Alstom Unsp/Adr

Welcome to the Alstom 2025-2026 Full Year Results Conference Call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to Martijn Sian, CEO. Sir, please go ahead.

Good morning. Good morning, everyone, and thank you for joining us. to discuss handsome results for the fiscal year 25-26. It is fair to say that I joined the company at a critical time. The past year has demonstrated both our strengths and the areas where we must raise the level of performance. On the one hand, the order backlog is at a record high. We've got a solid base to build on. Progress has been made in the last few years on several aspects. On the other hand, the execution challenges we have faced on some rolling stock projects are highlighting areas of project execution that require improvement. This improvement will ensure that we convert our backlog into sustainable profit and cash generation. The shortfall in cart production in the fourth quarter was not a one-off event, but instead highlights a lack of consistency in project execution within the rolling stock prototype that led to guidance being revised. After only six weeks in the role, it would be presumptuous for me to claim that I have the answers to improve operational performance on financial trajectory of such a large and complex business. Today, therefore, I will begin by highlighting key takeaways from the past fiscal year before showing my assessment of the current context and outlining my priorities for the group. Bernard will then talk and work you through the financial performance for the year, and I will conclude with the outlook of the 26-27 fiscal year. So starting with some highlights for the year. Last fiscal year was a record high for order intake, with nearly 28 billion euros for new orders. This reflects the commercial success of several new platforms, including Avelia Horizon for very high-speed trains and Coradia Max for double-deck regional train solutions. In addition, Alstom achieved a record level of orders in signaling, confirming its position as one of the leading players in digital rail solutions. Group sales grew organically by 7.2% in the last fiscal year. All product lines contributed to growth except for systems. Adjusted EBIT margin was below expectation and below last year's level. This was mainly driven by underperformance in rolling stock with a mix of projects in industrialization and homologation as well as some projects in late stage executions. I will come back to this in more details in the following slides. Three cash flows with €336 million in line with this guidance. So, this slide illustrates the commercial success of our rolling stock platforms with a particular focus on Avelia Horizon. The first order of Avelia Horizon was signed with SNCF eight years ago. we have continued to secure additional orders based on the same platform with different customers. Each new order relies on a proven core design. This brings clear benefits to both Alstom and our clients. It limits development risk and cost, makes better use of an established supplier base, and shortens the time between ordering tech and entry into commercial service. This ability to use on-scale platforms across customers and geographies is a clear strength for Alstom. It shows that we can industrial platforms while still adapting them to specific customer needs. It also strengthens our credibility with customers who are looking for reliable solutions, predictable deliveries, and faster time to market once homologation has been reached. Going forward, this platform-based approach will remain the foundation of how we build and manage the rolling stock backlog, with discipline and a strong focus on execution and risk control. Moving to a selection of key operational milestones delivered during the fiscal year. In the U.S., NextGen at CELA entered commercial service on the northeast corridor for Amtrak. with trains built in the U.S. for the U.S. market. As of this month, there are over 10 trains running for commercial service. In India, metros enter service in Bhopal and on daily line extensions, incorporating Alstom CBTC signaling technology. In France, MF19 enters service on Metro Line 10 in Paris, with further deployment planned across eight lines through to 2033. And in Australia, we delivered the country's first brownfield CBTC installation with the opening of Melbourne's metro tunnel. Turning now to this section, which explains under this slide, we explain how I look at the current situation of the group. Astom is an industrial project business. In this type of business, execution quality and financial performance depend first and foremost on the backlog, its size, its balance and its margin profile. From this perspective, clear progress has been made over the past few years. The backlog has increased by more than 20 billion euros over five years. It is also better balanced across rolling stock, services, signalling and systems. At the same time, the gross margin embedded in the backlog has improved by around 200 basis points. Several factors explain this progress. First, rail market fundamentals are strong, with around 210 billion euros of identified opportunities globally over the next three years. This provides visibility but also requires discipline in how we select products. Second, the combination of rolling stock and services transcends visibility on lifecycle economics. Over the past two years, around half of the rolling stock volumes secured also included maintenance contracts. Third, Alstom has built a strong position in digital rail solutions supporting both standalone signaling growth and integrated turnkey projects. Overall, this gives a solid base to build upon and gives me confidence that the business can be set back on course. In an industrial project business like ASTOM, balance sheet strengths and cost disciplines are essential. Progress has been made on this front over the last three years. The deleveraging plan launched in 2024 strengthens the balance sheet, and fixed costs have declined as a percentage of sales. On the environmental side, scope-free emissions linked to passenger transport products sold to customers have been reduced by around 20% over three years, reflecting both product evolution and customer demand for low-carbon mobility. Some progress has also been achieved operationally. Manufacturing quality has improved, and the transformation plan has been launched in Germany, where the industrial footprint is being adjusted to improve efficiency and competitiveness. The improvements do not solve all issues, but they show that actions taken in recent years are starting to deliver results and create a stronger foundation. This slide shows clearly that further progress is required on execution. Execution in the rolling stock business has not yet reached the level of consistency we expect. This has affected operational performance, reduced financial visibility, and complicated forecasting, particularly in the fourth quarter. Car production was broadly stable over the first nine months of the year, but fell short in Q4. resulting in full-year production finishing nearly 100 cars below plan. Most of the Q4 shortfall relates to several major rolling stock platforms where development and industrialization phase are happening at the same time and are taking longer than expected. As a result, homologation has been delayed and additional costs have been incurred. Resources remain engaged for longer, testing phases are extended, and in some cases, retrofits are required. These factors are putting pressure on near-term margins and cash. They do not lead to deliveries being cancelled, but rather delay them on the associated cash inflow. In parallel, the group is analyzing a limited number of contracts, where additional challenges were identified during project reviews in the fourth quarter. So this slide highlights the margin impact of execution inconsistency and industrial inefficiencies. In short, we should be operating at a gross margin level much closer to the 16 to 16.5 percent implied in the backlog. This gap is not structural, and closing it is my number one priority. Before defining solutions, it is critical to fully understand root causes. First, planning execution is often impacted by insufficient end-to-end coordination between teams, suppliers, customers, and regulatory authorities, leading to overlaps in development, industrialization, testing, and homologation. Second, while our engineering capabilities are strong, we need to reach a level of quality and technology in order to have a maturity which comes faster with a clear right first time approach. Finally, development and manufacturing are often organized through highly optimized but complex setups. When project management is not strong enough and business processes are not fully aligned across the group, This can lead to blurred accountability and execution inefficiency. This issue can be fixed and the team and I are fully focused on delivering tangible operational improvements. In the meantime, on this slide, you see that we are already launching a number of pragmatic short-term actions that can start making a difference quickly. First, we are reinforcing lean operating discipline with shorter management cycles, faster decision-making, and earlier issue identification closer to the shop floor. Second, we are strengthening accountability across teams by clearly defining roles and decision-wise. We are simplifying the way we work so teams can focus on execution rather than coordination. Third, we are maintaining a lean cost base with resources prioritized towards critical projects and spending tightly linked to delivery needs. Finally, we are accelerating procurement actions through faster sourcing, increased standardization and better leverage of our order book in supplier negotiations. These actions contribute to core execution fundamentals. We will be implementing these actions with determination, and I will keep you regularly informed on how we are progressing. In the meantime, we are preparing for deeper operational changes. And by deeper changes, I mean aligning offering, footprint, and operation organization. This concludes my preliminary remarks and I will now hand over to Bernard for the final financial review.

Good morning, everyone. As shown on slide 15, Alstom recorded 27.6 billion afforders in the fiscal year. The book-to-deal ratio was 1.4 at group level. As a result, the backlog reached 104.4 billion euros compared with 95 at the end of March 2025. The increase was driven by strong order intakes, partly upset by negative currency effects. All product lines contributed to growth of the backlog. In rolling stock, the book-to-bill was also 1.4%. It's important to underline that this performance was in part supported by several options exercised during the year. Those options represent 37% of the order intake of the rolling stock product line. This includes Avelio Horizon high-speed trains, Aero RNG commuter trains in Paris, New Jersey transit trains in the U.S., and Coradia Max regional trains in Germany. This reflects the strength of our platforms and the quality of the discussions we have with our clients, rather than a purely opportunistic commercial decision to tender. And of course, orders booked as options have a different cash impact compared to new orders. Signaling had a record year for order intake. We secured major contracts in Italy, Taiwan, Brazil, and Singapore. In services, order intake accelerated in the second half of the year, driven in particular by operations and maintenance contracts in the US and Canada. While the share of backlog from services decreased slightly to 38% at the end of March 26th, will continue to ambition a share of above 40% in the short term. Looking at regions, the Americas delivered their best year ever, including a large commuter train order in New York. Europe continues to stand as the largest region for Alstom, supported by strong momentum in France, as well as flagship contracts in Portugal and in Poland. Turning to sales, on slide 16, sales reached 19.2 billion euros for the year, up 7.2% on an organic basis. All production lines, with the exception of systems, contributed to sales growth. Rolling stock sales totaled 10 billion, representing 9% organic growth. This reflects good momentum in France, particularly supported by the RER-NG program, continued momentum in Asia Pacific with locomotives in India, and project execution in Italy. Service sales reached 4.7 billion with 7% organic growth, supported by strong performance in Italy, the UK, Australia, and airport people movers in the U.S. Sales in signaling came in at 2.7 billion euros, with 8% organic growth, driven by robust execution in France, Italy, and Germany. Reported growth was more modest, 2%, mainly due to the deconsolidation of the North American conventional signaling business. Finally, system sales. totaled 1.8 billion, representing a 5% organic decline. Performance was impacted by the ramp-down of the Mexico Trenmeyer contract, which was naturally upset by ramp-ups in the Philippines, Taiwan, and Brazil. Looking at inorganic items, foreign exchange was a 2.8 point headwind, driven by euro appreciation against most currencies. Scope had a negative 0.6 point impact also. On the reported basis, sales, therefore, increased by 3.7% during the fiscal year. Let me now turn to the P&L on slide 17. Gross margin was 2.5 billion euros for the fiscal year, representing 13.3% of sales. This is a decrease of 80 basis points compared with the previous fiscal year. Excluding scope and currency, the gross margin percentage decreased by 60 basis points. On the one hand, we continued to make progress on industrial efficiency, contributing 50 basis points to gross margin. While total car production declined at group level, production increased in countries that previously had excess capacity. In particular, production in Germany almost doubled compared with the prior fiscal year. On the other hand, this improvement was more than offset by project execution challenges. These mainly relate to higher-than-expected costs at completion on several rolling stock projects. This resulted in a negative impact of 110 basis points on gross margin. Despite currency, scope and gross margin headwinds, adjusted EBIT was broadly unchanged at 1.2 billion euros compared with the prior fiscal year. Turning to slide 18 and the analysis of adjusted EBIT margin development for the fiscal year. Scope and currency... had a negative 30 basis point impact. Adjusted for these items, adjusted debit margin was stable compared to the prior year. For the reasons I just discussed, gross margin was a headwind on adjusted debit margin for 60 basis points. R&D expenses accounted for 3% of sales in the year, 20 basis points higher than in the prior fiscal year, with stronger spend in H2 compared to H1 As for CLAM, headwinds from gross margin R&D were offset by continued tight control costs on SG&A, contributing to 40 bps improvement, as well as the strong performance of Goin Ventures, contributing 40 bps. I would stress that the later reflects strong performance for JD's overall, but also an exceptional contribution from one specific JV in China upon the successful completion of proportion contracts. Together, adjusted debit margin was down 30 basis points to 6.1%. Looking at net profits on slide 19, non-operating expenses have reduced to 155 million euros in the fiscal year, non-operating expenses mostly related to right-sizing initiatives of the food price in Belgium, in France also, and the German transformation plan and some legal costs. As a reminder, integration costs were nil in the fiscal year as Bombardier's integration program was included in the prior fiscal year. Net financial expenses decreased to 165 million euros from 214 million last year, thanks to lower interest charges and benefit from currency hedging compared to the prior year. Effective tax rate was 35%, stable compared to the prior year, reflecting some depreciation of deferred tax assets in a limited number of countries, with the structural tax rate remaining around 27%. Finally, adjusted net profit increased by 12% to 559 million for the year. Turning to free cash flow on slide 20, free cash flow came at 336 million in line with guidance. Let me highlight a few items. Adjusted EBITDA was 1.5 billion broadly unchanged compared to the level of the prior year. CapEx and CapDev together amounted to $567 million, up $85 million compared to the prior year, representing 3% of sales, in line with the medium-term view. Financial and tax cash-out together amounted to $356 million, similar to the level recorded in the prior fiscal year. This resulted in funds from operations of €507 million for the fiscal year down compared to €553 million in the prior fiscal year. Finally, working cap was a €171 million headwind last year. Turning to trade working cap on slide 21. Trade working capital stood at 29 days of sales at the end of March, compared with 34 one year ago. The change in trade working capital resulted in an actual cash inflow for $119 million over the year, with a stronger contribution in the second half. Trade working cap has been more tightly managed in a context of greater contract working capital consumption. Payables and inventory days have converged, standing at 82 days and 81 days, respectively. Let me now come to contract working cap. On slide 22, contract working cap moved from a favorable 89 days of sales one year ago to 81 days at the end of March. and now stands at negative 4.3 billion euros, less favorable than last year, where it was negative 4.5 billion. Over the year, contract working cap represented a cash outflow of close to 300 million euros. Contract liabilities, net of contract assets, decreased from a favorable 59 days one year ago to 55 days at the end of March. Solid down payments and the continued contribution from well-financed contracts supported contract working cap. This was offset by a higher proportion of projects in Rumpet compared with last year. During this phase, pre-series calls are being produced and key homologation milestones have not been reached. Rolling stock projects typically move from a contract liability position to a contract asset position, therefore consuming working capital. Finally, provisions continue to decrease by $177 million as expected, reflecting the ongoing execution of the legacy backlog. Turning to slide 23 on cash seasonality. In that fiscal year, seasonality was more pronounced than two years ago. But overall, it remained fairly consistent with the normal pattern of our business that we have already underlined over the last two years. As a reminder, the first half of the fiscal year has fewer working days than the second half, and therefore lower production. fewer deliveries, and lower cash inflows. As a result, in any given year, we typically see a cash imbalance between the two halls, corresponding to an 800 to 900 million euro drag on free cash flow in H1. This imbalance can then be mitigated or could be amplified by the timing of downpayments as well as by trade working capital management. In fiscal year 26-27, cash consumption was 740 million in the first half, followed by cash generation of 1.1 billion in the second half. The phasing of down payments ended up relatively even throughout the year. In the first half, The slightly better-than-expected cash consumption was driven by strong receivables collection and the lower build-up of contract assets. In the second half, cash generation improved in line with the usual seasonal pattern, although cash collection for milestone achievements was lower than usual. This was partly upset by effective trade working capital management. Turning to fiscal year 26-27... We expect seasonality to be more pronounced than last year for three reasons. First, trade working cap is expected to be a drag in H1 due to activity. Second, down payments are expected to be more weighted towards the second half. And third, the phasing of milestone payments in rolling stock will also be even more H2 weighted than usual. partly reflecting the progress made on some contracts currently undergoing homologation and a number of commercial negotiations. As a result, we expect cash conception of around $1.5 billion in H1, followed by strong cash recovery in H2 to generate positive free cash flow for the year. Slide 24 shows how net financial debt slightly decreased to 404 million euros at the end of March 26, compared to 434 million one year ago. In addition to free cash flow, leases, dividends to minorities, combined with the hybrid bond coupon, amounted to around 250 million total cash outflow during the fiscal year. The 53 million euros of FX and others largely relate to the negative translation effect from the appreciation of the euro and cash balances held in non-euro dominated currencies. You will find in appendix of this presentation the updated bridge computation from enterprise value to equity value reflecting these evolutions. Now, the cash generation trajectory update is of course not the one we anticipated. when we issued the 1.5 billion euro cumulative free cash flow generation over the three years through to fiscal year 26-27. Having delivered around 500 million in fiscal year 24-25, 336 million in the last fiscal year, the free cash flow guidance of positive for fiscal year 26-27 issued last month mechanically implies a 600 to 700 million euro shortfall compared to the plan. In simple terms, this can be explained by around 100 million euros of currency headwinds, 100 million euros of investments being put forward, and around 450 million euros of lower-than-expected margin resulting from additional costs linked to specific rolling stock projects, some in random places, and some nearing completion. Last, turning to slide 25, the group commitment to investment-grade grading and conservative financial policy are unchanged. We have open discussions with the credit agency that issued a position paper on April 21st with rating unchanged based on preliminary 25-26 results and 26-27 updated outlook. That we confirm today. Looking at liquidity, cash and cash equivalents stood at $2.3 billion at the end of March, broadly unchanged compared with one year ago. In addition, the group have access to a 2.5 billion revolving credit facility and a 2.5 billion euro commercial paper program, both of which were undrawn at the end of March. Taken together, this provides a group with strong liquidity to support working capital needs. Turning to debt maturity, a 700 million euro bond will mature in October this year. We plan to refinance this maturity, balancing liquidity cost and leverage ratio in line with our commitment to investment-grade rating. This concludes my comments on the financial performance. I will now hand it back to Martin for the outlook.

Thank you, Bernard. As discussed last month, when we released preliminary figures, we adjusted our objectives for fiscal year 26-27 following the execution challenges we are facing. In the context of strong rail markets, we guide for a book-to-bill ratio above 1 at group level, but below the level reached last year at 25-26. We expect organic sales growth of around 5%, driven by improved execution in rolling stock and continued growth in services. Adjusted EBIT margin is expected to recover to around 6.5%. This reflects a step-up in gross margin from the very low level seen in the second half of 25-26, which was impacted by a limited number of projects. These projects are now under tighter monitoring, particularly during their ramp-up phase. We also guide for positive free cash flow. EBITDA is expected to improve year on year while capital expenditure will increase to support new platforms and services growth. We expect working capital headwinds, mainly in the first half. Improving project related working capital is a clear priority and I will engage directly with key customers. This is not the trajectory we set at the beginning of 2024. While issues became visible in the last quarter, the underlying gaps in operational excellence have existed for some time. Our current operational performance does not yet meet the standards expected from the world leader. The integration of two companies with different cultures and operating model has not fully translated yet into a robust and consistent delivery model. There is no quick fix in this industry. but I believe that proven ways of working that I have learned and applied during my career can be used here. Over the coming months, I will review our strategy and commercial approaches to ensure that offering, operations, and footprint are consistent and to make sure we are maximizing opportunities in signaling and services. The outcome, together with our financial ambitions, will be presented at a capital market day in early 2027. What Alstom needs is not just another cost-saving plan. We must address execution issues as their route. Successful implementation of the operational plans presented at the CMD is critical to bolting Alstom back on track for profitability improvement towards 8% to 10% and cash generation in line with best-in-class peers across our segments. This concludes our presentation. Thank you and we can now open for Q&A.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Akash Gupta from J.P. Morgan. Please go ahead.

Yes, hi. Good morning. I got to – my first one is for Martin. In your press release comments, you said that execution on some major rolling stock contracts continue to weigh on near-term margins and cash generation. I'm wondering if you can give us some indication of how many orders are we talking about here, and how does this compare to your overall 104 billion backlog? We have heard about these projects before, and also if you can clarify, are they still the same versus what was talked before, or has there been any addition to the list? The second one I have is for Barna, and it is the margin outside of rolling stock. We give a lot of attention to rolling stock, but maybe we can talk about if we take rolling stock out and look at the margin for other businesses, how does last year compare to year before? And then when we look at margin in current financial year 26, 27, what have you embedded in your guidance, which imply 40 basis points at group level? Thank you.

Okay, maybe I'll take the first one. So we don't communicate which are the projects which are facing the difficulties, but to give you some light on the situation, in the past we have usually focused our attention on some difficult low margin programs coming from the legacy Bombardier, and today we have to recognize that we have also some difficulties on more recent programs. especially some of them were in the late phase of their development. It is a part of the development where we are making the validation, the homologation, and in parallel the production ramp-up. And we have been late in some engineering projects which created late homologation. And this late homologation triggered engineering changes which pushed us order new parts to supplier and disrupted the production and leading also to retrofitosis as is a kind of topic that we are facing and this is also a kind of problem that we have because we have a lot of new product lines a lot of new products in our different product lines and this is a topic which will be solved when we will be in a serial mode because in serial mode our products are good in terms of quality and in terms of cost. So it's really the end of development programs which are facing the most difficulties. Bernard, maybe you can take the second part of the question.

Yeah. Definitely Rollingstock is the product line where we have those difficulties in 25, 26, and where we need to see some recovery in 26, 27. That's our guidance. For the other Rollingstock products, The other, sorry, product lines, signaling was doing very well, and we expect this performance in terms of percentage to be pretty stable next year. Service did also pretty well, and we expect next year an increase in sales and an increase also in performance. We don't disclose margins by product lines. But let's consider that we can see stability in signaling improvement in service, looking at all the rural and wild stock product lines.

Thank you.

The next question comes from Gail Debray from Deutsche Bank. Please go ahead.

Well, thanks very much. Good morning, everybody. Martha, I think you've talked a lot about restoring consistent execution. But do you think that the company also needs to rethink entirely the group's commercial strategy and perhaps become far more selective than before, especially around the rolling stock category? And I guess the question is, you know, from a balance sheet perspective, obviously if you're becoming more selective, there is kind of a trade-off between the near-term pain on the cash flow side and the long-term gain. So how long do you think the group could afford being more selective with lower down payments impacting cash flows?

Thank you for the question. There is two aspects to the question. On selectivity, what I have observed is that there is a strong process which has been put in place in recent years in order to have golden rules and to be sure that we bid only on good bids and I think that this is recognized by the increased margin in the backlog but also by the fact that I believe that the level of risk which is embarked in this order of book is better than in the past. Nevertheless, we are asked to progress in that. And it comes also to a topic of strategy. It is where do we want to be present. Today we have identified 13 priorities in terms of markets. What kind of offering do we want to do on these different markets? And this is a topic I will look at in the next months and which will be part of what we will present in the CND. Because you're right, the market is very strong. So we have a lot of opportunities and for us it's important to focus on lower risk at the same time with a good gross margin, but the level of risk that we embark is key. Today, what we are, the guidance we are giving is a book to build which is higher than one, but when we say that we don't plan to have the same level of order intakes than last year, It also shows that our ambition is really to be selective. And we are taking orders because it's necessary in a project company. I mean, that's the blood of a company to have new projects. We should not be driven by down payments.

Yeah, maybe, Gaël, I will do a follow-up on this one. Definitely, we do not take new orders for cash reasons. I mean, I do not see a single of the order intake in the Rolling Star product line that we have taken, that we have been awarded in 25-26 that has been done for only cash reasons. By the way, it's a decision of the client who ordered the contract. It's not us. And we have raised the bar in terms of cash curves. And what we have seen in some, I would say, cash-in headwinds this year is coming from progress payments that are not in the timing that we expected. And the down payments from new order has a limited share of total cash-in into this year. So I would definitely decouple. the question of liquidity and balance sheet management and the question of selectivity that has to do with the quality of the execution. That is another topic that we will address during the Capital Market Day.

That's very clear. Thanks very much.

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. I have two questions. The first one is kind of going back to the backlog and how quickly you can act on things in the backlog. I was wondering if you could help us understand at the what the percentage of products is at each phase, how much of the backlog is in kind of the early design phase, early ramp-up phase, and the well-advanced stuff where it might be hard to act because too much has already happened that compromises maybe the growth margin going forward. It would be interesting to know that. The second question, just regarding sort of your points you made, Before on the balance sheet, I was wondering if you would also consider, like you did some years ago, some inorganic measures to further strengthen the balance sheet for the refinancing and the other things you've mentioned. Thank you.

Maybe I have to clarify what is my ambition in terms of operational excellence. focus on solving a few projects in terms of improved delivery, better right first time engineering, etc. What I believe that we have to do and that's what we are starting to do is to put the system under tension in order to improve our operational efficiency across the board and to improve all projects, even the projects which are going well, And so, yes, the problems that we have had last year which led to the change of guidance were a limited number of projects, but what needs to be done and what we are starting is to improve the performance on all projects and to improve our lean standard in all our shop floors and all our engineering offices. I don't think that it should be a good way to see, to measure the speed at which we will recover based on only a few projects. It's more the speed at which we will improve the performance in all shop floors, all design offices. And as I said, it is a progressive improvement that we are expecting and that we have put also in our guidance 26-27. Bernard?

Yeah, I will take the second one and balance it. The current rating position does not rely on inorganic actions. Current metrics are in line. Next-year metrics are in line without inorganic actions, but selective measures could provide opportunity upside, and that's part of the review of the new CEO, but it's not needed from a balance sheet and rating point of view.

Got it. Thank you.

The next question comes from Vlad Sergeevski from Barclays. Please go ahead.

Good morning. Thank you very much. I'll ask you couples one by one. First one is on provisions which appear to be supporting for stability in the second half. New risk on contact provisions were at the lowest level since 2021. Could you help us to reconcile such a low level of new provisions with actually very high order intake? steady revenue growth, and several problem projects that you actually highlighted today.

Okay, I will take this one. I mean, the risk on contracts are, I mean, the provisions are down from 921 to 866, so it's a variation of 55 million, so that's not a huge impact. And it's driven by the natural loss contract or provision burnout, that comes naturally with the completion of such contracts. So I see the trend in provisions on contracts totally consistent with the end of such legacy contracts.

Understood, thank you. I was talking about new provisions, right, which were at a lower level compared to the prior periods. If I can also ask on contract assets.

On your comment, on new contracts, we don't take provisions because we do not take any on the contract. So we might revise the gross margin at completion, but not create provisions for losses.

Thank you very much for that. If I can ask about contract assets, it's obviously another half year of increase. It has been steadily increases for two years. Have you done the full review of the quality of contract assets and are you comfortable that all the 6.5 are genuine assets that will be invoiced to customers in the due course? And would you be prepared to commit when do you think contract assets will start going down?

What I did is an extensive review with all regions on their full business and regions had worked contract by contract but at my level what I did so far is regions by regions. We did also the first management business review and we will adapt to governance to be more focused on deliveries. Today I don't have the figure and maybe Bernard you can help me on that. to see when will the contract asset decrease. This is not... What we are looking at is how we can improve deliveries, how we can improve working cap project by project, not contract assets directly. But maybe Bernard, you can help me on that.

Yeah, maybe you follow up on this one. Definitely, yeah, we plan to reduce contract assets. That's part of the plan. The timing is subject to... some, I would say, actions, so I will not commit on anything like that today. But just to, again, to look at that. I mean, contract assets, yes, indeed, have increased. Contract liabilities also have increased. As you know, we look at the net of that. And the net of that has just increased by 85 million, 85 million. So when we work on a backlog of above $100 billion, a variation of $85 million, is something, of course, that is significant on a yearly basis. When we look at the scale of what we are doing, I don't think it's that material. On top of that, what I wanted to say, that the $600 million increase in contract assets is $400 million for rolling stock, but $200 million for service. And one part of that that you may have missed is the impact of CPA, so inflation, escalation of our prices that we recognize year on year, but in terms of cash, sometimes it comes at deliveries or at the end of the contract. So this inflation impact that has been quite significant in last year plays in a way a role in the increase of contract assets and in the gap between margins and cash.

Thank you very much for providing all those helpful details, gentlemen.

The next question comes from Delphine Brault from AutoBHF. Please go ahead.

Yes, good morning. Thanks for taking my questions. I have two. First, your Chinese GV contributed significantly to adjusted EBIT with 40 BIPs. How sustainable is this contribution? You mentioned notably an exceptional contribution. So what should we expect for this year? And second, if I remember correctly, two years ago, you stated that working capital should deteriorate by a cumulative €1 billion over three years. Is this assumption still valid? Thank you.

Maybe I can take the first one. The contribution of China's JV in 25-26 was exceptional and so what we have put in our guidance is a normalization of the contribution of Chinese JV to our P&L.

Yeah. Just to be sure, Delphine, I mean, having a great contract execution of some of our JVs is good news. by the way, some deterioration in some contracts, has the same nature of one-off as a good contribution in China from some JVs. So, it's two different lines in terms of P&L. Maybe the governance is not the same, but the nature of it is totally consistent with what we see in the execution of other contracts in the gross margin. Now, back to your second question. The deviation that we have seen in the third year of the 1.5 billion cumulative cash guidance is coming from margin deviation, FX and CAPEX. So we could consider that part of the CAPEX increase is part of the 1 billion headwind that we explained two years ago. The rest is pretty new, so I still see some headwinds coming from the change in the mix and to kind of normalization of the working cap. So I would say the story is a sign.

Thank you. The next question comes from Jonathan Mouncey from BNP Paribas. Please go ahead.

Thank you. Good morning, everyone. Maybe a couple of accounting questions. Obviously, you report today on the same day as Siemens does. I'm just looking at mobility today. They actually cut guidance on revenue. And if I understand it, the reason they did so was because U.S. tariffs have an impact on costs, and obviously they are recognizing revenue on IRS 15 and that therefore has implications. So, the actual revenue is missing and it will miss all year versus previous expectations. Is there potentially a similar effect to come for you too? And just secondly, on interest costs, you will be refinancing that, I think, 700 million in October. Obviously, the coupon is exceptionally low on the existing bonds. I guess we can expect interest charge to rise over the final six months of the year and obviously for the year to follow. Could you give any guidance on what the impact of all that is likely to be, please? Thank you.

Good morning, Jonathan. Yeah, by the way, we have the same IFRS rule as Siemens, just to be sure you get that. But for us, the U.S. tariff situation is pretty different. I mean, 85% of what we do in the U.S. is by American compliance, so we do not have the same impact. And And that's something that we explained for the last 12 months. We discussed with the clients and there is a kind of re-invoicing of the impact with the clients. So, no major impact such as the one you mentioned before. By the way, the situation needs some clarification in terms of legal framework, in terms of tariffs and impacts on clients. To make a long story short, we do not see at all the same impact on gross margin at completion and revenues as the one that you mentioned. On financial costs, the answer is yes. The refinancing will have an impact. on the bond that is maturing in October was almost nil. So, by definition, when you look at the interest rate situation, it would go up. So, we expect total financial expenses to increase next year compared with this year. Oh, I should say this year compared to last year.

Yes. Thank you.

The next question comes from Andre Coopman from UBS. Please go ahead.

Good morning. Thank you for taking my questions. Can I just start with thinking about the profit bridge for the fiscal year that you've just started, 66, 67. When we get there in a year's time, how do you expect it to look vis-a-vis the guidance for 40 basis points margin improvement? Is that from kind of project execution perspective? Issues not reoccurring? Do you expect further operational improvement, like you saw 50 basis points in 2026? Just want to understand how you see the mix of these likely conflicting drivers to play out in the next 12 months.

Hi, André. I will take this one. So to make it very simply, we see 50 bps negative coming from a combination of higher R&D and normalization of JD contribution and 100 bits improvement coming from a gross margin increase which is going to be again a combination of many things in many contracts plus 10 bits coming from maybe FX no more scope but impact so to make it very simply 50 bits headwinds from higher R&D, lower GD contribution and in the region of 100 dips, improvement in gross margin.

Maybe I can add something here. You could wonder why we are increasing R&D. The increase of R&D is a decision in order to speed up the maturity of technologies on platform below and tenders so that we de-risk a contract. I believe that this is one of the good decisions in order to be more predictable in what we deliver in the gross margin of the projects.

That's really helpful. Thank you. obviously this bridges a year-on-year impact, and can you help us quantifying the overall burden on the margin now from the execution issues? Is that the 60 bps that you incurred in fiscal 2026, or I guess that's added up over the last couple of years at least?

Yeah, I can take this one. When you add it up, all the impacts on the last years, yes, the total contribution of project execution was a negative in the 150 bits region as a total. Part of that was compensated by the improved industrial efficiency, but project execution by itself is wearing something in the 150 bits region as a total this year.

Great. Thank you very much for your time.

The next question comes from James Moore from Rothschild and Co. Redburn. Please go ahead.

Yes, good morning, everyone, and thank you. I've got a short one on free cash margins and a longer one on engineering, and perhaps we should go one at a time. Just on the free cash flow margin, Martin, hi. You talked a bit about a longer-term ambition of being in line with the best peers, best-in-class peers. I think your German friends, have been rolling closer to 10% pre-cash margins for a few years, with the odd exception, versus your zero this year, or one to two over three years. I understand there's no quick fixes. I just wonder, how long do you think that would take? Is it a five-year story or a 10-year story? And that's the first question.

Okay. And this is, I understand the question. I was expecting it. And this is typically what we plan to do. to work on in the next month in order to have a comprehensive presentation at the Capital Market Day beginning of next year. I think it would be present because, you know, I've not been here for more than two months, I mean seven weeks exactly, to tell you how long it will take. But it's clear that our ambition is to be at the benchmark of the market.

Very fair answer. Could you talk a bit about engineering, please? freeze discipline and standardization. From your own understanding, have you got to the idea yet as to what Alstom is doing in terms of percentage of value engineering? How much is a design freeze today? And whether you'd like to change that? And whether you'll say no to bespoke customer spec? even at the cost of orders and where you see the biggest productivity bottlenecks today on that. Is it design validation or more monogation or more supply readiness or factory flow? Just to understand what you're seeing at this early glance on the problems.

You have identified a lot of the root causes. First it starts by the bidding and the selectivity of the process. and it's true that in the golden rules that have been set in IceDome in order to decide if we bid or not bid, the proximity of what the customer is expecting compared to an existing platform is something which is absolutely important. The way we measure that, the way we identify what are the gaps between what we already do and what the customer needs has to be very strong. In the past, sometimes, we underestimated the number of modifications that we had to do and then it has a domino effect because it creates extended development, desynchronization between developments on the same platform and this is one of the pillars of what we need to do to improve and that's why less shifting some platform maturity before a build is absolutely necessary. Then you know the good thing that I see in our rolling stock product line is that we have a lot of new products which have been decided and which are being developed today in high speed train, regional, etc. And so today we have in the last five years we have faced a lot of engineering activities, a lot of new people have joined us which is a good asset for the future. but it's true that skills have been building progressively and I think that we have to be very careful on the staffing and the way our teams are managed for that. And the third topic I'd like to underline and please, you know, remember I'm new in this job but what I see is that we have some complexity in the way we work between regions because I believe that the fact that Alstom is global is a very good thing. We discussed about TARIS before, but even when we speak about engineering, because we are making a lot of development worldwide, which allow our team to gain experience. Now we have to share this experience between regions, between countries, and what we are engaging today is to have a Tiger team, which will help some critical projects in some regions leveraging on skills which exist in other regions in order to make sure that we can leverage on all the skills existing in the company and today i have to see that sometimes between engineering teams in different parts of the world we have not been always with harmonized processes and seamless activity so sorry if it was a little bit not very structured, but that's the way I see the situation in Nigeria.

That's very helpful. Thank you.

Ladies and gentlemen, as a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. The next question comes from Martin Wilkie from Citi. Please go ahead.

Yeah, thank you. Good morning. It's Martin from Citi. I wanted to come back to the gross margins. And obviously, you've given for some time now the gross margin in the backlog at 18%. It's similar to where you were six months ago. And I know there's a lot of moving parts in that because there are longer-dated contracts in service and signaling and things like that. But I was surprised that that number hadn't gone down slightly given some of the rolling stock contracts. that you have at the moment that are going through the lower gross margin. Can you give some of your thoughts as to sort of why that remains unchanged and what you're effectively embedding in terms of the assumed remaining gross margin in the backlog for some of these problematic rolling stock contracts? Thank you.

Hi, Martin. This is Bernard. I will take it. So, yeah, the gross margin is pretty stable. It's up 20 bits here on the earth, so lots of moving parts. side, positive side, the quality of order, I will not quantify it, but it's true that the quality of the order intake is still very good, with a kind of strategic guiding approach, focusing on the good opportunities, maybe more pricing discipline across the industry as well, so that was a positive. On the negative side, the mix, this year was not as good as last year because you've seen a very strong book to build on the rolling stock side. So that was more a kind of headwind. Same thing for the negative revisions of margin of completion. You've seen a quite strong impact in the gross margin that we have traded. That was discussed before. some loss at completion, the reduction in provision as well. So the maximum impact came from the revision, but the maximum negative impact come from the negative revisions of margin at completion. The vast majority of that came as an impact in the P&L as well as in the backlog, and still some to be traded. when it's not on Eros contracts and when the percentage of completion is not 100%. And then I must say we also take some, let's say, cautiousness in the way we book some contracts in order to have some buffers going forward. So these are all the moving parts when you analyze the gross margin over a more than 100 billion backlog.

Great. Thank you very much. And if I could have a follow-up just unrelated on car production, you've guided for an increase next year. I know it's slightly lower in the fourth quarter, and that does suggest that some of these, you know, throughput rates is going higher. Do we have any sort of measure as to what that looks like compared to what you might have thought a couple of years ago? So even though it's up sequentially relative to where you might have been thinking, is that car production level still lower than what you might have thought if we were thinking of it a couple of years ago, or is that back up to the level that you would have thought? Just to give us some sort of sense as to where you are in that trajectory of improving car production.

I was not there a few years ago, but I will try to answer it based on what I understood of the situation. I think that the capability of the company is to deliver much more than 4,500 in terms of industrial capacity, et cetera, and we did that. We were aiming to a higher number in the past, for sure. At the same time, delivering a car in serial production is quite different in terms of workload, in terms of complexity than delivering a car which is in a ramp-up situation. So it's not always obvious to compare a situation where we had more serial production cars and potentially simpler cars because high speed train is not similar to other cars. And so we have to be careful when we are comparing the situation at several years of difference. When we have set this objective, it's clear that it needs significant improvements operationally in order to overcome the difficulty we had last year and to go further in terms of car deliveries.

Great. Thank you very much.

Thank you. So it's now time to close this call. And so maybe a few words. This was my second call with the investment community since the start of my mandate, so in seven weeks. And my objective has been to be candid about where the group is and where it is performing well. Equally, where we need to raise the bar in terms of level of execution, and particularly in rolling stock. To be clear, I'm mindful that there is a lot of work which remains to be done and some actions have already been launched and now the urgency is also to work on deeper changes. That's the purpose of what we will discuss in the Capital Market Day beginning of 27. So thank you for your time and have a good day.

Thank you ladies and gentlemen. The live presentation is now over. You may now disconnect.