Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q1 2020 order intake and sales results. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.
Yes. Hello. Good morning. Welcome, and thank you for joining us for the presentation of Thales's Q1 2020 order intake and sales. I am Bertrand Delcaire, the Head of Investor Relations at Thales. I hope you have not been too much affected by the ongoing COVID-19 crisis. With me today are Patrice Caine, Chairman and CEO, and Pascal Bouchiat, CFO of Thales. As usual, this presentation will be webcast live on our website at thalesgroup.com, where the slides and press release are also available for download. A replay of the call will be available later today. Continuing the context, we thought it would be useful to start with an update on the impact of the crisis on the Group, followed by the usual review of our Q1 numbers. With that, I would like to turn over the call to Patrice Caine, who will address the first topic.
Thank you, Bertrand, and good morning, everyone. First of all, and on behalf of Thales, I hope that you and your loved ones have been keeping safe since the beginning of the sanitary crisis we are all going through. Let us start on slide number three, and let me start this update by stressing that this crisis raises a unique set of challenges, as it does for most companies at the moment. Of course, when facing a crisis, we first think about its impact on demand. From that point of view, I would like to remind you that I already mentioned every time I have the chance to talk with investors and analysts, Thales has developed its portfolio to improve its resilience with a diverse product mix, which you can see on the right.
At this point, and that should not come as a surprise, we see the biggest demand impact affecting our civil aeronautics businesses, and especially avionics, electrical systems, and in-flight entertainment, which represents all together 11% of pro forma 2019 sales. To a lower extent, we also see some demand impacts in a few DIS niches, such as identity solutions and automotive IoT connectivity modules. So far, the rest of our businesses, which represented around 85% of our sales last year, has only seen delayed contract signatures affecting sales in future periods. What is unprecedented in this crisis is that the sanitary measures imposed by governments translate into multiple challenges, not only in production and project execution, but also in the interactions with customers and suppliers. Moving now to slide number four.
As announced earlier this month, to deal with this crisis, we have decided to implement a global adaptation plan addressing three areas. Number one, the adaptation of our operations to ensure the health and safety of our employees. Number two, the implementation of immediate cost-saving actions. Number three, the strengthening of our liquidity position should the crisis persist or worsen. Now on slide number five. The globalization of the crisis six weeks ago has created huge challenges to our operations. Across the Group, the past weeks have been quite intense for the teams, and I must thank them for their remarkable mobilization. No need to go through the list of measures that have been put in place at our 430 sites, which are standard.
In the countries which were under strict lockdown situations, we have naturally decided to focus first on maintaining the continuity of critical and strategic services for our customers before gradually resuming other operations. As you very well know, we are an industrial company. While our solutions include a lot of software, the vast majority also involve systems that require physical assembly, test, and integration. A good illustration is the picture on the upper right of this slide. AIT, means assembly, integration, and test, is a crucial phase in the design of a satellite, and it involves, as you see on the picture, several people who have to work next to each other in a clean room. Supply chains have also been a big area of attention for us.
On this topic, we've been able to leverage the global integrated procurement organization that was put in place in 2018 in order to comprehensively monitor our critical suppliers. It was a real test of our model. At this point, I'm happy to report that we have not faced major challenges on that front. Most critical suppliers that stopped operations in the past weeks are expected to have resumed deliveries in the coming days. Moving now to slide number six. To further help you to understand the situation in terms of productivity, the chart on the right of the slide shows a simplified productivity model for a given site that had to deal with a strict lockdown. Again, to simplify, we have shown here a three-phase scenario based on the three milestones that you can see on the horizontal axis.
The start of a strict lockdown, the implementation of less restrictive sanitary measures, and the end of all measures. Productivity drops significantly when the strict lockdown is implemented, then progressively improves as the team learn to operate under restrictive sanitary conditions. Then it further improves once measures are partially relaxed, returning to nominal levels only when sanitary measures are over. The hatch area shows the diversity of situation within Thales depending on the nature of work. As I was showing on the previous slide, sanitary measures have a high impact on operations in physically constrained environments, such as the assembly of a satellite, or if a team has to go to a customer site during a lockdown period. On the other hand, it is, for example, easier to continue software engineering from home.
Automated production processes, such as the production of EMV or SIM cards, are typically less disrupted as well. At this point, while the obvious ambition is to return as close to and as quickly as possible to normal productivity, levels of productivity in each situation and potential learning curves involve a lot of guesswork. The biggest unknown remains the scope and the duration of sanitary measures on a country-by-country basis. As a consequence, you must understand that at this point, we are not in a position to articulate potential consolidated productivity levels for a given month or quarter. I am now on slide seven. Since the overall impact of this crisis will clearly be very significant, we are launching significant cost-saving actions, and this is the second lever of our adaptation plan.
I will not comment the full list that you can see on the left, which targets both OpEx, including people and other costs, and CapEx and working capital. The quantification and consolidation of the potential savings from these actions is ongoing, and it still depends on many variables and scenarios. Importantly, as you can see on the simplified P&L by nature, shown on the right, the percentage of fully variable costs, namely direct procurement on contracts, is quite low, 28% of sales. As you know, we are an R&D-driven company, and employee cost is by far our number one cost line, representing 40% of sales. Turning now to slide eight on the topic of liquidity. This slide recaps the actions we announced earlier in April.
As you see on the right, thanks to the additional EUR 2 billion credit facility we signed earlier this month, we have a pro forma liquidity of EUR 6.4 billion, providing ample room in the event that this crisis persists or worsens. Like many companies across Europe, in a spirit of responsibility with the all group stakeholders, the board of directors decided to withdraw the final dividend proposal, which will avoid a cash outflow of around EUR 430 million. After this overall review of the impact of the crisis and the measures we have taken, I now hand over to Pascal, who will comment our Q1 order intake and sales.
Thank you, Patrice, and good morning, everyone. Now looking at Q1 headline numbers for order intake and sales. I am now on slide ten. Both KPIs were in line with expectations prior to the first impacts of the COVID-19 crisis. New orders amounted to EUR 2.66 billion, up 17% on a reported basis, thanks to the consolidation of Gemalto, and down 15% on an organic basis, with the crisis explaining about half of this decline. Sales came to EUR 3.9 billion, down 4.7% on an organic basis, but up around 2% excluding the estimated crisis impact, with different trends in our four operating segments, which I will explain in the next few minutes. Looking now into details at our order intake and now on slide 11.
As you can see, the reported growth is +17%, including a EUR 731 million scope impact, basically corresponding to the consolidation of Gemalto and a negligible currency impact. The organic decline was primarily driven by the lower number of orders above EUR 1 million. Only one was booked during Q1 2020, compared to three in Q1 2019. The contract we booked in Q1 covered the supply of an air surveillance system to a Middle East customer and was not officially disclosed. Orders below EUR 10 million remained strong, with an organic growth of 4% excluding Gemalto.
The impact of the COVID-19 crisis is estimated at around EUR 190 million, with the biggest parts in civil aeronautics, but also delayed orders across the other businesses. Turning now to slide 12, looking at sales growth. Here as well, the biggest impact is naturally the consolidation of Gemalto, driving a scope impact of almost EUR 700 million.
Adjusting for the scope impact, organic growth amounted to -4.7%. The impact of the COVID-19 crisis is estimated at EUR 200 million, of which EUR 60 million is in civil aeronautics. Since this amount includes a scope effect, the chart on the right shows pro forma computations, which isolate the underlying growth trends before the impact of the crisis of around +2%. Turning to the geographical perspective, let me just point out that the decline in emerging market sales was driven by the end of some projects, like in transport, and the fact that the crisis affected Asia first. Now, looking briefly at each segment, one by one, and now on slide 13 for aerospace.
First, as explained earlier by Patrice, it is not surprising for aerospace to be our most impacted segment, with the civil aeronautics business, flights avionics and IFE, directly impacted by the drop of both airline activity and the first production adjustments by OEMs. However, orders were actually up by 16% at EUR 778 million, against EUR 672 million in Q1 2019, thanks to a dynamic start of the year for the avionics business from January to mid-March. Space orders remained stable at a low level, but Q1 is traditionally a soft quarter for this business anyway. Sales were down by 11.9% versus Q1 2019, with an estimated EUR 60 million drop in civil aeronautics revenues caused by the COVID-19 crisis. Other businesses in this segment, including space, also started to be negatively impacted by the loss of productivity across Europe. Now, moving on to slide 14 with our transport business.
Order intake was down from EUR 249 million- EUR 156 million, mostly due to the delays in finalizing contracts. These delays were not significantly related to the COVID-19 crisis, and there is no indicator at this stage pointing to a future material decrease of demands for rail signaling. Sales were down 13% from EUR 398 million- EUR 347 million, mainly because of the phasing down of the four major projects which we mentioned previously. Excluding these four major projects, sales were slightly up, with a limited COVID-19 impact in the quarter.
Turning now to slide 15, looking at the defense and security segments. Lower order intake, down 26% versus Q1 2019, was due to the natural volatility of large contract signatures. Three were signed in Q1 2019 versus only one in Q1 2020. The current situation has obviously created even more volatility, with further delays in decision-making and contract signatures.
Organic sales growth remained positive at +2.4%, despite high counts in Q1 2019, and the first impact of COVID-19 disruptions across European production sites in March. The underlying growth, excluding COVID-19, remained strong, continuing on the very good 2019 trends. Turning to slide 16, looking at our last segment, Digital Identity and Security. As you remember, Gemalto was consolidated from April 1st, 2019, hence changes are not meaningful. As mentioned previously, order intake at DIS is structurally aligned with sales for most businesses, as they operate on short cycles. The difference between order intake and sales in Q1 2020 was due to two more significant contracts that we booked in the biometric business.
At EUR 727 million, sales were up by 5% on a pro forma basis, with a continuous good trend in EMV payment cards, especially in North America, and a modest decline in our removable SIM cards business. COVID-19 disruptions were concentrated in the businesses that Patrice mentioned earlier. Biometrics, with less demand for passports and border control systems, and IoT connectivity modules, which also faced some supply chain challenges in China. Let me now turn over the call to Patrice, who will give some perspectives.
Thank you, Pascal. Let me conclude this short presentation with two outlook slides. I am starting first with slide 18. As you understood, it is impossible at this point to quantify the financial impact of this crisis. The mobilization of the Thales teams has been remarkable, and we have launched the necessary actions to address both cost savings and balance sheet risks. So far, the demand impact is limited to 50% of the portfolio. However, the macro environment remains very uncertain at all levels. GDP growth, for instance, country budgets and potential stimulus packages, oil prices, and so on. Importantly, we have no visibility on the scope and duration of sanitary measures, which is, as I stressed earlier, a key factor to assess the recovery of productivity in the coming months. Altogether, we are preparing for a very difficult Q2 and H1.
Now let me finish this presentation with a longer-term perspective, and I am now on slide 19. Six months ago, when we held our CMD, Capital Market Day, on the Gemalto acquisition, I stressed how I saw that resilience was a key to value creation in a more uncertain world. We are clearly not immune to a crisis like the one we are now facing. However, as we project ourselves after this crisis, we will be able to capitalize on several structural assets. Our diverse and robust customer base, balanced among five different markets, will facilitate the necessary adjustments.
Secondly, the higher demand for the key capabilities addressed by our products and solutions, security, safety, product resilience, what you may call more broadly trust-enabling solutions. Third, our leadership in critical technologies strengthened through the acquisition of Gemalto. Fourth, the culture of operational performance we have developed across the group over the past years. Finally, fifth, the strength of our balance sheet. 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 will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. The first question comes from the line of Olivier Brochet from Credit Suisse. Please go ahead.
Yes. Good morning, gentlemen. Thank you for taking my questions, and I hope you are well and safe. I would have a couple of them. First of all, when I look at the lost activity that you have in Q1 and can expect in Q2, how much do you think can be caught up in the future, i.e., how much is actually lost and not recoverable? I understand for the part that is demand driven, but for the part that is affected by production disruption, that would be helpful to see what you think of the future. Second question would be on the cash position at end of March. I would expect a material decline versus the year-end. Would you be able to provide some sense of where it is? I do not know, versus historical, versus H1. Some sort of help on that front, please.
Okay. Good morning. Good morning, Olivier. Overall, on Q1, of course, it is always a bit difficult, I mean, to assess how much is a true loss and how much is delayed at this point. Part is going to be part of what we are going to share with you this morning, the fact that we are extremely cautious with probably any statement that we make this morning because of this unique situation that we are experiencing. Please do consider that, of course, we will try to answer as much as possible, but having in mind that we are going through a unique set of events. Yes, of course, part of that is a loss. But I would tend to believe that out of the EUR 200 million that we mentioned, its impact, probably one-third is probably a loss and two-third is more a delay.
When I talk about a delay, it's more the fact that this has been the outcome of the first production difficulties that we faced in the second half of March. This represents pretty much 2/3 or 70% of this EUR 200 million impact with sales that will be postponed. But of course, provided that we can then catch up, and of course, it will be the case in Q2, as I guess you have understood. Q2 will be really impacted by those production difficulties. I guess we'll have opportunities to come back on this point later on in the discussion. Yes, probably a good rule of thumb is to consider that 1/3 is probably a loss, 2/3 is delay, but being very cautious about our ability to catch up in the second part of 2020. Your question about cash flow.
As you know, our profile of cash flow at Thales is quite similar. Putting aside the COVID-19 crisis, our traditional historical profile of cash flow is pretty much different between H1. In general, we tend to consume cash flow in H1, and we generate a large amount of cash flow in the second half of the year. So what we see end of March is a pattern which is pretty much similar to what we have seen in Q1 2019 and 2018 with, I would say, until the end of March, not that much an impact of the COVID-19 crisis. Now, it's true that we are expecting a significant impact in term of cash flow to start kicking in as from Q2.
Okay. Thank you.
Thank you. The next question is from the line of George Zhao from Bernstein. Please go ahead.
Hi. Thanks for taking my question. Within the civil aeronautics business, how much of the business do you think is more related to maintenance activities that is more correlated to flight hours versus upgrades where the airlines may have some discretion around the timing of the spend? Could you share the revenue decline rate for this business kind of exiting the quarter and heading into Q2? Thank you.
Hello, good morning. Good morning, George. I guess your comment or your question was in particular related to our civil aeronautics business, which of course, is the business that is going to suffer the most. We mentioned that this business overall represent between EUR 2.1 billion and EUR 2.2 billion of annual sales, out of which EUR 750 million are aftermarket.
When I say between EUR 2.1 billion, EUR 2.2 billion, this includes both our, I would say, traditional avionics business, I mean, in particular what we call the cockpit avionics business, which for the civil part represent between EUR 1.3 billion and EUR 1.4 billion. Out of which, we believe that aftermarket represents EUR 500 million, so quite a significant chunk. The rest of our civil aeronautics business, which represents approximately EUR 800 million, is our IFE, in-flight entertainment business. Out of which, we believe that aftermarket represents something around EUR 250 million.
You see that overall, this is what Patrice mentioned, overall representing 11% of our sales. Out of which, aftermarket, EUR 750 million, representing in total 4% of the overall Thales level of revenue. Of course, we are expecting quite a big hit on the aftermarket, and probably starting as from Q2. Also, of course, a hit in the more OEM part of this business. By the way, driven by probably an Airbus delivery.
Thank you. The next question is from the line of Céline Fornaro from UBS. Please go ahead.
Yes. Good morning. I hope everyone is well and your family is too. Thank you for taking my question. My first question would be on looking at the order books, we do have a significant decline, as you pointed, on some of the end markets and some of the businesses. How much do you think we should read into that? Because when we look at the destinations, the French order intake seems pretty solid. Mature markets mostly hit by U.K. drops or other European countries, and emerging markets haven't dropped yet.
How much should we read into that for the rest of the year, and how do you think Q2, potentially on orders could look like? My second question would be, if Patrice, you could maybe articulate, given that Thales has got so many end markets, or at least four, what would be your view in terms of recovery shapes, VLU, these type of letters, in the different big four end markets? Thank you.
Good morning, Céline. I hope you are well, and good health, too. On your question on end markets, what can I say? First, I think we have already commented the civil aerospace market, so I don't think it's useful to come back on that. By the way, we more or less follow, I would say, the trend that has been described as much as possible by large OEMs up to now. Looking at other vertical markets, typically defense or space, cybersecurity, even ground transportation. So far, all these markets have not shown, I would say, something which would be, I would say, visible from the outside. Meaning that these customers are mainly governmental customers or governmental-related customers. So they are robust customers, if I may say, sound customers. They pay on time, even in advance in some cases to help companies, even large groups like Thales.
All their projects are multi-year, long-term projects, meaning that they have not been affected, apart from the production part that we have tried to explain previously during the presentation. But seen from the customer, they have not changed their mind, or they have not changed their position on these large projects. Now the big question is per geography what would be the future? What would be the financial resources of these big customers in Europe, France, Germany, U.K., or in the Middle East? Honestly, it's difficult to say. Because on one hand, you could say, well, there will be stimulus packages in these countries, okay? Will they benefit to our vertical markets or not? You can hear, I would say, either positive messages or no messages at all in some countries, even at European level, typically.
If you take the Middle East or oil price-dependent countries, it's a big question mark. If you remember four or five years ago now, when the oil price dropped, it was around EUR 100 per barrel. It was divided by two at that time. The big question was will it affect the demand, the budget in these countries? In fact, it did not affect these budgets.
Now the drop is again, I would say, almost divided by two from 50 to 25, if I'm a bit simplistic. Will it affect the budget, the defense budget, if you take this one from these countries? Honestly, it's too soon to say. It's quite a mixed answer. On one hand, these customers are stable, robust, sound, and we are, I would say, committed on long-term projects. Now, on the other hand, there are, I would say, macroeconomic factors that may affect, or not, their budget and their ability to pass additional orders in the future.
Thank you.
Thank you. The next question is from the line of Ben Heelan from Bank of America. Please go ahead.
Hi, everybody. Thank you for taking my question. I was wondering if we could come back on civil aeronautics, and you could give us some information or some color about the growth rates that you have seen in IFE, aftermarket, and in the line fit business through the month of April. Secondly, obviously, you have given a lot of info in the beginning of the presentation in terms of lower productivity, the impact of sanitary measures.
When we are thinking about how the lower revenues are going to impact EBIT this year, should we be looking at the 40% of sales that are employees, the 4%-5% of sales that are depreciation, amortization, and be assuming that is the level of negative drop through that we should see from the level of revenues? Then on the EUR 50 million of cost incurred related to the sanitary measures, should we assume that is on top of the drag of lower revenues, or is that included? Basically, is that one-off in nature? Thank you.
On civil aeronautics, I think we have already commented a lot. The market, I do not know what else can we say. It is pretty, I would say, unstable. If you listen to Airbus, typically communication and Boeing communication, well, they give you and they give us, I would say, a pretty short-term visibility in terms of production outflow. So it is difficult to say more. For sure, IFE, which is much airline-related business, will be affected as well by this aeronautical crisis. So difficult to say more, but the impact will be very significant, for sure, on the short term. Now, I am not sure I can say more on this one.
Mm-hmm. Okay, Ben, maybe on your second questions. I mean, first, on the EUR 50 million that we reported being, first, I would say, impact in terms of additional costs regarding the COVID-19. Please bear in mind that here we are talking about specific additional costs that are needed, in particular, for example, to source all kinds of product equipments like mask, any products that are necessary to put in place sanitary measures. Plus also some specific IS/IT upgrade in order to favor home office. So, those EUR 50 million, of course, comes on top of the cost that we have presented in this simplified P&L on page seven. Now on the core of your questions, and hardly this gives me the opportunity to come back on this simplified P&L on page seven.
Basically, when we go through those various lines, and probably one key point for all of you guys is to assess which of those costs are fixed and which of those costs are variable, and to which extent. Of course, if we take direct procurements cost and contracts, this first line representing in 2019, 28% of our cost, it is of course a variable cost and quite simple assessment. Then there is this Thales employee costs, which, as you mentioned, 40% of the level of revenue. We believe and of course, we are fully mobilized to adjust this level through, in particular, furlough measures that we are putting in place. Of course, through hiring freeze, in particular relating to our support functions. And of course, because there will be some adjustments on the overall variable compensations for white collars.
All in all, and just to give you a rule of thumbs, we believe that we can adjust this line by probably something around 5% in 2020 in order to adjust for overall level of revenue. That will be below, of course, what we had in mind when we enter 2020. The next line is other costs, EUR 3.1 billion. Here, of course, this is a mixed bag between a cost that are pretty much fixed and also cost on which, of course, when it is fixed on the short term. And of course, also part of those costs on which we're playing and we're acting a lot in order to reduce them. To give you this high level assessment, I tend to believe that the fixed parts of this line should represent probably something like 1/3 of this EUR 3.1 billion.
Behind that, it's things like, for instance, rental costs, things like insurance, some tax that are fixed. So, a bunch of different items, on which on the short term, it's very difficult to act. The rest which represent probably slightly below two thirds. Of course, we are working a lot on them and our ambition, but it's at this point an ambitions representing probably 2/3 of those costs, where we are going to strive to adjust them probably in line with the reductions of our level of revenue. This is the ambition, to adjust those costs in line with the drop in the expected level of revenue. Basically, this is what I can share with you in order for you to have a better view on how we are going to manage our cost basis in 2020.
That's great. Thank you, guys. Thank you.
Thank you, Ben.
Thank you. The next question is from the line of Andrew Humphrey from Morgan Stanley. Please go ahead.
Hello, everyone. Hope you're all keeping well. Just a couple from me. Firstly, on orders, can you talk through some of the dynamics there, particularly on space and transport? On space, you say you've seen a stabilization of orders. Is that a function of lower comps or could we be moving through the trough on order momentum there? On transport, you've talked about delays in finalizing some contracts.
I suspect that comes as no great surprise given where we are with COVID-19 at the moment. But your discussions with customers, if you could characterize those and say whether those are orders that could come back relatively quickly or whether you think those projects have been delayed for a longer period of time. Then finally, just on geographical split, I think you saw sales in France up 10% in the quarter. Clearly a very strong performance. Was there anything specific you'd call out there? Was that largely defense related? Any more details you could give around that would be great.
Okay. Good morning, Andrew. I will start and Pascal will complement if I've forgotten anything. If I start with the space, then I will tackle transport. Space, I would say, globally speaking, so far I've not seen any change in the behavior, in the discussions that we have with our customers, be they institutional like space agencies in Europe or ESA at European level or other customers, defense or civil ones. By the way, it may sound even paradoxical, but the bid activity is very active.
We have a lot of ongoing bids with many customers all over the world, by the way. I cannot say that there is a particular area of the world which is more active than another one. Now, in this lumpy business, it's always difficult to say which orders will materialize in 2020 or will drift a little bit in 2021. Again, I'm saying so far. Remember that in space, when you have to renew a capacity- The time it takes between the order which is passed and the satellite which is in service, it's several years. So these players have to clearly, I would say, plan far in advance the renewal of the capability.
The ones that are considering to buy a satellite, in fact, they look at the market three or four years down the road. So clearly, hopefully after this sanitary crisis. Secondly, institutional customers clearly have probably a different, I would say, software when they analyze or when they plan their budget, meaning that they are probably, if not dependent, but probably far less dependent on the crisis than other customers. On transport, even if transport is a totally different market compared to space, again so far, we have not seen major changes in the discussions we have with many customers around the world.
For sure, there we can expect, I would say, some delay. When I say some delay, I mean discussion that would take probably a bit longer than expected. For sure. Now, what I call the underlying trends, the fact that large cities like New York, like London, like Singapore, like Paris, I take our major customers, large cities have still a huge need for dealing with this massive urbanization and the need for green and collective means of transport. That's why looking, I would say, a bit further away, not just at Q2 or Q3 2020, there is no, I would say, profound reason that this market will change drastically. So if I may, a bit [inaudible], nothing to do, to my opinion, with the civil aeronautics sector. Nothing to do with this one.
There is even some, I would say, thoughts, ongoing thoughts, that it may accelerate the pace at which metros will be more and more automatized to be more resilient, to be less human dependent, if I may say. Some big players, some big customers, clearly envisage to accelerate the pace at which they switch from, I would say, non-automatic metros to fully automatic metros. I hope it gives you some, I would say, some hints of the evolution of our market. But clearly what I'm saying is not for Q2 or Q3. It's more something which is true for months and years ahead of us. On France, Pascal, do we have a split? Clearly, the French defense customer is a big customer for France by destination.
Overall, and in France as a country by destinations, you probably have in mind that last year, our order intake relating to France by country of destination was a bit above EUR 5 billion. Let's consider that probably something like 2/3 relate with the French Ministry of the Armed Forces, something like that. Here, of course, at this point, we don't see in the short-term any change in term of pattern. But of course, we need to be vigilant about potential adjustment on the five years program law in France, it's what we call the LPM.
At this point, we don't have any input showing that it will be revisited downwards. We have a pretty positive input from the French Ministry of the Armed Forces. Now, in the mid, long term, of course, we need to be quite vigilant on this front. The rest of the business in France is in particular relating to aeronautics, but also space aeronautics, and in particular directed to others, of course. Here, I have no need to comment. Overall in France, if we put aside the civil aeronautics, overall, the tone is, at this point, still pretty positive.
Okay. Very helpful. Thank you very much for the answers.
Thank you. The next question is from the line of Zafar Khan from Société Générale. Please go ahead.
Thank you very much. Good morning, everyone. Hope everyone on the call is safe and well. Just a two-part question, please. Just following on from Ben's question on the drop-through, and thank you very much for slide seven. That's extremely helpful. Would I be correct in thinking based on the 2019 cost base that you have and assuming no change there. For each Euro of sales that you would lose, would that mean around about EUR 0.50 of EBIT lost? That's the first question.
Then just following on from that, what you're saying on slide seven is reduction of R&D and CapEx. Can you give us some idea of what you're thinking in both of these areas? Because I imagine, as you said, the only real hit is going to be in the civil aeronautics business. So where would you be reducing CapEx? What kind of R&D? How much of that is blue sky that you could defer? And the employees, the reductions there, is there going to be some structural change in those numbers or is it just a furlough and a lot of these people come back again when things pick up? Thank you.
Okay. Good morning, Zafar. So, on your first questions, and thanks for your thanks about page seven, which was designed to help you design your own model. I don't want to make additional comments in term of bottom line impact. You mentioned the figures that I don't want to confirm. I guess that page seven was designed to help you build your own model with some key information. And this mix between what is fixed, what is pure variable, and on which type, of course, can we work in order to adjust them in the short terms against this drop in revenue. It's true that we have not discussed CapEx so far.
CapEx, if you take overall what we had in mind as we enter 2020 and before the COVID-19 crisis, when I talk about CapEx, we probably need to discuss together both CapEx and also on potential new leases, which under IFRS 16, are now reported not in capital expenditure, but more in the cash flow generations, but as additional debts. Basically, we probably need to discuss about the addition of those two elements, which as we enter 2020, overall, our view was to have something like EUR 750 million in term of CapEx plus additional leases and probably a split between the two. But something like EUR 550 million of CapEx and EUR 200 million of leases. At this point, probably a bit too early. And of course, we'll adjust the level of CapEx also in line with expectation in term of the drop of revenues.
But probably at this point, a good rule of thumb would be to consider that we strive to adjust our level of CapEx, and this is probably in line with the drop in revenue. It's probably a good rule of thumb, but it's a preliminary indication for you. It's really a topic that we still need to dig further in the next weeks to come. Probably adjusting CapEx plus leases in line with the expected drop in level of revenue.
If I pursue on R&D, Zafar, it's a very good question because R&D is really at the core of what we do. By the way, preserving our talents, what I call our talent, is a key for the future, and we need to strike a good balance or fair balance between short-term contingency measures, of course, to minimize the impact of this crisis on our 2020 P&L for full. And the balance between, as well, long-term ability to continue, once the crisis is over, and it will end somewhere in the future, to outperform the market and our competitors. So you see that's what we are trying to do. Secondly, R&D, per se, in terms of line of the P&L, will be certainly reduced in 2020. But it could be a reduce in a smart way.
When I say smart way, I mean avoiding to, again, lose talent that could prevent us to rebound after the crisis. And typically, to give you some ideas of what we have started to do, by the way, is first to redeploy some of the engineering teams, which are affected by what I call the demand crisis, the drop of the demand to redeploy these engineering teams on what I call customer-funded programs. To maximize our ability to bill our customers, this is, I would say, quite straightforward. And our ability to bill our customers is a good way to minimize the impact on our sales in 2020.
Another example, which I can share with you, is again, quite straightforward, is to redeploy some of these engineering teams affected by a demand drop on some sectors of Thales, which are not affected by any kind of demand drop so far, and typically defense. Redeploying engineering teams, for instance, from avionics, where we have a lot of system and software engineers, top talents to serve or to be on defense projects. This is doable, and this is what we have started to do, again, to not lose any talents, and not to, I would say, prevent us to rebound in the future. But per se, the R&D line will decrease in 2020, but you see, in a smart way.
Thank you. The next question is from the line of Christophe Menard from Kepler Cheuvreux. Please go ahead.
Yes, good morning. I had two questions. The first one is on the cash flow for fiscal year 2020. You spoke about the operational performance. You just spoke about the CapEx. Could you also tell us, if possible, if you expect some impact at the inventory level? Also, I would say the EUR 400 million cash unwinding, is it still valid as an assumption, or could it be delayed in time? So that's, to the extent of what you can answer on this.
The second question is on the monitoring of critical suppliers. The question is, have you spotted any of your suppliers that are already in some sort of a distress? Or are you more at peace, I would say, with the health of your suppliers? Is there any plan that you should put in place to support them? Also any impact on free cash flow during the year? Thank you.
Christophe, on cash flow, in first, anything we share with you about those reversal of down payments and also the unwinding of positive effects that we benefited end of 2019, all of that is still valid. All of that is absolutely valid. Now, you raised quite an important topic which is the other elements of the working capital. Please do consider that at this point it's really too soon.
At this point, of course, let's be cautious, but let's consider that the way the overall supply chain will have to adjust it to reflect a drop in level of demand and in particular in this aeronautics business. These adjustments, we are working on all of that at this point. Really, too early to mention whether or not we'll have to bear with an additional level of inventories end of 2020 as compared to end of 2019. At this point it's really too early. Critical suppliers?
We can understand critical suppliers. First, as I said earlier during the call, we have put in place or we leverage our global procurement organization to monitor the situation. Because first, it starts with monitoring our critical suppliers to know whether they have or they will have difficulties or not in the future. So far, we have not detected any critical suppliers, I would say, having major difficulties. Not saying that it will not happen, but so far it's okay, if I may say. We'll continue to do so. By the way, not on our own.
We share that at GIFAS level, the syndicat professionnel of the aerospace and defense industry, where Airbus, Safran, Thales and some others. We have, I would say, dedicated some seasoned professional to help all of us to monitor the situation. The first set of actions, if something weird occurred, will be to help these suppliers to get access to public funding, to the measures that have been decided by all the governments in countries where these suppliers are.
Of course, we are not a bank. We do not intend to buy or to acquire our suppliers. But by doing so, by, I would say, being able to detect early difficulties of the suppliers, normally we should maximize our chance and again, not only Thales, but the whole industry, to minimize the number of difficult cases that will probably happen in the future. But so far, we have not yet encountered such, I would say, difficult cases.
Maybe, Christophe, to extend a bit on the other elements of the working capital, maybe a point of attentions on the receivables. What is quite positive for Thales as a company is that most of our clients, most of our customers, are quite strong customers, either in state or institutional bodies, or quite strong customers like Airbus. It's also true that we also have some exposure to some companies that are going through a very difficult period of time. In particular, here, I'm talking about airlines. What we also need to have in mind regarding this type of customer is that we receive requests to extend payment terms. So we also need to be quite vigilant on this point, of course from a cash flow standpoint, but also from a risk management standpoint. This is also an additional matter that we need to monitor in the next coming months.
Thank you very much. It was very helpful.
Thank you. The next question is for the line of Harry Breach from MainFirst. Please go ahead.
Yeah. Good morning, everyone, and thank you for taking my question. I am glad to hear everyone is well and wish everyone at Thales who has been affected a swift recovery. Guys, can I just touch on just three, hopefully simple topics? Just firstly, Patrice, I think you mentioned across the 430 sites of Thales, are all the sites currently up and running? Second question, just looking at the mix of employees across the group, could you give us some idea of how many of these are on permanent contracts compared to temporary or contract workers or others? Then thirdly, just thinking about Naval Group, can you help us to understand how Naval Group is adapting to the situation and what they are expecting in terms of impact on their operations and on their profitability?
Okay. Good morning, Harry. I suggest to start with your second questions. So mix of employees. At Thales, most of our employees are Thales salaries on a permanent basis. This represents the vast majority of our employees and there are, of course, temporary workers. But overall, their share is quite, not insignificant, but quite modest, as compared to the overall Thales employee cost. Probably a good rule of thumb would be to consider that basically, out of the EUR 7.4 billion of Thales employees, on top of that, you probably need to adopt a few hundreds of million euros of cost coming from temporary workers.
Now, and maybe this gives me an opportunity to discuss a bit more on the furlough measures, because also a way for us to adjust our overall Thales employee costs is to put in place furlough measures, which we have started for a few days now. After putting in place, I would say, advance paid leaves, vacations, we have put in place furlough measures in vast countries, but in particular in France, where, as you know, we have almost half of the overall employees at Thales. Just to give you a few figures. We will have, in the next few months, approximately 20,000 employees in France that will be under furlough measures. Those 20,000 employees represent approximately half of the overall number of employees that we have in France. So we understand that half of them will be furloughed with overall, 40% of furlough time for those employees.
You see that it is quite significant. This relates in particular to blue, but also some white collars are putting aside senior officers that are not eligible to this type of measures in France. You see that we're working quite hard in order to adjust as much as we can the level of measures in order to reduce our overall salary cost. A question about Naval Group. Naval Group is also facing, of course, production difficulties as what we describe on page six with this beautiful drawing showing the current situation and how we are expecting this to progressively recover.
Basically, Naval Group is facing the same type of difficulties, which, of course, are going to put in place the same exact type of sanitary measures, self-distancing, working two shifts, all these type of things. In particular in Q2, Naval Group will be quite fully impacted by those sanitary measures. I'm expecting quite a significant drop in the contributions of Naval Group to the Thales level of EBIT, in particular in Q2 with, of course, many uncertainties on how H2 will evolve.
Sorry, Pascal, just to come back just for a second on the furlough point you made. I think you gave us a number of 40%. Can you clarify? I didn't quite hear what you said the 40% number related to.
As I mentioned, half of our staff, half our headcount will be furloughed in the next coming months, in particular in May and June. What I mentioned, the overall, how to say, off periods for those employees are concerned by those furlough measures. The average furlough off time will represent 40% of their expected working time.
This is 26,000 people will work at 60%.
Yes. Probably, yeah, that's the way to put it.
[inaudible] should comment on sites.
Yes.
Can you start on this one? You're right Harry, we have a lot of sites across the world, but it's also normal for a global company. So more than 400 sites all around the world, of different size, of course, by the way. I would say that most of them, if not the vast majority of them, are clearly open. But the question is not are they open or not? It is the level of efficiency or the level of productivity of these sites. And that's what we try to explain with our own words on the different sites, showing the impact of sanitary measures on a given, I would say, site in a given country.
Again, to answer your question, it's not very easy because we face a very diverse set of situations, which is normal, by the way, because the situation depends mainly on the decisions taken country by country or government by government. In some countries where, I would say, very strict lockdown has been decided for several weeks, if not several months, of course, the impact on the productivity or efficiency of the site is very significant, despite the fact that the site is open with, I would say, people working on site. In some countries, I would say the productivity, the efficiency has been far less impacted because the sanitary situation is better or less worse, I would say, and so on and so forth.
If I just take some examples to illustrate the variety of situations that we encounter, and by the way, I don't think it is specific to Thales. It's specific to countries in which we are present. Australia, for instance. Australia, I would say things are running almost normally. I would say it's okay. The impact is probably less important than the one we see in Europe. China has recovered, for instance. Our Chinese operations are working. Singapore was okay, but Singapore has decided to go back to a lockdown. By the way, our activities are exempted from lockdown. Anyhow, it clearly disturbed the activity of our different sites in Singapore. You take Europe, again, even within Europe, you have, I would say, various situations. Spain, Italy, France with a very strict lockdown, I would say, situation.
Some countries like Germany or the Netherlands which have been less impacted than France or Spain and Italy. I will not also continue to give you some other examples, but just to illustrate that it's difficult to give you one single answer because it really depends on the countries in which we are present and depends on the measures decided by the government, in terms of sanitary protection that have been imposed on us, as on any, by the way, companies in a given country.
Great. Thank you. Thank you very much.
Thank you.
Maybe a last question.
Yes. The last question is from the line of Tristan Sanson from Exane. Please go ahead.
Yes. Good morning, everyone. Thanks for taking my questions and spending much time with us today to address all our questions. So three quick ones. The first one is going to be on the cash savings that you are targeting for this year. From all the indication that you provided, my understanding is that maybe you should be able to read something like 3% of sales in cash saving. Is it roughly the right order of magnitude, or is it way off what you are trying to get? Second question, does it have any impact on your ability to reach the target synergies for digital security or is there any risk of deferring the process?
Then, can you tell us whether you have force majeure clauses that are integrated in all your contracts and that can protect you from paying material penalties in the current environment? Finally, if you can tell us very quickly if you could see the current situation as an opportunity in any way for transformation, for redeployment of workforce, for acquisition, anything would be useful. Thank you.
As time is running out, I'll be quite quick. On your first point, I want to comment more. Of course, I mean, you have also understood that the level of savings will also depend on the level of shortfall in term of level of revenue, which at this point in time is really a bit premature to comment. Synergies on Gemalto, at this point no reason to change what we shared with you in term of synergies, both from cost synergies but also from our revenue synergies. Third question about force majeure. Yes, in most of our contracts we have the force majeure, and of course we preserve our rights, which means that we inform our clients for this very unique situation in order for Thales to ensure the right level of protection. Maybe for Patrice, the last question about the transformation. Opportunity of transformation.
Of course, you know this question. A crisis is always an opportunity for, I would say, good quality company to rebuild even further after the crisis. Be it on, I would say, an internal standpoint, how we will draw lessons from this crisis to increase even further our agility and our efficiency. I think that we have seen, I would say, very good things that may help us to be even more agile, more efficient. We have experienced at large working from home, typically, and we have seen interesting things. We have experienced new production organization in some our sites that, I would say, should give us additional opportunities in terms of production efficiency in the future. But it's also true on an external standpoint. You've mentioned M&A. Typically, after this crisis, there will be winners and losers.
Looking at the strength of the group and the quality, if I may say, of the management team, I'm pretty sure that we will be in a good position after. We will be impacted on one hand, but we'll be in a much better position than many other companies, thanks to our resilience. I've always insisted on our resilience, because of our different set of vertical markets, robust customers, the fact that we master world-leading technological portfolio. All these strengths that I've repeated on and on are clearly tangible things that will allow Thales to be extremely well positioned after the crisis to be part of the winners. Clearly, there will be opportunity that the group will sign in the future.
That is really helpful. Thank you so much.
Thank you [inaudible] .
Well, thank you for all these questions. I think it was useful to take the time to give you as much as possible, I would say, all the information that we were able to share this morning and to give you as much visibility as possible despite all the uncertainties, of course, that is not typical just to Thales. Just to conclude this call by stressing, as you have understood, that the impact of this crisis will be very material on Q2 and H1. No need to insist any further. However, at the same time, be, I would say, assured that the management team is there, the captain is on board, on the deck. We are taking all the necessary actions to minimize the impact of this crisis and, of course, remain strongly positioned to return to profitable growth in the longer term.
It is exactly the meaning of the answer I have given to Tristan Sanson a few minutes ago. Next week we will hold our AGM behind closed doors. Again, unfortunately because of this sanitary crisis. H1 results will be disclosed later in July as expected. Have a goodbye. Take care, stay safe. Bye-bye, and thanks for this opportunity to discuss.
Thank you very much. Bye-bye.
Thank you. Ladies and gentlemen, if you didn't have a chance to ask your question on today's call, please do not hesitate to send your question to Thales Group investor relations at ir@thalesgroup.com and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.