Thales S.A.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q3 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 and 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 turn the conference over to Alexandra Rocheron, VP, Head of Investor Relations. Please go ahead.

Good morning. Welcome and thank you for joining us for the presentation of Thales 9 Months 2023 Order Intake and Sales. I'm Alexandra Boucheron, the Head of Investor Relations at Thales. With me today, Pascal Boucher, CFO of Thales. This presentation is audio webcast live on our website at thalesgroup.com, where the slides and the press release are also available for download. A replay of the call will be available in a few hours. With that, I would like to hand over the call to Pascal Boucher.

Thank you, Alexandra, and good morning, everyone. So as usual, to start this presentation, I wanted to highlight a few key messages. I'm now on slide two. I will start with a few words on our recent dynamisms in terms of portfolio management. We have been quite active both in the first half and during the third quarter of 2023. And I wanted to come back in particular on the acquisition of Imperva that was announced at the end of July. Imperva is a leading US-based data and application cybersecurity company with an enterprise value of $3.6 billion, which makes it one of the largest acquisitions conducted by Thales after Gemalto. With this acquisition, Thales is taking its cybersecurity business to the next level. This acquisition represents a rare opportunity for us to create a world-class leader in premium cybersecurity products, enabling growth in data security and Thales entry into the attractive application security markets. So clearly, we are excited about this new step in Thales development in this fast-growing market, and we are very satisfied that it has been well received by our shareholders. who also saw the potential for value creations thanks to significant synergies. Of course, we have been working on getting all the various regulatory approvals that we need, and it is progressing well to ensure closing early 2024. As you can see on the slides, we were also happy to confirm the closing of two deals. the acquisition of Tesserance, an Australian cyber security service business, and also the disposal of the electrical system business to Safran. A last word on portfolio management. Even though it has been longer than anticipated, good progress was made again regarding the transport business disposal. And we welcome the decision from yesterday where the European Commission has approved the acquisition. Of course, Thales remains fully committed with Hitachi Rail to finalize this transaction in the first half of calendar year 2024. As you can see, there is also two additional positive news that I wanted to highlight. First, we are very proud to be part of the CAC SBT 1.5 degrees index, demonstrating the recognitions of our ESG strategy. And last point, we already presented you that graph during Q1 Earnings Calls, as it was a proposition submitted by the French Ministry of Defence to the Parliament. The budget for the period from 2024 to 2030 has now been voted and approved, which is of course positive for Thales, as France represents 40% of our defense sales and is our lead customer and source of innovations funding. This budget incorporates significant investments in new domains of confrontations such as cyberspace, space or drones in which Thales has strong positions. So turning now to slide three, which summarizes our key figures for the first nine months and the third quarter of the year. As you can see on the slide, the total order intake at the end of September was down by 18% versus ICOMS, as we booked the Jumbo Rafale UAE contract in Q2 2022. Order intake came down by 6% organically in Q3, but again versus a very strong plus 36% organic growth in Q3 2022. Sales over nine months were up by 7.5% organically, supported by an organic growth of 7.2% in Q3 that I will comment in a minute. I'm now on slide four, looking into details at our order intake. As mentioned, Q3 can slightly be lost on Q3 2022. However, the commercial activity remains strong during the third quarter with three additional large orders booked. Two in defense and one in space. Also, please keep in mind that order intake on a quarterly basis can be pretty volatile due to large contracts. The second tranche of Rafale Indonesia is a good illustration. We were working on the finalizations of the contract, and due to the IFRS rules, it will be booked on link Q4 2023. Looking at the chart by unit value now, it's worth noting that small and medium orders continue to progress over the periods, with small orders even up 8% organically. Turning now to slide five, looking at sales goals. First, a world on the currency impact, as you can see, Q3 was again negative at minus 103 million euro, reaching a total of minus 183 million euro over nine months. And we expect the trend to continue to be negative over Q4, to land at around minus 250 million euros for the full year. In terms of scope, there is also a significant impact to model over the full year 2023, resulting from the acquisitions and transfer of activities carried out in 2022 and 2023. I already gave you all the details during the H1 earnings goals, so allow me to refer you to our IR team if you need more information on the subject. Now, over nine months, organic sales growth stands at 7.5%, mostly driven by, firstly, aerospace, confirming a double-digit type of organic growth clearly driven by the avionics part of the business. Secondly, a continuous robust scenario in defense and security, as expected. And thirdly, the ongoing strong sales momentum in DIS outside of the smart cars business. And I will come back on that point in a few slides. Turning to the geographical perspective, let me point out that growth was particularly strong in mature markets, and especially in France, the UK, and all the rest of Europe. Now, looking briefly at each segment one by one. I'm now on slide six for aerospace. Orders at 3.4 billion euros were done by seven persons organically due to ICOMs in both businesses. In space, while we booked five large contracts again over the first nine months, their total value was lower than the total value of the five telco contracts booked during the same period of last year. Civil aero business continued to be quite dynamic with a double digit organic growth, despite one large order booked in Q3 last year in IFE. Sales at 3.6 billion euros were strongly up by 10.9% organically, clearly driven by the robust growth in aeronautics. up at a double-digit organic growth in both OE and aftermarket activities over nine months and also at Q3. The space business remains impacted by supply chain challenges during Q3, especially in mechanical parts, and the situation is expected to continue in Q4, likely leading to a flattish organic growth versus full-year 2022 sales for the space business. However, thanks to the good dynamics in avionics, we are confident that the segments will achieve a high single digit type of organic growth over the full years 2023, as indicated already in the past. Turning now to slide seven, looking at the defense and security segments. Order intake amounted to 6.5 billion euros. down by 29% organically versus a very strong nine months in 2022, as I mentioned before. Two new large orders above 100 million euros were booked in Q3 for a total of seven in nine months. At 31 billion euros at the end of September, our backlog represents 3.4 years of sales. TAILS amounted to 6.8 billion euros by 6.2% organically versus 2022, with several business lines reaching a double-digit type of organic growth over the period, like electronic combat solutions, network and infrastructure systems, and cyber defense solutions. This is just to give you a few examples. Q3 confirms the strong dynamics of the segments, up 8.1% organically versus the same period of last year. However, an important point here. As you know, our defense business is subject to phasing effects, and I wanted to highlight that the strong high single-digit third quarter does not mean that you should expect the same trends over Q4. Looking back at last year's sequence between Q3 and Q4 in defense is a good example. We released 8% organic growth over Q3 that then decelerated to 1% over Q4. Thanks to this solid organic growth over nine months, we confirm our ability to deliver the mid-single digit organic growth we committed to for these segments over the full year 2023. And finally, digital identity and security. I'm now on slide eight. So at 2.4 billion euros, sales were up by 6.9% organically over nine months. When we look back on a quarterly basis, different dynamics in terms of organic growth emerge. A very strong Q1 at 20.1%, a softer Q2 at plus 4.7%, and a slightly negative Q3 at minus 1.5%. This significant slowdown in growth over nine months was in line with the guidance I gave during the H1 earning goals. It was driven by the lower demand and lower price effect and smart cards turning to organic drop in Q3 after an exceptional performance during most of 2022 and Q1 2023. It's also important to note that apart from these smart card activities, the rest of the business within the DAS continue to perform well, almost balancing the smart card decrease with the double digit organic growth over Q3. We anticipate that over Q4, smart cards should remain clearly negative in terms of organic growth versus ICOMs in Q4 2022, resulting from DIS segments into another slightly negative organic growth. Which brings me to the final slide, so slide nine, on our 2023 financial objectives. As you understood, Q3 order intake was in line with our expectation, and we have a solid pipeline of orders for Q4, which allow us to confirm our full year order intake target, namely a book to bill ratio above one. Our sales dynamics remain strong, despite some headwinds in space and the smart card business within the IS. But all together, we confirm our plus five to plus seven persons organic growth guidance range. And no change to our EBIT margin guidance between 11.5 and 11.8 persons. Many thanks again for your attention and I will now be pleased to take your questions.