Thales S.A. (THLEF) CEO Patrice Caine on Full Year 2020 Results - Earnings Call Transcript

Thales S.A. (OTCPK:THLEF) Full Year 2020 Earnings Conference Call March 4, 2021 2:30 AM ET

Company Participants

Bertrand Delcaire – Head of Investor Relations

Patrice Caine – Chairman and Chief Executive Officer

Pascal Bouchiat – Chief Financial Officer

Conference Call Participants

George Zhao – Bernstein

Tristan Sanson – Exane BNP Paribas

Ben Heelan of Bank – America

Christophe Menard – Deutsche Bank

Celine Fornaro – UBS

Harry Breach – Stifel

Bertrand Delcaire

Yes, hello. Good morning. Welcome, and thank you for joining us for the presentation of Thales 2020 full year results. I am Bertrand Delcaire, the Head of Investor Relations. With me today are Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales. As usual, the presentation will be in English and followed by a Q&A session. It is webcast live on our website at thalesgroup.com, where the slides, press release and consolidated financial statements are also available for download. A replay of the call will be available in an hour. With that, I would like to turn over the call to Patrice Caine.

Patrice Caine

Good morning, everyone. So let’s start with Slide 2 on the highlights of 2020. As you will see in a minute, our results were, of course, severely impacted by the COVID-19 crisis. However, thanks to the mobilization of the team, we delivered a strong performance on many KPIs. First, from a commercial point of view, we booked a record volume of orders with major successes across our key markets. Second, our focus on cash generation drove a robust free operating cash flow performance significantly above expectations. And third, very early in the crisis, we launched a comprehensive crisis adaptation plan, targeting €750 million of P&L savings and at least €50 million of CapEx reduction.

The teams achieved significantly above these two targets, €100 million above for P&L savings and €75 million above for CapEx, representing a 25% cut. On these short-term actions, we also worked hard on our Ambition 10 strategic priorities. As I will explain in the second part of the presentation, we made substantial progress on the capture of Gemalto synergies and the transformation of Transport and on the repositioning of our Space business. But first, let me comment on a few figures, and I’m now on Slide 3. At €18.5 billion, order intake was down 6% on an organic basis. It was actually up 4% in the second half and a very strong performance in Defence & Security, offsetting the decline in the other segments and in particular in civil aeronautics.

Therefore, book-to-bill reached 1.09, significantly above one. The COVID-19 crisis impact on sales was material. They dropped by 10.4% on an organic basis. The impact of the crisis was, however, much less severe in H2 than in Q2 when we faced major operational disruptions across most of our businesses. This unprecedented situation drove a 33% drop in EBIT at €1.352 billion. It is close to the midpoint of our July guidance. Pascal will show in a few minutes how our global adaptation plan allowed us to offset a few headwinds in the second half, leading us to achieve an H2 margin before restructuring expenses at the same level as in H2 2019.

Adjusted net income declined by 33% as well. Free operating cash flow, cash flow amounted to €1.057 billion. Our cash conversion ratio improved further from the already high level of 2019, and Pascal will, of course, come back on this strong performance in more detail. Last chart on the slide, the dividend. Considering our performance in the crisis, the quality of our cash generation and the prospects for our businesses, the Board decided to come back to the 40% payout ratio it had approved a year ago before the crisis led us to consol the final dividend. This drives a dividend proposal of €1.76 per share, only 15% under the 2018 level. So after this rapid introduction, I now hand over to Pascal, who will comment our financial results in greater detail.

Pascal Bouchiat

Thank you, Patrice, and good morning to everyone. So I’m now on Slide 4, so starting with our order intake dynamics. As Patrice mentioned, despite the sanitary crisis, we’ve achieved quite a robust order intake in 2020, €18.5 billion. This corresponds to a strong book-to-bill at 1.09 and even 1.10 excluding DIS, whose book to bill is structurally equal to one. We booked 19 large-sized orders in 2020 versus 2021 in 2019. And we did even better in absolute terms with €5 billion versus €4.5 billion in 2019, obviously, with the MKS 180 contract for €1.5 billion helping in Defence & Security.

As expected, Q4 was a really strong quarter with 13 large orders, including three contracts with institutional Space customers, firstly, Space Rider, which is a future European unmanned spaceplane; secondly, an additional work on the ExoMars mission; and thirdly, the ground operations of the existing Galileo constellations; one large order in Transport with the development of the first digital signaling node for the Deutsche Bahn and large – excuse me, nine large orders in Defence & Security, including on top of the MKS 180 contract already mentioned before, several orders related to French military communication network and also three contracts with the UK MOD.

Orders with a unit value of less than €100 million were down by 8% compared to 2019. The bulk of this decline came from the sharp decrease in Avionics and IFE order intake of around 40%. Turning briefly to the geographical perspective. The dynamics remain strong in mature markets with an organic increase of 3%, thanks to no less than 12 large defense orders in five countries. So overall, a very solid performance in 2020 in regard to order intake, considering all the disruptions induced by the COVID-19 crisis.

Moving on to Slide 5 and looking at sales. The chart on the right shows the different drivers behind reported and organic growth. The currency effect was a bit more material than usual, a negative 1.3% of sales over the full year. It was concentrated in H2 where it represented more than 2% of sales. It was particularly strong at DIS, which was impacted by the devaluations of several emerging market currencies. The significant scope effect, €698 million, was, of course, primarily due to 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 progressive recovery, minus 7.8% in H2, driven by two main factors.

First, as expected, we were still impacted by the major drop of demand in civil aeronautics, still in the range of minus 50% in H2, driving a decline by more than 35% for Avionics and IFE sales. Second, delayed tenders in other businesses, in particular, Transport and DIS, weighed on H2 growth. Moving on now to Slide 6, looking at the adjusted P&L from sales to EBIT. To facilitate the comparisons, we’ve decided to present here our adjusted P&L, including Gemalto in Q1 2019. At constant scope, EBIT was down by 33% year-on-year and down by 34.5% organically, with the margin moving down from 10.6% in 2019 to 8% in 2020.

We’ll have a look at the drivers of this performance in a minute, but looking at the key items of the P&L, let me point out that, of course, you can see the impact of the crisis on our gross margin, down by 180 basis points from 27.6% to 25.8%. However, you can also see that our indirect costs have decreased by 10.4%, which is fully in line with the decrease in sales. As planned, we worked hard to limit as much as possible all discretionary expenses and also decided to carefully reduce R&D and selected projects. As expected, our restructuring costs were up from €104 million to €169 million, notably due to the restructuring plan ongoing in our civil aero business.

Let me point out here that we expect restructuring costs to remain elevated in 2021 as well with around €150 million, implying overall limited total COVID-19-related restructuring costs, two years with €50 million or so above normalized levels. Finally, Naval Group delivered a much lower contribution to our EBIT, €22 million versus €65 million in 2019. This decline was due to the COVID-19 disruptions that it faced in Q2 2020. Encouragingly, its contribution to EBIT was stable in H2 2020 compared to H2 2019. To further explain what happened during the year, we’ve decided to keep the presentation of the EBIT bridge you saw in H1. I’m now on Slide 7.

In Appendix, Slide 37, you can find the traditional EBIT bridge presentations. So on this slide, starting from the 2019 EBIT, including Gemalto’s Q1, overall €2.008 billion, we estimate the decline in gross margin before cost-saving actions at approximately €1.350 billion. It is a combination of the 11% decline in sales and the drop in gross margin due to the fixed nature of direct costs outside procurement for around five points. Now on the positive side, we estimate that our cost-saving actions have delivered €100 million more than the €750 million target we announced at H1, reaching a total of €850 million. A little more than half of these savings came through our actions to reduce direct costs and the rest through our actions to cut indirect costs in proportion of our sales decrease.

You can see on this slide the details of the strong performance on indirect costs, minus 12% on R&D and sales and marketing and minus 9% on G&A. In other words, our cost-saving actions represented about 5% of sales, a strong performance for companies that only buy from the outside around 50% of its cost base. This outperformance on cost savings allowed us to offset the higher-than-planned headwind on restructuring costs. If you remember back in July, we built our guidance on €130 million of restructuring expenses. Finally, the equity affiliates headwind was in line with our July expectations. It was not just due to Naval Group, as mentioned previously, but also to the material negative impact of the crisis and our civil aero-exposed JVs. I’m thinking of Diehl Aerospace in Germany but also L3 assets in the U.S.

Moving on to Slide 8, looking now at our Aerospace segment in more details. So starting with orders. At €3.8 billion, the order intake was down by 20% organically compared to 2019. This change reflects the severe drop in order intake in civil aerospace since Q2 2020, combined with the decrease in space orders by 5% versus 2019. We recorded several major institutional wins during 2020, but as you know, many of these large contracts were by tranches. So at this stage, we have only booked small orders for studies and design. Overall, this momentum is clearly positive and paving the way to return to growth in the coming years, and Patrice will elaborate further on the topic in a few moments.

At €4.2 billion, sales were down 24% organically, mostly due to the sanitary crisis impacting both our original equipment and aftermarket civil aero businesses and also generating some delays in terms of contract signatures in the commercial Space business. EBIT is a negative €76 million, despite a positive H2 EBIT at segment level, which was driven by the recovery of the Space business. On top of the obvious impacts on gross margin from the severe drop in sales, let me point out that our loss in aeronautics is due to the lower JV contributions and also to the quite significant restructuring costs we booked last year. As you know, Thales, we include restructuring costs within our EBIT, which is not always the case of other listed companies.

Now moving on to Slide 9 with Transport. Order intake first. The 4% organic decrease came from two different dynamics during the year: a solid year for the mainline signaling business, including the Stuttgart digital node contract, which we booked in Q4; and a softer year in urban rail signaling business, mostly due to the financial pressure on subway operators, which, for example, led some of them to delay the signing of additional small contracts of – on existing projects. Sales were organically down by almost 14%, resulting from the phasing down of major contracts. And that was – that bit was anticipated and flagged but also resulting from COVID-19-related disruption, such as travel limitations and the delayed contract awards, as mentioned before.

Profitability, on the contrary, was clearly up at €86 million, with EBIT margin progressing from 2.9% to 5.3% despite the COVID-19 disruptions I just mentioned. This is really a strong achievement for this segment, demonstrating ongoing solid progress in our transformation plan and paving the way to our 8% EBIT margin target. Now moving to Slide 10, Defence & Security. Order intake amounted to €9.9 billion, up by 1% organically, benefiting again from robust orders in many areas. The book-to-bill was strong at 1.23, and the order book for this segment reached a new record of €23.2 billion. Again, some of these orders, like the MKS 180 or maintenance contracts, this covers up to 10 years.

So they will not necessarily provide a major boost in the short term but support long-term growth. Sales amounted to €8.1 billion, down 1.8% organically. The strong H2 recovery, plus 3.2% organic, versus quite high comps in 2019 – comps in 2019, this offsets the majority of the Q2 operational disruptions that we faced. Many business units contributed to this momentum. I could mention system and services for ships, military radio communication, our secure networks, surface radars, protective vehicles, et cetera. As expected, EBIT margin remained strong at 12.9% despite a slight sales decrease and the wide disruption due to the sanitary crisis. This performance is to be compared to the 14% EBIT margin in 2019, which was, however, boosted by a positive €40 million one-off. Again, this year, I mean, the segment benefited from solid project execution, strong cost control and also limited restructuring costs.

Last segment, Slide 11, DIS, Digital Identity and Security. Here as well, to facilitate comparisons, we have shown in 2019, including Gemalto’s first quarter. In spite of the context, the performance of this segment was really strong, demonstrating the quality of the business and the success of the integration. Sales amounted to €3 billion, down 5.9% organically. The decline resulted from two main factors: the decrease in smart card sales which we’ve forecasted in 2020 because of the high basis of comparison in H2 2019; the impact of the crisis on some of its businesses like automotive IoT modules, which were affected mostly during Q2 2020, and also passport within biometrics which has been logically impacted by travel restrictions since Q2 2020.

Now at €324 million, EBIT was up 8.4% organically, with an EBIT margin progressing from 8.6% to 10.8%, thanks to various factors: cost synergies ahead of plan for around €20 million; good cost control; and also positive product mix effects and especially more smart cards than expected. Turning now to Slide 12. A few comments on items below the EBIT. The cost of net financial debt and the other financial results was up by €39 million. This is mostly due to lower return on cash deposits, some interest costs linked to the funding of the Gemalto acquisition and also to higher currency losses.

Our effective tax rate is decreasing from 26.3% to 23.1%, mostly thanks to the lower tax rate in France. Minority interest were down compared to last year on the back of the impact of the crisis on the group results, leading to an adjusted net income, group share of €937 million and an adjusted EPS of €4.40, both down by 33%. Moving now to Slide number 13. Let’s have a look at the conversions of EBIT into free operating cash flow. The usual recurring items moved into different directions versus 2019: financial interest increasing from €37 million in 2019 to €52 million in 2020, mostly due to the cost of debt over full 12 months; income tax paid, down from €154 million in 2019 to €109 million in 2020; also, equity affiliates, which corresponds to the gap between our share in their net income and the actual dividends we received from them, balancing themselves in 2020 to a zero impact versus a negative €60 million in 2019.

We strongly outperformed our global adaptations plan, in particular on the CapEx side. At €387 million, our CapEx, €125 million lower than in 2019 at constant scope. This provided €109 million tailwind with the EBIT to cash conversion. Our very strong focus on working capital in the crisis paid off as well. The change in working capital only represented a €420 million headwind last year. It included positive and negative factors that I will describe on the next slide.

Other cash items, not including the EBIT, such as restructuring and pensions, amounting to €177 million. The improvement against 2019 is mostly due to difference between restructuring expenses and cash out and also to some Gemalto-related items. I’m now on Slide 14, discussing our strong free cash flow performance. As you can see, we significantly over-delivered on our free operating cash flow scenario. This was driven by three main factors. First, our cash-focused initiative that we launched in 2019, combined with our crisis adaptations plan delivered over €250 million above targets.

You saw how we were €75 million ahead just on CapEx cuts. Second, we benefited from the support of several of our customers, who decided to pay us earlier than usual for a total of approximately €150 million. Third, the reversal of down payments on large project was lower than expected by approximately €150 million. Let me stress that we estimate that there are roughly €500 million left of exceptional down payments and CapEx effect on our balance sheet at the end of December 2020. They should unwind over the next two to three years.

This excellent 2020 cash performance, combined with the additional benefit to expect from a cash-focused initiative, enabled us to upgrade our midterm guidance on cash conversions. Over the 2019-2023 period, we now expect cash conversions to reach 95% on a reported basis. In other words, we expect to fully offset the headwinds from the unwinding of down payments and cutoff effects. Moving on to Slide 15, with a quick look at the evolutions of our net debt position. I guess, this slide is quite self-explanatory. On top of the free operating cash flow, we see deficit payment on UK pensions consistent with previous years. Dividends paid only amounted to €85 million, corresponding to the interim dividend paid in December 2020.

New leases under IFRS 16 were also lower than in 2019. Hence, we significantly deleveraged the balance sheet, with our net debt dropping from €3.3 billion down to €2.5 billion. Now to finish, a word on the dividend on Slide 16. This year, the Board has decided a return to the pre-COVID-19 distributions ratio. The payout ratio is back at 40%, which represents €1.76 dividend per share, taking into account, of course, the impact of the crisis on our adjusted EPS. So that’s the end of this financial review. I’m now turning over the call to Patrice, who is going to address our current strategy and guidance.

Patrice Caine

Thank you, Pascal. So I’m now on Slide 18, turning to our strategy and outlook. This morning, I thought it would be useful to take a step back from the short-term issues and update you on some of the key value-creation drivers we are going to leverage over the medium term in the post-crisis period. So let’s start with our largest segment, Defence & Security. Over the past year, investors have often asked us whether the defense budget increases we were seeing were sustainable. At least, in our key markets, the latest government statements are clearly positive. The French government has fully confirmed the military planning law that runs until 2023 and plans for further growth in the coming three years.

This year, the budget will grow by 4.5%, and this figure actually includes a 7% growth for the equipment budget. Australia, our second-largest market, confirmed its plan to increase defense spending by 7% per year until 2026. And last November, the UK surprised positively with the announcement of a four-year £16 billion boost to the defense budget. The simple reality is that geopolitical tensions remain elevated and that they come with a broader variety of threats. On top of the positive outlook for defense budgets, the chart on the right illustrates the key differentiating aspects of our portfolio.

Our solutions, whether we talk of sensors, of secured networks or of command and control solutions, are what we call force multipliers. As armed forces want to be able to sense better the environment or exchange more data, to call them better, the value of intelligent systems keeps increasing within platforms. These dynamics apply in all milieu and open strong growth prospects for our businesses. Finally, let me remind you how we have managed over the past few years to achieve best-in-class margins in this segment. Looking at the 10 largest defense businesses in Europe, U.S. and the UK, we are now the one with the second-highest EBIT margin and the only non-U.S. company among the top 5.

This is a great demonstration of how our investments in differentiated technologies and our strict focus on cost and execution are delivering value. I am now on Slide 19, addressing the long-term perspective for our Space business. Here as well, our sustained R&D strategy is paying off. Over the past nine months, Thales Alenia Space, our joint venture with Leonardo, has recorded remarkable wins across a broad spectrum of institutional markets. Back in July, I talked about Copernicus, Europe’s flagship Earth observation program, and we will play a key role in five out of the six upcoming missions, enabling Europe to track global CO2 emissions, monitor sea surface temperature, collect essential information on forest and land cover and much more.

More recently, we have recorded several competitive wins in space exploration, which will, for example, take us to the moon as part of the NASA Artemis program or to Mars. Just a few weeks ago, we had a major success on Galileo. The European Commission awarded us the construction of six satellites for the second generation of this crucial navigation infrastructure. Let me point out that each of these projects is worth several hundred million euros. So that’s in line with stand-up with each contractual rules. So far, we have often only booked their first tranches. For example, on Copernicus, we have only booked €200 million of orders last year, while the total value of these missions is above €1.5 billion. We also recorded major wins on the telecom side.

On the GEO side, the market continued to improve in 2020, but the majority of this improvement came from the so-called C-band repurposing projects. Globally, this project triggered 13 orders for conventional satellites, and we were the only non-U.S. manufacturer to win some of them. More encouragingly, over the past few weeks, we have booked the first order for our new generation flexible GEO satellite, Space Inspire, by an undisclosed customer. In addition, our Indonesian customer, PSN, finalized the financing of its VHTS satellite named Satria. And of course, three weeks ago, after a thorough evaluation, Telesat announced that it had selected us to be the prime contractor on their $5 billion telecom constellation.

This major success incorporates several key innovations such as advanced onboard digital processing and optical links. Telesat is making good progress on the funding of its project. A few weeks ago, it announced a CAD 400 million investment from the government of Québec. These accelerating commercial dynamics are in line with the latest market forecast, which expects significant growth in satellite services over the next 10 years. I’m now on Slide 20 with a strategic updates on our Avionics and IFE businesses. Well, as Pascal explained earlier, these businesses have been massively impacted by the crisis. With civil sales dropping in the 50% range over the last three quarters of 2020, they have lost around 1/3 of their sales last year.

By April 2020, we launched a comprehensive action plan to address this crisis, which will last for several years. This plan builds on three major levels. Number one, we are implementing the necessary structural cost adaptation while making sure that we retain the right competencies and capabilities to support our customers when demand recovers. And on the right, you see the cost targets we have set for 2021 versus 2019. Number two, we are refocusing our R&D efforts to seize opportunities, notably to develop a greener and smarter aviation. Already in 2021, around 1/3 of sales under R&D will go to concepts that enable a greener aviation. And third, we are accelerating our performance initiatives in two areas.

As of 1st of July, we will set up a dedicated global service business line. And this will allow us to consolidate some sites, improve customer service and expand our activities in this higher-margin market. In addition, we will further deploy lean manufacturing best practices, in particular, in the area of inventory management. Moving to market dynamics, there is no doubt that air transport demand will return and continue to grow faster than GDP for many years, if not decades. However, as you can see on the chart from IATA on the right, the recovery will take at least three years, and the uncertainty on its pace is still very high.

Considering the recent extensions of travel restrictions across the world, our base scenario for 2021 will not surprise you. After a strong decline in Q1 2021 comparable to what we saw in Q4 2020, aftermarket sales should gradually improve from Q2. On the other side, the multiyear downturn on the wide-body markets will naturally weigh on our line fleet activities, driving a base scenario of mid-single-digit decline in our overall Avionics and IFE sales. Let me now update you on some of the key group-wide strategic initiatives we have been developing as part of Ambition 10. So first, our digital strategy, and I am on Slide 21.

Of course, I won’t comment all the examples on this slide, but let me mention two. Just a few weeks ago, after our global competitive tender, NATO selected us to supply its first theater-level defense cloud. This contract not only demonstrates our ability to integrate the best commercial technologies to develop military solutions, it also opens a new market for us. Back at the Capital Market Day in October 2019, Philippe Vallée talked of this higher focus on adapting our data protection offer to enable seamless security across multiple clouds. In December last year, this led us to announce a new partnership with Google Cloud.

More broadly, whether you think of Telesat or Galileo in space, or the digital node in Stuttgart for the Deutsche Bahn, or of MKS 180, the frigate program, each of our major recent successes builds on the digital investments we have accelerated over the past five years. Second key priority in continuation of our digital strategy, the capture of synergies with Gemalto, and I am now on Slide 22. Starting on the left with revenue synergies.

Well, they continued to materialize in line with the plan we presented in October 2019. In September, we launched our CipherTrust Data Security Platform. This platform integrates the best technologies from Thales and Gemalto into a compelling cybersecurity offer, which helps organization discover, protect and control their sensitive data everywhere. This new product received strong recognitions from industry analysts. Another important lever we are already using is our global sales network, for example, when selling digital identity or passport solutions. This allowed to book several projects, for example, in Australia and in Africa.

Last, we are now starting to insert Gemalto technology into Thales' solutions. This is, for example, the case with airport security projects, where the integration of DIS contactless technologies allow us to build really attractive solutions. Another set of product opportunities lies with physical and digital access to critical sites. For example, in Mexico, we have already been awarded the design of a new generation security system for a hospital, combining Thales' security platform with Gemalto biometric solutions. Altogether, as you understand, we are making good progress on the capture of these revenue synergies in line with the 2023 targets.

Then turning to cost synergies. As mentioned by Pascal, the teams managed to achieve a solid acceleration in 2020 with €80 million of EBIT contribution compared to €60 million in the October 2019 plan. We were, in particular, ahead on procurement savings and on data protection and SG&A. It’s too early to upgrade the 2022 target for cost synergies, but we are already upgrading the amount we expected for 2021. Third Ambition 10 strategic priority, operational performance, and I am on Slide 23 now. I’ve already stressed our progress on the structural cost adaptation in civil aero and the solid ramp-up of Gemalto cost synergies. Let me remind you that we are also making good progress on the transformation of our Transport business.

In spite of COVID-19, margin was already above 5% last year, increasing our confidence in the delivery of the 8% to 8.5% medium-term target. Finally, we keep enriching our group-wide performance initiatives. For example, our new procurement organization keeps delivering over 30% of our spend is now concentrated with what we call global strategic suppliers. On some of these topics, the crisis actually creates opportunity to accelerate transformations. This is, for example, the case with smart working, which we have now integrated in our real estate plans and that will drive additional savings over the coming few years.

Last group-wide topic I wanted to address this morning is sustainability, and I am now on Slide 24. Sustainability is at the heart of our purpose, building a future we can all trust. It drives our focus in two directions. First, through the products and solutions we are developing, which are almost all aligned with key societal needs, around 55% of the portfolio address the need to be protected against physical and digital threats. Another 25% helps society to become greener through greener air transport, more efficient rail infrastructures or observation satellites dedicated to environmental applications and services.

The rest typically has major social benefits. This is, for example, the case of telecommunication satellites, such as Satria, which will help Indonesia bridge the digital divide; or foundational ID systems, which often gets funded by the World Bank, since having a legal entity is essential to have access to government programs or social benefits. For many of these product lines, sustainability-related innovation boosts growth opportunities. For example, as the air transport industry prioritize the reduction of CO2 emissions, it increases market opportunities for our Avionics and air traffic management businesses.

Another example, when companies become more aware of the important data security and privacy, they accelerate their investments in data protection and encryption. If we take a step back, over the past 15 or 20 years, we have continuously strengthened our sustainability commitments, which are now completely embedded in our strategy and incentive schemes. And for example, we have defined 2023 targets in terms of diversity, in terms of both direct and indirect CO2 emissions or in terms of workplace health and safety. And these targets are now embedded in the variable compensation plan of 2/3 of our employees. To present our actions on all these fronts and answer questions you may have on our sustainability strategy, we have decided to organize a dedicated event on this topic involving our various internal experts. We have to finalize its date, but our aim is to hold it in the next few months.

Moving now to Slide 25, discussing our 2021 outlook. Starting with the business assumptions on the left-hand side of the slide. While our base case assumes that the sanitary and macroeconomic context improves this year, uncertainties remained particularly high, especially with respect to the recovery of air traffic and, to a lower extent, corporate investment decisions. Still, we are confident that almost all our end markets will expand over the full year. For 2021, I set 3 short-term strategic priorities.

First, we will continue to focus on our growth initiatives, in particular, the capture of revenue synergies with DIS and on reinforcing our digital technology leadership. Second, we’ll fully implement the structural cost adaptation plan in our aero businesses. And third, while we intend to sustain a high level of R&D investment, it will be particularly important to increase our selectiveness, which brings me to our financial objective for 2021, considering the business environment that I’ve just described, and I am now on Slide 26.

With respect to order intake and taking into account the already announced contracts, we expect another year of strong commercial performance, driving a book-to-bill ratio above 1. Based on March 2021 scope and foreign exchange rates, we expect sales to amount to between €17.1 billion and €17.9 billion, which corresponds to an organic growth between around 2% and 6%.

The wider-than-usual range is, of course, due to the higher than usual uncertainties at the start of the year. Thanks to the initiatives I’ve presented earlier, I expect a significant improvement in EBIT margin, reaching between 9.5% and 10%. Well, this concludes our presentation. Many thanks for your attention. And together with Pascal, we are now pleased to take your questions.

Question-and-Answer Session

Operator

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

George Zhao

So you achieved €100 million of additional savings, but your total year EBIT was pretty much right at the midpoint of the guidance. So were there other costs that were higher than what you had expected?

And of the €850 million total savings from last year, how are you thinking about how much of that was sustainable structural savings versus non-sustainable temporary savings that will likely come back either this year or over the next few years as the demand recovers?

Pascal Bouchiat

Okay. So I explained in my presentation that, I mean, this, in particular, additional savings, the €100 million, allowed us, in particular, I mean, to increase the level of restructure. We mentioned back in July that our view would be to have a level of restructuring for 2020 that would be around €130 million. We are ending at a level which is more in line, with €170 million.

So I mean, this is basically what we have done. It’s also true that Q4 in our aero business was a bit weaker than expected in terms of level of demand as compared to what was our originally planned in July 2020 for the full year 2020. So overall, I mean, pushing more on this cost saving also allowed us to face the situation with a bit like the last months in this aero business in Q4. Now if I come back on your second question, which is, out of the €850 million, what is the structural and what will reverse? So maybe, I mean, to simplify a bit, I’m going to explain on the key components of those €850 million and to discuss what we can expect in 2021. So €850 million, mainly three key buckets.

So I mean, the first bucket is only, I would say, discretionary expenses and also travel-related costs, overall, representing approximately €300 million. And here, it’s basically, I mean, dropping any non-essential cost for the short terms, consultant fees, for instance; some internal projects, in particular, IT projects; and of course, quite a significant amount coming from travel cost. Overall, we dropped our travel costs by something around 60% in 2020 as compared to 2019. We believe that tomorrow, I mean, post-COVID world, Thales will be able to operate with a level of overall travel cost that will be 1/3 below what it was in 2019.

So I mean, this representing probably something like €100 million recurring, filling just on this topic. The rest of this first bucket is more, I would say, discretionary expenses, and we will adjust this level based on how we see the market in terms of level of demand.

Second bucket of cost is, I would say, the remunerations and in particular a drop in variable compensations, overall, representing a level of savings that was around €250 million. And this is more some kind of one-off, of course, as we expect variable compensations in our company to come back as soon as 2021 on a more normalized level.

The third component of those €850 million represents all savings relating to hiring freeze, reductions in temps, reductions in, I mean, procurement from, I mean, companies that we’ve hired to help us develop our program. And here, it will be quite simple. We will adjust this level of savings depending on our level of business. So basically, if we see, I mean, the level of growth returning quickly, of course, I mean, those savings will progressively fade away.

Now if we see a situation where, I mean, the level of demand will be a bit more subdued, I mean, this time, of course, we’ll keep pushing quite strong on this type of aspect. So here, I have not talked about more midterm initiatives that Patrice has started to comment in his presentation, which come on top of the €850 million but with more midterm impact. We are working very hard to keep transforming engineering department.

We keep working on our support functions and, in particular, in new initiatives in marketing and sales functions. We also keep working quite hard on how to improve the overall footprint of Thales and, in particular, taking advantage of the development of homeworking, how can homeworking help us to reduce the overall footprint in terms of real estate at Thales.

Of course, it’s not for 2021 in terms of savings, but we are here developing projects that will allow us in the midterm to keep reducing our overall cost bases. So this is basically what I could share with you, both on those €850 million but also on more structural actions that we are working on.

Operator

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

Tristan Sanson

I have three, please. The first one is on the book-to-bill for trajectory for 2021, so you said above 1. So we have the lower end of the range, but we have a fairly dense pipeline of large orders. I wonder whether you thought that the strong book-to-bill that we had in 2020 was potentially achievable again in 2021. And especially, do you include that Telesat order being firmed up in the construction of your guidance? That’s the first question.

The second one, I was keen to get some precedence on the free cash flow guidance for 2021. So you’re guiding for underlying conversion at 95% and unwinding of the cut-off effect partly in 2021. So are you comfortable with the level of about €1 billion? Is it what we should understand from that guidance? And so does it include new jumbo contracts with attached to large down payments?

That’s the second question. And the third one, so thanks for the update on the sustainability strategy of Thales and the rendezvous for a later event. At first glance, what do you think growth will come from going forward? Will it be from making the world greener, safer or more inclusive? It’s a quite interesting way to look at actually your business leads today.

Patrice Caine

I can take the first one on the book-to-bill, and you take the second one, Pascal. So on the book-to-bill, number one, for sure, I’m very confident. By the way, when we say so, we deliver, so you can be confident as well. We – I see really a strong momentum on almost every business segment, putting aside the civil aero, of course. But despite that, all the pipe is extremely active. We have already announced since the 1st of January this year, galileo now is on contract.

It is signed now, so it’s a big, big contract. As you know, Telesat, Telesat, despite the fact that they need to close their financing, is an important, I would say, potential opportunity. And by the way, the direction is already very good news. Space Inspire, we have mentioned the first customer for Space Inspire as well.

When I look at – in defense, the number of prospects are also very, very large. I was in IDEX, the defense show in the UAE last week, and believe the Middle East is still a very active area in terms of Defence & Security. So yes, you can be really confident on our ability to achieve this book-to-bill above 1. And it will come from all our businesses, Defence & Security, Ground Transportation, Space and DIS as well, of course.

Pascal Bouchiat

Yes, I mean, maybe just to complement Patrice’s answer. I mean, this book-to-bill above 1, I mean, this guidance doesn’t include, I mean, a major order intake that would come from the Telesat project. And the reason is quite simple. At this point, and even though, I mean, we are actually confident, I mean, Telesat is working on the structure of its funding. And as I mean, the overall Telesat project is a $5 billion project. For Thales, it would be around $3 billion in terms of the level of stake. But you can imagine that putting together a global funding of a project of this kind, of course, it takes a bit of time.

I mean, despite the fact that Telesat is a very experienced satellite operators and has put together quite a solid business, it’s more about, I mean, time, I mean, to put together this type of funding. And here, of course, a bit of uncertainty about the time schedule and into complete financial closing.

Now on free cash, I mean, thank you very much for your question because it gives me the opportunity to come back on what we said. I mean, first, and this is really, I mean, an upgrade on our guidance, I keep saying that cash flow shouldn’t be looked at just on a yearly basis, on a yearly basis, but we need to look at, I mean, probably a longer period of time.

And what we say is that over this 2019-2023 period of time, we do believe that we should be able to deliver a global average conversions ratio of 95%, despite the fact that we know that in this period of time, they will have faced a very significant amount of reversal on down payments on very large-sized project that we booked different with this player. So which means that, overall, our cash optimization program allowed us to compensate on this period of time, I mean, this negative unwinding of down payments.

Now as your question was more on 2021, I can confirm that, I mean, a 95% conversions ratio but also factoring that we will still have in 2021 some unwinding of down payments. My view today when you put all of that together, a €1 billion level of free cash flow in 2021, as you pointed out, Tristan, is in my view, at this point in time, a good guidance.

Patrice Caine

On the third point of sustainability, this morning is a bit – let’s consider this, what I said, as a first teaser, in fact. That’s why we need to spend a bit more time to explain, I would say, why we see a lot of things and a lot of opportunities arising from this topic. So let’s be patient a little bit. And we’ll have, I would say, enough time during the year to explain what we see more in-depth than this morning, which is more dedicated to our financial results.

Operator

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

Ben Heelan

Yes. I had some questions on Space. Firstly, you just mentioned there on the Telesat contract, it’s about a $3 billion contract. How should we think about CapEx for that contract for you and the phasing of that? Is that something that’s going to happen in the short term? Or is – just any color around CapEx on that. And then also, how should we think about revenues in some of the other LEO satellite deals, agreements that we’ve seen? There’s obviously an ongoing need to continue to produce the satellites medium term because of the orbit that they’re on.

Is that something that we should be thinking about here for you? You mentioned there also on the financing that Telesat is also still finalizing its financing. Is that something that you’re considering supporting? Do you see any value in being involved in kind of owning and running these LEO constellations? And then finally, on competition in Space, we’ve obviously seen a huge wave of SPACs in the U.S., these small special purpose acquisition companies, and there are a lot that are very focused on Space. So it feels as though competition is heating up. Just any thoughts about how you see the competitive environment at the moment.

Pascal Bouchiat

Okay. So a number of questions on Space, in particular in Telesat. So I mean, this is, as we pointed out, quite a huge project. Of course, we are very vigilant about, I mean, the overall cash flow profile of such a project. And of course, investments that Thales Aerospace will have to do and to support the development of this project will have to be funded by the project. And it’s not our intentions, I mean, to fund on our own, I would say, the funding availability any this project. So it has to be, I say, independent and self-funded, I mean, projects from our clients and supported by a global funding that is working on today.

You mentioned also, I mean, Thales being part of this global funding. I mean, we were more a satellite provider. And this specific project, we are demonstrating, I mean, the overall, I would say, unique value proposal of Thales Aerospace when it comes to the development of constellations.

You probably have in mind that most of the challenge in orbit constellations have been developed and produced by Thales Aerospace. This is, of course, I mean, the Iridium, the Iridium NEXT constellations with 70 satellites today wandering in the space. But I could also mention other satellites that Thales Aerospace has developed and produced, the O3b satellite constellations for our SES client.

But I could also mention the Globalstar constellation that we have also put together. And our view is that – it’s not just our view. As Mr. Goldberg, the CEO of Telesat, has made it clear that it selected Thales Aerospace also on the basis of our experience in developing such a complex project. So this is basically what we are focused on as opposed to, I mean, funding on our own equity project of these clients. You also had a question about...

Patrice Caine

The competition in the U.S.? Yes, so I can take this one. I mean, you may comment, Pascal. When I look at the U.S., what we have seen in the recent years is clearly new entrants in the field of launchers, for sure, with a very famous one to be specific, but not that many in the field of satellites, to be very precise. Furthermore, in the field of satellites, which is our field, I mean, we are not in launcher business, the new entrants are, I would say, "limited" and to small satellites, we see a portion of the market, a small portion of the market.

In fact, the market, which is still, I would say, composed of, I would say, large, very complex satellites, be that GEO stationary or not, by the way, in terms of telecommunication, in terms of scientific application, in terms of observation, are still, I would say, the world, or, I would say, big players like Thales. Because, in fact, it really needs decades of investment. It really needs a very high-end technological knowledge to be able to deliver these satellites. So you see, clearly, there is – I don’t see, I would say, new entrants as a threat to us.

Furthermore, new entrants is, I would say, small satellite and satellite applications. We have decided a while ago, by the way, to be part of this, let’s say, emerging markets. And I can take you a few examples, BlackSky and LeoStella. We are a shareholder of BlackSky in the U.S. We have a joint venture with BlackSky, which is named LeoStella, to produce, to manufacture and deliver this constellation made of small observation satellites that is extremely promising. And this is Thales, so we can say that we are part of this new space domain.

Second example, NorthStar. It’s a Canadian company dedicated to what we call SSA, space situational awareness. We are the one on which NorthStar rely on to deliver this constellation of satellites to observe satellites from the space. That’s why it is called SSA. And third example is the domain of IoT. We are the one who will deliver the constellation for Kinéis. Kinéis is a European player that ambition to deliver IoT services from space, and they rely on Thales for this, again, small but nice, I would say, satellite and constellation for this kind of service. So you see, I’m very confident that we are well placed, I would say, all across the different segments of solutions and types of applications, notwithstanding the fact that there are some new entrants in this domain.

Operator

And your next question comes from the line of Christophe Menard of Deutsche Bank.

Christophe Menard

Yes. I have three questions. The first one is on the midterm guidance, the margin guidance that you are mentioning in the presentation. I mean, initially, the target was 2023. Quite obviously, that’s changed. In terms of horizon, should we wait until Aerospace fully recovers to see such a margin target achieved?

Or I mean, could DIS or Space, I would say, partly offset the margin shortfall that we have in aero or civil aeronautics activities? The second question is on order intake. Emerging markets, I mean, still a bit down. When would you see a bounce? And it’s probably a question more longer term, but would we see an increase or a balance in order intake from emerging markets as of 2022?

Or do you have any view on this actually at the moment? I mean, I understand it’s a bit difficult to have a view on this. And the cash conversion rate, can you give us a more detailed schedule of the down payment outflows? I understood that 2021 was supposed to be a high number, but given the €1 billion guidance you gave, I understand it may not be the €400 million or the €300 million that I was initially expecting on that down payment outflow.

Pascal Bouchiat

So maybe I will take the first one and leave Patrice to answer the second one and take the third one. So first, in terms of horizon, yes, it’s a midterm horizon. And of course, I mean, we need, I mean, to see the overall civil aeronautics market to more or less normalized for us to support, I mean, this 11.5% to 12% guidance, which is, I remind you, was significantly above our peak level of profitability back in 2019, which was at 10.6%. So the move from 10.6% to 11.5%, 12%, of course, takes into account progressions on some of our key businesses, in particular, in DIS and our Transport business.

You probably also have in mind that back in 2019, our Defence & Security business achieved a peak level in terms of EBIT margin with some positive tailwinds. I mentioned on the call, €40 million of tailwinds on Defence & Security in 2019. And we made it clear that this midterm guidance, the 11.5%, 12%, it does take into account a level of profitability within our Defence & Security business, which is more between 12% and 13%, probably more the high part of this range but below, I mean, what we delivered in 2019.

So I’m not saying that, I mean, to reach this level, the civil aeronautics business will have to be fully – will have fully recovered, but of course, we need to have, I would say, the civil aeronautics business that will have more or less normalized. Now in terms of the exact, I mean, schedule, let’s take a bit of time. I mean, we are entering 2021. As you have understood, we still embark uncertainties, if I also follow what other players in the aeronautics business have shared with the investment community. So I mean, of course, in a few months, a few quarters, we’ll probably have a better view on how we see this market overall recovering.

Patrice Caine

On your second question, it’s right to say that EM, emerging markets, were less a contributor in the recent years than mature markets. However, it didn’t prevent us to post book-to-bill above 1 in the recent past. And yes, at the same time, mature markets was, I would say, doing or was enjoying good momentum that clearly benefited to us and to Thales.

And in fact, it is the beauty of our business model. It’s really the beauty of our business model by being, I would say, a key player in, let’s say, 50-plus, in fact, it’s even much more than that, but let’s say 50-plus countries in the world, gives us this ability to have a, I would say, so large pipe, if you allow me this expression, in terms of opportunities that really forged our confidence to, again, be able to achieve a book-to-bill greater than 1 in 2021. And honestly, looking at this type of opportunities, it comes from everywhere. It comes from emerging markets area. It comes from mature markets area. So at the end of the day, this guidance, clearly, we are very confident to achieve it by the end of 2021.

Pascal Bouchiat

Christophe, last question about cash conversions ratio. And I understand that you would like me to give you the exact cash conversions ratio in 2021, 2022, 2023. As I keep saying on cash conversions, we are – we might face, I mean, some cut-off effect. It This is happening quite regularly. This is why I tend to focus our commitment more on several years view. And hence, I mean, this 95% conversions ratio that I mentioned. Now as I answered Tristan, I guess it was Tristan’s question about, okay, good, but what do you tell us with regard 2021?

And I mentioned a guidance around €1 billion, with an underlying assumption that 2021 should be affected overall by a level of down payments reversion that should look like something around €200 million. This is our view, which means that the €500 million net balance that we have today, end of 2020, it should drop to something around €300 million end of 2021, with the rest, the remaining €300 million being probably unwinded in 2022, 2023. This is probably my best view today in terms of, I mean, down payments reversal. But also considering that we might have some cut-off exercise – some cut-off effect between year and the next one.

Christophe Menard

If I could, just a clarification on this point. The 95%, it’s an average? Or it’s actually some sort of minimum level that you would expect over the rest of the period? Because over...

Pascal Bouchiat

At this point, it’s more a global guidance for this 2019-2023 guidance. Now of course, if in the meantime, we managed to book large size export contract with a pretty positive funding. I mean, we might exceed, I mean, this level of conversions ratio.

Operator

And your next question comes from the line of Celine Fornaro of UBS.

Celine Fornaro

If I may, I have two questions. One relates firstly on the Transport business, where you basically achieved a margin in the second half that was at or above the 8% level. You guided that you’re planning to return to that medium-term margin level. Could you maybe provide a little bit more color on how we should think about 2021 if some of the cost actions or customer mix could affect or accelerate this margin recovery?

And also how you think about orders and customers returning in some of the urban businesses? And my second question would be regarding DIS, where there was negative organic growth in 2020. Just thinking on how you see that for 2021, as some parts of the business should be exposed to growth when we look at other tech companies.

Pascal Bouchiat

Thank you very much for your two questions. So first on Transport, I mean, first, in terms of the level of order intake, yes, we expect an order intake to progress in 2021 versus 2020. We are working today on various opportunities there. Now where we have probably a bit of uncertainty is how quickly will we see in urban transport operators, I mean, to come back and to award contracts, considering, I mean, the impacts of the drop in today’s urban transport traffic on their own accounts.

But overall, in particular, in our mainline business, we see today quite a good momentum, which also means that from this point, from a sales standpoint, we expect, I mean, an organic growth in our Transport business that, in my view, should be probably around mid-single digit on this business, allowing together with, I mean, still progress in terms of overall cost structures and project executions to keep increasing our EBIT margin as compared to what we’ve delivered in 2020. So overall, I mean, continuous progressions in terms of margin in this business, with the level of sales that should start to rebound as from the 2021. DIS, Patrice?

Patrice Caine

I can start, and you complement, Pascal. With DIS, to answer more precisely to your question, Celine, we should always decompose a little bit the question into sub-questions, in fact, because subsegments may behave differently. First of all, as you know, smart card should be down next year in particular because of high costs – this year versus next year, sorry, this year, 2021, sorry, in particular because of high costs in 2020 – looking at 2020, what was achieved in 2020.

But I would say, the long-term gradual, I would say, a tendency of this business, no change compared to what we said, in particular, during the Capital Market Day in October 2019. The second, I would say thing is typically, ID documents and so on and so forth. You know that we have suffered from a headwind in particular in the passport area, which is linked to the air travel situation.

That’s a fact. And of course, it will gradually recover in line with the gradual recovery of the air transport. It’s more or less, I would say, correlated, I would say, more or less correlated. But still, in the medium term, this is a good business, of course, and a growing business. And all the rest of the portfolio of DIS, clearly, is growing nicely and even more than nicely. Looking at cybersecurity, for instance, leads are clearly booming everywhere, and we have, I would say, tied very, very encouraging or promising partnership, typically, the one we have mentioned with Google.

And Google is not a small player in this cloud world to bring a very complementary solution to what they offer, which is core in this domain, bring your own key or even bring your own security, so to de-correlate, I would say, the cloud provider from the security provider. And this is a long-term trend that is clearly increasing more and more, the fact that large corporation do not want to, I would say, have a single provider that bring both cloud capability and the security. And this long-term trend clearly will benefit to Thales, as we are introducing, number one, in this domain is data protection and cryptology on this particular type of application. So combined, all in all, 2021, probably low single-digit growth. But it’s a combination of, I would say, different segments of business with different dynamics.

Operator

And your next question comes from the line of Harry Breach of Stifel.

Harry Breach

Yes. Can I possibly just maybe look at Space a little bit more? Galileo was a very significant win for Thales Alenia Space against the incumbent. Can you help us to understand sort of what the drivers were of that? And particularly would it be – is it a contract that you guys expect to be completely in line with your margin goals for Thales Alenia Space? And where do you think if the win was driven by technical proposition or price or otherwise?

Maybe the second question, thinking again about the pace of recovery at Space overall, is it – are you still looking at getting back to sort of low, mid-single-digit margin this year? I think that was the previous plan and then high single-digit in 2023 for the space business. It would be great just to have a little bit of an update. And then maybe just to follow-on, on Celine’s question slightly differently. Just the Transport margin in the second half of last year was very strong. Was there anything particularly unusual in there? Or any reason to think why that wouldn’t be sustainable this year in 2021?

Patrice Caine

So I will take the first question on Space. To make it sure, clearly, the feedback from the commission is clear. We have been selected, thanks to our technical superiority. It’s the feedback we’ve got. So really, our technical proposal was very convincing, sorry, and clearly above Airbus and OHB. And on top of that, we have been able, I would say, to make no sacrifice on price.

And we have been selected with a higher price than the number 2, than Airbus, so really demonstrating that technical superiority can drive, I would say, price power – pricing power, thank you, Bertrand, pricing power, and that there is no reason to sacrifice price just for the sake of winning a big contract on. This is very, very positive. And we all know in this small domain the performance of the first generation of Galileo satellites provided by OHB. And they had to turn to some, I would say, players to be able to deliver that. So clearly, it was based on, I would say, the good quality of the proposals, the proposal we have submitted to the EU.

Pascal Bouchiat

Okay. Maybe, certainly, I mean, on your question about Space margin, yes, I mean, you mentioned that we guided you to a low single-digit for 2021 and high single-digit, 2023. My view is that, I mean, 2021, yes, I mean, a low to mid-single-digit EBIT margin for our Space business is really what we have in mind. And yes, I mean, we are expecting our Space business EBIT margin to keep growing in the next few years and, in particular, 2023, I mean, this high single-digit level of a which is quite a good level of margin for this business.

I do think this is achievable in 2023, one – we’ll have in all those new projects that we have mentioned, one in full speed in 2023. So we should take advantage of the leveling effect in this horizon of time for our Space business and to achieve this level of high single-digit EBIT margin. And maybe on Transport, and this is where, I mean, we all need to be a bit cautious. And we shouldn’t just take a semester and to consider that, I mean, this is a normal run rate.

And in particular in Transport, let’s say, in the past that H2 is always stronger than H1. This is how it is in this business. So please don’t consider that the H2 2020, this is what we can extrapolate for the full year 2021. No, it’s not. It will not be this way. However, I mean, once again, I’m quite confident about we keep increasing progressively the profitability of our Transport business and with, I mean, this 8%, 8 percent-plus EBIT margin being really at stake in a reasonable timeframe.

Patrice Caine

I think we are running out of time. We are running late, in fact, so we need to close this session. Sorry for those who haven’t had time to raise their questions, but of course, Bertrand, Pascal, myself, we are at your disposal in the days and weeks to come to answer your other questions. So to conclude, as you understood, our business performed really well under this unprecedented circumstances.

And I take the occasion to reiterate my thanks to the teams of Thales for their exemplary commitment. Across all our markets, I think our digital strategic positions, sorry, us very well for continued profitable growth, and we have several questions this morning around that. And I hope that you have been, I would say, reassured and convinced that it is the case and it will continue to be the case looking forward. So with Pascal, we look forward to speaking with you in the upcoming investor roadshows and conference. And until then, take care and stay safe. Thank you. Bye-bye.

Pascal Bouchiat

Thank you very much. Bye-bye.

Operator

Thank you, ladies and gentlemen, if you didn’t have a chance to ask your question on today’s call, please do not hesitate to send your questions to Thales Group Investor Relations at [e-mail] [e-mail], and we will get back to you as soon as possible. Thank you for all your participation, and you may now disconnect.