Thales S.A. (HO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales 2020 Half Year Results 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.

Yes. Hello. Good morning, everyone. Welcome, and thank you for joining us for the presentation of our H1 2020 results. 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 a few hours. With that, I would like to turn over the call to Patrice Caine.

Good morning, everyone. I hope you're all safe and healthy. So let's begin with Slide 2. As usual, let me start with the highlights of our H1 2020 results. As you will see in a minute, our H1 results were, of course, severely impacted by the COVID-19 crisis. These results are, however, in line with the framework that I presented back in April during our Q1 presentation. They combine the major impact on civil aero demand, down by more than 50% in Q2; smaller but meaningful impact in biometrics and IoT; and a temporary disruption, sometimes very material of almost all group operations. Very early in the crisis, we decided to implement a global adaptation plan and it has already started to deliver some significant benefits in this period, more than EUR 300 million. This crisis did not prevent the teams from being very active on the commercial front. And even though they are not in our H1 order intake as the contracts are still being finalized, I'm happy to report today that we were selected on several flagship projects in the past weeks. In space, I'm referring to the fact that we will be a key contributor to the 5 of the 6 Copernicus Earth observation missions, including the most iconic one, the CO2M mission, which will monitor atmospheric CO2 emissions. Let me stress that the total value of these projects will be around EUR 1.8 billion even if only the first tranches, corresponding to the advanced definition phases, will be booked this year. Secondly, in naval defense, after winning projects in Spain with Navantia and the U.K. with Babcock for the Type 31 project last year, we also -- we will also be a major contributor to the MKS180 frigate program, the largest program in the history of the German Navy. We expect to sign the corresponding contract later this year, adding more than EUR 1.5 billion to our backlog. Finally, as I will explain in the second part of the presentation, our positioning as a supplier of intelligent systems and digital solutions in 5 critical markets is even more relevant in the post-COVID-19 world, and our strategic road map is solidly addressing both the near and long term. So first, let me comment on a few key figures and I'm now on Slide 3. So at EUR 6.1 billion, order intake was down 13%, primarily because of the lower volume of large contracts booked in the first period. The COVID-19 crisis impact on Q2 sales was significant, minus 20%, taking sales down 5.4% over the half year and 13.6% organically. Then EBIT and adjusted net income declined 60%, marked by the drop in civil aero sales and by operational disruptions. Let me stress here that a significant part of this negative EBIT impact is, by nature, temporary, as it is linked to the implementation of lockdowns and sanitary measures. In this unprecedented situation, we asked our teams to be very focused on cash management, and this delivered well. Free cash flow generation has remained under control. At minus EUR 471 million, it was only slightly below the normal seasonality. This free cash flow level drove our net debt position up to EUR 3.9 billion. So after this rapid introduction, I now hand over to Pascal, who will comment our financial results in greater detail.

Thank you, Patrice, and good morning to everyone. So let's start with order intake, I'm now on Slide 4. As usual, the chart on the right shows the breakdown of our orders by contract value. Obviously, to no surprise that the Q2 disruptions have created delays in terms of finalizing and signing contracts and this is especially apparent for large orders. With 4 of them in H1 2020 versus 7 last year, the total value booked decreased by EUR 1 billion. We booked 3 contracts of more than EUR 100 million in Q2: the supply of anti-submarine sonars to the U.S. Navy, showing again the leadership of Thales with navies around the world; the expansion of the strategic munition supply for the Australian MoD, total value of this contract is above EUR 600 million over 10 years and the first tranche booked in Q2 at a value of just below EUR 200 million; and the third large contract is a space contract for an undisclosed customer. Considering the natural volatility of large orders, I have often stressed in the past the importance of a large base of small orders under EUR 10 million. It is demonstrated clear this year. Excluding Gemalto's consolidation, order intake was down 10% for such small orders, in particular, driven by the drop of demand in civil aero. Excluding it, our volume of small orders decreased by only 5% versus last year. Moving now to Slide 5 and looking at sales. Sales are decreasing overall by 5.4% versus H1 2019, and that negative growth is resulting from different moving parts. There is still a significant scope impact, EUR 697 million due to Gemalto Q1 sales that were not included in our H1 2019 numbers and a EUR 20 million negative currency effects. Then there is obviously the impact of the sanitary crisis, which started at the end of Q1 and reached its peak during Q2, driving a 20% drop in sales during that period. As we explained previously, COVID-19 consequences on sales can be broken down in 2 distinct impacts. The first impact is due to the major drop of demand in civil aeronautics, more than 50% in Q2, with additional smaller impacts in businesses like biometrics and IoT within DIS. And the second is what we call the productivity impact due to the disruption of operations across all businesses, which explains the 16% drop in the civil aerospace. Turning briefly to the geographical perspective, which is not very meaningful in such a period. The sales decline is more visible in emerging markets than mature markets. It is mainly due to the expected phasing down of a couple of major Defence & Security and also Transport contracts. Moving on now to Slide 6, looking at the adjusted P&L from sales to EBIT. As mentioned already, EBIT margin is clearly down at the end of June 2020, 4.5% versus 10% last year. This usual presentation of our adjusted P&L is a bit difficult to analyze considering the significant scope effects, in particular, the overall increase of indirect cost in percentage of sales, moving from 17.3% to 19% is directly resulting from the consolidation of Gemalto. Those businesses come with higher gross margin but also with higher levels of R&D and sales and marketing costs. So to better explain what happened in the first half of 2020, we've changed a bit the presentations of the EBIT bridge. I'm now on Slide 7. Of course, in appendix, you can find the traditional EBIT bridge presentations. This is on Slide 28 and the H1 2019 P&L at 2020 scope on Slide 29. Starting from the H1 2019 EBIT, including Gemalto's Q1 2019, EUR 829 million, we estimate the decline in gross margin due to the COVID-19 crisis and before cost-saving actions at approximately EUR 740 million. Now on the positive side, we estimate that our cost savings actions have already delivered the equivalent of 4% of sales in savings, EUR 320 million, half through our actions to reduce direct costs and half -- approximately half through our actions to reduce indirect costs. You see on the slide the 9% decline in indirect costs with minus 9% on R&D and sales and marketing and minus 10% on G&A. In other words, our cost-saving actions offset a little more than 40% of the currency impact on our gross margin. Compared to H1 2019, we have a small savings on restructuring, minus EUR 17 million. As last year, we booked the engineering competitiveness plan in our Transport business. Last element of the bridge, equity affiliates were materially down from EUR 80 million last year to EUR 1 million this year. Managing the lockdown and sanitary measures was quite challenging for shipyards, driving Naval Group sales down 26% and its contributions to our EBIT into negative territory, minus EUR 15 million. The decline of the other JVs contributions was particularly material in civil aero. I'm thinking of Diehl Aerospace in Germany and also L3 assets in the U.S. So moving now to Slide 8. I will go through the performance of each of our operating segments in the next few slides. So let me just highlight a few points here. EBIT in the Aerospace segment is clearly negative due to the combination of the drop in demand and operations disruption, and I will further develop them in a minute. Transport EBIT turned to a positive, a low margin. And third, in parallel, both Defence & Security and Digital Identity & Security segments maintained a strong performance considering the unprecedented context with their respective margin at 10% and 9.5%. So I'm now on Slide 9. So let's start with Aerospace. Starting with orders. At EUR 1.6 billion, the order intake was down 8% to H1 2019, which is not as bad as we could have been feared by considering the major COVID-19 impact on civil aero during Q2 2020. The main reason behind this limited drop is a combination of 2 effects: first, a strong first quarter for Avionics. As a reminder, our Q1 2020 was up 15% for the all segments; and also an improved dynamics in the space market, both on the commercial and on the institutional side. At EUR 2.9 billion, sales were down by more than 25% strongly affected by the drop in demand, including aero. I already mentioned the figure more than 50% in Q2, both linefit and aftermarket for flight Avionics and IFE faced similar declines. Sales were also impacted by the productivity impact caused by the lockdown and sanitary measures on all other activities during Q2. The military have mix space and also the microwave tube operations. In terms of EBIT, as I mentioned on the previous slide, the negative EBIT, minus EUR 109 million, was due to the combination of the sharp drop in sales I just mentioned and also a 12-point decline in gross margin. This, in spite of the strong cost actions we took in Q2, which, for example, drove 11% reduction in indirect cost over H1. Let me stress that EBIT should materially recover in H2, thanks to the full effect of our cost savings actions and the improvement in productivity, notably in non-civil aero businesses. So now moving on to Slide 10 with Transport. First, order intake was down 21% versus H1 2019 and was mostly affected by delays in bid processes and contract awards due to the sanitary crisis. Sales were down by 13.7% organically. Part of this negative growth was anticipated because of the phasing down of works of major urban rail projects, which have been driving very high comps since the end of 2018. This was obviously aggravated by the COVID-19 operation disruptions, especially in regard to carrying on-site installations and testing activities. We expect these disruptions to be H1 one-off, of course, assuming that there is no major degradation versus current sanitary conditions. The combinations of the decrease in sales and the impact on operation performance is, of course, affecting EBIT this year, which amounts, however, to a positive EUR 4 million. Still, this represents a significant improvement against H1 last year when EBIT was strongly negative due in particular to 2 negative one-off costs. However, like what I mentioned earlier for aerospace, our transformation plan, combined with the full effect of the cost-saving measures and the more reduced operation disruption should drive a higher-margin H2, allowing us to target a full year EBIT margin above last year, 2.9%. So moving on now to Slide 11 with Defence & Security. First of all, it's important to remember that 2019 was an exceptional year for this segment. So we're clearly starting the year with high comps in addition to facing an unprecedented crisis. With that in mind, order intake was down 36% at EUR 2.4 billion. As I mentioned earlier, this is primarily due to the volatility of large contracts, above EUR 100 million. We booked 3 such large orders this year against 6 last year in the context of delays at finalizing contracts. However, what is important to note is that we have not lost any significant opportunity during this period and we do expect a catch-up during H2, especially with the signature of the MKS180 contract that Patrice mentioned earlier. Sales reached almost EUR 3.6 billion, down 7.3% organically. The drop was due to the COVID-19-related operational disruptions that have been progressive -- that have been progressively disappearing. Encouragingly, 6 out of 13 business lines have managed to grow in spite of the context, notably in the naval domain but also in our communication networks and protected vehicle businesses. Turning to EBIT margin. Profitability remained at a solid level, 10%, considering the drop in sales and gross margin. This outcome was achieved thanks to rapid adjustments of our indirect costs in line with the drop in sales. Last segment on Slide 12 was DIS, so our Digital Identity & Security segment. Of course, organic and total changes are not meaningful in this segment since the consolidations of Gemalto's effective from the middle of the period last year. As usual, there is no need to comment on order intake since it is structurally aligned with sales in most of our DIS business lines. Pro forma H1 sales were flat with a limited minus 5% sales drop during Q2. On the positive side, both EMV cards and SIM cards grew above their long-term trends on the back of the reissue cycle in the U.S. and the robust demand for contactless cards worldwide during the sanitary crisis as well as probably some precautionary buying of SIM cards. On the negative side, as expected, both biometrics and IoT module businesses were impacted by an immediate decrease in terms of demand from the very beginning of the pandemic in March 2020. While short-term visibility is low in DIS markets, at this point, we are a bit cautious and assume that they will be a bit less supported in H2. The demand for our biometric travel documents and IoT modules will remain the price and smart card sales should decline in H2. In terms of EBIT, DIS delivered a very strong performance in H1. You see EUR 140 million and a 9.5% EBIT margin. Our operations at DIS were less disturbed than in other businesses, and the gross margin mix was favorable overall. The indirect cost performance was also pretty good and it benefited from the ramp-up of cost synergies. We see, I mean, H1 2019 pro forma EBIT margin, which was only 3%, which means that H1 2020 is much above the pro forma H1 2019 EBIT margin in this segment. Turning now to Slide 13. Just a few comments on items below the EBIT. Cost of net financial debt and the other financial results is up by EUR 25 million, mostly due to the increase in cost of debt after acquiring Gemalto in 2019. Finance cost and pensions was slightly down by EUR 7 million, thanks to lower discount rates. The effective tax rate moved down from 26.6% to 23.2%, thanks to a more favorable country mix and to the higher rate of research tax credits compared to pretax income. Minorities' interests were negative at minus EUR 14 million at the end of H1 2020, leading to an adjusted net income of EUR 232 million and adjusted EPS of EUR 1.09. Moving now to the key items on the cash flow statement, I'm now on Slide 14. During the first 6 months of 2020, our operational free cash flow was minus EUR 471 million. As you see in the chart, this negative level was due to the strong seasonality of working capital, which is usually very negative in the first half of the year. As you remember, one of our first actions as soon as the sanitary crisis started has been to ensure that the group would be in a safe position in terms of cash. Since then, we've been managing our cash flow with great attention. In the past few months, our cash optimization plan that we launched mid-2019, this plan focused, in particular, on 3 items: first, reductions of overdue balances; second, tight control of supply chains, and consequently of inventories; and third, proactive negotiations with both customers and suppliers in order to obtain more favorable payment terms whenever possible. Of course, I mean, this didn't prevent us from being proactive in our support to small suppliers with advanced payments, for example, and of course, if anyone required. Now looking at the moving parts detailed on the right part of the slide. Operating cash flow line by EUR 350 million, which is less than the minus EUR 472 million EBIT decrease. Thanks to our strong focus on cash, the change in working capital was less negative than last year. Recurring pension cash-out and net financial interests were up due to the consolidations with Gemalto. And income tax paid was slightly down due to the more favorable country mix. Finally, as part of our global adaptation plan, we were able to reduce our CapEx by EUR 14 million, which corresponds to a 16% reduction at constant scope. Altogether, these actions strongly helped to limit the decrease in terms of free operating cash flow, down by only EUR 139 million versus H1 2019 to be compared with a decrease of EUR 472 million for the EBIT during the same period last year. So overall, cash flow, very much under control. Now let me finish -- I'm now on Slide 15. Let me finish with a word on the evolutions of our net debt position. Very little to mention here apart from the dividend payments, which amounted to EUR 336 million in H1 2019 and 0 in H1 2020 as per the decision that was taken by the Board to withdraw the final payments to the 2019 dividends. We also see on this slide the EUR 94 million negative within this other box, which relate to the impact of the IFRS 16. So I now turn the call over to Patrice to talk about strategy and outlook.

Thank you, Pascal. I'm now on Slide 17, turning to our strategy and outlook. Now that we are exiting the COVID-19-related emergency period, it is time to start asking ourselves whether we should adjust our positioning or accelerate some aspects of our strategy to take into account the post-COVID-19 context. A little more than a year ago, in anticipation of the acquisition of Gemalto, I launched an initiative to define our shared purpose as the new Thales. It was an exceptional opportunity to collectively define the true why of our company. This process, which involved more than 35,000 employees in 40 countries, let us to take as our banner ambition the sentence that you read on the left of this slide: building a future we can all trust. Of course, what we do is unchanged. We help our customers master their critical decision chains, thanks to sensors, mission systems, command and control systems, and digital identity and security solutions. Stating our purpose in this way helps us articulate the reinforced relevance of our positioning in a post COVID-19 world that needs trust and trustable solutions. More than ever, customers expect us to not just incorporate the most advanced technologies, but also address the issues of resilience, technological autonomy and sustainability. Our Ambition 10 framework, which I presented several times in the past years, remains well adapted to maximize value creation in this context. Customer- and user-centricity; operational performance initiatives; investments in R&D, especially in digital; and the integration of Gemalto remain the 5 key levers to support long-term profitable growth. Turning now to Slide 18, reviewing briefly the growth perspective in our civil businesses. While the very near-term outlook is still naturally uncertain, each of the markets we serve is driven by major long-term societal trends, amplified by the ongoing crisis. In each of them, we are focused on faster-growing segments. First, starting with civil aeronautics. Of course, the recovery of this market will take several years, but there is little doubt that air transport demand will return and continue to grow faster than GDP for many years, if not decades. Our solutions for this market, both avionics and air traffic management are key contributors to a greener and smarter aviation. According to several studies, new-generation connected and the collaborative avionics combined with improved air traffic management can deliver a 10% reduction of fuel consumption. As these solutions can be implemented on existing aircraft, they can deliver their savings on a much shorter time horizon than new engine or even new hydrogen propulsion technologies. Turning to our Transport business. Rail operators have faced a major drop in traffic during the crisis, but this is clearly temporary. Traffic is returning to normal. And more importantly, investments in green mobility infrastructures are on the priority list for many governments. As a global leader in signaling solutions, we are very well placed to benefit from this investment plan. Moving now to Space. As mentioned by Pascal, visibility remains low on the commercial telecom satellite market. But the long-term perspective remains robust and is probably accelerated by the crisis. Space systems are essential to deliver key functions of a greener, more digital and connected world such as reducing the digital divide. As I mentioned in my introduction, Earth observation missions are among the key European Space Agency and European Commission projects, and we have demonstrated again our leadership in these areas by being awarded a key role on 5 of the 6 upcoming Copernicus missions. Finally, our Digital Identity & Security business is, of course, at the heart of major trends: digitalization and the need for trust. Interestingly, over the past few months, we have seen increased demand for several emerging DIS solutions such as biometric payment cards, which will see its first commercial launch by BNP Paribas in a few months; new border control gates incorporating facial or contactless fingerprint recognition and even temperature sensors, or more broadly, digital civil identity solutions. Supplying highly secured digital identity on top of traditional physical identity documents enables all types of e-government procedures online, saving money and increasing revenue. Moving now to Slide 19 with our Defence business. Since the start of the COVID-19 crisis, investors have asked if the increased pressure on government budgets in many countries may drive a decline in defense budgets in the coming years. So far, we have not seen any material signal in this direction. None of our big customer countries have mentioned reducing their defense spending going forward. We are rather seeing the opposite with MoD being very supportive, accelerating payments to industry and investigating opportunities to bring forward procurement programs. In particular, our 2 largest defense customers, France and Australia, have reaffirmed their budget growth plans. The overall context is unchanged, driven by increased geopolitical tensions and the need to address complex threats. From that point of view, what happened in the latest recession after 2008 is not a good template as the level of geopolitical tension was much lower at the time. Moreover, within global defense markets, we are positioned on faster-growing segments. Connectivity, sensor suites, system of systems, all of these are at the core of future connected collaborative combat and defense capabilities. Let's take the example of FCAS in France, Germany and Spain or Tempest in the U.K. These market segments are expected to grow faster than overall budget because they match very well with key customer priorities, better information, tighter coordination and because the digital technologies in which we have invested enable major improvement in capabilities. Our work on MKS180, the new German frigate program is a great example of these dynamics. At more than EUR 1.5 billion, this contract, which we expect to book in the coming 2 or 3 months, is one of the largest in our history. It includes, in particular, a new generation version of our best seller naval mission system, tacticals and a fully digital radar suite, coupled with intelligent software design to handle complex naval threats such as swarm attacks. We expect this sort of commercial success to drive our Defence & Security backlog to a new record high at the end of the year. Moving now to Slide 20, discussing the drivers of margin expansion going forward. Under the Ambition 10 framework, we continuously launch initiatives to improve the operational performance of the group: procurement, engineering, support functions and so on. On top of this, we remain well on track to deliver on Gemalto cost synergies, EUR 120 million by 2022 as shown on the right. The transformation of our Transport business, which delivered an EBIT improvement even in the COVID-19 crisis will continue in the coming years. Within our COVID-19 global adaptation plan, the bulk of cost actions are temporary as they are addressing the temporary decline in sales. At the same time, like all other players in the civil aero system, we are starting to implement the necessary structural cost adjustments in our Avionics and IFE businesses. The plan will be finalized in the coming months based on the OEM production scenarios and the scope of governmental support, notably in R&D, and on long-term temporary furloughs. By 2022, all these actions should allow us to return to the level of profitability we achieved in 2019, 10.6% on a pro forma basis. Importantly, we remain, of course, fully committed to delivering on our medium-term EBIT margin, 11.5% to 12%, something we should be able to achieve once the civil aero market has more or less normalized. Turning now to Slide 21, discussing our H2 2020 outlook. Starting with the impact of the crisis on the left of the slide. While we do expect internal productivity to be almost back to normal over H2, we also expect to continue facing some limited supply chain and customer site access issues as well as travel restrictions, which will weigh on our ability to record sales. In addition, I shall stress that the near-term macro trends remain uncertain: first, in civil aeronautics, where aftermarket business will depend on the pace of recovery of air traffic; second, with respect to corporate IT investments; third, more generally, over the overall economic environment. Turning to our global adaptation plan, H2 will benefit from the full impact of our cost-saving actions for which we are targeting around EUR 750 million of savings in 2020. As explained by Pascal, all the teams have been very mobilized on cash management in the crisis. In that context, we will cut CapEx at least in line with the decline in sales, which will represent at least EUR 50 million. And as I mentioned on the previous slide, in the coming months, we will finalize the structural cost adaptation plan for our civil aero businesses, which brings me to our financial objectives for 2020 considering the business environment that I just described very shortly, and of course, assuming no major step-up in sanitary measures on our key markets. So I'm now on Slide 22. With respect to order intake, we expect to record another year of strong commercial performance in Defence & Security, especially thanks to the booking of MKS180, which should be sufficient to drive our group book-to-bill ratio above 1. In view of the near-term uncertainties, we are taking a broader-than-usual range for our sales guidance. So based on the July 2020 scope and foreign exchange rates, we expect sales to amount between EUR 16.5 billion and EUR 17.2 billion. Thanks to the initiatives I've presented earlier, we expect EBIT to be in the EUR 1.3 billion to EUR 1.4 billion range, corresponding to an EBIT margin of around 8%, a rather modest decline in margin over H2, 50 to 100 basis points. Let me stress an important point. This EBIT guidance is based on an EBIT contribution from JVs of around EUR 70 million and on our current base scenario for restructuring costs, EUR 130 million. As we are only starting the discussions with unions on the mix of structured cost measures in civil aero, we are unable to confirm, of course, this envelope if this envelope will cover them in full. This concludes our presentation. Many thanks for your attention. And together with Pascal, we are now pleased to take your questions.

Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Olivier Brochet from Crédit Suisse.

Patrice, Pascal, Bertrand, I would have 3 quick ones, please. The first one is you didn't provide a free cash flow outlook for 2020. If you could give us some elements of the main moving parts, that would be helpful. Second, in 2021, can you provide a bit of color on where or how much of the, I'd say, headwinds of 2020 will be removed? And third, a quick one on Australia. Can you provide an update on Hawkei and on the conversations around the submarine contracts that might come in the future?

Okay. Olivier, thank you for your questions. So starting with free cash flow. I mean, first, of course, I mean, in this overall context, we need to be a bit cautious with regards free cash flow. What is probably good to have in mind is that, I guess, we demonstrated in H1 that, I mean, we managed to -- actually, to contain our free cash flow at a level which is what is satisfactory considering the overall seasonality of working capital for Thales. Second point. I do confirm this underlying 95% conversions ratio from net adjusted income to, I would say, normative free cash flow for Thales. And I mean this is also valid for 2020, and I guess it's going to be valid for the next years to come. Third point, and this is something that we will need to keep in mind. We have, at Thales, some cash flow volatility due to, I mean, those down payments, prepayments and some cut-off effect that was in the past. You probably have in mind that as we released our 2019 figures, we provided you with a table showing, I mean, the sequence of those a bit exceptional working capital moves throughout and in the past period and resulting of a EUR 700 million of outstanding working capital position end of 2019. Those EUR 700 million, reflecting the positive prefunding, in particular, on some large-sized export contracts as well as some nice, I would say, advance payments and cut-off effect that we benefited, in particular, in 2019. And I said that, I mean, this should unwind partially in 2020. So what is our updated view today and those EUR 700 million? My view today is that, I mean, we should probably have, let's say, as I would assume, probably half of that reversing in 2020 and the rest in the next coming years. So with, I mean, what you have in mind in terms of net income for 2020, with what I mentioned on the underlying 95% conversion ratio and what I've just explained on those remaining down payments and cut-off effects that we benefited in the past and how it should unwind 2020, I guess, that you should have a quite an appropriate vision on how our 2020 cash flow should look like. And of course, it will be pretty positive, of course. So that was on free cash. Patrice?

Pascal, yes? You want to...

Can you take the question about the 2021 headwinds? It was your question, Olivier, 2021?

Yes, exactly. Yes.

How much of 2020 headwind would be reverted in 2021?

Is it a business question? Or is it a free cash flow question? It's a business question?

No. No, it's a business question, more generally, yes.

So I mean, as we said, I mean, if we take the civil aero business, I guess, all players are today considering that what we see today, what we are experiencing, it is going to last for a few years. So we don't expect, I mean, civil aerospace business to recover in 2021. So on this first point, and I guess it is probably in line with what other players, other companies are sharing with you. Though overall, I mean, 40%, 50% drop on this specific market -- 40% drop in this specific market is probably a good rule of thumb as compared to pre-COVID-19 level of business. Now I mean, the rest of our businesses, I mean, we mentioned that our drop in sales in 2020 is essentially driven by, I mean, the impact of the sanitary measures and the level of disruption that this has created in particular in Q2 2020. We mentioned that it is normalizing and with the level of internal productivity that is getting back to almost normal level of productivity. We're a little bit cautious also about, I mean, the potential impact at our customers as we see also, I mean, some disruption at our customers making, for instance, access to their site a bit more difficult than it was in the past, of course. This also, together with, I mean, restrictions in terms of travel, for instance, all of that, I mean, are creating some uncertainty. Now I guess we commented that Defence & Security in -- even though, of course, there is some uncertainty as we see and I guess that our tone was pretty positive with regard, I mean, this business in terms of level of demand, of course, being a bit cautious for the long term, but our tone is pretty positive on this side. DIS, we mentioned, but I guess, I mean, Patrice will come back on this point later on, DIS, we have to be a bit cautious as we mentioned because of the lack of visibility for those short-cycle type of businesses. We benefited in H1 from pretty strong level of demand with regards to smart cards and we need to see how this will develop going forward.

Globally -- no, you've answered quite extensively, Pascal. Globally, at group level, and if we take a step back, the progressive improvement of the different markets on which we are present apart from civil aero has led us to say, to consider that in 2022, we should be back to the level of operational performance, the level of profitability of 2019. So if you factor all these, let's say, elements, all these ingredients, headwinds, tailwinds, positive, negative and so on and so forth, it has led us to make this statement. So this is the global view. At the end of the day, we look at as Thales in general. Moving back to Australia, Hawkei and submarine. With Hawkei, things are, say, on track to make it short. Things are on track. So no particular, I would say, point to be mentioned. Submarine. So the difference, I would say, competition -- or competitive dialogues are still ongoing, mainly with Lockheed Martin in our case. So we are waiting -- still waiting, I would say, some final say of Lockheed on several tenders, and in particular, on the sonar side. So the ball arrays, the flank arrays, the towed arrays. My tone is -- I would say, is rather positive, but now it's too soon to say it's done. So -- and it should be announced I hope before the end of the year, that's before the end of the year, at least a kind of a down selection from Lockheed, no?

And the next question comes from George Zhao from Bernstein.

On the DIS segment, how are you thinking about balancing profit preservation and growth investment as you look to capture the Gemalto cost and revenue synergies? And then quickly on the civil aeronautics and IFE, what was the order intake for Q2? And as you think about the recovery there and the potential for maintenance deferred on the aftermarket? What's the order like in terms of Q2 compared to the 50% down revenue?

So George, I mean, civil aeronautics, it's more a short time cycle type of business. So our order intake and revenues are pretty similar. I mean the 50% drop on sales, I mean, that we have reported is, in my view, quite a good proxy on the overall level of order intake on this business. So probably, I mean, what is important to have in mind is that, overall, I mean this civil aeronautics business, a drop in terms of demand by something around 50% in Q2. This is true for revenues, and my view, it is pretty much also true for order intake. Your first question to...

So the balance between profit and growth when we manage overall DIS portfolio, that's a very good question. What we try to do, it's not a surprise, it's to clearly manage for cash, I would say, mature activities like SIM business. It's a mature activity and to extract as much profit as possible from this activity to reinvest in fast-growing and profitable activities like cyber, data protection or digital identity, even biometrics. So it's our day-to-day duty to show in a smart way so that we meet the level of growth and profitability we shared 1 year ago now during the Capital Market Day. So nothing new compared to what we said at that time. Now I say our day-to-day duty to manage this balance between extracting profit on one hand and reinvesting, on the other hand, on fast-growing profitable segments.

Which is just not DIS, I mean, challenge. I mean this is a common challenge that and this is where, I mean, at Thales, I mean, we make decisions. Balancing growth and profitability is a permanent challenge and guides most of our decisions.