Earnings Call: Q4 2018

Feb 26, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales 2018 Annual Results Conference Call. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would like now to hand the conference over to Mr. Bertrand Delcaire, Head of Investor Relations. Please go ahead, sir. Yes, thank you. Good morning. Welcome, and thank you for joining us for the presentation of Thales 2018 full-year results. I'm Bertrand Delcaire, the Head of Investor Relations at Thales. With me today are Patrice Caine, our Chairman and CEO, and Pascal Bouchiat, our CFO. As usual, the presentation will be in English and followed by a Q&A session. It is also 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 as from tomorrow morning. With that, I would like to turn over the call to Patrice Caine. Good morning, everyone. Let's start with slide number 2. What are the highlights of 2018? First, 2018 is clearly another year of overachievement on all financial targets. Our order intake is a bit above expectation, EUR 16 billion, thanks to a solid Q4. Our sales growth is once again very robust, +5.3% organically, including an exceptional performance in transport. Profitability is significantly up, +25% for EBIT and +40% for adjusted net income. Importantly, these numbers are not achieved at the expense of the long term, since at the same time, we stepped up our R&D investments at 10% compared to 2017. From a strategic point of view, the Capital Markets Day in early June last year, we presented an important milestone with the presentation of our new medium-term ambitions, priorities, and financial commitments. In a few minutes, I will provide you an update on these priorities I set at that time. Of course, 2018 is the year during which we have been extensively preparing the integration of Gemalto. As usual, with such large transactions, securing all the required regulatory authorizations has been taking a lot of time, but it has enabled us to extensively prepare for the integration. Before I comment the key figures of the year, I would like to put our 2018 performance in perspective. I'm now on slide number 3. You remember how at our Capital Markets Day back in June, I presented our key financial targets for the second phase of Ambition 10 until 2021. An organic growth of 3%-5% on average, and a margin of 11%-11.5%. Our ambition was to achieve these targets while at the same time driving up our investments to support future growth, in particular in sales-funded R&D. On each of these three key performance indicators, 2018 represents a solid first step, as you can see on this slide. Organic sales growth is in the upper range of our target, +5.3%. EBIT margin is up 80 basis points compared to 2017, and sales-funded R&D is up 10%. Let's move now to slide number 4 and look at our key figures. Before reviewing them, let me remind you that we have been implementing the IFRS 15 standard since the 1st of January 2018. In consequence, to ensure comparability, all prior year figures have been restated for the application of the standard. At EUR 16 billion, order intake is up 9% on an organic basis. This is slightly above our target for the year, which we had set at EUR 15.5 billion. Book-to-bill is just above one, 1.01 to be exact. I already indicated the figure for organic sales growth previously, +5.3%, which is obviously a very solid number. EBIT reaches EUR 1,685 million, organically up 25% compared to 2017, easily crossing the 10% EBIT margin threshold, which represents the upper range of the 2017-2018 target we had set four years ago now. At EUR 1,178 million, adjusted net income is strongly up as well by 40%. Free operating cash flow amounts to EUR 811 million. A year ago, together with Pascal, we had stressed how our 2017 free cash flow performance had been flattered by a very strong WCR performance at the end of the year, and how the mechanical reversal of this effect would generate a significant headwind in 2018 and 2019. Really, no surprise with this figure, in line with our expectations. Last chart on the slide, the dividend. This new year of strong financial performance has led our board to decide to propose a 19% increase in the dividend to the next AGM at EUR 2.08 per share. 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. I'm now on slide 5. Starting with our order intake dynamics. As Patrice mentioned, we achieved a solid order intake in 2018, EUR 16 billion, 7% above 2017, and even 9% organically. As usual, the main reason behind this performance is found in large orders with a unit value over EUR 100 million. In 2018, we booked 19 large orders, including nine in Q4, which was particularly dynamic. This is the same number as in 2017. The difference is that the average size of these large orders was higher in 2018, and also, it included one jumbo order, OneSky, the Australian air traffic management contract we booked in Q1, with a value of around EUR 800 million. Going through the list of these large orders, which you can find in the press release, I'm sure you will notice that orders from mature markets were heavily represented, in particular in Defense and Security, driving the workloads order intake in these markets. These strong dynamics fully offset the lower order intake in emerging markets affected by phasing effects. As expected, the base of smaller orders with a unit value below EUR 10 million, which was done in H1, fully recovered. It is stable on a reported basis and actually at 1% at constant currency. Moving on to slide six, looking at sales. As usual, we focus on organic sales growth, i.e., excluding scope and currency effects. The scope effect was pretty negligible in 2018. The currency effect was more material, a negative EUR 168 million, or 1.2% of sales. As you can see on the slide, this currency impact was actually concentrated in H1, while it was insignificant in H2. Once we put aside scope and currency effects, we delivered a 5.3% organic sales growth in 2018, slightly above our upgraded guidance. Interestingly, this growth was geographically quite balanced, with mature markets growing at almost 5% and emerging markets slightly faster. Moving on now to slide seven, looking at the adjusted P&L from sales to EBIT. As mentioned already, EBIT was up 23% year on year and 25% organically. The EBIT margin increased by 170 basis points, from 9% in 2017 to 10.6% in 2018. We will have a look at the drivers of this strong performance in a minute, but looking at the key items of the P&L, let me point out that first, gross margin increased by 140 basis points from 24.4% to 25.8%, demonstrating that our efforts to improve this crucial KPI are delivering. Indirect costs were up by 5%, growing slightly faster than sales. As planned, we continue to materially ramp up R&D expenses at 10% while controlling marketing and sales expenses at 4% and also strictly tightening G&A at 3%. Net, this means that in percentage of sales, we managed to almost fully offset the increase in R&D through our efforts on other indirect costs. Third, restructuring costs were lower than expected, EUR 48 million, reflecting the reduced need to restructure businesses across the group. Finally, Naval Group. It delivered a solid improvement in its contribution to our EBIT from EUR 33 million in 2017 to EUR 63 million in 2018, thanks to strong sales growth and its continued competitiveness initiatives, but also the non-recurrence of the negative IFRS 15 impact, and also a few positive non-recurring items. Slide eight. Now looking, as usual, into greater details at the drivers of the change in our EBIT between 2017 and 2018. Starting with 2017, our pro forma IFRS 15 EBIT amounted to EUR 1,265 million. The mechanical impact, scope, currency, and pension weighed slightly on performance in 2018 for a negative EUR 24 million. At EUR 402 million, our organic operation performance was very strong. There were multiple drivers behind it. Part of it is due to the fact that the starting point, the 2017 EBIT, was depressed by the impact of the IFRS 15 standards. Part of it was due to a EUR 20 million one-off in Defense and Security we booked in H1. The majority of this improvement comes from our Ambition 10 initiatives, growth, competitiveness, procurement, value-based marketing, product policy, and so on. In parallel, we continued to invest part of these operational improvements into R&D, organically up EUR 83 million, as you can see on the right side of the chart. Moving now to slide 9, which shows the breakdown of our EBIT by operating segments. I will go through the performance of each of them in the next few slides. Looking at this table, let me just highlight two points. First, every segment contributed to the EBIT improvements. Second, Defense and Security delivered a very safe performance with a 280 basis points margin improvements that brought it to a 12.6% EBIT margin. Slide 10, looking at our Aerospace segment in more details. Starting with orders. At EUR 5.3 billion, the order intake was slightly up compared to 2017. This quasi-stability hides a material recovery of space orders after a low 2017, offset by declines in avionics and in-flight entertainments, which had both booked large orders in 2017. At EUR 5.8 billion, sales growth was limited, +1.4% organically. This figure combined as well contrasted by mix. Aeronautics and Institutional Space recorded solid growth, which was offset by declines in IFE and the slowdown of the commercial teleco satellite markets. EBIT amounted to EUR 580 million, or 10% of sales. Thanks to our competitiveness initiatives and lower restructuring costs, this segment managed to slightly increase its profitability while reinvesting materially in R&D, especially in space and in cockpit avionics. Now moving on to slide 11 with Transport. First, a steady order momentum there at 6% organically, with several large contracts, especially in mainlines. The sales performance was quite exceptional, almost +80% organically, benefiting from both the delivery of the large urban rail contracts we won in 2015 and 2016, and the acceleration of our mainline signaling business. Profitability continued to improve, thanks to the progressive delivery of loss-making contracts, with EBIT margin reaching 4.4% of sales in 2018. Turning to 2019, two points I would like to stress with respect to this segment. First, obviously, the very strong growth in 2018 will provide the icon for 2019, meaning that you should expect that growth will normalize this year. Second, in order to support the achievement of our 2021 margin target, we've decided to implement an ambitious engineering transformation plan which will trigger restructuring cost in 2019, probably to the tune of EUR 20 million-EUR 30 million. This will naturally slow down the progression of margin this year. Last segment, Defense and Security on slide 12. Order intake amounted to EUR 8.8 billion, up 13% year-on-year. It was again broad-based, with many businesses contributing. Naval systems, combat aircraft, air traffic management, military communications, enterprise securities, and so forth and so on. Sales reached EUR 8 billion at 5.6% organically. Most business units contributed to this favorable sales growth with stronger revenues, in particular from surface radars Combat aircraft systems, naval systems, military radio communications, and also cybersecurity. Profitability benefited from several positive factors. The stronger revenues, our competitiveness initiatives, good project executions, but also the EUR 20 million one-off I have mentioned at H1 2018, and also the non-recurrence of the negative IFRS 15 impact. If you remember, this segment is the one that faced the biggest drop in profitability when its EBIT was restated under IFRS 15. All in all, EBIT reached for the first time, the EUR 1 billion mark, 12.6% of sales, which corresponds to over 280 basis points improvements compared to 2017. Turning now to slide 13, a few comments on items below EBIT. At minus EUR 50 million in 2018, the cost of net financial debts and the other financial results was lower than in 2017, benefiting from a EUR 9 million positive one-off item. Just like in H1, the finance cost and pensions dropped slightly, benefiting from both a lower discount rate and a lower net pension position. At 26.7%, the effective tax rate was slightly up compared to 2017, if you remove one-off items. By one-off items, I refer to the impact of tax reforms in France and in the U.S. that had increased our tax expense in 2017. Adjusted net income, group share amounted to EUR 1,178 million, up 40%. The adjusted EPS reached EUR 5.65 and was up by the same percentage. Turning now to slide 14, let's have a more detailed look at the conversions of EBIT into free operating cash flow. What were the key moving parts? The usual recurring items were comparable to 2017, representing around EUR 175 million. They included financial interests, which were almost zero, income tax paid amounted to EUR 91 million, in line with 2016 and 2017. Equity affiliates, which correspond to the gap between our share in their net income and the actual dividends we received from them, represented a negative EUR 85 million. Like in 2017, we were very selective with CapEx projects, resulting in a global balance between CapEx and D&As. Once again, the swing factor was a change in working capital, which was a large EUR 590 million headwind in 2018. When last year I presented our 2017 free cash flow performance, I stressed that the remarkably strong positive change in working capital was driven in particular by cut-off effects, and was, in consequence, going to reverse in 2018 and in 2019. Here we are. Other cash items, not including the EBIT, such as ForEx, restructuring, and expenses related to Gemalto, were as usual negative for EUR 180 million in 2018. Adding together all these items, our free operating cash flow amounted to EUR 811 million, and the conversions of adjusted net income into free operating cash flow was 69%. This level of cash conversions, and I'm now on slide 15. This level of cash conversion is, of course, lower than what we have achieved in the past few years. It falls completely in line with our expectations and in particular, the comments I made on this topic at our Capital Markets Day back in June. On this slide, we have put two simple charts to explain these points. On the left side, you see our reported cash conversions dropping from an average 121% over the 2014-2017 period to 69% in 2018. On the right side, you see the same comparison based on amount before one-offs, exactly as we have presented them back in June. Adjusting for this one-off completely removes this gap. The 2018 underlying cash conversions performance is 86%, comparable to the one we achieved over the 2014-2017 period. This, despite the fact that in 2018, our free cash flow was affected by a EUR 30 million cash out linked to the Gemalto acquisitions. Obviously, the fact that we booked fewer defense orders in emerging markets weighed as well on change in working capital in 2018. Turning now to slide 16. In order to analyze the evolution of our cash position over 2018 and the use of our cash flow. Once again, our net cash position on the balance sheet increased further in 2018. Besides the free cash flow, which I just commented, you will notice that deficit payments on pensions were slightly up, reaching EUR 98 million in 2018. Acquisitions and disposals were a net negative of EUR 61 million. It was made up of several small items, the biggest one being related to the investment of Thales Alenia Space in Spaceflight, the company behind the BlackSky constellations and digital platform projects. The dividend payment to Thales shareholders amounted to EUR 382 million, in line with the increased dividends. In consequence, at the end of 2018, our net cash position almost reached EUR 3.2 billion, up EUR 210 million against the end of 2017. To finish, just a word on the dividends, slide 17. For this year, the board has decided to keep the payout ratio stable at 38%. In consequence, the dividend is growing by 19%, in line with reported adjusted net income. This adds one material step-up to the attractive growth trend you see in the chart. Adjusted EPS has now been at 12% per year over the past six years, and in parallel, dividend has grown slightly faster, 13% per year. That is the end of this financial review. I now turn over the call to Patrice, who will address our current strategy and guidance. Thank you, Pascal. I am now on slide 19. At this point, I would like to give you a progress update on the implementation of the strategy that we presented in detail at the Capital Markets Day back in June last year. You remember the motto, the ambition of this second phase of Ambition 10 until 2021. We are aiming for leadership in all activities, which means two things. First, growing profitably over the long term, and second, growing faster than our markets. To achieve this ambition, we have set five key priorities, and they are listed on the right part of the slide. Now, where do we stand on each of them. I am now on slide 20. First, customer-centric organization and culture. What have we been working on with respect to this important priority. A couple of years ago, if you remember well, we decided to reinforce our marketing function, hiring a CMO, Chief Marketing Officer, and building up competencies around important concepts like value-based pricing. Now that these best practices are in place, the current focus is on the way we market digital solutions, which is quite different from a traditional engineering system, and how we adapt our marketing strategy to strengthen our positioning as partners in the digital transformation of our customers. As I mentioned last year, we decided to follow the same approach with sales, setting up a central sales transformation function to support our sales team in the achievement of the three priorities which you see on the left side of this slide. This new central function is now up and running, and the team has now launched a comprehensive transformation program addressing many important topics like the optimization of resource deployment, the strengthening of customer engagement, sales talent development, reinforcement of cross-selling capabilities, thanks to new digital tools, and many others. As you understand, we are only at the beginning of this initiative. It is very promising, and it will gather further speed in 2019. The second priority, and I am now on slide 21, is operational performance. You all remember this slide, and in particular, our focus on the four key initiatives that cover the majority of our cost structure. How have we progressed on these key initiatives? Let us move to slide 22. To illustrate the progress we have made, let me zoom on two areas in which we are now executing step changes and that are already delivering significant benefits. Starting with procurement on the left side of the slide. The new procurement organization, which we presented at the CMD last June, is now fully operational. It has already managed to take 90% of our external purchases through the category wave process, often identifying significant savings. In parallel, it carried 25 so-called product conventions in 2018. Product conventions in which cross-functional team rigorously optimize the value of a given product. Looking at a very simple KPI, the number of active suppliers, as we call them, we have already managed to reduce it by 18%. If I take the second example and turn to support functions on the right side of the slide. Here as well, we are implementing multiple transformation initiatives. As you can see on the chart, these initiatives have already helped us further reduce the weight of support functions as a percentage of sales, which last year was down 30 basis points compared to 2017. The third priority is R&D investments, and I am now on slide 23. I am sure that you are convinced that having a world-leading R&D capability is one of our key assets at Thales. The numbers at the bottom of the slide are impressive. Really impressive. More than 25,000 people work in R&D, around 40% of our staff, and we spent more than EUR 3 billion on R&D every year, i.e., around 20% of sales. Last year, several researchers who work in or collaborate with our research labs received prestigious recognitions for their work. I could mention Mrs. Julie Grollier, who received the CNRS Silver Medal, or Mr. Thierry Debuisschert for his work on diamond-based sensors, or even Mr. Gérard Mourou, who has been collaborating on many projects with our research centers and who was awarded the Nobel Prize in Physics end of last year. For the next few years, we have made a clear strategic choice: accelerate our investments in R&D. Earlier this morning, I showed you how we increased our self-funded R&D by 10% in 2018. In 2019, we plan to increase our self-funded R&D slightly faster than sales. How do we deploy these additional resources? First, we continue to reinforce our digital capabilities, our three digital factories, in which we are investing EUR 150 million over three years. Cybersecurity, big data analytics, AI, and so on and so forth. Second, we focus on the development of new dream products that have the biggest market potential. Space is a good example, where we are ramping up investments to develop new-generation telecom satellites. Third, and importantly as well, R&D plays a key role when it comes to rationalizing for the clients, what we call product policy in terms. Part of the game, of course, is to leverage this self-funded R&D to gain access to additional customer-funded R&D, so that by 2021, adding up both our total R&D spent could reach EUR 4 billion. Moving to slide 24. The fourth priority, the capture of digital opportunities. As I have stressed in the past, considering the length of acquisition cycles in our markets, we are aware that these digital business opportunities will take some time to materialize, and that the greatest opportunities will probably crystallize in a few years, let's say beyond 2022. Still, across all our markets, we have been recording significant successes in the three categories we have presented in June: digital inside dream products, breakthrough innovations, and new digital services. I won't comment all the examples we have put on this slide, but let me mention two of them. First example, autonomous rail technology. The picture that you can see on the slide shows a New York subway on which we recently carried an impressive demonstration of autonomous metro using inertial positioning, lidar, sensor fusion, and AI. Beyond the technological prowess, these sort of innovation, autonomous trains and metros, could bring large operating savings, allowing operators to install and maintain much fewer trackside signaling equipment. In practice, this means that these new technologies will progressively be adopted and could contribute to a revenue growth in the near to medium term. Second example, we have already launched commercially several solutions that were developed at our digital factory. The picture on the right side of the slide refers to MVP, we call Alexandrie, a secure digital platform dedicated to maritime intelligence, which has now been launched. I could also mention another MVP we call PartEdge, which is a digital marketplace to facilitate aircraft parts trading and many more. These are just a few examples to show you that we've made good progress on this priority as well, and that we can now capitalize on our digital expertise to address many digital opportunities across our markets now and in the future. Last but not least of our strategic priorities, Gemalto. I'm now on slide 25. Just a brief update on where we stand. First, in terms of execution, we made some significant progress last week with the announcement that we have signed a definitive agreement with a buyer for our GP HSM, General Purpose HSM business. There are now only three regulatory authorizations left to obtain, meaning that we have good confidence that we will be able to close on the acquisition of Gemalto sometime next month. Second, over the past 12 months, we have been preparing extensively for the integration of Gemalto, setting up an integration office, mobilizing hundreds of people in both companies. Last month, Gemalto announced internally its future leadership and organizational structure once it will become our digital security global business unit. As you understand, we have a clear integration plan, and we are ready to hit the ground running as soon as the acquisition is closed. Now, moving on to the outlook for 2019 and beyond, and I am on slide 26. I understand that some of you have raised questions about defense budgets, about slower economic growth in Europe or in China, and so on and so forth. My view on the business environment is clearly positive as we see Thales combining solid growth opportunities and resilient characteristics. On our civil markets, we are exposed on powerful long-term growth trends, global air traffic, urbanization, data protection. Furthermore, whether we like it or not, as a citizen, in many countries, we are at the start of what will probably be a long up cycle in defense budgets. On top of this, our investments in digital technologies and our positioning on intelligent systems open up additional growth opportunities. Of course, these opportunities come with risks, and we are exposed, like any business, to geopolitical or macroeconomic factors that are obviously beyond our control, which is why it is important to keep in mind the characteristics that make us very resilient vis-à-vis these geopolitical or macroeconomic factors. I have listed three of them on the right side of the slide. First, our solutions actually address deep-seated aspirations from society, security, safety, trust, environmental efficiency, which represent fundamental drivers of demand. Second, our business model is very diversified along several dimensions, the geographies and markets we serve, the numerous programs we develop for our customers. It is the combination of these two drivers that give us confidence in our outlook. Which brings me to our financial objectives for 2019, and I am now on slide 27. With respect to order intake, we should continue to benefit from positive trends in the majority of our markets, leading us to expect an order intake of around EUR 16 billion. In terms of sales, considering the exceptional growth of transport in 2018, we expect a normalization of growth there, and hence an organic growth of 3% to 4% compared to 2018. Thanks to all the initiatives I presented earlier, combined with the growth in sales, we expect another significant improvement in EBIT, reaching between EUR 1,780 million and EUR 1,800 million. I remind you that all these numbers are based on our current scope, excluding Gemalto and the impact of the disposal of our GP HSM business. These represent ambitious goals fully in line with our medium-term targets, and as importantly, fully in line with our ambition to build year after year, a consistent trajectory of profitable growth and value to our shareholders. This concludes our presentation with Pascal. Many thanks for your attention, and now we are pleased to take your questions. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. First question comes from the line of Christian Loveling from Bernstein. Please ask your question. It is about how you see the cash flow dynamic playing out in 2019 with respect to your underlying earnings targets or EBIT guidance. If you could just kind of talk about major moves and working capital and other parts, that would be great. Secondly, around the Gemalto acquisition. You have clearly updated where things stand with the timeline. How do you think about financial risk? Have you had deep access to the financials in the last several months or quarters? How are you managing risks, I suppose, of avoiding any sort of surprise once the deal closes and you begin integration? Okay. Good morning, Christian. On cash flow, on perspective of cash flow in 2019, this is quite simple. We said a few months ago at our Capital Markets Day that we target a 90% conversions ratio from adjusted net income to free operating cash flow. We keep this target. Having said that, what you need to have in mind, I guess it was quite obvious when we presented our 2017 performance. Our 2017 performance in terms of free cash flow was exceptional. I remind you that our conversions ratio was in excess of 140% with the free operating cash flow in 2017 amounting to EUR 1.4 billion. I made it clear at that time, I repeated this statement, that we benefited in 2017 of around EUR 400 million of one-off, I would say in particular, advanced payments. I indicated that this should be reversed, half of it in 2018, this is what happened, and half of it should be reversed in 2019. So 90% underlying conversions ratio, but adjusting for this second reversal of payments, that would represent approximately EUR 200 million headwind in 2019. Your second questions relate to financial risks on Gemalto. Can you elaborate a bit more on what you mean by financial risks on Gemalto? Sure. So, maybe that was the wrong term to use, I suppose. My question was just really around how deep of an access have you had to Gemalto's books and Okay and financial performance of their businesses? Okay. As you know, Gemalto is a listed company, which means that carrying extensive diligence is, of course, not possible for a listed company. Now, our level of discussion with Gemalto management is such that we don't anticipate any bad surprise when we integrate this company within Thales. Okay, great. Thank you. Thank you. Next question comes from the line of Olivier Brochet from Credit Suisse. Please ask your question. Yes. Good morning, everyone. I would have two questions. The first one on Gemalto to continue on that and talk about timing. You have three regulatory approvals still to come. The DOJ with the signing of this HSM agreement, I suppose is not necessarily a big issue. I am a bit surprised that Russia still hasn't closed. Can you maybe discuss that a bit? The second is on the order intake. Two things there, the EUR 16 billion target you have for 2019, I just wanted to check that it doesn't include any large deal, for instance, the Australian submarine equipment or a Rafale order. Second, how do you see the export market, in terms of momentum and competition at the moment? Thank you. Shall I start with the first one, Bertrand? Good morning, Olivier. As you said, DOJ, I would say, a no-brainer. We are really in the final stage of, I would say, waiting for the final draft of the consent decree, as it is called. By the way, the fact that we have now signed a definitive agreement to sell nCipher shows that it's virtually a done deal, I would say, virtually. So we need to weigh the paper itself, but it's really no-brainer. In Russia, I would say, nothing to be worried about. It's just a lengthy process, to be honest, a very lengthy process. The two authorizations are one, in terms of foreign investment, like U.S. and France or issues in the States. By the way, we are well-known in Russia. Gemalto is well-known in Russia. So again, it's a no-brainer. The second authorization is related to antitrust. Again, there is absolutely nothing to be debated in Russia as far as the antitrust question is concerned. It is just a lengthy process. Nothing to be worried about, but we are still, I would say, in line to get all these last three authorizations by the end of Q1. The second part of the question, Olivier Brochet, was on the guidance on order intake and your question about does this include large deals. On that, of course, this includes a number of large opportunities. When I say large opportunities in excess of EUR 100 million each. Basically, this is for us some kind of a recurring kind of deals. Now, if your question is does this include jumbo projects that are always very difficult to predict? The answer is no. You mentioned in particular, I guess it was the Australian opportunity regarding submarines. First, on this specific opportunity, this is today an ongoing competition. I can confirm that the amount at stake is in the magnitude of EUR 1 billion. Having said that, it will be a multi-stage contract. So, don't expect this to have a material impact in 2019 for Thales. Of course, in case we win this opportunity. Your second question on order intake was about exports. Was your question more on 2018, 2019? On 2019, the momentum and competition that you see in the market at the moment, please. Okay. When we discuss about order intake, we need to consider that by definition, order intake can be volatile. The more you detail, the more you focus on the specific countries or geographic areas, the more you need to consider volatility. So when we look at the dynamics overall in emerging countries, as you have seen in 2018, a level of order intake, which was quite low as compared to, in particular 2017, with in particular, various, say, cutoff between 2018 and 2019. We keep seeing a lot of demands, a number of requests for proposal in most emerging countries. Overall, it is true that we are targeting a significant increase in order intake in 2019 as compared to 2018 in those emerging markets. This is consistent with the level of commercial dynamics that we see today in those markets. Thank you for that. On the large jumbo contract, you do not include either a Rafale order in there? When you discuss about Rafale, you might have opportunities. Do we see opportunities in 2019 for a level that would exceed this bar, which is EUR 500 million for a jumbo project? This is not what we have included today in our 2019 guidance. Okay, very clear. Thank you. Next question comes from the line of Romain Gourville from Bank of America Merrill Lynch. Please ask your question. Hi, everyone. Thanks for taking my questions. The first one is on the social event in France at the moment and the Yellow Vests movement. We're just wondering if you see any short-term risk to the French defense budget with, for instance, some spending being reallocated. The second one is with regards to space. It looks like momentum is better. Order intake was pretty good in Q4, so should we expect this to continue into next year? Where are we now compared to your midterm expectation of, let's say, flat growth over the coming year, especially with regards to visibility in the telecom satellites market? Thank you very much. Good morning, Romain Gourville. Well, on the first question, with to what has happened in France and the Yellow Vests protest, honestly, I see no short-term risk on defense budget. That's my personal view, based on the fact that it has been repeated many times by the president. It's a multi-year budget, so giving visibility to the industry, globally speaking. Third, the world has not changed because of the Yellow Vests. The geopolitical situation has not changed. There is still a strong need to invest in defense as far as France is concerned. It's also true for the main European countries, like Germany, typically, and many others. On space, as you know, there are several segments in the market. The institutional one is a fairly, I would say, robust market, as we say. There is a ministerial conference by the end of the year, which is an important landmark in this domain. Again, the long-term underlying need is robust in this space activity. The telco has been, I would say, quite slow or low over the past 2 years. Last year, we are obviously again at a low point. 2019, that's my personal view, could be a year of recovery, in particular because there are several very large competitions ongoing on this market in 2019. Now it's up to us to seize these opportunities and to win these opportunities. So 2019, I would say, good potential. However, we need to win these opportunities to come back to a, I would say, a better level of order intake and sales for 2019 and onwards. Thank you very much. Next question comes from the line of Christophe Menard from Kepler Cheuvreux. Operator, line is open. Good morning to you all. Three questions on my side. The first one is on the restructuring cost you mentioned about transportation, those EUR 20 million-EUR 30 million. Could you detail what it relates to? Why is it coming now? Will it actually help you improve the margin beyond? That was the first question. Second question is on Gemalto. You had some time to look at the synergies. You mentioned last time, we had a call on Gemalto, when you presented the deal, EUR 100 million-EUR 150 million of cost synergies by 2021. Have you managed to refine this at this stage? The last question is on the EBIT margin in defense. 12.6%, that is actually the target in 2021, so it is a very strong performance. How should we be looking at the EBIT margin performance between now and 2021? Should it be around that level or down? Can it be up, basically, from where you were in 2018? Thank you very much. Okay, Christophe. Good morning. First on the restructuring regarding transport. What we want to do is to keep improving the overall competitiveness of this business, and in particular, on the engineering side. This is what we are preparing for, is to overall improve this competitiveness, with, in particular, taking advantage of developing engineering facilities, engineering competency centers in overseas. Other countries, in particular, in labor cost countries where we think that we can keep developing quite a large Engineering competency centers. This is also, I hope, to secure our 2021 EBIT margin that we communicated at the Capital Markets Day, the 8%-8.5% that I do confirm for 2021. The order of magnitude of this one-off charge on our 2019 P&L should be between EUR 20 million and EUR 30 million. So having an EBIT margin impact, I would say a one-off negative EBIT impact between 100 and 150 basis points. Second question was on Gemalto synergies. Yes, of course, as you can imagine, we keep working and getting ready to integrate Gemalto and to develop synergies. So we are ready for that. Does it mean that we are changing our guidance on the cost synergies on Gemalto? The answer is no. We do confirm this level of synergy between EUR 100 million and EUR 150 million. By the way, despite the fact that, as you are aware of, we had to get the regulatory, the antitrust authorizations, we had to divest our GP HSM, which represent approximately EUR 100 million of sales. Despite this divestiture, we keep confirming the level of synergies that we announced end of 2017. EBIT in Defense. Yes, quite a strong performance in 2018. I would say that all planets were aligned in 2018 for our Defense and Security business. Good level of growth, very good quality of project executions. Also, I mean, a EUR 20 million positive one-off event that we commented, and also overall level of restructuring that was quite low. So overall, level of performance above expectations. It's not a fact, which means that, at this point, we keep the guidance that we indicated at our Capital Markets Day. Our level of EBIT margin in 2021, that should be between 11.5% and 12.5%, so around 12% to make the long story short. Thank you very much. Thank you. Back to Christophe. Next question comes from the line of Tristan Sanson from Exane. Please ask your question. Hey, good morning, everyone. It's Tristan from Exane. First question is on the cash, the clarification on the cash outflow for 2019. If I understand properly, you said that you're going to have an adjusted net income to free cash flow conversion of about 90%. To this, you need to deduct the EUR 200 million of reversal of the tax effects you benefited from in 2017. That would point towards something like EUR 950 million or slightly higher. But I remember at the Capital Markets Day, you also said that the 90% conversion rate would have to be considered excluding all the WCR movement from large contracts, including new advances from new contracts, but also the exceptional consumption of some large advances on this contract. To put the question clearly, the EUR 950 million of 2019, should we deflate that from additional consumption of advances on the Rafale, or should we take that as a basis for calculating our forecast? That's the first question. Second, very quick clarification. Just wanted to be sure I understood properly the total restructuring expenses that you expect in 2019, including the extra engineering reorganization in Transport, should it be close to what we had in 2017? So EUR 80 million or so, higher than this? Not sure I've properly understood. Third is on the tax outlook with one year before the French tax reform. If you could give a hint of where you expect your tax rate to be in 2019, that would be very useful. Thank you. Okay. Good morning, Tristan. First, on your first questions on cash flow. First, your calculation is correct. We should start from the expected net adjusted income in 2019 times 90% and from that deducting EUR 200 million. This is the calculation that you have done. I do not want to confirm because you mentioned 950. Of course, this is your own calculation, but the math, the underlying calculation is correct. Yes, this is our objective, or this is our guidance. This point, what I said at the Capital Markets Day, which was the potential reversal of down payments coming from a large sign export project that we booked back in 2015, 2016, which means that my guidance today is, I would say, is probably a bit better than what we shared with you at the Capital Markets Day, or in other terms. Our ability, I would say, to compensate for those negative reversals of previous down payments. Your second question was about restructuring charges. Was it, I mean, returning charges in the P&L, or was it, I mean, cash out? On P&L, please. On P&L. Overall, in 2019, what we expect is a level of restructuring expenses in the P&L close to EUR 100 million, which is quite significantly above what it was in 2018, and also slightly above what it was in 2017. My recollection was that in 2017, our restructuring expenses in the P&L was around EUR 80 million. Basically, what we plan in 2019, the level of restructuring expenses are slightly above what it was in 2017. So close to EUR 100 million, including what I mentioned on our transport business. Your last question was about tax. Tax 2019, what we have in mind today is a level of tax rate between 26% and 27%. This is what we have in mind. Now, I mean, what is important to share with you was that until quite recently, we were anticipating the drop in tax rate in France, which was announced by the French government a year ago, to be confirmed. I remind you that what was expected is for large companies, tax rate moving from 34.4% to 32% in 2019. What the government recently announced, but it has not gone through the parliament, but what the government said a few weeks ago was that they would decide to hold the existing 34% in 2019. Which means that 2019 overall, quite a stability overall in term of tax rate for Thales. I mean, a good guidance for me is between 26% and 27%, as it was in 2018. Thank you, Pascal. That's great, and that's very good news for the cash. Indeed. I would like to turn the call over to the speakers for any additional or closing remarks. Well, if there are no further questions, let me conclude this call by thanking all of you for your participation, your attention, your questions. Of course, together with Pascal, we look forward to seeing you on one of our upcoming roadshows. Thank you and goodbye. Thank you very much. See you soon. Bye-bye. Thank 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 question to Thales Group Investor Relations at ir@thales.com, and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.