Earnings Call: Q4 2011

Mar 6, 2012

Welcome to the Thales conference call. I now hand over to Mr. Luc Vigneron, Chairman and CEO. Sir, please go ahead. Good evening to everybody, and thank you for joining us tonight for the presentation of our 2011 results. In my presentation tonight, I will first give you an overview of the main highlights and our key achievements last year. I will then walk you through the details of our financial results. Finally, I will share with you our views for Thales going forward. I will mention the page I'm commenting along with my speech. I'm moving to slide number 3, which puts forward the main achievements of last year. You can see that after two difficult years, we are quite pleased to have met or exceeded our objectives on all metrics: order intake, resilient revenues, EBIT, and free operating cash flow. This achievement is quite remarkable, I think, as we continue to operate in a pretty volatile environment globally. In Europe, the sovereign debt crisis intensified, creating increased budgetary constraints for our main customers, with some impact onto our order intake on the second part of the year. In the Middle East, the Arab Spring has also had some impact onto our order intake last year. Nevertheless, the order intake was up 1%, driven by good performance of civil aeronautics and of emerging countries with, in particular, the Mirage 2000 upgrade contract in India. Revenues remain globally stable, with a strong resilience of our defense activities and growth in civil activities. Profitability was sharply up. We reached a 5.7% EBIT margin last year, which reflects better project execution and the positive impact of our Probasis performance plan. We are not there yet, but it's clearly a positive step towards our goal to bridge the gap with our European peers by the end of 2014. You remember my famous goal in terms of famous and very frustrating, because I don't give any figure as regard the EBIT target at the end of Probasis. We also had a very good generation of operational cash flow this past year, enabling us to keep our strong balance sheet. I move to slide 4, focusing on the orders. We scored many commercial successes last year. We had told you that we expected the book-to-bill ratio of around one, and we ended up the year with a ratio of 1.01 exactly. We won several major orders. The list of them is on the slide. We're also pleased with our small orders. You know that they are our bread and butter. You can see that these smaller orders with a unit value of less than EUR 10 million continue to rise compared with the previous year, and they represent more than half the orders received by Thales last year in terms of value. Slide five is about our difficult programs. The list of them was disclosed in 2010, last year, about the 2010 results. Agreements have been reached with our customers on these contracts, and today all of them, including the EuronM and MELTEM, have been rebased, and execution conditions have been stabilized. We have still a lot of work ahead of us, as those contracts won't be achieved before several years, 2017 for the EuronM, end of 2013 for MELTEM, same for ticketing Denmark, 2016 for the last three. We are speaking of long-term contracts, but we are quite satisfied at this point in time, as we have been able to strongly reduce uncertainties, and we have not experienced any new overruns on them during 2011. Slide six. A few words about Probasis. We are now halfway through as planned. The flow down of these benefits to the P&L is progressive as expected, and as I explained to you already last year. Anyway, I will come back to this later. Our strong focus on project execution is starting to pay off. More generally, our non-quality costs have started to decrease significantly this year, I mean, 2011. Our NQCs, non-quality costs, were lower than the reference year we keep in mind when we track our Probasis result, the year 2008. We are also making good progress on the supply chain front, where more than half of our savings actions have been implemented. Finally, the reduction of our indirect cost is continuing, and last year, our SG&A costs were lower than our reference year. All in all, we are on track on Probasis. As planned, two-thirds of the plan should have been implemented at the end of 2012, this year. Slide seven, about the portfolio optimization. We have continued with our disposal program with the sale of our IT services activities in Spain and of our minority stake in Napsol in the U.S. You are aware that we have a project to sell part of our French IT services business in France. The most important move on our portfolio, though, has been our decision to exercise our option to raise our stake in DCNS from 25% to 35%. We've got increased rights in the governance of DCNS, as a result of this stake increase, and I'm now sitting on the board of directors. Our cooperation with them will be strengthened, which is a basic target of the strategic move. This should deliver increased operational efficiency and therefore, be value-creating. In addition, we have started discussions with Nexter, the French land defense company. These discussions are progressing well. The target is the same as for DCNS, a deeper cooperation and increased operational efficiency. The project would be to combine our ammunition affiliate, TDA, with the equivalent activities of Nexter, and simultaneously, we would become a minority shareholder of Nexter. In optronics, we have signed an MoU with Safran to create an equally owned joint venture. Such joint venture should be established by the middle of this year. We have covered technical, commercial, and program aspects on future French MOD optronics projects, where we were competitors in the past. The industrial assets of both groups remain under the control of the two parent companies. They will not be involved in the JV. Finally, we have been busy strengthening our presence outside Europe, and we have taken full ownership of our JVs in Turkey, a company called Yaltes, and in Brazil, a company called Omnisys. We have also acquired a small French company specializing in optics for space, called SESO. Let us now move to our financial results, slide nine. I have already covered the main figures. Let me just add that our net profit reached EUR 566 million last year, which represents 2.8 EUR per share. Our financial structure remains strong. We ended up the year with a net cash position of plus EUR 192 million, excluding the positive impact of the consolidation under the proportionate method of DCNS at 35%. In view of all these factors, the board of directors has proposed a dividend of 78 cents, up by more than 50% compared to last year. This demonstrates that the management and the board of Thales are confident that the group is steadily progressing on its path to recovery, and they are willing to have our shareholders benefit from this recovery. Slide 10 is about the EBIT. We can run through the major constituents of our EBIT. We improved significantly our gross margin up to 22.7% last year, compared to 16% the year before. This essentially illustrates the fact that we stopped the bleeding on our difficult contracts, the ones which were disclosed last year. Those contracts are the source of substantial charges recorded in 2009 and 2010. More generally speaking, we have improved on project execution, following the measures undertaken as part of our Probasis performance plan. Do not forget that when you consider our gross margin, we have to deliver on our difficult contracts, which are zero margin contracts, and that represent a share of our turnover. Self-financed R&D remains stable, despite less capitalization in 2011 compared to 2010. EUR 10 million last year compared to EUR 43 million the year before. SG&A costs are starting to decrease as we are now beginning to get the first benefits of our savings actions. The actual reduction is more than the figure you see in the P&L, as some one-off related to the IT technology within Thales, as well as real estate, are accounted within the G&A cost and not restructuring. As expected, restructuring is on the rise in line with the various measures being implemented throughout the group, especially in France and in the U.K. The result is a substantial increase of our EBIT, which amounts to EUR 749 million. Slide 11 describes the EBIT bridge from 2010 to 2011. If we go fast over this, first of all, we benefited from the absence of further provisions on the complex contracts that were disclosed to the market. The contract mix also improved on the back of improved project execution. All in all, we registered more positive than negative cost variances on our contracts this year. For Probasis, for the first time, growth benefits flowing down to the P&L exceeded the impact of the competitive pressure. Remember that in our Probasis plan, we expect that a substantial part of our target end of the period, the EUR 1.3 billion targeted for the year 2014, we expect that a significant part of it will have to be given to our customers to compensate for the competitive pressure. We are quite satisfied to see, nevertheless, the first positive flow down into our P&L of our Probasis efforts this year. On the other hand, as expected, we were affected by a couple of headwinds. Additional self-funded R&D charges booked in the P&L following our more stringent approach towards capitalization of R&D costs. A haircut in R&D tax credit in France, which had a negative impact of about 25 basis points. This is a result of new specificities of the French law regarding tax credit for research. Finally, restructuring charges that are higher than last year, though a bit below the figure of 150 basis points of revenues, which we had mentioned earlier last year, thanks to a slightly better than anticipated workload. When we talked to you early 2011, there was still a lot of uncertainty regarding, for example, the Mirage upgrade program in India, and this is why we were a bit more cautious regarding restructuring. Slide 12 is about R&D. You can see the fact that our R&D expense has remained self-funded, has remained stable. Do not forget that what you are seeing there is just approximately a fourth of the global R&D we are spending in the group funded and self-funded, customer funded and self-funded. You can also see on this slide the small headwind of about, it is not a small headwind by the way, of almost one percentage point of revenue stemming from the difference in the amortization of the past capitalized R&D versus the new capitalized R&D. Let us move to slide 13 about the net result. The income of operating activities amounted to EUR 797 million. It included an income of EUR 37 million for the revaluation of the interest previously held in DCNS, from 25% to 35%. If you want more details, I will ask Jean-Claude to explain to you what is for me a very technical capital gain linked to the application of the IFRS 3R. So it is more an accounting gimmick than any true profit. Net financial expense amounted to EUR 58 million. The decrease compared to previous year being mainly due to the fair market value of our Forex derivatives portfolio supporting the hedging policy of our contracts. Other components of the pension charges were down compared to the previous year. Here again, due to an IFRS technicality, which led us to book a charge in 2010 and to write it back in 2011. Going forward, we should come back to figures closer to the EUR 100 million watermark. Income of equity affiliates remained stable last year as improved results of DCNS still accounted at 25%, under the equity method used until last year. These improved results offset the fact that we have no longer our share of the results in Camelot and in Indra Espacio, companies which we opted out in 2010. Slide 14, is the time when we focus more onto the detailed figures of our businesses. You can see that we are benefiting from the variety of our activities. On the defense and security sector, we are growing in terms of order intake, whereas on slide 15, aerospace and transport, we are decreasing. All in all, we are stable, slight increase, which shows the benefit of the fact that we have several markets enhanced. In the defense and security, most of the growth is obviously related to the Indian Mirage contract, whereas in aerospace and transport, most of the decrease is the mechanical effect of the fact that, in 2010, we had got a EUR 1.1 billion space contract in the U.S., the Iridium NEXT satellite constellation contract. Nevertheless, when we look in defense and security to all our other activities, we are growing in terms of orders in land defense systems. The only area where we experience a downside was air operations, but there again, the previous year was very successful. Remember, the very successful export contracts of our air defense radars, the GM 400. In aerospace and transport, behind the global decrease, resulting from the absence of a big and a huge elephant like Iridium last year, we can say that we have substantial growth in avionics, as well as in transport systems for terrestrial applications. For example, it is in this sector that we recorded our large contract for the Ecomouv' project in France, nationwide tolling system, whereas we recorded our PPP with the French Ministry of Defense for their future headquarters in the defense and security domain, the project called the Balard Project in France. We have seen improvement at order level and revenues level in almost all our segments, except some of them. Having in mind that, the comparison with 2010, we don't have the same big contract in the aerospace transport domain as Iridium in 2010. We have also good evolution of the results, in those two sectors. In both cases, it is a result of a sharp reduction in negative variances and contracts, but also higher volumes in civilian markets for the aerospace and transport. We addressed that at mid-year results, the positive effect of the agreement signed with Airbus for the A400M project. Let's move now to the slide 16 about the cash flow. On the back of these improved results, the operating cash flow increased significantly last year at EUR 1,242,000,000, compared to EUR 389,000,000 in 2010. Compared with last year, movements in WCR and contingency reserves were negative as a result, in particular, of the cash outflow impact of the provisions booked on our difficult contracts in 2009 and 2010, plus the impact of the payment of the Taiwan arbitration. Together, these impacts represent an outflow of more than EUR 400 million, which must be borne in mind. The decrease in capital expenditures is actually mainly due to the reduction of the proportion of the R&D costs that were capitalized in 2011. Including the investment made in late 2011 to increase the stake in DCNS to 35% for an amount of EUR 265 million, the net cash flow amounted to EUR 1 million versus EUR 282 million the previous year. The slide 17 gives you more color onto the bridge between last year and this year for the net cash. You will see that we are now starting to show what will be the impact of the consolidation of the 35% of DCNS and the other proportionate method on the cash. This is why you have the two columns, the one without DCNS at EUR 192 million, and then the one including DCNS at EUR 906 million. But never forget that the DCNS cash remains within DCNS. After this detailed outlook, I will say a few words about our objectives for this year, 2012. Let's move to slide 19. For the sake of clarity, let me stress, just after my comment on DCNS, that all our financial targets, which we are sharing with you today, exclude the positive impact of the proportionate consolidation of DCNS. By the way, we intend, in the future, to continue to report to you both set of figures, set of figure including the proportionate consolidation of DCNS, because this is what the IFRS will ask us to do, but also a set of figures excluding them in order that you keep the capability to track our performance excluding DCNS. Our performance of last year confirms the relevance of our strategy in the current environment, and this supports our confidence in delivering an improved performance this year. But having said that, the environment around us is not improving, and we have seen that on our order intake on the second half of last year. The instability remains high in the Middle East. In some cases, customers have disappeared. In other cases, they are postponing their decisions. We have serious uncertainties as to the economic situation in Europe. If you have looked into the details of our order intake last year, I'm sure you have seen that the order intake for U.K. as a destination country is minus 15%, and for the rest of Europe, excluding U.K. and France, is minus 11%. We have already seen a very significant impact of the Euro crisis onto our order intake last year, and we don't see the situation improving this year. Last year, we were lucky to have France as a destination country quite strong. But this year, we have general elections, and we don't know what will be the major decisions of the future government. There are many uncertainties. We know that the budgetary situation of our main customers lead us to expect a decrease in defense orders this year. We think that this is likely to be only partially offset by the increase in commercial orders, where we are expecting a sustained growth, primarily in aeronautics and ground transportation. That's why, all in all, we are assuming a book-to-bill ratio slightly below one this year, excluding, of course, any exceptional export order like a Rafale order. Also having in mind that revenues should be higher than in 2011, in line with the execution of the very good order book that we have already. In terms of EBIT margin, we are confirming our target of 6% for this year after restructuring charges expected at 1% of revenues. As I've already said, our ultimate objective remains to bring our profitability in line with our European peers by the end of 2014. Slide 20 is not new to you. It is just a way to remind you of our assets to capture growth in this uncertain environment. We have many strengths. Our balanced portfolio between defense and civil increases our business resilience, and the commonality of our technologies allows us to leverage successes in one area to develop another. This is something I am trying to increase, as you know, in the company, and I am quite confident that even if it takes some time, it will deliver substantial benefits in terms of new order intakes in the future. Our defense offering is well aligned with priority capabilities of our main customers. Even if we know that they will be under budgetary constraint, we also know that they will focus on areas where we are very present, very active, and quite often, global leaders like C4I systems, secure communication networks, intelligence, reconnaissance, C4ISR subjects for the initiated people. Let's not forget that defense is only half of our business. We have a strong exposure to growing civil markets in aeronautics, where we can expect low to mid-single-digit growth of markets. Ground transportation, same. Civil security, same. Space, where the situation could be more stable as there, again, part of the market is depending on budgetary money from governments. There are segments that are growing faster than that, like the in-flight entertainment domain or cybersecurity, where we have two-digit annual rate growth. Also, you will notice in this slide that defense in developed countries, which are the ones where we face budget problems, accounts for less than 40% of our revenues. On the contrary, we enjoy a strong and long-standing international footprint. In many countries, we have been present for more than 30, 40 years, sometimes 50 years. This gives Thales a real edge in the competition. I can mention an anecdote. Malaysia, for example, we created our first JV there 15 years ago. We had several successes in defense. Last year, in Oyoden, and this is one of our major contracts of last year, we scored a large defense contract of electronic systems for armored vehicles. Simultaneously, we got also major successes in urban rail civilian market. It's an anecdote, but it's a good example of what we are seeing in several growing, emerging markets. Slide 21 is about our emphasis onto innovation. Our commitment there remains strong. We have seen the figures before, about 5% of revenues for self-funded, 20% of our revenues including customer-funded. Our strategy here is to spend our R&D money better through increased sharing and cross-fertilization. That's why we are developing networks of experts on a transverse basis around key technological domains. We put also a stronger focus on products and customers. We are also addressing the streamlining of our product portfolio to leverage common technologies and reduce development risk. On page 22, slide 22, you will see a few words about our Probasis performance plan. As already said, it's largely underway. You have there a few comments. Concerning the non-quality cost, we have now implemented increased rigor in bid evaluation and project execution. At the bottom of the slide, the CHORUS 2.0 new common language, new set of working methods being spread out, rolled out through the entire Thales group, will increase the level of quality of our teams in all our engineering contracts. On supply chain, we have put in place our new purchasing organization worldwide with segments specialized at worldwide level to improve our supply chain, whereas before that, each company in Thales was doing its own purchasing separately from the others. In SDNA, we have started to implement shared service centers on a country basis, for example, in France or in the U.K. Areas already dealt with are, for example, HR, communication, and we are starting now this year, areas like accounting. Purchasing has been started last year and will continue this year, and so on. We have also reduced the complexity of the internal legal organization of our group. Just have in mind that when I joined Thales, we had approximately 500 legal entities in the group, and we have reduced that number by about 20% already. Deleting something like 100 legal entities without any impact onto our operations, obviously, but simplifying a lot the cost associated with this complexity. Probasis is on track and delivering, and I can even say that in the current environment, I'm quite pleased by the fact that I launched that plan in 2009, end 2009, early 2010, as it has given us a head start on some competitors which have to do the same now. The slide 23 is not new. It is a summary of our global strategy. This concludes my presentation, and I trust that you realize that the ambitious transformation launched two years ago is well underway. It is delivering its first tangible results. As the environment on our key home markets becomes increasingly tougher, we are building a stronger Thales, a more international Thales, more export-oriented Thales, well-placed to deliver sustainable and profitable growth for its shareholder, its personnel, and its customers. Thank you for your attention. I will now be pleased to take your questions. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press 01 on your telephone keypad. Our first question is from Mr. Alain Champeau from Cheuvreux. Please go ahead. Yes. Good morning, Luc, Jean-Claude, and Omar. I have three questions. Antoine Champeau from Cheuvreux. The first one is the orders taken in 2011. Could you give us an idea of the gross margin attached to these orders, including the Probasis benefits already secured and compared to the 22.7% you have reported in your P&L? My first question. My second question is on what you mentioned before for the G&A cost. You said there were some IT costs embedded onto this line. Could you give us the amount of IT and real estate costs that you have in this G&A line? My third question is linked to the Indian Rafale. Could you give us an idea of the order of magnitude for the first equipment contract value and, second, the aftermarket business? Thank you. I answer? Okay. Is that okay? Antoine, you are asking difficult questions, as usual. I will be straightforward. I will not comment the Rafale negotiation ongoing in India. It's a very strategic project, but negotiations are going on, and as usual, I will not make any comment on them. The only thing that you have to note, to notice, is that we have not taken the assumption in our guidance for this year of such a huge contract. If we succeed, it would be a really great news for us. For the G&A costs, I'm afraid there are also, it will be difficult for me to go into the details of our IT, real estate, and the like costs inside G&A. If I mention that while commenting G&A costs, it is because these costs are substantial. It's part of our Probasis plan to reduce, on the long term, our IT costs as well as our real estate costs. But you can imagine that it is an area where you have to invest first before getting the return on investment. This is why we have, all in all, in G&A, a headwind there that will last last year, this year, maybe next year, but then deliver the benefits expected by these investments on the end of the Probasis period. Gross margin on last year order intake, I will tell you that the level of gross margin on order intake last year was quite similar to, grossly speaking, quite similar to the year before. The reason being that the Probasis effect were still largely used to compensate the competitive pressure on the market. Nevertheless, it's good news because, during the same time, competition has increased in defense into our domestic markets as a result of the budgetary pressure. On export markets, we know that it has always been a very competitive domain. Last but not least, let's not forget our exposure to the dollar for approximately 20% of our turnover, including indirect exposure. The level of the dollar remained last year and remains this year at a level that is partly a problem for us, as you know. Thank you. Thank you. The next question is from Mr. Olivier Brochet from Exane BNP Paribas. Please go ahead. Yes. Good afternoon, all of you. Or good evening, actually. I have three questions. The first one is on the tax rate for 2012, what we should be looking at and going forward, given the changes that we are experiencing or about to experience on that respect, especially in France. The second question is around Nexter, which is calling from restructuring in consolidation in Europe, in land armament. What are your views there? I know that you were a strong proponent of that in your previous job. What is your view today? The third question is also around Nexter and the question revolves around the way that you will manage conflict of interest on the Australian ammunition and vehicle business of Thales versus what is at Nexter. If you can give us some color of what can happen there. Is this a business that can be brought to Nexter in a second phase, for instance? Okay. Thank you, Olivier, for this question. First part, tax rate for this year. Around 25% should be a reasonable assumption. Second question about Nexter and the consolidation of land defense companies in Europe. I have not changed my mind. There is a need for that, obviously. The move that we are trying to implement with Nexter currently is a limited move. As for DCNS, our major target is to leverage a cooperation spirit as well as synergies that couldn't be possible to be obtained without some form of shareholdership between the two companies. In both cases, my major target is to deliver win-win benefits through closer cooperation on export markets, as we have quite often complementary positions on some export markets. We face similar requests by the local customers in terms of localization, transfer of technology, offsets from time to time, after-sales support, and so on. Also, in very early studies, so at the other side of the spectrum of the product life cycle, I started by the right side with the customer, now I am speaking of the left side, starting in the labs. I think that between platform guys like DCNS and Nexter and equipment guys like we are, there are real benefits, mid-term and long-term benefits, to share ideas as to where is the technology going. When both of us, we think in our labs about the future, I have in mind future five years to 10 years ahead of us. These are the two areas where I expect benefits from this increased strategic relationship between Thales and DCNS, already done, and potentially with Nexter, if we succeed to reach an agreement with them this year. Your third question was about conflict of interest with Thales Australia. This is not a significant subject. By the way, we are in the same situation vis-a-vis DCNS. In fact, the areas of potential conflict of interest are absolutely minor, as the product ranges, the market positions are very different. When we are speaking of conflicts of interest, we are speaking of a few percent of turnover of those companies, and that can be easily managed through ad hoc processes. Okay. In terms of the call for regrouping, for instance, between Nexter, Rheinmetall, Krauss-Maffei, Patria, or Oto Melara, that Mr. Burton mentioned, what are your views there? Are you supportive of that, or? I was supportive of that when I was at Nexter, but I also explained the fact that it's easier said than done, because those consolidation are not easy to implement. I'm sure that it is the right direction to move, but it will be a matter of opportunity. Because to strike a deal, you need to be two persons who share the same views and so on, and that can take time. Thank you. We are not involved in that aspect. Our discussions with Nexter are absolutely focused on the subject I mentioned previously. Okay. You will have no board representative at Nexter, or? Why not? No, I am asking. You see, you are asking for the results of the negotiation that is ongoing. You deserve it. I will wait until the summer then. Thank you. Thank you. The next question is from Mr. Carl Walton from Merrill Lynch. Please go ahead. Good evening, everyone. Just one question on the pension. The IAS 19 changes, the abolition of the corridor accounting. Could you give any comment on impacts that this will have for you? Unfortunately, I will give the floor to Jean-Claude, because your question is really technical, and it will be a good means for me to test Jean-Claude. Jean-Claude, please. Thank you, Luc, for that. Thank you, Carl, for asking. Clearly, the first question is also on the timing. We do not know when this reform is to be implemented. It could be as from 2013, could be later, so we will have to see exactly what the impact is. Clearly, if and when this is implemented, this will have an impact. It may not be insignificant, but that will not change the underlying reality in terms of obligations. At this stage anyway, it is a bit too early because we do not even have a precise date as to the implementation of the new rule. Okay. Any color on when you might Have you been given any indication of when you might get some color? Discussions are really ongoing at the moment. An initial date has been given that it could be as early as 2013. For next year's accounts. But it could be later on. It is still not decided, so we will see again how it will be. But basically, there are certain charges that today, as you know, we amortize over time and that will have to be taken in one go. So that will have an impact. But again, that it is just another expression of the same underlying reality, so that does not change either Thales' financial stability or the underlying obligation of Thales in terms of pensions. Okay. Thank you very much. Thank you. The next question is from Mr. Christophe Menard from Kepler. Please go ahead. Yes, good evening. I had one question on the cash flow. Namely, can you help me understand the bridge going forward in 2012? The contract mix was really good in 2011. What would be the kind of recurring contract mix to expect in 2012? In terms of the net gain or net benefit from Probasis, what should we kind of expect in 2012 as a ballpark figure as well? Christophe, you are talking cash flow, you are talking P&L? I am just- No. Sorry, sorry. Yeah. My other question is on cash flow. This is P&L. Yeah, sorry. It is easy to bridge. This is P&L, yeah. Okay. Yeah. Sorry. Sorry. My apologies. Maybe the best for you in terms of you have two questions, really, on the contract mix first, on Probasis. Remember that within the contract mix of this year, there is also the one-off impact of the EUR 800 million, which, as a one-off, will not be repeated next year. So that is something to keep in mind for the direction of that particular item. On Probasis, probably a good slide, it is in the annex, but you will see slide 31 in your slide pack. We give you basically how you can expect the slowdown of Probasis benefits in the P&L. We have shown you what happened in 2010 and 2011. So, we have left the column blank for 2012 for you to work a little bit, but I am sure you will come up with something. Essentially, you have the mechanics behind how the slowdown is working. Okay. Thanks. Thank you very much. On the cash flow, that was the second question. Should we expect a provision consumption in 2012 of EUR 200 million, as you previously guided, so that we should be looking at a free cash flow of about EUR 600 million going into 2012? Is it kind of a right figure to think about or to think of? You are right that we will continue to consume provisions in 2012 at around that level. You are absolutely right. It will go down. It will go down after that. Luc mentioned a minute ago that some major contracts mature in 2013, some big contracts, big problem contracts. That will be a milestone for the decrease in terms of the cash outflows on those problem contracts. If I may, a very last question on Watchkeeper. I understood there were some issues with Watchkeeper in the U.K. Is it included in the non-quality cost of 2011, or are there any issues to come in 2012 regarding the contract? Well, on the Watchkeeper program, we have revised the schedule with the customer. It has been revised last year, and we continue to make progress against the new schedule, and we are in line. We are in line with the new schedule, and our customer should be able to progressively introduce a new system in theater this year. Regarding non-quality cost, I don't have the figures in mind, but I don't think that this is a contract where we are experiencing significant problems in terms of non-quality costs. Thank you very much. Thank you. The next question is from Zafar Khan from SocGen London. Please go ahead. Yes. Hello, good evening, everybody. I got a couple of questions, please, on the Probasis. On slide 6, you are suggesting that the non-quality costs in 2011 were lower than the 2008 level. Luc, I know you have given previously a number for 2009 and a number for 2010. I remember EUR 1 billion, EUR 1.4 billion. I do not quite remember ever hearing a number for 2008, so I do not know what lower than that number means because I do not know what the number is. I wondered if you could help us on that. That is one question. The second one, again, is on Probasis, the supply chain, where you are suggesting 60% of the actions implemented. What exactly does that mean? What actions have you implemented? How does this add up to 60%? Those are the questions on Probasis. I would like some help, please, in the cash flow. You have consolidated the provision use and the working capital, the change in working capital. I just wondered if you could break out the working capital in particular. I want to know what has been happening on that side, and if you can give any guidance for 2012 on working capital consumption. Finally, the fourth question is on employee numbers. I noticed that you are consolidating your proportionate amount on the DCNS. Could you tell me what has happened to the employees within Thales, how that number has evolved from 2010 to 2011? Zafar, just to give you the figure on the NQCs, the EUR 1 billion you are referring to is actually the 2008 number. We actually made clear when we launched the Probasis plan that clearly the level of 2009 was already affected by very large provisions on the number of contracts, and therefore could not be the reference year to compute savings. So we used 2008 as a reference for non-quality costs, and the EUR 1 billion you are referring is actually the 2008 figure. EUR 1.4 billion being the 2009 figure. Okay, that is good. Thank you for that. For the second question, the 60% of the actions, what are the actions? In fact, we do not go into details, but I am sure you will understand that having the size of the group in mind, that we have hundreds of action plans in our hundreds of companies. When we put forward the 60% figure, it is just to give some color on what is our feeling in terms of achievement and rolling out of those action plans. Those action plans are many. I mentioned earlier the action plan to integrate our purchasing more globally. But we have also plenty of action plans in the product policy domains. If you remember well, the two major subjects that will deliver benefits at the end of the Probasis plan under the umbrella supply chain are, on the one hand, purchasing savings. This is being addressed by what I said earlier about the organization, the worldwide organization we have implemented. The other subject is more rigor in product policies. This second subject, by definition, is close to all our many products in the group. So we have many action plans related to product policies throughout the company. The 60% is just a way to give you where we feel we are in terms of rolling out all these action plans in the company. For the cash flow, I give the floor to Jean-Claude. Well, there's one difficulty, as you know, Zafar, is that a number of provisions, the ones on the construction contracts, so the one on the long-term contracts. The one on the IAS 11 are actually, you will see that precisely in the construction contracts in the accounts. Clearly, the change here in working capital, and let's call that provisions on the construction contract, is negative. But the explanation is, again, mainly the fact that we have consumed provisions on the contract. It's a bit difficult to isolate the pure working cap. But if we're looking, for example, and you may have this in mind, the terms of payment from our main customers, they have not deteriorated over the year, so that it has a meaningful impact on the WCR. About the employee numbers now, we don't release the figures. Okay. Yes, we release the figures. You release the figures there in- Yes. Note 5. You have actually all the figures. It's 63,000. You have the impact of the DCNS number of employees, which is shown at the bottom of the page. You can just see that roughly speaking, we're 63,000 at group level, excluding DCNS. But I think that at the end of your question, you were trying to get some color as to how we manage our employees and- That's exactly what I'm asking, is really, I just want to know- Hello. What have you been doing? Have you taken the numbers out? If you could- Yes. Develop that theme. Okay. In fact, what we have done last year is we have reduced our overhead in France and in the U.K. But this cannot be seen when you compare the figures year on year, because at the same time, we have optimized our production people in our labs, mainly. I am speaking of engineers, I am not workers. As we had discovered that part of our non-quality cost was related to stretched subcontracting scheme in some of our units. So we have hired additional engineers and so on to do more in-house work of good quality onto our ongoing contracts. And this is part of our way to reduce our non-quality cost. But on the other hand, we have reduced progressively our overhead cost in France. Maybe you will remind that I announced at the end of 2010, for France only, a reduction program of employees of approximately 1,500 people. In fact, we implemented something that is slightly less than 1,000 because our first figures were assuming very late success on the Indian market. The success on the Indian market at the middle of last year allowed us to keep on our units more people than expected in our labs. But within this slightly less than 1,000 reduction of people in some of our units, approximately half are in the overhead domain. And this is part of our move towards more agile units. It is also the result of a progressive higher integration of the group with less and less units doing everything on their own as if they were separate companies, and more and more mutualization of support functions, G&A functions, at country level first. And we are doing that in France, we are doing that in the U.K., in Germany, and in the States. The other countries will follow. So we are working on the subject, even if it cannot be seen at first sight when you compare the figures year on year, because those figures are a mix of people moving in, people moving out, and so on. Okay. That is very helpful. Thank you. Thank you. We have another question from Mr. Olivier Brochet from Exane BNP Paribas. Please go ahead. Yes. One more if I can, about DCNS prospects, because you presented your guidance for the year excluding DCNS. Can you give us an idea of what we should be looking at for 2012 and in, I do not know, 2, 3 years, 2014 or 2015, in terms of the cash situation and the contribution to earnings for the group, please? I think that is one of the reasons why we will also continue to report with and without DCNS, so that you see the contribution. We reckon that at 35%, that remains modest, our contribution to the business. Yes. But should we look at it as a stable business or as a growing business? As you may know, they have a huge order book. Mm-hmm. And we are, by the way, very thankful for all the details that you provide in note 2 about the company. That should drive the top line going forward. There is no reason why the operating income should change from where it is? Well, they are also working on their championship plan, so we hope that it could even improve. Okay. In terms of the cash, is it due to change dramatically, or should we look at it as a stable level of cash? Well, this will clearly depend on the order intake as well, because some of the cash comes also from the very high level of orders clearly, and some of the cash may well be consumed as contracts are executed. But you shouldn't expect that the cash disappears entirely, and there's a huge level of cash, in a way, that will remain in the next few years within DCNS. Okay. That's helpful. Thank you. Thank you. Our next question is from Mr. Harry Nies from HSBC. Please go ahead. Good evening. I've got two questions, both on margin. Firstly, last year you gave us two years' worth of EBIT margin guidance, and I was just wondering what was the thinking of only giving us one year this time around, and whether there's any expectation that the progression might slow in 2013. Secondly, I was just wondering whether you could give us a steer on the individual divisions, defense and security, aerospace and transport, for the year ahead on margin. Well, my answer to the first question will be back to normal, as we gave last year, two years in compensation for what was a very disappointing 2010 year. So back to normal means the guidance for the next year, for this year, 2012. Now, it is clear that we are working on improving our profitability for the future. I told you that we are not there yet, when I mentioned the figures for last year. We will not be there yet, if we match our guidance for this year. So, at the same time, as I said earlier, we are facing many uncertainties on the market. This is why the will to continue to push up the profitability will be there, no doubt. Probasis should deliver, as you can see on the slide, more on the second part of the period than on the first part of the period, just by the effect of inertia in our deep dive workshops. We are not releasing a guidance for 2013 or 2014 and so on. The only guidance that you have is the same frustrating, for you, target of reaching the same level of profitability as our European peers. Regarding the top line, we have given you some color about our civil markets, where we gave you an idea of the annual growth of this market. You can also cross-check with official information from other sources on those markets. For defense, we are expecting pressure on the top line in the medium term, as a result of short-term pressure on the order intake. Nothing on the margin then, within the individual divisions? I don't know. As you know, Harry, when looking at the performance of the two sectors in 2011, there is obviously some room of improvement on defense and security, but less than in the aerospace and transport, but it'll continue its recovery going forward. If indeed, on the margin improvement between 2012 and 2011, you will have more of that in aerospace and transport than in defense and security. Even if probably defense and security can improve as well. You've seen that defense and security had the bulk of restructuring charges this year. It may not be the case next year, but it's a bit early to tell. Would you be able to actually provide information historically of the split between those restructuring charges between the divisions? Yes. We have given that in the past, I guess, for 2010 as well, but I can send it to you. Okay, thanks. Thank you. The next question is from Mr. Tristan Sanson from Exane BNP Paribas. Please go ahead. Yes. Good evening, gentlemen. Tristan Sanson from Exane. I was curious to get a few details on how you build the number for competitive pressure to EUR 140 million you report for 2011 and EUR 130 for 2010. What is your methodology to calculate that? If you could give us a very rough idea of how we should look at the allocation of that pressure between the two divisions, that would be helpful. Thank you. This is a question for Jean-Claude. First of all, as you know, the 1% competitive pressure is something that we've seen at Thales over a couple of years. We know that if we don't basically find approximately EUR 130 million-EUR 150 million savings every year, our margin deteriorates. That's the first thing. Second point, it's also something on which we've asked everyone within the Probasis reporting to give their own input. So every unit within the group has given us an input. That's also a way to, with the figure we had, the EUR 140 million we had for 2011, is very much a bottom-up exercise, and it falls within what we've experienced regularly for Thales. You're too sophisticated, Tristan. I don't think you should go into that kind of detail, try and find whether competitive pressure is high in one sector or another, but it's probably too sophisticated an exercise for us. The trend going forward we'd be looking at a stabilization at around EUR 140 million-EUR 150 million, or you see a reason why it should be non-linear and increase actually in a slightly faster way in 2013? Up to now, we don't see any reason to change our mind on this subject. The future will let us know about what will happen. But up to now, including taking into account the pressure on prices seen on the second half of last year on some of our markets, we don't see any reason to change this assumption yet. You mean that it should be around EUR 140, EUR 150? Yes. Yeah. Okay. Thank you. Thank you. There are no further questions in the queue. Well, thanks to all of you, and see you for the mid-year 2012. Bye-bye. Ladies and gentlemen, this now concludes our conference call. Thank you all very much for attending.