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Thales CEO says European defence capacity tied to orders

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European defence stocks rally for a second day

(Adds European defence stocks, pause in U.S. aid, new quotes)

By Tim Hepher and Isabel Demetz

PARIS, March 4(Reuters) - Europe's leaders have been

told by one of the region's biggest defence firms that their

ability to fill any gaps in military readiness left by

transatlantic tensions will depend on how fast political pledges

turn into orders for arms factories.

European leaders agreed at a weekend summit that they

must sharply increase defence spending to show U.S. President

Donald Trump that the continent can protect itself, igniting a

major rally in European defence stocks on Monday.

And as investors digested the astonishing pace of

geopolitical changes, the sector rose for a second day after a

U.S. official said Trump had paused military aid to Ukraine

following last week's clash with its leader.

Shares in Thales reached an all-time high after

forecast-beating earnings and sensor maker Hensoldt

rose 16%, while other leading regional stocks posted

single-digit gains.

Asked whether Europe's companies could step up production

quickly enough, Thales CEO Patrice Caine struck a cautious note.

"Does Europe have the necessary technology to produce

the full spectrum of defence equipment that it needs? The answer

is yes," he told reporters, adding that France already supplied

virtually all its own military needs.

But he indicated that defence companies would be nervous

about getting ahead of concrete spending plans.

"Production capacity adjusts naturally to the level of

contracts. It is more a question for buyers, governments and

armies. Will the declarations be backed by extra contracts?,"

Caine told reporters after posting annual Thales results.

"When the contracts come we will be ready, but there is no

point in being ready too far in advance," he told analysts.

There have been repeated complaints from the European

defence industry that targets do not translate into orders, or

else that higher spending fills the coffers of U.S. rivals.

UK BOOST

Analysts too have been left pondering how quickly Europe can

meet the challenge, given shortages in supply chains and labour

capacity already felt broadly by defence and civil aerospace.

"Not immediately, not completely, but eventually possibly,"

Agency Partners aerospace and defence analyst Sash Tusa said.

New European Union plans to increase military capabilities

could mobilise close to 800 billion euros ($841.4 billion), EU

Commission President Ursula von der Leyen said on Tuesday.

After hosting the weekend summit, Britain on Sunday

announced an order for 5,000 lightweight multirole missiles

(LMM) from Thales UK for Ukraine, saying this would treble

production at its Belfast factory. That follows an order for 650

of the air defence missiles for Ukraine last September.

"For Thales it represents the equivalent of about one year

of revenues generated in Britain," which are about 1.5 billion

pounds a year, Caine said.

Thales said it is in the process of tripling capacity for

defensive radars as well as equipment for the Rafale warplane,

while quadrupling the capacity for effectors or the core

armament of a missile or weapons system excluding its sensors.

"The ramp-up is not that easy but you have seen our ability

to grow our production capacity pretty quickly," Thales CFO

Pascal Bouchiat said.