July 24, 2014 / 7:21 PM / 3 years ago

UPDATE 1-Thales H1 core profit up on weaker sales; reaffirms targets

(Adds quotes, details)

PARIS, July 24 (Reuters) - France's Thales SA reported a 15 percent increase in first-half operating income to 422 million euros ($568 million) on Thursday and reaffirmed its objectives for 2014 and beyond.

Thales, Europe's largest defence electronics company, said the improvement came despite a 1 percent dip in sales due to pressure on Western defence budgets and a lower contribution from 35 percent owned naval shipyard DCNS.

Thales said its order intake also dipped 1 percent in the first half to 5.22 billion euros as weaker transport and defence units blurred a 17 percent increase in future aerospace business, in a sign of continued strength in the civil aerospace cycle.

Aerospace, buoyed by the commercial aircraft sector, was also the only division to post higher sales, which grew 2 percent, while Defence and Security revenue fell 5 percent.

Thales, whose products range from civil air traffic control systems to combat radar, said orders from emerging markets grew 13 percent, lifted by demand in Latin America including a security contract for Mexico City.

"Order intake in emerging markets should continue to increase, with double-digit growth expected for 2014, offsetting the fall in order intake expected in mature countries, particularly in defence markets," Thales said in a statement.

Sales should remain stable in 2014, returning to "moderate growth" over the medium term, it added.

The company plans through ongoing cost cuts to boost its operating profit by 5 percent to 7 percent in 2014.

It also expects to reach operating margin of 9.5 percent to 10 percent by 2017/2018, up from a stronger-than-expected 7.4 percent in the first half of 2014.

The company had higher cash outflow in the first half as defence companies traditionally get paid at the end of the year, but said it expected this to be corrected in the second half.

Thales said state-controlled DCNS, facing overspending in its civil nuclear activities, would provide a lower contribution in 2014 than last year.

Former Airbus Group defence executive Herve Guillou this week took up an appointment as chief executive officer of DCNS, taking over from Patrick Boissier, who is retiring six months early.

"It will be up to Herve Guillou to look at the situation and restore an improved profitability at DCNS, Thales CEO Jean-Bernard Levy said.

Thales said it would not be significantly affected by the diplomatic rift between the West and Russia over Ukraine.

"Russia is a potential growth area for Thales, coming from quite a low base, hardly more than 1 percent of our sales," Levy told analysts during a conference call.

DCNS partly builds two Mistral-class helicopter carriers sold by France to Russia.

French President Francois Hollande has rejected U.S. and UK calls to halt the sale of the first ship, but has said the fate of the second would depend on the outcome of the Ukraine crisis.

"Obviously the current situation in Ukraine means this growth potential may be delayed for quite some time, especially as we have to expect that authorisation for export of sensitive technologies may happen more slowly," Levy said.

He said this would have "no significant effect" on the company's finances. ($1 = 0.7425 Euros) (Reporting by Gwenaelle Barzic, Tim Hepher; Editing by Andrew Callus and Jeffrey Benkoe)

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