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Thales CEO Sees Profit Uplift in Regional, Product Review

Thales SA (HO) Chairman and Chief Executive Officer Jean-Bernard Levy, 10 weeks into the job, said he’s reviewing the regional and product focus at Europe’s biggest defense electronics company to improve profitability.

Thales rose as much as 13 percent in Paris, the most in 13 years. Levy, the former Vivendi SA (VIV) CEO, said Thales is in a “significant period of introspection ” about its future direction. Cost cuts plans will be refined along with the company structure, he said.

Levy was tapped in late December to succeed Luc Vigneron, who was ousted by primary shareholders Dassault Aviation SA (AM) and the French state after less than three years into an effort to improve financial performance. The aerospace company has leaned increasingly on booming commercial sales to Boeing Co. (BA) and Airbus SAS as military demand has sagged.

“When you look at aerospace companies, we are still the poor guy in the room,” Levy said yesterday in reference to profit margins that trail competitors. The company will stick with the cost savings plan Vigneron put in place “but with different style,” Levy said.

Thales surged as much as 3.43 euros to 30.42 euros in Paris, the most since 2000, and traded at 29.98 euros as of 9:32 a.m. Before today, the shares had risen 2.8 percent this year, valuing the company, owned to 27 percent by the French state, at 5.5 billion euros.

Earnings Target

The operating margin last year rose to 6.5 percent from 5.7 percent in 2011, the company said today. The target for this year is an earnings gain of as much as 8 percent, Neuilly-Sur- Seine, France-based Thales said.

The company’s sales and Ebit figures beat consensus estimates and free-cash flow and dividend increases are “key” positive, Morgan Stanley analyst Rupinder Vig said in a report this morning, rating the shares “overweight.”

“Today’s results are solid and the positive guidance for 2013 should be positively received by investors,” Vig wrote.

The maker of airliner in-flight entertainment equipment and the radar for France’s Rafale combat jet generated only about 22 percent of its 13.3 billion euros ($17.5 billion) in sales from emerging markets last year, which have become increasingly important for defense deals as western countries cut spending.

Emerging Markets

“We need to be much more emerging-market minded,” said Levy. The review is focusing on “geography and product lines,” while deals are not a priority, he said.

“I do not believe Thales problems will be resolved through the magic touch of mergers and acquisitions,” the French executive said.

Earnings before interest and tax, including a 35 percent holding in warship maker DCNS, rose to 927 million euros from 749 million euros, the company said. The increase was driven by a 37 percent jump in earnings from the commercial aerospace business and cost cutting introduced by its former management.

Sales this year should remain stable, with growth in civil activities offsetting a less favorable situation in defense, Thales said. A French government review of defense priorities will not affect Thales until next year, Levy said.

The company proposed a dividend of 88 cents, an increase of 13 percent compared with 2011.

To contact the reporters on this story: Robert Wall in London at rwall6@bloomberg.net; Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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