Thales S.A.

Yes. Hello.

Good morning. Welcome, and thank you for joining us for the presentation of Thales' nine months 2019 order intake and sales.

I’m Bertrand Delcaire, the Head of Investor Relations here at Thales. With me today is Pascal Bouchiat, CFO of Thales.

As explained, the presentation and audio webcast is live on our website at thalesgroup.com, where the slides and press release are also available for download. A replay of the call will be available in the next few hours.

And with that, I would like to turn over the call to Pascal Bouchiat.

Thank you, Bertrand, and good morning, everyone. I’m now on Slide two.

So before moving onto the numbers and explain in particular the drivers behind the adjustments to our 2019 sales guidance we issued Thursday night, I wanted to take a step back and give a bit more perspective, especially on our growth prospects. First, I wanted to stress the unchanged defense budget growth context.

For example, the French government presented its 2020 budget a few weeks ago. The defense budget is very much tracking the trajectory that was approved last year as part of what is called the LPM, the Military Programming Law.

The budget will increase by €1.7 billion into 2020, i.e., around 4%. I could also mention Australia, where the budget for the current financial year, which started in July, is up 6%.

Second, turning to our Space business. The signs of recovery that we mentioned in September are confirmed.

Already 11 geostationary satellite orders had been publicly announced year-to-date, which is more than in the whole of 2018. We are currently participating in the final stage of four significant tenders, demonstrating that the market is gradually recovering.

Third, we have continued to progress on the integration of Gemalto. As mentioned at the Capital Markets Day earlier this month, the identity management and data protection teams are selling a unified Thales-Gemalto product portfolio since the 1st of September.

And we are actively working on many cross-selling and up-selling opportunities. Finally, of course, the Capital Markets Day was also the opportunity to set new medium-term targets.

And they are, of course, unaffected by the 2019 sales guidance adjustment we announced last Thursday. Turning now to Slide three, which summarizes our key figures for the third quarter and the first nine months of the year.

New orders during the first nine months of 2019 amounted to €10.45 million, down 6% organically. Q3 orders were clearly on soft side explaining that our nine months order intake is slightly below our expectations.

Sales came to €12.41 billion, 14% above last year. As I will show you in a minute, the low organic growth is driven by the slowdown of Space and the high comps in Transport.

I’m now on Slide four with our order intake dynamics and key commercial successes for the first nine months of 2019. As I just mentioned, we achieved a solid order intake over the period of €10.4 billion, 10% above September 2018 on a reported basis.

Excluding Gemalto’s consolidation, order intake was down 6%, and as you see on the chart, this decline was due to above €100 million. We booked nine large orders on the first nine months of 2019 against 10 over the same period last year, including the OneSKY contract for €855 million.

Looking at Q3, we booked two new large orders: the combat management system for two ships and the modernization of French military satellite-based navigation system. Moving onto Slide five, looking at sales.

Here as well, the reported growth of 14% is, of course, driven by the consolidation of Gemalto. So currency effect remains slightly under 1% of sales over the period, an €85 million positive impact, mostly due to the stronger U.S.

dollar. Excluding scope and currency, organic growth is flat.

From a geographic perspective, this organic growth is quite contrasted. Mature markets confirm their growth profile with an organic growth by 4.2%, while emerging markets are down 10% versus last year.

As you can see on the chart to the right, this negative growth comes after a long period of outperformance. Now looking briefly at each segments one by one.

I’m now on Slide six. In Aerospace, orders were down compared with the first nine months of 2018, €2.6 billion.

As explained in our press release last week, this is due to a slower-than-expected recovery of Space orders with still a very low level of order intake in Q3. Encouragingly, as I mentioned earlier, there are several tenders which conclusion is expected in the next few weeks.

Sales were organically down by 6.8% for the same reason. As Space orders have been delayed, we have not been able to reach the expected level of sales.

Let me stress that this challenge is concentrated in Space, with all other Aerospace businesses recording organic growth over the period. For the full year of 2019, as announced last week, we now anticipate a decline in Space sales of around 13%.

Now moving on to Slide seven with Transport. First, order intake was back to a more normal level after a strong nine months level last year, in which We booked four large orders.

Sales continued to be impacted by the strong phasing effects on urban rail projects. As a reminder, the comps will be in Q4.

Last year, sales grew organically by 21% for the nine months and 11% in Q4. Turning now to Slide eight.

Looking at the Defence & Security segment. Defence & Security orders amounted to €5.3 billion, up by 7% year-on-year.

It was once again broad-based, with solid dynamics in many businesses such as airspace protection systems, optronics, missile electronics, equipment for combat aircraft and ships, military tactical communications and networks. Sales were organically up by 7.7% and reached almost €5.7.

Many business units contributed to this strong performance. I could mention surface radars, combat aircraft, naval systems but also military telecommunications and also civil cybersecurity.

So as in previous quarters, a broad-based sales growth in Defence & Security. As announced last Thursday evening, we now expect full year organic sales growth to be around 6% to 7%, which is slightly lower than anticipated.

Two factors are slowing our growth this year: First, we are facing delays in the production ramp-up of the Hawkei Australian military vehicles. The move from what is called to low rate initial production to full rate production has been delayed to 2020.

Second, we faced some delays in finalizing a few orders weighing on H2 sales. Let me stress that these adjustments doesn’t change the overall picture for Defence & Security segments that will deliver its best year ever in 2019 with very solid growth and record margins.

Now moving onto Slide nine with Digital Identity & Security, the last segment. I don’t comment order intake, which is not meaningful for this segment.

Nine months' sales were slightly up. On the positive side, EMV cards confirmed its good dynamics, notably driven by the re-issue cycle in the U.S.

On the negative side, as expected, the HSM business was affected by the reorganization it had to go through. This brings me to Slide 10, which is a recap of our updated full year financial objectives.

Our order intake target is unchanged to be slightly above €18 billion. For sales, as disclosed on Thursday last week, our guidance is now at around 1% organic growth versus 2018.

For DIS, nine months sales are in line with our expectations, leading us to confirm the 0% to 2% organic sales growth target. Finally, and more importantly, we reconfirm our EBIT guidance, €1,980 billion to €2 billion.

Being able to offset at EBIT level a two-point sales guidance adjustment is a strong demonstration of the resilience in our business model and of how we steer the group profile equations. Many thanks again for your attention, and I will now be pleased to take your follow-up questions.

I would have two questions, if I may. On the full year outlook, would you be able to give a bit more color on the orders that have been delayed in defense, where geographically they are coming from, emerging market, mature, France?

Just so that we can understand a bit better what is happening here. And the second question is on the cash flow impact of this revision to sales guidance.

If you could help us with that as well, please.

Okay. Olivier, so in terms of the delay of order intake and your question is a bit [indiscernible].

So it’s mainly – it’s more in the emerging markets. And I guess that you have seen that overall, the level of order intake in emerging markets are not that high overall.

It stood at – we were a bit more bullish in terms of striking order intake in emerging markets, in particular with the Middle East. And it’s true that in those countries in particular, there’s clearly an uncertainty between when – you have, of course, intense discussions with your clients – and when you can really record or book a contract you have in your backlog.

In those countries, discussions take time. And it’s nice that it is taking even more time than anticipated, in particular, in those regions.

Your second question was about cash flow. So it’s, of course, not a tailwind nor a headwind.

We’ll be seeing our guidance in terms of the overall level of revenues, meaning that – activities that we’ll deal a bit less to our customers as compared to what we had in mind. So of course, because of that, we’ll have a bit less cash-ins from our customers.

This is, I would say, a pure technical effect now in terms of magnitude. We can talk about a few times of [indiscernible] in terms of impact.

So most impact is material, but of course, no headwinds nor tailwinds as we’ll cash in a bit less cash from our customers.

Okay, thank you.

My first one would be if you could provide a little bit more detail and color on the four space competitions and when you would hope to hear on those and what are your chances against competition. And my second question would be on the Transport division, just to get a better feel on how this division is performing.

I guess you do have updates on profitability regularly on it. So how are we tracking for your full year target there?

And what lesson learned have you got from the revised Space guidance that you could embrace also for the Transport division? Thank you.

Okay. Celine, so on Space, I mean, you have to understand that I need to be a bit cautious as I’ve just explained that we’re expecting to book significant order intake in Q3 and that’s been delayed.

So I need, of course, to be cautious. It’s true that our belief, our strong belief is that several customers should make decisions in terms of awarding contracts in the next few weeks.

So hopefully, we’ll be able to win some of those competition. And this should happen in Q4 2019.

Of course, I cannot comment on those competitions. Look, what you need to have in mind is competition in various places in the world.

It’s not just on one country, on one continent. It’s, I would say, pretty much broad-based.

Now, once again, I’m cautious, and at this point in time, not being to tell you when this will kick in. It’s, of course, an endorsed contract.

And in fact, some of those contracts are being awarded to Thales. But it’s true that we have strong hope that some of them will materialize in Q4 2019.

So on Transport, so in terms of overall profitability, at this point and in those things, I especially mentioned to you. Now it’s true that we expect a level of sales in Q4 to be quite strong, to be above what it was a year ago in Q4.

It’s true that the comps in Q4 2019 are significantly less demanding than they were so far. What I’ve mentioned is that end of September, the 2018 comps was quite demanding with a 20 plus – 20,000 plus growth in 2018 as compared to 2020.

In Q4, it will be – the comps will be a little bit less demanding. As in Q4 2018, our growth was at around 48%.

So we have various milestones in terms of delivery for Q4. So this is what I can share with you.

I have to admit that I have not gotten the last part of your question.

Well, it’s more about how you manage and how you take a view as the group CFO based on what the divisions are saying to you and what level of conservatism you add on top as a layer, I guess, or not compared to what they say. And I know Transport is a project business, so there is always a risk there.

So I guess maybe on Space, you would have wished be more cautious. And I’m just wondering if on Space – Transport, it applies.

Celine, it’s – I don’t want to comment the level of conservatism that I see for the divisions it’s true that – and probably, to make the long story short, the overall guidance adjustment and [indiscernible]. When I look at 2019, it’s true that all of that, at the end of the day, was driven by what happened in the Space business.

And probably, we need to analyze that we’re being probably a bit too optimistic in terms of recovery of the space market in 2019. And it’s true that the level of order intake that we managed to book in Space in Q3, which is rather small now because it represents something which is only €160 million, which is much below our expectation.

This – I see a cautious company. It’s probably an incentive to be a bit cautious on what might happen in this business.

Now, and once again, we are positive in terms of order intake in Space in Q4 and also pretty much the same, by the way, on Transport.

The first one is, again, on orders. I’m just trying to kind of work out now what is priced in for Q4.

If I look at where consensus forecasts are, I think consensus for full year orders is about €18.9 billion. I think the implication there is that organic orders, so ex Gemalto, would be in the region of €7.5 billion, which is obviously a lot better than it has been for the last few years.

Can you confirm that, and I guess, give of view on where that incremental order comes from? And secondly, I wanted to follow up on some of the comments you made around Transport.

You mentioned that discussions with customers are fairly intense at the moment. So I wanted to ask what implications that might have on pricing and where you’re seeing particular challenges there at the moment.

Okay. So first, on order intake, what I would like to reiterate is what we expect for the full year, which is slightly above €18 billion.

I don’t think that we mentioned a figure which is significantly ago. But I do reconfirm what we keep saying for quite a while, which is the level of order intake is slightly above €18 billion.

Now when I look at what it means in terms of order intake in Q4 as compared to Q4 2018 and a fundamental Thales scope, I guess it was your question, it’s true that the – what we expect in terms of order intake in Q4 2019, putting aside Gemalto, as compared to Q4 2018, is slightly above; and a resounding yes in particular on our Space business, where we expect the level of order intake, which is above what it was a year ago; and also on the Transport business. Now this is how we see in Q4.

And no specific points to comment on that. Transport, I understand your question was about the level of discussion and the intensity of discussions, in particular price-wise, with the customers, was it?

Yes. I wondered how far that was a euphemism for the pricing challenges.

This market – the transport market is not something which is new. The competition is there.

The pressure on pricing is there. It’s not something which is new.

We have, by the way, new examples a few weeks ago on – and I don’t want to make any more comment, but we have seen in a specific geographical area that one of our competitors has provided an EBIT with a level of pricing that, in our view, was below what it should be in terms of the overall level of profitability. So this is something that we need to have in mind, which means, of course, that all competitiveness initiatives on top of project executions is absolutely essential in this business as well.

This is a business where we seek a strong shift. Overall, a competitive environment.

But once again, it’s not something which is new, and it sounds as a surprise to us. It’s okay for a normal business to face quite an quite intense competition in the Transport business.

I could mention the segments. Space, the same thing.

Many of the business, including in Defence & Security also. So yes, a competitive pressure there in Transport as in many other businesses at Thales.

Three questions on my side. The first one is on the cost savings that you announced for this year, the extra cost savings that earned for mitigating the sales headwind that you announced.

Can you explain a bit how you prepared for this? So is it that you realized last week that you were heading for a miss on top line?

You then prepared this cost savings over three days. So were they prepared ahead of that?

So what was the philosophy behind preparing for these exceptional cost cuts? And is there any kind of reversal of discretionary spending that we should expect as a consequence in 2020?

That’s the first one. The second question is on the Hawkei program situation.

Can you remind us a bit of the history of the program and why there have been some reliability issues? How you address them?

And why is the move from LRIP to full rate production being still deferred by the Australian MOD? And the third point is on how we should see that the 1% organic growth target that’s part of – against the backdrop of your 2019-2023 plan, where you said that you’re going to reach on average 3% to 5% organic growth.

But you said that we should have a backloaded profile. Is it the plan to [indiscernible] back end of the plan?

So 1%, should we understand that the first few years can be materially lower than the bottom of the range? We can have a couple years below 3% and end up higher than 5%?

Is it the way we should understand it? You already have full effects

Okay. Tristan, quite different questions that needs to spend a bit of time.

So first, on cost savings. I guess, and once again, coming back on 2019 and the issue that we faced overall at Thales.

You were mentioning Hawkei, but I would say that Hawkei is a type of project where we might have some difficulties. But I came to believe that it’s not a normal life of a company like Thales to handle a few projects that we’re not doing exactly as it should be.

It’s part of what we need to do. And so normally, of all that should have been compensated and it should have never [indiscernible] Hawkei.

Once again, the issue that we face revenue-wise is really what happened on our Space business. And I mean, in April, when we realized that overall, our Space activities wouldn’t be in line with our expectations in terms of revenue, we have decided at group level and not just, of course, in our Space business, to put in place some kind of a contingency plan and asking all our businesses to keep pushing even harder in terms of competitiveness but also to stop some excess expenses that, in our view, were not – or could be postponed or could be stopped.

I could mention very basic things like travel expenses and then on conventions and a freeze of consigning activities. So these type of, what I would say, quite obvious and basic contingency plan that we started, which means that it’s not in the last week that we have put in place that.

So it’s more at Thales, from a cost-saving standpoint, to have started this type of contingency plan a few months ago, back in April. Your second question was more specifically on the Hawkei project.

So what you need to have in mind is that this project, which was booked in 2019 – 2018 actually, 2015, 2016, for around $1 billion of order intake, we intend to supply and rebuild protected vehicles to the Commonwealth. This type of project is structured along three stages: The first stage is what we call engineering development.

The second stage is what we call low rate initial production, and this is for reliability testing and verification and the first production of few or several vehicles in order for the rest of the clients to perform all the testings that they have in mind. And the third stage is moving to a full rate production for the [indiscernible] and most of the production of vehicles.

So what happened very frankly is – the fact that we were not in a position to move from a low rate initial production to full rate production. I don’t want to comment too much on that and the underlying reasons behind that.

But this critical phase to move from stage two to stage three and moving to really full rate production with that at stake and the delivery of a number of vehicles in Q4, this has been delayed. This has been delayed.

And today, a bit cautious on when we will be able to move to full rate production. Hopefully, this should happen in 2020.

I don’t want, at this point in time, to be more precise. So this is really what happened on this programming.

Your last question was more about the sequence of organic growth in the next years to come. And in that, Tristan, I will come back to what we said in the Capital Markets.

So yes, we said that most will be more backend-loaded. And yes – now I don’t want to give you more color in terms of organic growth in 2020, in particular, 2021.

That’s beyond your questions. Most probably, you’ll request for me to provide you with guidance in terms of organic growth for 2020 or for the first few years.

I do see that at this point, I do believe that we should give you 2020 guidance and precise organic guidance – organic growth guidance for 2020 as when we release our 2019 figures in February. At this point in time, today, it’s only a bit too – it is really too early.

Okay, thank you.

Thanks very much. My questions have actually been answered.

Thank you.

Hi, everyone. Yes, thank you for taking my question.

I’ve got two. Firstly on emerging market revenues.

You highlight in the presentation that the growth slowed down quite materially. Just wondering if there’s anything in particular that drove that and how should we be thinking about that into 2020.

And then secondly, you also highlight in the presentation that there’s relatively tough comps in the IFE business within Aerospace, and that was one of the drivers of the lower order growth. I was just wondering how should we be thinking about these facing forward.

Or is this something that is structurally slowing for you? Thank you.

Okay. Ben, so in terms of growth in emerging markets in 2020, I need to be a bit cautious on this one.

But it’s true that – it’s really different, of course, the level of order intake that we should be able to take in Q4 2019 and also the level of order intake we should be able to get in the first – probably the first half of 2020. It’s true that – and this is where we have a bit of uncertainty because it’s true that we have some projects and some large projects that are coming to an end on emerging countries in various businesses at Thales, which means that it is quite important that we can replenish our backlog for emerging countries.

And 2020 will be a direct consequence on our ability to replenish our order intake in the next few quarters. So we are today looking at and pursuing some significant opportunities in various countries in emerging markets, in particular, by the way, in the Middle East.

So also we’ll see what is going to happen then. Your second question was on IFE and the – really, I don’t remember.

Yes. You highlight in the presentation that there was some tough comps in the IFE business, and that was part of the driver of the weaker order growth in Aerospace.

I was wondering if that’s just phasing? Or is that something that’s structurally slowing?

No, no. No.

It’s true that when we look at our Avionics business, and let me put aside the Space business, we might have a bit of volatility in our Avionics business driven by the IFE business. And the reason is quite simple.

The cockpit avionics business is, I would say, quite steady and with quite a good level of visibility in terms of order intake, and consequently, level of revenues. IFE, in terms of order intake, can be a bit more bumpy in terms of order intake because here, it’s about taking much – a larger order than, of course, what we usually book.

Cockpit avionics is a business, when it comes to winning competitions with the large airlines, this can create a bit of bumpy effect on this business. So we see, at this point in time, I don’t want to be more specific.

And yes, the comps was quite high so far, and in my view, should probably be because a bit like in [indiscernible].

Okay. Great, thank you.

Thank you very much. Good morning everyone.

I’ve got four, if I may, Pascal. The reduced guidance last week for me wasn’t a huge number, but there was quite a big reaction in the share price.

And my thinking was that maybe investors are questioning how well on top of the situation the management is. So maybe if you could just help us understand how the information flow works in the group, in the management, information systems, just to reassure people that this is just a one-off.

That’s the first question. The Space sales has been down 13%.

You say it’s because of some delays in orders. Can you help us understand the typical kind of lead times between orders and sales in this business?

I was thinking that the lead time is quite long, so short-term slowdown in orders shouldn’t really impact sales that immediately. So we need a little bit of help in understanding that.

Very encouraged that you’ve maintained the EBIT guidance for the full year despite the shortfall in sales. Does that mean the mix of EBIT by division has now changed?

Or is it the same as you’re expecting previously? And finally, on the SIM cards.

The 9-month sales are down, you say, in the SIM cards. Can you help us understand what’s happening on the volumes on SIM cards nine months versus nine months in terms of unit volumes, what the trend is there, please?

Okay. Good morning, Zafar, so on your first question, so in terms of the information flow in the company and explaining to the corporate team, so what you need to have in mind is that when it comes to actual figures, in particular in Q3 figures, and it’s part of the September credit, which take around two weeks and to be continued.

And I guess I was clear, despite that overall, our level of order intake in September has been weaker than expected. And a good example of that is our Space business, as I’ve mentioned.

And it’s clear that behind that, it is a decision from the customers to make a final decision, as I mentioned. Linked to that is several points in terms of the way we manage information.

What you also need to, again, keep in mind is that we have at Thales regular forecast update. And last one only took place a few weeks ago with, of course, back and forth discussions with risk and opportunity analysis business-by-business for us to assess the level of reasonableness and the level of risk, ability to compensate, all this type of discussions that we have at Thales, and of course, our seven global business unit.

So course, it takes just a bit of time if you could consider that in just a couple of hours, the term "make your own conditions" about having – there is a new updated forecast, the risk and opportunity analysis, the ability to compensate, the level of contingencies, you might have all this type of things that represents what we need to do in order to address concerns at a company like Thales. So your second question, which, for me, is also linked to the first one, on Space.

And what we adjusted is a drop from 10% to 13%, which represents something like €70 million of revenues. So lead time – you mentioned about lead time in this business.

We [indiscernible] and when we book a new contract in the business like Space, we start executing the project right away, which means that we don’t wait two years to start working on the project and to start generating revenue. We start generating revenue from day one.

And by the way, IFRS 16 with revenue based on cost recognitions, we have this effect. Now to bring the satellites overall in the average duration to produce the satellites is something like two years.

It’s probably a good way to assess our lead times. Your third question was about EBIT guidance.

Everything that we share at H1 in terms of level of EBIT margin in Defence & Security, in Space, in Transport EBIT margin is correct. So for me, what we have just announced last week in terms of adjusting our organic growth guidance, we have pretty much marginal impact on our mix of EBIT.

On SIM cards, I don’t want to comment on the exact level of volume now. What I can share with you is clearly our intent, and this is what we have been doing.

It’s not just to chase volume in our SIM card just for the sake of getting volumes. We have declined some projects in some countries where, in our view, was not – the level of margins, the level of prices was not equivalent to the level of margins that we are expecting in this business.

So we mentioned at our Capital Markets Day that we’re expecting overall a drop in this business of around 10% earlier. And what I see today is pretty much in line with this overall guidance.

So it’s mostly quite disappointing in the first nine months in this business, having in mind that we have – and this what we started before the acquisition of Gemalto. And we’ve reduced the level of export in countries where the level of prices is, in our view, not appropriate.

Yes. Good morning, Pascal Bouchiat.

Just a couple quick questions on the net debt, please. I’m not sure if you’ve given guidance, but if you are able to, it would be great for net debt at the end of this year under the new definition.

And then just curious if you have in mind the time frame for moving back to the net cash position, if you see that happening over your forecast period through to 2023. Thank you.

Good morning. David, so in terms of net debt by the end of 2019, this is information that we disclosed at our Capital Markets Day when I presented the overall capital structure of Thales and comparing our level of net debt to the level of EBITDA.

And what I said on these occasions was that we are expecting a level of net debt by the end of 2019, under the IFRS 16 norm, we are expecting this level of debt to be around €3.5 billion. And putting aside the IFRS 16 impact, a level of net debt that should be around €1.8 billion.

Now in terms of sequence to get back to a positive cash situation, I don’t want to give you more than what we shared with you in terms of the overall guidance and operating cash flow in the next years to come. So I guess you should probably be [indiscernible].

And overall, nothing more to say than this at this point.

All right, thank you very much.

No more questions?

No more questions?

Okay. So if there is no more questions, so what I just can mention to you is that we have our next formal session in terms of release of results that will take place on February the 26th.

And in the meantime, I guess that we’ll have many, many Interactions as we will be road showing. We have set aside an analyst dinner somewhere in November with Bertrand.

So we’ll have multiple opportunities to continue our interactions. Thank you very much, and see you.

Bye-bye.