2018 Full-Year results

EBIT between €1,780 million and €1,800 million

Thales’s Board of Directors (Euronext Paris: HO) met on 25 February 2019 to examine the 2018 financial statements5.

“Thanks to the commitment of its 66,000 employees, 2018 has been an excellent year for Thales. Order momentum stepped up in the fourth quarter, enabling order intake to reach €16 billion and exceed the annual objective. For the third year running, organic sales growth exceeded 5%, driven by an exceptional year in Transport and strong growth in the Defence &Security segment. Operating profitability improved across all segments and reached 10.6%, a level never before achieved by the Group.

Our action plan until 2021 is clear: to support profitable growth in the long term, we will continue to roll out our operational performance initiatives and to strengthen our customer- centric culture while also continuing to step up our investments in innovation.

The integration of Gemalto, which we have been actively preparing for over a year, will, in the coming weeks, consolidate our position as a global leader in digital security.

In an increasingly digital world, Thales’s business model, both robust and balanced, delivers value more than ever.”

Patrice Caine, Chairman and Chief Executive Officer

 

 

 

1 Since 1 January 2018, the Group has been applying IFRS 15 “Revenue from Contracts with Customers”. All changes in this press release are calculated compared with the figures restated for the application of this standard, which appear in the 2018 consolidated financial statements.

2 In this press release, “organic” means “at constant scope and currency”. See note on methodology, page 13.

3 Non-GAAP financial indicators, see definitions in the Appendices, page 13.

4 Proposed to the Shareholders’ Meeting on 15 May 2019.

5 At the date of this press release, the audit procedures have been completed and the Statutory Auditors’ report was in the process of being issued.



Key figures

 

In € millions, except earnings per share and dividend (in €)	2018	2017 restated for IFRS 15	2017 reported	Total change6	Organic change
Order intake7	16,034	14,931	14,920	+7%	+9%
Order book7 at end of period	32,329	32,064	31,914	+1%	+1%
Sales	15,855	15,228	15,795	+4.1%	+5.3%
EBIT8	1,685	1,365	1,543	+23%	+25%
in % of sales	10.6%	9.0%	9.8%	+1.7 pts	+1.7 pts
Adjusted net income, Group share8	1,178	840	982	+40%
Adjusted net income, Group share, per share8	5.55	3.97	4.64	+40%
Consolidated net income, Group share	982	680	822	+44%
Free operating cash flow8	811	1,365	1,365	-554
Net cash at end of period8	3,181	2,971	2,971	+209
Dividend per share	2.089	1.75	1.75	+19%

2018 order intake amounted to €16,034 million, up 7% on 2017 (+9% at constant scope and currency). Order momentum was particularly strong in the Defence & Security segment. At 31 December 2018, the Group’s order book stood at €32.3 billion, which represents 2 years’ worth of sales.

Sales totalled €15,855 million, up 4.1% compared to 2017 pro forma IFRS 15 sales, and 5.3% at constant scope and currency (“organic” change). Sales growth remained high, driven by strong momentum in the Transport (up +17.9% on an organic basis) and Defence & Security (up +5.6% on an organic basis) segments.

In 2018, consolidated EBIT was €1,685 million (10.6% of sales) compared to €1,365 million (9.0% of sales) in 2017, up 23% compared to 2017 pro forma IFRS 15 EBIT. All operating segments improved their EBIT margin while increasing their R&D investments.

 

 

 

 

 

 

 

6 All the “total changes” are calculated compared with the figures restated for the application of IFRS 15, which appear in the 2018 consolidated financial statements.

7 As of 1 January 2018, the Group has been applying the IFRS 15 standard “Revenue from contracts with customers”, which

introduces the concept of accounting order book (“revenue remaining to be recognized”). The definitions of “order book” and “order intake” have been adjusted accordingly, with no material impact at Group level.

8 Non-GAAP financial indicators, see definitions in the Appendices, page 13.

9 Proposed to the Shareholders’ Meeting on 15 May 2019.



As such, the Group exceeded all the financial objectives it had set for 2018: an order intake of around €15.5 billion, an organic sales growth of +4% to +5% compared to 2017, and an EBIT of between €1,620 million and €1,660 million, based on February 2018 scope and currency.

At €1,178 million, adjusted net income, Group share was up 40%, thanks to the strong improvement in EBIT.

Consolidated net income, Group share was €982 million, up 44%, thanks to the strong improvement in income from operations (+€307 million).

Free operating cash flow10 was €811 million versus €1,365 million in 2017. This decrease is explained by the partial reversal of one-off items which had driven working capital to a very low level at 31 December 2017.

As a result, the Board of Directors decided to propose payment of a dividend of €2.08 per share, a rise of 19% compared to 2017.

 

 

Order intake

In € millions	2018	2017 restated for IFRS 15	2017 reported	Total change	Organic change
Aerospace	5,346	5,237	5,200	+2%	+3%
Transport	1,858	1,781	1,780	+4%	+6%
Defence & Security	8,775	7,857	7,883	+12%	+13%
Total – operating segments	15,979	14,875	14,863	+7%	+9%
Other	55	57	57
Total	16,034	14,931	14,920	+7%	+9%
Of which mature markets11	12,797	10,722	10,824	+19%	+21%
Of which emerging markets11	3,237	4,210	4,095	-23%	-22%

2018 order intake amounted to €16,034 million, up 7% on 2017 (+9% at constant scope and currency12). The ratio of order intake to sales (“book-to-bill”) stood at 1.01 compared to 0.98 in 2017.

 

 

 

 

 

 

 

 

10 Non-GAAP financial indicator, see definition in the Appendices, page 13.

11  Mature markets: Europe, North America, Australia, New Zealand. Emerging markets: all other countries. See table on page 17. 12 Taking into account a negative currency effect of €175 million and a net negative scope effect of €18 million, mainly linked to the consolidation of Guavus as of 12 September 2017 (Defence & Security segment) and to the disposal of the identity management business during Q2 2017 (same segment).



Thales booked 19 large orders with a unit value of over €100 million, representing a total amount of €4,593 million:

corvettes, and the modernisation of sonar systems equipping the Australian Royal Navy’s Collins class submarines;

At €11,441 million, orders of less than €100 million per unit were down 5% on 2017, with the Group having recorded fewer orders with a unit value of between €10 million and €100 million. Orders with a unit value of less than €10 million remained stable compared to 2017, with the growth in Q4 fully absorbing the delay observed in the first part of the year.

From a geographical perspective13, order intake in emerging markets, which had benefited from 7 large orders in 2017 versus only 3 this year, was down 23% to €3,237 million. Meanwhile, order intake in mature markets rose significantly (+19% to €12,797 million), driven by the increase in defence budgets in many countries.

 

 

 

 

13 See table on page 17.



At €5,346 million compared to €5,237 million in 2017, order intake in the Aerospace segment was up +2%. This slight increase is explained by opposing trends: order intake in the avionics and In-Flight Entertainment (IFE) businesses was down, having benefited in 2017 from the booking of two large orders in these domains. As expected, order intake in the Space business showed clear signs of recovery following a weak 2017, benefiting from several successes with large institutional clients.

At €1,858 million, order intake in the Transport segment remained buoyant, up 4% on 2017. This segment benefited in particular from several large main line signalling contracts.

Order intake in the Defence & Security segment was €8,775 million compared to €7,857 million in 2017 (+12%), benefiting from robust bookings in equipment for ships, fighter aircraft, air traffic management, military communication networks and cybersecurity. For the first time, the order book for this segment exceeded €20 billion, representing 2.5 years’ worth of sales, and increasing visibility on the business in the years to come.

 

Sales

In € millions	2018	2017 restated for IFRS 15	2017 reported	Total change	Organic change
Aerospace	5,780	5,747	5,985	+0.6%	+1.4%
Transport	2,001	1,723	1,761	+16.1%	+17.9%
Defence & Security	8,020	7,690	7,983	+4.3%	+5.6%
Total – operating segments	15,800	15,160	15,729	+4.2%	+5.4%
Other	55	67	66
Total	15,855	15,228	15,795	+4.1%	+5.3%
Of which mature markets14	10,960	10,570	10,913	+3.7%	+4.7%
Of which emerging markets14	4,894	4,657	4,882	+5.1%	+6.5%

2018 sales amounted to €15,855 million, compared to €15,228 million in 2017, up 4.1%. The organic change (at constant scope and currency15) came in at +5.3%, driven by strong momentum in the Transport and Defence & Security segments.

 

 

 

 

 

 

 

 

 

 

 

14 Mature markets: Europe, North America, Australia, New Zealand. Emerging markets: all other countries. See table on page 17.

15 The calculation of the organic change in sales is shown on page 18.



As expected, sales remained stable in Q416 (-0.2% on a reported basis, +0.1% on an organic basis), affected by a high basis of comparison in the Transport and Defence & Security segments, and by phasing effects between Q3 and Q4 2018 in the Aerospace segment.

 

 

From a geographical17 perspective, this performance reflected solid growth in both emerging (+6.5% at constant scope and currency) and mature markets (+4.7% at constant scope and currency). As a result, in 5 years, the Group’s sales in emerging markets have increased by more than €2 billion, from €2.9 billion in 2013 to €4.9 billion in 2018 (+70%).

In the Aerospace segment, sales totalled €5,780 million, up 0.6% compared to 2017 (+1.4% at constant scope and currency). This limited growth reflects the slowdown of the commercial telecom satellite market, along with a high basis of comparison in In-Flight Entertainment, partly offset by good momentum in the aeronautical businesses. The drop in sales in Q4 is not an indication of this business’ momentum; it reflects phasing effects between Q3 and Q4 (Q3 organic growth: +8.8%; Q4: -2.9%).

In the Transport segment, sales totalled €2,001 million, up 16.1% compared to 2017 (+17.9% at constant scope and currency). The segment benefited from the ramp-up of the large urban rail signalling contracts signed in 2015 and 2016, combined with an upturn in main line activity.

Sales in the Defence & Security segment reached €8,020 million, up 4.3% compared to 2017 (+5.6% at constant scope and currency). Many different businesses contributed to this momentum: surface radars, optronics, systems for fighter aircraft, systems and services for military ships, military radiocommunications, cybersecurity, etc.

As expected, sales in the Defence & Security segment remained stable in Q4 (-0.5% on a reported basis, +0.0% at constant scope and currency), affected by a very high basis of comparison (Q4 2017 growth: +22.1% at constant scope and currency).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16 See table on page 18.

17 See table on page 17.



 

Results

EBIT In € millions	2018	2017 restated for IFRS 15	2017 reported	Total change	Organic change
Aerospace	580	567	601	+2%	+3%
in % of sales	10.0%	9.9%	10.0%	+0.2 pts	+0.2 pts
Transport	88	57	72	+56%	+57%
in % of sales	4.4%	3.3%	4.1%	+1.1 pts	+1.1 pts
Defence & Security	1,007	757	869	+33%	+35%
in % of sales	12.6%	9.8%	10.9%	+2.7 pts	+2.8 pts
Total – operating segments	1,675	1,380	1,542	+22%	+23%
in % of sales	10.6%	9.1%	9.8%	+1.5 pts	+1.5 pts
Other – excluding Naval Group	(53)	(48)	(47)
Total – excluding Naval Group	1,623	1,333	1,495	+22%	+23%
in % of sales	10.2%	8.8%	9.5%	+1.5 pts	+1.5 pts
Naval Group (35% share)	63	33	48	+91%	+91%
Total	1,685	1,365	1,543	+23%	+25%
in % of sales	10.6%	9.0%	9.8%	+1.7 pts	+1.7 pts

 

In 2018, consolidated EBIT18 amounted to €1,685 million, or 10.6% of sales, compared to

€1,365 million (9.0% of sales) in 2017.

The Aerospace segment posted EBIT of €580 million (10.0% of sales), versus €567 million (9.9% of sales) in 2017. The margin in this segment improved slightly, with competitiveness initiatives and lower restructuring costs offsetting the acceleration of R&D expenses, particularly in the space segment.

EBIT for the Transport segment continued to recover, reaching €88 million (4.4% of sales) compared to €57 million (3.3% of sales) in 2017. The delivery of old low or zero margin contracts proceeded as planned. In 2019, the improvement in this segment’s margin should be affected by the recording of a restructuring provision related to the implementation of an ambitious engineering transformation plan.

 

 

 

 

 

 

 

 

18 Non-GAAP financial indicator, see definition in the Appendices, page 13, and the calculation, pages 15 and 16.



In Defence & Security, EBIT markedly improved to reach €1,007 million, compared to

€757 million in 2017 (+33%). This segment’s margin was 12.6% compared to 9.8% in 2017 pro forma IFRS 15, and 10.9% in 2017 on a reported basis. Besides the non-recurrence of the negative effect linked to the application of IFRS 15, this significant improvement is explained by the strong sales momentum, the impact of competitiveness initiatives, solid project execution and an exceptional provision reversal of €20 million following the resolution of two trade disputes.

The contribution of Naval Group to EBIT was €63 million in 2018, compared to €33 million in 2017, benefiting in particular from the increase in its sales (+13%), its competitiveness  initiatives, and the non-recurrence of the negative effect linked to the application of IFRS 15.

 

At –€7 million in 2018 compared to €5 million in 2017, the amount of net financial interest

remained very low. Other adjusted financial results (expenses)19 amounted to a net expenseof

-€8 million in 2018, compared to a net expense of -€29 million in 2017, primarily due to the recovery in foreign exchange performance. Financial costs on pensions and other long-term employee benefits19 improved (-€52 million compared to -€63 million in 2017), benefiting in particular from the decrease in net liability and a lower discount rate in the United Kingdom.

Adjusted net income, Group share19 amounted to €1,178 million, compared to €840 million in 2017, after an adjusted income tax19 of -€387 million compared to -€375 million in 2017. At 26.7%, the effective tax rate was up slightly on 2017 excluding one-off items20 (26.2% — 33.0% including these one-off items).

Adjusted net income, Group share, per share19 came out at €5.55, up 40% on 2017 (€3.97).

At €982 million, consolidated net income, Group share was up 44%, benefiting from the strong improvement in income from operations (+€307 million).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19 Non-GAAP financial indicator, see definition in the Appendices, page 13, and calculations pages 15 and 16.

20In 2017, the tax expense included 3 non-cash one-off items, linked to changes in the tax rules in France and the United States, for a sum of €77 million on the 2017 pro forma IFRS15 adjusted income statement.



Financial position at 31 December 2018

In € millions		2018	2017 restated for IFRS 15	Change
Operating cash flow before working capital changes, interest and tax		1,932	1,596	+336
+	Change in working capital and provisions for contingencies	(519)	403	-921
+	Pension expense, excluding contributions related to the reduction of the UK pension deficit	(129)	(121)	-8
+	Net financial interest received (paid)	(2)	8	-10
+	Income tax paid	(91)	(91)	-1
+	Net operating investments	(380)	(431)	+50
=	Free operating cash flow	811	1,365	-554
+	Net balance of disposals (acquisitions) of subsidiaries and affiliates	(61)	(80)	+18
+	Contributions related to the reduction of the UK pension deficit	(98)	(82)	-16
+	Dividends paid	(382)	(349)	-33
+	Changes in exchange rates and other	(60)	(248)	+188
=	Change in net cash (debt)	209	606	-397
Net cash (debt) at start of period		2,971	2,366
+	Change in net cash (debt)	209	606
=	Net cash (debt) at end of period	3,181	2,971

In 2018, free operating cash flow21 amounted to €811 million compared to €1,365 million in 2017. This decrease is explained by the partial reversal of one-off items which had driven working capital to a very low level at 31 December 2017.

At 31 December 2018, net cash totalled €3,181 million compared to €2,971 million at 31 December 2017, after the distribution of €382 million in dividends (€349 million in 2017) and a net disbursement of €61 million linked to acquisitions and disposals completed during the year, corresponding in particular to an additional stake acquired by Thales Alenia Space in the US company Spaceflight Industries, as part of the “BlackSky” constellation project.

Shareholders’ equity, Group share totalled €5,700 million, compared to €4,922 million as at 31 December 2017, with consolidated net income, Group share (€982 million) and the decrease in the net pension liability (€287 million net of tax) largely offsetting the distribution of dividends (€382 million) and the decrease in the value of currency hedges (€88 million net of tax).

 

 

 

 

 

 

 

21 Non-GAAP financial indicator, see definition in the Appendices, page 13.



Proposed dividend

At the Annual General Shareholders’ Meeting on 15 May 2019, the Board of Directors will propose the distribution of a dividend of €2.08 per share, an increase of 19% on 2017, corresponding to an adjusted net income per share pay-out ratio of 38%, stable compared to 2017.

If approved, the ex-dividend date will be 21 May 2019 and the payment date will be 23 May 2019. The dividend will be paid fully in cash and will amount to €1.58 per share, after deducting the interim dividend of €0.50 per share paid in December 2018.

 

Update on the projected Gemalto acquisition

On 17 December 2017, Thales and Gemalto (Euronext Amsterdam and Paris: GTO) announced the signing of a merger agreement including an all-cash offer for all issued and outstanding ordinary shares of Gemalto, for a price of €51 per share cum dividend22 (the “Offer”). This Offer was unanimously recommended by Gemalto’s Board of Directors.

The proposed merger is progressing satisfactorily. There are only 3 regulatory authorisations still to be obtained: the antitrust authorisations in the United States and in Russia, and the authorisation pertaining to foreign investments in Russia.

As required by certain antitrust authorities, Thales signed a definitive agreement to dispose of its General Purpose Hardware Security Modules (GP HSM) business.

Thales and Gemalto expect to close the “Offer” in March 2019, once all the regulatory authorisations have been obtained.

 

Outlook

The outlook described below does not take into account the acquisition of Gemalto, nor the ongoing disposal of the GP HSM business. The Group may need to update it depending on the effective closing date of these 2 transactions.

Since 1st January 2019, the Group has been applying the IFRS 16 “Leases” standard. Based on the current assessment, this standard is expected to have no material impact on GroupEBIT.

In 2019, Thales should continue to benefit from positive trends in the majority of its markets, combined with its unique positioning in digital solutions. In this context, order intake  is expected to be around €16 billion.

 

 

 

 

 

 

 

22 Valuing the equity capital of Gemalto at approximately €4.8 billion.



Sales are expected to continue showing solid momentum and achieve organic growth of 3% to 4% compared to 2018, incorporating the normalisation of growth in the Transport segment  after an exceptional performance in 2018.

As announced during the June 2018 Capital Markets Day, the Group will continue to step up its R&D investments, specifically targeting digital technologies. Self-funded R&D expenses are therefore expected to grow slightly faster than sales.

The growth in sales, combined with the impact of the Ambition 10 strategy on competitiveness and differentiation of products and services, should result in Thales delivering an EBIT of between €1,780 million and €1,800 million (based on February 2019 scope and currency), representing an increase of 6% to 7% compared to 2018.

Over the 2018-2021 period, and based on February 2019 scope, Thales has set the following medium-term targets:

 

 

 

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