Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales twenty twenty Half Year Results Conference Call. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr.
Bertrand Delcare, VP, Head of Investor Relations. Please go ahead, sir.
Yes. Hello. Good morning, everyone. Welcome and thank you for joining us for the presentation of our H1 twenty twenty results. With me today are Patrice Caine, Chairman and CEO and Pascal Bouchiat, CFO of Thales.
As usual, the presentation will be in English and followed by a Q and A session. It is webcast live on our website at talesgroup.com, where the slides, press release and consolidated financial statements are also available for download. A replay of the call will be available in a few hours. With that, I would like to turn over the call to Patrice Caine. Good morning, everyone.
I hope you are all safe and healthy. So let's begin with Slide two. As usual, let me start with the highlights of our H1 twenty twenty results. As you will see in a minute, our H1 results were, of course, severely impacted by the COVID-nineteen crisis. These results are however in line with the framework that I presented back in April during our Q1 presentation.
They combined the major impact on CVRO demand, down by more than 50% in Q2, a smaller but meaningful impact in biometrics and IoT and a temporary disruption, sometimes very material, of almost all group operations. Very early in the crisis, we decided to implement a global adaptation plan and it has already started to deliver some significant benefits in this period, more than €300,000,000 This crisis did not prevent the team from being very active on the commercial front. And even though they are not in our H1 order intake as the contracts are still being finalized, I'm happy to report today that we were selected on several flagship projects in the past weeks. In Space, I'm referring to the fact that we will be a key contributor to the five of the six Copernicus Earth Earth observation missions, including the most iconic one, the c o two m mission, which will monitor atmospheric CO2 emissions. Let me stress that the total value of these projects will be around €1,800,000,000 even if only the first tranches corresponding to the advanced definition phases will be booked this year.
Secondly, in naval defense, after winning projects in Spain with Navalntia and The UK with Babcock for the Type 31 project last year, we also we will also be a major contributor to the MKS-one 180 frigate program, the largest program in the history of the German Navy. We expect to sign the corresponding contract later this year, adding more than EUR1.5 billion to our backlog. Finally, as I will explain in the second part of the presentation, our positioning as a supplier of intelligent systems and digital solutions in five critical markets is even more relevant in the post COVID nineteen world, and our strategic roadmap is solidly addressing both the near and long term. So first, let me comment on a few key figures and are now on Slide three. So at EUR 6,100,000,000.0, order intake was down 13%, primarily because of the lower load volume of large contracts booked in the first period.
The COVID-nineteen crisis impact on Q2 sales was significant, minus 20%, taking sales down 5.4% over the half year and 13.6% organically. Then EBIT and adjusted net income declined 60% marked by the drop in CVNO sales and by operational disruptions. Let me stress here that the significant part of this negative EBIT impact is by nature temporary as it is linked to the implementation of lockdowns and sanitary measures. In this unprecedented situation, we asked our teams to be very focused on cash management and this delivered well. Free cash flow generation has remained under control at minus €471,000,000 it was only slightly below the normal seasonality.
This free cash flow level drove our net debt position up to EUR 3,900,000,000.0. So after this rapid introduction, I now hand over to Pascal, who will comment our financial results in greater detail.
Thank you, Patrice, and good morning to everyone. So let's start with order intake. I'm now on Slide four. As usual, the chart on the right shows the breakdown of our orders by contract value. Obviously, it's no surprise that the Q2 disruptions have created delays in terms of finalizing and signing contracts, and this is especially apparent for large orders.
With four of them in H1 twenty twenty two versus seven last year, the total value booked decreased by €1,000,000,000 We booked three contracts of more than €100,000,000 in Q2. The supply of anti submarine sonars to the US Navy, showing again the leadership of Thales with navies around the world. The expansion of the strategic munitions supply for the Austrian MOD. Total value of this contract is above EUR 600,000,000 over ten years and the first tranche booked in Q2 has a value just below EUR 200,000,000. And the third large contract is a space contract for an undisclosed customer.
Considering the natural volatility of large orders, I have often stressed in the past the importance of a large base of small orders under €10,000,000. It is demonstrated clearly here. Excluding Gemalto's consolidation, order intake was down 10% for such small orders, in particular driven by the drop of demand in CVIRO. Excluding it, our volume of small orders decreased by only 5% versus last year. Moving now to Slide five and looking at sales.
Sales are decreasing overall by 5.4% versus H1 twenty nineteen and that negative growth is resulting from different moving parts. There is still a significant scope impact, euros $697,000,000, due to Gemalto Q1 sales that were not included in our H1 twenty nineteen numbers and a €20,000,000 negative currency effect. Then there is obviously the impact of the sanitary crisis, which started at the end of Q1 and reached its peak during Q2, driving a 20% drop in sales during that period. As we explained previously, COVID-nineteen consequences on sales can be broken down into distinct impacts. The first impact is due to the major drop of demand in civil airness, more than 50% in Q2, with additional smaller impacts in businesses like biometrics and IoT within BIS.
And the second is what we call the productivity impact due to the disruption of operations across all businesses, which explains the 16% drop in non civil aero sales. Turning briefly to the geographical perspective, which is not very meaningful in such in such a period. The sales decline is more visible in emerging markets than mature markets. It is mainly due to the expected phasing down of a couple of major defense and security and also transport contracts. Moving on now to Slide six, looking at the adjusted P and L from sales to EBIT.
As mentioned already, EBIT margin is clearly down at the June 2020, 4.5% versus 10% last year. This usual presentation of our adjusted P and L is a bit difficult to analyze considering the significant scope effect. In particular, the overall increase of indirect costs in percentage of sales, moving from 17.3% to 19% is directly resulting from the consolidation of Gemanto, whose businesses come with higher gross margin but also with higher levels of R and D and sales and marketing costs. So to better explain what happened in the 2020, we have changed a bit the presentations of the EBIT bridge and now on slide seven. Of course, in appendix, you can find the traditional EBIT bridge presentations.
This is on Slide 28 and the H1 2019 P and L at 2020 scope on Slide 29. Starting from the H1 20 '19 EBIT, including Gemalto's Q1 twenty nineteen, $829,000,000, We estimate the decline in gross margin due to the COVID-nineteen crisis and before cost saving actions at approximately EUR $740,000,000. Now on the positive side, we estimate that our cost savings actions have already delivered the equivalent of 4% of sales in savings, EUR $320,000,000, half through our actions to reduce direct costs and half, approximately half through our actions to reduce indirect costs. You see on this slide, the 9% decline in indirect costs with minus 9% on R and D and sales and marketing and minus 10% on G and A. In other words, our cost saving actions offset a little more than 40% of the crisis impact on our gross margin.
Compared to H1 twenty nineteen, we have a small savings on restructuring, minus €17,000,000 as last year, we booked the engineering competitiveness plan in our Transport business. Last element of the bridge, Equity Affiliates were materially down from €80,000,000 last year to €1,000,000 this year. Managing the lockdown and sanitary measures was quite challenging for shipyards, driving Naval Group sales down 26% and its contributions to our EBIT into negative territory minus €15,000,000 The decline of the other JVs contributions was particularly material in civil aero and thinking of Deal Aerospace in Germany and also ACSX in The US. So moving now to slide eight. I will go through the performance of each of our operating segments in the next few slides.
So let me just highlight a few points here. EBIT in the aerospace segment is clearly negative due to the combinations of drop in demand and operations disruption, and I will further develop them in a minute. Transport EBIT turned to a positive low margin. And third, in parallel, both Defense and Security and Digital Identity and Security segments maintained a strong performance considering the unprecedented context with their respective margin at 109.5%. So I'm now on Slide nine, so let's start with Analyst Day.
Starting with orders. At €1,600,000,000 the order intake was down 8% to H1 twenty nineteen, which is not as bad as we could have been seen by considering the major COVID-nineteen impact on civil aero during Q2 twenty twenty. The main reason behind this lengthy drop is a combination of two effects. First, a strong first quarter for Evgenics. As a reminder, our Q1 twenty twenty was up 15% for the all segments and also an improved dynamic in the space market, both on the commercial and on the institutional side.
At €2,900,000,000 sales were done by more than 25%, strongly affected by the drop in demand in Q1. Already mentioned the figure more than 50% in Q2. Both line sheets and aftermarket for flight agenics and IFC faced similar declines. Sales were also impacted by the productivity impact caused by the lockdown and sanitary measures on all other activities during Q2, military avionics, space and also the microwave tube operations. In terms of EBIT, as I mentioned on the previous slide, the negative EBIT minus 109,000,000 was due to the combination of the sharp drop in sales, I've just mentioned, and also a 12 decline in gross margin, this in spite of the strong cost actions we took in Q2, which for example drove 11% reduction in indirect cost over H1.
Let me stress that EBIT should materially recover in H2, thanks to the full effect of our cost saving actions and improvement in productivity, notably in non seasoned aero businesses. So now moving on to Slide 10 with Transport. First, order intake was down 21% versus H1 twenty nineteen and was mostly affected by delays in bid processes and contractor works due to the sanitary crisis. Sales were down by 13.7% organically. Part of this negative growth was anticipated because of the phasing down of works on major urban rail projects, which have been driving very high comps since the 2018.
This was obviously aggravated by the COVID nineteen operation disruptions, especially in regard to carrying on-site installations and testing activities. We expect these disruptions to be H1 one off, of course, assuming that there is no major degradation versus current sanitary conditions. The combinations of the decrease in sales and the impact on operational performance is of course affecting EBIT this year, which amounts, however, to a positive €4,000,000 Still, this represents a significant improvement against H1 last year when EBIT was strongly negative due in particular to two negative one off costs. However, like what I mentioned earlier for Aerospace, our transformation plan combined with the full effect of the cost saving measures and the more reduced operational disruption should drive a higher margin in H2, allowing us to target a full year EBIT margin above last year 2.9. So moving on now to Slide 11 with Decent and Security.
First of all, it's important to remember that 2019 was an exceptional year for this segment, so clearly starting the year with high comps in addition to facing an unprecedented crisis. With that in mind, order intake was down 36% at €2,400,000,000 As I mentioned earlier, this is primarily due to the volatility of large contracts above €100,000,000 We booked three such large orders this year against six last year in the context of delays at finalizing contracts. However, what is important to note is that we have not lost any significant opportunity during this period and we do expect a catch up during H2, especially with the signature of the MKS 180 contract that Patrice mentioned earlier. Sales reached almost €3,600,000,000 down 7.3% organically. This drop was due to the COVID-nineteen related operational disruptions that are being progressive that have been progressively disappearing.
Encouragingly, six out of 13 business lines have managed to grow in spite of the context, notably in the naval domain, but also in our communication networks and protected vehicle businesses. Turning to EBIT margin, profitability remained at a solid level, 10%, considering the drop in sales and gross margin. This outcome was achieved, thanks to rapid adjustments of R and D costs in line with the drop in sales. Last segment on slide 12 with DIS, so our Digital Identity and Security segment. Of course, organic and total changes are not meaningful in this segment since the consolidations of Gemalto was effective from the middle of the third last year.
As usual, there is no need to comment on order intake since it is structurally aligned with sales in most of our BIS business lines. Pro form a H1 sales were flat with a limited minus 5% sales drop during Q2. On the positive side, both EMV cards and SIM cards grew above their long term trends on the back of the reissue cycle in The U. S. And the robust demand for contactless cards worldwide during the same time crisis, as well as probably some precautionary buying of SIM cards.
On the negative side, as expected, both biometrics and IoT module businesses were impacted by the immediate decrease in terms of demand from the very beginning of the pandemic in March 2020. While short term visibility is low in DIS markets, at this point, we are a bit cautious and assume that there will be a bit less supportive in H2. Demand for biometric travel documents and IoT modules will remain depressed and SmartCare sales should decline in H2. In terms of EBIT, BIS delivered a very strong performance in H1. You see €114,000,000 and a 9.5% EBIT margin.
Our operations at the IS were less disturbed than in other businesses and the gross margin mix was favorable overall. The indirect cost performance was also pretty good and it benefited from the ramp up of cost synergies. We see in H1 twenty nineteen pro form a EBIT margin, which was only 3%, which means that H1 twenty twenty is much above the pro form a H1 twenty nineteen EBIT margin in this segment. Turning now to Slide 13, just a few comments on items below the EBIT. Cost of net financial debt and the other financial results is up by EUR 25,000,000, mostly due to the increase in cost of debt after acquiring Gemalto in 2019.
Finance cost and pensions was slightly down by €7,000,000 thanks to lower discount rates. The effective tax rate moved down from 26.6% to 23.2%, thanks to a more favorable country mix and to the higher way of research tax credits compared to pretax income. Minority interest were negative at minus EUR40 million at the end of H1 twenty twenty, leading to an adjusted net income of EUR232 million and an adjusted EPS of EUR 1.9. Moving now to the key items on the cash flow statement and now on Slide 14. During the first six months of 2020, our operational free cash flow was minus EUR $471,000,000.
As you see on the chart, this negative level was due to the strong seasonality of working capital, which is usually very negative in the first half of the year. As you remember, one of our first actions as soon as the sanitary crisis started I think to ensure that the group would be in a safe position in terms of cash. Since then, we have been managing our cash flow with great attentions. In the past few months, our cash optimization plan that we launched in mid-twenty nineteen, this plan focused in particular on three items. First, reductions of overdue balances.
Second, tight control of supply chains and consequently of inventories. And third, proactive negotiations with both customers and suppliers in order to obtain more favorable payment terms whenever possible. Of course, I mean, this didn't present us from being proactive in our support to small suppliers with advanced payments, for example, and of course, if and when required. Now looking at the moving parts detailed on the right part of this slide, Operating cash flow declined by EUR $350,000,000, which is less than the minus EUR $472,000,000 EBIT decrease. Thanks to our strong focus on cash, the change in working capital was less negative than last year.
Recurring pension cash out and net financial interest were up due to the consolidations with the German tool. Our income tax paid was slightly down due to the more favorable companies. Finally, as part of our global adaptation plan, we were able to reduce our CapEx by €14,000,000 which corresponds to a 16% at constant scope. Altogether, these actions strongly helped to limit the decrease in terms of free operating cash flow, down by only EUR 139,000,000 versus H1 twenty nineteen to be compared with a decrease of €472,000,000 for the EBIT during the same period last year. So overall, flow is very much under control.
Now let me finish. I'm now on Slide 15. Let me finish with the words and the evolutions of our net debt position. Very little to mention here, part of the dividend payments, which amounted to EUR $336,000,000 in H1 twenty nineteen and EUR 0 in H1 twenty twenty after the decision was taken by the Board to withdraw the final payments to the 2019 dividend. We also see on this slide the €94 within this order box which relate to the impact of the IFRS 16.
So I now turn the call over to Patrice to talk about strategy and outlook.
Thank you, Pascal. I'm now on Slide 17, turning to our strategy and outlook. Now that we are exiting the COVID-nineteen related emergency period, it is time to start asking ourselves whether we should adjust our positioning or accelerate some aspects of our strategy to take into account the post COVID-nineteen context. A little more than a year ago, in anticipation of the acquisition of Gemalto, I launched an initiative to define our shared purpose as the new Telets. It was an exceptional opportunity to collectively define the true why of our company.
This process, which involved more than 35,000 employees in 40 countries, led us to take as our banner ambition, the sentence that you read on the left of this slide, building a future we can all trust. Of course, what we do is unchanged. We help our customers master their critical decision change, thanks to sensors, mission systems, command and control systems, and digital identity and security solutions. Stating our purpose in this way helps us articulate the reinforced relevance of our positioning in a post COVID-nineteen world that needs trust and trustable solutions. More than ever, customers expect us to not just incorporate the most advanced technologies, but also address the issues of resilience, technological autonomy and sustainability.
Our ambition 10 framework, which I presented several times in the past years, remains well adapted to maximize value creation in this context. Customer and user centricity, operational performance initiatives, investments in R and D, especially in digital and the integration of Gemalto remain the five key levers to support long term profitable growth. Turning now to Slide 18, reviewing briefly the growth perspective in our civil businesses. While the very near term outlook is still naturally uncertain, each of the markets we serve is driven by major long term societal trends amplified by the ongoing crisis. In each of them, we are focused on faster growing segments.
First, starting with Civil Aeronautics, of course, the recovery of this market will take several years, but there is little doubt that air transport demand will return and continue to grow faster than GDP for many years, if not decades. Our solutions for this market, both Agenix and Air Traffic Management, are key contributors to a greener and smarter aviation. According to several studies, new generation connected and collaborative Agenix combined with improved air traffic management can deliver a 10% reduction of fuel consumption. As these solutions can be implemented on existing aircraft, they can deliver their savings on a much shorter time horizon than new engine or even new hydrogen propulsion technologies. Turning to our transport business.
Rail operators have faced a major drop in traffic during the crisis, but this is clearly temporary. Traffic is returning to normal and more importantly, investments in green mobility infrastructures are on the priority list for many governments. As a global leader in signaling solutions, we are very well placed to benefit from these investment plans. Moving now to Space, as mentioned by Pascal, visibility remains low on the commercial telecom satellite market, but the long term perspective remains robust and is probably accelerated by crisis. Space systems are essential to deliver key functions of a greener, more digital and connected world, such as reducing the digital divide.
As I mentioned in my introduction, Earth observation missions are among the key European Space Agency and European Commission projects, And we have demonstrated again our leadership in these areas by being awarded a key role on five of the six upcoming Copernicus missions. Finally, our Digital Identity and Security business is, of course, at the heart of major trends, digitalization and the need for trust. Interestingly, over the past few months, we have seen increased demand for several emerging DIS solutions such as biometric payment cards, which will see its first commercial launch by BNP Paribas in a few months. New border control gates incorporating facial or contact lens fingerprint recognition and even temperature sensors. Or more broadly, digital civil identity solutions.
Supplying highly secured digital identity on top of traditional physical identity documents enables all types of e government procedures online, saving money and increasing revenues. Moving now to Slide 19 with our defense business. Since the start of the COVID-nineteen crisis, investors have asked if the increased pressure on government budgets in many countries may drive a decline in defense budgets in the coming years. So far, we have not seen any material signal in this direction. None of our big customer countries have mentioned reducing their different spending going forward.
We have rather seen the opposite, with MOD being very supportive, accelerating payments to industry and investigating opportunities to bring forward procurement programs. In particular, our two largest defense customers, France and Australia, have reaffirmed their budget growth plans. The overall context is unchanged, driven by increased geopolitical tensions and the need to address complex threats. From that point of view, what happened in the latest recession after 2008 is not a good template as the level of geopolitical tension was much lower at the time. Moreover, within global defense markets, we are positioned on faster growing segments: connectivity, sensor suites, system of systems all of these are at the core of future connected collaborative combat and defense capabilities.
Let's take the example of SCAS in France, Germany and Spain or Tempest in The UK. These market segments are expected to grow faster than overall budget because they match very well with key customer priorities, better information, tighter coordination and because the digital technologies in which we have invested enable major improvements in capabilities. Our work on MTS-one 180, the new German frigate program, is a great example of these dynamics. At more than EUR1.5 billion, this contract, which we expect to book in the coming two or three months, is one of the largest in our history. It includes, in particular, a new generation version of our best seller naval mission system Tacticals and a fully digital radar suite coupled with intelligent software designed to handle complex naval threats such as swarm attacks.
We expect this sort of commercial success to drive our defense and security backlog to a new record high at the end of the year. Moving now to Slide 20, discussing the drivers of margin expansion going forward. Under the ambition 10 framework, we continuously launched initiatives to improve the operational performance of the group, procurement, engineering, super functions and so on. On top of this, we remain well on track to deliver Gemalto cost synergies, euros 120,000,000 by 2022, as shown on the right. The transformation of our Transport business, which delivered an EBIT improvement even in the COVID-nineteen crisis, will continue in the coming years.
Within our COVID-nineteen global adaptation plan, the bulk of cost actions are temporary as they are addressing the temporary decline in sales. At the same time, like all other players in the civil aero ecosystem, we are starting to implement the necessary structural cost adjustments in our Avionics and IP businesses. The plan will be finalized in the coming months based on the OEM production scenarios and the scope of governmental support notably in R and D and on long term temporary furloughs. By 2022, all these actions should allow us to return to the level of profitability we achieved in 2019, 10.6% on a pro form a basis. Importantly, we remain of course fully committed to delivering on our medium term EBIT margin 11.5% to 12%, something we should be able to achieve once the CVDRO market has more or less normalized.
Turning now to Slide 21, discussing our H2 twenty twenty outlook. Starting with the impact of the crisis on the left of the slide. While we do expect internal productivity to be almost back to normal over H2, we also expect to continue facing some limited supply chain and customer site access issues as well as travel restrictions, which will weigh on our ability to record sales. In addition, I shall stress that the near term macro trends remain uncertain. First, in Civil Aeronautics, where aftermarket business will depend on the pace of recovery of air traffic.
Second, with respect to corporate IT investments. Third, more generally, over the overall economic environment. Turning to our global adaptation plan, H2 will benefit from the full impact of our cost saving actions, for which we are targeting around €750,000,000 of savings in 2020. As explained by Pascal, all the teams have been very mobilized on cash management in the crisis. In that context, we will cut CapEx at least in line with the decline in sales, which will represent at least EUR50 million.
And as I mentioned on the previous slide, in the coming months, we will finalize the structural cost adaptation plan for our CV payroll businesses, which brings me to our financial objectives for 2020 considering the business environment that I just described shortly and of course assuming no major step up in sanitary measures on our key markets. So I'm now on Slide 22. With respect to order intake, we expect to record another year of strong commercial performance in Defense and Security, especially thanks to the booking of MKS 180, which should be sufficient to drive our group book to bill ratio above one. In view of the near term uncertainties, we are taking a broader than usual range for our sales guidance. So based on the July 2020 scope and foreign exchange rates, we expect sales to amount between EUR16.5 billion and EUR17.2 billion.
Thanks to the initiatives I've presented earlier, we expect EBIT to be in the €1,300,000,000 to €1,400,000,000 range, corresponding to an EBIT margin of around 8%, a rather modest decline in margin over H2, 50 to 100 basis points. Let me stress an important point. This EBIT guidance is based on an EBIT contribution from JVs of around EUR70 million and on our current base scenario for restructuring costs EUR130 million. As we are only starting the discussions with unions on the mix of structural cost measures in civil aero, we are unable to confirm, of course, this envelope if sorry, this envelope will cover them in full. This concludes our presentation.
Many thanks for your attention. And together with Pascal, we are now ready to take your questions.
Thank you. Ladies and gentlemen, we now begin the question and answer session. And your first question comes from the line of Olivier Rochet from Credit Suisse. Ask
morning, Patrice, Pascal, Bertrand. I would have three quick ones, please. The first one is you didn't provide a free cash flow outlook for 2020. If you could give us some elements of the main moving parts, that would be helpful. Second, in 2021, can you provide a bit of color on where or how much of the, let's say, headwinds of 2020 will removed?
And third, a quick one on Australia. Can you provide an update on Hokkai and on the conversations around the submarine contracts that might come in the future? Thank you.
Okay. Good morning, Olivier. Thank you for your questions. So starting with free cash flow, mean, of course, I mean, in this overall context, we need to be a bit cautious with regard free cash flow. What is is probably good good to have in mind is that, I guess, we're demonstrating each one that, I mean, we managed to, say, to contain our free cash flow at a level which is was satisfactory satisfactory considering the overall seasonality of working capital for Parete.
A second point, I do confirm in this underlying 95% conversions ratio from net adjusted income to, I would say, normative free cash flow for Thales. And I mean, is also valid for 2020, as I guess it's going to be valid for the next years to come. Third point, and this is something that we will need to keep in mind, We are at the list some free cash flow volatility due to, I mean, those down payments, prepayments and some cutoff effect that was in the past. You probably have in mind that as we released our 2019 figures, we provided you with the table showing, I mean, the sequence of those a bit exceptional working capital moves throughout the past period and resulting of EUR 700,000,000 of outstanding working capital positions 2019, those €700,000,000 reflecting the positive prefunding, in particular, on some large nice export contract as well as some nice, which is advanced payment and cut off effect that we benefited in particular in 2019. And as I said, I said that this should unwind partially in 2020.
So what is our updated view today on those €700,000,000 My view today is that, I mean, we should probably have, let's say, as I would have said, probably half of that reversing in 2020 and the rest in the next coming year. So with, I mean, what you have in mind in term of net income for 2020, with what I mentioned on the underlying 95% conversions ratio and what I've just explained on those remaining down payments and cutoff effects that we benefited in the past and how it should unwind in 2020. I guess that you should have a quite an appropriate vision on how our 2020 cash flow should look like. And of course, it will be pretty positive, of course. So that was on free cash.
Costayan, you want
to I think, Costayan? Question about the 2021 headwinds. It was your question, Olivier, 2021?
Yes. Exactly. Yes.
'21? Is it a business question or is it a free cash flow question or is it a business question?
No. No. It's a business question. More generally
So so I mean, as we said, I mean, if we take the civil aero business, I guess, all players are today considering that what we see today, what we are experiencing, it is going to last for a few years. So we don't we we don't expect, I mean, civil aerospace business to recover in in 2021. So on the first point, and I guess it is probably in line with what other players, other companies are sharing with with you. So overall, I mean, a 4040%, 50% drop on this specific market, 40% drop on this specific market is probably a good rule of thumb as compared to pre COVID-nineteen level of business. Now I mean, the rest of our businesses, I mean, we mentioned that our drop in sales in 2020 is essentially driven by, I mean, the impact of the sanitary measures and the level of disruption that this has created, in particular, in Q2 twenty twenty.
We mentioned that it is normalizing and with the level of, I would say, internal productivity that is getting back to almost normal level of productivity, we are a little bit cautious also about, I mean, the potential impact at our customers as we see also some disruptions at our customers, making, for instance, access to their sites a bit more difficult than it was in the past. Of course, this also together with, I mean, restrictions in terms of travel, for instance, all of that, I mean, creating some some some uncertainty. Now I guess we commented that defense and security, I mean, BENSO, of course, there is some uncertainty as we see. And I guess that Arthorn was pretty positive with regard, I mean, this business in terms of level of demand, of course, a bit cautious for the long term, but our tone is pretty positive on this side. DIS, we mentioned, but I guess, and Patrice will come back from this point later on.
DIS, have to be a bit cautious, as we mentioned, because lack of visibility for those short cycle type of businesses. We benefit in H1 from putting a strong level of demand with regard to smart cars, and and we need to see how how how this will will develop going forward.
But globally, you know, you've answered quite extensively, Pascal. Globally, at group level and if we take a step back, the progressive improvement on of the different markets on which we are present apart from civil aero has led us to say, to consider that in 2022, we should be back to the level of operational performance, level of profitability of 2019. So if you factor all these, let's say, elements, all these ingredients, headwinds, tailwinds, positive, negative and so on and so forth, it has led us to make these statements. So this is the global view. At the end of the day, we'll look at at Teles in in general.
Moving fast to to Australia, two points and submarine. And submarine. Well, Okay, things are set on track to to make it sure. Things are things are on track, so no particular, I would say, point to be to be mentioned. Submarine, so the different, I would say, competitions or competitive dialogues are still ongoing, mainly with Lockheed Martin in our case.
So we are waiting still waiting, I would say, some final say of Lockheed on several several tenders and in particular on the sonar side. So, you know, the bow arrays, the trunk arrays, the towed arrays. My tone is, I would say, is is is is rather positive, but now it's it's it's too soon to say it's done. So and it should be it should be announced. I hope before the end of the year, that's before the end of the year.
I see it's a kind of a down selection from the team.
Thank you.
Thank you. And the next question comes from Josh Zawo from Bernstein. Please ask your question.
Hi. Good morning. On the DIS segment, are you thinking about balancing profit preservation and growth investment as you look to capture the Gemalto cost and revenue synergies? And then quickly on the Civil Aeronautics and IFV, what was the order intake for Q2? And as you think about the recovery there and the potential for maintenance defer on the aftermarket, what was the order like in terms of Q2 compared to the 50% down revenue?
Thanks.
So Josh, I mean, good morning. I mean, similarly on FX, see, mean, it's more of a short time cycle type of business. So order intake and revenues are pretty similar. I mean, the 50% drop sales, I mean, that we have reported is, in my view, quite a good proxy on the overall level of order intake on this business. So probably, I mean, what is important to have in mind is that overall, I mean, this civil analytics business, a drop in terms of demand by something around 50% in Q2.
This is true for revenues. And my view, it is pretty much also true for order intake.
First question to For the balance between profit and growth when we manage overall DIS portfolio, That's a very good question, of course. And what we try to do, it's not a surprise, is to clearly manage for cash, I would say, mature activities like C business, it's a mature activity and to extract as much profit as possible from this activity to reinvest in fast growing and profitable activities like cyber, data protection or digital identity, even biometrics. So it's our day to day duty to do so in a smart way so that we meet the level of growth and profitability we shared one year ago now during the Capital Market Day. So nothing new compared to what we said at that time. Now it's our day to day duty to manage this balance between extracting profit on one hand and reinvesting on the other hand on fast growing profitable segments.
Which is, by the way, not the IS, I mean, a challenge. I mean, this is a coming challenge that and and this is where, I mean, at that, I mean, we we make decisions, balancing growth and and and profitability is is a permanent challenge and drives most of our obligations. Okay. Josh, is it okay?
Yes. Thank you.
Thank you very much.
Thank you. And the next question comes from the line of Celine Fornau from UBS. Please ask your question.
Yes, good morning gentlemen. Three questions, if I may. So the first one would be on the free cash flow and, you know, slightly better performance than expected in in in H one, which is great. But just being cautious that potentially there's not, how much are the elements that are being brought forward in 2020 compared to a 2021, expectation that we would have had, before COVID. So how much has been put forward and potentially in the defense divisions?
My second question would be on your comments on Gemalto on the IoT exposure and why would you see that continuing to be weak in H2? And maybe you can give us an update on the other end markets beyond automotive. And thirdly, if we should expect some deferred tax losses from the civil aerospace losses book, which could bring a lower cash tax or lower tax rate? Thanks.
Good morning, Selim. So on free cash, if I understand your questions well, I mean, is H1 level of free cash consistent with some cash out being deferred to H2? I mean and having a negative impact on H2, I mean, this is not my view. Was not was not pushed, I mean, expenses, I mean, to to h two that would result in a in a in a pretty bad, I think, level of h two production. No.
It's not, it's not what it's not what we have done.
Pascal, I meant more from a customer prepayment perspective, those that maybe could have come in 2021 and not happen in 2020 and this type of cutoff points.
No, mate. But it's business life. I mean, overall, I mean, I don't see anything special on top of what I shared with you about, I mean, the way those €700,000,000 of prefunding that we benefited in the past is going to unwind partially in 2020 and in 2021, 2022. It does not unwind it in H1. I mean, this is also we don't know why, I mean, H1 was pretty positive.
Overall, in h one and with hopefully, I mean, this will continue in h two. We are seeing overall, I mean, most of our customers, I mean, I mean, paying us and I would say in due time. And most of our clients, except some of them, willing to extend payment terms while nothing on in due time. So overall, I mean, pretty positive. We could have faced a situation where most of our clients would have told us, I want to extend my payment terms, and I will not pay you in due time because I want to extend payment terms.
This happened here and there, but at this point, in a pretty limited number of of cases. IoT You
can take this one if you want the question. So then you Yeah. Yeah. You take the third one. So IoT, good morning, Philippe.
IoT, in fact, the if we take a step back again, what we try to do is to is to focus on what I call demand in markets, on markets which are already willing to value things like security, of course, which is a key differentiator because IoT when we speak about IoT, IoT is a is a vast in fact, it's a vast field of different types of solutions from pure communities to high end and complex or highly secured connectivity. And for sure, we focus on the second part of this of this market. Typically, they are providing what I call vertical segments like smart metering or even payments. We have definitely security or or secured IoT as a value. And clearly, we can extract value from our customers on this type of solutions.
Automotive as well belongs to to to this type of demanding customers, but it's true that automotive will probably continue to be depressed in the coming months, 2021, I don't know, but at least for H2, clearly. Short term, midterm, it's always the path that we should make short term, it's a difficult market, long term or midterm. They are already providing the article one like the one I've mentioned, smart metering, payment and still automotive once it will have resumed.
Your last question, Celine, was about the deferred tax on the civil business. So overall, yes, my view is that we are going to book some deferred tax assets losses on on the civil business. Overall, by the project, good opportunity for me to share with you that we see a level of tax rate for 2020 that will be a bit below our previous guidance. We see today a level of tax rate that might be probably more like what was in H1, so something around 23%. And yes, I mean, accounting for deferred tax assets in 2020 will have a positive effect on our P and L in terms of tax income, but with no tax saving in 2020, we should benefit from that in 2021 in terms of tax tax savings.
And maybe last point that I can share with you also is that and we have not communicated on this on this point, but it's also true that we we have some tax tax synergies coming from Gemalto integrations that also are going to help us manage a level of tax rate that the next few years will be probably below what we have in mind so far.
Thank you very much.
Thank you. And the next question comes from the line of Malini Chohan from Redburn. Please ask a question.
Good morning, Patrice, Pascal and Bertrand. Three questions, if I may. Firstly, could you just clarify on your expectations in terms of recovery for 2022? Were you guiding to an absolute level of EBIT in line with 2019? Or was that on the margin side, so a 10.9% margin in 2022?
Second question, I know you mentioned that the bulk of the cost saving measures in 2020 will be temporary. Could you give us an idea of the percentage of how much will be temporary versus permanent or carried on into 2021? And then finally, in terms of your book to bill guidance of greater than one, I know the MKS one eighty order is supporting that. But could you give us some color on any of the other orders that you have in the pipeline, which you're confident that will come through in the second half?
For 2022? Yeah. Well, I can start, and you can comment the second. Yes. First, it's it's ten point six and ten point nine, to be precise, the level of profitability in percentage in 2019 pro form a, of course, pro form a.
So that's what we are clearly that's what we are aiming at in 2022. So in percentage term, definitely, I think I think it's clear. Then 2020, the CAL
I mean, yes, mainly. I mean, one first, I mean, for your question about, I mean, those contingency plan and how much of that will will continue in 2021? May may maybe, I
mean,
first, high high level content I I excuse me, high level contact and and and comments. What we are facing here, we see that on the the small portion of our of our business, we we see a drop in demand that is going to last. And, of course, I mean, this will drive more of a structural cost adjustment. And and the rest of our business, it is facing or are facing, particularly in Q2, I mean, more of the consequences in terms of production from the sanitary measures. And of course, I mean, this is hopefully, this is going to be temporary.
And again, I mean, I mean, temporary effects, we have put in place more temporary type of measures. Now, I mean, going forward 2021, and the second element, we'll adjust our cost base in 2021, also to address the evolutions in terms of situations and in terms of in terms of business. If I go through, I mean, the various measures that we have put in place, we have put in place, for instance, hiring fees or drop in contractors, drop in temporary staff. And of course, here, we will adjust, I mean, our policy, of course, depending on the level of business. We are also putting in in case furlough measures.
And here again, I mean, I mean, we'll see, I mean, what what is going to continue here again associated with the level of business is going forward. A third element is more of, I mean, a drop in variable compensations in 2020. And of course, I mean, this is more like a temporary measures. Then, of course, we have, I mean, in, I would say, many other external expenses. A good example of that is travel cost.
A good example of that is discretionary expenses. And of course, I mean, we will adjust, I mean, this type of measures depending upon the level of business that we'll see. And of course, on top of that, those structural measures that will help adjust our cost base, where, I mean, we believe that we are going to face a lasting drop in demand and primarily in our civil aeronautics business. So we'll be pragmatic at this point, probably too early. So some of those measures have a clear temporary effect.
Some of them can be extended going forward.
Book to bill now?
Book to bill. Yeah.
Book to bill, our guidance is what we said that book to bill should be greater than one in twenty twenty this year. Of course, it's made of a limited number of big, big contracts like MKS 01/1980. We spoke with Copernicus project as well, the contracts. Honestly, the the number of order we book in a given year is several thousand at Teles. So it's made of a very large number of orders.
We give us confidence on this book to bill greater than one is the good, if not very good resilience of what we call small orders at Telesho. Remember, our small orders are orders below €10,000,000 And these small orders, of course, are very, very numerous. These small orders below EUR 10,000,000 are very resilient in H1 and we continue. That's our I would say that's what we foresee in H2. So all of this should lead to this achievement by the end of the year.
Thank you.
Thank you very much. You're welcome.
Thank you. And your next question comes from Zafar Khan from Societe Generale. Please ask your question.
Thank you very much and good morning everyone. I've got a handful of questions please, I may. Pascal, you mentioned that DIS order intake is structurally aligned with sales. So just wanted to understand how that works. Second question, just on the drivers in H1 for smart cards because you're saying that's been quite good.
Third one was just on potential restructuring costs, maybe in H2 or 2021, given that you have to go through the process? And then finally, just in terms of the aerospace sales outlook for 2021, I know a lot of the business is short cycle in that order intake, but just what your view is on the sales in the aerospace segment in 2021 compared with 2020.
Okay. Zafar, good morning, first. So I mean, DIS, I mean, yes, it's true that, I mean, order intake look like revenues because, I mean, backlog in this business, putting aside our biometric business, but putting it aside, the rest of business is a business of of flows. I mean, it's not a long term contract. I mean, if if you take the smart account businesses, but also the side of security and the level of backlog is is is in this type of business, a short time, I mean, type of backlog.
So, basically, this is this is why, I mean, revenue look like order intake. I mean, in this in this business, I mean, clients, the order was quite reduced. I mean, and that is kind of it has nothing to do with, I mean, long term type of contract that we've seen in our businesses, whether it's be some kind of of things. Your question about smart cards in terms of business, so it's good. I mean I mean, we we have seen in in h one, I mean, quite a good level of demands in in in this business with, I mean, the development of contactless accounts, which also goes with, I mean, sanitary measures.
And I guess all of us, we are now used to using, I mean, con contactless accounts to prevent from, having to to to to enter a a code in a in a in a a transactions device. So overall, good. On the SIM account, we have seen a level of demand, which was also rather good. We are a bit cautious because, I mean, again, it's shorter time type of business and always a bit difficult to assess what was the level of precautionary buy from our clients in H1. And this is why, I mean, we are a bit cautious in H2.
It might be that some of our clients, because of anticipating some production issue overall in their supply chain. We might have had some clients deciding to launch precautionary appropriate orders in H1. H2 restructuring is true that, as we mentioned, we're starting a discussion with our trade unions, and we're also assessing, I mean, the balance of tools that we are going to use in order to adjust our cost base. I mean, for instance, I mean, between using long term furlough measures that are now accessible in some countries as opposed to a more, I say, mean, restructuring in a traditional way. Of course, this will have an impact on our level of restructuring.
So overall, we I mean, the level of restructuring that's underpinned our EBIT guidance is quite clear. This is EUR 130,000,000, I mean, probably something like EUR 30,000,000 above our initial guidance on this front. Now it might be that in a few months, once we'll have moved in terms of the exact measures and the scope of measures that we'll put in place, we'll come back to you with a figure that will be a bit different. At this point, it's a bit too early. My view is that, I mean, the €130,000,000 is probably more bottom of floor than the ceiling in terms of restructuring.
Once again, I mean, times being more like a one off cost in order to address in particular in the civil analytics and in situations. Twenty twenty one aerospace, my comment will be probably more on, when you talk about aerospace, I guess you are talking about about our segments.
Yes.
Yes. So so this, so this overall segments, yes, I mean, we we we we should have, I mean, some recovery. But here again, here again, I mean, we should be we should be a bit cautious. If I take, I mean, the civil avionics, sales civil analytics business, yes, probably we should start in a bit of recovery. But let's be clear, at this point, it's probably a bit too early.
We'll see how we I mean, the overall, I mean, traffic will develop in the next quarters. At this point, it's probably a bit early, but probably a bit of recovery, but that will be pretty progressive. Now, I mean, the rest of the business in our Aerospace business in 2020 has been impacted by the sanitary measures. This is the case of the West, our existing business, the non civil aeronautic business, and it is also true for the space business. And this is where in 2021, of course, we are going to see, some recovery, terms of sales because once again, some sanitary conditions will have normalized, hopefully, in 2021.
That's excellent. Thank you very much.
Thank you. You're welcome, Jafar.
Well, if there are no further questions, it's time to conclude then. So let me conclude by stressing the many factors of resilience that will help us navigate through the uncertainty of the coming months, our broad market diversification, our large confirmed backlogs and our best in class product positioning recently demonstrated once again by some great commercial successes. Thanks a lot for being with us this morning and looking forward to seeing you soon. Bye bye.
Thank you, ladies and gentlemen. If you didn't have a chance to ask a question on today's call, please do not hesitate to send a question to Thales Group Investor Relations at irthales dot com and we'll get back to you as soon as possible. Thank you for participation. You may now disconnect.