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Executives

Patrick Kron - Chairman & Chief Executive Officer

Nicolas Tissot - Chief Financial Officer

Analysts

Andreas Willi – JPMorgan

Ben Uglow - Morgan Stanely

Lisa Randall - Nomura

Daniel Cunliffe - RBS

Martin Wilkie - Deutsche Bank

William Mackie - Berenberg Bank

Gael de Bray - Societe Generale

Olivier Esnou - Exane BNP Paribas

Jose Manuel Arroyas – Santander

Christel Monot - UBS

Alfred Glaser - Cheuvreux SA

James Stettler - UniCredit

Alstom (OTCPK:AOMFF) F2Q2011 Earnings Call November 4, 2010 12:00 PM ET

Patrick Kron

Thank you and good morning ladies and gentlemen. Welcome to the conference call presenting our first half results for the fiscal year 2010/11. That means accounts from the 1 April 2010 to 30 September of the same year, which includes four months of our new Grid sector from June to September with no comparison with last year available.

I would like to remind you that all the published elements; presentation, financial reports, including MD&A and accounts, as well as the press release are available on our website www.alstom.com.

I will start with the key highlights of the first semester and review the situation of our Power, Transport and Grid sectors. Then Nicolas Tissot, our CFO, will go through the financial results and the conclusions.

On slide three, you can see that the group published this morning an operating performance which is in line with the guidance. Excluding the four months of Grid consolidation, sales declined by 8%, as a consequence of the drop of orders for the last 18 months, including Grid. That amounts to €10.4 billion, up 8%.

Income from operation reached €675 million, excluding Grid, which corresponds to a margin of 7.6%, in line with the 7% to 8% bracket that we gave and as expected, Grid’s margin at 5.8% is slightly dilutive.

Finally, the net income at €401 million, which includes a specific negative impact of €75 million linked to Grid’s acquisition, PPA impact and acquisition costs, elements which will be commented by Nicolas later on, the net income decreased by 29%. This drop resulted mainly from the low operating income and higher financial and restructuring charges.

On slide four, you can see at the same time that order intake continued to be impacted by the weak power thermal markets at €5.6 billion. Orders are down to around 20%, 21% from the first half of last year, which included two large contracts; one for power plant in the UK, around €1 billion at that time, and the other one for suburban trade advice. The backlog continues to be solid despite its moderate decline at €45.3 billion. It represents a little bit less of two years of sales.

Free cash flow became negative over the period at 963 minus, due to the strong deterioration of the working capital linked to the low book-to-bill ratio, the lack of down payments associated to turnkey orders, as well as the unfavorable cash profile of contracts at the end of their execution. This will be commented in details further on.

Looking at the orders on slide five, you see that the low demand on new power equipment, thermal power equipment in mature markets continue to impact the group intake during the first half of the year, while you can see on the slide that at the same time the flow of medium and small-sized projects resisted quite well and is more or less steady.

We have however experienced a strong decrease in the booking of large contracts, illustrated by the fact that only eight projects about 100 million of size were booked during the six months, as compared to 10 and above over the previous semesters.

Geographically, one can see that Western Europe has been the largest area in terms of orders; 35% of the total, notably with the booking of a win contract in the U.K. and regular orders in Sweden, while North America accounted for 15% of these total orders, but it needs to be remarked that this geographical split corresponds to a balanced repartition between mature and emerging markets.

In H1, 50% of our sales, of our orders were booked in historical markets; Western Europe plus North America, while 50% were booked in the faster-growing markets as BRICs or other emerging markets. Asia-Pacific representing 21% where the main contract registers. We have metros in India; nuclear equipment in China; Middle East/Africa representing 12% of the order with an air quality control system in South Africa, tramways in Tunisia and substations in the Emirates as well as in Libya. These were among the main contracts received.

Eastern Europe is 10% of the total orders, benefited from the large contract for locomotives in Russia. Finally, South and Central America contributed 27% of the orders, with wind turbines in Brazil and a hydro contract in Chile, but again it’s interesting to note that the share of emerging markets in the order books represented 50% of the total orders, editing fees compared to last year where it stood slightly below 30%. This evolution highlights, one, the quick recovery of demand in these regions, and secondly, our ability to participate in this recovery to our presence in these areas.

On slide six, you see that we have obviously a book-to-bill ratio which is low at 0.63, excluding Grid 0.67, including this new sector. That means a level well below one over the period. This being said, you also can see that the backlog remains ahead of it, even is slightly decreasing because of this book-to-bill below one, giving us still around two years of visibility; 25 months excluding Grid, 23 including Grid, which by nature has shorter lead times. I remind you that our order book is fully secured and as I say repeatedly, the proper execution of this backlog remains our top operational priority.

On slide seven, you have more details about sales and income from operations evolution. You can see that excluding Grid, sales declined by 8% as a consequence obviously of the decrease of past order intakes. The income from operation moved from €828 million in September 2009 to €763 million in September 2010. And as you can see, it has been mainly affected by the impact on the gross margin of the lower volumes of sales, combined with some under-recovery, the combination representing around €200 million. This has been partly offset by a positive impact of around €50 million linked to meet execution and S&A saving.

You will also see that Grid contributed to the IFO at the level of €88 million for these four months. Overall, operating margin declined from €8.6 million in H1 to €7.3 million during H1 of last year, to €7.3 million for the first half of this year.

If we go to slide eight, you have a general view of our market condition. They remained globally challenging during this first half, while presenting some contrasted situations. Starting with Power, you see demand from end markets continue to be weak, especially in the new thermal equipments and the reason is simple; because of the uncertainty on the rhythm of the economic recovery, customers continue to postpone some projects, not only in Europe, but also in the USA, with in addition to, some uncertainties in future regulations such as the Climate Change Bill, which probably blocked some decision processes.

The situation in emerging markets where the economic growth has rebounded is more encouraging. Globally speaking, increasingly stringent environmental or regulation continues to drive the need for CO2-free technologies such as hydro, wind and nuclear. And lastly, the aging of the fleet and the postponement of investment for new equipment in mature market continued to sustain demand for service and retrofit markets which definitely remain sound.

Concerning transport, the market was more resilient. For passengers’ railways, we are more, as you know, in passengers’ railways than in the freights, which has been a little bit more bumpy. The opportunities still exist not only in historical markets, but beyond the traditional frontiers of Western Europe and this evolution continues to be driven by economic growth, demographics, ever-increasing urbanization and the rising concern for environmental issues.

Lastly on Grid, the market started to recover after the 2009 crisis. As I said, this market has lower lead time, shorter lead time, than in power generation and we are confident that it will continue to grow in the future.

If you go to Slide Nine, you can see that due to the weak market conditions in Thermal, we launched in the mature markets of Europe and North America. We launched a restructuring plan in order to adjust to demand, and this is important in our business, not compromising our chances to benefit from the rebound.

Concerning the plan that we’ve announced early October, it targets thermal systems and product business in the USA and in Europe and involved 4,000 positions, representing more or less 20% of the existing positions in this area. In Power plant the sector, we continue to optimize its industrial base and implement a strict control of the costs in order to diminish overheads.

To improve our efficiency, we have also decided to reorganize the Power sector by fuel in eight different businesses which are steam, gas, nuclear, hydro, wind, thermal renewable, thermal service, and power automation and controls. To better address the demand, we have continued to focus resources in the stronger growth areas with a special attention and focus on Asia.

Finally, regardless of the short-term evolution of our orders, we are continuing and will continue to keep spendings of R&D at a high level in order to allow us to put in the market products with the most competitive AGSCCS (ph) solutions, turbine efficiency, et cetera, et cetera.

On Slide 10, you can see that we have also continued the ongoing adjustments of our headcounts through natural attrition and termination of fixed term contracts, representing a net decrease around 2,000 positions. Including Grid, it puts the total work force at the end of September 2010 close to 95,000 people.

By sector, as it is stated in the slide, Power represent more or less half of Alstom work force, with Transport a little above 25%, Grid more or less 21%, and Corporate and International Network a few percent. By geography, you also see in this chart that 30% of our employees are located in emerging market, which has been a significant shift compared to the situation a few years ago.

Let’s go now at the operational review by sector starting by commercial achievements, performance and main events, starting with Power.

On Slide 12, you see that after 18 months of downturn, the Power market starts to show positive signs, especially in the emerging markets. This is by far not reflected in the orders for the half year, but I want to share with you one indication, which is where we try to better share with you our assessments that, with the pipeline remains very active and if I may say, more active today than it was a year ago.

This doesn’t meant that it will turn immediately into orders and the past has shown to both of us that this is not necessarily the case, but it’s a fact that if I just look at the firm bids which we have committed towards a broad variety of customers, they are substantially higher in overall volume compared to last year; both new equipment and retrofit at 20% above last year. And when you look at the repartition by technology and by geography, you see that in emerging markets, the bids that we are putting there have doubled, more or less, compared to the situation of last year.

So, it’s not only an increase in absolute terms, but also a shift towards emerging markets. And if you look also by technology, while remaining active in traditional thermal markets, we are also more active in Renewable, as you can see, with a faster growth of our firm bids towards renewable versus classical thermal, but both moving upwards.

By the way, to illustrate this trend, you might have noticed a few successes over the past weeks and since we closed the first half. Notably in India for gas and steam plants, as well as in Singapore where we were rewarded two contracts for two gas turbines.

We received yesterday night a letter from a new customer, Sencorp in Singapore, which informs us that we have been selected for another GT combined cycle for this third customer in Singapore with a view to sign an EPC contract, eternity contract, before the end of December. We are working in a number of other projects, such as Brazil for hydro projects, in which we are well-positioned and expect positive news in the near future.

If we look at service, the service market showed overall resilience as customers tend attend to faster maintenance and service of the installed base over investment in new plants. We believe that the market will continue to be sustained in the coming years and demand, as indicated in Slide 13, is expected to go up.

Looking at the numbers on Slide 14 in the order, they are down. I mentioned that in my starting comments, compared to the same period of last year where we had this large U.K. gas contract, this 5GT26. We have on the slide a few illustration of the major successes registered in our free sub-segments covering over Power sector.

As already mentioned, thermal systems and products experienced strong growth in order intake over the period. The main contracts registered were for nuclear equipment in China, boiler in India, environmental control system in South Africa. If we look at thermal service, the thermal service numbers are good and they show resilience. We have had, during the period of the first quarter of the year, two small OEM contracts for modest amounts; this is by far below the same period of last year.

During the second quarter, we didn’t register any OEM contracts and therefore, I consider that our numbers, 2 billion of orders with minimal OEM contracts, is a good number, showing good resilience and giving us all the comfort that we are well-positioned in this good segment.

Obviously we hope that as soon as possible, new turnkey projects will be banded with new long-term OEM contracts, but this refers to the original statement of new orders in the thermal systems and products. So, thermal service did well both in retrofit and regular service and the numbers are, in my views satisfactory.

When you look at the renewable, they showed the past better resilience with good commercial successes in hydro in Chile, wind in Brazil and the U.K., et cetera. And the geography is mentioned in the slide and nothing specific to add.

Moving to Slide 15, the sales are down by 13%, driven by the lower volume of order intake, notably in thermal systems and products. By geography, Europe accounts for the largest share and sales were fueled by robust contracts for gas plants in the U.K. and in the Netherlands, among others. Middle East/Africa represented around a fourth of the total sales as the last Turnkey project that we have booked over the recent periods are getting through our industrial footprint. No specific other comments concerning the geography, allowing me to move to slide 16.

I will not repeat the orders and sales as I gave my comments on these points over the previous slides. Just like to highlight that the Power backlog represents 20 months of sales for €21.5 billion. And again, as a consequence of lower volumes and under absorption of cost, our operating income declined by 25% from €677 million to €509 million, leading for an operating margin for Power down at 8.5% compared to the 9.8% recorded a year ago.

As we go to Slide 17, these elements refer almost specifically to the restructuring plan that we announced for thermal systems and products in North America and in Europe in order to adapt our operation to the market conditions and weak demand in this area. The project includes reduction of 4,000 positions in total, which represents around 20% of the total positions involved and this is currently being discussed, as per regulations, with our unions at European, national and local levels.

A few quantitative elements concerning the impact of this initiative, we assume restructuring costs which would be around €280 million. The booking of these elements will depend obviously on the consultation and implementation of the various components of this global plan, but we expect to book most of these amounts during H2 2010/11, in line with our will to speedily execute this program.

Out of this €280 million, €30 million will be non-cash items; the rest being cash ones mostly related to employees’ termination costs. So, again, €280 million assumed as a total restructuring cost, out of which 25% will be cash spendings. Obviously the restructuring cash will be spent according to the actual execution, assuming that 25% will be spent during the current fiscal year and the remaining part will be over 2011/2012.

Concerning the savings, we estimate the full yearly impact of €300 million and we expect that this full impact will be reached in full year 2012/13. Next year, we’ll have a partial impact of this total saving as we gradually implement the plan and we expect to have some benefits, around 40% to 50% of this total amount, namely €120 million to €150 million, and this will definitely help us to keep our guidance on margins, even though the thermal market has not rebounded yet.

We were assuming a gradual rebound in recovery when we gave the guidance. It means that we’ll be able, through this cost saving, to confirm the guidance as we do at the end of this presentation.

Going on Slide 18, you can see some elements on technology and CapEx. We have continued to consolidate our portfolio in service and Renewable. We acquired a small coaching service company in the USA and we made an investment in BrightSource, which is a company involved in solar energy and more specifically, thermal solar energy; BrightSource being specialized in solar power, for those of you who have a detailed understanding of this market.

We also are moving in Russia with a number of initiatives, including some specific discussions with Rushydro, which is the largest power generation company, involved in hydro power and wants to participate with them into the development of the Russian hydro power industry.

The CapEx decreased as main programs are under execution got to completion. At the same time, we continue in the construction of new important facilities; two in turbines assembly lines in Texas and in Brazil, as well as the erection of new plants in India concerning the first in turbines that we do in partnership with Bharat Forge. This investment is obviously supported by Alstom, being selected by the local utility and national utility, NTPC, for five steam turbines after its recent big tender that we have won against all competition.

On future CapEx, we are going to continue to invest wherever necessary to keep developing our positions; more specifically in emerging countries while deploying, obviously strict selectivity across the Board.

Let me turn now to transport with Slide 19. The market which is, in our case, more focused on passenger transportation, proved to be resilient and driven by the same levels that are already described in each formability and supports of these needs by public funding.

We consider that the market goals will continue to be boosted by demand and even though there are some budget restrictions on the number of markets which can delay investment here and there, we continue, that’s overall the priority given to this type of transportation, both into the cities’ mass transit and between the cities, we’ll continue to allow our business to move ahead.

You have here a list of large opportunities that I am not going to detail. I’m happy to report that over the last month, we had two positive news: one for Metro Gaz in Montreal which was finally, eventually attributed; and locomotives in Kazakhstan with a new joint venture that we made in combination with TMH, our Russian partner, where Alstom Transport represents close to €800 million. The first one has been booked in Q3 and we expect the second one to be booked in Q4. We also learned during the night that we have been selected for the Panama Metro, which is an interesting and substantial project for us.

Going on Slide 20, you see that the order intake in transport decreased compared to last year, but as you know, the large projects are by nature - the transport order intakes include some large projects which give some bumpiness to the sequence of orders. And we expect, again, the market to be resilient and we expect the ability to participate in the resilience and development of this market. I remind you that the backlog of transport is more or less around three years offset.

You have in the slide the indication of some contracts that were rewarded to us. Of particular importance and interest is a contract for rolling stock metros in India, first of the kind we get, which will allow us to beat a factory in Chennai and serve Indian market and the border inter-land.

Concerning the sales that we have on Slide 21, during the first half, the sales ramped up at €2.9 billion, up 5%. Europe accounted for a large part of the sector sales with a number of contracts being traded, including delivery of high-speed and very high-speed trains in France and Italy, as well as urban transit equipment in Germany, France, Spain and Sweden.

Asia-Pacific accounted for 17% with a ramp-up of the trading of EMUs and locomotive contracts in China, as well as a ramp-up of metros order in Australia, North America, Latin America, Middle East, accounted for around 7% each.

If I go to the key figures on Slide 22, I will not come back on orders and sales, but want to remind you once again the backlog remains strong; 38 points of sale at €18.6 million. Profitability slightly increased with an income from operation up from €195 million to €213 million, leading to an operating margin of 7.3% above last year’s number, which stood at 7%.

On Slide 23, you see that during the first half, we continued to strengthen our presence in emerging markets, getting ready to seize opportunities on these fast-growing areas. The partnership with TMH led to an agreement with TMH to serve locomotives to RZD, so it has turned into a very practical case; such did the joint venture with KTZ that we announced few months ago and which turned into a large order in which Alstom Transport will participate with an order around €800 million.

In China, we have signed a memorandum of understanding with CNR, one of the two larger rail companies, to work together on some projects and more specifically, mass-funded ones, but also some intercity projects. We definitely expect this would broaden Alstom access to the Chinese markets as well as some cooperation on targeted other ones.

If we look on Slide 24, we have here a representation of some innovation on rolling stock on which we have been working, as well as in R&D, a strong focus kept on signaling. The Alstom VHS platform called Speedelia was unveiled in the professional meeting in France last September, and this Speedelia comes in addition to our two high-speed lines, products, to TGV Duplex and the AGV.

The prototype for the new regional train release was presented also in France and completes as well our Coralia range. We have also put in the market by the testing of new loco called Prima II. The AGV is going through its dynamic test; first Coralia, now the transit went into commercial operation, and the first tram-train, Citadis Dualis, was delivered last August. So, a lot of activity in this area for new products which are coming into the market and are going to support our future order insights.

CapEx decreased again, thanks to selectivity and also completion of a number of large projects, and they are focused on the modernization of our key product lines. We need to associate the new products with some corresponding investments in our industrial and engineering footprint and we have obviously also used this CapEx to keep improving the productivity of the said footprint.

Moving now to Grid; the third sector of Alstom since the acquisition of Areva T&D jointly with Siemens in June 2010, during the first half of the year or at least the four months in which we had consolidated the numbers, the market started its recovery after the decrease that was experienced in 2009 in line with worldwide economic slowdown. The growth was particularly sustained in North Africa, South America and Russia. Ultra-high voltage technologies and the smart grids are, in our view, the two main drivers which are going to support the growth of Alstom Grid in the future.

If we look at the orders received in the sales over this period of four months, Grid showed a sound volume of activity recording orders of €1.4 billion in Middle East/Africa, Asia-Pacific and Europe, representing a bit less than between 25% and 30%, while North and Latin America represented each a bit less than 10%.

Key projects were booked in Russia, in Tajikistan and in Germany. MEA, Middle East/Africa period, benefited from the recovery of some end markets and the need for significant infrastructure investment and the books are there as well some large contracts in the MEA, Saudi Arabia or Libya.

Asia-Pacific regions were, as expected, supported by activity in India and in Chin. Sales amounted to €1.5 billion over the period, with repartition indicated in this slide.

Moving to the key figures on Slide 27, I will not, again come back on the orders and sales, but I want to say that the Grid backlog that we got day one when we took over this activity from AREVA didn’t concede any surprise. It stood at €5.3 billion at the end of September 2010. The income from operation reached €88 million, 5.8% of the sale. And, as anticipated, Grid operating margin is slightly dilutive for the group in the current year. It will not be the case over the long period, but it was the case for this year.

As expected, the sector remained focused on the good quality execution of its backlog and working on its costs to globally improve performance, as well as developing in fast-growing and hi-tech technologies such as network management systems and ultra-high voltage transportation of electricity in that regard.

If I go in Slide 28, you have here the indications of what we do both in CapEx and in R&D. The CapEx, we’re focused on emerging markets with investments representing 47%. They are mainly aimed at completing the expansion of our industrial footprint in China, India and Turkey.

To strengthen and keep its competitiveness, we did conduct and we will continue to conduct R&D programs focused on our four key areas, such as High Voltage Direct Current (HVDC) and Ultra-High Voltage (UHV), technologies which enable the transmission of large amounts of power over long distance; digital substations; network management and power electronics.

Now, I’m sorry to have been a bit long in the description of our environment and the detailed operation in our three sectors, but now I hand over to Nicolas for the detailed explanation on the financial results which were published this morning.

Nicolas Tissot

Thank you, Patrick. Good morning, ladies and gentlemen. And let’s start on Slide 30 with the P&L. Net income decreased from €562 million in September ‘09 to €401 million in September ‘10; a 29% decline resulting from; first, the evolution of income from operations which is down by 8%. I will not comment again on the evolution of this line which was already amply commented by Patrick.

Therefore I will concentrate on the below four lines with, first, the impact of the preliminary purchase price allocation of Grid, so the accounting exercise that we have to conduct according to IFRS rules. The preliminary impact of this exercise is a growth negative effect of €98 million, which corresponds first to the amortization of acquired margin in backlog, which is the pure PPA accounting impact which represents €63 million, and on the other hand, by the acquisitions costs of €35 million that, as you know we can no longer capitalize in IFRS.

Increase of the restructuring cost line from €27 million to €47 million is related, as announced with last year results, to additional efforts to optimize the industrial base both in Power and transport. However, as the bulk of the charges related to the adaptation plan of Power Thermal is expected to be booked in H2 of the current year, as Patrick explained, restructuring costs should be around €350 million for the full year.

Capital gains and other remain at roughly the same level as last year at €19 million due to litigation costs related to former marine activity of the group. Therefore, EBIT decreased by 23% from €782 million to almost some €600 million, although preliminarily we expect the PPA to have an impact on EBIT of around €250 to €300 million over the two fiscal years, current year March ‘11 and next year March ‘12.

Then going down to P&L; the financial result is negative at €52 million versus €12 million last year, as we moved from net cash to net debt situation, as you know. The geographical tax mix and associated effective tax rate remains at a similar level as last year at 24%, despite the drop of the EBIT.

Minority interest and other represent minus €15 million. As a result we have, again a net income down by 29% from €562 million to €401 million, which is penalized by the preliminary net impact of the Grid PPA and acquisition costs for a net impact this time; the €98 million gross impact becomes minus €75 million net.

Shifting to Slide 31, we move to the free cash flow which stands at minus €963 million versus €77 million positive one year ago.

The evolution of the working capital which stands at almost minus €1.4 billion, which compares to €0.5 billion negative last year, is by far the most important effect. It is linked to the way cash generation works in our businesses according to the type of contract, to its stage of completion and also the phase of the cycle. I know how difficult it is to model; so first, this working capital evolution is strongly correlated to the book-to-bill ratio which was at 0.67 during the semester if it’s to say well below one.

This mechanically leads to reduction of our negative working capital and also, during H1, we have two specific reasons which explain a stronger deterioration that we see. First; a mixed effect, we have no turnkey plant orders; we received therefore less down-payment. We also have a lot of service in the order inflow without down-payment.

This is the first impact and the second specific impact is related to the weight in the contracts traded in the P&L of major contracts at the end of their execution with unfavorable cash profiles, because we received less progress payments at the end of the execution.

With roughly €900 million change, this evolution explains the bulk is not all the deterioration of the free cash flow compared to the last year. The other minor changes are related to the scope effect of Grid on depreciation, the increase of amortization of intangible and R&D capitalization as we capitalized on a number of projects in our three sectors which are new to the more plants in Power or AGV in Transport.

We also had a one-off on new expansion, which is due to a change in regulation of the €30 million negative. Tax cash out, which stands at €134 million, which is more or less in line with the P&L, included €30 million tax cash out coming from Grid.

Our financial cash out, amounting to €30 million, reflects once again the fact that we turned from net cash to net debt position, leading to higher interest paid on gross debt and the remuneration of our gross cash.

All in all, our free cash flow was strongly negative during the first half of the year. Going forward, its evolution will obviously depend on the volume and nature of orders, but looking at the current pipeline, we would expect it to be positive during H2.

On Slide 32, you see that, as expected during the first semester, we moved from a net cash position of €2.2 billion at the end of March ‘10 to a net debt situation of €1.5 billion at the end of September ‘10. This evolution mainly comes from the acquisition of Grid, €2.3 billion, but also of course from the negative free cash flow at almost minus €1 billion and the payment of the dividend of last year at €364 million. It is still worth noting that without the acquisition of Grid, Alstom would still be very close to a zero net cash net debt position at the end of September.

Shifting to the evolution of equity on Slide 33, you’ll see that it slightly decreased from €4.1 billion at the end of March last year to €3.98 billion at the end of September ‘10. The net income at €401 million has been offset by the payments of the dividends, €364 million, and the negative effect of the lower interest rate on pensions for minus €226 million for the path recorded directly in equity. This results from the increase of our commitment as our liabilities are calculated with the lower discount rate, and this impact is not being balanced by the increase of our assets.

Going to Slide 34, it shows you that our liquidity profile at the end of September ‘10 remained strong. We have gross cash amounting to €2.7 billion and we’ll benefit from an undrawn credit line of €1 billion, so this is our situation today, following the bonds issuing we made early October.

Overall, group liquidity position today reaches €3.7 billion to be compared with €5.3 billion at the end of March ‘10. In terms of financing activities, we were active during the semester when the group consolidated its liquidity with the expansion of two existing bonds for €500 million each and, in addition to that, as I just said, at the beginning of October, the group issued two new bonds with maturity 2015 and 2018 for a total amount of €1 billion. These operations were well received by the markets and demonstrate that the group, based on its current rating, has a good access to suitable resources of financing for its businesses.

As a conclusion on Slide 36; we intend to leverage our solid fundamentals in the businesses. We have chosen to benefit from the commercial rebound, which is gaining momentum in emerging markets. I remind you that we realized 50% of our order inflow of this semester in emerging markets and 42% of our phase in the same emerging markets.

In these regions, we have a good positioning as that we are in the process of strengthening even further through the adaptation plan that was presented by Patrick. In major markets where recovery is slow, we will adapt accordingly. The objective is to keep our competitive advantages worldwide. That’s why we will maintain a high level of R&D in our three sectors to stay ahead in innovation.

Even though the level of commercial and industrial activity will be impacted by the slower-than-expected recovery of demand in some areas and businesses, and especially in Power, we confirm our operating margin guidance for the group at 7% to 8% for both current fiscal year and next year.

I just want to mention, and this is shown on Slide 37, that in terms of Investor Relations team, I remind you that Juliette Langlais will replace Emmanuelle during her maternity leave, which will start tomorrow, congratulations Emmanuelle until mid-March. As for the events to come, we have orders on sales for the first nine months of current year to be communicated on the 20th of January ‘11 and full year results to be published on May the 4th, 2011.

This is the end of our presentation. We are now happy to take any questions you may have. Ladies and gentlemen, thanks for your attention.

Question-and-Answer Section

Operator

(Operator Instructions) Our first question comes from the line of Andreas Willi. Please go ahead, announce your company name and location.

Andreas Willi – JPMorgan

Good morning. It’s Andreas from JPMorgan in London.

Patrick Kron

Good morning.

Andreas Willi – JPMorgan

Two questions, please; the first one on R&D. You talked about the increase in the amortization from past capitalization. You still substantially capitalized R&D above the level you amortized. Should we therefore expect R&D costs in the P&L to continue to go up going forward because of that effect and also, did you see a need to increase R&D in general to develop new kind of mid-market product ranges in areas like transmission?

And the second question I have in terms of your transmission business; it’s bit difficult for us to model the sales going forward, given we don’t really have a history of orders or book-to-bill. The quarter showed a small book-to-bill, small below one. Is the business roughly stable from the sales level or what should we expect as a quarterly run rate for the business from here?

Patrick Kron

Well, on the R&D, the capitalization is not the policy. It depends on which programs were active on the specific point in time. When we work on our one single-deck platform or when we work on CCS, it’s clear that it includes a platform component and a generic component which allows some capitalization. But this will go up and down depending on the quarter.

Nicolas Tissot

We have a good example right now with our new ARABELLE technology in nuclear, which is now proven and that we could capitalize.

Patrick Kron

As an example also, the CCS projects in which we work, so these are typically capitalization. I think that we have had a slight increase in the P&L of our R&D expenses during the first half. Obviously, the numbers that were reported include also Grid. I would consider this level to be more or less stable or it could have some limited upwards evolution, but I’m not considering that there will be a step change there. This allows, through allocation of resources to move on the various areas in which we think we must move, such as the mid-market products, as you mentioned, et cetera, et cetera.

So, again, I think that my message is it’s not because the order are soft that the R&D spending will evolve accordingly. Unfortunately or fortunately we have a long-term view on R&D. We need to spend this money and we continue to spend this money. It has no reasons to see a substantial step up or down and therefore I mean continuity of slides upwards trend is the likely option. Concerning Grid, we have not a waterproof sequence as this business was not owned by us, and as the business was split between Schneider and Alstom, as you know. So we have not provided a history.

As we look forward, it will depend on the orders obviously. The Grid is much more reactive to what happens in the end markets because it has, by nature a shorter backlog and it has, by nature, shorter lead times, so therefore it’s more sensitive to what happens on the market.

So it will depend on the order. I mean, there is a recovery of demand. The market is sound. There is some price pressure on this market, as in other ones, but my assumption is that we are in a growth pattern. So what should be the anti-fire of this at the current stage, I don’t want to commit. But we definitely are looking towards increase of sales and increase of profitability.

Andreas Willi – JPMorgan

Thank you.

Operator

Our next questions come from the line of Ben Uglow. Please go ahead with your question, announce your company name and location.

Ben Uglow - Morgan Stanely

Yeah. Good morning. It’s Ben Uglow from Morgan Stanley. Two questions; one, Nicolas, I just wanted to make sure I sort of completely understood what you were saying in terms of working capital and free cash flow. I guess you’re expecting based on the orders that you see, free cash flow to be positive in the second half of the year relative to the first half, and on that basis, we shouldn’t be expecting a material increase in the €1.5 billion of net debt at year end.

I just wanted to confirm that that’s kind of what you’re saying, assuming that the orders are okay. And the second question, I guess, is for Patrick. The cost savings that you mentioned, the €120 to €150 million, I’m interpreting that you’re saying that without these cost savings, the margin guidance of 7% to 8% might be under some pressure. Can you talk about the price trends, particularly in the Thermal business? Is this what’s making you a little bit more qualified in your comments?

Nicolas Tissot

So on your first point, Ben, you correctly understood my points. We expect the H2 free cash flow to be in positive territory, and therefore that would evolve accordingly.

Ben Uglow - Morgan Stanely

Okay. That’s very clear. Thank you.

Patrick Kron

That’s the first point. On the second question, in addition to your comments that I read in the Financial Times this morning, on your second question, what I’m saying is that full year, the savings will be 300. Full year is estimated, we expect the full impact of the plan to be achieved in March 2012. Obviously, ‘11, ‘12, there will be ramp-up of the plants and therefore only a partial impact of the savings. I am expecting it be between, I said, one-third and half. That means 120, 150, as indicated in the slide.

Obviously, it is directly related to our ability to determinedly move ahead in the plan itself and have it implemented in due time, and therefore make sure that all the legal steps are accomplished.

The comments on the price is irrelevant again, sorry to say to the short-term guidance, as you know. A quiet decline in a turnkey project has more impact on what will happen in the future. That’s what happened immediately.

The qualification was the following; in the guidance that we gave, and you monitor that closely, we indicated that our guidance was assuming project execution. Any guidance we give will assume project execution. This is the core that we have to do, but it will also assume a gradual recovery of demand, as you remember.

We don’t see, to be totally clear, the gradual recovery of demand coming as we hoped it would come in some areas in the world, typically in North America and in Europe. That’s why we have decided to adjust ourselves while keeping flexibility; to swim when the tide will go up again. What I’m saying is lower than expected recovery in demand is, in theory impacting adversely the sales, thus as negative volume impacts on the IFO.

I was just saying that I don’t quantify, again, the guidance in relation with the recovery of demand because I’m expecting that the cost saving will boost the numbers and offset the possible impact of the slowdown in sales versus what measure might be assumed when we get the guidance.

Ben Uglow - Morgan Stanely

Okay. So I mean, that’s a very clear answer. Thank you, Patrick.

Patrick Kron

You’re welcome.

Ben Uglow - Morgan Stanely

So what you’re saying really is it’s more about the timing of recovery and volume than anything to do with price?

Patrick Kron

Yes. And obviously, and I’ll just conclude on that point - and obviously you are seeing and that’s why we wanted to share with you a simplified way to go from the former income from operation to the present one. And that’s where you see that the impacts of the volumes on the i4 is important and the volume has been the main driver of the decline in Power.

Look, you see that the saving in Power went down by, let’s say, close to €1 billion from €6.9 billion on the first half of last year to, let’s say, €6 billion on this half and this represents a minus €1 billion, minus €100 million. The fact that the income from operation went down by a bit more than €150 million, in line with this €900 million decline in sale, should not be viewed as a major surprise.

Ben Uglow - Morgan Stanely

Okay. Thank you very much.

Operator

The next question comes from the line of Lisa Randall. Please go ahead and announce your company name and location.

Lisa Randall – Nomura

Thank you. Good morning, everyone. Lisa Randall from Nomura. Just two questions on Power, please. Firstly, Patrick, are you able to talk about what sort of pricing environment you’re seeing amongst the firm bids that you’re now participating in? And I just wanted to clarify: When you talk about a firm bid, is that a bid where you submit a tender?

So I guess at that stage, you have a fairly good feel for what the environment is from a pricing perspective? And then just secondly, I know you don’t disclose the figure, but can you perhaps give us some indication of what the margin of profitability trend has been over the last year and a half in Thermal Service, please? Thank you.

Patrick Kron

Yes. On the first, Lisa two points, which I am not answering specifically. Your point, will you please come back and we’ll clarify if we can do so, and if you want to do so? But on the new - on the firm bids, again, don’t over-assess these elements. A firm bid is a bid, in which we are firmly committed with the customer; that means we answer the tender and either customer say, “Please sign,” and we do sign. Okay.

This is ongoing tender. These are massive numbers. The question is, will these projects go to an end; will it be won by us; will it be won by a competitor? So you have three possible options. It remains in the pipeline. We win it. We lose it. Okay, what I’m telling you is, and what is interesting is - and it’s not a new fact because I told you that we have been very active over the last 12 years in commercial activities. And you can claim that, “Look, my friend, it’s nice, but still the orders remain low,” which is a fact, which I will not - I’m not going to challenge.

I’m telling you that I see a few indicators which are not - I’m not meaning that point is back, but it’s a few indicators which are, well, the level of the firm bid is moving up. Secondly, when I look at where we do this firm bid, it’s inline with our analysis of where the markets we move. So therefore, we are offering, we are bidding in a lot of areas and by the way, you see that, I would say those expenses are also growing when we try to monitor our costs. We spend in R&D; we spend in CapEx; we spend in selling expenses. And in the selling expenses, the €10 billion cost is the one which is moving up.

So we are participating in the tenders where they are. So it’s there. But again, when will it translate into others? I don’t know. I just have a few indicators: Orders in the - I mean, projects awarded to us in India; both (inaudible). Two projects in Singapore; a third one announced yesterday night. So I mean, we are - things are moving.

So let’s see how it develops and let’s see how it goes. On the pricing, I’m not obviously going to talk about the detailed price or the detailed orders. When last time I was asked about the pricing environment, I was telling that there was price pressure on the market and there is definitely price pressure on the market. At the same time, we have the ability to adjust our costs. When we bid in the tender in Singapore, the engineering addressing the tender is in Kuala Lumpur.

And so we addressed, and by the price issues, we address geographic mix by our own footprint and by our own supply chain actions, and therefore price pressure doesn’t mechanically kill the margins. It’s obviously put pressure on the gross margin. We have heard these pressures and we work accordingly. And again, we lost a number of tenders while we were not satisfied, because we didn’t want to go to unreasonable grounds, and that’s what we will continue to do. Taking an order makes sense, but we need to be sure that the order, it only makes sense if it leads to positive economic consequences.

Concerning margins in the Thermal Services, I have - I told you, again, because I saw some reports expressing some concern on the overall level of orders and activity in service and retrofit. Currently, if we address the mix and, again, the OEM, as I said earlier, I am satisfied by both the resilience of the market and our ability to participate in this market. So I have no problem with the situation of the overall level of service activities. And when I look at the margins of thermal service, it doesn’t create any headache as well. I consider that the margin remained sound in this market, so I don’t see any deterioration in this environment.

Lisa Randall – Nomura

Okay. Thank you, Patrick.

Patrick Kron

Welcome.

Operator

The next questions come from the line of Klaus Bergelin. Please go ahead, announce your company name and location.

Daniel Cunliffe – RBS

Hello there. It’s Daniel Cunliffe from RBS in London. Question on prepayments on the new orders. You were talking obviously a number of orders in Singapore and elsewhere. I understand prepayments level, roughly about 15% in terms of mature markets and emerging markets, but as low as 5% to 10% certainly in some of your competitors in the emerging markets.

Could you just kind of really kind of go through this and kind of state where prepayments are on these new contracts? Thanks.

Patrick Kron

Well, I’m not going to detail the situation of any specific contracts, but I am not of the opinion that there is any adverse shift in the prepayment are made and concerning these orders, we expect to be in the same type of situation as we have been, are and will be.

So, no. Maybe you refer to some unclear and unfinanced contracts made by Chinese competitors on some unallocated projects where some analysts have reacted more than when we won and you actually have reacted less than when we won after an international tender by being the lowest bidder in India, for instance. But I mean, as far as our understanding is concerned, and I already mentioned that, we don’t see any change in down payments. Obviously, when you see a turnkey project, it has not the same cash profile as when you see a service one. But this is a mix issue and not a change of major issue.

Daniel Cunliffe – RBS

Okay. Very clear. Thank you.

Patrick Kron

Welcome.

Operator

The next questions come from the line of Martin Wilkie. Please go ahead with your question and announce your company name.

Martin Wilkie – Deutsche Bank

Good morning. It’s Martin Wilkie from Deutsche Bank with a couple of questions. Firstly, on your cost line, you’ve given us some details on the annualized savings from head count reduction. But you do talk about adapting your manufacturing footprint and overhead. I was wondering if you could give us some sense as to the magnitude of savings you’re looking to make in those areas including, perhaps, how much of your sourcing and manufacturing is now moving to low-cost countries versus where it was, say, a couple of years ago.

And the second question was, just in terms of some of the competition increase we’ve seen, some big contracts being won by Chinese players outside of China over the past couple of quarters. I know you said already you passed off on some contracts perhaps where the margins weren’t as suitable as you might want them. But just generally, given that the tendering backlog seems to be more and more from emerging markets, if you could just give a sense of the momentum in the competition from those players, just as you’ve seen it develop in the past six months.

Patrick Kron

Okay. Thank you very much, Martin. If I - we are actively working on the supply chain. We are actively working on our manufacturing cost. And as we buy 60% of what we sell, it’s critical to have a supply chain adapted to the market conditions. We don’t provide numbers, possibly wrongly, but we don’t do it for at least two reasons. And I have been repeatedly trying to share this view, with limited success so far, I must admit.

The first one is that we don’t sell out of the shelf equipment. So when we go from one coal plant to another coal plant, or from one gas plant, it’s different. The scope is different. So it’s extremely frivolous to try to say, “Okay, we’re spending less on the next one.” But all in all, that’s why we have seen some incredible comments made by some of your colleagues. For instance, the price evolution or the comparison of the price at which we sell a plant and the price at which some Chinese sell the plant. When you sell a fraction of the plant, you can sell it cheaper than when you sell the full plant.

When you judge discount for instance, the heaters, condensers or this type of components, we still present sometimes a third or 20% of the total value of a plant. Then your comparison can be extremely misleading. But we are working on supply chain; that’s why I’m telling you that when we address a contract in Southeast Asia, and when we serve it out of our KL, when we use a very focused local supply chain, this is why we can afford addressing a contract where there is high pressure; because we monitor the consequences of this high pressure in our own industrial footprint and our supply chain.

Serving the same way some markets in Singapore or some markets in Germany or some markets in the U.S. doesn’t make sense. And we adapt the way we buy. We adapt engineer to the markets’ condition and the way the customer is requesting the product. So again, I don’t quantify these numbers because you never find them in the P&L. The numbers would make the P&L worse if the numbers were not there. So I hate to pile up hundreds of millions of savings and not find them in the P&L. When I talk about S&A, when I talk about restructuring cost, this is a fact; this is the cost; this is something that you can monitor and this is something we work on.

Nicolas Tissot

What we can maybe mention is that within the €280 million of restructuring costs that we mentioned in the presentation, we have €200 million related to head count reduction costs...

Patrick Kron

Definitely, and ...

Nicolas Tissot

Communication of what is not related to (inaudible).

Patrick Kron

Yes. And in fact yes it’s focused on labor, obviously you see, and don’t forget; we are labor-intensive. It’s high labor, skilled labor, but it is labor-intensive. If we look at the second point, which is the overall situation of tendering, again, our additional markets are not dead. They are moving more slowly than the emerging one. We are working on both. On the emerging one, as I said, we are adapting ourselves to market conditions.

Concerning the Asian competition, concerning Asia in general, it’s both a risk and an opportunity. The risk we know. We have local players, which tend to be more and more global. Sometimes they move in gigantic announcements where we struggle to find the practical consequences of these gigantic projects and have difficulties to find out where is the financing, where are the permits and where will the so-called project be implemented?

When we talk about India, when we talk about five turbo-generator sets these are tenders that we won. We won after an open competition. It’s not a kind of bilateral deal where we struggle to find out when and if it will be implemented.

So we have opportunities in these markets and this is reflected in the tenders, in the orders we have taken. We have also risks in this area, and in relation with this area, as we face competition. The Chinese competitors are moving abroad and that makes, obviously, competition tighter. But we look at that also; who the (inaudible) of what we have in hand; our ability to provide turnkey; our ability to establish partnership, technological leadership, service abilities in a number of areas. If we won in India against everybody, then this is because we had some arguments which prevailed.

Martin Wilkie - Deutsche Bank

Thank you.

Patrick Kron

Thank you.

Operator

Our next questions come from line of William Mackie. Please go ahead with your question and announce your company name.

William Mackie - Berenberg Bank

Yes. Hello. Good morning. It’s William Mackie from Berenberg Bank. Two questions, please. Firstly, coming back to the restructuring that you’ve planned within the Thermal Power business. You’ve referred to it in terms of head count, but when we think about it in terms of the capacity for production of thermal equipment, perhaps you could talk a little bit more about what it means with regard to capacity reduction and how far you can bring that into line with demand if the current situation of weak order intake in your traditional markets in the developed world continues?

The second question is more back to the Grid business. And when we met back in September to review the Grid division, I think you withheld or at least were hoping to be able to present some of your aspirations for revenue and specifically, margin development in that business. So are you now prepared, or can you share with us, what you see as a normalized operating margin? I think you’ve hinted it’s going to go up above 5.8, but where would you see that evolve against your current view of the markets, in the end-markets development?

Patrick Kron

Well, the only capacity and the head count. Well, actually, in our industry, we are not – as I said, we are not that capital-intensive, actually. We are technology-intensive and labor-intensive. So when I talk about head count reduction and 20% adjustment of the head count, this more or less matches what I mean in terms of capacity. This is the bottleneck. And that’s why, by the way, we need to be careful in the way we address that, because at the end of the day it’s - I will it’s easy to move downwards. It’s painful and costly.

But even we have to avoid the double punishment, which is to suffer because the trend is low and then to suffer because we don’t have the resources to swim when the tide goes up. So we want to both adapt and keep flexibility.

So again, capacity, it’s not kind; and machine tools, it’s fundamentally people. I remind you that 30% of our staff are engineers. So this is where the capacity is. On Grid, well it’s a bit difficult to quantify. Again, we expect this business to grow. But if I were today to score a number on the table of what would be the normative bracket for evolution, I would say that I consider that 8% to 12% of operating margin is to be reached in the three years to come; medium term is the type of level I would be expecting to see.

William Mackie - Berenberg Bank

Great. Could I have a quick follow-up with regard to the North American market for thermal power?

Patrick Kron

Yeah.

William Mackie - Berenberg Bank

I know it’s quite specific, but how do you see the evolution of your tender backlog or your opportunities there? We’ve seen a number of competitors make some very significant steps with some orders there. At what point can you begin to see conversion to orders to begin to support the backlog that you might need in Chattanooga?

Patrick Kron

I’ve not seen massive steps. I’ve seen a few orders in H class turbines by your German competitor on one specific customer, but I’m not sure that it creates a trend. Looking at Chattanooga, the plant is currently working on a number of retrofit orders. So the retrofit business is there. It’s fair to say that currently, the coal market is not moving for new bids. I’m expecting that there will be some new opportunities in gas, and nuclear is moving, but moving slowly.

So I would say in the current environment, I am expecting Chattanooga to focus very short-term on retrofit and a ramp-up of Chattanooga would probably be slower than in the highly booming market environment. So, we will, as I said, we start from zero and we will adapt to growth of Chattanooga to the evolution of the backlog and the demand. Then if there is no load that we not ramp it up. If there is limited load we will ramp it up limitedly and if there is a faster opportunities in retrofit or some new built in nuclear and elsewhere, we will move accordingly.

William Mackie - Berenberg Bank

Thank you. Thank you Patrick.

Operator

The next questions comes from the line of Gael de Bray. Please go ahead and announce your company name.

Gael de Bray - Societe Generale

Yes, thanks. Good morning, everyone. Thank you for taking my questions. The first one is actually related to your working capital development, especially looking at trade receivables for Alstom Grid. I can see in your financial statements that it accounted for roughly – well, a bit more than €2.2 billion, which is I guess probably around 50% of sales. So I just wanted to check this and if this is a correct number, I’d like to know what’s going on there and how quickly you could solve this issue?

The second question is related to the graph on page 25, which suggests that you expect the transmission market to decline around 2012. So what could be the reasons for this to happen? And maybe which could be the main geographies affected? Thanks a lot.

Patrick Kron

Yes. On the first market, I don’t have the detailed number. Maybe we will provide them to you in the second stage. But I would say Alstom Grid free cash flow was a negative. Alstom Grid figures On Alstom Grid free cash flow was slightly negative over the first four months and we expect that this situation will not continue when we expect to go to a normal situation. So by the combination of the classical actions on Grid.

The second comment on the Grid number on Slide 25, I’m sorry that you couldn’t join during the analyst presentation that was done. And why I think that we indicated that the market would grow.

The slight tick-down that is indicated here is assuming some adjustments on the buoyant level of demand in China that we were expecting would correct itself. And, as you know, our market share in China exists. We are present in China, but our market share there is modest. So the impact of what happens there has a lower direct impact on our order that’s what happens in other markets where we are more and more present.

Gael de Bray - Societe Generale

And on that, do you have any more precise view on what could happen in China within their new five-year program for P&D?

Patrick Kron

No, I have no specifics that are there. I was in China during a sort of meetings on the five-year plan. So we’ve got the confirmation from all the decision-makers that I met there that they remained strongly committed to grow infrastructure, but it’s difficult for me to quantify that at the present time.

Gael de Bray - Societe Generale

Okay. Thanks.

Nicolas Tissot

I mean, without answering precisely to your question regarding trade receivables for Grid, what I can just mention and confirm is that, on our balance sheet, negative working capital remains a very significant source of funds for the company, as you can read from our financial statements.

And the overall impact of the working capital aspects that read from the balance sheet, you will see that negative working capital evolves from €5.5 billion at the end of last fiscal year to €4.4 billion at the end of September ‘010. So you see that we certainly face a reduction of this negative working capital, but it remains a very significant source of funds.

Patrick Kron

On note 15 Gael, you have seen that the receivables on Grid are €2.23 billion.

Gael de Bray - Societe Generale

Yes, I see that.

Patrick Kron

Yes.

Gael de Bray - Societe Generale

Which looked like a very big number to me, but...

Patrick Kron

Good news; it gives opportunities.

Gael de Bray - Societe Generale

Okay. Thank you.

Patrick Kron

Thank you.

Operator

The next questions come from the line of Olivier Esnou. Please go ahead.

Olivier Esnou - Exane BNP Paribas

Yes. hello, good morning ...

Patrick Kron

Good afternoon.

Olivier Esnou - Exane BNP Paribas

I start with the interesting chart on Power Service, which you show will turn back up to sort of historical run rate of 2006, 2008. At that time, you were growing more than 10% over the ‘06, ‘08 period. So, is the indication here really that you want to say that you have a double-digit growth business now for the next years into 2012?

The second question; if I look at your firm bid chart, and compare it to the other, of course it gives some indication of your hit rate. Beyond saying that, your hit rate declined just because the price was not as low as your competitor. When you look at that, is there anything else to – in your assessment of that lower hit rates than just prices that you want to share with us?

And last question more financial wise, if I look at the tax rate, it was actually in line with the P&L, but historically, your guidance was that the cash tax sales was about 100 million lower in any given year than the P&L one. So is there a change here or something we should be aware of?

Patrick Kron

Okay. So service growth rate, hit rate, tax rate.

Olivier Esnou - Exane BNP Paribas

Yes.

Patrick Kron

Rate related. On the first point, no, the point is that we believe that the service business is resilient. This is the message and we expect that we continue to grow this business. When the turbine is not turning, you don’t service it, so we have been hit, as we discussed, in previous quarter by the fact that the economy – that the electricity demand was down.

So it was partly offset by some retrofit, et cetera, et cetera, but this is not the ideal condition. So the classical drivers which is the growth of demand, which is the aging of the fleet and which is the environmental constraints, these triggers growth of the business. We said that long-term the service business will grow 5% to 10%. I mean, there is no reason to change this guidance. So I’m still in this wavelength.

The second one concerning the increase of firm bids leading to a lower hit rate. Sorry, Olivier, but you are – this is not the right conclusion, if I may. It doesn’t mean that the impact is lower. The impact would be lower if hit rate means what we win versus what we lose.

One of the fundamental reasons of the combination of high level of bids and active pipeline and low orders is at up to now, we have seen a very substantial increase in the duration of the awards and the decision-making process there have been. So that we have made bid, but this bid didn’t turn, neither in a loss or a win.

So it doesn’t mean that the low rate is low. It doesn’t mean that we apply higher hygiene or lower hygiene than the competitors, I don’t know. We try to apply financial hygiene, but I mean, don’t make the conclusion that the price is declining, because it’s not true. What is true is that it has – there is still or disconnect in the level of activity we see in the tendering and the level of orders which are awarded in general, not necessary to us or the competition, but awarded in general. So this is the second comment. Concerning the tax rate?

Nicolas Tissot

Concerning the tax rate, there’s no change compared to what you had previously. It’s simply a timing effect, because we had just started doing first half early tax cash out on the Grid side, which explains that we don’t have the usual difference, but you will find it on a full year basis.

Olivier Esnou - Exane BNP Paribas

Okay. Thank you. Maybe just as a quick follow-up, you haven’t shown the sort of firm bid trend for the Transport business, but is it without maybe you didn’t want to give the number, but is it fair to say that it’s also going up? Or is it going down? What is the trend for that part of the business?

Patrick Kron

No, the situation in Transport is a little bit different, and that’s why we didn’t feel that you need to provide the same angle of explanations. In Power, again, I’ve been saying for a period of time that we are active upstream, and unfortunately you don’t see the translation in all those. That’s one. In Transport, the situation is a little bit different. If you look historically, we have more or less 1 billion orders per quarter, 4 billion of orders, which are medium and small sized, I mean excluding the tickets above 500 million and plus.

Then on the top of it, you have a number of large orders. Typically, what will happen is Kazakhstan when we have bookings, et cetera, et cetera and we have not had some. So I wouldn’t say, while we had some in the previous half year when we won contract 600 million or 700 million last time. So this is what explained grossly the delta in Transport between 2.4 billion and 2 billion. So the 2 billion is not absurd, nor a surprise. Additionally, we have three years of backlog. So there is no reason to get headaches. So that’s why, I mean, the explanation we did different angles of flow.

Olivier Esnou - Exane BNP Paribas

Okay. Thank you.

Operator

The next questions comes from the line of Jose Arroyas. Please go ahead and announce your company name.

Jose Manuel Arroyas – Santander

Good afternoon, gentlemen. It’s Jose Arroyas from Santander. I have a couple of questions, if I may. The first one is on pensions. The value of your liability on your defined benefit pension plans is up 40% since March. I see in your accounts that this is mostly due to lower discount rates. But what is the cash flow implications of this higher liability, i.e., will Alstom probably have to make additional contributions to the plan?

And secondly on customer prepayments, this is more of a general question. On average, what is the percentage of the total value of every new order that Alstom gets from customers by sector, if you may answer that, including Grid? Thanks very much.

Patrick Kron

Well, the second answer is very simple. There is no average. The situation is fundamentally different whether you get a turnkey plant. You can get on turnkey plant 10%, 15% down-payment. In the service contract you get zero. So when you get service contracts and you get low turnkey plants, it’s great for the margin that you have in backlog. It’s bad for the down-payments you receive from the customer.

Specifically, what we try to explain in while, in talking about first volumes, less orders, less down-payments and secondly the mix, less turnkey, no turnkey, therefore less down-payments. This is a combination of the two, which make it down. Sorry to say that the average doesn’t mean anything and whenever you try to oversimplify, you get off balance. Concerning the pension?

Nicolas Tissot

Regarding pension, the understanding, at the end of March 10th was minus, little bit more than minus 900 million. The evolution towards the number that you find in our financial statements which is almost minus €1.3 billion is related to a scope effect of Grid for €175 million and the rest is related to the old scope, with the impact that you mentioned regarding the lower discount rate that is used to calculate our commitments and the performance of our assets, which it does not completely balance out this impact.

Patrick Kron

Yeah, so to say it in non-financial terms, out of the 400, you have half in Grid and half in the existing, in the former portfolio and the formal portfolio is related to the liabilities related to the discount rate, rather than obviously a change in assets, which have been standing well. This is (inaudible)?

Jose Manuel Arroyas – Santander

And could you share with us whether you feel confident that there is little risk of additional contributions to the recent plan?

Nicolas Tissot

We had – due to a change in regulation in the U.S., we had to fund roughly 30 million specifically, but again, it’s a change in law. For the rest of our pension commitments, we don’t expect significant new funding, new cash outs related to pensions.

Jose Manuel Arroyas – Santander

Thanks very much.

Operator

The next question comes from the line of Christel Monot. Please go ahead, announce your company name.

Christel Monot - UBS

Hi, hello, everyone. It’s Christel from UBS. I have a question on working capital and just to better understand your explanation and if you can qualify a little bit? I mean, normally I mean we’re seeing a negative 1.4 billion from working capital. Normally this is quite correlated to the difference between the contracts you book in Power System and the revenues. But this time around it looks to be a much, much higher ratio, maybe half only is explained by the difference of orders versus revenues.

So can you be a bit more specific about what was due here to the book-to-bill? What was due to the unfavorable cash profile of contract at the end of execution? And the second question would be, if you can be a bit more specific about your expectation for free cash flow in the second part of the year, what makes you confident that actually you’re going to have a positive free cash flow in the second half? What are your main assumptions? Thank you.

Patrick Kron

I think that we are not going to go in qualification at this late part of the conference call. But again, I want to repeat that there are three fundamental reasons for the working capital to have deteriorated substantially, as you wisely and very clearly mentioned and I share these points. The first one is the low book-to-bill. The low book-to-bill, the 0.63 on Transport plus Power, versus 0.63, which is very low and gives the first explanation, we have less orders than sales to execute, and therefore this has the first significant impact on the working capital.

Second one is, given the sales, there are no turnkey projects and you know that the turnkey projects or the orders, in orders, sorry, within the 0.63 within the orders, there is no significant turnkey order. And you know that the turnkey orders may have an impact on the profitability which is lower than service, et cetera, but they are well financed. So when you talk about an average, obviously it’s important to check the mix.

So besides the volume 0.63, no, the orders low, there is no turnkey orders. Therefore, a mix which is favorable in terms of margins of orders received, but which is very negative in terms of down-payments. Not because there is change, but because it’s a different mix.

And thirdly, we have, as you know, we get money in terms of depending on the milestone of execution and the milestone of execution during this half were poorer in terms of down-payments, not by the change of policy, but just by the situation of the contracts where the sales were recognized. So they led to some margin recognition, but they didn’t lead to substantial payments, milestone payments. So this is a combination of the three factors, plus a small number of issues here and there, but of secondary importance. This is a combination of all this which gives this bad number, considering – because I’m not going to qualify differently the free cash flow.

Coming next, based on what we see in the orders, based on what we see in the nature of the orders and thanks to the ongoing actions that we have. We expect the free cash flow to be positive in H2. Obviously, if the orders don’t come, it might be a challenge again, but we are optimistic then we’ll have a free cash flow positive during the second half and obviously we are extremely concerned about making sure that cash generation go back to the normal conditions.

Christel Monot - UBS

Okay. So you’re confirming that basically when you are finishing a contract, customers are not slower than default in paying, but they owe you basically?

Patrick Kron

Yeah, I mean contract have a certain cash profile. There is not a unique cash profile of the contract and it happens that during H1, the cash profile of the contracts that we were trading lead to – had a negative impact on cash.

Christel Monot - UBS

Okay. That’s it. Thank you very much. That’s helpful.

Operator

The next question comes from the line of Alfred Glaser. Please go ahead, announce your company name.

Alfred Glaser - Cheuvreux SA

Yes, hello, Alfred Glaser from Cheuvreux. I have two questions, the first one regarding your guidance. You gave an indication on the operating margin you want to achieve, but no guidance on the top line sales outlook. In the mean time, the sales are accelerating to the downside. If you exclude Grid, actually sales were 14% down in Q2. So what can we expect in terms of sales being booked in the next few quarters and also going into 2011, 2012?

And my second question relates to Grid profitability. One of your main competitors complained about consistent price pressure in this business and the need to do more cost adjustments in the transmission business, in particular. Could you give us your view on that point, please?

Patrick Kron

On the first point concerning the sales, there is obviously no linearity in the recognition of the sales. So it’s difficult to consider that Q2 is the reference for any future numbers, but we indicated globally that our sales for the year will be at high single-digit, and the high single-digit could be considered as between 5 and 10 if we make quantitative applications. I consider that the level of the sales will be closer to the minus 10 versus the variation of the sales will be closer to the minus 10, but the minus 5, that’s for sure.

So we are excluding Grid, obviously, sorry, talking at the previous perimeter. So this is the first remark. We have no guidance yet on 2011, ‘12. Second questions on Grid, on Grid, as I said, the volumes are moving in the right direction. There is price pressure and we are working on efficiency and on cost. We have a restructuring program implemented in Switzerland currently, which has been negotiated with our unions. We keep working on the various costs, and so far there is no additional program underway.

Alfred Glaser - Cheuvreux SA

And so can we expect in Grid that we have a kind of linear improvement of the profitability going forward? Or will there be some initial restructuring sales that that will take its toll on profitability in the first 12 or 24 months?

Patrick Kron

Well, when I talk about the profitability, I talk about the IFO and I consider – we have not given any short-term guidance on IFO. But I am hoping that the profitability of Grid will improve from the starting point that you have in front of you. But I don’t believe in the linearity in life. So I cannot confirm linearity, life is never linear.

Alfred Glaser - Cheuvreux SA

Alright. Thank you.

Patrick Kron

Welcome.

Operator

The next questions come from the line of James Stettler. Please go ahead with your question, announce your company name.

James Stettler – UniCredit

Yes, hi. It’s James Stettler here from UniCredit. Two questions, please. On the contract you mentioned in India where you were the lowest bidder. Can you on a contract like that generate a normal type of margin? Has your cost base come down to that degree? Obviously, you’re building it up with a JV with Bharat Forge. That’s the first question.

And second question is, what’s the feedback been in the U.S. market? I think you’ve been marketing now the GT24 for I guess, for this year. Is it viewed as a competitive turbine? Is it a price issue or is just mainly a market issue? Or you haven’t booked any orders yet?

Patrick Kron

Well, on the first point, I am not going to comment profitability on a single contract, but obviously, we have bid on the assumption that this market will be served by a local footprint and this local footprint is supposed to be competitive to address the pricing that we have made. So again, we want this joint venture to be a profitable one, and we are going to grow it on the merits of sound orders.

This being said, I’m not going to give any details on profitability. I just wanted to mention this, because what made big noises were unclear frame contracts coming from Chinese competitors what is a clear award following an international tender that we won, was not recognized with the same attention, if I may. That’s the first one.

On the GT24, again, we keep working on upgrading our turbines, both on the 50 and the 60 hertz. It’s fair that we have not had yet some GT24 ordered. We are working both on the upgrades, sorry, of the existing GT24 and on new ones. We have the corresponding products, and we hopefully will have orders. I’m not sure that we missed massive orders in this area so far. So the demand has been weak so far and when the market will move we expect to participate in it.

James Stettler – UniCredit

And there seem to be a lot of questions here. Is this a competitive turbine relative to the H frames that are out there today?

Patrick Kron

This is, again, there was 1 H, there was one order taken with H frames. I have no comments to say. We are working on a competitive line of turbines. We are going to expand this range of turbines. We are working on upgrades, and we continue to work on it. This is something in which life doesn’t change over six months. And I have no concern in our ability to match the demand how and where it will be.

James Stettler – UniCredit

Great. Thank you.

Patrick Kron

Thank you. Well, I think there are no more questions registered. So if you don’t mind, I would like to close this meeting. I would like to thank you for your questions and your interest.

I would also wish to apologize for having being a bit long in answering, but there were a number of clarifications, which I viewed as necessary. And thank you again, and our colleagues Emmanuelle for few hours, Juliette, Nicolas and myself will be happy to answer any additional questions you may have. Thank you again, and have a good day.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect your lines. Thank you.

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