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Thales 2017 Full-Year results



06 Mar 18. Thales 2017 Full-Year results

. Order intake: €14.9bn, down 9% on an organic basis1

. Sales: €15.8bn, up 7.2% on an organic basis

. EBIT2: €1,543m, up 14% (up 16% on an organic basis)

. All 2017 objectives exceeded

. Adjusted net income, Group share: €982m, up 9%

. Consolidated net income, Group share: €822m, down 13%

. Free operating cash flow: €1,365m, 139% of adjusted net income

. Dividend3 up 9% to €1.75

. Gemalto acquisition project on track

. 2018 objectives: organic sales growth between 4% and 5%4

EBIT between €1,620 and €1,660m

Thales’s Board of Directors (Euronext Paris: HO) met on 5 March 2018 to close the 2017 financial Statements.

Patrice Caine, Chairman & Chief Executive Officer, stated, “2017 was another record-breaking year for Thales. The Group exceeded all its annual financial targets. As expected, order intake remained high. It was comparable to the 2016 level if we remove the exceptional Rafale contract for India that was booked in September 2016. For the second consecutive year, organic sales growth exceeded 5%, driven by a solid performance across all of our businesses. At 9.8% – a level never achieved before by the Group – our operating profitability came in at the upper range of the target set in April 2014. This financial performance was made possible by the dynamism of our commercial actions, the pursuit of our competitiveness improvement plans, the strengthening of our technological leadership, and more generally, by the commitment of our 65,000 employees, all of whom I would like to thank today on behalf of the Board of Directors. At the same time, Thales is continuing to prepare for the future and is stepping up its growth strategy: in 2017, we increased our R&D investments by 9% and further strengthened our expertise in artificial intelligence, with the set up of a new research laboratory in this field, as well as in big data, thanks to the acquisition of Guavus, a pioneer in real-time big data analytics. We are actively preparing the acquisition of Gemalto, which is expected to close in the second half of 2018. This project will cement our position as a leader in the digital transformation of our industries and customers, and enable us to build a global leader in digital security.”

Key figures

New orders in 2017 amounted to €14,920m, down 10% compared to the high level recorded in 2016, which was boosted by the Q3 2016 booking of the 36 Rafale fighter aircraft contract ordered by the Indian government. The Group has therefore exceeded the €14bn order intake target set at the start of 2017. The strong order momentum in Transport and Defence & Security enabled the Group to offset the slowdown of orders in Space. At 31 December 2017, the Group’s order book stood at €31,914m, which represents almost 2 years’ worth of sales.

Sales came in at €15,795m, up 6.1% on a reported basis, and up 7.2% at constant scope and currency (“organic” change). Sales benefitted from both a high rate of growth in emerging markets (organic growth of +10.3%, running at more than 10% for the fourth consecutive year) and a marked upturn in organic growth in mature markets1 (+5.8%, after +3.9% in 2016 and +0.5% in 2015).

In 2017, consolidated EBIT was €1,543m (9.8% of sales) compared to €1,354m (9.1% of sales) in 2016, up 14%. All operating segments contributed to this increase and improved their EBIT margin.

As such, the Group noticeably exceeded all the financial objectives it had set for 2017: an order intake of around €14bn, a mid-single digit organic sales growth, and an EBIT of between €1,480m and

€1,500m, up 9% to 11% on 2016, based on February 2017 scope and exchange rates.

At €982m, adjusted net income, Group share rose 9%. Its increase was held back by one-off items relating to tax reforms in France and the United States.

Consolidated net income, Group share was €822m. It posted a fall of 13%, affected by the sharp fall in capital gains on disposal of assets.

At €1,365m compared to €954m in 2016, free operating cash flow reached a record level, benefiting from the rise in adjusted net income, from a slight reduction in operating investments (€431m compared to €472m in 2016) and from a combination of items that improved the change in

working capital requirement. At 31 December 2017, net cash was €2,971m, up more than €600m compared to 31 December 2016.

As a result, the Board of Directors decided to propose payment of a dividend of € 1.75 per share, a rise of 9% compared to 2016.

The Group exceeded the €14bn order intake target set at the start of 2017. The strong order momentum in Transport and Defence & Security enabled to offset the slowdown of orders in Space.

The consolidated order book remained at a high level: €31.91bn at 31 December 2017, an increase of €7.4bn (30%) since the launch of Ambition 10 (€24.47bn at 31 December 2013).

Thales received 19 large orders with a unit value of over €100m, representing a total amount of


. 1 contract booked in Q1 2017, for the provision of a telecommunications satellite to the Russian

operator Gazprom Space System;

. 7 large orders booked in Q2 2017:

o The supply of in-flight entertainment (IFE) systems to a major carrier

o The construction for Inmarsat of a very high throughput satellite (V-HTS)

o The operation and maintenance of critical security, information and communication systems at the French Ministry of Defence’s new headquarters

o A contract in the framework of the development and construction of five

intermediate-sized frigates (FTIs) for the French Navy

o Thales’s stake in the manufacturing of the first armoured vehicles for the Scorpion programme, for the French Ministry of Defence

o The supply of AREOS reconnaissance pods to a military customer

o The delivery of several systems and sensors to an emerging-market navy

. 3 large orders booked in Q3 2017:

o An additional contract in the framework of the development and construction of the intermediate-sized frigates (FTIs) for the French Navy

o The notification of an additional contract in the framework of the CONTACT tactical digital

communications programme for the French Ministry of Defence

o The sale of an integrated air defence system to an Asian country

. 8 large orders booked in Q4 2017:

o A new tranche of the construction programme for 6 meteorological observation satellites “Meteosat Third Generation”, for ESA and EUMETSAT

o The modernisation of the signalling and telecommunication systems for one of the main railways in Egypt

o The extension of a signalling project for one of the world’s largest undergrounds

o A further contract related to the 36 Rafale fighter aircraft ordered by the Indian government

o An operational support contract for the European air defence systems on behalf of OCCAR, to be delivered through the Eurosam joint venture

o The support of the “Voyager” air-tanker programme for the United Kingdom’s air force

o The second part of the SSOP sensor support contract for the United Kingdom’s Royal Navy

o The first tranche of the aerospace consumables logistics programme for the French armed forces (LORCA programme)

Orders with a unit value of less than €100m grew by 1% compared to 2016.

From a geographical point of view, order intake was logically down in emerging markets (€4,095m, -36%), Asia having benefited in 2016 from the order related to Indian Rafale fighter aircraft and the Middle East, from 2 large orders. Order intake in mature markets recorded growth (€10,824m,

+7%), driven especially by France (+28%) and the United Kingdom (+15%).

At €5,200m compared to €5,872 m in 2016, order intake in the Aerospace segment was down 11%. Avionics, both civil and military, was particularly robust. In-flight entertainment (IFE) maintained a solid commercial performance, in both the fields of traditional multimedia systems and in connectivity. Space order intake was however significantly down, affected by the wait-and-see attitude of telecommunications satellite operators and by a high basis of comparison in the institutional area (observation, exploration, navigation). Order intake in the Transport segment totalled €1,780m, up 18% on 2016, driven by robust growth in both urban and mainline signalling. At €7,883m, order intake in the Defence & Security segment posted a 13% fall which can be

explained by India’s 2016 booking for Rafale fighter aircraft. Excluding this “one-off” item, order intake in this segment was up, benefiting from robust bookings across almost all businesses.

Sales for 2017 stood at €15,795m, compared to €14,885m for 2016, up 6.1% on a reported basis, and up 7.2% at constant scope and exchange rates1 (“organic” change), driven by very good momentum across virtually all segments.

Taking into account a negative exchange rate effect of €145 m and a net positive scope effect of €2m, mainly linked to the consolidation of RUAG’s opto-electronic business as at 1 January 2017 (Aerospace segment), Vormetric as at 16 March 2016 and Guavus as at 12 September 2017 (Defence & Security segment), off-set by the disposal of the identity management business, effective as at 9 May 2017 (Defence & Security segment). The breakdown of these effects by quarter can be found on page 19.

As expected, sales saw a marked acceleration in the fourth quarter2 (+12.5% on reported basis, +14.8% in organic terms), driven by a weak basis of comparison and by phasing effects between Q3 and Q4 2017. From a geographical perspective3, this good performance reflects both continued strong growth in emerging markets, running at more than 10% for the fourth consecutive year (+10.3%), and increased organic growth in mature markets (+5.8%, after +3.9% in 2016 and +0.5% in 2015). Emerging markets accounted for 31% of Group sales, up from 30% in 2016 and 23% in 2013, the year prior to the launch of Ambition 10.

Sales in the Aerospace segment came in at €5,985m, up 3.0% compared to 2016 (up +3.6% at constant scope and currency). The commercial avionics business remained robust, driven in particular by the growth in deliveries of avionic systems to Airbus. In-Flight Entertainment was affected by a high basis of comparison and posted a slight drop in sales as a result. Space sales experienced strong growth, lifted by the ramp-up of contracts signed in 2014 and 2015 in both observation and telecommunications activities. Sales in other segment businesses fell, as the growth in the training and simulation business was insufficient to offset the declining sales of microwave tubes, affected by the slowdown of the global satellite market.

In the Transport segment, sales totalled €1,761m, up 9.9% compared to 2016 (up +11.2% at constant scope and currency). This growth reflected the progress on the major urban signalling projects won in 2015 and 2016 (Doha, Dubai, Hong Kong, London). The strong rise in sales in the fourth quarter is not representative of the trend in this business activity; it reflects a low basis of comparison and phasing effects between quarters.

Sales in the Defence & Security segment were €7,983m, up 8.0% compared to 2016 (up +9.4% at constant scope and currency). Almost all businesses contributed to this momentum. The Land and Air Systems business recorded particularly acute growth in optronics, missile electronics, Air Traffic

Management and protected vehicles, with the ramping-up of the Hawkei vehicle supply contract for the Australian Defence Force. The Defence Mission Systems business posted strong growth for combat aircraft systems, driven by the 3 major Rafale contracts in Egypt, Qatar and India. Despite favourable dynamics in cybersecurity and military network and infrastructure systems, the Secure Information Systems and Communication business posted a more modest growth, especially as several major critical infrastructure protection contracts came to an end.

As expected, sales in the Defence & Security segment recorded strong growth in the fourth quarter (+19.4% based on reported figures, +22.1% on an organic basis), owing to contract phasing effects and a favourable prior-year basis of comparison. In 2017, consolidated EBIT2 was €1,543 m, or 9.8% of sales, compared to €1,354m (9.1% of revenues) for the same period in 2016. EBIT advanced by 14% based on reported figures, and by 16% on an organic basis. Compared to 2013, the year before the launch of Ambition 10, it is up 53% (+50% on an organic basis).

The Aerospace segment posted EBIT of €601 m (10.0% of sales), versus €571m (9.8% of sales) in 2016. The EBIT margin rose in particular in the Space and cockpit avionics businesses, even as the Group implemented a sharp upturn in R&D investments. Profitability remained however under pressure within the microwave and imaging systems activities, affected by the slowdown in the global satellite construction market.

EBIT for the Transport segment continued to grow sharply, at €72m (4.1% of sales), compared to €11m (0.7% of sales) in 2016. This improvement is fully in line with the recovery plan that has been implemented since mid-2015, but low or zero margin contracts continued to weigh down on profitability. Ongoing transformation efforts and the gradual phasing-out of low-margin contracts should help this business regain its past profitability levels by 2018/2019.

EBIT for the Defence & Security segment was €869m (10.9% of sales), compared to €787m (10.7% of sales) in 2016. Just as in 2016, the EBIT margin for this segment improved organically by 0.3 points, driven by sales growth, good cost control and a drop in restructuring costs.

Naval Group’s contribution to EBIT totalled €48m in 2017, compared to €34m in 2016, buoyed by the improved operating profitability in naval defence (which nevertheless included a few one-time items), partially offset by the depreciation of some assets in renewable marine energies.

At €5m in 2017 compared to €6m in 2016, the amount of net financial interest remained low. Other adjusted financial results (expense)1 amounted to a net expense of – €29m, compared to a net expense of – €10m in 2016, primarily due to a less favourable foreign exchange performance.

Adjusted finance costs on pensions and other employee benefits1 remained stable (-€63m, versus -€66m in 2016), with the rise in pension obligations between 1 January 2016 and 1 January 2017 offset by a decline in discount rates.

Financial position at 31 December 2017

At €1,365 m versus €954m in 2016, free operating cash flow1 reached a record level, benefiting from the rise in adjusted net income, from a good control of operating investments (€431m compared to €472m in 2016) and from a combination of items that improved the

change in working capital requirement (€223m versus -€63m in 2016). Some of these items will have a negative effect on changes in working capital requirement in future periods. As a result, the cash conversion rate from adjusted net income into free operating cash flow reached 139%. The net balance of acquisitions and disposals amounted to -€80m. It primarily included the net cash outflow of €91m incurred when finalising the acquisition of Guavus, one of the pioneers in real-time “big data” analytics, and the proceeds from the disposal of the identity management business finalised in May 2017.

At 31 December 2017, net cash totalled €2,971m compared to €2,366m at 31 December 2016, after the distribution of €349m in dividends (€297m in 2016). At €5,326m versus €4,640m at 31 December 2016, equity, Group share was up, driven by the consolidated net income, Group share, a fall in net pension provisions, and a higher valuation of the currency derivatives portfolio.

Proposed dividend

At the Annual General Meeting on 23 May 2018, the Board of Directors will propose the distribution of a dividend of € 1.75 per share, an increase of 9% on 2016. If approved, the ex-dividend date will be 30 May 2018 and the payment date will be 1 June 2018. The dividend will be paid fully in cash and will amount to € 1.30 per share, after deducting the interim dividend of € 0.45 per share paid in December 2017.

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