THALES (HO) Q2 2026 Earnings Call Transcript

Good morning, everyone, and welcome to this presentation of Thales H1 2026 results. I'm Louis Gonnet, Head of IR for Thales. With me today in the room are Patrice Kahn, our chairman and CEO, and Jamie Papin, our CFO. As usual, this presentation is webcasted live on our website, thalesgroup.com, where the slides and press releases are also available for download. A replay will be available soon after the end of the event. With that, I'd like to turn over the call to Patrice Kahn.

Good morning everyone and welcome to Thales 2026 half-year results conference call. So let me begin with a few highlights of our performance in the first half of the year and I'm on slide number two. So first we delivered robust order intake, mainly driven by defense and space, once again demonstrating the strength and the relevance of our products and solutions. Notable examples include major contracts to supply satellites to Luxembourg and Turkey, or air surveillance systems to Qatar, or radars to the UAE. Our sales growth was driven by the successful ramp-up of our defense activities, especially in sensors and effectors, together with the rebound in cyber and the resilience of our aerospace business. From an operational perspective, our continued focus on efficiency and competitiveness resulted in a robust year-on-year improvement in profitability. The first half was also marked by outstanding free operating cash flow generation. This performance was exceptional, notably reflecting the growth in order intake and our strong project execution. Now, beyond these financial results, we also reached several important strategic milestones rooms during the first half of the year. We launched new solutions to enhance counter drone capabilities and smart ammunitions. We entered into promising partnerships with Destinus, for instance, to support armed forces in counter US and ground-based air defense through enhanced system integration and production ramp-up. We also entered with a partnership with Airbus Defense and Space, MBDA, Dutchland, Safran Electronics Defense and Destinus to establish the Blixem Exo Consortium, a multinational European industrial partnership to develop Europe's first sovereign exo-atmospheric upper-air interceptor program, or again with Renault to enhance our mass production. On top of that, we also enlarged our strategic partnership with Google to develop trusted cloud solutions now in Germany. And finally, in early June, we announced the plan acquisition of Excel with the ambition of creating a world-class player in autonomous underwater warfare, while further strengthening our capabilities in inertial navigation. So let us now take a closer look at the numbers, and I am on slide number three. So as previously said, the commercial momentum in H1 2026 was particularly robust with other intakes reaching 12.5 billion euros, a 22% organic increase year over year. The book-to-build ratio is maintained significantly above 1, reaching 1.14. Sales reached 10.9 billion euros, growing by 7.8% organically in H1. And if we exclude the one-off impact linked to the constellation of two geostationary satellites, the underlying organic growth in H1 is close to 10%, at 9.6% precisely. Adjusted EBITs rose by close to 10% on a reported basis, while EBIT margin improved to 12.5%. Then, adjusted net income group share grew sharply by 13%, reaching 990 million euros for the first half. Free operating cash flow generation was exceptionally strong in the first half, reaching 1.8 billion euros, which is close to three times the level reached in H1 2025. Of course, Jeremy will further elaborate on that evolution. Net debt now, well, net debt stood at around 500 million euros at this year to be compared to 1.6 billion euros at 31st of December 2025. As you can see on the chart, over the last 12 months, net debt has been reduced by around 3 billion euros, which is a major achievement. So moving to the next slide and leaving the floor to Jeremy.

Thank you, Patrice. Good morning to everyone and thank you for joining our call. Turning to page four, order intake was solid in the first half of 2026, standing at 12.5 billion euros, a 22% organic growth. This achievement reflects a continued strong momentum across our businesses, with particularly good bookings in space and in defense. Growth was widespread, with all regions contributing, Europe and the Middle East leading the growth in H1. A benefit of our long-lasting presence in those regions, our engagement to remain close to our clients and to offer them highly performing products and solutions in the current context. In the first half of 2026, 18 large orders with a unit value above 100 million euros were booked, seven in Q1, 11 in Q2. Of these 18 large orders, 13 were in defense, including a number of new contracts in air defense. We had mentioned the Sante new generation in Q1, and Q2 has seen further orders in air surveillance and air traffic management. The momentum was also good in the naval domain. Furthermore, the group recorded five large orders in space, both in observation, exploration, and in telecom, supported by sustained and robust institutional demand. Finally, our small orders, those below 10 million euros, were up 5% organically, which is another indication of the ongoing healthy underlying momentum of the businesses and the high granularity of demand across all our portfolio. Overall, the solid order intake performance confirms the strength of our positioning on growing markets and the continued relevance of our offerings. Now let me move to sales on page five. In H1 2026, sales were up 7.8% organically to 10.9 billion euros. If we exclude the impact of the cancellation of two geostationary telco satellites in our space business, sales growth amounted to 9.6%, which reflects a solid underlying growth momentum. Each of our three segments contributed to growth in H1. In terms of geographies, sales growth remained well-balanced between mature and emerging markets. Europe posted a solid 9.4% organic increase, while emerging markets grew by 14.6%, including a particularly strong performance in the Middle East, up 36.7%. You will note that in H1 2026, changes in scope had a very minor impact, and currency impact was negative at minus 116 million euros, mainly linked to the evolution of the euro against the U.S. dollar in the first quarter. Turning to slide six and having a look at the drivers of our group EBIT adjusted increase year-on-year. Adjusted EBIT for H1 2026 amounts to nearly 1.4 billion euros, up 10% year-on-year and 11% organically. The strong increase in our gross margin was the main driver of our adjusted EBIT growth in the semester. It is up 219 million euros, and the main contributors to sales volume growth were defense and aerospace. Part of this increase in gross margin was reinvested to support our future growth. R&D was up 9% and reached 6.2% of sales, and marketing and sales were up 4%. GNA expenses up only 3% are being constrained, growing at less than half the pace of sales and reflecting our focus on cost discipline. Finally, restructuring costs stood at 24 million euros in the first half, down by 30 million euros compared to last year. This is mainly explained by the ongoing execution of our space adaptation plan over the first staff of last year, which incurred some restructuring costs back then. This plan is now over and paying back. Moving on to the performance review by segment and starting with aerospace on page seven. Orders in the segment reached 3.3 billion euros, up 24% organically, reflecting solid momentum overall. In avionics, order intake remained high, notably in the civil domain. Order intake in space showed strong demand from institutional customers. In total, five large contracts were booked in space in the first half of 2026, including geostationary telco satellites for Luxembourg and Qatar, and orders for major programs and missions such as Copernicus and ExoMars. Cells amounted to 2.8 billion euros in the first half, up 2.1 percent organically. This performance was primarily driven by avionics, where sales increased in the first half. Sales growth in Q2 was, however, a bit slower than Q1, as a result of the first impacts from lower air traffic on aftermarket activities. In space, underlying growth was solid over the first half. However, Thales has been notified of the cancellation of two telco satellites based on our space-inspired platform, ordered back in 2022. This impacted sales by a negative 153 million euros over the semester. Given the positive underlying momentum with our customers and the quality of the space-inspired platform, we are confident in our capacity to reuse what was achieved and delivered so far as part of this contract. If one excludes this one-off element, aerospace sales were up a solid 8.8% in the first half of 26, reflecting the continued underlying momentum in both avionics and space. Looking at adjusted EBIT, the segment delivered 130 basis points increase in margin to 10.4%. This strong progress was supported by an improvement in space profitability as it benefits from the successful implementation of the adaptation plan carried out since 2024. Meanwhile, avionics continue to deliver a high and solid contribution. Moving on to the fence on slide 8. Order intake reached 7.4 billion euros, up 28% year-on-year, reflecting sustained and continued success for Thales products and solutions across many geographies, but notably in Europe and in the Middle East, where demand remains very strong. 13 large contracts were booked in the first half, compared to six in the first half of 25. The strong performance was broad-based across the portfolio, as the vast majority of our products and solutions are addressing critical needs of our clients. In particular, air defense solutions saw strong client demand in the first half. It's also worth mentioning that two large orders in the first half were related to the development of the F5 standard of the Rafale, a key priority of the French military programming Defense sales amounted to 6.3 billion euros, up 13% organically year on year. This reflects another quarter of double-digit growth in Q2 at 11.9%, supported by the ongoing production ramp up in sensors and effectors and by solid contracts execution across the defense business. Finally, adjusted EBIT increased by 22 percent organically in the first half, with an improvement in margin from 12.8 percent last year to 13.8 percent. Overall, these results confirm a solid, sustainable trajectory in the defense segment. Cyber and digital now on slide Nine. Cells in the cyber and digital segment reached 1.8 billion euros, a 0.4% increase. In cyber, sales were up 1.6% organically year-on-year. Growth resumed in Q2 with a 4.5% organic growth. This is a positive evolution and a good sign that the business trajectory is recovering. Digital sales, digital identity sales were broadly flat year on year. After a good Q1, Q2 sales declined compared to last year when our secured connectivity solution had recorded some non-recurring one-off orders. In payment services, digital banking solutions saw continued strong growth. However, those were more than offset by lower volumes in payment costs. Moving to profitability, with adjusted EBIT down year-on-year, this decline is driven by a decrease in digital identity. H-125 had benefited from two one-offs we mentioned last year, an exceptional contribution from a JV, TELIT, and another one-off order in secured connectivity. In addition to that, margin was also impacted by some challenging situations in the market. first in payment and services, where pressure is building in both volume and prices, but also in identity and biometrics. This activity, which includes secure travel documents, saw an impact in the first half from lower passenger traffic, and accordingly, less issuance and renewals of documents. In cyber, adjusted EBIT was up 5.5% organically, with a resilient margin at 14% while we resume growth. Moving on, the first half of 2026 adjusted P&L on slide 10. The cost of financial debt and other financial results was down compared to last year. This improvement is driven mainly by lower net financial charges at minus 33 million euros, reflecting lower average net debt over the period. Foreign exchange results were also favorable in the semester. The finance cost on pension and employee benefits were stable year on year. The effective tax rate in the first half was nearly similar to last year and stands at 25.8%. It includes this year again a temporary additional corporate tax in France, which added an additional 57 million euros to our tax charge in the semester. Excluding this impact, the effective tax rate is stable at 21%. As a reminder, the additional corporate tax is expected to stand at nearly 100 million euros in 2026. Minorities' year-on-year evolution reflects the further reduced net losses incurred in Thales-Alenia space as the company's operating profit turned positive. Overall, adjusted net income group share stood at 990 million euros, up 13% compared to last year. Turning to free cash flow on slide 11, the free cash flow was somewhat exceptional in the first half of 2026 and stands at 1.9 billion euros versus half a billion euros last year. As you can see, the main driver of this performance was a significant improvement in change in working capital, driven by a continued supportive momentum in the order intake, with a very strong semester, as I detailed earlier, coupled with favorable phasing-in customer payments. This reflects Thales' longstanding ability to execute projects well, which is obviously a key focus for the group. As you know, a target of adjusted net income to free operating cash flow conversion was upgraded early July, and we now aim at reaching 100 to 110 percent conversion ratio in 2026, which is obviously strongly supported by the H1 performance. Before handing over to Patrice for strategy and outlook, let's look at the net debt evolution over the past six months. Net debt amounted to 519 million euros as of June 2026. This is down 1.6 billion euros and compared to a negative 1.6 billion euros at the end of December 2025. This is nearly a 3 billion euros reduction in net debt since June of 2025. The main driver of the decrease in net debt is, of course, the exceptional free cash flow generation we just reviewed. The group also paid $606 million in dividend in the first half, and new leases amounted to €178 million. Our financial position is very sound. We have ample means to finance our growth going forward, starting with the planned acquisition of Excel that we announced a couple of weeks ago. Thank you for your attention. I now turn over the call to Patrice to review the group's strategic priorities and guidance.

Thank you, Jeremy. So moving now to slide 14, which is a kind of a recap. So Thales is well positioned on markets, offering strong growth and long-term visibility, supported by a comprehensive product portfolio and a broad customer base. So we continue to see attractive growth opportunities across our three core businesses, defense, aerospace, and cyber and digital. So if we start with defense, in defense, demand for our products continue to grow, driven by the current geopolitical environment all around the world, and the breadth of our products spanning cross-air defense, maritime warfare effectors, electronic warfare, among others, together with the diversity of our customer base, provide a strong foundation for sustainable long-term growth. Our strong commercial momentum and our continued ramp-up of our industrial capabilities will continue to support our fast pace of organic sales growth. Looking ahead, as already said, the planned acquisition of Excel will further strengthen our strategic position in the autonomous underwater systems domain and in inertial navigation. Now moving to aerospace, in a nutshell, well, in avionics, the underlying market fundamentals are solid, of course, supported by structural long-term growth in passenger demand for air travel. And this is the case regardless of temporary uncertainties related to the current situation in the Middle East. In space, activity continues to benefit from Europe's growing focus on space sovereignty, supported by an unprecedented level of public funding. Typically, the last ministerial conference, 2025-2028, has secured 22.1 billion euros for European Space programs, increasing the European Space Agency budget up to 30%. And looking further ahead, the next EU multi-annual financial framework is expected to allocate around 70 billion euros to space, almost double the amount under the previous one. And this favorable space environment is also very promising for the BROMO project, as well as for future growth opportunities. And finally, cyber and digital. Well, in cyber and digital, demand continues to grow as well with AI typically acting as a key market accelerator. We expect AI to strengthen our position by accelerating the digital and AI transformation of our customers and therefore growing the needs for cybersecurity as cyber attacks continue to grow in both scale and sophistication. leveraging ai these trends are driving demand for detection and response services application security and data protection to mention a few to address these evolving needs we will continue to expand our portfolio with new solutions including for instance our next generation HSM, hardware security modules, namely Luna 8, a new data security posture management solution, or another example with our forthcoming AI security fabric solution expected in 2027 next year. So moving to the last slide, slide 15. Well, the performance in the first half confirms the trajectory of durable and profitable growth on which Thales is established and we are entering the second half of 2026 with confidence. The robust momentum and strong visibility enjoyed by the group, in particular within defense activities, has led us to upgrade two of our 2026 guidance items a couple of weeks ago, which are number one, the expected book to be ratio for 2026 now expected above 1.1 and number two the conversion rate of our adjusted net income into operating free cash flow for the year now expected between 100 percent and 110 percent therefore we are confirming our objective to deliver to deliver sorry between six and seven percent of organic growth for sales in 2026 corresponding to sales of 23.3 to 23.6 billion euros it means that non-recurring items have no effects on our sales guidance given the underlying improvement in growth trends notably in defense we are also confirming our expectation of a solid increase in adjusted EBIT margin, which is expected between 12.6% and 12.8% for 2026. And this is driven mainly by progression in the aerospace and defense segments. So that concludes our presentation with Jeremy. And now we are happy to take all 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 it's star one one to ask a question thank you we are now going to proceed with our first question the first questions come from the line of chloe lemari from jeffreys please ask your question uh patria and louis thank you for taking my uh my questions uh i would have a first one on uh the momentum in defense uh because

we've seen obviously growth that uh stands rather ahead of your high single digit um uh gross target so could you maybe talk about the the unlock there uh what's happened uh for you to be able to sustain such a level of uh production and and delivery and whether this could remain sustainable for the division in the in the future my second question was on iris square i was wondering how the discussions were ongoing around that project given there's been some concern that germany is investing in its own sovereign satcom constellation so any color on how any progress on the on the Irish project would be much appreciated. Thank you.

Thank you, Corey. We'll share the answer with Jeremy. I can start with growth and Iris Square, and you would complement Jeremy, if you wish. So, yes, indeed, the first semester has allowed us to post quite a robust growth percentage. Honestly, it's the consequence or the outcome of the investment we have made in the previous years in terms to, in order to ramp up the production. So we've made a lot of investment in our industrial capacities, in our engineering and also capabilities that led us to this type of course. Now it's too soon to change the perspective of the full year. We see, you know, this business, you know, that by heart is not linear. are but though it's very encouraging as well at the same time on i square things are progressing i would say as expected so this is for me quite quite positive we are waiting i would say being under contracts or following contracts i would say soon i say soon because there is i would say always some discussions to be i would say closed but i see that coming now soon and what is also encouraging is the uh official uh willingness to see iris square and the german constellation being uh interim interoperable uh so this is also a positive sign from from our german colleagues or from Germany to position the constellation they need for their own needs being complementary and not in competition with iris square so for me the late and the last or latest sorry Franco German ministerial console that was held last week was also very reassuring on this on this point maybe if I may, Chloé, add a point on defense.

I think what we can say is that clearly the outlook for us this year has moved to a high single-digit growth in revenue, to a low double-digit growth potential. So clearly, you know, that some of that momentum is clearly going to continue. And the other point is we are also obviously aiming at and supporting the business further by reinvesting some of the – into the R&D. So clearly the focus on strengthening and keeping the momentum is there.

Can I add a follow-up on this? When you say you're investing into R&D, it obviously doesn't show in the margin. That was a really strong performance. Are you capitalizing it?

No, no. No capitalization at all. But as you will see, the R&D is up faster than revenue, as we had indicated, and it's at 6.2% of revenue now for the group.

Okay, very clear. Thank you. Thank you. We are now going to proceed with our next question. And the next questions come from the line of Ross Lowe from Morgan Stanley. Please ask your question.

Hi, morning. Thanks very much for taking my questions. So the first one, just on space, I wonder if you can get a little bit more detail on the growth and margin achieved in the first half. And what is driving that? Is it just volumes? Is it the result of the sort of transformation in that business or maybe even price? And then a follow-up to Chloe's question on the defense margin, which was very strong, 13.8%. How sustainable is that as we progress through the remainder of the year?

So on space, I would say the outlook, First of all, in the first half, the business, obviously, you know, the revenue is somewhat impacted by the cancellation in those satellites that I mentioned, which reduced the revenue by 150 million euros. The underlying growth is, however, solid, and we were making good progress on the program completion. We are also benefiting from the payback from some of the cost adjustment plans that we had kicked off and were in full implementation through last year. On the outlook for the reminder of the year, I would say on space, we should see a low single-digit growth and taking into account the cancellations. And, yeah, that's the current outlook. on defense the defense margin there is you know there is nothing there is there is nothing that is specific in in h1 we think we can support a margin that you know will be above 13 and a half percent so I would say while the growth is significant. We are seeing operational leverage and constant good execution on our programs, which allows the margin to hold up.

Thank you. If I could maybe just quickly follow up on the margin a bit more specifically in space in both the first half and your expectations for the full year, please.

In the first half, what I mentioned in space is that we had turned the uh positive and uh you know we expect to uh see that in the full year okay thanks very much thank you we are now going to proceed with our next question and the next questions come from the line of alessandro posi from mediobanca please ask your question hi good morning all and uh thank you for taking the questions uh and the first one is on uh order intake uh specifically in defense I think here the other intake was supported by good performance of funds I guess this is coming from the f5 but also Middle East was up 200% I believe can you give us a sense of whether do you think this is a one-off in in each one because of the situation or whether you think this is something sustainable that could support order intake as we go into the second half and in in the coming years the second one is on free cash flow you retain the guidance that you have given just recently that the the performance was really stronger and if you look at the second half implies small positive free

cash flow which is at odds with the historical performance so just wondering whether it's just being conservative or there is just an acceleration of the free cash flow in of the payments in h1 versus h thank you i can uh hello alessandro thank you for your questions hi i can start on the uh on the first one and over then to jeremy for the free cash flow So, indeed, in the appendix, you see all the organic, I would say, change H1 2025 versus H126 in terms of order intake. It's positive and strongly positive almost everywhere, in fact. Then, you know very well this business, as I said, it's not linear across the year. So, it's always difficult to, you know, say that for the full year, it will be times two the first semester. uh what we see uh for real uh what we see for real is that demand now come from everywhere in the past i used to say that we had i would say two engine of growth middle east asia south asia for the things sorry why now a third engine of growth which is europe and not only france but europe as a whole has been added to the two previous one and when you see a look at the percentage of growth of order intake for Europe, it's also very impressive, plus 46% organic growth H1 2025 versus H1 2026. So let me just give a more qualitative answer because, again, this is something which is not an equation, but clearly we do expect for the four year strong and very robust order intake momentum for defense as a whole leveraging all these needs and coming from europe middle east needless to say that you are are important in this region of course considering the the war in or with iran and still strong momentum in asia and Southeast Asia. Free cash flow, Jeremy?

Yeah, the free cash flow, as you pointed out, I think what we want to signal is obviously the fact that you cannot simply multiply H1 by 2 for the full year outlook. I want to point to the fact that our CAPEX guidance for the full year is still roughly €850 million. So obviously the capex in H2 will be higher than the capex in H1. There were some, I would say, cut-off payments between H1 and H2 in terms of cash-received down payments that one needs to take into account. Overall, I think what is important is the fact that we are, you know, very, very confident about the overall cash generation of the business. We are, you know, normalizing working capital. And as some of our, I would say, production in sensors and effectors grows. So there are a number of factors. But overall, obviously, the message on free cash flow is confident. okay I'm just wondering if you expect any large down payments again in the second half I I won't comment on on that but again we had we had some favorability in the in the first half thank you very much we are not going to proceed with our next question and the next questions come from the line over Christophe Menard from Deutsche Bank please answer your question yes good morning thank you for taking my question I had to the first one is on the space

margin by 2028 are we still on the same trajectory given the strong performance in h1 and should you I mean could we consider levels above 7% by 2028 and the second question is on the digital identity recovery should we expect some recovery in in h2 and is the margin target of 13% for cyber and digital still the message that you have or could it be lower given the h1 performance thank you so maybe starting with the the target on digital it for the full year

I think you should look at it as, yes, we are aiming at trying to be a stable X one-offs, I would say, in the one-timers in 2026. So that would be around 13%, as you mentioned. We do reckon it is a, you know, voluntaristic target, but clearly we do not want to trade growth for margin. So we are confident that, you know, we are not confident, but we are aiming for this rebound in the second half compared to the first half. And then on your first question. I can take it if you wish.

Yes, on space, Christophe, bonjour. We've said, you know, previously, and I'm sure you remember that, that what we foresee or what we are aiming at is a kind of a linear progression towards 7-ish percent by 2027. So we didn't extend to 2028, and your question was on 2028. So, one, it's a bit too soon to say. let's first reach this level of operational profit by 2027 it's around seven percent and it is clearly in our hands or at reach of course but there is no reason why we should not continue to improve beyond 2027 of course so without sharing and figures on 2028 yes we do work and to continue to improve beyond 2020 Savannah thank you very much we are now going to proceed with our next

question and the next questions come from the line of some Burgess from Goldman Sachs please ask your question some Burgess your line is open you may ask good morning thanks very much for taking a question just the first question on space hey can you hear me yes yes we can we do hear you yeah yes Yes.

Can you hear me? Yes, we do. Okay, great. Perfect. Thank you very much. Thanks for taking the question. Thanks for taking the question. I think there's a bit of a lag. In space, what demand trends are you seeing across commercial institutional and defense markets? And on the commercial side, are you seeing more interest on low-Earth orbit applications versus geostationary. And then just a second question, if I can, on digital. How much of the margin decline that you saw reflected those non-recurring benefits in H125 versus some of the market pressures you mentioned in payment services and identity and biometrics?

I can take the first one, Jeremy. I'll leave you the second one. So good morning, Sam. and thanks for your two questions well on space and that's what I've tried to to recap during the presentation first and foremost yes we do see a very strong momentum on the institutional segment which is the vast majority of our business in fact that space i remember a few years ago it was around two-thirds should be still the same a bit more probably now of our business of talent alien space business is made with let's say governmental agencies european space agency and so on and so forth and you know i've shared those two figures during the presentation which i would say are two good illustrations of this momentum Number one, the latest ministerial conference that defined every three-year, the three-year budget, and the one which was held a while ago and that covers 2025-2028, decided to globally speaking invest 22 billion euros, so representing 30 percent, I would say, increase versus the previous ministerial conference. But that's the second illustration, which is even more promising, is, you know, the budget, the space budget that is under discussion at EU level. And clearly, the figures that are under discussion, so it's not yet decided, of course, which would be a bit, I would say, cautious. But the figures which are under discussion are extremely, extremely important. Around 70 billion euros to cover this multi-year period of budget for EU devoted to space. So institutional markets, for me, it's kind of a no-brainer, a very strong momentum. Number two, defense. You know, defense is something which, I would say, doesn't happen every year. I mean, it is something that it's a more, I would say, scattered market, but still very active and in particular linked to the geopolitical situation. So the momentum of defense, space for defense is really the same as we see in defense in general. And typically, the satellite that we have been, I would say, awarded by Qatar just recently is a military satellite. And it shows how important, having, in this case, it's a military SATCOM satellite, it's important for those countries. The last segment that you have, I would say, mentioned is the commercial one. This one has been clearly, I would say, impacted by the arriving of Starlink and the likes a while ago. So for the geostationary satellite, telecommunication geostationary satellite, this market is what it is now. So clearly it's a few satellites per year. Now, which has emerged is, as you said, LEO constellation. And we've discussed, we've had the question about Iris Square, typically Iris Square, which is, by the way, semi-commercial, semi-institutional, to be honest, but is a huge opportunity for us, which clearly, if it's materialized, and I'm optimistic on this point, will represent a very significant chunk of business for TAS for the years ahead of us. So globally speaking, yes, the tone about space is clearly much more positive than two or three years ago, you remember, where the situation was a bit different. Turning to digital, Jean?

On digital, Sam, I would say that in the margin decline that you have seen in digital, about two and a half points of the margin decline are linked to the one-offs that we mentioned. So, you know, you can take those off to 14.6%, and that's consistent with what we had said earlier in the last year about the fact that the overall year-end margin had to be adjusted by at least 70 basis points. And there's also an impact from Forex to the margin in H1 of 26 for another 30 to 40 basis points. So, altogether, I would say, you know, about half or slightly more is the combination of the one-off and the forex.

Very comprehensive.

Thank you.

We are now going to proceed with our next question. And the questions come from the line of Olivier Brochet from Rothschild & Co. Please ask your question.

Yes, good morning, Patrice, Jeremy, Louis. I would have a couple of questions. First of all, on Avionics. Could you unpack how the original equipment aftermarket has been trending and what you expect?

Could you speak a little bit louder, Olivier? We can't hear you very well.

Sorry, I will try to speak louder. So on Avionics, can you unpack how the original equipment and aftermarket have been trending, including in IFE? Secondly, in biometrics, the slowdown that you've been experiencing, is it as a result of an outside exposure to the Middle East or is it broad-based? And third, in payment, could you be a bit more specific on what happened in H1 and how recurring that softness or weakness that you've experienced is, please. And apologies for the...

No, no, we could hear you. That's okay. Thank you, Olivier, and I hope you will go well. So Avionics, I start, and you will compliment. So Avionics, if we look at the two segments, only on one side and support and maintenance on the other side i would say very simply oh we uh we are aligned with i would say uh communications made by airbus and boeing so we are just following if i may say uh the um the ramp up or their product their own their production rate. So if you listen to their indications, that's quite consistent with our own, I would say, deliveries. And by the way, we are clearly not the bottleneck here in this regard, as long as at least Airbus is concerned. Number one, support and maintenance. It's true that the situation in middle east has had a slight impact i would say that was manageable so nothing to be worried about at this stage but let's be vigilant yet we have seen a slight reduction as as a consequence of aircrafts flying less in fact now so that's the color i could share with you about avionics biometrics I should say the main explanation and we've seen that to a much greater extent of course but we have seen the similar situation during COVID in fact when people are prevented to travel and that was the case in the Middle East but not only in the Middle East because the Middle East is an international hub for many international connections when people are prevented to travel less they just don't renew their passport and there is a kind of automatic I would say a consequence on this on this situation hence the fact that the this business line has been has been impacted by this external of a factor linked to say uh difficulties to to to travel in uh globally globally speaking uh payments um it's a very competitive market uh that's not new by the way so it's a competitive market it's also a market which we have seen in the past stocking and destocking effects so it's always a kind of a a bit complex, you know, to model or to forecast precisely the way banks will renew their banking cards and so on and so forth. For us, the main stake, if I just take a step back, is really trying to accelerate the digitalization of this business as we have successfully done it for the mobile connectivity solutions business line. That's, for me, what is, I would say, at stake on a more strategic standpoint. I do not discard the fact that on the short run, we see those type of ups and downs in terms of growth for the business, for the payment business.

But the strategic stake for me is the acceleration of the digital part of this business. so Jamie you want to try something no no it's okay this is a little gate at this for us yeah should I say both in fact now we do we do think we do think we will see some there was some as mentioned by your patrice some customer delays i would say linked to stocking the stocking so

that trend on volume can improve and should improve in the in the second half but it's always difficult to time perfect thank you very much we are now going to proceed with our next question the next questions come from the line of evade way from ciccib please ask your question Yes, good morning.

Thank you for taking my question. Coming back to DIS, maybe on the cyber side, I mean, it looks like, you know, in the second quarter, you are improving the organic growth profile of 4.5%. Do you believe you can continue to accelerate the growth in cyber, Maybe too high single digit, maybe more in line with the cyber sector growth is my first question. And the second question is back to payment cards and to move towards e-cards like you did with e-seam. How long do you think you will be able to gradually be more competitive on the e-card side? And do you believe moving into e-card will enable you maybe to improve margins as maybe what we've seen between SIEM and e-SIEM? Thank you.

You take the first one and I take the second one, Jeremy?

So in cyber, as you saw, we managed to achieve the 4.5% growth year on year. So that is a first step. I would say the immediate outlook is to maintain this level of rebound and, of course, to further beyond, I would say, the next few quarters to see a further acceleration. But what we are expecting for the second half is this, I would say, a full year between low and mid-single-digit growth in cyber. And on payment cards?

Yeah, I can follow on on payment cards on this one. Bonjour, Eric, and thanks for your questions. And this business line is, you know, around 1 billion euro-ish business, just to share an order of magnitude of this business. And the percentage of digital business within this business line is around 10%, if my memory is correct. Let's say around 10%. So clearly, there is a way to go to move from 10% gradually to something which would represent us for the mobile connectivity business, let's say, much more than 50, 55, 60, and so on and so forth. So I suppose it would take a bit of time, unless we would do something, I would say, inorganic, but that's not in our hands now. It would be progressive, of course, to move from 10% to 20, 30, 40, 50, and so on and so forth. But we have a plan. And by the way, the digitalization of this business is much more than e-payment or e-card, as you have mentioned. In fact, we have, we say, we have, we market a solution, a comprehensive solution to digitalize the full customer journey when a customer interacts with its own bank. So it's something which is quite, I would say, complex in a positive sense, which means that it is a sticky business. When you are, I would say, integrated, deeply entrenched in the ISIT system of our customers, of banks, this business is quite sticky in a positive sense. and, of course, largely profitable. Let's keep in mind as well, and we've shared that in the past, that this business is a profitable business. So what we, I would say, see here is the consequence of a lower volume than expected, hence a lower, I would say, EBIT in absolute value, but in percentage, though we do not disclose the percentage, but I give you a qualitative, I would say, indication, is either is a very good and very profitable business overall whether it is physical or digital hope it helps I can give some color thank you thank you very much we are now going to proceed with our next question and the questions come from the line of Sebastian grow from BNP Paribas please ask your question

good morning patrice jeremy and louise um i have two the first one would be on defense and the centity outlook and there was some recent news flow suggesting there might be an acceleration in demand for the system including from germany so i was wondering whether you could provide an update with regard to the overall demand funnel for the system and how one should think should think about the potential limitations if and when a given country already uses the patriot system And the second question I have, and sorry for labeling and getting back to the digital margin debate again, but if I may follow up on your earlier comments that you made at the potential margin recovery, is my understanding correct that the current underlying margin drop by about 250 basis points is really solely timing related? Or simply put, this will consider a margin of around 12% in digital as a realistic target?

I can start on Samtienji. thanks for your questions first of all you know when a country needs to get equipped with this type of high-end air defense system whether you call it long range or mid-range depending of who said vocabulary that is used by such or such armed forces. Definitely, and this is a fact, the SAM-TNG clearly surpass in terms of performance Patriot. This is a fact. Number two, the other big advantage of SAM-TNG is its availability. In fact, Patriot is a good system for sure, but the availability of the interceptors, of the missiles are extremely far away and typically for the moment if you want to get one you would have to wait 2032 something like that to get not only the system but in particular the missiles which are of course needed to operate such a system which is not the case for some tng where the availability is more 2028 ish versus 2032 for the Patriots so it's clear that the value prop of the some key and G is very attractive for many countries now of course the US political influence can rebalance those advantages that's why by the way it's it's a real competition between the some TNG system and and the Patriot the least if I may say or the number of prospects and potential opportunities for some TNG is quite substantive I can name a few countries which have been named by officials so it's not a secret but typically Ukraine Greece some Nordic countries countries in the Middle East as well in fact we see demand in demand sorry in many many countries now as for all I would say large and costly if I may say costly systems it's difficult to predict if it will come to a positive outcome in the second semester of this year or in 2027 or or even after there has a lot of political influence as well in those domains so on one hand this is a quite very promising system and the need is very important for this type of system now in terms

of pretty modernization how do we say forecast future order intakes it's always a kind of a delicate exercise to be to be conducted on digital journey on digital obviously what what we had said is that the margin adjusted for the one of last year was you know somewhat between 12 and a half and 13 percent and and you know the outlook the outlook this year would be to to try to rebound towards those levels but it's an appeal it's an appeal task and and so we are we are seeing a

better margin in the second half clearly coming through that that's what I would qualify it if I might just quickly quickly follow up on this I mean this has been really speed margin decline so we're talking nine percent here and I think excluding what you mentioned before it's a 30 40 bips currency had when excluding the, say, 250 bps or so of a margin inflation that we saw in H125, the underlying margins pull down 300. So I heard your commentary around some timing effects in the first half of 26, but I was just wondering if there's more to it, so is this only timing or is there anything else in the market that has kind of resided in this very steep margin decline?

Yeah, there is, sorry. So there is some timing, but I would not qualify it as all timing regarding the margin level achieved in the first half of the year. And so for digital, you know, what we will expect in the full year is to see a rebound from the first half and I would say into the 12% plus level.

Understood. thank you very much for the clarification thank you we will now take one last question and the last questions come from the line of david perry from jp morgan please ask your question yes hi patrice and jeremy thanks for squeezing me in uh two questions uh these are a bit philosophical if that's okay um just on defense patrice um a lot of investors are now debating creating old technology versus new technology. Just be really interested in your thoughts on these industry trends and how you think Thales is positioned. The second one is obviously you've had a lot of questions on digital and you say you have a plan. Does that plan include just selling the business and moving on? Because it does seem to be distracting from the really good performance you're delivering in defense right now.

Thank you, David, for your two questions. Shall I start on defense? Honestly, I don't know what is an old or a new technology in defense. And what I see is the fact that we have, I would say, or we do master a range of technologies that allows us really to, I would say, have the right solution and product for the current needs. Whether you think of, let's say, technologies that have been known in the past, based on electronics, radio frequency, laser technologies, and so on and so forth. New technologies linked to the digital world, data analytics, AI, cyber, cloud technologies, hybrid communications, and so on and so forth. And even technologies of tomorrow, when we speak about quantum technologies, not quantum computing, but quantum technologies for sensors, which is going to prepare the future of the future of telus and that's probably one of the key strengths of the group being able to be i would say across all these technologies whether they are old or new again i don't know what is an old audio technologies but clearly that's what makes me i would say confident in the future of our portfolio and our ability to meet today's and tomorrow's need of armed forces on cdi do not share your appreciation david that it's a distraction i would say it's it's a good and profitable business we do leverage technologies i know that you love figures guys but we love as well technologies and synergies and cdi bring to defense and aerospace businesses technologies know-how that was or were lacking to talus before cdi's cdi and that are super useful to fuel the growth in those defense typically cloud technologies were not mastered by the group before the different acquisition in the CDI field. Sorry to interrupt, Patricia.

I'm just asking about digital. Cyber, I get, but digital, I just don't see the synergies and profit.

That's why I'm trying to explain you, David. Cloud technologies are coming from the digital, I would say, part of the business. That's pretty clear. By the way, when we do hybrid communication for Sorry to be a bit technical, but you need as well to understand, I would say, the underlying reasons of the synergies, what we see on the day-to-day business between CDI and defense or aerospace. It's the case coming from mastering 4G, 5G standard and technologies coming from mobile connectivity business to offer what is called now in the defense world, hybrid communication solutions, mixing some good old defense technologies with frequency hopping and so on and so forth. with the fact that we do leverage as well civil networks that's what we see in Ukraine that's what we see in the Middle East that's what we see in the most modern conflicts okay so again it doesn't appear in the figures so you may

challenge the figures but this is the reality we live in and this is what allows us also to perform better in our legacy domains like defense and aerospace Again, just building on that to put it in the context, what we're talking about, what we've talked a lot about today is roughly a year-on-year impact of 20 to 25 million euros, for which we are confident that we will recoup some of it in the second half.

All right. Thank you.

Thank you, David.

Thank you. This concludes the question and answer session. So I'll now hand back to the management team for any closing remarks.

Well, I think this is it. So thank you, everybody, for your participation. Thank you for your questions. Of course, do not hesitate to reach out to the IR team for any follow-up questions. And have a great day. See you soon.

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 the Talus Group Investor Relations at the following email address, ir at talusgroup.com. And we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect your lines.