Earnings Call: Q4 2015

Feb 23, 2016

Ladies and gentlemen, welcome to the Thales 2015 full year results. I now hand over to Mr. Bertrand Delcaire, Head of Investor Relations. Sir, please go ahead. Yes, hello. Good morning. Welcome and thank you for joining us for the presentation of Thales 2015 full year results. I'm Bertrand Delcaire, the new Head of Investor Relations at Thales. With me today are Patrice Caine, Chairman and CEO, and Pascal Bouchiat, CFO of Thales. As usual, the presentation will be in English and followed by a Q&A session. It is webcast live on our website at thalesgroup.com, where the slides, press release, and consolidated financial statements are also available for download. A replay of the call will be available as from tomorrow morning. With that, I'd like to turn over the call to Patrice Caine. Well, good morning. I'm on slide 2. First, a few words on the trading environment in our key markets. Let's start with aerospace. We understand that there are some debates in the market on the sustainability of the civil aerospace cycle. From our perspective, we continue to enjoy a positive momentum in avionics, driven by the increases in production rates at Airbus, including the ramp-up of the A350, on which we have, by the way, a significant shipset. In the IFE was also quite dynamic. Traffic growth is clear. IATA recently reported a +6.5% RPK global growth for 2015. Airlines are increasingly interested in a new generation IFE system, which we are very well placed to offer. Turning to our space activities, the telecom market, which has been quite weak in recent years, started to recover in 2015. On the other hand, we saw increased demand in the institutional and military segments, on which we have leadership positions. Let's move to transport. We continue to see a strong demand for our transport signaling activities. This segment remains driven by the growing organization in emerging markets, which requires investments in rail infrastructures and the upgrading of existing systems in mature markets. Of course, with oil price falling, some rail infrastructure investments may be temporarily delayed in oil exporting countries, but the need for such infrastructures remain very strong to our opinion. On the other hand, as demonstrated by the major contract we signed with the London Underground this summer, many cities are looking for solutions to upgrade their systems to improve service quality and increase capacity. Finally, in defense and security, we are all aware of the high level of geopolitical tensions. It continues to drive defense budgets in several emerging markets, particularly in the Middle East and in Asia. Some oil exporting countries may face increased budgetary constraints, but security remains clearly an essential need for these countries. In mature markets, we do see an inflection point. While in previous years we were facing a downward pressure on defense and security spending, as you know, several governments are now looking at increasing their budgets. This is typically true in France and in the U.K., but now even Germany is looking at significantly increasing its spending. Let's move to slide three. In this context, our performance plan Ambition Boost has clearly delivered. First, we had a record level of orders in 2015, interestingly driven by all segments and almost all geographies. This order intake was not just driven by large Rafale export contracts, by the way. In terms of growth, 2015 shows, as expected, the return of sales growth driven in particular by our active targeting of emerging markets in the past two years. Sales in emerging markets are up 40% compared to three years ago, for instance. This top-line growth was not at the expense of profitability, which is improving in line with our midterm target. We did manage this EBIT improvement in spite of the project execution challenges we face in the transport segment, which we have, as you remember, actively addressed last year. We remain focused on our Ambition 10 strategy, continuing to deliver profitable growth. If you turn to page four, this slide summarizes in a few charts our key figures and indicators. Let's start by order intake. Order intake reached EUR 18.9 billion, up 31% compared to 2014. This is a record level, significantly above our expectations. It follows on a year, 2014, which was already very strong. Let's look at sales now. Sales increased by 8%. This growth was partly driven by a significant positive currency impact, but more importantly, by an organic improvement of 4.5%, slightly higher than our objective of low single-digit growth. If we move to EBIT. EBIT reached EUR 1,216 million, which is 6% or 7% above our guidance of between EUR 1,130 million and EUR 1,150 million. It was up by 23% compared to 2014. The EBIT margin is up one point compared to 2014. It reached 8.6%, at a level the group has never attained, at least for the past 10 years. This improvement was driven by our Ambition Boost actions, which clearly delivered more than EUR 100 million of EBIT improvement. Let's move to free operating cash flow now. Moving on to free operating cash flow, which was particularly impressive this year. Free operating cash flow more than doubled, in fact, and reached EUR 1,110 million in 2015. Of course, down payments on export contracts helped, but also the high level of cash conversion, again, in spite of the increased investments we decided to launch, which are important to secure our future growth. At EUR 809 million, adjusted net income was up 44%. Logically, this strong financial performance allows us to propose to the next AGM a 21% increase in the dividend, driven by a 35% payout ratio. After this short briefing, short overview, I now hand over to Pascal, who will comment our financial results in greater details. Pascal, the floor is yours. Thank you, Patrice, and good morning to everyone. I am now on slide 5, focusing on our main commercial successes in 2015. As Patrice mentioned, we achieved a record order intake last year, EUR 18.9 billion, up 31%. As you can see on the chart, we were particularly successful at signing contracts above EUR 100 million. We have won 24 large orders compared to 19 in 2014. You will find appended the list of these 24 contracts. It is important to see that these contracts had a much higher average value than last year, EUR 330 million versus EUR 165 million in 2014. This is because we recorded five jumbo contracts over EUR 500 million, a contract above EUR 1 billion on the signaling of four major underground lines in London, the two Rafale orders from Egypt and Qatar, the order of more than 1,000 vehicles, the Hawkei, by the Australian Defence Force, and also a French military satellite communication system, COMSAT NG, for which we are the lead contractor. As a reminder, the last time we had a contract above EUR 500 million was in 2011 with the retrofits of the Indian Mirage 2000. This commercial performance was not just driven by these jumbo contracts. Even after removing them, our order intake is slightly above 2014 and significantly above previous years. You can also see this with the orders below EUR 10 million in unit value, which increased 6% year-on-year. Finally, this very strong commercial performance was driven by all segments of the group. As you noticed, each segment had a jumbo contract in 2015. Almost all geographies contributed to the improved order intake. Europe is up 21%, including France at 14%. Other mature markets are up 44%. Emerging markets are up 45%. Globally, the order book reaches EUR 32.3 billion, up 30% compared to the end of 2013, the equivalent of 2.3 years of sales. Moving on to slide 6 and looking at sales. As usual, we focus on organic sales growth, i.e., excluding scope and currency effects. As a reminder, the scope effect was quite small in 2015, EUR 78 billion, mostly due to the integration of LiveTV, which as you remember, was effective from June 2014. The currency effect was significantly larger, EUR 430 million. It was driven by the strong appreciation of the dollar and the pound against the euro by respectively 20% and 11%. As Patrice already stressed it, one of the key messages of this year is a return of organic sales growth. While sales dropped 1% in 2014, they were up 4.5% in 2015. For the past three years, as part of Ambition Boost, we have been working hard to accelerate growth, especially in emerging markets. As you can now see, the delivery in terms of sales. After the strong increase in order intakes observed in the past two years, emerging market sales have further accelerated in 2015, reaching 16% growth in 2015 after 12% growth in 2014. Expressed as a share of revenues, that moved from 23% in 2013 to 25% in 2014, and now 28%. As importantly, this growth in emerging markets is driven by many countries. The largest country only represents 11% of emerging market revenues, and the top 10 countries only represent 62% of emerging market sales. On the other hand, mature markets, which have often been affected by budget restrictions in the past few years, have now started to recover. Mature market sales recorded a 0.5% organic growth in 2015, driven in particular by Europe, excluding France and U.K., and Australia. France was just flat over 2014. Moving on to slide 7. As mentioned already, EBIT was up 23% year-on-year. Excluding DCNS, it was up by EUR 92 million or 8% versus 2014, despite the difficulties in transport. Excluding DCNS and transport, EBIT was actually up 15% and the EBIT margin increased by 60 basis points to reach 9.8%. This reflects the continued impact of our performance improvement measures. You will, in particular, notice that in spite of a further increase in R&D and marketing and sales expenses, indirect costs grew more slowly than sales as we continued to reduce our G&A costs. Moving on to slide 8 to look into greater details at the evolutions of our EBIT between 2014 and 2015. In 2014, our EBIT reached EUR 985 million. From that base, it benefited from a EUR 49 million positive impact coming from scope, currency, and a negative EUR 24 million due to pension impact. The small scope impact relating mostly to the acquisition of LiveTV, which was consolidated as of June 2014. The currency tailwind was, of course, driven by the depreciation of the euro against the US dollar and the pound sterling. This was partly offset by the increase in pension service cost, primarily due to the falling interest rate between the beginning of 2014 and the beginning of 2015. All in all, our organic operational performance improved by EUR 130 million in spite of the negative impact of transport, which amounted to a negative EUR 84 million. Our other businesses delivered a very strong improvement in operational performance in 2015. As you can see on the right side of the chart, we continued to invest part of this operational improvements in R&D and sales and marketing, which are organically up respectively, 32 and EUR 37 million. Moving on to slide 9. I will go through the performance of each of segments in a minute. Just let me highlight two points. Aerospace and defense security both continued to deliver a strong performance and are posting margin levels of about 10%. Both segments have already reached the 9.5%-10% level, which is our 2017, 2018 target at group level. DCNS recovered from its large 2014 losses. While we must remain cautious, its operational recovery is on track. However, the DCNS 2015 results included some positive one-off items, resulting into a contribution slightly above expectations. Therefore, we don't expect any significant improvement in the contribution of DCNS to our results in 2016. Moving on to slide 10 to give you a focus on aerospace. Starting with orders. At EUR 6.3 billion, the order intake was strongly up, driven especially by space activities and in-flight entertainments. Space activities was particularly dynamics. We recorded 10 contracts above EUR 100 million in this segment from telecom, military, and institutional customers. Our in-flight entertainment was also commercially very successful. We recorded several large contracts, including with JetBlue, Singapore Airlines, Saudi Arabian Airlines, and Japan Airlines. At EUR 5.4 billion, sales were up 7% on a reported basis and 2% organically. Looking at avionics, the healthy growth in civil avionics was partly offset by the weakness in helicopters and in electronic tube systems. Space sales continue to grow moderately on the back of the large orders in observations, explorations, and navigations. EBIT reached EUR 580 million, or 9.6% of sales. The EBIT margin is slightly down against a high comparable in 2014 because we decided to increase R&D expenses quite substantially in both our avionics and space businesses. Moving on to slide 11, a few words on situations in transports. First, the strong commercial momentum in this activity. In 2015, the order intake reached EUR 2.8 billion, up 70% compared to 2014. This was, of course, linked to the award of the major rail signaling contracts in London. At EUR 1.5 billion, sales have returned to organic growth after two years of decline, with a significant contribution from urban rail signaling project. We expect sales growth to continue in 2016 and beyond, driven by the record backlog of this activity. Having said that, last year, the profitability of this activity was marked by the execution difficulties we have faced on several projects. The reason behind the negative results of this activity are essentially two-fold. First, contracts which had significant provisions booked in 2014 now trade at zero gross margin, i.e., with a negative 15% or so EBIT margin. Second, during the first half of 2015, the new management of this business performed a detailed review of the project portfolio, and this led to some further adjustments of cost to completion on certain contracts. Patrice Caine will update you later on the recovery of this activity, which remains a top priority for us. Let me just remind you that while the operational recovery is on track for completion by the end of 2016, we continue to expect transport to be at breakeven in 2016, followed by a gradual margin improvement over the next few years. This is due to accounting rules, as a significant share of sales, about 20% in 2016, will continue to be recorded at zero gross margin, and thus at strongly negative EBIT margin. Now let's move on to slide 12, defense and security. All indicators are positive in this segment. Order intake was strongly to EUR 9.7 billion, a 28% increase. This strong rise was not just driven by the Rafale orders from Egypt and Qatar, which will be mostly fulfilled by the defense mission system activity. Land and air systems, as well our security business, were also very dynamic. In spite of budget constraints in many countries, we have managed to sustain our book-to-bill ratio above one for the past three years. These strong commercial dynamics have been feeding into sales, which amounted to EUR 7.1 billion, up 7% organically. Sales were up in all segments, with higher revenues, in particular, from protected vehicles, radio communications, cyber, as well as air traffic management and air defense. EBIT increased strongly to EUR 760 million. That is 10.7% of sales, thanks to a favorable volume impact, and also very good project executions. Turning to slide 13 now, below EBIT item of the P&L. The net financial interest remained close to zero as it was in 2014. The other financial results are close to breakeven in 2015, while they were affected by a small negative one-off in 2014. The finance cost and pensions are broadly stable. At 26.7%, our effective tax rate continues to drop versus the 29% of 2014 and the 31.5% of 2013. As the profitability of our operations in lower tax countries improves, we expect our effective tax rate to remain in the 26%-27% range in 2016 and the next years to come. In 2 years, our tax rate will have dropped by 5 percentage points, which hopefully will be reflected in market valuation. Minority interest were also stable compared to last year, leading to an adjusted net income of EUR 809 million, up 44%, and an EPS of EUR 3.89, up 42%. Moving to cash conversions, 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 standard recurring items represent a little less than EUR 200 million. They include the financial interest paid, which amounted to a positive EUR 9 million in 2015, driven, of course, by the high level of cash. Income tax paid was EUR 102 million, in line with 2014. Other items primarily include equity affiliates, restructuring, and pension. As you can see, they represented a total cash out of EUR 78 million on top of what was in the EBIT, most of it coming from equity affiliates and the gap between our share in their net income and the actual dividends we receive. All in all, this was relatively small. The next item is capital expenditure. The key point here is to see that we are currently in a period of increased CapEx. In 2015, our operating investments reached EUR 458 million, EUR 77 million above our D&As. One of the main drivers of this increased CapEx was the upgrade of our industrial footprints in several countries and higher investments in information systems. Those 2 items are essential to continue improving our competitiveness. Finally, the change in working capital was a positive EUR 143 million. It benefited from the prepayments we received on several export contracts. Adding all these effects, our free operating cash flow reached EUR 1,110 million, only EUR 106 million below EBIT, and significantly above adjusted net income. The conversions of net income to free cash flow was very high at 137%. Moving on to slide 15 on the evolutions of our cash positions over the last 12 months and the use of our cash flow. Our net cash position on the balance sheet was strongly up. Beside the free operating cash flow I've just mentioned, deficit payment on U.K. pension increased to EUR 101 million versus EUR 70 million in 2014, as a result of both the strengthening of the pound sterling against the euro, and of the higher pension deficit at the end of 2014. There was no significant acquisition in 2015, and the main disposal concerned our 30% share in a small-sized German company. The dividend payment amounted to EUR 234 million. Finally, the other items amounted to EUR 159 million, mainly related to subscriptions options. At the end of 2015, our net cash position thus reached almost EUR 2 billion. I should remind you that in 2016, part of the prepayment from large export contracts booked in 2015 will be reversed, and we'll cash out $400 million for planned acquisitions of Vormetric. To finish, a word on the dividend, slide 16. We see that since 2011, our EPS grew by 10% per year. Regarding 2015, our board decided to propose a dividend of EUR 1.36, up 21% versus 2014. On this basis, since 2011, our dividends will have increased by 15% per year, which is significantly above the 10% EPS increase I have just mentioned. Now, I will turn over the call to Patrice to talk about our current strategy and outlook. Thank you, Pascal. Thank you. Now I am on slide 18. For this point, I wanted to share with you my views on the group's strategy. You remember that two years ago, we presented to you a new strategy, Ambition 10. We started from the unique strengths of Thales, which I will briefly summarize on this slide, exceptional technologies, global footprint, leading position in growing end markets. First, yes, we have exceptional technologies within the group, and I shall add that it is essential to constantly reinvest in this technological leadership, hence the more than EUR 700 million we invested in R&D last year. Second, Thales is one of the most global groups in aerospace and defense sector. Commercially speaking, we are present in over 100 countries and over 50 in terms of industrial presence. In many markets, we have long-standing historical relationships with local industry, authorities, universities. We are often considered as a key local player. Third, we have built leading positions in a number of high-growth end markets related to civil aviation, to space, to advanced defense systems, to efficient rail signaling solutions to mention a few. If we move to slide 19. While we had these unique assets, we considered that we needed to reinforce the group Return to sales growth after several years of virtually flat sales, as you know. Second, leverage our global presence. While we have historically had a very broad international presence, the share of revenues coming from emerging markets was still low, and far be more profitable. Our profitability around 6% in 2011, 2012, was clearly lagging sector peers. Hence, the decision to build our Ambition 10 strategy on three pillars. Very simple: growth, competitiveness, and people. To deploy this strategy, we launched Ambition Boost, our performance program. I will not come back on every item on this slide, of course. We do not have time this morning. But the key point to see here is that we designed Ambition Boost as a comprehensive program, not just targeting competitiveness, but also working on growth and on people aspects, which are absolutely crucial to fulfill our Ambition 10 strategy. Moving to slide 20. After two years of implementation, the results that we have announced this morning clearly demonstrate that we are delivering on our strategy growth with a visible acceleration in our commercial performance, competitiveness with progress on several projects on which I will come back this morning, addressing also the execution challenges we have been facing in our transport activity. I am on slide 21 now, starting with our growth initiative. First, with respect to order intake, we focused our Ambition Boost effort in three areas, to be simple. First, we set up a dedicated organization targeting commercial, but also industrial development in emerging markets, and this point is really key. We put an increased emphasis on capturing larger contracts, as you know, and we communicate upon now, and also multi-year service contracts. We also decided to increase our customer focus and work much more actively on the value propositions we articulate to our customers, hence the fact that we hired a Chief Marketing Officer to help us to do that. Pascal Bouchiat already presented to you the record order intake we achieved in 2015, and you can see it here on the right. It is 30% above 2014 and almost 50% above 2013. The two key drivers of this performance were indeed larger contracts with more than 20 on average in the past three years, including 24 in 2015, and the doubling of orders coming from emerging markets which reached EUR 6 billion in 2015 compared to EUR 3 billion in 2012. Moving to slide 22. The significant increase in order intake over the last two years has been a key driver in the acceleration of organic sales growth. Already, the organic sales growth that we recorded in 2015 at +4.5%, as already said, is at a level that we have not seen for many years. At this time, I am really convinced that thanks to this new growth momentum, we will be able to deliver continuous sales growth in the coming years. This is why we have decided to upgrade our midterm sales guidance. For the next three years, we are now targeting mid-single-digit organic sales growth instead of the moderate sales growth we were targeting before. Let's move to slide 23 now. Our recent mid-size M&A transactions perfectly complement the growth initiatives that I have just talked about. In 2014, we purchased LiveTV. In October 2015, we announced the purchase of Vormetric. Two very good examples of our M&A strategy. If we start with LiveTV. In addition to its significant customer base, we were very interested in LiveTV's portfolio of innovations, especially with respect to internet connectivity, in order to complement our high growth in-flight entertainment business. Having a strong expertise in connectivity has now often become an essential element to win IFE competitions. This combination has started to deliver clearly with a significant acceleration of order intake in this area in 2015. A few words on Vormetric now. In a similar fashion, Vormetric fits very well with our existing cybersecurity business, which is particularly strong on the hardware side, while Vormetric brings unique solutions on the software side. Once this transaction is completed, something we expect at the end of Q1 2016, this combination will create a world leader in this very fast-growing area of data protection. In addition, we have started to leverage this leadership position in cybersecurity in our other civil markets, such as in urban rail signaling and supervision, but also IFE, ATM, and many other businesses of Thales. This should not only generate additional sales, of course, but it should also contribute to further differentiating our offer in this market. Next slide. Of course, competitiveness remains a key priority for the group, and I wanted to highlight only a few ongoing initiatives in that area for the sake of the time. First, let me say a few words about our initiatives with respect to the competitiveness of engineering. Engineering is clearly the core added value of Thales. Combined with our unique portfolio of technologies, it is a key function of the group that comes up with the solutions that meet the requirements of every customer. This is why it occupies more than one-third of group staff. The demands on our engineering function keep on increasing. Our customers ask us to deliver differentiated solutions, addressing more complex and critical situations in time, and of course, at a lower cost. In this context, to improve performance, the key is to use, of course, improved methods, processes, and tools. In this respect, since 2014, we have thus worked in two directions. First, the gradual deployment of new state-of-the-art engineering methods, such as value-based engineering or the agile method. Typically, about 3,000 software engineers, around 60% of the targeted population, now use the agile method on a day-to-day basis, compared to a few hundred at the beginning of 2014. I said two directions. The second one is the design and initial deployment of what we have called internally Orchestra. Orchestra is a single platform combining off-the-shelf tools with Thales' unique proprietary systems. Around half of our engineers now use Orchestra, and all new products are now designed on that engineering platform. In the next few years, we will fully deploy these methods and tools across all units. This will facilitate the sharing of best practices across the group. Of course, this project will not only contribute to increasing our efficiency, but it will also deliver simplification, having fewer tools to maintain and IT systems to run. Second topic with respect to competitiveness that I wanted to highlight this morning is on slide 25. We continue to focus our efforts on the reduction of structural costs. When we talk of structural cost, we refer to our G&A cost base, which we have managed to reduce as a percentage of sales over the past three years, as shown on the graph. The 0.5 point reduction you can see on the right other side, represents around EUR 70 billion of saving, falling directly to the bottom line. To deliver on these improvements, we have been consistently looking for efficiency gains through systematic benchmarking, both internally and externally. This ongoing transformation concerns, in particular, our support functions such as finance, HR, legal, communication, and it will continue to generate savings for the group. Secondly, we also refer to our industrial facilities, where quite often, rationalization can deliver significant efficiency gains, not just by saving real estate square footage, but also by bringing teams close together. For example, this year, we will regroup the avionics teams from several sites in France into a single brand new site in Bordeaux. Needless to say, such real estate initiatives require investments, and they partially explain the ongoing pickup in CapEx that was mentioned by Pascal. Third, and now I'm on slide 26. I wanted to give you a quick update on the recovery of our transport activity, as already mentioned by Pascal, which remains a high priority, of course. To fix the issues in this activity, we have implemented a vigorous recovery plan. The new management team, in place for a bit more than one year now, has performed a thorough review of the contract portfolio during first semester of last year. It has significantly reinforced the governance of both bidding process and project execution. It has now launched a deep transformation plan, in particular, drawing resources from other Thales activities. I expect that the operational recovery of this business will be completely completed by the end of 2016. It will have taken 18 months or so, which is rather rapid in light of the long duration of transport contracts and compared to similar situations in this industry. Let me remind you that the financial recovery of this business will, however, take a bit more time as the zero gross margin contracts will need to flow through the P&L in the next two to three years, as said by Pascal before. We first expect this activity to be breakeven in 2016 and improve progressively in the subsequent years. This business has returned to organic growth last year. Really, it has great technologies and a strong commercial position. Typically, winning the London Underground contract was a strong vote of confidence and a recognition of its world-leading position. We are now to carefully monitor the execution, of course, of the most challenging projects, but I remain fully confident in our ability to deliver on this recovery plan. On slide 28 now. As we continue to deliver on the Ambition Boost initiative that I just described, and the many more that I did not mention, we expect our profitability to continue improving in line with the midterm targets we set out two years ago. Last slide 28. On this basis, what is our formal guidance for 2016 and 2017, 2018? For 2016, we expect our order intake to remain high, but not to reach the record level we had in 2015, which benefited from a unique conjunction of jumbo orders. Hence, our expectation of a level close to 2013, 2014, i.e., EUR 13.6 billion. The record-high backlog should result in a mid-single-digit organic sales growth like in 2015. This positive trend, combined with our efforts to improve competitiveness and the progressive return to profit of the transport activity, should result in an increase of around 7%-9% in EBIT compared to 2015, to reach EUR 1,300 million-EUR 1,330 million, to be precise. For the medium term, I've decided to upgrade our organic sales objective from a moderate growth to a mid-single-digit growth. We have also reconfirmed our target of a further improvement in our EBIT margin to achieve a rate of 9.5%-10% by 2017, 2018. Let me conclude by saying that Thales delivered a strong performance in 2015. We have exceeded all our financial objectives. All our Ambition Boost initiatives are delivering now. I really believe that this puts us on a favorable trajectory to deliver sustainable and profitable growth at Thales and further value to our shareholders, of course. This concludes our presentation. Many thanks for your attention. Together with Pascal, I will now be pleased to take your questions. Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. The first question is coming from Olivier Brochet, Credit Suisse. Sir, please go ahead. Yes, good morning, Patrice. Good morning, Pascal. I would have two sets of questions. The first one on FX, please. Can you give us a sense of what you think FX is going to contribute in 2016? How to think of FX in 2018, given what you've already locked in terms of hedges? That's the first bit. The second bit is in transport. Can you give us a sense of how much turnover will be at zero gross margin in 2017 and 2018? In 2018, is it fair to say that in your guidance or your outlook, you take into account a 7% or a return to something like 7% operating margin for transport? Thank you. Okay. Good morning, Olivier. On your first question about Forex. In 2016, we don't expect any significant tailwind coming from Forex. The reason is quite simple. As you know, we are today having a hedge on the US dollar for avionics businesses. These hedges today are on the basis of an exchange rate, which for 2016 is 1.25, which is very close to what we had in 2015. 2015 was 1.26, so just a sense of improvement on that. We will start benefiting from a more favorable exchange rate for avionics businesses as from 2018. The sequence will be the following. 2015, 1.26. 2016 and 2017, 1.25. 2018, we'll get advantage of 1.15. So a 10-cent improvement in 2018 versus 2017. This on the basis of an overall level of net exposure for our avionics business, which represents 550 million US dollars. So I guess it would give you the bottom line impact that we can anticipate for 2018 now. Thank you. With regard in the transportation business, we believe that in 2016, we will have around 20% of our transport business that will flow in our P&L with zero gross margin. As you know, zero gross margin, in the bottom line, in term of EBIT, this translates into something like minus 15 or so EBIT margin. This means that overall, EUR 300 million, this represents approximately 20% of our rail signaling business that will flow in the next two years with this type of strongly negative margin. Yes? Yes. So for 2016, that is 20% of the revenues, and it will be about 20% as well in 2017. Yes. It will come down progressively, of course. Yeah. From this level in 2016, then coming down progressively over the next couple of years. Okay. Thank you. Thank you. Thank you so much. The next question is coming from Madame Céline Fornaro, Bank of America Merrill Lynch. Madame, please go ahead. Yes. Hi. Good morning, gentlemen. If I can, I would have three quick questions. The first one would be for Pascal, regarding slide seven that you presented. We can see that there has been a small improvement on gross margin on the second half of 2015 compared to the first half. I am thinking, how should we think about these growth margin improvements, given also what you are saying on transport over the next couple of years? Similarly for the marketing in general, and administrative expenses over the next couple of years. My second question would be for Patrice. You mentioned that the telecom satellite business is coming back, which clearly we have not heard for a long time. Do you think that that could help a little bit the profitability of the satellite business? On transport, if you could just explain to us the emerging market exposure in that division in terms of the order book. How have you seen the payment installments coming through at the end of 2015, or what are the customers saying from that perspective? Thank you very much. Okay. Good morning, Céline. On your first questions, I guess that you relate to page 7, yes. The gross margin and then the R&D and the marketing and sale expenses and what we can expect going forwards. Maybe first, a comment on gross margin in 2015 versus 2014. Because you see on this table on page 7 that we see a slight drop of our gross margin in 2015 versus 2014. Moving from 24.5% in 2014 down to 24% in 2015. This drop is due to the difficulties of our transport business. Putting transport aside, our gross margin in 2015 would have been slightly above what we delivered in 2014. Which means, and this is a key message, the growth, the ability of Thales to restore growth, is not done at the expense of profitability. We expect the gross margin in term of percentage in 2016, 2017, to continue moving up. With regard R&D and marketing and sales, it's our view that we need to continue increasing our R&D and marketing and sales expenses. My view, and probably a good guidance for you in term of overall modeling, is that keeping a stable level of R&D expenses and marketing and sale expenses as a proportions of our sales is quite a good guidance. Which means that it's not our view to take advantage of higher level of sales, to get advantage of operating lever with regard R&D and expenses. On the other side, of course, as we did in the past few years and what we plan to continue, of course, we'll continue working hard to cut our G&A cost, which means that not only we'll be able to absorb inflations, but because of the top-line growth. We should continue to see our G&A cost as a proportion of sales continuing to come down in the next years to come. On telecom, that is how we see the market. I am not saying that everybody sees the same, but yes, 2015, we had a sense that we have won more satellites in this field of commercial telecom business than usual, than the previous years. We had a positive comeback with Eutelsat. Eutelsat has not ordered any satellite from us since many years. We came back with this key customer last year. O3b also ordered a large batch of satellites. We also won new customers, like Bangladesh or Turkmenistan. Moreover, it is a combination, I would say, an active commercial telecom satellite market with an active institutional market and an active defense market. Look at defense, COMSAT NG, Germany ordering a third satellite for optical observation. Many others, by the way, prospects in the pipes in terms of high-resolution observation satellites. Last but not least, we also put on the table some kind of creative combined deal between our connectivity business and our satellite business, doing a combined deal with a satellite operator, procuring a satellite from Thales, but also furnishing broadband to our connectivity business. The third question was on transport and the exposure to emerging markets that. Yes, so in the backlog. What are these customers telling you at the moment? Because some of them may have seen big currency changes. How are the installed payments coming through and things like that? Thank you. No, Celine, no specific issues on. On payments. On payment on this type of things. No, we don't have today any difficulties in getting paid in all our businesses, not just for transport, and no issue today to get paid in particular from emerging countries. Not what we see today. No specific concern as we speak today in term of getting paid by our customers. Okay, and how big would you say is EM in the transport division? The adjusted gross margin, you- The point is- Excuse me. The component of emerging markets in our transport division, I would tend to believe that it's probably slightly above Thales average, so it should be something probably around one-third. Certainly, one-third of the total level of our sales. Okay, perfect. Thank you very much. Thank you. Thank you. The next question is coming from Mr. Nick Cunningham, Agency Partners. Sir, please go ahead. Yes, good morning. Thank you very much. Yes. The Aerospace division booked a very good margin, and that fell back a little bit on higher R&D. You just booked a margin in Defense that was way ahead of your medium-term group intentions targets. Question is, was there anything in Defense which was a one-off in terms of some profit release from a long-term contract or whatever, which won't recur? In other words, could Defense fall back a little bit in the same way that Aerospace did? Second question, there was some positive one-offs in DCNS. Is it possible to quantify that? By the way, forgive me if I've missed anything that was in the statement, but there's been three sets of results this morning, so I haven't read it in detail. Finally, looking at cash flow in 2016, you said that you had some advances in 2015, which you'll obviously start to work your way through in 2016. Perhaps if we look at it in terms of cash conversion, historically, you've converted EBIT at about 40%-50% in terms of free cash flow. Do you drop back into that range or do you even go below that range because you're using up advances? Thank you very much. Okay. Good morning, Nick. On Defense and Security, it is true to say that, 2015, we clicked all the boxes in terms of performance for our Defense and Security segment, combining, as I mentioned, growth, but also excellent quality of project executions. Did we benefit from any one-off item? Slightly, yes. You probably have in mind that when we released our June figures, we mentioned that in these divisions, we benefited from the completions of a project, where in the past we were very cautious in terms of the way we recognize margin. With the completion of this project, we managed to reverse a EUR 15 million provision on this contract. This is the type of one-off that we benefited. But you see, this is really a minor contribution as compared to the level of profitability of this business. Now, let us have in mind that Defense and Security in 2015 have been extremely good, particularly in terms of project executions. Let us have that in mind when we consider 2016. DCNS, yes, one-off events and in particular, non-operational one-off events, also below EBIT, DCNS one-off events. As we record in our EBIT, the share of the DCNS net income, we also get advantage of the positive or negative one-off items of DCNS below their own EBIT line. This, in 2015, represented something like EUR 15 million, which means that for us, in terms of impact, it is something which is slightly above EUR 5 million. Nothing very significant on that. Your comment about cash flow. Yes, and I guess we made the point that cash flow in 2015 for Thales was exceptional. Now, adjusting for what I would consider being a one-off or being the down payments that we benefited from in 2015, and readjusting our cash flow performance for that. In 2015, our cash flow generations would have been between EUR 650 million and EUR 700 million, which means that our conversions ratio would have been between 55% and 60%, which is above what we achieved in 2013 and 2014. Our EBIT to cash flow conversions ratio was more in line with the 50%. This is what we delivered in 2014. You see here that putting aside, once again, the down payment that we benefited in 2015, our conversions ratio in 2015 has been extremely favorable, between 55% and 60%. All of that, also having in mind that we continue to invest more than what we depreciate on our P&L. I guess that we made a comment when we look at the cash flow. You have seen in 2015 that our CapEx exceed by EUR 77 million, the level of G&A. This will continue at least over the next 2 years, because, as we have already discussed, we continue to invest to upgrade our industrial footprint with various operations that are taking place today. Plus also the fact that we are also increasing our information system investments. Those 2 components, industrial footprints, information systems, are absolutely critical to boost and to continue developing Thales' competitiveness over the midterms. Now, we think that in 2 years' time, probably we will have completed significant operations, in particular with regard industrial footprint. At this point in time, I guess our level of CapEx will come down to the level of G&A, which will be drivers to continue increasing our level of EBIT to cash flow conversions ratio. Which is, as we said a few years ago, it is for Thales to target a recurring level of EBIT to cash flow conversions ratio at 160%. Thank you. Just looking at 2016, just assuming that there are no further big advances paid, although actually, you're obviously doing very well. Presumably, you do go below the normal average in 2016 as far as our forecasting is concerned, as you burn those advances. In 2016, of course, the level of cash flow will be, I would say, penalized as compared of what should be a recurring level of conversion ratio because of the reversal of the down payment that we took advantage of in 2015. This is quite mechanical reversals of this down payment. So yes, please do consider that, of course, after a level of conversions ratio in 2015, which was extremely high because of the down payments. You have seen net adjusted income to cash flow, conversions ratio at 137%. Of course, in 2016, we'll have some kind of reversals. Having in mind that in the mid terms, this is what I said about our EBIT to cash flow conversions ratio being at or above 60%. Thank you very much. Thank you, gentlemen. The next question is coming from Mr. Tristan Sanson, Exane BNP Paribas. Sir, please go ahead. Yes. Good morning, Patrice, Pascal, and welcome, Bertrand. I have a number of quick technical questions. First one is on the free cash flow guidance that you just provided. Did I correctly understand that you say that mid-term, the free cash flow conversion should be at or above 60%, which is a rewording of a previous guidance, which was moving from 50% towards 70%? Should we understand actually the same worded in a different way, or is it really reflecting the impact from the last prepayment that you received in 2015? Second question, on the restructuring expenses, which were a bit lower than expected in 2015. I suspect there is a correlation between that and the acceleration of the organic growth, meaning that you have a less requirement to downsize some activities. But can you explain to us a bit what happened in 2015 and what is the outlook for that in 2016? On the R&D, I am not sure I have totally understood your message for 2016, but is it like marketing expenses? Should we expect it flat as a percentage of sales, or is there any further increase, more material increase expected? And the final one is on the French defense performance in 2015. I think you said France overall was flat year-on-year, but I am not sure whether you are including only the French MoD activity or other activity in that. But I know that the end of the year was a bit complex to finalize. So can you tell us whether you are going to start 2016 from a fairly easy comparison base in France or a fairly difficult one? Thank you. Okay. Good morning, Tristan. On your first, those are technical questions, so I will take the lead and will keep Patrice for more strategic questions. Cash flow conversions, no, not at all a change in our guidance in term of cash flow conversions ratio, which is to target 60% plus in the medium terms. And you see that if I take the last two years, we are quite well-positioned versus this medium term target. 2015 restructuring, yes, you are absolutely right. Probably slightly a bit below what you were expecting, slightly below EUR 100 million. And we expect a similar level for 2016. And it is true that, as you pointed out, growth will allow us to have less restructuring and restructuring more today, much more about developing our competitiveness than dealing with workload issues that we might had in the past because of no growth at Thales. All of that is positive. In 2016, my view is that it should be quite stable versus 2015. R&D, your understanding is absolutely correct. A good guidance would be to consider that R&D should be flat as a proportion of sales. In France, your comment was about our sales in France, which was flat in 2015 versus 2014. This is France by countries of destinations. From this base, we expect as for the other mature countries, France to develop growth the next years to come. Okay, thank you. Thank you. Thank you, gentlemen. The next question is coming from Christophe Menard, Kepler Cheuvreux. Sir, please go ahead. Yes, good morning. I had two questions. The first one was on the bridge in 2016. I was just trying to understand your guidance in 2016 and what it implies for the efficiency improvements. If I factor in the growth you're going to have, it seems that we're going to have something like efficiencies of EUR 40 million-EUR 50 million in 2016. Is that a number that is close to what you expect? That would actually be one of the lowest number in the past years. The second question is precisely about 2017 and 2018, because you made a very good explanation about the gains on engineering cost. Should we expect the impact on the engineering cost and the efficiency associated with them to materialize in 2017 and 2018? To that effect, can you narrow down a little bit the range of the profitability you gave? Could we expect as of 2017, a margin of 10%, precisely because efficiencies are running at a very high level in your engineering cost? Yes, Christophe, good morning. I don't want to be too specific and to start cutting our performance in pieces. From the EUR 1.2 billion of EBIT in 2015, we commit to increasing this level of EBIT. This overall between EUR 85 million and EUR 115 million. This on the basis of the same currency, by the way. Because this guidance for 2016 is based on the level of currency that we see today. What we see today is very much in line with the average of 2015. This means that we are targeting overall for Thales, an increase in our EBIT between EUR 85 million and EUR 115 million on the same currency. Now, a part of that will be driven by volumes and part of that will be driven by better efficiencies. At this point in time, I think it's really, Christoph, a bit too early to make any distinctions. On the midterms, 9.5%-10%, we confirm our targets. As you know, on the basis of a significantly higher level of the top line, which means that in term of absolute figures, in term of EBIT, in absolute terms, as compared to what we might have told you a few years ago, particularly in 2014, when we released this 9.5% to 10% guidance for 2017, 2018. Of course, the underlying level of EBIT will be higher because, we have upgraded our projections in term of organic growth. Okay. Thank you very much. Thank you, Christoph. Thank you, gentlemen. The next question is coming from Mr. Zafar Khan, Société Générale. Sir, please go ahead. Thank you. Good morning, everyone. Just wanted to pick up on that, please, if I may, on the margin guidance for 2017, 2018. Clearly, when you gave that guidance a few years back, I do not think you were thinking of mid-single digit organic sales growth, which you are now guiding to. But you have not changed the guidance. Could you please discuss with us the operational gearing within the group, and why there is not a bigger drop through of the organic growth that you are guiding to in terms of the EBIT? So I need some help with that. Why is the margin not expanding beyond what you have previously guided to? The other thing was just on the 2015 numbers, clearly very good numbers. You did much better than the guidance. But if I could just be slightly controversial there. Are the divisional guys not being completely honest with you on what they can achieve, and therefore underplaying the potential, and therefore you are giving guidance, which is then exceeded quite significantly by the actual result? I just want a little bit of help on that. Are the guys being stretched at the divisional level to give you the proper numbers? The third one, just on the aerospace 2015 numbers. You say the organic EBIT actually is down 3%. Is it all R&D or is there something else going on in the aerospace division? Could you please also just help me understand the kind of difference between the margins you achieve in the aerospace business versus those in the space business? Thank you. Okay. Thank you very much, Zafar. A first word on 2015 and the slightly controversial question or comment that you made, Zafar. If you were in my seat or in my shoes, I think you would see from a very different perspective. It is a lot of efforts. It is extremely difficult for such a company like Thales to achieve such kind of results. We are not in a recurrent business with factories producing the same thing every day, every week, every month, every year. Each time we do something for a new customer, of course, we try to leverage as much as possible, product policy, building blocks, reuse, and so on and so forth. We are in a very complex engineering business. Hence, the fact that reaching this level of profitability or performance is really a challenge, and I am quite proud of it. Even if you consider that we could do more, I think that 2015 was quite a remarkable achievement. Hence, by the way, the 2016 and 2017, 2018 guidance. Look at where we come from. Look at where we were a few years ago. Look at the trajectory that we have achieved. We need, clearly, to continue to build on credibility. We need to continue step by step to improve profitability. So please do not go too fast. Do not consider that everything is in the bag when we start the year. It is not at all the case. We will continue to improve in 2016 by almost EUR 100 million EBIT. Yes, we will benefit from growth. Also remember that when we organized the investor day in 2014, we committed whatever the growth. So we took the risk, if I may, or took the challenge to commit on the guidance, even with zero growth. Yes, we confirm for the moment this range, 9.5%-10% for 2017, 2018. I still consider this is a challenging area where we want to land in one year or two years ahead of us. It is clearly too soon to say more for the moment about this profitability guidance. Pascal, you want to complement? Yes. Maybe on aerospace, your comment about this slight drop in terms of EBIT organically. As I said, this is driven by increased level of R&D. What it means, R&D in the aerospace business amounted to 5.7% of sales in 2014 and increased up to 6.5% in 2015. So you see, 80 basis points increase in R&D spendings, which is higher than the drop in the EBIT margin that we have seen in 2015 versus 2014. This substantial increase in R&D is both for our avionics business and in particular, Thales investing more in terms of product policy to develop the new generations of avionics that will be on the next commercial aircraft and helicopters. Also, in our space business, investing in our new electrical propulsion satellite platform. So those two areas have requested a significant amount of new R&D investments. We think that in 2016, in terms of R&D for aerospace, it will stabilize in terms of R&D on sales. We don't communicate the profitability of avionics versus space. This is something that we don't communicate. Now, we see those two businesses being quite profitable. In terms of your first question, Zafar, was about operating lever and how can we give you guidance on that. It's true that, as compared to what we told you in beginning of 2014. As Patrice Caine said, we took these commitments in 2014, regardless of the expectations in terms of top line. We said that our investments will also depend upon our ability to grow this company and to grow it in a profitable way. It's true, and this is what we have seen over the last two years. We have seen overall, Thales continue to invest more and more in R&D and marketing and sales, at least in line with the progressions of the sales. Even in some cases, our R&D and marketing and sales costs are moving up even more rapidly than the top line. This, once again, to drive effectiveness, competitiveness, innovations for R&D expenses, but also to fuel the growth with regard to marketing and sales. My view is that on the next two to three years, we'll keep having a stable R&D and marketing and sales expenses as a proportion of sales, which means that it is our choice not to take advantage of these operating factors on those two specific lines, which are R&D and marketing assets. I would say, in particular with regard to R&D, which is the key component for Thales to continue developing our business. Because of that, yes, please don't consider that R&D, in particular, are a way for us to take advantage of operating levers. On G&A, on the contrary, yes, as we have demonstrated in the past, we are benefiting from this operating lever, and this will continue going forwards. So we are quite focused in terms of what we consider being good expenses to be a more competitive company. I would say it's bad expenses, not bad expenses, but expenses that we would like to continue dropping in the next years to come. With all of that, allowing us to achieve 9.5% to 10% in the next two years. Then we will see afterwards, Zafar. Because you already raised the question about will Thales be able to go above this level? It's a bit too early. But I guess with all the comments that Patrice Caine made about our key Ambition Boost drivers, there is a way for Thales not to just stop in 2018. There's a life after 2018. That's very encouraging. By the way, I didn't want to take anything away from the excellent work the team has done. But- Patrice Caine, it was a congratulations session, but. We know. I don't want to take anything away from the hard work you guys have done and just want to say congratulations. A very good set of results. Thank you, Nathan. Thank you. Thank you, gentlemen. As a reminder, ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. We have a question from Mr. David Perry, JP Morgan. Sir, please go ahead. Yes. Good morning, gents. I agree, a nice set of results. I've just got two boring questions, please. One, Pascal, you said something about the tax rate coming down over the next five years. I wasn't quite sure what exactly you were guiding to, if you could clarify that, please. Secondly, again for you, Pascal, of your net cash, how much of this would you say is unspent customer deposits, if you have that number, please? Thank you. David, your first question about tax, and thank you for this question because it allowed me to get back to a statement that I made when I joined Thales, which was to consider that this company needs to work on its tax rates. This is what we have been able to do. To give you the figures, in 2013, our tax rate at Thales was 31.5%. We managed to drop it at 29% in 2014. In 2015, we managed to continue dropping this tax rate at 26.7%. Of course, there is a limit to the drop, but my view, and this is what I would like to confirm with you, is that we think that in the next years, and of course, assuming that the tax regulations will not change, which is a bet, of course, but assuming that tax regulations will not change, we do think that Thales' tax rate will be between 26% and 27% going forward. This is something new, which is our ability to confirm that what we have done over the last years is not just a one-off, but we think that we will be able to keep this level to 27% at least for the next few years. Okay. On the customer deposit, this is a non-ending debate. I do not want to communicate on that. The key message on that is that Thales, as a company, is able to operate with overall a negative operational working capital. This is very important when you consider return on capital employed. Because of that, because of a negative working capital, overall, our capital employed are quite limited. Because of that, our return on capital employed are much above EBIT as a proportion of sales. This will continue. Of course, there will be up and down. What we have also demonstrated in 2019 is that we can strengthen this model where we take advantage of pre-funding from our customers. This is a model that we want to keep developing in the years to come. Of course, it depends business by business. You have businesses where this, of course, pre-funding is the whole of the game. In some other businesses, not the case. It is true that in particular in export contracts, of course, as you know, much more complex project to manage. The good thing, as part of the good thing, is the fact that those contracts benefit from pre-funding, which is, by the way, probably the best way to manage the overall risk that those project might develop. This is basically what to do at Thales to continue driving this company with a negative working capital and a very high level of return capital employed. Okay. If I just ask that second question a different way, then. How much cash do you think you've got available for future bolt-on acquisitions? Enough. Enough. There's not a magic number, David. I guess that it's quite obvious that we have the appropriate level of flexibility allowing us to continue considering smart, meaningful bolt-on acquisitions as we did in 2014 and as we are going to do in 2016 with the finalizations of the Vormetric acquisitions. This is the type, as Patrice Caine mentioned, this is the type of acquisitions that we would like to continue considering at Thales, and it's true that our balance sheet allow us to that. Okay, great. Thank you. Thanks, David. Thank you. Thank you, gentlemen. At this time, we have no other questions. Okay. Thank you very much to all of you. I guess that we will have the opportunity to meet with most of you in the next coming weeks in our roadshow. Just to remind you that our next call will be on May 4, when we release our Q1 figures, and in particular, our order intake and sales for the first quarter of 2016. Thank you very much for your attention and see you very soon. Bye-bye. Thank you. See you during roadshow. Bye-bye. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.