Welcome to the Alstom conference call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to the speakers to begin today's call. Please go ahead.
Good morning, everyone, and thank you for joining us at short notice. I am Martin Sion, CEO of Alstom, and I am joined by Bernard Delpit, Executive Vice President and CFO. Bernard and I will make a few introductory remarks and today's announcements before opening the floor to Q&A. The start of the year is challenging, to say the least. It has reinforced the need to sort trends across the organization and the need to strengthen our balance sheet. On my first few months in the company, I visited more than 35 sites. I met with Alstom's teams, customers, suppliers, and investors, and immersed myself in some of our largest projects. My objective was to move quickly from diagnosis to action.
I know that it takes time to change an organization of this size, and this is why, shortly after joining, I launched several urgent actions to deliver early improvement across the company. This includes reinforcing lean management principles, strengthening accountability of project managers, but also simplifying processes to improve efficiency and accelerating cost-saving programs thanks to a better coordination across projects and regions regarding procurement so that we can fully leverage the scale of the backlog.
Finally, I have also mobilized dedicated teams of Alstom experts, which I like to call the tiger teams. Their role is to challenge project teams, to help the project team to strengthen risk identification and governance, and improve planning, but also to ensure effective mitigation measures are in place. These tiger teams have been deployed on several critical projects, including Coradia Max, a regional train platform sold to several customers in Germany and Central Europe.
The program is at the critical stage of testing and homologation, and the input from the tiger teams has proven valuable to assess the situation of the project. First, their work has helped develop technical solutions and mitigation measures following major issues that emerged in the first quarter of the fiscal year, and which led us to pause production. The technical solutions were finalized in the end of the summer. Later on, in the second quarter, another specific tiger team identified the need to recalibrate the testing phase to comply with validation and homologation requirements. This has led to extended homologation timeline and later start of commercial service, which became clear only recently. These changes have also knock-on effects across the broader Coradia Max portfolio, which comprises six projects. So the impact from this platform is significant and is a clear reason why we are here today.
But I also want to put into perspective the fact that we also delivered solid achievements in the first half, and the challenges on Coradia Max are not representative of the broader rolling stock backlog, mainly for three reasons. First, other major projects are progressing well towards the start of commercial service. For instance, Alstom's new high-speed platform, Avelia Horizon, got homologated last May and will enter commercial service this week, as decided by our customer. Second, a significant share of the backlog is already in serial production, where we are following the right planning discipline. These projects are achieving their production targets. This includes, for example, the commuter trains in France, locomotives in Kazakhstan and India, and regional trains in South Africa. Third, another significant share of the backlog is still in the development phase.
These projects will benefit from the operational initiatives already underway, as well as the broader operational plans we are now developing. Beyond rolling stock, services and signalling businesses are confirming their full potential. Here, the focus is different. We need to sustain the solid momentum and raise our ambitions to drive growth and performance further. Let me now hand over to Bernard, who will take you through the financial figures and updated guidance for the current fiscal year.
Thank you, Martin. Let me now take you through preliminary and unaudited figures for the first half of the fiscal year. Car production was 1,860, below the level of the same period last year, largely reflecting the reduced cadence on the Coradia Max platform. We expect production to increase in the second half due to seasonality. However, we are revising full-year guidance to around 4,000 cars compared with 4,400 to 4,500 previously due to Coradia Max. Sales reached EUR 9.3 billion, up 3% reported and 2% organic. Growth was held back by lower-than-planned car production. Consistent with the revised production outlook, we now expect organic sales growth in the low to mid-single digits for the full year, compared with around 5% previously. Adjusted EBIT margin is at around - 4% in the first half, compared with positive 6.4% in the first half of last year.
This decline of around 10 percentage points is entirely due to the gross margin adjustment on Coradia Max and the situation in the Central and Northern Europe region of Alstom. As a result, we are revising full-year adjusted EBIT margin guidance to around 1%, implying a second-half margin of around 6.5%. Finally, free cash flow was EUR -1.2 billion in the first half, slightly less negative than expected due to milestone payments and down payments moving from the second half into the first. As expected, payables in H1 are also lower than at March closing. For the full year, we now expect free cash flow of EUR -1.5 billion. The shortfall is primarily due to milestone payments moving into subsequent years, as some homologation timelines have extended for the six Coradia projects. It also reflects prolonged uncertainties in the Middle East, considering the geopolitical situation.
Let me now hand back to Martin.
Thank you, Bernard. The lessons learned from the tiger team exercise are essential. They are proving effective, either helping resolve challenges or identifying further engineering and planning issues that need to be addressed. We will continue using this approach to strengthen execution on critical projects. We expect to complete the reviews by the end of this fiscal year. Their findings help shape the operational plan we are now developing. Of course, the free cash flow profile we now expect for this year requires the group to strengthen balance sheet to maintain its investment-grade rating. With the support of the board, we are therefore launching a debt reduction plan of around EUR 2 billion, combining organic and inorganic measures to be implemented no later than September 2027.
We have already reinforced liquidity with an additional EUR 2 billion credit facility, adding to existing facilities and the EUR 1.6 billion of cash on our balance sheet at the end of September. As I mentioned, the short-term actions we have launched are already having an impact, but we need to go further and make more fundamental changes to our operating model to ensure we deliver right first time, every time. To this end, we are reviewing how we are organized and how we operate. The guiding principles are clear: greater simplicity, clearer accountability, and stronger attention to development risks based on the lessons learned from Coradia Max. We will also look at where we can unlock more value through organization, product portfolio, and footprint. These work streams are already underway, and we will communicate decisions as they are made.
We will present the overall outcome together with the medium-term financial trajectory at the Capital Markets Day in the second quarter of 2027. All Alstom's team are focused on strengthening project execution and putting the company on a successful trajectory. Even if the situation is difficult, I am confident in Alstom's future. We operate in a growing market, we have a strong competitive position, and we have the levers to realize our full potential. This concludes the introduction, and we will now take your questions.
Ladies and gentlemen, if you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Andre Kukhnin from UBS. Please go ahead.
Yes, good morning. Thank you for taking my question. Sorry about that. I wanted to understand the first half first. You said that delta of 10 points of margin is primarily due to Coradia, so we are talking about EUR 950 million. Could you just explain to us how much of it is kind of operational higher costs? Is there a big proportion there of penalty being paid or provided for the customer? What does need to happen in second half for that 6.5% margin to materialize, please?
Okay, I will take this one. Bernard's talking. We will not give the full breakdown of the EUR 950 million that you just mentioned, but yes, it includes both additional costs and penalties. These are the main drivers, and we have taken the full reassessed impact at completion of the program in H1.
Okay, got it. For the deleveraging plan, for the EUR 2 billion, could you give us any idea of the kind of mix of organic, inorganic within that, please?
For the moment, it's too early to share with you the breakdown of the plan. We are just starting the plan. We have already initiated some process for the disposals that are usually part of this kind of program, and we are working on the rest of the deleveraging plan. As you know, we had already one in 2023, 2024, so it will, I would say, work the same way in terms of sequence of preparation and execution.
Mm-hmm. Got it. Thank you. I'll go back in the queue. Thank you.
The next question comes from Gael de Bray from Deutsche Bank. Please go ahead.
Good morning. Thanks very much. What is the share of the backlog that's related to the Coradia platform, please, and what's the new level of the gross margin in the backlog now?
I can take the size of the six Coradia Max projects in the backlog, which presents around EUR 5 billion. Maybe you can take it over on the gross margin in the backlog, Bernard.
Yeah, the gross margin for the Coradia program is now negative.
For the group as a whole, would you provide an indication of what it is?
The gross margin in the P&L for H1, Gael?
No, for the—
In the backlog.
In the backlog, I think it is going to be around 18%, as most of the deterioration comes from program contracts that are now in negative territories.
Okay. Thanks very much. And maybe the last one from me. Also, I am trying to understand how far you are ready to go for the divestment portion of the deleveraging program. Would you consider a potential divestment of one of the, well, best assets that you have in portfolio, including signalling, for example?
As Bernard said, we have already initiated, since I arrived, a review of what could be divested. I think it is normal for a new CEO to do that. Our focus is on activities which are profitable, obviously, because that is the purpose of selling in this context, but which would not be at the core of our business.
Okay. Thanks very much.
The next question comes from Akash Gupta from JP Morgan. Please go ahead.
Yes. Hi, good morning. I got a few as well. My first one is on the full-year outlook. At the midpoint, you are reducing this year production by around 450 rail cars. I am wondering how much of this is driven by Coradia, and are there any non-Coradia projects as well which are driving this revision in your production target?
Okay, Akash, I will take this one. I would say that the Coradia Max project are representing the vast majority of the revised production outlook. The gap is coming from Coradia.
Thank you. The second one is on deleveraging program. I think you mentioned EUR 2 billion by September 2027. Of course, you have some good assets that will be desired by others, but that it may have implication on future margins, and I think in the release you mentioned you still target 8%-10% over the medium term. The question is that, would you be willing to look at something like divesting minority in some of the businesses? For example, since your last debt reduction plan, we have seen some companies in India have sold down minority for their Indian business, given the high valuation there. I do not know profitability of your Indian business, but you have a big business there. Just wondering, could that also be on the table, or that is not possible for you to consider?
Akash, I will take this one. We will not share at this stage details on what assets we are going to divest. I would say it is going to be a combination of some strategic thinking about what is core and what is not core, and more a financial approach of the impact on the future margins versus the proceeds that we can get out of those disposals now. Early stage, I would say, Akash.
Yeah. Maybe lastly, I think there will be some question today on how you get to this EUR 2 billion number. I think for this financial year, you have EUR 1.5 billion negative, but does this also imply that for the next first half of next fiscal year, we might see another EUR 500 million of outflow, which is why you are targeting EUR 2 billion and not more and less. Thank you.
Yeah. Let me frame it maybe a bit simplistically, but clearly. Out of the EUR 1.5 billion negative free cash flow this year, I would say that around EUR 1 billion should reverse over the next years because these are progress payments that are right-shifting. Regarding now the margin deterioration of, let's say, 0.9% that we booked in the P&L, that will impact free cash flow by 1%- 1.5% at completion. So, on a cumulative basis, you end in a range between EUR 1.5 billion and EUR 2 billion need for deleveraging.
Thank you.
The next question comes from Vlad Sergievskiy from Barclays. Please go ahead.
Yes, good morning. Thanks very much for that. I do have three questions, and I will ask them one by one. First one, you now expect a EUR 250 million of free cash flow in the second half of this year, versus prior expectation of about EUR 1.5 billion positive. At the same time, you expect a chop on car production and your margin going back to about 6% in the second half. Could you please let us know what has changed in your planning assumptions for the second half, in particular, drive this change of about EUR 1.7 billion to EUR 1.8 billion of cash flow generation for the second half?
Okay. First, I will correct your assumptions. As I said, the EUR 1.2 billion in H1 comprised some left-shifting from progress payments that we are expecting, expected, sorry, in H2. I would say that the revision is around EUR 1.5 billion and not the EUR 1.8 billion that you mentioned. Second, the vast majority of the revision is coming from cash in from the Coradia and the German projects that is right-shifting. As I said during my introductory comments, we have also taken some cautiousness because we are facing uncertainty in the Middle East. That's a combination of cash in that is right-shifting, plus some new, I would say, assumptions in terms of commercial momentum because of the geopolitical background.
That's super clear. Thank you. My second one would be on contract assets. In March, they stood at about EUR 6.5 billion, so I believe they will be higher in the first half. Based on what you know today, could you rule out material write-downs on this contract asset number?
No, I do not think so. I think that the majority of the consequences of what we are announcing today will be an increase of our provision for loss at completion.
Understood. My final and very quick one. Thank you very much. Did you already manage to have a discussion with Moody's on those preliminary numbers? Based on your full-year guidance, it looks like you will be struggling to achieve their downgrade triggers on all three occasions, which is margin, cash flow, and leverage. Any other feedback from Moody's, please?
It's not to me to reflect our discussions with the agency. I guess that the agency will keep you posted, but we have an open dialogue with Moody's.
Thank you very much. Thank you.
The next question comes from Martin Wilkie from Citi. Please go ahead.
Yeah, thank you. Good morning. It's Martin from Citi. Just coming back to the EUR 1 billion in the backlog that is the Coradia. My understanding is that there are multiple contracts inside a broader sort of program for the train design itself. Are all contracts inside the Coradia now considered onerous, or just the early ones? Just understand of how that will work from accounting on each of the contracts. And of that EUR 5 billion, over what period does it deliver? Just to understand over what timeframe we should expect a 0% gross margin on those Coradia contracts. Thank you.
I'm not sure I heard all your questions, but I guess it's about the gross margin on the Coradia contract. I mean, the answer of Bernard saying that the Coradia contracts are today negative is true for all six projects. What we have to understand is that the logic on the Coradia project was to have a first development covering most of the homologation for the other one. The delay we are taking for the first one is having a knock-on effect on all the five other ones. It's contract with significant penalties, and which led to the cliff effect that you see when you see the size of the degradation in the short term. This contract, when we speak about EUR 5 billion, is for the rolling stock contract, obviously, not the service contract.
The final of those six contracts, over what timeframe does it deliver? Just to understand how many years this will be a drag for.
I don't have the precise date for the last deliveries, but the enter into service will start in 2028, and it should end beginning of 2030 or something like that.
Okay. Great. Thank you very much.
Ladies and gentlemen, as a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from William Mackie from Kepler Cheuvreux. Please go ahead.
Yes, good morning. I have two or three questions, please. The first question would relate to the level of gross margin reset that you've taken. You've put a large spotlight on the most significant projects around Coradia Max, but you've also mentioned Northern Europe, and there are some legacy questions around some of the Coradia Stream. To what extent is the reset Coradia, and what other projects have also been reset within this adjustment?
Okay, [inaudible]. I will not use the reset language. We have, in fact, aligned financially with the new schedule, very recent new schedule for the Coradia, and six projects, so it's a very large program. Yes, it has knock-on effects on other programs that are sold from Germany. But the vast majority of what we are discussing here is the Coradia Max issue.
Okay. The second perhaps relates to the technical visibility you have now on completing homologations and entry into service around the six Coradia Max projects. There have been multiple delays. To what extent should we build confidence that you have a fixed and deliverable timeline going forward?
I fully understand the question, and this is exactly the topic of why, during the last months, we had experts from all the company and the tiger team working with the project team in order to assess the robustness of the hypothesis and to see how we can, on the technical side, due to the problem which emerged a few months ago, it has been successful. We have found solutions to overcome the problem which led to the pause in production in July. For the testing and validation planning, it's true that the tiger team identified some significant weakness. Now we have a plan which is robust, which has been validated with the most knowledgeable people in Alstom. It's something that I'm reviewing very frequently. Today, I'm confident that it will be the last rescheduling that we do for the Coradia Max.
It's a commitment that we made to the customer, and we had to be transparent and to reflect this situation in the financial situation.
Thank you. The last question I have relates to the cash, the billion cash recovery program. We've discussed on a number of occasions some of the inorganic measures, but could you give a sense of how you see a potential split between organic and inorganic? Then, in detail, what organic measures do you have in mind? Thank you.
It's too soon to go into this detail, and this is something that we will work, and we will work it with our board.
Yeah. I can just add that I think that a large part of the EUR 2 billion will be inorganic. When we are mentioning organic, it is about discussions with the clients, and we are engaging with our clients to discuss some term of payments and maybe adaptation to our contractual terms.
Thank you very much.
The next question comes from Delphine Brault from ODDO BHF. Please go ahead.
Yes. Good morning. Thanks for taking my questions. I have two. First, with what you see today, where your net debt to EBITDA ratio should land, you believe, at the end of H1? Or same question is, what is your level of EBITDA currently?
We will discuss that with the full set of data, Delphine. By definition, looking at the leverage ratio at the end of H1 with such a deterioration, I don't think it's the most critical question. It's how we look at it on a forward basis, not only in March, but in September, as we said that we want to execute our deleveraging program by the end of September. So the idea is to come back on this basis on something totally in line with Moody's expectation for an investment-grade company.
Okay, thank you. Second, would you be ready to consider the entry of the French state in your capital or reinforcement, considering that BPI is already in?
I mean, this is not something that we are discussing today.
I think, no, this has not been discussed. I think the support of the French government, because we are very large employer in France, is obvious, but we have not discussed such things with the French government.
Thank you.
The next question comes from Andre Kukhnin from UBS. Please go ahead.
Oh, yes. Hi. Thanks for taking my follow-ups. I just wanted to check on Coradia Max. What is the current expectation for the homologation timeline?
The date that we communicated is end of Q. I mean, I will say it in months rather than quarter because of the financial and calendar year. So in March 2028 for the first Coradia Max project, and the others are after.
Okay. I was thinking that homologation comes first, and then there is still a period of time before the entry into service. Is that still the case? The entry into service is planned to be in 2028, or is that calendar 2028 or—
Yeah, yeah. Yeah, that is a discussion to have also with the customer, so I will not be more specific on that.
Okay. I just wanted to understand, well, make sure that I understand this right, that you were already producing these trains, and you were producing them before the first issue occurred, and you have resolved it, and the H1 result includes the cost of retrofitting that to the already produced trains, as well as producing further.
Yeah.
Now there is another issue that you will also have to retrofit.
Yeah, what you say is right. What we identified in the Q1 of this year is the fact that there were some technical challenges which needed additional retrofits. That's why we have paused the production to prevent, to increase the level of cars which would need to be retrofitted. The technical experts have found a solution to make these retrofits in an industrial manner, and the cost of the retrofit is included in the H1 situation that we are presenting today.
Right. So how many trains have you produced on this already, and can you give us any indication for the year-end? Because I think that would help to explain the cash swing, cash recovery.
I will put it differently, Andre. The gap in H1 in total number of cars is mainly, I would say, two-thirds coming from the Coradia. That will continue to grow in H2. I mean, the gap coming from the Coradia, because obviously we expected a ramp-up in H2. So we will prepare the numbers for our November discussion. But the message here is that the gap to our expected production plan is mainly, majority coming from Coradia.
Right. Okay, got it. I guess in 2027, you'll still be producing them balance sheet before actually starting to ship and getting paid in 2028, or will there be stage payments in 2027 based on the progress on the homologation?
We are extremely, I mean, we are limiting, if not bringing to close to zero, the number of Coradia cars produced in this fiscal year, waiting all the tests to be completed in order to ramp up on a sound basis next year. That is what we do.
Retrofitting the existing cars which have been produced in the past year.
Got it. Thank you for your time.
The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi, good morning. Thanks for taking my question. I wanted to check on the assessment of the problems that have been gone wrong on these contracts. Is it all due to the phase of execution, or is there anything in terms of the original terms of the contracts that you would have now in retrospect said would have to have been different? I am asking just in relation to the orders you are taking now. Obviously, you are still taking a lot of orders now. Are the conditions that you are signing on have in any sense meaningfully changed versus before, or you would say that wasn't the problem in the first place?
Yeah, it's a good question. Thank you. I think that in terms of the problem we are a conjunction of difficulties in development, project management, which could have been better, and also terms and conditions which are very stringent. I believe that today, in the current tenders, the terms and conditions would have been identified at tender phase, and the situation would have been different. In terms of project management, in the actions I launched since I joined, we are reinforcing project management in order to make sure that the kind of situation that we are facing today would not happen. If it happens, it should be identified much sooner to prevent it to take this kind of size. All that will be embedded in the change of operational routine and organization that we are working on.
To be more precise, the T&Cs that have created this impact this year, we don't have that in other contracts. We don't have that in other contracts. By the way, they are not all the same for all the six Coradia contracts. It's limited to two out of the six where we have this kind of severe impact due to term and conditions.
Got it. Thank you.
The next question comes from Jonathan Mounsey from BNP Paribas. Please go ahead.
Hi, everyone. Good morning. Thanks for fitting me in. A couple, if I may. First of all, we start with the free cash flow guidance now for the year, which is minus, I think, EUR 1.5 billion. You say that you're committed to strengthening the balance sheet to the tune of EUR 2 billion. I just wonder why not more, because we've got bad free cash flow this year. I guess there's going to be costs to execute the turnaround plan in the group. Headroom in case there are any further project issues elsewhere across the group would seem sensible. Then you've potentially got, I don't know, fines from the customers who are having to wait for delayed trains. It doesn't really feel like, when you add all that together, you're going to be materially deleveraging. You say that the key shareholders that have board membership supportive.
Wouldn't it be a good idea, with their support, to raise more money? The second question, just to understand. Obviously, currently, while you have that investment-grade rating, your metrics don't really meet that threshold, which is why we need to strengthen the balance sheet. I'm just wondering, you've announced the new revolving credit facility, and it's got no financial covenants. First of all, do you need to use that revolving credit facility? The lack of financial covenants, somewhat, at least to me, sounds surprising. Perhaps you could say something about the interest rate you're having to pay to achieve that. Thank you.
Okay. On the sizing of the EUR 2 billion, I mean, it's a discussion that we had considering our situation, the current forecast for this year, and cash generation for next year. So, I think it's the right balance. We discussed it at length, and I think it has been validated. So, I will not give you other figures today. This is our assessment, and I think that's the right one. Considering the revolving credit facility, it's here to give some comfort on the way we will manage liquidity over the next quarters, and it gives us some horizon to strengthen the balance sheet. So again, even if this is the same number, but it faces different situations, and I think that the right thing we had to do in order also to have what I would call a strong liquidity situation.
Thank you.
Ladies and gentlemen, thank you for your questions. Let me hand the conference back to the speakers for closing comments.
Okay. Thank you for having this call together today, and we will be with you in 2 weeks for the full presentation of the first half. Thanks again. Bye-bye.