Earnings call: Thales announces robust Q1 results, confirms 2024 goals

Thales Group (HO.PA) has reported a strong performance in the first quarter of 2024, with significant growth in order intake and sales. The company announced that it has achieved a record high for Q1 with new orders totaling €5 billion, marking a 46% increase on an organic basis. Sales for the quarter reached €4.4 billion, reflecting a 7.9% organic growth.

Thales also noted the successful acquisition of Cobham (LON:), which will be integrated into their accounts starting from the second quarter of 2024. The Defence & Security segment demonstrated particularly robust commercial activity, contributing to a backlog of €36 billion. Thales reaffirmed its financial objectives for 2024, expecting continued organic growth across its key segments.

Key Takeaways

• Thales reported a 46% increase in order intake and a 7.9% increase in sales on an organic basis.
• The Defence & Security segment secured four contracts over €100 million and two contracts exceeding €500 million.
• Thales completed the Cobham acquisition, set to be consolidated from Q2 2024.
• The company launched cortAIx, an internal organization focusing on artificial intelligence.
• Aerospace segment saw a 13% organic growth, while Digital Identity & Security experienced a slight 2.5% decline.
• Thales plans to nearly double radar production capabilities in France and the Netherlands over three years.
• The company expressed potential interest in acquiring Atos’ defense and security business.
• Thales aims to recruit approximately 8,500 new employees in 2024.

Company Outlook

• Thales confirmed its financial objectives for 2024, including mid-single-digit organic growth.
• The company expects the EBIT margin recovery in the Space business to reach 7% in the mid-term.
• Thales targets strong double-digit profitability for the Avionics business.

Bearish Highlights

• The Digital Identity & Security segment saw a slight organic sales decrease of 2.5%.
• Supply chain challenges, particularly in PCBs and mechanical parts, are impacting the defense and security sector.
• The in-flight entertainment (IFE) business has not yet returned to pre-pandemic revenue levels.

Bullish Highlights

• Defence & Security segment’s order intake grew organically by 127%.
• Aerospace segment experienced a 13% organic sales growth.
• Thales’ air defense business represents a substantial €2 billion of their overall business.
• The company sees stable pricing in the banking sector and plans to maintain pricing levels by exiting certain markets in the telco sector.

Misses

• Supply chain issues are affecting production capabilities across all countries where Thales operates.
• The telco sector is facing price pressures, particularly in Asia.

Q&A Highlights

• Thales is focusing on organic growth for its biometrics business and AI developments.
• The company highlighted the importance of successful integrations, particularly of Imperva and Cobham AeroComms.
• Thales may update its guidance in July with the release of Q2 figures, acknowledging the need for caution due to various factors.
• Higher restructuring costs are anticipated in 2024, especially in the space business.

In summary, Thales has kicked off 2024 with strong financial performance and strategic initiatives that position the company for continued growth. Despite facing supply chain challenges and market pressures, Thales remains committed to achieving its financial objectives and leveraging its internal capabilities, particularly in artificial intelligence and biometrics, to drive future success.

Full transcript – None (THLEF) Q1 2024:

Alexandra Boucheron: [Call Starts Abruptly] Thales Q1 2024 order intake and sales. I am Alexandra Boucheron, Head of Investor Relations at Thales. With me today is Pascal Bouchiat, CFO of Thales. As usual, this presentation is audio webcasted live on our website at thalesgroup.com, where the slides and the press releases are also available for download. A replay will be available soon after the end of the event. With that, I would like to turn over the call to Pascal Bouchiat.

Pascal Bouchiat: Okay. Thank you, Alexandra, and good morning, everyone. Before moving on to the numbers, as usual, I wanted to highlight a few items. I’m now on Slide 2. First of all, let me come back on the quite strong start of the Defence & Security segment commercial activity in Q1 2024, with four large contracts over €100 million and especially two contracts above €500 million. These new commercial successes illustrate Thales’ unique positioning to capture major opportunities across a wide spectrum of activities in the growing defense markets. And I will come back in greater details on those contracts during the presentation. Second point I wanted to highlight is the closing of the Cobham acquisition, which will be consolidated in our accounts from Q2 2024 as expected. This addition to our existing Avionics business will establish a game changer in the very attractive and fast-growing communication and connectivity market to the benefit of a more sustainable aerospace future. And we are happy to welcome this highly skilled team of aerospace communication experts within the group. Last point and I’m sure you saw plenty of communication on the topic already. Thales has announced last month the creation of cortAIx, an internal organization dedicated to artificial intelligence, gathering over 600 AI experts and bringing together the company’s AI capabilities in research, sensors and systems. So let’s now have a look at our Q1 headline numbers. I’m now on Slide 3. New orders amounted to €5 billion, up 46% on an organic basis. Hence, a very strong start of the year in terms of commercial activity, which I will further comment in the next slides. Sales came to €4.4 billion, up a solid 7.9% on an organic basis, above full year guidance. This level of sales represents a new record high for our first quarter. Looking now into details at our order intake, I’m now on Slide 4. As you can see, the strong 46% organic growth is fueled by both large and medium-sized orders. Four large orders above €100 million have been recorded in the first half, all of them in the first quarter, all of them in our Defence & Security business, reaching a total of €1.6 billion to be compared to three large orders in Q1 2023. That represented €400 million. Two of these three large contracts in Q1 last year were related to space in observation and explorations and one contract was for an undisclosed large military customer. Orders between €10 million to €100 million were up 46% with Aero up 56% and Defence & Security up 50%. Smaller orders decreased slightly organically as anticipated due to the very high comps in smart cards in Q1 2023. But overall, a very strong first quarter in terms of order intake and a new record high for Q1. Turning now to Slide 5, looking at sales growth. First, a word on currency and scope. The currency impact was not material this quarter, minus €17 million, as showed in the graph. The scope impact was more significant, resulting from the acquisition and disposal carried out in 2023. The largest impact was linked to the acquisition of Imperva closed in December 2023 and fully impacted Q1. We have also finalized the acquisition of Tesserent in October last year. Now in terms of divestiture, we closed the disposal of the aeronautical electrical system to Safran (EPA:) at the end of Q3 2023. So all of that resulting in a scope effect, which contributed €99 million in Q1 2024. And as mentioned in Slide 2, keep in mind that Cobham will be consolidated from April 2024. The organic growth reached 7.9%, ahead of our full year guidance. It was driven by a sharp performance of our Defence & Security activity, and I will comment in greater details the dynamics by business in the coming slides. Turning to the geographical perspective, a strong quarter across the board with most geographies strongly up. So overall, a strong first quarter in terms of sales. Now looking at each segment one by one. I’m now on Slide 6, so Aerospace. Orders were down 13% organically with two different dynamics. Aeronautics, good ongoing commercial activities with orders up double digits versus Q1 2023, which was by the way already a strong quarter with a double-digit growth, too. Space, significantly below Q1 2023, where, as I mentioned earlier, two contracts above €100 million has been recorded. Sales were up 5.1% organically. Aeronautics continued to perform well overall with a civil aero original equipment activities up double digits. Space business sales were slightly up compared to favorable comps in Q1 2023 and fully in line with our full year trajectory. Turning now to Slide 7, looking at the Defence & Security segment. As I mentioned before, an exceptional quarter in terms of order intake, up 127% organically with four contracts above €100 million and a sharp 50% increase in contracts between €10 million and €100 million. Our backlog in Defence & Security is reaching a new record high at €36 billion, representing 3.7 years of sales. Organic sales were up 13.4%, continuing on a positive trend across most business lines, from Electronic Combat Solutions to surface radars or airspace mobility solutions. It’s important to note that while we have seen an impressive 13% growth in the first quarter, please keep in mind that this is only the first quarter of the year and it was supported by more favorable comps. Looking at 2023, H1 was softer than H2. Therefore, it is reasonable to anticipate a bit of reversal of this trend in 2024 with a stronger first half and potentially softer second half. Additionally, as you – as you well know, our Defence & Security business operates long-term projects with nonlinear revenue recognition. So this strong 13% growth is also resulting from a positive cutoff effect between Q1 and Q2. Last point, despite some easing, supply chain tensions persists, necessitating to remain vigilant regarding their potential impact on production. All of that to say that this first quarter doesn’t establish a definitive trend for the entire year. We confirm the mid-single-digit to mid-single-digit plus organic growth. We are committed to for the defense business over the full year 2024. Turning now to Slide 8, looking at our last segment, Digital Identity & Security. At €916 million, sales were down 2.5% on an organic basis. This slight decrease didn’t come as a surprise and was resulting from: first, the digital businesses performing in line with our full year forecast, but also the smart card businesses clearly down compared to very high comps in Q1 2023 with lower volumes, especially in the banking area in North America and negative price effect on SIM cards, particularly in Asia. Again, this was anticipated. DIS posted a very strong H1 2023 and a softer H2 2023. Hence, we expect a reverse trend in 2024 with a strong H2 versus H1. For the full year, we expect DIS organic growth to be close to mid-single digits. So let me finish here with Slide 9 and a reminder of our financial objective for 2024. Q1 represents a solid start of the year, which allows us to confirm the financial objectives for 2024. So this concludes my brief presentation. Many thanks for your attention, and I will now be pleased to take your questions.

Operator: Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Thank you. We are now going to proceed with our first question. And the questions come from the line of Victor Allard from Goldman Sachs (NYSE:). Please ask your question.

Victor Allard: Good morning, Pascal, and thank you for taking my question. I have three quick ones, if that’s okay. The first one is on defence. And I’m curious if you could help us appreciate in more detail the underlying drivers of the very strong revenue performance in defence. So you mentioned many activities in the double-digit range. I’m curious if there was one segment which stood out or progressed better than your expectation? And also, would you have a reference point to share probably with us in terms of where you are currently tracking in terms of radar ramp-up? That’s the first one. Second one is now considering Cobham AeroComms is now closed and also considering the view in terms of space margin that you shared with us earlier this year, would you have a view in terms of margins for Aerospace over the medium term? If I can squeeze, last one is on DIS. You mentioned, I think mid single-digit organic sales growth. Would you have a view in terms of the phasing of that growth profile as we go into the second part of the year, in particular in terms of smart cards? Thank you.

Pascal Bouchiat: Okay. Victor, so let me start with your first question about the underlying business lines that supported this quite strong growth in defence. I have to say that it’s not specific to a single or even a few business lines. I mentioned in particular electronic combat system. I mentioned AeroComms’ capability, which we mentioned, also communications. So it’s really, I mean, across the board that we see, I mean, this level of growth. Once again, I mean, I guess that you know very well that on our Defence & Security business, we never reached such a level of backlog. And you have seen, I mean, that the momentum in terms of demand from a commercial standpoint is still there. And we expect this to continue, which means that overall, I mean, our challenge in particular in Defence & Security has become more today a delivery challenge. So it’s more about us being able to keep ramping up our production capabilities, but also to go even quicker in terms of overall project execution, in particular, when it comes to specific developments. So this is really, I mean, what support, I mean this growth. And I have to say that it’s really, I mean, across the board and probably a bit difficult for me to explain, I mean, which business lines would lag behind the other ones. Probably a good example of that is what you mentioned on what are ramp-up. I’m not sure that we share with you, I mean, figures in terms of radar production output increase, but is true is that we are today investing in particular in two countries in terms of radars additional production capabilities. One is in France and the other in a site which is close to Paris at Limours. And the second one being in Netherlands, in particular in Hengelo. Those are the two largest sites with regards the production of radar. And it is true that overall, I mean, what we are getting ready is, but of course, this will take time because all of that is a significant investment, but probably what you need to have in mind is that over a three-year period of time, it’s probably more – almost doubling the overall production capability of our radars and in particular, the specific star product, which is our Ground Master radar line, which stands out with us as being a star product and where we keep getting a number of opportunities in many countries across the globe. It’s probably a good illustration of what a successful product policy can deliver in terms of potential for growth. So this, in particular, Ground Master radar capability is really developing very nicely. Cobham AeroComms closed. And your question was about my view about – I mean, the midterm EBIT – was your question about the overall Aerospace segment? Okay. So the overall…

Victor Allard: Was just taking stock of the fact that we’ve now seen Cobham AeroComms closing and also I think at full year, you shared an update in space for margins. So I was wondering if you would have a view to share with us in terms of the potential over the medium term for the division.

Pascal Bouchiat: Okay. So I mean here, I mean, I need to discuss on one side, I mean, the Avionics business and on the other side, I mean, the Space business. So on the Space business, I think it was quite clear, I mean, because as we released our 2023 financials, we were quite clear about what we’re expecting in terms of recovery of EBIT margin for our Space business. And we mentioned overall, I mean 7%, overall, I mean, EBIT margin for our Space business in the mid-term. Now when it comes to the Avionics business, so overall, it’s true that we are targeting in this business a clear strong double-digit. So is it 12% but probably this order of magnitude in terms of overall level of profitability that we expect from our Avionics business. So all of that resulting in a global Aerospace business that should be double digits in the next few years. I mean, here, it’s not a commitment because this is the type of thing that we’ll be sharing with you at our Capital Market Day, but as a rule of thumb, yes, I mean the – our challenge today is really on how to recover the level of, I mean – a good level of profitability in our Space business. This is really, I mean, what is driving, what is going to drive the progressions of margin in this overall Aerospace business. Your last question was about DIS and the phasing. So yes, as I mentioned, it’s true that when you look at 2023, the start of 2023 was especially strong with in particular, a level – an organic growth in Q1 2023, which in my recollection was something like 20%. And then I mean, we have seen, I mean, this level of growth, dropping with in particular Q4 being negative against Q4 2023. So we’ll see a reverse trend in 2024. And I guess it’s not a surprise. That’s the point that we mentioned a number of times, we’re expecting – I mean, against this very high comp in the first half of 2023, in particular in Q1, we are expecting to see a negative organic growth in Q1 and this recovering progressively. By the way, I need to share with you that this slight drop that I mentioned in terms of organic growth for DIS in Q1 this year, minus 2.5%, it’s a bit better as compared to what I was expecting. Here again, I mean, against a 20% organic growth in Q1 2023. So really, I mean, quite a strong reference base. So overall, it’s developing pretty much as expected. And you will see, in particular, in H2, DIS returning to a positive organic growth against the same quarter of 2023.

Victor Allard: Very good. Thanks so much.

Pascal Bouchiat: Thank you.

Operator: We’re now going to proceed with our next question, and the questions come from the line of George Zhao from Bernstein. Please ask your question.

George Zhao: Hi, good morning, everyone. First question, Tesserent and Imperva, they added €131 million of revenue in Q1 but if you look at Q4, they added €70 million, and that was only one month of Imperva contribution. So was the relatively weaker Q1 all about seasonality? Can you share what the underlying growth of those two businesses was in Q1? Second one, Pascal, you made some comments early about Thales potentially being interested in the Atos defense assets. Could you just clarify those comments? Why would that be the best use of cash for the Thales potentially? Thanks.

Pascal Bouchiat: Okay. Thank you, and good morning, George. So on Imperva, I mean, what we all need to have in mind is that, I mean, this type of business is a bit of a seasonal business with, in particular, a very strong Q4 that’s something that you will keep seeing as we integrated Imperva. Okay, first point. Second point, I don’t want to comment specifically on the Q1 organic growth at Imperva, but to give you more how we see 2024 in terms of growth for this business. And yes, clearly, I mean, we are expecting, I mean, Imperva to be close to double digits in terms of organic growth in 2024 versus 2023. Now, I mean, I also need to indicate to all of you that this 2024 growth at Imperva against 2023 will not be accounted as organic growth as we will report our 2024 financials because it will be considered as a scope effect. But what is more interesting is really to have in mind that we expect Imperva to be close to double digits in terms of top line growth in 2024. So nothing very specific to mention on this matter. No, I mean, your second question was about Atos. And let me give you a bit of explanation on this matter. I mean, we have clearly mentioned that – I mean, first, no interest at all for Thales to buy Atos. Second point, no interest at Thales to buy this specific divisions, which is essentially on cybersecurity, which is called BDS, no interest at all from Thales. I’m very clear on this point. Now what we know is that within this BDS division, Atos operate a small-sized defense and security business. And my comment is if this business, this specific defense and security business, which is essentially what we call a mission-critical system business, which is quite a small one business, would become available, I mean, Thales, we might look at it to see whether or not this could be of interest for us. Well, the size of this business, this defense and security business within this BDS division at Atos represents between €200 million and €300 million of annual revenue. So for you, just to get an idea of what we are talking about. So it’s quite modest. Once again, it’s a minor part of this BDS activity, and yes, as we do, by the way, on many occasions, we will be looking at the merits of this potential acquisition.

George Zhao: Thank you.

Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Olivier Brochet from Redburn Atlantic. Please ask your question.

Olivier Brochet: Yes. Good morning, Pascal, Alexandra. A couple of questions on my end. First one on hiring. Can you remind us of your hiring plan for 2024 and how it went in, let’s say, the first four months of the year? Secondly, on pricing in SIM and EMV payment cards, can you give us a bit more color there on what happened in the quarter? And lastly, air defense, how much of revenues does that represent for Thales in aggregate at group level? If you could share that with us.

Pascal Bouchiat: Okay. I mean, your last question would be probably the more difficult one, Olivier. So in first, good morning, Olivier. So let me start with hiring. So I mean, just to remind you that in 2023, we recruited a bit less than 11,000 employees at Thales. And we mentioned that in 2024, we are expecting hiring to be at 8,500 new employees. And you see a drop against 2023, which, in my view, is quite positive. And the reason is quite simple. We have seen the overall turnover dropping quite significantly. I mean before COVID, our turnover at Thales was pretty stable, and it went up pretty strongly through the COVID until the beginning of 2023 and it’s good to see that we have seen since then and progressively the overall turnover getting back to pre-COVID level. So all of that is positive because it means that we need less recruitments to make this – I mean, the same type of output, requiring, I mean, less hiring, which is very positive because, as you know, and we have been quite clear on this topic, is to that onboarding new employees, in particular, new engineers and in particular, young engineers is a clear challenge. We mentioned, I would like to confirm that this is one of our key challenge, not just, I mean, onboarding on just a few weeks, I mean all of that requires time because we get a talented engineer from the outside but the challenge is for they will need to learn what we do at Thales. This overall domain level of competency, which is so important to be able to mix more academic skills to, I mean, domain knowledge, making them real contributors to execution of our project. So I need to say that, I mean, seeing turnover getting back to a level which is something like 5% overall turnover is really a good news overall for Thales. And the start of the year in terms of hiring is pretty much in line with this overall 8,500 recruitments for the full year. Pricing on EMV. First, I mean, looking at the overall, I mean, banking activities, banking accounts, we see our prices, I mean, holding pretty firm, a bit of drop, but which really reflect more, I mean, the drop in input costs than the drop overall in terms of margin. So overall, I mean, banking is doing pretty well in terms of pricing. Now it’s also true, and probably a good occasion to share with you that on banking we see a drop in demand in particular in the U.S., it was anticipated. All of that was pretty much anticipated, but overall, a drop in volumes and probably, I mean, some adjustment in terms of level of stocks at our clients, in particular in North America, but overall pricing that are staying pretty – at a level, which is pretty satisfactory. On the telco side, here it’s a bit different. We see more pressure on prices, and in particular, in some geographies and in particular, in Asia, which led us to decide to exit, I mean, some specific markets in Asia. Maybe you have in mind that in the last three years and because of this shortage of components, a clear lack of offer when decided to reenter some markets, some geographies, in particular in Asia, taking advantage of solid pricing. And today, we are really, I mean, adjusting our presence, but in some cases, deciding not to bid or to exit some very specific markets in Asia in order for us to preserve the overall level of pricing. But overall, it’s more on the telco side that we see pressure on margin. Last point was on air defense. My gut, it’s not that – I don’t have a magic figure on this matter. I mean, what, by the way, our defense cover at Thales, it covers both, I mean, sensor, in particular, radars. By the way, when you discuss about air defense, air surveillance is also for me part of air defense. I was mentioning before the success of our Ground Master radar, it’s – for me, it’s part of defense, even though in some cases, it’s not associated with effectors – it’s not associated to missiles. But then it’s still, I mean, airspace protection capabilities. I mean, second is, I mean, effectors in particular, missiles. And in particular, our V/SHORAD, very-short range of air defense, StarStreak and low LMM in particular, coming from our UK industrial footprint. And then I would add also all the more system about integrated air system, which covers, I mean, mid-range capability, what we call SAMP/T in particular. So overall, just to give you an idea, but as a rule of thumb, maybe, I mean, Alexandra, I know, will come back on this point to you. But rule of thumb for me I would mention probably something like €2 billion of overall, I mean, business for us when you add up – maybe, yes, slightly below €2 billion. But as a rule of thumb, I think it’s a good figure, but Alexandra [indiscernible] will come back to you on this matter.

Olivier Brochet: That’s very good. Thank you very much, Pascal.

Pascal Bouchiat: And by the way, with quite a strong demand on all those materials.

Olivier Brochet: Thank you.

Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Christophe Menard from Deutsche Bank (ETR:). Please ask your question.

Christophe Menard: Yes. Good morning. Thank you for taking my question. I had three quick ones. The first one is on order intake in emerging markets. I mean, it’s obviously strong in Q1. Could you comment on the trend? I mean, in 2023, because of, I mean, the comparison base, emerging market orders were down. If we – I mean, if we do not consider the large orders, what is the trend in emerging markets? And what are you seeing? Is Q1 a good indication? And probably we could talk about the midsize order intake and the midsize orders and the small size orders. So that was the first question. The second question was, I may have missed it, sorry, but the aftermarket growth in Avionics in Q1, just to have a reference point. And the last question is on Cobham Aerospace. Now that you have the keys of the acquired entity, are you seeing any significant R&D investment needs for new generation of product? Or is the current generation already well developed and you can capitalize on it?

Pascal Bouchiat: Okay, good morning, Christophe. So on your first question, overall, yes, I mean Q1 in terms of order intake in emerging markets, extremely strong. But again, I mean, reflecting, in particular, I mean, two very large size project. One was, as you have seen, I mean, the booking of the last tranche of the Indonesia project for Rafale with 18 aircraft. And the second, also a pretty large – a very large project, in excess of €500 million, for a military customer in the Middle East country that I cannot mention for confidentiality with them. But probably two good examples of the overall positioning of Thales in those emerging countries. Now it’s – I mean, from, of course, a single quarter, it’s very difficult, of course, I mean, to draw long-term conclusions. However, I mean, what I can confirm is that we keep seeing, I mean, a number of opportunities in many countries, in many emerging countries or what we qualify being emerging countries. It’s to, of course, in the Middle East. And I’m sorry for this word of emerging countries. But it’s to that Middle East, in particular, we keep seeing, I mean, various opportunity there on many aspects. Asia as well. We – of course, I mean, we have mentioned Indonesia with the success of the Rafale, but Indonesia is also a country for our air defense business. Last year, we booked quite a large size project for Ground Master for radar capabilities here as well. And we see other opportunities in Indonesia. It could be also the case in space, in particular, on the observation standpoint. So you see here, I’m mentioning a number of either projects that we booked in emerging countries but also potential opportunities. So a bit difficult. But I mean, we keep seeing quite a strong level of demand across the board, but also in emerging countries. So on civil, so you probably – I mean – and your question was more on aftermarket. So you probably remember that last year, our aftermarket was especially strong because we mentioned last year that the overall organic growth of our aftermarket in 2023 against 2022 was in excess of 30%. So what we are seeing in Q1 is some kind of stabilization in this market in terms of level of demand, with still quite a solid demand but stabilizing on the spare parts business in particular because it’s true that in 2023, there has been some restocking at some – at a number of airlines. So we are a bit more vigilant on this matter in 2023, how we will see, I mean, aftermarket developing. Of course, it will be in progression against 2023 what should be this overall level of growth in aftermarket, if you combine both repairs where we keep seeing quite a strong level of demand and spare parts where, I mean, there might be more some type of stabilization there in terms of overall level of achievements. All of that, I mean, consistent with when we look at our Avionics business overall, probably mid-single digit to high-single digits – overall high single-digit level of organic growth for the overall Avionics business at Thales in 2024 versus 2023. And your last question was about Cobham and the need for – and the R&D needs. Now if your question is because I mean it was a private equity-owned company. So if your question was, did Cobham drop R&D in the past, I mean, to boost profitability. It is not our view. I mean, Cobham AeroComm managed to develop state-of-the-art in particular communications but also cockpit, highly secured connectivity assistance that are developing pretty nicely in terms of commercial developments. So of course, there will be a need to keep investing on R&D. But I don’t see us, I mean, to change gears overall in terms of level of R&D, which is already pretty significant in this business.

Christophe Menard: Thank you very much [indiscernible].

Operator: We are now going to proceed with our next question. And the questions come from the line of Ben Heelan from Bank of America (NYSE:). Please ask your question.

Ben Heelan: Yes. Morning. Thanks for taking my question. Pascal, I wanted to push a little bit on defense because the orders that you see now over the last 18 months, 24 months, the book-to-bill, and I appreciate there’s some large orders in there. But the book-to-bill has been running in the 1.4 to 1.5 level. And you’re obviously seeing that demand not just in the very large orders, but also in the small- to medium-size orders as well. So I guess the question is, is that really conducive to mid-single digit, medium term? Just looking at it, it feels like it should be higher than that on a medium-term basis. So if there’s any color that you can give around that, that would be super helpful. And then secondly, within aeronautics, is there any specific comments that you can give us around in-flight entertainment and exactly what you’re seeing in terms of order demand, how the supply chain is playing out there and where you are from a profitability standpoint in that business? Thank you.

Pascal Bouchiat: Okay. Good morning, Ben. Thank you for your two questions. So you are pushing a bit on defense in terms of growth expectations. No, I mean, what you say is fully right. I mean, a level of orders, which exceeds quite largely our level of revenue and this for quite a while now. And my comment in terms of level of demand, we’re still very positive on this matter. So when I look, I mean, the challenges that we are facing today is, once again, a challenge in terms of overall delivery. And I think that we are doing pretty well overall in terms of number of people that we keep training and that will progressively contribute better to our project executions. Where I need to say is that I’m a bit more – not concerned, but more vigilant is what is going on the overall supply chain. And I have to say that – by the way, it’s not specific for this because we also see that, in particular, in our aerospace, in particular, Avionic business, it was that we keep seeing a number of challenges on the supply chain. And today, when I look at the supply chain, there are two specific areas where we keep facing some difficulties. One is PCBs, printing circuit boards, not electronic components, but more, I mean, the production of PCBs. And in particular, it’s a challenge in some European countries, starting with France, which is our largest industrial footprint, where I mean, today, the level of production from our supplier is not in line with our expectations in terms of needs, I mean, to keep growing our business. Second point, and this time, it’s more, I mean, across the board, that’s supply chain issues that we face in all countries where we operate, is hardware, in particular, mechanical parts. And here again, I mean, many countries, network of SMEs struggling, I mean, to ramp up overall production output with quite a strong level of demand. Those guys, in particular, also serves the aerospace [ph] business as well, which is also growing pretty nicely. And here again, I mean, we’ve seen some difficulties, I mean, to follow the level of demand that companies like Thales are placing to them. So we have been working pretty actively on this matter, specific difficulties or challenge on defense and security linked with, I mean, the fact that in most cases, your clients ask you I mean to get supply from the country. It has to be a domestic supply for sovereignty reasons, as you can imagine, which means that it’s – I mean, there is less flexibility in defense in terms of supply chain to find alternative source outside the country to go, for example, in Asia, I mean, to get supply that are probably more obvious. That’s something that we can do more easily in civil businesses, which is clearly a challenge on defense and security in particular. So we’re working pretty actively on this matter in terms of helping our supply chain, in terms of, also, I mean, investing in our own internal production capability on this matter because Thales, we also produce PCBs in some sites, but our level of internal production is also quite limited, but we keep investing on this matter, and we keep working with our supplier and our supply chain. That’s for me, I mean, a challenge, which makes me a bit cautious when it comes to committing the company to grow even higher in terms of our view. Now you could argue that when we look at Q1 overall, in terms of defence and security, organic growth, I mean, quite a strong double-digit organic growth. Now I also need to say that we need also here to be a bit cautious because it’s a quarter, we’ve got a cutoff between Q1 and Q2. So here again, I’m not telling you that this is the type of growth that we’ll get for the full year. So mid-single digit, mid-single digit plus as we did last year is probably today the best rule of thumb. That’s probably something that we’ll spend a bit of time on at our Capital Market Day, I mean, to explain to you, I mean, the various drivers we are working on, I mean, to grow our overall production capability with the constraint I’ve just mentioned. Aeronautics and in particular IFE, so we see, I mean, the level of demand on IFE. Here, it’s in particular, IFE, not that much connectivity, but IFE, we see a level of demand which is clearly growing. That’s something that you probably remind that this business, I mean, suffered a lot because of the COVID. And we started seeing, I mean, a new request for proposal tender from customers that started end of 2022, which has been confirmed in 2023 and it’s true that today, we have been actively involved in various bids at large customers and it’s true that we see most of our customers willing to invest in their overall cabin and IFE is a key component in terms of overall differentiations for them. So it’s true that we are quite positive in terms of level of demand, which means that, I mean, IFE will be a growth driver for our overall avionics business in 2024. Probably a bit too early to be more precise, but it’s true that we see IFE in terms of level of demand growing. This business, as you know, I was quite clear in the past in 2022, 2023 was unfortunately because of the strong drop in level of revenue, negative EBIT, and hopefully it will be able to turn positive in 2024.

Ben Heelan: Thanks Pascal. One quick follow-up. Are you back at 2019 levels of revenue in the IFE business now? Or have you still got a way to go?

Pascal Bouchiat: No. We’re still not at the level of 2019. My view, it will probably take us, I don’t know, will it be maybe probably 2026, probably getting back to 2019, because once again it’s a business where we got no orders from 2020 to 2022.

Ben Heelan: Super clear. Thanks, Pascal. Appreciate it.

Pascal Bouchiat: Thank you.

Operator: We are now going to take our last question. And the questions come from the line of Aymeric Poulain from Kepler Cheuvreux. Please ask your question.

Aymeric Poulain: Thank you for taking my question. So I’ve got two complementary questions actually to some of the answers you provided. So on M&A, thank you for the clarification on Atos, but there are also some press articles suggesting interest in AI and biometric potential deals. Would you be able to comment on those as well? That would be my first question. And the second would be on the guidance. You kept the guidance unchanged despite strong start on top line in the two most profitable division which potentially could have led to a slight increase in the guidance. So narrowing of the range towards the higher end the guidance and yet you kept that guidance unchanged. And you gave some idea of why the prudence required given the seasonality and some comp effect but are there other factors beyond the kind of Avionics supply chain issues, the timing on the comps of the various division? Inflation, is it a factor as well?

Pascal Bouchiat: Okay. Good morning, Aymeric. I mean, first, on M&A, I mean, in most cases, I prevent from commenting what we are thinking about in terms of M&A. But just to remind everybody, I mean, our key criteria that support our M&A policy and I guess it’s also quite clear that we are very much focused on the successful integrations of Imperva and Cobham AeroComms which is, I mean the top priority in 2025 – in 2024 for Thales. I think that we mentioned that we have no choice on M&A on AI and the reason is quite simple. I mean we’ve got everything we need from the inside, from Thales standpoint. We explain our new organizations, what we are doing on AI through cortAIx and the combinations of work on the upstream parts at our AI lab but also this time more downstream, I mean, to develop AI on sensors, but also on system and system of systems. So we presented a number of cases in this matter. And all of that, meaning that we’ve got everything we need in-house, and we don’t consider, I mean, any move in terms of M&A on this matter. Biometrics is a business at Thales, our BIS business. It’s a business that we would like to grow. I mean, first, on organic standpoint, if one day there is something that is available for sales, of course, we will consider, but at this point, there’s nothing more than that on this matter. I mean, once again, in terms of key M&A criteria, it has not changed. So I mean, the growth boosters allowing us to acquire, I mean, technologies with, I mean, also a view on how to expand our geographical scope in particular, where we believe that we can strengthen our presence in some geographies. Easy to integrate. That’s a key element for us, I would say, it’s plug-and-play type of acquisitions, which, I mean, it is also in line with I mean the size and the – size of this, I mean, potential acquisitions. And last point, of course, in terms of valuations. Now again, top priority in 2024 is really the success of integrations on Imperva and in Cobham AeroComms. In terms of guidance, yes, we have not changed our overall guidance in terms of revenue, in terms of EBIT, nothing very specific. A bit cautious at this point because we are just on Q1 figures. Maybe for your attentions, a point that I have not commented. But the fact that we will get in 2024 more restructuring costs as compared to the previous years, it’s a point that I’ve already made as we release our 2023 financials, in particular, at our space business, but also as – because we account as restructuring costs, cost of integrations, in particular at Imperva and Cobham AeroComms. And so because of that, probably more restructurings. I’ve mentioned, as we released our 2023 financials, level of restructuring costs for the full year of 2024, €120 million. It might be a bit above this level, in particular driven by our space business. This also at a time where clearly in 2024, development cost will be at a peak for our space business in order to finalize the developments for new generations of highly flexible space-inspired satellite. So I mean, the combination of the two should also be taken into accounts when you look at the aerospace business for 2024. That’s probably the only point that I have not commented through your questions. We will see, Aymeric, whether or not we update our guidance, but probably end of July as we release our Q2 figures.

Aymeric Poulain: Thank you.

Pascal Bouchiat: Okay. So if there are no further questions, let me conclude this call by stressing that, as you have understood, Q1 2024 was pretty solid. Of course, we remain focused on the executions of our growth strategy and of course, the delivery of our financial objectives. So I guess we’ll have many opportunities to exchange all together. Thank you very much in advance and have a good day.

Operator: 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 questions to the 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, and have a nice day.

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