Thales S.A.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Fully Year 2024 conference call. The presentation will be held by Patrice Kane, Thales CEO, and Pascal Boucher, Thales CFO. It will be followed by a question and answer session, at which time, if you wish to ask a question, please 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. I would now like to turn the conference over to Ms. Alexandra Boucheron, VP, Head of Investor Relations. Please go ahead, madam.

Good morning. Welcome and thank you for joining us for the presentation of TELES 2024 full year results. I am Alexandra Boucheron, TELES Head of Investor Relations. With me today are Patrice Kane, Chairman and CEO, and Pascal Boucheron, CFO. The presentation will be followed by a Q&A session. As usual, this presentation is audio webcasted live on our webcast at thalesgroup.com, where the slides and the press release are also available for download. Finally, a replay will be available soon after the end of the event. With that, I would like to turn over the call to Patrice Kane.

Thank you Alexandra and good morning everyone. So as usual let's start with the highlights of 2024 before moving on to the numbers and I'm now on slide number two. So starting with the commercial dynamics which was outstanding across the entire portfolio. In 2024 Thales signed six contracts with a unit value in excess in excess of 500 million euro this solid momentum drove a new record for both order intake and battle our sales growth stands above the top of the guidance range set for set for this year at 8.3 percent on an organic basis This performance was notably driven by strong growth in defense. The adjusted EBIT recorded double-digit growth of 13% versus last year. And last but not least, on the financials, cash generation was excellent once again. So in a nutshell, we were able to deliver a sustained robust growth in revenue, profits, and cash in 2024, exceeding all our financial objectives. Moreover, Thales is rolling out its strategic roadmap to strengthen its global tech leadership in defense, in aerospace, and cyber and digital. And we are currently successfully integrating Imperva and Coban Mirocoms, which delivered an excellent performance in 2024. Finally, we launched an adaptation plan in the space business to recalibrate our cost structure to renew market conditions in civil telecommunication markets and restore profitability. Let's now move to slide number three to look at our financial performance with a few charts. As previously said, we have enjoyed strong commercial momentum in 2024 with our order intake up 6% organically, reaching 25.3 billion euros, a level never seen in the history of the group. The book-to-bill ratio is significantly above 1, reaching 1.23. Sales recorded a sharp plus 8.3% organic growth, crossing the 20 billion mark and reaching a new high at 20.6 billion euros. Adjusted EBIT rose by more than 13% on a reported basis. while EBIT margin improved to 11.8%. Adjusted net income group share grew by 7% at 1.9 billion euros, and this despite higher financial expenses linked to the increased cost of debt following the two acquisitions mentioned previously. Free operating cash flow from continued activities increased by 9% largely outpacing 2 billion euros. And last chart, the dividend. This new year of a strong financial performance is leading our board of directors to propose at the next AGM in May a 9% increase to 3.70 euros per share. It demonstrates Thales' confidence and commitment to regular shareholder returns. Turning to slide number four, looking now at our extra financial performance in 2024. I indeed wanted to come back on the continuous progress we have made in terms of corporate social responsibility. First pillar, our strategy for climate change. Our CO2 emissions from scope one and two decreased by 56.8% in 2024 and Scope 3 emissions decreased by 24.7% compared to 2018. The Group has thus achieved its 2030 targets ahead of schedule for the second consecutive year. The absolute carbon footprint reduction targets remain relevant for 2030 in light of the group's growth prospects. A word also on the Thales Climate Passport, a training deployed in 2024 to raise employees' awareness to climate change and its impact on society. This large-scale campaign was a real success with over 67% of managers close to 35,000 TALIS employees who completed this training in 2024, way above the 50% target set. Our second pillar aims at strengthening gender diversity. where at the end of 2024, we are in line with our mid-term trajectory. First, the percentage of women in senior management positions reached 21.1%. This performance is in line with the group's trajectory to reach the set goal of 22.5% by 2026. Second, The percentage of management committees with at least four women reached 61.5% in 2024 compared to 52.6% at the end of 2023. For 2026, we have set an ambitious target to have 75% of management committees with at least four women. Finally, the anti-corruption pillar, where our priority is to seek for permanent implementation of the best standards. In this area, 100% of concerned employees were trained in corruption prevention in 2024, demonstrating the group's continuous commitment to train all employees potentially exposed to risky situations on an annual basis. Also, in 2024, the ISO 37001 certification for anti-bribery management systems was renewed for three years and extended to Germany, Australia, and New Zealand. Thus, in 2024, the revenue generated by certified entities represents 64% of the group's revenue versus 58% in 2023. Those achievements reflect the continuous progress in CSR performance and put us on track to achieve our mid-term targets. After this short introduction, I now hand over to Pascal, who will comment our financial results in greater detail.

Thank you, Patrice, and good morning to everyone. I'm now on slide five. So starting with order intake, as Patrice mentioned, we achieved again a very strong order intake level in 2024, above 25 billion euros, namely 25.3 billions, leading to a book-to-bill ratio reaching 123, and even at 128, excluding cyber and digital, whose book-to-bill is structurally equal to one. So a strong performance and support to future growth as it is the fourth year in a row that our book-to-bin is above 1.2. In more detail now, this growth was notably fueled by large orders. 35 orders with a unit value over 100 million euros were booked in 2024, and even six of them with unit value in excess of 500 million euros. Looking by segments, 27 large orders occurred in defense, and from very different countries, reflecting the worldwide growth of the defense budget. We also enjoyed a good momentum in space, especially in the fourth quarter, with five large orders booked in Q4, of which four in OEN activities, OEN standing for observations, exploration and science, and navigation. I will come back to it in a couple of minutes. Regarding smaller orders, it's worth mentioning that order intake below $10 million and between $10 and $100 million also recorded solid growth. So overall, an outstanding performance in 2024 for order intake. Turning now to slide 6 and full year 2024 sales growth. As anticipated, the scope effect is significant at 649 million euros, resulting mostly from the acquisitions of Cobam, Imperva and Tesserant, partially offset by the disposal of the aeronautical electrical system business to Safran. Currency impact is not material. Turning to organic growth, Sales increased by 8.3% year-on-year, above the top of our guidance range. This was notably driven by decent activities that recorded a sharp double-digit organic growth. As expected, Avionics recorded mid-single-digit growth, and Cyber and Digital posted a low single-digit organic growth. From a geographical perspective, full year 24 sales organic growth was well balanced across the board, including good momentum in both mature and emerging markets. Let's now move to slide seven with a look at the bridge for EBIT from 2023 to 2024. Before commenting it, and as you have seen, we've decided to amend the denomination of our EBIT, adding adjusted before. Please note that these evolutions reflect the ESMA's latest recommendations relating to the denomination of performance measures. However, the definitions of our operational profitability indicator has not been changed at all. Starting with a word on the mechanical impacts on adjusted debits. Scope effect was positive at €162 million contributions. As already commented, primary link to Cobham Aerocom and Imperva. Pension costs were up by €5 million, while currencies impact was marginal. More importantly, you can see the robust progressions of our gross margin, up by 329 million euros, mainly driven by the sales volume progression and defense. Within indirect costs, R&D expenses continued to increase and represented 6.2% of total sales at the end of 2024. As you know, R&D is a key driver of differentiation for Thales. G&A marketing and sales expenses grow organically at half the weight of revenue. Now looking at the performance of each segment one by one, starting with aerospace on slide eight. Orders in the aerospace segments came in at 6.4 billion euros, up 14% in organic terms. Evianix continues to enjoy a solid commercial momentum across all segments. The space business recorded double-digit growth in order intake with a dynamic fourth quarter, during which Thales booked five large contracts with unit value above 100 million euros, of which four related to the OEN business. Now, moving on to sales that reached 5.5 billion euros for 2024. Here again, trends are contrasted between avionics and space. Avionics recorded mid-single-edged organic growth in 2024. This growth reflects the continued strong dynamics in flight avionics, original equipment, and also aftermarket businesses. supported by strong air traffic momentum. However, as anticipated, growth in Q4 was softer due to delays in aircraft and seats delivery that our clients are currently facing. Moving on to profitability. Aerospace segment adjusted EBIT margin remain almost flat. Evianik posted solid double-digit margin up year-on-year. It notably benefited from Coba Merocom's profitability in line with expectations. As anticipated and communicated, Space Business posted a negative adjusted EBIT due to a continuous effort in R&D in 2024, along with a restructuring cost associated to the adaptation plan initiated in March 2024. We can now move to the defense business on slide nine. Order intake amounted to 14.7 billion euros in 2024, to reach a new record high. In 2024, Thales booked 27 contracts with a unit value above 100 million euros, of which five contracts had a unit value above 500 million euros. I can notably name the entry in force of the third phase of the Rafale place by Indonesia, or the order of two new F-126 frigates by the German Navy. With a book to build significantly at 1.34, our backlog in defense reaches a new high at 39 billion euros, representing 3.6 years of sales and providing a very comfortable level of visibility. Sales came close to 11 billion euros, up 13.3% organically compared to last year. This sharp growth reflects a continued supportive environment across most business lines. The segment benefits from the continued efforts and investments to ramp up production and delivery capacity. We have been particularly active in 2024 in these fields, especially regarding effectors like ammunition and missiles, but also airborne equipment or also surface water. Patrice will come back on that point later. Please note the level of growth recorded during the fourth quarter was exceptionally high. It reflects some specific trends that are not recurring or replicable, such as, for example, destocking for tactical radios in the US and also the grandmaster radar business with significant production ramp-up that mostly took place in Q4 when supply chain bottlenecks were unlocked. The production over 2024 should be more linear. Now, looking at cyber and digital on slide 10. As you already know, 2023 figures presented on this slide have been restated to include cyber-civil activities that were transferred from different segments. Scope impact was significant in 2024, notably with the contribution of Imperva over the 12 months of the year. In the cyber and digital segments, sales posted low single digit organic growth as expected at 1.4 persons, crossing the 4 billion euro mark. This performance reflects contrasted trends. The cyber business has recorded a steady pace of growth, successfully leveraging on impervious integrations. This more than offset digital identity activities that have been impacted notably by the slowdown in banking and payment solutions markets. Whether this is talking from our customers, in particular North America, lasted longer than expected. It's worth noting that the digitalization of our secure connectivity business continues at a good pace. For the first time, the digital part of this business exceeds the theme. You might remember We talked at the Capital Market Day about connectivity solutions to qualify the digital part, which comprise eSIM and on-demand connectivity platforms. In this context, the cyber and digital segments posted a solid increase in adjusted EBIT, both in value and margin. The segment adjusted EBIT benefited from the contribution of Imperva that delivered a profitability above expectations. On top of that, digital identity showed resilience in margin thanks to a continuous focus on pricing. As expected, cost of financial debt Sorry, I'm now turning to slide 11, looking at items below the adjusted debits. As expected, costs of financial debt significantly went up due to the increase in debt linked to the acquisition of Imperva and Coba Merocoms. Please keep in mind that in 2024 we also benefited from positive run-off amounting to around 30 million euros on this specific line. The final cost on pensions and other employees benefits went down by 27 million euros, more than 50% decrease due to the removal of the interest expense following the transfer of our pension obligations in the UK, carried out in December 2023. Then taxes. As you can see, the effective tax rate stand at 20.4% for this stable year-on-year. As a reminder, this figure didn't embark any tax surcharge as the 2025 French budget was not adopted before the end of 2024. Let me point out that we expect for 2025 a P&L and cash impact close to 80 million euros from the tax implications of this French 2025 budget. Additionally, our share in Naval Group's net income, which is recorded in our EBIT, will be affected by 8 million euros for the same reason. Minorities have increased year on year, primarily due to the losses incurred by Thales Alenia Space. This leads to an adjusted net income increasing sharply from 1,663 million euros to 18 and 80 million euros on the perimeter of the continued operation. The EPS stands at €9.24 per share in 2024, a 9% increase on a year-on-year basis. Now, a few words on the bridge from adjusted EBIT to free operating cash flow. I'm now on slide 12. A word on the usual recurring items. In 2024, CAPEX investment stands clearly above DNA, resulting in a global negative balance of 138 million euros. This reflects the group's strategy to invest into future growth and capture market opportunities. Change in WCR working capital requirements represented a 26 million euro tailwind in 2024. Other cash items not including the adjusted bid such as cash restructuring, Forex or IFRS 16 lease amortization amounted to a net of 182 million euros. So all in all, 2024 was another year of very strong free operating cash flow generation from continuing operations that exceeded 2.1 billion euros. This is leading to conversions of adjusted net income to free operating cash flow of 114%, which is quite a strong performance again on this matter. Moving now to the operation drivers of cash generation on slide 13. So this robust performance on cash flow generations can be attributed to several factors. First, the order intake throughout the year exceeded expectations, particularly in defense. Second, we have continued to benefit from several payment terms and phasing on our defense contracts. And last, our internal cash program continued in 2024 within all our businesses, addressing new untapped areas of progress. As shared at our Capital Market Day, we remind that we expect a conversions of net income into free operating cash flow of 95% to 105% on average over the period 2024-2028. For 2025, we anticipate a cash conversions ratio between 95% and 100%. Finally, moving on to slide 14 with a quick look at the evolutions of our net debt position. So on page 14, in terms of capital deployments, 2024 saw the closing of two significant operations. The acquisition of Cobham Aerocomps for around 1 billion euros on one hand, and the disposal of the transport business on the other hand, leading overall to a net acquisition and disposal impact of plus 359 million euros. The dividend cash out increased to 708 million euros in 2024 versus 634 million euros in 2023, in line with the net income progression and a payout ratio of 40%. In 2024, the cash out related to our share buyback program amounted to 176 million euros. 1.2 million shares have been purchased in 2024 equivalent to 0.6 percent of the capital overall this share buyback program has been completed end of march 2024 All in all, 7.5 million shares were purchased as part of the program, equivalent to 3.5% of the capital and in line with the target. At the end of December 2024, the group's net debt stands at just a little over 3 billion euros. To conclude, award and dividends on slide 15. This new year of strong financial performance is leading our board to propose to the next AGM a dividend of €3.70 per share, up 9% versus 2023, and in line with the payout ratio at 40%. As you see from the chart, this correspondence to a significant 20% per year increase in the dividend since 2020, reflecting the strong EPS performance. So that marks the end of this financial review. I'm now turning over the call to Patrice, who will address our strategic priorities and guidance.

Thank you, Pascal. Now turning to our strategy outlook for 2025. On slide 17, 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 our November 14th Capital Markets Day. So first priority, ramping up our capacity to address the strong underlying trends in our markets, one of our primary focus in recent years. which will continue in 2025, has been to increase our capacities. And this includes, number one, production capacities, and number two, ensuring we have the right talent to seize market opportunities. Second priority, restoring space profitability. A key priority for the group this year is to focus on leveraging the Thales and ES space adaptation plan launched back in March 2024 to restore profitability. Third priority, maintaining our innovation and R&D leadership to increase differentiation, as these capabilities remain major drivers of competitiveness in our markets and are fully part of our DNA. Lastly, our fourth priority for this year will be to continue delivering strong value creation from our recent acquisitions in PERVA and COBAM, which have both undergone successful integration so far. So first, the capacity ramp up, and I'm now on slide 18. As presented during our Capital Markets Day, Thales is well positioned on fast-growing markets with long-term visibility. Our markets are indeed fueled by sustainable underlying macro trends, like the geopolitical situation for our defense business, leading to increased defense budgets to build credible military capabilities, or like the continuous and steady growth of air traffic forecasted for the next decades, as well as OEMs huge backlog for our avionics business. As a consequence, many of our products are in high demand. To respond to this trend and serve our customers, we have taken actions both internally and externally to accelerate production. Internally, by investing in some of our production sites and recruiting the right talents. Externally, by supporting our supply chain and mitigating potential bottlenecks. Just to give you a few examples, these capacity expansions have already enabled, or will enable in the coming months, to increase our Rafale equipment, our defense radar or our SATCOM cockpit system production capacity threefold and multiply our effector production by four. But as I mentioned earlier, ramping up our capacity also means ensuring we have the right talents in place to seize market opportunities. Thankfully, our strong brand awareness, which has made us a very attractive employer in the past years, led to over a million applications in 2024. Having successfully onboarded over 8,100 people in 2024 and upskilled all our teams, we are now experiencing lower turnover rates, which are back to pre-COVID levels. Now focusing on high expertise roles, we are fully on track with our recruitment target and expect to complete around 8,000 recruitments in 2025. Now moving on to space, slide 19. As you all know, we have been implementing since March 2024 the transformation plan of Thales Alenia Space Telecom's business line in order to optimize its structure, maintain its leadership position, and restore its profitability. This plan mainly consists in the redeployment of 1,300 positions across the group with no forced departure. We are currently right on track with around 50% of positions already redeployed by end of 2024. Hence, we will now seek to leverage this plan to drive profitability recovery with key milestones, expecting operating breakeven in fiscal year 2025, finalizing adaptation plan by early 2026 and reaching 7% plus EBIT margin in 2028. A key aspect of space profitability recovery will also lie in delivering on promising business growth perspectives. TASS has indeed won several significant projects in the last months, notably in observation and exploration with flagship projects like Argonaut Lunar Lander for cargo delivery, Airlock Module for the Lunar Gateway, or Copernicus CO2M payload development, to name only a few. And at the same time, we see the demand in telco geo stabilizing. Third priority regarding our innovation leadership, slide 20. Maintaining strong R&D capabilities is indeed key to bringing pioneering and differentiating products to our customers. In the end, this is why our customers prefer us over the competition. We are already a recognized leader in R&D with a critical mass, enabling us to anticipate the next technological disruptions. And this effort has not gone unnoticed as our 11 mentions in Clarivate's Top 100 Innovators ranking show. To give two concrete examples of this leadership and illustrate on how it enables us to provide the best for our customers, we have launched our Data Risk Intelligence solution, The first solution, combining Thales and Imperva best technologies for better data protection. And second example, FlightEdge, a revolutionary connected cloud-based in-flight entertainment system already selected by some major customers like Delta, DOS, and Qatar Airways. And now focusing on AI, which is already a reality for Thales. So we launched in 2024 our Cortex AI Accelerator, equipping it with industry-leading capabilities, 800 AI experts by the end of 2025 and around 100 PhD students, Europe's number one patent applicant in the field of AI for critical applications, bringing to market over 100 products and services with Thales AI. And to give you two simple examples of how AI is embedded in our products to the benefit of our clients. First, our GM200 radar is enhanced by AI to safely identify even the smallest threats on the battlefield, like very small drones. Second, our developments in the field of maritime mine countermeasures have led to creating the world's first autonomous drone system for mind quantum measures, which integrates AI. Moving now to slide 21. Finally, Thales will focus in 2025 on continuing to deliver strong value creation from recent acquisitions. Imperva and CopaMiracoms are already providing strong operational performance thanks to Imperva's integration progressing as planned and the ongoing merge of commercial forces and the success of Cobam Aerocom's light integration. Focusing on M&A, we are still open to selective and pragmatic M&A opportunities, concentrating our attention on clear strategic fundamentals strong investment service, and strict financial criteria. Last slide, slide 22. Well, all these priorities will bring Thales to pursue ambitious financial targets in 2025, a book-to-bill ratio above one. Organic growth of 5 to 6%, or 21.7 to 20.9 billion in sales, billion euros in sales, and 12.2 to 12.4% adjusted EBIT margin. Many thanks again for your attention, and we'll now be 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 one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one for any question. We are now going to proceed with our first question. The questions come from the line of Chloe Lemarie from Jefferies. Please ask a question.

Yes, good morning, Patrice, Pascal, and Alexandra. I have two questions, if I may. The first one is just on the enablers of the strong defense performance in Q4, because I don't think I can recall a quarter growing this fast in the division. Also, when you commented on Q3 results, you didn't seem to expect such a strong acceleration. So just what surprised you in the capacity unlocks in Q4, and how do you think this carries on going forward? And the second is, can you talk about the margin you expect by division for 2025, in particular the margin recovery in aerospace, given space should be breakeven this year? Thank you.

okay uh good morning chloe so uh maybe i will um i will start so on uh on kufer i mean first i mean and i keep saying that uh looking at our financial just in a quarterly basis uh might not uh might not be the best way i mean to assess I mean, our mid- or long-term overall progressions in terms of growth and profitability. Of course, we've got some volatility. And of course, I mean, this level of volatility is still more obvious as we go from the end of a specific year and the entry in another year. I mean, across quarters in the same civil years, it's probably less apparent, but of course, and I do welcome your questions about why is it that in particular in defense, your growth in Q4 was so strong. So as I started mentioning in my financial review, a few points on this matter. First, it is true that we managed to deliver some equipment that were on our balance sheet in some countries. The best example of that is our client in the US asking us to deliver a significant amount of radios that we had on the shelf that were ready to be delivered. But where we're expecting, we are waiting for the clients to give us a green light, I mean to deliver this, those radio. And it can go pretty quickly. This is more what I would call being some kind of cutoff because it's so that intense, was not our intent, but our expectations was to deliver this stock of radios pretty regularly across Q4, but also the first half of 2025. Another example that I mentioned also is on our radar productions, in particular Grand Radar, the famous Grand Master family, which is, by the way, so successful where I mean we went through a number of production difficulties across 2024 and this really i mean being the outcome of difficulties in the supply chain and you probably remember that i commented many times at our call i mean some difficulties for us i mean to keep producing with a supply chain having some up and down stop and go this creating i mean some disruptions overall in our own production units and it's so that in q4 we got a pretty good delivery from the supply chain. And we managed to deliver a number of radars that was really above expectations. So you see here, I'm giving you two examples where it's more like not a one-off, but more, I mean, Equipments, products that we have in the past considered that they would be delivered progressively until mid 2025. So this is good news. But again, this is why we got this level of growth. Patrick?

Yes, on margin expansion for 2025, as you know, we do not disclose very precise figures per division. but I can give you some qualitative elements that should give you comfort looking at this margin expansion at group level from 11.8 in 2024 to 12.2, 12.4% as we've just shared a few minutes ago. Number one, in the aerospace industry, clearly the space recovery should be, will be a driver of improvement in terms of margins for 2025, definitely. Plus, of course, the full contribution of COBA may come in our financial for 2025. That's the two, I would say, main drivers or explanations. of this future margin expansion. And number two, looking at cyber and digital, it's exactly, I would say that it is the concrete illustration of what we say during the capital market day when we explained that this division would reach 16 to 17% EBIT by 2028. So looking at starting point 2024 and the, let's say, endpoint 2028, This is another, I would say, step up in 2025 that we foresee for this segment or this division. Last but not least, as you know, we do consider that in defense we are already best in class in terms of profitability level. profitability level, around 13%. So this is something that we confirm as should be, I would say, stable around this 13% figure. So you have the different, I would say, moving piece that should give you comfort on this margin expansion for 2025.

Thank you very much.

We are now going to take our next question. The next questions come from the line of Christophe Menard from Deutsche Bank. Please ask a question.

Yes, good morning. Thank you for taking my question. I had two questions. One, it was in the context of the current discussions of increasing defense spend and whether you could give some sensitivity to the guidance you provided at the CND, how you are... looking at the targets that you presented to us with a higher defense spend across Europe. And the second question was around the time to market. Thank you for the slide on the production acceleration. Very interesting. The question is, in your portfolio of defense product, what are the products there where you can accelerate actually the the time to market. Is it air defense? Is it radar system, as you've just mentioned? And this in the context, quite obviously, of the supply chain bottlenecks that you had. Because my understanding is that you may get orders on the products that are easily available or faster than what your competitors can do. Thank you.

Hello Christophe. On the first point, which is, I don't know whether we can call it the elephant in the room, but what has been announced over the last weekend and some very strong statements about the needs, in particular in Europe, really to change gears in terms of a level of defence spending. Of course, I mean, and I guess it was quite clear at our capital market day, our trajectory for growth in defense. And I remind you that we mentioned six to seven persons as average organic growth for defense. over the 2024-2028 period. I mean, this level, of course, being based on what was in the market at that time, and in particular, I mean, France based on the 2024-2030 loi de programmation militaire, forcing, I mean, a rise in defense spending, but a rise that was more something like, let's say, between 5% and 7% per year. And not, of course, reflecting the latest statements, including from President Macron, saying that, I mean, not just President Macron, but across the board, where I guess that you heard, I mean, some very strong statements, the need to move from two persons up to three and a half persons. So, I mean, once again, our trajectory, and once again, midterm trajectory, is not based on this type of acceleration, it is much more based on what was known at that time. And now, I mean, will it change 2025? Probably no, because, I mean, probably 2025 in terms of level of growth of defense will be delivered essentially from our backlog. And now, of course, I mean, if those statements are confirmed When I say confirm, it's moving from statements to orders. So working to welcome orders, reflecting this type of pretty strong statements. And then, of course, we'll accelerate, which is probably a good transition for Patrice to come up with.

Thank you for passing me the ball, Pascal. So it's quite difficult to answer, I would say, with a single sentence your question because we have such an extensive portfolio of equipment and products and solutions that each of them is a bit different in terms of lead time or time to market and whatsoever. What I can say is What we have demonstrated up to now is our ability to adapt very fast to the demand. When you look at the few examples that we have shared with you this morning on this slide dedicated to capacity ramp-up, It has shown or demonstrated that in a couple of years, two years, let's say, one, two years, we have been able to grow the capacity, production capacity, or the output capacity quite fast. So in the future, if we have to continue to do so, it's our job, if I may, to go one step further in terms of industrial or engineering capacity and potentially higher additional talents if we need to have even more engineering forces within Thales. Now, to conclude on this point, What we do need really to trigger another step is additional contracts. We're not going to build capacity for the sake of saying that we are prepared to produce more. And that's probably where there is a gap between political statements that there is a strong willingness in Europe to spend much more, much more, and much more. Now the proof is in the pudding. Where the contracts will come, we will be ready, but it's no use to be ready too much in advance. So here is the delicate balance that we have played, I would say, quite smartly up to now, that we intend to continue to play smartly in the future. And it's for this part, which is the most structuring for our future, than the time to market of each and every product that we have in Thales.

Thank you very much.

We're now going to take our next question. The questions come from the line of Ben Hillen from Bank of America.

Please ask your question.

Yeah, morning guys. I hope you're well. First question for me is kind of similar to that question there, but more geared towards capital allocation. Obviously, things have moved very quickly over the last couple of months. since your CMD and Patrice, you know, the deals that you've done over the last year and a half have been around cyber. They've been common arrow. Do you think there's an opportunity to look more at defense assets on the continent or do you see any kind of shifting priorities in terms of how you're thinking about M&A over the next couple of years, given what has happened? Second question on space. Obviously, you've talked about the profitability improvement, but there's obviously these discussions ongoing with Leonardo and Airbus. Just if you could give us a bit of an update as to anything that's happening there, but also just what do you actually want to achieve? What is a good outcome for you in those discussions? And then a third one and final one is just on supply chain and defense. I think, Pascal, you highlighted an improvement in supply chain situation in Q4. PCBs have obviously been a big area of pressure for you over the last couple of years. Do you think that that situation is now resolved and, you know, PCB flow in France is kind of pretty stable and improving? Thank you.

Good morning, Ben. Thank you for your questions. I will start and Pascal will take on after me. So on capital allocation, as you know, but it's always worth repeating it, our priority is really to deliver the group, as we said during the Capital Market Day. which does not exclude M&A, but again, the main focus is to continue to deliver the group. Now, in terms of potential acquisitions, if it makes sense, of course, we do not exclude defense. I should say it positively. It includes potentially defense companies, though acknowledging that in defense, the game is more, I would say, constrained. Typically, government's green light is necessary and so on and so forth. It's clearly less constrained in the Anglo-Saxon world versus the continental European world. So you see, my answer is Why not? But still, this is something which is much more complex, constrained, that's typically cyber, where we can, I would say, move freely. Of course, there is always a strong financial rationale, a strong strategic strategy. rational, but no or minimal governmental, I would say, implication. Moving to space, I'm not going to be very talkative as usual, if I may say. in particular on this point. As we shared with you, frankly, we did confirm that, yes, we have some preliminary and explanatory discussions that are non-binding, by the way, with Airbus, along with our co-shareholder, Leonardo. That's a fact. Now we need to work, and typically to answer your good question, does it make sense for Thales? And for the moment, I don't have the answer. We need to work. It's a complex, I would say, potentially complex scheme, if I may say. It's a complex industry as well. So it's really too soon to say either it is good or bad for Thales and for Thales shareholders. But of course, if and when we have a clear view and a positive view, we'll come back to you and share with you the details of any potential move in this domain. Hence the fact that regularly we say that in the meantime we focus on our adaptation plan to recover, I would say, a decent level of profitability by 2027, 2028.

Maybe, Ben, on your last question about supply chain, good that you asked this question because I don't want to consider that everything is fixed from a supply chain perspective. You know here we are talking about I mean more mid-terms time, mid-terms type of topic. Even though we have seen the situation improving in 2024, we cannot say at this point that it is fully fixed, in particular on PCBs. There is still today quite a significant shortage in Europe, in particular in France, between the level of offer and the level of demand. which means that there will be a need and there is a need for investments in this field. By the way, Thales is investing in this matter. And for me, in terms of fixing this type of challenge, the horizon of time is more a few years than just a few months. So overall, the situation is improving, still not fixed. and we'll need to continue working on this topic in the next few years. Here again, also depending upon the level of growth, but this is really an area where we need to keep spending management time to keep putting it under control. Now, you have seen that it has not prevented us to grow above expectations in 2024. I can tell you that it has been a pretty bumpy road. This is also a comment that I've made in the past with a very strong level of mobilization of our teams. having to cope with stop and go, as I explained, so creating a bit of disruptions in our own production facilities. But at the end of the day, we managed to deliver and we'll keep working very hard on this quite important topic of supply chain.

Very clear. Thank you both.

Thank you.

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, Patrice and Pascal. I hope you're well. So two questions. The first, just coming back to French defence spending, I just really appreciate some of your wisdom. We don't get great reporting here in the UK on France, but when I look at the last week or so, real action in the UK, two and a half percent of GDP, huge press coverage of Germany talking about a 200 or even a 400 billion special defense fund. And I know you made the comment earlier about Macron's statement, but statements like that are very easy to make. I'm just wondering what is actually happening in France on a concrete level? Could you just sort of help us understand a bit the political situation and whether we are going to see an increase in spending in France. Your best take on it would be really helpful. Secondly, on cyber, I know you're planning to report audited numbers going forward, but could you give a bit of color on what happened to organic growth for cyber in 2024, please? Thank you.

Shall I start with the first one, Pascal? Good morning, David. Thanks for your two questions. I'll try to help. Looking at the different examples that you have taken, UK, Germany and France, maybe I will surprise you. But for me, these three cases are very similar. We hear, I would say, bold statements. Now, again, the proof is in the pudding. Whether a law, a budget law, will change positively or not the already existing trajectory. Looking at the UK, if my understanding is correct, the 2.5% has been articulated by the Prime Minister with a timeframe of 2027, meaning that for 2025, no change. And we know that the situation is what it is in the UK in terms of public spending in general and in particular in defense. And we have seen many strategic defense reviews, one after another, without any, I would say, big change, again, in the spending trajectory. Germany is very similar. This special defense fund has been, I would say, announced or has been, I would say, said. Now there is no majority, no government in Germany. So we will see. And I would be more than happy to see Germany spending more, of course. It's not, I would say, a pushback. It's just an observation. of, I would say, facts versus statements. And last but not least, France is very similar to this, I would say, situation. Macron is also quite bold recently, more than recently by the way, in his statements about the fact that we collectively in Europe, we should spend more. Even in France, we should spend more. But still, the LPM that has been voted in 2022 now has not changed. By the way, this is positive. It's a good, if not very good, LPM. Now, will there be another, I would say, upside or another step upwards that will be put in place by the French government? Maybe yes, if we listen to the political, I would say, official statements. But you know Thales very well. We love also facts and figures and we'll be able to revise our forecast when and if or if and when these statements will become reality. And when I mean reality, I mean new money or additional money and additional contracts.

So overall, on cyber, maybe, I mean, having a bit of a broader perspective, David, on one side, I mean, cyber delivering quite a good level of growth, I mean, pretty much in line with what we keep saying. I mean, I think I did it. And this featuring or this taking into account both product security growth, organic growth, service, premium services organic growth, and also, I mean, the impervious organic growth as compared to 2023. And this allowed to compensate what has been more difficult, let's be clear. It is about the digital and in particular in the banking markets where we kept facing in H2, I mean, this continued destocking, in particular in the U.S., which resulted in this overall banking market reporting a significant drop in revenues against 2023. This reflecting a loss in volume, when I say a loss, a drop in volumes, not a loss in market share. But I mean, this showing a drop in markets because of the level of stock that has been accumulated. We are expecting this to come to an end mid-2024. It does not happen. So it continues until the end of 2024. We start seeing a situation which is improving on this matter, but we are still pretty vigilant on this matter. And as I mentioned, for us, preserving our margin and focusing on pricing. So you see, I mean, this is what I mentioned in my speech, contrasted situations between cyber and the digital, in particular banking. Where we've seen better situations is on connectivity and in particular, as I mentioned, The rate of growth on eSIM and on demand connectivity was pretty good, and for the first time in this business, outpassing the revenues of the removable SIM business.

Thank you. Can I just follow up? Because on cyber, and thank you for the color, the high single digit, I mean, you were pretty clear at the CMD you're aiming for low double digits over the five-year period. And often these rates are higher at the beginning rather than at the end. So are you happy with the cyber print and What are you seeing at the start of this year, please?

Probably a bit too early. I think you need to be a bit more patient. So let's look at Q1 figures that we will be reporting in April, where we split the revenue between cyber and digital. At this point, I need to say that I didn't have an updated view on this matter. OK, thank you.

We are now going to proceed with our next question. The questions come from the line of Ian Douglas Pennant from UBS. Please answer your question.

Thanks for taking my question. I've got an echo on the line. I hope you don't. No, it's okay. So my first question, so you're reiterating the comment for 67% defense growth medium term and suggesting that that wouldn't be changed in 2025. Can I therefore confirm that that is indeed your expectation for 2025 for DNS, please? And then secondly, could you help us understand within DNS the split between long and short cycle products here. I'm just thinking that the radios must be, radios delivered, you know, very late in the year, according to any budget that needs to be used up, must be a very large line item for you to drive the difference between six to seven and the 13 that you delivered last year. Maybe you could just help us understand the difference, you know, how important short versus long cycle products are for you. Thank you.

Okay, good morning, Yann. So on defense growth in 2025, yes, I mean, the 6-7% is pretty much what we have in mind for 2025. What I call a mid-single-digit plus is today's best expectation for organic growth in defense in 2025 versus 2024. So, yes, I mean, this long-term view, as I mentioned earlier, based both on our backlog and the level of increase in different spendings in line with what we had in mind as we communicated at our Capital Market Day in November. Now, in terms of short cycle, long cycle, I mean, overall, I mean, our business, and defense is more a long cycle type of business. Now, it is true that the more we see our clients asking us to deliver on existing products, existing products meaning products that have been developed where there is no need for developments, for engineering. This is really, I mean, the development phase, the R&D phase. The engineering phase, that takes time. When it comes to develop a new type of product, we're talking about, I mean, years of developments. When it is to deliver more on existing products, like our current generations of Grand Master, or what I mentioned in terms of ammunition, missiles that have already been developed here, I mean, I'm not saying that this is really a short cycle, but there is no need for development. You might have to deal with obsolescence in some cases and make some kind of developments to manage obsolescence. But overall, we are talking here on cycles that are much shorter. And then for us, it's a question of getting the right level of orders and us investing in terms of production capabilities as we did and as it was presented in the slides that Patrice presented where we mentioned our ability in the last two, three years to increase quite significantly the delivery of existing products. So you see a bit of a gap between existing products and new types of products that require a significant amount of engineering to be developed. Of course, the more we can sell the first type of category, the better it is for us, because first, it goes quicker, and second, of course, the level of risk. as you manage the increased delivery of existing product is not as high as it is when you consider new developments.

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 for both of you. Hope you are well. Yeah, two questions as well on my side. First one is regarding execution and capacity increase. Just want to confirm on your side, when you say we are going to increase three-fold capacity on the different product items you mentioned, the time frame you are taking, is it really a one year or a little bit more than one year time frame? And the second question is, let's imagine we are in a scenario where there is a real push where political statement is followed by fact. And let's say we move to even 3.5% of GDP in the European defense in, let's say, three years' time frame. That would mean... I guess, you know, 40%, you know, above what is expected current level, you know, towards a 2.5. So the question will be, if you will have to increase your delivery and capacity, at least by an additional 10% a year, do you believe you will be quickly in a situation where you will be able to do it, or do you need some partnership with other industrial sites to make it happen? And if that happens, what will be the investment you will need to do to increase your industrial production to meet that, let's say, imagine 3.5% GDP spending, for example, for the French military defense budget, if we are in that scenario. Thank you.

Good morning, Hervé. I will share the answer with Pascal. Your question is of two-fold. Number one is really what we have presented in terms of capacity ramp-up. What you see on slide 18, this is done. This is not the future, this is the present. So this is what we have achieved over the recent years. By the way, a sub-question was, did it take one year or more? Clearly more, two to three years, depending on the products, of course, and the complexity. It's not only us, it's also the supply chain. We need as well the supply chain to be able to ramp up, meaning to invest and to hire. It's a collective game, it's not only Thales with our own means and resources. But again, I do confirm that what you see on this slide, this is done. Now, for the future, it's a bit of a science fiction. I mean, we don't know. As I said earlier, we have always, I would say, managed. And again, that's what you can observe looking at Thales. to increase or to invest in new proportion to follow the pace of the market and the contracts that we got. So if clearly there is additional need and contracts, again I'm talking about contracts, And you know that, by the way, even though a budget is voted, it takes a bit of time from every MOD in the world to transform a budget into a contract. It's not something that you buy on the shelf. It's not like an Apple store when you go and buy your iPhone. Those contracts are as well complex. It would take probably at least two years. I mean, budget plus contracts, new contracts, two years. So we have time to get organized. to add the required additional capacity to serve additional needs and contracts if they come. But again, we are clearly waiting from, I would say, moving to statements from statements to actions or concrete steps. It's not because we are prudent. It's not because it's our experience that led us to say, be careful, guys. We really need now to see concrete outcomes. The statements are positive, of course, and we are not discarding that. We are not pushing back on the fact that there is strong evidence tailwinds in defense, strong, very strong tailwinds. But to transform these tailwinds into real money, it takes a bit of time.

OK, thank you.

And maybe just a quick follow up. So let's imagine you have to increase, on average, by 10% of volume. Generally, in terms of investment on your side, how quickly, firstly, you can make it happen if we are in that scenario, in your view, and what is the investment you will need to plug in to make it happen.

If you can give a bit of a sense if we go with that scenario. I understand the major question. Hervé, you would like us to give you just the magic number, magic figure, I mean, to answer a very broad and complex question. a question which is extremely valid of course but you are asking us to provide a magic numbers but in our reality that is that is pretty pretty complex if it would be a plus 10 percent by the way i don't know whether your 10 percent is a 10 percent per year so an additional 10 growth per year which is quite different from 10 percent and then flat and then flattish So a 10% is not something that is probably so difficult to meet in terms of getting more capabilities. A 10% per year would be quite a different challenge, of course. Now, of course, all of that will require investments. By the way, you have seen our increasing investments in capital expenditure in the last few years. For me, it's not that much the level of capex, it's probably more about cash flow generation. My belief is that in case we would face this positive level of demands, growing demands, going further and going quicker, than what has been presented so far, based on what Patrice mentioned, getting real orders from our clients, then my view is that it should be positive in terms of cash flow generations, or at least in terms of conversions ratio. I wouldn't see this type of investments deteriorating our overall cash conversions ratio. So it would be positive from an EBIT standpoint, and it would be positive from a cash flow generation standpoint in terms of absolute level. So this is what I can answer, but of course this is more of a qualitative answer to qualitative questions, which is quite difficult to answer at this point in time. So you need probably to be also a bit more patient. All of that is pretty positive from the business standpoint for Thales. All of that is providing even more positive long term visibility. Now, it's more about the ramp up that is today discussed today. And once again, it's a valid question, but the answer is not that easy. However, you have seen our ability to grow our production capacity pretty quickly. I mean, two to three years, I mean, to triple the production of radar, for instance. It is pretty short considering the complexity of the supply chain and our own ramp-up overall at our plants. Thank you. Understood. Thank you very much.

We are now going to proceed with our last question. And the questions come from the line of Ross Lowe from Morgan Stanley. Please ask your question.

Hi, good morning, everyone. Thanks for letting me in. So just to come back on the sales guidance, you're maintaining the outlook for defense 6% to 7% in 2025. So what's driving the group guide to be 5% to 6% organic, which is below your medium term guide of 5% to 7% organic? And then secondly, just a quick modeling question for space. What was the absolute EBIT level in 2024? I think you were initially targeting negative 50. Thanks.

Okay, okay, Ross. So overall on group guidance, five to six with, yes, I mean, defense, six to seven. So overall, how we see, I mean, overall, I mean, We see our avionics business probably meet single digits. We see our space flat to low single digits. And we see our cyber and digital business probably meet single digits. And this is how you come up with five to six as we speak today. And of course, I mean, we'll rediscuss this matter mid-year as we publish our H1 figures. First point, I mean, a second point on space with overall level of restructuring that in 2024 has been close to 40 million euro. overall and in space, construction costs in 2024 at 40 million euros, absolute level of negative EBIT for space in 2024 has been close to minus 65 million euros.

Okay, thanks very much.

In the interest of time, this concludes the question and answer session. I will now hand back to Patrice Kane for closing remarks.

I will be very short as a closing remark. Thank you very much for your attention. We will be pleased, of course, to meet you in the following days and weeks during our upcoming roadshows. Have a good day. Thank you very much. Bye-bye. Thank you. Bye-bye.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines.