Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales twenty twenty Full Year Results Conference Call. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. And I would now like to hand the conference over to Mr.
Bertrand Declare, VP Head of Investor Relations. Please go ahead, sir.
Yes, hello. Good morning. Welcome and thank you for joining us for the presentation of Thales twenty twenty full year results. I am Bertrand Declare, Head of Investor Relations. With me today are Patrice Caine, Chairman and CEO and Pascal Boucher, CFO of Thales.
As usual, the presentation will be in English and followed by a Q and 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 an hour. With that, I would like to turn over the call to Patrice Caine. Good morning, everyone.
So let's start with Slide two on the highlights of 2020. As you will see in a minute, our results were of course severely impacted by the COVID-nineteen crisis. However, thanks to the mobilization of the team, we delivered a strong performance on many KPIs. First, from a commercial point of view, we booked a record volume of orders with major successes to be above expectations. And third, very early in the crisis, we launched a comprehensive crisis adaptation plan targeting EUR750 million of P and L savings and at least €50,000,000 of CapEx reduction.
The teams achieved significantly above these two targets, euros 100,000,000 above for P and L savings and €75,000,000 above for CapEx, representing a 25% cut. On these short term actions, we also worked hard on our ambition 10 strategic priorities. As I will explain in the second part of the presentation, we made substantial progress on the capture of Gemito synergies, on the transformation of transport and on the repositioning of our space business. But first, let me comment on a few figures. And I'm now on Slide three.
At EUR18.5 billion, order intake was down 6% on an organic basis. It was actually up 4% in the second half and a very strong performance in Defense and Security, offsetting the decline in the other segments and in particular in Civil Aeronautics. Therefore, book to bill reached 1.09, significantly over one. The COVID-nineteen crisis impact on sales was material. They dropped by 10.4% on an organic basis.
The impact of the crisis was however much less severe in H2 than in Q2 when we faced major operational disruptions across most of our businesses. This unprecedented situation drove a €33,000,000 drop in EBIT at EUR 1,352,000,000.000. It is close to the midpoint of our July guidance. Pascal will show in a few minutes how our global adaptation plan allowed us to offset a few headwinds in the second half. Obviously, the MKS one eighty contract for €1,500,000,000 helping in defense and security.
As expected, Q4 was a really strong quarter with 13 large orders, including three contracts with institutional space customers. Firstly, Space Rider, which is the future European unmanned space claim. Secondly, an additional work on the ExoMars mission. And thirdly, the ground operations of the existing Galidro constellations. One large order in transport with the development of the first digital signaling mode for the Deutsche Bahn, and large excuse me, nine large orders in defense and security, including on top of the MKX one ninety contract, already mentioned before, several orders related to French military communication network, and also three contracts with the UK MOD.
Orders with the unit value of less than 100,000,000 Euro were down by 8% compared to 2019. The bulk of the decline came from the sharp decrease in ASEAN mix and IFE order intake of around 40%. Turning briefly to the geographical perspective, the dynamics remain strong in mature markets with an organic increase of 3%, thanks to no less than 12 large decent orders in five countries. So overall, a very solid performance 2020 in regard to order intake, considering all the disruptions induced by the COVID-nineteen crisis. Moving on to slide five, looking at sales.
The chart on the right shows the different drivers behind reported and organic growth. The currency effect was a bit more material than usual, a negative 1.3% of sales over the full year. It was concentrated in H2, where it represented more than 2% of sales. It was particularly strong at BIS, which was impacted by the devaluations of several emerging market currencies. The significant scope effect, €698,000,000, was of course, primarily due to Gemalto Q1 twenty nineteen sales.
Turning to organ growth, the breakdown per quarter shows a major swing. After the 20% decline we faced in Q2, sales achieved a progressive recovery, minus 7.8% in H2, driven by two main factors. First, as expected, we were still impacted by the major drop of demand in civil aeronautics, still in the range of minus 50% in h two, driving a decline by more than 35% for avionics and IFC sales. Second, delayed tenders in other businesses, in particular transport and DIS weighed on H2O. Moving on now to slide six, looking at the adjusted P and L from sales to EBIT.
To facilitate the comparisons, we decided to present here our adjusted P and L including Gemal two in Q1 twenty nineteen. At constant scope, EBIT was down by 33% year on year and down by 34.5% organically, with the margin moving down from 10.6% in 2019 to 8% in 2020. We'll have a look at the drivers of this performance in a minute. But looking at the key items of the P and L, let me point out that. Of course, you can see the impact of the crisis on our gross margin, down by 180 basis points from 27.6% to 25.8%.
However, you can also see that our indirect costs have decreased by 10.4%, which is fully in line with the decrease in sales. As planned, we work hard to limit as much as possible all discretionary expenses and also decided to carefully reduce R and D and selected projects. As expected, our restructuring costs were up from 104,000,000 Euro to 169,000,000 Euro, notably due to the restructuring plan ongoing in our civil aero business. Let me point out here that we expect restructuring costs to remain elevated in 2021 as well with around €150,000,000 implying overall limited total COVID-nineteen related restructuring cost, two years with €50,000,000 or so above normalized levels. Finally, Nevel Group delivered a much lower contribution to our EBIT, €22,000,000 versus €65,000,000 in 2019.
This decline was due to the COVID-nineteen disruptions that we faced in Q2 twenty twenty. Encouragingly, its contribution to EBIT was stable in H2 twenty twenty compared to H2 twenty nineteen. To further explain what happened during the year, we've decided to keep the presentation of the EBIT bridge you saw in h one. I'm now on slide seven. In appendix slide 37, you can find the traditional EBIT bridge present presentations.
So on this slide, starting from the 2019 EBIT, including Gemalto's Q1, overall €2,080,000,000 We estimate the decline in gross margin before cost saving actions at approximately €1,360,000,000 Through the combination of the 11% decline in sales and the drop in gross margin due to the fixed nature of direct cost outside procurements for around five points. Now, on the positive signs, we estimate that our cost saving actions have delivered €100,000,000 more than the 750,000,000 target we announced we announced at h one, reaching a total of €850,000,000. A little more than half of these savings came through our actions to reduce direct costs, and the rest through our actions to cut indirect costs in proportion of our sales decrease. You can see on the slide the details of the strong performance on indirect costs, minus 12% on R and D and sales and marketing, and minus 9% in G and A. In other words, our cost saving actions represented about 5% of sales, a strong performance for companies that only buy from the outside around 50% of its cost base.
This outperformance and cost savings allowed us to offset the higher than planned headwind on restructuring costs. If you remember, back in July, we built our guidance on 130,000,000 of restructuring expenses. Finally, the equity affiliate headwind was in line with our July expectations. It was not just due to naval growth as mentioned previously, but also to the material negative impact of the crisis and our civil aero exposed JVs. I'm thinking of Deal Aerospace in Germany, but also ACSS in The US.
Moving on to Slide eight, looking now at our Aerospace segment in more details. So starting with orders, at €3,800,000,000 the order intake was down by 20% organically compared to 2019. This change reflects the severe drop in order intake in civil aerospace since Q2 twenty twenty, combined with the decrease in space orders by 5% versus 2019. We record several major institutional wins during 2020. But as you know, many of these large contracts were by tranches.
So at this stage, we have only booked small orders for studies and design. Overall, this momentum is clearly positive and paving the way to return to growth in the coming years. And Patrice will elaborate further on the topic in a few moments. At €4,200,000,000 sales were down 24 organically, mostly due to the sanitary crisis impacting both our original equipments and aftermarket civil aero businesses, and also generating some delays in terms of contract signatures in the commercial space business. EBIT is a negative €76,000,000 despite a positive h two EBIT at segment level, which was driven by the recovery of the space business.
On top of the obvious impacts on gross margin from the severe drop in sales, let me point out that our loss in Aeronautics is due to the lower JELI contributions and also to the quite significant restructuring costs we booked last year. As you know, Thales will include restructuring costs within our EBIT, which is not always the case of other listed companies. Now moving on to slide nine with Transport. Order intake first. The 4% organic decrease came from two different dynamics during the year.
A solid year for the mainland signaling business, including the Stubyard digital node contract, which we booked in Q4, and a softer year in urban rail signaling business, mostly due to the financial pressure on subway operators, which for example led some of them to delay the signing of additional small contracts of an existing project. Sales were organically down by, almost 14% resulting from the phasing down of major contracts. And that was, that bit was anticipated and flagged, but also resulting from COVID-nineteen related disruption, such as travel limitations and the delayed contract awards as mentioned before. Profit volume on the contrary was clearly up at €86,000,000 with EBIT margin progressing from 2.9% to 5.3% despite the COVID-nineteen disruptions I just mentioned. This is really a strong achievement for this segment, demonstrating ongoing solid progress in our transformation plan and paving the way to our 8% EBIT margin target.
Now moving to Slide 10, Defense and Security. Order intake amounted to EUR 9,900,000,000.0, up by 1% organically benefiting again from robust orders in many areas. The book to bill was strong at 1.23 and the order book for this segment reached a new records of €23,200,000,000. Again, of these orders like the MKS 180 or maintenance contracts, this covers up to ten years. So they will not necessarily provide a major boost in the short term, but support long term goals.
Sales amounted to €8,100,000,000 down 1.8% organically. The strong H2 recovery plus 3.2, organic versus quite high comps in 2019. This offset the majority of the Q2 operational disruptions that we faced. Many business units contributed to this momentum. I could mention system and services for ships, military radio communication, secure networks, surface radars, protected vehicles, etcetera.
As expected, EBIT margin remained strong at 12.9% despite a slight sales decrease and the value disruption due to the sanitary crisis. This performance is to be compared to the 14% EBIT margin in 2019, which was however boosted by a positive €14,000,000 one off. Again this year, I mean the segment benefited from solid project execution, strong cost control, and also limited restructuring costs. Last segment on slide 11 is DIS, Digital Identity and Security. Here as well, to facilitate comparisons, we are showing 2019, including Gemalto's first quarter.
In spite of the context, the performance of this segment was really strong, demonstrating the quality of the business and the success of the integration. Sales amounted to €3,000,000,000 down 5.9% organically. The decline resulted from two main factors. The decrease in smart car sales, which was forecast in 2020 because of the high basis of comparison in H2 twenty nineteen. The impact of the crisis on some of its businesses like automotive IoT modules, which were affected mostly during Q2 twenty twenty, and also Passport within biometrics, which has been logically impacted by travel restrictions since Q2 twenty twenty.
Now at €324,000,000 EBIT was up 8.4% organically with an EBIT margin progressing from 8.6% to 10.8%, thanks to various factors. Cost synergies ahead of plan for around €20,000,000 good cost control and also positive product mix effects and especially more smart cards than expected. Turning now to Slide 12, a few comments on items below the EBIT. The cost of net financial debt and the other financial returns was up by €39,000,000 This is mostly due to lower return cash deposits, some interest cost linked to the funding of the Gemalto acquisition and also to higher currency losses. Our effective tax rate is decreasing from 26.3% to 23.1%, mostly thanks to the lower tax rate in France.
Minority interest were down compared to last year on the back of the impact of the crisis and the group results, leading to an adjusted net income, Group share of €937,000,000 and an adjusted EPS of 4.4 both down by 33%. Moving now to slide number 13. Let's have a look at the conversions of EBIT into free operating cash flow. The usual recurring items moved into different directions versus 2019. Financial interests increasing from €37,000,000 in 2019 to €52,000,000 in 2020, mostly due to the cost of debts over full twelve months.
Income tax paid down from €164,000,000 in 2019 to €109,000,000 in 2020. Also equity affiliates, which corresponds to the gaps between our share in their net income and the actual dividends we receive from them, balancing themselves in 2020 to a nil impact versus the negative of €16,000,000 in 2019. We strongly outperformed our global adaptations plan in particular on the CapEx side. At €387,000,000 our CapEx €125,000,000 lower than in 2019 at constant scope. This provided €109,000,000 tailwind in the EBIT to cash conversion.
Our very strong focus on working capital in the crisis paid off as well. The change in working capital only represented €420,000,000 headwind last year. It included negative factors that I will describe on the next slide. Other cash items not including the EBIT, such as restructuring and pensions amounting to €177,000,000 The improvements against 2019 is mostly due to difference between restructuring expenses and cash out and also, to some Gemalto related items. I'm now on Slide 14, discussing our strong free cash flow performance.
As you can see, we significantly over deliver on our free operating cash flow scenario. This was driven by three main factors. First, our cash focus initiative that we launched in 2019 combined with our crisis adaptations plan delivered over €250,000,000 above targets. You saw how we were €75,000,000 ahead just on CapEx cuts. Second, we benefited from the support of several of our customers who decided to pay us earlier than usual for a total of approximately €160,000,000 Third, reversal of down payments on large project was lower than expected by approximately €150,000,000 Let me stress that we estimate that there are roughly €500,000,000 left of exceptional down payments and cut off effect on our balance sheets at the December 2020.
They should unwind over the next two to three years. This excellent 2020 cash performance combined with the additional benefit to expect from a cash focus initiative enable us to upgrade our mid term guidance on cash conversions. Over the twenty nineteen-twenty twenty three period, we now expect cash conversions to reach 95 on a reported basis. In other words, we expect to fully offset the headwinds from the unwinding of down payments and cut off effects. Moving on to slide 15, with a quick look at the evolutions of our net debt position.
I guess this slide is quite self explanatory. On top of the free operating cash flow, we see deficit payment and UK pensions consistent with previous years. Dividends paid only amounted to EUR85 million corresponding to the interim dividend paid in December 2020. New leases under IFRS 16 were also lower than in 2019. Hence, significantly deleveraged the balance sheet with our net debt dropping from EUR3.3 billion down to EUR2.5 billion.
Now to finish, a word on the dividend on Slide 16. This year, the Board has decided to return to the pre COVID-nineteen distributions ratio. The payout ratio is back at 40%, which represents 1.76¢ dividend per share, taking into account, of course, the impact of the crisis on our adjusted EPS. So that's the end of this financial review. I'm now turning over the call to Patrice, who is going to address our current strategy and guidance.
Thank you, Pascal. So I'm now on Slide 18, turning to our strategy and outlook. This morning, I thought it would be useful to take a step back from the short term issues and update you on some of the key value creation drivers we are going to leverage over the medium term in the post crisis period. So let's start with our largest segment, Defense and Security. Over the past year, investors have often asked us whether the defense budget increases we were seeing were sustainable.
At least in our key markets, the latest government statements are clearly positive. The French government has fully confirmed the military planning law that runs until 2023 and plans for further growth in the coming three years. This year, the budget will grow by 4.5% and this figure actually includes a 7% growth for the equipment budget. Australia, our second largest market confirmed its plan to increase defense spending by 7% per year until 2026. And last November, The UK surprised positively with the announcement of four year GBP 16,000,000,000 boost to the defense budget.
The simple reality is that geopolitical tensions remain elevated and that they come with a broader variety of threats. On top of the positive outlook for defense budgets, the chart on the right illustrates the key differentiating aspect of our portfolio. Our solutions, whether we talk of sensors, of secured networks, or common and controlled solutions are what we call force multipliers. As armed forces want to be able to sense better their environment or exchange more data to call them better, the value of intelligent systems keeps increasing within platforms. These dynamics apply in all media and open strong growth prospects for our businesses.
Finally, remind you how we have managed over the past few years to achieve best in class margins in this segment. Looking at the 10 largest defense businesses in Europe, U. S. And The UK, we are now the one with the second highest EBIT margin and the only non U. S.
Company among the top five. This is a great demonstration of how our investments in differentiated technologies and our strict focus on cost and execution are delivering value. I am now on Slide 19, addressing the long term perspective for our Space business. Here as well, our sustained R and D strategy is paying off. Over the past nine months, Thales Alenia Space, our joint venture with Leonardo has recorded remarkable wins across a broad spectrum of institutional markets.
Back in July, I talked about Copernicus, Europe's flagship earth observation program and we will play a key role in five out of the six upcoming missions, enabling Europe to track global CO2 emissions, monitor sea surface temperature, collect essential information on forest and land cover and much more. More recently, we have recorded several competitive wins in space exploration, which will, for example, take us to the moon as part of the NASA Artemis program or to Mars. Just a few weeks ago, we had a major success on Galileo. The European Commission awarded us the construction of six satellites for the second generation of this crucial navigation infrastructure. Let me point out that each of these projects is worth several €100,000,000, but that's in line with standard ESA contractual rules.
So far, we have often only booked their first countries. For example, on Copernicus, we have only booked EUR200 million of orders last year, while the total value of Ignition is above EUR1.5 billion. We also recorded major wins on the telecom side. On the GEO side, the market continued to improve in 2020, but the majority of this improvement came from the so called C band repurposing project. Globally, this project triggered 13 orders for conventional satellites and we were the only non U.
S. Manufacturer to win some of them. More encouragingly, over the past few weeks, we've booked the first order for our new generation flexible GEO satellite, Space Inspire by an undisclosed customer. In addition, our Indonesian customer PSN finalized the financing of its VHTS satellite named Satria. And of course, three weeks ago, after a thorough evaluation, Telesat announced that it had selected us to be the prime contractor on their $5,000,000,000 telecom constellation.
This major success incorporates several key innovations such as advanced onboard digital processing and optical links. Telesat is making good progress on the funding of its project. A few weeks ago, it announced a CAD400 million investment from the Government of Quebec. These accelerating commercial dynamics are in line with the latest market forecast, which expects significant growth in satellite services over the next ten years. I'm now on Slide 20 with a strategy update on our Avionics and IFE businesses.
Well, as Pascal explained earlier, these businesses have been massively impacted by the crisis, With CV sales dropping in the 50% range over the last March 2020, they have lost around a third of their sales last year. By April 2020, we launched a comprehensive action plan to address this crisis, which will last for several years. This plan builds on three major levers. Number one, we are implementing the necessary structural cost adaptation while making sure that we retain the right competencies and capabilities to support our customers when demand recovers. And on the right, you see the cost targets we have set for 2021 versus 2019.
Number two, we are refocusing our R and D efforts to seize opportunities notably to develop a greener and smarter addition. Already in 2021, around a third of self funded R and D will go to concepts that enable a greener addition. And third, we are accelerating our performance initiatives in two areas. As of July 1, we will set up a dedicated global service business line and this will allow us to consolidate some sites, improve customer service and expand our activities in this higher margin market. In addition, we will further deploy lean manufacturing best practices, in particular in the area of inventory management.
Moving to market dynamics, there is no doubt that air transport demand will return and continue to grow faster than GDP for many years, if not decay. However, as you can see on the chart from IATA on the right, the recovery will take at least three years and the uncertainty on its base is still very high. Considering the recent extensions of travel restrictions across the world, our base scenario for 2021 will not surprise you. After a strong decline in Q1 twenty twenty one comparable to what we saw in Q4 twenty twenty, aftermarket sales should gradually improve from Q2. On the other side, the multiyear downturn on the wide body markets will naturally weigh on our line fit activities, driving a base scenario of mid single digit decline in our overall avionics and INFP sales.
Let me now update you on some of the key group wide strategic initiatives we've been developing as part of ambition 10. So first, our digital strategy and I am on Slide 21. Of course, I won't comment all the examples on this slide, but let me mention two. Just a few weeks ago, after global competitive tender, NATO selected us to supply its first theater level defense cloud. This contract not only demonstrates our ability to integrate the best commercial technologies to develop military solutions, it also opens a new market for us.
Back at the Capital Market Day in October 2019, Philippe Valet talked of his high focus on adapting our data protection offer to enable seamless security across multiple clouds. In December, this led us to announce a new partnership with Google Cloud. More broadly, whether you think of Deysat or Galileo in Space, of the digital node in Stuttgart for the Dutch band or MKS180, the Frigate program, each of our major recent successes builds on the digital investments we have accelerated over the past five years. Second key priority in continuation of our digital strategy, the capture of synergies with Gemalto and I am now on Slide 22. Starting on the next with revenue synergies.
Well, they continue to materialize in line with the plan we presented in October 2019. In September, we launched our CypherTrust data security platform. This platform integrates the best technologies from Thales and Gemalto into a compelling cyber security offer, which helps organization discover, protect and control their sensitive data everywhere. This new product received strong recognitions from industry analysts. Another important lever we are already using is our global sales network, for example, when selling digital identity or passport solutions.
This allowed to book several projects, for example, in Australia and in Africa. Last, we are now starting to insert Genmalto technology into Thales solutions. This is for example the case with airport security projects where the integration of DIS contactless technologies allow us to build really attractive solutions. Another set of product opportunities lies with physical and digital access to critical sites. For example, in Mexico, we have already been awarded the design of a new generation security system for a hospital combining Thales security platform with Gemalto biometric solutions.
Altogether, as you understand, we are making good progress on the capture of these revenue synergies in line with the 2023 target. Then turning to cost synergies, as mentioned by Pascal, the teams managed to achieve a solid acceleration in 2020 with €80,000,000 of EBIT contribution compared to EUR60 million in the October 2019 plan. We were in particular ahead of ahead on procurement savings and on data protection and SG and A. It's too early to upgrade the 2022 target for cost synergies, but we are already upgrading the amount we expected for 2021. Third ambition 10 strategic priority, operational performance.
And I am on Slide 23 now. I already stressed our progress on the structural cost adaptation in civil aero and the solid ramp up of Gematto cost synergies. Let me remind you that we are also making good progress on the transformation of our transport business. In spite of COVID-nineteen, margin was already above 5% last year, increasing our confidence in the delivery of the 8% to 8.5% medium term target. Finally, we keep enriching our group wide operational initiatives.
For example, our new procurement organization keeps delivering over 30% of our spend is now concentrated with what we call global strategic suppliers. On some of these topics, the crisis actually creates opportunity to accelerate confirmations. This is, for example, the case with smart working, which we have now integrated in our real estate plan and that will drive additional savings over the coming few years. Last group wide topic I wanted to address this morning is sustainability and I am now on Slide 24. Sustainability is at the heart of our purpose, building a future we can all trust.
It drives our focus in two directions. First, through the products and solutions we are developing, which are almost all aligned with key societal needs. Around 55% of the portfolio address the need to be protected against physical and digital threats. Another 25 helps society to become greener through greener air transport, more efficient rail infrastructures or observation satellites dedicated to environmental applications and services. The rest typically has major social benefits.
This is for example the case of telecommunication satellites such as Satria, which will help Indonesia bridge the digital divide or foundational ID system, which often gets funded by the World Bank since having a legal entity is essential to have access to government programs or social benefits. For many of these product lines, sustainability related innovation boosts growth opportunities. For example, as the air transport industry prioritize the reduction of CO2 emissions, it increases market opportunities for our Agenix and Air Traffic Management businesses. Another example, when companies become more aware of the importance of data security and privacy, they accelerate their investments in data protection and encryption. If we take a step back over the past fifteen twenty years, we have continuously strengthened our sustainability commitments, which are now completely embedded in our strategy and incentive schemes.
And for example, we have defined 2023 targets in terms of diversity, in terms of both direct and indirect CO2 emissions or in terms of workplace health and safety. And these targets are now embedded in the variable compensation plan of two thirds of our employees. To prevent our actions on all these fronts and answer questions you may have on our sustainability strategy, we have decided to organize a dedicated event on this topic involving our various internal experts. We have to finalize its date, but our aim is to hold it in the next few months. Moving now to Slide 25, discussing our 2021 outlook.
Starting with the business assumptions on the left hand side of the slide. While our base case assumes that the sanitary and macroeconomic context improves this year, uncertainties remain particularly high, especially with respect to the recovery of air traffic and to a lower extent corporate investment decisions. We are confident that almost all our end markets will expand over the full year. For 2021, I set three short term strategic priorities. First, we will continue to focus on our growth initiatives, in particular the capture of revenue synergies with DIS and on reinforcing our digital technology leadership.
Second, we fully implement the structural cost adaptation plan in our IO businesses. And third, while we intend to sustain a high level of R and D investment, it will be particularly important to increase our selectiveness. Which brings me to our financial objective for 2021, considering the business environment that I've just described and I am now on Slide 26. With respect to order intake and taking into account the already announced contracts, we expect another year of strong commercial performance driving a book to bill ratio above one. Based on March 2021 scope and foreign exchange rates, we expect sales to amount to between EUR17.1 billion and EUR17.9 billion, which corresponds to an organic growth between around 26%.
The wider than usual range is of course due to the higher than usual uncertainties at the start of the year. Thanks to the initiatives I've presented earlier, I expect a significant improvement in EBIT margin reaching between 9.510%. Well, concludes our presentation. Many thanks for your attention. And together with Pascal, we are now pleased to take your questions.
Thank you, gentlemen. Ladies and gentlemen, we will now begin the question and answer session. And your first question comes from the line of George Thao of Bernstein. Please go ahead. Your line is open.
Hi, good morning everyone. So you achieved €100,000,000 of additional savings, but your total year EBIT was pretty much right in at the midpoint of the guidance. So were there other costs that were higher than what you had expected? And of the $850,000,000 total savings from last year, how are you thinking about how much of that was sustainable structural savings versus non sustainable temporary savings that will likely come back either this year or over the next few years as the demand recovers? Thanks.
Okay. Good, good good morning. So I I explained in my presentation that, I mean, this in particular additional savings of the €100,000,000 allowed us in particular, I mean, to increase the level of cost structure. We mentioned back in July that our view would be to have a level of restructuring for 2020 that would be around €130,000,000 We are ending up at a level which is more in line with $171,170,000,000 euros I mean, this is basically what we have done. It's also true that Q4 in our Aero business was a bit weaker than expected in term level of demand as compared to what was our general plan in July 2020 for the full year 2020.
So overall, I mean, pushing more on the cost thus cost saving also allowed us to face the situation with a bit like than less demand in this aero business in in q four. Now, if I if I if I come back on your second question, which is out of the 850, what is what is structural and what will reverse. So maybe, I mean, to simplify a bit, I'm going to explain the key components of those eight fifty neo and to discuss what we can expect in 2021. So €850,000,000 mainly three key buckets. So, I mean, the first, the first bucket is, any, I would say, discretionary expenses and also travel related costs.
Overall, representing approximately $303,100,000,000 euros and and here it was, it's basically dropping any nonessential cost for the short term consultancy consultant fees, for instance, some some some internal project, in particular, IFIT project, and, of course, quite a significant amount coming from travel cost. Overall, overall, we dropped our travel costs, by, something around 60% in 2020 as compared to 2019. We believe that tomorrow, I mean, post COVID world, Thales will be going to operate with the level of overall travel cost that will be one third below what it was in 2019. So, I mean, representing probably something like €100,000,000 recurring, I'm selling just on this on this on this topic. The rest of this first bucket is is more, I would say, discretionary expenses, and we will adjust this level based on how we see the market in terms of level of demand.
Second second bucket of of of cost is, I would say, is a one in rations and in particular, I mean, drops in variable compensations. Overall, representing a level of savings, that was around 250,000,000. And and and this is more of a some kind of one off, of course, as we expect variable compensations in our company to come back as soon as 2021, on a more normalized level. The third, the third the the third component of those 850,000,000 Euro, represents all, savings relating to, high entries, reductions in terms, reductions in procurement from, mean, companies that we hire to help us develop our program. And here, I mean, it will be quite simple.
We will adjust this level of savings depending on our level of business. So basically, if we see, I mean, the level of growth returning quickly, of course, I mean, savings will progressively fade away. Now if we see a situation where, I mean, the level of demands will be a bit more subdued, I mean, this time, of course, we keep pushing quite strong on this type of aspect. So here, I have not talked about more midterm initiatives that Patrice has started to comment in his presentation, which come on top of the €850,000,000 but with more midterm impact, we are working very hard to keep transforming and and genuine departments. We keep working on our support functions, and in particular, new initiatives and marketing and sales functions.
We also keep working quite hard on how to improve the overall footprint of Thales, and in particular, I'm taking advantage of the development of homeworking. How can homeworking help us to reduce the overall footprint in terms of the real estate Thales? Of course, it's not for 2021 in terms of savings, but we are here developing projects that will allow us in the mid terms to keep reducing our overall cost basis. So this is basically what I could share with you both on those eight fifty, but also on more structural actions that we are working on.
Very helpful. Thank you.
Thank you. And your next question comes from the line of Tristan Sansour of Exane BNP Paribas. Please go ahead.
Good morning, Patrice Pascal, Bertrand. Thanks for taking my question. I have three, please. The first one is on the book to bill for trajectory for 2021. So you said above one.
So we have the lower end of the range, but we have a fairly dense pipeline of large orders. I wonder whether you saw that the strong book to bill that we had in 2020 was potentially achievable again in 2021. And especially, do you include actually the Telesat order being firmed up in your in the construction of your tenants? That's the first question. The second one, I was keen to get some precision on the free cash flow guidance for 2021.
So you're guiding for underlying conversion at 95% and an unwinding of the cutoff effect partly in 2021. So are you comfortable with the level of about €1,000,000,000 Is it what we should understand from that guidance? And so does it include new jumbo contracts with attached to large down payments? That's the second question. And the third one, so thanks for the update on the sustainability strategy of Thales and the rendezvous for a later event.
At FirstNet, what do you think growth will come from going forward? Will it be from making the world greener, safer or more inclusive? It's a quite interesting way to look at actually your business split today. Many thanks.
I can take the first one on the book to bill, and you take the second one. So good morning, yes. On the book to bill, the one, for sure, I'm very confident by the way, when we say so we deliver, so you can be confident as well. We I see really a strong momentum in almost every business segments putting aside the CVRO of course. But despite that, all the pipe is extremely active.
We have already announced since the January 1 year, Galileo now is in the contract, It is signed now. So it's a big, big contract. As you know, Telesat despite the fact that they need to close their financing is an important, I would say, opportunity. And by the way, the selection is already very good news. Space Inspire, we have mentioned the first customer for Space Inspire as well.
When I look in defense, the number of prospects are also very, very large. I was in IDEX, the defense show in The UAE last week. And believe me, Middle East a is very active area in terms of defense and security. So yes, you can be really confident on our ability to achieve this book to bill above one and it will come from all our businesses, defense, security, ground transportation, space and DIS as well of course. Yes.
Good morning, Chris. Maybe just to complement and answer, I mean, this book to be above one, I mean, guidance doesn't include, I mean, a major order intake that would come from the Telefonica project. The reason is quite simple at this point, and even though, I mean, you have to be confident, mean, Telesat is working on the structure of its funding. And as an in the overall data set project is a $5,000,000,000 project For Thales, it would be around $3,000,000,000 in terms of level of state, but you can imagine that putting together a global funding of a project of this kind, of course, it takes a bit of time, I mean, despite the fact that Telestat is a very experienced satellite operators and has put together quite a steady businessman. It's more about, I mean, time, I mean, to put together this type of funding.
And here, of course, a bit of uncertainty about the time schedule, I mean, to complete a financial closing. Now on free cash, and thank you very much for your question because it gives me the opportunity to come back on what we said. I mean, first, and this is really an upgrade on our guidance. I keep saying that cash flow shouldn't be looked at just on a yearly basis, but we need to look at, I mean, probably a longer period of time. And what we say that over this twenty nineteen, twenty twenty three period of time, we do believe that we should be able to deliver a global average conversion ratio of 95% despite the fact that we know that in this period of time, we will a have very significant amount of reversion on done payments and very large sized project that we booked before this period.
So which means that overall, our cash optimization program allowed us to compensate on this period of time and in this negative unwinding of down payments. Now, as your question was more on 2021, I can confirm that, I mean, a 95% conversions ratio, but also factoring that we will still add in 2021 some unwinding of the payments. My view today when we put all of that together, the EUR 1,000,000,000 level of free cash flow in 2021, as you pointed out, Krishna, is in my view at this point in time a good guidance. On the third point of sustainability, this morning is a bit let's consider this, what I said, as a first teaser in fact, that's why we need to spend a bit more time to explain, I would say, why we see a lot of things and a lot of opportunities arising from this topic. So let's be patient a little bit and we'll have, I would say, enough time during the year to explain what we see more in-depth than this morning, which is more dedicated to our financial results.
Looking forward to it. Many thanks. That was extremely helpful answers. Thanks.
Thank you. And your next question comes from the line of Ben Healen of Bank of America. Please go ahead.
Yes, good morning. Thank you for taking my question. I had some questions on Space. Firstly, you just mentioned that on the Telesat contract, it's about a $3,000,000,000 contract. How should we think about CapEx for that contract for you and the phasing of that?
Is that something that's going to happen in the short term? Or just any color around CapEx on that? And then also, how should we think about revenues in some of the other LEO satellite deals or agreements that we've seen? There's obviously an ongoing need to continue to produce these satellites medium term because of the orbit that they're on. Is that something that we should be thinking about, here for you?
You mentioned there also, on the financing that Telesat is also, still finalizing its financing. Is that something that you're considering supporting? Do you see any value in being involved in kind of owning and running these LEO constellations? And then finally, on competition in space, we've obviously seen a huge wave of SPACs in The U. S, these small special purpose acquisition companies.
And there are a lot that are very focused on space. So it feels as though competition is is heating up. Just any any thoughts about how you see the competitive environment at the moment? Thank you. Okay.
Good good morning, Ben. So a number of question on on space in particular and and and telestat. So so, I mean, this is, as as we pointed out, quite a huge project. Of course, we are very vigilant about the overall cash flow profile of such a project and and of course, I mean, investments that, Talitha and Northspace will have to do and to support the development of this project will have to be funded by the by the project. And, it's it's not it's not it's not our intentions.
I mean, to funds on our own, I would say, the funding availability in this, of this, of this, of this project. So it has to be, I say, independent and self funded, I mean, a project from our clients and supported by a global funding that is working on, today. You mentioned also, I mean, Thales being part of this global funding. I mean, we we were more of a a satellite provider and and and this specific project, we are demonstrating, I mean, the overall, I would say, unique value proposal of THALAS and EASTERCE when it comes to the development of constellations. You probably have in mind that, most of the current in orbit constellations have been developed and produced by Teletomere space.
This is, of course, I mean, the Iridium peculiar Iridium next constellations with 70 satellite today one in the in the space. But I could also mention other satellites that satellite space has developed and and produced. The o three d sat and satellite constellations for SCS clients, but I could also mention the global star constellations that we have also put together. And our view is that, it's not just our view, as Mr. Goldberg, the CEO of Telesnaat has made it clear that he selected Thales and Naspase.
Also, the basis of our experience in developing such a complex project. So this is basically what we are focused on as opposed to, I mean, funding on our own own equity, a project of this of this of this kind. You also had a question about The competition in the in The US. Yes? Yes.
Can take this one and you may come. When when when I look at The US, what we have seen in the recent years is clearly a new entrance in the field of launchers for sure with a very famous one with specifics, but not that many in the field of satellites to be very precise. Furthermore, in field of satellites, which is our field, mean, we are not in launcher business. The new entrants are, I would say, limited to small satellites, which is a proportion of the market, a small portion of the market. In fact, the market which is still, I would say, composed of, I would say, large, very complex satellites, geostationary or not by the way, in terms of telecommunication, in terms of scientific application, in terms of observation are still, I would say, the world of, I would say, big players like Thales, because in fact, it really needs decades of investments.
It really needs a very high end technological knowledge be able to deliver these satellites. So you see clearly there is, I don't see, I would say, a new entrance as a threat us. Furthermore, new entrance is, I would say, small satellite and satellite applications. We have decided a while ago, by the way, be part of this emerging markets. And I can take you a few examples, BlackSky and LEOstellar.
We are a shareholder of BlackSky in The US. We have a joint venture with BlackSky, which is in LEOstellar to produce, to manufacture and deliver this constellation made of small absorption satellites that is extremely promising. And this is Thales. So we can say that we are part of this new space domain. So for example, North Star, it's a Canadian company dedicated to what we call SSA, space situational awareness.
We are the one on which North Star rely on to deliver this constellation of satellites to observe satellite from the space. That's why it is called SSA. And for example, the domain of IoT, we are the one who will deliver the constellation for Kines is a European player that ambition to deliver IoT services from space and very light on Thales for these, again, small but nice, I would say, satellite and constellation for this kind of service. So you see, I'm very confident that we are well placed, I would say, all across the different segments of solutions and types of applications, not withstanding the fact that there are some new entrants in this domain.
Okay. That's great. Thank you.
Thank you. And your next question comes from the line of Christophe Menard of Deutsche Bank. Please go ahead.
Yes. Good morning. I have three questions. The first one is on the midterm guidance, the margin guidance that you are mentioning in the presentation. I mean, initially, the target was 2023.
Quite obviously, it has changed. In terms of Horizon, should we wait until Aerospace fully recovers to see such a margin target achieved? Or, I mean, could DIS or Space, I would say, partly offset the margin shortfall that we have in aero or civil aeronautics activities. The second question is on order intake. Emerging markets, I mean, a bit down.
When would you see a bounce? I mean, it's probably a question more longer term, but would we see an increase or a bounce in order intake from emerging markets as of 2022? Or do you have any view on this actually at the moment? I mean, I understand it's a bit difficult to have a view on this. And the cash conversion rate, can you, give us a more detailed schedule of the, down payment outflows?
I understood that 2021 was was supposed to be a high number, but given the the one billing guidance you gave, I I understand it it it may not be the 400,000,000 or the 300,000,000 that I was initially expecting on that down payment outflow. Thank you very much.
Okay. Good morning, Christophe. So maybe I will take the first one and leave, Christian, the second one and take the third one. So first, in terms of in of in terms of horizon, yes, it's a midterm horizon. And of course, mean, we need to see the overall civil aeronautics market to more or less normalize for us to support and in this 11.5% to 12 guidance, which is, I'll remind you, was significantly above our peak level of profitability back in 2019, which was at 10.6%.
So it's a move from 10.6% to 11.5%, 12%, of course, takes into account progressions on some of our key businesses, in particular, in the IS and our transport business. You probably also have in mind that back in 2019, our defense and security business achieved a peak level in terms of EBIT margin with some positive tailwinds. I mentioned on the call €40,000,000 of tailwinds Defense and Security in in 2019, and we made it clear that this midterm guidance is 11.5, 12%. It does take into account a level of profitability within our Defense and Security business, which is more between 1213%, probably more of the high part of this range, but below what we delivered in 2019. So I'm not saying that to reach this level, civil analytics business will have to be fully recover, but of course, we need to have, I would say, the senior anemic business that will have more or less normalized.
Now in terms of the exact, I mean, schedule, let's take a bit of time. I mean, we are entering 2021. As you have understood, there's still an embarrassing incentive. If I also follow what other players in the analytics business have shared with the investment community. So I mean, of course, in a few months, few quarters, we'll probably have a better view on how we see this market overall recovering.
On your second question, it's right to say that EM energy markets were less a contributor in the recent years than mature markets. However, it didn't prevent us to post book to bill above one in the recent past. And yes, at the same time, mature markets was, I would say booming or was enjoying a good momentum that clearly benefited to us and to tariffs. And in fact, it is the beauty of our business model. It's really the beauty of our business model by being I would say a key player in let's say 50 plus, in fact it's even much more than that, but let's say 50 plus countries in the world gives us the ability to have a, I would say, so large pipe, if you allow me this expression in terms of properties that really forge our confidence to again be able to achieve a book to be greater than one in 2021.
And honestly looking at this type of opportunities, it comes from everywhere. It comes from emerging markets area. It comes from mature markets area. So at the end of the day, this guidance clearly, are very confident to achieve it by the end of twenty twenty one. Christophe, last question about cash conversions ratio.
And I understand that you would like me to give you the exact cash conversions ratio in 2021, 2022, 2023. As I keep saying, on cash conversions, we have we might face some cutoff effect. This happened quite regularly. This is why I tend to focus our commitment more on several years you enhance, I mean, this 95% conversion choices that I mentioned. Now, as I answered Tristan, I guess it was Tristan's question about, okay, good, but what do you tell us with with regard 2021?
And I mentioned, I mentioned a guidance around 1,000,000,000 rule, with an underlying assumption that 2021 should be affected overall by a level of down payments. We were saying that should look like something around EUR 200,000,000. This is our view, which means that the EUR 500,000,000 net balance that we have today 2020, it should drop to something around EUR 300,000,000 2021. With the rest, remaining €300,000,000 we'll probably unwind it in twenty twenty two, twenty twenty three. This is probably my best view today in terms of down payments with the sale, but also considering that we might have some, some cut off exercise, some cut off effect, between, here and the next one.
Thank you very much. If I could just have a clarification on this point, the 95 percent, it's an average or it's actually some sort of a minimum level that you would expect over the rest of the period? Because over
At this point, it's more of a global guidance for this twenty nineteen, twenty twenty three guidance. Now, of course, if in the meantime, we managed to book a large size export contract with a pretty positive funding, I mean, we might exceed this level of convergence ratio.
Thank you very much. Thank you.
Thank you. And your next question comes from the line of Celine Fornarow of UBS. Please go ahead.
Good morning, If I may, I have two questions. One relates firstly on the transport business, where you basically achieved a margin in the second half that was up or above the 8% level. You guided that you're planning to return to that medium term margin level. Could you maybe provide a little bit more color on how we should think about 2021 if some of the cost actions or customer mix could affect or accelerate this margin recovery? And also how you think about orders and, you know, customers returning in some of the urban businesses?
And my second question would be regarding DIS where there was negative organic growth in 2020. Just thinking on how you see that for 2021 as some parts of the business should be exposed to growth when we look at other, you know, tech companies. Thank you.
Okay, good morning, Selim. Thank you very much for your two questions. So first on Transport, mean, first in terms of level of order intake, yes, we expect, I mean, order intake to progress in 2021 versus 2020. We're working today on various possibilities there. Now it's where we have probably a bit of uncertainty is how quickly will we see an urban transport operators, I mean, to come back and to award contracts considering, I mean, impacts of the drop in today urban transport traffic on their own accounts.
But overall in particular, in our Mainline business, we see today quite a good momentum, which also means that this time from a sales standpoint, we expect, I mean, an organic growth in our Transport business that in my view should be probably around the mid single digits on this business, allowing together with still progress in terms of overall cost structures and project executions to keep increasing our EBIT margin as compared to what we deliver in 2020. So overall, I mean, continuous progressions in terms of margin on this business is a level of sales that should start to rebound as from the 2021. DIS, I can start and you complement, Tafkaan. With DIS to answer more precisely to your question, Salina, should decompose a little bit the question into sub questions in fact because sub segments may behave differently. First of all, as you know, smart card should be down next year in particular because of icons this year, sorry, this year, 2021, In particular, because of icons in 2020 looking at 2020, which was achieved in 2020.
But I would say the long term gradual, I would say, tendency of this business. No change compared to what we said in particular during the Capital Market Day in October 2019. The second, I would say, thing is typically ID documents and so on and so forth. You know that we have suffered from a headwind in particular in the passport area, which is linked to the air travel situation. That's a fact.
And of course, it will gradually recover in line with gradual recover of the air transport. It's more or less, I would say correlated, I would say more or less correlated. But still in the medium term, this is a good business of course and a growing business. And all the rest of the portfolio of BIS clearly is growing nicely and even more than nicely looking at cybersecurity for instance, needs are clearly booming everywhere. And we have, I would say tied very, very encouraging or promising partnership, typically the one we have mentioned with Google.
Google is not a small player in this cloud world to bring a very complementary solution to what they offer, which is called in this domain, bring your own key or even bring your own security. So to correlate, I would say the cloud provider from the security provider. And this is a long term trend that is clearly increasing more and more. The fact that large corporations do not want to, I would say, have a single provider that bring both cloud capability and the security. This long term trend clearly will benefit to Thales as we are, as you know, number one in this domain, data protection and cryptology on this particular type of application.
So combined all in all, 2021 for low single digit growth, but it's a combination of, I would say, segments of business with different dynamics.
Thank you very much.
Thank you. And your next question comes from the line of Harry Breach of Stifel. Please go ahead.
Yes. Hello. Good morning, Patrice. Good morning, Pascal. Good morning.
But, Tom, thank you for taking my question.
Can I can I possibly just maybe look at look
at space a little bit more? Galileo was, you know, a very significant win for for Tala Selenya space against against the incumbent. Can you can you help us to understand sort of what the drivers were of that? You know? And particularly, would it be is it a contract that you guys expect to be completely in line with your your margin goals for Tardis and Enya space?
And and whether you think if the win was driven by technical proposition or or price or otherwise? And so the second question, thinking again about the pace of recovery at space overall, is it are you still looking at getting back to sort of low mid single digit margin this year? I think that was the the previous previous plan and then high single digit in 2023 for the space business. It'd be great just to have a little bit of an update. And then maybe just to to follow on on, Celine's question slightly differently.
Just the the transport margin in in the second half of last year, you know, was was was very strong. Was there anything particularly unusual in there or any reason to think why that that wouldn't be sustainable this year in in 2021?
So good morning. I will take the first question To on make it short, clearly, the feedback from the commission is clear, we have been selected. Thanks to our technical superiority. It's the feedback we got. So really our technical proposal was very convincing and clearly above Airbus and Redoubi.
And on top of that, we have been able, I would say, to make no sacrifice on price. And we have been selected with a higher price than the number two than Airbus. So we are demonstrating that technical superiority can drive, I would say, price power, power and that there is no reason to sacrifice price just for the sake of winning a big contract. This is very, very positive and we all know in this small domain the performance of the first generation of Galileo satellite provided by OLED and they had to turn to some players to be able to deliver that. So clearly, it was based on, I would say, the good quality of the proposals we submitted to the EU.
Okay. Maybe, I mean, first, mean, good morning, Harry. On your question about space marginal, yes, I mean, you mentioned that we guided you to a low single digit for 2021 and high single digit 2023. My view is that, I mean, 2021, yes, I mean, a low to mid single digit EBIT margin for our sales business is really what we have in mind. And yes, I mean, we're expecting our Space business EBIT margin to keep growing the next few years and in particular 2023.
I mean, this high single digit level of margin, which is quite a good level of margin for business. I do think this is achievable in 2023 when we have all those new projects that I've mentioned, one in full speed in 2023. So we should take advantage of the level effect in this horizon of time for our Space business and to achieve this level of high single digit EBIT EBIT margin. Maybe on Transport, and this is where, I mean, we all need to be a bit cautious and we shouldn't just take a semester and to consider that, I mean, this is a normal run rate and particularly in transport, we have seen the past that H2 is always stronger than H1. This is how it is in this business.
So please don't consider that the H2 2020, this is what we can extrapolate for the full year 2021. No, It's doing not this it's doing not this way. However, I mean, once again, I'm quite confident about our ability to keep increasing progressively the profitability of our transport business and and with this 8% plus EBIT margin being really at stake in a reasonable timeframe. I think we are running out of time. We are running late in fact, so we need to close this session.
Sorry for those who had another time to raise their questions, but of course Bertrand, Pascal, myself, we are at your disposal in the days and weeks to come to answer your questions. So to conclude, as you understood, our business performed really well under these unprecedented circumstances. And I take the occasion to reiterate my thanks to the teams of Thales for their exemplary commitments. Across all our markets, I think our digital strategy positions us very well for continued profitable growth and we have several questions this morning around that. And I hope that you have been, I would say, reassured of being that it is the case and will continue to be the case looking forward.
So Mr. Pascal, we look forward to speaking with you in the upcoming investor road shows and conference. And until then, take care and stay safe. Thank you. Bye bye.
Thank you very much. Bye bye.
You, ladies and gentlemen. If you didn't have a chance to ask your question on today's call, please do not hesitate to send your questions to Thales Group Investor Relations at irthales dot com and we will get back to you as soon as possible. Thank you for all your participation and you may now disconnect.