Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q3 2022 results conference call. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.
Yes, hello. Good morning. Welcome and thank you for joining us for the presentation of Thales' nine months 2022 order intake and sales. I am Bertrand Delcaire, the Head of Investor Relations at Thales. With me today, Pascal Bouchiat, our CFO. The presentation is audio webcast live on our website at thalesgroup.com, where the slides and press release 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 Pascal Bouchiat.
Thank you, Bertrand, and good morning, everyone. As usual, to start these presentations, I wanted to highlight a few key messages. I'm now on slide two. First, over the past three months, most European countries have disclosed their 2023 budgets. Several countries, such as Germany, the Netherlands or Norway, are planning significant growth for their defense budgets in 2023 and beyond. Looking at our largest market, France, the defense budget is confirmed at EUR 44 billion, in line with the military programming law and the equipment budget, as you see on the chart, is planning up 8%. These announcements are fully in line with the analysis we have previously shared with you. The new geopolitical context will drive steady multi-year defense investments in Europe, making of the region one of the faster-growing over the coming decade.
Second, we have been quite active over the summer in terms of portfolio management. At the end of July, we announced our intentions to combine our IoT connectivity business together with Telit. This transaction would create the Western leader in cellular IoT solutions, in which we would retain a 25% stake. We expect these operations to close before the end of Q4, and it will drive the de-consolidations of a little more than EUR 300 million of sales. In September, we entered into negotiations to sell our aeronautical electrical system business to Safran, which generated revenues a bit above EUR 100 million in 2021. Turning now to acquisitions. In early October, we closed on the two Cybersecurity acquisitions we announced over H1.
On the one hand, S21sec and Excellium in managed security services, and OneWelcome in customer identity and access management. They come on top of the simulation and training business of RUAG and also AAC, the joint venture we had with Leonardo DRS, and that we are taking full control of. Finally, let me stress that we now expect the disposal of the transport business to close early in 2023 once we'll have secured all the regulatory authorizations and completed the carve-outs. Third, we continue to leverage the sustainability impact of our portfolio, working to make the world safer, greener and more inclusive. Let me mention three examples in Q3. First, on the greener side, Thales Alenia Space reached important milestones on several environmental observations projects. Two satellites were finalized and are scheduled for launch by the end of the year.
SWOT, which will revolutionize the field of oceanography, and MTG, the first of the new generations of European weather forecasting satellites. Second example on the inclusion side. We launched the biggest satellites we ever built, KONNECT VHTS . It will help bridge the digital divide by providing very high-speed internet access across Europe, especially in isolated regions with poor coverage. Finally, looking at biometrics. We joined major development agencies and governmental organizations to show our support for the International Identity Day initiative. Whose aim is to increase awareness about the importance of SDG 16.9, the need to provide a legal identity for all citizens, not just as a legal right, but also as a practical necessity to enable access to public services.
Talking about ESG, let me finish by stressing that our exit from white phosphorus, effective since end of June, has already driven incremental interest from investors who had previously put us on their exclusion list because of our involvement in this product. Now, turning to slide three, which summarizes our key figures for the third quarter and the first nine months of the year. As you can see on the slide, the commercial dynamics remain strong during Q3, with order intake at +36% organically, taking us to a solid 41% over nine months. Sales over nine months were up by 6.4% organically, supported by a strong organic growth of 8.5% in Q3 that I will comment in a minute. I'm now on slide four, looking to details at our order intake.
As I mentioned, Q3 was again a strong quarter for us in terms of commercial activity with an organic growth at +36%. After an already dynamic H1, taking us to a very strong EUR 15.4 billion over nine months, up 41% organically against the first nine months of 2021. Looking at the chart by unit value, it's worth noting that all categories, small, medium, and large orders, clearly progressed over the period. The strong growth was driven by both large orders above 100 million EUR and also small-sized orders below 10 million EUR, which increased by 14% during the period. The number of large orders increased from nine signed orderslast year to 16 orders this year. Of course, this number includes the jumbo UAE Rafale order signed in Q2.
As usual, you can find the list of large orders in the press release. They were spread across all geographies in Defense & Security, in space, and also one in aeronautics. Turning now to slide five, looking at sales growth. First, a word on the currency impact. As you can see that the Q3 impact was again largely positive at EUR 126 million, reaching a total of EUR 282 million over nine months. We expect this trend to continue the directions over Q4. Clearly, we'll boost in terms of sales this year coming from the currency impact. On the other hand, the scope impact remain pretty small, EUR 57 million. It basically refers to the consolidation of RUAG Simulation & Training , and also of AAC.
Over nine months, organic sales growth stands at 6.4%, mostly driven by the ongoing strong sales momentum in DIS and also a continuous robustness in Defense & Security, with high single digits organic growth in Q3 versus the same period of last year. Turning to the geographical perspective, let me point out that growth was particularly strong in mature markets and especially in France, U.K., and also North America. Now looking briefly at each segment one by one. I'm now on slide 6 for aerospace. Orders were slightly down, as you can see, by 3% organically, but mostly due to the impact of the jumbo contract related to Galileo last year. The commercial activity remained strong in Q3, which included three large orders over EUR 100 million.
In space, one for the next tranche of SICRAL 3, the Italian military satellite program, and one for commercial satellite with the Korean operators, KT SAT. In Avionics, also one in IFE for the A350 contract with Emirates. Sales were organically up by 2.1% over nine months, and as mentioned at H1, several factors continue to explain this slow growth. First, the loss of sales to Russia is mostly recorded in this segment. Second, both space and microwave tubes were still facing high costs. Let's keep in mind that space recovered strongly last year. It was organically up by 27% over nine months.
Third, while civil Avionics and Space markets continue to recover quite strongly, the global wide-body OEM markets remain very weak, around 60% lower than in 2019. Let's also keep in mind that both Avionics and Space continue to face ramp-up challenges in regard to supply chain delays as well as recruitment challenges. Now turning to slide seven, looking at the Defense & Security segments. Order intake remains strong, up organically 86% over nine months. Of course, thanks to the support of the jumbo Rafale UAE order signed during H1. However, Q3 remain also quite dynamic commercially, with one large contract over EUR 100 million signed for a Sea Fire radar to a non-European MOD, confirming the competitiveness of this new technology.
With a total of nine large orders above EUR 100 million since the beginning of the year, Defense & Security is further strengthening its future growth with a new record backlog of more than EUR 29 billion. Organic sales growth remained also solid at 5.2% over nine months, confirming its sustained mid-single digit trajectory. Among the many activities behind this growth, I can mention Rafale programs, radios and embedded and tactical communication systems, information command and intelligence systems, and integrated airspace protection system. And all of that despite Hawkei program fading down in Australia. Now, turning to slide eight, looking at our last segment, Digital Identity and Security. As mentioned previously, order intake at DIS is structurally aligned with sales for most businesses as they operate on short cycles. Hence, no need for me to comment.
At EUR 2.6 billion, sales were up at a strong 16%, organically. The H1 performance extending to Q3 in spite of ongoing supply chain challenges. Cybersecurity continued to deliver robust growth, double-digit organically over nine months, driven by our encryptions business, where Thales is a clear leader worldwide. Biometrics continued to recover also at double-digit organic growth, over nine months. Again, a reminder that the rebound in biometrics started during Q4 2021. Hence, organic growth is expected to slow down at the end of the year due to higher comps. Finally, the smart card businesses, both EMV and SIM, still performing strongly, mostly due to pricing effect, which of course, is a positive effect for Thales this year, but also a difficult parameter to forecast.
Hence, a bit of prudence when it comes to 2023 and the outlook of the smart card businesses. All of that bringing me to the final slide nine, with an update on our 2022 financial objectives. As you understood, Q3 order intake is in line with our expectations, and we have a solid pipeline of orders for Q4, which allows us to confirm our full-year order intake target, namely a book-to-bill ratio significantly above one. Our sales dynamics remained strong, even if they are differentiated across our three segments, as you saw in the previous slide. We are now expecting to be in the upper part of the 3.5%-5.5% guidance range.
You will notice that as we update the scope and foreign exchange rate, the sales guidance range mechanically increases by around EUR 100 million to EUR 17.2 billion-EUR 17.6 billion. This doesn't change our EBIT margin guidance. Many thanks again for your attentions, and I will now be pleased to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one one on your telephone and wait for your name to be announced. If you wish to cancel your request, please stand by. Once again, please press star one one to ask a question. Please stand by while we take our first question. The first question is from the line of Daniela Costa from Goldman Sachs. Please go ahead.
Hi, good morning. Can you hear me?
Yes.
Hi. Good morning, Pascal. This is Victor Allard from Goldman Sachs on behalf of Daniela Costa. Potentially, if I have three questions, the first one would be on transport. We have seen earlier this month news flow pointing to the potential risk around the deal going through with the CMA, you know, potentially considering whether the deal could harm competition. I was wondering if you could please provide us some color on the deal and the sort of confidence that you have on this going through. The second question would be on aerospace, and if you could please give us more color on the sort of challenges that you're facing in the division. You mentioned the impact of Russia and the slow recovery in wide body.
I was wondering if you could please perhaps, like, provide us more color as regards to the
Mm-hmm.
-other segments. The last question is on labor and wages. Probably framing my question in two parts. First would be on the labor front and how you're tracking in terms of your hiring so far this year versus your plan. Second part of the question would be on wages and as we approach the annual salary negotiation, was wondering if you could please provide some reference points for labor costs into next year. Thank you.
Good morning, Victor Allard. Thank you for your three questions. Starting with transport. I mean, the carve-out is progressing pretty well. Now from a regulatory standpoint, I mean, we are progressing. I mean, the file is today under review by the European Commission. No specific concern in our view. All of that, I mean, in line with closings that we expect in early 2023. My view of probably will it be end of Q1.
Yes, probably the most likely scenario today is in Q1, I mean, to complete this transaction, so no specific concerns on those two matters. Aerospace. Yes, I mean, I commented some drivers which constrain overall, I mean, our growth on this segment. Yes, I mean, in particular I mean Russia for this specific segment in terms of which is this space, represents EUR 70 million on an annual basis. And this, I mean, reflecting the fact that we cannot continue operating in this country, both from a space standpoint but also from Avionics standpoint.
This is the first point. Second point, it's also true that we are also in these segments also meeting, as by the way, in any other segments, some challenges in terms of supply chains. I mean, specifically on microchips. Last point is also, I mean, when you look at the overall level of top line growth on these sectors, you should also consider that specifically on space. I mean, 2021 is clearly quite a high comparison base. You probably remember that space recovered quite strongly in 2021. If I look at the first three quarters in 2021, overall the growth last year was around 27%.
Of course, I mean, this year is of course quite limited considering this quite high level of performance. Those are the elements. Maybe last point is about the fact that, yes, I mean, the wide body market is still quite sluggish. In particular is driving our IFE level of revenue, which is quite low. Which remains very low, as I mentioned. Today, I mean, this IFE business is around 60% below what it was in 2019. Now, on the positive side, because there are also quite positive sign, we keep seeing quite a strong level of recovery on both the OEM single aisle segment, but also the overall aftermarket.
Overall, I mean, aftermarket is doing quite well with overall a level of growth, which is above 20% by the end of September. You see quite a mix, a mixed situations. The good thing is that we keep seeing quite a strong recovery in the overall single-aisle segments, whether on OEM or on the aftermarket. On the other hand, it's true that the wide-body and in particular driving our IFE business, being still quite sluggish. Last question was about labor and wages.
First on in terms of recruitments, we're right in line with the overall, I mean, guidance that we provided to you with regard to number of recruitments that we'll achieve for the full year of 2022. We said that it would be around 11,000 new recruitments in 2022. Looking at the situation end of September. We recruited 8,700 new employees at Thales. Run rate, which is very much in line with the 11,000 recruitments that we need to complete for the full year 2022. Last point is about annual salary. Yes, I mean, we are expecting, I mean, annual salary negotiations to start probably mid-November.
Of course, at this point, it's probably, I mean, too early to mention any specific point on this matter. I think, however, keep in mind that looking at the overall, I mean, the overall salary level overall at Thales, which represent EUR 8 billion, half of that relates to our French footprints. It's also important to have in mind that today France is a country where we see the lowest level of inflation, the overall lowest level of CPI. Of course, I mean, annual salary negotiations will be quite an important topic, of course, with impact in 2023. That will be quite substantial.
However, I mean, relative to our peers, relative to our competitors, I don't see us, and in particular with this, I mean, French footprint that I just mentioned, overall, relative overall position, which in my view, remain pretty favorable.
Thank you very much. Very clear.
Thank you. We'll now take the next question. Please stand by. This is from the line of Benjamin Heelan from Bank of America. Please go ahead.
Yeah, morning. Thank you for the question. Two from me. Going back on those comments you just made, around supply chain, are things getting better in the supply chain, or do you think things are still tough, or are they getting worse? Could you just give us an update, are things getting better or not? Then second question on DIS, obviously it was very strong in Q3. How should we think about that trending into Q4 and into 2023? Is Q3 a pull forward? 'Cause it was, you know, it was over 20% growth. Should we be thinking teens growth into Q4 and into 2023?
Just interested, are there any one-offs in that number, or are those trends what we should be thinking about through the next 12 months? Thank you.
Yes. Good morning, Ben. I mean two important questions. Supply chain, I mean, do we see things improving or deteriorating? I tend to believe that it is stabilizing, but we still I mean some concern about what it means and the level of vigilance, the time we spent on this matter I mean in order to keep it under control, which is really the case. I'm quite convinced it will continue to be very much under control considering everything we do on this matter, which is essentially I mean anticipations.
It's true that we spend a lot of time tracking, I mean, any ability for us to make advanced supply whenever we think it makes sense. Also, it's quite important how to diversify our source of supplies, but also, I mean, and based on our in-house design capability, begin to replace, in some cases, whenever possible, one chip with another one that would be more easily accessible. Last point, which is quite also important, what we have done in the last 12 months is once we get the chips, how can we go quicker in terms of integrating those chips in our final products for us to deliver on time to our clients?
You see, I mean, a number of actions that we keep working on with also our view, it's how should we think about the medium-term future, not just in 2023, because we know in 2023, this issues will continue probably to be tight. Considering that, how should we protect over the medium term? Should you consider more, I mean, medium-term commitments vis-à-vis some specific suppliers? This is the type of questions that we're asking to ourselves. Making a long story short, quite in my view, stabilizations, but a permanent challenge and vigilance today at Thales. We think that this will continue throughout 2023.
DIS, quite a strong level of growth in Q2 in particular. We think that Q4 will be a more demanding comp base as in particular, I mean, IBS, excuse me, our biometrics secure documents business line really started to recover in Q4 last year. Basically, I mean Q4 on this specific business, of course, will be of course less impressive than what we have seen since the beginning of 2022. A point which is on which I mean it's at this point a bit difficult to have a clear view is the level of demand considering I mean the slight recession and in particular in the overall Telco business.
At this point, we have not seen any input from our clients suggesting a drop in the level of demands for the Telco business. By the way, pretty much the same on the banking account activities. However, it shows that it's a point of uncertainty, in particular relating to 2023. It's quite obvious that in case we see a downturn in level of demands, in particular on smartphones, it's likely that there will be probably, I mean, adverse side effects on the level of demands for SIM cards. A bit of vigilance on this matter.
Third point, which will be also quite important, but at this point, just, I mean, reflections, will we see the chip market starting to to ease a bit sometime in 2023? Will we see a drop in in prices on on chips? At this point, this is not what we have seen in particular on those chips that we supply at at at Thales. But here again, I mean, a point of of uncertainty. All of that meaning that Q4, we've got today quite a good level of visibility. We know that Q4 organic growth in the IS will be lower than what we have reported so far, in particular linked to the biometric comparison base.
Now, when it comes to 2023, and in particular as from Q2 2023, it's probably a bit too early now to guide you. I mean, that's something of course we'll be able to come back to you probably as we release our 2022 figures. Today, you know, I mean, this is a short cycle flow business. We know that, I mean, the level of demands, the overall pricing dynamics can change quite quickly. Now, once again, at this point, no data point suggesting, I mean, a drop in the level of demands or a pressure on selling prices.
Okay, great. A quick follow-up. You mentioned higher prices for DIS. Is it the whole portfolio that's benefiting from higher pricing or are there particular elements, biometrics, maybe Cyber, that are the real drivers of the price improvements that you've seen?
No, it's not specifically Cyber. It's across the board, maybe with the exceptions of the biometrics and secure documents, where we operate more on a long-term, I mean, a fixed price type of contract. The rest, whether it is EMV, Telco, Cyber, I mean, we have seen quite a strong pricing power. It's not limited to Cyber. It's really, I mean, most of our portfolio, including our banking and also our Telco businesses, which has done pretty well throughout 2022 in terms of price increases, I mean, to pass to our clients higher input costs.
Okay. Okay, great. Thanks, Pascal. Thank you.
Thank you. We'll now take our next question. Please stand by. This from the line of Aymeric Poulain from Kepler Cheuvreux. Please go ahead.
Good morning, and thanks for taking my question. The first question is on the book-to-bill and slight slowdown in Q3. Given the seasonality of your order intakes, what's your best guess, your guide for above 1.0x for book-to-bill? But you are at 1.2x or slightly above that for the year. Do you expect a slowdown given the comps of last year, or do you see continued momentum on the order side for the rest of the year? That's the first question. The second question is to come back on the pricing power and the difference between aerospace and digital with a significant contrast.
Could you and you maintained obviously your guidance for margin despite the stronger sales momentum. Could you elaborate on the impact of the fixed price contract on the inability to pass on inflation on the aerospace on the margin and of course on the digital? Should we assume a much higher margin as a result? And how sustainable this is for 2023?
Good morning, Aymeric. Starting with book-to-bill. I mean, first, I think it's very important we need to have in mind that order intake in a company like Thales is always a bit bumpy across quarters. In particular, when you book some large contracts can move from one quarter to the other one. Volatility, which is inherent to our business. Now, overall, I mean, the trends where 2022 has been quite positive. What was seen in 2022, maybe, as compared to what happened in the last few years, is probably more order intake until the end of September.
It shows that when you look at 2020, 2021, we have seen a very large portion of our order intake being booked in Q4. This year, it will be probably more linear or, I mean, a bit less twisty end or back-loaded as we have seen in the past, which is, in my view, pretty good. Overall, I mean, how will we end up?
I mean, when looking at the consensus today, I'm quite happy with the level of order intake, which is today in the consensus, and which is, in my view, a quite good illustration of what it means a book-to-bill, which will be significantly above one. Pricing power. Of course, I mean, you mentioned two businesses which are quite different, the IS and the aerospace. The IS, I mean, even though, I mean, there is no specific clauses in most of our contracts, I mean, to protect us in terms of being able to pass high input cost to our clients.
I mean, we have seen in 2022, I mean, this ability to exercise pricing powers in a market which has been quite disciplined, and in a market where, of course, I mean, the scarcity of chips also help in increasing prices. I mean, what will it mean in terms of margin for 2022 for the IS business? You probably have in mind that, in the roadshow, I was quite confident that as early as 2022, Thales, the IS, should be able to be in the range of level of EBIT margin that we announced back in 2019 for 2023. This range was 12.5%-13.5%.
My view is that we should be able to be in this level of range as early as 2022. A year ahead of our commitment. How sustainable is it for 2023? It's probably a bit too early at this point, but I'm quite confident 2023 to have our IBS business holding quite firm in terms of overall level of EBIT margin, and in particular in the range that I've just mentioned. Aerospace is a bit of a different story. As I explained many times, aerospace is more a world of fixed and firm prices.
Of course, I mean, the ability to pass to our clients increasing input costs is more difficult than in other businesses, and in particular, in our the IS or our Defense & Security businesses. Yes, I mean, there will be an impact in terms of EBIT margin in 2022, 2023, but all of that is, in my view, fully consistent with, I mean, the fact that we confirm the overall guidance in terms of EBIT margin, the 10.8%-11.1% for 2022. Now, of course, I mean, we keep working hard in our aerospace business.
First, I mean, to pass the increase in prices to our clients, and there are ongoing discussions, negotiations with various clients. Of course, I can't be more specific on this matter. Second point, which is also quite important, it's in particular in the world of space. In the past, the world of space was a world of fixed and firm prices. Almost all contracts are being based on fixed and firm prices. It's true that considering the level of inflation, all the bids that we submit today, I mean, takes into consideration this overall inflationary environment for us to be able to protect our mid-term margin on this specific space business.
Yes, thank you.
Thank you. We'll now take our next question. Please stand by. Next question is from the line of George Zhao from Bernstein. Please go ahead.
Hi, yes, good morning, everyone. Going back to your revised sales guide, does that assume any changes in currency or scope, or was that purely driven by the organic growth moving to the higher end of the guide you had before? Secondly, in the coming planning, I know a lot has been asked about pricing, within DIS, but within the price increases for smart cards, you know, are they leading to better profitability or are they fully passed through of the cost?
Mm-hmm
that have increased such that there's no or little profit benefit?
Good morning, George. I will start on your question about DIS and particularly on banking and smart cards. What we are seeking to do, at least is of course to compensate any higher input costs and to preserve our margin. I mean, we are also looking to do in some cases even better. Today, overall, my view is that when it comes to our EMV overall Telco business, we are doing a bit more than just preserving our level of margin. So this is basically what we're striving to do, and it works pretty well.
Once again, in a situation where the level of demand remains quite strong, but with also, as you have understood also, clearly a shortage in terms of supplies. Which also means that we ensure that we serve our best customers in the best way we can. This is also in such situations where our clients really perceive what it means to have a long-term, high quality relationship with a supplier like Thales. Because I can tell you that we see them in Telco. I see banks that are keen, I mean, to be served in due time, despite this overall, quite difficult environment from a supply standpoint.
Of course, I mean, reliability of supply, reliability of quality, it also mean we need to be rewarded when we manage our customers in such a way. Overall, I mean, we are striving to expand our margin in this overall inflationary environments. Now, your questions about our 2022 guidance. What is, in my view, quite important is with the comments and the fact that today we consider that we should be in the upper part of the guidance that we provided in the past. 3.5%-5.5% organic growth.
Today, I mean, we believe that we should be in the upper part of this range, and it is a bit new. Now, it's true that in terms of absolute level of revenues, we have also adjusted our level of sales level for 2022 also to reflect, I mean, the impact of a stronger U.S. dollar. This is bringing something like EUR 100 million of additional revenues. Also a bit of a scope effect, I mean, following the consolidations of a few small side businesses throughout Q3 that I've just mentioned at the outset of my presentations.
In particular, on two new businesses on cyber, one being the S21sec and Excellium managed services businesses that were acquired, on which we closed the transactions in October. The seventh being the small size OneWelcome customer identity and access management businesses that we closed end of September.
In other words, the EUR 100 million addition to your sales is purely from currency and scope.
Yeah.
Not from moving the organic growth.
No, it's clearly, I mean, the currency effect.
Okay, thanks.
Thank you. We'll now take our next question. Please stand by. This is from the line of Chloe Lemarie from Jefferies. Please go ahead.
Yes. Good morning. Thank you for taking my question. I have a couple. The first one would be to come back on the comment you made on the impact of demand from the recessionary environment, so on the different businesses. I understand that SIM cards obviously could see an impact there. But just to come back on the bank cards, would those typically align with the macroeconomic cycles, or would you have some new products or other specific cycles that could offset this in 2023? And any other specific businesses that you see more at risk of that recessionary environment? The second question would be on FCAS and the phase 1B contract.
If it is signed, indeed later this year, what could this represent for you in terms of order intake? Could it trigger some revenue recognition, even if it's signed, towards the very back end of the year? Thank you.
Okay. Good morning, Chloe. I have to say, I mean, the line was not great, and it seems like that you are in a noisy environment. I'm not sure that I got all the questions. I mean, starting with FCAS. I don't want to make specific, I mean, comments on FCAS signature. What I can say, however, is that in case, I mean, FCAS moves forwards, of course, we should get a positive effect for Thales, which in my view, will be more in 2023 than that in 2022.
What is known as the phase 1B of this contract, where, as you know, I mean, Thales will be involved on two matters. One being the overall sensors, I mean, part of the program, which is quite significant for us. The second one being about the overall collaborative combat, which is also, I mean, where we'll get the business. Now, when I look overall at the phase 1B , so order intake 2023. But overall, I would say it's not a major contract for us in terms of size. Once again, for this specific phase 1B .
tend to believe it's part of this normal defense business order intake that we'll get in 2023. You shouldn't consider that from an order intake standpoint and from a revenue standpoint. I mean, FCAS in 2023 should be something that will be of that significance. Your first question was about, if I understood well, on the recessionary environments, and in particular, where we could see, I mean, some impact. Overall, my view is that, I mean, probably Thales is one of those few companies with quite a strong level of resilience when it comes to impact of overall global recessions.
The reason is, I mean, we don't see in the short term any impact of recessions on our, in particular, Defense & Security business, and probably quite a modest impact also on our aerospace business. Where we could consider impact is, yes, on our DIS business, and my view is, specifically on the Telco business. As I mentioned, of course, I mean, lower sales on smartphones will result probably in lower level of demands when it comes to SIM cards. Our banking business, in my view, should be more preserved because here it's more a mechanical renewal of cards.
I don't see a, I would say, a significant impact of recessions on the level of demand on this business. Cyber, yes, but overall, there are underlying very strong drivers for growth on Cyber that I'm not specifically concerned about the impact of recessions on our Cyber security business. Overall, you see that I'm quite positive overall, and considering that we should be well protected. The level of resilience Thales against, I mean, recessions, in my view, will continue to be quite strong, yeah.
Thank you. I actually would have one follow-up on the interest rate environment. Are you seeing any customer scaling back some of the investment plans? I'm thinking maybe space could be more affected, but is this something you're worried about or is it very marginal at this point?
No. I mean, so far we have not had any inputs suggesting that increase in interest rate would result in a low level of demands in any of our businesses, in particular on space, no. Not at all.
Clear to hear. Thank you.
Thank you. We'll now take our next question. Please stand by. This is from the line of Christophe Menard from Deutsche Bank. Please go ahead.
Yes, good morning. I had a few questions. The first one on the pricing at DIS. Is there a lag between better pricing and I mean, that you negotiate and the time it is implemented, i.e., if you negotiate better pricing today, will it be sustainable until next year, or is it only three months, six months? Still on DIS, biometric cards, EMV cards. Is it still a niche market or is it contributing nicely to your mix in well, in 2022 or even in Q3? That was for DIS. Still on DIS, on the margin, you mentioned 12.5%-13.5%, which you mentioned in the past as well. How should we think about upside to the 13.5%?
What could be drivers to this? It's more probably theoretical at this stage, but just to understand the drivers. The last question is on aerospace. You mentioned the pricing being probably one of the reasons for the margin impact. Are there any other elements impacting margins in aerospace at this stage? Is it IFE, for instance? Is it the tubes? Any input on your side would be helpful. Thank you.
Okay. Good morning, Christophe. First, in terms of pricing at DIS, the way it works, there is always a bit of lag effect, but as you know, this is a short cycle flow business. Overall, I mean, this lag effect is quite limited. It's really a question of 1 or 2 months, but not a question of 3, 4, 5, 6 months. It grows pretty overall pretty quickly. On the overall, I mean, banking accounts and how do we see, I mean, the business in terms because you mentioned biometrics.
The mix effect, I mean, our mix has been pretty good in 2022 in our banking business. In particular, not that much on biometrics which is still today at this point a product which is in a launch phase, with at this point contributions to our level of revenue, which is extremely modest. However, in 2022, we are taking advantage of quite a strong mix effect coming from the developments of our mobile accounts in some geographies. It's probably a bit more like some kind of one-off effect. I'm not sure that this will continue at this pace in 2023.
Overall, we took advantage in 2022 of a significant amount of additional sales from metal cards, some in some geographies. What I've not mentioned, but which is also quite significant this time, I mean, this time from an ESG perspective, is the fact that we keep developing our offers on ESG cards, I mean, in particular, based on recycled plastics. This is also doing pretty well. Questions on margin at DIS and, I mean, first, let's be in this range that I've just mentioned, the 12.5%-13.5% EBIT margin before considering going even higher than that.
Of course, I mean, drivers on these matters is of course, I mean, prices, level of demands, leverage effects, how much we will invest in terms of sales and marketing efforts. This is in particular important in our Cybersecurity business. Level of R&D as well. All of that, I mean, that we need to have in mind. I mean, a level of profitability that would be in this range would be already quite positive overall for us. Last point on aerospace. I mentioned about space. I mean, level of demand is there, I mean, pretty good.
However, it's true that from a margin standpoint, it's true that the impact of inflation is headwinds overall for us. IFE, I mean, at this point, still quite a low level of demand. I've mentioned that we booked a new contract on IFE with Emirates for the first time that we book a significant new contract probably since 2019. Showing that we see now some airlines starting really to reconsider refurbishing their overall cabin as a clear differentiator vis-à-vis their own clients. This, of course, will have to be confirmed.
I mean, booking a large size contract with Emirates is hopefully a good first sign of a potential recovery in terms of demand for IFE. Of course, I mean, this has to be confirmed, and at this point it's probably a bit too early to be more positive in terms of demand for this IFE business. Last point, it shows that overall, I mean, our microwave tube business was quite strong in 2021 with a level of sales that will be below this level in 2022. I tend to believe that this is much less important than my comment both on space and IFE.
Thank you very much for the details.
Thank you. We'll now take the next question. Please stand by. This is from the line of Harry Breach from Stifel. Please go ahead.
Yeah. Morning, Pascal. Morning, Bertrand. Can you hear me?
Yes, you seem to be far away. I mean, Harry.
Hang on. Is this better now, Pascal?
Slightly better. Please go on.
Slightly better. Sorry. Pascal, just hopefully very easy one. Just in the context of the defense budget in France and the 2023 figure, which is perfectly in line with the
Mm-hmm.
Loi de programmation militaire , which I suppose was ultimately decided, you know, four years ago in a very different European and geopolitical context. Should we think perhaps that the intent is just to stay in line with the Loi de programmation militaire , not just for next year, but also 2024, but really not above that? You know, it's a good high single digit rate. There's nothing, you know, there's nothing bad about that. But do you think that the intent of the government is just to continue with the LPM's projections for the next two years? Second easy question, Pascal. Just on free cash flow.
I think the current consensus now is around EUR 1.638 billion good order intake in the third quarter, hopefully some customer down payments associated with those. Do you think there's any upside to that consensus number, or are you sort of broadly happy with it? Then the final one, Pascal, one of the unusual features in aerospace broadly, the broad market this year, has been the pulling forward of catalog price increases for spare parts and aftermarket items. Did Thales Avionics pull forward the timing of increases to its spare price catalogs? Can you give us sort of any indication, was it in line with the low teens that we've seen elsewhere, and could that have helped the organic growth number at aerospace in the third quarter?
Okay, Harry. Starting with LPM in France, I mean, at this point, a bit difficult for me to elaborate on the unlikely outcome of this new LPM. As you know, it should be released in H1 2023. I mean, our interactions with our clients here, the French MOD, all of that's suggesting that there's a clear need, I mean, to keep increasing, I mean, defense spending in France, at least in line with the current LPM, which as you know, I mean, was foreseeing a substantial increase in 2023, which is materializing.
Overall, I mean, this overall 7% increase in defense spending in 2023, overall moving from EUR 41 billion of 2022 defense budget to EUR 44 billion in 2023. I mean, it's really part of the 2023 finance law. It's, I mean, it is done. Now it's more about, I mean, the, from this new level, will we see a EUR 3 billion annual increase in the new LPM in the next few years? This is what, I mean, should be confirmed in H1 2023. At this point, it's a bit too early.
I mean, a path could be, I mean, EUR 44 billion in 2023, EUR 47 billion in 2024, EUR 50 billion in 2025. It could be a path. Now, I mean, what I'm sharing with you is the type of high level discussion that we have within the French Ministry of Defense. In no way you should consider that, at this point that there's been the confirmation accepted overall by our clients. We need to be a bit patient. Another good point is that there's a global consensus of keeping increasing, I mean, defense spending. To be more precise, we will need to wait for the outcome that will come in H1 2023.
I cannot be more precise than that. I'm happy with the EUR 1.6 billion consensus. I don't want to guide you on an upgrade on this matter. I mean, EUR 1.6 billion is a level of free cash that would result in a conversion ratio from net income to free cash flow that would be above 100%, which would be extremely positive after, I mean, our outstanding level of performance in 2021.
EUR 1.6 billion is, in my view, already quite a challenging, I mean, level, and it's not my intent today to tell you is that we are today in the positions to exceed this level. Last question about aerospace and catalog prices. What I can share with you, where, I mean, we see, I mean, ability to increase prices is really on the aftermarket business, with, in particular airlines. This is situations where, I mean, we trade based on catalog prices, and it's really, I mean, where, I mean, we can exercise increase in prices to reflect higher input costs. This is basically what we keep working on with our clients.
Yes, I mean, this is something on which we spend quite some time. I mean, for me, it will be a way in 2023 to compensate for higher input costs, in particular higher labor cost, on this business. This is where we have more flexibility on aftermarket with airlines as compared to probably more OEM fixed and some price contracts.
Pascal, just to be clear, the increase in the catalog prices would take effect in January? You have not accelerated that into 2022, the fourth quarter?
I mean, Harry, you can imagine that, I mean, we've got different contracts with different airlines. Not all of them start in January in terms of renewal dates, so it depends. It depends on our various contracts. Not all of that is revisited in January the first.
Mm-hmm. That's very clear. Thank you, Pascal.
Thank you.
Thank you. We'll now take the next question. Please stand by. This is from the line of Tristan Sanson from Exane. Please go ahead.
Yeah. Good morning, Pascal. I'll be quick with a few final questions. First, I was expecting the Rafale in Indonesia to enter the backlog in Q3 within the category of more than EUR 100 million orders. It's not. Is it because it's technically there's something that means that could not be booked in Q3, or is it that it's less than EUR 100 million? Second, you said, I think on the Q2 results call that you had hedged the bulk of 2023 at an average rate of $1.08 on the dollar to euro. Did you further progress on hedging 2023? Is it fully covered, and at what rate?
Third, can you give a few qualitative comments on the progress of on-time delivery on the A320 that you have of cockpit Avionics? Finally, you discussed at the beginning of the Q&A the salary negotiations for 2023. Now for 2022, there's quite a number of companies that are in the sector that are discussing special bonus payments to employees to make up for temporary inflationary pressure, especially in France. Is it something that is being discussed with the unions as well, which underpins part of your cautious comments on the cost inflation pressure?
Mm-hmm
Within the boundary of the guidance you gave for margin? Many thanks.
Okay. Good morning, Tristan. Yes, you're absolutely right, I mean, about the Rafale, Indonesia and you pinpoint this contract, which has not been booked in Q3 and which most likely will be booked in Q4, so no specific concern. But I mean all conditions, I mean, to book this contract will be met in our view in Q4. First point. Second point about FX. I mean, 2023 is today fully hedged. It was already almost the case back in July and the average rate is what you mentioned, $1.08 for 2023.
We started to hedge a part of our 2024 exposure. OTD with regard to A320, I guess that you realize this is quite a sensitive information, so I don't want to be that specific. I mean, we do whatever we can, I mean, to preserve our OTD vis-à-vis our clients on this matter. I've not seen, I mean, Airbus mentioning Thales, I mean, to be a supplier that would delay in the production of A320.
Can I just be qualitative on whether in Q3 it has been improving or whether it's similar to Q2?
I don't know exactly. I mean, Tristan, but at this point, I mean, well under control, but once again it's a point of vigilance with, of course, I mean, what I mentioned about, I mean, the supply, in particular on chips. So, I mean, what I can confirm is that we keep working hard, spending a lot of time, I mean, of course, I mean, to preserve our ability to deliver on time to our clients on this matter. A lot of internal work, I mean, to optimize as much as we can on this matter. Last point about salary negotiations.
What is probably a bit different from other companies that you mentioned is the fact that at Thales overall, I mean, we completed the 2022 annual salaries negotiations, probably later than in many other groups. First point and second point, we believe that we will start our annual negotiations relating to 2023 mid-November. This is basically what we have in mind. Of course, as part of this overall negotiations relating to 2023, I mean, specific elements like what you mentioned.
I don't like the term of special bonus, but it's more in particular in France what has been called, I mean, a specific bonus linked to a sharing of added value is the way it is today phrased in France. Of course, this will be part of the overall, I mean, drivers in terms of negotiations with our trade unions.
Okay, it's clear. Many thanks, Bertrand.
Thank you. I'd now like to hand the conference back to the speakers for closing remarks.
Okay. Thank you, and thank you very much for your questions. Quite a number of questions. Thank you very much for that. Overall, I mean, as you understood, the commercial momentum is quite strong across our three segments. Of course, I mean, our teams, they continue to manage, in my view, quite well in this quite complex operating environment. Of course, I mean, we remain very much focused on managing all the operational factors that hold back growth and also, of course, I mean, the consequences of inflation. Thank you very much for your participation. Together with Patrice Caine, I will participate in various conferences and investor events in the coming weeks.
Of course, I mean, in the meantime, the IR team, Bertrand, Olivier, Florian are of course at your disposal if you have further questions. Thank you very much and, bye-bye.
Thank you. Ladies and gentlemen, if you didn't have a chance to ask your question on today's call, please do not hesitate to send your question to Thales Group Investor Relations at ir@thalesgroup.com, and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.