Thales S.A.

Yes, hello. Good morning, everyone.

Welcome and thank you for joining us for the presentation of our H1 2020 results. With me today are; Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales.

As usual, the presentation will be in English and followed by a Q&A session. It is webcast live on our website at thalesgroup.com, where the slides, press release and consolidated financial statements are also available for download.

A replay of the call will be available in a few hours. With that, I would like to turn over the call to Patrice Caine.

Good morning, everyone. I hope you’re all fit and healthy.

So let’s begin with the Slide 2. As usual, let me start with the highlights of our H1 2020 results.

As you will see in a minute, our H1 results were, of course, severely impacted by the COVID-19 crisis. These results are however, in line with the framework that I presented back in April during our Q1 presentation.

They combine a major impact on civil aero demand, down by more than 60% in Q2, smaller, but meaningful impact in biometrics and IT and a temporary disruption, sometimes very material, of almost all group of patients. Very early in the crisis, we decided to implement the global adaptation plan, and it has already started to deliver some significant benefits in this period, more than EUR 300 million.

This crisis did not prevent the teams from being very active on the commercial front. Even though they are not in our H1 order intake, as the contracts are still being finalized, I’m happy to report today that we were selected on several flagship projects in the past week.

In Space, I’m referring to the fact that it will be the key contributor to the 5 of the 6 Copernicus earth observation missions, including the most iconic one, the CO2 emission, which will monitor atmospheric CO2 emissions. Let me stress that the total value of these projects will be around EUR 1.8 billion, even if only the first tranches corresponding to the advanced definition phases, will be booked this year.

Secondly, in Naval Defence, after winning projects in Spain with Navantia and the UK with Babcock for the Type 31 project last year. We also – we will also be a major contributor to the MKS180 frigate program, the largest program in the history of the German Navy.

We expect to sign the corresponding contract later this year, adding more than EUR 1.5 billion to our backlog. Finally, as I will explain in the second part of the presentation, our positioning as a supplier of intelligent systems and digital solutions in five critical markets is even more within in the post-COVID-19 world, and our strategic roadmap is solidly addressing both the near and long-term.

So, first, let me comment on a few key features and I’m now on Slide 3. So at EUR 6.1 billion, order intake was down 13%, primarily because of the low volume of large contracts book in the first period.

The COVID-19 crisis impact on Q2 sales was significant, minus 20%, taking sales down 5.4% over the half year and 13.6% organically. Then EBIT and adjusted net income declined to 60% marked by the drop in civil aero sales and by operational disruptions.

Let me stress here that the significant part of this negative EBIT impact is by nature, temporary, as it is linked to the implementation of lockdowns and sanitary measures. In this unprecedented situation, we asked our teams to be very focused on cash management, and this delivered well.

Free cash flow generation has remained under control, at minus EUR 471 million. It was only slightly below the normal seasonality.

The free cash flow level draws our net debt position up to EUR 3.9 billion. So, after this rapid introduction, I now hand over to Pascal, who will comment our financial results in greater detail.

Thank you, Patrice and good morning to everyone. So let’s start with order intake, I’m now on Slide 4.

As usual, the chart on the right shows the backbone of our order by contract value. Of just speaking of supply that the Q2 disruptions have created delays in terms of finalizing and signing contracts, and this is especially apparent for large orders, looking forward in H1 2020 versus 7 mergers, the total value booked decreased by EUR 1 billion.

We booked 3 contracts of more than EUR 100 million in Q2. The supply of anti-submarine sonars to the US Navy, showing again the leadership of Thales with navies around the world.

The extension of the strategic munition supply for the Australian MoD. The value of this contract is above EUR 600 million over 10 years, and the first one is booked in Q2, as a value just below EUR 200 million.

And the third large contract is the Space contract for an undisclosed customer. Considering the natural volatility of large orders, I’ve opened trust in the past, the importance of a large base of small orders under EUR 10 million.

It is demonstrated clearly here. Excluding Gemalto’s consolidation, order intake was done 10% for such smaller orders, in particular, driven by the drop of demand in civil aero.

Excluding our volume of small orders decreased by only 5% versus last year. Moving now to Slide 5, and looking at sales.

Sales decreased in overall by 5.4% versus H1 2019, and that negative goals is resulting from different moving parts. There’s still a significant scope impact, EUR 697 million due to Gemalto Q1 sales that we have not included in our H1 2019 numbers.

And a EUR 20 million negative currency effect. Then the obviously the impact of the pandemic crisis, which started at the end of Q1, and which it speaks during Q2, driving a 20% drop in sales during the period.

As we explained previously, COVID-19 consequences on sales can be broken down into different impacts. The first impact is due to the major drop of demand in civil aero that is more than 50% in Q2, with additional smaller impact in businesses like biometrics and IoT, within DIS.

And the second is what we call the productivity impact due to the disruption of operations across all businesses which explained the 16% drop in the civil aero sales. Turning briefly to the geographical perspective which is not very meaningful in such periods.

The sales decline is not visible in emerging markets than mature markets. It is mainly due to the expected fading down of a couple of major Defence & Security and also Transport contracts.

Moving on now to Slide 6, looking at the adjusted P&L, from sales to EBIT. As mentioned already, EBIT margin is clearly down at the end of June 2020, 4.5% versus 10% last year.

This usual presentation is our adjusted P&L is a bit difficult to analyze, considering the significant scope effects, in particular, the overall increase of indirect costs is just under the sales, moving from 17.3% to 19% directly resulting from the consolidation of Gemalto, with businesses come with higher gross margin, but also with higher levels of R&D and sales and marketing costs. So to better explain what happened in the first half of 2020 what changed a bit as the presentations of the EBIT bridge, I’m now on Slide – on Slide 7.

Of course, in appendix you can find the traditional EBIT bridge presentations, it is on Slide 28 and the H1 2019 P&L at 2020 scope on Slide 29. Starting from the H1 2019 EBIT including Gemalto’s Q1 2019, EUR 829 million, we estimate the decline in gross margin due to the COVID-19 crisis, and the cost saving actions at approximately EUR 740 million.

Now, on the positive side, we estimate that our cost savings actions always been brilliant, the equivalent of 12% of sales exiting, EUR 320 million, half where our actions to reduce direct costs and half – approximately half where our actions to reduce indirect costs. In terms of 9 – the line, the 9% decline in indirect costs with minus 9% on R&D and sales and marketing and minus 10% on G&A.

In other words, our cost saving action offsets a little more than 40% of the COVID impacts on our gross margin. Compared to H1 2019, we have a small savings on restructuring, minus EUR 17 million, last year we booked the engineering competitiveness plan in our Transport business.

Last element of the bridge, equity affiliates were materially down from EUR 80 million last year to EUR 1 million this year. Managing the lockdown and sanitizing measures was quite challenging for shipyards brought in Naval Group sales down 26% and its contributions to our EBIT due to negative territory, minus EUR 16 million.

The decline of the other JV’s contributions was particularly material in civil aero and thinking about the Civil Aerospace in Germany and also L3 assets in the US. So moving now to Slide 8.

I will go through the performance of each of our operating segments in the next few slides. So let me just highlight a few points here.

EBIT in Civil Aerospace segment is clearly negative, due to the combination of a drop in demand and operation disruptions and will further develop then in a minute. Transport EBIT turned to a positive, a low margin and certainly in parallel, both Defence & Security and Digital Identity & Security segments maintained strong performance, considering the unprecedented context with their respective margin at 10% and 9.5%.

So, I’m now on Slide 9. So let’s start with our Aerospace.

Starting with orders at EUR 1.6 billion, the order intake was down 8% to H1 2019, which is not as bad as we could again feel by considering the major COVID-19 impacts on civil aero during Q2 2020. The main reason behind this lengthy drop is a combination of two effects.

First, strong first quarter for avionics. As a reminder, our Q1 2020 was up 15% for the whole segments.

And also an improved dynamic in the Space market, both on the commercial and on the institutional clients. A EUR 2.9 billion sales were done by more than 25%, totally affected by the drop in demand in civil aero.

I already mentioned the figure, more than 50% in Q2, both linefit and aftermarket for flight avionics and IT face similar declines. Sales were also impacted by the positive impact caused by the lockdown and centering measures on all the activity during Q2.

In EBIT Avionics, Space and also the microwave tube operations. In terms of EBIT, as I mentioned on the previous slide, the negative EBIT minus EUR 109 million was due to the combination of a sharp drop in sales I’ve just mentioned and also 12-point decline in gross margin.

This in spite of the strong cost actions we took in Q2, which right now then drove 11% reduction in indirect cost over H1. Let me stress that EBIT should materially recover in H2, thanks to the full effect of our cost savings actions and the improvements in productivity, notably in non-civil aero businesses.

So now moving on to Slide 10 with Transport. First, order intake was down 21% versus H1 2019 and was mostly affected by delays in bid processes and contractor awards due to the sanitary crisis.

Sales were down by 13.7% organically. Part of this negative growth was anticipated because of the phasing down of works of major urban rail projects, which have been driving very high comps since the end of 2018.

This was obviously aggravated by the COVID-19 operation disruptions, especially in regard to carrying on site installations and testing activities. We expect these disruptions to be H1 one-off, of course, assuming that there is no major degradation versus current sanitary conditions.

The combinations of the decrease in sales and the impact on a percent of performance is, of course, affecting EBIT this year which amounts however to a positive EUR 4 million. Still I mean, this represent a significant improvement against H1 last year, when EBIT was astoundingly negative, in particular to 2 negative one-off costs.

However, like what I mentioned earlier for Aerospace, our transformation plan combined with the full effect of the custom measures, and the more reduced operational disruption should drive a higher margin in H2, allowing us to target the full year EBIT margin above last year of 2.9%. So moving on now to Slide 11, with Defence & Security.

First of all, important to remember that 2019 was an exceptional year for these segments. So clearly starting the year with high comps in addition to facing an unprecedented crisis.

With that in mind, order intake was down 36% at EUR 2.4 billion. As I mentioned earlier, this is primarily due to the volatility of large contracts above the EUR 100 million.

We booked three such large orders large orders this year, again, 6 last year in a context of delays at finalizing contracts. However, what is important to note is that, we have not lost any significant opportunity during this period.

And we do expect a catch-up during H2, especially with the signature of the MKS 180 contracts that Patrice mentioned earlier. Sales reached almost EUR 3.6 billion, down 7.3% organically.

The drop was due to the COVID-19 related operational disruptions that have been progressively determined. Interestingly, 6 out of 13 business lines managed to go in spite of the contracts, notably the naval domain, but also in our communication networks and protected vehicle businesses.

Turning to EBIT margin, profitability remains at the solid level, 10% considering the drop in sales and gross margin. This outcome was achieved, thanks to rapid adjustments of our indirect costs in line with the drop in sales.

Last segment on Slide 12, the DIS. So our Digital, Identity & Security segments.

Of course, organic and total changes are not meaningful in these segments since the consolidation of Gemalto was effective from the middle of the period last year. As usual, there is no need to comment on order intake since it is structurally aligned with sales in most of DIS business lines.

Pro forma H1 sales were flat with the limited minus 5% sales drop during Q2. On the positive side, both EMV cards and SIM cards grow above their long-term trend.

Under that of the re-issue cycle in the US, and the robust demand for contactless cards worldwide during the sanitary crisis, as well as probably some precautionary buying of SIM cards. On the negative side, as expected, both biometrics and IoT module businesses were impacted by the immediate decrease in terms of demand from the very beginning of the funding in March 2020.

While short-term visibility is low in DIS markets. At this point we’re a bit cautious and assume that there will be a bit less supportive in H2.

The demand for our biometric travel documents and IoT modules will remain depressed and smart card sales should decline in H2. In terms of EBIT, DIS delivered a very strong performance in H1, you see EBIT, EUR 140 million and a 9.5% EBIT margin.

Operations at DIS were less disturbed than in other businesses and the gross margin mix was favorable overall. The indirect cost performance was also pretty good and it benefited from the one that of cost synergies.

We see I mean in H1 2019 Pro forma EBIT margin, which was only a 3% which means that H1 2020 is much above the pro forma H1 2019 EBIT margin in these segments. Turning now to Slide 13, just a few comments on items below the EBIT.

Cost of net financial debt and the other financial results is up by EUR 25 million, mostly due to the increase in cost of debt after acquiring Gemalto in 2019. Finance costs and pensions were slightly down by EUR 7 million, thanks to lower discount rates.

The effective tax rate moved down from 26.6% to 23.2%, thanks from a favorable country mix and to the higher way of research tax credits compared to pre-tax income. Minorities’ interests were negative at minus EUR 14 million at the end of H1 2020, leading to an adjusted net income of EUR 232 million and adjusted EPS of EUR 1.09.

Moving now to the key item on the cash flow statement, I’m now on Slide 14. During the first six months of 2020, operational free cash flow was minus EUR 471 million.

As you see on the charts with negative level was due to the strong seasonality of working capital, which is usually very negative in the first half of the year. As you remember, one of our first actions as soon as the sanitary crisis started, I’ve been to ensure that the Group would be in a safe position in terms of cash.

Simply then work and managing our cash flow with great attention. In the past few months, our CASH optimization plan that we launched mid-2019.

This plan focused, in particular, on three items. First, reductions of overdue balances; second, tight control of supply chain and consequently of inventories and sales, positive negotiations with both customers and suppliers in order to obtain more favorable payment terms, whenever possible.

Of course, I mean, this didn’t prevent us from being parties not suitable to small suppliers with advanced payments. For example, and of course, this and one required.

Now looking at the moving parts, detail on the right part of the slide. Operating cash flow declined by EUR 315 million which is less than the minus EUR 472 million EBIT decrease, thanks to our strong focus on cash, the change in working capital was left negative in last year.

recurring pension cash out, and net financial interest were up due to the consolidations with the Gemalto. And income tax paid was slightly down due to the more favorable country mix.

Finally, as part of our global adaptation plan, we were able to reduce our CapEx by EUR 14 million which corresponds to a 16% reduction at constant scope. Altogether the actions strongly helped to limit the decrease in terms of free operating cash flow, down by only EUR 139 million versus H1 2019 to be compared with a decrease of EUR 472 million for the EBIT during the same period last year.

So overall cash flow very much under control. Now, let me finish, I’m now on Slide 15.

Let me finish with the world and evolutions as our net debt position where we’d just like to mention here part of the dividend payments which amounted to EUR 336 million in H1 2019 and 0 in H1 2020 as per the decision was taken by the Board to withdraw the final payments to the 2019 dividends. We also see on the slide, the EUR 94 million negative within the other box, which relate to the impact of the IFRS 16.

So, I now turn the call over to Patrice to talk about strategy and outlook.

Thank you, Pascal. I’m now on Slide 17, turning to our strategy and outlook.

Now that we are exiting the COVID-19 related emergency period, it is time to start asking ourselves whether we should adjust our positioning or accelerate some aspects of our strategy, to take into account, the post COVID-19 context. A little more than a year ago, in anticipation of the acquisition with Gemalto, I launched an initiative to define our share to propose as the new turrets.

It was an exceptional opportunity to collectively define the true why of our company. This process which involve more than 35,000 employees in 40 countries, that is to take as our banner ambition, the sentence that you read on the left of the – of this slide, “building a future we can all trust”.

Of course, what we do is a change. We help our customers master that critical decision change, thanks to sensors, mission systems, command and control systems and Digital Identity & Security solutions.

Stating our purpose in this way helps us articulate the reinforced relevance of our positioning in a post COVID-19 world that needs trust and trustable solutions. More than ever, customers expect us to not just incorporate the most advanced technologies, but also address the issues of resilience, technological autonomy and sustainability.

Our Ambition 10 framework, which I presented several times in the past years, remained well adapted to maximize value creation in this context. Customer end user centricity or performance initiatives, investments in R&D, especially in digital and the integration of Gemalto remain the five key levers to support long-term profitable growth.

Turning now to Slide 18, reviewing briefly the growth perspectives in our civil businesses. Why the very near-term outlook is still naturally uncertain?

Each of the markets we serve is driven by major long-term societal trend, amplified by the ongoing crisis. In each of them, we are focused on faster growing segments.

First, starting with civil aeronautics, of course, the recovery of this market will take several years. But there is little doubt that air Transport demand will return and continue to grow faster than GDP for many years, if not decades.

Our solutions for this market, both avionics and air traffic management are key contributors to a greener and smarter aviation. According to several studies, new generation, connected and collaborative unique combined with improved air traffic management can deliver a 10% reduction of fuel consumption, as these solutions can be implemented on existing aircraft, they can deliver their savings on a much shorter time horizon than new engine or even new hydrogen propulsion technologies.

Turning to our Transport business. Rail operators are faced a major drop in a traffic during the crisis.

But this is clearly temporary. Traffic is returning to normal.

And, more importantly, investments in green mobility infrastructures are on the priority list for many governments. As a global leader in signaling solutions, we are very well placed to benefit from these investment plans.

Moving now to Space. As mentioned by Pascal, visibility remains low on the commercial telecom satellite market.

But the long-term perspective remains robust, and is probably accelerated by the crisis. Space systems are essential to deliver key functions of a greener, more digital and connected world, such as reducing the digital design.

As I mentioned in my introduction, first of the recognitions are among the key European Space Agency and European Commission projects. And we have demonstrated again, our leadership in these areas by being awarded the key role on 5 of the 6 upcoming Copernicus missions.

Finally, our Digital Identity & Security business is of course at the heart of major trends. Digitalization and the need for trust.

Interestingly, over the past few months we have seen increased demand for several emerging DIS solutions such as biometric payment cards, which we’ll see its first commercial launch by BNP Paribas in a few months. New border control gates, incorporating facial or contactless, fingerprint recognition and even temperature centers for more broadly, digital civil identity solutions.

Supplying highly secure Digital Identity on top of traditional physical identity documents enables all types of e-government procedures online, saving money and increasing revenue. Moving now to Slide 19, with our Defence business.

Since the start of the COVID-19 crisis, investors have asked if the increased pressure on government budgets in many countries may drive a decline in Defence budgets in the coming years. So far, we have not seen any material signal in this direction.

None of our big customer countries have mentioned reducing that Defence spending going forward. We have rather seen the opposite, with MoD being very supportive, accelerating payments to industry and investigating opportunities to bring forward procurement programs.

In particular, our two largest Defence customers, France and Australia have reaffirmed their budget growth grants. The overall context is unchanged, driven by increased geopolitical tensions and the need to address complex threats.

From that point of view, what happened in the latest recession after 2008 is not a good template as the level of geopolitical tension was much lower at the time. Moreover, within global Defence markets, we are positioned on faster growing segments, connectivity, sensor suites, system of systems, all of these are at the core of future, connected collaborative combat and Defence capabilities.

Let’s take the example of FCAS in France, Germany and Spain or Tempest in the UK. These market segments are expected to grow faster than overall budget, because they match very well with key customer priorities, better information, tighter coordination and because the digital technologies in which we have invested enable major improvement in capability.

I will work on MKS 180 the new German frigate program is a great example of these dynamics. At more than EUR 1.5 billion this contract, which we expect to book in the coming two or three months, is one of the largest in our history.

It includes, in particular, a new generation version of our best seller, naval mission system tacticals and a fully digital product suite, coupled with intelligent software design to handle complex, naval threats, such as swarm attack. We expect this sort of commercial success drive our Defence & Security backlog to a new record high at the end of the year.

Moving now to Slide 20, discussing the drivers of margin expansion going forward. Under the Ambition 10 framework, we continuously launch initiatives to improve the operational performance of the Group.

Procurements, engineering, support functions and so on. On top of this, we remain – we’re on track to deliver on Gemalto cost synergies, EUR 120 million by 2022 as shown on the right.

The transformation of our Transport business which delivered an EBIT improvement even in the COVID-19 crisis will continue in the coming years. Within our COVID-19 global adaptation plan, the birth of cost actions are temporary as they are addressing the temporary decline in sales.

At the same time, like all of the players in the civil aeronaut system, we are starting to implement the necessary structural cost adjustments in our Avionics and IFE businesses. The plan will be finalized in the coming months based on the OEM production scenarios and the scope of governmental support, notably in R&D and on long-term temporary sorrows.

By 2022, all these actions which will allow us to return to the level of profitability we achieved in 2019, 10.6% on a pro forma basis. Importantly, we will remain, of course, fully committed to delivering on our medium-term EBIT margin, 11.5% to 12%, something we should be able to achieve once the civil aero market as more or less normalize.

Turning now to Slide 21, discussing our H2 2020 outlook. Starting with the impact of the crisis on the left of the slide.

While we do expect internal productivity to be almost back to normal over H2, we also expect to continue facing some limited supply chain and customer site access issues, as well as travel restrictions which will weigh on our ability to record sales. In addition, I shall stress that the near-term macro trends remain uncertain.

First in civil aeronautics where aftermarket business will depend on the base of recovery of air traffic. Second, with respect to corporate IT investments.

Third, more generally, although the overall economic environment. Turning to our global adaptation plan, H2 will benefit from the full impact of our cost saving actions, for which we are targeting around EUR 750 million of savings in 2020 as explained by Pascal, all the teams have been very mobilized on cash management in the crisis.

In that context, we will cut CapEx at least in line with the decline in sales, which will represent at least EUR 50 million. And as I mentioned on the previous slide, in the coming month, we will finalize the structural cost adaptation plan for our civil aero businesses, which brings me to our financial objectives for 2020, considering the business environment that I just described – very shortly, and of course, assuming no major step up in sanitary measures on our key markets.

So I’m now on Slide 22. With respect to order intake, we expect to record another year of strong commercial performance in Defence & Security, especially thanks to the booking of MKS 180, which should be sufficient to drive our Group’s book-to-bill ratio above 1.

In view of the near-term uncertainties, we are taking a broader than usual ramp for sales guidance. So based on the July 2020 scope and foreign exchange rates, we expect sales to amount between EUR 16.5 billion and EUR 17.2 billion.

Thanks to the initiative I’ve presented earlier, we expect EBIT to be in the EUR 1.3 billion to EUR 1.4 billion range, corresponding to an EBIT margin of around 8% a rather modest decline in margin average to 50 to 100 basis points. Let me stress an important point, this EBIT guidance is based on an EBIT contribution from JVs of around EUR 70 million and on our current base scenario for restructuring cost EUR 130 million.

As we are only starting the discussion with unions on the mix of the structural cost measures in civil aero, we are unable to confirm, of course, this envelope, if – sorry, these envelope we’ll cover them in full. This concludes our presentation.

Many thanks for your attention and together with Pascal, we are now ready to take your questions.

Yes, good morning Patrice, Pascal, Bertrand. I would have three quick ones, please.

The first one is, you didn’t provide a free cash flow outlook for 2020. If you could give us some elements of the main moving parts, that would be helpful.

Second, in 2021, can you provide a bit of color on where or how much of the, I’d say, headwinds of 2020 will be removed? And third, a quick one on Australia.

Can you provide an update on Hawkei and on the conversations around the submarine contracts that might come in the future? Thank you.

Okay. Good morning, Olivier.

Thank you for your questions. So starting with free cash flow.

I mean, first, of course, I mean, in this overall context, we need to be a bit cautious with regard free cash flow. What is probably good to have in mind is that, I guess, we demonstrated in H1 that, I mean, we managed to contain our free cash flow at a level which is what is satisfactory considering the overall seasonality of working capital for Thales.

Second point, I do confirm in this underlying 95% conversions ratio from net adjusted income to, I would say, normative free cash flow for Thales. And I mean, this is also valid for 2020 and I guess it’s going to be valid for the next years to come.

Third point, and this is something that we will need to keep in mind. We have, at Thales, some cash flow volatility due to, I mean, those down payments, pre-payments and some cut-off effect that was in the past.

You probably have in mind that as we released our 2019 figures, we provided you with a table showing, I mean, the sequence of those a bit exceptional working capital moves throughout and in the past period and resulting of a EUR 700 million of outstanding working capital position end of 2019. Those EUR 700 million, reflecting the positive pre-funding, in particular, on some large-sized export contracts as well as some nice, I would say, advanced payments and cut-off effect that we benefited in particular in 2019.

And I said that, I mean, this should unwind partially in 2020. So, what is our updated view today on those EUR 700 million?

My view today is that, I mean, we should probably have, let’s say, as I would assume, probably half of that reversing in 2020 and the rest in the next coming years. So with, I mean, what you have in mind in terms of net income for 2020, with what I mentioned on the underlying 95% conversion ratio and what I’ve just explained on those remaining down payments and cut-off effect that we benefited in the past and how it should unwind 2020, I guess, that you should have a quite an appropriate vision on how our 2020 cash flow should look like.

And of course, it will be pretty positive, of course. So that was on free cash.

Patrice?

Pascal, yeah, you want to –

Can you take the question about the 2021 headwinds? It was your question, Olivier, 2021?

Yes, exactly. Yes.

How much of the 2020 headwind would be reverted in 2021?

Is it a business question? Or is it a free cash flow question?

It’s a business –

No, no it’s a business question, more generally, yeah.

So I mean, as we said, I mean, if we take the civil aero business, I guess, all players are today considering that what we see today, what we are experiencing, it is going to last for a few years. So we don’t expect, I mean, Civil Aerospace business to recover in 2021.

So on this first point, and I guess it is probably in line with what other players, other companies are sharing with you. So overall, I mean, 40%, 50% drop on this specific market – 40% drop in this specific market is probably a good rule of thumb as compared to pre-COVID-19 level of business.

Now I mean, the rest of our businesses, I mean, we mentioned that our drop in sales in 2020 is essentially driven by, I mean, the impact of the sanitary measures and the level of disruption that this has created, in particular, in Q2 2020. We mentioned that it is normalizing and with the level of internal productivity that is getting back to almost normal level of productivity.

We’re a little bit cautious also about, I mean, the potential impact at our customers as we see also, I mean, some disruptions at our customers making, for instance, access to their site a bit more difficult than it was in the past, of course. This also, together with, I mean, restrictions in term of travel, for instance, all of that, I mean, are creating some uncertainty.

Now I guess we commented that Defence & Security in – even though, of course, there is some uncertainty as we see and I guess that our tone was pretty positive with regard, I mean, this business in term of level of demand, of course, being a bit cautious for the long-term, but our tone is pretty positive on this side. DIS, however we mentioned, but I guess, I mean, Patrice will come back on this point later on, DIS, we have to be a bit cautious as we mentioned because the lack of visibility for those short-cycle type of businesses.

We benefited in H1 from pretty strong level of demand with regards to smart cards and we need to see how this will develop going forward.

Globally – no, you’ve answered quite extensively, Pascal. Globally, at Group level, and if we take a step back, the progressive improvement on – of the different markets on which we are present apart from civil aero has led us to say, to consider that in 2022, we should be back to the level of operational performance, the level of profitability of 2019.

So if you factor all these, let’s say, elements all these ingredients, headwind, tailwind, positive, negative and so on and so forth, it has led us to make this statement. So this is the global view at the end of the day, we look at as Thales in general.

Moving back to Australia, Hawkei and submarine. Well Hawkei, things are, let’s say, on track to make it short.

Things are on track. So no particular, I would say, point to be mentioned.

Submarine, so the difference, I would say, competition or competitive dialogues are still ongoing, mainly with Lockheed Martin in our case. So we are waiting – still waiting, I would say, some final say of Lockheed on several tenders, and in particular, on the sonar side.

So you know the ball arrays, the flank arrays, the towed arrays. My tone is, I would say, is rather positive, but now it’s too soon to say it’s done so and it should be announced I hope before the end of the year, that’s before the end of the year, at least a kind of a down selection from Lockheed.

Okay, thank you.

Hi, good morning. On the DIS segment, you know, how are you thinking about balancing profit preservation and growth investment as you look to capture the Gemalto cost and revenue synergies?

And then quickly on the civil aeronautics and IFE, you know, what was the order intake for Q2? And you know as you think about you know the recovery there and the potential for maintenance defer on the aftermarket?

You know what’s the order like in terms of Q2 compared to the 50% down revenue? Thanks.

So George, I mean, good morning. I mean civil aeronautics revealing, it’s more a short time cycle type of a business.

So our order intake and revenues are pretty similar. I mean, the 50% drop on sales, I mean, that we have reported is, in my view, quite a good proxy on the overall level of order intake on this business.

So probably, I mean, what is important to have in mind is that, overall, I mean, this civil aeronautics business, a drop in terms of demand by something around 50% in Q2. This is true for revenues, and my view, it is pretty much also true for order intake.

Your first question –

So the balance between profit and growth when we manage overall DIS portfolio, that’s a very good question. What we try to do, it’s not a surprise.

It’s to clearly manage for cash, I would say, mature activities like SIM business. It’s a mature activity and to extract as much profit as possible from this activity to reinvest in fast-growing and profitable activities like cyber, data protection or Digital Identity, even biometrics.

So it’s our day-to-day duty to do so in a smart way so that we meet you know the level of growth and profitability we shared one year ago now during the Capital Market Day. So nothing new compared to what we said at that time.

Now I say well our day-to-day duty to manage this balance between extracting profit on one hand and reinvesting on the other hand, on fast-growing profitable segments.

Which is just not DIS, I mean, challenge. I mean this is a common challenge that and this is where, I mean, at Thales, I mean, we make decisions.

Balancing growth and profitability is a permanent challenge and clients and most of our decisions. Okay, George is it okay?

Yeah, thank you.

Thank you very much.

Yes. Good morning, gentlemen.

Three questions if I may. So the first one would be on the free cash flow and you know slightly better performance than expected in H1, which is great.

But just being cautious that potentially there’s not – how much of the elements that are being brought forward in 2020 compared to a 2021 expectation that we would have had before COVID. So how much has been pulled forward potentially in the Defence divisions?

My second question would be on your comments on Gemalto on the IoT exposure, and why would you see that continuing to be weak in H2? Maybe you can give us an update on the other end markets beyond automotive.

And thirdly, if we should expect some deferred tax losses from the Civil Aerospace losses book, which could bring lower cash tax or lower tax rate. Thanks.

Good morning, Celine. So on free cash, if I understand your questions well, I mean, is H1 level of free cash consistent with some cash out being deferred to H2?

I mean and having a negative impact on H2, and this is not my view. Well we have not pushed, I mean, expenses, I mean, to H2 that would result in a pretty bad asset level of H2 production.

No, it’s not what we have done.

Pascal, I meant more from a customer pre-payment perspective, those that maybe could have come in ‘21 and have happened in ‘20 and this type of cut-off points.

No. I mean it’s business life.

I mean, overall, I mean, I don’t see anything special on top of what I shared with you about, I mean, the way those EUR 700 million of pre-funding that we benefited in the past is going to unwind partially in 2020 and in 2021, 2022. It does not unwind in H1.

I mean and this is also the reason why, I mean, H1 was pretty positive. Overall, in H1 and hopefully, I mean, this will continue in H2.

We are seeing overall, I mean, most of our customers are, I mean, telling us, and I would say in due time and most of our clients except some of them willing to extend the payment terms are not paying in due time. So overall, I mean, a pretty positive.

We could have faced a situation where most of our clients would have told us, I want to extend my payment terms and I will not pay you in due time, because I want to extend payment terms. This happened here and there, but at this point, in a pretty limited number of cases.

IoT –

I’ll take this one, if you want, Pascal, and then you take the third one. So IoT – good morning, Celine.

IoT, in fact, if we take a step back, again, what we try to do is to focus on what I call demand markets, on markets which are ready willing to value things like security, of course, which is a key differentiator, because IoT – when we speak about IoT, IoT is vast. In fact, it’s a vast field of different types of solutions from pure commodities to high-end and complex or highly secured connectivity levels.

And for sure, we focus on the second part of this market. Typically, they are providing what I call the vertical segments like smart metering or even payments, where definitely security or secured IoT has a value.

And clearly, we can extract value from our customers on this type of solutions. Automotive, as well, belongs to this type of demanding customers.

But it’s true that automotive, we probably continue to be depressed in the coming months, 2021, I don’t know, but at least for H2 clearly so. Short-term, mid-term, it’s always the perspective we should make.

Short-term, it’s a difficult market. Long-term or mid-term, they are already providing vertical ones like the one I’ve mentioned, smart metering, payment and still automotive once it will have resumed.

Your last question, Celine was about deferred tax on the civil business. So overall, yes, my view is that we are going to book some deferred tax asset on losses on the civil business.

Overall, probably good opportunity for me to share with you that we see a level of tax rate for 2020 that will be a bit below our previous guidance. We see today a level of tax rate that may – should be probably be more like what was in H1, so something around 23%.

And yes, I mean, accounting for deferred tax assets in 2020 will have a positive effect on our P&L in terms of tax income. But with no tax savings in 2020, we should benefit from that in 2021 in terms of tax savings.

And maybe last one that I can share with you also is that and we have not communicated at this point, but it’s also true that we have some tax synergies coming from Gemalto integration that also are going to help us manage a level of tax rate that the next few years will be probably below what we had in mind so far.

Thank you very much.

Good morning, Patrice, Pascal and Bertrand. I have three questions, if I may.

First, Patrice, could you just clarify on your expectations in terms of recovery for 2022? Were you guiding to an absolute level of EBIT in line with 2019 or is that on the margin side, so a 10.9% margin in 2022?

Second question, I know you mentioned that the bulk of the cost saving measures in 2020 will be temporary. Could you give us an idea of the percentage of how much will be temporary versus permanent or carried on into 2021?

And then, finally, in terms of your book-to-bill guidance of greater than 1 and there’s a MKS180 order is supporting that, but could you give us some color on any of the other orders that you have in the pipeline, which you’re confident that will come through in the second half?

For 2022? Well, I can start and you complement further.

Yes. First, it’s 10.6%, not 10.9%, to be precise, the level of profitability in percentage in 2019 pro forma, of course, pro forma.

So that’s what we are clearly – that’s what we are aiming at in 2022. So in percentage terms, definitely, I think it’s clear.

Then 2020, Pascal?

Yes, I mean, yes, Malini, I mean I think on first. I mean, for your question about, I mean, those contingency plan and how much of that will continue in 2021.

Maybe, I mean, first, high level content. I think should be high level contact and comment.

What we are facing here, we see that on a small portion of our business, we see a drop in demand that is going to last. And of course, I mean, this will drive more structural cost adjustments.

And the rest of our business, it is facing or have faced particularly in Q2, I mean, more of the consequences in terms of production of the sanitary measures. And of course, I mean, this is – hopefully, this is going to be temporary.

And again, I mean, temporary effects, we have put in place more temporary type of measures. Now I mean going forward, 2021 and the second element will adjust, I mean, our cost base in 2021 also, I mean, to address the evolutions in terms of situations and in terms of internal business.

If I go through, I mean, there are various measures that we have put in place. We have put in place, for instance, high-end fees or drop in contractors, drop in temporary staff.

And of course, here we will adjust, I mean, our policy, of course, depending on the level of our business. We are also putting in place furlough measures.

And again, I mean, we’ll see, I mean, what is going to continue is here again, associated with the level of businesses going forward. The third element is more, I mean, a drop in variable compensations in 2020.

And of course, I mean, this is more like temporary measures. Then, of course, we have, I mean, drop in, I would say, many other external expenses.

A good example of that is travel cost. A good example of that is discretionary expenses.

And of course, I mean, we will adjust, I mean, these type of measures, depending upon the level of business that we’ll see. And of course, on top of that, those structural measures that will help adjust our cost base, where, I mean, we believe that we are going to face a lasting drop in demand and primarily in our civil aeronautics business.

So we’ll be pragmatic. At this point, it’s probably too early.

So some of those measures have a clear temporary effect. Some of them can be extended going forward.

And –

Book-to-bill.

Book-to-bill.

Book-to-bill, our guidance is – what have we said that book-to-bill should be greater than 1 in 2020 this year. Of course, it’s made of a limited number of big, big contracts like MKS180.

We spoke of Copernicus project as well, the contracts. But honestly, the number of orders we book in a given year is several thousand at Thales.

So it’s made of a very large number of orders. What give us confidence on this book-to-bill greater than 1 is the good, if not very good, resilience of what we call small order at Thales.

You remember, small orders are orders below EUR 10 million. And these small orders, of course, they are very, very numerous.

These small orders below EUR 10 million are – be very resilient in H1 and will continue. That’s our – I would say, that’s what we foresee in H2.

So all of this should lead to this achievement by the end of the year.

Thank you.

Thank you very much.

You’re welcome.

Thanks very much and good morning everyone. I’ve got a handful of questions, please, if I may.

Pascal, you mentioned that DIS order intake is structurally aligned with sales. So just wanted to understand how that works?

Second question, just on the drivers in H1 for smart cards, because you’re saying that’s been quite good? Third one was just on potential restructuring costs, maybe in H2 2021, given that you have to go through the process.

And then, finally, just in terms of Aerospace sales outlook for 2021. I know a lot of the business is short cycle in that order intake.

But just what your views on the sales in the Aerospace segment in 2021 compared with 2020?

Okay, Zafar, good morning first. So I mean, DIS, I mean, yes, it’s true that, I mean, order intake look like our revenues, because, I mean, in backlog in this business, putting aside our biometric business, but putting it aside, the rest of business is a business of flows.

And I mean it’s not the long-term contract. I mean, if you take the smart card business, but also the side of security and the level of backlog is in this type of business a short time, I mean, type of backlog.

So basically, this is why, I mean, revenue look like order intake. I mean, in this business, I mean, our clients, their order was quite reduced, I mean, that is done.

It has nothing to do with, I mean, long-term type of contracts that we see in our other businesses, whether it’s Defence, Transport or Space. Your question about smart card in terms of business.

It’s true, I mean, we have seen in H1, I mean, quite a good level of demand in this business with, I mean, the development of contactless accounts, which also goes with, I mean, sanitary measures. And I guess all of us who are now used to using, I mean, contactless card to prevent from, I mean, to enter a code in the transaction device.

So overall, pretty good. On the SIM card, we have seen a level of demand which was also rather good.

We are a bit cautious because, I mean, once again, it’s a short time – type of business. And always a bit difficult to assess what was the level of precautionary buy from our clients in H1.

And this is why, I mean, we’re a bit cautious in H2. It might be that some of our clients because of anticipating some production issue overall in their supply chain, we might have had some clients deciding to launch precautionary procure – I mean, orders in H1.

H2 restructuring, it’s true that, as we mentioned, we’re starting a discussion with our trade unions. And we are also assessing, I mean, the balance of tools that we are going to use in order to adjust our cost base.

I mean, for instance, between using long-term furlough measures that are now accessible in some countries as opposed to a more, I would say, I mean, restructuring in a traditional way. Of course, this will have an impact on our level of restructuring.

So overall, we – I mean the level of restructuring that underpin our EBIT guidance, it’s quite clear. This is EUR 130 million.

I mean probably something like EUR 30 million above our initial guidance on this front. Now, it might be that in a few months, once we’ll have moved in terms of the exact measures and the scope of measures that we’ll put in place, we’ll come back to you with a figure that will be a bit different.

At this point, it’s a bit too early. My view is that, I mean, the EUR 130 million is probably more a bottom or floor than a ceiling in terms of restructuring.

Once again, I mean we’re trying to be more like a one-off costs in order to address in particular, I mean, the civil aeronautics and institutions. 2021, Aerospace, my comments will be probably more on – when you talk about Aerospace, I guess, you’re talking about our segment?

Yes, yes.

So this overall segment, yes, I mean, we should have, I mean, some recovery, but here again, I mean, we should be a bit cautious. If I take, I mean, the civil avionics – civil aeronautics business, yes, probably we should start seeing a bit of recovery.

But let’s be clear, at this point, it’s probably a bit too early. We’ll see how we, I mean, the overall, I mean, traffic will develop in the next quarters.

At this point, it’s probably a bit too early, but probably a bit of recovery, but that will be pretty progressive. Now, I mean the rest of the business in our Aerospace business in 2020 has been impacted by the sanitary measures.

This is the case of the rest of the Aerospace business, the non-civil aeronautics business and it is also true for the Space business. And this is where in 2021, of course, we are going to see some recovery in terms of sales, because once again, sanitary conditions will have normalized, hopefully, in 2021.

That’s excellent. Thank you very much.

Thanks. You’re welcome, Zafar.

Well, if there are no further questions, it’s time to conclude then. So let me conclude by stressing the many factors of resilience that will help us navigate through the uncertainty of the coming months.

Our broad market diversification, our large confirmed backlogs and our best-in-class product positioning recently demonstrated once again by some great commercial successes. Thanks a lot for being with us this morning, and I’m looking forward to seeing you soon.

Bye-bye.