Gentlemen, welcome to the Alstom conference call. Today's conference is being recorded. I now hand over to Mr. Henri Poupart-Lafarge. Sir, please go ahead.
Thank you. Good morning, ladies and gentlemen. Welcome to our half year results conference call. I'll start with the usual agenda. We start with the introduction, we go over our strategy and our results, I will make a short update on Siemens Alstom project. Of course, we will open the floor for questions and answer. As a summary, as you have seen from our press release and our results, the first half of 2017-2018 has been extremely good in terms of performance, in terms of operational performance and totally in line with our objectives of 2020. If you take the order intake, the order intake has been of EUR 3.2 billion, of course lower than last year, we didn't record this year any extremely large order.
That's why the small and mid-size orders have summed up to this number, which is a good number if you take into account the fact that there was no large order during this first half. Sales were up 5%, organically or factually, at EUR 3.8 billion, again, in line with our long-term objective of 5% growth annual. The EBIT has been up 16% at EUR 231 million. The margin, adjusted EBIT margin, has been at 6.2%. Here as well, a strong progression as compared to last year, in line with our objectives. What was quite remarkable is the free cash flow of EUR 227 million, clearly outlining the good performance of our project as well as the results of our cash focus program and the emphasis that we are putting on cash within the company.
This is leading to a reduction of our net debt, which is now at EUR 101 million, confirming the very strong balance sheet that we have, and equity of EUR 3.8 billion. We come back on Siemens Alstom. It's early days. As you know, it's a long process, things are going exactly in line with our expectations. However, it takes a lot of time, as you know. Just going back to the different items of our P&L, focusing on our strategy of 2020. You remember the five pillars of this strategy, customer-focused organization, the solutions, innovations, operational excellence, and diverse and entrepreneurial people.
This strategy has been set for now a number of years. Year after year, we confirm the relevance of this strategy and the results, which are totally in line, not only in terms of headlines, but also in their details, totally in line with the implementation of such a strategy. The first one is definitely to take advantage of the growing market worldwide. As you can see, we have now very balanced order intake levels in the different regions as well as in the different product lines. Out of the EUR 3.2 billion of orders, you have now a good balance between the different product lines, where Rolling Stock is now representing less than half of the activity, as we know, usually, classically now in our portfolio, the rest being split between the Systems, Services and Signaling.
As I said, there was no large order this half year, therefore no large Systems orders. The level of orders for Systems was relatively small as compared to last year. You can look at the split of the backlog, which is, as you have seen, 45% in Europe, now the split of the backlog, 16% in Asia, 17% in Americas, 22% in Middle East, Africa. A situation which is much more balanced than a few years ago. If you look at the sales, by the way, now we are around 50% in Europe. The rebalancing of our portfolio, taking advantage of the growth in the, I would say, outside Europe has occurred.
Some examples of orders, which again, we had a very nice activity in North America, particularly in Canada, on the back of our strong success of our Citadis Spirit, both in Ottawa and in Toronto, also in Los Angeles. Good first half of North America. Some activities in Europe, particularly on regional trains. We did book the first order in Sub-Saharan Africa, in Senegal, of regional trains. This is one of the last regions, Sub-Saharan Africa, where we had little presence. We are increasing our presence with a number of potential orders. Of course, in Asia, continuing success in Asia. Now coming back on Canada. You've seen two contracts for almost 100 light rail vehicles, our newly introduced Citadis Spirit.
It's a good story because I think this is a product that we have introduced a few years ago, only four or five years ago, on the market. This has, thanks to, I would say, the good execution of the Ottawa project, we were able to book a project in Toronto. In terms of solutions, as said now for a number of years, we intend to decrease the relative weight of Rolling Stock and increase the weight of the different activities or the different other activities. Of course, quarter by quarter, it may vary, depend on the execution of some projects. Today, Rolling Stock is now 43% of the total of our activity. Services, 19%, Signaling 16%, Systems 22%. There was a high growth of sales in Systems during the first half on the back of the execution of both Riyadh and Dubai.
On Rolling Stock, it has been a relatively stable situation. We have started to trade the regional projects that we have booked in Europe. Amtrak is going in the right direction. We will come back to that. We have delivered some trams in Algeria. Signaling and Services have slightly decreased on the back notably of their presence in the U.K. and the adverse ForEx impact in the U.K. R&D, this is the innovation, one of the strong actor of our strategic plan. As you know, we have launched, five years ago, the complete renewal of our product range in Rolling Stock, starting by the tram. We have seen the good success in North America, the Metropolis, the regional trains, and now the high speed and very high speed, notably with the contract in the U.S., but also the so-called TGV du futur in France.
This is now well ongoing. We are continuing to develop, and we are spending a lot of money on the very high speed and on regional trains. Of course, we have ramped down our spend on tram and metro, now that we have renewed the range. Continuing to grow our smart mobility programs, in Signaling, not only in different digitization of the mobility. We have also spent quite a lot of money on predictive maintenance. Some, I would say, headlines. The first one with the hydrogen train. We have signed November 9th, a few days ago, the first commercial success for the Coradia iLint after the development of the hydrogen train. Quite noticeable is that we have received the innovation award at the Busworld.
The Busworld is the equivalent of InnoTrans, the world fair for buses, which happens to be in Belgium. We received the innovation award for Aptis, which means that we have really brought to the market a breakthrough concept. Operational excellence, I think it is always the same story. Day after day, we are taking advantage of all our initiatives in terms of cost cutting, in terms of project management, in terms of portfolio improvement. Although this half year, the very strong growth of Systems, which is good, I would say in terms of margin, not as good as a Signaling or Services. The mix has not played such a large role. Having said that, we continue to take advantage of all our initiatives and the good execution of our portfolio. In terms of initiatives, just a few of them.
As you know, we still continue to work a lot with our suppliers. Of course, as you know, two-third of what we sell has been bought. We need to clearly improve day after day the partnership with our suppliers. We have created what we call an alliance. Now we have 20% of our suppliers being purchased through the alliance, which is really innovating together in terms of product, also innovating together in terms of ways of working. We have increased the low-labor-cost countries purchase to 45%. We were closer to 40% last time. Year after year, we are increasing that. Of course, because we are growing globally, we take advantage of the growth, also we take advantage of this footprint to serve other regions. One example of that is India. We are continuing to grow our activity in India.
We are now more than 3,000 people in India. Bangalore as an engineering site is becoming the largest engineering site for Signaling, but also, this is new, the largest engineering site for Rolling Stock as well. A continuing nice story in India. As you can see on the picture, I'll come back to that, Madhepura factory is now being built. Coming back to this very large contract that you probably follow. On PRASA, not a lot to say. We have delivered all our trains from Brazil. As you can see on the picture, revenue operation has started. All that is going well. The factory is almost completed. Actually, even though it's not fully completed, we have started to work in the factory of Gibela. Things are moving in line with our schedule.
On India, I think we have done excellent work on India. The contract was booked two years ago, more or less, within two years we have managed to build a new factory in Madhepura, and we are producing the first locomotive, which will go out of the locomotive by February 2018. I think this is extremely good achievement of all our teams worldwide to have been able to produce in such a record time. Actually, much ahead of schedule in terms of Indian production, the first locomotive. Amtrak, it's early days for Amtrak. We have started to freeze the design and the livery, which is always very important, which has been revealed in October. Far, so good. I think we are progressing quite well on the engineering of the train, but of course, it's early days in terms of project execution.
Clearly, this solid project execution has allowed us to grasp the fruits of our cost-cutting measures, which have not been hampered by any deterioration of the margin of our backlog. On the contrary, the margin in the backlog continues to improve quarter after quarter. Just on a more general topic, we have been very proud to have been certified ISO 37001, which is Anti-Bribery Management System. I think we are the first French company to have been certified ISO 37001. I think it shows all the efforts and all the discipline that we have put in place in the company on these topics. Similarly, we have been selected for the Dow Jones Sustainability Index for the seventh consecutive year, and we are now part of the top 5%. It means that we are also progressing on sustainability.
As being seen by the CDP Score B, as you know, Alstom is fully dedicated to a sustainable development, both because our products per se, rail is the most environmentally friendly mode of transportation. Also internally, we are improving our ways of working in order to decrease the energy and the carbon footprint of our production. I will now hand over to Marie-Josée for the financial results.
Good morning, everyone. I'll take you through the other financial indicators. Moving straight to the items below the adjusted EBIT line in the P&L. You'll see we have. Sorry for that. We have restructuring charges of just below EUR 20 million for the semester, driven by footprint rationalization, notably in the U.K. and in Brazil. The other charges include the amortization of intangible assets and integration costs, which are progressively reducing compared to last year. This led to a substantial increase of our EBIT at EUR 194 million compared to EUR 168 million last year. The financial result has decreased to EUR 51 million compared to EUR 71 million last year for the same period. This comes directly out of the reduction of the gross financial debt after we repaid the bond maturing last February for close to half a billion.
The group also recorded a tax charge of EUR 40 million, corresponding to an effective tax rate of 28%, compared to 33% last year. I actually consider this rate should be sustainable in the future. The share in net income of equity investors amounted to EUR 110 million. This is made of, let's say, two main items. First, the reevaluated options on the energy alliances for EUR 80 million, and the improved performance of our non-controlling interest in CASCO in China and TMH in Russia, which together contributed EUR 30 million in terms of P&L for the semester. This leads us to a net result, a net income of EUR 230 million for the first half 2017/2018. If we look at the cash flow generation, of course, the operating performance increasing has supported the good cash flow generated over the period, as well as two main other items.
The positive evolution of the working capital, which benefits, of course, from the company-wide efforts on the cash focus program that continues to bear its fruits, as well as from the favorable cash profile of a number of contracts, which have allowed us to decrease the construction contract in progress in our balance sheet. The second item is the staging of, or the phasing of the CapEx, where you actually recognize there is a ramp-up of our CapEx, in particular, including the strategic CapEx we are making in South Africa and in India. Definitely, I expect more to come in the second half. All this actually contributed to this high profit cash generation over the period of EUR 227 million for the first semester.
Looking a little bit more in detail into the CapEx, as I mentioned before, we invested EUR 80 million over the semester, which is twice as much as last year. This included, let's say, the normative EUR 30 million that we have on a recurring basis, as well as EUR 50 million transformation CapEx, mainly, as I said, in PRASA and in South Africa, as well as in Madhepura, in India. We also recently inaugurated Widnes, our biggest and most sophisticated train modernization center in the U.K., which allows us to do some renovation on the fleet in this market. We are now at EUR 100 million spent out of the EUR 300 million transformation CapEx over the three years. I definitely expect a ramp-up on the second half year.
Looking at the liquidity and gross debt, the company enjoys a sound liquidity position, over EUR 2 billion, which includes the cash available as well as the EUR 400 million revolving credit facility, which is, of course, fully undrawn. On top, we continue to enjoy the flexibility with the put options we have on the energy JVs. You can see the gross debt continues to be reduced over time. It sits now at EUR 1.5 billion at end of September 2017, we have actually reimbursed the EUR 272 million bond maturing in October last month. The next maturity will come next October and should follow the same path. Looking at the evolution of the net debt as a consequence, it has been reduced EUR 100 million over the semester, moving from a EUR 200 million position at end of March to now EUR 100 million.
It benefits, of course, from the positive cash flow generation over the period. Basically, this cash generation allows to offset the cash we spend on the IT separation costs we have with GE, as well as the dividend payments that were performed in June this year. We have a slight capital increase that you can see on the chart of EUR 30 million, including Indian Railways' contribution to Madhepura for EUR 11 million, as well as EUR 20 million stock option subscription. This, of course, has positively contributed on the reduction of the net debt. We have similarly actually enjoyed an increase in the equity level of the company, reaching now a little bit under EUR 3.8 billion, benefiting from a net income of EUR 213 million generated over the period.
Some positive evolution of the pensions, thanks to the positive evolution of the interest rates in the U.K., which is the main pension scheme that we have in the company, which basically totally offset the dividend payment as well as the ForEx evolution that we have, where basically EUR has strengthened over all the other currencies worldwide by around 10% over the semester. This is it for me.
Thank you, Marie-Josée. On the project, on Siemens Alstom project, as I said, nothing particularly new. As you know, we have signed the memorandum of understanding on September 26th. We have put in place the necessary teams to execute the deal, as well as to start all the different procedures. The first one being the work on sales information, which has been launched in line with expectations. As you know, we should sign the business combination agreement after this information process, and this should happen during the first quarter of 2018, the first quarter of calendar year 2018, so between January and March 2018. Thereafter, we launch the actual process of authorization by the antitrust administrations around the world. Nothing new there.
Things are moving smoothly, totally in line with our expectation and anticipation, knowing that, as we said, it will be a process which will last during at least 12 months. In terms of objectives, it will not surprise you. I think these good results in terms of operational performance confirm our 2020 objectives. We continue to see the sales growth, which has been fueled by the large backlog, adjusted a bit to reach 7% and 100% cash conversion, knowing that this is something that we have achieved during the H1. That's something which we have achieved last year despite some cash outflow linked to CapEx, notably.
Something that we Which confirms that the sustainability of our working capital, you know that one thing which is extremely important for us is to stabilize our working capital to make sure that these large sums of money are stable, and that's what we have achieved over the last 2-3 years now, and we continue to do so thanks to our own efforts. Thanks a lot. I think it will be time for question and answer. Thanks.
Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, ladies and gentlemen, it is star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. We will now take our first question from Akash Gupta from JP Morgan. Please go ahead. Your line is open.
Hi, good morning, everyone. My first question is on sharp increase in GE puts contribution, given that you have said previously that there is a formula of how the value of these puts will increase per year, which I think is 2% for two joint ventures and 3% for one. Maybe if you can elaborate what exactly has changed in terms of how you revalue these put options. That's my question number 1.
Marie-Josée.
Okay, Akash. In fact, as you know, the put options are used as hedging instruments to protect us against the adverse effect of the negative results of the GE JVs. Not only those instruments, let's say, allow us to be used as a coverage for any negative results, but they also get a remuneration. The valuation is based on the Black-Scholes method, for those of you who want to go into the nitty-gritty of the details. Therefore, there is a content in the valuation, which is the value of time. As time elapses and we get closer to the exercise date of the puts, this amortization of time speeds up, let's say.
Therefore, let's say we have an accrual in the valuation so that we catch up the execution value of those put options, which you already know is EUR 2.6 billion in September 2018. We are basically ramping up the valuation that sits in the balance sheet to achieve that and the realization value by September 2018. You should expect a similar phenomena in the second half of the year.
Thank you.
We will now take our next question from Dennis Dinkelmeyer from Goldman Sachs. Please go ahead. Your line is open.
Yeah. Hi, good morning. Thanks for taking my question. I'd like to further clarify the terms of the GE option. Given the recent changes at General Electric, I just wanted to ask you to remind us of the outstanding terms of that transaction and if there's anything that GE could do to reverse the transaction, or if there's any conditions that are potentially subject to the closing of Siemens and Alstom. Thank you.
Thank you. Nothing has changed. Obviously, the changes within GE has no consequences on our contract with GE. It's a put option that we have in our hands on two of three of the joint venture, as we know, the renewable and the grid one. On the third one, first, it's a much smaller number because we're talking only EUR 100 million out of EUR 2.6 billion. Here it's a call from GE if we exercise the put on the two first ones. Nothing had changed, and it's totally in our hands for the two put options.
As a reminder, ladies and gentlemen, it is star one to ask a question. We will now take our next question from Christophe Cadron from Societe Generale. Please go ahead. Your line is open.
Yes. Good morning, everybody. Just coming back with three questions, if I may. First, coming back to the execution of the current projects, could you come back on your ability of increasing the profitability there? What are the main drivers behind to give more color on the achievement you have made in terms of profitability? This is my first question. Second question relates to the competition on the current environment. Did you see any pressure on pricing still? Could you give us a view on what's happened since the announcement of the potential merger with Siemens? Do you have seen any negative reaction from clients on what are the main reaction of the clients, but also of the competitive landscapes with regard to this potential combination? Last question, could you come back on the WCR on the positive evolution there?
What are the done payments part in terms of contribution as it is with regards to the inventories? How do you see this metric evolving into the future? As Henri mentioned, this is a clear focus of the company. Thanks a lot.
Thank you, Christophe. On the first question on execution, as you know, the first objective is first to execute in line with the customer objectives. In terms of cost, time, quality, of course. Then, as execution goes, we can improve our cost base. For example, through design to cost or through sourcing activities. Clearly, the number one, I would say, goal is not to have any problem. If you have no problem, then of course, as you have set aside some contingencies, as you have set aside some money there, it allows you to improve the global portfolio. Classically, we are trying to improve a little bit everywhere. Clearly, we are trying to avoid any negative contract. That's why it's so important that our large contracts that you have seen are executed properly, which is totally the case.
We have not seen any, I would say, impact of the announced deal of September 26. It's also fair to recognize that it's early days. We are just one month after the announcement, so we cannot see any move on the market. We have not seen any negative positions taken from any customer. We have not seen any move from competition. We have not seen things on the market. It has been very well received by our employees internally, both in Siemens and in Alstom, which I think is a very good starting point because we need to design this new organization together. That's very positive. It has been positively, as well, received by the customer.
I think it confirms that both Siemens and Alstom are seen on the market as two very strong players, and two with a very good reputation in terms of technology and quality. I think it will add up to a very nice brand. Only positive things, and we have not seen any changes of any attitude of our customers or our competitors. On the working cap, Marie-Josée?
On the working capital, actually, it's been continuously improving. When we look at the down payments, they've been relatively flat over the period, meaning actually the down payment consumption equals the new down payments received on the orders that we booked over the semester. Clearly, we continue to get progress payments, let's say, on the projects under execution. In line, let's say, with what we explained earlier, which is we try to have, let's say, a more linear or more regular flow of cash between the customers and ourselves during the execution phase of our projects. At the same time, we are obviously continuing to grow the company and increase our capabilities. Hence the effect, and the increase you see in the inventories.
It has also a collateral effect, which is an increase in the payables since we buy more, in line with the growth of the company. We also have a nice evolution of the trade receivables with, let's say, close to EUR 150 million decrease of the receivables. In line, let's say, with the good cash collection that we've had over the period.
Thank you, Marie-Josée. Next question. Alfred?
We will now take our next question from Alfred Gläser from Oddo. Please go ahead, your line is open.
Yes, good morning. I wanted to ask you, could you give us maybe a bit updated guidance on the transformation CapEx? How much you want to spend in the second half year, then how much you want to spend next year? On the order intake, could you give us a kind of expectation what you see ahead for second half year? How much you might book overall for in the current fiscal year?
On the order intake first, Alfred Gläser, I think we said it already in the past. There are not so many very large orders this year. It's a question of phasing of the orders. Nothing which could be alarming or could reflect a general trend of the market. We have not lost large orders as well, so it's just that none of them has really been booked by anybody so far. We'll see. It's always difficult to predict the timing of some orders. As you know, one large order is about the TGV du futur, which is the renewal of the very high-speed fleet in France. Of course, if it falls before end of March or after end of March, it will change the facial numbers.
To be fair, it does not really change the operational aspect to it, but from a purely communication standpoint, it will change a lot the total number. We are not expecting very soon some very large orders, which would be soft on that respect. Maybe Marie-Josée on the CapEx.
Regarding the transformation CapEx, so as Henri Poupart-Lafarge indicated, you see we are clearly starting production in both South Africa and India. Therefore, we are now clearly having an acceleration phase of the investment. I expect definitely our second half year to be twice as much, let's say, as the first half year in this aspect.
Thank you. Next question.
We will now take our next question from Gaël de-Bray from Deutsche Bank. Please go ahead, your line is open.
Yes, good morning, everybody. Thanks for taking the questions. Actually, I've been disconnected and missed the first set of questions, I hope I will not make you repeat what you already said. Two questions, please. The first one is on the incremental margin, which was close to 17% in the first half. I think this is a much better drop-through than what we had seen in the past couple of years, when it probably ranged between 10% and 14%. Was there anything unusually positive in the first half, or would you expect to be able to maintain such a good operating leverage going forward? The second question is on the order performance.
If I adjust for the two large contracts in Italy and Sweden in fiscal Q2, the flow of small and mid-sized orders below EUR 50 million exceeded EUR 900 million in the quarter, right? I think this is a record high level. Could you talk a bit about this, whether there is an ongoing change in the market or perhaps in your commercial approach towards smaller contracts, or if it is just the usual volatility of the business that made it this way? Thank you.
I think, Gaël, on the first question, I'm not looking at precisely whether it was increasing by 17 or 14. There is a nice ramp-up of our actions. We said it, I think, two or three years ago, that starting more or less now, all the operational measures will kick in after a time, which was marked more by just the impact of the growth and the impact of the mix. Now we really see the impact of the cost reduction measures. On that front, it's a good ramp-up, and I don't expect it to slow down in the future. This is in line with our objective and in line with what we expected from the plan. Positively impacted by the fact that, as I said, we have no issue on our project execution, which are well executed, and therefore, we have no negative news coming from that.
It's a combination of the cost reduction measures kicking in and the good execution of the project, so it should not stop in the future. On the order intake, it's true that we are increasing the small and mid-size orders. It's difficult to say whether it's a trend of the market. It's clearly something that we are pushing, and our geographical organization, our localization help us in getting more small and mid-size orders. It's clear that it's much easier when you are closer to the customer to get this kind of order than when you are far away. At the same time, it's a little bit early days to know whether the numbers you are quoting is a recurring number. We'll see in the coming quarter.
It's true that this is something that we are pushing internally, is to not only have the big orders, but also to have the day-to-day gardening, as we call it.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad.
Okay. If there's no other questions, thank you for having attended this call. Selma and Julien are, of course, at your disposal to answer any further questions. I think our next meeting or call will be on January 17th, 2018, for the Q3 orders and sales. I wish you a very good day. Thanks. Bye-bye, everybody.
Ladies and gentlemen, this concludes the Alstom conference call. Thank you for your participation. You may now disconnect.