Thales on Friday reined in its earnings expectations for this year and unveiled a cost-cutting programme as it warned the weak US dollar threatened to take a heavy toll on future profits.

Denis Ranque, chairman of Europe's second largest defence electronics group, said Thales was expecting operating profit growth of 2-5 per cent in 2005, down from the 10 per cent target set last year.

Mr Ranque said that the previous targets had been set when the dollar was trading at about $1.15 to the euro, against more than $1.30 today. If the group did nothing, he said, Thales' operating profits would be hit by ?30m ($40.4m) this year, and as much as ?130m in 2007.

To offset the effects of the weak dollar on new contracts, Thales planned to improve its competitiveness by cutting costs, increasing the level of research spending, and reorganising its sales force. The programme, which would involve the regrouping of different Thales sites in France and abroad, would cost a total of ?200m over the next two years.

He refused to be drawn on the level of annual savings, but said these would at the very least have to cover the effects of the dollar.

Meanwhile, in a reference to last year's attempts by the French government to force a merger with EADS, Mr Ranque insisted that any deal would have to have a ?very great industrial logic. Only strong synergies generate value for shareholders.? Mr Ranque has made it clear that he sees few synergies in a deal with the France-German aerospace group. But he refused to rule out a deal with Finmeccanica, the Italian defence electronics group, which Thales approached earlier this year. He described Finmeccanica as an ?interesting player? in the defence electronics field.

Mr Ranque's comments came as the group reported an increase in pre-tax profit from ?329m to ?435m, on lower sales down ?300m at ?10.3bn. Operating margins rose to more than 7 per cent.

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