Thales SA

PAR:HO

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q1 2020 Order Intake and Sales Results. [Operator Instructions] I must advise you that this conference is being recorded today. I'd now like to hand the conference over to Mr. Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.

[Bertrand Delcaire, Head of Investor Relations & VP]

Yes. Hello. Good morning. Welcome, and thank you for joining us for the presentation of Thales' Q1 2020 Order Intake and Sales. I'm Bertrand Delcaire, the Head of Investor Relations at Thales. And I hope you have not been too much affected by the ongoing COVID-19 crisis. With me today are Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales. As usual, this presentation is also webcast live on our website at thalesgroup.com, where the slides and press release are also available for download. A replay of the call will be available later today. Considering the context, we thought, it would be useful to start with an update on the impact of the crisis on the Group, followed by the usual review of our Q1 numbers. With that, I would like to turn over the call to Patrice Caine, who will address the first topic.

[Patrice Caine, Chairman & CEO]

Thank you, Bertrand, and good morning, everyone. First of all, and on behalf of Thales, I hope that you and your loved ones have been keeping safe, since the beginning of the sanitary crisis, we are all going through. So let's start on Slide #3, and let me start this update by stressing that this crisis raises a unique set of challenges, as it does for most companies, at the moment. Of course, when facing a crisis, we first think about its impact on demand, and from that point of view, I would like to remind you that I already mentioned every time I had the chance to talk with investors and analysts, Thales has developed its portfolio to improve its resilience with a diverse product mix, which you can see on the right. At this point, and that should not come as a surprise, we see the biggest demand impact affecting our civil aeronautics businesses and especially Avionics, electrical systems and in-flight entertainment, which represents altogether 11% of pro forma 2019 sales. To a lower extent, we also see some demand impacts in a few DIS niches, such as identity solutions and automotive IoT connectivity modules. So far, the rest of our businesses, which represented around 85% of our sales last year, has only seen delayed contract signatures, affecting sales in future periods.What is unprecedented in this crisis is, that the sanitary measures imposed by governments, translates into multiple challenges, not only in production and project execution, but also in the interactions with customers and suppliers. Moving now to Slide #4. As announced earlier this month, to deal with this crisis, we have decided to implement a global adaptation plan, addressing 3 areas: number one, the adaptation of our operations to ensure the health and safety of our employees; number two, the implementation of immediate cost-saving actions; and number three, the strengthening of our liquidity position should the crisis persist or worsen.I'm now on Slide #5. So the globalization of the crisis, 6 weeks ago, has created huge challenges to our operations. Across the Group, the past weeks have been quite intense for the team, and I must thank them for their remarkable mobilization. No need to go through the list of measures, that have been put in place at our 430 sites, which are started -- standard.In the country, which were under strict lockdown situations, we have naturally decided to, focus first, on maintaining the continuity of critical and strategic services for our customers before gradually resuming other operations.As you very well know, we are an industrial company. While our solutions include a lot of software, the vast majority also involves systems that require physical assembly, test and integration. A good illustration is the picture on the upper right of this slide. AIT, means assembly, integration and test, it's a crucial phase in the design of a satellite, and it involves, as you see on the picture, several people who have to work next to each other in a clean room. Supply chains have also been a big area of attention for us. On this topic, we've been able to leverage the global integrated procurement organization that was put in place in 2018, in order to comprehensively monitor our critical suppliers. It was a real test of our model. And at this point, I'm happy to report that we have not faced major challenges on that front. Most critical suppliers that stopped operations in the past weeks are expected to have resumed deliveries in the coming days. Moving now to Slide #6. So to further help you to understand the situation in terms of productivity, the chart on the right of the slide shows a simplified productivity model for a given site that had to deal with a strict lockdown. Again, to simplify, we have shown here a 3-phase scenario, based on the 3 milestones that you can see on the horizontal axis: the start of a strict lockdown; the implementation of less restrictive sanitary measures; and the end of all measures. Productivity drops significantly when the strict lockdown is implemented, then progressively improves, as the teams learn to operate under respective sanitary conditions. And then it further improves, once measures are partially relaxed, returning to nominal levels only when sanitary measures are over.The hatch area shows the diversity of situation, within Thales, depending on the nature of work. As I was showing on the previous slide, sanitary measures have a high impact on operations in physically constrained environments, such as the assembly of a satellite, or if a team has to go to a customer site during a lockdown period. On the other hand, it is, for example, easier to continue software engineering from home. Automated production processes, such as the production of EMV or SIM cards, are typically less disrupted as well. At this point, while the obvious ambition is to return as close to and as quickly as possible to nominal productivity, levels of productivity in each situation and potential of return involve a lot of guesswork. The biggest unknown remains the scope and the duration of sanitary measures on a country-by-country basis. As a consequence, you must understand that at this point, we are not in a position to articulate potential consolidated productivity levels for a given month or quarter. I am now on Slide 7. Since the overall impact of this crisis will clearly be very significant, we are launching significant cost saving actions, and this is the second level of our adaptation plan. I will not comment the full list, but you can see on the left, which targets both OpEx, including people and other costs and CapEx and working capital. The quantification and consolidation of the potential savings from these actions is ongoing, and it still depends on many variables and scenarios. Importantly, as you can see on the simplified P&L by nature, shown on the right, the percentage of fully variable costs, namely direct procurement on contracts is quite low, 28% of sales. As you know, we are an R&D-driven company and employee cost is, by far, our #1 cost line, representing 40% of sales.Turning now to Slide 8 on the topic of liquidity. This slide recaps the actions we announced earlier in April. As you see on the right, thanks to the additional EUR 2 billion credit facility, we signed earlier this month, we have a pro forma liquidity of EUR 6.4 billion, providing ample room in the event that this crisis persists or worsens. Like many companies across Europe, in a spirit of responsibility vis-à-vis all Group stakeholders, the Board of Directors decided to withdraw the final dividend proposal, which will avoid a cash outflow of around EUR 430 million. After this overall review of the impact of the crisis and the measures we have taken, I now hand over to Pascal, who will comment our Q1 order intake and sales.

[Pascal Bouchiat]

Thank you, Patrice, and good morning, everyone. So now looking at Q1 headline numbers for order intake and sales, I'm now on Slide 10. Both KPIs were in line with expectations, prior to the first impact of the COVID-19 crisis. New orders amounted to EUR 2.66 billion, up 17% on a reported basis, thanks to the consolidation of Gemalto, and down 15% on an organic basis, with the crisis explaining about half of this decline. Sales came to EUR 3.9 billion, down 4.7% on an organic basis, but up around 2% excluding the estimated crisis impacts, with different trends in our 4 operating segments, which I will explain in the next few minutes.Looking now into details at our order intake, I'm now on Slide 11. As you can see, the reported growth is plus 17%, including a EUR 731 million scope impact, basically corresponding to the consolidation of Gemalto and a negligible currency impact. The organic decline was primarily driven by the lower number of orders, above EUR 100 million. Only one was booked during Q1 2020 compared to 3 in Q1 2019. The contract we booked in Q1, covers the supply of an air surveillance system to a Middle East customer and was not officially disclosed. Orders below EUR 10 million remained strong, with an organic growth of 4%, excluding Gemalto. The impact of the COVID-19 crisis is estimated at around EUR 190 million, with the biggest part in civil aeronautics, but also delayed orders across the other businesses.Turning now to Slide 12, looking at sales growth. Here as well, the biggest impact is naturally the consolidation of Gemalto, driving the scope impact of almost EUR 700 million. Adjusting for the scope impact, organic growth amounted to minus 4.7%. The impact of the COVID-19 crisis is estimated at EUR 200 million, of which EUR 60 million is in civil aeronautics. Since this amount includes a scope effect, the chart on the right shows pro forma computations, which isolates the underlying growth trends before the impact of the crisis of around plus 2%. Turning to the geographical perspective, let me just point out that the decline in emerging market sales was driven by the end of some projects, like in Transport, and the fact that the crisis affected Asia, first.Now looking briefly at each segment, one by one, I'm now on Slide 13 for Aerospace. First, as explained earlier by Patrice, it is not surprising for Aerospace to be our most impacted segment with the civil aeronautics business flights, Avionics and IFE directly impacted by the drop of both airline activity and the first production adjustments by OEMs. However, orders were actually up by 16% at EUR 778 million against EUR 672 million in Q1 2019, thanks to a dynamic start of the year for the Avionics business from January to mid-March. Space orders remain stable at a low level, but Q1 is traditionally a soft quarter for this business, anyway. Sales were down by 11.9% versus Q1 2019, with an estimated EUR 60 million drop in civil aeronautics revenues caused by the COVID-19 crisis. Other businesses in the segment including Space also started to be negatively impacted by the loss of productivity, across Europe. Now moving on to Slide 14 with our Transport business. Order intake was down from EUR 249 million to EUR 156 million, mostly due to the delays in finalizing contracts. These delays were not significantly related to the COVID-19 crisis and there is no indicator at this stage, pointing to a future material decrease of demand for wave signaling. Sales were down 13% from EUR 398 million to EUR 347 million, mainly because of the phasing down of the 4 major projects, we mentioned previously. Excluding these 4 major projects, sales were slightly up, with a limited COVID-19 impact in the quarter. Turning now to Slide 15, looking at the Defence & Security segment. Lower order intake, down 26% versus Q1 2019, was due to the natural volatility of large contracting natures. 3 were signed in Q1 2019 versus only 1 in Q1 2020. The current situation has obviously created even more volatility, with further delays in decision-making and contracting signatures.Organic sales growth remained positive at plus 2.4%, despite high comps in Q1 2019 and the first impact of COVID-19 disruptions across European production sites in March. The underlying growth, excluding COVID-19 remains strong, continuing on the very good 2019 trends. Turning to Slide 16, looking at our last segment, Digital Identity & Security. As you remember, Gemalto was consolidated from April 1, 2019, hence, changes are not meaningful. As mentioned previously, order intake and DIS is structurally aligned with sales for most businesses, as they operate on short cycles. The difference between order intake and sales in Q1 2020 was due to 2 more significant contracts that we booked in the biometrics business. At EUR 727 million, sales were up by 5% on a pro forma basis, with the continuous growth trends in EMV payment cards, especially in North America, and a modest decline in our renewable SIM cards business.COVID-19 disruptions were concentrated in the businesses, that Patrice mentioned earlier. Biometrics, with less demand for passports and border control systems, and IoT connectivity modules, which also faced some supply chain challenges in China. Let me now turn over the call to Patrice, who will give some perspectives.

[Patrice Caine, Chairman & CEO]

Thank you, Pascal. So let me conclude this short presentation with 2 outlook slides and starting first, with Slide 18.As you understood, it is possible -- it is impossible at this point to quantify the financial impact of this crisis. The mobilization of the Thales teams has been remarkable, and we have launched the necessary actions to address both cost savings and balance sheet risks. So far, the demand impact is limited to 15% of the portfolio. However, the macro environment remains very uncertain at all level. GDP growth, for instance, country budgets and potential stimulus packages, oil prices and so on. As importantly, we have no visibility on the scope and duration of sanitary measures, which is, as I stressed earlier, a key factor to assess the recovery of productivity in the coming months. Altogether, we are preparing for a very difficult Q2 and H1. Now let me finish this presentation with a longer-term perspective, and I'm now on Slide 19. Six months ago when we held our CMD, Capital Market Day, on the Gemalto acquisition, I stressed, how I saw that resilience, was a key to value creation in a more uncertain world. We are clearly not immune to a crisis like the one we are now facing. However, as we project ourselves after this crisis, we will be able to capitalize on several structural assets. Our diverse and robust customer base, balanced among 5 different markets, will facilitate the necessary adjustments. Secondly, the higher demand for the key capabilities addressed by our products and solutions: security; safety; product resilience, what you may call more broadly trust-enabling solutions. Third, our leadership in critical technologies, strengthened through the acquisition of Gemalto. Fourth, the culture of operational performance we have developed across the group over the past years. And finally, fifth, the strength of our balance sheet. So this concludes our presentation. Many thanks for your attention. And together with Pascal, we are now pleased to take your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Olivier Brochet from Crédit Suisse.

[Olivier Brochet, Research Analyst]

Yes, gentlemen, and I hope you're well and safe. I would ask a couple of them. First of all, when I look at the last activity that you have in Q1 and kind of expecting in Q2, how much do you think, can be caught up in the future? I.e., how much is actually lost and not recoverable? I understand for the part that is demand-driven, but for the part that is affected by production disruption, that would be helpful to see what you think of the future. Second question would be on the cash position at the end of March. I would expect a material decline versus the year-end. Would you be able to provide some sense of where it is, I don't know, versus historical versus H1. Some sort of help on that front, please.

[Pascal Bouchiat]

Okay. So overall, on Q1, of course, it's always a bit difficult. I need to assess how much is true loss and how much is delayed at this point. And probably it's going to be probably -- I mean, part of what we are going to share with you this morning, the fact that we're extremely cautious in probably any statements that we make this morning because of these unique situations that we're experiencing. So please do consider that, of course, we'll try to answer as much as possible, but having in mind that we are going through a unique set of events. So yes, of course, I mean, part of that is a loss, but I would tend to believe that out of the EUR 200 million that we mentioned, this impact, probably 1/3 is probably a loss, and 2/3 is more, I mean, a delay. And when I talk about a delay, it's more the fact that -- I mean, this has been -- I mean, the outcome of the first production difficulties that we faced in the second half of March. And this represents pretty much 2/3 or 70% of this EUR 200 million impact with sales that will be postponed. But of course, provided, of course, that we can then catch up. And of course, it won't be the case in Q2. As I guess you've understood, Q2 will be really, I mean, impacted by those production difficulties. I guess we'll have opportunities to come back on this point, later on in the discussion. So yes, I mean, probably a good rule of thumb to consider that, 1/3 is probably loss, 2/3 is delay, but being very cautious about our ability to catch up in the second part of 2020. Your question about cash flow, as you know, I mean, our profile of cash flow at Thales is quite seasonal. And putting aside, I mean, the COVID-19 crisis, our traditional historical profile of cash flow is pretty much different between H1. In general, we tend to consume cash flow in H1 and we generate a large amount of cash flow in the second half of the year. So what we see, end of March, is a pattern which is pretty much similar to what we have seen in Q1 of 2019 and 2018, with, I would say, until the end of March, not that much an impact of the COVID-19 crisis. Now it's true that we are expecting, I mean, a significant impact in terms of cash flow to start kicking in as from Q2.

[Operator]

The next question is from the line of George Zhao from Bernstein.

[George Zhao, Research Analyst]

So Within the civil aeronautics business, how much of the business do you think is more related to maintenance activities that's more correlated to flight hours versus upgrades, where the airlines may have some discretion around the timing of this spend?And then could you share -- the revenue declined, right, for this business kind of exiting the quarter and heading into Q2?

[Pascal Bouchiat]

So I guess -- I mean, your comment or your question was in particular related to civil aeronautics business, which, of course, is a business that is going to suffer, I mean, the most. So we mentioned that, I mean, this business, overall, represent between EUR 2.1 billion and EUR 2.2 billion of annual sales, out of which EUR 750 million are aftermarket. When I say between EUR 2.1 billion, EUR 2.2 billion, this includes both the traditional Avionics business, I mean, in particular what we call the cockpit Avionics business, which for the civil part represent between EUR 1.3 billion and EUR 1.4 billion. Out of which, we believe that aftermarket represents EUR 500 million. So quite a significant chunk. The rest of our civil aeronautics business, which represents approximately EUR 800 million, either IFE, in-flight entertainment business, out of which, we believe that aftermarket represents something around EUR 250 million. So you see that, overall, I mean, this is what Patrice mentioned, overall, representing 11% of our sales, out of which aftermarket, EUR 715 million, representing in total 4% of the overall Thales level of revenue. And of course, we are expecting quite a big hit on the aftermarket, probably starting from Q2. And also, of course, a hit in the more OEM part of this business, by the way, driven by probably an Airbus delivery.

[Operator]

The next question is from the line of Celine Fornaro from UBS.

[Celine Fornaro, Head of EMEA Industrials Research]

I hope everyone is well and your families, too. I just had -- my first question would be on looking at the order books, we do have a significant decline, as you pointed on some of the end markets and some of the businesses, how much do you think, we should read into that? Because when then we look at the destinations, the French order intake seems pretty solid, and mature markets, mostly hit by U.K. drops or other European countries, and emerging markets hasn't dropped yet. So how much should we read into that for the rest of the year?And how do you think Q2 potentially on orders could look like? And my second question would be, if Patrice, you could maybe articulate, given that Thales has got so many end markets or at least 4, what would be your view in terms of recovery shapes, V, L, U, these type of letters in the different big 4 end markets.

[Patrice Caine, Chairman & CEO]

Celine, I hope you are well and in good health, too. So on your question on end markets, what can I say? First, of course, I think, we have already commented the civil aeronautics market. So I don't think it's useful to come back on that. And by the way, we more or less follow, I would say, the trend that has been described as much as possible by large OEMs up to now. Looking at other vertical markets. Typically, defense, aerospace, cybersecurity, even ground transportation. So far all these markets have not shown, I would say, something which would be, I would say, visible from the outside, meaning that these customers are many governmental customers or governmental-related customers. So they are robust customers, if I may say, sound customers. They pay on time, even in advance, in some cases, to help companies, even in large groups like Thales. And all their projects are multiyear, long-term projects, meaning that they have not been affected apart from the production part that we have tried to explain, previously, during the presentation. But seen from the customer, they have not changed their mind or they have not changed their position on these large projects. Now the big question is per geographies, what would be the future? What would be the financial resources of these big customers in Europe, France, Germany, U.K. or in the Middle East?Middle East, honestly, it's difficult to say because on one hand, you could say, "Well, there will be stimulus packages in these countries, okay?" Will they benefit to our vertical markets or not, and you can hear, I would say, either positive messages or no messages at all in some countries, even at European level, typically. And if you take the Middle East or oil price-dependent countries, it's a big question mark. If you remember 4 or 5 years ago now, when the oil price drop was around 100 million -- EUR 100 per barrel, it dropped or it was divided by 2 at that time. The big question was, "Will it affect the demand, the budgets in these countries?" And in fact, it didn't affect any budgets. Now the drop is, again, I would say, quite -- almost divided by 2, from 50 to 25, if I'm a bit simplistic. Will it affect the budget, the different budgets, if you take this one from these countries? Honestly, it's too soon to say. It's too soon to say. So it's quite a mixed answer. On one hand, these customers are stable, robust, sound, and we are, I would say, committed on long-term projects. Now on the other hand, there are, I would say, macroeconomic factors that may affect or not, that may affect their budget and their ability to pass additional orders in the future.

[Operator]

The next question is from the line of Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

I was wondering, if we could come back on civil aeronautics and you could give us some information or some color about the growth rates that you've seen IFE, aftermarket and in the line-fit business through the month of April? And then secondly, obviously, you've given a lot of info in the beginning of the presentation, in terms of lower productivity, the impact of sanitary measures. So when we're thinking about how the lower revenues are going to impact EBIT this year, should we be looking at the 40% of sales that are employees, the 4% to 5% of sales that are depreciation, amortization and be assuming that, that is the level of negative drop-through, that we should see on -- from the lower revenues? And then on the EUR 50 million of cost incurred related to the sanitary measures, should we assume that, that is on top of the drag of lower revenues? Or is that included? So basically, is that one-off in nature?

[Patrice Caine, Chairman & CEO]

On civil aeronautics, I think, we have already commented a lot the market. I don't know what else can we say, it's pretty, I would say, unstable. If you listen to Airbus, typically, communication and Boeing communication. Well, they give you and they give us, I would say, a pretty short-term visibility in terms of production outflow. So it's difficult to say more. And for sure, IFE, which is much airline-related, it's an airline-related business, will be affected as well by this aeronautical crisis. So difficult to say more that the impact will be significant, will be very significant, for sure, on the short run. Now I'm not sure, I can say more on this one.

[Pascal Bouchiat]

Okay. Ben, maybe on your second question. I mean, first, on the EUR 50 million that we reported in -- I mean, first of this impact in terms of additional costs, regarding the COVID, please bear in mind that, I mean, here, we are talking about, I mean, specific additional costs that are needed in particular, for example, to source all kinds of products, equipments like masks, I mean, any products that are necessary to put in place sanitary measures. Plus also, I mean, some specific IT upgrade, in order to favor, I mean, home office. So of course, I mean, those EUR 50 million, of course, I mean, comes on top of -- I mean, the cost that we have presented in this simplified P&L on Page 7. So now on the core of your questions and probably, this gives me the opportunity to come back on this simplified P&L on Page 7. So basically, I mean, when we go through, I mean, those various lines and probably one key point for all of you guys is to assess which of those costs are fixed and which of those costs are variable and to which extent. So of course, I mean, if we take direct procurements of costs and contracts, this first line, representing in 2019, 28% of our cost, it is, of course, I mean, a variable cost and quite simple assessment. Then there is -- I mean, this Thales employee costs, which, as we mentioned, 40% of the level of revenue. I mean, we believe -- and of course, we are fully mobilized to adjust this level, through, in particular, I mean, furlough measures that we are putting in place, of course, I mean, through higher increase, in particular, relating to our support functions. And of course, because there will be, of course, I mean, adjustments on the overall variable compensations for white collars. All in all, and just to give you, say, overall rule of thumb, we believe that we can adjust this line by probably something around 5%, in 2020, in order to adjust for our overall level of revenue. That will be below, of course, what we had in mind, when we enter 2020. And the, I mean, the next line is other costs, EUR 3.1 billion. And here, of course, I mean, this is a mixed bag between costs that are pretty much fixed and also costs on which, of course -- when I say fixed in the short term and of course, I mean, also, I mean, part of those costs on which we are playing and we are acting a lot in order to reduce them. So to give you a, how should I say, a high-level assessment, I tend to believe that -- I mean, the fixed part of this line should represent probably something like 1/3 of this EUR 3.1 billion. And behind that, it's things like rental costs, things like insurance, some tax that are fixed. So I mean, a bunch of different items on which, on the short term, it's very difficult to add. And the rest which represents probably slightly below 2/3. Of course, I mean, we're working a lot on them. And our ambition but it's, at this point, I mean, an ambition, representing probably 2/3 of those costs where, I mean, we are going to start to adjust them, probably, in line with the reduction of our level of revenues. This is our ambition, to adjust, I mean, this -- those costs in line with the drop in the expected level of revenue. So basically, I mean, this is what I can share with you in order for you to have a better view on how we are going to manage our cost bases in 2020.

[Operator]

The next question is from the line of Andrew Humphrey from Morgan Stanley.

[Andrew Edward Humphrey, Vice President]

Everyone, I hope you're all keeping well. Just a couple from me. Firstly, on orders. Can you talk through some of the dynamics there, about particularly on Space and Transports. On Space, you've seen a stabilization of the orders. Is that a function of lower comps? Or could we be moving through the trough on order momentum there? And on Transport, you've talked about delays in finalizing some contracts. I suspect, that comes as no great surprise, given where we are with COVID at the moment. But your discussions with customers, if you could characterize those and say whether those are orders that could come back relatively quickly or whether you think those projects have been delayed for a longer period of time? And then finally, just on geographical split. I think, your sales in France, up 10% in the quarter, clearly a very strong performance. Was there anything specific you'd call out there? Was that largely defense-related? Any more details you could give around that would be great.

[Patrice Caine, Chairman & CEO]

Okay, Andrew. I will start and Pascal will complement, if I've forgotten anything. If I start with the Space, and I will tackle Transport. Space, I would say, globally speaking, so far, I've not seen, I would say, any change in the behavior, in the discussions, that we have with our customers, be it institutional, like space agencies in Europe or ESA at European level, or I would say other customers, defense or civil ones. By the way, it may sound even paradoxical, but the bid activity is very active. We have a lot of ongoing bids with many customers all over the world, by the way. I cannot say that there is a particular area of the world which is more, I would say, active than another one. Now in this lumpy business, it's always difficult to say which orders will materialize in 2020 or will drift a little bit in 2021. And again, I'm saying, so far. Remember that in Space, when you have to renew capacity, the time it takes between the order which is passed and the satellite which is in service, it's several years. So these players have to clearly, I would say, plan far in advance the renewal of the capability and the ones that are considering to buy a satellite, in fact, they look at the market 3 or 4 years down the road. So clearly, hopefully, after this sanitary crisis. And secondly, institutional customers clearly have probably a different, I would say, software, when they analyze or when they plan their budget, meaning that they're probably, if not dependent, but probably far less dependent on the crisis than other customers.On Transport, even if Transport is a totally different market compared to Space, again, so far, we have not seen major changes in the discussions we have with many customers around the world. For sure, there, we can expect, I would say, some delay. When I say some delay, I mean, discussion that would take probably a bit longer than expected, for sure. Now the -- what I call the underlying trends, the fact that large cities like New York, like London, like Singapore, like Paris, I take our major customers. Large deals are still a huge need for dealing with this massive urbanization and the need for green and collective means of transport. That's why looking, I would say, a bit further away, not just at Q2 or Q3 2020, there is no, I would say, profound reasons that this market will change drastically. So it's -- if I may be a bit caricatural, nothing to do, to my opinion, with the civil aeronautics sector. Nothing to do with this one. There is even some, I would say, thoughts, ongoing thoughts that it may accelerate the pace at which metros will be more and more automatized, to be more resilient, to be less human-dependent, if I may say. And some big players, some big customers, clearly, and this age to accelerate the pace at which they switch from, I would say, non-automatic metros to a fully automatic metros. So I hope it gives you some, I would say, some hints of the evolution of our market. But clearly, what I'm seeing is not for Q2 or Q3, it's more something which is true for months and years, ahead of us. On France, Pascal, do we have a split? Clearly, the French defense customer is a big, big, big customer for France by definition.

[Pascal Bouchiat]

So, I mean, overall, I mean, France as a country by destinations, you probably have in mind that last year, I mean, our order intake, relating to France by country of destinations was a bit above EUR 5 billion. And let's consider that something like 2/3 relate to the French function efficiency, something like that. So here, I mean, of course, at this point, we don't see in the short term any change in terms of pattern. But of course, I mean, we need to be vigilant about, I mean, potential adjustment in the 5 years program law in France is what we call the IPM. At this point, I mean, we don't have any input, showing that it will be revisited downwards. And we have that pretty positive input from the French embassy. Now in the mid long term, of course, we need to be quite vigilant on this front. The rest of the business in France is, in particular, relating to aeronautics, but also Space. Aeronautics, in particular, cannot directed to Airbus, of course. And here, I may need to comment. So overall in France, I mean, if we put aside, I mean, the civil aeronautics, overall, I mean the tone is, at this point, still pretty positive.

[Operator]

The next question is from the line of Zafar Khan from Societe Generale.

[Zafar Khan, Equity Analyst]

I hope everyone on the call is safe and well. Just a 2-part question, please. Just following on from Ben's question on the drop through, and thank you very much for Slide 7, that's extremely helpful. Would I be correct in thinking, based on the 2019 cost base, that you have in assuming no change there, for each euro of sales that you would lose, would that mean around about EUR 0.50 of EBIT loss? That's the first question. And then just following on from that, what you're saying on the Slide 7 is reduction of R&D and CapEx. Can you give us some idea of what you're thinking in both of these areas. Because I imagine, as you said, the only real hit is going to be in the civil aeronautics business. So where would you be reducing CapEx? What kind of R&D? How much of that is blue sky that you could defer? And the employees, the reductions there, is there going to be some structural change in those numbers? Or is it just a furlough and a lot of these people will come back again, when things pick up?

[Pascal Bouchiat]

Okay. Zafar. So on your first questions, and thanks for your -- thanks about the Page 7, which was designed to help you design your own model. Now I don't want to make additional comments in terms of bottom line impact. You mentioned, I mean, the figures that I don't want to confirm, I guess, that in Page 7, was designed to help you, build your own model with, I guess, some key information. And this mix between what is fixed, what is a pure variable and on which type of cost can we work in order to adjust them in the short terms, against, I mean these drop in revenue. It's true that we have not discussed CapEx so far. Capex, I mean, if you take overall what we have in mind, as we enter 2020 and before the COVID-19 crisis, when I talk about Capex, we probably need to discuss together, both CapEx and also I mean, potential new releases, which under IFRS 16 are now reported, not in capital expenditure, but more in the cash flow generations, but as additional debt. So basically, we probably need to discuss about the addition of those 2 elements, which as we enter 2020, overall, our view was to have something like EUR 750 million, in terms of CapEx plus additional leases and probably a mix between -- a split between the 2 by something like EUR 550 million of CapEx and EUR 200 million of leases. So at this point, probably a bit too early. And of course, I mean, we'll adjust the level of CapEx also in line with expectations in terms of the drop of revenues. But probably, at this point, a good rule of thumb would be to consider that we'll strive to adjust our level of CapEx, and this is probably in line with, I mean, the drop in revenue. It's probably a good rule of thumb. But I mean, it's a preliminary indication for you. It's really, I mean, a topic that we still need to dig ourselves in the next weeks to come. So probably adjusting CapEx plus leases in line with the expected drop in level of revenue.

[Patrice Caine, Chairman & CEO]

If I pursue on R&D, Zafar, it's a very good question because R&D is clearly at the core of what we do. By the way, preserving our talents, what I call our talent, is key for the future. And we need to strike a good balance or fair balance between short-term contingency measures, of course, to minimize the impact of this crisis and our 2020 P&L [ for 4 ]. And the balance between as well, a long-term ability to continue once the crisis is over and it will end in the future, somewhere in the future, to outperform the market and our competitors. So you see that what we are trying to do. Secondly, R&D per se, in the P&L, in terms of line, or the P&L will be certainly reduced in 2020, but it would be reduced in a smart way. When I say smart way, I mean avoiding to, again, lose talent that would prevent us to rebound after the crisis. And typically, to give you some ideas of what we have started to do, by the way, is first to redeploy some of the engineering teams, which are affected by what I call the demand crisis, the drop of the demand, to redeploy these engineering teams on what I call customer-funded programs. So to maximize our ability to bill our customers, this is, I would say, quite straightforward and our ability to bill our customers is a good way to minimize the impact on our sales in 2020.Another example, which I can share with you is, again, quite straightforward, is to redeploy some of these engineering teams, affected by a demand drop on some sectors of Thales, which are not affected by any kind of demand drop so far [ and to pay ] defense. So redeploying engineering teams, for instance, from Avionics, where we have a lot of system and software engineers, as top talents to serve or to be on defense projects. This is doable, and this is what we have started to do, again not to lose any talent and not to, I would say, prevent us to rebound in the future. But per se, the R&D line will decrease in 2020 but, you see, in a smart way.

[Operator]

The next question is from the line of Christophe Menard from Kepler Cheuvreux.

[Christophe Menard, Head of Aerospace and Defense Sector]

I had 2 questions. The first one is on the cash flow for fiscal-year 2020. You spoke about the operational performance. You just spoke about the CapEx. Could you also tell us, if possible, if you expect some impact at the inventory level. Also, I would say the EUR 400 million cash unwinding, is it still valid as an assumption? Or could it be delayed in time? So that's -- I mean, to the extent of what you can answer on this. And the second question is on the monitoring of critical suppliers. The question is, have you spotted any of your suppliers that are already in some sort of a distress? Or are you more at peace, I would say, with the health of your suppliers? Is there any plan that you should put in place to support them? And also any impact on free cash flow during the year?

[Pascal Bouchiat]

Christophe, so on cash flow first. I mean, first, anything we share with you about those reversal of down payments and also the unwinding of positive effects, that we benefited, end of 2019, all of that is still valid. All of that is absolutely valid. Now you raised quite an important topic, which is the other elements of the working capital. And please do consider that at this point, it's really too soon. And so at this point, of course, let's be cautious. But let's consider that the way the overall supply chain will have to adjust to reflect a drop in level of demand in, particularly, civil aeronautics business, I mean, this is adjustment. I mean, we are working on all of that, at this point. And really, I mean, too early to mention, whether or not we'll have to bear with an additional level of inventories end of 2020 as compared to end of 2019. At this point, it's really too early. Critical suppliers?

[Patrice Caine, Chairman & CEO]

Well, we can with some critical suppliers. First, as I said earlier during the call, we have put in place or we leverage our global procurement organization to monitor the situation because, first, it starts with monitoring our critical suppliers to know whether they have or they will have difficulties or not in the future. So far, we have not detected any critical suppliers, I would say, having major, major difficulties. I'm not saying that it will not happen. But so far, it's okay, if I may say. Now we'll continue to do so. And by the way, not on our own, we share that at [ the fast ] level, the [ handicap protection and -- of the Aerospace and Defence industry, where Airbus, Air France, Thales and some others, we have, I would say, dedicated some seasoned professional to help all of us to monitor the situation. The first set of actions, if something weird occurred will be to help these suppliers to get access to public funding to the measures that have been decided by all the governments in countries, where the suppliers are. And of course, we are not a bank. We do not intend to do -- to buy or to acquire our suppliers. But by doing so, by, I would say, being able to detect early, early difficulties of the suppliers. Normally, we should maximize our chance, and again, not only Thales, but the whole industry, to minimize the number of difficult cases that will probably happen in the future. But so far, it has not yet -- we have not yet encountered such, I would say, difficult cases.

[Pascal Bouchiat]

Maybe, Christophe, to extend a bit on the other elements of the working capital, maybe a point of attention on the receivables. I mean, what is quite positive for Thales, as a company is that, most of our clients, most of our customers are quite strong customers, even state or institutional bodies, are quite strong customers like Airbus. Now it's also true that we also have some exposure to some companies, that are going through a very period of time. And in particular, see, I'm talking about airlines. What we also need to have in mind regarding this type of customer is that received request to extend payment terms. So we also need to be quite vigilant, at this point. Of course, I mean, from a cash flow standpoint, but also from a risk management standpoint. This is also an additional matter that we need to monitor in the next coming months.

[Operator]

The next question is from the line of Harry Breach from MainFirst.

[Harry William Freeman Breach, Research Analyst]

I'm glad to hear everyone's well and wish everyone at Thales, that has been affected, a swift recovery. Can I just touch on just 3 hopefully simple topics? Just firstly, Patrice, I think, you mentioned sort of across the 430 sites of Thales, are all the sites currently up and running? Second question, just looking at the mix of employees across the Group, could you give us some idea of how many of these are on permanent contracts compared to temporary or contract workers or others? And then thirdly, just thinking about Naval Group. Can you help us to understand how Naval Group is adapting to the situation and what they're expecting in terms of impact on their operations and on their profitability?

[Pascal Bouchiat]

Okay. So I suggest to start with your second question. So mix of employees. I mean, at Thales, I mean, most of our employees of Thales, salaries on a permanent basis. This represents the vast majority of our employees. And these are, of course, only -- a temporary workers. But overall, I mean, their share is quite -- not unsignificant, but quite modest as compared to the overall Thales employee costs. I mean, probably a good rule of thumb would be to consider that, basically, out of the EUR 7.4 billion of Thales employees. On top of that, you probably need to add up a few hundreds of million euros of costs coming from temporary workers. Now and maybe this gives me an opportunity to discuss a bit more on the furlough measures, because also a way for us to adjust overall Thales employee costs is to put in place, furlough measures, which we have started for a few days now after, I mean, putting in place, I would say, advance paid leaves vacations. We have put in place a furlough measures in various countries, but in particular in France, where, as you know, I mean, we have almost half of the overall employees at Thales. So just to give you a few figures, we will have in the next few months, approximately, 20,000 employees in France that will be under furlough measures. Those 20,000 employees represents, approximately, half of the overall number of employees that we have in France. So we understand that half of them will be furloughed, with overall -- I mean, 40% of furlough time for those employees. So you see that it is quite significant. I mean, this relates, in particular, to blue, but also some white colors, putting aside and in senior officers that are not eligible to this type of measures in France. So you see that we are working quite hard in order to adjust as much as we can, I mean, the level of measures in order to reduce our overall salary costs.Your question about Naval Group. Naval Group, it is also facing, of course, I mean, production difficulties, as what we described on page -- was it on Page 6? On Page 6, with this beautiful drawing, showing, I mean, the current situation, how we are expecting this to progressively recover. So basically, Naval Group is facing the same type of difficulties with, of course, having to put in place the same exact type of sanitary measures, self-distancing, working 2 shifts, all these type of things. So in particular, in Q2, Naval Group will be quite strongly impacted by those sanitary measures. So I'm expecting quite a significant drop in the contributions of Naval Group to the Thales level of EBIT, in particular, in Q2 with, of course, I mean, many uncertainties on how H2 will evolve. Your...

[Harry William Freeman Breach, Research Analyst]

Sorry, Pascal, just to come back just for a second on the furlough point you made. You -- I think, you gave us a number of 40%. Can you clarify, I didn't quite hear what you said the 40% number related to.

[Pascal Bouchiat]

I mean, as I mentioned, so half of our staff, half of our headcount will be furloughed in the next coming months, in particular, in May and June. And what I mentioned, the overall, I would say half periods for those employees concerned by those furlough measures, the average furlough off time will represent 40% of their expected working time.

[Patrice Caine, Chairman & CEO]

This means, 20,000 people who will work at 60%.

[Pascal Bouchiat]

Yes, probably a good way to put it.

[Patrice Caine, Chairman & CEO]

A few comments on site?

[Pascal Bouchiat]

Yes. Yes. Yes.

[Patrice Caine, Chairman & CEO]

I'll start on this one. You're right to say, Harry, we have a lot of sites across the world, but it's also normal for a global company, yes. so more than 400 sites all around the world, of different sizes, of course, by the way. I should say -- I would say that most of them, if not the vast majority of them, are clearly open. But the question is not are they open or not, it is the level of efficiency or the level of productivity of the sites. And that's what we try to explain with our onwards on the different slide, showing the impact of sanitary measures on a given, I would say, site in a given county. So again, to answer your question, it's not very easy because we face a very diverse set of situations, which is normal, by the way, because the situation depends, mainly, on the decisions taken country-by-country or government-by-government. So in some countries where, I would say, a very strict lockdown has been decided for several weeks, if not several months. Of course, the impact on the productivity on such sites is very significant, despite the fact that the site is open with, I would say, people working on site. And in some countries, I would say, the productivity, the efficiency has been far less impacted because the sanitary situation is better or less worse, I would say and so on and so forth. So if I just take some examples to illustrate the variety of situations that we encounter, and by the way, I don't think, it is specific to Thales, it's specific to countries, in which we are present. Australia, for instance, Australia, I would say, things are running, I would say, almost normally. I would say, it's okay. The impact is not -- is probably less important that the one we see in Europe. China has recovered. For instance, our Chinese operations are working. Singapore, Singapore was okay, but Singapore has decided to go back to lockdown. So by the way, our activities are exempted from lockdown, anyhow. It clearly disturbed the activity of our different sites in Singapore. You take Europe, again even within Europe, you have, I would say, various situations. Spain, Italy, France, with a very strict lockdown, I would say, situation. And some countries like Germany or the Netherlands, which have been less impacted than France, Spain and Italy. So I will not continue to give you, I would say, some other examples, but just to illustrate that it's difficult to give you one single answer because it really depends on the countries in which we are present and depends on the measures decided by the government in terms of sanitary protection that have been imposed on us as on any, by the way, companies in a given country.

[Operator]

The last question is from the line of Tristan Sanson from Exane.

[Tristan Sanson]

Just 3 quick ones. The first one is going to be on the cash savings, that you're targeting for this year. From all the indication that you provided, I understand that, you -- maybe you should be able to hit something like 3% of sales in cash savings. Is it roughly the right order of magnitude? Or is it way of what you're trying to get? Second question, does it have any impact on your ability to reach the target synergies for digital synergy -- sorry, for digital security? Or is there any risk of deferral in the process? Then can you tell us whether you have force majeure clauses that are integrated in all your contracts and that can protect you from paying material penalties in the current environment? And finally, if you can tell us very quickly, if you could see the current situation as an opportunity in any way for transformation, for the deployment of workforce, for acquisition, anything would be useful.

[Pascal Bouchiat]

As time is running out, I'll be quite quick. So on your first point, I want to comment more. So of course, I mean, we have also understood that, I mean, the level of savings will also depend on the level of our shortfall in terms of level of revenue, which at this point in time, is really a bit premature to comment.Synergies on Gemalto, I mean, at this point, I mean, no reason to change, I mean, what we shared with you in terms of synergies, both from cost synergies, but also from revenue synergies. Third question about force majeure, yes, in most of our contracts, we have a force majeure. And of course, we preserve that one, which means that we inform our clients for this very unique situation in order for Thales to ensure the right level of protection. And maybe for Patrice, the last question about the transformation.

[Patrice Caine, Chairman & CEO]

The opportunity or transformation. Of course, you know this question, crisis is always an opportunity for, I would say, good quality company to rebound even further after the crisis, be it on, I would say, an internal standpoint, how will, I would say, draw lessons from these crisis to increase even further our agility and our efficiency. And I think that, we have seen, I would say, very good things that may help us to be even more agile, more efficient. We have experienced at large, working from home, typically. And we have seen, I would say, interesting things. We have experienced new production organization in some of our sites, that I would say, should give us, I would say, additional opportunities in terms of production efficiency in the future. But it's also true, on an external standpoint, you have mentioned M&A. Typically, this crisis -- after this crisis, there will be winners and losers. Looking at the strength of the Group and the quality, if I may say, of the management team, I'm pretty sure that we will be, I would say, in a good position after we will be impacted on one hand, but will be in a much better position than many other companies, thanks to our resilience. I've always insisted on our resilience, because of our -- we are in different set of vertical markets, robust customers, the fact that we master world-leading technical portfolio, all these strengths, that I've repeated on and on are clearly, I would say, tangible things that will allow Thales to be extremely well positioned after the crisis to be part of the winners. And clearly, there would be opportunities that the Group will seize in the future.

[Bertrand Delcaire, Head of Investor Relations & VP]

Well, thank you for all these questions. I think, it was useful to take the time to give you as much as possible, I would say, with the information that we were able to share this morning and to give you as much visibility as possible, but despite all the uncertainties, of course, but it's not typical just to Thales.So just to conclude this call by stressing, as you have understood, that the impact of this crisis will be very material on Q2 and H1, no need to insist any further. But however, at the same part, at the same time, we, I would say, assured that the management team is there, the captain is on board, on the deck, we are taking all the necessary actions to minimize the impact of this crisis and, of course, remain strongly positioned to return to profitable growth. In the longer term, it's exactly the meaning of the answer, I've given to Tristan, just a few minutes ago. So next week, we will hold our AGM behind closed doors, again unfortunately, because of this sanitary crisis. And H1 results will be disclosed later in July, as expected. Have a good bye, take care, stay safe. Bye-Bye. And thanks for this opportunity to discuss.

[Pascal Bouchiat]

Thank you very much. Bye-bye.

[Patrice Caine, Chairman & CEO]

Thank you.