Alstom Unsp/Adr

Hello and welcome to the Alstom full year 2023-24 annual results call. My name is Saskia and I will be your coordinator for today's event. Please note this call is being recorded and for the duration your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to Henri Poupare-Lafarge, CEO, and Bernard Delpy, CFO, to begin today's conference. Please go ahead.

Good morning everyone. Welcome to Alstom's full year results for the fiscal year 23-24. I will start by a few highlights and then Bernard will walk you through the full year results. Then I will go through our trajectory and guidance before taking our questions. So let's start with the key figures. Starting with financial performance. Orders and sales came a bit better than we expected with a strong finish of the year. Adjusted EBIT was close to 1 billion, up 17% year-on-year. This represents a 5.7% margin in line with our guidance. Recage flow of negative 557 million euros came up on the upper part of the range announced last October. Regarding ESG performance, we are making good progress against our roadmap. Scope 1, 2, and 3 emissions are reducing ahead of plan, with notably good energy and heating savings at our production facilities. Further improvement on taxonomy sales alignment comforts our position as a leading company on this indicator. And step by step, we are making progress on diversity with close to one fourth of management now being women. Turning to the usual snapshot on market opportunities, we continue to see very supportive demand for rail globally, largely thanks to the growing need for zero emission mobility. We have reviewed our pipeline for the next three years down to 190 billion euros from 200 billion plus previously. There are two main drivers. The first one is India. Indian railways are currently revisiting their procurement strategy, leading to mega-tenders being canceled or postponed. Elsewhere, the pipeline in Europe is broadly unchanged, and we see many opportunities in America, the Middle East, Africa, and Australia and New Zealand. Overall, we have decided to reinforce our commercial focus on geographies where we've got a clear competitive advantage to make sure that we invest time and effort on fewer tenders but with a higher win rate. The revised approach does not change our book-to-bill guidance of above one for the next three years. As usual, a few illustrations of orders booked during this second half. services contracts, cross-country in the UK, velocity in Australia, attractive turnkey projects with Tel Aviv Green Line, Abidjan Metro and Alula Tramway in Saudi Arabia, and some options on long-term frame agreements like the MF19 metros for Paris. On the operational front, we see the benefits of the efforts made by the teams to integrate Bombardier and bring quality and efficiency to the levels closer to Alstom's level before the acquisition. For instance, we are getting good margin on orders and our customers are showing again a high level of satisfaction with a remarkable progress on quality indicators like the number of demerits per car. We are ramping up despite logistics headwinds and pressure on the supply chain giving high demand from all O&Ms. We are improving our engineering and manufacturing on-time delivery, even if we can, and we will do better. Now the priority is to translate these operational improvements into accelerated profit and cash generation. In order to do so, we have taken resolute actions. We are looking to reduce industrial inefficiencies as we accelerate industrial optimization. We are actively implementing cost efficiencies, in particular across overheads and indirect procurement. Finally, we are optimizing supply chain in order to drive further inventory term improvements. As we promised to you earlier this year, we are today announcing the details of the deleveraging plan, and this is a balanced plan. Firstly, we have already announced two disposals for a total of around 700 million euros. This includes, for the most part, the sale of the U.S. signaling activities announced last month. We have here a good deal with a good price. Then we will be launching an abridged bond for about 750 million euros and a right issue for around 1 billion. The total proceeds are expected to be around 2.4 billion euros, equivalent to an actual deleveraging of 2 billion euros, consistent with what we announced back in November. The precise timing and modalities will depend, of course, on market conditions. I will now let Bernard comment on the results for the next year and walk you through the details of the deleveraging plan. Bernard, up to you.

Thank you, Henri. I will focus on the full year results, and then we'll address details of the deleveraging plan. This brings total... Okay, sorry, I start again. starting with the order intake, slide 11. The group enjoyed a strong Q4 with €5 billion of orders, including notably a high level of small orders. This brings total order intake for the year to nearly €19 billion, equivalent to a book-to-bill of 1.1%. Europe has been again the most dynamic region. Middle East and Africa and Australia also recorded good momentum. Numbers for Americas have been impacted by a few orders being postponed. In terms of product lines, the group recorded strong performance on services and systems with book-to-bill well above 1. And this offsets a softer performance for rolling stock with book-to-bill at 0.7. If we take a step back, more than €60 billion of orders have been booked since the merger with BT, which represents two-thirds of our current backlog. We're happy with the quality of the €19 billion of orders in the year. Margins on new orders continue to exceed the margin in the backlog, which in turn largely exceeds the margin in the P&L, and therefore supports our mid-term margin trajectory. Turning to sales on slide 12, organic growth stood at 9.4% for the year, well ahead of the guidance and with a strong finish on Q4. In particular, the group delivered a strong performance in services, systems, and signaling, all delivering close or above double-digit organic growth. Rolling stock organic growth at 6% reflects close to 4,700 cost deliveries. Forex and scope had a negative impact on sales during the year. These headwinds were less pronounced in the second half. We can also confirm that we have booked around 1.7 billion euros of sales at zero gross margin from the legacy BT backlog during the year. Looking now at the P&L on slide 13. Sales growth was 6.7% on a reported basis at 17.6 billion euros. Gross margin increased by 20 bps year-on-year to 14.3%, or 2.5 billion euros. Net R&D costs on P&L end of the year in line with the prior year level at 3.1% of sales. Selling and administrative costs improved, now 6.3% of sales. The SG&A cost program starts to impact despite inflation during the year. Finally, we had a sound and stable contribution from Chinese GVs at 131 million euros. Altogether, adjusted debit margin increased by 50 bps compared to the prior year and reached 5.7%. Analyzing the main drivers behind the adjusted debit margin increase for the full year, I would make four comments. Synergies from BT acquisition have delivered a contribution of 30 bps. This will be the last year to track that indicator now that operations at costs are fully merged. Non-performing sales from legacy BT portfolio have reduced significantly. to 1.7 billion in the fiscal year from 2.3 in the prior year. This represents a 30 bps improvement in line with expectations. Volume and mix developed in line with plan. And finally, we revised margin at completion both positive and negative on a few BT legacy contracts. This includes, obviously, Aventra, which was the most significant one. The net effect of these revisions was a negative 30 bps for the year. Turning to net profit on slide 15... It's fair to say this year we booked a lot of non-operational and one-off impacts, leading to a net profit before PPA of 44 million euros. On restructuring, 115 million euros were booked and relate to the SG&A cost efficiency program announced during the year, and 31 million euros were booked for industrial setup rationalization in Europe. we incurred €142 million for integration over the full year, down 22% versus previous year. As planned, integration efforts will be finished next year, where we plan less than €90 million. We had also two unfavorable decisions on litigations for which we had booked a bit more than 100 million euros of provisions, one in the U.S. and one in Turkey. We are appealing against the U.S. one, but Turkey should be cashed out shortly. On financial results, as expected, we saw an increase in the second half of the year, largely due to the volume of drawdowns during the year and to the level of interest rates compared to last year. Alone, it represents a toll of $242 million this year, and it will slightly decrease in This year, when the full impact of the deleveraging plan will materialize in H2. Next year, we should come back to something more in line with around 150 million. And finally, as announced in Q3, we have closed the sale of the stake in TMH for 75 million euros. This has resulted in a non-cash recycling charge in P&L of 197 million euros relating to currency translation effects. And slide 16 shows reflect this, as we think they should drastically drop over the next three years and as such contribute to stronger cash generation, non-operating expenses will definitely go down starting this year. Turning to free cash flow for the year on slide 17. Free cash flow was a negative €557 million for the year at the upper end of the guided range. A few moving parts to flag. Equivalent to adjusted EBITDA reached €1.1 billion or 6.4% of sales. CapEx and CapDev reached €450 85 million euros, or 2.7 of sales, in line with expectation and exactly at the same level as a percentage of sales as last year. Financial and tax cash out were particularly heavy. The delivery plan will reduce financial expenses going forward. To be reminded, it was only 173 million cash outs last year, so 2.5 times less. And working capital change has impacted negatively free cash flow by 856 million euros, and we will review details in the next slides. A few additional considerations here. First, a few individual factors have had a, what I would call, a disproportionately large impact on free cash. Either way, with VAT effect of changing rules in France, or the Aventra program as two obvious examples. Second, from a business standpoint, we faced a double whammy in rolling stock, whereby production continued to ramp up fast, while book-to-bill was only 0.7%. Third, Raising shortened debts to fund working capital needs combined with rising interest rates led to high financial cash charges, as I already said. Fourth, seasonality between the two halves have been more pronounced this year, with the second half of the year generating a solid free cash flow of €562 million. We note that half of the negative 1.1 billion euros of free cash flow of the first semester has been reversed in the second semester, thanks to improving working capital. The other half, largely related to VAT, Forex, and financial charges, will therefore not be reversed. Some details... on trade working capital on slide 18. Trade working capital stood at 34 days of sales at the end of March. A few drivers to highlight. First, inventories have reduced by around 400 million since H1. Half of this reduction comes from a reclassification of fixed assets into fixed assets of a fleet of finished trains which was put on lease during the year. And the other half comes from a strong operational action plan we've been taking on supply chain and which is delivering results. And we have therefore improved turns since H1, with inventory and payable days reducing strongly. This enabled us to close with a low level of payables, which is a good starting point for the year. Second comment, of note, we have reduced long-term overdue by more than 100 million euros, which demonstrates the resolution of some long-term issues with some customers. The overall level of receivables reflects strong invoicing in the last months of the year. And last, excluding the non-reversible impact of VAT that explained the other assets and liabilities move in the first half, this line is stable. Looking at contract working cap on slide 19, a negative working cap of 4.6 billion euro with 4.9 billion assets up 440 million, 7.9 billion liabilities up 1.2 billion, and 1.6 billion provisions down 167 million. It is lumpy by nature for a project company like Alstom. Contract working cap improved to a negative 96 days of sales at the end of March compared to 89 days the year before. Contract working capital has shown significant seasonality this year. After negatively impacting the first half by €700 million, contract working capital contribution was a positive €600 million for the full year. A few drivers to highlight this strong imbalance. High level of deliveries and acceptances during the second half of the year led to contract assets reducing to 103 days compared to 116 days at the end of September. Down payments have been more second-half weighted this year. This has resulted in a significant increase in contract liabilities, as well as increased cash seasonality between the two halves. And provisions on risk on contracts have been reduced by around €200 million, as I guided. I must admit we reversed the trend more dramatically than I was expected in October, especially on the liability side. On the next slide, I wanted to take the opportunity of this presentation to deep dive into seasonality and share with you lessons learned from the past year. In the last five years, we've consistently seen stronger cash generation in the second half of the year than in the first. Free cash flow seasonality is inherent to our business, and it can be analyzed as follows. First, cash out is more or less evenly distributed annually. over H1 and H2. But cash in from progress payments has shown strong seasonality, historically, mostly due to the closing dates with fewer working days over H1. European factories being typically closed in July or in August with less production and less client availability for train acceptances. And last, down payments are either mitigating or exacerbating this seasonality depending on commercial momentum. Regarding fiscal year 2024-2025, we expect down payments to be again more second-half weighted. This is reflected in the free cash flow guidance for next year with a specific comment on H1 milestone. Turning on to liquidity slide 21, I will not comment on total available liquidity, which is very ample. As you know, it includes an additional RCF line of €2,250,000 signed in November and syndicated in December. Upon the execution of the €2 billion deleveraging plan, this RCF agreement will terminate. Looking at net debt evolution... Net financial debt was reduced to €3 billion at the end of March, compared with €3.4 at the end of September, largely thanks to a positive €562 million free cash flow during the second half of the year. The delveraging plan is precisely designed to address this situation. And now I come to the focus on the delveraging plan on slide 23. We have delivered 700 million euros of disposals. The U.S. deal delivers an excellent outcome for Alstom from a financial and strategic point of view. We will be issuing a vanilla hybrid bond for around 750 million euros. It is permanent capital. It is non-dilutive and it is subordinated instrument which allows to be considered, reconsidered in five years once cash generation reaches strong levels. It qualifies for a 50% equity content from a rating point of view and 100% equity from an accounting point of view. It fits well with our cash generation profile. This will be launched shortly, depending on market conditions. And then we will be executing a write issue for a total amount of around $1 billion, again to be launched in the next weeks, depending on market conditions. As already announced, it is obviously a transaction with preferential subscription rights. Net proceeds, all in, are expected to amount to 2.4 billion euros, while the impact on delivery is expected to be around 2 billion, again largely due to the treatment of hybrid bond as 50% equity and 50% debt by the rating agency. Proceeds would be used to repay short-term debt, including commercial papers and RCF. The remaining proceeds will be invested in highly liquid short-term investments. This additional cash will ultimately be used to repay senior debt upon maturity, but will also help reduce near-term reliance on short-term financing to absorb working capital swings. This plan is fully supported by our reference shareholders who have indicated that they intend to participate in the capital increase proportionally to the stake in Alstom. Having shared this plan... Combined with the appreciation of our company operational, commercial plan, and our guidance, Moody's has confirmed that the investment grade rating outlook would be stabilized once the two market transactions are executed. Moody's has issued a press release expressing this opinion in its own language, and I think you can read it on their website. Henri, over to you.

Thank you, Bernard. So let's go now to the trajectory. First, just our objectives, our midterm objectives. First and foremost, to restore the profitability through our best-in-class operations, as well as to set foundations to become the real one-stop shop reference partners. For that, we have defined four priorities, the first one being the excellence in operations, precisely, to create profitable opportunities in focused markets and segments, to establish enduring customer partnerships, boosting services, and finally, to accelerate innovation and digital for better differentiation. So what does it mean concretely for Rolling Stock? Since the merger, we have been more selective in order intake, with an average book-to-bill which was around 1.5 for rolling stock before and is now around 1 since the merger. This has allowed us to increase the rolling stock margin backlog by around 160 basis points. With the losses on legacy contracts such as Evantra, the profitability of rolling stock is still negative this year. What are we undertaking for the future? First, we reinforce our focus on 13 key countries. We reinforce our commercial disciplines in terms of margin targets, contract management, terms and conditions. And we reinforce operations, notably on engineering and supply chain, to improve our execution. What are we expecting over the next few years? The clear improvement of margin and backlog, the rolling stock profitability being restored, at least to meet single digit, However, the normalization of the book-to-bill around 1 versus 1.5 in the past will continue to impact rolling stock contract working cap in the coming couple of years. Second, we have taken resolute actions in terms of industrialization in order to adapt our cost base to an output stabilized around 4,800 to 5,000 cars per year. And as announced, we are cutting SG&A costs with about 1,500 FTEs. This represents a cash out of around 350 million euros in the next three years to come. And we expect first to increase gross margin by reducing our industrial inefficiencies and second to reduce HGNSL ratio by one point versus financial year 23. Regarding services, this is now driving the transformation of Alstom. You have seen the very positive order intake over the last couple of years and this is expected to continue. Building on the installed base of our two legacies, we are expecting a book to build to remain largely above one over the next few years. This will lead the service backlog to a level equivalent to rolling stock for the first time in Alstom history in about three years. Services have a solid mid-teens profitability. We are investing in CapEx and in working capital over the plan to continue developing this outstanding franchise. We expect these efforts to pay off with progressively an improved mix and increased predictability of our numbers. Finally, regarding signaling and systems, we have a positive growing demand and a clarified competition landscape with Hitachi finalizing Thales acquisition and Siemens forming the top three with Alstom. Demand is increasingly complex, with autonomous trains, cybersecurity, more and more digital. This is a premium to leaders, and we see margins improving, with double-digit profitability reached in signaling and at hand for Turkey. Now, looking at the analysis of gross margin in backlog, first, we are happy to confirm that we have been consistently delivering at least a 50 bps increase in backlog gross margin in the last three years. We expect this trend to continue over the next three years, largely driven by holding stock. Next year, we anticipate the indicator will come back to premature level at around 80%. Second, the share of the backlog booked with gross margin of 20% and above is increasing thanks to the quality of order intake in the last few years. Third, the share of the backlog below 10% gross margin is reducing thanks to the execution of the legacy contract and the strict monitoring of the execution of new projects. We expect this trend to continue as you can see on the chart. Fourth, the reducing share of difficult projects in the backlog over the next few years will result in a net reduction of provisions for contract losses. Turning to margin outlook starting with fiscal year 2024-2025, we are guiding for adjusted EBIT margin to improve to around 6.5%. In addition to positive volume and mixed contribution, we expect to start seeing the early benefits from the various initiatives to reduce industrial inefficiencies as well as indirect procurement costs and G&A. Looking now at medium term, we expect an acceleration in the margin momentum in the fiscal 25-26 compared to the fiscal year 24-25. In addition to continuous improvement of backlog growth margin, this acceleration is largely driven by the full benefits of self-help initiatives as mentioned. However, given the slight dilution from disposals as well as updated assumptions on the BlackRock execution, we now expect our mid- to long-term ambition of 8% to 10% adjusted EBIT to be reached in fiscal year 2027. Turning to free cash flow generation, we expect FFO to progressively improve as a percentage of sales driven by adjusted EBIT trajectory and reduction of non-operating costs. This will more than offset investment in services as well as restructuring cash out. Regarding trade working capital, we should be able to manage it within a relatively narrow range. Contract working capital should be a headwind in the next few years. with holding stock working capital stabilization, growth of service and signalings, and provisions reducing with the completion of large loss-making contracts. Contract working capital tends to be lumpy by nature, in particular due to the timing of signature contracts and related down payments. Over a few years, these effects tend to normalize, and that is why we are committing to a three-year free cash flow generation of at least 1.5 billion euros. In terms of capital allocation, deleveraging will remain our main priorities in the short term. The deleveraging plan will be executed as soon as possible if market conditions allow it, and we expect to stabilize our investment grade rating accordingly. FFO generation should be stronger in the coming couple of years, and despite the working capital headwinds, we confirm our target to reach net zero debt in two years. We will then reevaluate our dividend policy. In the meantime, we will go on with a more dynamic M&A policy of dynamic portfolio management. So to conclude, let me summarize our guidance, starting with key assumptions behind guidance. First, we consider market demand will remain supportive, allowing for selectivity. Second, we assume the level of down payment for fiscal year 2024-2025 will be broadly in line with 2023-2024. Third, we assume the deliveraging plan announced today will be completed during the first half of the new fiscal year. And fourth, we will finalize the integration during the year and put in place our various cost efficiency programs. Now, looking at outlook for this financial year. We expect bulk to be above 1 and sales organic growth around 5%. We anticipate adjusted EBIT of around 6.5%, as explained before, with margin improvement to be more pronounced in the second half of the year due to structural seasonality, but also to the timing of the various self-help initiatives. We expect free cash flow generation to be within a range of 300 to 500 million euros for the full year. Regarding the first half, Bernard has explained the structural seasonality due to our closing dates. So with down payments being more second-half weighted, we expect free cash flow for the first half to be negative within the range of 300 to 500 million euros. Finally, turning to mid- to long-term ambitions, we confirm book-to-bill above 1 and foresee growth to be around 5%. Our adjusted-debit ambition is confirmed within the 8% to 10% range. We expect free cash flow conversion will be trending towards 100% over the cycle. Last but not least, with the elements discussed before, we are committing to generating at least 1.5 billion euros of free cash flow over the next three years. Thanks to all for listening. I'll now take the questions, your questions with Bernard. Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question from the queue, please press star 2. So again, that is star 1 for your question today. And our first question comes from Andrea Kuknin from UBS. Please go ahead.

Good morning. Thank you very much for taking my questions. Maybe just first one, I wanted to follow up on the disposals program. Given the announcements you've made so far and how you've outlined the structure, can we assume that you're now done with the disposals program, or are there still some assets that are under discussion?

Thank you for your question. As far as the deliberating plan is concerned, we are done in the sense as we have set the proceeds which are taken into account in this deliberating program to achieve the 2 billion mark that we set ourselves as an objective. That doesn't mean that we are not going to continue to have a dynamic management of our portfolio to grasp opportunities, to create value, create synergies, and to manage some rotations. But as far as the deleveraging program is concerned, the 2 billion mark, again, we are done with that.

Got it. Thank you. And the second question, I just wanted to... try to reconcile the message on the three years of cash generation of at least one and a half billion with the 100% conversion target and the 8 to 10 EBIT margin target. So I just ran some quick maths here and I'm getting to kind of a net income. If you do hit the 8% bottom end of that EBIT target and grow at 5%, I'm getting to net income level at about sort of 900 million in FY27, while if I go to your cash flow guidance and say midpoint of this year, that leaves about 1.1 billion for 26 and 27, but maybe ramping cadence that implies only about 600 million of free cash flow for 2027. So just wanted to check if that mass kind of agrees with you and that kind of trending towards 100. I guess we should be taking it kind of really towards 100 as opposed to close to 100.

I will take this one. I'm not sure I want to make the math live here with you, but let's say that the cash conversion trending above 100% is through the cycle, so mid to long term. Here the 1.5 billion is really for the next three years, including this year. So that's why, I mean, it's not... that obvious to reconcile the two approaches. Let me tell you that the 1.5 billion commitment for the three years takes into account some headwind in terms of working capital, where the 100% cash conversion long-term is based on a stabilization, or let's say a neutral working cap evolution. That's a big difference between the two horizons.

Great, thank you. And if I may, just the very last one. We're getting quite a lot of incoming on the kind of exact timing of the equity raise. You've obviously said in the coming weeks on the call, can we interpret that kind of your intention is to go as quickly as possible, circumstances permitted, permitting?

I think we have indicated that we'll do that on the near term as market conditions will allow it. I'm not sure we have said coming weeks precisely, but we'll do as soon as practically feasible.

In the press release, we say it's going to be in September the later. But what we intend to do is as soon as market conditions are low, we are ready to launch that.

Got it. Thank you. Thanks for your time.

Thank you. And we're now moving on to a question from Aguirre Debris from Deutsche Bank. Please go ahead.

Well, thank you very much. Good morning, everybody. I have two questions, please. The first one, on the divestment program, I'm trying to understand why only one transaction was completed out of maybe seven or eight at the beginning of the process. I mean, is this because of the lack of appetite in the market for your assets, or is this because prices were too low, or the timing of proceeds would have been too long if it had been mootied? Or is it just because you eventually decided that a bigger capital increase was a better option than selling good assets? I'm just trying to understand the thought process here.

Okay, Gail, I will take this one. The sound was terrible, but I think I get the sense of what you are asking. We were working on the potential of a lot of transactions, and that was, I think, what helped us to select the best one for the market. delivery plan, both in terms of economics, I would say, and in terms of certainty of execution. And as Henri said, it's not because we are done with the plan that we are done with divestment. We said clearly that we would continue to have a dynamic management of our portfolio of activities. But when it comes to the plan, we had to take a decision to draw a line saying, now we are done. And the $700 million coming from TMH and the U.S. signaling put us on the right track to get the $2 billion. That's why we ended here. But it's just for the sake of the delivering plan that we end here. It doesn't mean that we are done with divestments.

Okay, understood. And there's a second question. about the free cash flow commitment of at least 1.5 billion euros for the next three years. Could you perhaps help us understand or give us some granularity in terms of how the various components of the working capital are expected to trend over this period of time, especially the metrics you can control at least to a degree, like provisions, contract assets, maybe inventories.

Okay, we'll take this one. I think it's what basically is explained on the slide 32. We'll have some positive drivers, EBITDA improvements, The reduction in non-operating expenses as well will play a role. And our management of inventories also in terms of turns should be a positive driver. On the headwind side, I would put some specific investments in CapEx for our service business. I will also put the cash out for restructuring. We've made provisions, and we will cash that out in the next years. And we also flagged contract working cap as a potential negative. because of the rolling stock backlog stabilization, because of the ramp-up of services and signaling, and because of the consumption of loss-making contract provisions. So here are the moving parts that are driving the positive cash generation at least at 1.5 billion over three years. And again, back to the first question we had, we can help you do the math, but I think it's pretty straightforward and in line with what we think in the medium term, improvement in FFO and towards, I would say, stabilization in terms of working cap. That's how we end with this figure.

Is there a way you could help us quantify what could be maybe the maximum potential negative headwind coming from the contract working capital.

I don't think I can give any specific guidance or indication on that, but it's true that it's lumpy by nature, right? So difficult for me to tell you more on that.

Okay. Thanks very much. Thank you. And up next, we have Martin Wilkie from Citi. Please go ahead.

Yeah, thank you. Good morning. It's Martin from Citi. I have a couple of questions as well. The first one was just on the change in the percentage of your cash conversions. You're now targeting 100% conversion net income from above 80% before. And just to understand what drove that. We saw this period that the cash dividend from your strategy advantage was higher than it has been in the past. You just have to understand, is the cash conversion of that number now slightly better, and therefore that improves that percentage conversion at the group level, or is it more driven by stability in provisions and working capital across the cycle? Thank you.

Okay, I will take this one. As you said, we've changed our... approach to cash conversion. Previously it was 80% on a specific date. Now it's trending above 100% over the cycle. I think that this new approach, in my view, is clearer. I do not see reasons, in fact, why not trending above 100% over the cycle. So the 80%, I struggle to continue to see that as a target. The reason is that EBITDA trajectory leads north 10% of sales, clearly. Non-operational expenses will be brought back to not much in the long term. This business is low capex intensive by nature and very stable as percentage of sales over the cycle. And we are taking back control of financial expenses through our deleveraging plan. So the only uncertainty is around working capital. And from that point of view, over the cycle, let's say in three years' time, four years' time, the change in mix would have stabilized, and the average percentage of completion of a rolling stock project will move upwards, allowing to reach a more neutral change in working capital for contracts. And trade working capital should also be stabilized, considering the plateau expected around 5,000 cars falling stock. That's why a cash conversion trading above the notion of 100%, I think, is what we see as a percentage of net income. It's, I think, much more clearer and straightforward, logical than the 80% point in time. Thank you.

No, thank you. That's very helpful. And if I could have a separate question. You touched briefly on the Aventra program and mentioned how it has had some drag on the margin as you revisited the assumed gross margin and those contracts. Obviously, that was one of the contracts that caused some of the cash drag last time around. Just to understand where we are in that program in terms of customer acceptance or anything else that we've seen called that could impact your numbers, over the next 12 or 24 months. Thank you.

Yes, indeed the Aventra program has still been very difficult during the full year, so during H1 as well as H2. We have now completed the deliveries of all the new-build trains, so that has been fully done and accepted. There are still some trains to be retrofitted. We expect the completion of this retrofit to happen in the first half of this year, which will put an end to the delivery of the trains. There will still be, of course, some work to be done during the service of the trains themselves to ensure the reliability grows. So at that stage, we don't expect any further deterioration of the program. We are now very close to the end of the delivery of the program in the coming months.

Great. That's very helpful. Thank you.

Thank you. And we now move on to a question from Vlad Zervievsky from Barclays. Please go ahead.

Yes, good morning, gentlemen. Thank you very much for taking my three questions. I'll do it one by one. First of all, could you talk about a little over $200 million of dividends from joint ventures, which seems to be supporting your cash flow in the second half? It accounted for almost 40% of your cash flow. Is it usual for you to get the JV dividends in the second half? And should we expect the same magnitude of the dividends in the years to come as well.

Thank you, Vlad, for this question. As you know, our joint ventures in China are profitable, are very sound joint ventures. So we do get each year some dividends. Of course, the level of dividends can vary from one year to another year, depending on the profitability, depending on the dividend policy of each of the joint venture. So there have been an exceptional high level this year. And we do expect nevertheless to have a continuous dividend extraction year after year from this joint venture.

Thank you for clarifying that. Can I also ask a question on your inventory change? It looks like the inventory write-down line reduced by about 100 million euros in the second half. Could you please comment whether this change or write-down reversal had any impact on adjusted EBIT in the second half?

I will take this one. Yes, of course, it will have an impact going forward. But just to specify, as I explained, with two different things in the inventory move since H1, one is specific to the reclassification of a fleet from inventories to fixed assets, because in the meantime, we've leased it. and we could even sell it going forward. And the second one is just because we have better managed the inventory, and this one will not have specific EBIT impact.

Yeah, if I could just clarify that to make sure. I was more asking about specifically the reduction of the write-down part, not the overall inventory, and whether this write-down part had any mechanical policy impact on the P&L in this second half and not really going forward.

Oh, yeah, for sure. If we write up a provision that is no more of any use, it has an impact on the adjusted debit, yeah, sure.

Understood. Thank you very much. And the last question from me. Your interest costs in this second half were significantly higher than the interest costs which are related to bonds, leases, and commercial paper. Would you help us understand what the delta in interest costs is attributable to? And this delta in interest costs have increased quite a bit, this half as well.

I think that it has to do with the average shortened debt during the second half and the level of interest rates. And that's basically it. I mean, there is nothing else to flag on the cost of debt. Again, on average, we were more relying on funds at a price that was very different from last year's. That's basically the explanation.

So thank you so much for the answer.

Thank you. And from Redburn, we have James Moore with our next question. Please go ahead.

Good morning, everyone. I have two questions. I'll go one at a time. Lots of my others have been answered. Maybe I could start on cash and equivalents. As you go through the deleveraging plan, that number is going to go up a lot. I wondered if you could talk about what you think the right minimum cash and equivalents number needed to run the business from an operating perspective is. And tied to that, I wondered if you could talk about the priorities for usage of surplus cash over the coming years. I'm not talking about the immediate paying down the commercial paper, not using the RCF, but more the decision that you get to make between retiring senior bonds in two, three years' time, which are attractive capital, or potentially retiring a hybrid bond in five years' time. I wondered if we could start there, please.

Okay, James, I will take this one. Interesting point, and that was a debate we had with the agency that, you know, they look at the gross debt, but also they have, I think, a smart view on what is the right way to use cash. And we ended up with the conclusion that even if the minimum cash that we need from an operational point of view is still around $800 million, The fact to keep some of the proceeds, excess cash, to reduce funding needs intra-year and to earmark it in order to pay debt at maturity was the best compromise we can find. Better anyway than repaying cheap debt with a cost of fund that is higher now for the new money. So that's kind of compromise that we found.

Very helpful. And on the profitability, you're clear about the six and a half this year and then 8.0 as a minimum two years later after that. How should we think about the interim year of 25.6? Should we think about that as 7.25, i.e. roughly halfway? You talked about an acceleration in the uptick in profitability. I just wondered if that's a sensible guide or whether you at this stage see any reasons for a different development than that.

So we have not given any precise guidance for the interim financial years, but as you can see from the trajectory, there is an acceleration going on. So it's not totally linear as we are executing some of the projects and the tail end of some of the projects. So we expect a non-linear trend between the long-term guidance, between, I would say, the 6.5 to the long-term guidance.

Very helpful. Thank you very much.

Thank you. And we're now moving to a question from Alexander Virgil from Bank of America. Please go ahead.

Yeah, thanks very much. Good morning, gentlemen. I wondered if you could just give us an update, Bernard, on the implementation of the new cash management practices and maybe some of the softer side of things. You talked towards the end of last year about some of the changes that you've made from an operational standpoint to try and make sure that we have a much better handle on and track of cash within the company. So I wondered if you could just give us a sense of that. And then second question, on the non-operating expenses line, it would seem that the bits that you don't have control of, i.e. others and litigation and legal fees are kind of the big swing factors here. I appreciate you can already predict the legal side of things, but what's in others and why is it going down to zero? Thanks very much.

Thank you for the question. Two points. Basically, from an operational standpoint, as you know, we were and we are on a mid-term to long-term turnaround trajectory with a number of actions in order to improve our operational efficiency, such as industrial excellence, optimization, supply chain, excellence engineering turnaround. We have decided in October to improve, to focus much more on all what is cash levers, in particular in terms of inventory reduction, in particular in terms of overview, and the overview is at a record low level this year. So we have emphasized even more in the company all the levers which have more cash direct impact. And then we have improved as well, and this is probably at the heart of your question, always cash control. And here maybe I should give the floor to Bernard who will explain a little bit more what we have done in terms of rolling forecast and control of our cash management. So in addition to the action that we put from an operational standpoint, we have also put some actions in terms of controlling.

Yeah, well, of course, on this there is no specific magic trick, I would say. It's just what I would call routine or rituals, having a view every month at our forecast for the next three months and improving month after month the reliability of the forecast. That's absolutely key. We, and I think it's very internal, but... if you ask question we have created what we call a cash cockpit in order to have a better articulation between operations and finance which is absolutely key when it comes to cash and everything comes from that having someone drum-beating actions from a manufacturing, engineering, and commercial point of view in order to recover the cash that is out and to be sure that in terms of inventories and planning of operations, we are not overshooting versus what we think we're going to do. I think it's absolutely key. So again, no magic trick. It's just a question of discipline. It's improving month after month. We have only started in October. So I think that going forward, it will improve again and again. It does not eliminate. the lumpy nature of this business. I mean, it's not because you have a strong control over cash that you may consider that all predicted down payment will come at the times we predicted, because it's sometimes beyond our control. But at least we have, for what is in our hands, a stronger control over cash. Alex, if I can go to your question on NOE. I think you said lack of control. I would like to react to that, but I think it's not the case at all. So difficult to say that they were not heavy this year, for sure. but with a limited cash impact this year. But I do agree it raises the question of the rational. And there is a strong rational behind all those non-operational charges. Restructuring costs, of course. It prepares the future of the company with paybacks typically around 12 to 18 months. So we look at that in details. It's under control. Integration costs. By the way, they are funded by the synergies that you've seen since the beginning of the integration. So we are coming to the end of those integration costs, mainly IT convergence. So this year will be the last year of integration costs as an OEE. Litigations, it reflects the past, except for some legal fees that could have a strong return in the future, we hope. The recycling of the FX impact in TMH is just technical, so I don't think it's worth spending time on that. And by the way, it's non-cash. And financial expenses is not exactly non-operational expenses, but let's say it's below the line. And I think we are taking back control of that. So, again, I do not see NOE as a big part of expenses that we do not control. It's exactly the opposite. Thank you, Alex. That's very helpful. Thank you very much.

Thank you. And we're moving on to a question from Akash Gupta from J.P. Morgan. Please go ahead.

Yes. Hi. Good morning, everybody. I have a few as well. The first one is clarification on the guidance. Maybe if you can clarify if the divestment of North American signaling business is included in margin guidance or not.

Yes, Akash, it is. And precisely this is one of the reasons why we had to push back a little bit the mid-term guidance because it has a dilutive impact on our profitability.

Thank you. And my second one is on market activity and demand outlook in America. I think there was a time when everybody was bullish on the U.S. demand outlook, but we have not seen that much of orders for you as well as peers. Maybe if you can talk about what do you see in the U.S. and how do you see the presidential election later this year would impact the decision-making of your customers?

We still see a very good market. And I think I said it a little bit in October, November, that some of the projects have been shifted to the right and a relatively low level of order intake in North America. But we are still working on a number of tenders. which should come this year probably, most probably this year. I don't, I mean, it's of course far too early to anticipate what can happen after the presidential election, but it's hard to recognize that the Job Infrastructure Act which has funded most of these opportunities, is a bipartisan act, and therefore we don't anticipate any major move in that direction. So still there, but as you said, it takes time to be concretized.

Thank you. And my final one is on Bombardier litigation. Is there any update on the timing and the process that we should be aware of? Thank you.

No, Akash, no real update. It's continuing as planned and, unfortunately, relatively slow, but continuing to trend in the right direction. I think Bernard made a subtle allusion to that, talking about the legal fees, so some of it is for that, but we expect, of course, positive outcomes, but not in the very short term.

Thank you.

Thank you. As a brief reminder, that is star one for your questions today. And our next question now comes from Delphine Bolt from Oddo, BHF. Please go ahead.

Yes, good morning, everyone. I have two questions. First, looking at your slide 33, and maybe I'm extrapolating a bit too much, But it looks like the squares for the contract working capital changes and the net debt as of March 26 are a bit more below the line, meaning that the midpoint is a small net cash. Can you confirm and can you explain what could drive this change?

I will take this one. So no scale here, but you get a good eye. So it's a little bit below the line. And we said it on the previous page, on page 32, that we could have some headwinds in some of the segment of our business, including in services and signaling, because the ramp-up, which is very good in terms of margin, has some impact on working capital. And the rolling stock, which is always better in terms of cash curve, is below the other segments in terms of book-to-bill. That's why it's slightly below the line.

But Bernard, the contract working capital is below the line. The net debt is more centered. Yeah. The contract working capital is weighted below the line, but the net debt itself is centered around the zero point.

Thank you. And then maybe you can update us on the contracts, potential contracts that have been won but not signed yet.

We still have a few projects that we have announced and which have not been booked yet. Whether it's in Portugal, where we are still discussing with the customer. We have one, as you know, Haifa Nazareth in Israel, which is also being... in the financial close period. We have this very, very large project in Toronto for the electrification of the network, which is a multi-billion project, which we are still working on finalizing. Interestingly, because it's more unusual, we have as well announced very large signaling projects which have still to be booked, whether we talk about the large, what we call CP7, which is the regional signaling in the UK, which is a multi-hundred million of projects which are still to be booked in different trenches. We have also announced close to one billion contracts in Australia in signaling, with two contracts, one of 800, one of 200, which also have to be booked. So In addition to the rolling stock and the turnkey projects, which takes time to be booked, which is more unusual, is the fact that we have very large signaling projects which have been awarded but not yet booked. Thank you.

Okay. Thank you. And as there are currently no further questions in the queue, I'd like to hand the call back over to you, Mr. Pupar Lafarge, for any additions or closing remarks.

Thank you. Thank you, all of you, for your attention today. So if I need to wrap up our publication, as you remember, the H1 was weak and probably not properly communicated. H2 was much stronger with a production wrap-up and good deliveries, inventory discipline, and as well as cash generation. So we have strongly, as said by Bernard, reinforced our controls on our operations and our cash, and this is definitively paying off, with fundamental progress on integration, strong customer satisfaction, strong margin on our intake. Clearer monitoring, mobilization around cash, and rolling forecasts. And again, a resolute action plan to turn these operational improvements into sustainable profit and cash generation. Hence, we have provided, I think, clearer guidance, including elements on the seasonality. Finally, the deleveraging plan is robust and balanced, ready to be executed with investment-grade rating, reaffirmed by Moody's and short-term perspective of outlook change to stable. So thanks again, and happy to talk to you in the coming days.

Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.