Thales S.A.

Good morning ladies and gentlemen and thank you for standing by. Welcome to today's TELUS Q1 2023 results conference call. There will be a presentation followed by a question and answer session at which time if you wish to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr Bertrand Delcaire, VIP, Head of Investor Relations. Please go ahead, sir.

Yes, hello. Good morning. Welcome and thank you for joining us for the presentation of Thales' Q1 2023 order intake and sale. I am Bertrand Delcaire, the Head of Investor Relations at Thales. With me today is Pascal Bouchard, our CFO. As usual, this presentation is audio webcast live and on our website at thalesgroup.com. where the slides and the press release are also available for download. A replay will be available soon after the end of the event. With that, I would like to turn over the call to Pascal Boucher.

Thank you, thank you, Bertrand, and good morning, everyone. Before moving on to the numbers, as usual, I wanted to highlight a few items. I'm now on slide two. First, I wanted to point out that While we are not yet back at the COVID-19 level, our aero aftermarket and biometric business continue to be boosted by the ongoing air traffic recovery, which clearly shows in our Q1 numbers. The second important matter I wanted to stress is the better visibility that we now have in regard to the new LPM, the Military Programming Law in France. The LPM gives direction in terms of defense spending in France between 2024 and 2030, which offers seven years of visibility for a country that represents 40% of our defense sales. and is our lead customer and source of innovation funding. It draws a growth acceleration moving from 5% growth per year in recent years to 6% expected from 2023 to 2027 before reaching 7% per year from 2027 to 2030. In addition, it is striking to see that it plans significant investments in new domains of confrontation, such as cyberspace, space, or drones, in which we have strong positions. Obviously, this is very positive for Thales, and it confirms the trajectory Patrice Kane highlighted in March. when he said that we expected that growth for our descent segments would move up from mid-single digit in 2023 to mid-single digit plus in 2024. Looking internally, we continue to implement our EST roadmap with two significant milestones to share with you. We received the SBTI certification in March, and it's a great validation of our strong commitment in regard to CO2 emission reduction. We are one of the very first large aerospace and defense companies to receive it. Second important topic, anti-bribery remains paramount across our different markets and geographies. Hence, the importance to continue to expand the certifications to ISO 37001 standards. The certification now covers five countries, which represent almost three quarters of our state. France, UK, Netherlands, USA, and Canada. So let's now have a look at our Q1 headline numbers. I'm now on slide three. New orders amounted to 3.4 billion euros, up 13% on a reported basis and 14% on an organic basis. So a strong start of the year in terms of commercial activity, which I will comment in further detail in the next slide. Sales came to 4 billion euros, up a solid 9.4% on an organic basis, above full year guidance. Despite the negative scope effect, these Q1 sales represent the new record high for our first quarter. Looking to details at our order intake, I'm now on slide four. As you can see, the strong organic growth by 14% is fueled by each category of orders. three large orders above 100 million euros, for a total of 401 million euros, versus two large orders in June 2022. Two of these three large contracts were related to states in observation and exploration, and one contract was for an undisclosed large military customer. Orders between 10 to 100 million euros were up by 8%. And finally, orders below 10 million euros progressing by 17%, driven by the ongoing rebound of our civil iron biometrics businesses, especially in aftermarket and passport production. Turning now to slide five, looking at sales goals. First, award and currency and scope. The currency impact was not material this quarter, minus 16 million. The scope impact was most significant, resulting from the acquisition and transfer activity carried out in 2020. The biggest factor was a transfer of our IoT connectivity module business to Sellit, which drives a negative 97 million euro impact in Q1. This impact is expected to be at around 360 million euro over the full year. On the acquisition side, we add the Bolton transactions we closed last year. REIT in aero, AAC, SEC21 and Exelium in the defense and security segments. And also one welcome in DIS. All of that for a total of approximately €60 million over Q1 and an estimated €350 million over the full year. So as you can see on the right, a negative impact of 39 million euros in Q1. And you should expect a similar type of impact going forward in Q2. And then clearly more negative in Q3 and Q4 as acquisitions were closed in Q2 and Q3 last year. Over the full year, the overall negative impact should be around 250 million euros, and this does not include the expected disposal of our aero-electrical systems. The organic growth reached 9.4% ahead of the full year guidance. It was driven by the ongoing performance of the IS and by the SMS business and was supported by a steady, strong quarter in business. And I will comment in greater detail the dynamics by business in the coming slides. Turning to the geographical perspective, a strong quarter across the board, with most geographies strongly up. The only region squarely negative was Australia, and it didn't come as a surprise as the country stayed in the middle of the production of the Hawkeye vehicle. So overall, a strong first quarter in terms of sales. Now, looking briefly at each segment one by one. I'm now on slide six for aerospace. Borders were slightly down by 3% organically, and despite two positive news. First, the two contracts above 100 million euros in space, as I mentioned earlier, and also the ongoing rebound of small orders in civil aero. The reason behind the slightly negative organic variations is that in Q1 2022, the total value of the two large contracts was greater than the total value of the two large contracts booked in Q1 this year. Sales were strongly up. 10.2% organically, driven by the strong growth in aeronautics, including 45% in civilian aero aftermarket. The space business remains flat, as forecasted, versus a strong Q1 in 2022. Now, turning to slide seven, looking at the descent and security segments. As you can see, another strong quarter in terms of order intake, up by 31% organically with one contract above the 100 million rule, versus 921, 2020. And also, small orders nicely up IC delegates. Organic sales growth was up by 5.4% organically continuing on a positive trend across most business lines, from air defense to secure communications or marine mission systems. One point that I wanted to highlight is that despite these good reasons, it's important to keep in mind that component shortages and supply chain tensions are still a reality. Hence, nice to see and to confirm that the teams have been able to manage to go mid single digits despite this ongoing headwind. It's obviously a positive sign in regard to our ability to deliver the mid single digits organic growth we committed to for the defense business for the full year of 2023. Now turning to slide eight. Looking at our last segment, digital identity and security. At 779 million euros, sales were up by 20.1% on an ordinary basis. This strong performance was mostly due to an ongoing growth in passport demand within our biometric business above expectations. However, forecasting a low type of growth for the rest of the year, this is what we need to have in mind. And also, a new strong quarter for smart card businesses still benefiting from pricing effects on top of a small volume growth. Again, let me remind you that these smart card businesses are a bit difficult to forecast over multiple quarters as they are short cycles. We expect growth to soften in the coming quarters and pricing in this market will even turn negative over the second half of 2023. So let me finish with slide nine and a reminder of our financial objectives. Q1 represents the steady start of the year, which allows us to confirm the financial objectives for 2023. So this concludes my presentation. Many thanks for your attention, and I will now be pleased to take your questions.