Earnings Call: Q4 2012

Feb 28, 2013

The slide press release and financial statements available for download. There will be a replay available as from tomorrow morning. Now I will hand over to Jean-Bernard. Thank you, Jean-Claude. Merci. Bonsoir à tous. Good evening. Very pleased to welcome you here at the Thales headquarters, for those who are in this room, and all our friends listening on the site or through the site. I am very pleased also because it is my first opportunity since I have been appointed as Chairman and CEO at Thales to speak to the financial community. It has just been a little above two months of experience, and it has been a very fascinating time for me. In a few minutes, Pascal Bouchiat, our CFO, will walk you through the details of our financial results for 2012. Before he does, I would just like to share with you some of my initial comments and thoughts on our environment, on the performance of Thales, and of course, what I believe should be our priorities going forward. As I am looking at our environment and the strategy for Thales through these next few years, I think it is clear the geographical balance of our world is shifting. Obviously, defense markets are not going to grow, and especially in our key countries, such as France and the U.K. On the other hand, emerging economies are doing well and are driving growth, and we have significant presence on all continents. It means it is a great opportunity for Thales, but I want to say, we will only benefit from this opportunity if we are prepared to increase our local industrial presence and our cooperation with partners, and I am sure we have lots of progress to make in these areas. Opportunities are very significant. If I look at air traffic, for instance, air traffic continues to grow. It was up about 5% in 2012. It means a lot of good opportunities for us. For instance, the backlog from Airbus to Thales today means over EUR 1.5 billion of sales for the next five to six years. In-flight entertainment also, which we sell directly to airlines, is growing significantly at high single-digit rates. Rail transport is also an area for significant growth, mid-single digit rates. This is due to urbanization in emerging countries or to upgrades of existing transportation systems on mature countries. Our defense and security systems and equipment are also key in these geographies. We believe they are very well-aligned with our customers' priorities. As we see integrated systems, secured networks, intelligence systems, very important for our clients. We have good growth potential. Where are we when we look at our current performance? Well, clearly, I do not believe we are where we should be. I don't believe our performance is as a level of excellence that we should expect. Indeed, we have delivered on our objectives for 2012. We planned a book-to-bill ratio to be a bit below one, and this is what we achieved, 0.95. No truly large orders have been booked in 2012. There were only two orders worth more than EUR 200 million for the whole of Thales. None of them in emerging countries. Most of our orders have indeed remained concentrated on mature markets. We had said that sales would grow slightly, and indeed, sales have grown slightly, but this is due mostly to our civil activities, and the rate of growth is not very significant. EBIT margin has improved. This is the good news. EBIT organically is up 15% on a year-on-year basis. The level of EBIT we are delivering today is above the target that we had set. This is the good news. This is due to the effectiveness of our performance plans, but not to growth. My conviction is that we can do better, both in terms of growth and in terms of profitability. Why is this? Why am I convinced that we are only at the beginning of our trajectory? First, it's based on what I have seen during my first few weeks at Thales, visiting a number of sites, a number of clients in Europe and in Asia. I have met great people, very talented and very passionate people. I have seen technologies which are world-class. During this period, we have been recognized as one of the most innovative companies last year, among the top 100 global innovators last year. Half our sales are made on segments where Thales has a leading position among the world's top three players. Also, our international footprint is quite extensive. We have significant presence in about 50 countries. These are very powerful assets. We have great potential. Thales has all it takes to be more ambitious. But we have to do better on two major fronts, profitability and international growth. On profitability, yes, indeed, our operating results have improved recently, but we are still not delivering a level of profitability close to what our European peers regularly achieve. We have to continue to improve on project execution. We're doing better, but we could still do even more, and we have to permanently address our cost base. We have done some of that, and we will continue to address the cost base. On international growth, as I said, I'm really surprised. I've been really surprised that our sales in emerging markets over the last few years has not been growing. We say we want to grow there, but we have not achieved it. These views, this analysis, has driven me towards the organization changes which I have disclosed about four weeks ago, and which will be implemented in March. Before I give you more about this new organization and the strategy behind it, I will leave the floor to Pascal for a more in-depth presentation of the financial results. Pascal? Thank you, Jean-Bernard, and good evening, everyone. For those of you that are on the call, I will be announcing the slide. It's not for you, but for those of you that are on the slides. I will start this overview on page 8, and you can see on this slide that we met all our objectives in 2012. We see our book-to-bill ratio at 0.95, and we know that growth in avionics and in transportations have not been able to fully offset the drop in defense and in space orders. With regard to sales, we see that our sales are up 1.5% year-on-year, excluding, of course, the DCNS impact. Finally, our EBIT margin at 6.4% is exceeding our objective of 6%. The reason behind that is the fact that we are delivering ahead of our schedule in term of P&L benefits with regard our performance improvements program. The next slide summarize our key figures for 2012. I've just said a word on the trends on orders, sales, and EBIT. On this slide, I would just point out the net income and the fact that our net income grew by 13% versus 2011. This is the reason why our board this morning has recommended an increased dividend of EUR 0.88 per share, also on the back of a good level of cash flow generation. On slide 10, we see that we also continue to work on portfolio optimization. Planned disposals were implemented in 2012, in particular our civil fixed-wing aircraft simulation in U.K. We also divested our Business Solutions IT services in France, and end of December, we also divested our minority share within Diehl Aircabin. We also achieve some small bolt-on acquisition that we have completed both in Europe and in the U.S. Each time to purchase additional technology or complementary technologies. I will just mention Visionix, for instance, in U.S., which is a small-sized company developing new technology with regard helmets-mounted display, and this allow us to complement our existing range. A second example would be SYSGO, a leading-edge German company, developing highly secured operating system, which are used, in particular, in the avionics industry. All in all, the amount of cash proceeds in 2012 were EUR 155 million above the level of cash that we spent for those acquisitions. Let's now move to page 11, just to give you a snapshot on our main orders in 2012. We see that our orders stood at EUR 12.6 billion excluding DCNS. I would say down only 5% versus last year, although, we know that we didn't book a contract similar in size to the EUR 1 billion plus Mirage upgrade in India that we signed in 2011. This level of performance also reflects the positive momentum that we got in both the avionics, but also in the rail signaling business. When we look at those charts, we see that the smaller orders, those with a unit value below EUR 10 million, those smaller orders continue to rise versus 2011, up by 5% and continue to represent more than half of the orders that we received in terms of value. We also see a same positive trend with regard medium-sized orders, those with unit value between EUR 10 million and EUR 100 million. Those medium-sized contract or orders grew by more than 20%. On the other side, it is quite obvious that with regards large orders, i.e., orders in excess of EUR 100 million, it is true that even putting aside the Indian Mirage upgrade that we signed in 2011, even putting aside this contract, we see a drop in those large orders. Jean-Bernard mentioned the fact that we booked two contracts above EUR 200 million versus last year, six contracts that were in excess of EUR 200 million in unit value. All in all, we see that our backlog remain quite strong at EUR 29.7 billion, including DCNS and EUR 25 billion excluding DCNS, the equivalent of about two years of sales. Let us move now to page 12, and give you an idea of our key figures in greater details. We know that sales have grown marginally at constant scope, but it is true that our EBIT jumped 15% organically year-on-year, reaching EUR 927 million, including DCNS, representing 6.5% of sales, significantly above the level that we achieved in 2011, which was at 5.7%, and obviously above the objective that we set at the beginning of 2012. This is clearly reflecting the impact of our performance improvement program and also, but to a lesser extent, lower restructuring charges. Improved operational performance is illustrated by the increase in gross margin, which amounted to 23.2% in 2012 versus 22.7% in 2011. Moreover, the strict control of costs enable us to fully contain inflation on SG&A costs. Finally, and this is quite an important comment, this good performance has not been reached at the expense of investment in research and technology. We have actually intensified these R&D efforts by about 5% in 2012 versus 2011. And I remind you that we almost fully expense our R&D costs. This cost us approximately 40 basis points in 2012. As we continue to amortize R&D assets, and at the same time, we only capitalized a marginal amount of R&D costs. Next page 13. This is the bridge, summarizing what I have just mentioned. A strong EBIT growth, driven essentially by the improvement of operational performance, which contributed EUR 99 million to our EBIT in 2012. Once again, this is a level which is significantly above what we have indicated end of July when we released our H1 2012 results. As I mentioned, lower restructuring charges also helped, but of course, to a lesser extent. You see on this slide the increase in R&D expenses on the basis of the same perimeter and effects we see that our R&D increased by EUR 34 million in 2012. Let us move now to page 14, just to give you a snapshot on our defense and security segments. Order intake was down 5% and, as I mentioned, linked to the booking last year of the Indian Mirage 2000 upgrade. Excluding this contract last year, our order intake in defense and security would be up 12%, with in particular Land Defense, but also Air Operations, which registered increase in orders. You have heard, I guess, about our Bushmaster orders in Australia, missile electronics contract in France and India, radar system for the Netherlands. Also order intake for our C4I system that was up, and in particular, driven by radio communication and also protection systems. Sales for this segment posted a slight decrease as planned, with only the Land Defense businesses which posted higher sales, with in particular an increase in optronics in France and also export in particular in Australia. Although we see a slightly decreasing sales in this segment, we managed to keep EBIT flat, both in term of absolute figures and in term of margin, which represented 7%. This is due to our stringent focus on both project executions, but also in this segment, lower restructuring charges. Moving now to page 15, to detail the aerospace and transport key figures. Orders in aerospace and transport dropped by 4% versus 2011. This is due to the drop in orders with regard our space division, in particular with regard telecom business line. On the other side, we continue to see a growing and above one book-to-bill with regard the signaling activities, and also with regard our commercial avionics, which as I mentioned, reported increased level of orders on the back, I would say, of higher production rates at aircraft manufacturers, but also with regard to development of IFE business. Sales in this segment up 5%, with in particular the avionics and transportation contributing to this growth. We see that the EBIT is moving up quite substantially, 42% increase year-on-year. 6.6% EBIT margin versus 5% last year. This has been driven by additional volumes and also a strong improvement with regard project executions. At this stage, I would like to let you know that as from now, we will provide an improved granularity on the result of aerospace and transport. We will now report aerospace on one side and transport on the other side. Moving to page 16, the net income. What we see is that despite higher pension costs and higher taxes in 2012, especially in France, our net result is up 13% compared with 2012. As you have noticed, we have decided as from now, to communicate on an adjusted net result. You will see the details of those adjustments in slide 29. Basically, what it means. First, with regard EBIT definitions, this has not changed. As before, the only adjustment that we do on figures reflect the impact of purchase price allocations. Below EBIT, we will now exclude some non-recurring and also non-operational elements that bring significant volatility to the net results of Thales. In particular, we will exclude from our adjusted net income, the capital gain on disposals. We will also exclude the mark to markets, movements on FX derivatives, and we will also exclude all other components of pension charges, apart from the net interest cost. We do think that this will improve the overall visibility and predictability of our net results, and of course, also EPS going forwards. Next page, this gives me the opportunity to come back on two headwinds that have impacted our net results in 2012. First, on pension. Quite a complex matter. In 2012, it's a matter of fact that interest rates decline further and reach historically low level. This has a direct mechanical impact on the level of pension obligations, pushing up pension obligations. Our pension deficits in 2012 grew from EUR 1.6 billion end of 2011 to EUR 1.9 billion end of 2012. This in turn has impacted the interest costs on our obligations. On pension, as you are aware, we need to get ready for the implementation of IAS 19 revised, that will be implemented as from 2013. We think that it's important to tell you, the impact of this revised standard. First, and I think it's absolutely critical for you, this has no impact on cash, and this has no impact on the level of obligations. It should have no impact in term of valuation. Now it's true that it will have an impact on our balance sheets. You know that actual losses will have to be recognized one-shot in the equity. Whereas today, they are amortized over time. This is a significant difference. You have to know that this charge to the equity will be equal to the difference between our pension deficits and the current provisions. At the end of 2012, this charge would represent EUR 1.1 billion with, as I mentioned, this impact on the equity of Thales. Now, in term of P&L, the implementation of IAS 19 revised, this will have a negative impact on our operating profits at around EUR 10 million, as some costs will have to be reclassified from finance to operating results. Below EBIT, there will be no impact as you know, we have decided to adjust our net results. On taxes, we have to note that taxes have gone up, notably in France, where new taxes and also limitation to tax deductibility were introduced in the course of 2012. As planned and as we communicated end of July, we were ending up 2012 with a tax rate of 30%. Going forwards, we expect this tax rate to move up slightly. Page 18, the free operating cash flow, where we see this free operating cash flow, which grew very substantially in 2012, and which EUR 669 million, almost twice the amount of 2011, although taxes and CapEx were clearly on the rise. This quite good performance was due to the improved results that we managed to deliver, and also to the fact that we received significant customer payments at the end of 2012. This positive impact will, of course, reverse in 2013. However, on average, 2012, 2013, we think that our cash conversion rate should be significantly higher than 50%. Let's move now to page 19 to complete this financial overview. This page 19, shows that this increase in free operating cash flow, this combined with the proceeds of the disposal that we completed in 2012, this allowed to increase the level of net cash by EUR 622 million year on year. You see on this slide that we ended the year with a positive net cash positions of EUR 1.5 billion, EUR 900 million excluding our share of the DCNS cash. Overall, and at the conclusion of this financial review, our performance in 2012 has been encouraging. We have met or we have exceeded our targets. I will now hand over to Jean-Bernard that will make a few words on our outlook. Thank you, Pascal. A few words on the outlook, and before that, a few more comments about the new organization. Here we are. As you know, we are implementing right now a new organization with a management team, which is slightly changed, not a revolution, more an evolution. I am insisting a little on organization because it is something which I feel is very important. It is not only setting internal issues, which maybe external stakeholders would not care too much about. Organization, to me, is very important because it does reflect strategic priorities. Our new organization will be more balanced in order to better serve our customers globally, and will strengthen our international firepower. These are two strategic priorities: better serve the clients, have a better international growth. In a nutshell, we will be organized around six global business units. These business units will have full P&L responsibility in order to implement a truly global approach to our product lines. The scope, the perimeter of these global business units will be the same as what are or were the current seven divisions, but for one exception. We are merging two of the current divisions into a single business unit, Land Defense and Air Operations. Land Defense and Air Operations are being merged into a single business unit, which we call Land and Air Systems. Simultaneously, we are implementing, creating a new integrated international development department, led by Pascale Sourisse. This team will be in charge of capturing growth on emerging markets, fully focused. As you know, performance plans will remain a very top priority. They will be supervised by Patrice Caine as part of his duties as Chief Operating Officer. As I said, this new organization will be more simple, more collective, and will help align everybody's efforts with the strategy to focus on improving growth and performance. A few words on our outlook for 2013. I am convinced that Thales is entering a new stage in its development. Our performance in 2012 was better than in 2011. I find it encouraging, but it should improve further in 2013. The outlook for 2013 is that the order intake should be slightly up when compared to 2012, and we hope our performance in emerging countries will indeed offset the less favorable environment in Europe and in the U.S. Sales. We are expecting sales to remain globally stable in 2013. Profitability through EBIT. With the benefit of the performance plan, EBIT in 2013 should continue to increase and should be between 5% and 8% higher than what we achieved in 2012. As a conclusion, Thales has indeed delivered on its objectives for 2012. This is good, this is better, but this is not enough. Thales has superb assets. My mission will be to leverage on Thales' strength, assets, and potentials to lead a significant improvement of the results over the medium and long term. With this, we have finished, Pascal and myself, our initial presentation, and we will take your questions from the room here and from the friends listening through the telephone. Maybe we have a first question here, please. Yes. Hello. It's David Perry from JP Morgan. First of all, congratulations on the 2012 numbers, which look like they're ahead of the market's expectations. I'm a bit confused by the guidance for 2013. Because if we take the upper end of your guidance of an 8% EBIT increase, I think that comes out at about EUR 74 million, if I've done the maths right. I go back to a couple of years ago and Mr. Vigneron's chart that you presented to the market on Probasis, and it was always a back-end loaded program, and there was a 300, I think we had to eyeball it, but it was about a EUR 300 million increase in Probasis savings coming through in 2013, and we know that all of that wasn't going to flow to EBIT. I'm just surprised that you're only guiding to a EUR 74 million increase in EBIT, given what Probasis was meant to promise. So perhaps two things. Why cautious in 2013? Maybe you can give us an update on Probasis, whether that plan is still in place and whether it's still being audited, and whether we should still use that to help us forecast earnings going forward. The answer is clearly yes. We are fully following up on our performance plans and fully committed to improve the numbers. I will let Pascal give you more details about how you could do the maths regarding the achievement of the performance plans at Thales in 2012 and the expectation for 2013. Pascal? Yes. Absolutely. Coming back to what we mentioned with regard to the impact of Probasis, I remind you that end of July, we indicated you what we were expecting on the bottom line, the net profit of Probasis. We mentioned that we were expecting in 2012 a EUR 50 million versus 2011. We said that in 2013, we were expecting an additional EUR 100 million versus 2012. 100. So when you look at what we achieved in 2012, I mentioned that our operational performance, which is driven by Probasis, was EUR 99 million. So clearly above the expectations that we mentioned end of July, EUR 99 million versus EUR 50 million. We do confirm. Just showing it for everybody, you can find this in page 13, the EUR 99 million of improved performance, page 13. In 2012, we are above our expectations in term bottom line profits of Probasis. Now, what about 2013? We do confirm the EUR 100 million of additional EBIT coming from our performance improvement program in 2013 versus 2012. This is what Jean-Bernard said. We do confirm those additional EUR 100 million. Now, what you need to have in mind to reconcile this EUR 100 million coming from this improvement program with the figures that you mentioned, the EUR 75 million. It's quite simple. First, I mentioned that there will be a non-cash EBIT impact on pension. I mentioned in my presentation EUR 10 million. The second point that you need to be aware of is that our average hedging rate in 2013 is a bit less favorable than it was in 2012. In 2012, the average US dollar exchange rate was 1.3. Our current average rate for 2013 is 1.34, and this has an impact which will be a bit above EUR 20 million. Third point, but this is quite a minor one. We mentioned a number of disposals in 2012. This will have an impact between EUR 5 million and EUR 10 million in 2013. Last but not least, it's true that we want to continue increasing our investments in R&D. I mentioned that in 2012, we managed to increase our R&D cost by EUR 34 million. I'm not telling you that we'll do the same in 2013, but the message that we are going to continue investing more in R&D to develop growth for Thales in the medium terms. So if you put all of that together, you will realize that all of that works and that basically, our guidance is consistent with what we mentioned with regard to Probasis. Just a very simple clarification. It might be a language thing. When you say bottom line, you mean EBIT? EBIT. Okay, EBIT. Thank you. Please. Yes. Good evening. Tristan Sanson, Exane BNP Paribas. I have two questions as a clarification or follow-up on what you just said. First, can you detail what is the level of restructuring expenses that you have on your target for next year of EBIT development? Should we stay on the level of 0.8% of sales? Can you tell as well whether this is actually dependent on the number of contract wins that you can have, or whether you are fairly certain about what you're going to have? Second question is on R&D spending. You mentioned, or you detailed the level of self-funded R&D that you have this year, and you say it's going to continue going up next year. What about the total R&D? Actually, I'm interested in knowing whether there's a slight transfer from government-funded towards self-funded R&D, and so whether there is an end market pressure or whether there's a will from you to develop your portfolio. Okay. Tristan, first, on restructuring. We can guide you on the level of P&L restructuring charges in line with what we booked in 2012. So around EUR 120 million, a bit less than 1% of our sales. Now, this is based on what we see today, but you know that we are starting the year, and we are also facing uncertainties, of course. As we speak today, we do think that this level of restructuring is very much in line with how we see the overall level of workload that we'll deliver in 2013. Now, we are end of February. It's a bit difficult to be too assertive on that. But yes, this is a good guidance for you. Your second question was? Excuse me, I've not noted. Oh yes. R&D. Yes. No, on R&D, it is a matter of fact that we want to develop, in particular, R&D in our civil businesses. That was already the case in 2012. Most of the increase in R&D that we mentioned was in the avionics businesses, to a much lesser extent in our mission system defense business. In 2013, we are expecting to continue increasing the level of R&D investments, in particular in the avionics business, but also in the transport business and also in our space activities. Can I add something, as I am the newcomer? I am allowed to speak after you. If you look at our performance in 2012, all the benefit of the improvement in EBIT is, as you can see on page 15, on aerospace and transport, let us say what is not defense or mostly defense and security-related. As you can see, EBIT for this business grew from EUR 286 million to EUR 392 million, which is organically +42%. This includes the R&D charge. As you know, and when you compare us to other companies, and do not forget to compare us rightly with other companies, we do not capitalize R&D, or very little. When I see this kind of 42% growth on organic and when I see the expectation for 2013, I am quite happy that we have a very sound balance sheet with almost no R&D on the balance sheet, and that indeed, we are investing a bit more in R&D for, let us say, the so-called civil activities, but with very significant improvement on the bottom line. Maybe we have more questions. Ladies first. It is soon March 8th. Next week. Thank you. Milene Kerner from Deutsche Bank. My first question is, what will be your main priority over the next few months, and when should we expect an update on your strategy about improving profitability and also increasing sales in emerging markets? My second question is, what will be your added value on Probasis or whatever you want to call it, and can you put this into perspective versus what you did before joining Thales? And my third question is for Pascal. Just when do you expect a decline in SG&A, and when should we start to see some benefit from the IT? Excellent question. You are right. Our performance plans, as of now, have not led to very spectacular results regarding SG&A, so there is plenty to be done to improve on SG&A. I will first come back to the strategy and to the way I am thinking about it looking forward. Let's be clear. Thales cannot have, as a main mission, to survive through a difficult period on defense markets and to reduce its cost. Thales absolutely needs to be more cost-effective, but you cannot run such a large company with a long-term or medium and long-term mission, which is about surviving in a shrinking environment. You need to give the company areas of growth. And to do this, you need to empower the company to be really looking for growth, to be looking to stretch to the next order in order to improve the total volume of activity inside the company. The strategy really has to add to what has been done in driving the company very strongly towards its cost base. It has to add another dimension, which is the growth and the profitability in the future will be the addition of a continued effort on the cost base. And hopefully, we can demonstrate improvement in SG&A, because I quite agree with you. So many efforts for not a very convincing SG&A result is a bit disappointing, but it has to add to this dimension of cost competitiveness, a true dimension of growth. And it has been four years that Thales has been saying we need to go towards emerging markets. But where are we today? We are at 20%-22% of sales in emerging markets, and this is not enough, and this has to fuel the strategy. At the same time, in terms of methodology, and I am trying to choose my words very carefully, I am not totally convinced that the way that the cost effort, the performance plans have been implemented are totally in line with what the management of a very large and sophisticated company should be in terms of what is the level of buy-in when compared to the level of constraint. And you were talking about my own experience in industry for too many years or many years. I believe buy-in is key to success, and you cannot find long-term Profits and improvements only through constraints. So my intention is indeed to try and follow the same objective, but with different style, and to let the structure be convinced and move forward through its momentum, and not be constrained and move forward only in a top-to-bottom approach. Maybe this is what I have to say. Now, regarding strategies, we are right now launching a very complete, very global exercise internally about what should be the strategic priorities in terms of geographies and in terms of product lines. And I am not totally clear today about what this should be, and I am even less clear about whether it would be wise or not, when we look at the competitive situation, to share too much of that with our shareholders. So, at this stage, it is clear that we are in the process of a significant introspection, I do not know if that is the right English word, about where we should go in the next few years, five, maybe 10 years, what our ambitions should be, how to implement it in a way where people will indeed buy in and be part of a collective effort. This will take maybe a little time, but 2013 doesn't look too bad, so it helps me, but 2013 looks quite okay. My plan is that we will indeed implement this new momentum with the people at Thales and be successful in the strategic dimensions that we will have together defined during the next, say, 6 months. Okay? Do you want to make more comments about the SG&A performance? Also IT? IT. First, Milene, when you look at our figures in 2012, this SG&A line is flat on an organic standpoint and excluding FX. This means that we managed to absorb something like EUR 40 million of inflation. This is not that simple. Now, the second point is that you need to be aware that making saving in SG&A, it's also the outcome of investment in IT. We made it clear that the IT, let's say, situation of Thales was not what we could expect from such a large organization. We have too many applications. I wouldn't tell you the number of ERP within Thales because it's so large that nobody within the organization knows how many ERP we have today within Thales, but it's too many. We are today in an investment phase with regard to IT, because to get savings both on IT but also on SG&A, and those savings driven by more effective IT tool, it takes a bit of time. We are today in an investment phase. This will continue in 2013. It's matter of fact. I see probably quite a significant impact of those investments to start flowing probably as from 2015. But once again, Milene, this doesn't change what we mentioned with regard the expected Probasis or performance improvement plan. But you know, in this program, it's also a balance of items where we are ahead of schedule. And in particular, with regard to supply chain today, in term of cost savings, we are ahead of what we are expecting. If you take today IT, it's matter of fact that this is a bit more complex than what the previous management has indicated, and in particular, driven by the complexity of the IT tools that we have to manage within Thales. And we need to streamline those IT system before getting the benefit in term of drop in SG&A. Okay, we had a question on the second row. Please. Zafar Khan from Société Générale. I've got four questions, please, if I may. Two for Pascal and two for yourself, Monsieur Lévy. If I could just start with the sort of operational questions. Just on the cash conversion, you said that you should do better than 50% this year. I don't know if our definitions are different, but 50% is pretty poor, so it's got to be substantially ahead of 50%, I would imagine, given the working capital being funded by customers, particularly on the defense side. Defense companies should be doing circa 100% cash conversion. So just need clarification on that one. The second one is on R&D. What I really want to understand is what costs go into that line. What is R&D? Is it employee cost only? Is there other stuff? I'd just like to know what you're putting into that line. I am intrigued by this constant remark that we do not capitalize R&D, other companies do. I was under the impression that actually, this in accounting remit, that you do not have much scope in terms of flexibility, that you capitalize when the product has an order book, when it is marketable, and you do not capitalize until then. I do not know how much scope you guys really have on that. If I were to believe what you are telling me, then it causes big question marks for a lot of other companies in terms of what they are doing with their capitalization. I really want to understand that. Then I have two for yourself, Monsieur Lévy. The first one is on your mandate. What have the major or the majority shareholders given you as a remit? What are you able to do? What are your degrees of freedom? It is a broad question. You can give me a broad answer on that one. Then the second one, which is effectively a follow-on from that question, is on the structure of the group. I have to admit, my models on Thales look very messy because every two years, I am changing the structure of the company. I very much get the impression that if Thales did not exist in its current form, you would not invent it in this form. I want to know what are the synergies between these seven business lines. We will exclude ECNS in this discussion, but what are the synergies? Why, if you are being transparent, are you not reporting space and avionics separately? Is that something to do with some trade confidentiality that you do not want to give the avionics numbers separately? I have to say, when you disposed of the commercial simulation business, I was a bit surprised because I thought simulation, whether it was commercial or military, was lots of lines of code. That is why I am asking about the synergies across the various businesses. Are they all standalone, or are there strong synergies across those seven business lines as you have now grouped them? I will answer your two questions, which are not so much related. My mandate with regard to the board, of course, Thales is a company which is controlled through a pact of shareholders that brings together the French state and a private group, Dassault. The mandate I have from these shareholders and from my board is to make the company more profitable. That is clear. If you don't mind me asking, I guess it's going to be in the document somewhere. What are your rewards? Is it just margin improvement? Is it cash generation, top-line growth? What is the mix? I did not speak of growth. I said the company has, today, a level of profitability which is below what it should be, and I've given some explanations. I think my major mandate, there are, of course, other, I would say, prerequisites. But beyond the prerequisites, the mandate is that the company should be more profitable. Obviously, with the level of technology we have, it means we can only be more profitable if we have growth. Anyway, I do not believe you can grow profits in a flat or shrinking company. Maybe you can do that for one or two years, but not in the long run. So the company should be driven towards shareholder value through increasing profits. I'll share something I have observed with you. Maybe you've done the analysis yourself, but Thales sales per employee are not commensurate with the cost per employee. If you map the aerospace and defense sector, sales per employee, cost per employee, you tend to get a line going in that direction. Thales is a complete outlier on that. Great. That means we can improve a lot. That's good news. I imagine that you could do it for more than 2 years. I do not believe that is true. We are a company that, and this is an answer to your second question, that has a continuity of skills, and you are talking about lines of codes and things like this, but I would say the skill goes beyond the line of code. I am sure you understand this, although the lines of code are part of the skills, obviously. Thales has a set of skills which brings together various technologies, which help us sell equipment and systems with very sophisticated clients and a high level of performance. And I think there is a continuity from time to time. There will be cases where some of the assets will not have a critical size, will not have a leading technology, in which case we should not be there. In some aspects, we may be needing some add-on technologies or market access assets, in which case we may be adding new assets. But as it is today, I do not believe that Thales' issue is around its scope, and you say if it was not what it is, it would not be invented, but I believe you could say the same of almost every company in the world. If not only in our space. I do not believe that Thales' problem today is its perimeter. I think Thales' issues today it's that the sales in 2012 or 2013 are about similar to what they were in 2007, and that the profit is probably below what it was in 2007, not by much, but a little below. And this is not the way you can manage a large company, just by managing flat outlooks. We have to look where our markets are. And as I gave some examples in my initial speech about some of the fast-growing markets we have, there are some in the defense business, there are some in the security business, and there are some in the pure civil business. There is a clear link in all this, which is electronic hardware and software skills. And I believe this is where we should be. It doesn't mean we will not move, but I do not believe that Thales' issues will be resolved by a magic touch of M&A. Not at all. I understand what you are saying, and maybe it is a little premature. Maybe we need to wait until you reveal the grand plan. But what you are saying is that the structure is fine as far as you are concerned, or is that something that will need some analysis? I am saying that I believe that Thales' lack of profitability is not due to the, how should I say, the breadth of technologies or products or markets. I think it is due to its own focus towards one of the elements of profit, which is cost, not towards the other element of profit, which is growth. I am absolutely, myself, focused on doing both, not only the one part. Maybe we have two questions, more technical from you to Pascal, and then we will go to your left-hand neighbor. Okay. Zafar, on your first question, cash conversion. My explanation was not clear enough, so thanks for your question. First, what do I call cash conversions? It is really the ratio between free cash flow and EBIT. This is what I call a cash conversion. Now, what do we expect? What I was explaining is that in 2012, because we receive quite substantial payments at the end of 2012, our conversion rate was extremely high, in excess of 70%. If you put aside DCNS, this conversion rate was close to 90%. What I said is that, because you might get payments in December or you might get payments in January, what makes sense is probably to look at not just one year, but on average on two years. What I was saying is that globally, if you take both 2012 and 2013, I am expecting the overall conversion rate to be significantly above 50%, but on average for 2012 and 2013. Okay. On R&D. Yes, R&D, it is essentially brains, and so top-level engineers. So it is essentially labor cost expenses. You have to know, but I know that you know, Zafar, is that in particular in some business model, and I am in particular targeting the avionics business. Clearly, you develop new products, new equipment, new systems, for the aircraft industry on your own equity, on your own funds. Then you are rewarded by orders, on which you will be able to amortize your R&D expenses. Now, your questions on R&D capitalizations. We could say that the IFRS, and there is no scope for judgments with regard R&D capitalization. The truth is totally different. This is a matter where judgment is extremely important, and you have companies that are quite aggressive in terms of R&D capitalizations. I am not saying that this is a way to improve EBIT results, but I think this is a point that you as analysts, you need to look at quite carefully. At Thales, it is quite simple, is that we decided to be extremely prudent in terms of capitalization of R&D. So our policy is to expense most of what we spend in terms of R&D. And today it is true that when you look at our P&L, there is a combination of both R&D amortizations, R&D asset that we book in the past, and also the fact that we no longer capitalize our almost insignificant amounts. This means that as compared to other companies which are in a reverse mode, i.e., capitalizing much more than what they amortized, they improve their EBIT through this way of accounting. And it is true that at Thales, we are quite cautious when we look at the business plans. For instance, we are quite conservative in terms of discount rate to discount the expected business plan. Clearly, we apply a judgment which is today extremely conservative with regard R&D capitalizations. So no bad surprise to be expected on write-off of R&D capitalization at Thales. I will not comment on other companies, of course. Okay, let us try to go maybe a bit more quickly. Good evening. It's our fault. I'm not saying you're Ali West from Redburn. Just one very quick follow-on on group structure, if I may. Last year, we had a long conversation with your predecessor about how managing and thinking about the business according to the area, geographical structure, area A, area B in France, was useful in terms of management synergies, product synergies, et cetera. I was just wondering if you could talk a little about how, under your new structure, whether you will be continuing to think that way or whether we should be looking for a slightly different geographical focus going forward. I've been spending only a few weeks here, but certainly one of my 10 biggest surprise was the definition of zone A and zone B, which by the way, shows there is no explanation behind the split of A and B. Certainly, one of my first thoughts was to try and make our international management rational, and this is why I have split the way we manage our international operations according to three set of countries. The seven countries where we have strong presence, both in terms of skills and market access, which are four of them in Europe, United Kingdom, Netherlands, Germany, and France, and three outside Europe, the U.S.A., Canada, and Australia. I'm adding New Zealand to Australia. I'm sorry for New Zealand, it is a country. But from our perspective, let's merge it with Australia. In these seven countries, we have thousands of people. We have very recurring revenues from local customers. We have centers of competence with a global reach, what we call business lines or business domains, which have a global reach. These countries are managed individually, not as a bunch of countries. Each of them has its management. It's got strong local management, and it will have executive committee supervisor, non-executive chairman, which on top of his own duty, will have the duty to be the supervisor for one of the countries. I am myself, the supervisor for the United Kingdom. Then we have the other European countries. There are about 10 countries where we are strong enough to have a real local base, and there are another 10 countries which are smaller, where we more or less have an export business with minimum local support. These 10 countries will be managed through the Chief Operating Officer's office, as they are of a similar size. We do 100, EUR 200 million of sales in each of these countries. So from a Thales perspective, each of them is not very significant, but as a whole they are. They have some significance, and they will be managed in a coordinated way through his office. Then we have all the rest of the world, all of Latin America, from Mexico to Patagonia, all of Africa, all of Asia from Egypt and the Middle East to China and Japan and Southeast Asia. This is the area for growth. At this stage, this was until today, this was split between area A and area B. There were some people that had joint responsibilities for A and B, and some people which had only responsibilities for A or for B or for part of it. This was not very rational in my view. We will now have from now on, have a very focused organization under Pascal Tourret, who is a very experienced manager, having worked, I would say, on both sides of trading and exporting and country management, and of course, also a lot on the product management. She will have the mission to grow our business where our best growth perspectives are, which is in this very wide area. So this is quite a significant change from where we were standing. We will have joint responsibilities of the business units and of the country directors over the key projects when we have been awarded a bid. Over the bids and over the projects, this would be a joint responsibility. Not the single responsibility of the country, then looking for support. We need to have the product people very involved in customer satisfaction. The previous organization was diverging between the product people and the client. Okay? The customer satisfaction has to be improved through the joint efforts of the local people and of the product people. This was, in my view, one of the key problems of the former organization. Okay. Sorry to have made a long answer after I have said it would be a quick one. Okay. We still have time for a few more questions, maybe to the back here. Yes, good evening. Christophe Menard from Kepler. First question was on the Probasis result net on the bridge. Congratulations, actually, very good number. I was wondering what is the spillover effect for 2013? You clearly did better in 2012. Can we say that you could do better than the 100 you mentioned earlier? Can't you wait a bit? Pascal, do your best. Are you expecting me to tell you today that we couldn't do better? We're just starting the year. No, it's a quite demonstration of confidence from Thales management that we can continue to deliver on these incremental improvements while you have noticed that in 2012, we did significantly better than what we committed. So which means that the starting point, beginning of 2013, is a bit more difficult because we did more in 2012. Although, or despite this fact, we confirm in term of incremental savings, this EUR 100 million. So we are confident, but you are confident for this figure at this point in time. I was just looking at the components of the Probasis plan or performance plan. We had in the past a detailed non-quality cost, supply chain and SG&A, and also these are the gross benefits, and then you have the net benefits that you derive from that. In 2012, where did you derive your better performance? Was it non-quality cost or was it, you mentioned supply chain, or did you give back to customer less than expected? No, but at a certain point in time, it's a bit difficult to assess, what did we give back to our customers? What did we do in term of supply chain? So this is the reason why we do think it makes more sense to provide you with more aggregate figures. Now, in the past, we have not communicated on actual savings per category. Now, what I can tell you is that it's matter of fact that as I mentioned, we did better than expected in term of the overall supply chain. Where I think that we can do even better in 2013, it's about still contract management and project execution. Even though we did better in 2012 versus 2011, this is clearly an area where in 2013, I do think that we can do significantly better than our 2012 actual performance. Project execution is key, gap against what we forecasted when we book a contract. There are still a lot of improvements that we can achieve at Thales on these aspects. At SG&A, I answered, I would say that 2012 in line with what we are expecting. One last question, if I may, just more philosophical about the Livre Blanc de la Défense. I was just wondering whether the requirements following the operations in Mali, have been changing the input that you are required to make in the Livre Blanc. In short, the recent operations have changed something to the Livre Blanc discussion or nothing? I just want to answer very shortly on this. We have given our views on the Livre Blanc and the strategic thinking for France over the next few years in defense. What happened in Mali since mid-January did not drive Thales to give different inputs than what it had been giving the Livre Blanc team before mid-January. Okay. By the way, you should ask our clients. We are quite happy with the feedback we get from a lot of our electronic equipment, whether it's for reconnaissance or more aggressive parts of the French efforts, very successful efforts in Mali. One last question, maybe? On the call? Okay. So please, as you are in the room, please, and then we'll have a question from the call. Yan Derocles from Oddo. Maybe two questions. The first one, as a matter of clarification, because you created this net adjusted result, on which line you will base your dividend payout going forward? The second question maybe to follow up from that first question. At the beginning of your presentation, you stressed that you've got leadership position on roughly 50% of your turnover. So what is your vision for the remaining 50% where you are not well ranked? Can you do more in terms of portfolio optimization? What are your criteria in terms of family and so on? That's a very good question, which I can't answer today. I'm going to review, and it will take some time. Our business segments, and there are many of them, and I will have to make a decision around what makes sense and does not make sense in the long run. There may be some changes in the scope after I have made this analysis, but it's way too early to say. The only thing I can say is that there were a few decisions made recently. For instance, we sold our Business Solutions IT services business, which made a lot of noise in France because the social partners were not too much in favor of it. But I have told them very clearly that I strongly believe when Thales is in such a position where it doesn't really have any differentiation and it's not one of the leading players on such a market, I think it was the right decision not to stay in that business. Just to give you an example of one of the decisions of my predecessor, which I have endorsed. About EPS, maybe I'll give you the answer. We are indeed going to, and this is with, of course, a change, and that has been approved by the board, that we are now going to work on payout ratios based on adjusted EPS, as it has been described by Pascal a few minutes ago. Okay. Do we have a question from the call? We have a question from Christian Laughlin from Barclays. Sir, please go ahead. Hi, good evening, everyone. Thank you for taking my questions, firstly. Just two quick ones from me. One, over the medium term, say between now and 2015, where do you expect group margins to progress to? Are low double-digit margins possible, or do you see high single digits as a more reachable goal? Number two, do you expect to have to revise your outlook once the white paper from the French government is released, or have you had private meetings or discussions with MOD officials about the outcome, and that's reflected in your outlook for 2013? Okay, on the first question, it is too early to say. I am not committing at this stage to any long-term outlook for profit. I am just stating in a qualitative way that 2013 will be improved when compared to 2012 because we are expecting a 5%-8% increase in pre-tax profit when we are expecting flat sales. Obviously, it means the ratio is going to improve. Regarding the future, it is too early to say. I have to say my mission from the board, and this is exactly a repeat of my answer a few minutes ago regarding my mandate, is to clearly improve that number. Regarding the 2013 outlook, fortunately, we are not counting on any significant revenues or profit that would be at risk following any decision made on Livre Blanc. Livre Blanc will not directly impact our 2013 revenues and profits. Whether it is fortunate or unfortunate, I do not know. What I know is that it will impact our future, 2014 and onwards. But 2013 is almost free of any direct impact from decisions that could be made as a consequence of Livre Blanc and Loi de programmation militaire, military programming bill. Okay. Thank you. Okay. From the room now. Sorry, just a very quick question. What was the cash outflow from the provision booked over 2007 and 2010 in 2012? What do you expect in 2013, and how much cash outflow still need to flow through your cash flow statement post 2013? Pascal? On that, I don't know. I mean, Jean-Claude, whether we communicated on this figure, which is quite a sensitive one. Okay. I'm not sure we should. Okay. If you may, we'll have a private caucus regarding that, and we will decide what we release or not. No, another way to answer your question, Milene Kerner, is to remind you that despite the fact that, yes, it's true that we're consuming cash from existing provisions for those loss-making contracts, we managed to deliver the EUR 750 million of free cash flow. And those provisions, as I mentioned, has no impact on EBIT, and I made comments on our 2012 and 2013 average conversion rate ratio, which of course takes into account what we expect in term of cash out coming from those provisions. But I don't want to comment in too much detail, how much does this represent. Okay. We have more questions from the call? We have a question from Rupi Vig from Morgan Stanley. Please go ahead. Yep. Good afternoon, everybody. I've just got two short questions, so I'll leave you plenty of time to answer. One just around what surprised you. Monsieur Lévy, you said a little while ago that you had, I think, 10 surprises, if I heard you correctly. Could you perhaps just give us some of the other surprises that you found in your short time so far at Thales? Second question, just around EM exposure. You've talked a lot over the last hour about increasing EM exposure and getting more out of that part of the world. How do you plan to do that, given that everybody is clearly trying to get more and more out of EM? What's your strategy there in terms of extracting more? Thank you. If I may, I will give you a single answer to both questions. If I wanted to answer both, it would take a long time, especially the first one, because there are so many surprises when you get into Thales. I would say one of my key intakes, and this is also related to the second question, is that we are all supposed to be driven by the consumer, by the client. This is true on your local market, this is true on emerging markets, and this is the way that the company should be organized, that the flow of decisions come from the client, not a top-down approach. Obviously, Thales has a long way to go before it can be proud of its market or marketing skills. I would say that answers also the second question. We need to be much more emerging market-minded, but also just listening to the customer. I've met a few of them, and I can tell you, just doing a few very basic cultural changes will improve the situation significantly, and I hope this can come in a reasonable timeframe. On this side. Credifiscial. Just a simple question. Your cash generation is pretty good. It's good news to hear that you want to increase company profitability, but your cash net position is only EUR 1.5. Given what you said, we can expect a net cash position above EUR 2 billion at the end of the year. The question that you will probably hear a lot this year is what are you going to do with that money? When you look at most aerospace companies, we are still the poor guy in the room. Permit. I don't believe Thales' issues today should be focused about changing the perimeter, doing M&A, and so on. I think our key issues are not, at least for a little while, around this question, which I understand lots of people are very keen to think about and rationalize and so on. I think Thales' issues are regarding its current profitability. Yes, indeed, the cash generation was extremely positive in 2012. But as Pascal has explained, it is due to some positive cutoff effects or cash-in effects at the end of the year, which cannot be obviously replicated every year. The key question is about profitability, and the answers will come from inside Thales, not from any magic M&A decisions. If we do not also forget that, you mentioned EUR 1.5 billion, but this includes our share within DCNS, which is not accessible to Thales except through a dividend upstream. I do think that the white figure is more than EUR 900 million, which is really on Thales' balance sheet. Tristan Sanson again. I have a follow-up on the EBIT margin development in 2012. If I understand properly, you said that the EUR 99 million of earnings improvement organic is mainly Probasis. You said it is mainly stemming from additional gross savings compared to what you are targeting. I wanted to know whether there was also an impact from how gross savings turn into net savings and more or less the pricing pressure that you are experiencing, knowing that in the past, you gave us both a schedule for gross saving and net savings. In this schedule, 2012 was really the weak year in terms of conversion of gross into net. So did you have a positive surprise? Were you able to retain more of these savings? No. Clearly, it is a matter of fact that we are in the overall competitive context that we were expecting being of 2012. There is today quite a strong pressure, I can tell you, on prices. You probably remember that we mentioned in particular pressure on the transport business in terms of prices. This is still the case. So I do not see us having taken advantage of a better environment in terms of what we need to give back to our customers. This is the first point. The second point, and maybe a bit anticipating, you have seen that our sales are stable in 2012 versus 2011, which means that there is no volume impact that is recorded in this improvement of operational performance. So this is really and clearly an overall, I would say Savings, but of course, including the price relationship that we have with our customers. Just a little personal addition. I am basically interested in the bottom-line saving. Okay. The gross saving, and then you say, well, I have to give it all to the customer. Okay. I'm not really fond of this. Okay. Just to be clear, we didn't have EUR 200 million gross savings giving EUR 50 million net. We had 250 or 300 growth, giving EUR 100 million net. I think the important point is 100 net, okay? I think the only important point is the 100 net, 99 to be precise. We have one more question from the call. We have a question from Céline Fornaro from Bank of America. Please go ahead. Yes. Hi, good evening. Thank you for taking my question. My first question would be a follow-up on the back of Rupi's question on the emerging markets. Could you just explain, Monsieur Lévy, how do you think or why Thales has failed in the emerging markets up to now? From your answers to Rupi, is that fair to say you think it's more people-related rather than R&D, i.e., product or technology or pricing, first of all? My second question would be, when you say you are focused on delivering on profitability, it seems that it's going to be very challenging to be in end markets that don't really grow too much, have a higher R&D expense, potentially pricing pressures, and on top, grow profitability. I'd like to hear your thoughts on that. Thank you. Yes, you're right, it's a challenge, but this is my role in the company. As I said, we have areas where there is solid growth ahead of us, and this is where we will improve first. We can also improve in a lot of areas, even if our markets are difficult and the competition is high, but why should we not do as well, if not better as our competitors? Regarding emerging markets, what did we do wrong? The achievement is not right. You have to look through the chain from the client to the product, and if you have a big divide between the people in charge of local and client approach and the local service and the people in charge of product and technologies, and they don't meet together to go to the customer, to win a contract, to execute the project well, and to get a repeat order or whatever from a satisfied customer, then you should not be surprised that creating this divide has led to this situation. All right. Just one comment on that is I thought that some of the issues that Thales have had in the past, a few years back, were related to the fact that some of the products were too bespoke for the customers, and maybe too much engineered based on the client demands. That's a very good comment, which I share. You should listen to what the customer needs, to what you want to sell him. You are absolutely right. Thank you very much. It's Zafar Khan again, Soc Gen. Just wanted to hear your comments on whatever you can tell us about the 787 battery issue. I know you're the integrator of that system. Any impact on your sales? Are you involved in the discovery process? What's going on there? To be very clear on this. Yeah, please. We are not the integrator of a USAP system. Of the battery. We are not the integrator, okay? We deliver a set of equipment to Boeing, which is made from various vendors, and our task, our activity, is to deliver a set of electrical equipment to Boeing. We deliver a set of equipment to Boeing. Regarding this matter, we are bound by very strict confidentiality rules by our client, Boeing, and I do not intend to breach these rules. I can only say that at this stage, Thales has been bringing a lot of efforts to support Boeing and the manufacturer of the battery equipment and battery charger unit to support and try to find the root cause and try to find what could be a solution that could be implemented to resolve these issues. I do not want to make any more comments. I just wanted to correct what you said about our role. Thank you very much for the correction. I was just trying to understand, are Boeing continuing to take this set of components you deliver to them? Absolutely. And- We work very closely with Boeing and we continue to be pleased with the relationship with Boeing and to be the supplier to Boeing of this set of equipment. Thank you. There is no change in the current line of responsibility, if this is your question. Absolutely no change. One last question this time before we finish. We are done. Thank you very much to everybody for coming tonight or listening tonight to this presentation, and I wish you all a good evening. Thank you.