Earnings Call: Q4 2013

Feb 19, 2014

Good evening to all. Welcome. Thank you for joining us tonight for the presentation of our 2013 annual results. With me today are Jean-Bernard Lévy, Chairman and Chief Executive Officer of Thales, and Pascal Bouchiat, Chief Financial Officer. As usual, we will run this presentation in English. It is going to be followed by a Q&A session. It is also webcast live on our webcast at thalesgroup.com, and you can download there the slides, the press release, and the financial statement. As usual, the replay of the call will be available from tomorrow morning. With that, I would like to turn the call over to Jean-Bernard. Thank you very much, Jean-Claude. Good evening to everyone here in Neuilly and also from anywhere you are listening to us. I will begin today with some comments on our operating performance and progress in 2013. I believe these are strong results. After that, Pascal will walk you through the details of our financial results, and we will also share with you our outlook for 2014. 2013 was a busy year for Thales, but also a successful year. Our performance plans have delivered ahead of expectations. We are able today to report on improving operating profitability. We have started to restore some growth with, most importantly, and I will come back to that, a 30% increase in our order intake in emerging markets, 30%. At the same time, our domestic defense business in Europe, mainly France and the U.K., has demonstrated a strong resilience despite, as you all know, continued budget headwinds. We have conducted a comprehensive collective exercise to develop a shared strategic long-term vision for Thales, which we call Ambition 10. With these 2013 achievements, I feel really comfortable about our ability to meet our long-term ambition. If I now on to slide 3, let us look at our major indicators for 2013. A substantial improvement in profitability despite a stable top line. For the first time ever, EBIT exceeded the EUR 1 billion mark, and our EBIT margin reached 7.1% of sales. I believe this is also an all-time high for Thales. Our adjusted net income increased by 13% to EUR 644 million, and we increased the order intake by 7% altogether, allowing us to reach a book-to-bill ratio of one, exactly one, as you can see, 14,168, 14,194, so very similar numbers for orders and sales. Moving ahead to page 4, just comparing these numbers with the guidance. On all metrics, we have delivered on our commitments. Order intake is indeed up by 7% year-on-year, thanks to a strong performance during Q4 and a 30% growth in emerging markets. Sales are flat as expected, and EBIT grew by just a shade more than 8% in 2013 when compared to 2012. With this very strong operational performance throughout the year and our continued good cash flow generation, we are now confident with a decision that the board made this morning to propose to the general assembly in May this year to increase the dividend. The dividend, subject to final shareholder approval, will be increased by 27% from EUR 0.88 to EUR 1.12 per share. This includes an increase in the payout ratio from 30% to 35%. Our good results of 2013 were driven by a relentless focus on business execution and competitiveness. Project execution continued to improve. Project cost variances have gone down with, of course, a direct positive impact on our gross margin. We also continued to work on making our procurement more efficient across the group. We purchase about EUR 6 billion every year, and now about 25% of these purchases are pooled at group level, while it was barely 10% five years ago. G&A costs have to be a constant focus, and we have good news here. For the first time in many years, G&A have actually decreased by 2% year on year. I am really convinced we can do more and there is still room for improvement on that front. Globally, as Pascal Bouchiat will discuss further in a few minutes, our performance programs have delivered in excess of the EUR 100 million we had been expecting this year. If I now turn onto page six, slide six. As I just said, 2013 has been a successful year for new business capture, with a 7% increase in new orders. Our order book at the end of 2013 totaled EUR 29.5 billion, or the equivalent of slightly above two years of sales. This has been achieved without any jumbo contracts being booked. As usual, as you can see on the slide, orders with a unit value of less than EUR 10 million continue to represent about half the orders received in terms of value. As you can also see, the contracts with a unit value above EUR 100 million have very significantly increased, which is described in more details on slide seven. Last year, we captured as many large orders above EUR 100 million as we did in 2012 and 2011 combined. Importantly, 10 of these large orders are in emerging markets, against only two in 2012 and five in 2011. You have on the slide the list of the 19 large orders that we have been able to book in 2013. As you can see, it's a variety of orders from many countries in the world with, of course, a specific focus and quite a remarkable success in emerging markets. More details on page eight. Orders in emerging markets were indeed up by 30% in 2013 from EUR 3.5 billion in 2012 to EUR 4.6 billion in 2013. They now represent almost a third of our total orders of the year. Our performance has been particularly strong, as you can see, in the Middle East, where our order intake almost doubled from 2012 to 2013. We will, of course, intensify our business capture effort in these growing economies. Despite some short-term currency issues, we believe the underlying macroeconomic situation of our key emerging markets is favorable. These markets bring a great potential for Thales, with tremendous needs for infrastructure, air transport, civil security, and defense. With that, I'd like to turn over to Pascal, who will walk you through our financial results in greater detail. Pascal? Thank you, Jean-Bernard, and good evening to all of you. Let's look now at the key figures in greater detail. I will start on page 10. As you see, as mentioned by Jean-Bernard, order intake increased by 7% versus last year. At constant scope and the Forex, we managed to increase our order intake by 10%. This, as Jean-Bernard said, primarily driven by the 30% plus increase in emerging markets, but also significant increases in France and in U.K. Sales remain stable versus last year, but EBIT jumped 8% year-on-year, reaching for the first time, EUR 1 billion and EUR 3 million, 7.20% of sales. At constant scope and Forex, our EBIT increased by 11% versus 2020. I would also like to mention that this performance has been achieved in all our business segments, apart from DCNS. All of them improved their figures versus last year. This will reflect the impact of our performance improvement measures underpinned by improving project execution and a strict control on our costs. Improved operational performance, you can see on this slide. This is illustrated by the continued increase of our gross margin, which reached 23.6% in 2013 versus 23.2% a year ago and 22.7% in 2011. A continuous increase in our gross margin year after year. We also managed to keep our G&A cost down. G&A costs decreased 2% year-on-year, meaning that first, we fully absorbed inflation, but also on top of that, we managed to decrease those costs despite spending more resources, in particular on our IT system. Let me now move to page 11 and to comment this EBIT bridge. As you can see, moving from EUR 927 million in 2012, up to a bit more than EUR 1 billion in 2013. First, and maybe a word on Forex. You see here that the weakening of a number of currencies against the euro in 2013, and in particular, the Australian and the Canadian dollar weighed for a bit more than EUR 50 million on our profitability through a few mechanical conversion impact. As you know, these currencies have continued to weaken, and their current rates are today about 10% below their average of 2012. We have therefore, and we'll come back on this point later on, but therefore factor the historic headwind in our 2014 guidance. Coming back to our EBIT in 2013. Clearly this EBIT growth derives from our performance plan. This year again, we delivered more than expected. All in all, we benefited EUR 167 million impact from operation improvement, the bulk of it in the amount of EUR 120 million coming from our performance plan. Quite logically, as we went ahead of our expectations with our performance plan, the additional net impact, in term of EBIT for 2014, will be more in the regions of EUR 80 million-EUR 90 million than another full EUR 100 million. In parallel, we have continued to get ready for the future. Restructuring costs have remained high at EUR 119 million. As we implemented a number of plans, particularly in Europe. In 2014, they should stay at this level as we continue to streamline our operations in Europe. R&D effort has gone by EUR 60 million versus 2012, as we continue to invest to support the development of our technologies to remain our competitive edge. And of course, we continue to almost fully expense this cost to the P&L. Also, in the context of preparing for the future, we are also investing more on bid cost, especially on demonstration cost, about EUR 37 million more in 2013 than in 2012. Last, about DCNS. DCNS, you see, contributing negatively to the growth of our EBIT, with some execution issues which impacted their results. I will come back on this point in a minute. Let me now move on page 12 to briefly comment our segment performance, starting with aerospace. Aerospace orders increased by 9% in organic terms versus 2012, mainly due to continued mid-single digit growth in civil cockpit avionics on the back of higher production rates at aircraft manufacturers, and also stronger support activities in 2013. IFE, in-flight entertainment orders were down, excuse me, though due to high comparable in 2012. I remind you that we booked a three-digit contract for a U.S. airline. Space orders, the double-digit growth in 2013 versus a rather low base in 2012. Some important contracts have been signed in 2013, ExoMars, Meteosat Third Generation, or a telecom satellite for Brazil. Sales in aerospace were up 6% organically, being the outcome of a continued positive momentum of commercial avionics with the production ramp-up at Airbus, but also other aircraft producers, as well as double-digit growth with regard sales in IFE. In space, sales were slightly up in line with the execution of some large telecom programs like, in particular, Iridium or Delta. EBIT for the aerospace segment, it grew by 26% year on year and amounted to 8.3% of sales, compared to 6.7% last year. This was helped by higher volumes and also a strong improvement in project execution. Aerospace is therefore not only a growth engine for Thales, but has now become also, for the first time, the most profitable segment within Thales. Let's now move to page 13 and transport. Transport orders dropped 8% on an organic basis compared to 2012. 2012, which had seen several major orders, mainly mainline signaling in Denmark and also urban rail in Singapore. In 2013, main wins were essentially in emerging markets. The trans mainline signaling contract in Africa, South Africa and Egypt, and also some contracts in urban rail in China. Transport segment had sales of approximately EUR 1.5 billion, still down compared to 2012, as activity generated in recent orders have not been able to fully offset lower sales in ticketing. EBIT was up 7% organically in 2013 versus 2012. In spite of lower volumes, contract executions strongly improved in H2 as compared to H1, and this reflecting overall a good quality of those projects in H2. Let's now move to page 14 with defense and security. This segment in 2013, developed a very strong increase in order intake, which reached, as you see, almost EUR 7.7 billion, up 17% versus last year. Quite a significant increase in order intake in our defense and security business in 2013. Defense mission systems benefited from an uplift in orders following the capture of major contracts, like the in-service support of the Royal Navy's major sensor system. In France, the new Rafale standard F3R, or in Saudi Arabia, the upgrades of the Sawari I frigate. New orders also from the secured communication and information systems, with in particular, the contract in France, as well as the significant increase in our cybersecurity business, which grew at a double-digit rate in 2013. The last global business unit in this segment is the land and air system, where orders were stable versus last year. Sales overall came close to EUR 7 billion, quite stable versus 2012. This reflecting quite a good level of activities in key contracts, the third tranche of contract in France, or the upgrades of the Mirage 2000 in India. Sales of sonar, electronic combat system, and cybersecurity systems were also up in 2013 versus 2012. On the contrary, land and air systems decreased, particularly in armaments and air defense. EBIT margin, a solid 7.4% EBIT margin compared to 7.1% last year, thanks to a continuous focus on cost, and overall quite a satisfactory project execution. DCNS, which is a different story. When you look at DCNS on page 15, new orders at DCNS amounted to almost EUR 800 million in 2013, plus 5% on an organic basis, with a key commercial success of 2013 being the award of a major contract in Saudi Arabia to upgrade the Sawari I frigate. Looking at sales, DCNS sales reported a 14% increase versus last year. DCNS continued to benefit from a favorable timing on significant milestones on some key programs, especially the FREMM frigate program, but also the submarine, and also the construction of the Russian command ship. EBIT, however, was clearly a disappointment in 2013. Despite those higher sales, EBIT was down by 15% compared to last year, resulting in a significant decrease in the EBIT margin. You see moving from 7.7% down to 5.4%. The reason behind this drop in profitability is significant difficulties on civil nuclear project, which have already affected H1, but this has continued in H2 of 2013. Today, the DCNS management is implementing corrective action in order to fix this situation. So moving now to our net income, on page 16. Our net result, our adjusted net results grew even more than our EBIT. It increased actually by 13% to EUR 644 million. And of course, the primary driver is the EBIT growth. But also, this increase comes from lower financial charges. First, we benefited from good market conditions in 2013, and we have decided to raise an EUR 800 million bond issue, which has been used to refinance more expensive bonds that was maturing. Also, on pension, we have seen a drop on pension interest rate in 2012. I remind you that, as opposed to other companies, we include finance charge and pension on our adjusted net income. On the other hand, our tax charge was up, of course, driven still by higher pre-tax profit, but also higher tax in France. But overall, the tax rate remain at 31% like in 2012, and very much in line with our guidance. Going forward in 2014, we think that the tax rate of Thales should remain at this level. Page 17, cash flow. As we expected, free operating cash flow was satisfactory, but lower in 2013 than in 2012, when we had received significant cash inflow at the very end of the year. So free operating cash flow reached EUR 466 million, meaning that the conversion rate of EBIT to free cash flow was significantly above 50% over 2012 and 2013 in aggregate, fully in line with our objectives. Page 18 on the evolution of our cash position. So excluding our 30% share of DCNS, our net cash position has gone up from a bit more than EUR 900 million to a bit more than EUR 1.1 billion. Of note, first, on top of the free cash flow generation, first deficit payments on our U.K. pension remain stable as a result of our negotiations with the trustees that we concluded in Q1 2013. You see EUR 89 million of acquisition. The bulk of it being the acquisition of OpenHydro by DCNS. OpenHydro being a company specialized in the development of marine renewable energies. Dividends paid in 2013 amounted to EUR 181 million, with a balance of EUR 0.63 per share paid in May in relation to the 2012 dividends, and an interim dividend of EUR 0.27 that we paid in December 2013 in relation to the 2013 period. Dividends, as Jean-Bernard Lévy said earlier, we have decided to significantly increase our dividends as our increased performance is today confirmed. I would say that Thales is now back to normal, and we are bringing back our dividends in line with the levels that we had in 2007, 2008. For 2013, that's been proposed at EUR 1.12 per share, 27% increase versus 2012, reflecting both the increase of earnings per share, but also the increased payout ratio from 30% to 35%. This means that we'll make a payment of EUR 0.85 at the end of May, after the interim dividend, which was paid in December. Going forward, we intend to distribute about 35% of our adjusted net income. So after this 2013 financial review, I would say it's my duty to touch upon a more technical subject for a moment. So on page 20, about IFRS 10 and 11. As I'm sure you all know, new accounting rules have been introduced as from January the 1st, 2014, with regard to consolidation of joint ventures. So in substance, IFRS 10 and 11 prescribe new accounting rules for those joint ventures. The proportional consolidation, which means the line-by-line consolidation of each item of the financial statements, P&L and balance sheet. This is no longer possible, and this is replaced by the equity method consolidation. In other words, we just take our share of JVs' net results in our consolidated P&L. I would say that this approach is quite similar to what is today in place in the U.S. or in the U.K. Particularly for Thales, this means that DCNS, but also large joint ventures, like Thales Raytheon Systems or Samsung Thales, will now be consolidated under the equity method. For the space activities, where you know we operate through two legal entities. We own 67% of Thales Alenia Space and 33% of Telespazio with Finmeccanica owning the balance of the shares. As required by IFRS 10, we conducted a detailed analysis of the governance of those JVs, and we concluded that going forward, Thales Alenia Space ought to be fully consolidated in Thales accounts, while Telespazio should be consolidated under the equity method. Of course, this accounting change doesn't affect our respective ownership of those two JVs or our coordinated approach with Finmeccanica under the space alliance. Finally, to reflect that the operating activities of our equity accounted companies are closely aligned with global Thales operations, our EBIT number as from this year, as from 2014, will take into account our share of net results of these equity accounted companies. Here again, aligning with U.S. or U.K. practice. Of course, we understand that these changes will create some disruption in your financial models. In order to help you in this transition process, we have provided you with our key 2013 number on a pro forma basis as if we had applied IFRS 10 and 11. I would like, in a summary, to highlight that you shouldn't feel too disoriented as our number post IFRS 10 and 11 are very similar to a number excluding these JVs, which we bought until 2011. What does this mean in term of figure? Now on page 20, 21. This slide summarize the main estimated impact of IFRS 10 and 11 on our 2013 results on a pro forma basis. In a nutshell, if we had already applied IFRS 10 and 11 in 2013. What do we see? First, our sales would have been amounted to EUR 12.7 billion. About three-fourths of the difference with our report numbers is linked to this DCNS safe now being excluded. Our EBIT number under the new definition, including, as I mentioned, our share of net results of equity affiliates, would have been almost unchanged at EUR 1 billion, 11 million as compared to EUR 1 billion and 3 million under the existing reporting schedule. Of course, our adjusted net results wouldn't have been affected. Operating cash flow would have been pretty similar to our 2013 reported figure. Lastly, our net cash, you see at the bottom of the slide, net cash at EUR 1.1 billion, would have been very close to the 2013 reported figure, excluding this element. Of course, we will provide you in the coming weeks a full set of 2013 pro forma figures. So that's for this quite long financial overview. Now, I'm turning over to Jean-Bernard. Thank you, Pascal. I will now turn to slide 23, and I would like to share with you the key features of our long-term vision, Ambition 10. We will, of course, have more time to discuss this in detail during our Capital Markets Day in early April. When I joined Thales a year ago, one of the major surprises to me was that our group had had virtually flat sales for the past five years, I could say now six years, and had not fully tapped the benefits of globalization. Thales is, of course, a European leader. But to me, Thales is not yet a truly global player. Despite significant improvements in our profitability, we still have a gap to close with most of our peers. With this in mind, I thought we would need from now on an ambitious vision for the next 10 years, which is what Ambition 10 is about. Ambition 10 is based on three pillars. It is about growth, about competitiveness, and about people. And I intend that these are the three key strategic pillars fostering the development of Thales going forward. We have now a clear roadmap that has been embedded in our budgetary process and in our objectives for 2014. This roadmap is supported by our new performance plan, which is called Ambition Boost. Our practice for 2014. What is the guidance? What are our objectives? In 2014, and I am on page 24, our performance should further improve. We expect our order intake to be stable overall this year. In France and the U.K., defense orders are expected to decrease following the large contract wins we had in 2013. However, emerging markets should enjoy a double-digit growth rate, and this will offset the less favorable environment in Europe. Sales are expected to remain stable in 2014. EBIT should make further progress as we continue to address our cost base and improve the quality of project execution. All in all, we anticipate a 5%-7% increase of our EBIT versus 2013, essentially driven by further impact from our performance plan, and as Pascal mentioned a few minutes ago, factoring in some Forex headwinds. Let me be a little more precise here. Current Forex rate cost us about 1.5% of EBIT, which means that at last year's average exchange rate, the average over the 12 months of 2013, our EBIT guidance would not be the 5%-7% increase over 2013, which is here, but would have been 1.5% higher. It would have been 6.5%-8.5%. But we have to take into account the decrease in many of the currencies where we trade. And at the current February 2014 exchange rate, our guidance for EBIT today is a 5%-7% increase. Let me conclude by saying that in 2013, we delivered a strong performance. We have met all our objectives, and indeed, we have exceeded expectations on both operating margins and order intake, especially very strong growth in emerging markets. To me, 2013 is a first step towards restoring sustainable and profitable growth at Thales and delivering further value to our shareholders. Many thanks for your attention. We will be glad to see many of you soon in Toulouse, early April, our Capital Markets Day. For the time being, Pascal and myself, with the support also of Pascal Tourret and Patrice Caine, who are here in the room with us. We will be happy to take your questions and answer as best as we can. Let's turn to the first question. We have a microphone here in the room. Please. Hello, Yann Derrec from Oddo. Maybe two or three questions. The first one on your guidance, because you gave mainly item focus on the P&L. Whereas on the positive side of your 2013 results, we are seeing that the free cash flow generation was quite amazing. Could you elaborate a bit more on this field for full year 2014? Second point on DCNS. What is in fact your degree of confidence on the corrective action implemented by DCNS management? Because in the wake of the first half results, you've already stressed that an improvement was expected in H2, we have not seen this impact. What is your degree of confidence now on this event? The last point, to come back on the free cash flow for 2013. I believe that this is mainly driven by the working cap improvement. But could you be a bit more precise on this matter? Okay, I will answer your question on DCNS, and maybe Pascal will give you the answer to your two questions related to cash flow and working capital requirements. On the DCNS situation, let's be clear. We have had a number of exceptional losses on contracts which are not related to manufacturing ships or boats, not to their core naval business, which is the historic business of DCNS. Indeed, there was already some difficulties that were foreseen in the first half, but these have been more visible in the second half. There are not one, but several such contracts in what one could call the diversification efforts of DCNS beyond its naval systems and naval construction business. We believe that the difficulties have been well analyzed and well provided for at the end of the year. Some of them are quite significant on some contracts, and we have ensured that the management of DCNS is fully in charge, still and fully acting to resolve these issues. Some of them are already showing some improvement, and we are confident that these bad news will not be repeated. On cash flow, Pascal? Yes. Cash flow, let me first come back on 2013. When we started 2013, when we released our last year figures, we said that in 2012 we had some kind of exceptional payment at the very end of 2012. Because of that, I would say an exceptional level of free cash flow in 2012. We said that we should take into account not just 2012, but 2012 plus 2013 in aggregate. Okay? It will make sense because of this type of cutoffs. When we look at 2012 plus 2013, overall, the EBIT to cash conversion ratio is a bit less than 60%. Once again, very much in line with what we said. Yes, quite a good level of performance. What does it mean for 2014? When we start from EBIT, as you pointed out, a key element is change in working capital. Of course, in a company like Thales, where we book orders and we receive down payments, change in working capital can come up and down depending upon the flow of order intakes and in particular, where we book those projects. I know it is long-term basis. There is no reason why this working capital change would be neutral. It should be neutral. Now, on a specific year, we have, of course, to be cautious because once again, it depends on the way we book contracts. This is the first point of explanation. Second point, in 2014, as by the way it was the case in 2013, we will continue to invest on some elements to improve the overall capabilities of Thales. In particular, on project to upgrade our engineering sites or overhaul our sites. We are today pursuing various project, Germany, in Netherlands, in France, the south part of France. A number of projects that are absolutely essential for Thales to develop its overall efficiency. Okay? I expect that in 2014, the balance between D&A and CapEx will be negative, probably a bit above EUR 50 million. Okay? With all of that included, I would say that for 2014, we are targeting, this is a bottom line cash flow, EBIT to cash flow conversion rate of 50%. Of course, if we can do better, in particular because if we can book orders with a positive down payments that will impact 2014, we will be able to do more than 50%. But it's a bit too early today because, of course, it's difficult for us to assess the type of, the number of orders we'll be booking in Q4 2014. I am a bit cautious in telling you that 50% EBIT to cash conversion ratio is today quite a good proxy for what to expect in 2014. Okay, thank you. Thank you, Pascal. We have more questions? Please. Yes. Good evening. Christopher from Kepler Cheuvreux. One question to elaborate on Jan's question on free cash. Going beyond 2014, where would you see the cash conversion rate? Because you have some provisions payment, or you are going to be using some provisions, or you use them actually, so the cash should actually improve in 2014 and 2015 and beyond. Yes, Christopher, you mentioned a specific item which is, the consumptions of reserves linked to loss at completions that have been booked in 2009 and 2010. Yes, it has an impact. Now, when you look at the overall level of cash for Thales, I would say it is the second order kind of driver. Overall comment, not just on 2014, but overall, going forward, what can we expect overall in term of EBIT to cash conversion rate for a company like Thales? I would say that, starting from EBIT, what is quite obvious is tax impact and overall something like a 30% tax rate. So starting from EBIT, deducting 30% of tax cash outs, this should leave us with a 70% EBIT to cash conversion ratio, assuming, however, a stable level of working capital. As I mentioned, you might have on that up and down, depending on when you book a contract. Last caveat is what I mentioned about capital expenditure versus D&A. It is true to say that today, and supporting our performance plan, we are today investing in CapEx a bit more than what we depreciate, what we amortize, in the order of magnitude that I mentioned. This is a second caveat, but in the long term, yes, a 70% EBIT to cash conversion rate is, I think, something which is absolutely achievable for Thales. Just a follow-up question on this. The business model, it generates cash. You are increasing the dividend, which is good news, but you will still be left with excess cash. What are the intention going forward with that usage of cash? Because you are going to end up with a lot of cash in 2 to 3 years. We are generating cash, and I think we are quite happy we are, and we are also quite happy to reward our shareholders with a 27% increase in the dividend this year, which, as I said, is due to the increase in the adjusted net profit, but also to a significant increase in the payout ratio. Now going forward, the question you are raising is about excess cash. We have indeed some cash at hand, and we are reporting very clearly what is in the hands of Thales and what is not. In other words, what belongs to DCNS, to which we do not have access. Indeed, we started the year a little below EUR 1 billion of cash, and we ended the year a little above EUR 1 billion of cash. This raises the question of the optimization of our balance sheet. What are our options? Of course, we can return more cash directly to the shareholders. This is one option, whether in the future we would indeed raise even more our payout ratio. Another option is to have some exceptional share buyback options. Another option is to look for using that cash to grow more the company, for instance, with an acquisition policy. At this stage, as I have said at several opportunities to discuss this with our investor base, I do not believe that for Thales, acquisitions are key to its current performance. The key for Thales is to improve its organic performance. I have also said that if and when we have to contemplate potential acquisitions, we have to look at the opportunity and to see whether it makes sense in our overall strategy, which, as I have said, is driven towards our global policy, emerging markets, and going more towards civil applications. This is still some thought that together with the board and the major shareholders we are having from time to time. I would say at this stage, the conclusion of these discussions, is that we are raising our payout ratio and thus increasing the recurring return of cash to shareholders through the dividend. Maybe from- We should take a question on the phone. Question from outside the room, from many of our friends are in London. We have the first question from Tristan Sanson, Exane BNP Paribas. Your line is now open. Okay, we have a further question from David Perry, JP Morgan. Yes. Hello, gentlemen. Good evening. Can you hear me okay? Yeah. Fine. Thank you, David. Okay, great. Thanks. Two questions, please. The first one for Mr. Lévy, the Ambition 10, and I think as it was reported in the media, if it was correct, a few months ago, talked about a 10% margin, hopefully quite soon. At that time, did you factor in the accounting change which has improved your margin? Also, perhaps could you give a bit more color on what you consider the near term, if the press reported it correctly? My question for Mr. Bouchiat is, just a bit of housekeeping. The tax charge of 30% on the numbers, is that what we should assume going forward? A few percentage points below what I was thinking. Thank you. Thank you, David. To answer your first question, we have reached slightly above 7% operating margins related to sales on the current, and I would say past, accounting standard, because from January 1, 2014, we now have to report in the new one. In the new one, this would translate into an 8% operating margin related to sales, as we have showed you in our presentation a few minutes ago. Where are we going from there? Well, let's say in the short term, the guidance for this year is that we will increase further our operating margin as the guidance is flat sales and 5%-7% increase in EBIT. This means we will get closer to a two-digit margin. If I look in the long run, I do expect Thales to be able to deliver superior margins to the current ones, to the 2012, to the 2013, to the 2014 margins that we have. I do believe that we have all it takes to get closer to what would be a peer group, although quite obviously, it is not so obvious to have a very good peer group for Thales. But we can see where many of our peers stand, and indeed, many of them report two-digit operating margins although, and especially when I read you, David, I do understand that some of them do not have the same accounting practice and are not as conservative as we are regarding both R&D capitalization and pension fund deficit accounting. If I remember well, the Street believes quite rightly that we have a conservative view on this margin, when compared to many of our peers. Yes, indeed, my intention is to regularly grow the operating margin above the current, let's say 8%. We now have to get used to the accounting standards that we have to report in. So to grow the current operating margin above the current 8%, we expect we will be above 8% in 2014 and even further up in the 2015 and going forward. It is, of course, very difficult to give predictions on what rate we can achieve, but my intention is indeed to get closer or within the peer group average and maybe later to get at a better ranking or at best ranking within the peer group, everything being equal regarding R&D capitalization and pension charges. Indeed, this would mean that at one point in time, I hope we will be able to report a two-digit operating margin, but it is much too early today to give any detailed predictions regarding such targets. Okay, very clear. Thank you. Thank you, Pascal. On tax rate, David, you have seen that 2013 tax rate, 31%, very much in line with what we reported in 2012. By the way, despite higher or stronger pressure, in particular in France. You know, France has increased its tax rate. Despite this, we managed to keep our tax rate stable in 2013 versus 2012. 2014, what I said is that I think that the 31% is a good proxy of our 2014 tax rate. Now, going forward, I am totally convinced that we can do better on that. We can be smarter on this topic. Of course, all of that is quite complex, but I think that we can do better in terms of tax rate going forward, assuming, of course, a stability of the overall tax pressure in term of tax rate per country. It is a matter of fact that Thales operates in a number of countries with different tax situations. Without being too precise today, of course, I think that there is scope for Thales to do better in term of tax rate in the medium terms. We have to work on that quite extensively. This cannot happen right away. Once again, we managed to keep our tax rate stable this year, despite a stronger pressure in France. In 2014, it should be stable. Then going forward, I think we can do better, but it is probably a bit too early to tell you more on that. Okay. Thank you, Pascal. More questions over the We have Mr. Tristan Sanson from Exane BNP Paribas back on the phone. Your line is now open. Yes, good evening, gentlemen. Sorry for slight technical issues earlier. I have three questions, if I may. The first one is on R&D capitalization. I am surprised to see, actually, the gross capitalization going up in 2013 versus 2012, minus some EUR 20 million, when I saw that you would limit that as much as possible. Can you tell us what is the trend here, why you capitalize more and what you expect to have in 2014, actually, for both gross and net capitalization? Second question is on your outlook. If I look at your EBIT guidance with an increase from 5% to 7%, and I take your EUR 80 million to EUR 90 million of savings minus the FX impact that you are talking about, I get the 5% to 7% that you are indicating. But at the same time, I have the impression that you have a number of tailwinds that will materialize next year. One is the recovery from DCNS. Mr. Boissier talked about a 7% margin achievable over that year. You should have a decrease in R&D amortization. You should get positive organic growth, indicating at the top-line level, the FX headwind, non-recurrence of transportation issues, et cetera. Well, simple question is why is the guidance for a bit more than that in term of EBIT growth? And especially, are there headwinds in term of bidding costs or R&D that I am not seeing that are mitigating this tailwind that I am seeing? And the final question is simple, is given the trend that you are experiencing on the order side, especially on the emerging market, when do you expect to return to material positive top line growth at group level? Is it a story for 2015 or for a bit later? Thank you. Okay. Maybe I will answer your last question and I will let Pascal talk to you about R&D capitalization and also, why an 8.5% or 6.5%-8.5% guidance at constant exchange rate and the 5%-7% at the current one, something that we feel is not as conservative as your question would imply. On orders and top line growth, I think it is absolutely mandatory for Thales to restore some more significant growth. You may have seen that in 2013, in fact, we achieved a 2% organic growth on the Thales core business and 3% when you add DCNS. So the 3%, which is reported, would be 2% ex DCNS, and I would say in the current standards, in the new accounting standards. It is a bit a race against the clock. As I have said, we really need to grow our emerging markets' orders as quickly as possible. And I want to publicly thank Pascal and her team for achieving such a remarkable growth in 2013. And we are now hungry for more in 2014. As I said, double-digit growth on top of the excellent success of 2013. But of course, we start from low. We start from a time where emerging markets orders were 26%, emerging markets revenues were only 23% of our total revenues. For this change to materialize into the top line, it means we need to really have good resilience on our business, whether it is orders or revenues in mature countries, Western markets. Now, how is this going to be balanced is the question. I would like to be able to tell you, I can predict in detail how the pluses and the minuses will be combined. How, with a higher basis for emerging markets, as we grow it every year from now on, it will be easier to get to growth because the weight of the emerging markets will have a bigger effect on the total sales and orders because your question would be the same on orders. We have a book-to-bill of one in 2013, so when it will have a larger effect on orders for the total company, this is something which is at the heart of our ambitions, restoring growth and of course, growing profits. And I can tell you, all our efforts, especially in terms of our international footprint, commercial efforts, are really focused on achieving this. So I am quite cautious. This is true. I am not telling you that the 2% organic growth of 2013 is a major change from what we had achieved in the previous year. I believe it is a marginal improvement. It is better to be at +2% than at -2%, obviously. I believe it will take a little time before the emerging markets become such a big part of Thales as a whole, then emerging markets growth will significantly offset the stability or slight decline of mature market orders and revenues. Maybe Pascal, on the two other questions? Yes, your first question was a technical one, Tristan Sanson, about the increase of R&D capitalizations. Moving from 2012, EUR 12 million of capitalized R&D up to EUR 32 million in 2013, so a EUR 20 million increase, as you pointed out. Let's assess that against the overall R&D that we spend at Thales, which is close to EUR 700 million. So we are talking here about R&D capitalization that represents less than 5% of our R&D spendings. Now, why is it that we increased by EUR 20 million? The answer is quite simple. We have to comply with accounting rules and IFRS, and you know that when you reach some specific milestone in term developments, there is no choice but to capitalize those costs. Despite the fact that we continue to use quite conservative assumptions when considering the merit of a capitalization, in some cases, we have no choice but to do it just to comply with IFRS. So this is quite simple. Your second point about the fact that, 5%-7% EBIT increase in the terms, with a stable effect resulting in a 6.5%-8.5% increase. I understand your point, Tristan Sanson, is that it is a bit shy or a bit conservative considering the number of tailwinds that we might have in 2014. First, as Jean-Bernard Lévy said, we are cautious. You mentioned items, but let us take some of them. DCNS. DCNS, it is true that 2013 has been quite a disappointment. It is true that we see some measures being taken by the DCNS management. Now we are quite cautious because behind that, it is a quite complex project where DCNS is just a member among many others as part of a consortium. Those quite complex projects today, there is no guarantee that all of that will be fixed in 2014, despite the fact that DCNS management is working quite hard on that. Second point on Forex. We mentioned a 1.5% impact, and hence, the fact that we mentioned 5% to 7% and not 6.5% to 8.5%. This impact, which represents approximately EUR 50 million impact, this is just today what we see on significant currencies, current exchange rates, in particular the Australian dollar or the Canadian dollar, and what is the slippage or the drop of those currencies today versus the average of 2013. It is quite obvious. In particular, the Australian dollar has dropped 10% in 2013 versus 2012 on average. But today, in February, has slipped another 10% versus the average of 2013. So we have to be cautious because we see clearly a lot of volatility on exchange rate. Last but not least, I mentioned what we expect from our performance plan in 2014. I mentioned that in 2013, we did better than what we communicated at the outset of 2013. I remind you that we said beginning of 2013 that we were targeting a EUR 100 million increase in performance in 2013 coming from this plan. At the end of the day, we deliver EUR 120 million. You probably recall that with regard to 2014, last year, that we said we were expecting an additional EUR 100 million, but based on the fact that in 2013, we would have achieved EUR 100 million. As we over-deliver in 2013, it is true that we are today a bit cautious about the bottom line effect of our performance plan in 2014. As I mentioned, EUR 80 million to EUR 90 million expected bottom line impact of this performance plan in 2014 versus 2013. It is true that we are considering the overall context, and also with the intent, I would say, not to create any disappointment at the end of 2014 in term of financials for Thales. Thank you, Pascal. Any more questions from Thank you. We have no further questions on the phone. Okay. I do not think we have any further questions in the room. With this, I will thank you all for your participation and invite you to meet us for more detailed presentations when we are all in Toulouse in April, and we will have our investor day. Thank you again, and enjoy the evening. Thank you.