Alstom SA

PAR:ALO

Earnings Call Transcript 2023-Q4

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Good morning, good morning, everybody. Welcome to Alstom '22-'23 financial results. I will start by giving you some highlights on the year. And then I will hand over to Laurent, who will detail to you the financial results as well as the trajectory and outlook. And I will come back for the conclusion, and we will then open the floor for questions and answers.

So just to give you a few highlights of the year. Of course, one of the main items is that the fact that we are now well established as a global leader in a very good market, in a buoyant market on all continents, all countries in all our activities. And that's one of the most satisfactory factor, I would say, in a year marked by a complex and uncertain macroeconomic environment. We are the undisputed global leader in this market. We have now a solid foundation. We have restored the customer satisfaction. We have stabilized all the projects, notably the ones coming from the ex Bombardier portfolio. All the new orders have been with the right quality, the right margin, the right risks. And we have now -- we can benefit now from the synergies, and we are, I would say, up and running to open this new chapter of Alstom history.

Just one or two words on the results themselves, which will be, again, detailed by Laurent later on. They are in line with our guidance, in line with our objectives, in line with our trajectory, which is I'll remind you, with growing adjusted EBIT, a positive free cash flow of roughly €200 million. We are giving to you some new objectives for the current year, so the year '23-'24 with an adjusted EBIT of around 6%, and the free cash flow would be significantly positive. And we are confirming our midterm targets, which will be reached in '25-'26. So 1 year after what was previously forecasted, and this is mainly due to the macroeconomic environment and indeed, the inflation, and we have already in the past, opportunities to detail to you the consequences of this macroeconomic environment.

So back to the main numbers of the year. Order of €20.7 billion, a book-to-bill of 1.25 showing a good market momentum, a good commercial momentum, sales of plus 7%, 16.5%. Adjusted EBIT, which increased more than 10%, 11% increase in adjusted EBIT, margin increasing at 5.2% and again, a positive free cash flow of around €200 million, which, of course, is a remarkable improvement as compared to last year's situation. As far as our ESG indicators are concerned, we have a strong decrease in our Scope 1 and Scope 2 emissions, slow decrease on energy consumption. So I have to say that we are in line, even ahead of our trajectory in terms of CO2 emission in terms of net 0 trajectory, which is extremely good news. And we have, for the first time, we are publishing our taxonomy alignment. I come back to that, but at 59%. This is an extremely high number. I think it's among the large capital goods industry. It's probably the highest level I know. We are still continuing to work on gender diversity within the group, and we are making improvement in that perspective as well.

So talking about the market, two aspects to the market. First is the traffic recovery after the COVID episode. So of course, it depends on the different regions. It varies depending on the continent. In Europe and Asia, it has mostly recovered the pre-COVID level. In the U.S., it's not as much, particularly in the urban transport as much as it was in the past, but Amtrak is now back to pre-COVID level. As importantly, if not more importantly, we have seen during the year -- this year, a confirmation of the all the sustainable agenda of most of the countries and regions in the world. A lot of investment plans have been announced throughout the world, and we are naming a few of them on the slide, whether it's in Germany, in Italy, in France with the €100 billion ticket, in India, in the U.S. with Infrastructure and Job Act, starting to produce results. Over the plan in Europe for the model [indiscernible], for the diesel replacement. So very nice momentum in favor of rail transportation throughout the world.

These are not just, I would say, policies. These are being translated into real order, a real pipeline of orders. And you can see on the slide so we are confirming market potential, a pipeline of more than €220 billion till '25-'26, ahead of what we were showing you last time. And in the next 18 months, we believe that it will be around €120 billion. I'm not going to detail all the regions, but all regions are a concern in Europe, of course, which is the majority of the market, half of the market is in Europe, but not only in Asia Pacific, whether it's in Philippines, in India, Australia, whether we are in America with -- by the way, a number of turnkey orders coming back in the Gulf countries as well. Latin America, which was low in the previous years, is now back on a very positive trend. And of course, the Newark, Canada is also very positive. So across the globe, a very nice pipeline.

Our own commercial successes, a growth of 7% as compared to last year, but 20.7%, which is important is to have a positive book-to-bill and even more important, which is to have a very quality order intake. I mean the question is not to book orders just for the sake of booking orders. It's really to improve the quality of our backlog, which we have done very well this year. If you book -- if you look at the 2 last years, so we have booked more than €40 billion orders, which is nice. I mean, after such a merger, after the equivalent of this large merger, sometimes you have a commercial slowdown, and this has not happened. And I think this is on the back, both on the successful integration as well as on a good market. In terms of scope, in terms of activities as well as geographical spread of these orders, as you can see on the slide, quite nice spread relatively large level of order intake this year in Europe, but we have in Americas, in APAC and America, I would say, also a large chunk of orders. In terms of activities, it is reflecting more or less where we want to go with a very large portion of services, but signaling has also been with a book-to-bill of 1.2. And systems is relatively low this year. As you know, it's bumpy. We have, as you will see, sales growing quite fast in systems, low level of order, but I expect more orders to come next year as we have already been awarded a number of orders, which we have not yet booked.

Some examples of orders, operation and maintenance, to recall that we are not doing only maintenance but also operations like in Newark or MARC. A lot of options on rolling stock orders, which is very good news because options are usually less risky than new orders. This is easier to implement. And as I said, some very large orders so in -- for Toronto, for example, or in signaling in Hong Kong.

From a sales perspective, so also a very steady growth from €15.5 billion to €16.5 billion, something which is extremely good in terms of momentum, the right level of growth with rolling stock, which is -- could be seen as relatively stable, but you have a high level of rolling stock in the system as well. So the combination of the 2 is showing a good growth. But as we want to have is faster growth in services, in signaling and in systems, which is picking up after a slowdown after the execution of some projects in the Middle East and which is now ramping up in Egypt, in Mexico or in Thailand. So a very nice mixed evolution as well.

I was detailing earlier, our ESG emissions, our ESG targets. So as said, very much in line, minus 22% in terms of Scope 1 and Scope 2. Our target for 2030 was 138. So we have already done more than half of the reduction needed to get to this level. So obviously, a lot of efforts have been done this year. That's extremely good on the back of all the energy savings, which have been launched as well, to be fair, to save costs, considering the energy price environment. On Scope 3, more complex to look at it. It's -- as you know, this is the emission of the products which had been sold. Here as well, we have a clear target and a clear reduction of scope that we are envisaging as we are moving them. It's not only, by the way, due to us, it's also due to the fact that our customers, the operators are also decarbonizing their operations.

In terms of taxonomy, as you know, in the first year where we need to publish to give you our taxonomy, European taxonomy eligibility is 100% as we are working on environment topics. And we have an alignment of depending on sales CapEx or OpEx of 50 plus, which again is much higher in a capital good industry.

Last but not least, as you know, we have a set of KPIs for the decarbonization, caring for our people, positive impact, acting as a supplier -- a responsible business partner and all these indicators are moving today in the right direction, and we have set up clear targets for March 2025.

Finally, a word on innovation. As you know, the ultimate goal of the new company, the merged company is to boost innovation in order to bring to the market more sustainable to greener, more digital, smarter solutions to the market. As we are moving, I would say, from the situation where we had to very thoroughly integrate the 2 companies to a situation where we can accelerate now our growth and our development. We are accelerating the R&D, and you will see that we are accelerating the investment in R&D as well. A lot of very positive points this year. On hydrogen, of course, as you know, we have done a fantastic momentum in terms of fantastic evolution in hydrogen. In terms of digital with cybersecurity, train autonomy, but also in terms of new platforms where we have developed, as you know, the new very-high-speed platform, which is saving at least 15% to 20% energy in terms of consumption and which is adding 20% of seats. So in energy per seats it is a marked improvement.

I will now hand over to Laurent, who will detail for you the financial results.

[Laurent Martinez, Chief Financial Officer]

Thank you, Henri, and good morning, everyone. So let's start with a review of our P&L. We delivered close to 7% of sales growth in the year, driven by the positive execution and in line with our trajectories. Gross margin has increased by 0.2% at 14.1%. RD was slightly lower this year in terms of P&L impact still with a slight increase in terms of gross cost, offset by financing received. S&A represents 6.6% of our sales driven by inflation and growth in our region to support our ramp up. Finally, as you see, a very sound and stable contribution from our Chinese JV, quite a nice catch-up considering the slow start of the year due to COVID restriction back in spring last year. So altogether, 5.2% of adjusted EBIT, very much in line with our guidance announced at our H1 result.

So moving to the main drivers behind this adjusted EBIT, very much consistent with the numbers I gave you back in November. So first of all, the ramp-up of synergies is developing as planned, contributing 60 basis points, equivalent to more than €200 million of synergies, and this fully in line with our expected execution in terms of synergies. Second, as you see reduction of nonperforming sales had a positive impact of around 20 bps, slightly above our initial expectations due to some sales shifting to FY '24, reflecting phasing dynamics of contract execution. Third point, higher volume and mix with a positive 30 basis point impact as expected. And finally, we guided, here in line on an inflation impact of 70 to 90 basis points. We are getting to the higher part of this range, considering in particular our salary increase negotiation outcome, and we'll have a closer look on this on the next slide.

So looking now at the negative impact on our margin from inflation and the developments, which will be trending down over the years. So you remind this 90 basis point headwind is primarily linked to lower margin at completion on non-index contracts, reflecting impact on higher energy cost, supply chain and labor. Over the last few months, we've been working towards increasing the share of index contract in our backlog reaching 71% in FY '23 versus 66% last year and expecting this share to exceed 80% by FY '26. As we generate a higher proportion of revenues from index contracts over the years, we expect as well a positive margin mix effect of 10 to 20 bps per year. This will bring the 90 basis point headwinds impacting our FY '23 margin to below 40 bps in FY '26. So altogether, of course, this margin accretion is an important driver towards our midterm margin achievement.

Meanwhile, we continue to be laser-focused on stringent action to reduce exposure to inflation. Neon commercial side, where we do prioritize index contract. 75% of our orders of FY '23 are protected from inflation and our pipeline is well above 80%. Energies where we have implemented energy savings with 10% reduction achieved and, of course, efficient energy hedging strategy, labor costs where the salary negotiations are now completed. And on supply chain, where we continue, as you know, to have a large share of our suppliers in fixed price, in particular, in the case of customer firm-fixed contracts with more than 80%. And as we move along, we secure indexation clause from our customers. We offer progressively this indexation protection as well to our suppliers. So all in all, as you see, we have been very active in managing inflation, and we have a clear path towards the progressive reduction of this impact over the next 3 years.

Turning to net profit. On restructuring, as announced, Phase 2 of our general restructuring has been booked in the second half of this year for €50 million. In terms of integration and other costs, we are now at plan, accelerating the deployment of our processes and tools, leading to €181 million cost during the year. We are specifically pleased to have deployed now our new digital suite in Latin America, Canada, France, Benelux, and this effort will decrease in FY '24 and will be completed by FY '25. Other one-off costs include significant effort on legal fees, in particular, related to Bombardier arbitration. On financial results, we had, as expected, an increase in the second half of the year due to rising short-term interest rate, but also due to the evolution of our portfolio of ForEx and bonds. A large part of these effects are noncash, as you will see on next slide. Last point, our ETR has been stable at 27%. So all of this is leading to an adjusted profit of €292 million for the full year.

So turning to the cash flow generation. So we delivered spot on our guidance with a positive free cash flow of around €200 million. Among the positive contributors, of course, uplift of profit definitively, disciplines that we kept on CapEx and R&D spend and the Chinese JVs, which has been delivering nicely in terms of dividends. Working capital has been impacted as expected by -- essentially by provision utilization, and I will deep dive into this in a minute. Financial cash out has been at €43 million, representing mostly interest expense and fees, while our tax cash out stand at €130 million. Overall, as you see, very pleased by our cash performance, driven by profit step-up, positive market momentum and cash discipline across the board.

So turning to the evolution of our working capital, a number of moving parts. First, I remind that we analyze inventories together with contract assets and liabilities. It's more representative of our supply chain and production cycle. So net increase is largely reflecting the increase of our activities and accelerated production ramp-up translating into sales, of course, and some stock anticipation to manage our supply chain challenges. Related to contract liabilities, as expected, nice increase driven by continuous healthy down payment, and we obviously expect this trend to continue during the next fiscal year. Second is the increase of trade payables is essentially related to the increase in inventories with turns equivalent to H1.

Finally, we have been disciplined in managing our trade receivables with turns as well equivalent to. So looking briefly at the other specific lines on the other liabilities, other payables are very stable at €1.44 billion in March '23 versus €1.5 billion in March '22. Suppliers with extended payment terms also stable at €303 million versus €324 million last year. German-specific down payments reduced to €198 million versus €471 million last year as with progress on deliveries. Of note, the change of regulation in France on VAT on progress being to align with European VAT directives. VAT is now being accounted on unbilled receivables. This translates into accounting impact on contract assets unbilled, accounts receivables and other current tax liabilities with limited cash impact during our fiscal year '23. Finally, related to provision, €230 million consumption over the year slightly below our expected consumption trajectories and consistent with the nonperforming sales we had this year. In terms of addition and [relies] on risk on contract, you will see that we are boldly stable, demonstrating our execution quality. So all this considering is working capital before provision standing at negative 10% of sales with continuous normalization to come in the next fiscal year. I will come back later on these subjects.

A few words on liquidity with a continuous strong liquidity position at around €4.8 billion, out of which our committed RCF, which are fully undrawn at the end of March '23 at €4.25 billion. As you know, we are using on top of our RCF, short-term commercial paper, bank facilities to cover our working capital swing within the period.

Net debt evolution, pretty stable, as you see, with drivers coming from the free cash flow, offset by dividend and lease contribution, but some one-off as well on Remedies with some ForEx impact as well, broadly stable versus March '22.

Turning to our long-term debt. No change in the key parameters here, namely no financial covenants, very long profile and with the first basically repayment in October 26, very low rate at 0.22%. On the right-hand side, you see as well that the current interest rate had a positive impact on our pension with €245 million year-on-year net pension liability improvement. Finally, Moody's has issued a Baa3 rating with a stable outlook, confirming Alstom investment grade. We remain fully confident in our delivering territories driven by cash generation and profit uplift, and we confirm that this rating has absolutely no impact on our financial trajectory.

To end this section on FY '23, we -- the Board is proposing a stable dividend of €0.25 per year, stable versus last year at the next July shareholder meeting, which is basically for decision.

Let's now turn to our trajectory and outlook. So starting with our sales trajectory, we confirm our target of delivering sales of CAGR of above 5% over FY '21 to FY '26. This is based definitively on our positive market momentum, our strong €87 billion backlog with around €38 million to €40 billion of sales, which are secured over the next 3 years. We'll delve into the growth drivers of our product line in more details this afternoon. Overall, we confirm a positive sales growth momentum, and we expect the sales contribution from signaling, systems and service to increase to about 50% of our group sales by FY '26.

Turning to our backlog execution dynamics. You see on this chart in dark blue, how the €40 billion of orders recorded since the last 2 years are now translating into sales with high-quality orders, all of them with, in average, consistent fully with our 8% to 10% EBIT target, but as well our cash trajectories. In parallel, we continue to execute on our legacy backlog. In particular, we expect nonperforming sales at 0% gross margin to reduce to around €1.7 billion in FY '24 and then around €1 billion in FY '25, consistent with our expectation. Contribution of this will be marginal as of FY '26. As our results, our gross margin in backlog is increasing steadily year-on-year by around 50 basis points per year since the acquisition, and we expect definitively this trend to continue over the next 3 years. Overall, quality of our orders combined with focus on execution will be driving our margin trajectories moving forward.

A few words on synergies. I'm very pleased to report a good performance this fiscal year with 250 -- €205 million achieved, driven by the good jobs of our procurement and operation team to name a few. Looking ahead, I'm very confident that we'll reach our synergy target of around [€500 million] in FY '26 based on the significant progress we've been doing in the last 2 years, our teams are now delivering on a very clear and committed plan around 4 areas: product convergence, financing, procurement and footprint and operation.

This is translating into our margin outlook for the outer years. So zooming on FY '24 first, margin contribution from synergies will reach an uplift of 50 to 60 basis points. Nonperforming sales will be supporting by 20 to 30 basis points, our profitability, volume and mix by 10 to 20 basis points and the negative impact of inflation will reduce compared to FY '23 with a positive impact of 10 to 20 basis points. Finally will be as well, as indicated by Henri, increasing our effort in innovation and R&D with a negative impact of 30 to 40 basis points. Looking ahead towards '25, '26, Synergies will bring another 80 to 90 basis points of profitability. Nonperforming sales will be reducing basically to nil and helping our profitability by 60 to 70 basis points, while the synergies will be as well supporting our profitability by 30 to 40 basis points. As indicated in our previous communication as well, we have a very high degree of visibility on all of these drivers, and we are expecting a linear development of those drivers during the years to come. In addition, last but not least, volume and mix effect will provide up to 2% of additional margin, leading to our 8% to 10% EBIT framework that we will be reaching as of FY '26.

So turning our earnings to EPS with basically a number of positive elements in terms of adjusting net income with a significant EBIT uplift driven by volume and margin. But as well, the material decrease of integration cost and restructuring, which will be starting as well in FY '24, together with the reduction of one-off related to the legal fees, mainly in the frame of our arbitration process. On the other side of the equation, a negative impact from financial expense linked to higher interest rates and mechanical increase in terms of tax due to our profit uplift. So as you see, a very material step up of our net income and our EPS in the years to come. So to end this section on trajectories.

Turning to cash. We expect free cash flow to be a significantly positive in FY '24. In terms of drivers versus FY '23 cash generation, positive contributors are mainly the positive momentum in EBIT and a significant reduction in integration expense, which -- with a trend which will continue up to FY '26, balancing on the other side, increasing financial interest and CapEx raising to 2% of sales. Last not least, on the working capital and consistent with our previous communication, we see around €900 million of working capital normalization with about 60% coming from provision consumption and 40% from net inventories ramp up. All in all, we are confident to generate significantly positive cash in FY '24. And we confirm our ambition to exceed 80% cash conversion by FY '26.

Henri, back to you.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Thank you, Laurent, for this detailed presentation. I will say 1 or 2 words of conclusion. So first and foremost, I would just want to summarize our guidance for next year, for 2024. So first, we'll continue to have a book-to-bill above 1, which will fuel the growth of our backlog and therefore, the growth of our future sales. And indeed, we forecast sales above 5%. In terms of profitability, so we are going to continue to not only increase our volume, but also increase our EBIT margin at around 6%. And again, for the free cash flow generation to be significantly positive. Regarding midterm targets, as already stated by Laurent. So we are confirming the midterm target of 8% to 10%, with a free cash flow conversion of 80% to be reached in '25, '26.

In terms of global, I would say, takeaways of this full year. I think this has been a very important year for Alstom, a very significant year for Alstom. We have seen externally 2 aspects. The first one is, as I said at the beginning, a very positive market momentum. So we continue to see the world investing in rail transportation. At the same time, we have had to go through a number of headwinds, in particular, inflation, supply chain and electronic components. And I have to say that Alstom has extremely well managed these headwinds. We have managed to deliver our financial targets despite all these headwinds. And as importantly, we have managed to transform our operations, to be in line with our operations to have good customer satisfaction despite all these headwinds.

I think the -- one of the main takeaway is also the stabilization of our portfolio. So we have to say that we are now ending a period of 2 years where we had to stabilize and I said it in the past, all the projects notably coming from Bombardier. It's now done. It's behind us, and we can work on the next stage of the efficiency on the next stage of growth and development. So we have delivered customer satisfaction. We have delivered the financial results in our trajectory, and we have put back, if I may say, the execution under control. This is showing the importance and actually the reason and the consequences of our market leadership, where we have extremely good customer relationship in the world. It is also showing the resilience of our business model spread across the globe, spread across different type of activities and namely also service activities, signaling activities, rolling stock activities. And last but not least, we have improved our backlog, which is paving the way for future improvements, both operationally and financially going forward.

So thank you, all of you. As you have seen this has been, as I said, a very important year for us, a very successful year for Alstom, which will mark a new step in our development. So before I'll open the floor for question and answer, I'll just remind you and invite you for an afternoon session. As you know, we do a more operational session with the leaders of our different activities as well as our COO, Danny this afternoon, so do not hesitate to join us at that time.

Now I turn back to the operator for questions and answers. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from [Esan Sang] of Goldman Sachs.

[Unidentified Analyst]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Okay. Thank you for your questions. So the first advantage is, as you said, we have pushed back by 1 year the midterm target. I just want to first confirm that this midterm target remains valid, and we definitively think that they are a good ambition for the state of the company today. We had some -- as you can imagine, we had some negative macroeconomic factors during the year. And notably, as we said, the inflation has lasted longer than anticipated. Basically, we were hoping that inflation was more on 2022, and it has been prolonged to 2023 as well. So this has had some impacts on our backlog and the margin in our backlog, obviously, as you know, not all the contracts are under protection, even if we are working on having the largest proportion as possible. This as you have heard we have also that the main impact, then we have, I would say, other impacts. As you have seen, probably, we have decided to reinforce our R&D programs. We have a lot of requests from customers in terms of energy savings, in terms of automatization and digital type of investment. So we have also decided to increase this R&D program. So this is a combination of factors, first one being the macroeconomic factors and also decisions that we have taken ourselves. So again, we confirm that this 8% to 10% is a good target. We have just pushed it back by 1 year.

The second question, in terms of rating, of course, it has no impact on our balance sheet per se. This is a view of Moody's on our balance sheet. I have -- I can see several good news, I would say, in this rating. The first one is that they said that it's a stable rating now. So there is no negative outlook anymore, which means that they are very comfortable with the situation. There will be no, I would say, automatic credit committee, for example. Secondly, I think the ratios which are asked by Moody's in order to achieve this rating and to sustain this rating are very much within reach. You all know that last time, the ratios were pretty ambitious and Moody's has given us a number of years to achieve these ratios, which was a little bit more than usual. And this time, we are in a much more stable situation as it being said. And therefore, I don't see any impact of this -- anything having impact of this rating change. And on the contrary, it gives, I would say, a better visibility for the group going forward.

[Operator]

And our next question now comes from Andre Kukhnin of Credit Suisse.

[Andre Kukhnin, Credit Suisse]

Can I just start with the growth outlook for fiscal '24? It's obviously open ended with above 5%, but still kind of into 5%, given the strength of the order backlog and the order intake in the prior year, it looks a bit conservative. So I just wondered if you could give a bit more color on whether you expect to run significantly above 5%? Or what are the kind of factors that are holding you back from acceleration given the strength of the market and the positive messages that you're giving on that?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Andre Kukhnin, Credit Suisse]

I just wanted to check also the decision to invest some of the margins near term in R&D as we've just highlighted through the presentation and the last question. How do you expect to payback on that? Is that through kind of higher profitability in fiscal '26 onwards? Or is it to higher market share? Or is that a [little bit] investment to maintain that kind of target market share that you have 35% to 40% on that pipeline of €220 billion?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Operator]

And we're moving on to James Moore of Redburn with our next question.

[James Moore, Redburn]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

So thank you, James, for this question. Yes, as you have at said, clearly, the wage negotiations for 2023 are over. Unfortunately, as I said, the inflation is not over. So I expect next year to have again some negotiations on that. It's a yearly negotiation for most of it. There are a few countries where you have some framework agreements like in Germany we see for the tariff agreement, but for most of it, it's a yearly one. And we have -- yes, it really depends on the country between high cost or best cost countries, high inflation, low inflation and so forth. But it's true that this year, we have basically 1 to 2 points more salary increase than what we had in the previous years. So if we are talking roughly 2.5% in the previous year, we are talking more 5% this year in the world, on average, knowing, of course, that you have countries which traditionally has a much higher inflation or if you take Turkey, India and so forth, you have, of course, much higher salary increases. But it's a yearly event.

[James Moore, Redburn]

That's very helpful. And my second question, if I could, is just on in [debtors] in general. I see the Moody's move. I see your point on the visibility, nice not to have 6 monthly reviews. But at the same time, it is only one notch, albeit neutral, one notch above non-investment-grade status and with all of your bonding and your requirements, do you think it will be easier for the group to issue some equity? Do you absolutely not want to issue some equity. I guess the rights [issue] question will persist. Is there anything you can help us all understand in terms of your ambitions there? That's the second question.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Thank you, Jim. We have -- and I think I said it in the past, we have a financial trajectory, which allows us to commit to investment grade while delivering the plan as we have given it to you. So we are continuing to go in that direction. We have no intention to change this direction and this trajectory this financial trajectory. As I said, basically, the rating of Moody's is not a complete surprise as compared to -- if you compare to our ongoing ratios. Basically, Moody's, as you have said -- as you've seen, is taking a more broader view on the global macroeconomic environment. Its also saying that it takes a lot of time to get to the ratios, and it's true. And they gave us last year, basically 4 years, and this was a long period. So they are now shortening this period. So no ambition to change our determination to continue to de-leverage the company by the increasing profitability and by the reduction of the debt going forward.

[James Moore, Redburn]

And the last one is just on the free cash flow. Maybe a question for Laurent. You talked about significant free cash this year. If you look at working capital without putting a number on it, what are the key topics inside working capital for the FY '24 year?

[Laurent Martinez, Chief Financial Officer]

So James. So on the drivers for FY '24, as I said, on the tailwinds compared to FY '23, a positive uplift of the profit, a reduction of the integration cost as well, all of that driven by the quality of execution and of course, global positive momentum. On the headwind, talk about financial interest, CapEx, restructuring in Germany. And to your point on working capital, we are expecting a continuation of normalization of our operational working capital in FY '24. And if I want to be specific on the provision, on the provision consumption, which was €230 million in FY '23, we are looking at a slightly lower amount in FY '24 to give you some colors on this very specific point on our working capital evolution.

[Operator]

Your next question comes from Guillermo Peigneux of UBS.

[Guillermo Peigneux, UBS]

Maybe again, want to labor a little bit on the cash flow, just following up on James' question, I think when you think, obviously, about the EBIT improvement with 5% revenue growth, you get to probably anything between €180 million to €190 million incremental cash flow versus higher EBIT. Then you think about the reduction of integration cost, as you said, you think about increased CapEx, increased R&D on the numbers that you provided more or less. I mean it gives you basically some negatives. But I think when we say significantly positive, you could end up -- or could you quantify a little bit that number? Is it something that is just €100 million ahead from previous year? Or when you do the numbers, actually, you come up with a significant number that is just probably walking towards that 80% free cash flow conversion that we are targeting by fiscal year '25?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Guillermo, so maybe I'll take a step back here and just to remind, last year, back in May, we said that we would deliver positive free cash flow, you remind in FY '23. And we gave a range of €100 million to €300 million at our H1 result. And as you have seen, we have been delivering spot on this guidance at close to €200 million for FY '23. This year, as you have seen, we are guiding to significantly positive in FY '24. And we will give a precise range to you during our H1 results in November. So all in, significantly positive. The drivers I was mentioning, is quality of execution quality of the market momentum and the down payments, all of that will be basically getting to a significantly free cash flow for FY '24.

[Guillermo Peigneux, UBS]

And maybe just talking about the fiscal year transition towards the 8% to 10% fiscal year '25, '26 margin target. I guess you said linear, I guess, from 5% will go to 6%. And then obviously, there is a gap in between your mid-target range and what the reports -- or what you target this fiscal year '24. But I was wondering, you said linear, but that linear means that you meet the lower end of the 8% to 10% margin guidance. I was wondering whether it can be [derived] it can be somewhat better than expected.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Thank you for your question. Yes, we said it's linear, meaning that it's not back ended and we are not going to tell you that it's 6% and stabilities and then a huge increase last year. So now on the -- where we are going to reach, we're going to reach the -- between 8% to 10%. We'll see where we are going to reach within this range. But it's true that we will come from the bottom of it, that's clear.

[Operator]

And up next, we have Alasdair Leslie of Societe Generale.

[Alasdair Leslie, Societe Generale]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Thank you. So on the volume and mix, so we have into this, indeed, the positive momentum we had in our sales for FY '23. You have seen the numbers which are positive in terms of services and sig. The mix is as well the mix of the execution of the project. It's the internal mix related to the backlog execution, and we still have, of course, the ex-BT backlog to be delivered. Looking ahead, Alasdair, in terms of the evolution of our mix, you have seen that we are aiming to get to a 50% mix of signaling, services and systems. And all of this, as you know, will be accretive to the group margin and something which will be basically a driver to get to the 8% to 10% global framework.

[Alasdair Leslie, Societe Generale]

Maybe as a sort of follow-up question then on the 0 margin contract time line. I was just wondering, can you say how much of this year's deliveries are sort of back-end loaded in the year, just to get a sense of the sensitivity and kind of risk, I suppose, a potential slippage into the next fiscal year? I'm sorry, on Slide 30, I think it is for FY '26, can we assume that sort residual, is that around €500 million still of 0 margin deliveries still in that bar chart and then basically down to 0 in the following year. Can we read it that way?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

No, absolutely, Alasdair. So FY '26, you have the right order of magnitude, so around €0.5 billion, a bit less than that and indeed something which will be becoming completely marginal after that.

[Alasdair Leslie, Societe Generale]

Okay. And just any kind of sort of insight in terms of the sort of phasing of the 0 margin deliveries just this year? Are they kind of sort of front-end loaded, back-end loaded?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Yes. So €1.7 billion for fiscal year '24 down to €1 billion in FY '25. And to your point as well, we had around [100, 100-plus] limited shift between FY '23 and FY '24 due to some re-phasing of deliveries in agreement with the customers. So that's why it's slightly lower than the €2.4 billion I was explaining back in H1.

[Operator]

And we're moving on to Gael de-Bray of Deutsche Bank.

[Gael de-Bray, Deutsche Bank]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Laurent Martinez, Chief Financial Officer]

So on your second question, indeed, the increase of global financial expense, H2 to H1. And to be clear, as indeed, the H2 is probably a good proxy for FY '24, a bit lower, and we are expecting a bit lower. This increase H1 to H2 is half related to the higher interest rate and half related to our FX portfolio, our bonding portfolios in terms of the fees. So basically, indeed, a good proxy less than twice for FY '24.

[Operator]

Our next question comes from Akash Gupta of JPMorgan.

[Akash Gupta, JPMorgan]

My first one is on the margin expansion guidance for FY '24. So you call for close to 6%, which is 80 basis points margin improvement. Can you talk about phasing of this margin improvement between first semester and second semester and whether it would be more evenly spread or front-end loaded and back-end loaded and maybe nuances towards what is driving that? That's question number 1.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Akash Gupta, JPMorgan]

And my second question is on cash flow. So you talked about €900 million working capital outflow over the next 3 years, and we can see most of it is driven by provisions. I wanted to ask what have you assumed for contract liabilities in that period compared to where it was at the end of FY '23?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

So Akash. So as you say, out of this -- so first, this €90 million is fully consistent with what we said a year ago, which was €1 billion of normalization, and we've been realizing €100 million in FY '23, so fully consistent. As you said, 60% of that is provisioned. 40% is our operational working capital. And within this, you have inventories, contract asset, contract labilities and the like. So complex to tell you precisely what will be the contract liabilities over time. But in the main, fully consistent with what we said back a year ago on our working capital normalization.

[Operator]

And now we're moving on to Delphine Brault from ODDO.

[Delphine Brault, ODDO BHF]

The first relates to organic growth in rolling stock. You did plus 2% reported. What was the organic growth? And what is behind this moderate ramp-up?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Delphine Brault, ODDO BHF]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

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

[Operator]

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

[Jonathan Day, HSBC]

I was wondering if you could just elaborate a little bit more about the risk of some inflation in future if inflation doesn't come down as the people speculate. I know James has picked up on the wage inflation, but just thinking generally about the raw materials inflation. Is there -- could you sort of elaborate a bit more on the risk around that inflation number? And then maybe also just on the free cash flow. Could you talk a little bit about the other line in free cash flow, things like the sort of share-based payments and remedies and how we should think about the movement in that line in future if possible that would be great.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

So Jonathan so starting on the -- on your point on inflation. So we have, as I said, a very clear action plan on inflation, number one, commercial you've seen the outcome, which has been positive. And more than 80% plus of our pipeline is -- will be protected by inflation. Energy, very well under control. On the material cost, as you know, both the energies and the material cost has been easing since 6 months. On labor cost, we talk about the salary negotiation, which has been completed, and we are now moving more and more to a back-to-back with our supply chain. So we have extremely good visibility and mitigation of the inflation. That's why we are fully confident that the 90 basis points we had as a headwind in FY '23, we'll be reducing by 10 to 20 bps per year down to below 40% in FY '26. To your second question, briefly on the cash. On the others, we have indeed the share-based payments, which will be relatively stable on a year-on-year basis for FY '24 onwards.

[Operator]

[Operator Instructions] And we now take a question from William Mackie of Kepler.

[William Mackie, Kepler Cheuvreux]

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

[Laurent Martinez, Chief Financial Officer]

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

[William Mackie, Kepler Cheuvreux]

Okay. The second question relates to, I think, your Slide 30. I just wanted to just talk about the sales from legacy backlog compared to new orders, as you've projected it over the next 3 years. Can you at least give a flavor? I know it's a very complex assessment, but the sort of difference in the project margin or gross margins within the legacy backlog ex including the nonperforming business compared to the new contracts that you've been consistently booking with better Gs and Cs on pricing?

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

No. Thank you. In general, as we said, this year has been extremely good in terms of quality. Clearly, the gross margin of these new orders in average were consistent with our midterm target, if not a little bit above this midterm target. So it has been a very good year also due to the mix. I mean, if you take it activity by activity, it's let's say, in line and the mix has been particularly favorable with a large portion of service project. So the difference, of course, with the 0 margin is, by definition, is huge. And when you took a gross margin 0 and here, we are talking a gross margin in line with our long-term targets. We are looking a lot of large difference in gross margin, a very large difference in gross margin.

[William Mackie, Kepler Cheuvreux]

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

[Laurent Martinez, Chief Financial Officer]

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

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

Thank you. I think this is ending our Q&A session. Thank you for your attendance. Again, I invite you for this afternoon session. Well, you will have also the opportunity to ask new questions to our colleagues. Just as a global wrap-up of our session today, just minor. So we had a very good year. '22, '23 has been a very good year for Alstom, marked by a very positive market momentum externally. Our ability internally to cope with a number of headwinds and to deliver our financial results and to significantly de-risk our portfolio. So I strongly believe that we have now an extremely sound base in order to build the future, which will be a growth and which will be cash flow generative on the back of a good market on the back of the innovation on the back of our global reach with our renewed customer relationship.

[Henri Poupart-Lafarge, Chairman and Chief Executive Officer]

So thanks a lot for your attendance today. I'm happy to talk to you soon. Thanks a lot. Bye-bye.

[Operator]

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