Alstom Unsp/Adr

Hello and welcome to Alstom's first quarter fiscal year 2025-26 orders and sales call. My name is Saskia and I will be your coordinator for today's event. Please note that this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. 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 your host, Bernard Delpitte, Executive VP and Chief Financial Officer. Please go ahead, sir.

Good morning. Thank you and welcome to this conference call to discuss orders and sales for the first quarter. Starting with order intake on slide 3, we recorded 4.1 billion euros of orders in the first quarter, up 12% compared to the same period last year. Book-to-bill was 0.9 for the quarter. Considering adverse FX movements, This brings backlog to 92 billion euros at the end of June, down from 95 at the end of March. From a regional perspective, Europe is again leading with large orders in France and in Bulgaria. The group enjoyed strong commercial momentum in rolling stock with two large orders in and a book-to-bill of one, on track to deliver full guidance of book-to-bill above one. The signaling business is also off to a good start, with contracts in Italy, Brazil and Taiwan. We recorded 1.7 billion euros of base orders in the first quarter, which is consistent with the 1.5 to 2 billion euro range we've seen in recent years. Turning to slide 4, with a focus on the two large orders awarded in the quarter. First, we will provide Coradia Stream regional trains to Bulgaria, together with maintenance for a total of 600 million euros. This contract illustrates the success of the Coradia platform with a high carryover rate for Coradia's stream trains already developed for other customers. Second, French operator SNCF ordered an additional 96 commuter trains for the Paris region as part of a framework agreement signed in 2017. A few additional remarks before moving to sales. First, we have already good visibility on orders for Q2. We signed a €2 billion order with MTA in New York for the provision of 316 cars, with an option for 242 additional cars. and discussions with other public transport authorities in the U.S. are also progressing well. Second, the medium-term pipeline of opportunities is solid. For instance, the German government has made great progress towards over 100 billion euros of investment allocated to rail over the next five years, which is nearly double the spend compared to the previous five-year plan. We've already got a framework agreement in place with Deutsche Bank Networks for website signaling, and around 10 billion euros is allocated to the rollout of ERTMS in Germany, and it provides some upside to medium-term pipeline in Germany. Third, The quality of order intake remains a top priority, and orders taken in the first quarter continues to be accretive to gross margin in the backlog. Turning to sales on slide 5, sales reached 4.5 billion euros in Q1, driven by 7.2% organic growth. All product lines contribute to organic sales growth. In particular, sales in rolling stock reached 2.4 billion euros, representing a 5% organic increase. This was driven by the significant ramp-up in Germany. France also continues to be a meaningful contributor, thanks to the RER as well as TGV projects. In the U.S., continuous ramp-up for Baft in San Francisco compensates for the ramp-down of other projects, including Amtrak. Sales in services reach $1.1 billion in Q1, up 2% on an organic basis. The product line continues to benefit from execution in the U.S., as well as a ramp-up of projects in Germany, Italy, and South Africa. Sales in signaling came at 0.6 billion euros. Organic sales increased by 9% thanks to project execution, mainly in France, Italy, and Germany. The 5% decrease in reported terms is mainly due to the deconsolidation of the North American conventional signaling business last year, as we present today. the 1.5% negative scope impact on total sales. Finally, systems recorded 0.3 billion euros in Q1, representing 36% organic growth. Systems benefited from the strong ramp-up in Brazil and the Philippines. Turning to slide six, and car production. We see it as a fairly good indicator of activity levels for the rolling stock business this year, which accounts for around 50% of sales. Cars produced were broadly stable in Q1 compared to last year. The mix was also positive with ramp-ups for higher value cars like high-speed and commuter train in France, for instance, compensating for the ramp-down of lower-value cars like metros, also in France or in Brazil. Also in the first quarter, a higher share of projects were in their ramp-up phase compared to the first quarter of last year. Overall, we continue to expect stable production for the full year, and we expect a positive mix going forward, explaining positive growth of rolling stock sales. Turning to guidance on slide 7, let me highlight again the key assumptions behind the guidance for this current fiscal year. We assume market demand remains supportive, no changes. We assume stable car production compared to last year with ramp-up in Germany compensating for ramp-downs in metro cars in France and Brazil. We assume R&D expenses back to above 3% of sales for the full year compared to 2.8% in the last fiscal year. Regarding tariffs. The impact on the group's financials was minimal in the first quarter, in part thanks to constructive discussions we're having with customers regarding the application of change in law clauses in the contracts. For the rest of the fiscal year, we assume we'll continue to mitigate the impact from U.S. tariffs. Moving to the guidance. We expect book-to-bill for rolling stock and the group to be above 1 for the full year, with a book-to-bill ratio in Q1 that is already encouraging. We confirm organic sales growth within the 3-5% range, with the first half that is likely to be at the top end of that range. We expect adjusted EBIT margin to be around 7% for the full year, with the indication that in last year's H1 adjusted EBIT has been close to the full year margin of the fiscal year just reported. We expect free cash flow seasonality this year to be pronounced for two reasons. First, we expect down payments to be more second-half weighted. Commercial momentum is strong, but several orders already booked in Q1 or in the pipe for Q2 are options for which cash payments at the time of booking are usually much smaller than down payments received for first-time orders. And second, the cash impact from the ramp-up in certain geographies will be more visible in the first half than in the second half. For these reasons, we confirm H1 free cash flow guidance for up to minus 1 billion, and we see very limited upside for this level. We have not revised our views on the second half, that is, to generate at least 1.2 billion euros of free cash flow, thanks to margin progression, favorable phasing of down payments, and the seasonal distribution of activity and progress payments. Hence, We confirmed the free cash flow guidance for the full year at 200 to 400 million euros. Thanks for listening, and I will now take your questions.

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. And our first question today comes from Gail Debray from Deutsche Bank. Please go ahead. Your line is open.

Good morning, everybody. Thanks very much for the time here. The first question I have is on the car production level this quarter. I remember I think last year's Q1 production was impacted by supply chain challenges, and this year's Q1 production level is not really any better. Is this just a question of mix or do you still see some supply chain disruptions here and there?

Thank you, Gaël. No, we have not seen major issue with the supply chain in Q1. And the fact that Q1 this year is comparable to Q1 last year is very much the guidance for the full year. So it doesn't mean that we continue to have supply chain issue. It means that because of the phasing of the production of cars, it's consistent with what we have seen last year. So that's That's why. And as I said, maybe we should emphasize it again, this year we have a high share of what we call ramp-up projects. You know, we make the distinction between startups. project, ramp-up project, and serial mode. So in startup, you have not started to produce the cars, you are really in a phase of development, let's say. And in ramp-up, you are in the first train sets, of a series. So that's where you have, I would say, not the most difficult part, but you are starting the production. And then you have serial mode. So this year, in H1, we have a higher share of ramp-up projects versus last year. Last year, the supply chain had an impact on serial production. That's why it was quite significant. This year, the mix... between ramp-up and serial is different with a higher share of ramp-up projects.

Okay, that's helpful. Thanks very much. And the second question I have is on the free cash flow dynamics. I mean, you've had obviously a big success recently with New York, which I think was not necessarily anticipated to be awarded so early, potentially not enough in the year. And you're talking about potentially all the projects, down the road in North America, likely to be backed maybe in the second quarter. New Jersey, for example, is certainly one of them, if I'm not wrong. So with that in mind, I mean, do you still expect really to see the same negative seasonality in pre-cash flow as previously guided, or do you feel maybe now slightly more confident? to perform a bit better than the up to 1 billion euro negative number you guided for.

Well, Gail, as I said when I reiterated the guidance, The $1 billion, up to $1 billion is very much what I think. The down payments or the orders that you mentioned were very much taken into account, in fact, in the guidance. So, no, it's not bringing anything new. That's great. That's good news. But that was taken into account in the guidance. And I take the opportunity to say that what is specific this year is that we have a good visibility on a strong order intake. That will be H2 weighted and specifically on down payments. that will be H2-weighted as well. So, nothing new from that point of view. It's great news for you, for everybody, but for us, we expected these orders to come in.

Okay. Thank you very much.

Thank you.

Thank you. And our next question now comes from Delphine Brault from Oddo BHS. Please go ahead.

Yes, hello, can you hear me?

Not so well, but we'll try, Telfin.

Okay, hello, good morning all. My first question relates to Germany. Can you update us a little bit on your strategy in Germany? Where are you in terms of efficiency improvement?

Okay, first, it's not... Strategy here, it's more execution, right? So we are at the very beginning of the turnaround plan. Nothing much to report since we explained our plans in May. We are in the middle of discussions with unions on different sites. that we plan to transform into service, from rolling stock to service sites. We have good discussions with unions, so not much new, but it goes according to plan. What is happening today in Germany, there are two things maybe to underline. First, ramp-up of projects. I mean... Contracts were awarded to our German sites some years ago, so they were in what I called startup phase for those years, and now they are entering into the ramp-up phase, so really execution of the last miles of engineering and the first miles of manufacturing is very much where we are today in Germany. And the second thing that we are looking closely to the announcements of the German government in terms of signaling, and what we see is good. Maybe you've seen that a budget has been presented to the Bundestag, and we've seen, even if it's still pretty difficult to understand how you articulate special funds and the budget, we see at least 10 billion of spending on signaling for the next five years. Part of that is on the West side, and it has been subject to a contract already awarded last year where we have our share of that and part of that comes on top of this program on top of Westside could be on board or other things and that has not been taken into account in our pipeline guidance for the moment so we are working to see how this will be reflected in our activity but I must say that today in terms of options or, let's say, implementation of the volume contract awarded last year. We've seen some delays in the implementation, but it will come, and that's good news. So, in a nutshell, for Germany, the strategy, I mean, it has not much change. We think that Germany will be a great country for rail, and we prepare ourselves. to respond to this stimulus in the best possible way.

Thank you. And then maybe a short one. Some updates on the level of competition. Last time you mentioned more competition in some regions. I know three months is a short period, but was it still the case in the recent months?

First, when I mentioned that, it was in January, so it was not in the full year result. I mentioned some geographies where nothing changed, but we've seen the competition quite active. We have not seen that again since the beginning of this fiscal year, maybe because we have been awarded contracts in geographies where we have a substantial market share. That's why. But no real change in the competition landscape as of today, Delphine.

Thank you. Thank you. And from Goldman Sachs, we now have Daniela Costa with our next question. Please go ahead. Your line is open.

Hi. Good morning. I have two questions. One is just a quick clarification from the prior question on Germany, and then I'll ask the second main one. But just on Germany, so given the kind of ramp-up phase you're going to get through now, how is your level of capacity utilization there if we have a big pickup in orders in the coming years? year or so, would you need to add more capacity now in Germany?

Of course not I'm sure you have well understood that we sold a plant in Germany because we have some spare capacity here and the idea is to reduce the overall rolling stock capacity so for sure we have all needed capacity to phase a ramp up Hello? How much spare capacity do you have? We don't give numbers, but I can tell you that we have not a problem of capacity in Germany. I mean, the story is to reduce the overall rolling stock capacity in Germany rather than to be short of capacity. So, I mean, we will at least double our PC9 production without any capacity issue in Germany this year.

Got it. Very clear. And then just so you have 7% organic sales growth now, which is ahead. And as you said, in the first half, you'll stay at the top end of the 3 to 5. But your car production was marginally down year on year. So you probably expect that to accelerate to meet the guidance. So is there a scenario or what happens in the second half to get you back inside of the guidance range? Is it mix? Is it pricing? Is it something else? Or the guidance is conservative?

I think, well, first, it's too early to issue a new guidance. I said clearly that... I see H1 at the top end of the guidance, so by that time, we'll have more visibility for the rest of the year. So, yes, indeed, if we are at the top end of the range at the end of H1, I see room for improvement in the guidance. Let me please have some more visibility to refine our assumptions. It's mainly a question of mix for the rolling stock. But what I've seen in Q1 is very much what we see for the full year. In service, of course, the comparison basis is pretty tough because we had a strong year last year after a kind of 10% CAGR since the merger with Bombardier, so the comps are high. That's why we've seen a pretty low, I would say, soft increase. Q1 in terms of service. We see the same for the rest of the year, but we could see some improvement here. The moving parts were on system and signaling, where what we have seen in Q1 is much better than what we forecast for the full year. So, system is limited in terms of total size. So, I don't think that it will be a game changer. But still, it could account for some tens of basis points of growth. And for signaling, let's see, because part of sales are coming from what we call small base orders. So, that could be a potential upside. But I'll be in a better place later. in November when giving the full guidance to refine our sales guidance.

Got it. Thank you.

Thank you. And our next question now comes from Andre Cookman from UBS. Please go ahead. Your line is open.

Yes, good morning. Thank you very much for taking my questions. I'm sorry, but I'll start with another follow-up on Germany, please, given all the news flow. Could you give us some idea of how much of that 10 billion is Westside versus other? And also, could you give some color on what is your kind of entitled market share in this market?

Hi, André. I'm sorry, but I'm not in a position, because I don't know, in fact, what is the mix for the $10 billion, what will come from Westside, onboard, and potentially other segments of the signaling business. So difficult to give more colors on that. So, the only thing I can say is that our market share on onboard signaling is higher than our market share on wayside. And the volumes that were allocated last year were only on wayside. So, I think that the additional volume... coming from the 10 billion figure that I mentioned before, we'll see some higher share for Alstom going forward. So from that point of view, it's good news. But as soon as we have some news in the mix of the 10 billion, which for the moment is a draft, it has not been validated by the German parliament, as soon as we get some clarity, we'll update our pipeline to reflect that.

That's really helpful. Thank you. And secondly, I just wanted to dig in a little bit more into the rolling stock business mix when you talk about the ramp-up versus serial production. Could you give us some idea on what normal is or kind of where were we, say, last year in H1, H2, in terms of mix of revenues, how much was coming from kind of ramp-up projects versus serial, and maybe also indicated by how much it's shifting from H1, H2 this year so that we can kind of appreciate the cash flow and margin dynamics better.

Well, we didn't go into those details. We tried to explain why the cap redaction level is at that level. But we don't go into much more detail. It's difficult to have a read across of the mix in terms of volume, the mix in terms of sales. We just want to explain to you why with a car production that is stable, we still have some increase in sales because of the mix. And that's pretty logical. When you produce less metros but more TGV, you have a mix impact. And the cars... that you produce have a higher value in terms of cost and in terms of sales and in terms of margins than the one you produced before. So that's why, you know that Alstom has, I mean, only published a number of cars recently. And I can understand why, because it's an indicator that is pretty difficult to interpret because one car could be a TGV or a loco or a metro. But I think it's good for you to have that because it reflects our industrial day-to-day life. And it's one of the drivers of sales and main driver in terms of cash. The only thing that... I could tell you that the ramp-up project, so not the startup and not the serial mode, will account between 15% and 20% of the total volume for this year. That's what I can tell you. Now the impact on free cash flow, the impact... On margins, this is something else, but considering that we have a higher share of ramp-up, it goes with some free cash flow headwind. So that's at least consistent.

That's really helpful. I'm sorry if I may, just the 15% to 20% for this year, would I be right to think that It was similar last year, but the mix between H1 and H2 is different this year versus last year, and that's the cash implication.

No, no, no, no. That's higher than last year for the full year. The 15% to 20% is a full year picture, and it's higher than last year.

That's great. Thank you very much for your time. You're welcome.

Thank you. And from City, we now have Martin Whiskey with our next question. Please go ahead.

Thank you. Good morning. It's Martin. Just a question coming back to your opening remarks. You mentioned that the growth margin, the backlog, has seen an increase of benefit from orders this quarter. If we go back to the failure numbers a few months ago, I think the backlog growth margin was unchanged and there were a couple of headwinds that caused that. What's driven the expansion this quarter? Is it just the quality of new orders or have some of those drags that you saw last time around? I think it was FX and some other inflation that limited the expansion last quarter. Has that now reversed or what's driven that expansion this time around? Thank you.

Hi, Martin. I think it has to do with the quality of the order intake. I would say that the FX is more or less neutral in terms of order intake margin. So, no, it's not a question of FX. It has to do with the first, the mix between rolling stock and the rest, and where we have put the bar in terms of of gross margin. So, yeah, I slightly changed the wording, because the previous wording was always to say we are happy with the quality of under intake, which is above the average gross margin of the backlog, which in turn is above the P&L, so I slightly changed it, but the meaning is the same. We're happy with the order intake margin because it's accretive to the backlog. It means that it's above the average backlog, but it reflects both quality of the orders. It will increase gross margin in the same segment for running stock and also the mix. But the mix in terms of service has not played a role in the quality of the gross margin this quarter.

Great. That's helpful. Thank you very much. And if I could just have a follow-on question as well. When we think about the order intake that you've seen so far this quarter, you mentioned already this was partly in your expectations already. When we think about the remainder of the year, the rolling stock portion of orders have been very, very strong, but obviously you've got an intention in the medium term for rolling stock to become a gradually smaller part of the mix. It doesn't seem that's happening yet. So just in terms of how we should expect rolling the mix of orders over two or three years. Do you still have that view that rolling stock gradually becomes a smaller part as signaling systems and so forth become larger?

Yes, absolutely, Martin. Definitely, we don't intend to grow again the share of our rolling stock. I mean, we like rolling stock because it's core to a pure player such as Alstom. But the direction of the journey is clear. We want to have an activity balance between rolling stock and service, and on top of that, to have a good business in signaling. So the 40-40-20, which is a mix between rolling stock, services, and signaling, is very much what we intend to have in the backlog in the coming years. So it will take some time before being reflected in sales, of course, because the duration of rolling stock contract and service contract is not the same. But there is absolutely no change in the strategy. You've noticed that the book to build for our livestock was below one for the last two years. So, I mean, we have in a way accelerated the transition to a more service-weighted backlog. But if we continue like that, we would be below 40% for sure for rolling stock. So there is a kind of rebalancing in terms of order intake, but there is absolutely no change in the strategy. We want to reduce the share of rolling stock on our sales. It was above 50% last year on sales, and it will be in the next decade below 50%. No change in the strategy, Martin.

Great. Thank you very much.

Thank you. And we now take a question from Jonathan Manson from BNP Paribas. Please go ahead. Your line is open.

Hello. Good morning, everyone. Yeah, maybe the first question. I see in the assumptions underpinning the guidance, it's just a very minor tweak compared to the last quarter for your results. I think you say the The U.S. tariffs, you now expect to be able to mitigate them, whereas I think previously you were sort of saying guidance was given excluding any impact of tariffs. Maybe just an update on why you're able to feel more confident on that. Is it purely that the larger tariff threat has maybe waned a bit or you're able now to sort of scope the actions that you're going to take? Just really why are we now confident that the tariffs will not actually be an issue?

I would say it's a combination of two things. First, some months ago it was pretty difficult to see where this tariff discussion would lead us in terms of impact on our backlog. Now we have more clarity, and one of the important aspects of that is the endgame for in Northern America with Canada and Mexico, and so I think that the landscape is now clearer, and that's important for us. So we have better views of the impact on tariffs, and it's not as extreme as we thought a few months ago. It has an impact, for sure. It's not good, but it has an impact, and the second reason is that we manage it. We had a very constructive discussion, as I said, with our clients in order to absorb that because that's just a reflection of our contract structure. We have changed in law and we just need to make sure with the clients that we have the same reading of the contract and we have a very high confidence that based on that, we'll be able to, I would say, to reflect in our sales the impact of something that was not in the initial contract. So that's why first the gross impact and then the net impact, we have better visibility and we think we'll manage that.

Maybe just a follow-up. The guidance on free cash flows, really specifically for the first half, the one billion, the up to one billion burn, it's always sounded to me like you're effectively describing the worst-case scenario. I mean, you're four months into the half now. Are you any more able to understand the true outlook? I'm really thinking, you know, what's the best case scenario? What's the expected value? I mean, I guess the range of outcomes is perhaps on like a bell curve. You know, what's the outcome with the largest probability? And I'm saying that in the context, I think consensus has maybe got a burn of about 750. So it hasn't gone to the worst case scenario. But are you happy with that? Do you think that's fair as a sort of consensus assumption?

You know that I never comment consensus. I would reiterate the wording because we have put a lot of ourselves in wording exactly what we think on H1. We see limited upside, very limited upside on the 1 billion. I still consider that 1 billion is kind of maximum, but I see limited upside on that. You know that managing for... few hundred millions, the landing is extremely difficult in our industry. So, I will not elaborate more, but I'm sure you have well understood what I said. Limited upside to the 1 billion max on H1 and at least 1.2 billion in confidence on the 1.2 billion cash generation on H2. So when you combine both, I think you should have a good understanding of where we sit today. It has to do with what we think about FFO progression over the full year and it has to do with the down payment weighing and total amount between H1 and H2. And again, I want to maybe something that could come as a surprise to you, but when you have large options, so that's big in terms of orders, but that's not as big in terms of down payments, because options do not come unless we negotiate differently with down payments so when looking at that it explains why we see more down payments in the second year and that's why we see a significant increase in H2 free cash flow versus last year Thank you, very clear Thank you

And now we take a question from Vlad Zergeski from Barclays. Please go ahead. Your line is now open.

Yes, good morning, and thank you very much for taking my two questions. Both of them are on service. Service grows 2%, as you mentioned, in the first quarter. Is there upside or ramp-up to this 2% rate through the rest of the year and perhaps into next year, particularly given how strong the order intake in service was over the past years. And second, the more conceptual question on service. Obviously, you mentioned very strong 10% CAGR of service revenue growth since BT deal, but the book-to-bill was even greater than that, much greater than 1.5% since the BT deal. Why there is a fundamental difference and such a big difference between revenue growth and service and book-to-bill and services? Is it something to do with extension of the service backlog and duration or something else? Thank you very much.

Well, I think that I already answered on service growth, if I understood well your first question. The 2% is indeed less than last year, but the comps were tough last year. I think that last year Q1 for services was something like 13% up, so that's why it's below that this year, but it's still growing. And now, maybe also back to your second question, it has to do with the phasing of a service contract. Some service contracts start with what we call a mobilization phase. We need to get prepared. So it's not really development, but we need to prepare for the maintenance to start. So at the very beginning, we have kind of... startup phase, like in the rolling stock, but not as pronounced, and you know it's not funded, where we have to mobilize resources, so it comes with costs ahead of what we can invoice in terms of maintenance. So, because the book-to-bill was very high, and we were in a phase where we have increased our service base, we had a kind of mobilization phase, We have been through, and this phase now has, I would say, not ended, but is less pronounced than in the past. So it explains kind of phasing of service growth versus last year.

Thank you very much.

Thank you. And now from J.B. Morgan, we have a question from Akash Gupta. Please go ahead. Your line is open.

Yes, hi, good morning, and thanks for squeezing in. I have just one question left, and that is on the pipeline of orders. Can you provide us a bit more color in terms of what size of projects you expect to see in the remaining part of the year? We had already two very large orders in the first four months. but I'm wondering if we have more orders of a billion or two billion size or the pipeline is skewed with a high triple digit mid-size orders. And the background of the question is just because larger order size and lumpy they are in terms of the timing of those orders. So any color on the pipeline, size of pipeline in orders, that would be great. Thank you.

Hi, Akash. Well, I will not give you too much color because, you know, we have a view on the total size of the orders. We are keeping the same optimistic view on the total order coming in the next quarter. But in terms of kind of orders, we are working on multiple different opportunities, should it be high-speed, commuters, regional trains, and signaling as well. So I think it's going to be a combination of all that. I do not see mega contracts coming in the next, I would say, seven months. Even if we are working on significant opportunities, but no, the large ones, the ones that have not been recorded in Q1, but that you have seen in July in the U.S., we are also working on different opportunities in APAC. as well and in Canada as well so it's coming but I think it's too soon to give you more granularity the only thing you can say that we are pretty optimistic that the total size of the order intake will be higher than last year and with a book to bill for rolling stock above one And because of the two orders that you've seen in July, or that could come through and be booked on Q2, I think that the book-to-bill of crawling stock will be substantially higher in Q2 than in Q1. So that's what I can say, Akash.

Thank you. And maybe just to follow up to that, when we look at your base orders, in Q1 they were somewhere in the middle of the $1.5 to $2 billion range. For the rest of the year, how do you see prospects of base orders? Last year, do we see similar growth in base orders as well, or is higher order intake entirely coming from your expectation on larger orders or more than 200 million in size?

Well, yeah, yeah. I see where you stand. I would say that I did not see a major difference in terms of base orders this year versus last year. So we are still in the region 1.5 to 2 billion per quarter. Nothing has really changed. And we don't bet on higher large, sorry, base orders to reach our order intake target this year.

Thank you, Bernard.

You're welcome. Thank you. And we now move on to a question from James Moore from RoadShield and Company. Please go ahead. Your line is open.

Yes, thank you, and good morning, everyone. Bernard, maybe I could start with one, two follow-ups. I noticed you dropped the language on R&D to sales being above 3%, and I wondered if that was a function of gross margin progression being perhaps a touch short of your 100 bits for the year and wanting to hit the 7% adjusted margin, or more a function of timing and the challenge of spending that amount of R&D dollars? I guess that's the first one, and maybe I could come back on the other two.

Yeah, please. On R&D, it was not intentional to change the wording on that. But, you know, it's my job to make sure that you manage different moving parts of profitability bridge. So it doesn't mean that we will reduce the R&D target that we believe is It needs to be above 3% to get to the 7%, but that's one of the possibilities that we have in order to reach the around 7% commitment. So no change in the plan, so don't see in the wording any implied consequences in the gross margin. We are still in the same perspective as when we issued the guidance in May.

Very helpful. And you mentioned the change of law clauses. Maybe this is a question about the fact that in the supply chain crisis, Alstom talked about trying to add more escalated clauses. I wondered if you could help me understand the difference between what those escalated clauses that were added a couple of years ago, how that differs to now adding surcharges for tariffs. Presumably, they're the same sort of mechanism. I wondered why that wasn't covered already in the old surcharge adjustments that were put into contracts.

Well, At the end of the day, when you take a kind of helicopter view, it has the same impact because you want to pass through your clients some things that were not priced or costed like that at the very beginning of the contract. But, I mean, next time I will bring my legal people to answer to your question. But contractually, you do it. There are things where you make provisions for at the time of the bid and things. You don't want to increase your price because you will be less competitive. But you are clear on the formula of escalation of your price to reflect different landscapes. or potential events that could happen in the execution of the contract. So it's a big kind of contract management issue here. But when it comes to tariffs, when we offer a price and that a large part of the bill of material is built in the country but sometimes comes from abroad, you have to be very specific and will be more and more specific considering the landscape in terms of tariffs. But in a nutshell, what we call CPA, so escalation, and change in law is different. I mean, you can't escalate a cost base for tariff. You have to be extremely detailed, and you have to come to your client to say, well, at the time of the bid, We thought that the tariffs on such and such part of the bill of material was such. Now it has changed. It has nothing to do with the economic environment. It has to do with what your government is deciding. So it has to be reflected in the price. So we have both escalation formula, and you know that we think that we are well protected from that point of view, and change in law where things that cannot be reflected in an escalation formula have to be implemented.

Yeah, thank you. And lastly, if I could, you mentioned the 100 billion German budget, and you mentioned the signaling opportunity. but didn't seem to expand so much on the rolling stock opportunity. I presume you see a very attractive rolling stock opportunity also in Germany. I wondered if you could expand a little on that.

It's a bit early, James, to elaborate on that. I understand that there is a lot that will be done on the infrastructure of the network in Germany. You know that some part of that infrastructure we are not in. I think it will be a material part of the 100 billion. So we don't know exactly. We have not changed our views. I mean, when you want to modernize your network, you have to start with the network itself in terms of signaling if you want to improve your traffic management, but in terms of infrastructure as well. So we have not seen a lot in terms of rolling stock. By the way, our backlog is quite heavy in Germany with the existing backlog for rolling stock. We now have to deliver. In the years, I would say, since the merger, we have taken some good order intake and some great ones. So now we have to execute. We are in the ramp-up phase of those contracts. So, if it comes with new rolling stock orders, it will be great, but I have no details on the granularity of this, because, again, the government has to fund infrastructure, Deutsche Bahn, but when it comes to local public transport authorities, we don't know yet. It's too early, James, too early.

Thank you, Bernard. Thank you.

Thank you. And we now move on to a question from Louise Billon from Alpha Value. Please go ahead. Your line is open.

Hi. Good morning, everyone. Thank you for taking my question. Could you provide more details on the projects in the ramp-up phase? So what are the projects in the ramp-up phase? Is there a risk in the development of those projects? And if yes, to what extent is this risk included in the fully-African spoke islands? And also maybe could you give us the recent development for the TGVM project?

Okay. Generally speaking, all our projects come with risks and opportunities, so it's our task to manage both. And yes, when you have a higher proportion of ramp-up projects into the year, from that point of view, it's more risky than a year with only serial projects. When you have a high... proportion of serial projects, what you face could be supply chain issues. That's what happened last year. Now we are in a different environment. We don't think that the supply chain will be the driver. It's more the end of the engineering phase and the end of it between engineering and manufacturing. That's where we are. Is it taken into account in our free cash flow guidance? Yes, in a way that by definition when you have more ramp-up projects, I mean, you burn cash because you are ordering raw material, you have a higher proportion of WIP, and finished goods waiting for the homologation. That's why, by definition, a year with heavy ramp-up project is more challenging in terms of cash generation. And, of course, it still has some risk of execution, but that's our day-to-day job. There is nothing much I can elaborate. The only thing I could say that this year, ramp-up projects are mostly... in Germany and in France and you mentioned one of those which is a TGVM not much I can say by the way it's the client that will decide when to go for a revenue service we are ahead of this moment we are still in the testing phase and we'll have the obligation phase so still a long way to go and it's not to me to give any specific news on the TGV the client

Okay, thank you.

Thank you. And as a brief reminder, that is star one, if you would like to ask a question today. And we now move on to a question from William Mackey from Kepler Shepard. Please go ahead. Your line is open.

Yeah, good morning, Bernard and team. A couple of questions. I guess the first one would be, could you update us on the progress of a number of the legacy contracts, the tail risk at the end of your backlog, and what level of – I'm thinking particularly the Amtrak contract for high speed. There's a number of contracts in Denmark and France, which are perhaps under some scrutiny externally. update on how you see those progressing and the potential impact or drag that's going to have on the full year operating profitability. My second question moves across to Asia and just to see if you can provide any more color on your thoughts about progress of the business in China and some of the assumptions you might be making for contributions from JVs this year.

Okay, so we are moving from orders and sales to profitability here, and so not much I can share with you today, Will, but... By definition, all contracts that have a high percentage of completion are in the delicate phase of the end of the program. So, you mentioned some of them. So, as I said before, as now the event rise is totally executed in terms of manufacturing, we are at the end of it. So, I don't mention it as... as a major drag on our margin and having not Aventra will be a kind of improvement versus last year even if we are still refining some discussions with the client for the reliability phase of the program so we are not definitely out of it but the most painful part of that has been done and has been provisioned I would say Nothing specific to discuss on DSB. Maybe on Amtrak, we are expecting some news. Could have been this morning. Could be in the next days in terms of start of the revenue service. So still expecting some good news. We have had some cash, I must say, since the beginning of the year. We see more coming, and it will take some quarters in order to reduce what we see as a positive working cap, so waiting on our cash situation. So it will be recovered over the next quarter. I think it will take... between two and six quarters to recover the cash from Amtrak. So we're optimistic about this one. It will come shortly. I hope that you will see some news from our client in the coming days. Yeah, I shouldn't say days because I don't know exactly. It could be weeks, and this is beyond my control. So forget about the horizon. It's up to the clients, not up to me. And in terms of Asia, we have no specific news to share with you and our business in China. We've seen some good news. Good results from the JVs. So nothing to flag in terms of potential negative impacts in H1. I mean, the contribution remains robust. And when I mean robust, I mean in line with what we've seen previous years, both in terms of contribution to adjusted debit and to dividends and cash. So nothing really new here.

Thank you very much. A quick follow-up, just to frame this discussion about contracts in ramp-up or serial phase. You talked about the 15% to 20% share on a number of occasions. Just to frame it in perhaps a medium-term context, do you have a in mind a sort of balance of how the mix of rolling stock, the ebbs and flows of the business through a cycle should normally sit. Do you think ramp-up should be 5 to 10, or it's about where it should be? Or is it just only possible to sort of make an observation about the current state of development of the business?

Well, it's already pretty difficult to have a view of the endgame in terms of total cars. So for the moment, I keep... My view that 5,000 cars will be the cruise speed level in the next years. So we are not there yet. So having a book to build above one is the journey. Book to build this year and the next year maybe to there. But now... Elaborating on the mix between serial ramp-up and startup is very difficult. By definition, as we will have a book to build above one, it means that we'll have more startup projects coming in the pipe for the next two years, and that will be reflected in the ramp-up in, let's say, three to five years, and then serial mode five to six. That's what I believe. Now it's extremely difficult because it depends on the number of cars. and the delay and the execution risk that we have. And all projects have not the same development phase. It depends on the carryover. So the more gaps you have to bridge between your solution and the client has, the longer it takes in terms of development and the longer intake. to switch from startup to ramp-up. So sorry to be a little bit vague here, but it's extremely difficult to give you more granularity on what is the ideal mix between serial, startup, and ramp-up. But I will think about that if you think it's really a key parameter into thinking about the cash, normalized free cash flow going forward. Could be. Could be important.

Thank you for the insights, Bruno.

You're welcome, Will. Bye. I think that we are done now. Thank you very much for your time, and let's have a good summertime, summer break, and we'll be happy to talk with you when necessary. Thank you. Bye-bye.

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