Thales in pound seats

Europe’s largest defence electronics firm Thales met forecasts with a 2% rise in 2008 operating income and said its profitability would be at least stable in 2009, while toning down revenue ambitions.
The French company posted earnings before interest and tax (EBIT) of €877 million, up from €857 million the year before, and said its operating margin — hit by already announced one-off charges — came in flat at 6.9%.
Reuters reports like-for-like operating earnings rose 15%.
Thales has a majority stake in the unlisted African Defence Systems and separately wholly owns Flightcraft Aviation (formerly Racal) that dominates the Southern African aviation electronics and air traffic control markets.   
Thales revenues rose 1% or 8% on a like-for-like basis to €12.665 billion from a restated 2007 level of €12.504 billion, also matching market expectations.
Net income fell 35% to €650 million after being boosted by capital gains in 2007 and the company said it would recommend a 5% increase in the dividend to €1.05.
Analysts had on average expected operating profit of €876 million and net income of €547 million on revenues of €12.7 billion euros, according to Reuters Estimates.
Chairman and Chief Executive Denis Ranque said the start of 2009 had been “promising” but that the company would closely watch the economy and its portfolio of high-tech developments from military hardware to air traffic control and ID systems.
“We will be vigilant. We will rapidly put the brakes on if we feel things are not developing as they should,” he said.
He said Thales had expanded restructuring by launching a new cost-cutting drive worth €200 million a year by 2011.
Thales said it aimed to keep its “operating margin stable or higher than the 2008 level” in a year that promises steady defence spending for the time being, mixed with persistent doubts over commercial satellites and civil aerospace demand.
It predicted like-for-like revenue growth of 3-5% in 2009, down from 8% in 2008.
Thales’s core earnings had been well flagged to investors following a profit warning at the end of October.
Thales said then it would reach its operating margin goal of 7.25% excluding a third-quarter provision of €60 million for the delayed Airbus A400M military transport programme.
Thales makes the Flight Management System for the troubled A400M troop and equipment transport aircraft.
Asked at a news conference whether Thales would make a contribution as part of any deal to ease the financial burden for EADS, which faces billions of euros in penalties for the delays, Thales Chairman and CEO Denis Ranque ruled that out. “Absolutely not,” he said.
He added that EADS had received significant cash advances from the A400M commissioning countries to develop the plane, but had failed to pass any of this on to suppliers like Thales.
“EADS has kept all the cash. They are being financed like a military programme but we are being financed like a civil programme. We have not received any cash from EADS,” he said.
An EADS spokesman declined to comment.
In civil contracts, suppliers tend to develop technology at their own expense, sometimes in return for a share of revenues. Military contracts often involve lower risk for companies.
EADS has however likened its own contract for the A400M — Europe’s largest single arms purchase — to a civil contract rather than a military one. That is because the price was set in stone and cannot be altered to absorb rises in defence costs.
A French Senate report last month said that EADS had received a total of €5 billion in cash advances from the governments of nations that ordered the A400M in 2003 — Britain, France, Germany, Spain, Belgium, Luxembourg and Turkey.
In addition, South Africa has paid close to R3 billion.
EADS reported a total net cash position of €9 billion at the end of September 2008.
Europe’s largest aerospace group has taken charges of €1.7 billion against losses on the A400M, which has been plagued by delays and in-fighting between itself and suppliers.
The A400M as supposed to enter service in 2009 but is now reported to be unlikely to be delivered until at least 2013
In January, Ranque fired the executive in charge of Thales aerospace programmes, partly over the A400M project
Thales last year took a total of €80 million in charges for the delayed programme, hitting its aerospace division, plus €45 million for problems with two ticketing system contracts that weighed on its security division.
Aerospace and Space profits fell 14% to €203 million in 2008 as the margin shrank 1.35 points to 4.9%.
Security systems, which make up a quarter of Thales’s business, brought in 20% lower profits of €159 million and generated a 1-percentage-point slimmer margin of 5.3%. Thales said the margin picked up in the second half.
Thales’s core defence business — which won more new orders in Britain than in France for the first time last year — produced fatter margins of 9.8%, up 1.6 percentage points, with profits up by a quarter to €532 million.
Britain ordered two Thales-designed aircraft carriers last year, then delayed their entry into service by 1-2 years in a move criticised by UK parliamentarians on Thursday.
Thales was presenting results for the first time since a shake-up in its shareholding structure in December, when French planemaker Dassault Aviation agreed to buy a 20.8% stake from Alcatel-Lucent and a further 5% already held by the controlling Dassault family.
In January, Ranque, who is Europe’s longest-serving head of a major defence company, dismissed reports of a plot to oust him and pledged to defend the interests of all shareholders.
Ranque said he was open to discussing asset swaps with French engine maker Safran, an idea mooted publicly by Safran, but that any such talks must await Dassault’s formal shareholder move expected in the Spring. Both firms have interests in optronics and inertial navigation systems.