Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales H1 H1 20 21 Half Year Results Conference Call. That will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today. I'd now like to hand the conference over to Mr.
Bertrand Delcare, HVP, Head of Investor Relations. Please go ahead, sir.
Yes. Hello. Good morning. Welcome, and thank you for joining us for the presentation of Thales' H1 2021 results. I'm Bertrand Delcare, the Head of Investor Relations at Thales.
With me today are Patrick Kane, our Chairman and CEO and Cal Bucha, our CFO. As usual, the presentation will be in English and followed by a Q and A session. H. It is webcast live on our website at thalesgroup.com, where the slide, press release and the consolidated financial statements HR. A replay of the call will be available in a few hours.
With that, I would like to turn over the call to Patrick Lane.
Good morning, everyone. So let's begin with Slide 2. As usual, let me start with the highlights Thales' H1 twenty twenty one results. First, the commercial dynamics were undoubtedly It was also clearly above H1 twenty nineteen, making it a record first half in terms of order intake. 2nd, as expected, both sales and EBIT rebounded materially from the heavy COVID-nineteen disruptions last year.
Once again, the teams have delivered an excellent performance in terms of free operating cash flow, Significantly ahead of plan, and Pascal will explain
it in
more detail. Considering our sales performance year to date, we have decided to upgrade our full year guidance. Finally, and I will come back on this in the second part of the presentation, as we start to It is becoming clear that for Thales, a broad range of But first, let me comment on a few key figures, and I'm now on Slide 3.
At €8,200,000,000
order intake was up 35% with 9.8% on non diluted basis was driven by the recovery in Q2, almost 18%. HR. EBIT and adjusted net income recovered massively as well,
+
121% and plus H1 100 and 55%. Let me point out that this EBIT level, euros 768,000,000 H2 actually only 7% below H1 twenty nineteen. The solid improvement of profitability in transport and HHS, offset the majority of the decline recorded in Cimileo. Thales H. Since the beginning of this unprecedented crisis, we have asked our teams to be very focused on cash management, And this led to another excellent performance in terms of free operating cash flows, €420,000,000 This free operating cash flow level drove our net debt position down to €2,500,000,000 The chart at the bottom right of the slide shows the deleveraging sequence since we completed the acquisition of Gemato.
After this rapid introduction, I now will hand over to Pascal, who will comment our financial results in greater depth.
Okay. Thank you, Patrice, and good morning, everyone. I'm now on Slide 4 looking into details at our order intake. So Q2 was again a strong quarter for us in terms of commercial activity with the reported growth at plus 41%, which follows an already dynamic Q1, resulting in H1 order intake 35% above H1 2020 and also strongly up versus H1 2019. Looking at the chart by unit volume, It's quite encouraging to note that all categories, small, medium and large orders, Increasing from 4 last year to 7 in H1 2021 and medium orders between €10,000,000 and €100,000,000 which increased by 55% during the period.
You can find the list of large orders in the press release. They were spread across many geographies H. Turning now to Slide 5, looking at sales growth. As Patrick mentioned before, We recorded an impressive 9.8% organ growth in Metron 2021. But let's not forget that Q2 2020 was heavily impacted by the beginning of the health crisis, Hence providing easy comps over the period.
However, Q2 2021 has proven to be strong in terms of rebalance H. With an organic growth of 17.8 percent despite our civil Aero and Biometric business H. R. E. Still heavily impacted by COVID-nineteen.
The biggest drivers Behind the positive organic growth were twofold. First, the ongoing recovering of safety in space. HQ on the back of the commercial successes we recorded since Q3 last year. 2nd, Turning to the geographical perspective, let me just point out that the rebound was stronger in mature markets, H. Which didn't come as a surprise considering the strong impact of the health crisis on emerging countries Moving on now to Slide 6.
Now looking to greater details, advertisers Starting with H1 2020, our EBIT amounted to €348,000,000 Mechanical impact, scope, currency and pensions were not significant over the period, minus €1,000,000 Our gross margin recovered strongly from 23.8% last year to 26.3% this year, Which drove a €393,000,000 improvement. There were multiple drivers behind it, But the majority comes from the recovery phase. Our global adaptations plan implemented last year Thales H. On top of all ongoing ambition and initiatives, competitiveness, procurement, value based marketing, product policy and so on, which as you can see continue to deliver. On the other front, we managed to keep indirect costs stable.
The small increases in R and D and G and A were offset by savings in marketing and sales. The phasing of restructuring costs represents a small headwind filings. Let me point out here that we expect Our restructuring cost to end up around €150,000,000,000 over the full year, I. E, to remain This is especially true for Naval Group, whose contribution is now back to the 2019 level. Now looking briefly at each segment 1 by 1.
I'm now on Slide 7 for Aerospace. Orders were massively up, as you can see, plus 80% organically, Thanks to a strong momentum for the Space business and the additional 2 large contracts booked during Q2. The second tranche of €650,000,000 on the Galileo order and also SeQual III. We also noted a progressive recovery of CB Aero demand during the Q2. Sales We're up by 10.2% organically, driven by the strong rebound in space HQ more than 50% above Q2 2020.
Similarly to my comment on order intake, We saw a slight recovery in sales coming from the flight heavy duty business, up by approximately 20% During the Q2 2020, this especially on its aftermarket activities. EBIT is back at a positive €69,000,000 after H1 H1 2020 deeply affected by the health crisis. Its recovery is, of course, driven by the improvement in sales I am by the effect of both the global adaptations plan and the civil, iron, structural costs adaptations program.
Let me point out
that it also includes a negative one off of €10,000,000 Turning now to Slide 8 with transport. Order intake was up by 32% from €442,000,000 to €579,000,000 Thanks to a strong demand momentum in our mainline business coming from both mature and emerging countries. H. Sales were up by 6% organically, thanks to growth in our mainline business with projects H. O.
B. Like the Stuttgart digital node contract seen in Q4 2020. This improvement was achieved Despite the continued scaling down of large contracts still impacting our urban rail business. H. EBIT margin continued to progress in line with our transformation plan, reaching 5.2% at the end of June 2021, Fully in line with our mid term target of a margin between 8% and 8.5%.
Now moving to Slide 9, Defense and Security. Order intake amounted to €3,400,000,000 up by 39% organically after H1 2020 affected by a weak Q2 due to the beginning of the health crisis. The segments HQ. We recorded 4 orders above €100,000,000 versus €3,000,000 in 2020, including a new one in Q2 for modernization and support contracts of tactical radars in Canada. The strong rebound in orders confirmed against a solid momentum of the Group Solutions.
At the end of June 2021, The segment had a backlog of close to €23,000,000,000 representing almost and A session. Sales amounted to €4,200,000,000 strongly up by 14 0.9% organically versus a weak H1 2020, but also 7% above H1 2019. Many business units contributed to this solid recovery, including electronic warfare systems, networks and infrastructures and also Sonars. As expected, EBIT margin recovered versus H1 2020, up from 10% to 20%. As you remember, our operation in April May 2020 H.
I. S. Last segment on Slide 10 with the IS Digital Identity and Security. As usual, I don't comment on orders as they are structurally aligned with sales. Sales amounted to €1,400,000,000 down 2.2% organically.
The decline resulted from different moving parts. The ongoing impacts of the crisis and biometrics, which has been impacted by travel restrictions since Q2 last year, a high basis of comparison in EMV payment cards, H1 2020. These two factors are setting the double digit growth H. At €152,000,000 EBIT was up by 6.6 percent organically with an EBIT margin progressing further from 9.5% to 11.1% H. Despite the ongoing disruptions I just mentioned in biometrics, the segment benefited from HV.
Additional cost synergies in line with our plan together with the tight control on costs and also the leverage Turning now on to Slide 11. Just one comment on items below the EBIT. Regarding taxes, our tax flow changes in the U. K, but also in Italy, trigger some non cash one off items. I already mentioned the negative one off recorded in Aerospace EBIT.
This item show here at 2 levels. 1st, our income tax expense includes €51,000,000 income, which explain this low effective tax rate 14.7%. Providing for this one of item, our H. I. E.
Also increases the share of minority interests by around €10,000,000
All in
all, this was an adjusted net income, group share of €591,000,000 H. I. E. And an adjusted EPS of €2.78 which are both Actually higher than in H1 2019. Finishing up with 2 slides on cash flow.
I'm now on Slide 12. As you know, our working capital is usually negative in the first half of the year, mostly due to a strong seasonality. However, during the 1st 6 months of 2021, Our operational free cash flow has reached a solid €420,000,000 HQ. Coming, of course, as you can see, on the first line of the table from our higher EBIT, but also clearly from a much H. R.
E. That's the group places on cash management and in particular, on the reduction of overdue balances. The time control of our supply chains and also proactive negotiations with both H1, H1 free operating cash flow also benefited from 2 factors you can see at the bottom of the table. 1st, income tax, what presented an income of the period €29,000,000 this due to a positive cutoff effect H. E.
At the end of last year. And second, CapEx was still lower than D and Thales. However, we expect CapEx to grow in the next few semesters HQ and to come back progressively to a level in line with our DNA. Looking at the full year net, I expect the headwind versus our 95% target convergence ratio to be closer to €50,000,000 compared to around €200,000,000 at the start of the year. Also keeping in mind that the adjusted net income As usual, this guidance doesn't include the potential benefits from debt payments Moving on to Slide 13 with a quick look at the evolutions of our net debt positions.
H. Nothing special to comment on the individual drivers, but more important to measure the intensity of deleveraging H. E. Achieved in the past 2 years from €3,900,000,000 at the end of 2020 to €2,500,000,000 At the end of June 2021, I. E.
Reductions of more than €1,400,000,000 Thales H. Over 12 months, this has been driven by our cash flow generations, which amounted to close to €2,000,000,000 in the last 12 months. H. And this, I'm handing over to Patrice for our strategy and outlook.
Thank you, Pascal. I'm now on Slide H. Now turning to our strategy and outlook. Starting March, I detailed 3 strategic priorities for 2021. 1st, implementation of the structural cost adaptation plan in civilero second, our continued focus on growth initiative filings, our vision to sustain a high level of R and D.
So this morning, I thought it would be useful to give you an update on this initiative Starting with Aeronautics, and I'm now on Slide 16. The adaptation of our Aeronautics HQ. The new context remains a key short term priority. And as Pascal Thales. More than 3 quarters of the necessary staffing adjustments H.
I. Thanks to internal mobility and transfers H. I. C. We have been able to maximize the retention of competencies.
In parallel, The global service business line I announced in March is now fully operational. As a reminder, it will allow us to consolidate some sites, HQ. In terms of near term market dynamics, Let me point out that as shown on the chart on the right, ISR expects that the recovery of air traffic will remain modest in 2021. So it is important to remain a bit cautious regarding the second half of the year. On the other hand, the medium term outlook is very supportive.
The updated A320 production plan announced at the end of May by Airbus with the firm rate of 64 by Q2 2023 HQ. On top of this recovery dynamic, we see a multiplication of growth opportunities, especially around digital and green solutions. H. R. I'm thinking of our solutions around flight trajectory optimization, gear for training and simulation as well, To complete the picture on the Aerospace segment, let me provide a quick update on our space business, Alimin, Spain.
As Karel mentioned,
our commercial dynamics remain very strong in H1 with the signature of Phase 2 for Galileo and C Force 3. This dynamic extends to the commercial exploration market. At the beginning of the month, we have booked the contract for the construction of the 1st commercial space HQ. Turning to the Commercial Telecom side, no need for me to come back on our consolidation leadership, which was demonstrated by our down selection by Telesat for its projects. On top of this, we continue to invest I'm now on Slide 16.
So turning to the 2nd priority, growth initiative. We first remain focused on the capture of core revenue synergies with Sigmato, HMO, which are progressing in line with the plan. You remember how the combination of H. Thales and Gemalto cybersecurity assets is a major synergy opportunity. Well, in September last year, we launched H.
E. C. For trust data security platform, which integrates the best data security technologies from both H1. Many large companies have deployed this platform in H1, and for example, 4 of the Top 10 U. S.
Bank. The success of this product or service drove solid double digit sales growth H. E. And further integration in Microsoft Products. Of course, We continue to leverage our global sales network to sell via solutions on a global basis.
H&A. And of the H1, we booked projects both with different customers and with single ones, such as banks or mobile products. The 3rd area is insertion of Gemato Technologies into Telect Solutions will naturally occur HVAC over a longer time frame. One emerging opportunity is private 5 gs networks. Are more and more interested in setting up their own private 5 gs networks, which offers more robust security features HVAC.
And our solutions for this market now include the full range of Gemato security capabilities So all in all, we won 49 revenue synergy projects in H1 2021. Moving now to Slide 17. So taking a slightly longer term perspective, I wanted to and A. Thinking about our digital growth strategy, You remember the framework that we presented back at the CMD in 2018. Our first priority has been to insert digital technologies Inside our core products, our green products, as we call them internally.
This is the column on the left. Behind these concepts are many of the successes of the past few years. In parallel, Thales' H. R. C.
These investments have allowed us to target new emerging markets. Many of these emerging markets Thales. I'm now on Slide 18. So let me take 2 examples. As the volumes of data explode, The changes are quite different.
1st, at HQ level for the core infrastructure,
The
key priority is the management of security levels. On theaters of operation, filings, whether it is the size, what we call the size, for soldiers, vehicles, aircraft, platforms in general Some of the unique requirements of defense customers: the ability to run offline, ruggedness, And thanks to the breadth of our expertise in both defense and CV technology, we are very well positioned to address Emerging High Growth Market. Earlier this year, NATO awarded us the first contract H. R. This solution reduces the time it takes to set up the infrastructure HQ.
So we are starting to incorporate combat cloud features in ground vehicles, H. R. S. And it will represent an important project within FAS, the Future Combat Aerial System H. So now turning to Slide The second example I wanted to give Market research companies now forecast an even faster adoption of lithium they assumed 2 years ago before the COVID-nineteen crisis.
They now expect that by 2025, H. E. SIM actually activated as the main subscription identification. This will generate H2 revenue streams for us. On top of the purchase of eSIMs by smartphone manufacturers, H.
We will receive fees from mobile operators for the remote management of network subscriptions. These subscription services, for which we are the global leader, HVAC, run on an attractive software and service business model. Altogether, the EC market represents for us €150,000,000 revenue opportunity by 2023 with a further doubling by 2025. Turning now to Slide 20. 3rd key priority, which extends beyond 2021, H.
R and D Investments. More than ever, H. E. Technology leadership remains our biggest driver of differentiation and hence pricing power. Over the coming years, while we will remain very selective, we intend to continue to increase R and D faster than sales.
On top of the focus areas, I've mentioned in the past cybersecurity, big data analytics, AI, IoT. We will step up our investments in new areas to ensure that we remain at the leading edge of Technology in our markets. I'm thinking of edge and far edge computing, for example, The application of quantum physics to sensors and communications or post quantum cryptography just to mention a few. Which brings me to our financial objective for 2021. And I'm now on slide 21.
As you understood, considering the strength of sales year to date, we have decided to upgrade our sales guidance. Based on the July 2021 scope and foreign exchange rates, we expect sales to amount to HHS. And together with Ascal, we are now pleased to take your questions.
Thank you. Ladies and gentlemen, we now begin the question and answer session. Thales H. A. And your first question comes from the line of George Zau from Bernstein.
Please go ahead. Your line now is open.
Hi. Good morning, everyone. Your guide implies about 9 point $3,000,000,000 of sales in H2 at the midpoint. That would be down almost 9% versus 2019 And that compares to Q2 essentially flat 2 years ago. So I guess could you talk about what's driving that given your more positive commentary regarding H.
E. Growth rebound. And my second question is more on the long term. On DIS, Clearly, the environment now is very different from back when you provided the 4% to 6% revenue growth guide. So what will it take To get back to that growth trajectory, if travel takes longer to recover, what will this segment be like?
King. When can we expect to see the growth acceleration for the segment as a whole? Thanks.
Yes. Good morning, George. So on your first question about, I mean, H2, I mean, first, I guess it's important to recall everybody that even though today we have, of course, a better view on the full year 2021. As compared to our initial view beginning of March, when we set our initial target of sales, You are seeing probably that we have reduced the range of our guidance with regard to our level of revenue for 2021. Initially, we provided you with 17.1% to 17.9%.
We decided to have a much H. R. E. Launch, €17,500,000,000 to €18,000,000,000 H. Reflecting, of course, a better view, but still recognizing that there's still a number of uncertainties ahead of us.
So I mean the final reason behind that is our Aerospace business and in particular, of course, Of course, I mean, driven by, I mean, what we keep hearing and in particular about traveler restrictions. So at this point, We are a bit cautious on how we could see our H2 level of revenue for this H. So this is the first point. The second point is also I mean to consider that With regard of the IS business, H2 was also a pretty solid base. You probably have in mind that in H2 2019, but also in H1 2020, we took advantage of this Renewal of payment terms in the U.
S. And hence the fact that in H1 2021, where we brought a negative growth on this business. And we believe that H2 for VRS could be probably slightly negative or 10 on H2. And here again, I mean, travel restrictions, H. It's clear, I mean, a point of concern for us, in particular, in our secured documents business line, but also our biometric H2 Business line.
3rd item is defense and security. You probably have in mind that H2 last year was especially strong in terms of top line as compared to, of course, I mean, to H1 2020, but also Question against HP 2019. So overall, given though, I mean, the dynamics is there on our Defense and Security Business. I mean today after quite a strong growth in H1, but once again Against quite a modest comparison base, today in H2, of course, we will need Thales, H. A.
Last one is transport, where as we all know, I think that's been a bit yes,
Sorry, we have a little problem with the phone connection, but I will monitor it.
Okay. So last point was on transport, Well, I mean, we believe that H2 in terms of top line growth will be positive against H2 of 2020, but also recognizing that here again, we take advantage of a strong momentum at mainline, But also the fact that we also are in more threatening their own situations and some large size Urban project in our transport business. So this is, I mean, George, What is behind this guidance for H2? Once again, probably The most important point to have in mind is the level of uncertainties relating to I mean, the impact of the semiconductor coin. 2nd point on the IS, Patrick.
I can start and
I will let Pascal completely fund with our points to be added. Yes. We gave, I would say, a mid term growth perspective when we discussed the IAS a while ago. It was
in 2018. Yes, it was in 2018.
Well, in fact, it's a mix of different business segments, as you know. Clearly, it's composed of fast growing markets or 13 segments like cyber. Cyber, it's data protection, data management and all the recent, I would say, scandals show and illustrate how I would say strong is the need for more and more data protection in our digital world. It's also the case for what we HQ, Identity and Access Management, which is a very important segment and which drive which will drive growth for the HCPL business line and the cybersecurity business line of DIS. And I could also add the EC motivation or subscription I've just talked about.
Last but not least, the need the growing need for digital identity, I don't know if you have noticed that the EU has The commission, sorry, has proposed to modify EU directive to H. E. Enable what they call EU digital wallets across all European countries. And clearly, this will drive this will boost H. O.
B. I. D. Across Europe, across EU. On the other hand, we have a market that will be flattish like probably a smart card for banking sectors and Our theme will be even decreasing, of course.
So this mix led us to foresee this range that you have Recall 4% to 6% in average. Clearly, I see no change or no, I would say, No facts that would make us change our mind in terms of growth H2. Rate for DIS in the years to come. So clearly, it confirms, in fact, what we said a while ago now.
H. Okay. Thank you.
Thank you. And your next question comes from the line of Celine Fornaro from UBS. Please ask your
H2. My first one would be if you could give us a little bit more color on the performance within the Aerospace division. So a very strong uptake or recovery in the space business and how sustainable disease. I mean, we know space is always very cyclical. So if you could just give us a little bit of HQ over the next 6 to 12 months on this top line and EBIT performance there and also the recovery on the civilian Avionics, IFE and Connectivity businesses in terms of maybe comparing to 2019 levels Of sales, but also on the profitability and how you see the recovery path there.
And then my second question would be on the point that you raised, Patrice, regarding R and D, which should grow above the sales level and some The areas that you mentioned, if you could maybe help us a little bit to understand what is already core and strong in Thales and where you could actually gain by going and acquiring this externally as maybe you have done with some of your
Okay. Good morning, Celine. Maybe I will start maybe with The first two questions and leave the floor to Patrick for the third one. So Aerospace, I mean, first, I mean, I guess it was quite obvious from our presentation that We're taking advantage of quite a strong momentum in our Space business. You probably have in mind, it was already the H2 2020.
We made it clear that we were extremely happy to win a number of projects on the observations, explorations, navigation activity. And I mean, an additional example that we commented A few weeks ago and on this call is in 2020, 2021 is the fact that we managed to book This huge Galimao project in total €750,000,000 This coming on top of what was also a good last year, both on the Observation business with I mean, its famous Copernicus program and also various exploration mission. And by the way, we announced a few days ago, I mean, a new success In terms of exploration missions with Talison Space, H. R. J.
D. With Leonardo being on the development of the ISS project. This comes on top of a clear Strong momentum on the more commercial telco business. In particular, we see today a number of projects emerging with regards constellations. Now I mean, as we all know, constellations are pretty large, and in some cases, will be jumbo projects.
And of course, none excuse me, not all of those projects will go through. But Just to recall you that we have been selected by Telesat a few months ago and this is A clear jumbo opportunity with potential $3,000,000,000 H. I. E. C.
At this point as you know I mean Telesas keep working and putting together its overall financing, And we are making progress on this point. It's also true that in addition to this large size project, Yes, additional other ongoing projects. So clearly, I mean, all of that resulting in a number HQ of Opportunities. And it's also true that we're seeing in 2021 Quite a strong increase in our space business as compared to H1 2020, Which has been, as we all know, also affected by production disruptions because of the health crisis. If we take, I mean, the H1 and comparing on one side our Agilent business and on the other side and A.
Our Space business in H1 2021 is up something like almost 40% in terms of level of revenue As compared to H1 2020, on the other side, our hygienic business is still down In between mid single and more of a high single digit drop against H1 2020. But of course, with the profile, which is quite different between Q1 and Q2. Q1 2020 was not almost not affected by the crisis. So it's true that Q1 2021 for our agenomics business was significantly down. And Q2 H.
I. E. A. Business. If I take one figure, assuming that A pre COVID level of activity for our Ag Unit business would be 100.
We are still In the bottom of the crisis, a drop in this business between 4045 persons. So moving from 100 to something between 55 and 60. And then from that, it's true that on Q2, We have seen a recovery, I'd say, between 15% 20%, but of course, on the basis H. I. R.
E. So overall, Q2 2021 in rough figures It's probably down between 30% 35% against what it was in 2019 H. Before the call, so a recovery in Q2, but a recovery which is still, I would say, it's quite modest, H. But showing a bit of recovery, in particular, in the aftermarket. That was our H.
I have no specific comments on IFE connectivity, but As I mentioned, it's more aftermarket. So IFE is also in Q2, I mean, helped in terms of level of business by this aftermarket slight recovery. Having said that, it's probably more in the cockpit agenics than in IFE that we have seen in Q2, most of the recoveries that I've just mentioned.
So, Joseline, on the R and D side, yes, plus H. A few things for you to say. Why? We do think it is so important for us to continue to Sustain a high level of R and D and to reach this type of percentage when we say between 6 H. In fact, we do already do a lot of R and D at Thales, of course.
But we see additional growth HQ. Quantum clearly is the next revolution in the domain of sensors or communication, H. Some thoughts that will, I would say, embed quantum characteristics. We'll see H. Their performance being multiplied by a factor of 100 of 1000, which is a revolution, Quantum communication and what is called QKD, so quantum key distribution, will make communication, H.
I would say impossible to be intercepted, to be breached. So this will be a clear evolution H. For everybody, by the way, and mastering this technology will allow Thales to be in a leading position in this domain. I've also mentioned the Far Edge
and Edge Computing
because One key question of PBT, a different forces is how can we leverage the power of the HQ. When we are far from the cloud, you take a comment post. The comment post, there is a connection to, I would say, back office for headquarter, but it's H. In an even more demanding, I would say, environment like a platform, like a tank, like a vehicle, like H. 5 gs is another area where we see a lot of opportunities for FELENCE.
What we do in 5 gs, we provide brand new services, again, to highly demanding customers. One of the revolution of 5 gs is the ability to slice the network to create virtual network H. Within the physical network and typically there are already, I would say, large tenders In some European countries, from PDP, police forces or security forces, they need HQ to have their own virtual network with a high quality of service. And for that, 5 gs is a big solution. It's impossible to do so With 4 gs or 3 gs standards.
And the last example H. To show that we need to expand our R and D exposure in post quantum cryptology, so this is Nothing to do with Quantum Physics. This is how do we design new crypto algorithm. So this is math and computer science. I'm not so fond of.
How do we design new crypto algorithm To, I would say, resist against the future arrival of quantum computing. And we are one of the 2, I would say, consortium that H. E. A. P.
E. Is competing at the Mist, so this is an international body that will certify this algorithm against H. I. D. M.
So showing that Thales is, again, a leader in this domain. And once it will be, I would say, standardized, We will be able to inject this new crypto algorithm in, for instance, our HSN, hardware security module, HQ. In our chips for banking cards, for example, that will, I would say, offer a level of security in terms of crypto, Thales, H. I. C.
So I take these different examples to show why we need to increase our R and D H. By mastering these technologies. Now we do need probably to activate The 2 levers. 1 is organic. So we need to develop competencies, hire new talents in these domains.
H. Mastering Quantum Physics is not an easy task, and so we need to increase our own internal resources. And of course, We are open to activate M and A levers, so to buy small companies, medium companies, almost, I would say, large, in fact, To complement what we do on an internal, I would say, standpoint. So I hope it gives colors to
Thank you. And your next question comes from the line of Tristan Sanson from Exane BNP Paribas. Please ask a question.
Yes. Good morning, everyone. It's Tristan here. Thanks H. H.
I have a few quick questions of clarification, if I may. The first will probably be for Pascal. Just To get a clearer view on the trajectory for full year free cash flow this year, to be sure I really understand your message. So, so far, you had a guidance which was for about €1,000,000,000 that's €1,000,000,000 of free cash flow for 2021. You say that you're going to get a cutoff effect or headwind from normalization of the effects that would be H.
Maybe €150,000,000 better than initially expected. There's a comment also on the non cash tax One off that you're going to have on net income, but I'm not sure exactly how we should impact it. So If I understand correctly, Foot Point awarded €1,150,000,000 €1,200,000,000 of underlying free cash flow and A. Plus, the benefit of down payments from extra export contracts. So if we take the Rafale orders already announced, Including Egypt, even though this has not been formalized.
What I understand is that you should get towards something like EUR 1,300,000,000. Is that the right way to see it just according to your official message? That's the first question. The second one is on H. O.
Cost Management. Well, we have complex movements in the cost base year on year because we have Inefficiencies that disappear, we have temporary savings that are disappearing as well. We have some restructuring benefits. And all in all, we have If I look at the sum of R and D, G and A and marketing expenses, we have a cost base that is fairly flat year on year. Can you give a bit more granularity on How these elements are offsetting each other?
Do we really have significant restructuring benefits already or the year to come? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] And if we look at inefficiency disappearing, is it a material number to get a better feel? And maybe the third question is on The aerospace momentum to follow-up on the previous one. So since the beginning of
the year, you had
a number of positive developments. We talked about the strong book to bill in the country and strong order intake in space. We had the positive momentum for H. Rafael, on the military part. We have the uptick in A320 production rate, which is an important program for your Avionics OE business.
And you mentioned Good aftermarket momentum. What does it mean for the first year that the trajectory of the Aerospace division over the next We have talked about space, but our aerospace overhaul is becoming like a mid- to high single digit or high- to high single digit gross business. That would be an helpful view. Thanks.
Okay. So a number of questions
H. So first,
H. Your analysis is almost right, But with a slight caveat. I mean, the first point is, I mean, we can really guide you on, I mean, elements that in which we are almost certain to get. And it's true that You mentioned waffle orders. On waffle orders, there are waffle orders that we have already booked And which are because of that in terms of down payments already taken into account H.
R. E. Q and A. And our future waffle orders, which at this point are not booked I'm in top of the calendar, Egypt, which are not part of our guidance with regard 2021.
[SPEAKER CARLOS
GOMES DA SILVA:] So which means that as opposed to what you mentioned Tristan, I mean the positive down payments H. Coming from Greece is the fact in our guidance. So now in terms of guidance, Overall, I mean, the math that you mentioned are pretty much a wise. I mean, initially, I mean, At the end of 2021, we guided you to a 95% A pre one off conversions ratio. And we said that We would face something around €200,000,000 headwind coming from the reversal of down payments.
And with all of that, Probably a level of free cash that the market considered in around €1,000,000,000 or slightly below €1,000,000,000 From that, what do we say? We say first that, I mean, net this €200,000,000 H. So overall, I mean €150,000,000 of additional free cash in terms of guidance for the full year 2021. H. On top of that, it's also true that we mentioned a one off non cash item on our net adjusted income, Which is those €40,000,000 one off non cash tax item.
And despite I mean, this is a noncash item, which normally drives a reduction of our convergence ratio. What I keep telling you is that this 95% will still apply to our guidance for 2021. So it's 95% on the basis of a higher level of net income Because of this one off non cash item and also a much more reduced And of course, as I mentioned, this guidance doesn't take into account additional potential large size export contract that we could book in H2. And of course, we all think about Wafaa in Egypt. 2nd point about A simple way, I mean, to look at our, I mean, cost HRO.
Management is really an interesting how we see our gross margin H1 Moving from H1 2020 to H1 2021 and also considering our level of Indirect costs, which are below the gross margin. So first, I mean, the good thing is that, I guess that you have seen this quite significant progress of gross margin from 23.8% H1 2020 to 26.3 percent in H1 2021. And this also, I mean reflecting both, I mean, a more normalized level of productions. But of course, also, I mean the first impact for global adaptations plan and in particular in our space, in particular in our H. In organic business.
So overall, I guess that you have understood that overall, we managed to cut our headcount base On top of that, of course, I mean, we keep working on all our competitiveness program H. That we have already commented in the past. And lastly, on more indirect costs, I guess it's quite obvious from our PMM that we are quite cautious in terms of managing our sales, marketing and G and A expenses. You have seen that overall despite this almost 10% organic growth on our revenue, Overall, I mean, if I add up marketing, sales and G and A, I mean, we have slightly less expenses H1. As compared to H1 2020, where we have decided to grow a bit is more handy And this will continue in the next semesters.
So this is what I can tell you in H. In terms of overall aerospace trajectory H. In the next year. So I mean basically, I mean what We share with you today is consistent with our previous messages, which is that on space, this business, HQ, which in 2020 dropped below the €1,900,000,000 mark should be around €2,500,000,000 in 2024. This level of revenues Do not take into account the potential impact for Telesat project.
So you see here, I mean quite a strong growth. Now on the Agenemix business at this point, I'm sorry for that, H. It's a bit too early. I mean, we did welcome, I guess, like everybody, the Airbus announcements H. With overall getting back to this pre COVID level of production output as soon as 2023 And then in 2024, 2025, with production output, which would be significantly above pre COVID level, which is quite a good news.
Now, of course, I mean, as everybody else, I mean, we'll look very carefully at how the recovery, I mean, the normalization of the situations With regard, our travel materialized and from that, I mean, of course, We will come back to pre COVID, I mean, based on this overall evolution to the situations in terms of struggle.
Thank you, Pascal. It's a really helpful quarter.
Thank you. And your next question comes from the line of Christophe Menard from Deutsche Bank. Please ask your question.
Yes. Good morning, everyone. I have three questions on my side. The first one was on the order intake guidance, which you left book to bill above 1. My question is considering the better sales, should we the nominal number of orders considering the very strong performance in Q in H1.
Are you looking at higher orders than you were initially looking at the start of the year? I mean, still book to bill above 1, but is that above 1 higher than what you initially thought? The second is on the M and A priorities and the H and D. What you mentioned earlier, I mean, we're seeing a number of transactions in defense at the moment and the latest H. I wanted to understand the priorities on your side.
Is it more bolt on on your side or would you be considering mix of large acquisition and bolt ons or it's really about HQ. Acquiring technologies that is the top priority if you do M and A, of course. And the last one is on the free cash flow performance in H1, which was, I mean, in my knowledge, one of the best performance you've ever done or at least in the last in several years. How reputable is it? How I understand there are prepayments, but is it the new norm?
Do we have a more balanced H1, H2 to come or is it something exceptional?
Good morning, Christophe, and thank you for your questions. H. I will take the first and the last one and Patrice will take the second one. I mean, order intake, I guess that from our tone, I mean, we are quite positive in terms of commercial It's more positive than it was a few months ago when we released our 2021 guidance. And it's true that, I mean, H1 gives us strong confidence to achieve this book to bill over 1.
At this point, I mean, we don't want to be more specific, but it's true that both What we managed to book in H1 and also our view in terms of potential additional order intake in H2
Christophe, bonjour. On the M and A side, what we intend to do and You will not be surprised, of course, to look to continue to look at bolt on acquisition as we did in the past, Mainly to complement our technical portfolio and to accelerate what I call our ambition and strategy in terms of Growth and Competitiveness Technologies are there to serve growth and competitiveness. Now it's true that we do not exclude to look to larger ones. I think so. I have nothing specific in mind.
So don't go any, I would say, quick conclusion on this point. But clearly, this is a H. We do not exclude at all because we generate good level of cash flow because we have Practically, we do the net debt position of the group in the past years and so on and so forth. By the way, as usual, If we do so, we will always keep very, I would say, strong financial discipline. Our look for a target for which the volume will be, I would say, at least to our mind, not the right one.
H.
That's right, by the way, on the latest transactions you
may have in mind, you have not seen Thales. Clearly, our approval of the venue was Clearly, not the one that has been acquired by some competitors.
H. Okay. Christophe, on free cash, on your last questions, Thank you for your questions. It also gives me the opportunity to come back on, I mean, the drivers H1, very strong level of performance, but also coming back on your question about a more balanced cash flow Between H1 and H2. So first, I mean, coming back on the key drivers, the R and D level of percent, which is Barry Stone, I mean, for H1 at Thales.
In the past, I remember 1 year, I guess it was 3 or 4 years ago where we had a positive insurance free cash, but it's something which is quite unusual at Aleph and it's true that we see our working capital Going up quite substantially in H1 and then dropping in Michelin. This is the overall usual pattern at Thales. Now coming back on our H1 performance, there are various components behind that. First is We have a very solid level of order intake. And of course, I mean, we mentioned a record level of order intake, which means that Some of those order intake also came in with down payments, with significant down payments.
This is H. Great, Quentin. 2nd component is really, I mean, the impact of our cash optimization program. You probably remember that back in October 2019 at Capital Market Day, I mentioned our desire, our willingness to put in place H. A strong, I mean, cash optimization program.
I mean, at that time, a bit of skepticism from some Analyst on this cash program. But when I look back at what we have done, I'm quite proud on what we have done. And it's true that H1, I mean, running full speed on this matter H. In terms of chasing overdues, in terms of, I mean, putting a bit more pressure on supply chain and negotiating payment terms H. Based at customers, but also on some suppliers.
So right now, I mean What we also need to have in mind is that once you have put in place those drivers and you get the benefit, now it's From a cash flow perspective, it's from this new base is to keep at this level that will not generate additional cash But maintaining the level of programs that we managed to get. And 3rd point that we also need to have in mind in H1 is So more of the specific items. I mentioned in particular and in this tax situation where I will give you a very simple example. In Netron 2020, We pay our interim tax contribution on the basis of the 2019 H2 Fiscal and an exercise. In 2021, we paid I mean this interim tax contributions on the basis for 2020 level of OIBDA, which was of course Much lower than a year ago.
Also in this matter, we took advantage of what we call I mean 2 up Being, I mean, the fact that we get reimbursed of a bit of excess of tax cash contributions H2 2020. I mentioned about also, I mean, this positive H. I got between DNA and CapEx that will progress in neuro in the next semesters. And last item that also we'd like to comment is that in Estrone, in total in June, We also took advantage of advanced payments from some customers, which is more of a H1 versus H2 kind of cutoff. We decided to pay us in advance, which is also quite positive.
So you see a number of drivers behind that. Some of them driven by 3 d, I mean, the action plan that you have put in place, some of them more linked Now having all of that in mind, it's true that we wish to have a more balance of cash flow between H1 and H2. Now it also comes to, I mean, our order intake pattern and our ability to convince some of our customers, I mean to grant awards and or to award contracts, not at the very end of the year, H. But more on a regular basis throughout the years. Now it is our wish.
It is our wishes. We also need to convince our customers. And I guess that it will allow us to have this more balanced view from a cash flow standpoint between H1 and H2. But you understand from my comments that, of course, we are not the only one to decide when we discuss about
And your next question comes from the line of Andrew Humphrey from Morgan Stanley.
Hi. Thank you very much. I've got a couple about DIS, Gemalto, if I may. One is on the banking wins that you highlighted, 4 out Is that happening in the old SafeNet business? And I guess in that I think that was a business that had been maybe slightly neglected.
Are you finding it easier to, I guess, Explore new opportunities there with potential customers. And secondly, the eSIM revenue opportunity you put up, I think €150,000,000
in a
couple of years' time and then doubling beyond that. Is that incremental? And how should we view that in the context H.
Okay. I shall start on this one.
So yes, I've mentioned that 4 out of the 3rd bank in U. S. Banks have adopted our new H. Platform to, I would say, manage their data and creep and decrypt their data and so on and so forth. It is it's a clear synergy coming from the acquisition of Genato by Teles.
It's what I called, and if
you remember, I used this expression, the merger within the merger. It's clearly coming from The merger between Vometrix, which was Thales Asset. We acquired H. Before the Christian Bernardo, which was Thales Asset and the merger with SafeNet, that was the Gemalto asset. So This merger within the merger between Vormetric and Cessnet led to a very, I would say, important rationalization
in terms
of product policy, R and D, go to market, Leading to a brand new successor as the one I've mentioned. And this is, I would say, very H. Positive looking ahead. On the second part of your question, When I presented the transition between RCIM to eSIM, and it's not only the eSIM, it's also the fact that H. We are in the business of activation of this.
So when you subscribe or when you get a subscription, in fact, There is a slight however with the fact that partially, it will cannibalize the ARS business, of course, partially. So all in all, you should, I would say, combine the positive effects that The AirStream business is an enormous, not a group, it's not a surprise, is a declining event. But it's a very smart way, I would say, to compensate The decline by being, I would say, also a player in the eSIM and not only in the eSIM, but as well as in the, what I call, the subscription business. And by the way, Thales is in a leading position compared to our competitors on this particular part
of the business.
And your next question and comes from the line of Harry Breach from Stifel. Please ask your question.
Yes. Good morning, Patrice, H. Pascal Bertrand, thank you for taking my question. Guys, just 3 hopefully very quick ones, All quite different. Space, clearly, the selection by Telesat was H.
A major event. But I wonder if you can help us to think about the level of bid and proposal activity H. That Thales Alenia has underway for its more traditional telecom satellite. So I'm thinking about more the fixed satellite services, satellites that were previously the larger part Telecom satellite business rather than Constellation. Secondly, a completely different area, Just looking over at the Middle East, I think in the slide presentation in the appendix, you mentioned that Orders from the Middle East in the first half, I think, were down 40% organically H.
Against the First Half of twenty twenty. Is there any particular elements going on there? I know in the past, Patrice, you said that Big customers there are still keen, still motivated to buy products. Is there any sort of hesitation, any drivers you Can help us to understand and whether you see that perhaps rebounding later this year or next? And then maybe just finally guys, if I can, Naval Group seems to have made a good rebound, strong rebound in its first half of twenty twenty one.
Can you give us some sort of feeling about where Naval Group margins or EBIT might get to for the full year? Should we take the first half H. Results for Naval Group, that's EUR 34,000,000 I think and double it or could it be better? Thank you.
Okay. Thank you. Good morning, Harry. So I will answer your
first question and I'll pass it back to Karl, The 2 remaining ones. So space, it's important to really to understand or to keep in mind that We need to stay on 2 legs on both legs, geostationary satellites and Constellations. We are very happy to having been selected by Telesat for this mega constellation. At the same time, we cannot, I would say, that all our future on constellations, we need to stay A leading player, by the way, in geostationary telecommunication satellite. HR.
And hence the need for investment in our brand new software design satellite H&A and Space Inspire. The main difference between the 2, of course, is the size of the opportunities. When we bid for a consideration, it, I would say, draws or consumes, I would say, HMO. More, I would say, bit the resource then for a geostationary satellite, but the reward is higher, Of course, as well. Looking at the magnitude of EBITDA of TeleSat, I would say, future order intake compared to H.
Yes. Good morning, Harry. On the Middle East, and you mentioned that you're absolutely 40% drop in order intake in H1 'twenty one versus H1 in 2020. But I mean, we need to really I mean to bear in mind that, of course, I mean, order intake H. I mean volatility.
And it's true that in Q1 2020, you probably have in mind that we book H1. Large size next much above €100,000,000 large size contract in Iraq, Which was not the case in H1 2021. Now I mean to take a bit of Thales' HQ. High level of perspective. I mean, we keep In the Middle East, I mean, a number of opportunities.
We're going to have to Fine. I mean, a very large size project in Q4 2020 in one key country in the Middle East. We keep working on various opportunities This is Gerard Phillips. Now, having said that, I mean, what would happen in Q3, what should happen in Q4, H. I mean, it can be volatile, but please do consider that, I mean, the level of activity from a commercial standpoint H.
And starting with, of course, defense and security. 3rd question about nethergroup. I mean, yes, I mentioned that H1-twenty twenty one came back to a normative level of profitability, Which is more in the 7% plus EBIT margin overall and which results in the level of contributions from a net income perspective that you have seen in our contributions From Jolis. And I can say that Nevan Group is active on Neville Group has been affected by the pandemic, in particular in Q2, with, I mean, some quite significant production disruptions In Q2 last year, this is over and they came back to a normalized level of production.
Patrice, sorry, I think you cut out for a little moment earlier on. H. Just on the geostationary satellite side, do you see is there a good level of bid and proposal activity HQ. On that front? Or does it remain still quite slow?
Okay. So sorry if I've been cut. Sorry for that. No, definitely, the level of activity is strong in terms of geostationary satellites. So we are currently bidding on a number of prospects or RFPs across the H.
Small world of satellite operators. So definitely, this is an active market. Currently now we need to win, of course, with the competition. But this is clearly an active one at the moment.
That's clear. Thank you very much all. Thank you.
Thank you. And your next question comes from the line of Sean Steuart from JPMorgan. Please ask your question.
Hi, good morning, everyone. Thanks for taking my question. I have two questions actually on the DIS business. In 2019, when you first consolidated DIS, you flagged to us that H1 is usually A week for that business. However, in H1 this year, the margin was very strong.
So I just wondered if there were any one offs there in H1. Or do you think that the DIS business can do a sort of double digit margin in H1 going forward? And then the second question, you've spoken a lot About the cyber business in your presentation today, would you say the strategy going forward is, are you looking to do
H. So good morning, David. First, I mean, DIS, First, I mean, we think that we can really operate this business With a more balanced level of profitability between H1 and H2 that this business has done in In the past, first point, I'm not telling you that the level of margin that was reported in H1, which is Above our expectations, ahead of our plan. But I do think That overall and this large disconnect that you have mentioned as we H1 Consolidated business for the first time. We think we can probably have a more balanced level of profitability between H1 and H2 going forward.
Now there might be, of course, a bit of gap, but not in the magnitude that we have seen H1 2019, where at that time the level of profitability was below 5%. Now overall also, which is probably the most important part of the answer, is when you compare, I mean, our 2019 level of profitability for the full year. Then 2020, Then our guidance for 2021. It's a gradual but quite significant improvement in terms of level of margin.
Cyber, sorry, Cyber, why not? H. It's clearly a Corvid and Portales doing very well. So if we can reinforce this cyber activity HQ. We'll look at them.
Very simple. So we need to stop, sorry, All your questions this morning, which showed the interest you pay in Thales. So just a few words in terms of conclusion. As you understood, we are ahead of plan on the 1st 6 HQ, leading us to upgrade our guidance on sales. We continue to execute on our strategy, especially around digital technology that underlined during the question.
H. So together with Pascal, I look forward to seeing you at the upcoming road shows and conferences. And finally, as noted on Slide 22, filings. Please mark your calendars for the 5th October for our ESG Investor Day. Have a good day.
Thank you all and bye bye.
Bye bye, everyone.
Thank you. Bye bye, all.
H. Thank you. Ladies and gentlemen, if you didn't have a chance to ask a question on today's call, please do not hesitate to send your question to Thales Group Investor Relations at irstalis.com, and we'll get back to you as soon as possible. Thank you for all participation. You may now disconnect.