Earnings Call: Q4 2014

Feb 26, 2015

Ladies and gentlemen, welcome to the Thales 2014 annual results. I now hand over to Jean-Claude Climeau, Vice President, Investor Relations. Sir, please go ahead. Good morning. Welcome, and thank you for joining us today for the presentation of 2014 annual results. With me today, we have Patrice Caine, our Chief Executive Officer, and Pascal Bouchiat, our Chief Financial Officer. As usual, we will run this presentation in English. It will be followed by a Q&A session. It is also webcast live on our website at thalesgroup.com, where you can download the slides, press release, and the consolidated financial statements. A replay of the call will be available as from tomorrow morning. With that, I would like to turn over the call to Patrice Caine. Well, thank you, and good morning to everyone. I am very pleased to speak to you this morning, as it is my first opportunity to speak to the financial community since I was appointed as CEO of Thales just two months ago. It has been an exciting two months, even if I know Thales quite well, of course. As you know, I have been with Thales for more than 12 years now, and most recently as a Chief Operating Officer, in particular in charge of the global performance program named Ambition Boost. In a few minutes, Pascal Bouchiat, our CFO, will walk you through the details of our financial results for 2014. But before he does, I would just like, sorry, to share with you some of my initial comments and thoughts on our business environment and on our performance over the past year. So on slide 2. First, perhaps a few words on our business environment. Overall, 2014 has been a very volatile year on many fronts. As you all know, oil prices have gone down by more than 50%, which is striking. The U.S. dollar has gone up by 15% against the euro. Of course, we all can witness that geopolitical tensions have risen, and particularly in the Middle East. While at the same time, emerging countries' growth continue to be quite strong, over 4%. All in all, a mix of tailwinds and headwinds for Thales. To be a bit more specific about our key markets, let us go through the three main areas: aerospace, transport, and defense and security. Still on slide 2, aerospace. Avionics continues to enjoy a positive momentum. Last year, world air traffic grew by 6%, and as a result, aircraft manufacturers continue to have massive backlogs. We at Thales, therefore, continue to expect increased production rates at aircraft manufacturers, and this, combined with the progressive ramp-up of the A350, with which we have, by the way, a larger shipsets, will further sustain our activity. Space remains a very competitive market, but the telecom segment seems to be recovering from the tough over the past years. Transport, while business drivers are strong, as growing urbanization in emerging markets is driving continued investment in infrastructure, while at the same time, mature countries also invest to upgrade their existing systems. In this environment, we pursue, and we have pursued various prospects in emerging markets in Europe, and we have been quite successful capturing new orders in the past few months. Last, defense and security. Given the increase of geopolitical tensions, defense budgets in emerging markets, in our view, are unlikely to decrease. The recent signing of the Rafale contract in Egypt is a typical example. In western countries, we face ongoing strong budget pressures. No surprise. However, with the level of perceived threat like terror attacks, but also increasing awareness on cybersecurity, this should limit the downward pressure on security and defense spending in which Thales operates. We can move on to slide 3 now. In this environment, Thales had a strong year in 2014. Our performance program, Ambition Boost, delivered both order intake and underlying operating profitability. They both are on the rise. We had particularly strong operating results in both aerospace and defense and security. Transport, however, had project execution challenges, and of course, we will come back on this later on. As expected, we also observed a continuous growth in emerging markets, while mature countries held up very well with a significant order intake, and that was a good news for this past year. Again, 2014 was strong at Thales, but serious execution difficulties at DCNS, as you know now, cast some shadow over the global picture. We can move on to slide 4. I will now focus shortly on DCNS situation, which we already talked about one month ago. As you know, DCNS has conducted a comprehensive and in-depth review of its project portfolio. The main conclusions of these reviews pointed to difficulties, mainly in civil nuclear diversification activities and some naval programs like the Barracuda nuclear submarine attack. This led to financial losses at EURAM for DCNS and to a negative EBIT contribution of minus EUR 117 million for Thales, versus plus EUR 40 million EBIT contribution in 2013. Now, what's the way forward that we expect for DCNS? With the portfolio significantly de-risked, we don't foresee further booking of significant provision this year. That's one point. Secondly, a new management team is in place now with a clear roadmap to recover, focusing on project execution and competitiveness. Of course, core business only, and that has been clearly said and expressed and discussed with DCNS management. However, talking from experience, improvement in project execution can and will only be gradual. We therefore expect a very progressive return to profitability at DCNS, with not much more than a break-even contribution to our EBIT for this year in 2015. That's for DCNS. Let's move to slide number 5. Slide number 5 summarizes in a few charts our major indicators and achievements of the year. It is quite self-explanatory. If we go through the different charts, order intake first. Order intake has increased by 11% year-on-year. That is 8% on an organic basis. Well above our expectations a year ago, and Q4 has been, in particular, very strong, with the signature of several large contracts in both mature countries and emerging markets. Sales, well, sales as expected, were broadly flat with headline numbers up by 2%, but essentially on scope and an organic decline of around 1%. EBIT, efforts to improve our competitiveness paid off, and our EBIT, excluding DCNS, is up by 13% year-on-year. Last but not least, free operating cash flow. Free operating cash flow reached EUR 501 million. It is an increase by 5% year-on-year, slightly above our expectations of a flat level of cash flow versus 2013. If we move on slide 6, it summarizes our 2014 year. In a nutshell, we are in line or above our objectives last year, excluding, of course, the impact of DCNS losses on our EBIT. Now after this overview, I would like to hand over to Pascal, who will comment our financial results in greater details. Pascal? Thank you, Patrice, and good morning to everyone. From now on slide 7, focusing on our main commercial successes of 2014. As Patrice mentioned, 2014 has been a good year on the commercial front, with order intake up in all our sectors and overall up by 11% year-on-year. Book-to-bill is significantly above one at 1.11, which bodes well for future growth. We have won 19 large orders, that is above EUR 100 million in unit value, the same number as the last year, with a fair balance between mature countries and emerging markets. Q4 has been particularly strong with several orders received in space with the FalconEye observation satellite in the U.A.E., transport with a significant contract for a 500-kilometer high-speed train line in Spain. In defense security, with the launch of the SCORPION land force program in France, air defense radar and optronic pods also in France, military communication networks and Doha harbor security in Qatar, long-distance system in Australia, and radar to equip Gowind frigate in Egypt. Globally, the order book remains strong at EUR 27 billion, the equivalent of more than two years of sales. Moving on now to slide 8 on our order intake by destination. We said two years ago that Thales needed to speed up its business capture from emerging markets in order to deliver top-line growth again. We are pleased today that this renewed strong focus on these high-growth geographies is clearly paying off. As you can see, emerging markets order intake reached EUR 4.3 billion last year. That is an increase of more than 40% in just two years. With a strong contribution from the Middle East, and we are also expecting further progress from these markets in 2015. Let us now move on to slide 9. As mentioned already, EBIT ex DCNS was up 13% year-on-year on globally flat sales. This reflects the impact of our performance improvement measures, focusing on better project execution and cost control. Improved operational performance is illustrated by the continued increase of our gross margin, which reached an all-time high level of 24.5% of sales, compared to 23.7% last year, reflecting 80 basis points improvements. Let us now move on to slide 10 to look in greater details at the evolution of our EBIT between 2013 and 2014. Our 2013 EBIT was EUR 1 billion and 11 million, including EUR 40 million of positive contribution from DCNS. So ex DCNS, our 2013 EBIT was therefore EUR 971 million. From that base, our EBIT benefited from a EUR 55 million positive impact from scope and ForEx. Most of this impact is scope-related, linked to the impact of the full consolidation of Trixell and the French unit of Thales Raytheon Systems, as well as the acquisition of LiveTV. In addition, there was a modest tailwind from better hedging rates. Actually, at this point, I would like to say that we stick to our policy to hedge our avionics dollar exposure with a two to three years horizons. However, we have decided not to be more specific going forwards on the precise hedging rates we have achieved, because our hedging performance is effectively a competitive advantage which needs to be protected. All in all, our operational performance improved by EUR 70 million, corresponding to about EUR 90 million coming directly from our cost-saving initiatives, very much in line with our expectations of a EUR 80 million to EUR 90 million impact. This combined with a negative volume effect of about EUR 20 million linked to the organic drop of our sales. In the meantime, we have limited the amount of restructuring cost year-on-year, while in parallel, R&D has grown by EUR 4 million versus 2013, as we continue to invest to support the development of our technology. And of course, we continue to almost fully expand this cost to the P&L. Let me now move on to page 11. I will go through the performance of each of our segments in a minute. Just let me highlight the very strong performance of both aerospace and defense and security, which are both posting double-digit organic increases of EBIT. Both segments have actually already reached the 9.5%-10% return on sales watermark, which is our 2017, 2018 target at group level. Transport, on the other hand, has been disappointing, with EBIT level well below group expectations. I will come back on this later on. Moving ahead to slide 12 with aerospace. So we see that in these segments, order increased by 17% versus 2013. In avionics, orders were driven by the continued growth in commercial cockpit avionics on the back of high production rates at aircraft manufacturers. In space, orders were supported by the recovery of the telecom segment after a relatively weak year in 2013. We also won several large contracts for navigation and observation satellites. Sales are up 6% year-on-year. This is driven by avionics, with increased production rates at Airbus, as well as a strong growth in flight entertainment and connectivity following a good level of order intake last year. In space, sales are flat due to low activity on the constellations programs such as Iridium and O3b. EBIT grew by 20% year-on-year. That is 11% on an organic basis. And costs, for the first time, the 10% return on sales are threshold. This improvement was driven by Avionics, with both positive volume impact and the impact of competitiveness measures, whereas the EBIT of space activities remained stable. Moving to slide 13, transport. Transport orders grew by 14% year-on-year with a very strong Q4, which included the signature of a large contract in Spain for high-speed line, but also in Mexico and Doha. Sales were down by 3% compared to last year. Mainline Signaling recorded growing sales thanks to several contracts in Europe, but this was offset by lower sales in ticketing and urban rails. In this environment, EBIT reached only EUR 32 million, or 2.3% of sales. This is due to execution difficulties on several projects, more particularly in urban rail. Over the course of the year, we have taken corrective measures, including staff relocation to strengthen management and operational team. We have also changed the top management, bringing in Millar Crawford, a Thales veteran with a long and successful track record in managing complex projects in various activities and countries. The progressive recovery of this business, which in our view continues to have a great potential, is of course a priority for Thales and Millar. And Millar will lead these efforts with the full support of Patrice Caine, Michel Mathieu, our new COO, and myself. Moving on now to slide 14. Defense and security. We see that in this segment, order did very well in a challenging budget environment and overall grew by 7%, reaching 7.6 billion. This growth actually exceeded our initial expectations and was driven by several large contracts in both emerging markets and mature countries. Sales remained flat compared to last year, down by 2% organically. Most of our activities had slightly lower sales with the exception of Optronics, Cybersecurity, and Network Systems. Despite this negative volume impact, EBIT margin is sharply up, reaching almost 10% of sales compared to 7.7% last year, essentially on the back of good project execution and lowering restructuring costs. Turning now to slide 15. Finance charges, expenses remained stable compared to last year, but finance cost and pensions rose due to higher interest rates applied. I will say a few more words on pension in a minute. As expected, our tax rate was 29% versus 30% in 2013. It should remain in that range this year. Minority interest reached EUR 72 million versus EUR 39 million in 2013, as we now consolidate Trixell and TRS France at 100%, whereas we only own 50% of the shares of those two companies. Adjusted net income was, of course, impacted by DCNS negative contribution and dropped to EUR 562 million. EPS amounted to EUR 2.75 on an increased share count of 204.8 million. Turning to page 16. Our operating cash flow reached EUR 501 million in 2014, a level close to the one of 2013, as expected. As usual, we received significant cash inflow in the second half of the year. Capital expenditure were on the rise as we continue to streamline our industrial footprint and improve our IT. And this relatively high level of CapEx should continue until 2017. Beyond that, CapEx should trend again in line with depreciation and amortization charges, thereby helping grow our conversion ratio. Moving ahead to slide 17 on the evolution of our net cash position and the use of our cash flow. We see on this slide that deficit payment on U.K. pension remained stable at EUR 69 million. We spent EUR 374 million on acquisitions over the year, the bulk of it being LiveTV. The integration of LiveTV is now well underway, and the company is delivering in line with our expectations. Dividend pay in 2014 amounted to EUR 243 million, with a balance of EUR 0.85 per share paid in May in relation with the 2013 dividends, and an interim dividend of EUR 0.34 paid in December 2014 related to the 2014 dividends. On page 18, a quick focus on pension. In 2014, our pension deficit has increased to EUR 2.6 billion compared to EUR 1.9 billion last year. This is due to the sharp decrease of discount rates. On average, the drop of discount rate was about 160 basis points. If we look now at the consequences at P&L. First, we see that despite the fact that service cost remained stable in 2014, we think that the increase of the amount of pension of obligations will mechanically trigger a rise in service costs in 2015, which will have an impact of approximately EUR 25 million at EBIT level. With regard finance cost and pension, which as you know, is reported below EBIT, but of course, included in our adjusted net income, we see that on the other hand, those costs should go down this year in 2015, generating a modest tailwind at adjusted net result level. I will turn over the call to Patrice to talk about dividends, strategy, and guidance. Thank you, Pascal. I propose that we move to slide 19. Yes, a word on the dividend. As you know, our dividend policy is to maintain a payout ratio of 35% of our adjusted net income. However, this year, given the impact of DCNS losses on our income, yes, we took the view that an exception should be made to this rule. Hence, reflecting positive momentum in our businesses and our confidence in free cash flow generation, we decided to maintain the dividend unchanged at EUR 1.12 per share. Hence, as a consequence, the payout ratio will thereby be temporarily increased to 42%. Let's move to slide 20. On slide 20, I would like to share with you some initial comments regarding my views of the group's strategy. As you know, as a CEO of Thales, I have actively participated with Jean-Bernard Lévy in the definition of our strategic ambition, Ambition 10, and our global performance program, Ambition Boost. Two years ago, we were all convinced that this strategy was right. I am pleased to say that our 2014 results clearly validate our analysis. Our underlying profitability has improved, and importantly, we are back on the path of growth. Our order intake is up for the second year in a row. On top of that, our performance program, Ambition Boost, is really the engine that powers this strategic ambition. Let us be clear, it is not just a cost-saving plan. It is much more than that. It is a truly global performance program, which addresses top line growth, bottom line competitiveness, and of course, talent management. Let us move to slide 21. Well, 2015 priorities. Our 2015 priorities are therefore directly derived from our strategic focus. First, we shall continue to improve our competitiveness, of course, and we need to address or to continue to address all efficiency levels, all type of costs. Project execution remains a key focus. We need to keep our stringent view on bids and projects, and we can still improve our project execution, in particular in transport. I also expect engineering, in particular, to become more and more a strong contributor to the improvement of our results. You know that I have been a strong advocate in my former role that engineering was, and is, a very promising level in terms of competitiveness improvements. Of course, we will support as a shareholder, the turnaround of DCNS. Michel Mathieu, who succeeded me as COO and CPO after his very successful turnaround of Avionics, will work closely with Pascal on all these matters. Second, deliver top-line growth and accelerate our globalization. To support our growth in emerging markets, we need to take substantive steps to increase our local footprint in these geographies. Strategic plans for our key emerging markets have been defined now. We are now turning them into selective action plans, and we focus our efforts where the expected return is the highest. We will also put an increased emphasis on capturing large contracts, these contracts above EUR 100 million, but also, what I call extra large contract. These contracts in the region or the area of half a billion EUR, which are very structuring for the company. Finally, we will be developing our marketing approach. We have now recruited a new CMO, Chief Marketing Officer for Thales, which is, by the way, a brand-new position in our company's history. Marketing will clearly support our growth efforts by helping us be more customer-centric and more pertinent in our product policy. Finally, focusing on attracting and retaining the best talents. Of course, we need to become truly global in our approach through increasing diversity, mobility, and local presence. Let us move to slide 22 now. On this basis, what is our guidance for 2015? For 2015, after an order growth of almost 20% in two years, we expect order intake to remain high with a new increase in order intake expected from emerging markets. By the way, recent announcements such as the signing of Rafale contract for Egypt are, of course, very encouraging in this respect and is very positive. The continued growth in order intake over the last two years should result in an increase in sales in the low single digits, in 2015, and this is for the first time in many years. This positive trend, combined with efforts to improve competitiveness and the progressive return to profits at DCNS, should result in an increase of around 15% in EBIT compared to 2014. Based on current action rates, EUR 1,130 million to EUR 1,150 million. In the medium term, we do confirm our objective of a moderate increase in sales and a further improvement in our EBIT margin to achieve a rate of 9.5% to 10% by 2017, 2018, as explained during the Capital Markets Day we held in 2013. Let me conclude by saying that Thales delivered a strong performance in 2014, ex objectives. I really believe that this puts us on a favorable trajectory to deliver sustainable and profitable growth at Thales and further value to our shareholders. This concludes my presentation, and I thank you all for your attention. And together with Pascal, we will be very pleased now to take your questions. Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero and one on your telephone keypad. We have a question from Celine Fornaro from Bank of America. Please go ahead. Yes. Hi, good morning, everybody. Two questions, if I may, please. The first one would be probably more for Pascal. It would be trying to understand how much cost savings you think you're going to have in 2015. And then following back on this, if we think about the EBIT bridge, 2015 against 2014, you have basically a tailwind of DCNS of EUR 117 million, which should reverse, and then you have a EUR 25 million pension headwind, some volume benefit. So I'm just trying to understand a little bit on your guidance and what's in there for your vision on transport and the transport recovery. And my second question would be more for Patrice. Probably stepping back a bit, if you look at Thales over the last five to six years, we have three different management teams and different boards. I was wondering if in your agenda, you mentioned three points, but probably one that also comes to mind is a portfolio review, and I was wondering how you think about that. Because things like DCNS prove that there is a question mark on some of the things that Thales owns or doesn't have enough control on. So happy to hear your thoughts on that. Thank you. Okay. Good morning, Celine. On your first question, which is understanding the bridge between 2014 and 2015 in term of EBIT. A few comments. Yes, as you mention, headwinds regarding pension, which as I mentioned, a EUR 25 million negative impact versus 2014, as I mentioned. As I said, due to the increase of our obligations driven by the drop in interest rates. Now, in term of, I would say, the split of the contribution of volumes and cost saving. True to say that, over the last three years, our increase in EBIT was purely driven by cost savings. In particular, driven by better project executions, savings on purchasing, and drop in some overall corporate cost. All of that has been the key drivers to increase our EBIT so far. We made it clear that for most of those drivers, what we had to do has been done. Basically, in 2014, this is really the end of this, I would say, overall three years cost-cutting plan that we put in place. By the way, in term of delivery, very much in line with what we said a few years ago. So now, going forwards, the increase will be driven both by restorations of volumes. But as you have seen, we guide you to a low single-digit increase in volumes in 2015 versus 2014. But I would say this is the first time that we commit ourself on that. There will be, of course, some additional savings coming from cost, but at a level which will be significantly more modest than it was so far as compared what we deliver over the last three years. What we also need to have in mind that in 2015 in particular, two key topics for us, which are certainly essential to continue delivering goals. One is R&D, and we've seen 2015 R&D cost moving up. Second thing is, overall, our investments with regard to sales force and marketing. Patrice made it clear that we are developing action on that with, he mentioned, a new Chief Marketing Officer. So we are going to continue increasing our efforts on marketing sales and also on R&D. With regard, and you mentioned, DCNS 2014, minus 117. 2015, today, quite a cautious stance on DCNS. Confirming what we said a few weeks ago, saying that DCNS recovery will be progressive. That in 2015, it means that targeting something around a breakeven position in term of business contribution is basically what we have in mind. Your last point was about transport. Transport, yes, we're expecting transport to improve in 2015 versus 2014. But here also, it's going to be progressive. It will take a few years for us to restore level of margin for transport at a level that we deem satisfactory. Basically, 2015 transport, an improvement. Yes, this is what we are targeting. But once again, a gradual increase. Patrice, on the portfolio. Yes. In fact, Celine, in your question, there is two sub-questions. The first one was, if I remember well, on the product portfolio, but also related to the management changes over the past year. Then the other question on DCNS. First, on the management, since my appointment as CEO, I've definitely chosen to improve or to give privilege to management stability. Hence, the promotion of Michel Mathieu as a COO, hence the promotion of Gil Michielin to a handover from Michel to lead the avionics business. Gilles is a very well-known and respected Manager in this business area in avionics, and hence the promotion of Millar Crawford to lead our transport business. Yes, we do need management stability, in particular in our businesses, which are long-term businesses, where our customers really give value to have long, I would say, long-term interactions with Thales management. As every year, we conduct a product portfolio review. We do it each year, and we will do it this year. Having said so, and without being much more precise, globally, Thales' perimeter is very consistent, very current, very robust. Saying so, you can draw the conclusion easily. As by the way, we are quite integrated group, sharing talents, sharing technologies, and sharing international organizations. On DCNS, which is another kind of question, I think there are two priorities. The first one, as a shareholder of DCNS, we clearly set to DCNS management as a top priority zero, if I may say, to restore operational profitability within DCNS. And it is clearly shared by the other shareholder of DCNS, and clearly shared by the new management of DCNS. But we're also a partner or supplier of DCNS and in this field, yes, we can continue to improve our relationship by, I would say, being even more integrated by working on open architecture that creates value for DCNS and value for us. As you probably know, we represent on the FREMM Frigate 20% of the added value. We represent on the BPC close to 40% of the added value, and so on and so forth. So in terms of business, we are more and more integrated, which is the case in such very, I would say, complex objects like a frigate. Over the past decade, over the past 10 years, I have the strong conviction that we have created a lot of value for DCNS and for Thales by being a shareholder and hence by, I would say, creating a real momentum between the two companies to really work as a team on such complex programs. When I started my career in Thales, I started my career by negotiating the first, I would say, cooperation agreement with DCNS, hence my conviction that we have created a lot of value in this domain. Okay. Thank you very much. Thank you. We have a next question from Tristan Sanson, BNP Paribas. Please go ahead. Yes. Good morning, everyone. So it's Tristan from Exane. Three questions, all on margins, sorry for that. First one is on 2014. Please, Pascal, can you explain to me again the EUR 56 million contribution that you have in your EBIT bridge from ForEx and scope? I struggled a bit to understand what are the various constituents of that and to understand why it's so strong. Especially, can you explain the performance of LiveTV this year compared to your plan? The second question is on your 2017-2018 margin outlook. If I remember well, when you announced initially this margin target, you said that 9.5% would be reachable with no growth and that actually with some growth you would be able to do 10%. Now we're happy to hear that you can deliver growth supported by your book-to-bill performance. Given that you are going to reach that growth and you also have a currency environment that is much more favorable at that time, how did your perception of your ability to achieve that margin target evolve since then? Do you not think that it should be at some point actually moved up to 10%, 10.5%, something like that? The side question with this is there a will to reinvest more of the extra profit into R&D and marketing, compared to plan as you are announcing today? The final one is on the margin in defense. I just wanted to know whether this high level of profitability we had in 2014 is actually sustainable in 2015-2016. Thank you. Okay. Good morning, Tristan. First, a technical question about this EUR 56 million in our bridge. The bulk of it is a pure, I would say, mechanical impact coming from the reconsolidation of those two JVs, Trixell and TRS France. This representing approximately EUR 40 million. The ForEx tailwind 2014 was around EUR 50 million versus 2013. LiveTV, right in line with our expectation. As I said, the integration is going well. In term of growth potential from LiveTV, we have not changed our view. That LiveTV will help avionics with regard growth. No change on LiveTV, but once again, a confirmation of what we said when we announced this acquisition. About 2017, 2018 margin, maybe what I suggest is to make a first answer and then leaving the floor to Patrice, if you want to comment a bit more on that. So, 2017, 2018. Today, what we do just to confirm what we said a few months ago, and no change. We are not going to pick up any new informations, some of them being positive, some of them being less positive. You are mentioning ForEx, but you are not mentioning pension. Life is such that we have to face a situation that can change. Basically, we do confirm 9.5%-10%, without being more precise, by the way, in term of years. It is 2017, 2018. I am not saying that we will be at 9.5% in 2017 and 10% in 2018. No. This is a medium-term objective, 9.5%-10%, in this time horizons, which is 2017, 2018. What we see today, restoration of growth, is once again in line what we shared a few months ago when we talk about our expectations in term of increase of ordering taking. Patrice. Well, if I may just add a few comments on the 2017 and 2018 guidance. Yes, you are right. There are a lot of opportunities, a lot of good things that have happened since the Capital Markets Day. However, there are still a lot of uncertainties, questions, that may happen between now on and this horizon. Oil price may change again. Who could say what would be the euro-dollar exchange rate in a 2017-2018 horizon? Who could say what will be the world stability and what will happen in the Middle East area? If you remember well, when we look at the speed of change of our environment, yes, many things can happen, in positive or in negative. To my opinion, it is very premature to envisage any change of our guidance. We want to be credible. We want to deliver what we announced. I think that for the moment, it is important that we confirm, but too soon to move up our guidance at this horizon of time. Your question, Tristan, on our will to invest in R&D. Yes, this is the case, and this is what I said, in particular in 2015, where we will increase our R&D investments. The reason is quite simple. We do think that technology, innovation, are a key differentiator for Thales. Both in term of competitiveness, but also in term of growth. Basically, this is in particular through innovation and technology that will make the difference. So it will go up. You add, if my memory correct, last question on margin in defense and whether or not the level of margin as we report in 2014 are sustainable or not. I would say that 2014, by the way, both on defense, security, and aerospace, margin on those two key segments were a bit above our expectation when we started 2014. Now, 2015, for defense, I do not want to be too precise. It is true that the 2014 base is quite a demanding one. So a bit too early to confirm that we will be able to maintain this level in 2015. But all in all, this type of margin, which is close to 10%, is, in my view, quite a reasonable guidance for the next years. If I just may ask for a precision about the. Yeah. Without growth, we would have to push even harder in term of drop, with reduction of cost. Basically, this is what we confirm today. You reiterated that part of the guidance too. Okay, thank you very much. Thank you. We have a next question from Olivier Brochet, Credit Suisse. Please go ahead. Yes, good morning, Patrice and Pascal. I will have two questions and a very small one after that. First, on what exactly happened. The reason I'm asking is that you had many wins commercially in the last few months, and I'm wondering if it can be a reason for worry for these new contracts that we're looking at. Second one is on ForEx. The EUR weakness is a competitive boost versus U.S. competitors. How should we think of it, more orders for you or less margin for them going forward? My third question is on pensions. Did I understand correctly that the impact of the financial income, I would say, tailwind, will be offsetting completely the negative impact on the EBIT, or was it something that I misunderstood? Second, in which branch should we allocate this extra EBIT cost? Well, perhaps I take the first one on transport, and I try to be sure because we could spend a bit of time on this one. In fact, in a nutshell, there is nothing which is rocket science. Everything that we have to do to restore DTS situation is, I would say, back to basics on some, I would say, key points of the business. Why have we lost, I would say, some of these basics? Probably, it's linked to the previous organization, under Luc Vigneron's time, where we were organized, I would say, by country, if you remember well. Most of DTS programs are multi-country programs, where the two centers of competence, Canada and Germany, respectively for URS and Mainline Signaling systems, work with country of destination, where the systems are sold and delivered. It means that we have to have a seamless approach between these countries, and which were clearly not helpful with the previous organization by country. Now we are where we are. We are organized adequately to handle these kind of projects. But yes, we have to clear some projects which have difficulties, originated in back to 2009, 2010, 2011, mainly. But here again, nothing rocket science. We just have to do it, and to do it, I would say, in the right order. Okay. On ForEx, Olivier, first, overall, what we see is, of course, positive for Thales, of course. Now, in term of impact with regard in the overall competition against, in particular, U.S. players. First, what we need to have in mind is that when we face competition in emerging countries, in particular, when we export, we're facing both European and, in some cases, U.S. competitors. It's not a world where there are only U.S. players. Basically, we're facing both European, which are also taking advantage of drop of the EUR, and also U.S. players. Now, will it be, at the end of the day, a drop in the U.S. players' margin or more volume for us? I would say it's probably a bit too early. All of that is quite new. We don't see any relaxations in term of overall competitive pressure in our export markets. We probably also need to see what is going to happen with regard to the U.S. defense budgets. I guess that you have seen some comments about U.S. deciding, or that might decide to increase defense spendings, perhaps from 2016. We'll see. Overall, this is quite a complex environment, and a bit too early to assess how it will evolve. Now, overall, it's true that it should be, of course, a bit more better for European players like Thales. Your question on pension. Your understanding was not correct. What I said is that in term of service costs, which is recorded in our EBIT, there will be a EUR 25 million increase in 2015 versus 2014. With regard finance costs, there will be a EUR 10 million drop in pension finance cost in 2015 versus 2014. Bottom line, in term of pre-tax impact, it's going to be a negative EUR 15 million that we expect in 2015 versus 2014. Okay. In terms of the branches where we should see- Yes, in terms of branches, as a rule of thumb, do consider that it will be evenly spread over our various businesses. Evenly. So a third, a third, a third. Yes. No, because as you have seen, the size of our business. Weighted by size. Yes. Excuse me. Weighted allocations in line with the size of each of our three business. Okay. Clear. Thank you. Thank you. We have Nick Cunningham from Agency Partners. Please go ahead. Thank you. Good morning, gentlemen. Couple of questions. First of all, your revenue guidance is for growth, but you had a book-to-bill of 1.11 in 2014, which would appear prima facie to imply a faster rate of growth than that. Is that just lags between winning the contract and execution, or is short cycle stuff going backwards? Second question, if you go back to 2009, 2010, if you like, the crisis the company had, if that was an issue of contract execution, I would say from contracts that had been won in pursuit of revenue growth. I think two questions arise this year, therefore. You had similar problems, arguably, in transport, which seems disappointing, if you like, soon after such a big crisis. Are the controls really in place? Second point, that becomes really important where you said that you're going to go out and pursue large contracts, which appear to me to be where those risks lie. How can we be confident that we're not going to have some recurring major contract losses in future years? Thank you. Okay. Good morning, Nick. Revenue profile as compared to order intake, as we always said, there is a progressive ramp-up in sales coming from the flowing of the backlog. It takes a few years. Hence, the reason why, in particular for 2015, we are guiding you to a low single-digit growth, despite the fact that in 2013 and 2014, our book-to-bill was significantly over one. Second point that you also need to have in mind is that, in 2013 and 2014, we also booked a long-term contract. When I say long-term contract, contracts that are expected to be executed over quite a long period of time. It was the case in 2013, where we booked a large service contract for the British Naval forces, where we mentioned that it was a 10-years contract. Another example in 2014, where we mentioned that we signed, in U.K. as well, by the way, a long-term contract to refurbish the overall military traffic management in U.K. We mentioned that this project will be executed over quite a long period of time. It's more than 15 years. So for those two reasons, progressive ramp-up in term of the backlog flowing during the P&L, plus the fact that some of large contracts that we managed to book both in 2013, 2014, will be executed over quite a long period of time. This is the reason why we are guiding you to a low single-digit growth in term of sales in 2015. Yes, perhaps on the second part of your question, transport and large or extra large contracts. Yes, you're right to recall that we had some execution issues in 2009, 2010. That's a fact. However, I think that the causes of these difficulties are a bit different, if not quite different from the ones that we see in transport as of today. At this period of time, 2009, 2010, extremely difficult contracts, both on the technical side and on the T&Cs side. We had, clearly, a real technical challenge, and contractual challenge to overcome at this period of time. When we look at the GTS project execution difficulties, I think they are of another kind. As I said, nothing rocket science. There's no technical, I would say, difficulties, or I would say it's usual or standard for this kind of activity. But it's nothing extremely difficult. It's more, as I said, a matter of organization, of better organization. A matter of, also, we think the adequate level of resources on these projects. Yes, we have had very successful commercial activities, and now we have, of course, to adapt the level of resources to this level of projects and contracts we have in our books. You see, it's clearly, for me, a very different situation from what we have gone through with the avionics. By the way, the nomination of Michel Mathieu was gone through this successful turnaround and this difficult period in avionics is, I would say, the perfect match to handle with the new head of DTS, this phase in transport. I'm very confident that we will come back to, I would say, normal situation in the years ahead of us. On extra large contracts, my view is that there is absolutely no correlation between size and risk, absolutely. That is what we have seen over the past decade or even more within Thales. If you take the contract that we will book for Egypt behind Dassault and DCNS and MBDA, as well in all the different contracts that have been signed in Egypt, it is huge. It is almost close to EUR 1 billion. However, if I may be a bit caricatural, a repeat order of things we have to deliver to Dassault, to DCNS, to MBDA, and so on and so forth. It is quite the same for another large or extra large contract that we are still waiting, for Lebanon. It is a EUR 0.5 billion contract. But when you look at what is inside this contract, it is more or less recurring things. So absolutely no risk in this contract. Here again, to summarize what I said, there is no correlation between size and risk, what we think that is. Thank you. Could I just follow up very briefly? Just on those big defense export contracts, to what degree will those actually be incremental revenue or, on the other hand, replacing what would have been French orders that simply get pushed to the right to accommodate those deliveries? Nick, your question on Egypt. Basically, there is order intake impact, of course. There is, of course, a cash impact. In term of sales, in term of revenue, as those aircraft will replace forecasted delivery to the French state, we don't expect any significant impact on our 2015 or 2016 level of sales. Are they better priced or have a better cash profile, perhaps, than French state sales? Nick, I am sorry, but I cannot be, of course, too precise. I am not going to give you the detail of the down payment of each of our contracts. So basically, in a nutshell, positive in term of order intake and cash profile, and I would say it is neutral in term of sales for Thales. Thank you. Understood. Thanks. Thank you. Thank you. We have a next question from Zafar Khan from Societe Generale. Please go ahead. Thank you very much. Good morning, gents. A lot of questions on transport, but I do not think I have fully understood the issues here. Patrice, I understand it is not rocket science, but if you could help us a little bit, please, I would be very grateful. Just on transport first, if I could ask a couple of questions there. How big is the ticketing versus signaling business within that division, and was the ticketing at loss? I imagine signaling should be doing peer group margins. So I need a little bit of help on that. Were there any provisions taken on the contracts? How does that flow through in 2015? I know you guys are mentioning going back to normal, but what is the progression going to be between the very disappointing numbers you reported in 2014 and whatever the normal is? I guess the normal must be the type of margin you were making a couple of years ago or the one you reported in 2013. So I need to understand the progression in that. If you could please treat me as a complete idiot in this and just give me the basics so I can really understand what is going on and how I should be modeling this going forward. So that is the question on transport. I think next point, I just want to highlight that looking at the numbers this morning was quite a big shock for me. I was hoping that given all the problems you have had with contracts in the past, that there would be better monitoring rather than just saying that because it is a geographical issue, the finger slipped through the net and you have ended up with this problem. So I really need to understand transport. That is the first one. The second one is just on the restructuring going forward. If you could please help us in understanding what kind of restructuring costs we should be putting in for 2015 and beyond. Then just on the margins in the aerospace business, very good margins, and you have said that you have already hit the targets that you had set for 2017, 2018. So is that it in terms of the margins in aerospace and defense, or can we expect some progressive improvements there? Okay. Good morning, Zafar. Maybe starting from the end, because you had many questions. On aerospace and defense, what we said is true, that 2014 was a bit above expectations in term of level of margin for those two key businesses. Because of that, being a bit cautious in 2015 versus 2014 in term of potential improvement. Now, in the medium terms, it is our belief that there is still opportunity for further margin expansion in these two businesses. I am not saying that what we reported in terms what you should take into account for 2017, 2018. I do think that there is still room for potential improvement, but of course, limited considering the level that we already achieve. My cautious message was on the potentially improvement in 2015 versus 2014 in those two businesses. Restructuring, 2015, a level of restructuring that should be in line with 2014 or potentially slightly less. But as a rule of thumb, assuming that it should be stable in 2015 at the level that we had in 2014 is a good guidance. Okay, so where are you spending the money? That is over EUR 100 million. How will that be spent, and in which divisions? It will be spent in various activities. It is matter of fact, and when we are talking about restructuring, it is also restructuring to continue improving our competitiveness. I have to say that both in aerospace and defense and security, there are still room to improve competitiveness. Even though avionics and space has today quite good level of margin, we are thinking about a new way for us to continue boosting competitiveness, and it means that there will be restructuring in aerospace in 2015 in term of restructuring costs. Because we seek to continue improving our profitability in aerospace. The same for defense and transport as well. So please do consider that there will be restructuring in our various businesses in 2015. With regard transport, I will make a few comments and then leaving the floor to Patrice. First, Zafar, I do understand your comment, but please, we need to look at the situations, take into account the amount at stake. You are talking about large overspendings in the past at Thales. Here, we are reporting, yes, disappointing figure with regard transport. Now, when we look at the magnitude of the drop in profitability, it has absolutely nothing to do with what happened at Thales back in 2009, 2010. Basically, we improved a lot our project executions in our two largest segments, which are aerospace and defense and security, with the outcomes that we present today. The level of maturity for transport is not at this level. This is a point that I made a number of time in 2014, the fact that transport, in term of overall project executions, in term of maturity, was behind aerospace and defense and security. Now, in term of the magnitude of the issue that we're facing in transport, once again, it has nothing to do with the magnitude of the issue that has been met by Thales back in 2009 and 2010. Please do consider the relative level of issue that we're facing in GTS. Patrice. Just a few points, as you have already I think covered that, but more qualitative aspect. When we look at the contracts that have suffered some difficulties, it's essentially contracts where we have enter new countries. Typically, it is South Africa, Norway. It's true that in this case, each customer has each own concept of operations. We have to understand it well and to then to adapt our core products, core solutions to that. The adaptation is not difficult. It's what I call it's not rocket science. But it's true that understanding perfectly well the concept of operations of a new customer may take a bit of time and may require a bit of level of investment or costs. Clearly, it has been underestimate in these cases, in these contracts. I do confirm or repeat what Pascal has said. Most of these contracts were taken just after the, I would say, this activity came within Thales perimeter. Probably the not probably, but surely the, I would say, project management standard, build review, peer review standard of this activity, which has been inherited from Alcatel, was not at the right level and for sure, not at the level that we expect within Thales. Okay. If I could please follow up. What you've been saying this morning is everything is going to be fine and life should be very good now. You have EUR 1 billion of cash on your balance sheet. Given your shareholder structure, I wouldn't expect you to be buying back stock. I guess the other way of rewarding your shareholders is to give them progressively higher dividends. I know DCNS has had a little bit of a problem, but you don't control that. It's only 35% owned. So why are you so conservative with the dividend this morning? Why aren't you putting that up? Surely you don't need the EUR 1 billion and you're going to generate more cash, and therefore some return of money to shareholders in a higher dividend would have been very welcome. Can you just tell me what your thinking is behind that? Because the dividend signals to me management's confidence in what they're doing and what they believe their business outlook is. And keeping it just flat, I know you're talking about payout ratios, et cetera, but this is an exceptional year in DCNS. Why haven't you raised the dividend? Okay. Zafar, one key point that you have not mentioned is that last year, we increased our dividend by 27% and moving up our payout ratio from 30% to 35%. Today, you see that basically, the stability in dividend means that our payout ratio in 2014 is 40% plus 42%. So quite a significant increase. I'm not guiding you to a long-term payout ratio at 40%. What we do this year, 40% is based on the fact that we had to bear in 2014, which is a one-off negative impact coming from DCNS. And with the will, say, is to keep a message, which in our view is more a message of confidence that basically, the issue at DCNS is a one-off issue that hit us in 2014. So keeping the dividend at a stable level versus 2013, after once again, a surge in dividends in 2013 versus 2012. Now, in term of use of cash, once again, a will from Thales to keep a very solid balance sheet. Once again, this is something which is critical in our business relationship. As you know, we are developing long-term relationship with our customers, and a robust capital structure is absolutely critical in the eyes of our customers. And because of that, yes, having quite a solid balance sheet is clearly what we have in mind. Second point is keeping flexibility, and 2014 was quite a good, I would say, example of what it means for Thales. When you look at what happened in 2014, a EUR 500 million plus cash flow, but also, I would say, is a significant move in term of acquisitions, with in particular, the acquisition of LiveTV. It is true that this point will confirm that it is really our strategy to increase our business and to go on an organic standpoint. It is true that we want to keep the flexibility to make a potential move on a more strategic standpoint, in particular with regard about bolt-on acquisitions. So this is all these type of things that we consider and our board deciding to propose a stability of the dividend after a 27% surge in 2013. Thank you very much. Thank you, Zafar. Okay. As time is running, I think we will have time for one more question. We have Christophe Menard from Kepler Cheuvreux. Please go ahead. Yes, good morning. Thank you for taking the question. I had three quick questions. I do not know if you take the three, but the first one is on your guidance for 2015 on sales. Is it organic or headline? That is a quick question. The second one is on transport. First, what does the Hitachi transaction on STS change for you? If we project ourselves in the future, what are the criteria that you will be regarding in the future for transportation to justify that this is still a core business for Thales? So what matters? Where are you seeing margins in the long term on that business? Because it is true that the margin surprised a little bit this time. The last question was on order intake. Why are you so confident about order intake in 2015? You were a bit more cautious last year, so seemingly, the outlook is very solid and strong. We heard about the Rafale, of course. Are they really a very strong prospect at this stage that make you so confident? Okay. Good morning, Christophe. First question about our guidance in terms of low single-digit growth in sales. This is based on an organic view. Transport? Well, transport, short answer, the acquisition by Hitachi of Breda and STS definitely will not turn the game, at least for us, on a signaling standpoint. Even if we look at the overall activity of Hitachi, both rolling stock and signaling, Hitachi will stay an actor of a side which is much smaller compared to Alstom, GE, and the two monsters, and closely one in China. Clearly it's not a game changer at all for us. Order intake. We are guiding you to a stability in term of order intake in 2015 versus 2014, with still a progression from emerging countries. Yes, the good level of confidence that we have on that, and it shows that we managed to, still not to book, but to be awarded various contracts since the beginning of 2015. Even though, of course, we have to be cautious. Overall, today, we see some opportunities materializing in term of order intakes, which give us a good confidence on the guidance that we're presenting today. I think that in term of order intake, when you look at 2014 and 2013 in particularly, we are seeing order intake very much twisted to the end of the year, with Q4 both in 2013 and 2014 being extremely strong quarters in term of order intake. We might see in 2015 a more regular, a more stable level of order intake throughout various quarters. I think it will be probably a positive. Overall, despite the fact that, of course, we have to make sure that those opportunity will translate, our level of confidence is quite good for 2015 in term of business prospects. Okay. I think this is the end of the conference call. Thank you very much to all of you for participating in this call. I guess that we'll have the opportunity of meeting with most of you in the next couple of months. Our next call will be on May the 6th for order intake and sales on Q1 2015. Thank you very much, and see you. Bye-bye. Bye-bye. Thank you very much. Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.