Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales 2020 half-year results conference call. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. Bertrand Delcaire, 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 2020 results. With me today, 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 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. Let's begin with slide two. As usual, let me start with the highlights of our H1 2020 results. As you will see in a minute, our H1 results were, of course, severely impacted by the COVID-19 crisis. These results are, however, in line with the framework that I presented back in April during our Q1 presentation. They combine the major impact on civil aero 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 EUR 300 million.
This crisis did not prevent the teams from being very active on the commercial front. 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 Observation missions, including the most iconic one, the CO2M mission, which will monitor atmospheric CO2 emissions. Let me stress that the total value of these projects will be around EUR 1.8 billion, even if only the first tranches corresponding to the advanced definition phases will be booked this year.
In naval defense, after winning projects in Spain with Navantia and the U.K. with Babcock for the Type 31 project last year, we will also be a major contributor to the MKS 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 EUR 1.5 billion to our backlog. 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-19 world, our strategic roadmap is solidly addressing both the near and long term. First, let me comment on a few key figures, and now on slide three.
At EUR 6.1 billion, order intake was down 13%, primarily because of the lower volume of large contracts booked in the first period. The COVID-19 crisis impact on Q2 sales was significant, -20%, taking sales down 5.4% over the half year and 13.6% organically. EBIT and adjusted net income declined 60%, marked by the drop in civil aero 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 -EUR 471 million, it was only slightly below the normal seasonality.
This free cash flow level drove our net debt position up to EUR 3.9 billion. 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. Let's start with order intake and now on slide four. As usual, the chart on the right shows the breakdown of our orders by contract value. Obviously, we are surprised 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 2020 versus seven last year, the total value booked decreased by EUR 1 billion. We booked three contracts of more than EUR 100 million 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 munition supply for the Australian MOD. Total value of this contract is above €600 million over 10 years, and the first tranche booked in Q2 has a value just below EUR 200 million.
The third large contract is a space contract for an undisclosed customer. Considering the natural volatility of large orders, I've often stressed in the past the importance of a large base of small orders under EUR 10 million. 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 civil air. 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 2019, and that negative growth is resulting from different moving parts. There's still a significant scope impact, EUR 697 million due to Gemalto Q1 sales that were not included in our H1 2019 numbers, and a EUR 20 million negative currency effect.
There's obviously the impact of the sanitary crisis, which started at the end of Q1 and which hit its peak during Q2, driving a 20% drop in sales during that period. As we explained previously, COVID-19 consequences on sales can be broken down into distinct impacts. The first impact is due to the major drop of demand in civil aero, more than 50% in Q2, with additional smaller impacts in businesses like biometrics and IoT within the DIS. 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 a period. The sales decline is more visible in emerging markets than mature markets.
It is mainly due to the expected fading down of a couple of major defense and security and also transport contracts. Moving on now to slide six, looking at the adjusted P&L from sales to EBIT. As mentioned already, EBIT margin is clearly down at the end of June 2020, 4.5% versus 10% last year. This usual presentation of our adjusted P&L is a bit difficult to analyze considering the significant scope effects. In particular, the overall increase of indirect costs in percentage of sales, moving from 17.3% - 19%, is directly resulting from the consolidation of Gemalto, whose businesses come with higher gross margin, but also with higher levels of R&D and sales and marketing costs. To better explain what happened in the first half of 2020, we have changed a bit the presentation 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&L at 2020 scope on slide 29. Starting from the H1 2019 EBIT, including Gemalto's Q1 2019, EUR 829 million, we estimate the decline in gross margin due to the COVID-19 crisis and the cost-saving actions at approximately EUR 740 million. 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 million, half through our actions to reduce direct costs and approximately half through our actions to reduce indirect costs. You see on the slide, the 9% decline in indirect costs, with -9% on R&D and sales and marketing, and -10% on GA. In other words, our cost-saving actions offset a little more than 40% of the crisis' impact on our gross margin.
Compared to H1 2019, we have a small savings on restructuring, -EUR 17 million, as last year we booked the engineering competitiveness plan in our transport business. Last element of the bridge, equity affiliates were materially down from EUR 80 million last year to EUR 1 million 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, -EUR 15 million. The decline of the other JV's contributions was particularly material in civil aero. I'm thinking of Diehl Aerospace in Germany, and also ACSS in the U.S. Moving now to slide eight. I will go through the performance of each of our operating segments in the next few slides. 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, I will further develop them in a minute. Transport EBIT turned to a positive, low margin and third in parallel, both Defense & Security and Digital Identity and Security segments maintain a strong performance considering the unprecedented context with their respective margin at 10% and 9.5%. I'm now on slide nine. Let's start with aerospace. Starting with orders. At EUR 1.6 billion, the order intake was down 8% to H1 2019, which is not as bad as we could have been feared by considering the major COVID-19 impact on civil aero during Q2 2020. The main reason behind this limited drop is a combination of two effects. First, a strong first quarter for avionics. As a reminder, our Q1 2020 was up 15% for the all segments.
Also an improved dynamic in the space market, both on the commercial and on the institutional sides. At EUR 2.9 billion, sales were down by more than 25%, strongly affected by the drop in demand in civil aero. I already mentioned the figure more than 60% in Q2. Both line seats and aftermarket for flight avionics and ICU face 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, -EUR 109 million, was due to the combination of the sharp drop in sales I've just mentioned and also a 12-point 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 the improvement in productivity, notably in non-civil aero businesses. Now moving on to slide 10 with transport. First, order intake was down 21% versus H1 2019 and was mostly affected by delays in bid processes and contractor awards due to the sanitary crisis. Sales were down by 13.7% organically. Part of this negative growth was anticipated because of the setting down of works on major urban road projects, which have been driving very high comps since the end of 2018. This was obviously aggravated by the COVID-19 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 +EUR 4 million. 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 disruptions, should drive a higher margin in H2, allowing us to target a full-year EBIT margin above last year's 2.9%. Moving on now to slide 11 with defense and security. First of all, important to remember that 2019 was an exceptional year for this segment.
Clearly starting the year with high comps in addition to facing an unprecedented crisis. With that in mind, order intake was down 36% at EUR 2.4 billion. As I mentioned earlier, this is primarily due to the volatility of large contracts above EUR 100 million. We booked three such large orders this year, against six last year, in a 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 EUR 3.6 billion, down 7.3% organically. This drop was due to the COVID-19-related operational disruptions that have been progressively disappearing.
Encouragingly, six out of 13 business lines 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 indirect costs in line with the drop in sales. Last segment on slide 12 with DIS. 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 period last year. As usual, there is no need to comment on order intake since it is structurally aligned with sales in most of our DIS business lines. Pro forma, H1 sales were flat, with a limited -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 re-issue cycle in the U.S. and the robust demand for contactless cards worldwide during the sanitary crisis. As well as probably some precautionary buying of SIM cards. On the negative side, as expected, both biometric and IoT module businesses were impacted by an 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 they will be a bit less supportive in H2. The demands for biometric travel documents and IoT modules will remain depressed and smart card sales should decline in H2. In terms of EBIT, DIS delivered a very strong performance in H1. You see EUR 114 million and a 9.5% EBIT margin.
Our operations at DIS 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 H1 2019 pro forma EBIT margin, which was only 3%, which means that H1 2020 is much above the pro forma H1 2019 EBIT margin in this segment. Turning now to slide 13, just a few comments on items below the EBITs. Cost of net financial debt and the other financial results is up by EUR 25 million, mostly due to the increase in cost of debts after acquiring Gemalto in 2019. Finance cost and pensions was slightly down by EUR 7 million, thanks to lower discount rates.
The effective tax rate moved down from 26.6% to 22.2%, thanks to a more favorable country mix, and to the higher rate of research tax credits compared to pre-tax income. Minority interests were negative at -EUR 40 million at the end of H1 2020, leading to an adjusted net income of EUR 232 million and an adjusted EPS of EUR 1.09. 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 million. As you see in the charts, 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, had been to ensure that the group would be in a safe position in terms of cash. Since then, we've been managing our cash flow with great attention. In the past few months, our cash optimization plan that we launched in mid-2019, this plan focus in particular on three items. First, reductions of overall balances. Second, tight control of supply chains, and consequently, of inventory and terms. Practical negotiations with both customers and suppliers, in order to obtain more favorable payment terms whenever possible. Of course, this didn't prevent 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 million, which is less than the minus EUR 472 million EBIT decrease. Thanks to our strong focus on cash, the change in working capital was less negative than last year. Recovering pension cash outs and net financial interest were up due to the consolidations with Gemalto. Income tax paid was slightly down due to the more favorable country mix. Finally, as part of our global adaptation plan, we were able to reduce our CapEx by EUR 14 million, which corresponds to a 16% reduction at constant scope. All together, these actions strongly helped to limit the decrease in terms of free operating cash flow, down by only EUR 139 million versus H1 2019, to be compared with a decrease of EUR 472 million for the EBIT during the same period last year. Overall, cash flow very much under control. Now let me finish.
I'm now on slide 15. Let me finish with a word on the evolutions of our net debt position. Very little to mention here apart of the dividend payments, which amounted to EUR 336 million in H1 2019 and EUR 0 in H1 2020, after the decision was taken by the board to withdraw the final payments to the 2019 dividends. We also see on this slide the EUR 94 million negative within this other box which relate to the impact of the IFRS 16. I now turn the call over to Patrice to talk about strategy and outlook.
Thank you, Pascal. I'm now on slide 17, going to our strategy and outlook. Now that we are exiting the COVID-19 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-19 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 Thales. 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 chains, 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-19 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&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 avionics and air traffic management, are key contributors to a greener and smarter aviation. According to several studies, new generation connected and collaborative avionics, 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 air 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 the 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 we see its first commercial launch by BNP Paribas in a few months, new border control e-gates incorporating facial or contactless 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 resilience.
Moving now to slide 19 with our defense business. Since the start of the COVID-19 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 defense 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. Take the example of SCAF in France, Germany, and Spain, or Tempest in the U.K. These market segments are expected to grow faster than overall budgets 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 improvement in capability. Our work on MKS 180, the new German frigate program, is a great example of these dynamics.
At more than EUR 1.5 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 Tacticos 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 launch initiatives to improve the operational performance of the group, procurement, engineering, support functions, and so on. On top of this, we remain well on track to deliver on Gemalto cost synergies, EUR 120 million by 2022, as shown on the right.
The transformation of our transport business, which delivered an EBIT improvement even in the COVID-19 crisis, will continue in the coming years. Within our COVID-19 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 IFE 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&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 forma basis.
Importantly, we will remain, of course, fully committed to delivering on our medium-term EBIT margin, 11.5%-12%, something we should be able to achieve once the civil aero market has more or less normalized. Turning now to slide 21, discussing our H2 2020 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 after-market 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 EUR 750 million 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 EUR 50 million. As I mentioned on the previous slide, in the coming months, we will finalize the structural cost adaptation plan for our civil aero businesses. Which brings me to our financial objectives for 2020, considering the business environment that I just described very shortly, and of course, assuming no major step-up in sanitary measures on our key markets. 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. Based on the July 2020 scope and foreign exchange rates, we expect sales to amount between EUR 16.5 billion and EUR 17.2 billion. Thanks to the initiatives I've presented earlier, we expect EBIT to be in the EUR 1.3 billion-EUR 1.4 billion range, corresponding to an EBIT margin of around 8%, a rather modest decline in margin over H2, 50 basis points- 100 basis points. Let me stress an important point. This EBIT guidance is based on an EBIT contribution from JVs of around EUR 70 million and on our current base scenario for restructuring costs, EUR 130 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, if this envelope will cover them in full. This concludes our presentation. Many thanks for your attention. Together with Pascal, we are now pleased to take your questions.
Thank you. Ladies and gentlemen, we now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Olivier Brochet from Credit Suisse. Please ask your question.
Good 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 how much of the, let's say, headwinds of 2020 will be removed? Third, a quick one on Australia. Can you provide an update on Hawkei and on the conversations around the submarine contracts that might come in the future? Thank you.
Good morning, Olivier. Thank you for your question. Starting with free cash flow. Of course, in this overall context, we need to be a bit cautious with regard to free cash flow. What is probably good to have in mind is that I guess we demonstrated in H1 that we managed to contain our free cash flow at a level which was satisfactory considering the overall seasonality of working capital for Thales. A second point, I do confirm in this underlying 95% conversions ratio from net adjusted income to normative free cash flow for Thales. This is also valid for 2020, as I guess it's going to be valid for the next years to come. Third point, this is something that we will need to keep in mind.
We are, at Thales, some free cash flow volatility due to those down payments, prepayments, and some cutoff effect that we have seen in the past. You probably have in mind that as we released our 2019 figures, we provided you with a table showing the sequence of those a bit exceptional working capital moves throughout the past period, and resulting of a EUR 700 million
Of outstanding working capital positions end of 2019, those EUR 700 million reflecting the positive pre-funding, in particular, on some large export contracts, as well as some nice advances payments and cut-off effect that we benefited in particular in 2019. As I said, this should unwind partially in 2020. What is our updated view today on those EUR 700 million? My view today is that, we should probably have, let's say, as a rule of thumb, probably half of that reversing in 2020, and the rest in the next coming year.
With 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 cut-off effects that we benefited in the past, and how it should unwind in 2020, I guess that you should have an appropriate vision on how our 2020 cash flow should look like. Of course it will be pretty positive. That was on free cash.
Australia, you want to take Australia?
The question about the 2021 headwinds. It was your question, Olivier, 2021?
Yes, exactly. Yes. How much of the 2020 headwinds will be reverted in 2021?
Is it a business question or is it a free cash flow question? It's a business question.
No, it's a business question, more generally.
As we said, 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. We don't expect civil aerospace business to recover in 2021. On the first point, and I guess it is probably in line with what other players, other companies are sharing with you. Overall, a 40%, 50% drop on this specific market, 40% drop on this specific market is probably a good rule of thumb, as compared to pre-COVID-19 level of business. Now, the rest of our businesses, we mentioned that our drop in sales in 2020 is essentially driven by the impact of the sanitary measures and the level of disruptions that this has created, in particular in Q2 2020.
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. I was a bit cautious also about 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 restrictions in terms of travel, for instance, all of that, creating some uncertainty. I guess we commented that Defense & Security, even though, of course, there is some uncertainty as we see, and I guess that our tone was pretty positive with regard, this business in terms of level of demand, of course, being a bit cautious for the long term, but our tone is pretty positive on this side.
The DIS, probably we mentioned. I guess Patrice will come back on this point later on. The DIS we have to be a bit cautious, as we mentioned because of lack of visibility for those short cycle type of businesses. We benefit in H1 from pretty strong level of demand with regard to smart cards. We need to see how this will develop going forward.
Globally, now that you've answered quite extensively, Pascal, globally, at group level, and if we take a step back, the progressive improvement 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, the level of profitability of 2019. 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 this statement. This is the global view. At the end of the day, we look at Thales in general. Moving perhaps to Australia, two points.
Okay submarine.
Submarine. Well, Hawkei, things are on track, to make it short. Things are on track, no particular, I would say, point to be mentioned. Submarine, the different, I would say, competitions or competitive dialogues are still ongoing, mainly with Lockheed Martin, in our case. We are still waiting, I would say, some final say of Lockheed on several tenders, and in particular on the sonar side. You know the bow arrays, the flank arrays, the towed arrays. My tone is, I would say, is rather positive, now it's too soon to say it's done. It should be announced, I hope before the end of the year. I see it a kind of a down selection from Lockheed.
Okay. Thank you.
Thank you. The next question comes from George Zhao from Bernstein. Please ask your question.
Hi, good morning. On the DIS segment, how are you thinking about balancing profit preservation and growth investment as you look to capture the Gemalto cost and revenue synergies? Quickly on the civil aeronautics and IFE, what was the order intake for Q2? As you think about the recovery there and the potential for maintenance deferral on the aftermarket, what was the order like in terms of Q2 compared to the 50% down revenue? Thanks.
George, good morning. Civil aeronautics, you hear me? It's more a short-time cycle type of business. Order intake and revenues are pretty similar. The 50% drop on sales that we have reported is, in my view, quite a proxy on the overall level of order intake on this business. Probably, what is important to have in mind is that overall, this civil aeronautics business, a drop in terms of demand by something around 50% in Q2. This is true for revenues and my view is pretty much also true for order intake. Your first question.
For the balance between profit and growth when we manage overall DIS portfolio, that's a very good question of course. What we try to do, it's not a surprise, is to clearly manage for cash, I would say, mature activities like SIM business. It's a mature activity. 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. 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 there. 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.
By the way just not DIS, I mean a challenge. This is a common challenge that this is where, I mean, at Thales we make decisions balancing growth and profitability is a permanent challenge and drives most of our decisions. Okay, George, is it okay?
Yes. Thank you.
Thank you very much.
Thank you. The next question comes from the line of Céline Fornaro from UBS. Please ask a question.
Yes. Good morning, gentlemen. Three questions, if I may. The first one would be on the free cash flow and slightly better performance than expected in H1, which is great. Just being cautious that potentially how much are the elements that are being brought forward in 2020 compared to a 2021 expectation that we would have had before COVID? 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? Maybe you can give us an update on the other end markets beyond automotive. 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, Céline. On free cash, if I understand your questions well, is H1 level of free cash consistent with some cash out being deferred to H2 and having a negative impact on our H2? This is not my view. We have not pushed expenses to H2 that would result in a pretty bad, I think level of H2 production. No, 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 these type of cutoff points.
It's business life. Overall, I don't see anything, especially on top of what I shared with you about the way those EUR 700 million of pre-funding that we benefited in the past is going to unwind partially in 2020 and in 2021, 2022. It has not unwinded in H1, this is also within why H1 was pretty positive. Overall, in H1, hopefully, this will continue in H2. We are seeing overall, most of our customers are paying us, I would say in due time, most of our clients, except some of them, willing to extend payment terms are not paying in due time. Overall, 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 cases.
Can take this one if you want, Pascal.
Yes.
So then you.
Yeah.
You take the third one. [inaudible] IoT. Good morning, Céline. IoT, in fact, if we take a step back again, what we try to do is to focus on what I call demanding markets. On markets which are ready, willing to value things like security, of course, which is a key differentiator because IoT, when we speak about IoT is a vast field of different types of solutions from pure connectivity to high-end and complex or highly secured connectivity modules, and for sure, we focus on the second part of this market. Typically, they are providing what I call vertical segments, like smart metering or even payments, where definitely security or secured IoT as a value. Clearly, we can extract value from our customers on these type of solutions. Automotive as well belongs to this type of demanding customers.
It's true that automotive will probably continue to be depressed in the coming months. 2021, I don't know, at least for H2. Clearly, short-term, mid-term, it's always the path that we should make short term. It's a difficult market long-term or mid-term. They are already providing vertical ones, like the one I've mentioned, smart metering, payment, and still automotive, once it will have resumed.
Your last question, Céline, was about deferred tax on the civil business. Overall, yes, my view is that we are going to book some deferred tax assets on losses on the civil business. Overall, by the way, 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 now should be probably more like what was in H1 so something around 23%. Yes, accounting for deferred tax assets in 2020 will have a positive effect on our P&L in term of tax income. With no tax shield in 2020, we should benefit from that in 2021 in term of tax savings.
Maybe last one that I can share with you also is that. You have not communicated on this point. It's also true that we have some tax synergies coming from Gemalto integration. That also are going to help us manage a level of tax rate that the next few years will be probably below what we had in mind so far.
Thank you very much.
Thank you. The next question comes from the line of Malini Chauhan from Redburn. Please ask your question.
Good morning, Patrice, Pascal, and Bertrand. Three questions, if I may. First, 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? Finally, in terms of your book-to-bill guidance of greater than one, I know the MKS 180 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?
Well, I can start, and you complement whatever. Yes. First, it's 10.6 and 10.9 to be precise. The level of profitability in percentage in 2019, pro forma. That's what we are aiming at in 2022. In percentage term, definitely, I think I've been clear. 2020, Pascal?
Yes, Malini, good morning first. For your question about those contingency plan and how much of that will continue in 2021. Maybe, first, high-level context and comments. What we are facing here, we see that on the small portion of our business, we see a drop in demand that is going to last. Of course, this will drive more structural cost adjustments. The rest of our business is facing, or are faced, particularly in Q2, more of the consequences in terms of production from the sanitary measures. Of course, hopefully, this is going to be temporary. Again, temporary effects, we have put in place more temporary type of measures. Now, going forward, 2021, and the second element will adjust our cost base in 2021 also to address the evolutions in terms of situations, and in terms of business.
If I go through the various measures that we have put in place. We have put in place, for instance, hiring freeze or a drop in contractors, drop in temporary staff. Of course, here, we'll adjust our policy, of course, depending on the level of business. We have also put in place furlough measures. Here again, we'll see what is going to continue here, again, associated with the level of businesses going forward. A third element is more a drop in variable compensations in 2020. Of course, this is more like temporary measures. Of course, we have a drop in, I would say, many other external expenses. A good example of that is travel cost. A good example of that is discretionary expenses. Of course, we will adjust these type of measures depending upon the level of business that we'll see.
Of course, on top of that, those structural measures that will help adjust our cost base, where we believe that we are going to face a lasting drop in demands, and primarily in our civil aeronautics business. We'll be pragmatic. At this point, it's probably too early. Some of those measures have a clear temporary effect. Some of them can be extended going forward. Book-to-bill.
Book-to-bill. Our guidance is whether we've said that book-to-bill should be greater than one in 2020 this year. Of course, it's made of a limited number of big contracts, like MKS 180. We spoke with Copernicus projects as well, contracts. Honestly, the number of orders we book in a given year is several thousand at Thales. It's made of a very large number of orders. What gives 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 Thales. You remember our small orders are orders below EUR 10 million, and these small orders, of course, they are very numerous. These small orders below EUR 10 million have been very resilient in H1, and we continue. I would say that's what we foresee in H2.
All of this should lead to this achievement by the end of the year.
Thank you.
Thank you much.
You're welcome.
Thank you. Your next question comes from Zafar Khan from Société Générale . Please ask a question.
Thank you very much, and good morning, everyone. Got a handful of questions, please, if I may. Pascal, you mentioned that DIS order intake is structurally aligned with sales. Just wanted to understand how that works. Second question, just on the drivers in H1 for smart cards, because you were 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. Finally, just in terms of aerospace sales outlook for 2021. I know a lot of the business is short cycle in that order intake, just what your view is on the sales in the aerospace segment in 2021 compared with 2020.
Okay. Zafar, good morning, first. DIS, yes, it's true that order intake look like revenues because backlog in this business, putting aside our biometric business, but putting it aside. Rest of business is a business of flows. It's not a long-term contract. If you take the smart card businesses, but also the cyber security and the level of backlog is, in this type of business, a short time type of backlog. Basically, this is why revenue look like order intake. In this business, our clients, the order is quite reduced in that scan. Which has nothing to do with long-term type of contracts that we see in our businesses, whether it's defense, commercial, or space. Your question about smart cards in term of business.
It's true, we have seen in H1, quite a good level of demand in this business with the development of contactless cards, which also goes with sanitary measures. I guess all of us who are now used to using contactless cards to prevent, I mean, to enter a code in a transactions device. Overall pretty good. On the SIM card, we have seen a level of demands, which was also rather good. We are a bit cautious because, once again, it's a short time type of business and always a bit difficult to assess what was the level of precautionary buys from our clients in H1. This is why, 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 procure orders in H1. H2 restructuring is true that, as we mentioned, we're starting the discussion with our trade unions, and we're also assessing the balance of tools that we are going to use in order to adjust our cost base. For instance, between using long-term furlough measures that are now accessible in some countries, as opposed to a more, how say, restructuring in a traditional way. Of course, this will have an impact on our level of restructuring. Overall, the level of restructuring that underpin our EBIT guidance.
It's quite clear this is EUR 130 million, probably something like EUR 30 million above our initial guidance on this front. Now, it might be that in a few months, once we 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 the one EUR 130 million is probably more a bottom or floor than a ceiling in terms of restructuring. Once again, with fine being more like a one-off cost in order to address, in particular, in the civil aeronautics and institutions. 2021 aerospace. My comment will be probably more. When you talk about aerospace, I guess you are talking about our segments?
Yes.
These overall segments, yes, we should have some recovery, but here again we should be a bit cautious. If I take the civil avionics, civil aeronautics business, yes, probably we should start seeing a bit of recovery. Let's be clear, at this point, it's probably a bit too early. We'll see how the overall 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. The rest of the business in our aerospace business in 2020 has been impacted by the sanitary measures. This is the case for the rest of our aviation business, the non-civil aeronautics business, and it is also true for the state business.
This is where, in 2021, of course, we are going to see some recovery in terms of sales, because once again, sanitary conditions will have normalized, hopefully, in 2021.
That's excellent. Thank you very much.
Thank you. You're welcome, Zafar.
Well, if there are no further questions, it's time to conclude then. 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 ir@thalesgroup.com. We'll get back to you as soon as possible. Thank you for participation. You may now disconnect.