Alstom Unsp/Adr

Good morning, good morning everybody. Welcome to Alstom 22-23 financial results. I will start by giving you some highlights on the year and then I will hand over to Laurent who will detail to you the financial results as well as the trajectory and outlook and I will come back for the conclusion and we will then open the floor for questions and answers. So just to give you a few highlights of the year. Of course, one of the main items is the fact that we are now well established as a global leader in a very good market, in a buoyant market, on all continents, all countries, in all our activities. And that's one of the most satisfactory factors, I would say, in a year marked by a complex and uncertain macroeconomic environment. We are the undisputed global leader in this market. We have now a solid foundation. We have restored the customer satisfaction. We have stabilized all the projects, notably the ones coming from the ex-Bombardier portfolio. All the new orders have been with the right quality, the right margin, the right risks. And we have now, we can benefit now from the synergies and we are, I would say, up and running to open this new chapter of Alstom history. Just one or two words on the results themselves, which will be again detailed by Laurent later on. They are in line with our guidance, in line with our objectives, in line with our trajectory. which is, I remind you, with a growing adjusted debit, a positive free cash flow of roughly 200 million euros. We are giving to you some new objectives for the current year, so the year 2023-2024, with an adjusted debit of around 6%, and the free cash flow will be significantly positive. And we are confirming our mid-term targets, which will be reached in 2025-2026, so one year after what was previously forecasted, and this is mainly due to the macroeconomic environment and indeed the inflation, and we have already in the past opportunities to detail to you the consequences of this macroeconomic environment. So back to the main numbers of the year, orders, 20.7 billion, a book-to-bill of 1.25, showing a good market momentum, a good commercial momentum, sales plus 7%, 16.5%. Adjusted EBIT, which increased more than 10%, 11% increase in adjusted EBIT, margin increasing at 5.2%. And again, a positive free cash flow of around 200 million euros, which of course is a remarkable improvement as compared to last year's situation. As far as our ESG indicators are concerned, we have a strong decrease in our scope 1 and scope 2 emissions, strong decrease on energy consumption. So I have to say that we are in line, even ahead of our trajectory in terms of CO2 emission, in terms of net zero trajectory. which is extremely good news. And we are, for the first time, we are publishing our taxonomy alignment, to come back to that, but at 59%, this is an extremely high number. I think it's among the large capital goods industry. It's probably the highest level I know. We are still continuing to work on gender diversity within the group, and we are making improvement in that perspective as well. So talking about the market, two aspects to the market. First is the traffic recovery after the COVID episode. So, of course, it depends on the different regions. It varies depending on the continent. In Europe and Asia, it has mostly recovered the pre-COVID level. In the U.S., it's not as much, particularly in the urban transport, as much as it was in the past. But Amtrak is now back to a pre-COVID level. As importantly, if not more importantly, we have seen during this year a confirmation of the sustainable agenda of most of the countries and regions in the world. A lot of investment plans have been announced throughout the world, and we are excited. Naming a few of them on the slide, whether it's in Germany, in Italy, in France, with the 100 billion ticket, in India, in the U.S., with the Infrastructure and Job Act starting to produce results, over the plan in Europe for the Model C, for the diesel replacement. So very nice momentum in favor of rail transportation throughout the world. These are not just, I would say, policies. These are being translated into real order, real pipeline of orders. And you can see on the slide, so we are confirming market potential, a pipeline of more than 220 billion euros till 2025-2026, ahead of what we were showing you last time. And in the next 18 months, we believe that there will be around 120 billion. I'm not going to detail all the regions, but all regions are concerned. In Europe, of course, which is the majority of the market, half of the market is in Europe, but not only in Asia-Pacific, whether it's in the Philippines, in India, Australia, whether we are in America, with the By the way, a number of turnkey orders coming back in the Gulf countries as well. Latin America, which was slow in the previous years, is now back on a very positive trend. And of course, the US, Canada is also very positive. So across the globe, a very nice pipeline. Our own commercial successes, a growth of 7% as compared to last year, but 20.7, which is important, is to have a positive book-to-bill, and even more important, which is to have a very quality order intake. I mean, the question is not to book an order just for the sake of booking orders. It's really to improve the quality of our backlog, which we have done very well this year. If you look at the two last years, we have booked more than 40 billion euros of orders, which is nice. I mean, after... such a merger after the equivalent of this large merger. Sometimes you have a commercial slowdown, and this has not happened, and I think this is on the back, both on the successful integration as well as on a good market. In terms of scope, in terms of activities, as well as geographical spread of these orders, as you can see on the slide, quite nice spread. Relatively large level of order intake this year in Europe. But we have in Americas, in APAC and AMECA, I would say, also a large chunk of orders. In terms of activities, she's reflecting more or less where we want to go. with a very large portion of services, but signaling has also been with a book-to-bill of 1.2, and system is relatively low this year. As you know, it's bumpy. We have, as you will see, sales growing quite fast in systems, low level of order, but I expect more orders to come next year, as we have already been awarded a number of orders which we have not yet booked. Some examples of orders, operation and maintenance, to recall that we are not doing only maintenance, but also operations, like in New York or Mark. A lot of options on rolling stock orders, which is very good news, because options are usually less risky than new orders. This is easier to implement. And, as I said, some very large orders in Toronto, for example, or in Singling in Hong Kong. From a such perspective, so also a very steady growth from 15.5 to 16.5, something which is extremely good in terms of momentum, the right level of growth. With rolling stock, which could be seen as relatively stable, but you have a high level of rolling stock in the system as well. So the combination of the two is showing good growth. But as we want to add is faster growth in services, in signaling and in systems, which is picking up after a slowdown, after the execution of some projects in the Middle East and which is now ramping up in Egypt, in Mexico or in Thailand. So, a very nice mixed evolution as well. I was detailing earlier our ESG emissions, our ESG targets. So, as said, very much in line, minus 22 percent in terms of scope one and scope two. Our target for 2030 was 138, so we have already done more than half of the target. Reduction needed to get to this level, so obviously a lot of efforts have been done this year. That's extremely good on the back of all the energy savings which have been launched as well, to be fair, to save costs considering the energy price environment. On scope three, more complex to look at it. As you know, this is the emission of the products which have been sold. Here as well, we have a clear target and a clear reduction of scope that we are envisaging as we are moving. It's not only, by the way, due to us, it's also due to the fact that our customers, the operators, are also decarbonizing their operations. In terms of taxonomy, as you know, in the first year, we need to publish to give you our taxonomy, European taxonomy. Eligibility is 100%, as we are working on environmental topics. And we have an alignment of, depending on sales, capex or opex of 50+, which, again, is much higher than any capital good industry. Last but not least, as you know, we have a set of KPIs for the decarbonization, caring for our people, positive impact, acting as a responsible business partner, and all these indicators are moving today in the right direction, and we have set up clear targets for March 2025. Finally, a word on innovation. As you know, the ultimate goal of the new company, of the merged company, is to boost innovation in order to bring to the market more sustainable, greener, more digital, smarter solutions to the market. As we are moving, I would say, from the situation where we had to very thoroughly integrate the two companies to a situation where we can accelerate now our growth and our development, we are accelerating the R&D, and you will see that we are accelerating the investment in R&D as well. A lot of very positive points this year. On hydrogen, of course, as you know, we have done a fantastic momentum in terms of fantastic evolution in hydrogen. in terms of digital with cybersecurity, trade autonomy, but also in terms of new platforms where we have developed, as you know, the new very high-speed platform, which is saving at least 15% to 20% energy in terms of consumption and which is adding 20% of seats. So energy per seat is a marked improvement. I will now hand over to Laurent. We will detail for you the financial results.

Thank you, Henri, and good morning, everyone. So let's start with a review of our P&L. We delivered close to 7% of sales growth in the year, driven by the positive execution and in line with our trajectories. Gross margin has increased by 0.2% at 14.1%. R&D was slightly lower this year in terms of P&L impact, still with a slight increase in terms of gross cost offset by financing received. S&A represents 6.6% of our sales, driven by inflation and growth in our region to support our ramp-up. Finally, as you see, a very sound and stable contribution from our Chinese GV. Quite a nice catch-up, considering the slow start of the year due to COVID restrictions back in spring last year. So altogether, 5.2% of ADJC debits, very much in line with our guidance announced at our H1 result. So moving to the main drivers behind this adjusted EBIT, very much consistent with the numbers I gave you back in November. So first of all, the ramp-up of synergies is developing as planned, contributing 60 basis points, equivalent to more than 200 million of synergies. And this is fully in line with our expected execution in terms of synergies. Second, as you see, reduction of non-performing sales had a positive impact of around 1%. 20 bps, slightly above our initial expectation due to some sales shifting to FY24 reflecting phasing dynamics of contract execution. Third point, higher volume and mix with a positive 30 basis point impact as expected. And finally, we guided, you remind, on an inflation impact of 70 to 90 basis points. We are getting to the higher part of this range, considering in particular our salary increase negotiation outcome. And we have a closer look on this on the next slide. So, looking now at the negative impact on a margin from inflation and the development which will be trending down over the years. So, you remind this 90 basis point at Edwinds is primarily linked to lower margin at completion on non-indexed contracts, reflecting impact on higher energy costs, supply chain and labour. Over the last few months, we've been working toward increasing the share of index contracts in our backlog, reaching 71% in FY23 versus 66 last year, and expecting this share to exceed 80% by FY26. As we generate a higher proportion of revenues from index contracts over the years, we expect as well a positive margin mix effect of 10 to 20 bps per year. This will bring the 90 BZ point headwinds impacting our FY23 margin to below 40 bps in FY26. So all together, of course, this margin accretion is an important driver toward our mid-term margin achievement. Meanwhile, we continue to be laser-focused on stringent action to reduce exposure to inflation. Number one, commercial side, where we do prioritize index contract. 75% of our orders of FY23 are protected from inflation, and our pipeline is well above 80%. Energies, where we have implemented energy savings with 10% reduction achieved, and of course, efficient energy aging strategy. Labor costs, where the salary negotiations are now completed. And on supply chain, where we continue, as you know, to have a large share of our suppliers in fixed price. in particular in the case of customer firm-field contracts with more than 80%. And as we move along, we secure indexation clause from our customers. We offer progressively this indexation protection as well to our suppliers. So all in all, as you see, we have been very active in managing inflation and we have a clear path toward the progressive reduction of this impact over the next three years. Turning to net profit, on restructuring, as announced, phase 2 of our general restructuring has been booked, the second half of this year for 50 million euros. In terms of integration and other costs, we are now, as planned, accelerating the deployment of our processes and tools, leading to 181 million euro costs during the year. We are specifically pleased to have deployed now our new digital suite in Latin America, Canada, France, Benelux, and this effort will decrease in FY24 and will be completed by FY25. Other one, of course, includes significant effort on legal fees, in particular related to Bombardier arbitration. On financial results, we had, as expected, an increase in the second half of the year due to rising short-term interest rates, but also due to the evolution of our portfolio of forex and bonds. A large part of these effects are non-cash, as you will see on the next slide. Last point, our ETR has been stable at 27%. So all of this is leading to an adjusted profit of 292 million euros for the full year. So turning to the cash flow generation, so we delivered spot on our guidance with a positive free cash flow of around 200 million euros. Among the positive contributors, of course, uplift of profits, definitely. Disciplines that we kept on CAPEX and R&D spends and the Chinese GVs, which has been delivering nicely in terms of dividends. Working capital has been impacted as expected, essentially by provision utilization, and I will deep dive into this in a minute. Financial cash out has been at 43 million euros, representing mostly interest expense and fees, while our tax cash out stands at 130 million euros. Overall, as you see, very pleased by our cash performance, driven by profit step-up, positive market momentum, and cash discipline across the board. So turning to the evolution of our working capital, a number of moving parts. First, I remind that we analyze inventories together with contract assets and liabilities, and it's more representative of our supply chain and production cycle. The net increase is largely reflecting the increase of our activities and accelerated production ramp-up, translating into sales, of course, and some stock anticipation to manage our supply chain challenges. Related to contract liabilities, as expected, nice increase driven by continuous healthy down payment, and we obviously expect this trend to continue during the next fiscal year. Secondly, the increase of trade payables is essentially related to the increase in inventories with turns equivalent to H1. Finally, we have been disciplined in managing our trade receivables with turns as well equivalent to H1. So looking briefly at the other specific lines, on the other liabilities, other payables are very stable at 144 billion euros in March 23 versus 1.5 in March 22. Suppliers with extended payment terms also stable at 303 million euros versus 324 last year. German specific down payment reduced to 198 million euros versus 471 million euros last year as with progress on deliveries. Of note, the change of regulation in France on VAT and progress billing to align with European VAT directives. VAT is now being accounted on unbuilt receivables. This translates into accounting impact on contract assets, unbuilt account receivables, and other current tax liabilities with limited cash impact during our fiscal year 2023. Finally, related to provision, 230 million euros consumption over the year, slightly below our expected consumption trajectories and consistent with the non-performing sales we had this year. In terms of addition and release on risk on contract, you will see that we are broadly stable, demonstrating our execution quality. So all this considering is working capital before provision standing at negative 10% of sales with continuous normalization to come in the next fiscal years. I will come back later on these subjects. Few words on liquidity with a continuous strong liquidity position at around 4.8 billion euros, out of which our committed RCF, which are fully unloaned at the end of March 23 at 4.25. As you know, we are using on top of our RCF short-term commercial papers, bank facilities to cover our working capital swing within the period. Net debt. Evolution, pretty stable as you see, with drivers coming from the free cash flow, offset by dividend and lease contribution, but some one-off as well on remedies with some forex impact as well. Broadly stable versus March 22. Turning to our long-term debt, no change in the key parameters here, namely no financial covenant, very long profile and with the first basically repayment in October 26, very low rate at 0.22%. On the right-hand side, you see as well that the current interest rate had a positive impact on our pension, with 245 million euros year-on-year net pension liability improvement. Finally, Moody's has issued a BAA3 rating with a stable outlook, confirming Alstom investment grade. We remain fully confident in our delivery trajectories, driven by cash generation and profit uplift, And we confirm that this rating has absolutely no impact on our financial trajectory. To end this section on FY23, the board is proposing a stable dividend of 25 cents per year, stable versus last year at the next July shareholder meeting, which is basically for decision. Let's now turn to our trajectory and outlook. So starting with our sales trajectory, we confirm our target of delivering sales of CAGR of above 5% over FY21 to FY26. This is based definitively on our positive market momentum, our strong 87 billion euro backlog with around 38 to 40 billion euro of sales which are secured over the next three years. We'll delve into the growth drivers of our product line in more detail this afternoon. Overall, we confirm a positive sales growth momentum, and we expect the sales contribution from signaling systems and services to increase to about 50% of our group sales by FY26. Turning to our backlog execution dynamics, you see on this chart in dark blue how the 40 billion euros of orders recorded since the last two years are now translating into sales with high quality orders, all of them with, in average, consistent fully with our 8 to 10% EBIT target, but as well our cash trajectories. In parallel, we continue to execute on our legacy backlog. In particular, we expect non-performing sales at zero percent gross margin to reduce to around 1.7 billion euro in fy 24 and then around 1 billion euro in fy 25 consistent with our expectation contribution of this will be a marginal as of fy 26. As our result, our gross margin needs backlog is increasing steadily, year on year, by around 50 basis points per year since the acquisition, and we expect definitively this trend to continue over the next three years. Overall, quality of our orders combined with focus on execution will be driving our margin trajectories moving forward. Few words on synergies. Very pleased to report a good performance this fiscal year with 250, 205 million euros achieved, even by the good jobs of our procurement and operation team, to name a few. Looking ahead, I'm very confident that we'll reach our synergy target of around Half a billion euros in FY26, based on the significant progress we've been doing in the last two years. Our teams are now delivering on a very clear and committed plan around four areas, product convergence, financing, procurement, and footprint and operation. This is translating into our margin outlook for the outer years. So zooming on FY24 first, margin contribution from synergies will reach an uplift of 50 to 60 basis points. Non-performing sales will be supporting by 20 to 30 basis points our profitability, volume and mix by 10 to 20 basis points, and the negative impact of inflation will reduce compared to FY23 with a positive impact of 10 to 20 basis points. Finally, we'll be, as well as indicated by Henri, increasing our effort in innovation and R&D with a negative impact of 30 to 40 basis points. Looking ahead toward 2025-2026, Synergies will bring another 80 to 90 basis points of profitability. Non-performing sales will be reducing basically to nil and helping our profitability by 60 to 70 basis points, while the synergies will be as well supporting our profitability by 30 to 40 basis points. As indicated in our previous communication as well, we have a very high degree of visibility on all of these drivers, and we are expecting a linear development of those drivers during the years to come. In addition, last but not least, volume and mixed effect will provide up to 2% of additional margin, leading to our 8 to 10% EBIT framework that we will be reaching as of FY26. So turning our eyes to EPS with basically a number of positive elements in terms of adjusting net income with a significant EBIT uplift driven by volume and margin, but as well the material decrease of integration cost and restructuring which will be starting as well in FY24 together with the reduction of one-off related to the legal fees mainly in the frame of our arbitration process. On the other side of the equation, negative impact on financial expense linked to higher interest rates and mechanical increase in terms of tax due to our profit uplift. So as you see, a very material step up of our net income and our EPS in the years to come. So to end this section on trajectories, turning to cash, we expect a free cash flow to be significant positive in FY24. In terms of drivers versus FY23 cash generation, positive contributors are mainly the positive momentum in EBIT and a significant reduction in integration expense, with a trend which will continue up to FY26, balancing on the other side, increasing financial interest and capex, raising to 2% of sales. Last but not least, on the working capital and consistent with our previous communication, we see around 900 million euros of working capital normalization with about 60% coming from provision consumption and 40% from net inventories ramp-up. All in all, we are confident to generate significantly positive cash in FY24 and and we confirm our ambition to exceed 80% cash conversion by FY26. Henri, back to you.

Thank you, Laurent, for this detailed presentation. I will say one or two words of conclusion. So first and foremost, I would just want to summarize our guidance for next year, for 2024. So first, we continue to have a book to build above one, which will fuel the growth of our backlog and therefore the growth of our future sales. And indeed, we forecast sales above 5%. In terms of profitability, so we're going to continue to not only increase our volume, but also increase our EBIT margin at around 6%. And again, for the free cash flow generation to be significantly positive. Regarding mid-term targets, as already stated by Laurent, we are confirming the mid-term targets of 8% to 10%, with a free cash flow conversion of 80%, to be reached in 2025-2026. In terms of global, I would say, takeaways of this full year, I think this has been a very important year for Alstom, a very significant year for Alstom. We have seen externally two aspects. The first one is, as I said at the beginning, very positive market momentum. So we continue to see the world investing in rail transportation. At the same time, we have... had to go through a number of headwinds, in particular inflation, supply chain, electronic components. And I have to say that Ashtom has extremely well managed these headwinds. We have managed to deliver our financial targets despite all these headwinds. And as importantly, we have managed to transform our operations, to be in line with our operations, to have a good customer satisfaction despite all these headwinds. I think one of the main takeaways is also the stabilization of our portfolio. So we have to say that we are now ending a period of two years where we had to stabilize, and I said it in the past, all the projects notably coming from Bombardier. It's now done. It's behind us, and we can work on the next stage of the efficiency, on the next stage of growth and development. So we have delivered customer satisfaction, we have delivered the financial results in our trajectory, and we have put back, if I may say, the execution under control. This is showing the importance and actually the reason and the consequences of our market leadership where we have extremely good customer relationship in the world. It's also showing the resilience of our business model spread across the globe, spread across different type of activities and namely also service activities, signaling activities, rolling stock activities. And last but not least, we have improved our backlog, which is paving the way for future improvements, both operationally and financially, going forward. So thank you, all of you. As you have seen, this has been, as I said, a very important year for Alstom, a very successful year for Alstom, which will mark a new step in our development. So before I open the floor for question and answer, I just remind you and invite you for an afternoon session. As you know, we do a more operational session with the leader of our different activities, as well as our CEO, Danny, this afternoon. So do not hesitate to join us at that time. Now I turn back to the operators for questions and answers. Thank you very much.

Thank you. If you want to ask a question, please press star 1 on your telephone keypad. That is star 1 for your question today. Our first question comes from Yifan Zhang of Goldman Sachs. Please go ahead.

Morning. I hope you can hear me well. I have two questions, if I may. The first one is on just can you maybe elaborate a bit more on why you postponed the targets given that You know, this year you're roughly in line with what you guided. And inflation is a question that doesn't really change much versus what you had last quarter or last half year. So I just want to understand a bit more on your rationale there. And the second question will be around the credit rate downgrade. How do you think that will impact your balance sheets going forward? Thank you.

Thank you for your questions. So the first element is, as you said, we have pushed back by one year the mid-term target. I just want to first confirm that this mid-term target remains valid, and we definitely think that they are a good ambition for the state of the company today. We had some, as you can imagine, we had some negative macroeconomic factors during the year. And notably, as we said, the inflation has lasted longer than anticipated. Basically, we were hoping that inflation was more on 2022 and it has been prolonged to 2023 as well. So this has had some impacts on our backlog and the margin in our backlog, obviously. As you know, not all the contracts are under protection, even if we are working on having the largest proportion as possible. This has figured we have also – that's the main impact. I would say other impacts, as you have seen, probably we have decided to reinforce our R&D programs. We have a lot of requests from customers in terms of energy saving, in terms of automatization, digital type of investments. So we have also decided to increase this R&D program. So this is a combination of factors, first one being the macroeconomic factors. And also decisions that we have taken ourselves. So again, we confirm that this 8% to 10% is a good target. We have just pushed it back by one year. The second question in terms of rating, of course, it has no impact on our balance sheet per se. This is a view of Moody's on our balance sheet. I can see several good news, I would say, in this rating. The first one is that they said that it's a stable rating now, so there is no negative outlook anymore, which means that they are very comfortable with the situation. There will be no, I would say, automatic credit committee, for example. Secondly, I think the ratios which are asked by Moody's in order to achieve this rating and to sustain this rating are within reach. You all know that last time the ratios were pretty ambitious and Moody's had given us a number of years to achieve these ratios, which was a little bit more than usual. On this time, we're in a much more stable situation, as it's been said, and therefore I don't see any impact of this rating change. On the contrary, it gives, I would say, better visibility for the group going forward. Thank you.

Thank you. And our next question now comes from Andre Kuknin of Credit Suisse. Please go ahead.

Good morning. Thank you very much for taking my questions. Can I just start with the growth outlook for fiscal 24? It's obviously open-ended with above 5%, but still kind of pinned to 5. Given the strength of the water backlog and water intake in the prior year, It looks a bit conservative, so I just wondered if you could give a bit more color on whether you expect to land significantly above five, or what are the kind of factors that are holding you back from acceleration, given the strength of the markets and the positive messages that you're giving on that?

Thank you for your question. I think it's a target, as you see, and an objective. And as you said, I mean, we have a very positive market and we have a very positive backlog and the growth of our backlog and so forth. Having said that, we want to have a quality in our growth. So we want to be relatively selective. We are favoring the quality of our backlog. We are also favoring both in terms of risk and in terms of mix by targeting service signaling. So we are not going for the last, I would say, the last bit of growth. We really want to secure a very sound and solid growth pattern. So we don't see any objective above this 5% to be given to the group because we don't want to give any impression that we will favor growth over quality of the backlog. So yes, the 5% is a relatively conservative number, but it shows our, again, willingness to make sure that we have quality orders.

Okay, clear. Thank you very much. Sorry for the background noise. I just wanted to check also on the decision to invest some of the margin near German R&D, as you just highlighted through the presentation and the last question. How do you expect to see the payback on that? Is that through kind of high profitability investments? in fiscal 2016 onwards or is it to hire market share or is that a needed investment to maintain that kind of target market share that you have 35 to 40% on that pipeline of 220 billion?

Yeah, thank you. Sorry if I misunderstood a little bit of noise. In terms of innovation, clearly this is increasingly required by the market. In some instances, this could lead to increased market share because we take a specific position on the market, like for the hydrogen train, for example, where, of course, we're the only one to be able to provide, to supply hydrogen trains for the moment. Most of the time, I would say that in a tender, particularly in Europe, you have a technical type of mark and you have a financial one. And by improving your technical requirements, for example by saving energy, this allows you to have a better price and therefore a better profitability. Again, it's not only a question of market share, it's also a question of improving the quality of our render intake by improving the way our customers are valuing our product. And today I can tell you that this type of approach from customers is increasingly important. Energy is playing an increasingly important role in all our tenders. But equally, we have requirements in terms of noise, vibration, in terms of recyclability, in general, sustainable performance. So it's not only, I would say, a question of market share. It's also a question of profitability of our backlog.

Next question. Thank you. I'll stop here. Thank you very much. Next question.

Thank you. And we're moving on to James Moore of Redburn with our next question. Please go ahead.

Hi, everyone. I've got three, if I could. The first one is on labor negotiations and wage inflation. You mentioned that the negotiations are completed today. Could you say for how long you now have visibility of wages? Is it visibility just for this year or multi-year visibility? And what percentage of inflation at the group level for wages should we expect? That's the first question. Maybe one at a time is easier?

James? Thank you, James, for this question. Yes, as you have actually said, clearly the wage negotiations for 2023 are over. Unfortunately, as I said, the inflation is not over, so I expect next year to have again some negotiations on that. It's a yearly negotiation for most of it. There are a few countries where you have some framework agreement, like in Germany for the tariff agreement. But for most of it, it's a yearly one. And we have a – yes, it really depends on the country between, you know, high cost or best cost countries, high inflation, low inflation, and so forth. But it's true that this year we have basically one to two points more salary increase than what we had in the previous years so if we are talking roughly 2.53% in the previous year we are talking more 5% this year in the world on average knowing of course that you have countries which traditionally has a much higher inflation or if you take Turkey, India and so forth you have of course much higher salary increases but it's a yearly event

That's very helpful. My second question, if I could assist on indebtedness in general. I see the Moody's move. I see your point on the visibility. Nice not to have six-monthly reviews. But at the same time, it is only one notch, albeit neutral, one notch above non-investment grade status. And with all of your bonding and your requirements... Do you think it will be easier for the group to issue some equity? Do you absolutely not want to issue some equity? I guess the rights issue question will persist. Is there anything you can help us all understand in terms of your ambition? That's the second question.

Thank you, James. We have, and I think I said it in the past, we have a financial trajectory which allows us to commit to investment grade while delivering the plan as we have given it to you. So we are continuing to go in that direction. We have no intention to change this direction and this trajectory, this financial trajectory. As I said, basically the The rating of Moody's is not a complete surprise if you compare to our ongoing ratios. Basically, Moody's, as you have seen, is taking a more broader view on the global macroeconomic environment. It's also saying that it takes a lot of time to get to the ratios, and it's true. They gave us last year basically four years, and this was a long period. So they are now shortening this period. So no ambition to change our determination to continue to deliver the company by the increasing profitability and by the reduction of the debt going forward.

Thanks. And the last one is just on the free cash flow. Maybe because of the law, you talk about significant free cash this year. If you look at Working capital, without putting a number on it, what are the key topics inside working capital for the FY24 year?

So good morning, James. So on the drivers for FY24, as I said, on the tailwinds compared to FY23, a positive uplift of the profit, a reduction of the integration cost as well. All of that driven by the quality of execution and, of course, global positive momentum. On the headwind, talk about financial interest, CapEx, restructuring in Germany, and to your point on working capital, we are expecting a continuation of normalization of our operational working capital in FY24. And if I want to be specific on the provision, on the provision consumption, which was 230 million euros in FY23. We are looking at a slightly lower amount in FY24 to give you some colors on this very specific point on our working capital evolution.

Thank you. Thank you. Next question.

Our next question comes from Guillermo Pino of UBS. Please go ahead.

Thank you for taking my question. Maybe again, I want to labor a little bit on the cash flow, just following up on James' question. I think when you think, obviously, about the EV improvement with 5% revenue growth, you get to probably anything between $108 to $190 million incremental cash flow from yours of higher EBIT. Then you think about the reduction of integration costs, as you said. You think about increased capex, increased R&D on the numbers that you provided, more or less, and it gives you basically some negatives. But, you know, I think when we say significantly positive, you know, you could end up – or could you quantify a little bit that number? Is it something that is just, you know, 100 million from previous year? Or when you do the numbers, actually you come up with a significant number that is just probably – walking towards that 80% precast low conversion that we were targeting by fiscal year 25.

Good morning, Guillermo. So maybe I take a step back here. And just to remind, last year, back in May, we said that we would deliver positive free cash flow, you remind, in FY23. And we give a range of 100 to 300 million euros at our H1 result. And as you have seen, we have been delivering spot on on this guidance at close to 200 million euros for FY23. This year, as you have seen, we are guiding to significantly positive in FY24, and we will give a precise range to you during our H1 result in November. So all in, significantly positive. The drivers I was mentioning, it's quality of execution. quality of the market momentum and the down payments, all of that will be basically getting to a significantly free cash flow for FY24.

Okay, thank you. Thank you. And maybe just talking about the fiscal year transition towards the 8% to 10% fiscal year 2025-2026 margin target, I guess you said linear, I guess from... Five will go to 6%, and then obviously there is a gap in between, you know, your mid-target range and what reports or what you target this fiscal year 24. But I was wondering, you know, you said linear, but that linear means that you meet the lower end of the 8% to 10%, you know, margin guidance. I was wondering whether that linearity can be somewhat better than expected.

Thank you for your question. Yeah, we said it's linear, meaning that it's not backhanded, and we are not going to tell you that it's 6% and stability is a huge increase last year. So now where we are going to reach, we are going to reach between 8 to 10. We'll see where we are going to reach within this range. But it's true that we will come from the bottom of it. That's clear. Thank you. Thank you. Next question.

And up next, we have Alistair Leslie of Sorcedo Generale. Please go ahead.

Hi. Good morning. I was wondering if you could unpack the volume and mix component of the margin bridge a little bit more. I suppose I'm surprised that at 10 to 20 basis points, I think, this year, it's relatively low and down compared to 30 basis points until when last year. I mean, the portion of sales in the P&L, I think you have this year from orders taken since April 2021 is expected to double compared to last year. And given the assertions, I suppose, around higher margins on those contracts, should that not be showing up more in volume kind of mixed component within the bridge? So that's the first question. Thank you.

Thank you. So good morning Alistair. So on the volume and mix, so we have introduced indeed the positive momentum we had in our sales for FY23. You have seen the numbers which are positive in terms of services and SIG. The mix is as well the mix of the execution of the project. It's an internal mix related to the backlog execution. And we still have, of course, the ex-VT backlog to be delivered. Looking ahead, Alistair, in terms of the evolution of our mix, you have seen that we are... aiming to get to a 50% mix of signaling, services, and system. And all of this, as you know, will be accretive to the group margin and something which will be basically drivers to get to the 8% to 10% global framework.

Thanks. Maybe a sort of follow-up question then on the zero margin contract timeline. I was just wondering, can you say how much of this year's deliveries are sort of back-end loaded in the year, just to get a sense of the sensitivity and kind of risk, I suppose, of potential slippage into the next fiscal year? I'm sorry, on slide 30, I think it is, for FY26, can we assume that that's sort of residual? Is that around 500 million still of zero margin deliveries still in that bar chart? and then basically down to zero in the following year? Can we read it that way?

No, absolutely, Alistair. So FY26, you have the right order of magnitude, so around half a billion, a bit less than that, and indeed something which would be becoming completely marginal after that.

Okay. And just any kind of sort of insight in terms of the sort of phasing of the zero margin deliveries just this year? Are they kind of front-end loaded, back-end loaded? Yes.

So 1.7 billion euros for fiscal year 24, down to 1 billion euros in FY25. And to your point as well, we had around 100 plus limited shifts between FY23 and FY24 due to some re-phasing of deliveries in agreement with the customers. So that's why it's slightly lower than the 2.4 billion euros I was explaining back in H1.

Thank you. Thank you. Next question.

Thank you. And we're moving on to Gail Debray of Deutsche Bank. Please go ahead.

Thanks very much. Good morning, everyone. On the financial structure question, I know that most of your debt comes from bonds with very low coupons, long maturities, and with no financial covenant. So that's great. But Can I still ask the question, you know, under which circumstances would you consider the capital increase? So this is question number one. And question number two, just looking at the significant step up in your financial expenses between H1 and H2, would it make sense basically to use the H2 number maybe as a run rate for what to expect into fiscal 24, or would you actually expect something even bigger than this? Thanks very much.

Thank you, Gaël. Just let me be very clear on the first question. I mean, the company this year has significantly decreased its risk level. I mean, if there is one fundamental achievement in this 22, 23 year, is despite all the headwinds, despite all the macroeconomics headwinds, despite the supply chain perturbations, the electronic components crisis, which we tend to forget. Despite all these headwinds, we have significantly, I would say dramatically decreased the level of risk embedded in our backlog by solving all our technical issues, by having restored all customer confidence and so forth. So there is no way I can envisage today such thing as a capital increase because, again, if I had not envisaged it last year, there are even fewer reasons to envisage it this year as the company has enhanced considerably its profile, basically, its credit profile or its risk profile. So we see, and also we see the headwinds. I mean, remember last year, we were also still impacted by the COVID and so forth. So there are also fewer headwinds today than we had 12 months ago. So frankly, on that one, I just want to ensure that our creditworthiness, to call it like that, has significantly improved during the last 12 months. So I can only be much more reassured this year than I was 12 months ago. On the second question, Laurent.

So, good morning, Gaël. So, on your second question, indeed, increase of global financial expense H2 to H1. And to be clear, yes, indeed, the H2 is probably a good proxy for FY24. A bit lower, we are expecting a bit lower. This increase, H1 to H2, is half related to the higher interest rate and half related to our FX portfolio, our bonding portfolios in terms of the fees. So basically, indeed, a good proxy, less than twice for FY24.

Thank you. Next question. Very clear. Thank you.

Thank you. Our next question comes from Apash Gupta of JP Morgan.

Please go ahead. Yes, hi. Good morning, everybody, and thanks for your time. My first one is on the margin expansion guidance for FY24. So you call for close to 6%, which is 80 basis points margin improvement. Can you talk about phrasing of this margin improvement between first semester and second semester and whether it would be more evenly spread front-end loaded and back-end loaded and maybe nuances towards what is driving that. That's question number one.

No, thank you, Akash. On this one, we have a Classical seasonality in our deliveries, because of the summer and how it happened and so forth, between first half and second half. Having said that, as you know, as far as EBIT is concerned, it's not a huge seasonality. So you should expect something relatively linear, but with a certain seasonality. But that's the only thing I can say on H1.

Thank you. And my second question is on cash flow. So you talked about 900 million working capital outflow over the next three years. And we can see most of it is driven by provisions. I wanted to ask, what have you assumed for contract liabilities in that period compared to where it was at the end of FY23?

So, good morning, Akash. So, as you say, out of this, so first, this 900 million euros is fully consistent with what we said a year ago, which was 1 billion euros of normalization, and we've been realizing 100 million euros in FY23, so fully consistent. As you said, 60% of that is provision. 40% is our operational working capital. And within this, you have inventories, contract assets, contrariabilities, and the like. So, complex to tell you precisely what will be the contract liabilities over time, but in the main, fully consistent with what we said back a year ago on our working capital normalization.

Thank you. Thank you, Akash. Next question. Thank you.

And now we're moving on to Delphine Brault from Oddo. Please go ahead.

Yes, good morning all. Thank you for taking my questions. The first relates to organic growth in rolling stock. You did a 2% reported. What was the organic growth? And what is behind this moderate ramp-up?

So, good morning, Delphine. So, the organic growth on rolling stock is slightly lower than 2%. Still, you have in mind that we had a huge ramp-up in terms of systems, and 40% of our system activities are actually rolling stock driven. So, if I take that into account, I'm more at 3% to 4%. of growth and rolling stock, which is very much in line with our expectation in terms of evolution.

Thank you. Thank you. And second question. So you executed 2.3 billion euros of Bombardier Legacy contract last year. So there is a 200 million euro gap versus your initial expectation. Can you detail a little bit what is behind this gap?

On this one, most of the contracts have been in line with our estimate, and as I said, if anything, we have addressed a very large number of contracts, and some of them are now fully traded. We had some phasing issue because, as you have said, it has been slightly delayed because of, notably, because of customer requirements not to take over the trends too fast. This is, if I may say, in one particular place, which is in the UK, but that's it. So it's a very... local matter which will be compensated this year because in IAO it should be completed even before the end of the year.

And now we're moving on to Jonathan Day of HSBC. Please go ahead.

Hi, good morning. Thanks for taking the question. I was wondering if you could just elaborate a little bit more about the risk from inflation in future if inflation doesn't come down as people expect it. I know James has picked up on the wage inflation, but just thinking generally about the raw materials inflation, could you elaborate a bit more on the risk around that inflation number? And then maybe also just on the free cash flow, could you talk a little bit about the other in free cash flow, things like the share-based payments and the remedies and how we should think about the movement in that line in future. That would be great. Thanks.

So, good morning, Jonathan. So, starting on your point on inflation, so we have, as I said, a very clear action plan on inflation. Number one, commercial, and you've seen the outcome, which has been positive, and more 80 plus of our pipeline will be protected by inflation. Energy, very well under control. On the material cost, as you know, both the energy and the material cost has been easing since six months. On labor cost, we talk about the salary negotiation which has been completed, and we are now moving more and more to a back-to-back with our supply chain. So we have extremely good visibility and mitigation of the inflation. That's why we are fully confident that the 90 basis points we had as headwinds in FY23 will be reducing by 10 to 20 bps per year. down to below 40 in FY26. To your second question, briefly on the cash, on the others, we have indeed the shares-based payment, which will be relatively stable on your basis for FY24 onwards. Thank you.

Thank you. Thanks. Thank you, Jonathan. Next question.

Thank you. As a brief reminder, to ask a question today, please signal by pressing star 1. And we now take a question from William Mackey of Kepler. Please go ahead.

Very good morning to everyone. Thanks for the time. So three questions, one short. The first on cash flow, just reviewing the movements in working capital last year and the buildup in inventories and contract assets, nicely offset by a prepayment move. but it's still quite volatile. Can you give us some sense of how we should expect the working capital elements, the key elements, to develop in the first half versus the second? Should we anticipate a similar bias, or can you see something more similar to a linear development this year?

So, good morning Will. So, as we said in terms of H1 to H2, we have the usual seasonality we have on our production, sales and cash. We are expecting as well a seasonality on our orders between H1, which probably should be lower than on the H2. So, that will basically turn into the evolution. Difficult early days to be precise in terms of the various working capital items, Will, at this stage.

Thank you very much. The second question relates to, I think, your slide 30. I just wanted to just talk about the sales from legacy backlog compared to new orders as you've projected it over the next three years. Can you at least give a flavor? I know it's a very complex assessment, but the sort of differences in the project margin or gross margins within the legacy backlog excluding the non-performing business compared to the new contracts that you've been consistently booking with better T's and C's and pricing?

No, thank you. In general, as we said, this year has been extremely good in terms of quality of our backlog. Clearly, the gross margin of these new orders, in average, were consistent with our mid-term target, if not a little bit above this mid-term target, so it has been a very good year. Also, due to the mix, I mean, if you take it activity by activity, it's, let's say, in line, and the mix has been particularly favorable with a large portion of service projects. So the difference, of course, with the zero margin is, by definition, is huge. When you took a gross margin zero, and here we are taking a gross margin in line with our long-term targets, we are looking at a lot of large, large difference in gross margin, very large difference in gross margin.

Okay, last one is perhaps more detailed. The warranties, if I look at the movement in provisions, it appears that there's a big step up in warranty-related additions in the second half. Is that a fair observation? And if it is, what's happening to your warranty levels?

So that's completely normal in terms of evolution. You know, the warranties are booked when we are completing projects. So something which is basically completely normal in terms of adaptation. If I look at March 22 to March 23, our global level of provision of warranties are moving from 605 to 597. So as you see, extremely stable. So nothing specific on that, I will.

Thanks a lot for your time. Thank you. I think this is ending our Q&A session. Thank you for your attendance. Again, I invite you for this afternoon's session where you will have also the opportunity to ask new questions to our colleagues. Just as a global wrap-up of our session today, just a reminder, we had a very good year, 2022-2023 has been a very good year for Alstom, marked by a very positive market momentum externally. Our ability internally to cope with a number of headwinds and to deliver our financial results and to significantly de-risk our portfolio. So I strongly believe that we have now an extremely sound base in order to build the future, which will be a growth and which will be cash flow generated on the back of a good market, on the back of the innovation, on the back of our global reach. with our renewed customer relationship. So thanks a lot for your attendance today and happy to talk to you soon. Thanks a lot. Bye-bye.

Ladies and gentlemen, this conference is now over. Thank you for your participation.