Thales S.A.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales first half 2024 results conference call. The presentation will be held today by Mr. Patrice Kane, Thales chairman and CEO, and Pascal Bouchier, Thales CFO. It will be followed by a question and answer session, at which time, if you wish to ask a question, you need to press star one and one 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 Ms. Alexandra Boucheron, VP, Head of Investor Relations. Please go ahead.

Good morning. Welcome and thank you for joining us for the presentation of CELES 2024 Half-Year Results. I'm Alexandra Boucheron, Head of Investor Relations at CELES. With me today are Patrice Kane, Chairman and CEO, and Pascal Boucheron, CFO of CELES. As usual, this presentation is audio webcasted live on our website at stylusgroup.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'd like to turn over the call to Patrice Kane.

Good morning, everyone. So, as usual, I will start with the highlights of the period. and I'm now on slide number two. So we have enjoyed a strong commercial dynamics again in this first half and notably in a defense and security where we have recorded three orders in excess of 500 million euros. This momentum was especially driven by large orders leading our backlog to reach a new historical record of 47 billion euros. Sales were also robust, growing by 6% organically, standing at the top of the guidance range set for this year. This growth was fueled by strong organic growth in aeronautics and defense and security ahead of our expectations. Strong achievements in terms of profitability as well, with an EBIT margin up 20 basis points compared to last year, While we increased our R&D expenses, notably in space, and Pascal will come back to it, and faced high comps for the IS. Last but not least, we completed the acquisition of Cobham Aerospace, and we eventually finalized the disposal of our transport activity. And I would take this opportunity, of course, to thank all the teams who contributed to this operation. Let's move now to slide number three, looking at our financial performance in the future. As previously said, we have enjoyed strong commercial momentum this semester, with order intake increasing by 26% in real terms and by 23% organically, and reaching 10.8 billion euros ahead of expectations. The book-to-bill ratio is once more above 1 at 1.13. Sales reached 9.5 billion euros, growing by 8.9% in real terms and 6% organically. Ebit grew by more than 10%, while EBIT margin improved to 11.5%. This is in real terms, and Pascal will come back on organic numbers later in this presentation. Adjusted net income grew by 6%, taking into account higher financial expenses, as you know, and reaching 866 million euros. Free operating cash flow is positive at 23 million euros, down from previous year as expected, in a still tight supply chain environment, it reflects higher stocks to face higher demand and the need to build strategic inventories to properly serve our customers. Lastly, our net debt position increased by about 400 million euros compared to December 2023, taking into account dividend payments and the completion of our share buybacks program. After this brief introduction, I now hand over to Pascal, who will comment our financial results in greater details.

Thank you, Patrice, and good morning to everyone. I'm now on slide four. So, starting with our order intake dynamic, as Patrice mentioned, we achieved again a very strong order intake level in H1 2024 at 10.8 billion euros, almost aligned with the record high of H1 2022, which was including the Jumbo Rafale order from the UAE. Hence, book-to-bill ratio stands at 1.13 and even at 1.17, excluding the IS, was booked to be structurally equal to 1. So, strong performance and good support to future goals. As shown on the slide, this growth was mainly driven by large orders. 12 orders with a unit value over 100 million euros were booked in H1. And even three out of these 12 orders had a unit value in excess of 500 million. Namely, an additional order from the German Navy for two more frigates The execution of the third tranche of the 42 Rafale Aircraft Order placed by Indonesia in 2022 and also an order for an air surveillance system for military customers based in the Middle East. Looking by activity, nine large orders occurred in defense and security and from very different countries. reflecting an overall strong demands across the board. Turning to orders with a unit value below 100 million euro, the overall increase by 4% versus H1 2023. So overall, quite a solid performance again in H1 2024 regarding order intake. Moving on to slide five, looking at sales. As anticipated, H1 net scope effect is significant at 276 million euros, resulting from the acquisition of Cobam in perverse antecedents, partially offset by the disposal of the electrical system activity sold to Saffron. Currency impact is negligible. Excluding scope and chain effects, our H1 sales go up by 6%, which is at the top of the guidance range set for this year. On the positives, I would say, aeronautics went really well, recording a double-digit growth. Defense and security as well, reaching a high single organic growth. And DIS is back to positive organic growth in Q2, thanks to the good dynamics in both the cybersecurity and the biometric activities. On the other hand, space sales have been stable over the last six months, as anticipated. Turning to the geographical perspective, let me point that growth was solid in mature markets, and especially in France, the UK, the rest of Europe, and also Australia. Growth from emerging markets stands at 2.7%. Moving on now to slide six, looking at the EBIT performance drivers in H1 2024. As mentioned already, EBIT was up by 10.4% in real terms and by 4.7% organically year-on-year, with the margin progressing from 11.4% in H1 2023 to 11.5% in H1 2024. Third driver is our gross margin that went up by almost 13% allowing to hit a new high at 29.2% of sales versus 28.2% last year. Driven by the combination of relative acquisitions and also good performance from all our activities, but space which keeps suffering. With regard to indirect costs, overall a 3.4% organic increase, almost half of top-line organic growth, meaning indirect costs are well under control. SG&E costs have been contained, growing only slightly above 1% despite inflation and a growing top-line. In contrast, R&D expenses are up 7.6% organically, reflecting sustained R&D investments. Restructuring costs are still quite low in H1 2024, as restructuring of space just started. Most of the costs linked to the restructuring plan of our space business will be recorded in H2. Finally, we have lower contributions of our equity affiliates done by 10 million euros compared to last year due to a non-recurring item. Contribution from Naval Group is in line with last year at 44 million euros. Now, looking briefly at each segment one by one, I'm now on slide seven, starting with aerospace. orders stood at 2.7 billion euros at 16% organically. Avionics order intake were very dynamic recording a solid double legit organic growth and more specifically the Aeronautics with one large ordering Q2 booked to install our new IFE product for a major airline. and also new orders related to military avionics and also training and simulation activity. In space, we booked two large contracts, both in Q2 2024, one ExoMars 2028 in our observations, exploration, and navigation business, and another one in our telco business, this one relating to our new generation of geostationary satellites. Overall, the total orders booked in H1 2024 for space were slightly below H1 2023. Sales at 2.6 billion euros increased organically by 4.8%, clearly driven by the double-digit organic growth in aeronautics, reflecting a notably excellent dynamic in our IFC and civil flight avionics businesses. This compensated flat sales in the space business. Now, if we look at profitability, EBIT margin is down compared to H1 2023 from 6.9% to 6.5%. Again, the avionics business recorded a strong organic performance at a solid double digit EBIT margin. in line with where it was before COVID, thanks to operational leverage and the top-line goal. On the other hand, space EBIT is negative in H1 2024. For the full year 2024, EBIT level for space will be negative by around 50 million euros due to restructuring costs linked to the recovery plan. and also the peak of R&D expenses to finalize the developments of this new generation of geostationary satellites. Consequently, the margin of the aerospace segments as a whole will be at the same level as last year. And maybe a last word before we move on to the next segments. We completed earlier in April the COMAM acquisitions and integration is going well. Patrice will come back to that later on. Turning to slide eight, looking at the defense and security segments, which is straightforward. Order intake amounted to 6.1 billion euros, up 36%. Q1 was exceptional, Q2 softer as anticipated because of high comps and also cut-off effect between Q1 and Q2. Still showing an excellent momentum with large orders booked between April and June this year. Our backlog in defense and security hit a new high at 36.5 billion euros, representing 3.7 years of sales. Sales amounted to 4.9 billion euros, up 8.5% organically versus H1 2023. Many business units reached again strong organic growth. This strong level resulted from the combinations of our strong backlog, as mentioned above, and the efforts put by the group into ramping up its overall production capability. So to conclude on the defense and security organic sales growth, we are ahead of the confirmed mid-single digit plus pull your guidance. Last point, the EBIT margin, as you can see, slightly up at 12.9%. Again, a solid performance. And finally, digital identity and security. I'm now on slide nine. Before speaking about the figures, let me just remind you two significant scope evolutions that you have to take into consideration for 2024. First, of course, integration of Tessiant and Imperva over the 12 months of 2024, but also the transfer of the civil cyber activities from our defense and security segments from January the 1st, 2024. 2023 figures have been restated for this internal transfer. At 1.9 billion euros, sales are by 15.1%, but almost flagged organically, meaning we are back to positive organic growth in Q2 after a 2.5% decrease in Q1. This despite still lower sales at our banking payments solution business. And finally, EBIT is down by 7.4% organically at 272 million euros with an EBIT margin now at 14.1% versus 14.7% in H1 2023, which was, however, quite a demanding reference base. This slight EBIT margin erosion is due to lower volumes in banking payment solutions and price pressure on mobile communication. In these environments, we decided to support our pricing policy to protect our margins at the expense of a bit less sales in some countries. The above 14% EBIT margin reflects the successful implementation of this strategy. Turning now to slide 10, looking at items below EDIT. First, the cost of net financial debt. It might be surprisingly low for some of you. It takes into account costs of financial debt for 87 million euros related to a 4.6 billion euro net debt at the end of June 2024. And this is in line with our expectation. However, this is partially offset by other financial income. mainly on non-recurring dividend payments from non-consolidated investments for around 20 million euros, as well as 10 million euros positing Forex results, while it was negative by 10 million euros last year. So this ends up in a total amount of minus 55 million euros for H1, which of course cannot be extended for the full years, considering what I've mentioned about non-recurring items, positive items. The final cost on pensions and other employee benefits one down by 10 million euros due to the removal of the interest expense following the transfer of our pension obligations in the UK that we carried out in December 2023. Then taxes. As you can see, the effective tax rate stands at 20.4% versus 20% in H1 2023. The adjusted net income from discontinued activities is in line with expectations for five months in 2024 relating to this transport activity. So all of that leading to an adjusted net income group share increasing from 819 million euros in H1 2023 to 866 million euros in H1 2024 and an adjusted EPS of 4 euros and 21 cents, up 7.7% versus last year. Now a few words about our free operating cash flow. I'm now on slide 11. Since the disposal of a transport activity is now effective, we choose to focus on the free cash flow from continued operations. So free operating cash flow from our continued operation amounts to 23 million euros versus 253 million euros in H1 2023. As Patrice explained earlier, we are to further increase our inventories as we have an increasing number of orders to execute and we are still facing some supply chain issues on certain components. Increasing our inventories enables us to properly serve our customers in these environments. Of course, cash remains a key focus across the group And we confirm for the full year 2024, a conversions ratio close to 100% from adjusted net income to free operating cash flow, putting aside the contribution of transport. Finally, moving on to slide 12, with a quick look at the evolutions of our net debt position. Our net debt end of June amounted to almost 4.6 billion euros versus 4.2 billion euros end of December 23. As you know, we have continued to work on our capital redeployment in H1 2024 on key elements. First, from an M&A standpoint, the acquisition of Cobham for about 1.1 billion euros, and the completion of our disposal of our transport activity for about 1.7 billion euros. And second, the completion of our share buyback program in March 2024, resulting in a cash out of 176 million euros in H-124. This came on top of the 534 million euros dividend payments. For the year end, we expect a significant drop in our debt driven by a strong cash flow generation in H2. We also need to keep in mind the expected interim dividend payments in Q4 and a normative level of new IFRS 16Ds. And that's the end of this financial review. I'm now turning over the call back to Patrice.

Thank you Pascal. So now on slide 14, turning to our strategy and outlook. Here are the four strategic priorities we intend to focus on in the near term, which are fully in line with what was stated during the full year result presentation. First, ramping up our capacity to address the strong underlying trends in our markets. One of our primary focus in recent years has been to increase our capacities. This includes not only production capacities, but more importantly, ensuring we have the right talent in place to seize market opportunities. Looking back to March 2024, we announced the hiring of approximately 8,500 people for high expertise roles while continuing to invest in enhancing Thales brand awareness. maintaining our innovation leadership and sustaining excellence in R&D, which remains a major driver of competitiveness in our markets, fully part of our DNA, as shown by an impressive 20,500 patents portfolio as of end of 2023. A key priority for the group this year also is to deploy and focus on Thales AlinaSpace Adaptation Plan launched back in March 2024. And lastly, about integration of acquisitions. You know that we proceeded to large acquisitions in 2023 with Tesserent, Imperva, Cybersecurity, and with Cobam in aerospace in April 2024. That is one thing to acquire a company, That's something else to integrate it, especially for large acquisitions. So let's see where we are on these four strategic priorities, turning now to slide 15. So first, the capacity ramp-up. We are fully on track with our recruitment targets. So far, we completed 3,900 recruitments as of end of June 2024, and we are confident in reaching our year-end targets. This hiring campaign confirms we can rely on an excellent brand awareness. In addition, we've made several announcements in this first half regarding capacity expansions. In March, we announced that we will multiply by four our missiles production in Belfast between 2022 and 2025. In June, we announced our intention to quadruple our ammunition production capacity at La Ferté-Saint-Aubin, namely from 20,000 in 2023 to over 18,000 a year by 2026. In July, we inaugurated in Herstal, Belgium, an assembly line to quintuple the production of 70 millimeter laser-guided rockets from 2023 to 2025. And lastly, in Limur, where we produce one of our star products, the GM200 radar, the production has more than doubled between 2021 and 2024, from 10 to over 24 radars per year. And we are moving towards a rate of 30 radars per year. Secondly, innovation leadership. I will focus here more on AI that is already a reality for Thales. Indeed, we have been working on AI for several years now, and were already at scale with an impressive critical mass of 300 AI specialists and around 100 doctoral students. But we decided to move further and we launched an AI accelerator. It will include an AI lab dedicated to early stage research, an AI factory dedicated to the development of AI systems across all our businesses, and an entity dedicated to foster AI in sensors. The core expertise of STALES, of course, relying on synergies between civil and military fields. Thirdly, about space recovery. As you know, we have announced in March 2024 an adaptation plan in space First, to optimize its structure. Second, to maintain its leadership position. And third, to restore, of course, its profitability. This plan mainly consists in the redeployment of 1,300 positions across the group with no forced departure. Those redeployments have actively started and will take place over 2024 and 2025. This plan is designed to preserve and develop skills within Thales thanks to growing opportunities and activities in other businesses of the group. Lastly, about the acquisitions integration. So number one, Imperva's integration is going well. We have started to work on cross-selling opportunities, mapping, and sign out first deals in cross-selling, showing the capacity for Thales and its partners network to offer Imperva application security solutions to Thales' better data security customers. In addition, we are working on organizational integration. Indeed, we are carefully preparing the integration of the sales forces and the partners network to maintain the commercial momentum. This integration will be effective at the beginning of 2025. In terms of R&D, we are committed to retaining talent and fostering collaboration among teams. Starting from the third quarter and in accordance with our plan, we will launch the first features resulting from the integration of Thales and Imperval data security platforms. Number two, regarding Cobam. So regarding Cobham, we intended to proceed with a light integration of this very qualitative and efficient company. Hence, it is now a business line, fully part of the Avionics business unit. Things are also going very well. So turning to slide 16, about 2024 financial objectives that we decided to refine. Our order intake remains unchanged. We expect another year of strong commercial performance, driving a book-to-bill ratio of 1. Regarding organic sales growth and taking into consideration the strong H1 performance, we now expect sales to grow organically between 5% and 6% instead of 4% to 6% as announced in March. Based on the July 2024 foreign exchange rate, This corresponds to sales between 19.9 and 20.1 billion euros. Incorporating all the elements we discussed earlier, we expect a further improvement in EBIT margin, which now should be part of a range between 11.7% and 11.8%. which is consistent with the consensus as we meet on our website on the 27th of July. Last slide, slide 17 is for you to save the days of our upcoming Capital Market Day that will take place on November the 14th in Paris. We will start the day around 11 a.m. with a product showroom, and we will start the presentations around 1 and 1.30 p.m. We will be very glad to receive you for a cocktail at the end of the day, of course, and the event should thus end around 9.30 p.m. Well, this concludes our presentation with Pascal, so many thanks for your attention. And now we are pleased to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. Once again, it's star 1 and 1 on your telephone and wait for your name to be announced. Thank you. We are now going to proceed with our first question. The questions come from the line of Christophe Menard from Deutsche Bank. Please ask a question. Your line is opened.

Yes, good morning. Thank you very much for taking my question. I'm going to start with two questions. The first one is related to a recent political mention that the LPM could see an adjustment in 2025. Do you have more details on this and how it could impact your business? And the second question is on the free cash flow. I mean, given the level of oil intake you had in H1, we could have expected a higher level of prepayment. I understand that there is also inventory buildup. So just wanted to have more color on that inventory buildup, whether it's purely defense related. whether it's consuming all the prepayments or whether actually prepayments were not that big in H1, just to understand the different elements here around free cash flow. Thank you very much.

I take the first one, Pascal? Yes. Bonjour, Christophe. So on the LPM, in fact, this is not a surprise at all. It was voted in the law. This adjusted, in fact, vocabulary means that it gives a little bit of flexibility in terms of physical priority, not in terms of financial priority. So it doesn't mean that it will lead to more or less money. It just gives the ability to the Ministry of Defense to reorganize slightly, I would say, the priorities in terms of acquisition. That's all it means, nothing more, nothing else. And it was said explicitly by the French president on the 13th evening when he delivered his speech, as usual, by the way, in front of the armed forces just before the Baisti day. On the free cash flow.

Okay. So, bonjour, Christophe. So, on free cash, I mean, first, it's important to have in mind that it's a typical pattern for Thales. I mean, in general, H1 being quite low in terms of free cash and quite a strong level of cash flow on H2. And you perceive that I will confirm the overall guidance for the full year 2024. In terms of the comments relating to each one, first maybe on done payments. Done payments are much related to the nature of the contract that we sign. I mentioned in particular three quite large project contracts in excess of 500 million euros to outside Europe. one in Indonesia, the other one in the Middle East, and this traditionally comes together with some joint payments. It's a typical pattern for this type of defense export contract. The last one that I mentioned was about the two additional frigates, two additional boats for the F-126 project in Germany. Typically, there is no down payment associated with this type of contract. So you see, I mean, it can be quite a different pattern. Now, what we need to have in mind that overall, I mean, we have not seen any change in the way we get done payment from our customers. It's pretty much in line with what we've seen in the past. All of that also meaning and I made it clear that we build up inventories in a significant way in H1 2024 as compared to the end of 2023. Probably the level of stocks will go down in the second half and will end up 2024 at a level of stock that will be lower than it is end of June 2024. Now, as we mentioned, quite important also here again to bear in mind that in this quite volatile, complex, under-constrained supply chain environment. For us, it's critical that we can build up strategic stocks on specific type of components, but also hardware. And it's true that we keep suffering on this matter. We have also been a bit impacted by what I call missing parts. which results in a product that is fully available for our clients but where there is a missing part and that we cannot deliver to our customers because we keep waiting to get this last missing part. So still a bit of volatile environments from the supply chain and overall tight supply chain environments. And overall, I mean, this level of increase in stock reflects these overall environments. But we expect, I mean, a drop in H2 as compared to the levels that we got out of Jonah.

Thank you very much. Thank you.

Thank you. We are now going to proceed with our next question. The questions come from the line of George Thao from Bernstein.

Please ask your question.

Hi. Good morning, everyone. First, what exactly changed in the guide with respect to space even? I mean, previously, you had the expected peak R&D this year. So is it higher R&D expense now, or is restructuring cost higher this year? And what does this all mean for the path towards the high single-digit margin for space by 2027? And second question, coming back to that defense outlook, can you sustain the mid-single-digit growth over the medium term, given the current government uncertainty? The LPM covers the medium term, but we know that the finance bills need to be approved annually. So if we see delays under this government, how do you assess the downside risk?

Okay, good morning, Georges. Maybe I will start on space. So first, it's true that overall it's quite clear that we confirmed the overall guidance in terms of EBIT margin, even though the range is narrower than it was in March. And it's true that we expect today, as I mentioned, a level of EBIT for space, which is for the full year 2024 below what we had in mind a few months ago. So I mentioned minus 50, 5-0 for the full year 2024. So behind that, I mean, there are two key elements. First, I mean, we mentioned in March that restructuring costs will be equally split between 2024 and 2025. And overall, we believe that the response in charge will be higher in 2024 than in 2025. So we tend to go even quicker on the overall, I mean, cost adaptations program for space that we had initially in mind. And this coming on top of the overall level of revenue that for 2024 is a bit below than what we expected a few months ago. We're expecting space sales to be slightly positive in terms of organic growth in 2024 versus 2023. Today, our best guess is that it could be just stable as compared to last year. which means that it's even national reason for us to go even quicker in terms of the overall restructuring of space. This doesn't change at all, I mean our midterm view in particular 2027 in terms of a bit margin for space. Maybe last point, I mean on space. I guess it was clear from the presentation that 2024 the peak of our investments in terms of R&D for space are the developments of our new generation of geostationary satellite should be finalized by the end of 2024. So this means that 2025 will benefit from lower R&D expenses for the reason I've just mentioned. Patrice, a defense view, midterms.

Yeah. Hello, Charles. Good morning. So defense outlook. and the question of the single-digit growth in the long run or in the long term. First and foremost, as you know, this defense outlook is mainly linked or correlated with the geopolitical situation. It's the least to say that this situation is preoccupying, if I may say, in many parts of the world. And it's not going to change because of such or such election in such or such country. And namely in France, if you refer to the situation in France. There is a war in Ukraine, there is ongoing tensions, if not rising day after day around Taiwan. There is the conflict or the war between Israel and Palestine. And also, it's the least to say that the US election is another factor of, I would say, volatility, if you allow me, in this overall environment. Even the new Commission, by the way, in Europe, has reiterated its strong support and strong, I would say, involvement in defense matters and support to Ukraine in particular or to its own security in Europe. Secondly, as far as France is concerned, there is and there has always been, by the way, a very large consensus on defense matters and defense budgets. So it's true that LPM gives you a multi-year budget planning even though each year there is a loop that is voted to confirm this But clearly, this benefits from a very large consensus in France as far as the French budget is concerned. And perhaps the last element to explain why we are confident on this mid-single-digit growth long-term trajectory. is also that we benefit as TALES, and this makes us a bit different from typically US competitors, to a highly diversified defense customer base. Unlike our US peers that are mainly exposed to one single market, which is very large, of course, on the US market, we are exposed in a positive sense to many, many markets. in Europe, UK, France, Germany, Belgium, outside Europe, Middle East, Asia, South Asia, even further away, Australia, as you know. So this highly diversified custom base also brings a level of resilience to our defense activity.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Hervé Drouet from CIC Market Solutions.

Please ask your question.

Yes, good morning. Thank you for taking my questions. Two on my side. The first one, can you give us a bit more clarity on what you want to do with your space business? Obviously, I mean, it looks like there are ongoing discussions with potentially other partners. But when we looked at, for example, what you invested in R&D in space, it looks like you are putting money in your space business. Does it mean in the medium term you are quite keen in keeping that business and potentially consolidating it rather than spinning it off? That's the first question. The second question is regarding Imperva. Can you share with us what was the margins of Imperva in the first half, 2024, and if you have taken any restructuring or integration costs to include Imperva in your DIS unit. Thank you.

Shall I start with Space, Pascal? Good morning, Hervé. Thanks for your question. So, space business, again, we should probably, to answer, I would say, correctly to your question, make the difference or take, I would say, three segments one by one, because they deserve, I would say, probably a detailed analysis. Number one, If you take the first segment, which represents two-thirds of task turnover, namely observation, exploration, and navigation business segment. So two-thirds of the business is very sound, very robust. We benefit from a strong order book. We have, I would say, good customers, many open space agency or some national space agencies. And we enjoy, I would say, a reasonably profitable business on this segment of the market. And looking forward, the outlook is really positive, as a need, as a willingness to nations to invest in this domain is quite strong. Second segment is... is the service business, Telespatio. It's not TAS per se, but Telespatio contributes as well to the resilience of our space business. It's a nice, growing, profitable business in terms of service. So clearly a no-brainer for us, a good business to be in. The third one, which is at stake at the moment, is the telco business, which is clearly under pressure, as described by myself and by Pascal. For many reasons we have already explained, so probably not going to come back on these reasons this morning. But still, if we take a mid-term perspective, the needs in telco are absolutely huge. So we are confident on the long run, once we will have, I would say, finished our peak of R&D in terms of space-inspired development, that we will recover, I would say, a normalized level of profitability. Hence, overall, our commitment for 2027 that has been recalled by Pascal making this business, a good business, a good and I would say reasonably profitable business on the long run.

Maybe just to complement Patrice, in particular this 2027 objective in terms of margin for space, 7%, this level of return on sales allows this business to have a level of returns which is above the average cost of capital of this business. Overall, probably the best demonstration that this business can be a good business for Thales. Your question on Imperva was very specific, Hervé. So, imperver margin in H1 was pretty strong, in excess of 15%, even a bit above. I will not detail, I mean, to give you the exact figures, but in excess of 15 persons. And you also asked for, I mean, level of integration cost and restructuring. It's true, and I confirm that overall for the full year 2024, we will have integration costs for Imperva. It has been quite minimal in H1. It will be more materials in H2. And we mentioned, I think, in the past that overall, I mean, integration costs for Imperva in 2024 should be around 20 million euro. So I confirmed this amount. The bulk of it will be booked in H2. And overall, I mean, good to see that, I mean, the integration of Imperva is seamless, smooth, going well. So overall, we are quite happy with the first seven months after the completion of the acquisition.

Okay, that's very clear. Thank you. Thank you very much for your two answers.

Thank you, Hervé.

Thank you. We are now going to proceed with our next question. The questions come from the line of Ben Hillen from Bank of America. Please ask your question.

Yeah, good morning, guys. Thank you for taking my question. I just wanted to come back on that space question that you just had. And the question was more like, Patrice, would you be comfortable seeing or be willing to seeing a European champion in the space market? Because I think that's what our question was kind of pointed to. We've seen the headlines around discussions with Airbus following the challenges that they've had. So is that something that you think is an attractive option down the line and even achievable down the line? That would be my first question in space. My second question on defence. At Q1, you talked a lot about PCBs being a bottleneck on the supply chain and one of the big challenges that you've had to deal with and manage. And you talked about things slowly starting to get better. I was wondering if you could give us a bit of an update on where you are on that and how things are progressing there. And then the third defense question I had was at Q1, you commented in the presentation that the orders between 10 and 100 million had grown about 46%. organically, and when I looked at the half-year numbers, it looked as though the overall growth was around 4%. So I was just wondering if I'm missing something there, if there was a timing effect there, just any color you can give us around that. Thank you.

Good morning, Ben. I shall start with the first question, Pascal, going back on space. First, I should have said so to Hervé before. Our plan, our baseline is what we have explained. I mean to restructure the telco segment and to continue to, I would say, run the space business with all the loyal customers that we have in the institutional markets, for instance, or in other parts of the world. That's really our baseline at the moment. Second, you have referred to some, I would say, comments here and there or rumors or whatsoever. Let me just tell you that such type of, I would say, either rumors or talks existing or not, had been ongoing during my 10-year tenure as a Thales CEO. So this is nothing new for me. Perhaps it's new for some of you, but this is nothing new. And no need to comment any further. We need really to focus on what I call plan A, is to restructure the business to put it back on track by 2027 as already explained. Now perhaps the last and very theoretical answer on any, I would say, big merger. On one hand, it could bring, I would say, competitiveness and innovation by optimizing R&D and so on and so forth. On the other hand, you know all the hurdles or that you may encounter in such type of big, big mergers. So it's now your own opinion to make the plus and the minuses. But again, this is a theoretical answer to any big regrouping in any kind of business you may imagine.

Okay, good morning Ben. So update on the PCB. The situation is still quite tight on PCB in terms of supply in some countries, in particular in France, which means that we keep working very hard in terms of increasing the overall supply. and it's true that in some cases we also need to allocate PCBs within the group in terms of priority. So this is reflecting a situation which is not back to normal overall. Then it's about what we do. So we keep working very hard to get second supply, to provide long-term visibility, to sign longer-term contracts. And all of that is working because at the end of the day, I mean, you see the overall top line growth that we can deliver. Defense is a good example, but aeronautics is also a good example. And those are two businesses that are impacted today by the shortage of PCBs, which shows that despite, I mean, all these type of difficulties, we can navigate this type of quite complex environments. It's not easy, of course, from a day-to-day standpoint for our teams. But overall, we managed to deliver growth despite these constraints. Now, overall, it was my comments earlier about consequences, not specifically on PCBs, because PCBs were in a shortage. But overall, one outcome is more inventories overall and to be able to navigate through this quite complex overall supply chain environment, which is not at this point fully stabilized. Your last question, if understood well, was about between Q1 and Q2 on order intake relating to project with unit value below 100 million euros. First, I think it's important to remind everybody that, of course, the bigger the unit value for order intake, the more volatility we can get across quarters. And it's true that a large size project order intake can be quite bumpy. But also the same for mid-size type of projects, in particular the one from 10 to 100 million euros. And it's true that Q1 was especially strong when it comes to order intake relating to contract of unit value between 10 and 100 million euros. Because here again, we might have some volatility. Where I mean it's more a linear trend is a small size contract with unit value below 10 million euros and this is much more linear and this is why I commented about something like four percent growth on this matter. Nothing more I mean to interpret or to consider from from our discussion, but more volatility across quarter than anything else when it comes to, in particular, large-size unit value contracts.

Okay. Very clear. Thank you both.

Thank you. Thank you, Ben.

As a final reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Once again, it's still 1-1 if you have any questions at this time. Thank you. We are now going to proceed with our next question. And the questions come from the line of George McWhirter from Barenburg. Please ask your question.

Good morning. Thanks for taking my questions. Just one, please, on the aerospace divisional margin. How do you expect this to trend in the coming years? given you've got the challenges in space, but offsetting that, I think you've got some accretion from the carbon aerospace communication acquisition. So any comment you can give there would be great. Thank you.

Okay, good morning, George. So, I mean, the margin on aerospace. I would say it's quite simple. I mean, we communicated on our objective relating to our space business with this 7% overall level of EBIT margin in 2027. Now, when it comes to the avionics business, this is where we have not at this point provided you with mid-term guidance. This is what we are going to do at our Capital Market Day in a few months. So you need to be a bit patient. But overall, I mean, what I've mentioned is that We, at this point, came back to pre-COVID level in terms of profitability for Avionics business. So quite a solid double-digit EBIT margin. And it's true that the integration of Cobam will have quite a booster effect on the Avionics EBIT margin. we said that this business is today operating under a level of EBIT margin which is 30%, 30% plus EBIT margin. And this is basically what we see for this business in 2025. And this is absolutely confirmed. So, I mean, you've got various parameters that these equations will be even more explicit as we share with you. I mean, midterms, probably 2028. So midterms. profitability objective for our space business, but those objectives will gather what I've just explained, both from space and what we expect from Aegeanics, including this booster effect coming from the acquisition of Cobham Aerocomm.

That's very helpful. Thank you.

Thank you, George.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Tristan Sanson from BNP Paribas. Please ask your question.

Good morning, Pascale. Thanks for taking my questions. Just a couple of simple clarification. I wondered, Pascale, whether you could give us a few elements about organic cost trajectories in H1. I'm struggling a bit to recoup the organic evolution of the R&D spending, the bidding costs, the SG&A that usually you provide in a bridge. So if you could provide this, it would be useful. And the second question, I want you to understand how the moving parts in the full year trajectory versus the plan. So you said that you expect space to have a negative contribution by €50 million this year. Can you remind us how much you had in mind initially at the beginning of the year? And in terms of offsetting movement, I think you mentioned a non-recurring tailwind from, is it equity fillets in H1? If you can tell us what it is and how much you gain, that would be useful. But I see other mitigating factors that would be helpful to understand how the trajectory to the guidance is shaping up. Many thanks.

Okay. Okay. Good morning. Bonjour. Bonjour, Tristan. So, I mean, first on... on the organic trajectory of our costs. I mean, it's probably better to refer to our presentation on page six of this trial, where we detail the evolutions of our costs, I mean, from both a total but also from an organic standpoint. and uh and the good thing is that we see on this uh on this on this table once again on page six of the presentation that we have really put our indirect costs under quite a strict control and in particular when it comes to sgna sgna so sgna is the addition of both sales marketing and the general administrative overall they went up by by only one percent from organic standpoints against h1 2023 and this despite inflation uh despite i mean the six percent top line growth uh this slight i mean one person plus increase in uh in uh in SG&A is a mix of slightly less than 1% increase in sales and marketing expenses and overall something like 2% increase in G&A. On the other side, it's true that we increase quite substantially our R&D expenses. overall at a base of 7.6% in H124 versus H123. So you see, I mean, quite a mixed trajectory, very strict control of SG&A, and yes, investing more in terms of R&D, but overall indirect costs contained at a level which is half the progressions of organic oils.

If I may add a quick one, thanks. I'm sorry I missed the table, but the kind of €40 million of organic increase in R&D expense is mostly coming from space?

No, it's a mix between space and also the avionics business, which are the two largest contributors of this increase. And the rest of our businesses, in terms of R&D expenses, I mean their hand expenses grow in line with the growth of the top line. Your second question was about our initial expectation for our space business in terms of profitability for 2024. It was slightly negative, whereas today it's true that we see more something like minus 50 million euros on this matter. So there's a gap between our initial view and what we see today on space. which is, let's say, between 30 and 40 million euros.

And just to be comprehensive on that one, the mitigating factor of that, that alludes to the guidance, is it a non-recurring item? As in equity affiliates?

Ah, okay. So, I mean, your last point was about, I mean, the contribution of equity affiliates.

Yeah, well, you said the overall guidance is not really changing. You are now in the range, but it's more or less flat, despite the 40-plus cuts to the outlook of space. There are other elements that are doing better. Oh, yes. I think you mentioned equity affiliates.

Overall, equity affiliates today are in line with what we have done last year. That's pretty much what we see. But overall, it's true that this less optimistic view on space is offset by, in particular, I mean, more a bit better profitability on Avionics and also a bit from our defense and the security business with overall, I mean, a level of top line and level of profitability, which is slightly above our initial expectations. So, I mean, those two elements, avionics and defense and security, compensating for, I mean, a less optimistic view relating to our space segment.

That's very clear. Thank you, Pascal.

Good. Thank you, Tristan.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Christophe Maynard from Deutsche Bank. Please ask your question.

Christophe Maynard again.

Hello, Christophe. Your line is opened. Hello, Christophe. Your line is opened.

Yes, sorry, I'm back. I had two quick questions I wanted to ask. The first one on capacity extension you mentioned in your presentation. I understand that this is included in your guidance for free cash flow in 2024. Is there any capex impact to expect in 2025? That's the first question. On the Q1 call, I think Pascal, you mentioned quickly that you could be interested in some small site security and defense business at Atos, so nothing to do with BDS or nothing to do with a larger acquisition. Can you provide us any update on this? We know we've been following the news in the press quite obviously about what's going on, but you were mentioning at that time mission-critical businesses and kind of small size, so any updates? Thank you very much.

Okay, Christophe. So we start on CapEx and as I already answered the Atos questions in April, we'll leave our CEO Amin to... So we'll be able to compare the two. So on CapEx, it's true that I mean, and we made, by the way, a few press releases on extending capacities on many items, on ammunition, on missile extension in UK, in Belgium, on in particular rockets, on what are extensions in France. And of course, I mean, behind that, it's of course, I mean, the capital expenditure, all of that sitting pretty well with full your guidance that we shared with you. I mean, being of 2024, we said that we should be seeing a capex increase in 2024. last year 2023 it was 620 million euro we mentioned it could go up to 720 million euro probably still a good ballpark so 700 million euro plus it's probably a good guidance for 2024 2025 at this point is probably a bit too a bit too early but we still uh we still uh get quite a significant level of capex in 2025 significantly above our level of dna and depreciation uh a cost of course i mean to sustain i mean the need for us to keep investing more uh following i mean Our backlog, what we shared again with you in terms of expectations on all the intakes. So all of that is for me, I mean, fully consistent. So at this point, probably a bit too early to share, I mean, CapEx for 2025, but of course, probably, I mean, 700 million euros being probably more a floor than a cap. ceiling on what we can anticipate for 2025.

Renato, that's my turn. Hello Christophe. Thank you for the question again. As you know, defense and security is a core business of Thales. So, I would just say that, of course, we look potentially at any opportunity worldwide in terms of defense and security acquisition. And in the case you are mentioning, and I'm not going to comment it any further, but clearly the case that you are mentioning could fall under this category. They run a very, very small, modest defense business at us. So if there is one day an opportunity to look at it, we'll do our job, we'll look at it, and no less, no more. So nothing new, if I may say, compared to what Pascal told you. It was during Q1 call. But again, it is the main, I would say, important thing to keep in mind is the fact that in defense and security, yes, we look from time to time to opportunities here and there. And it may be the case in the case you are mentioning, Christophe, no more, no less.

Thank you. Thank you very much for the call on this.

Thank you. We're now going to proceed with our next question. And the questions come from the line of David Perry from JP Morgan. Please ask your question.

Yes. Good morning, Pascal and Patrice. Apologies. I just want to repeat a question and I'm just not sure I heard the answer. It's probably my fault. I think it's from George earlier on the aerospace outlook. I think it's quite important, given you've lost one and a half billion of market cap in the share price this morning on quite a small drop in EBIT related to space. And some of that seems to be that you're pulling forward restructuring. So I guess there's a consensus for EBIT in aerospace on your website. It's 542 next year in 2025. I mean, are you broadly happy with that consensus at the moment for aerospace or does that need some kind of reset, do you think?

Thank you. Good morning, David. I mean, at this point, I mean, a bit difficult for me to comment. I mean, 2025, I think that I said and would like to confirm that Considering what we shared on space, we expect the level of EBIT margin for 2024 for aerospace to be stable versus 2023. So stability in terms of EBIT margin. And this reflecting, of course, quite a positive growth on avionics, but also on the other side, I mean a significant drop on space, as space in 2023 was just breakeven. And I mentioned that in 2024, it could be probably something like minus 50. Now, what can I share for 2025? First, on avionics, I mean, we are pretty positive and pretty optimistic on Avionics with the ramp-up of Coba Myrocom with the level of order intake that we see on Avionics with the growth coming back quite significantly on IFE. So on Avionics, I mean, for me, it's all positive, which means that We expect a margin in 2025 for Avionics to keep growing over what will be already a strong level of profitability for 2024. Now, unspaced. Unspaced, negative in 2024. It's going to be positive. This is our view in 2025. So we'll get back in the green territory. fueled by, as I mentioned, lower R&D expenses, less restructuring costs, and the first significant impact of our cost adaptations program that we are putting in place. So if you take those three demands, you will end up with a level of profitability for space in 2025, which will be a positive, probably a bit too early to say how much it will be, but positive. So if you add up what I've just mentioned, AVENIX plus space benefiting from the three drivers that I've just mentioned, I mean, I guess that you've got everything, I mean, to make up your mind. But it should be positive, yes.

Well, yeah, just to press you one more time, I could make up my mind, but coming from you is a lot more powerful. Sure. Is it going to be a 9% plus margin in aerospace in 2025, or do you think 9% will be a struggle?

Yeah. At this point, it's really, for me, it's a bit too early to be so precise, David. Probably the type of thing that we'll be able to share with you in a few months, but at this point, probably a bit too early.

All right. I can only try. Thanks a lot.

Thank you.

Thank you. We're now going to proceed with our last question. And the questions come from the line of Emerick Poulin from Kepler Chivalry. Please ask a question.

Yes, good morning. All of my questions have been kind of answered, but following up on David's questions, share price reaction, you know, relative to the very small adjustment in EBIT guidance, stock looking very cheap. Is there a point where you might decide to resume the buyback program given the valuation that you currently enjoy?

I think it's a good question for the CMD and for next year. It's a board decision, as you know, Emeric. So let me just ask you to be a bit patient and wait for the CMD. It would be the perfect occasion to discuss or rediscuss capital allocation and typically this type of level. It's part of the toolbox now. So I'm happy to discuss that in November. Perfect.

Thank you.

So if there are no further questions, I think it's time to conclude this call. So as you understood, H1 2024, to our opinion, was pretty solid. And we, of course, remain focused on the execution of our growth strategy and the delivery of our financial objectives for the full year. Thank you very much for your participation. Have a nice summer break and see you or talk to you very soon. Goodbye. Thank you very much. Bye-bye.

Thank you, ladies and gentlemen. If you didn't have a chance to ask your questions on today's call, please do not hesitate to send your questions to talusgroupinvestorrelations at ir at talusgroup.com. ir at talusgroup.com. and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect your lines. Thank you.