Ladies and gentlemen, welcome to the Alstom half year results conference call. Note that this call is being recorded. At any time during the presentation, you can press star one to enter the queue for the question- and- answer session. I now hand over to Henri Poupart-Lafarge. Sir, please go ahead.
Good morning, everyone. Welcome to Alstom first half 2022-2023 results. I will start by giving you some highlights, then I will leave the floor to Laurent, which will give you some details on our financial results, as well as some data on our trajectory and outlook. Then I will come back for the conclusion, and of course, I will take the questions that you may have. Let's start by giving you the main messages of this first half. The first one is about the demand. The demand is being confirmed. We told you in May that we had a large pipeline, and I can confirm that this large pipeline is still there. It has even increased.
This is on the back of the long-term trends, which are the economic growth, the urbanization, but also, as you know, by the huge investments launched by a number of regions in the world in favor of high mobility on the back of the need of a transition of mobility towards sustainable mobility. The first half's results are definitively solid, and we have achieved all our targets. We are totally in line with our trajectory, but I will leave it to Laurent to give you more details on this one. These good financial results, these sound financial results, are backed by sound operational results. I can tell you that the operational turnaround is totally in line with our plan, both as far as Alstom is concerned, but also as far as the integration of Bombardier is concerned.
We are putting in place all the actions which have been announced to you over the last period and which are bearing their fruits. This in turn allows me to give you a more detailed outlook for the financial year 2022-2023, both in terms of adjusted EBIT, which we now estimate at between 5.1%-5.3%, as well as for the free cash flow, which we expect it to be between EUR 100 million-EUR 300 million positive cash. Here are, as you can see on the slide, our main key performance indicators for the year.
I have to say, as you can see on the slide, that I have decided not only to give you the financial ones on this slide, but as well as the ESG indicators, which as you know are extremely important for us as well. The first one, the classical one, orders EUR 10.1 billion, book-to-bill of 1.25. We are continuously recording a good level of order intake, fueling our future growth. I want to insist on the fact that the quality of this order intake is extremely good and is totally in line with our current plan and our future targets. Sales have grown by 8.1% here as well, in line with our trajectory and on the back of the last year's and last period order intake.
Sales amounts to EUR 8 billion. EBIT margin, adjusted EBIT margin at 4.9%, an increase of 40 basis points, as compared to the same period of last year. We are progressively, as we have said, enhancing our profitability, recovering our profitability. Free cash flow EUR -45 million. A small usage of cash, of course, as compared to last year, which, as you may recall, was recording a very large cash outflow. This is in line again with our anticipation, with a good level of cash down payments, particularly good level of cash flow in. One or two words on our ESG indicators.
We make progress on all fronts, whether we talk about scope 1 and scope 2 emissions, - 6.5% as compared to the baseline. Energy consumption, - 5% as compared to our baseline. We are increasing the electricity from renewable sources. Last but not least, we are improving our ratio of women in management. We are going to continue to report to you on these indicators very regularly from now on. Turning now to demand, very strong market potential. We are portraying to you a kind of three years rolling pipeline. We have above EUR 190 billion, including a large portion of it in the next 18 months. It's not only back-ended, but it's also front-loaded.
We can see on the slide that we have very large tenders on all continents. I think I said it in last May, all continents are positively oriented, whether we talk about the Americas, North America, Latin America, whether we talk about Europe on the back, not only of the replacement of the existing fleet, but new lines, increased capacity. AMECA with a number of large turnkey projects coming back. APAC, of course, Southeast Asia, Australia, very buoyant market in Australia as well. Very sustained level and we are aware of some of the macroeconomic challenges, but we don't see any slowdown of the demand, despite of this global environment.
As far as Alstom is concerned, looking backwards on our first half results, it's a good level of order intake, an increase as compared to last year. A record level backlog of EUR 85.9 billion, close to EUR 86 billion. On the back of a book-to-bill, which is above one, which has increased mechanically our backlog, but also the weakening of the euro has increased mechanically as well, this backlog. As you can see, on the right-hand side of the chart, we have a good level of order intake in all regions. Europe being our primary region, a large market, but as well as Americas, APAC and AMECA. Of course, when you talk about AMECA or Americas, it can be influenced by one or two big tickets.
We have a sustainable level of order in all these different regions. Similarly, in terms of activities, we have a large order in Rolling Stock, in particular for Germany, for Egypt as well. We have huge order intake in services, systems and signalling as well. A few examples of these contracts. You've seen on the Rolling Stock contract, so the largest one for Baden-Württemberg, which is one of the largest regional trains ever ordered in Germany. Double deck trains together with their service maintenance activities. We have within this family of Coradia regional trains, which is a very successful family. New orders in Romania, in Spain as well.
Continuously recording some successes in high speed, very high speed in Sweden, in France. As I was mentioning, a very sound level of order intake in services with the 30 years maintenance on Baden-Württemberg, maintenance as well in Romania, and maintenance in Spain as well. A lot of our orders are coming now bundled with rolling stock and services together. Sales. I will not go into all the details, but we have a sound level of sales in all our segments. Rolling stock, +2% may seem relatively low, but we have a number of rolling stock which are included in our systems business, which has increased a lot. We have a ramp-up of our rolling stock activities.
Services with a significant step up, particularly in Europe and in the Americas on the back of a number of large contracts which are being executed. Signaling growing smoothly. Here as well, this is only the external part of signalling, but we are larger growth if we take into account the signalling which is included in our system. Because as you can see, there is a huge jump in our systems activity. There was a slowdown in the previous years because of the end of some contracts in the Middle East, Dubai, Riyadh, for example. Now, we have the ramp-up of the new contracts, whether it's in Cairo, in Montreal, in Thailand, sorry.
Still in Montreal with the REM, quite significant trade this half year. Really nice ramp-up of our systems activities. Execution of our projects. I would say it's exactly in line with our trajectory. First, because we mentioned that in the past, we have a level of what we call non-performing sales. All the order intake mainly inherited from Bombardier, which had zero gross margin. EUR 1.3 billion of sales generated by this backlog. We have said that it would be EUR 2.6 billion-EUR 2.7 billion for the year. We are in line with this trajectory.
It represents today 16% of our sales, and this will go down progressively to a much lower level as we are executing this backlog. This is translating into some decrease in our provisions, of course, as we are consuming the provisions because of this contract. Again, this is in line with our trajectory. We have not changed our level of provision since day one, and we are keeping this level and things are in line with our plan, not only in terms of global amount of provision, but as well in terms of timing.
I'm pleased to tell you, for example, that the last two settlement negotiations are now being finalized and there is no more uncertainty on this backlog of negotiations, which we had to manage after the integration of Bombardier. Talking about Bombardier integration, just a few points. It's now one year and a half. We have converged our processes, all our processes, and we are now, of course, focusing on deploying common and standard processes throughout the group. Our digital suite that we have within Alstom, that we have developed within Alstom, is being now deployed throughout the group. It took us some time because first, of course, you need to change the processes, and when the processes have been adopted, then you can deploy the full suite of tools.
We have deployed seven countries, and we intend to deploy all countries by December 2024. We can only confirm the synergies. As compared to last year, which was around EUR 100 million, we want to double this number for this year. Overall, I've always said that it will take three to four years to fully integrate Bombardier, and the date of December 2024 is definitively in line with this plan to three to four years. We are very satisfied by the way this is being managed. Operationally, I think during the Capital Market Day, we had this opportunity to tell you a little bit more operationally what it means and how we need to turn around some of our operational indicators.
We wanted to tell you, to show you today, where we stand at the end of September as compared to the graphs that you have seen again last May. We are pleased to tell you that on all fronts we have made some further improvements, whether it's the gate review, which is an engineering indicators, which is stabilizing but at a decent level. Where we've done a lot of progress, defect per unit. All the quality indicators have improved tremendously. I can say as well that we have now excellent customer relationship. We are back to a normal customer relationship because the quality of what we deliver is in line with the customer expectations.
Still need to work on delivery on time, and we still have some target to improve the delivery on time. We have improved, but we need to continue to improve this one. As you can see, open quality issues have decreased tremendously. Manufacturing support have to improve. Engineering on time is improving. Globally, we are going into the details of each and every operational indicators. We are in line with our trajectory to put back the operational performance of the group at the level where it was before the integration. This has been done, I would say, despite a challenging environment, but despite the electronic component and all kind of supply chain crisis.
I have to say that the group has very well managed this crisis because we have not been impacted on any of our projects by this electronic component shortages, which I think if you compare with other industry, it's quite an achievement. Coming back to innovation and coming back to one of our key highlight. As you know, Alstom is pioneering the hydrogen technology. We made a lot of progress in the last semester with the first fleet in commercial services in Germany with the 3/4 of autonomy on fuel cells.
One thing which has not been announced is that we have received around EUR 350 million of subsidies from different countries in Europe to support our R&D development in hydrogen. This is a significant amount of money which is really not only I would say showing the importance of the hydrogen economy for Europe but also showing the importance of Alstom as being the leader in this technology for rail transportation. Europe counts on Alstom to develop future trains future hydrogen trains. Second part of our innovation all what is autonomous mobility.
We are continuing to develop both for passenger trains and for freight trains a number of projects with ATO, so with automatic train operations, which is something which is quite usual and conventional for metro, but which is not yet developed for mainline. We are also pioneering this technology for mainline both in France and in Germany, as well in other countries. We have some different type of pilots, and we are period after period achieving a milestone to secure these technologies. These were a little bit the highlights of the first half. Now I'm pleased to hand over to Laurent, which will comment on our financial results and financial trajectory. Thank you. Up to you, Laurent.
Thank you, Henri. Good morning, everyone. Let's start with the P&L. With basically 8.1% sales growth in H1, of which 5% organic on back of a positive project execution and in line with our trajectories. In terms of gross margin, we have uplifted by 40 basis points to 13.2%. Similar to last year, we have some phasing on R&D expense, and you should expect some increase during our second half of our fiscal year. SG&A represents 6.3% of sales in H1, stable versus last year. Finally, sound contribution of our JVs in China at EUR 75 million, to be compared with EUR 77 million last year. Thanks specifically to a positive contribution of Casco, our signalling, and as well our rolling stock JV in China, as an export base to Asia and Europe.
All together, as you see, EBIT at 4.9%, improved by 40 basis points compared to last year. Moving to the main drivers behind the change in adjusted EBIT for the first half. Number one, on the synergies with the ramp-up developing as planned, representing 60 basis points of margin improvement. Second, lower contribution from non-performing sales with a positive impact of around 10 basis points in H1. Third, higher volume and favorable project mix helped by margin, driving a 50 basis point uplift in H1. Last but not least, effect on the macro headwinds, mainly inflation, accounted for - 80 basis points impact on our margin and reflecting lower margin at completion from the part of the backlog that is not covered by indexation clause. Let's look at the dynamic of these subjects on the next slide.
For Alstom, as we indicated, the current macro challenges are essentially about inflation since we have been able, as Henri explained, to mitigate fully the challenges caused by supply chain, including electronic components in H1. A number of actions have allowed us to mitigate these inflation headwinds. Number one, we took strong cost out measures on a project-by-project basis. Second, 35% of our cost base is labor, and these costs are fixed for this fiscal year. Third, energy costs, even if they represent less than 1% of our cost base, are subject to high increases. Still, they are hedged at 90% for this fiscal year, 50% for next fiscal year, and around 20% for our fiscal year 2024/2025. Fourth, on the commercial side, 90%+ of our order pipeline is covered by indexation, this reflecting our selectivity.
Looking at the backlog in more detail. First, contracts with indexation formula account for 2/3 of our backlog and 50% of our sales in H1. Indexation formula, as you know, covers all our cost factors, raw material, energy, labor, and supplies. In addition, 60% of our suppliers are with fixed price or limited indexation. As a result, margin contribution for this contract have slightly gone up, leading to a marginal positive impact on H1. Second category, contracts without indexation for 1/3 of the backlog and representing 50% of our H1 sales. Out of this 50%, 10% are short term, therefore, not impacted by inflation as prices are revised on a regular basis. For the remaining 40% of sales, higher share of our suppliers, actually 80%, have prices fixed or indexation with a cap, mitigating hence inflation impact.
We have reflected all of these cost factors in our cost to complete based on our central inflation scenario, resulting in, as I explained, lower margin at completion for this non-index contract, leading overall to a net impact of 80 basis points as we anticipated in our fiscal year 2022. Turning to net profit briefly. Restructuring charge low in H1 with a phase two of our general restructuring, which probably will be implemented in second half. In terms of integration cost, I remind that we have announced EUR 400 million for integration cost over the next three or four years. We are now ramping up this integration cost with an investment of EUR 64 million in H1, an effort which will be, of course, continuing in both H2 and the next two fiscal years.
In addition, we booked EUR 50 million of one-off cost related to final non-cash remedies accounting impact and legal fees. Below adjusted EBIT, financial result stable with some increase expected in H2. ETR stable at 27%, leading to an adjusted net profit of EUR 179 million, broadly stable versus last year. Let's move to the free cash flow. Clearly on our trajectories to reach a positive cash generation for our full year 2022/2023 with a few drivers limiting our net impact to EUR -45 million in H1. Number one, disciplined on CapEx and R&D spend. Second, working capital very much in line with our expectation. I will come back on that in a minute. Third, good performance of our Chinese joint ventures with EUR 97 million dividend received during our first half.
Moving into some details on the working capital, a number of moving parts. Number one, we analyze inventories together with contract assets and liabilities as it represents our supply chain and production cycle. This net increase is very much in line with the translation of the ramp-up during H2 and next year, and as well, some stock anticipation to manage current supply chain challenges. Related to contract liabilities, continuous healthy down payments that we are expecting to follow up for the second half. Just want to flag as well, that our specific down payment scheme related to German customers has decreased from EUR 471 million to less than EUR 300 million in H1. Secondly, increase in trade payables essentially related to the increase of inventories and as well some currency impact.
In terms of, trade payables are now pretty much aligned with the level we've seen in Alstom pre-acquisition. Third, pleased to report a decrease in trade receivables, not least thanks in particular to an effective cash collection in H1 and a reduction in overdues. Finally, stability in terms of other current assets and liabilities. Just to be very precise, on a few specific points. On the other liabilities, other payables are stable as announced in full in fiscal year 2022 at EUR 1,534 million versus around EUR 1.5 billion in March 2022. Good stability of suppliers with extended terms at EUR 348 million versus EUR 324 million. Tax and VAT receivables reducing from EUR 167 million in March 2022 to today EUR 128 million.
All things considered, working capital before provision is therefore standing at 9% from 10% last year, absolutely in line with the expected trajectories we announced in May. Related to provision, here again, EUR 144 million of provision consumption, very much in line with our consumption trajectory. A few words on net debt, with the usual evolution driven by free cash flow dividend and lease contribution together with some one-off on remedies and Forex impact. This is developing as planned with a low point for this half year, which will be uplifted in the second half with the expected cash generation in H2. Looking at liquidity, very strong liquidity at EUR 4.6 billion as of end of September.
Our EUR 4.25 billion RCF being the backbone of this liquidity and which has not been drawn as of end of September 2022. Short-term commercial papers and bank facility are used to cover our working capital seasonality. I want to stress that we monitor our gross cash proactively and considering that we manage all our liquidity centrally at group level, EUR 800 million of gross cash is more than enough to drive our treasury operations. A few words on our long-term debt. As you know, no change compared to the last half year for sure, with a very favorable maturity profile under current market conditions, with no refinancing before October 2026 and an average fixed rate at 0.22%.
On the right-hand side, you see a positive evolution driven by interest rate on our pension, with a decrease of the underfunded plan by EUR 200 million and an increase on the surplus overfunded plan by EUR 50 million. Altogether, net liability reducing by EUR 250 million. Overall, we are delivering in accordance with our plan. We are confident in our deleveraging trajectories driven by cash and profit generation, and therefore expect no rating action from Moody's following this H1 result. Let's turn now briefly to the trajectories for the second half with the key drivers first in terms of adjusted EBIT. Synergies, as I explained, is developing as planned with an expectation of 60 basis points contribution for the full year in line with H1. Non-performing sales consistent with H1 with an accretive impact of 10 basis points.
Third, I would like to note that by March 2023, more than 50% of our backlog will have been renewed. Margin on intake is in line with our profit trajectories, and margin backlog is improving since the acquisition. On this basis, we expect higher volumes, favorable business mix to help margin by 30 basis points for this full year. Finally, we expect inflation to still weigh on the margin generated by our non-index contract during H2 with a net impact consistent with H1, i.e., 70-90 basis points.
To end on the trajectories and on the cash generation, we expect to generate positive free cash flow between +EUR 100 million-+EUR 300 million for the full year, driven by positive momentum on EBIT, strict management on R&D and CapEx, and as expected, offset by working capital change driven by provision consumption and normalization on working capital before provision. Thank you. I will now hand over to Henri for the conclusion.
Thank you, Laurent. Focusing on this yearly outlook and recalling our target and guidance, which I've announced at the beginning of this presentation. 2022-2023 book-to-bill to be above one, again, on the back of a good market, a good commercial momentum, as you have seen during the first half. Sales growth consistent with our guidance, our midterm guidance. We continue to grow progressively as expected. Adjusted EBIT, so that we are detailing or specifying to be between 5.1%-5.3% range. Free cash flow, which is expected, in the +EUR 100 million- +EUR 300 million range.
We are giving to you a more precise range that we are using to give you in the past. This is so definitively confirming our trajectory, which we had planned, and this is in line with our mid-term targets for 2024, 2025, which you all know, which are put on the right-hand side of the slide here. Now I think we can turn now to the Q&A. Before the Q&A, I just want to remind you some of the key features of Alstom. The first one is, of course, to be the leader in a very dynamic market.
A dynamic market which is not being impacted by the current macroeconomic situation, but, on the contrary, which is impacted by very long-term drivers, as I said, urbanization, sustainable development, and so forth. Very solid drivers. We have a solid backlog, today, which offers us long-term visibility, and we are improving the quality of this backlog period after period as we are improving the execution of this backlog, and we are improving the quality of the order intake. As you know, our strategy is to have a global footprint, with multi-local supply chain in order to better serve our customers, but also, to take advantage, of this global situation.
I can tell you that in the current uncertain environment, particularly in the current uncertain supply chain environment, it has been of great help to have been able to use this global supply chain. Last but not least, we have a very large portfolio of activities, but I just want to outline, of course, our strong service. We are having by far the largest installed base, but we have a strong franchise in service as well as a strong franchise in signalling, which is more digital driven. Thanks for your participation. All that is in line with our plan, and I'm happy to now take your questions. Thank you.
Thank you. As a reminder, if you would like to ask a question on today's call, please press star one on your telephone keypad. Our first question today comes from Andre Kukhnin of Credit Suisse. Please go ahead.
Hi, it's actually Calvin Chen here from Credit Suisse asking on behalf of Andre. Before I go into my question, just want to quickly double-check on one number, which is guidance revenue growth consistent with midterm guidance. Does that mean it's 5% for fiscal year 2023, or fiscal year 2023 will contribute to the 5% CAGR trajectory going into fiscal year 2025?
Hello. Yeah, thank you for your question. Indeed, we have guided to a 5% average per year in terms of compound annual growth, and we anticipate to do that and actually a little bit more than that during this year.
Okay. Got it. Thank you very much. Yes, so my first question will be on cash for sure, 'cause you've given kind of more detailed guidance this time, EUR 100 million-EUR 300 million. This guidance looks better. What do you see as the positive development here? Do you think this is guided a bit conservative or not?
Yeah. Yeah, first of all, I mean, there are two questions in your question. The first one is, indeed, the fact that we are giving a kind of range and a more precise range of cash flow. I think this was something which was asked by a number of investors. I think as well as we are normalizing our situation, getting back to a more classical conventional situation after the integration of Bombardier, we have more visibility to give you a more precise guidance. Indeed, it's slightly better in terms of guidance at what we said back in May. You know, at that stage, you have seen during the first half that we had a good cash performance.
It's on the back of this performance, which has been driven by a number of factors, but including a good cash in coming from down payment. We have good terms of payments in our order intake. Actually, we see on the market a sustainable level of down payments. We don't see huge pressure on the terms of payment. This is on the back of that we have slightly improve our cash guidance.
Thank you very much for that. Very clear. My second question is on cash management. We see some of your peers are tightening cash and payment management. Any implication on your net working capital and in particular accounts payable in the next few quarters or also in, probably in the medium term?
Yeah. I think we have given some analysis on any of the working capital lines, so that you can look at that. Maybe Laurent can come back to some of these lines. We don't expect major move going forward. Of course, in terms of turns, because the growth of the company is leading to some growth, for example, in payables because of the growth of the activity. On the other hand, we have improved the receivables and we've decreased, for example, the overdues. I put that on the back of stabilization of a number of our projects.
We have improved our customer relationship, and this is one of the main feature actually of the first half, is the way we have stabilized our projects. This in turn has improved the receivables. Maybe I will turn to Laurent, which can repeat some of the highlights on the working cap, in particular on payables.
Yeah. Looking ahead in terms of the second half, in terms of free cash flow moving forward, to get to your point, Calvin. On a step up on profitability, as we anticipate in H2 versus H1, you have seen our guidance. Indeed, as Henri mentioned, continuous healthy down payment, which will be helping our contract liabilities. Continuation of a strict control on CapEx, where we see some acceleration in second half versus first half. Looking at the working capital globally, an overall stabilization of our overall working capital in the second half.
That's basically the key drivers, which will be leading to the +EUR 100 million-+EUR 300 million of free cash flow, that we are confirming on the back of solidity of execution.
Thank you very much. I've got more questions, but I'll go back. Thank you. Thank you very much.
Thanks, Calvin.
Thank you. Our next question now comes from James Moore of Redburn. Please go ahead.
Yeah. Morning everyone, Henri, Laurent. I've got three questions, if I could. The first two are really about your backlog, the escalates and indexation. I just wondered if you could help us a little understand away from that number that you've given for the group, the 2/3 Of the backlogs covered with indexation, how that looks divisionally and by region, first of all. My understanding is maybe signalling is almost no cover, services is almost a 100% cover, maybe trains is 50%. Maybe I've got that wrong, but if you could help us understand that. I also understand regionally that Germany has a very different picture to France, or again, maybe I'm wrong there, but if you could clarify that.
The second question is the macro inflation impact to margin of 80 basis points in the first half and for the full year. By the way, thanks for all the extra detail today. It's very, very helpful. On that number, just trying to think how it should progress as we look into FY 2024 and FY 2025 as hedging starts to come down and we start to see more of the impact of inflation coming through. Would we expect that number to increase? Is there any way you could help us think about how that should progress going forward and how you think price will play on the other side? The third question is just R&D capitalization at CapEx, quite low in the first half.
Is that the start of something more sustainably low, or should we still think about 2% CapEx to sales as a good guide?
Thank you. Thank you for your questions. A lot of questions I will hand over as well to Laurent for more details. Just as a general picture, what you say is correct on the indexation on our backlog. I.e., services is quasi entirely with indexation clauses, and in particular, of course, the long-term maintenance projects. signalling, if you talk about small contracts, they have no indexation clauses. If you talk about long-term projects, some of them have, and it depends on the market. You said rolling stock is more or less half. In terms of market, I will not go into the details because of course, these are commercial negotiations. But in the main, what you say is also correct. There are indexation clauses quite traditionally in France.
They were not in Germany. Some countries even had some regulations which were forbidding indexation clauses, like in Spain. We are moving that, so the market is now moving. As you know, in the pipeline, we have 90% of the projects which will have indexation clauses. So even in countries which had no indexation clauses in the past, they are putting some new ones progressively. But it's true that some markets are traditionally indexation clauses, others not. But you have to again look at both rolling stock and maintenance. For example, in the U.K., there is no indexation clauses on the rolling stock contract, but the maintenance contracts have all indexation clauses, so it's not like black and white.
In the main, you are correct. On all, what is R&D and CapEx, I will not draw any mid-term, long-term conclusions on the first half. It's true that it's a relatively slow, low during the first half. Nevertheless, our guidance for the full year remains the same in terms of R&D intensity and CapEx intensity. Maybe you can comment, Laurent, for the question of the inflation and the bids.
Good morning, James. Just to give you a bit more color on the backlog by product line. 50%+, as Henri said, on the rolling stock.
On services, we are 85% and 90%, and the remaining is only the short-term sales where we are revising the price on a very regular basis, so we are not impacted by inflation and signalling we are a bit less than half, indeed, in terms of coverage. To the point on how all of this will be evolving by 2024, 2025. If I look at our current sales which are not covered by inflation, as I say, we are at 40% for this year, and we will be reducing that by around half by 2024, 2025. Around 20% of our sales, which will be exposed by inflation.
As you see, basically this inflation headwind will be reducing over time as we are now signing quality order intake with inflation protection. As we say, 90% of our pipeline in terms of tenders is covered by inflation mechanism, hence reducing the exposure over time.
That's very helpful. Just to clarify, I get that it goes down over time, and by time I mean two to three years. I just wondered whether it got worse in 2024 before getting better. Are you trying to signal that you think that it could come down from the 70, 90 basis points this year, next year?
The exposure on 40% will be reduced progressively from 40% this year of sales exposed to 20%. That would be a marginal decrease step-by-step.
I understand that. Sorry to labor it, but if the degree of inflation more than doubled, that would more than offset that. I'm just wondering whether because of hedging contracts, derivatives, et cetera, that you're not seeing the full impact of what spot markets have done this year. I wondered if the inflation piece could more than offset the halving of the exposure.
No, no. To be clear, 80 basis points is the peak at 8% for the 40% of sales, and this 80 basis points will be reduced progressively next year and the following year.
Great. Thanks. Thanks, Laurent. Thanks, everybody.
Thank you. We now move on to our next questioner, which is Ben Uglow of Morgan Stanley. Please go ahead.
Thanks very much. Good morning, everyone. I hope that all are well. I guess two follow-ups really to the preceding questions. Very helpful color on the 80 basis points inflation adjustment or inflation headwind. Laurent, could we dive in a little bit into the components? I may have mistakenly written this down, but did you say that wage costs were something like 1/3 of that of your costs? And if so, can you give us a sense of those wage negotiations? What is going on in different regions? How are you sort of managing the workforce? When would we see those inflationary impacts from the wages actually begin to come in?
Is that a first half of calendar next year event? That was my first question. The second question was really pushing back on the free cash flow. If I look at that EUR 100 million-EUR 300 million, that is essentially 1%-2% of sales. In the past, Alstom has done much better numbers than that. What I'm really trying to understand is in the second half, when normally we would see seasonal kind of benefits from working capital, what is it in your working capital that is going to be kind of resistant to coming down more? Is it to do with inventory levels? Is it to do with you know?
Are there other things going on in terms of potential restructuring? Why would we not see a better inflow of working capital or reduction in working capital in the second half? If you could sort of split out the components a bit, that would be helpful. Thank you.
Thank you, Ben. Just to be clear on the inflation and the wage inflation, we are doing our salary negotiation in the main because it can vary from one country to another one. In the main, starting in January. What we have recorded today is our estimate on the impact of the wages. That will have to be confirmed during the negotiation. We'll see, of course, because we are, as you know, with the financial year, which is starting later than the other ones. We'll see what the other ones are doing, the other industries are doing. Some countries have also, as you know, like Belgium, some mechanical, I would say, inflationary adjustment for the wages.
These are the assumptions. We'll confirm to you in May basically at our yearly results whether these inflation these assumptions have been confirmed or not, but these are our today assumptions on the wages. Now on the cash flow, I see two questions. The first one is the absolute level is still relatively low in terms of cash flow generation, and this is of course on the back of provision that we are going to use. As you know, we are still in this delivery of non-performing projects, and we are using provision for that, and we are also paying some of the penalties related to our negotiations and so forth.
You were probably mentioning as well the sequence between H1 and H2. It's true that usually H2 is better than H1, and it has been the case quite considerably last year, of course, for specific reasons. This nevertheless can vary from time to time because of the phasing of some projects, phasing of down payments. As I said, we had a particularly good first half in terms of down payments. These are—I mean, I will not qualify it as totally abnormal. We have a certain phasing, which is again classical. It is at the level where it is. It's maybe a little bit less than what we have experienced other years, but this is mostly the phasing of our projects.
In terms of absolute level, this is due to again the provision consumption that we still expect to end the second half.
Understood. I get the point on the free cash. Just one quick follow-up. Thank you for the timing, I guess, issue of these wage negotiations, which I think most companies in Europe are gonna have a, you know, it's gonna be a different type of environment. In terms of the way you price contracts, when you are in a customer discussion, is the labor component part of that discussion? I guess the reason why I'm asking is, to what extent are your customers willing to pay for your wage increases? Is that something that people look at or not really?
Yeah. I think it's one element of our cost. Indeed, when we have ex-indexation clauses, one of the indices is labor cost. Then, of course, when it's a new costing, then we take into account our expected wage increase and basically the expected increase in all our types of all the elements of our cost base. Indeed, labor cost is considered as one of the indices to be taken into account.
Understood. Thank you very much. I'll pass it on.
Thank you. Up next, we have Gaël de-Bray of Deutsche Bank. Please go ahead.
Good morning, everybody. I have two questions, please. The first one is about the latest, the last two settlement agreements that are being finalized. Could you just provide an update on this, you know, in terms of both timing and the potential magnitude, as well as an update on the expected cash usage of provisions for the second half and perhaps for next year as well? The second question is more around the 2024-2025 margin objective of between 8%-10%. Many things have obviously happened since the integration of Bombardier, including, you know, pretty negative external factors such as the war in Ukraine, the lockdowns, much higher than expected inflationary pressures, and so on and so forth.
I'm curious, you know, to see if there was any significant buffer in this objective when it was originally set, or is it fair to assume that the very low end of the targeted margin range is now probably more likely than the midpoint?
Thank you, Gaël de-Bray. First question on the settlements. Difficult to go into the details of these settlements. They will not lead, by the way, to any strong cash outflow short-term. It's more a mid-term where, you know, in a settlement from time to time, you pay in cash. From time to time, you pay in kind. Through services that you provide, extra warranty, for example, spare parts or other type of services. It's not something which necessarily translate into a cash out day one. That's the two settlements which have been finalized are of this nature.
They are in line and totally in line with our estimate in terms of size of the settlement and cost of this settlement from a P&L standpoint. Therefore, the provisions which were set aside are, I would say, adequate, appropriate. But in terms of cash outflow, it will take some time. In terms of provision usage, we are globally, as you know, continuing to trade non-performing contracts. We are continuing to pay. I don't expect any significant difference during H2 as compared to H1 in terms of provision usage in general, but again, not necessarily related to these last settlements. More global question regarding the 2024, 2025.
There are several angles to your question. First of all, when you look at the macro environment, it's fair to recognize that you have a number of headwinds. These headwinds, some of them are short-term, some of them are more longer terms. You have seen that we are either navigating through these headwinds, like electronic component crisis, or we are not necessarily impacted by these headwinds. On the contrary, we have positive news since we have announced the guidance, in particular on the market side, where the demand is still strong. The competitive landscape is also relatively stable. We have a good demand environment.
The headwinds are more on the supply chain, and we don't expect, as we told you at the beginning of the presentation, that we don't expect any slowdown of the market. On the contrary, our customers are confirming their investment plan. In the menu, you have pluses and minuses. I will not give any detail on, you know, just confirm our guidance, and I will not detail if it's on the upper part or lower part of this guidance. I just want to outline that everything is not black and white. Not everything which has happened since we have announced the guidance are negative. You have positive impacts and negative impacts. That's when you look at the macro.
Then when we look internally, what we have seen during the first half is a very good quality of our order intake. The gross margin of the order intake is totally in line with our guidance of 2024/2025. The orders that we are recording are confirming this guidance. And therefore it gives us some good internal, I would say, and micro, as compared to the macro things, micro points to confirm the guidance.
That's great. Thanks very much, Henri.
Thank you. We now move on to Nancy Ni of Goldman Sachs. Please go ahead.
Yeah, good morning, and thanks for taking my question. I've just got a quick one. I hear you know, that you don't expect any slowdown in the market. I was expecting you to maybe elaborate a bit more on sort of the large tenders that you're expecting to be awarded in the coming quarters.
No. In the pipeline, there are a few large projects. We are not expecting in the next quarter extremely large projects. There is some tenders in India which are well-known by the market. A very large tender in India which are coming. That's one. There are some large tenders in Germany which are coming as well, but I don't know whether the results will be announced before the end of this quarter. We have one or two tenders in Philippines which we are waiting. Of course, apart from these tenders, we have a number of options which are coming in the next few months, particularly in France, where we have very large frame contracts.
These are the main. It's a bit. There is no one very large project that we are waiting for, but a number of projects throughout the world. We are also waiting for in Australia, for example, as well, a relatively large contract in Australia.
Okay, great. Very clear. Thank you.
Thank you. We're now moving on to Martin Wilkie of Citi. Please go ahead.
Thank you. Good morning. It's Martin from Citi. One question that has obviously been going to many companies over the last few months has been the risk of energy costs and shortages in Europe. That risk seems to be taken off the table, at least for this winter. Are you worried about that going into next year? You know, many companies, you know, building inventory of components that could be high energy intensity, whether it's in metals or glass or ceramics or these kind of things. Does that cause you in Europe to carry a higher level of inventory going into next year to protect you against energy shortages 12 months from now? I'm keen to understand how you're thinking about your German footprint and protecting against any risk around that. Thank you.
Yeah, thank you. No, your analysis is correct. We are not expecting any shortages of energy this year, clearly. We had in this part of our debate on inflation, we have recorded some, of course, energy cost increases, and we have put in place a number of measures to limit our consumption of energy. We don't expect to be directly impacted. As you know, we are not a heavy energy consumer, but some of our suppliers are, in terms of primary part. We have looked at that. We have looked at plan B and how we can weather potential crisis. I cannot say that we have done any safety stocks at that stage.
We'll see during the spring, I would say, if things are getting well. This is, as you said, more for next year than for this year, and therefore we'll see in spring and if we need to do so. So far, we have not done any type of safety stocks.
Thank you. Just a follow-up question to a previous question on tendering. Obviously, a year or so ago, there was a lot of talk about the U.S. infrastructure bill and a lot of money there being allocated to refurbishing and renovating, replacing some of the aging infrastructure in North America passenger rail. Any sort of signs of any progress there, or is that something that's still sort of on the distant horizon in terms of how the U.S. market could develop?
No, it's a fair point. There is immense amount of money which has been put on the table. Most of it will go to infrastructure, i.e., bridges and tracks and things like that. Some of it will go to rolling stock as well. We see some of the agencies developing some projects. It takes time. I don't think we will have pickup of order intake this year. In the U.S., it would be more for 2023, 2024. The second half, we are discussing some of the orders. Among the tenders which we are waiting, there is U.S., but we are also waiting for a tender in Canada, for example, in Quebec.
There are some tenders in the U.S. or in North America, sorry. We are discussing some tenders in the U.S. as well, but they may be, I mean, all that takes a little bit of time, so maybe more for Q1 of next year.
Great. Thank you very much.
Thank you. Our next question now comes from Alasdair Leslie of Société Générale. Please go ahead.
Yeah. Hi, good morning. Just a couple of questions really. Just to follow up, you had quite a cautious message at the Q1 stage relating to component shortages. It seems to have turned out better than expected. Just wondering how you kind of assess the risk now ahead of H2 in terms of potential delays on deliveries. Are you kind of past the point of peak risk now in that sense? I was also wondering as a kind of follow on there, just whether it'd be possible to share with us the growth in deliveries and rolling stock in H1 and what we should maybe be expecting in H2. Are the comps in that respect tougher in the back half of the year?
The second question is really on slide seven, the EUR 108 billion of opportunity in the next 18 months you flag. Can we still assume you're kind of sort of targeting winning a 35% share of that pipeline? Or maybe due to greater selectivity, would it be a little lower than that now? Is there still a healthy outlook for systems orders in that 18-month pipeline as well? Thank you.
No. Thank you very much. No, in terms of electronic component, I don't know, it's because we're getting used to it. We are getting better or because the market is sort of stabilizing a little bit. It's true that the situation today, it's a little bit more comfortable than it was back in July. We have a little bit more visibility on a number of components. Having said that, we are still struggling, i.e., we are still in a kind of crisis mode, and we are following extremely closely all our requests, all our needs of electronic components in order to ensure the availability of these components as early as possible.
In terms of price, unfortunately, I have to say that the prices have not gone down yet. Still a complex situation, but probably better control, better visibility, and hence probably more optimism that you hear from definitively from us. In terms of market share, we don't intend to indeed to massively change our market share. Fair to recognize that during this period, we have been relatively selective, we are not. As I said, we are privileging the quality of our order intake and quality of the order book. We have a very large backlog, as you know. I don't expect any major moves. If there was something, it's probably going more towards the selectivity.
35% market share is in line with our current standard and which is in line with our, more or less, our order intake as compared to the EUR 100 billion, basically. In terms of turnkey, we don't expect large turnkey to come. We still have the gigantic turnkey in Toronto, which, you know, we have been selected for the full electrification of the Toronto network. So this has been. It's a multi-billion project, but which have not yet been recorded and which will be recorded by tranches, and that's one of the large turnkey. We are working on.
We have been awarded as well a turnkey in Tel Aviv for tram, which we are going to book only when it's financed, so probably not before next year. There are a few turnkeys which are being developed in the Middle East, like Bahrain, for example, which is also being discussed. The turnkey pipeline is relatively robust at that stage.
Thank you. Just to follow up on the deliveries in H2, should we expect on the rolling stock side a sort of sequential acceleration versus H1 or?
Well, we are ramping up now. As I said, my first priority was by far to stabilize the projects, first in terms of quality, to make sure that we are delivering good quality products, that we are increasing the reliability of our products. Indeed, I mean, if I had to outline one of the key achievement of the teams operationally, is definitely this marked improvement in terms of quality and therefore marked improvement in terms of customer relationship. We are now moving up to a progressive ramp-up of our industrial capabilities.
Yes, we are going to continue to ramp up, but progressively, there is nothing like a kind of change in slope during the second half. This first half, again, there was some ramp-up in our rolling stock activities. You need to add some of the ramp-up in our systems activity, which concern actually rolling stock equipment to see the good growth rate. There is nothing like an acceleration but a continuous growth to achieve a more sustainable level.
Okay, very clear. Thank you very much.
Thank you. Akash Gupta of JP Morgan has our next question. Please go ahead.
Yes. Hi, good morning, Henri, Laurent, and everyone, and thanks for your time. I have three short ones as well, please. The first one is on underlying free cash flow, both for first half and the full year. I mean, even we have a lot of moving parts in terms of integration cost, in terms of provisions, zero gross margin. But if we just strip out all these type of one-offs, which basically are going to fade away in two, three years, can you tell us what is the underlying free cash flow coming from the good projects, or basically 84% of your revenues in both first half and where you expect that underlying free cash flow to be at the full year?
The second one I have is on service growth, which was at 16%, was quite strong and perhaps supported by indexation given where inflation is. Shall we expect this type of growth in the second half as well? Any commentary on that would be great. Given high inflation likely continuing next year, how do we see service growth outlook in that context? Third one is on Moody's. You say explicitly that you don't expect any rating action from Moody's. Have you already had any engagement with them, and this is based on the proactive dialogue with Moody's, or this is based on your assumption that given how where the numbers are, Moody's will not likely to take any action? Thank you.
Thank you, Akash. I will leave the floor to Laurent for these questions, and most of them is tough.
Akash, on the underlying free cash flow for H1 and H2, it's a complex question. What I can just say and confirm is that our overall full year free cash flow is driven by our positive EBIT evolution compared to last year and the normalization of our working capital, as we have explained back in May, driven by the provision consumption EUR 144 million in H1, will go around double of it in the second half of the full year. And a normalization in terms of the operational working capital. As expected, we were at 10% of working capital before provision over sales last year.
We are at 9%. That is again in the trajectories we are expecting. That's providing some colors on the free cash flow. On the services, indeed + 16%, for H1. We continue to be very positive in terms of evolution for the second half and moving forward. You know that in terms of profitability, this is something which is extremely interesting in terms of our bottom line. Your third point on Moody's, it's a good point. We had a very positive dialogue with Moody's in the very last days. They definitely are looking at us on the medium term, as you know. We are very confident on our deleveraging trajectories, which is driven by profit first and cash.
I expect indeed, on the basis of the very detailed discussion I had and feedback from Moody's in the last days, that they will be confirming our current rating.
Thank you. Maybe just to follow up on the cash flow bridge. You said provision is going to be roughly double of first half or around EUR 300 million. I mean, you also are having integration cost. How much cash outflow from integration cost are you expecting in the full year so we get a good sense of where the underlying cash flow is for the company?
Yep. We had EUR 64 million, Akash, of integration costs in the H1. We'll have a step up of integration costs in the second half as we are deploying our digital suites. As you've seen that we have made some good progress in the first half. That's a bit of acceleration. In terms of the restructuring costs, we will have a bit of headwinds in the second half in terms of restructuring costs in Germany. Probably, by the way, a booking on the second phase of the restructuring cost. The cash outflow in terms of restructuring will be more for next year and a bit of the following.
Thank you.
Thank you, Akash. Next question, please.
Thank you. Our next question comes from Vlad Sergievskiy of Bank of America. Please go ahead.
Yes, good morning, gentlemen, and thank you for taking my questions. I will have three, and I will ask them one by one, if you don't mind. Starting with the margin. Could you discuss the impact of increase in R&D capitalization and a meaningful increase in provision release on your profitability during the period? I think both lines actually contribute positively to margin. Also separate to that, do you expect margin to improve year-over-year in the second half in a material way?
Thank you. I'll let it to Laurent to answer to the first question on R&D capitalization. Let me be very firm on that, Vlad. There is no
I mean, there is nothing particular on that respect, neither on our policy of R&D capitalization, which remain exactly the same, nor on its impact on the margin. Laurent, you can confirm.
No, I confirm, Vlad, this is only related to the phasing on the R&D in terms of the maturity of the activities where we are just improving this ratio for the first half. Something which is very much in line with our very strict policy in terms of R&D capitalization.
All right. That's great, Laurent. Would you be able to comment on the margin trajectory in the second half? Is it significantly up year-over-year in your assumptions?
We are indeed expecting a margin evolution from this half year to the following half year. This will be driven as well by the incremental synergies, the project mix. We do see indeed a step up of gross margin, H2 versus H1.
Thank you very much for that. Can I also ask on working capital? You're talking about working capital normalizing. When I look at working capital balances, they continue to rise. Unbilled receivables or contract assets are up by EUR 300 million. Would you be able to give some color on what drove that? Is it linked to any particular project, perhaps underperforming projects? Also, would you be able to comment on a very sizable increase in working capital liabilities? I mean, between payables and other current liabilities, they were up by EUR 700 million. That would be very helpful. Thank you.
On the contract asset, Vlad, we have indeed an increase of around EUR 300 million. This is driven by the ramp up of our system activities. We have seen a massive ramp up by 40%, Cairo, to name an example. But as well on the rolling stock, PRASA, Coradia Stream, Amtrak, all of these projects are in full swing in terms of ramp up and is driving the contract asset element. I'm not sure to have understood your point acoustically on the liabilities, if you can rephrase, Vlad.
Yeah. 100%, Laurent. Thank you very much for the answer. I was talking about on the balance sheet the increase between trade payables and other current liabilities was about EUR 700 million in the first half, which presumably supported the cash flow in the first half. I was asking more about what drove such a significant increase.
No, that's clear, Vlad. On the trade payables, as I explained, this is driven very much by the inventory uplift and the ramp up of our activities, and we have some FX, so very much in line with our activity and execution. On the other current assets and liabilities, you need to look at the net of the two, and you see the key drivers on the other current liabilities is driven by hedging, and there is a counterpart on the asset. The net of other current operating assets and other current operating liabilities, only EUR 75 million with the net. By the way, you see that other payables are very much in line and stable versus where we stood in March 2022.
This is great, Laurent. The final one from me. Looking at rolling stock revenues, it looks like they didn't grow organically in this first half, despite book-to-bill staying above one time, and obviously you perhaps ramping up Bombardier contracts. Any reasons for lack of growth there? Is there a timeline when we should expect this growth to accelerate more in line with order intake?
I think. Thank you, Vlad. The growth of rolling stock, it's also a question of phasing of a number of projects. Yes, you will see a growth accelerating. Again, don't forget that there are some rolling stock components within the systems which are growing quite fast. For example, the monorail in Cairo, which is going quite fast. In terms of production, we are ramping up definitively. And in terms of sales, yes, you will see continuous growth going forward.
That's all clear. Thank you very much for the answers.
Thank you, Vlad. I think we need to take one or two questions max. After that, we'll have to close down. Go ahead.
Okay. Thank you. Our next question comes from Jonathan Mounsey of BNP Paribas Exane. Please go ahead.
Thanks very much for fitting us in. So, there was already a question around wage negotiations, but I wanted to talk more specifically about the risk of strike action. I know IG Metall probably seems to be, from its rhetoric, quite close to calling single day strikes. I think we've had some action in France, at least, again, sort of warning strikes, maybe in Belfort, some staff out there complaining about the negotiations and how they're progressing. First of all, your guidance talks about the risk of electronic component shortages in H1, but does it also include the risk of some lost days from strike action? More than that, you talked about 80 basis points drag from inflation as being the peak. Were we only talking about purchase price inflation there? What about higher wages?
Could we see cost-based inflation actually become more of a drag once you do negotiate higher wage payments and then push that through the P&L? Thank you.
Otherwise, thank you for the question. Otherwise, it's of course complex to anticipate any negotiations. We have contained, I would say, in France, any social impacts of these negotiations. Of course it's probably a little bit more tense than it is usually because of the current inflationary context, no doubt. So far, we have not been impacted on our deliveries, and we don't expect to be impacted going forward. We again, in our guidance of inflation, we take into account what we believe would be the outcome of all these negotiations, and we don't expect major disruptions during these negotiations.
There have not been major disruptions in the past in Alstom, and we believe that our social climate is definitely a good one.
Thank you.
Thank you. Maybe the last question. Thank you.
Thank you. Our last question today comes from William Mackie of Kepler Cheuvreux. Please go ahead.
Good morning. Thank you. A privilege to squeeze in there. Two questions then. Just firstly, could you walk us through again how you expect the backlog of zero margin to trade? It looks. You said EUR 2.6 billion of revenue for this year. I think that's slightly more than you initially anticipated. Maybe you're expediting that faster and how you think the backlog will flow into the next two years. That would be the first. The second, just thinking about the backlog of orders you have in rolling stock in the U.K. and Germany, what are you thinking about capacity utilization at this moment?
What potential measures you may need to take in the next 12-18 months to perhaps align capacity with backlog in those markets? Thank you.
No, thank you for your questions. Yes, indeed, we are mentioning EUR 2.6 billion of sales. This is probably, and you are mentioning it, a max that we can have. It may be a little bit lower than that, depending on the, as you said, the speed of execution of contract. Between EUR 2.4 billion and EUR 2.6 billion, that's what we can have. In terms of measures, we have launched already a restructuring plan in Germany to adapt to the current backlog. That is in line. We are not going to take new measures and, you know, it takes some time, by the way, to be implemented.
We have launched the negotiations, we have agreed on what should be done, and now we are doing it. In the U.K., there will be a slowdown of the activities in our site in Derby following the execution of our Aventra projects. This will come progressively next year. There are no plan at that stage, but it will go, I would say, ramp down progressively next year. Okay. Thank you, ladies and gentlemen, for your attention. As a conclusion, two things. First, as you have probably seen on the agenda, we are going to launch ESG Day on March 29th. That's the first time we will do it since a while.
We have managed to rebaseline all our indicators following the integration of Bombardier. We'll have a good set of numbers to give you, as well as a good set of policies and targets. Just as, again, as a conclusion for this first half, my take on the first half is, first that we confirm the very strong market, that we are totally in line with our plan from an operational standpoint, with again, the first year being devoted primarily to quality, being devoted primarily to stabilization of the projects. You are not hearing bad news externally in terms of new delays and so forth. Things are really being stabilized with excellent customer relationships, stabilizing as well by finalizing all the negotiations with the customers.
We are now working more and more on the efficiency of our systems, efficiency of our deliveries, to be able to ramp up quicker. That's what we're doing. This good operational, I would say, setup and trajectory translates quite automatically into the confirmation of all our financial targets, with some detail which has been provided to you for the first year and the confirmation for the mid to long term. Thanks a lot and looking forward to visiting all of you soon.