Thales (HO.PA), a global technology leader, has reported a strong financial performance for the year 2023, with significant growth in order intake and sales, and an improved profitability margin.
The company's organic sales growth was 7.9%, surpassing its own expectations, driven by high demand in the aerospace and defense segments. Thales also highlighted its strategic acquisitions and divestments, robust cash flow, and reduced net debt.
The company is making strides in ESG performance and has outlined key strategic priorities for the coming year, including increased capacity and leveraging artificial intelligence capabilities.
Key Takeaways
- Record order intake and backlog with 7.9% organic sales growth.
- Improved EBIT margin, up 60 basis points to 11.6%.
- Strategic acquisitions and divestments, strong cash generation, and reduced net debt.
- Progress in ESG ratings and performance, meeting non-financial targets.
- Aerospace segment drove sales growth, while the space business faced market and supply chain challenges.
- Plan to integrate Cobham acquisition in Q2 2024.
- Hiring plans for 8,500 high expertise roles and investments in brand awareness and production capabilities.
- Contingency plan to adapt space sector activities, including redeployment of 1,300 positions.
- Financial objectives for 2024 include strong order intake, organic sales growth of 4-6%, and EBIT margin improvement to 11.7-12%.
Company Outlook
- Thales expects growth in avionics, space, defense & security, and digital identity and security (DIS) segments.
- The company aims for a dividend payout ratio of 40% and to maintain a solid investment grade profile.
- Thales plans to recruit approximately 8,500 people in 2024 to support growth and innovation.
Bearish Highlights
- Space business broke even due to inflation and program execution delays.
- Smart cards experienced negative growth due to increased competition and pricing pressure.
- Challenges in the space sector include market decline, supply chain issues, and the need for a contingency plan.
Bullish Highlights
- Thales sees opportunities in new satellite technologies and defense projects.
- Defense & Security segments recorded record-high order intake and organic sales growth.
- Expectations of high-single digit to low-double digit business growth for global security products by 2024.
Misses
- Despite strong overall performance, the space business did not seek additional growth and focused on restoring profitability.
- Revenue drop expected in the first half of 2024 for the DIS division, with a rebound in the second half.
Q&A Highlights
- CEO Pascal Bouchiat discussed expectations for mid-single digit organic growth in the Defense & Security business for 2024.
- Thales will complete its current share buyback program by the end of March and will make future capital allocation decisions with the board.
- Short-term visibility for the smart card business, with order intake expected in the next three to six months.
- Thales is working on confidential constellation projects that could complement the geostationary satellite market.
Thales has demonstrated a solid financial performance in 2023 and is positioning itself for continued growth and innovation in the coming year. The company is navigating challenges in the space sector while capitalizing on robust demand in defense and security. With strategic investments in research and development, as well as a focus on sustainability and employee recruitment, Thales is set to strengthen its market position and deliver on its financial objectives for 2024.
Full transcript - None (THLEF) Q4 2023:
Alexandra Boucheron: Good morning, everyone. Welcome and thank you for joining us for the presentation of Thales 2023 Full Year Results. I am Alexandra Boucheron, the Head of Investor Relations at Thales. With me today are Patrice Caine, Chairman and CEO and Pascal Bouchiat, CFO of Thales. As usual, the presentation will be in English and followed by a Q&A session. It is webcasted live on our website at thalesgroup.com where the slides, press release and consolidated financial statements are also available for download. A replay of the call will be available in a few hours. With that, I would like to turn over the call to Patrice Caine.
Patrice Caine: So good morning, everyone. As usual, let’s start with the highlights of 2023 and I am on Slide #2. So starting with the commercial dynamics which was really strong across the entire portfolio and drove a new record for both order intake and backlog, our sales growth stands above the top of the guidance range set for this year at plus 7.9% on organic compared to a guidance between plus 5% and plus 7%. Strong achievements in terms of profitability as well with an EBIT margin at 11.6%, up 60 basis points compared to last year. And last, but not least, on the financials and of course Pascal will come back on it, cash generation has been very robust once again. Two highlights on the strategy side. First, we accelerated the deployment of our capital. We have been active in the rollout of our M&A strategy with three main acquisitions announced in 2023; Tesserent, Cobham Aerospace Communications and Imperva; as well as the disposal of our aeronautical electrical systems business. We have also successfully derisked our balance sheet from our UK pension obligations and we have conducted so far 92% of our share buyback program. And finally, we continued to progress in ESG ratings and performance, you will see that in a minute. So let’s move now to Slide #3 and looking at our financial performance in a few charts. At €23.1 billion, order intake stood once again above €23 billion and the Bouchiat book-to-bill ratio was significantly above 1 reaching 1.26. And please note, 2022 was a high comparison year as we booked one jumbo contract, the Rafale order from the U.A.E. for 80 aircraft. As mentioned, organic sales growth reached a very high level above the top of our guidance range, plus 7.9%. EBIT outpaced sales organic growth growing by more than 10% while EBIT margin improved to 11.6%. At €1.768 billion, adjusted net income grew by 14% and free operating cash flow remained very strong at €2 billion, that’s even after the capital deployment I mentioned. Last chart on the slide, the dividend. This new year of strong financial performance is leading our Board to propose to the next AGM in May a 16% increase higher than the net income to €3.40 per share. So turning to Slide #4 and looking now at our non-financial performance in 2023. I will come back later on our sustainability priorities going forward. But first, I wanted to show you our strong progress in 2023 in terms of extra financial performance at/or above the 2023 targets along the four pillars of our action plan. First pillar, our strategy for a low carbon future. Our operational CO2 emissions reduction are outpacing our ambitious target decreasing by minus 52% thanks to a further reduction of electricity consumption and an extensive move to renewable energy supply. Turning to the deployment of eco-design, the percentage of new developments incorporating eco-design reached our target of 100%. Second pillar on the right, diversity and inclusion. The group is here again outpacing both targets. The percentage of management committees with more than three women reaching 87% and the percentage of women in senior management at 20.4%. Turning to ethics and compliance. On top of the extension of our ISO 37001 certification to Canada and the U.S., we again mobilized the teams on anticorruption training of all exposed employees. With more than 8,000 employees trained in 2023, we achieved this target as well. And finally on health and safety at work, the frequency rate of accidents at work with subsequent lost work time decreased sharply by 37% versus 2018 compared to a target of 30% reduction. So after this rapid introduction, we will commence now our financial results in greater detail. So I am now on Slide #5. So starting with order intake dynamics, we achieved again a very strong order intake level in 2023, once again above €23 billion, namely €23.1 billion, almost aligned with the record high of 2022 and a book-to-bill of 1.26 and even 1.31 excluding DIS whose book-to-bill is structurally equal to 1. Strong performance and support to future growth as it represents the third year in a row that our book-to-bill is above 1.2. As shown on the slide, Q4 was a very strong quarter with 13 large orders over €100 million booked including one jumbo contract signed in the UK called Maritime Sensor Enhancement Team, MSET, to improve the Royal Navy ship’s availability and resilience over the next 15 years for a value just about €2 billion. This contract reflects our very strong positioning in naval and will include data driven decision-making to enable MSET to see behind the current support horizons and with the increased investment in emerging technologies including AI, virtual reality and big data creates a more proactive and predictive maintenance regime. Now looking at the different unit value of orders on the chart. You can see that small orders below €10 million increased in value despite the significant impact of IoT modules transferred to Telit at the end of fiscal year 2022 for €362 million. Adjusted from that impact, the organic growth of these small orders stands at plus 6% driven mostly by Aerospace at plus 14%. Large orders came slightly below 2022, but you remember that we booked the jumbo contract U.A.E. Rafale for a value just above €3 billion in 2022. So overall, a very solid performance again in 2023 in regards to order intake. Moving to Slide 6 and looking at sales. Well, the currency impact weighed negatively on sales over 2023 for a negative minus 1.5% and minus 1.4% over Q4. The total scope effect represented a negative 1.3% on sales, but there are many pluses and minuses behind this number. That is the reason why we have decided to include an additional slide in the appendix with a table of all impacts by quarters. So you can refer to Slide 44.Turning to our organic growth over the full year. Sales increased by plus 7.9% above the top of the guidance range with different dynamics across the 3 segments and, as I already mentioned, driven by the very strong performance of the Aerospace segment over the year. I will come back in greater details on the three segments in the next slide with Pascal. Turning to the geographical perspective, let me point out that growth was solid in mature markets and especially in France, the UK and all the rest of Europe and North America. Moving on now to Slide 7 looking at the EBIT performance drivers in 2023. As mentioned already, EBIT was up by 10.9% organically year-on-year with the margin progressing from 11% in 2022 to 11.6% in 2023 which is, as already said, a new record EBIT margin for the group. First, a word on the mechanical impacts. The strengthening of the euro had a small €21 million negative impact on our EBIT. Pensions were up by €36 million thanks to a lower level of liabilities over the period after a strong increase of the discount rate in 2022. But more importantly, you can see the solid progression of our gross margin up by €338 million at 28% of sales compared to 27.5% last year. And you have more details on the P&L in appendix Slide 37. Within indirect costs, R&D expenses continue to increase, but at a slower pace than sales representing 6% of total sales at the end of 2023 versus 6.1% at the end of 2022. That does not reflect a change of strategy, but again our decision in 2023 to allocate more resources to project execution. R&D remains a key driver of differentiation for Thales and I will come back on the subject in greater details later on. Our indirect costs have been in control. As you can see on the chart, G&A expenses and marketing and sales went up by less than the top line growth during the period. Finally, as expected, equity affiliates contributed less to our EBIT than in 2022 since last year we benefited from a €45 million positive one-off coming from Naval Group. Now looking briefly at each segment one by one and I’m now on Slide 8 for Aerospace. So orders at €5.6 billion were down by 5% organically due to high comps in both businesses. The Aeronautics business continued to be quite dynamic in Q4 with two large orders booked, one related to the training and simulation activities for the Rafale U.A.E. and one to install our new IFE product on board the future Emirates Boeing (NYSE:BA) 777X. The 2023 double-digit organic growth was fueled by the civil aftermarket orders up 32% versus 2022. In Space while we booked 6 large contracts during the year in our observation, exploration and navigation business; the activity total orders booked in 2023 were below last year’s strong performance with no large order booked in 2023 in the telco business. As you know, this part of the business is going through a difficult path and not just at Thales. There was an overall decline in demand impacting the geostationary telecommunications satellite market in 2023 and again I will come back on the subject later on. Sales now: well, sales at €5.2 billion increased strongly up 11.7% organically clearly driven by the above expectations strong growth in Aeronautics showing a strong double-digit organic growth in both OE mostly driven by Airbus higher production rate and aftermarket activities benefiting from the ongoing traffic rebound over 12 months. This compensated the underperformance of the space business. As previously mentioned, the telco part is still facing supply chain challenges, notably the propulsion system, leading to execution delays on some programs. Overall, Space business revenues remained flat compared to 2022 and we expect that it should be the case again in 2024. Now if we look at profitability, EBIT margin further expanded from 5% in 2022 to 7.1% in 2023 driven by the strong performance of the Avionics business. Indeed this business was back to a double-digit EBIT margin in line with where it was before the sanitary crisis thanks to a strong operational leverage on the top line growth. On the other hand, Space came at break-even over the full year impacted by a flat top line versus 2022, higher costs due to inflation and delays in program execution as mentioned before. And maybe a last word before we move on to the next segment. As you know, we have been working at finalizing the Cobham deal and I can confirm that we are progressing very well. At this stage, we believe we should be able to integrate Cobham to the Group sometimes at the start of Q2 2024. It is an important information for you to adjust your models and also to be taken into consideration when looking at the full year guidance. So turning to Slide #4 looking at the Defence & Security segments. So order intake amounted to €14.1 billion, up 2% organically versus the €14 billion record high of 2022. Q4 was again a very strong quarter with 10 additional large orders booked bringing the total at 17 large orders above €100 million booked during 2023. Our backlog reached €35 billion at the end of 2023 versus €31 billion at the end of 2022, a new record high representing 3.6 years of sales. Sales amounted also to €9.8 billion, up by 7.5% organically versus 2022. Many business units reached again a double-digit type of organic growth like critical information systems, cyber defense solutions, above water systems or surface radars just to give a few examples. This strong level resulted from the combination of our strong backlog as mentioned above and the efforts to put by the group into ramping up its capacity to deliver on programs. And I will also come back on these ongoing CapEx efforts in the strategy part of the presentation. Last point, the EBIT margin as you can see, still strong at 12.8% and in line with the 2022 performance. So finally DIS, Digital Identity & Security, and I’m now on Slide #10. At €3.3 billion, sales were up by 4.1% organically and let me remind you here that the decrease in terms of value is due to the transfer of the IoT modules business to Telit from 31 December, 2022 and this is for total sales of €362 million. Two different dynamics between H1 and H2 in terms of organic growth for this segment, a strong H1 across the different businesses at plus 11.7% and as anticipated, H2 slightly negative overall at minus 2.2%. The negative organic growth in H2 can be attributed to 2 distinct dynamics. On one hand digital solutions, namely cyber and biometrics, continued to perform very well with high single-digit organic growth despite the biometrics facing tough comparisons from H2 2022 and thus experiencing a normalization in activity levels since Q2 2023. On the other hand, smart cards experienced negative growth compared to very high comps in H2 2022 alongside decreased demand in terms of volumes and a decline in pricing. The influx of low cost competitors in the market led to a downward pressure on prices prompting us to prioritize profitability over volumes. While we could have potentially increased sales volume, the associated margin would have not been acceptable to us. And finally EBIT, EBIT was up by 1.5% organically at €508 million with an EBIT margin progressing significantly from 13.7% to 15.2% and this of course including the negative impact of the deconsolidation of the IoT modules. Other factors explaining the strong increase of the EBIT margin are number one, the net gross margin improvements compared to 2022, thanks to a favorable product mix including the transfer of the IoT modules I’ve just mentioned; and number two, the operating leverage on higher biometrics sales over 12 months. So let me just remind you 2 significant scope evolutions to take into consideration for 2024. Number one, first of course the integration of Imperva over the 12 months of 2024 as we finalized the deal beginning of December 2023. And number two, the transfer of the civil cyber activities from our Defense & Security segment from the 1st January 2024. We will come back on that part when commenting Slide 31 to give you more granularity. Turning now to Slide 11, looking at items below EBIT. First, the cost of net financial debts was lower in 2023 at €36 million versus €84 million in 2022, hence benefiting from the improvement of the group’s cash position compared to 2022 and the rise in interest rates over the period. On the other hand, the finance costs on pensions and other employee benefits went up from €35 million in 2022 to €76 million in 2023. This increase is mostly coming from France with a €31 million cost increase due to the sharp increase in rates in 2023 times 4 from 0.91% to 3.71% and partially offset by the drop in commitments versus 2022. Then taxes, as you can see, the effective tax rate is slightly decreasing at 20.1% versus 20.6% in 2022. We expect it to remain between 20% and 21% in 2024.Then minorities moving from a negative contribution in 2022 at minus €18 million to a positive contribution of €12 million in 2023 due to the Thales Alenia Space negative results in 2023. Leading into an adjusted net income from continued operations, group share moving up from €1.47 billion in 2022 to €1.66 billion in 2023. I just would like to stress out that this basis of comparison that you have to consider for next year, when the disposal of the transport division will have been finalized. On that note, everything is progressing as expected and we are confident that the deal will be closed by the end of H1 2024. Below you can see the adjusted net income from discontinued operations, which is the contribution of transport, up from €90 million in 2022 to €105 million in 2023. Please and as well that the group will no longer benefit from this additional contribution for the same reason just mentioned. All in all, this led to an adjusted net income group share reaching €1.77 billion and an adjusted EPS of €8.48, up 15% versus last year. Now a few words on the conversion of EBIT into free operating cash flow and I am now on Slide 12. First, a word on the usual recurring items. Regarding equity affiliates, which corresponds to the GAAP between our share in their net income and the actual dividends we received from them. This is where you find and the positive one-off at Naval Group. This year CapEx stands clearly above D&A resulting in a global negative balance of €171 million on our cash conversion. This definitely reflects the group’s strategy to invest into future growth and capture market opportunities and I will come back as well later on our future CapEx plans. Change in our WCR represented €173 million tailwind in 2023.And other cash items not included in the EBIT such as cash restructuring, ForEx or IFRS 16 lease depreciation amounted to a net €75 million positive. Finally, a transport contributed for €57 million in 2023. So all in all, another year of very strong free cash generation remaining above €2 billion in 2023. So now moving to Slide 13 commenting adjusted net income cash conversion that outperformed the 90% plus target set for this year. This robust performance can be attributed to several factors. Firstly, the order intake throughout the year exceeded expectations particularly in Defense & Security. Secondly, we have continued to benefit from favorable payment terms and phasing on our defense contracts. And lastly, the ongoing implementation of our cash action plan has yield positive results including improved on-time collection of invoices and successful management of inventory levels despite inflation and increased overall activity. It is worth noting that our first “CA$H!” initiatives was launched on 3 years ago now and we have decided to reintroduce an updated version in 2024 to further enhance these efforts in the future. For 2024, well, we anticipate another year of robust cash conversion close to 100% fueled by a projected additional down payments on 2024 order intake and existing contracts. Finally, moving on to Slide 14, with a quick look at the evolution of our net debt position. As I commented at the beginning of the presentation, we have materially accelerated in terms of capital deployment in 2023 especially with the acquisition of Imperva for $3.7 billion and with the UK pension obligation externalization that led to a minus €1.1 billion cash impact that corresponds to the sum of the corresponding pension deficit and the premium we paid to the entrant company that took over the obligation. The dividend cash-out increased to €634 million in 2023 versus €563 million in 2022 in line with the net income progression. The cash-out related to the share buyback amounted to €461 million. In our 2023, we purchased 3.5 million of shares over 12 months, which means that at the end of the year of last year 2023, we had already purchased 3.2% of the capital out of the 3.5% targeted. As a result of those pretty significant moving parts, the group’s net debt stands at €4 billion at the end of December 2023. So a word on dividends and I’m now on Slide 15. So this year the Board decided to maintain the payout ratio at 40%, which derives a dividend of €3.40 per share, up 16% versus 2022. As you see from the chart, this corresponds to a significant 25% per share increase in the dividend since 2020 reflecting the strong EPS performance. So that marks the end of the financial review. And now I will address our strategic priorities and guidance. So now I’m on Slide 17 and I’m turning to our strategy and outlook. So here are the 4 strategic priorities, we intend to focus on in the near-term and let me address them briefly one by one. So moving to Slide 18. To address the strong underlying trends in our markets, one of our primary focuses in the recent years has been to increase our capacities. This includes not only production in capacities, but more importantly, ensuring we have the right talent in place to seize market opportunities. We have successfully executed our ambitious recruitment plan announced a few years ago with significant progress made in 2022 and 2023 as illustrated in the graph. These hires have enabled us to strengthen our Engineering Centers in Romania and India and increase production output as planned. Additionally, it is worth noting that our global turnover decreased by more than 1.5 points returning to pre-COVID levels, which is a positive indicator of market recovery. To ensure the smooth integration of new hiring’s and provide them with the necessary tools for success, we have also enhanced our onboarding processes and established internal academies tailored to specific competencies. Looking ahead to 2024, we anticipate recruiting approximately 8,500 people for high expertise roles while continuing to invest in enhancing Thales brand awareness. Furthermore, internal mobility initiatives will be linked to the repositioning of our Space Telecommunication Sector, a topic I will explain later in this presentation. So moving to Slide 19. Well, ramping up also means investing in our facilities. As showed in the graph, we have further invested in 2023 to ramp up our production capabilities and we will continue to do so in 2024.We are, for instance, well on track to more than double our radar production capacity in France by 2025. Those CapEx have been used also to optimize our industrial footprint leading for example to sites such as our DIS site in Poland or some partnership projects for production localization in the Middle East, while seeking better adaptation of our sites to new modes of work, connectivity, attractiveness and so on and so forth and to the group’s environmental objectives carbon footprint, energy efficiency to mention a few. We have also launched a key project to deploy a global engineering information system highly secured and cloud based. This will develop velocity and fostering real-time cross-continental engineering team collaborations. In addition, we have been working tirelessly to mitigate supply chain tensions as well. While the situation has improved regarding electronic components, we are still rolling out broad action plans with our suppliers to mitigate recurring tensions on hardware namely PCB and mechanical parts to ultimately preserve our customers. Second priority and I’m now on Slide 20, sustaining excellence in R&D, which remains a major driver of competitiveness in our markets. So today, and I’m very proud to say so, Clarivate, the innovation analytics company, named Thales among the Top 100 global innovators for the 11th time in a row. This recognition illustrates the strength of our R&D leadership and our desire to remain very innovative as reflected in our impressive 20,500 patents portfolio. Of course to achieve this ambition, we continue to leverage on all sources of funding. A good example is R&D grants from the EDF (EPA:EDF), the European Defence Fund. We have benefited from more than €70 million grants in 2023 placing us as the main beneficiary of this fund. A significant share of our R&D expenses is also funded by customers like MoDs illustrating their appreciation of our valuable work. In terms of investment areas, we are still very much focused on quantum sensing, edge computing or open source hardware. A key area on which I would like to spend more time is also artificial intelligence. So let’s move now to Slide 21. So moving first on Slide 21 where I would like now to unveil the extent of Thales capabilities in AI for critical usages. AI is already a reality for Thales of course. We have been working on this for several years if not many years in a row. A few example among others AI can accelerate customers’ operations typically regarding POD Talios, the onboard AI analyzers in real-time optronics images captured in flight 100x faster than any current manual search. TopSky Sequencer in civil aeronautics. This allows increasing airport landing and takeoff capabilities by 20%. But AI can also improve decision-making and regarding our maritime patrol for instance, AI enables automatic target categorization of our SEARCHMASTER radars or another example on mine or related to mine countermeasure, AI leads to a revolutionary system that fully autonomously detects, identify and classify mines. So at Thales, we are already at scale with an impressive critical mass over 300 AI specialists from upstream R&D to implementation in sensors and systems. This internal expertise will help boost the group productivity also such as regarding automatic coding generation and massive testing. And last, let me point out that Thales is a pioneer to protect AI, its own AI and AI from others as well. This is a strategic issue for both our customers and Thales as well. We have been distinguished in many independent challenges in AI security like friendly hacking. Our capabilities allow us to ensure end-to-end security solutions, the robustness and cyber security of AI by mastering the variety of hacking threats and developing strategies to counter them. For example to avoid false classification of poised images, well, we introduce a watermarking solution. Thales TrUE AI approach is really key to develop our solutions, which meet three principles; they are transparent, they are understandable and they are ethical for a trustworthy AI. Moving now to Slide 22. This slide is to address the third strategic priority, sustainability. You already know this slide. Thales has more than ever a role to play in developing technologies contributing to a safer, greener and more inclusive world, safer through high tech equipment providing sovereign states with the means to protect their territory and population. Among the notable examples of 2023, we can cite the success of the GM 200 and GM 400 military radars, which enable many customers, many countries to monitor their airspace. Furthermore, the group’s growing prominence in cyber security stands out. With Imperva’s acquisition, we are now one of the top five global leaders in this field. Secondly, a greener world, more environmentally friendly, thanks to a range of solutions designed to reduce our customers’ ecological footprint or better observe environmental phenomena. For instance, in the civil aviation sector, Airbus adoption of the PureFlyt management system will help reduce airlines operations carbon footprint through flight path optimization. In the space sector, we won a major contract in 2023 for the establishment of the IRIDE constellation, a pioneering program in earth observation. And last and number three, a world that is more inclusive. A good illustration is the implementation of the TrUE biometrics offering that contributes to the advent of transparent, understandable and ethical biometric technologies aiming in particular to eliminate the risk of a discriminatory bias. Moving now to Slide 23. Our sustainability efforts have garnered external recognition as evidenced by the recent ratings we received. Typically, in March we obtained the SBTi certification, which served as confirmation of our significant pledges towards reducing CO2 emissions by 2030. In addition, the group was rated A by CDP, an impressive distinction placing Thales in the leading 1.5% companies. Similarly, the EcoVadis certification ranks Thales among the top 1% of companies Platinum medal. And finally, the group was selected by the Euronext Paris to join the CAC SBTi 1.5 index and was number one of CAC 40 in the SCE ranking concerning corporate scientific responsibility. Moving to Slide 24 now and this one is related to capital allocation. Over the past 2 years, we have successfully deployed all our capital allocation levers. We have been very active in M&A and portfolio management representing close to €4 billion impact as we announced not less than five acquisitions in cyber security and positioning now Thales as safety cockpit communication leader thanks to the announced acquisition of Cobham AeroComms. In terms of returns to shareholder, at the end of February we have conducted 92% of our share buyback program and then adding to that the dividends paid over the past 2 years, it represents a €2 billion contribution to shareholders. And finally, as we committed last year, we have successfully derisked our balance sheet from our UK pension obligations with a deal announced in December last year representing a €1 billion cash-out. It was the ideal spot to do so given the current level of interest rates and long-term inflation and their impact on the valuation of this liability. And let me remind you that since December 2023, we no longer need to make cash payments of around €100 million per year to fund this obligation. I’m now on Slide 25. So what can we expect this year in 2024? We will continue to keep an eye out for selective acquisitions applying the same strategy as always, seeking plug and play assets that complement our existing businesses while maintaining a strict discipline encompassing both financial and strategic assessments as well as valuation considerations. In terms of upcoming pluses and minuses to anticipate 2024, well, number one, we anticipate finalizing the acquisition of Cobham AeroComms along with the receipt of funds from the divestiture of our transport division with an estimated impact of €1.5 billion. Number two, our aim is to sustain our dividend payout ratio at around 40% alongside the completion of our ongoing share buyback program. And number three, our overarching objective remains unchanged to uphold a solid investment grade profile. Let me now give you some perspective on each of our operating segments starting with Avionics and I’m now on Slide 27. So we have identified several growth drivers for 2024 that will lead Avionic business to continue to grow at a more normalized pace in 2023 where sales grew by an exceptional 12% organically. First, aftermarket sales will continue to benefit from dynamic air traffic albeit at a slower pace than in 2023 where likely albeit built inventories. The ramp up of commercial aircraft production should continue as publicly stated by most of our customers despite still a tight supply chain. And in IFE, we have reported several commercial wins in 2023 that are progressively fueling sales recovery. Interesting to notice that historically focused on widebody, IFE products are progressively expanding to single aisle. And last demand remains robust for military avionics. Finally, we have been dynamic in terms of strengthening our portfolio with the acquisition of Cobham AeroComms as already mentioned and described and we have also disposed our aeronautical electrical systems. Let me now spend some time on our Space business and I’m now on Slide 28. So as a reminder, our space business is part of what is called the Space Alliance, which involves two joint ventures with Leonardo; namely Thales Alenia Space specialized in space infrastructures and Telespazio specialized in services. Thales Alenia Space is fully consolidated in Thales financial statements and Leonardo’s share is accounted for a non-controlling interest. On the other hand, Telespazio is consolidated as an equity affiliate. Regarding TAS, as you can see on the pie chart on the middle, one of our key assets is that we have a well-diversified portfolio of customers. Two-thirds of TAS sales are generated in institutional and military markets where we enjoy strong leadership positions. Those markets offer many domestic and export opportunities. For instance in November 2022, the European Space Agency Ministerial Council committed to its biggest ever budget increase leading to plus 17% in ESA budgets for the next 3 years namely 2022-2025 total subscriptions by member states equivalent to a yearly 5% growth, which will drive significant opportunities for us. That was for the first two-third. The remaining one-third of TAS activities are dedicated to commercial customers and mainly telecommunication operators such as ACS, Eutelsat or Intelsat. In this field as well, we offer best-in-class product range from GEO satellites to LEO and MEO constellations for instance. Despite current headwinds, we identify market opportunities over the long-term such as the new generation of highly flexible GEO satellite, software-defined satellite, the IRIS square constellation in Europe and several other LEO/MEO projects. And in defense, we see indisputable sovereign growing needs, Syracuse V project for the French MoD for instance. Now if we focus on the commercial telecommunication side and I’m on Slide 29. So yes, we have been facing in this activity the combination of conjunctional exogenous headwinds. No inflation passthrough mechanism in place while inflation has reached unprecedented levels and supply chain difficulties notably for propulsion in our case. Those have led to delays and higher costs in development of our new generation of satellites. In addition, the underlying market dynamics have been changing with lower GEO satellite orders moving from 20 historically to rather 10 per year in 2023 while the emergence of mega constellation impacts the business model of satellite operators. In this context, we are putting in place a contingency plan aiming to adapt our activity to the GEO market new size while maintaining our ability to manage constellations projects and leverage defense, satcom and OEN momentum that I previously described. These necessary structural adjustments to our cost base are leading to the redeployment of around 1,300 position, out of which 1,000 in France, to other Thales activities given the expected growth from the other activities of the group. This plan will be executed over 2024 and 2025 and a social process will be launched in the coming weeks. The ultimate objectives being: number one, adjust the workforce to the current workload; number two, reduce fixed costs to enhance competitiveness; and number three, as a consequence, restore Space midterm profitability towards 7% EBIT margin. Turning to our second reporting segment, Defence & Security and I’m now on Slide 30. Firstly, demand remains robust and our backlog has reached a new record high at 3.6 years. Geopolitical tensions are pushing up budgets in our key regions giving us opportunities to grow. In addition, our product lineup meets the needs of customers preparing for high intensity conflicts and EU initiatives are backing joint procurement with new funds and aiming to make as much as half of its defense system purchase within the EU by 2035. Sales are steady and should continue to grow despite some supply chain issues and we are ramping up capacity to meet demand as I explained earlier. From a margin standpoint, we expect to continue to deliver industry-leading margins close to 13%. Well, I’m now on Slide 31 looking at our third and last segment DIS. Firstly, cyber security remains a top priority. We are in the process of integrating Imperva and Tesserent about which we are very excited about as they enable us to expand our leadership position in the market, including application security and premium cyber security services. Additionally, we are transferring civil activities from Defence & Security creating even more synergies. Our R&D efforts in biometrics are aimed at building product leadership, ensuring we stay ahead of the curve in this rapidly evolving field and we grow our profitability in this field. With smart cards, our focus remains on maximizing margin contribution as we did in 2023. We are expanding our cloud-based business models with promising transitions to eSIM and ebanking services. And a very important message, we estimate that in 2024 rSIM, removable SIM, should only represent 7% of DIS revenues. Lastly, we are anticipating a normalization of demand and stock levels providing resilience for our operations. Let me comment as well key 2023 realizations that are fueling 2024 pipeline. In securing mobile connectivity, we have seen a strong acceleration of eSIM adoption primarily in the U.S., but not only. In 2023 we have more than doubled the number of eSIM activations performed in our extensive install base of on-demand connectivity platforms. We have also crossed a very important milestone with now more than 100 million of cars securely connected with our automotive eSIMs. In payments, we are supporting the move to eco-friendly payment cards with a full range of recycled plastics or biosourced cards. We have more than doubled the number of eco-friendly cards delivered in 2023 crossing the 250 million units milestone. We are also enjoying significant growth with fin-techs. Those fin-techs issuing more and more physical payment cards, a strong indicator that physical payments card are here to stay in the foreseeable future. Lastly, with the acquisition of Imperva, our cloud-based annual recurring revenues has enjoyed a step change with a threefold increase. The Imperva contribution coming on top of an already sizable and fast growing set of transaction and subscription-based revenues like the SIM activations I’ve just mentioned, like our digital banking solutions or our customer identity and access management platform. So all this brings me to our financial objectives for 2024 and considering the strategic priorities and business outlook that I just described. I’m now on Slide 32. So with respect to order intake, we expect another year of strong commercial performance driving a book-to-bill ratio above 1. We expect sales to grow organically between 4% and 6% and based on the February 2024 foreign exchange rates and Cobham Aerospace Communications integration as of April 2024, this corresponds to sales between €19.7 billion and €20.1 billion. Incorporating all the drivers we discussed earlier, we expect a further improvement in EBIT margin reaching between 11.7% and 12%. So this concludes my presentation. Many thanks for your attention. Pascal has just arrived. He was a bit late and stuck in the traffic to be transparent so that’s why I was the only speaker this morning. But now Pascal is with us and we are happy together to answer your questions
Operator: Thank you. [Operator Instructions] And the questions come from the line of Christophe Menard from Deutsche Bank. Please ask you question. Your line is opened.
Christophe Menard: Yes. Good morning. Thank you for taking my question. The first question I have. I know it’s early days but for Imperva, can you comment on the attrition rate if any that you may have seen or conversely, is it easier to retain people or employees at the moment in the tech world? That’s the first question. The second question was on the aftermarket growth in Avionics. What kind of growth should we expect? I understand that it should be lower than in 2023, but still what we’ve heard from other sectors like the engine guys, there’s still strong growth in aftermarket. So is it something similar or can you help us quantify a little bit? And regarding the Space restructuring, can you give us a little bit more detail on the restructuring cost and also what proportion of employees the 1,300, that represents as a whole of the Space activities? Any further color on this would be interesting and helpful. Thank you.
Pascal Bouchiat: Good morning, Christophe, Pascal Bouchiat speaking. And once again sorry for being late this morning. I was, as Patrice mentioned, blocked in traffic jams. Maybe I will start with your third question about Space, Christophe. And yes, it’s true that of course we will have a bit higher level of restructuring charges for 2024. By the way, this is embedded in our guidance on our EBIT margin. And if I look first at Thales as a whole, if you look back at the recurring level of restructuring charge on our P&L, if you look in the last 3 years including 2023, we were more around €90 million. In 2024 we believe that this level will be significantly above, probably something like €120 million and this reflecting two things. One is the cost associated with the recovery of Space. And also second, but that’s the point that we have already highlighted in the past, of course Imperva. We need to spend a bit of cash in order to integrate this business. So overall, this plan for Space will be delivered in 2024, 2025. Overall, as a rule of thumb, let’s consider that in term of overall restructuring charges on our P&L, it will be something like €50 million so which, as you mentioned, is a bit significant. Even though as we mentioned, most of the employees that are affected by these situations will be redeployed within Thales. But still in particular in managing mobility, this creates training people, all of that has of course a bit of a cost. You ask for how large is it relative to the size of our Space business. So overall, our Space business has a total headcount of around 8,500 people. So you see here we are talking about 1,300 jobs out of 8,500 headcount in this business. AGS, as we mentioned, the performance in 2023 was outstanding above our expectations and overall around 30% growth versus 2022 with probably some kind of catch-up effect. And in particular when it comes to spare parts, probably airlines have stopped ordering spare parts throughout the COVID and probably were willing to catch-up in 2023. Now going forward, I don’t want to be that specific. Of course, there is no reason why overall level of growth on our aftermarket would be different from the one from our competitors or the players, suppliers of this type of equipment; it should be similar. But of course it’s a bit more difficult at this point to be more precise on this front. What I can do overall, Christophe, maybe is to guide you not just only on AGS, but probably your questions allows me to come back on a more global footprint about what did we factor in our guidance in term of organic growth rate for Thales as a whole and what does this mean for our Avionic business. Overall, it’s consistent with probably a mid single-digit plus type of organic growth for overall Avionics business. Your last question was about Imperva attrition rate.
Patrice Caine: So, hello, Christophe. So nothing is noticeable if I may say so quite reassuring. We have not observed any surge in the attrition rate. It’s quite standard for this type of activity, very reasonable in fact. So we are confident that all the talents that we need to retain will stay with us and are happy to work with Thales now.
Christophe Menard: Thank you, [indiscernible]. Thank you very much.
Operator: Thank you. [Operator Instructions] and the questions come from the line of George Zhao from Bernstein. Please ask your question. Your line is open.
George Zhao: Hi, good morning, everyone. First on cash use, your current share buyback program expires this month. Given that you’re going to have a net cash inflow from the AeroComms acquisition and the transport disposal, I guess how are you thinking about potential for further share repurchase beyond this month? And second one, drilling further into your 4% to 6% organic growth forecast this year. You said DIS is expected to be in-line with last year’s 4%, Aerospace decelerating a little bit from 12% last year. I guess that seems to leave Defence & Space in the 5%-ish range. I guess is that your working assumption for the segment or are you assuming something higher towards the path of the mid single-digit plus growth that you’ve been talking about? Thanks.
Pascal Bouchiat: Thank you very much, George, for those two questions. Maybe I will start on your question about Defence. So you remember our guidance that we communicated just a year-ago in the 2023-2024 period of time and at that time we said that we’re expecting Defence organic growth to be mid-single digits in 2023 and mid-single digit plus in 2024. Now when you look at our 2023 figures, I guess you concur with me saying that we have outperformed the level of organic growth for our Defence & Security business because overall it stands at 7.5% so above expectation. Now looking forward in 2024, I guess that you will realize the size of our backlog for this business. So the traction is there. Now we also need also to share with you that we keep having a material impact from the supply chain. This is today clearly the limiting factors on the supply chain. I can tell you that 2023 has been quite a bumpy journey in terms of managing the supply chain in particular in our Defence business and probably a bit difficult at this point to say whether or not we will see significant progress or not on this matter. This is in particular the case on two-type of components: one being a PCB, printing circuit boards. And the second being more extensively on hardware where we keep seeing a number of suppliers and this is not just in a single country, but really across the board in many countries, are still struggling to ramp up their overall production capabilities. And that’s for me and probably today the limiting factors. When you put all of that together, at this point what is implicit in our guidance is a level of organic growth for Defence & Security business, probably mid-single digit to mid-single digit plus. That’s probably the best rule of thumb today. Even though we have enough in term of backlog to go even further, but with these limiting factors that I mentioned. Your first question about usage of cash. I guess that we have been quite explicit on what we have done in 2023 and within particular this decision to de-risk our balance sheet with regard the issue of UK pension funds where, as we said, we have allocated €1 billion of capital on this matter and this has to be taken into account in the overall equations. So what we are going to do is of course to complete this share buyback. This will be done by the end of March as expected, as committed. That’s a program that we started 2 years ago and we said it will be completed in 2 years’ time and this is basically what we have done. I guess that we have demonstrated that Thales can use this type of tool when it comes to managing, optimizing its overall capital structure. I don’t see us moving on these fronts in the next few months. Now, that’s an open topic, which means that we will keep working with our Board to see what it means in the mid-terms. So I mean first, we demonstrated that it works. Second, probably not in the very short-terms, but the line is still opened with our Board on this matter.
George Zhao: Very great. Thank you.
Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of David Perry from JPMorgan. Please ask your question.
David Perry: Hi. Yes. Good morning Pascal and Patrice. So, two questions, the first is just on the smart card business, can you just remind me what’s the kind of visibility on that? Is it a business you plan quarter-to-quarter or do you have visibility 6 months, 12 months just on things like volume and price? And the second one, maybe I will chip and make it part A and part B. But on Space, what’s the timeframe you have got in mind to return to a 7% margin? And part B, Leonardo last Thursday was suggesting that there had been some talks perhaps with Airbus about industry consolidation to deal with some of the challenges you have got. Could you talk to that, please? Thank you very much.
Pascal Bouchiat: Okay. Thank you very much for your questions, I mean – David. So, first on smart cards, this is, as we keep seeing, a short-term type of business in terms of cycle, which means that I mean the overall visibility in term of order intake is more in the three months to six months. So, it’s of course I mean a short-term type of visibility. Now, having said that, I mean we track the market. We have got indicators that give us in our view quite a good view on how things should develop throughout 2024. I tend to believe that now in term of price, I mean the visibility is more. I mean let’s say it’s a 1-year horizon when it comes to banking, even in some cases a bit further than that. I mean the price anticipations on removable SIM accounts is more limited. It’s more a question of a couple of months and that’s also what’s important. Now, when we look at the sales of our removable SIM business, in 2024, the revenue of removable SIM will be below €300 million, which represents less than 7% overall of the overall revenue of our DIS business. We have seen – and by the way, I mean less than €300 million, it’s something like 40% of the sales of mobile communication solution business line. And the reason for that is that we keep developing a lot of digital business embedded SIM with behind that I mean services, so in particular, the rise of activations and Patrice made it clear in his presentations. And also second thing, which is going pretty nicely, is embedded SIM communications in other markets and in particular in the car industry. Today, most of new cars are equipped with embedded SIM and we take advantage of this new business in particular when it comes to activation. So on Space, I mean we mentioned I mean a return to this 7% of EBIT margin in the mid-term. So, in the mid-terms in our understanding is probably something around 20%, 27%, David, if you want me to be a bit more precise. And last point was, Patrice, I mean on discussion.
Patrice Caine: Hello David. Good morning. Well, we are with Airbus and ourselves and Leonardo in the consortium for IRS square [ph]. So, it’s quite I would say natural that we discuss on this particular topic. IRS square is a big initiative led by the EU as you know. Still, by the way, difficult to predict whether it will come to a positive outcome or not because it’s quite a complex endeavor for everybody. So, that’s the main purpose of our discussion with Guillaume and Roberto. And the rest are, I would say, more or less a speculation where you know everything about the sector, it’s quite concentrated and complex. So, my main focus as Thales is really to succeed our restructuring plan on telco. That’s top priority for the Space Alliance to grow our OEN business which is a nice business, again two-third of that is related to observation, exploration and navigation. And a third, to continue to develop and if possible invest in the services part of Telespazio. So, you see, we have already plenty of food on our plate, so we shall focus on that and try to make IRS Square happen, which is of another kind, but very important for all of us.
David Perry: Thanks. That’s very clear. Thank you.
Operator: Thank you. We are now going to proceed with our next question. And the questions come from the line of Aymeric Poulain from Kepler Cheuvreux. Please ask your question. Your line is open.
Aymeric Poulain: Yes. Thank you very much, indeed good morning everybody. So, the first question for me is on capital allocation and if we combine the acquisition of Gemalto (AS:GTO) and Imperva, we have an investment in excess of €9 billion and DIS currently contributes slightly in excess of €500 million of EBIT. So, when do you expect the return of these two large deals to meet your order rates? And perhaps on that, do you see the comments made by Palo Alto recently around the potential slowdown of cyber security market as a risk to this target? That will be the first question. And the second one on share buyback versus M&A, obviously you have been paying top dollars for a large acquisition while the stock price has not performed well relative to its peer and now arguably trades at a decent discount to most of its closest comparable. So, how do you actually make the decision on capital allocation between share buyback and M&A and what would be the criteria you would use to justify perhaps a second share buyback? Thank you.
Pascal Bouchiat: Good morning Aymeric, maybe I will start with your first questions for analysis about I mean what we invested in Gemalto and Imperva and I mean the €500 million that you mentioned being the EBIT. I think that you are a bit unfair because you mentioned I mean the combinations of Gemalto acquisition plus Imperva, but you just take into account I mean the contributions of Gemalto and not take into account the contributions of Imperva in terms of bottom line that is of course going to happen from 2024. First point now I mean when looking and I let’s I mean split your question in two parts. One is the acquisition of Gemalto, we are today with the level of EBIT, which is reported in this business plus also some synergies that we managed to get in other businesses. We are already today on Gemalto acquisition at a level of returns which exceeds our cost of capital, first point. Second point, as we announced Imperva transactions, we made it clear that we would be able to meet the hurdle rate in terms of cost of capital. I think that we mentioned for 5 years post the transactions and this is basically what I confirm to you today. So, this is how I could answer your questions. Your question on Palo Alto, what was it exactly?
Aymeric Poulain: I think two weeks, three weeks ago there was a significant drop in their share price and they commented on the potential slowdown of the cyber security market and I wondered if that kind of impacted your own cyber security business.
Pascal Bouchiat: Overall, I mean we expect globally our cyber security business in 2024 to be I mean at high-single digit to low-double digit business overall when it comes to in particular global security products including Imperva. This is basically what we forecast, so no specific additional comment on this matter. By the way, I mean we keep seeing more and more of our customers really open and willing I mean to have a vendor like Thales to be able to come up with an integrated offer. I mean this concept of a one-stop shop, which is more and more important for our clients, and considering I mean the complexity of the offer. So for us, Thales being able to come up with this global fully integrated data security platform together with this new offer on app sec and all of that combined with our offer on identity access management. So, really I mean placing Thales really at the heart of the key vendors when it comes to cyber security supply is what we see is more and more appreciated by our clients. Your second question was about share buyback and M&A, so I mean overall, I think I mean we demonstrated our ability to move on various tracks when it comes to I mean capital allocations. And at the end of the day, it’s in my view quite a balanced move on one side, and meaningful acquisitions that are preparing the future of this company in term of quality of businesses in particular in those businesses where we see a clear potential for higher growth. This combined with quite a significant level of cash upstream to our shareholders, I mean just in 2022, 2023 €2 billion upstream. And as I mentioned, I mean this will be open. Of course we also need to take into account I mean when it comes to share buyback the impact of the rise in interest rates. All of that I mean has also to be taken into account. And also specific decisions when it comes also to manage a long-term risk of Thales and in particular when it comes to managing I mean pension obligations where I mean we really fix this issue in UK. Now, I mean to be more explicit when it comes to M&A criteria, of course valuations multiple is of course at the heart of our analysis. Of course I mean valuations or return on invested capital of course is also part of the overall equations.
Aymeric Poulain: Okay. Thank you.
Operator: We are now going to proceed with our next question. Please standby. Our next questions come from the line of Tristan Sanson from BNP Paribas (OTC:BNPQY). Please ask your question.
Tristan Sanson: Yes. Good morning. Patrice, Pascal, thank you very much for taking my question. So, the first one is on Defence margin in 2023. So, you had 7.5% organic growth, margin is a slight pullback. Can you help us understand how much you think of the supply chain difficulties have been dragging down the margin and whether you think you can improve that a bit further as you saw over time this supply chain drag? And the second question is a more general question about efficiency within the group. As you are saying, you are investing in staffing and preparing for the stronger growth for the group. Can you comment on where do you think productivity and especially employee productivity is within the group today and where you want to bring it over time? Thank you.
Pascal Bouchiat: Okay. So, Tristan, maybe I will start with your first questions about I mean Defence. I mean it is true that in 2023, as I mentioned earlier, we have been a bit impacted by supply chain difficulties. And despite that, we delivered this quite strong level of growth, but at the expense of I mean a lot of efforts at our teams. I mean our teams have done a fantastic job in I mean navigating through I mean those difficulties. Now, when it comes to – and I guess your questions was more yes, but what does it mean to the bottom line, so I mean it’s always a bit difficult because it’s in some cases a bit stop and go, I mean having to wait for a part from the supply chain to arrive. So, I mean this type of difficulties. It’s probably a few tens of millions euro of bottom line impact, probably something like €20 million, €30 million, €40 million in terms of bottom line impact overall, which you see at the end of the day is not that significant. But it’s more I mean the fact that really I mean our teams has to get mobilized more than 100 persons to navigate through this type of difficulties, productivity?
Patrice Caine: On productivity, of course we work on as many levels as possible. Typically, I tried to mention some of them in the engineering side like the use of Gen AI to generate code automatically or semi-autonomously or to use Gen AI as well for massive testing and so on and so forth. Now, it’s really come and there is of course the operational level as well thanks to growth. Now, which really counts is the margins. We can generate the level of profit and as you know, we navigate I would say first at already a high level in terms of margin. And Defence 13% clearly it’s best in class and including of course the U.S. peers. And also we are I would say at least in Defence, most of the time margins are audited, so we need also to keep that in mind. Sky cannot be the limit in this regard. So, for us when we work on productivity, probably it’s a lever that counts, but we do count even more on innovation and technology to drive growth. It’s more a question of growth now than a question of trying to extract even more profit from our customers. Governmental customers are also sensitive ones about profit. That’s why DNA of Thales being tech and innovation is quite suited for this type of customers and markets and that’s why we insist so much on preparing the future, investing in new technologies to drive I would say differentiators and growth today and tomorrow.
Tristan Sanson: Thank you. Very helpful. I think my question was not very clear, so I apologize for that. But what I meant is that when you look at the strong recruitment of over 10,000 employees per year in ‘22 and ‘23 and still at 8,500, these big recruitment do not drive in your view a temporary drop in productivity…?
Patrice Caine: Yes. You are right, Tristan. Very hard to measure it precisely, but clearly younger juniors are less efficient than super senior experts that retire of course. That’s a challenge. That’s why we mentioned during the presentation our efforts onboarding, on training, the setting up of internal academies as well. More and more, I would say we professionalized ourselves in this regard. But still you are right to say that probably there is a slight loss of efficiency with newcomers.
Pascal Bouchiat: So, I would I mean say additional cost to keep growing our business, in particular in businesses that requires a lot of expertise, Defence is probably a good example. Now, I mean it’s really our duty to manage that as effectively as possible. Hence I mean those various actions that we highlighted, internal academies for instance is quite important. Also it’s good to see I mean our turnover getting back to pre-COVID because it means less recruitments, everything else being equal. And also I mean as a market is a bit less tight than it was in the last 2 years in particular in 2022. But also in the first half of 2023, it’s also for us important also to rebalance in term of recruitments between beginners and engineers that have more seniority and which can be onboarded more quickly. That’s also I mean part of what we are looking for.
Tristan Sanson: Thank you very much for this color.
Operator: Thank you. We are now going to proceed with our next question. And it comes from the line of Chloe Lemarie from Jefferies. Please ask your question. Your line is open.
Chloe Lemarie: Yes. Good morning. I have a first one on Space, please. I would want to know what would be the key moving parts from the current breakeven to 7% margin target. Is it the restructuring impact of volume or pricing? Second one is on Defence & Security. If you could give a bit more color on the 2023 performance excluding the cyber security assets which were transferred to DIS because it looks like it was already above the 13% margin that you guide for 2024? So, is it just a matter of prudence for 2024 investment in R&D or any other product mix headwind, please?
Pascal Bouchiat: Good morning Chloe. So, let’s start with Defence and so what we released in term of EBIT margin is 12.8%. Now, if I adjust for the transfer from Defence to DIS business, it’s probably slightly above 13% and it’s probably here again a good rule of thumb I mean for the next few years. So, 13% is probably I mean the right figure. Managing a business of this size with 10 basis points, I am sorry, but in some cases can be a bit challenging. So, 13% is the right figures, which once again is really at par with I mean very big peers particularly in U.S. And I think in both cases, with both I mean European peers in Defence & Security. Your first question was about Space, but I am not sure that I got it because the line was not good. Chloe, if you can repeat it, please?
Chloe Lemarie: Okay. So, on Space, I wanted to know what were the key moving parts from the current breakeven to 7% restructuring volume and pricing?
Pascal Bouchiat: Understood. So, what we are looking for is really I mean to restore the profitability of our Space business without seeking for additional growth or in other words, I mean considering the level of revenue that we posted in 2023 €2.2 billion and the question for us is how to restore the profitability based on this level of revenue. I am not saying that we will not seek for growth, but what we want to do is to restore profitability on the basis of the existing level of workload. And hence, I mean this overall cost adaptation plan that we have presented and of course I mean this will of course be a significant driver for this margin recovery. The second one is the completion of large investments on our new generation of geostationary satellites in which we are investing quite significantly. In which by the way and we mentioned I mean the points, we met in particular supply issue with regards I mean the supply of the engine of the satellite, which also caused some I mean additional cost and some delays. Now, of course I mean probably in a year time, this development will be for most of it behind us and will be also to adjust the level of investment in line with this quite significant effort that we are doing today. That was the case in ‘22, ‘23 and this will be the case in 2024. So, with quite significant investments including, by the way in self-funded R&D I mean to support the finalizations of this quite large development. So, they are the two key elements. Now, of course I mean we believe that observations, explorations and navigations business will continue to grow, always a good level of margin. But my message today is I mean really to ensure this overall recovery at a level of workload which is in line with what we see today in particular on our telco business.
Chloe Lemarie: Great. Thank you.
Operator: [Operator Instructions] And the next questions come from the line of Ian Douglas-Pennant from UBS. Please ask your question. Your line is open.
Ian Douglas-Pennant: Thanks for squeezing me in the last five minutes. I have two, please, one on DIS, one on Space. On DIS, could you talk about the outlook for pricing beyond I guess your insight that you mentioned in the next six months to 1 year? It seems like prices especially in bank cards should be still elevated at this point. Should we expect a headwind thereafter as those continue to normalize or am I wrong? And secondly, on the Space business, the IRS square contract, and could you talk about what your expectation is on the timing and the potential size of that to Thales? And additionally on that, given that you are reducing cost in the Space business, how does that impact if it’s at all your ability to execute on that contract if it was awarded? Thank you.
Pascal Bouchiat: Okay. Good morning Ian. So, I will start with I mean your question on DIS outlook and on pricing. I think what is very important to consider for you guys is not just the pricing, but pricing as compared to input costs. And at the end of the day what matter is not that much pricing, it’s really margin, so the gap between selling prices and input cost. And it’s true that we have seen it in the recent past quite a significant drop in input cost when it comes to in particular components. Now, when you put all of that together, I mean our view is that I mean we will keep enjoying and this is what we see today in 2024 quite a strong level of margin for all our smart card businesses whether it’s banking, but also I mean the removable SIM business. All of that will mean that probably in the first half of 2024 and in particular in Q1 in term of level of revenue as we will compare against quite a strong Q1 2023, overall in terms of revenue there will be probably a bit of a drop in terms of revenue, but still quite good level of margin. But we will see as early as Q2 I mean the situations returning positively with, on the second half of 2024, a positive move in terms of level of revenue for our smart card businesses. All of that by the way being consistent with I mean the level of guidance that we provided to you on the expected growth for profitability for DIS. Patrice, on IRS square, maybe?
Patrice Caine: Hello Ian, yes, on IRS square, perhaps a few elements or pieces of information. It was supposed to start or to have I would say a clear go ahead beginning of this year. Now, it’s a complex project. As you know, there is a combination of public fundings and private fundings and the consortium is a large one. So, honestly, it’s difficult to say. It’s difficult to say, so I would rather be prudent. Still we are extremely motivated with the different consortium members, but it’s difficult to be more precise than that or just repeating the official timing, which is beginning of this year. Now, two additional remarks perhaps, Ian. The 7% EBIT that we have discussed is independent from IRS square should it take off or not, so it’s kind of a bulletproof or independent from this large project. I think it’s prudent, I would say, to do so. And secondly, IRS square is not the only I would say constellation projects on which we work. We work on other ones which are confidential, so I cannot disclose them, but which are privately led and that may come into play in the future. So, just giving you a bit of color that they are the geostationary markets we have discussed during the presentation, but still constellation, LEO constellations are clearly opportunities that may come in addition to the market size we see in terms of geostationary satellites. Hope it helps.
Ian Douglas-Pennant: Thanks very much.
Pascal Bouchiat: I understand that we need to stop I mean the call. Patrice, if you want to make some maybe conclusion remarks.
Patrice Caine: Yes. So, let me just close rapidly with a few words of conclusion. So, as you have understood, 2023 was another year of strong performance for Thales indeed. Now, we are fully focused on the execution of our profitable growth strategy supported by rigorous capital allocation and we have had many questions on capital allocation in this respect. Now, with Pascal, we look forward to speaking with you in the upcoming investor roadshows and conference. So, thank you very much for your attention. Have a nice day and we will see you soon. Goodbye.
Pascal Bouchiat: Thank you very much.
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