Thales Group (HO.PA) has announced robust results for the first half of 2024, with a significant increase in its order backlog and improved profitability. The company's sales and EBIT margin have surpassed expectations, bolstered by high order intake and successful acquisitions. Thales also outlined its strategic focus areas and provided forecasts for the coming years, with a particular emphasis on the integration of recent acquisitions and the recovery of its space business.
Key Takeaways
- Thales achieved a 6% organic sales growth and a 20 basis point increase in EBIT margin.
- The company reported a record backlog of €47 billion and a book-to-bill ratio of 1.13.
- Acquisition of Cobham Aerospace completed, and transport activity disposed of.
- Organic sales growth between 5% and 6% for 2024 projected, with an EBIT margin between 11.7% and 11.8%.
- Strong order intake in H1 2024, with three orders exceeding €500 million each.
- Integration of Tesserent and Imperva progressing, with cross-selling opportunities under exploration.
- Upcoming Capital Markets Day scheduled for November 14th.
Company Outlook
- Thales anticipates organic sales growth of 5-6% for 2024.
- The EBIT margin is expected to be between 11.7% and 11.8% for 2024.
- The company is focusing on ramping up capacity, maintaining innovation leadership, and integrating acquisitions.
- Thales expects the aerospace divisional margin to trend positively in the coming years.
Bearish Highlights
- Thales reported a slight erosion in EBIT margin due to lower volumes and price pressure in certain segments.
- The profitability outlook for the space segment was adjusted to a negative contraction of €50 million for the year.
Bullish Highlights
- The company reported a strong order intake of €10.8 billion and a new historical record backlog.
- EBIT grew by more than 10%, and adjusted net income reached €866 million.
- Sales for 2023 were restated at €1.9 billion, showing a 16.1% increase.
- Positive organic growth experienced in Q2 after a decrease in Q1.
Misses
- Free operating cash flow was low in H1 2024 due to inventory buildup and the nature of certain contracts.
- Net debt position increased by about €400 million compared to December 2023.
Q&A Highlights
- Thales discussed the LPM adjustments, clarifying that it allows the Ministry of Defense to reorganize priorities rather than changing the financial outlook.
- Executives expect the level of stocks to decrease in H2 2024.
- The company is engaged in ongoing discussions and potential partnerships in the space business.
Thales Group has demonstrated a strong commercial performance in the first half of 2024, with significant growth in sales and profitability. The company's strategic initiatives, including the integration of recent acquisitions and a focus on innovation, are expected to drive continued growth. With a solid order intake and a record backlog, Thales is well-positioned to achieve its financial objectives for the full year and beyond. The company's executives remain committed to executing their growth strategy and capitalizing on market opportunities, as reflected in their positive outlook for the upcoming years. The financial community will be looking forward to more detailed updates at the Capital Markets Day in November.
Full transcript - None (THLEF) Q2 2024:
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales' First Half 2024 Results Conference Call. The presentation will be held today by Mr. Patrice Caine, Thales' Chairman and CEO; and Pascal Bouchiat, Thales' CFO. It will be followed by a question-and-answer session. [Operator Instructions] I advice you that this conference is being recorded today. I would now like to hand the conference over to Ms. Alexandra Boucheron, VP Head of Investor Relations. Please go ahead.
Alexandra Boucheron: Good morning. Welcome and thank you for joining us for the presentation of Thales' 2024 half year results. I'm Alexandra Boucheron, Head of Investor Relations at Thales. With me today are Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales. As usual this presentation is audio webcast live on our website at thalesgroup.com where the slides and the press release are also available for download. A replay will be available soon after the end of the event. With that, I'd like to turn over the call to Patrice Caine.
Patrice Caine: Good morning everyone. So, as usual I will start with the highlights of the period. And I'm now on Slide number 2. So, we have enjoyed a strong commercial dynamics aimed in this first half and notably in defense and security where we have recorded three orders in excess of €500 million. This momentum was especially driven by large orders, leading our backlog to reach a new historical record of €47 billion. Sales were also robust, growing by 6% organically, standing at the top of the guidance range set for this year. This growth was fueled by strong organic growth in Aeronautics and Defense & Security ahead of our expectations. Strong achievements in terms of profitability as well with an EBIT up margin 20 basis points compared to last year, while we increased our R&D expenses, notably in Space and Pascal will come back to it and faced high comps for DIS. Last, but not least, we completed the acquisition of Cobham Aerospace and we eventually finalized the disposal of our transport activity. And I would take this opportunity of course to thank all the teams who contributed to this operation. Let's move now to Slide number 3, looking at our financial performance in the future. As previously said, we have enjoyed a strong commercial momentum this semester with order intake increasing by 26% in returns and by 23% organically and reaching €10.8 billion ahead of expectations. The book-to-bill ratio is once more above 1 at 1.13. Sales reached €9.5 billion, growing by 8.9% in real terms and 6% organically. EBIT grew by more than 10%, while EBIT margin improved to 11.5%. This is in returns and Pascal will come back on organic numbers later in this presentation. Adjusted net income grew by 6%, taking into account higher actual expenses as you know and reaching €866 million. Free operating cash flow is positive at €23 million, down from previous year as expected. In a still tight supply chain environment, it reflects higher stocks to face higher demand and the need to build strategic inventories to properly serve our customers. Lastly, our net debt position increased by about €400 million compared to December 2023, taking into account dividends and the completion of share buybacks program. After this brief introduction I now hand over to Pascal who will comment our financial results in greater details.
Pascal Bouchiat: Thank you, Patrice and good morning to everyone. I'm now on slide 4. So starting with our order intake dynamics. As Patrice mentioned, we achieved again a very strong order intake level in 2024 at €10.8 billion almost aligned with the record high of H1 2022, which was including the Jumbo Rafale order from the US. Hence book-to-bill ratio stands at 1.13 and in at 1.17 explaining the IS was booked to be structurally equal to one. So strong performance and good support to future goals. As shown on the slide this growth was mainly driven by large orders. 12 orders with a unit value over €100 million were booked in H1. And even three out of these 12 orders at a unit value in excess of €500 million namely an additional order from the German Navy for two more frigates, the execution of the third tranche of the 42 Rafale aircraft order placed by Indonesia in 2022 and also an order for an air surveillance system for military customer-based in the Middle East. Looking by activities. Nine large orders occurred in Defense & Security and from very different countries reflecting an overall strong demand across the board. Turning to orders with a unit value below €100 million. The order increased by 4% versus H1 2023. So overall quite a solid performance again in H1 2024 regarding order intake. Moving on to slide 5, looking at sales. As anticipated, H1 net scope effect is significant at €276 million resulting from the acquisition of Cobham, Imperva and [indiscernible] partially offset by the disposal of the electrical system activity sold to Safran (EPA:SAF). Currency impact is negligible. Excluding scope and churn affects our H1 sales grew up by 6% which is at the top of the guidance range set for this year. On the positive I would say Aeronautics went really well recording a double-digit growth. Defense & Security as well reaching a high single organic growth. And DIS is back to positive organic growth in Q2. Thanks to the good dynamics in both the cybersecurity and the biometric activities. On the other hand space sales have been stable over the last six months as anticipated. Turning to the geographical perspective. Let me point that growth was solid in mature markets and especially in France, UK, the rest of Europe and also Australia. Growth from emerging markets stands at 2.7%. Moving on now to slide 6 looking at the EBIT performance drivers in H1 2024. As mentioned already EBIT was up by 10.4% in real terms and by 4.7% organically year-on-year with margin progressing from 11.4% in H1 2023 to 11.5% in H1 2024. Third driver is our gross margin that went up by almost 13% allowing to hit a new high at 29.2% of sales versus 28.2% last year driven by the combination of relative acquisitions and also good performance from all our activities, but space which keeps suffering. With regard to indirect costs overall a 3.4% organic increase almost half of top-line organic growth meaning indirect costs are well under control. SG&A costs have been contained growing only slightly above 1% despite inflation and a growing top-line. In contrast, R&D expenses are up 7.6% organically reflecting sustained R&D investments. Restructuring costs are still quite low in H1 2024 as restructuring of space just started. Most of the costs linked to the restructuring plan of our space business will be recorded in H2. Finally, we have lower contributions of our equity affiliates down by €10 million compared to last year due to a non-recurring item. Contribution from Naval Group is in line with last year at €44 million. Now, looking briefly at each segment one by one, I'm now on slide 7 starting with Aerospace. Orders stood at €2.7 billion up 16% organically. Avionics order intake very dynamic, recording a solid double-digit organic growth. And more specifically, the aeronautics with one large order in Q2 booked to install our new IFE product for a major airlines. And also new orders related to military avionics and also training and simulation activity. In Space, we booked two large contracts both in Q2 2024 one Exomars 2028 in our observations exploration and navigation business and another one in our telco business, this one relating to our new generation of gestational satellites. Overall, orders booked in H1 2024 for space were slightly below H1 2023. Sales at €2.6 billion increased organically by 4.8%, clearly driven by the double-digit organic growth in Aeronautics, reflecting notably excellent dynamic in our IFE and civil flight avionics businesses. This compensated flat sales in the Space business. Now, if we look at profitability, EBIT margin is down compared to H1 2023 from 6.9% to 6.5%. Again, the Avionics business recorded a strong organic performance at a solid double-digit EBIT margin, in line with where it was before COVID, thanks to operational leverage and the top line growth. On the other hand, space EBIT is negative in H1 2024. For the full year 2024, EBIT level for Space will be negative by around €50 million due to restructuring costs linked to the recovery plan and also the peak of R&D expenses to finalize the development of this new generation of geostationary satellites. Consequently, margin of the Aerospace segment as a whole will be at the same level as last year. And maybe a last word before we move on to the next segment. We completed earlier in April, the Cobham acquisitions and integration is going well. Patrice will come back to that later on. Turning to slide 8, looking at the Defense & Security segment, which is straightforward. Order intake amounted to €6.1 billion, up 36%. Q1 was exceptional, Q2 softer as anticipated because of high comps and also cutoff effect between Q1 and Q2, still showing an excellent momentum with five large orders booked between April and June this year. Our backlog in Defense & Security hit a new high at €36.5 billion, representing 3.7 years of sales. Sales amounted to €4.9 billion, up 8.5% organically versus H1 2023. Many business units reached again strong organic growth. This strong level resulted from the combinations of our strong backlog, as mentioned above, and the efforts put by the group to ramping up its overall production capabilities. So to conclude on the Defence & Security organic sales growth, we are ahead of the confirmed mid-single-digit plus full year guidance. Last point the EBIT margin, as you can see slightly up at 12.9%, again a solid performance. And finally, Digital Identity & Security, I'm now on slide 9. Before speaking about the figures, let me just remind you two significant scope evolutions that you have to take into consideration for 2024. First, of course, integration of Tesserent and Imperva over the 12 months of 2024, but also the transfer of the civil cyber activities from our Defence & Security segments from January 1, 2024. 2023 figures have been restated for this internal transfer. At €1.9 billion, sales are up by 16.1% but almost flat organically, meaning we are back to positive organic growth in Q2 after a 2.5% decrease in Q1. This despite still lower sales at our Banking, Payments and Solutions business. And finally, EBIT is down by 7.4% organically at €272 million with EBIT margin now at 14.1% versus 14.7% in H1 2023, which was, however, quite a demanding reference base. This slight EBIT margin erosions, is due to lower volumes in Banking, Payment Solutions and price pressure on mobile communication. In this environment, we decided to support our pricing policy to protect our margin at the expense of a bit less sales in some countries. The above 14% EBIT margin reflects the successful implementation of this strategy. Turning now to slide 10, looking at items below EBIT. First, the cost of net financial debt, it might be surprisingly low for some of you. It takes into account cost of financial debt for €87 million related to our €4.6 billion net debt at the end of June 2024. And this is in line with our expectations. However, this is partly offset by other financial income, mainly non-recurring dividend payments from non-consolidated investments for around €20 million as well as €10 million positive ForEx results, while it was negative by €10 million last year. So, this ends up in a total amount of minus €55 million for H1, which, of course, cannot be extended for the full year considering what I mentioned about non-recurring items, positive items. The finance cost on pensions and other employee benefits went down by €10 due to the removal of the interest expense following the transfer of our pension obligations in UK that we carried out in December 2023. Then taxes, as you can see the effective tax rate stands at 20.4% versus 20% in H1 2023. The adjusted NAV from discontinued activities is in line with expectations for five months in 2024 relating to this transport activity. So all of that leading to an adjusted net income group share increasing from €819 million in H1 2023 to €866 million in H1 2024 and an adjusted EPS of €4.21, up 7.7% versus last year. Now a few words about our free operating cash flow. I'm now on Slide 11. Since the disposal of transport activity is now effective, we choose to focus on the free cash flow from continued operations. So free operating cash flow from our continued operation amounts to €23 million versus €253 million in H1 2023. As Patrice explained earlier, we had to further increase our inventories, as we have increasing number of orders to execute and we are still facing some supply chain issues on certain components, increasing our inventories, enable us to properly serve our customers in this environment. Of course, cash remains a key focus across the group and we confirm for the full year of 2024, a conversions ratio close to 100% from adjusted net income to free operating cash flow, putting aside the contribution of transport. Finally, moving on to Slide 12, with a quick look at the evolutions of our net debt position. Our net debt end of June amounted to almost €4.6 billion versus €4.2 billion end of December 2023. As you know, we have continued to work on our capital redeployment in H1 2024 on key elements. First from an M&A standpoint, the acquisition of Cobham for about €1.1 billion and the completion of our disposal of our transport activity for about €1.7 billion. And second, the completion of our share buyback program in March 2024, resulting in a cash-out of €176 million in 2024. This came on top of the €534 million dividends payments. For the year-end, we expect a significant drop in our debt, driven by a strong cash flow generation in H2. We also need to keep in mind the expected interim dividend payment in Q4 at a normative level of new IFRS 16 basis. And that's the end of this financial review. I'm now turning over the call back to Patrice.
Patrice Caine: Thank you, Pascal. So now on Slide 14, turning to our strategy and outlook. Here now are the four strategic priorities we intend to focus on in the near-term, which are fully in line with what we – what was stated during the full year results presentation. First, ramping up our capacity to address the strong underlying trends in our markets. One of our primary focus in recent years has been to increase our capacities. This includes not only production capacities but more importantly, entering we have the right talent in place to seize market opportunities. Looking back to March 2024, we announced the hiring of approximately 8,500 people for high expertise roles, while continuing to invest in enhancing Thales brand awareness. Second, maintaining our innovation leadership and sustaining excellence in R&D, which remains a major driver of competitiveness in our markets, fully bound of our DNA, as shown by impressive 20,500 patents portfolio as of end of 2023. A key priority for the group this year also, is to deploy and focus on Thales Alenia Space adaptation plan, launched back in March 2024. And lastly, about integration of acquisitions, you know that we proceeded to large acquisitions in 2023 with Tesserent, Imperva, in cybersecurity and with Cobham in Aerospace in April 2024. That is one thing to acquire a company. That's something else to integrate it especially, for large. So let's see where we are on these four strategic priorities, turning now to Slide 15. So first capacity ramp-up, we are fully on track with our recruitments targets. So far we completed 3,900 recruitments, as of end of June 2024. And we're confident in reaching our year-end targets. This hiring campaign, confirm we can relay on an excellent brand awareness. In addition, we've made several announcements in this first half, regarding capacity expansions. In March, we announced that we will multiply by four our missiles production in Belfast between 2022 and 2025. In June, we announced our intention to quadruple our ammunition production, capacity at La Ferté Saint Aubin, namely from 20,000 in 2023 to over 80,000 a year, by 2026. In July, we inaugurated in Herstal Belgium, an assembly line to quintuple the production of 70-millimeter Laser Guided Rockets from 2020 to 2025. And lastly, in Lima, where we produce one of our star products the GM200 radar, the production has more than doubled between 2021 and 2024 from 10 to over 24 radars per year. And we are moving towards a rate of 30 radars per year. Secondly Innovation Leadership, I will focus here more on AI that is already a reality for Thales. Indeed, we have been working on AI for three years now. And we are already at scale with an impressive mass of 300 AI specialists and around 100 doctoral students. But we decided to move further and we launched an AI accelerator. It will include an AI lab dedicated to early stage research and AI factory dedicated to the development of AI systems across all our business and an entity dedicated to foster AI in sensors, the core expertise of Thales of course, relying on synergies between Civil and a Military AI. Thirdly, about Space Recovery, as you know we have announced in March 2024, an adaptation plan in space, first, to optimize its structure, second, to maintain its leadership position, and third to restore of course its profitability. This plan mainly consists in the redeployment of 1,300 positions across the group with no forced departure. Those redeployments have actively started and will take place over 2024 and 2025. This plan is designed to preserve and develop skills within Thales. Thanks to growing opportunities and activities in other businesses of the group. Lastly about the Acquisition Integration, so number one, Imperva's integration is going well. We have started to work on cross-selling opportunities mapping and signed our first deal in cross-selling, showing the capacity for Thales and its partners' network to offer Imperva Security Solutions to Thales' better data customers. In addition, we are working on organizational integration. Indeed, we are carefully preparing the integration of the sales forces and the partners' network to maintain the commercial momentum. This integration will be effective at the beginning of 2025. In terms of R&D, we are committed to retaining talent and fostering collaboration among teams. Starting from the third quarter and in accordance with our plan, we will launch the first features resulting from the integration of Thales and Imperva's data security platforms. Number two, regarding Cobham. So regarding Cobham we intended to proceed with a light integration of this very qualitative and efficient company. Hence it is in our business line fully part of the Avionics business unit. Things are also going very well. So turning to slide 16 about 2024 financial objectives that we decided to refine. Our order intake remains unchanged. We expect another year of strong commercial performance driving a book-to-bill ratio above one. Regarding organic sales growth and taking into consideration, the strong H1 performance we now expect sales to grow organically between 5% and 6% instead of 4% to 6% as announced in March. Based on the July 2024 foreign exchange rates, this corresponds to sales between €19.9 billion and €20.1 billion. In corporate all the elements we discussed earlier, we expect a further improvement in EBIT margin, which now should be part of a range between 11.7% and 11.8%, which is consistent with the consensus and is on our website on the 27th of July. Last slide, slide 17 is for you to save the date of our upcoming capital market day that will take place on November 14th in Paris. We will start the day around 11:00 a.m. with a product showroom and we'll start the presentation around 1:30 p.m. We will be very glad to receive you for a cocktail at the end of the day of course and the event should thus end around 9:30 p.m. Well this concludes our presentation with Pascal. So many thanks for your attention. And now we are pleased to take your questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Christophe Menard from Deutsche Bank (ETR:DBKGn). You may ask your question. Your line is open.
Christophe Menard: Yes, good morning. Thank you very much for taking my question. I'm going to start with two questions. The first one is related to recent political mentioning that the LPM could see an adjustment in 2025. Do you have more details on this and how it could impact your business? And the second question is on the free cash flow. The -- and I mean given the level of order intake you had in H1, we could have expected a higher level of prepayments. I understand that there is also inventory buildup. So just wanted to have more color on that inventory buildup whether it's purely defense related whether it's consuming all the prepayments, or whether actually prepayments were not that big in H1 just to understand the different elements here around free cash flow? Thank you very much.
Patrice Caine: I may take the first one, Pascal.
Pascal Bouchiat: Yes.
Patrice Caine: [Foreign Language] So on the LPM in fact this is not a surprise at all. It was voted in the low. This adjusted in fact vocabulary means that it gives a little bit of flexibility in terms of physical priority, not in terms of financial priority. So it doesn't mean that it will lead to more or less money. It just gives the ability to the ministry of defense to reorganize slightly, I would say, the priorities in terms of acquisition. That's all it means, and nothing more or nothing else. And it was said explicitly by the French President on the 13th evening, when he delivered his speech as usual by the way, in front of the armed forces just before the Bastille Day. On the free cash flow?
Pascal Bouchiat: Okay. So [Foreign Language]. So on free cash, I mean first it's important to have in mind that it's a typical pattern for Thales. I mean in general H1, being quite low in terms of free cash and quite a strong level of cash flow on H2. And you perceive that, you confirm the overall guidance for the full year 2024. In terms of, I mean the comments, relating to H1. First, maybe undone payments. You do mean done payments are much related to the nature of the contract that we signed. I mentioned in particular, I mean three quite large project contract in excess of €500 million to outside Europe one Indonesia, the other one in the Middle East and this traditionally comes together, with I mean, some down payments. It's a typical pattern for this type of defense export contract. The last one that I mentioned, was about I mean, the two additional frigates, traditional boats for the F1 2026 project in Germany. Typically, there is no down payment associated with this type of contract. So, you see, I mean it can be quite a different pattern. Now, what we need to have in mind is that overall, I mean we have not seen any change in the way we get down payments from our customers. It's pretty much in line with, what we have seen in the past. All of that also meaning, and I made it clear that we build up inventories in a significant way in H1 2024, as compared to the end of 2023. Prior the level of stocks will go down in the second half and we'll end up 2024, at the level of stock that will be lower than it is end of June 2024. Now, as we mentioned, quite important, also here again to bear in mind that in this quite volatile complex under-constrained supply chain environment, for us it's critical that we can build up strategic stocks on specific, I mean type of components, but also hardware and to that we keep suffering [ph] in this matter. We have also been a bit impacted, by what I call missing parts, which results in I mean product that is fully available for our clients, but was -- is a missing part and that we cannot deliver to our customers, because we keep waiting I mean to get this last missing part. So, still a bit of volatile environment from a supply chain and overall a tight supply chain environment. And overall, I mean this level of increase we spoke, reflect these overall environments, but we expect, I mean a drop in H2 as compared to the level that we got end of June.
Christophe Menard: Thank you very much. Thank you.
Operator: Thank you. We are now going to proceed with our next question. The question come from the line of George Zhao from Bernstein. Please ask your question.
Q – George Zhao: Hi. Good morning, everyone. First, what exactly changed in the guide, with respect to space EBIT? I mean previously, you had expected peak R&D this year. So, is it higher R&D expense now or is restructuring cost higher this year? I guess and what does this all mean for the – path towards the high single-digit margin for space by 2027? And second question, now coming back to defense outlook, can you sustain the mid-single-digit growth over the medium term, given the current government uncertainty? Now the LPM covers the medium term, but we know that the signing those need to be approved annually. So, if we see delays under this government, how do you assess the downside risks
Pascal Bouchiat: Okay. Good morning, George. Maybe I will start on space. So first, is that overall, it's quite clear that we confirm the overall guidance in terms of EBIT margin even though, I mean, the range is lower than it was, I mean, of March. It was that we expect today as I mentioned a level of EBIT for space, which is for the full year 2024 below what we had in mind a few months ago. So I mentioned minus 50 for the full year 2024. So with that, I mean, they are -- I mean, two key elements. First, I mean, we mentioned in March that our restructuring costs will be equally split between 2024 and 2025. And overall, we believe that the restocking charge will be higher in 2024 than in 2025. So we tend to go even quicker on the overall, I mean, cost adaptation program for Phase that we had initially in mind. And this coming are on top of the overall, I mean, level of revenue that for 2024 is a bit below than what we expected a few months ago. We're expecting, I mean, space sales to be slightly positive in terms of organic growth in 2024 versus 2023. Today I mean our best guess is that it could be just stable as compared to last year, which means that it's even additional reason for us to go even quicker in terms of the overall restructuring of space. This doesn't change at all, I mean, our mid-term view in particular 2027 in terms of EBIT margin for space. Maybe last point, I mean, on space. I guess, it was clear from the presentation that 2024 the peak of our investments in terms of R&D for space are the developments of our new generation of JSAT station satellite should be finalized by the end of 2024. So this means that 2025 will benefit from lower R&D expenses for the reason I've just mentioned. Patrice in defense mid-term?
Patrice Caine: Yes. Hello, George, good morning. So the defense outlook and the question of the mid single-digit growth in the long run or in the long-term. First and foremost, as you know, this defense outlook is mainly linked or correlated with geopolitical situation. It's the least to say that the situation is preoccupying if I may say in many parts of the world and it's not going to change, because of such or such election, such or such country and name France if you refer to the situation in France. There is a war in Ukraine. There is ongoing tensions if not rising day-to-day around Taiwan. There is the conflict of the war between Israel and Palestine. And also it's the least to say that the U.S. election it's another factor of, I would say, volatility if you allow me in this overall environment. Even the new tension by the way as in Europe has reiterated its strong support and strong, I would say, involvement in matters and support to Ukraine in particular or to its own security in Europe. Secondly, as far as France is concerned, there is -- and there has always been by the way a very large content on defense matters and defense budget. So it's true that LPM gives you a multiyear budget planning even though each year there is a look that is devoted to confirm this trend. But clearly this benefit from a large very large consensus in France as far as the French project is concerned. And as the last element to explain why we are confident on this mid single-digit growth long-term trajectory is also that we benefit as Thales and this makes us a bit different from typical US competitors to a highly diversified defense customer base. Unlike our US peers that are mainly exposed to one single market which is a very large growth in US market, we are exposed in a positive sense to many, many markets in Europe, UK, France, Germany, Belgium, outside Europe, Middle East, Asia, South Asia, even further away Australia, as you know. So this highly diversifying customer base also brings a level of resilience to our defense activity.
Operator: Thank you. We’re now going to proceed with our next question. And the questions come from the line of Herve Drouet from CIC Market Solutions. Please ask your question.
Herve Drouet: Yes. Good morning. Thank you for taking my questions. Two on my side. So first one, can you give us a bit more clarity on what you want to do with your space business? Obviously, I mean, it looks like there are ongoing discussion with potentially other partners. But when we looked at for example what you invested in R&D and space, it looks like you are putting money in your space business? Does it mean in the medium term, you are quite keen in keeping that business and potentially consolidating it, rather than spinning it off? So that's the first question. The second question is regarding Imperva. Can you share with us, what was the margins of Imperva in the first half 2024 and if you have taken any retiring or integration cost to include Imperva in your DIS unit? Thank you.
Patrice Caine: Shall I start with space, Pascal?
Pascal Bouchiat: Yes and we take Imperva.
Patrice Caine: Okay. Good morning, Herve. Thanks for your question. So Space business, again, we should probably to answer I would say correctly to your question make the difference or take I would say segments one by one, because they deserve I would say probably a detailed analysis. Number one, if you take the first segment which represents two-thirds of tax turnover namely observation, exploration and navigation business segment. So two-thirds of the business is very sound, very robust. We benefit from a strong order book. We have I would say good customers, mainly European Space Agency or some national space agencies. And we enjoy I would say a reasonably profitable business on this third month of the market. And looking forward the outlook is really positive as a need as a willingness to nations to invest in these domains is quite strong. Second segment is the service business, Telespazio is not past per se, but Telespazio contributes as well to the resilience of our space business. It's a nice growing profitable business in terms of service, so clearly a no-brainer for us, a good business to be in. The third one which is at stake at the moment is the telco business, which is clearly under pressure as described by myself and by Pascal for many reasons, we have already explained, so probably not going to come back on this reason this morning. But still, if we take let's say a midterm perspective, the needs in telco is absolutely -- these are absolutely huge. So we are confident in the long run, once we will have I would say finished our peak of R&D in terms of space inspire development that we will recover we say a normalized level of profitability. Hence, overall, our commitment for 2027 that has been recalled by Pascal making this business a good business good and I would say a reasonably profitable business on the long run.
Pascal Bouchiat: Okay. Maybe just I mean to complement Patrice. I mean, in particular in this 2027 objective in terms of margin for space of 7%. This level of return on sales allows this business to have a level of returns which is above the average cost of capital of this business. So overall and probably, the best demonstration that this business can be a good business for Thales. The question on Imperva was very specific Herve. So Imperva margin in H1 was pretty strong in excess of 15% even a bit both. I will not detail -- I mean, to give you the exact figures, but in excess of 15%. And you also asked for I mean level of integration cost and restructuring is true. And I confirm that overall, for the full year 2024, we will have integration costs for Imperva. It has been quite minimal in H1. It will be more materials in H2. And we mentioned, I think in the past that overall, I mean, integration costs for Imperva in 2024 should be around €20 million. So I confirm this amount. The bulk of it will be booked in H2. And overall, I mean good to see that, I mean, the integration of Imperva is seamless smooth going well. So overall, we are quite happy with the first seven months after the completion of the acquisition.
Herve Drouet: Okay. That's very clear. Thank you. Thank you very much for you answer.
Pascal Bouchiat: Thank you, Herve.
Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Ben Heelan from Bank of America (NYSE:BAC). Please ask your question.
Ben Heelan: Yeah. Good morning, guys. Thank you for taking my question. I just wanted to come back on that space question that you just had. And the question was more like Patrice would you be comfortable seeing or be willing to seeing a European champion in space market? Because I think that's what that question was kind of pointed to. We've seen the headlines around discussions with Airbus following the challenges that they've had. So is that something that you think is an attractive option down the line and even achievable down the line? That would be my first question on space. My second question on the same. So in Q1 you talked a lot about PCBs being a bottleneck on the supply chain and one of the big challenges that you've had to deal with and manage and you talked about things slowly starting to get better. I was wondering if you could give us a bit of update on where you are on that and how things are progressing there? And then the third defense question I had was in Q1 the -- you commented in the presentation that the orders between €10 million and €100 million has grown about 46% organically. And when I look to the half year numbers, it looks as though the overall growth is around kind of 4%. So I was just wondering am I missing something there, if there was a timing effect there. Just any color you can give us around that? Thank you.
Patrice Caine: Good morning, Ben. I shall start with the first question, Pascal, on space going back on space. First, I should have said to early before. Our plan -- our baseline is what we have explained. I mean to restructure the telco segment and to continue to I would say run the space business with all the loyal customers that we have in the markets for instance or in other parts of the world. That's really our baseline at the moment. Second, you have referred to some I would say comments here and there or rumors or whatsoever. Let me just tell you that such type of I would say either rumors or talks existing or not have been ongoing during my 10-year tenure as Thales, CEO. So this is nothing new for me. Perhaps it's new for some of you, but this is nothing new. And no need to comment any further. We need to focus on our -- what I call Plan A is to restructure the business and to put it back on track by 2027 as already explained. Now, perhaps last and very theoretical answer on any, I would say a big merger. On one hand, it could bring I would say competitiveness and innovation by optimizing R&D and so on and so forth. On the other hand, you know, all the hurdles or head backs to encounter in such type of big, big mergers. So, now your own opinion to make the plus and the minuses. But again, this is a theoretical answer to any big regrouping in any kind of business you may imagine.
Pascal Bouchiat: Okay. Good morning, Ben. So update on the PCB. The situation is still quite tight on PCB in terms of supply in some countries in particular in France, which means that we keep working very hard in terms of increasing the overall supply and dispose that in some cases we also need to allocate, I mean, PCBs within the group in terms of priority. So this reflecting I mean a situation which is not back to normal goal. No, I mean, the -- then it's about I mean what we do. So we keep working very hard, I mean, to get second supply, to provide long-term visibility to sign more longer-term contracts. And all of that is working, because at the end of the day, I mean, you see the old top line growth that we can deliver. Defense is a good example, but aeronautics is also a good example. And those are two businesses that are impacted today by the shortage of PCB, which shows that despite, I mean, all these type of difficulties, we can navigate this type of quite complex environments. It's not easy of course from a day-to-day standpoint for our teams. But overall, we manage, I mean, to deliver growth despite, I mean, this constraint. Now, overall, it was my comments earlier about consequences, not specifically on PCBs, because PCBs were in shortage. But overall, I mean, one outcome is more inventories overall, I mean, to be able to navigate what is quite complex overall supply chain environment, which is not at this point fully stabilized. Your last question, if I understood well, was about between Q1 and Q2 on order intake relating to our project with unit value below €100 million. So I mean, first, I think it's important to remind everybody that, of course, I mean, the bigger the unit volume for order intake, the more volatility we can get across quarters and it's true that large size project order intake can be quite bumpy. But also the same for midsized type of projects, in particular, the ones from €10 million to €100 million and it's true that Q1 was especially strong when it comes to order intake relating to contract of unit value between €10 million and €100 million. Because here, again, we might have some volatility where, I mean, it's more of a linear trend is a small size contract with unit value below €10 million. And this is much more linear. And this is why you commented about something like 4% growth in this matter. Nothing more, I mean, to interpret or to consider from our discussion, but more volatility across quarters than anything else when it comes to, in particular, large-sized unit value contracts.
Ben Heelan: Okay. Very clear. Thank you guys.
Pascal Bouchiat: Thank you. Thank you, Ben.
Operator: [Operator Instructions] We are now going to proceed with our next question. And the questions come from the line of George Mcwhirter from Berenberg. Please ask your question.
George Mcwhirter: Good morning. Thank you for taking my question. Just one, please, on the Aerospace divisional margin. How do you expect this to trend in the coming years given you've got the challenges in Space? But offsetting that, I think you've got the accretion from the Cobham Aerospace Communications acquisition. So any color you can give there would be great. Thank you.
Pascal Bouchiat: Okay. Good morning, George. So I mean the margin on aerospace, I would say, it's quite simple. As I mean, we communicated on our objective relating to our space business with the 7% overall level of EBIT margin in 2027. Now, when it comes to the Avionics business, this is where we have not at this point provided you with mid-terms guidance. This is what we are going to do at our Capital Markets Day in a few months. So you need to be a bit patient. But overall, I mean, what I mentioned is that, we at this point came back to pre-COVID level in terms of profitability for Avionics business, so quite a solid double-digit EBIT margin. And it's true that the integration of Cobham will have quite a booster effect on the Avionics EBIT margin. We said that I mean this business is today operating under our level of EBIT margin, which is 30%, 30% plus EBIT margin. And this is basically I mean what we see for this business in 2025. I mean so – and this is absolutely confirmed. So I mean you've got various parameters of these equations. We'll be even more explicit as we'll share with you. I mean our mid-terms probably 2028, so mid-terms profitability objective for our space business. But those objectives will gather what I've just explained both from space and what we expect from Avionics including this booster effect coming from the acquisition of Cobham AeroComms.
George Mcwhirter: Pascal, very helpful. Thank you.
Pascal Bouchiat: Thank you, George.
Operator: Thank you. We're now going to proceed with our next question. And the questions come from the line of Tristan Sanson from BNP Paribas (OTC:BNPQY). Please ask your question.
Tristan Sanson: Yes. Good morning, Pascal. Thanks for taking my questions. Just a couple of simple clarification. I wondered Pascal, whether you could give us a few elements about organic cost trajectories in H1. I'm talking a bit to recoup the organic evolution of the R&D spending, the bidding costs, SG&A that usually you provided a bridge or you provide this that would be useful. And the second question, I wanted to understand how the moving parts in the full year trajectory versus the plan. So you said that you expect space to have a negative contraction by €50 million this year. Can you remind us how much you had in mind initiative beginning of the year? And in terms of offsetting movements, I think you mentioned a non-recurring tailwind from – is it equity still in H1 if you size what it is and how much you gain that could be useful. But we see other mitigating factors that would be helpful to understand the trajectory to the guidance you're shipping it. Many thanks.
Pascal Bouchiat: Okay. Good morning. So I mean first on the organic trajectory of our cost. I mean probably better to refer to our presentation on Page 6 of these slides, where we detail the evolutions of our cost I mean from both the total but also from an organic standpoint. And the good thing is that we see on this table once again, it's on Page 6 of the presentation that we have really put our indirect cost under quite a strict control and in particular, when it comes to SG&A. So, SG&A is the addition of both sales marketing and general administrative. Overall, they went up by only 1% from an organic standpoint against H1 2023. And this despite inflation despite I mean the 6% top line growth. This slight -- I mean 1% plus increase in SG&A is a mix of slightly less than 1% increase in sales and marketing expenses and overall something like a 2% increase in G&A. On the other side it's true that we increased quite substantially our R&D expenses overall at a pace of 7.6% in H1 2024 versus H1 2023. So, you see I mean quite a mixed trajectory by strict control of SG&A. And yes investing more in terms of R&D. But overall indirect costs contained at a level which is half the progression of our organic growth.
Tristan Sanson: If I may add a quick one. Thanks Pascal, and sorry I missed the table. But the kind of €40 million of organic increase in R&D expense is mostly coming from Space or--
Pascal Bouchiat: No, it's a mix between Space and also I mean the Avionics business, which are the two largest contributor of this increase. And the rest of our business is in terms of R&D expenses, I mean their R&D expenses grew in line with the growth of the top line. Your second question was about our initial expectation for our Space business in terms of profitability for 2024. It was slightly negative whereas today it's towards that we see more like minus €50 million on this matter. So, there's a gap between our initial view and what we see today on space which is let's say between €30 million and €40 million.
Tristan Sanson: And just to be comprehensive on that one the mitigating factor of that that alluded to the guidance, you said a non-recurring item versus equity affiliates?
Pascal Bouchiat: Okay, I mean your last point was about I mean the contribution of equity affiliates.
Tristan Sanson: Yes. Well you said the thermal guidance is not really changed. Now, did the range but it's more or less flat despite like a 40-plus cuts to the outlook of Space. There are other elements that are doing better? And I think you mentioned equity affiliates is--
Pascal Bouchiat: No, no, I mean overall I mean equity affiliates, I mean today I expect I mean this is in line with what we have done last year. I mean that's pretty much what we see. But overall it's true that I mean this less optimistic view on Space is offset by in particular. Overall, I mean more EBIT, better profitability on Avionics and also a bit from our Defense & Security business with overall I mean level of top line and level of profitability, which is slightly above our initial expectations. So, I mean those two elements Avionics and Defense & Security compensating for I mean a less optimist view relating to our Space segment.
Tristan Sanson: That’s very clear. Thank you very Pascal.
Pascal Bouchiat: Thank you, Tristan.
Operator: Thank you. We are now going to proceed with our next question. And the question come from the line of Christophe Menard from Deutsche Bank. Please ask your question.
Pascal Bouchiat: Christophe Menard again.
Operator: Hello Christophe, your line is open. Hello Christophe, your line is open.
Christophe Menard: Yes sorry. Sorry, I'm back. I had two quick questions I want to ask. On capacity expansion, you mentioned in your presentation, I understand that this is included in your guidance for free cash flow in 2024. Is there any CapEx impact to expect in 2025? That's the first question. And on the Q1 call, I think, Pascal you mentioned quickly that you could be interested in some small site security and defense business at Atos so nothing to do with BDS, or nothing to do with a larger acquisition. Can you provide us any update on this? We know we've been following the news in the press quite obviously about what's going on. But you were mentioning at that time mission-critical businesses, I mean, it's kind of small size. So any update? Thank you very much.
Pascal Bouchiat: Okay, Christophe. So we start on CapEx. And as I already answered the Atos questions in April I will leave our CEO I mean to...
Patrice Caine: So we'll be able to compare the two of that, Christophe.
Pascal Bouchiat: So on CapEx, it's true that, I mean, and we made by the way a few press releases and extending capacities on many items on ammunition, on missile expansion in U.K., in Belgium in particular rockets work on rather extensions in France. So and of course, I mean, behind that it's of course, I mean, capital expenditure. All of that sitting pretty well with our full year guidance that we shared with you, I mean, being of 2024. We said that we should see increase in 2024. Last year 2023, it was €620 million. We mentioned it could go up to €720 million probably still ballpark so €700 million plus is probably a good guidance for 2024. 2025 at this point is probably a bit too early, but we'll still get quite a significant level of CapEx in 2025 significantly above our level of D&A, depreciation cost, of course, I mean, to sustain, I mean, the need for us to keep investing more following, I mean, our backlog what we shared again with you in terms of expectations on order intake. So all of that is for me, I mean, fully consistent. So at this point probably a bit too early to share, I mean, CapEx for 2025. But of course, probably, I mean, €700 million being probably more a floor than a cap ceiling on what we can anticipate for 2025.
Patrice Caine: On Atos that's my turn, Pascal.
Pascal Bouchiat: Yes, absolutely.
Patrice Caine: Christophe, thank you for the Question. Again yes, bonjour. As you know Defense & Security is a core business at Thales -- of Thales, -- sorry, definitely. So I would just say that, of course, we look potentially at any opportunity worldwide in terms of Defense & Security acquisition. And in the case you are mentioning and I'm not going to comment it any further. But clearly the case that you are mentioning could fall under this category. They run a very, very small modest defense business at Atos. So if there is one day an opportunity to look at it we'll do our job. We'll look at it and no less no more. So nothing new, if I may say, compared to what Pascal told you during Q1 call. But again, it is the main, I would say, important thing to keep in mind is the fact that in Defence & Security, yes, we look from time-to-time to opportunities here and there, and it may be the case in the case that you are mentioning Christophe no more, no less.
Christophe Menard: Thank you. Thank you very much for the color.
Operator: Thank you. We're now going to proceed with our next question. And the questions come from the line of David Perry from JPMorgan (NYSE:JPM). Please ask your question.
David Perry: Yes. Good morning, Pascal and Patrice. Apologies, I just want to repeat a question and I'm just not sure I heard the answer, which is probably my fault. I think it was from George earlier on the Aerospace outlook. I think it's quite important given you've lost €1.5 billion of market cap in the share price this morning on quite a small drop in EBIT related to space, and some of that seems to be that you're pulling forward restructuring. So I guess, there's a consensus for EBIT in Aerospace on your website. It's €542 million next year in 2025. I mean are you broadly happy with that consensus at the moment for Aerospace or does that need some kind of reset do you think? Thank you.
Pascal Bouchiat: Good morning, David. I mean, at this point, I mean a bit difficult for me to comment, I mean, 2025. I think that I said and I'd like to confirm that considering what we shared on space, we expect the level of EBIT margin for 2024 for Aerospace to be stable versus 2023. So, stability in terms of EBIT margin, and this reflecting, of course, quite a positive growth on Avionics but also on the other side, I mean a drop a significant drop on space as space in 2023 was just breakeven. And I mentioned that in 2024, it would be probably something like minus €50 million. Now what can I share for 2025? First on Avionics, I mean we are pretty positive, I mean pretty optimistic on Avionics with the ramp-up of Cobham AeroComm with, I mean, the level of order intake that we see on Avionics with, I mean, the growth coming back quite significantly on IFE. So on Avionics, I mean for me, it's all positive, which means that we expect a margin in 2025 for Avionics to keep growing over what will be already a strong level of profitability for 2024. Now on space and space negative in 2024, it's going to be positive. This is our view in 2025. So we'll get back in a growing territory. And this fueled by, as I mentioned, I mean, lower R&D expenses, less restructuring costs and the first significant impact of our cost adaptations program that we are put in place. So if you take those three elements, you will end up with a level of profitability for space in 2025, which will be a bit too early to say how much it will be but positive. So if you add up what I've just mentioned Avenixplus space benefiting from the three drivers I've just mentioned, I mean I guess that you've got everything I mean to make up your mind but it should be positive yes.
David Perry: Well, yeah, just to press you one more time. I could make up my mind. But coming from you is a lot more powerful. So is it going to be a 9% plus margin in Aerospace in 2025? Or do you think 9% will be a struggle?
Pascal Bouchiat: At this point it's really – for me it's a bit too early I mean to be so precise David, probably the type of things that we'll be able to share with you in a few months. But at this point probably a bit too early.
David Perry: All right. Let me try. Thanks a lot.
Pascal Bouchiat: Thank you.
Operator: Thank you. We're now going to proceed with our last question. And the questions come from the line of Aymeric Poulain from Kepler Cheuvreux. Please ask your question.
Aymeric Poulain: Yes, good morning. All of my questions have been kind of answered but following up on David's questions share price reaction, very small adjustment in EBIT guidance, stock looking very cheap. Is there a point where you might decide to resume the buyback program given the valuation that you currently enjoy?
Patrice Caine: I think it's a good question for the CMD for next year. It's a Board decision as you know Aymeric. So let me just I would say ask you to be a bit patient and wait for the CMD. It would be the perfect occasion to discuss or re-discuss capital allocation and typically this type of level. It's part of the toolbox now, so happy to discuss that in November.
Aymeric Poulain: Perfect. Thank you.
Patrice Caine: So if there are no further questions, I think it's time to conclude this call. So as you understood H1 2024 to our opinion was pretty solid. And we, of course, remain focused on the execution of our growth strategy and the delivery of our financial objectives for the full year. Thank you very much for your participation. Have a nice summer break, and see you and talk to you very soon. Goodbye.
Pascal Bouchiat: Thank you very much. Bye-bye.
Operator: 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 questions to Thales Group Investor Relations at ir@thalesgroup.com, and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect your lines. Thank you.
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