Thales S.A.

Good morning ladies and gentlemen and thank you for standing by. Welcome to today's Thales H1 2025 results conference call. The presentation will be held by Patrice Ken Thales Chairman and CEO and Pascal Bouchiat Thales CFO. It will be followed by a question and answer session at which time if you wish to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded. I would now like to hand 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 Thales H1 2025 results. I am Alexandra Boucheron, Thales Head of Investor Relations. With me today are Patrice Gaines, chairman and CEO, and Pascal Bouchard, CFO. The presentation will be followed by a Q&A session. As usual, this presentation is audio webcasted live on our website at salesgroup.com, where the slides and press releases 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 Patrick Kane.

Good morning, everyone, and welcome to Thales 2025 half-year results. So starting with a few highlights of the group's performance so far this year. To start, Thales has achieved a high single-digit sales growth in the first half of the year, mainly driven by avionics and defense. Indeed, focusing on defense, the supportive context has offered Thales increasing opportunities globally with a new order of 26 Rafale fighter jets for Indian Navy which was booked in Q2 2025 or with a 1.16 billion pound contract with the UK Ministry of Defence for the supply of 5,000 LMM missiles booked in July 2025 growing opportunities that we start to see with the rearm europe plan to enhance defense capabilities in europe and france planning to exceed the military programming law by progressively increasing total defense spending from 50 billion euros in 2025 to 64 billion euros in 2027. these amounts of 64 billion euros was initially supposed to be reached in 2029, meaning that we expect a real acceleration in France as well. So this context, along with a constant focus on operational efficiency, has led to a strong increase in our adjusted EBIT margin, which I will detail in the next slide. So now moving to our H1 2025 financial performance on slide number three. Commercial momentum was solid for order intake over the semester with 10.4 billion euros worth of orders. This reflects the high level of demand for TELUS products and solutions in most of our businesses. The book-to-bill ratio stands once again above one in H1 2025. Sales progression was robust in this first half of the year, up 8.1% in total and organic changes to 10.3 billion euros. Adjusted debits reached 1.2 billion euros, recording a solid 12.7 organic growth. Margin was up sharply and stood at 12.2%. Adjusted net income reached 877 million euros in H1 2025 or 937 million euros if we exclude the temporary additional corporate tax paid this semester in France. This compares to 866 million euros last year. In terms of cash generation, H1 2025 was particularly strong with a free operational cash flow of 499 million euros. Lastly, net debt position at end of June 2025 increased by 383 million euros compared to December 2024 3.4 billion euros as a result of the usual seasonal effects, including dividend payments. And if we compare to end of June 2024, the net debt has been reduced by more than 1 billion euros. I now hand over to Pascal, who will review our financial performance in greater detail.

Thank you, Patrice, and good morning, everyone. I'm in slide four, starting with order intake. As Patrice mentioned, momentum was studied in H1 2025 for order intake, which stood at 10.4 billion euros. One last contract was signed this semester with a unit value above 1 billion euros, namely the order of 26 Rafales by the Indian Navy. This compares to three contracts in H1 2024 with unit value above 500 billion euros, leading to a very high comparison basis. Now taking a step back and comparing this third half to H1 2023 order intake, we observe a robust increase of 21% in H1 2025 order intake, underscoring the group's solid growth trajectory. Ten large orders were booked in H1 2025. Six in defense. In all domains, illustrating the continued strong momentum and the relevance of our portfolio of products. Four in aerospace, of which three in space and one in electronics, all booked in Q1 2025. Importantly, orders below 10 million euros showed robust progress of 5%. Now, moving on to sales on slide five. First, a word on scope and current impact. H1 2025 saw a positive scope impact of 87 million euros. mostly concentrated in Q1 and mainly resulting from the Cobham aerospace communication acquisition. Cobham is integrated in the organic figures since April 2025. Yes, April 2025. Current impact was negative at minus 73 million euros due to the strengthening of euro against US dollar and Australian dollar. Excluding those, in fact, states were up 8.1% on an ordinary basis in H1 2021. This solid performance clearly demonstrates Thales' continued strong growth momentum. This growth notably reflects the good momentum in aerospace, mostly driven by avionics. In addition, defense delivered again double-digit growth in the supporting context that Chris already mentioned. Cyber and digital were slightly down in H1. A progressive ramp up is expected in H3. And I will come back to this in a minute. Finally, safe organic growth was well balanced between mature and energy markets. Europe posted a solid 8.9% growth in 2020-2025, while emerging markets delivered a negative growth. Turning now to slide six and adding a look at the drivers of adjusted EBIT year-on-year entry. Looking first at the mechanical impact. Scope effect was positive and amounted to 23 million euros, primarily linked to Coba-Merocom acquisition. Currency impact was negative at minus 9 million euros, while pension cost impact was marginal. As you can see, the strong progression of our gross margin was the most significant driver of adjusted GDP. It was up 160 million euros, driven notably by the sales volume increase and descent. While costs linked to marketing and sales are stable year-on-year, R&D expenses were up in May 2025 and stood slightly above 6% of sales, reflecting sustained R&D investment. G&A expenses were contained as well. growing organically at less than half the pace of revenue. Restructuring costs were higher in H1 2025 versus H1 2024, mostly driven by the costs linked to the adaptations plan in space. Finally, contributions from equity affiliates increased by 28 million euros. Most of our JV progressing well with also a few positive one-offs. On the other side, contribution from Naval Group was hampered by the temporary addition of corporate tax in France. Moving now to performance by segment and starting with aerospace. I'm now on flight seven. All those in the segment came at 2.7 billion euros. Avionics enjoyed a solid underlying demand across most segments, and notably in the military domain. Order in taking space was slightly down, although three large orders were signed in H-1-2025, of which two in Telco, one in Norway and Japan, and one in exploration. Pace amounted to 2.8 billion euros, leading to an organic growth of 5.8% year-on-year. This reflects, on the one hand, sustained growth in agonics, with a strong performance, notably in aftermarket, supported by robust air traffic momentum, and in military activities. On the other hand, space states are still impacted by the low demand experience over the last two years in the telco business. Now, commanding adjusted ethics with a sharp increase of 2.7 points in marketing, which stood at 9.1% in H1 2021. This is a strong progression was driven by the solid double-digit margin in Agenic, and also an improvement in space margin, and tried to deliver a positive adjusted edit before restructuring cost in full year 2025. Moving on now to design on slide eight. So, in this sense, order intake amounted to 5.8 billion euros in H1 2025, with flexing strong and continued commercial momentum, although year-on-year comparison is impacted by a quite tough comparison data. Six large contracts were booked in H1 versus nine in H1 2024. which also saw the booking of three contracts with unit value above 500 million euros. It's worth noting that small orders were particularly supported this semester. The good news is that additional March contracts are expected to be booked in H2, notably in Erdősen, with contracts with the UK and German governments. As a reminder, book-to-bid ratio is expected above 1 this year in defense. Sales amounted to 5.6 billion euros, recording a sharp organic growth of 12.7% ahead of full year expectations. This was driven by continued double-digit growth in Q2 after a very strong Q1. with solid momentum in most of the activities. The performance also benefited from continuous production ramp-ups. Barging was broadly stable, around 13% as expected, and in line with annual expectations. Moving now to cyber and digital on slide nine. At 1.9 billion euros, sales of the overall cyber and digital segments were down minus 1.9% organically. Commanding cyber first, whose sales were done organically in 2021. Cyber product growth, which represents more than 80% of total cyber business, was hampered by the short-term disturbances linked to the merger of Thales and Imperva sales forces. This merger has been completed at the end of Q2 as expected. During this process, marking the final step of the integration of Imperva, 70% of sales swaps were allocated either a new customer portfolio or a new product portfolio to sell. We now expect a progressive ramp-up in H2 for this year's activity. In cyber services, low market dynamic, hold back growth in H1. As you know, our priority for this activity is an executive strategy of premiumization. to refocus on segments offering more profitable growth. While this process implies rationalizing and standard designing some operations, it can temporarily act as a drive on both. Moving to digital identity, we face that recorded growth in Q2 after a slow Q1. Over the whole semester, organic growth is slightly down. H1 2025 was slow in identity and biometrics as the activity began normalizing to a more usual runway after the COVID catch-up effect that occurred until 2024 in the travel document activities. In secure connectivity solutions and payment solutions, the performance of digital solutions was very solid. While digital banking solutions were invigorous in the 2020-2025, digital solutions in secure connectivity also draw solid profitable calls. the overall adjusted edit margin of the segment has been holding well this semester protected by continued discipline pricing policies while overall margin was stable in cyber it's worth noting that the premiumization strategy is starting to bear fruits inside of services with an increased margin year on year Margin was slightly down, however, in CIDR products due to temporary low top line evolutions. Margin was also slightly up in digital identity, but also benefiting from a few positive one-offs. Now, looking at the H1 2025 adjusted P&L, I'm now on slide 10. The cost of financial debt and other financial returns was up compared to last year. The comparison impacted by the non-recurrence of positive one-offs recorded last year, mainly dividend payments from non-consolidated affiliates and also a foreign exchange debt. The final cost on pensions and other incurred benefits Looking at taxes, you can see the effective tax rate was significantly higher this semester and stood at 26.7%. This is due to this temporary additional corporate tax in France. Front-loaded in H1 2025 at 60 million euros out of the total 18 ABO million impact expected this year have been recorded in H1. Excluding this impact, the effective tax rate was brought stable at 21%. Minorities are down year-on-year, mainly linked to the reduced net loss incurred by TALES and the estate. Overall adjusted net income group share stood at 877 million euros in 2020-2025, or 937 million euros excluding the tax one-off. This compares to 866 million euros last year, so leading to an 8% growth. Moving now on slide 11 to free operating cash flow. So the free operating cash flow was particularly strong in the year 2020-2025 and stood at 499 million euros. versus minus 85 euros last year. This excellent performance was chosen mainly by the significant improvement in change in working capital. This reflects the continued satisfactory payments for 500 euros. including balance payments and the results from ongoing action plans to optimize stocks after being treated over the past years. This H1 2025 performance made us quite confident to achieve our guidance of 95 to 100% adjusted net income to favor in cash flow conversions ratio for 2025. Concluding the financial performance, moving on to slide 12, with a review at the net debt evolution. So we see net debt amounted to 3.4 billion euros at June 2021. That is 3 billion euros at the end of December 2021. The main drivers of this seasonal increase are the payment of our dividends resulting in a cash out of 586 million euros annually for an amount of 118 million euros. The disposal impact stood at minus 64 million euros. This is due to the final price adjustment related to the sale of the transport activity. These impacts were, however, partly compensated by the strong flavor in cashew I've just discussed. So thank you for your attention. I now turn over the call to Patrice to review our strategy priorities and guidance.

Thank you, Pascal. So now turning to our strategy and outcomes. So I'm on slide 14. Here are the four strategic priorities for 2025 we shared with you during our 2024 full year results. As you will see, we've made significant progress following these priorities in the first half of the year. So first, ramping up our capacity, which includes production capacity, but also ensuring we have the right talent to seize market opportunities. Second, restoring space profitability, a key priority for the group this year. Third, maintaining our innovation and R&D leadership to increase differentiation. And last and fourth, delivering strong value creation from our recent acquisitions, namely Impervan and Cobam, which have both undergone successful integration. So moving to slide 15, and first the capacity ramp-up. So due to the current supportive context and Thales' strong position and value offering, many of our products are in high demand. And to respond to this trend and serve our customers, we have continued our internal and external efforts 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 of these capacity extensions, Thales launched an unprecedented investment plan of around 350 million euros for its Cholet site in France, which employs 2,600 people, hosts R&D, production, and service activity in radio communications, cybersecurity, electronic warfare, and satellite communications. This project includes, among other developments, new industrial lines for equipment and systems to provide significant increases in production rates expected in the current context. And another capacity expansion has been implemented all around Europe, namely in Angola, the Netherlands, and Gdansk in Poland. But as I just mentioned, ramping up our capacity also means ensuring we have the right talents in place to seize market opportunities. So we have continued making Thales a very attractive employer brand. And our strong brand awareness has once again been recognized. The Universum Research Institute ranked Thales as the number one most attractive employer among entering students in France in 2025. If I move to space now, Well, as you all know, we have been implementing since March 2024, the transformation plan of Thales Alenia Space Telecom business line in order to, number one, optimize its structure, number two, maintain its leadership position, number three, restore its profitability. This plan mainly consists in the redeployment of 1,300 positions across the group with no forced departure. As of H1 2025, we have 35% of positions already redeployed. Moreover, TAS has had a certain number of recent commercial wins, and just to name a few, contracts to build telecom satellites in Norway and in Japan, A contract with ISPASAT to start the development of the world's first quantum key distribution system capacity from geostationary orbit. And a contract with the European Space Agency to develop the space segments of the navigation system orbiting around the moon. And this promising business and business growth opportunities show our transformation plan is going in the right direction. Hence, we are confident in TAS perspectives for profitability recovery. Third priority regarding our innovation leadership. 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 versus the competition. A few illustrations of what we have done so far this year in this area. Extending our Cortex AI accelerator worldwide with new AI industrialization capabilities in the UK and Singapore targeting 800 AI experts and around 100 PhD students globally at the end of 2025. For those of you who visited Thales stand at Paris Airshow, I imagine you have seen the number of products over 100 with Thales AI inside. Another example is our future potential partnership with Radial and Foxconn to create an industrial capacity to develop what we call system-in-package SIP technologies in France. For the more curious among you, this technology enables the integration of multiple electronic components into a single compact module. thanks to an increase in the density of electronic components while reducing their size. In one word, we are developing the electronic technology and components of tomorrow. It's a definite step towards more strategic autonomy. This partnership with Foxconn and Radial will indeed meet the growing needs of the aerospace automotive, teleco, and defense sectors. First priority, Thales is, of course, strongly committed to delivering strong value creation from recent acquisitions. Imperva and Cobam outcomes are already providing strong operational performance and synergies across the group. For example, Thales has launched a new solution combining Thales and Imperva's best technologies named File Activity Monitoring, or FAM. You all have in your companies unstructured data across servers, cloud services, and file shares that is to say everywhere. It could take an endless time to look at each file define the level of classification, and secure it. Thanks to AI capability, FAM, File Activity Monitoring, is doing everything for you automatically. This is just one example of the new state-of-the-art solutions that we are launching. Moreover, the activities stemming from the acquisition of COBAM and RACOMS are showing very strong performance thanks to the development of synergetic products such as the safety satellite communication system Thales will provide to equip the A400M mid-jury transporter craft. Moving to the last slide. So all these priorities will bring Thales to continue pursuing ambitious financial targets for 2025. A book-to-bill ratio above one, organic growth of 6 to 7%, or 28.8 to 22 billion euros in sales, and a 12.2 to 12.4, sorry, percent adjusted EBIT mounting. Many thanks again for your attention and we will 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 1 1 on your telephone and wait for your name to be announced. Our first question today is from the line of Benjamin Healan, Bank of America. Please go ahead.

Yes. Morning, everyone. Thank you for taking the question. First question, Patrice or Pascal, was on cyber. Obviously, a very strong decline in Q2, which on the face of it, I think is kind of marginally worse than yesterday. than certainly what I was expecting. And you've highlighted again, sales integration. Can you just talk a little bit about what is actually going on? Like, why is the integration of Imperva's sales team being so disruptive to the business? And you have some comments in the presentation about expecting a progressive ramp up in the second half of the year. Can you just talk a little bit about what we should read into that? Is that sequential improvement versus Q2? Should we see a return to year-on-year organic growth in that business? Any colour around that would be super helpful. Second question on space and can we get an update on the discussions between yourselves, Airbus and Leonardo? Any timelines that you can provide there would be helpful. And then finally on avionics. Can you break down a little bit what you're seeing in terms of aftermarket growth versus original equipment and any color on the IFE business that you have as well would be super helpful. Thank you both.

Okay, I start on cyber perhaps and this as well. But of course, Pascal will come later. Well, cyber, we said since the very beginning that this first semester will be not a normal semester, if I may say. Clearly, it's important and mandatory, by the way, operation to merge the two sales teams. We did so, if you remember well, Ben, between Vormetric and SafeNet a while ago. SafeNet belonging to Gemalto, Vormetric belonging to Thales. So when we acquired Gemalto, we had this merger within the merger between Vormetric and SafeNet. So honestly, I would like to reassure you, we know how to do it. We knew it would cause some inefficiency. You know, it gathers or it concerns 1,000 people. So it's a vast safety and approximately 70% of these people have changed either the customers they were supposed to address before or the products they were supposed to push before. Plus the fact that we have a line incentive scheme, which is also something which is both important and sensitive in this type of business model. So it's absolutely, I would say, expected and normal that some inefficiencies occurred in H1. Now, of course, the fact that it was a bit higher than your own expectation, you know, it's pretty difficult to model it very precisely. Now we need to take a step back, be a little bit patient. We are, I would say, very confident that it will progressively come back fully operational and efficient situation soon. And normally H2, I'm sure we'll have questions in Q3, but H2, end of H2, end of this year, we'll be able to measure, to monitor this return to full efficiency in this domain. But the quality of the asset, the quality of Imperva is a high quality company. The products are of high quality. That should, I would say, It helps to keep a cool head looking at just Q1 or Q2 figures in this domain, though they may seem a bit disappointing. Now, space. Not much to say, discussions are ongoing. And as I've said already in the past, we will always say something if and when we have something to say. So work in progress. I'm not sure it will get to something which could be positive or something which will be announced to the three of us. So too soon to say, but working on it. Good morning, Ben.

So again, so overall, I mean, very happy with the level of performance, particularly in terms of goals in H1. In terms of, I mean, the key sub-segments where we enjoy most of the goals in H1. One is the aftermarket, which has been pretty strong in H1. Good level of demand continues throughout H1. First point. Second, also, I mean, Cobham Aerocom, in terms of level of growth. You mentioned about OEMs, in particular at Cobham Aerocom, where? we enjoyed the largest level of growth. For the rest of OEM, it follows, I mean, in particular, the product and output of our key customers. There will be mentioned in particular IFE. So, IFE overall, no concern at all in terms of goals, underlying goals. At this point, I mean, the concern is more about our clients, being able to get their aircraft or their seats so that we can deliver our own products. That's a point that we mentioned in Q4 last year, and it's true that things seem to be a bit better, but we are still not there. And this is today, I mean, some kind of limiting factor overall in terms of growth for IFE. Now, in terms of underlying level of demand, I mean, IFE is back to what it should be in terms of level of demand.

Very clear. Thank you.

Thank you. Next question is from the line of Olivier Prochet from Rothschild. Please go ahead.

Yes. Good morning, Patrice, Pascal. I have a few questions, if I may. Starting first with cyber and digital, could you just give us a sense of how significant in terms of revenue is the banking solution business that you mentioned in the presentation? And you also mentioned there positive one-offs. What were they and of what scale were they, please? Secondly, on Imperva, to continue on Ben's question, have you seen some leakage on R&D and key people leaving or, on the contrary, has it been quite satisfactory on that front? And third, on ExoMars, if the U.S. gets out of ExoMars, what are the consequences for Thales, please?

Okay, so good morning, so in terms of digital, I mean, at this point, in terms of type of business, there's quite a difference between the level of transitioning on the mobile communication system from the classic R theme to the embedded theme. I mean, we already commented these transitions, which is going pretty nicely, and very soon we'll have most of our mobile communications driven by the digital IT embedded in the business. On banking, and that was your question, of course, I mean, the move will take much longer which means that even though the growth of our digital banking solution is pretty strong, it's really a double digit type of growth, the underlying level at this point is still a small-sized business. We are talking about a business which overall represents something like 55 million euros of annual revenue, but going fastly and paving the way for this progressive transition for the banking business. But once again, that will take time. And yes, I mentioned several one-offs, mainly two one-offs on cyber and digital in H1. One was a pretty strong level of demand and seen in a particular, in a specific telco operator in Asia. So that's the first point. And the second is more on JD with TEDx, which in 2024 was in terms of contributions, having a specific one of positive that came in 2020-21. Overall, I mean, the impact in terms of margin for the cyber and digital business is not that bad, but I mentioned this one.

In Perva, of course, we monitor attrition at Perva, or globally speaking, at our CSP business. Honestly, we have not observed anything that could be worrying or above benchmark. In fact, it's below benchmark, even in the US. And you know that in the US, also, some big digital or big tech companies I would say either stop hiring or lay off people. So the tension on the market is, I would say, probably less stringent than it was before. So nothing to be worried about on this. Of course, good and important question, Olivier, about key people, not only in R&D, but also in the sales team. We have also some key people in the sales area that are important for the business. Moving to space, in fact, more than ExoMars, we were, I would say, looking very precisely at the discussions and developments around Artemis, because, you know, we have a big stake in this Back to the Moon initiative. We have been reassured by the recent, I would say, vote of the big, beautiful Bill in the West. confirm the right level of credit of funding allocated to NASA on this particular project. So I would say so far, I would say we are Richard, there is no particular concern. Now let's also acknowledge that the situation in the West is always difficult to predict. So as you see, no concern, but let's... Thank you very much, both of you.

Thank you. Next question is from the line of Ross Law. Morgan Stanley, please go ahead.

Hi, morning everyone. Thanks very much for taking my questions. So the first is just again on cyber. Can you maybe be a bit more specific on your second half expectations? Should we be expecting year-over-year growth? Secondly, on space, you've called out the margin as being significantly improved. Can you maybe quantify that margin for the first half and also what you're expecting for the full year? And then thirdly, and lastly, you call it investing in expanding industrial capacities. Are you doing this on the assumption that defense spending in France goes above the current LPM trajectory, or are you continuing to assume for the time being that the LPM is maintained in its current form?

Thanks. Okay, good morning, Ross. Maybe I will start with the first one from Patrick and Tyler and Clayton. Yes. We expect cyber to get back to positive goals in H2. This one's probably a bit too early to quantify, but yes, we expect any progressivity. to get back year-on-year in Q3 and Q4 to be positive. This is how we see the most likely scenario for this cyber business. And in particular, on this cyber product sub-segment, which is the one where we want to resume both. Maybe just a bit of additional comments. As you know, cyber business. We've got and we present the bulk for business which is the cyber product business, overall level of revenue between 1.3 and 1.4 billion euros and this is clearly where we want to resume growth as quickly as possible and it should be the case as early as Q3. The second sub-segment, which is by far the lowest, which is cyber-solicit. You know in this business, its key purpose is really, I mean, to drive then sales in our cyber-product business. This is the famous doctor as opposed to the producer of medicine. So cyber-solicit is really designed, is meant to foster the sales of products. So this business is a much smaller one. It's a 250 million euro annual sale. which was significantly down, resulting from two factors. One was the softness in terms of demand in particular in Australia, and the second was really our decision to refocus this business on the most attractive market segments, and this is what we keep doing. So on this service sub-segment, The strategy is not that much growth in the short-term, it's more an increasing profitability. On the cyberproducts business, this is where we should see growth resuming in Q3. to quantify a bit more the progressions of EDIT. So what I can confirm is what we expect for the full year 2025. You probably have in mind that back in 2024, this space business, overall in terms of levels of EDIT we mentioned, was close to minus 70 million euros of EBIT and we said that in 2025 it should be black events before restructuring charges and this is what we what we expect overall and restructuring charge for space in 2025 it should be 20-25 billion euros which means that excluding this business should be back even in 2025. And the run rate, H1 2025, overall in terms of level of EBIT, really, I mean, and their things support, I mean, this overall level of profitability for the company.

Okay, if I take the third one and good morning, indeed, it's a good question. This, I would say, additional funding that has been announced by the French president is good news, of course, in terms of business momentum. which become on top of the already growing multi-year programming law. Now, in terms of capex, in terms of investments, and in the case of France, because the question is in France, but the reasoning would apply to any other countries of Thales. Of course, we take a global appraisal. We look at all the markets we serve from France, French market, but also all the export markets, number one. And it's mainly based on our, I would say backlog, some immediate expected contracts, but clearly something which is de facto firm. Hence the fact that LIMUR, when we have increased the production rate of our radar, time four in a few years, same for ammunition business in France, times four as well, was really based on, I would say, backlog plus immediate contracts. So coming back to your question related to the recent announcement of the French president, Honestly, it's been too soon to say that it will trigger additional capacity. Now, again, if it materializes next year, of course, we will always assess continuously our situation and see if it deserves additional industrial capacity or what we have already in hand is sufficient to serve this additional requirement or this additional need. So, to make it short, a bit too soon to say if this will trigger new CAPEX, but if yes, we will adjust as we did in the past.

Very clear. Thank you both.

Thank you. Next question is from Chloe Le Marie from Jefferies. Please go ahead.

Yes, good morning, Patrice, Pascal, and Alexandra. Thank you for taking my question. I'll start one with the guidance update. If you could share with us the moving parts from the initial 5% to 6% organic growth, I would assume it's fair to expect maybe slower cyber versus the mid-single digit, but maybe higher defense. So if you could just talk around that. The second is actually on restructuring. Could you just remind us what you expect in total restructuring costs for this year? And last point, just on the cyber performance, just wanted to see if you had seen any softness in the markets that kind of, let's say, amplified the impact of the sales integration. or if it's simply the effect of the sales integration that's affecting the group at this point. Thank you.

Okay, good morning, Chloé. So, I mean, you answered your first question on the moving path. So, yes, I mean, yes, the upgrade of the guidance on organic oils, moving from 5 to 6 to 6 to 7. Yes, and the policy is, of course, I mean, defense. And overall, it's true that today we see organic growth in defense in terms of probably for 2025. That will be probably, I think, a legit. This is how we see today, I mean, the most likely scenario. Now, it's also true that on the side, if I take cyber and digital, probably a flat to low single edit is probably more what we have in mind considering H1. But overall, and it's true that on this call we have not discussed a lot about the different goals, but it's true to say that we are quite positive on this business. And overall, and considering the size of our different business, Overall, this allowed us to upgrade our revenue guidance. So, second question was about expectations in terms of level of restructuring expenses for 2025. Overall, my view is that it should be around 120 million euros. with structural expenses was 65. So let's consider that it should be twice, a bit more, twice this amount for the full year, which if I remember well, it's probably what we expense in 2024, with still in 2025. It's still a level of restructuring charges for our state. That would be still material. I mentioned 20-25 million more. So this is what I can share with you in terms of restructuring charges for 2025. Patrick?

Yes. Good morning, Chloé, and thank you for your question. Indeed, it's a question we've asked to ourselves, of course. Now, what I can say, well, number one, we have, I would say, market figures only for Q1. And these figures, and we need to go into, I would say, quite a detailed analysis because, you know, this cyber market is highly fragmented. in terms of threats, and therefore in terms of products. So it needs a deep dive on what is really, I would say, pertinent for us, namely a data security segment, application security segment, or the IAM segment, identity and access management segment. In these different segments where we operate, in fact, Q1 figures, they do not show any kind of softness. So it's reassuring. considering your good question. Now for Q2, we are consolidating the figures. Therefore, more qualitatively, if I may, so it's not based on figures, but more qualitatively, all the feedback that we have from our team says that the market is there. I mean, nothing has changed in the market. And if we take a further step back, if we look at the number of cyber attacks worldwide, and we do publish yearly reports on the cyber, I would say, the level of cyber threats worldwide in our domains, it shows that this, I would say, the situation is worse and worse, if I may say. So we need more and more cyber protection, in particular, in our domains. So nothing to be, I would say, worried about. And again, the third driver is really the reorganization that created inefficiencies as already mentioned.

Very clear. Thank you. Thank you. Next question is from Alessandro Pozzi from Mediobanca. Please go ahead.

Hi, everyone. Thank you for taking my questions. I have two. The first one is on the French defense budget. As you pointed out in your opening remarks, there is an acceleration in defense spending in France. I was wondering if you have a sense of what could be your capture rate there and how well placed with your products to capture basically the increased spending. The second question is on the free cash flow. I think the improvement was in part driven by working capital. Can you tell us maybe what we should assume for the second half of the year for the working capital? Thank you.

I can start on the first one. Good morning, Alexandre, and thanks for your question. So yes, this announcement is clearly positive for us and for the defense industry as a whole. The figures are not negligible. 3.5 billion euros in addition to what was already expected in 2020 and 2027. Now it's a bit too soon to say how much we represent for Thales. So the good rule of thumb is the fact that we will have our fair share in finances. So if we take in average what we as Thales capture, globally speaking, of the defense budget, there is no reason why it should not be at least the same. So it's a bit of a qualitative answer, but for the moment, it's the best I can say on top of the fact that it is a positive. It is a positive, of course. Now, always keep in mind that we should see it as of next year in terms of order intake, but in terms of sales, it will take a bit more time, of course, as usual. Does it change our sales perspective for 2026, 2027? Probably not. Certainly not. But it's a nice additional opportunity in terms of order intake, of course, for 2026 and onward.

Yes. Good morning, Alessandro. And thanks a lot for your questions on cash flow because it seems to be that strong performance on free cash flow net one was not noticed uh not yet not yet thank you very much for that so overall uh yes as you know i mean our working capital is seasonal at um the sector with uh growth in working capital in H1 and the top in H2. This is the reason why our cash flow generation is much higher on H2 than it is in H1. Now, it's true that the way we started in 2025 was very strong and clearly above our own expectations. And as I mentioned, the price was acting from two factors. One overall, I mean, a pretty strong payment profile from our customers, both from current project execution, but also on done payments. And second was our ongoing actions to optimize our level of stocks So when you put all of that and you project yourself to H2, I'm quite positive. And I think that in my press, I mentioned that we are quite confident to achieve our guidance in summer three of working cash flow for the full year. Of course, it will depend upon maybe some last-minute payments or cut-offs in terms of payments from Q4 to Q1 2026. But overall, as you understand from my tone, we are quite positive in terms of cash flow generations. Again, in 2025, confirming, I mean, these pretty strong cash flow generations at Thales. So our ability to convert, I mean, I mean all our net income into free operating cash flow.

Just a follow-up on the cash flow. In terms of CAPEX, what should we assume in terms of year-on-year movement in 2025 versus 2024?

So we should see our CAPEX moving up in 2025. I think it was something like 620 billion euros. We should be probably around 700 in 2025 showing that we're accelerating and in particular as we see an opportunity in terms of business which needs the continuous ramp up. That's what I've already commented. So clearly, we keep probably increasing overall our capital expenditure. Now, it doesn't change our view in terms of overall our ability to convert net income to global financial, which means that it's my view that we can do both. On one side, I mean, keeping growing our capital expenditure and paving the way for future organic growth extensions, together with maintaining a pretty strong level of convergence ratio. As, by the way, we committed at our Capital Market Day in November last year.

Understood. Thank you very much.

Thank you. Next question is from the line of Hervé Troué from CIC Market Solutions. Please go ahead.

Yes, good morning. Thank you for taking my questions. The first one, I'm sorry, is back to Cyber. And if we look at the margins and the way the EBIT margin has evolved compared with first half, it's been, in fact, quite stable despite the pressure on sales. I was wondering, I mean, how do you explain that? Is it because you have taken less integration cost in H1 this year versus last year, or is it the product mix which has slightly changed, as you explained, potentially in the cyber services? And I was wondering if you can give us as well maybe a split between what is recurring, maybe coming from a SaaS type of a product versus which is more, you know, one-off sales you do, you know, on the go. So that's on the cybersecurity. And the second question is more on the defense side, especially on the order in tech, which has a pickup in Q2 versus Q1, slightly above O1. But if we looked at some countries, especially UK and France, I mean, UK, I think it's minus 25% versus Q1. 24% and France 10%. I understand, I mean, the budget is gradually increasing. I was wondering what explains maybe the softness for those two countries. I understand you are expecting some pickup in second half, but do you believe we are going to have still be negative at the end of the year on those two countries on order in tech, or we can go to par versus last year?

Thank you. Okay, good morning everybody. Maybe I will start implementing a bit more on cyber in terms of margin. And this is probably where I need also to come back on the two sub-segments that I've already commented, cyber product on one side, cyber services on the other side, because in terms of margin, it is quite different. So cyber product is where we get most of the margin. and a pretty strong level of margin for this segment. And here, I mean, our strategy is quite simple. It's resuming growth as quickly as possible, while preserving the level of margin that are more in the high-team, or low-training, at this point, more high-team. level of EBIT margin for this cyber product business. On the other side, I mean, the small size cyber services is today a level in the business where at this point the level of profitability is not what we expect. At this point, it's slightly negative. It was negative in 2021, particularly in H1 2024. We managed to improve I mean, the situation in H1 2025, that's also within the Y. I mean, despite the lower level of revenue, we managed to maintain quite a good level of margin. It is in particular because on side of services, we tend to focus on margin improvement as opposed to growth, and this is what happened. So we are pretty happy with I mean, the directions in terms of improvements of margin for this cyber . Yet, where we want to be, but it is a . Nothing more to report on cyber in particular, no specific one of . It's more, I mean, Those two different businesses, products on one side, services on the other side, and services where today we streamline, we rationalize, we focus on more attractive markets to improve the level of profitability.

On defense, if I follow up on defense, on one hand, you're right, the figures are the figures. Now, you know, in this long-term business like defense, we are obliged to report on a quarterly basis, but it doesn't make sense. So year after year, we explain why Q1 is up or Q2 is down. But honestly, the right measurement is at least a yearly measurement. And typically, you said UK is down by 25%. would we have taken or booked the big LMM contract in Q2 instead of a few days after, you would have said exactly the contrary. So you see how, I would say, meaningless, if you authorize me to say so, it is to look quarter after quarter at order intake, but this is the rule of the game, so we do so, but I do insist that we always take a bigger perspective when we look at OI for defense. Should I say the same, they are also for space or even . Now, of course, we do confirm the global, I would say, guidance for order intake in 2025. Book-to-bill ratio will be greater than one. And of course, defense will be a key contributor of this strong commercial performance. It's more qualitative answer I share with you, but clearly defense will be a key contributor of this commercial performance. And we do expect a strong commercial performance again in 2025 after several years or many years in a row with such strong momentum. And this is due again in defense to the geopolitical situation. So it's another way to step another step back and to look at the commercial momentum in defense and the one we see, we observe at Thales. So hope it has reassured you and given you enough of a color to be confident that defense is enjoying a strong defense momentum and in particular for Thales.

Thanks. That's very clear. Thank you both.

Thank you. Next question is from the line of David Perry, JP Morgan. Please go ahead.

Yeah, hi. I'm Patrice Pascoe. I hope you're well. I just want to dig into this plan to increase the defense spending from $50 billion to $64 billion in two years that Matt Spock spoke about. I think it was on July the 14th in his speech. It's a huge number. It's had very little media coverage here in the UK or impact on the shares, which suggests to me people don't really believe it. So could you just explain to me here in the UK, what is now the legislative process to make this happen? What are the next steps? What are the obstacles or the things that will make it happen or won't make it happen? And if it is passed into law, When is the money actually spent? Is there a time lag? Thank you.

Hello, David. Thank you for your question. It's a good question, as well, of course. I think the answer is quite simple. It just requires a budget law. So it will be embedded. It will be part of the budget law that France need to operate. There will be no dedicated law for defense. There is no intention and no need to change the LPM. It's just, I would say, it could be just translated in the budget law for 2026. Now everyone can speculate about whether there will be a law or not, a budget law or not in 2026. But clearly, the most likely scenario is that we will have one next year, and it will encompass this increase in terms of defense spending. I do observe as well that it's largely consensual in France, largely. I'm not saying that it's unanimity, but it's largely consensuous. and I'm not sure that I would say the debate in the House of Parliament will focus on this particular point. There are many other controversial topics to focus on than this one at the House of Parliament in France.

Thank you. Is there a date, a specific date we should look out for where say at least 2026 Because you're talking about kind of 14% a year growth. And I think most of us have been assuming 6% to 7% growth. So I'm just looking at when is this locked down and happens? And does the money get, if it's approved for 26, is the money spent in 26?

The orders are passed in 26. Now the cash flow plan are also specific contracts by contracts. But this is mainly This is concerning, I would say, bookings, ordering tax, contracts. So what you will see, normally, in 2026, is a 3.5 billion euro additional contract passed to the defense industry.

Maybe, I mean, if that is low, the caveat is that, I mean, three and a half billion is the overall increase in descent spending covering both OPEX and acquisitions. And at this point, there's a split between the two. As you know, overall in most countries, and it is also the case in France, acquisitions tend to represent something like one third of the global So you could assume that overall, out of the 3.5, let's consider that in terms of acquisitions, the additional goals on top of the existing LPM should be probably 1 billion euros, at least if we follow this type of ratio.

But there is no intention or no one has said in time that typically the number of military people will be higher next year. There is no reason why the salary would go through the roof next year. So in OPEX, there will be a portion for OPEX, but there will be no... CAPEX would be the first, I would say, beneficiary of this increase.

Okay. All right. Well, I'll keep an eye on the news flow. Thanks for the comment.

Thank you. Due to timing constraints, we'll take our final question. This is from Christophe Menard from Deutsche Bank. Please go ahead.

Yes. Thank you very much for taking my questions. I have three. The first one is on strategy and outlook. You mentioned some of the joint ventures with Foxconn. You had one with Kongsberg. Can you give more details as well? And there's a broader question around joint ventures. I mean, we've seen some of your peers rushing, so to say, to do joint ventures to gain access to technology. Do you have the same approach or do you have all the technologies in your portfolio to address future demand? That was question number one. Question number two is to get back on free cash flow in H1. I think, Pascal, you mentioned it's linked to inventory optimization. So am I right to think that it is structural? It's not just the prepayment of the Indian Rafale that is making that good performance? And the last question is on the 2028 guidance for defense. I mean, you said on the call We should be organic sales growth around, I mean, I understood eight, nine this year. We were at 13.3 last year. So the six, seven that you described between 24 and 28, is it something that is probably a need? I mean, maybe updated or maybe revised as time goes by. Thank you very much.

Can I start with the jump venture strategy? So what we contemplate, Bonjour Christophe, sorry, I should have said so first. The jump venture that we contemplate to create with Foxconn, Radial, and maybe other partners, by the way. First, it's not done, it was taken as an illustration of how we do prepare the future. So take it as an example of how we say, How do we care not only about short term, but also about mid to long term, I would say, future of the group. This is, I would say, super exciting, a bit technical, so I've tried to simplify it during my speech, but this is very promising. However, it has no impact on the short run in terms of financial or economic. Moving to Kongsberg, what we decided to do with Kongsberg is to, in fact, to merge our own forces in Norway, and we have had for decades a nice defense budget, which is very strong, typically, on crypto in Norway, with Kongsberg business in terms of software defense radio. By the way, in many cases, crypto and radio, it's intertwined quite significantly. So in terms of economics, it's a couple of hundred people and the range of 100 to 150 million euro to give you an order of magnitude of what it represents. So it's a nice adventure. It's a big one, but it's a nice one. And it is a nice way to, what we say, grab a bit more of the Norwegian market share, leveraging Kongsberg, I would say, presence, which is, honestly, stronger than ours. Ours is significant. Clearly, Kongsberg is one, if not the... Norwegian defense champion over there so it's a smart it's a smart move and the last aspect of your question was about technology the fact that you have observed several joint ventures created by other companies aiming at sharing or addressing technologies it's true that it's less our case because as you said by the way I do think that although we are not perfect but we have already a very very wide and strong technology or technical portfolio where we do need some adventure it's more to address the market more a go-to market i would say approach than sharing genuine technologies or co-developing things unless the customer asks us to do so which is another aspect but yes we do not feel that we say strong need to partner to get access to technologies in different countries.

Yes, Christophe, bonjour. So this performance in H1, I commented, which was pretty strong, and as you have seen, significantly above H1 2024. I mentioned that the profile of our stocks was part of the explanation. We need to understand that we are working pretty hard to optimize overall the level of stocks at Thales. We believe that there is opportunity in this matter. And what you have seen in each one is a first step of overall data management of the stocks. Behind that, hard work on things like a more effective state and operation planning, but also, I mean, being the outcome of a progressive improvement overall on supply chain. By the way, it was, it was, It was quite interesting in this course that we didn't get any questions on the supply chain. I mean, just a year ago, there were many questions on this matter. And it's true that we see the situation overall on the supply chain improving, even though we are still not there yet, and there is still some roadblocks, but overall the situation is progressively improving on this matter. which also allows opportunity probably to optimize overall level of stocks. And all of that overall trajectory where we discuss about the need for us to invest more in terms of capital expenditure. while preserving a pretty strong level of conversion ratio. So taking into account this global picture, opportunity to optimize stocks, a better supply chain situation, the need to keep ramping up overall our production capabilities. All of that is basically what we do to keep We are showing you on our ability to keep delivering a strong level of culture. Your second question was more about organic state, in particular on defense and adjusting, I guess it was probably upwards, our visions on the six to seven persons that we mentioned at the Capital Market Day in November. So to that I would say, Christophe, you need to be patient. By the way, it is very consistent to what we have said in the last six months. We said that all of that will take time. By the way, we explained that the first step was for the countries in which we sell those countries to explain how quickly they will be able to write their defense planning. and the comments on the French defense spending. And yes, the need, I mean, to have the statement from Mr. Macron to be translated into the 2026 finance law, all of that results in additional order intake that will drive more revenue and more . So let's take it step by step. You have seen that H1 was pretty strong. This led us to avoid the overall guidance for the full year, particularly driven by defense. So all of that supporting a pretty positive view on the developments of our defense business in the next few years.

Thank you very much, Director.

Thank you. I will now pass back to the speakers for any closing remarks.

No, no closing remarks. Thank you very much for being with us this morning, and we'll be pleased with Pascal to continue these discussions during our roadshow coming soon this week and early September. Thank you very much, and have a nice summer break for those who take vacations. Bye-bye. Thank you very much. See you. Bye-bye.

Thank you. Ladies and gentlemen, if you didn't have a chance to ask your question on today's call, please do not hesitate to send your question to talusgroupinvestorrelations at 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.