Earnings Call: Q4 2017

Mar 6, 2018

Ladies and gentlemen, welcome to the Thales 2017 annual results. I now hand over to Bertrand Delcaire, Head of Investor Relations. Sir, please go ahead. Yes. Good morning. Welcome and thank you for joining us for the presentation of Thales 2017 full year results. I am Bertrand Delcaire, the Head of Investor Relations at Thales. With me today are Patrice Caine, Chairman and CEO, and Pascal Bouchiat, CFO of Thales. As usual, this presentation will be in English and followed by a Q&A session. It is webcast live on our website at thalesgroup.com, where the slides, press release, and consolidated financial statements are also available for download. A replay of the call will be available as of tomorrow morning. With that, I would like to turn over the call to Patrice Caine. Good morning, everyone. Let us start with the slide number 2. First, let me start, as usual, with a few words on the trading environment in our markets. Beginning with aerospace. The momentum in cockpit avionics is unchanged, in our case, driven especially by the increase in production rates at Airbus. Secondly, IFE, in-flight entertainment, remains quite dynamic, with a strong interest from airlines not only in a new generation IFE system, but I would say also increasingly for internet connectivity solutions. Turning to our space activities. As we have stressed over the past few quarters, we have noticed a change of behavior from civil telecom satellite operators who have tended to postpone orders. I will come back later on this topic, but for now, let me just remind you that civil telecom applications represent approximately 40% of the EUR 2.6 billion of revenues we generate in the space segment. Turning to transport. Sorry. The dynamics there are robust, driven by long-term trends, the upgrading of existing systems in mature markets first, and the growing urbanization in emerging markets second. Moving on to defense and security now. In 2017, we have seen no change in the geopolitical and security environment, with the continuation of significant tensions and threats that support higher defense budgets in many countries. Looking at defense budgets in mature countries, I would point out that we are seeing the confirmation of the inflection point that we noticed previously. For example, the French government has presented its draft military programming law a few weeks ago, and it implies a quite significant acceleration of the defense budget in the coming years. I will come back later on this topic as well. Finally, thinking about what customers are most interested in these days, it is quite striking to see how digital has become the centerpiece in almost all our vertical markets. A year ago, we were seeing this topic gaining speed, definitely. It has further picked up, and as you know, we are now fully addressing it as part of our strategy. Moving to slide 3. In this context, I think it is fair to consider 2017 as a year of strong delivery. First, we have overachieved on all our financial targets. As expected, order intake has been quite robust. It was lower than in 2015 and 2016, but this is simply due to the fact that we did not book any jumbo orders in 2017, unlike 2015 and 2016. Our sales performance was clearly above expectations. For the second year in a row, it was very strong, +7%. Importantly, it was also broad-based, with all segments contributing. As importantly, of course, this top-line growth was not achieved at the expense of profitability, with an EBIT margin of 9.8%, which is at the top of the range we set ourselves for 2017-2018, you may remember, an EBIT margin between 9.5% to 10% EBIT. Secondly, from a strategic point of view, we have accelerated on all aspects of our Ambition 10 strategic roadmap: growth, competitiveness, talent. The headlines have naturally focused on the acceleration of our digital strategy, ending the year with the announcement of our offer to acquire Gemalto, which obviously represents a major milestone. At the same time, rest reassured that we have also made significant progress as well on cost competitiveness, and Pascal will show you that in a few minutes. Altogether, our ambition is unchanged, consistently deploying a strategy to deliver profitable and sustainable growth. Moving on to slide number 4. This slide summarizes in a few charts our key figures and indicators. At EUR 14.9 billion, our order intake remained at a solid level. Book-to-bill was slightly below one, 0.94 to be exact. On an organic basis, order intake was down 9% compared to 2016. As mentioned, this drop is mainly due to the natural volatility of jumbo orders. If you exclude from the 2016 figure, the Rafale order from India, our order intake would have actually been up. Sales now, sales increased by 7.2%, the second year in a row that we delivered an organic growth above 5%. EBIT reached EUR 1.543 billion, up by 14% on a reported basis, or up 16% organically compared to 2016. I've already mentioned how our EBIT margin was at the top of our midterm target. Compared to 2016, it was organically up by 80 basis points, with all segments contributing. At EUR 982 million, adjusted net income was up by 9%, and our free operating cash flow performance was exceptionally strong, EUR 1.365 billion, benefiting on top of our financial performance from good control of CapEx and strong WCR performance. Pascal will of course come back on this later on. Finally, this strong financial performance has led our board to decide to propose a 9% increase in the dividend to the next AGM at EUR 1.75 per share. After this brief overview, I now hand over to Pascal, who will comment our financial results in greater details. Thank you, Patrice, and good morning, everyone. I'm now on slide 5, focusing on our commercial dynamics in 2017. As Patrice mentioned, we achieved a solid order intake last year, EUR 14.9 billion, even though it was down as expected versus 2016. Actually, to assess our 2017 order intake performance, it's useful to take a longer-term perspective. When you look at the chart on the right, you see that the small and mid-size orders, i.e., those with a unit value below EUR 100 million, have shown a steady growth over the last four years. Since 2013, orders of unit value below EUR 10 million grew on average by 4% per year, while orders with a unit value between 10 and EUR 100 million grew on average by almost 9%. Such a profile is important, as these contracts provide our day-to-day bread and butter. You also see how the main driver of the volatility in order intake is the volume and size of large orders, i.e., orders with a unit value over EUR 100 million. Even more jumbo orders, the ones with a unit value over EUR 500 million. Both are shown in gray on the chart. From this point of view, this chart demonstrates simply how 2015 and 2016 were a bit exceptional with four jumbo contracts in 2015 and one in 2016. In 2018, we have already announced the booking of a new jumbo contract called OneSky, to upgrade all the Australian air traffic management systems. This order is one of the factors that will drive our 2018 order intake higher than in 2017. In 2017, we booked 19 large orders for a total value of EUR 2.9 billion. You will find the list of these contracts in the appendix. Looking at it, you may notice that more of them than usual are coming from mature markets, 12. This is, of course, the main driver in the strong order intake dynamics in mature markets, up 7% on an organic basis that we experienced last year. Moving on to slide 6 and looking at sales. As usual, we are focusing on organic sales growth, i.e., excluding scope and currency effects. As a reminder, the scope effect was pretty negligible in 2017, as we have divested around EUR 40 million in revenues and acquired about the same amount. The currency effect was slightly larger, 1% of 2017 revenues, a negative EUR 145 million. You may remember how our currency translation exposure is dominated by three currencies, the US dollars, the pound, and to a less extent, the Australian dollar. The main currency effect was quite different in the two halves. You remember how in the first half of 2017, it was dominated by the weakening of the pound against the euro, while in the second half, the weakening of the dollar had the largest effects. As Patrice already stressed, one of the key messages of this year's results is the strength of our organic growth, +7.2% after 6.8% in 2016. How did we achieve this? We will look at each segment in a minute, but at this point, I wanted to show you the geographic split of this growth. As shown on the chart, emerging markets have continued to deliver strong sales growth, above 110% for the fourth consecutive year. The novelty in 2017 is a strengthening of growth in mature markets with a solid 5.8% performance, higher than in 2016. By the way, our Q4 sales went up sharply, +15% organically, including growth above 20% in two of our three operating segments. As I explained when I presented the Q3 2017 sales back in October, our quarterly sales performance is naturally volatile. I think there is a chart showing this in the appendix. We were expecting a strong acceleration during the quarters in Q4, driven by cut-off effect and the low basis of comparisons. As you see, it turned out to be even stronger than we expected. Please, let us not over-interpret quarterly sales performance, which might be lumpy for a group like ours. Moving on to slide seven now. Slide seven summarizes our adjusted P&L. As mentioned already, EBIT was up 14% year on year and 16% organically. The EBIT margin was up 80 basis points from 9.1% in 2016 to 9.8% in 2017. Our gross margin was kept stable as a percentage of our sales, with pension impact and some mix effect across our businesses that compensated an underlying trend up in our percentage of gross margin that should be more visible in 2018. At the same time as we had planned to do, our R&D expenses grew by 9% versus 2016, i.e., even more rapidly than sales. On the other side, we kept a strict control of our indirect costs with both marketing and sales and G&A recording only a low inflations, +2% each. Lastly, our restructuring costs amounted to EUR 81 million, probably the lowest level we have booked over the last five years. Not so surprising considering that almost all our businesses are delivering solid growth and improving profitability. Moving on to slide eight that illustrates even more clearly these dynamics. Starting from the 2016 EBIT shown on the left, the mechanical effect of scope, currency, and pensions together weighed a bit higher than usual on our performance in 2017, around EUR 14 million, with all three items having a negative impact on our EBIT. Currency, as previously mentioned, this was mostly due to the weakness of the pound and of the dollar against the euro. Scope with a small effect from the acquisitions of Guavus and the disposal of our identity management activity. Pension, as expected, was a EUR 13 million headwind. These headwinds were more or less offset by the lower restructuring charges and the good performance of Naval Group. Which brings me to the middle of the chart, and you see that at EUR 279 million, our organic operational performance was the strongest since the launch of Ambition 10. We continued to invest part of these operational improvements into R&D and to a lower extent, sales and marketing, organically up respectively EUR 63 for R&D and EUR 21 million for sales and marketing. To provide a simple illustration of what we mean by operational performance, I wanted to show you a chart on the evolutions of our general expenses and now on slide 9. Over the last few years, we have worked quite a lot on our industrial footprints and in particular, consolidating sites. In parallel, we keep working hard to consolidate our IT systems with the successful launch of our new ERP core model in 2017, that will be rolled out within Thales in the next years to come. As Patrice Caine had mentioned last year, we are now actively focusing on the transformation of our support functions. In 2017, each support function, from HR to legal or finance, has been working on its transformation plans and has investigated various levers such as standardizations, simplifications, automations, or mutualizations. They are now moving to the implementation of these plans, which will contribute to our overall operation performance in the next few years. Finally, in 2017, we reduced by more than 50% the number of our operational legal entities in France through a comprehensive merger program. Such a simplification is an important enabler of these transformation plans. As you can see, we remain focused on the constant need to improve our competitiveness. Moving on to slide 10, I will go through the performance of each of our segments in a minute. Let me just highlight here that every operating segment delivered a strong EBIT performance, not only in absolute terms, but also in percentage of sales. I could even extend this comment to Naval Group, which also recorded a solid increase in net results, even if it had to record an impairment of its renewable energy business. Slide 11, and our first segment, aerospace. Starting with orders. At EUR 5.2 billion, the order intake was down by 11%. Our avionics and in-flight entertainment businesses maintained a solid commercial performance. However, space order intake was significantly down, affected by the wait-and-see attitude of telecom satellite operators and by a high basis of comparison. At almost EUR 6 billion, sales were up 3% on a reported basis and 3.6% organically. Aircraft avionics and space delivered solid growth. This was, however, partially offset by the drop of sales of our microwave tubes business, which was affected by the slowdown in the global satellite markets. EBIT reached EUR 601 million or 10% of sales in 2017. It further improved on 2016, even as we significantly increased the R&D expenses in this segment. The EBIT margin rose in particular in the space and cockpit avionics businesses. Moving on to slide 12, with a few words on the situations in our transport business. First, order intake was quite robust in 2017, driven by both mainline and urban signaling. You can see the growth, +20% organically. Sales were up 11% on an organic basis. This strong growth was driven in particular by the progress we made on the major urban signaling project we won in 2015 and 2016, like London, Dubai, or Hong Kong. Profitability recovered sharply at EUR 72 million, representing an EBIT margin of 4.1%. This improvement is fully in line with the plan we launched mid-2015. Of course, the profitability of this segment is still impacted by the recognition of revenues and the loss-making contract we still have in our backlog. However, thanks to the gradual fading out of this contract and our transformation efforts, we expect this business to keep increasing its profitability in 2018 and in 2019 to get back to its historical level. Last segment, defense and security on slide 13. Order intake in this segment was down 12%. I've already showed you how this is due to the Rafale contract we booked in Q3 2016. Excluding this one-off item, order intake in the segment was up with robust growth across almost all our businesses. The strong commercial dynamics of the past years have been feeding into sales, which amounted to almost EUR 8 billion, up 9% organically. Almost all business units had strong sales growth with higher revenues, in particular from missile electronics, protected vehicles, air traffic management, equipment for fighter aircraft, underwater system, and cybersecurity. Looking at these figures, as we expected, it's virtually impossible to trace the impact of the EUR 850 million adjustment to the French defense budget that attracted so much attention last summer. At 10.9%, EBIT margin was organically up by 30 basis points compared to 2016, driven by sales growth, good cost control, and slightly lower restructuring costs. Turning to slide 14 now, a few comments on the items below the EBIT line. The net financial interest and all the financial results were slightly negative, minus EUR 24 million. It was affected by a less favorable Forex performance compared to 2016. The finance costs and pension was broadly stable, as it has been the case over the past few years. Moving to taxes. You see how the effective tax rate was higher than usual, 31%. This was due to the impairment of deferred tax assets due to the drop in tax rates announced in the U.S. and France for a total negative amount of EUR 66 million. We have added a line in the table with the effective tax rate excluding these one-off items. As you can see, it remains stable, slightly below 26%, in line with our expectations. By the way, 26% is also a reasonable assumption when looking at 2018. All in all, both adjusted net income and adjusted EPS were up 9%, and of course, without the one-off tax item I mentioned, that growth would have been a bit higher, plus 14%. Now, looking at the impact of the new IFRS 15 standard, slide 15. Back in October, on the Q3 2017 conference call, I spent quite some time describing the different effects of these new standards on our accounts and quantifying them on our H1 2017 P&L. I refer you to this presentation if you need more explanations on the nature of the impact on our P&L. Our full-year P&L, which is in the appendix to the presentation, shows the same types of effects that I've mentioned at the time, dominated by the impact of the change in the percentage of completion method for long-term contracts. The change of method has an impact on the timing of sales and the associated profits. Importantly, very few long-term contracts no longer fulfill the criteria to recognize revenue over time. Otherwise, we would have had to manage very significant differences in the recognition of revenues and margin. The negative impact on EBIT margin, 80 basis points, looks bigger than over H1, but this is strictly due to the effect of negative operating leverage as we try to show on the right of the slide. The full-year negative operating leverage is bigger than over H1, simply because the sales impact is larger, at 3.6%, compared to a bit less than 2% over H1 2017. The other impacts of the standard are unchanged, representing approximately 20 basis points. Turning now to slide 16, 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 represented a little less than EUR 160 million. They included financial interest, which amounted to a small EUR 8 million income in 2017, driven, of course, by the high level of cash. Income tax paid was EUR 91 million, in line with 2015 and 2016. Equity affiliates, which correspond to the gap between our share in the net income and the actual dividends we received from them, represented a negative EUR 75 million. As expected, our CapEx remained above our D&As. You see the numbers, EUR 431 million of CapEx, EUR 291 million of D&As. However, let me point out that this level of CapEx was a bit lower than our initial plans, as we decided to reconsider some projects for which the expected return was not matching our hurdle rates. A big swing factor, as usual, was the change in working capital, which was remarkably strong in 2017. This performance was due to a combination of factors that all went in the same direction. Customers tended to pay us earlier than usual, and the cut-off effects with respect to supplier payments were also quite positive. As usual, all the cash items not including the EBIT were negative, EUR 294 million with several items there. The main ones being related to Forex restructuring, the commercial arbitrations we lost in October, and pensions. Adding all these effects of free operating cash flow, which EUR 1,365 million and the conversions of net income to free operating cash flow was very high, 139%. Moving on to slide 17, I wanted to show you the longer-term view on this important topic of cash conversions. With this work of performance in 2017, we now have a seven-year average cash conversions of 109%. Of course, this average is flattered by the prepayments we received in 2015 and 2016, and also the positive change in working capital items we had in 2017. You must expect both of these items to revert a bit in the next years. Starting in 2018, we spend of the positive items we had in our change in working capital last year. Still, our cash generation profile appears very robust over long time periods, 90% on an underlying basis remains probably a good number. Moving on to the evolutions of our cash position over the last 12 months and the use of our cash flow, and I'm now on slide 18. Our net cash position on the balance sheet increased further in 2017. Besides the strength of our free operating cash flow, which I've just described, you will notice that deficit payment on U.K. pensions was slightly down to EUR 82 million due to the drop of the pounds. Acquisition and disposals were a net negative of EUR 80 million. The main effect there being the cash outflow of EUR 91 million that we incurred when we finalized the acquisition of Guavus. As a reminder, there could be additional cash outflows related to these acquisitions, up to a maximum of $250 million, if growth materializes in line with objectives we agreed upon with the seller. The dividend payments amounted to EUR 349 million, in line with the increased dividends. In consequence, at the end of 2017, our net cash position reached almost EUR 3 billion, up EUR 600 million against end of 2016. To finish, a word on the dividends, and now on slide 19. This year, the board has decided to maintain stable the payout ratio at 37.7%. In consequence, the dividend is growing by 9% in line with the adjusted net income. This adds up one year to the nice growth trends you see in the charts. Adjusted EPS has been up 10% per year over the last six years, and in parallel, dividend has grown faster, 60% per year, doubling in five years. That is the end of this financial review. I am now turning over the call to Patrice, who will address our current strategy and guidance. Thank you, Bertrand. Let us move to slide 21 with an update on our strategy and outlook. Thinking about our strategy, I often start with this slide in one form or another, as it allows me to highlight the consistency of our approach. It is based on the simple ambition that we articulated almost four years ago and on three pillars, growth, competitiveness, and people. Since we come back extensively on all these topics at our upcoming Capital Markets Day in June, I thought I would focus this morning on just four hot topics or key topics. Do not deduct from this selection, of course, that we are neglecting the areas I do not address this morning. We are also looking to make significant progress this year in many other areas. I could mention, in particular, cost competitiveness with the ongoing acceleration of our procurement initiative and the transformation of our support functions, just to mention two initiatives. Let us move to slide 22 and address this first key topic, the defense budget trends in our largest markets. As you remember, our top three defense markets are France, the U.K., and Australia, representing roughly 50% of our defense and security revenues. Starting with France, just a few weeks ago, the government presented its draft military programming law, the LPM, as it is called in French. It covers a longer than usual period from 2019 to 2025. The government explicitly stated that it could update it in 2021 for the period from 2022 to 2025. This is why, on the charts, we have only shown the targeted 2021 budget, which is EUR 39.3 billion. It implies a 5% annual growth in the next three years, representing an acceleration compared to the previous three-year period from 2015. Of course, even more compared to the 2012-2015 period, which had no growth at all. Looking at the priorities set in this draft law, it is fair to say they are well-aligned with our portfolio. The law puts a particular emphasis on an area called knowledge and anticipation, including information superiority and intelligence, which are, of course, the key capabilities of many of our products, systems, or solutions. It is also quite ambitious in terms of digitization and breakthrough innovation, with an annual 7% growth in the funding of upstream R&D to reach EUR 1 billion by 2022. Lastly, support for exports is also identified as an important priority. Undoubtedly, a very supportive draft law. Moving to Australia. The chart shows you its budget level in the current financial year, 2017-2018, and how its growth is expected to accelerate to 7% per year in the next three years from an already rapid growth of +5% in the previous three-year period from 2014 to 2017. No need for me to come back on the drivers of this increase. You immediately think of the large naval programs in the way, the future submarine project, for instance, which will be major for Naval Group, but for Thales as well. You also saw our recent win in air traffic management, the OneSky project, which is a massive modernization program covering both civil and military airspace. Finally, one word on the U.K. The U.K. government has now launched a new review, which is due to report in summer 2018, and there are some well-understood risks in terms of program affordability, for example, related to the strength of the US dollar. But before drawing any conclusion, let's wait a little bit for the conclusions of this review to have a better view. As a matter of fact, at the same time, it is pretty consensual to expect that the U.K. will maintain a high level of spending in the years to come, above 2% of GDP, and that the priorities arising from this review will probably be well-aligned with our core competencies. Turning now to the second key topic, space, on slide 23. Let's start with the long-term perspective. It is important to remember three key underlying trends. First, the field of applications of space systems keeps on broadening. On top of traditional applications like video, meteorology, Earth observation, or scientific exploration, many new applications are emerging. I could talk of in-flight internet connectivity or broadband internet access in remote areas, or the increasing demand for advanced observation data from many vertical markets like oil and gas, agriculture, which can value real-time or quasi real-time observation data that can be delivered through constellations. I could also mention the whole area of situational awareness, which covers both military intelligence and civil applications, such as the handling of space debris. Second, there has been an acceleration of innovation from both a technological and business point of view. Here, I'm referring to new generational electric platforms, to HTS and VHTS systems, to constellations of different sizes and shapes, and so on and so forth. Third, the launch market. The launch market has changed quite significantly with new entrants, as you all know, supporting lower launch costs, and by the way, opening up innovation opportunities in satellite design as well. All in all, quite a positive long-trend perspective for space solutions. If we move to the near term. As we have stressed over the past few quarters, after 2 or 3 years of strong order intake and sales growth, our space business is facing a temporary headwind. Pascal has mentioned the weaker performance in terms of order intake last year. Part of this weaker phase is due to the natural cyclicity for what is, of course, the lumpiest of our business. This is quite apparent in our institutional activities, which represent roughly 40% of our sales today, and where we had quite strong bookings in the past few years. Part is also due to the behavior, as I already said, of civil telecom satellite operators, who also represent roughly 40% of our sales and have tended to adopt a wait-and-see attitude when faced with uncertainties, both in terms of demand for traditional applications and in terms of technological choices. Let me point out that this slowdown in order intake will have only a limited impact on our 2018 sales and EBIT, and that our financial trajectory in 2019 will depend on the order intake dynamics in the next few months. To support the recovery of order intake, on top of our reliance on the breadth of our portfolio, we will continue to significantly increase our investments in R&D. Typically, in 2018, we will, for example, accelerate the development of a new-generation digital and reconfigurable platform for civil telecommunication application. We will also launch several projects in Earth observation, including a new generation of high-revisit observation satellites, together with Spaceflight, our U.S. partner. This gives me a good transition to the third important point I wanted to make. I am now on slide 24, namely the reinforcement of our R&D leadership. R&D innovation is at the heart of Thales, and it remains a key differentiator in our markets. A few weeks ago, the scientific magazine Nature ranked Thales as the number one non-pharmaceutical company in Europe for the quality of our scientific publications. Considering the role of R&D in allowing us to sustain long-term sales growth and competitiveness, we have been systematically reinvesting in self-funded R&D, which has been growing in line with sales over the 2013, 2016 period. For 2018, we have decided to step up our level of investment in R&D, which will grow faster than the sales for the second year in a row. This is what we show on the chart. For 2018, this will correspond approximately to a 10% increase compared to 2017, and a more than 40% increase compared to 2013. As a reminder, our total R&D expenses are significantly higher, in the range of EUR 2.5 billion to EUR 3 billion when you include customer-funded R&D. This increase in our self-funded R&D budget will primarily serve two key areas. Number one, it will help us fund the development of key technological building blocks supporting key innovations, typically in aerospace and transport, what I have just shown you for space. Number two, it will be used to fund our digital initiatives. Here, I'm thinking in particular about our Thales Digital Factory we launched in the middle of last year, and it represents a EUR 150 million investment over three years and additional R&D in digital technologies. The final key priority I wanted to outline is our digital strategy and the projected acquisition of Gemalto. I'm now on slide 25, where we have listed several of our initiatives in this area. 2017 has seen a significant acceleration of our strategy. I'm not going to comment on all these initiatives. This slide, in fact, simply illustrates that, number one, our digital strategy is very focused. As shown on the top of the slide, we have identified four key technologies that are essential to master in order to address the digital transformation of our five vertical markets. Over the past three years, we have progressively directed more and more resources to strengthen our leadership in these four areas. Number two, we are pulling on a broad range of levers. Organic initiatives like the Thales Digital Factory or the setting up of a new research center in artificial intelligence. Collaboration with startups with, for example, the partnership with Station F, which ambitions to be the largest startup incubator worldwide. And of course, acquisitions with Guavus, which we announced and completed in 2017, and of course, Gemalto. Talking of Gemalto, I thought it would be useful to come back on the great complementarity between Thales and Gemalto's technologies. I'm on slide 26, which tries to illustrate this. You remember how the concept of critical decision chain is at the heart of what we do in every one of our vertical markets. Our solutions rely on sensors that collect data, which must be transmitted and stored, and then processed and presented to an operator for decision-making. We add the qualifier critical since the markets we serve are among the most demanding, relying on this data for critical, if not crucial, decisions, changing the flight trajectory of an aircraft, driving a train, preventing a cyberattack. Gemalto brings two very strategic building blocks that become key when you digitize the critical decision chain. Number one, the computing and connectivity modules, which provide very competitive and highly secured connectivity to each sensor. And number two, the connectivity platform. The connectivity platform, which manages the identification and authorizations of each sensor. The complementarity is also very strong when you look at the cybersecurity of the IoT of connected objects. Gemalto brings its unique expertise in endpoint protection, while we contribute our cloud and data protection expertise, which is now entirely hosted within Thales e-Security. Let me try to illustrate this with one or two examples. I'm now on slide 27. Last December, in my previous presentation, I took the example of air traffic management and the upcoming challenge of managing the explosion of unmanned aerial vehicles, UAVs, and drones. Today, I would like to take another example in another domain, in defense. Under the concept of Battlefield Cloud, of digitization of the battlefield, we see many ongoing opportunities where the combination with Gemalto will make a real difference. One use case I could describe is innovation with respect to what are called unattended sensors. With the reduction in their size, power consumption, and costs, these unattended ground sensors are more and more widely used in defense. For days or even months, they can detect, record, and communicate sounds, images, videos, communications, vibrations, and many other types of data. They can be used not just for special ops and covert operations, but also for intelligence and surveillance, for border surveillance, for urban combat, and anti-terrorism. To design and deliver such connected objects, we can bring together Thales's sensor expertise and Gemalto's connected object technologies in order to build a differentiated position. Coming now to our financial objective for 2018, and I'm on slide 28 now. Of course, since the new IFRS 15 standard is applicable as of 1st of January 2018, let me remind you that our guidance must be assessed against our 2017 numbers under that standard. With respect to order intake, we expect to continue to benefit from positive dynamics on the majority of our markets. The acceleration of the commercial momentum in the defense businesses should offset the slowdown of the satellite telecommunications markets, so that our order intake should be around EUR 15.5 billion. In terms of sales, in spite of a more moderate growth in the aerospace segment, we expect to achieve an organic sales growth of between 4% to 5%. The impact of our Ambition 10 strategy on product competitiveness and differentiation, combined with this growth in sales, will lead to a quite significant improvement in EBIT. We expect EBIT to be up by around 20% compared to 2017 and to reach EUR 1,620 million to EUR 1,660 million. I'm now on slide 29. So where does this guidance take us in terms of our midterm financial objectives? You may remember the EBIT margin target we set in April 2014. We have represented it as a rectangle on the slide. At 9.8%, our 2017 performance puts us in the upper-left corner of this target. The guidance for 2018 that I just presented to you takes us significantly above this rectangle, even though in both years we are investing much more in self-funded R&D than in previous years. Turning to sales. With this 2018 guidance, we are again clearly ahead of the organic sales growth target we set two years ago. These two achievements are, for me, the simplest illustration I can find of how we leverage our many Ambition 10 initiatives, addressing both the short term and the long term, to build a consistent trajectory of profitable and sustainable growth, delivering further value to our shareholders. Let me conclude with Slide 30, formally announcing our upcoming Capital Markets Day, where I hope to see and exchange with many of you. It's scheduled for the 6th of June, and will be held in one of our largest facilities at Gennevilliers, a few kilometers north of Paris. This concludes our presentation. Many thanks for your attention. Now together with Pascal, we will be pleased to take your questions. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. We have a first question from Mr. Olivier Brochet from Credit Suisse. Sir, please go ahead. Yes. Good morning, Patrice, Pascal. I would go for two topics on my side. The first one is on the free cash flow 2018. You have discussed a bit the drivers versus 2017, but if you could give a bit more granularity around what we should expect and how to think about the 90% conversion rate that you have mentioned. Is it a good level to think of as a starting point for 2018? Did 2017 include the payment for the arbitrage in an island somewhere in Asia? My second question is on the export markets, on the emerging markets, I would even say. You had a very strong performance again in 2017 at sales level, but very low order intake. Should we expect a slowdown in this area in terms of sales in the future? Do you see more competition coming from the U.S.? Do you see these countries reacting to the efforts of the U.S. to basically go back into the market? Okay. Olivier, I suggest I will start with the first question about our free cash flow in 2018. Yes, 90% is, in my view, quite a meaningful underlying conversion ratio. However, having in mind that our 2017 performance in term of free cash flow was, I guess that you have understood, a bit exceptional, with in particular, a very strong positive change in WCR, with in particular, in payments from our customers and advance payment from some of our customers that was not anticipated at this level, and also some cutoff effects with regard to payment to suppliers. In total, my view is that in 2017, those exceptional items amounted probably to something around EUR 400 million. Which means that putting this aside, our 2017 free cash performance would have still been quite good. And of course, inclusive of any items, including what you have just mentioned. So 2018, 90% conversions ratio, but probably considering that those EUR 400 million of positive change in WCR that we benefited in 2017, part of it will be reversed in 2018 and part of it will be probably reversed in 2019. So a good rule of thumb is to consider that out of the EUR 400 million that we benefited in 2017, let's consider that half of it should be reversed in 2018. Excuse me, Pascal. The 90% is before that reversal or after that reversal? No, it's before this reversal. It's before. Yes. Before the reversal. Let's consider your view in term of 2018 adjusted net income. Consider a 90% conversions ratio, and then deduct from that probably something like half of this one-off positive effect that we benefited in 2017 regarding the change in WCR. Very clear. Thank you. Okay. Export. Well, on export markets, first, Olivier. Good morning, Olivier. First, because of the nature of our business, it's always very tricky to interpret just one year. I know it could generate some frustration on your side, but honestly, we are on long-term trends, and I don't see, on a more qualitative aspect, any slowdown in export markets. It's still very active in the Middle East, I can tell you. It's still very active in Southeast Asia. By the way, the fact that the oil price has started to grow again, to start to come back to a historical level, will give, I would say, more freedom to these countries, especially in the Middle East, to invest in these domains, defense, transport, and so on and so forth. By the way, our U.S. colleagues and competitors are very busy with their domestic markets. I don't see any change on a day-to-day basis in terms of a competitive environment. It is already tough, as you know. It will continue to be tough, but no material change compared to what we have said recently, past quarters or past years. Now it is up to us, of course, to be more innovative, to be more competitive, and this is exactly the purpose of the constant investment in R&D, to make sure that as Thales, we stay at the leading front of the competition. Okay. Thank you. Next question from Mr. Romain Gourvil from Bank of America Merrill Lynch. Sir, please go ahead. Hi, everyone. Sorry, Romain, but we just can't hear you. Sorry, is that better now? Yeah. Sorry about that. Yeah, good morning, everyone. I've got two questions, please. First, on the book-to-bill, I think your guidance implies around one time for 2018, but it excludes jumbo contracts. Is there anything in the pipeline you can flag on that front? Also, your book-to-bill will be at one, slightly below one, in 2017, 2018. How should we think about organic growth in 2019, 2020 from that? Then just on the aerospace segment, can you elaborate on the different growth dynamics we are due to expect in 2018 between satellites, IFEC, and avionics? Thank you very much. Okay. Good morning, Romain. Yes, I mean, a book-to-bill around one in 2018 is what we have in mind today, excluding, I would say, new jumbo contracts. When I say excluding new jumbo contract, I guess you understood that we signed recently quite a large size jumbo contract with regard the upgrade of the Australian air traffic management. Which is a jumbo contract, but which is, of course, embedded in our EUR 15.5 billion order intake guidance for 2018. No additional jumbo contract. By definition, it is very difficult to anticipate when such jumbo contract could kick in. Let's be careful about that. In term of growth, I guess it has been quite clear, and our guidance was quite clear with regard 2018. Going further, it's probably a bit too early to guide you on what could happen post-2018. Of course, it will depend upon our 2018, 2019 order intake performance. What I would suggest is for you to be a bit patient and probably to address such longer-term guidance at our Capital Markets Day at the end of June. In term of aerospace, with regard the 2018 sales dynamic, I guess it was your questions. First, with regard our space business, after a few years of quite solid growth in this business, and I guess it's not something new, we are expecting this business to have a stable level of revenue in 2018 as compared to 2017. But it's also true that we expect our other businesses in this aerospace segment, and you mentioned the avionics, you mentioned the IFE, to keep growing in 2018 versus 2017. Overall, the adjustment of growth is focused on space. But once again, it's not new because this is, as I've mentioned, when we released our Q3 figures, that space after several years of solid growth would stabilize in 2018. Thank you, very clear. Next question from Tristan Sanson from Exane BNP Paribas. Please go ahead. Yes. Good morning, Patrice Caine, Pascal Bouchiat, Bertrand Delcaire, Bruno. Couple of questions on my side. The first one, I would like to get a bit more granularity on the driver of the 20% EBIT growth in 2018. 20% is massive. I suspect there are some IFRS 15 impacts, or with a very strong impact in 2017 that would get lower in 2018. Can you help me understand a bit that whether it's coming already from the evolution of this tailwind or whether there are other material drivers on top of organic growth, R&D that you already commented that I should be aware of in term of modeling? The second question is on transport. You said during the call that you want to bring transport back to historical levels in 2019. I wonder what this would be under IFRS 15, actually, whether we should take actually the previous historical margin. I do not know, 8%-10%, maybe 8%, or whether that could be different. And the third one, you gave a bit of granularity already on this, but I wondered whether you could give us a bit more details on where you spend the CapEx in 2017 and 2018, and how much is dedicated to organic investments in the acceleration of the digitalization of your business. Thank you. Okay. Good morning, Tristan Sanson. So what I suggest is to take the first question. Okay. So 20% growth in EBIT. Yes, and a combination of various factors. First, with regard IFRS 15, it's probably a bit difficult to tell you whether it's going to be a tailwind or headwind in 2018. Overall, my view today should be quite neutral. But of course, I'm creating a bit of uncertainty. This is why we've decided to expand a bit, to increase a bit our range in terms of EBIT guidance, which we got 2018 with the EUR 14 million range. Because, of course, the implementation of IFRS 15 creates a bit of uncertainty, which shouldn't hide the fact that in 2018, Thales should benefit from the combinations of quite a good level of top-line growth. I mean, the 4%-5% I've just mentioned. But on top of that, also, we are expecting our gross margin in term of percentage of sales to grow as compared to 2017. I don't want to be more specific than that, but it's true that 2018, we should get advantage of various competitiveness actions that we have put in place over the last 2 to 3 years, and that should kick in our P&L in 2018. And this, of course, much more than offsetting the increase in R&D that we mentioned, and that should represent an increase of around 10%. 10% in our R&D should look like around EUR 80 million of R&D. Last point also to guide you in terms of what are the key drivers. We'll take also advantage of probably around EUR 30 million of tailwind coming from our hedging situations, in particular in our avionics businesses. That will, by the way, help us to compensate for a negative Forex conversions effect that will come in 2018, coming from the drop in the U.S. dollars in particular. So you see, a number of factors, by the way, most of them being positive factors, and a combination of top-line growth as well as an increase in our percentage of gross margin that should allow us to keep growing our profitability, as well as keeping investing more in term of R&D to fuel the growth of Thales the next years to come. The transport- On transport- I'm sorry, if I can make just a very quick precision. When you say IFRS 15 should be neutral in 2018, it means neutral versus 2017 post IFRS 15, or does it mean versus 2018 before IFRS 15? No, what I am saying is that the level of EBIT that we expect in 2018 under the IFRS 15 new standards is pretty much in line with the level of EBIT that we would have expected under the previous standard. Okay. Very clear. Is what I mean. Thank you. Sorry for interrupting. No. As far as the transport is concerned, and if I have well understood your question, Tristan, the IFRS 15 is not at all an opportunity to revisit our endgame target to reach best-in-class profitability level, definitely. You remember our three-step approach. First recovery, then return to historical margins, and then reaching best-in-class profitability. I think that recovery is now behind us. We are on the curve, on the trajectory to return to historical margins. And of course, keep absolutely as the midterm or end objective to reach best-in-class, and there is no reason, as I have always said, for Thales not to reach this best-in-class profitability level in our transport business. The soft one was on CapEx? The soft question was on CapEx. On each kind of key items, how are we going to dedicate our CapEx level in 2018? I guess it was your questions, Tristan. First, not on R&D, because as you have understood at Thales, we don't capitalize R&D. Which means that R&D is the P&L expenses as we spend them. CapEx should be in 2018, dedicated, in my view, to three key areas. The first areas being IS, information system, where there's still a lot we need to do at Thales to keep developing our new IS generations. I mentioned in the presentations, the fact that in 2017, we launch our new ERP core model that will be rolled out progressively in the group as from 2018. This is one aspect, but besides ERP, you can imagine that for a company like Thales, an engineering company, IS is extremely important to support the competitiveness of our engineering as well as all of our support functions. Second key component will be dedicated to keeping investing in the quality of our industrial footprint. On that, we have done quite a lot in the past, and we will keep investing there. Probably a level that will be a bit lower than what we have spent in the past, as opposed to IS. Third component is all items necessary for us to develop our overall production capabilities and engineering capabilities. This being very much in line with the development of the activity of Thales as a whole. So CapEx following our volume developments to support the development of, I don't know, a new engineering landscape, bench tests. Test bench. Test bench. With, and I guess that you have noticed, quite a strict control in term of return. As I mentioned during my presentations, that has been very much focused and vigilant in term of the expected return on those investments. Thank you very much. Next question from Mr. Philip Buller from Barclays. Sir, please go ahead. Yes. Good morning, everyone. It is Phil Buller from Barclays. Thank you for taking my questions. I have two, if I may, both hinged around M&A and the balance sheet, I guess. Firstly, even post the Gemalto deal, there is still a considerable amount of headroom on the balance sheet. Should we assume that larger deals are off the agenda for the next 12 to 18 months? I am thinking specifically about your rail signaling business where obviously we have seen a lot of consolidation taking place. Does something inorganic need to happen here, or are you happy with your current position and owning this asset in its current scope? Secondly, in terms of management's compensation structure, I believe current metrics include orders, EBIT, cash, and TSR, which are all obviously very important items. What are your thoughts on returns on capital employed as a KPI, please? The dilution of which, I guess is an item a number of people have pointed out regarding Gemalto as being a disappointment. At the same time, I struggle to see what you could have acquired, which would not have been similarly dilutive to your returns as a standalone asset. Thanks. Okay, good. I take the first one on M&A. First of all, after the acquisition of Gemalto, we will have, I would say, consumed a very large portion of our cash. I am not sure I totally understand why you would think the opposite. Gemalto is a major deal. In total with the debt of Gemalto, it represents EUR 5.6 billion. It is quite a sizable acquisition at the side of Thales. Having said so, first Our first priority would be to focus on the integration of Gemalto. This is a serious topic. It takes several years in our businesses to fully integrate a company in a very, I would say, professional way. It's also not only a question of cash, it's also a question of management time. We need to focus and dedicate a significant amount of our management attention on delivering what we have committed vis-à-vis our board and vis-à-vis our shareholders, and extracting the synergies that we have forecasted with Gemalto. Having said so, I am not saying that we will do zero acquisition in 2018, but clearly, nothing sizable or significant seen from the outside. As far as our rail business is concerned, I would say no change compared to the latest discussion we had on this topic. I think we have the right technologies. It's not a question of size for me. The right technologies. Across the wider Thales, by the way, to cope with the upcoming revolution in the transfer world with autonomous train, with the digitalization of railways and so on and so forth. I am quite, I would say, comfortable and quite confident that this business will continue to grow and to develop nicely, notwithstanding the merger between Alstom and Siemens, which is ongoing. After this merger, by the way, we will be still number 2, along with Ansaldo. Despite the size of this new company, we will be number 2 worldwide. On management- Yes. Good morning. On management compensations and return capital employed. Yes, I mean, first, you are right to say that our variable compensations takes into account, in particular, order intake, cash flow generations, EBIT and TSR. This is quite a comprehensive set of targets, and it's true to say that it doesn't include return on capital employed. By the way, when we discuss overall with you, when I say with you, I mean the overall investment community, I don't feel that much a will for us to put return on capital employed as a key metrics of our variable compensation mechanism. I think it would make sense. My view is that it would really make sense. Now, it's true that by definition, the acquisitions of Gemalto will reduce our return on capital employed expressed in percentage. I guess that we all know that the return on capital employed at Thales today is close to 20%. Reflecting the level of return on sales and a capital return, which is quite positive. Overall, quite a low level of invested capital. My view on that, it is quite simple. With this level of return on capital employed, we should be pursuing growth and trying to expand the creations of value expressed in absolute terms, as opposed to just looking at return on capital employed just on the percentage standpoint. Once again, with this level of return on capital employed, 20%, we should see how we can keep growing the company, and delivering additional value creations expressed in absolute terms. Of course, my position would be totally different should we be at a level of return capital employed that would be much below this level. Gemalto's intent is to help us to develop the creations of value expressed in absolute terms. Making sure, of course, that as we expressed when we presented the Gemalto case, that these investments will have a positive effect in term of value creations with a level of return that exceeds our cost of capital. I guess it was your seven questions? Yeah, no, that's everything. Thank you. Understood. No worries. I asked only because it's an item a number of people have focused on post-Gemalto, so I was just curious. Of course. your thoughts. Thank you. Absolutely. Okay. Next questions. Next question. Okay, next question from Mr. Antoine Boivin-Champeaux from Natixis. Go ahead. Good morning, Antoine Rochat, Natixis. Good morning, Patrice, Pascal, Bertrand, and Bruno. I have got three questions. First one on your upcoming CMD on the 6th of June. At the time, I suspect you will not have closed the Gemalto acquisition. So what about this CMD, and are you going to be able to give medium-term objectives with Gemalto included? First question. My second question is on the U.K. defense. You briefly, Patrice, mentioned the U.K. military environment. Could you just remind us what is the percentage of group sales of U.K. defense? And my third question is linked to the fiscal relief in the U.S. Can we consider that this relief will help U.S. competitors to have a more aggressive policy in terms of prices on the export market? Thank you. Good morning, Antoine. First, on CMD. Definitely, the Gemalto acquisition will not be closed. We foresee the closure of this operation during the second semester of this year. First point. Second point, in fact, we have been asked by many of our investors, notwithstanding the Gemalto acquisition, to hold a CMD on a Thales standalone basis to give our investors mid-term perspective, as we did in 2014. To give our investors mid-term perspective on Thales as we know Thales as of today. And I am sure that our investors will be reassured that independently of Gemalto, Thales, on a standalone basis, continue to ambition, to improve, to grow, to improve its profitability, and so on and so forth. So you will have a good visibility on Thales. And of course, after the Gemalto acquisition, after a decent period of time and to work with them, we will, obviously, come back vis-a-vis with our investors to give them a global perspective on Thales plus Gemalto, which clearly one step after another, and it has been clearly asked by, I would say, a large consensus of our investors. On the second point, U.K. defense. Overall, U.K. defense represents between 3.5% and 4% of the total sales of Thales. So you see, Antoine, even though this is of course an important market to us, it is not that large. And what you need to be aware of now, our sales to the Australian Commonwealth, the Australian MOD today exceeds a bit what we sell to the U.K. MOD. Which means that, yes, of course, we need to be a bit vigilant about the trends in U.K., taking into account the Brexit. But for Thales overall, that is something which is not that large. You have got a last question about the U.S. tax change, and will it be a tailwind for U.S. players? I do not know how U.S. players are going to deal with that, but it is true that this is a significant drop in the overall tax rate in the U.S. Please also consider that France has also decided to commit to a reduction in its tax rate, even though it will be more progressive than the drop that the U.S. will experience as from 2018. But we see various countries converging on the overall will to drop tax rate for companies. And once again, it is going to be also the case in France, even though it will take a bit more time, as it is going to be a progressive rundown in terms of tax rate in France. Thank you very much. Okay, next question from Mr. Christophe Menard, Kepler Cheuvreux. Please go ahead. Yes, good morning. I have three questions. The first one is actually a follow-up on one of the previous questions about CapEx in 2018. What number should we be looking at for 2018 in terms of CapEx? Second question is the operational performance. Every single year, you do, I would say, you achieve great figures on operational performance. At the beginning of the plan, you were saying that the easiest part was the supply chain, and we are under the impression that the highest savings on operational performance could be made at the beginning in 2012 and in 2013. And actually, it is now that you are making the biggest savings or the biggest improvements. So I was wondering if you could break down where that operational performance is coming from. You mentioned support functions, but into the future in 2018 and 2019, will it be, again, support functions? Will it be engineering? How did it change over time? Because the starting point was, I understand, supply chain back in 2011, 2012, but where are we now? The last question is on space. I understand the market dynamics. My question is, how much is the USD weakness that we've witnessed recently, in the past few months, a reason for you not getting some contracts? I know that the U.S. competitors are extremely aggressive. Is the USD weakness one reason why space is also a bit difficult? That's basically it. Okay. Good morning, Christophe. On CapEx, a good guidance in my view with regard 2018. They want between EUR 450 million and EUR 500 million. So slightly up versus 2017 and still keeping, spending CapEx in excess of D&A. It's going to be the case in 2018, as it has been the case over the last few years. So EUR 450 million to EUR 500 million, in my view, is a good guidance. With regard to your operation performance? Well, it's difficult, honestly, to decompose and to split, I would say, operation performance really per level, because some levels interact with some others. To simplify or to give, I would say, a pedagogic view of what we do to give credibility to our message, we usually decompose operational performance improvement in a four quadrants approach. Supply chain, engineering, support function, and also project execution and product policy. As far as supply chain is concerned, honestly, Christophe, it's a never-ending story. I think we did great things in the past that has clearly benefited to the operational performance improvement. But the more we dig, the more we find. That's why we have relaunched, I would say, a kind of new cycle, to go even further in terms of supply chain. Probably, I think the best rendezvous will be during the Capital Markets Day, where we can discuss a bit further on these important topics, and try to give you a good level of confidence, in terms of operational performance. Where are the next, I would say, pockets of potential to continue to improve Thales's operational performance. With regard, Christophe, your last questions about the US dollars. First, what we need to have in mind is that, in 2017, the drop of the order intake is not Thales specific at all. The drop in order intake at Thales level with regard space, reflects the evolutions of the market, and in particular, the civil telecom market, which has been an historical low in 2017. Please don't make it a Thales specific issue. Second point, when we look at the competition, we face competitors, in particular from Europe. We face competitors from U.S., and we also face a competitor from Canada. It's not just U.S. My view is that, the situation of the US dollars in the past, we couldn't say that this has been a clear tailwind for us in terms of the commercial dynamics of our space business, over the last three years. No, I guess, it's much more complex than that. Once again, our view today is that we are not losing market share overall in the space business. It's more this historical downturn that was experienced in 2017. Thank you very much. It's clear. Next question from Harry Breach for Raymond James. Please go ahead. Thank you. Good morning, Patrice, Pascal, Bruno and Bertrand. Can you hear me? Yes. Yep. Perfect. Three simple ones. Firstly, Naval Group. Can you let me know what the impairment charge they booked on the renewable energy business was? The second question is, I am sorry to talk about IFRS 15, but I was a little surprised by the size of the impact for 2017 at EUR 178 million. I think looking back to the nine months sales presentation your restated figures for the first half of 2017 was just a EUR 50 million impact. So it looks as if there was a much heavier impact in the second half. Can you just help us understand that a little bit? Then last question was, can you help us just in terms of the satellite business. In 2017, can you give us a feeling for the level of revenues? Was it about EUR 2.5 billion? How the backlog is changing in that business, how much the backlog has moved over the last few years so we can have some idea about the level of activity they can sustain without needing new orders. Okay. Good morning, Harry. So on your first questions, I will not be that specific and giving you the impact of this impairment charge at Naval Group. What I can share with you is that, overall, on one side, there has been these impairments on this renewable energy business at Naval Group. On the other side, on the core business, it is true that Naval Group benefited from a few one-off items. Those two items compensating each other, which means that the level of profitability and the contributions for Thales that you have seen in our 2017 figures, in my view, reflect the, how says, more recurring overall level of performance. Naval Group mentioned that they are expecting their net income to grow around 10% in 2018 versus 2017. All of that reflecting a progressive improvement in the operational profitability of the Naval Group, especially on their core defense Naval business. The impact on IFRS 16, yes, overall, in relative terms, the impact is higher in H2 than in H1. Now, you mentioned two figures that are true, but please don't put aside the fact that our level of EBIT at Thales is much higher on the second half as it is on the first half of any year. So basically, we were expecting the impact in absolute terms to be higher in H2 than it was in H1. Now, where you are right is that in percentage terms, it is matter of fact that the impact was higher in H2 than in H1. And to that, I would tell you that overall, the impact of the IFRS 16 is a combination of hundreds of contracts. In our presentations in Q3, we provided various examples where we could see that there might be positive or negative impacts. Overall, it's true that the impact in H2 was, in relative terms, slightly higher than in H1, but reflecting positive and negative impact coming from this quite large number of project, and no one showing up as a specific item that I could mention to you today. Your last question was about Satellite the satellite business. Well, definitely. The level of activities is still high in EUR 2.6 billion, not EUR 2.5 billion, EUR 2.6 billion. For sure, due to last year order intake, the backlog has dropped. But as I said, it has no impact on 2018 sales and EBIT. Now, you are right that the level of activity beyond this time frame will depend on our ability to book new contracts in 2018 and onwards, and in particular, in 2018. So it's what to do this year to demonstrate that we're able to win some business. That's why, by the way, we continue to accelerate to invest, because I'm totally, I would say, convinced that the technological differentiator is the way for us in all our businesses, and in particular, in the satellite business. So on one side, I would say no impact on 2018. On the other side, clearly, a challenge for us to book new contracts to refuel the pipe and our backlog for the years after 2018. Great. Thank you very much. Last question? One question, yeah. Yes, last question from Celine Fornara from UBS. Ma'am, please go ahead. Sorry. Yes. Good morning, everyone. Thanks for taking my question. Well done for this set of 2017 results. I think no one has said it, but I do think they were really good, so thank you for that. If I may, two questions. The first one is regarding the R&D spending. I know we covered the CapEx, but I was just wondering where the R&D expense are actually going, and if they relate generally to people, or is it more software? How do you see your engineers pool evolving? You basically have 25,000 engineers. I know you said 10,000 are system engineers, 7,500 software, 5,000 hardware. So how do you think that is changing, and how do you see investing so much in R&D, for example, this year, where you could have a lot of people from Gemalto potentially helping you there? Are we not risking of double counting, or double spending on this? I would like to hear your thoughts. My second question is related to the defense budget trends that you highlighted, Patrice, in France, Australia, and the U.K. If I look at what happened over the last three years in those three key markets, you basically have outgrown the market trends by 100 to 150 basis points. Is this something that we should expect for the next basically three years? Thank you. Thank you. Hello, Celine. Good morning. Thank you for your nice words. It is always appreciated. For R&D, by the way, it is an excellent question. I would say, if I try not to be too long, the acceleration in R&D, in fact, is linked or relates with two main explanations. First, on our, what I call current product portfolio, product systems, and solution portfolio. It is a constant fight, I would say, to stay at the technical edge or technological edge compared to the competition. So we need constantly to, if not renew, improve, inject new features, and so on and so forth. It is what I call, and it is not pejorative at all, I would say, the traditional R&D investment cycle, in our existing and future product system solutions portfolio. On top of that, it is true that we have also opened new avenues in digital. It is true that on top of this first level, in terms of R&D growth, we have decided consciously 2 years ago now, 2 to 3 years ago, to accelerate on these four core digital technologies that you know quite well. In terms of nature of expenses, it is mainly, I would say, salaries. It is mainly engineers. We need to hire or to mobilize additional engineers, talented engineers to help us in this journey. The mix between software, hardware, and system, for me, should not change drastically. The engineering team, 25,000 people, it is like a cargo, it is a large boat, so the mix is not going to change overnight. Even if we look in detail, probably system and software part will grow probably a bit faster than the hardware, I would say, expert community. The second question, sorry, was? Defense and the fact that we are out there from the markets, overall, and will this continue? This is another excellent question, and it is at the core or it is one key question or subject of discussion that we will have during the Capital Markets Day. In terms of perspective, what kind of perspective we will give to the investors in terms of performance or outperformance of the underlying markets on which we are, be it defense or be it, I would say, transport or security and so on and so forth. I think you will have to wait a little bit, in fact, to have more insights on how we see things for the years to come. Thank you. Sorry, Patrice, on the R&D question, though. If you need to increase and you are hiring then these people for the new digital revenues, are you making basically a decision after the Gemalto acquisition then? Or how does it technically work? For me, technically, it's independent. Gemalto has their own needs in terms of R&D experts. Probably they will have to hire new talents. This, for me, independent of our intrinsic R&D growth that we foresee, at least for 2018. Okay. Thank you. If there is no further question, I wanted to thank you all for this discussion, for this Q&A session. As you understood, we absolutely remain determined to deliver profitable and sustainable growth with the implementation of our well-known Ambition 10 strategy. I do feel that the 2017 figures and the 2018 financial targets demonstrate this quite well. Together with Pascal and with the team, we will be meeting investors in the next few weeks, of course. We look forward to seeing you then, and we also hope that you will be able to attend our Capital Markets Day on the 6th of June 2018. Goodbye, and thank you all. Thank you very much. See you. Bye. Bye-bye. Bye-bye.