Thales SA

PAR:HO

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q3 2020 Order Intake and Sales Conference Call.[Operator Instructions] I must advise you that this conference is being recorded today.I would 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' 9 months 2020 order intake and sales.I am Bertrand Delcaire, the Head of Investor Relations at Thales. With me today is Pascal Bouchiat, the CFO of Thales.This presentation is audio 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 in a few hours.With that, I would like to turn over the call to Pascal Bouchiat.

[Pascal Bouchiat]

Thank you, Bertrand. And good morning, everyone.So before moving on to the numbers and as usual, I wanted to highlight a few key messages. I'm now on Slide 2.First, as we explained during the H1 results presentation in July, after the disruptions that we faced in Q2, we targeted returning to close to 100% internal productivity over H2. Thanks to the mobilizations of the teams, observations recovered strongly in Q3, which enabled us to post much improved sales growth. Organic sales growth actually turned positive if we exclude the aeronautics global business unit.Second, the past few months have provided us further confirmation that the dynamics on our defense markets remain solid. The French government presented its 2021 budget a few weeks ago. In spite of the COVID-19 crisis, the defense budget continues to track the trajectory that was approved in 2018 as part of what is called the LPM, the Military Programming Law. The budget will increase by EUR 1.7 billion in 2021, i.e., around plus 4.5%. I could also mention Australia, our second largest defense market, which reaffirmed its commitment to a 7% year growth in its defense budget; or Greece, which recently announced its intent to buy Rafale aircraft. These continued dynamics drive a significant pipeline of orders, including several that we expect to book in Q4.Finally, we recently announced [ a string ] of ESA contracts in space exploration, which are coming on top of the successes in Earth observation that were mentioned during our H1 results. In particular, as shown on the slide, Thales Alenia Space will be a major supplier to Artemis, NASA's lunar mission. It will design the 2 European modules of the space station that will orbit around the moon for a total value of more than EUR 600 million that will be booked progressively in the next years to come. These awards demonstrate the robust dynamics we are seeing in the institutional space market.Turning now to Slide 3, which summarizes our key figures for the third quarter and the first 9 months of the year. Figures for the first 9 months are, of course, marked by the disruptions we faced in Q2. More interesting are the Q3 figures, which show a strong recovery. Organically, order intake was only down 8%, and sales down 4% compared to last year. As I will show in a minute, excluding aeronautics, both KPIs actually turned positive in Q3.So I'm now on Slide 4 with our order intake dynamics and key commercial successes for the first 9 months of 2020. The 9 months order intake was marked by the impact of the COVID-19 crisis on civil aeronautics demand; and by the phasing of large orders, which you see on the right. However, looking specifically at Q3, order intake declined by only 8%, and excluding aeronautics, we actually achieved a low single-digit growth. Year-to-date, we booked 6 orders of more than EUR 100 million, including 2 in Q3: the third tranche of Scorpion, the French military vehicles program; and also a support and services contract for the French army. Going forward, we see a significant pipeline of large orders [ unfolded ] in Q4, starting with MKS 180, this German frigate program. And surprisingly, the decline in small orders below EUR 10 million primarily reflects the impact of COVID-19 on demand in civil aeronautics and also biometric passports.Moving now to Slide 5, looking at sales. The chart on the right shows the different drivers behind reported and organic growth. The currency effect was a small negative over 9 months at 0.8% of sale. It was concentrated in Q3, where it represented almost 2% of sales. It was particularly strong at DIS, which was impacted by the devaluation of several emerging market currencies. The significant scope effect, EUR 697 million, was of course primarily due to the Gemalto Q1 2019 sales.Turning to organic growth. The breakdown per quarter shows a major swing. After the 20% decline we faced in Q2, sales achieved a strong recovery, minus 4.3% in Q3. On the one hand, as expected, we were still impacted by the major drop of demand in civil aeronautics around 45% in Q3, driving a 30% decline for the whole aeronautic global business unit. On the other hand, thanks to the mobilization of all teams, we achieved a strong recovery of sales in the other businesses, which actually managed to grow by 1.5% in the quarter.Now looking briefly at each segment one by one. I'm now on Slide 6.So in Aerospace, orders were down 13%, compared with the first 9 months of 2019, at EUR 2.3 billion. This is reflecting 2 opposite trends: the major negative impacts of COVID-19 on our civil aero businesses; and the recovery of Space orders. As I mentioned earlier, we have seen a lot of activity in the institutional space market. In Q3, we booked the first phase of 2 of the 5 Copernicus missions we're involved in, and we expect the 3 others by the end of the year. On the other hand, the commercial telecom satellite market remained soft. Excluding C-band-related orders, only 4 geostationary satellites were ordered year-to-date worldwide.Sales improved materially in Q3 compared to Q2, minus 18% versus minus 38%. With an organic decline of around 45%, civil aero sales improved slightly but remained heavily depressed. Considering the travel restrictions that were imposed again at the end of the summer, we naturally remain cautious on the level of civil aero demand in the coming months. The bulk of the recovery came from the strong productivity improvements in the rest of the segments, in military avionics, in microwave tubes, in Space, which all together delivered low single-digit growth in Q3.Now moving on to Slide 7 with Transport. Transport order intake saw a pickup in Q3, up 19% organically. They were down only 6% over the first 9 months of the year. Mainline orders recovered in Q3, but we continued to see delays in urban rails contract awards. Sales in Transport were down by 12.3% organically. As mentioned previously, part of this negative growth was expected because of the phasing-down of work on major urban rail projects, which have been driving very high comps since the end of 2018. This was aggravated by the COVID-19 operational disruptions, especially in regards to carrying on-site installation and testing activities and, to a lower extent, by delays in urban rail contract awards.Turning to Slide 8, looking at the Defence & Security segment. Defence & Security orders amounted to EUR 3.9 billion, down 27% year-on-year. This was primarily due to the volatility of large contracts above EUR 100 million. We booked 5 -- 6 large orders this year against 9 last year in the context of delays at finalizing contracts. As I mentioned earlier, we have a significant pipeline of orders being finalized, and we expect to catch up in Q4 and to deliver once again a full year book-to-bill clearly above 1 in this segment. Sales were organically down by 3.3% and reached EUR 5.47 billion. Thanks to the mobilizations of all the teams, many businesses recovered strongly from the operation disruptions they faced in Q2, including surface radars, military communications and combat aircraft.Now moving on to Slide 9 with Digital Identity and Security, the last segment. I don't comment order intake, which, as you know, is not meaningful for this segment. Pro forma over 9 months, sales were down only 2%, overall a solid performance considering the impact of the COVID-19 crisis on the biometrics and IoT markets. Sequentially, sales growth improved slightly in Q3 compared to Q2. As expected, smart card sales moved into negative territory in Q3 after an "above long-term trend" performance in H1. Biometrics and IoT remain affected by the health crisis. With respect to Q4, we expect smart card sales to face high comps and biometrics and IoT to remain a bit weak because of the sanitary crisis.So all of that brings me to the last slide, Slide 10, with our 2020 financial objectives. As you understood, Q3 order intake is in line with our expectations. And once again, we have a solid pipeline of orders for Q4, which allows us to confirm our full year order intake target, mainly a book-to-bill ratio above 1. Thanks to the mobilization of the team, sales growth recovered strongly in Q3, more than 15 points above Q2. This quite solid performance increases our confidence in the group's ability to meet the full year objective of EUR 16.5 billion to EUR 17.2 billion. We confirm as well our 2020 EBIT target, EUR 1.3 billion to EUR 1.4 billion.We are making good progress on our global adaptation plan, which enable us to confirm the EUR 750 million target for 2020 cost-saving actions. And then our negotiations on the mix of structural cost measures are ongoing, so it's too early to update the restructuring cost assumptions embedded in this guidance, EUR 130 million. And of course, we remain extremely focused on cash management in this quite unprecedented crisis.So thank you very much. Many thanks for your attentions, and I will now be pleased to take your questions. I guess the line is or should be open for Q&A now.

[Operator]

[Operator Instructions] And your first question comes from the line of George Zhao from Bernstein.

[George Zhao, Research Analyst]

So first question, for Transport. In the press release, you talked about order weakness from delayed signatures notably caused by financial difficulties of some operators. We didn't see that language from last quarter's release, so have you observed anything incrementally worse over the last 3 months as it pertains to the demand impacts on the customer's ability to sign contracts? And my second question would be on the book-to-bill for Aerospace coming below 70%. Is that really driven by the civil aeronautics? We saw the slight uptick in revenue in the quarter, but did the orders improve sequentially for civil aeronautics?

[Pascal Bouchiat]

Okay. Thank you very much. So your first question, on Transport. We will need to consider, on one hand, the mainline segments, where we see good dynamics there with in particular, I mean, some significant orders that we booked in Q3. And overall, we remain quite positive on these mainline segments, as opposed to the -- more the urban rail segments where we see here more weakness. And as we mentioned, I guess, it was, as we released our H1 figures, yes, through some operators facing quite a steep drop in term of passenger traffic and putting them in, of course, a more difficult situation when it comes to awarding a new contract. And basically, this is what we kept seeing in Q3. So I wouldn't mention that, I mean, the situation has worsened in Q3 for the urban rail signaling business. I will say it is pretty much in line with what we have seen so far since the beginning of the pandemic.On Aerospace, yes, I mean, it's quite obvious that, I mean, the negative book-to-bill that we've seen is really, I will say, driven by this quite low level of demand in the civil aeronautics business. So yes, in this business in particular, we are today operating at a level of book-to-bill, which is below 1. It is going to be the case for the full year, yes. Now I mean, the more we'll move on, the more we'll see, I guess, order intake and level of sales in civil aeronautics converging because, as you know, this is a business where, I mean, the cycle is quite short. But yes, it's true that today, the civil aeronautic business is driving a book-to-bill which is significantly below 1.

[Operator]

And your next question comes from the line of Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

I was wondering in civil aeronautics if you could break out the impact and the trends that you saw in Q3 into IFE aftermarket and the linefit avionics work that you do and potentially any color of how you see those trends progressing into Q4. And then, Pascal, I know you mentioned in the call, in your prepared remarks, that orders are not super important for Gemalto, but they were very weak in Q3. Could you help us to understand why? And you highlight that there's going to be tough comps for that business moving into Q4. Could you help us understand what you expect from an organic perspective in Q4 on revenues?

[Pascal Bouchiat]

Okay, Ben. So on civil aero Q3 IFE linefit, so overall, I mean, we mentioned that on our civil aero business we have seen a drop in sales in Q3, which is -- I will say is pretty much in line with what we have seen in Q2. So let's consider overall a drop which is around 45% against Q3 of last year. And overall, it's -- I will say it's pretty much, I mean, what we see across our global civil aero business. You mentioned IFE linefit. So overall, it's pretty much what we see. So I mean a drop in linefit and drop in aftermarket, which overall looks pretty much -- are pretty much similar.Now it's true that we might see in some months a bit of improvement, but then, I mean, next month is showing a new drop. So we might see, and this is what we have seen in Q3, a level of sales for each particular month, which might be a big different. But overall when you consider, I mean, a 3 month's period, basically Q3, overall, this is what we have seen pretty much across all our civil aero business and no specific points to report to you showing a dynamic that would be quite different from aftermarket versus linefit or IFE versus more the cockpit avionics business.On DIS and Gemalto, I mean, so what do we see? And how could we anticipate Q4? You probably have in mind that in our DIS business, in particular, in the first half of 2020, we benefited from quite a strong level of demand in our smart card businesses, by the way, both on the banking and also on the telco segments. And we knew that we would see a progressive reduction in demand, in particular, in the banking segment, after this quite strong level of demand in H1 and in particular, in the U.S.; and basically, this is what happened in Q3. And we think that it will continue in Q4, where this banking segment has to be compared to quite a strong Q4 2019. So first points.Now overall, I mean, the level of demand as we see still remains overall quite solid. It's probably more Q4 2019 that was exceptionally high in term of level of demand. I mentioned in my presentation the situation, in particular, on biometrics and to a more global standpoint the overall secured documents segments, where it's true that we'll keep seeing today and because of the COVID-19 crisis a clear reduction in demand as compared to the same period of last year. And it is quite simple. I mean the less people travel, the less we see a passport renewal in particular.Our cybersecurity is doing quite well in DIS, with in particular, I mean, Q3 which has been quite strong. Now we need to see how Q4 will look like. I mean it's a short-time-cycle business, but overall, the level of demand is there.And last point is IOT. Well, overall, I mean, we keep seeing quite a soft level of demand in this business, a bit of recovery in the automotive market during Q3. However, we'll remain quite cautious on this market even for the automotive segment where we might see up and down throughout, I mean, the next few months. So overall, I mean, this is the picture I can share with you on our DIS business, which overall has shown quite a strong level of resistance against the -- I mean, since the beginning of the crisis.

[Operator]

And your next question comes from the line of Olivier Brochet from Crédit Suisse.

[Olivier Brochet, Research Analyst]

I would ask actually 3. The first one, on the free cash flow for 2020. Has anything changed compared to what you were seeing in -- at the end of June? And is, for instance, the strong order intake that you expect in Q4 having an impact there? Second, on currency, if currencies stay where they are at the moment, what should we expect in Q4, something similar to Q3 and in particular in DIS? And third, how do you see Space looking in 2021 with all the order intake that you've had so far this year?

[Pascal Bouchiat]

Okay, Olivier. So first question, about cash flow. We'll see today, I mean, a level of cash flow which is quite, I will say, firm against last year. And despite, of course, I mean, this drop in overall, I mean, level of EBIT since beginning of 2020 against the same period of last year, we'll see our cash flow today holding quite firmly. Now I mean probably a bit too early, and I don't want to change the guidance that we provided to you on cash flow for the full year 2020. All what I discussed with you end of July remain fully valid. Now of course, it is also true, and you mentioned the point, that Q4 is traditionally quite a strong quarter in term of cash flow generation. And it's true that, of course, we are expecting a level of down payments associated with various large orders that should kick in, in Q4, all of that being in line with, I mean, the guidance that we shared with you for the full year cash flow generation.Now in terms of currency, it's true that, I mean, as we all know, we have seen, I mean, some devaluations in some emerging countries' currencies. I mean the same for the U.S. dollars. And it is in particular on the DIS business, so yes, we are still expecting in Q4 at our DIS business -- I will say the negative impact coming from currencies are probably not as negative as it was in Q3.Space. And I guess, your question was more about our view on 2021 level of sales for our Space business. At this point, it's really, I mean, too -- it's really too early -- no. So let's move on step by step. We have seen, I mean, order intake in Space in Q3 showing quite a strong progress as compared to Q3 of last year, but Q3 last year was also quite a modest level of comparison. So let's complete 2020 before, I mean, discussing how we should see -- we should be seeing 2021 in term of level of revenues for this business. Overall, I mean -- and the message is still pretty much the same for this business. We see a level of demand in the institutional markets, whether it's observation, and it was the case in particular with the Copernicus project; or whether it is exploration, with what I mentioned about the -- this new lunar mission managed by the European Space Agency -- we will see, I mean, the institutional market of space being quite strong. On the other side, as I mentioned in my [ press ], we'll keep seeing a level of demand in the civil telco business, which remain quite low as we speak today.

[Operator]

And your next question comes from the line of Jeremy Bragg from Redburn.

[Jeremy David Bragg, Research Analyst]

Pascal, I wondered if I could ask about the confidence in the defense orders coming through in the fourth quarter, please; and if they don't come through, whether it really matters from a kind of medium-term perspective, if they slip. And then also, could you please give a little bit of color about the restructuring progress on the kind of negotiations that you're having there with the unions? And then the final thing, cheeky one, is would you be prepared to give any kind of initial view on 2021, whether you expect organic revenues to be up next year, for example?

[Pascal Bouchiat]

Okay, Jeremy. So on defense order, I guess, my tone was quite positive when commenting our Q3 order intake for defense. And it's true that end-of-September level of order intake for defense is quite below what it was a year ago. Now I made it quite clear that we are expecting Q4 to be quite strong in this business, and I'm quite confident on that. As I mentioned, we are finalizing various large-size contracts. And I mean, MKS 180 is a good example, and this is really, I mean, a jumbo contract for Thales. Now of course, as always, I mean, we might see here and there potentially, I mean, some kind of cutoff. Or I mean, we might see in a worst-case scenario some order intake in defense moving from Q4 to Q1. So of course, in term of overall level of revenue for 2021, 2022, it will not change the overall picture of defense, but of course, we might see, I mean, some delays there, which I don't see today. So I guess, I'm quite positive on our level of Q4 order intake for our Defence & Security business.Second point, restructuring. So we are today negotiating with our trade unions. And we expect, I mean, finalizing with them a global group agreement in the next few weeks. I mean I think, of course, I mean, by the end of 2020. So I mean discussion are pretty positive, I mean, between us and the trade unions. At this point and coming back to our guidance, our 2020 guidance, it's probably an opportunity for me to remind everybody that our guidance, our EUR 1.3 billion, EUR 1.4 billion EBIT guidance, is based upon the level of restructure, which is around EUR 130 million. You probably have in mind that end of July, I mentioned that EUR 130 million will be probably more a floor than a ceiling on restructuring. This is my view today. This is still my view today. So we might end up at a level of restructuring charges that could be a bit above this level, but it might be a few or several times [indiscernible]. At this point, it's probably still a bit uncertain, as we have not finalized, I mean, those negotiations. And of course, I mean, if it makes sense for Thales to go a bit further in term of restructure, of course, we'll proceed, I mean, in order to prepare for the future. Your last question was about...

[Bertrand Delcaire, Head of Investor Relations & VP]

[indiscernible]

[Pascal Bouchiat]

2021 in term of organic growth...

[Jeremy David Bragg, Research Analyst]

Yes, that was it.

[Pascal Bouchiat]

Yes. At this point -- and of course, I will be at this point a bit cautious. I mean I got this question from Olivier on Space and globally for Thales. Of course, I mean, we are expecting our level of revenues in 2021 to be above what it will be in 2020, of course, by definition with in particular, I mean, the disruption that we faced in Q2. Now at this point, I guess, it's -- sorry for that, but at this point, it's really too early to be more precise on that. So let's complete our 2020, I mean, fiscal year, delivering on those guidance, also seeing how we see, I mean, the COVID situation evolving. I guess that, all of us, we see that the overall sanitary context is deteriorating. And I'm not talking about Thales. I'm talking about the overall COVID-19, I mean, situation, in particular in Europe, with, I mean, more and more countries putting in place curfews but also even some other countries putting in place new lockdowns. I mean the case of Ireland, for instance. So of course, we are a bit cautious and a bit difficult to anticipate how, I mean, the sanitary situations will look like in 3 months, in 6 months, in 9 months. And of course, I mean, all of that, of course, we think, could be quite important in term -- in particular in term of level of demand.Now -- and I guess this is quite a positive message. You'll probably remember that, one way we did our H1 figures, we made it clear that the disruptions that we have seen in term of production in Q2 was for most part of them over. We learned how to operate despite all the sanitary constraints linked to the COVID. And I guess that you have seen that our Q3 figures demonstrate what we shared with you end of July, our ability to restore a level of production that is almost a normative level of productions, now all of that with a sanitary situations which is overall under control. And this is where, of course, we need to remain cautious as we see day after day a global sanitary situation in various countries to deteriorate. So I'm, of course, a bit cautious, but I'm confident, of course, I'm quite confident, on all the figures that we shared with you in term of 2020 guidance.

[Operator]

And your next question comes from the line of Tristan Sanson from Exane.

[Tristan Sanson]

I have 4, so I'll try to make -- keep them short. But the first one is on the behavior of your JVs, you indicated quite a drag from them in, H1 Naval Group, your JV with Diehl, U.S. businesses. Can you tell us how they behaved in Q3? And especially if you could expand a bit on Naval Group. I think they just announced a new transformation plan, so how you see the business evolving. That would be useful.Second question is on your cash flow trajectory to refine a bit on making -- to make sure I understand your answer to Olivier. You mentioned firm free cash flow -- or firm cash flow versus last year, so I suspect you're talking about like a free cash flow. We were at EUR 1.37 billion in 2019. Consensus is at EUR 0.5 billion for 2020, but -- so you're saying free cash flow should be closer to the one from 2019. And does the difference like fully come from new order intake down payments coming from H2? Or is there any other part in the free cash flow bridge that has moved?Third question is on defense spending or the defense spending environment. You talked about support from mature countries. You mentioned Australia, France and solid defense spending momentum. Can you tell us what you see today more in emerging markets, Southeast Asia, Middle East? What is the feeling you get on the persistence of solid defense spending there? And I'll stop this here because that's already a lot.

[Pascal Bouchiat]

Okay, Tristan. So first, on JV, I mean, when going through our JV, I mean, some of them are, in particular, in the field of civil aeronautics. And we have, in particular, I mean, 2 JV of this kind. One are located in Germany, which is Diehl Aerospace, which is clearly impacted by the severe drop in demands. And what we see overall at Thales in term of level of demands, we see, I mean, pretty much -- a pretty similar scenario in term of demand for Diehl Aerospace. Of course, I mean, the contribution of this JV will be, as you can imagine, quite low as compared to what it was a year ago. We also have a JV of this kind in the aeronautics business in U.S together with L3 Com. And here again, I mean, we see quite a strong drop in term of demand. So of course, I mean, this JV line will be quite strongly impacted by, in particular, I mean, those 2 JVs.And Naval Group that you probably have in mind that has seen quite major disruptions in term of production in the -- in Q2, we'll see, I mean, the situation improving at Naval Group. Now it takes a bit of time, so at this point a bit cautious in -- I mean, on H2. Of course, I mean, H2 will see quite a significant improvement as compared to Q2. However, I don't expect at this point Naval Group to come back on H2 to the level of contributions that they delivered in H2 2019.Cash flow. I mean thank you very much for your question because my answer was not precise enough. So thank you, to give me the opportunity to come back on this point. What I wanted to mean was that because of these quite strong drops in term of EBIT as we see -- as we have seen end of H1 as compared to end of H1 in 2019 and also considering the quite strong drop in term of EBIT for the full year 2020 as compared to 2019, I mean, without a specific cash optimization program, we might see, I mean, quite difficult situations in term of cash flow. And my message was not this one. My message was that I see a level of cash flow, as I speak today, which is quite well under control. It was by that case, I mean, the same message that I convey end of H1. I see today a level of cash flow which is well under control and in particular by all our cash optimization actions that we have put in place, including also, I mean, containment in term of capital expenditure and many other actions. All of that allowing me to confirm what we shared with you in term of 2020 guidance for the full year. And I'll remind you what I said end of July, starting with, I will say, a standard or normative 95% conversions ratio from net income to cash flow. I mentioned that in 2020, we will see, obviously, the material reversal on down payments on, in particular, large defense contracts, and I mentioned a level of down payments reversals of around EUR 300 million. So all of that are driving a level of consensus, which, in my recollection, is something around EUR 500 million. And I'm quite happy with this level of consensus really, I mean, reflecting what I've just mentioned, which is, first, ability to keep a conversions ratio which is rather good but also still having in mind the fact in 2020 we'll have quite a material reversal of down payments on some -- on several large export defense projects.Defense spending support, yes, I commented, yes, in particular France. I mean Germany is also quite positive, as you know. I mentioned also Australia, where I mean the 7%, I will say, average growth is -- has been confirmed. So all of that is positive.Now your question about emerging markets. We'll see today in emerging markets quite a strong level of -- I will say, of commercial activity with a number of requests for proposal, a number of discussions. Now what I see in emerging markets is there's a process to make these final decisions in term of awarding and making decisions to award contracts taking even more time than it was in the past. And I mean Middle East is a good example of that. So hence the fact that, of course, I need to remain cautious. I mean we are pursuing various opportunities in those countries, but this is where, I mean, we might have a bit of uncertainty in term of the exact timing for booking those contracts. So strong level of commercial activity. Now we need to move from that to getting and being able to book contracts. And that's it, I guess, Tristan.

[Operator]

Your next question comes from the line of Celine Fornaro. [Foreign Language]

[Celine Fornaro, Head of EMEA Industrials Research]

Two questions, if I may. My first one would be just regarding Transport and the slowdown that you're flagging regarding urban rail and if that could have an impact regarding your profitability progression. So what's the impact on the mix? And also, if you need to do further restructuring in that division and that could be one reason why you also think you could have higher restructuring charge; and the impact on cash, if you have deferred payments from some of these customers. And then my second question would be regarding the cards in Gemalto. So regarding the Q3 performance, if you could just help us understand how much were the cards down in the quarter and if that was relatively slightly less worse than what you expected and where do you see the biggest drop in Q4. I think you suggested potentially in banking cards, but why would it all of a sudden happen in Q4?

[Pascal Bouchiat]

Okay. Thank you, Celine. So on Transport, yes, I mentioned and confirm this slowdown in term of level of demand from the urban segment and, as I mentioned, I mean, driven by, I mean, the drop in passenger traffic. Now I mean, will this affect the midterm profitability? My answer is quite simple. I mean if the COVID generates in the midterms, I mean, less demands in urban, I mean, we'll adjust our costs accordingly. And overall, [ I see ] we are more on, I will say, the midterms project in term of execution. I mean I don't see today the need to drive, I will say, a material restructuring on this front. And what I mentioned in term of 2020 restructuring level is not at all associated with this softness in term of demand for the urban Transport business. And I don't see a significant impact on cash coming from this softness in Transport.Your second question was on DIS and in particular on smart cards. So overall, we see -- we have seen -- so I mentioned that in the first half 2020, both banking and SIM cards managed to get quite a good level of activity as compared to the same period of 2019. And we have seen, I mean, even throughout the -- I mean, the COVID-19 crisis, we have seen in H1 a level of demand, in particular, by the way, in the banking area being quite strong. And probably some of our clients are probably considering that there might be some production disruptions; and probably some of our clients asking for some kind of, I will say, additional stocks, precautionary stocks. Q3, I mean, overall in the smart card business, a drop which is close to 5% against Q3 2019. So I mean, how do we see Q4? I mean we know that Q4 last year was quite strong, so will we see in smart cards, I mean, a level of drop in volume of around 5%? I mean I guess it's probably a good rule of thumbs. I cannot be more precise on this front, but probably -- I mean this is probably a good proxy but once again on the basis of quite a strong Q4 2019 level of sales in those 2 subsegments.

[Celine Fornaro, Head of EMEA Industrials Research]

And if I'm not mistaking, I think you had said maybe a 10% to 15% drop in H2, so that will be quite encouraging.

[Pascal Bouchiat]

Okay, if -- I understand that there is no further questions, so thank you very much for your participation to this call. Maybe, I mean, opportunity for me to remind you that, even if all investor events are now virtual, which is not that helpful, of course, I mean, this situation must not prevent you from engaging with us. I would like to tell you that, together with Patrice Caine, I will participate in a few conferences and events in the coming weeks. And of course, in the meantimes, the IR team, Bertrand [ is here ]. Of course, I mean, they are at your disposal if you have any further questions.So thank you very much. See you, and have a good day. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, if you didn't have a chance to ask your question on today's call's, please do not hesitate to send a question to Thales Group's investor relations at [e-mail], and we'll get back to you as soon as possible. Thank you for all participation. You may now disconnect.