DCNS Loss To Trim Thales Profits €100M

Defense electronics company Thales said Friday it would take a €100 million (US $112 million) hit on 2014 operating profits due to an expected net loss of €300 million at naval shipbuilder DCNS.

Thales holds a 35 percent stake in DCNS, with the government owning 65 percent. DCNS contributed €40 million to Thales' operating profit in 2013.

Expected losses at DCNS stem from a sharp rise in "costs to complete" on the Barracuda nuclear attack submarine and other naval programs, and also civil nuclear energy programs, notably the Jules Horowitz research reactor, Thales said in a statement.

The expected €300 million net loss for 2014 at DCNS follows a comprehensive review of the company's programs, Thales said.

Excluding the negative impact from DCNS, Thales said its 2014 results would reflect "both stable order intake and sales," and growth of 5 to 7 percent in earnings before interest and taxes.

Thales expects a "break-even contribution" from DCNS in 2015 and a recovery after this year, Chief Financial Officer Pascal Bouchiat of the defense systems company said on a conference call, Reuters reported.

The review of costs and programs follows the appointment last year of Herve Guillou as chairman of the naval shipbuilder.

DCNS has launched a cost-cutting plan to find €100 million of savings this year and will complete in the first half a strategic development program, a DCNS spokesman said.

The high cost on the Barracuda was a cause for concern, and there is a potential for deeper losses on building the submarine, Sash Tusa, analyst at Edison Investment Research, said in a research note.

"We see this as far more worrying: The Barracuda programme (for up to 6 boats) has been stretched out, and deliveries look to stretch from later this decade to the end of the following one," the note said.

"Given BAE Systems' well publicized problems (and c.£1bn of charges) with the comparable Astute submarine programme for the UK, we think that the current c.€100-150m of charges that DCNS seems to have taken is likely only a starting point," the note said.

DCNS' difficulties seemed to stem from the "weak French defense budget," the note said. "With spending increases looking inconceivable short-term, the ripple effect could yet impact Thales' Land and Air activities too," the note said.

DCNS has appointed three directors in a bid to reorganize the company: Marie-Pierre de Baillencourt will oversee international business, Frank Le Rebeller finances, and Olivier de La Bourdonnaye industry. The company in October named Vincent Martineot-Lagarde as new program director for the Barracuda.

The industrial management team seeks to coordinate research, production and the supply chain, the DCNS spokesman said. The company aims for greater control of the industrial process, international growth and diversification. There are also ambitions for a simpler organization, development of skills and the financial culture.