Thales SA

PAR:HO

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q3 2021 Order Intake and Sales Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.

[Bertrand Delcaire, Head of Investor Relations & VP]

Yes. Hello. Good morning. Welcome, and thank you for joining us for the presentation of Thales' 9 months 2021 Order Intake and Sales. I'm Bertrand Delcaire, the Head of Investor Relations at Thales. With me today is Pascal Bouchiat, CFO. This 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.

[Pascal Bouchiat, Senior EVP & CFO]

Thank you, Bertrand, and good morning, everyone. Before moving on to the numbers, as usual, I wanted to highlight a few key messages. I'm now on Slide 2. Of course, early in August, we announced our entry into exclusive negotiations on the disposal of our transport business. I won't come back here until strong rationale for this strategic move. Let me just point out that in applications of IFRS 5. Transport is now treated as discontinued operations, which means that all the figures in this presentation excluded for both 2020 and 2021. We are making good progress on all the required social processes and expect to sign the final agreement with Hitachi in Q1 2022, putting us on track to close the transaction by the end of 2022 or early in 2023. Earlier this month, we held our first ESG Investor Day. We presented a lot of information on ESG-related growth opportunities across the group and the societal benefits of defense and the strict regulations that goes on it, and on the acceleration of our internal action plans. As they are central to our growth strategy, we will regularly come back on them in future presentations. In the meantime, don't hesitate to contact Bertrand and the IR team, if you want to discuss these topics further. Finally, I wanted to highlight 2 recent announcements. First, our largest defense customers are once again confirming the growth of their budget. For example, the French government presented its 2022 budget law earlier this month. The overall budget is 4% above 2021 and 14% above 2019. We are seeing a similar trend in our other large markets. The U.K. auto budget will be released tomorrow, and it is expected to show a significant growth as well, in line with the previous governments' announcements. Second, I wanted to highlight our recent product announcements that is a great example of material revenue synergy with Gemalto. I'm referring to the strategic agreements we signed with Google Cloud to co-develop a sovereign cloud offering. This project is a compelling demonstration of the product synergies we can achieve with Gemalto, as it integrates both Thales and Gemalto cybersecurity capabilities into a product that targets the sovereign French markets, customers that are managing critical infrastructures that want to have access to cloud solutions. The solutions will take some time to generate revenue, but the medium-term opportunity is quite material, several hundred million euros in a few years' time. Turning now to Slide 3, which summarizes our key figures for the third quarter and the first 9 months of the year. First, for clarity purposes, let me repeat that all the figures presented in this presentation are excluding the transport business, both for 2020 and for 2021 in accordance with IFRS 5. Now when we look at the numbers, as you can see on the slide, the commercial dynamics remained good during Q3, with order intake at plus 9% organically, taking us to a solid 28% over 9 months. We'll have a look at the moving parts in greater detail in the next slide. Sales over 9 months are up by 6.2% organically, despite a slight negative growth in Q3 that I will also explain in a minute. I'm now on Slide 4, looking into details at our order intake. As mentioned just before, Q3 was again a strong quarter for us in terms of commercial activity with an organic growth at plus 9%, after an already dynamic H1, taking us to a strong EUR 10.7 billion in 9 months, up 28% organically against 9 months 2020. Interestingly, on the same scope this is also above the EUR 10.3 billion of orders over the 9 months of 2019. Looking at the chart by unit value, it's worth noting that all categories, small, medium and large orders clearly progress over the period. The strong growth was driven by both large orders above EUR 100 million, increasing from EUR 6 million last year to EUR 9 million this year and medium-sized orders between EUR 10 million and EUR 100 million, which increased by 39% during the period. You can find the list of large orders in the press release. There were spread across many, many geographies in Defense & Security and in Space. Small orders also remained strong, up by 5%, 9 months and by 9% in Q3 2021. Turning now to Slide 5, looking at sales growth. Maybe just a word on the currency impact. As you can see, that the Q3 currency impact was actually positive at EUR 26 million, hence, reducing the negative impact over 9 months to minus EUR 49 million, and we expect the trend to continue in that directions over Q4. However, Q3 2021 came slightly negative, minus 1.4%. This was not a surprise for us as Q3 last year was strong, benefiting from a rebound after the productivity disruption during Q2 2020. Also, please keep in mind that our civil aero and biometric businesses remain both impacted by the sanitary crisis. Over 9 months, we are now at plus 6.2% of organic growth, mostly driven by the strong sales momentum in Space and the back of its ongoing commercial successes, and also a continuous robust scenario in Defense & Security, with high single-digit organic growth versus the same period of last year. Turning to the geographical perspective, let me just point out that the rebound was stronger in mature markets, especially in France and the rest of Europe, but with emerging countries still at a positive organic growth by 3% in 9 months. Now looking briefly at each segment one by one. I'm now on Slide 6 for Aerospace. Orders were strongly up, as you can see, by 63% organically, thanks to the ongoing momentum in space, including a new large order over EUR 100 million in Q3 for the security facility and mission segments of Galileo. It is also important to note that aeronautics orders started to rebound in Q3. They were up 8%, starting with the civil aero aftermarket, as you can imagine. Sales were up by 8.1% organically over 9 months, driven by the space business, which was up by 27% over 9 months. And despite our revenue in aeronautics, still materially impacted by the ongoing sanitary crisis with only visible rebound in aftermarket, as I was mentioning just before.Turning now to Slide 7. Looking at the Defense and Security segments. Order intake remained strong, up organically by 24% with a total of 5 large orders above EUR 100 million since the beginning of the year, including a support contract for the French MoD that we signed during Q3. Organic sales growth remained also clearly solid at almost 8% organic growth over 9 months. And despite Q3 with higher comps. As I mentioned earlier, Q3 2020 benefited from our rebound after Q2 impacted by productivity disruptions at the start of the sanitary crisis, and that was especially turned Defense and Security businesses with our employees unable to access sites during the first lockdown.Let me however declare, this negative growth in Q3 was anticipated and it doesn't jeopardize our ambition of a mid- to high single-digit growth for these segments over the full year. Turning to Slide 8. Looking now at our last segment, Digital Identity & Security. As I 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 2.1 billion over 9 months, sales were down by 1.3% on an organic basis with the Q3 2021 that came flat versus Q3 of last year. And other factors to mention here, biometrics was naturally depressed over the period with less demand for Passport and border control systems. Encouragingly, sales started to rebound in Q3 organically up by 5%. On the other hand, cybersecurity confirmed its sales momentum up 11% organically over the 9 months period with another high single-digit growth in Q3. Finally, as you know, the chip shortage is creating a temporary mismatch between supply and demand worldwide, and it created some delays in Q3, which we estimating at around EUR 20 million to EUR 30 million, so 2 to 3 points of both. Which brings me to the last slide, Slide 9, with a reminder of our 2021 financial objective. As you understood, Q3 order intake is in line with our expectations, and we have a solid pipeline of orders for Q4, which allow us to confirm our full year order intake target, namely a book-to-bill ratio above 1. In spite of the small headwind from the semi-conductor crisis, our sales dynamics is strong, and we are confirming our full year guidance both in terms of sales and EBIT margin. Many thanks again for your attentions, and I will now be pleased to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of George Zhao of Bernstein.

[George Zhao, Research Analyst]

The first question is on. In the past, you've talked about having more fixed price contracts estimate with other peers. I guess can you give us any figures on how much of the business is either repriced on a short-term contract award or has to pass through process though the contracts automatically passed on it's overall material cost in place? And then second question, last month, you called out minimal contribution from the past class submarines in the results last year. But had the project gone through as originally intended, what would have been like some value to tales how does that play into your reiteration of the 4% to 6% medium-term growth like for the business?

[Pascal Bouchiat, Senior EVP & CFO]

Okay. George, I have to say that, I mean, your line is not of good quality, so coming back on your first question. And I mean, inflation and the structure of our contract and to which extent do we have pass-through mechanism allowing to pass our increase in material prices to our customers. I need to spend a bit of time, I mean, to come back on the structure of our project. Let me start with our businesses that manage a project. And this relates in particular to our Defense & Security, but also to our Space business. And here, I mean, there are 2 situations. The first situation where I mean we have indexation clauses, basically on material inputs, but also on wages, and because of those indexation mechanism we are well protected in the case of an increase in both material costs of our wages. Now they are also in those project businesses where we are committed and fixing some prices. But in that situation, in most cases, we're protected because before valid any contract, I mean, we have commitments from our suppliers. And because of that, I mean we have also these situations, it's just level of protection. Now for the rest of our businesses which relates in particular to our Avionic business or to most of our DIS businesses, which are more about managing flows of products, a small orders but recurring orders. So here, in most cases, it's more, I would say, a short-term or annual negotiations in terms of prices. And then at the end of the day, it's a question of offer and demand. And of course, as we see most factors in this field been impacted by the increase in materials. There will be negotiations and we are quite convinced that we will be able to manage to pass to our clients, I mean, the necessary increase in prices in order to reflect the increase in raw materials. Okay. That was, I mean, your first question. Second one was about, I mean, the impact of the Australian submarines and to which extent could this affect our midterm growth trajectory for our Defense & Security business.

[Bertrand Delcaire, Head of Investor Relations & VP]

Was it the question, George?

[George Zhao, Research Analyst]

Yes. It's just a question is, have the projects gone through as far as intended, what would have been the lifetime value, I guess, how does that play into the iteration of the medium kind of growth? I know you had called out minimal contribution last year, but we could think of the overall lifetime value, which is perfect?

[Pascal Bouchiat, Senior EVP & CFO]

Okay. I mean, George, I guess, I mean, to address your questions I need to talk about both Naval Group and Thales. So relating to Naval Group, as we have already mentioned, by the way, we communicated quite quickly after the announcement of this -- of the cancellation of this contract. So we mentioned that, I mean, relating to Naval Group, on which, as you know, we have a 35% stake. So overall, we mentioned that this contract was expecting to bring a level of annual revenues of around EUR 500 million with a level of EBIT margin for Naval Group around 8%. So I mean, if you make the -- I mean, the calculations and taking into account of stake -- of 35% stake in Naval Group, I mean, you -- and after tax, of course, you realize that, I mean, the impact for us, I mean, through the equity earnings from Naval Group is not something which is sizable for Thales as a group. And the second aspect relates to our own business and a potential missed opportunity relating to our, I mean, supply from Thales to this project. So what you also mentioned was that, I mean, the level of contracts that we booked so far was very low. I mean, it was below EUR 30 million. So I mean, we -- I don't expect any significant impact. And your question about, I mean, the midterm growth rate for our Defense & Security business, I mean, my view is that it will not have any significant impact. I mean this is -- I mean, this is like, I mean, of course, I mean, we are managing our businesses with good news and sometimes a bit of less good news. So it's part for me is part of the ballpark of the management of opportunities. And in no way does this compromise our midterm guidance of mid-single digit for our Defense & Security business.

[George Zhao, Research Analyst]

And on that you mentioned that EUR 30 million of orders in your own business, would that haven't been expected to ramp up over time though?

[Pascal Bouchiat, Senior EVP & CFO]

No. I mean -- I mean, this EUR 30 million orders was what we already booked in the previous quarters relating to this contract. We are expecting, I mean, to book a few more tens of million euro relating to these contracts in 2022. But once again, I mean, what we are talking about is a few tens of million euros that we're expecting in 2022. When you compare this level to what we expect in terms of level of booking for Defense & Security business, I guess you will agree with me to say that it is something that is insignificant.

[Operator]

Your next question comes from the line of Benjamin Heelan of Bank of America.

[Benjamin Michael Heelan, Analyst]

I wanted to ask question on Aeronautics. I think you gave us the numbers for orders in Q3, and how did the business perform from a sales perspective in Q3? And how are you seeing trends in that business? And I guess a quick follow on from one of the questions George asked around pricing? Does that mean that we should assume you are seeing actually better pricing in the aeronautics business, and that was the first question. And second question was on the semi shortage that you called out. I am keen to understand kind of how much of digital identity security business is exposed today, this is a -- is that big issue, Is it not that big an issue? And how are you thinking about that into '22. And then finally, on the Google Cloud contract that you announced. I think you mentioned 100 -- a couple of hundred million euro of sales medium term. Does that mean that we should assume you already have governments signed up to the contract or is that just kind of an early expectation, and how should we think about margins?

[Pascal Bouchiat, Senior EVP & CFO]

Okay. Okay, Ben. So I mean, on your first question relating to the civil aero business, I mean, what we have seen in Q3 is a bit of a mixed trend. We clearly see, I mean, a positive trend relating to the aftermarket on the single A segment. And this, by the way, very much in line with, I mean, overall, I mean, the recovery of the domestic market. So here, I mean, overall pretty positive. On the long haul or wide-body on the other side, I mean, -- it's true that at this point, we don't see any significant trend up in terms of level of sales. Now on the OEM, here again, I mean, a slight trend that relating to the single A market. On the wide body, however, I mean, a situation which continued to be overall depressed. So overall, it means that aftermarket is overall positive in terms of level of sales against Q3 of 2020. I mean, this is really, I mean, relating in particular to our cockpit avionic business, I mean the rest is overall pretty much flattish. So overall, I mean, a slight positive growth, but on a level which remains quite modest as we speak here. Your question on pricing was also on civil aero or was it more broader?

[Benjamin Michael Heelan, Analyst]

No. It was specifically on civil aero.

[Pascal Bouchiat, Senior EVP & CFO]

Okay. I mean, on pricing, I mean, no issue -- No issue in terms of pricing. I mean it's more about speed of recovery, both in aftermarket, and you see that overall start, I mean, to materialize, I mean, on aftermarkets. And today, on OEM, no, it's not a question of pricing, it's more a question of overall demand. Second question about chip shortage, so I mean, if I look back at what we managed to do on this point, I really do think that we managed to navigate through this chip shortage quite well. And I mean, when I look back at the impact of our DIS business, I mean, looking at the end of September level of revenue, what we missed overall in terms of sales is between EUR 20 million and EUR 30 million of this, I mean, relating to EUR 2.1 billion of sales. So here, we are talking about between 1% and 1.5% of growth relating to the chip shortage. Now, I mean, what is important to consider is that we don't see the situation is improving overall in terms of supply. And it's true that we had a bit of cutoff between Q3 and Q4 in terms of chip supply, which had an effect on Q3, as I mentioned, something around EUR 20 million on Q3. So there will be a transfer between Q3 and Q4. Now when we see also a transfer of supply from Q4 to Q1, that is today an open point, and we're quite vigilant about managing in 2022 as well as we manage in 2021. Now, I mean -- and let's be very clear, the situations relating to the supply of chip for DIS business, where we consume a number of chips has absolutely nothing to do with, I mean, what you heard about, I mean, the impact on other sectors, in particularly the automotive sectors.Now it's true that, I mean, even EUR 20 million or EUR 30 million of sales, this represents approximately 1% of the overall 2021 level of revenue for DIS business. Your last question was about -- I mean, this is pretty nice opportunities with Google Cloud. I've not mentioned a couple of EUR 100 million in my presentation, I mentioned about several hundred million euros. So we are quite positive on that. This is today, I mean, our expectations, it doesn't mean that we have already signed contracts, because it will take a bit of time to put together the overall offering together with with Google Cloud. We think that our business will be ready to start, I mean, providing a service probably mid-2023. And yes, I mean, if you look at our expectation for 2025, 2026 is a several hundred million euros in term of level of sales. I don't want to be that specific in terms of margin, as you asked for. But I mean, margins are in line with the level of margin that we want to get in Thales. So probably considering that it is in line with the overall average level of margins that Thales will be able to deliver in this horizon of time.

[Operator]

And your next question comes from the line of Zafar Khan of Societe Generale.

[Zafar Khan, Equity Analyst]

I have 3 questions, please. First 1 is just on the Avionics 9 months versus 9-month sales. I was thinking that given the very strong improvement you've seen in the Space. I imagine Avionics was probably down this 9 months versus last year. The second one is just on the -- there's a lot of discussion in the media on supply chains. Do you have any issues in any of the business on the supply chain side or you're getting the stuff through as and when required? And the third one is just clearly, pleased that you're focusing the portfolio with the disposal of transport business. Is there any more to do on that front in terms of further focusing the portfolio?

[Pascal Bouchiat, Senior EVP & CFO]

Good morning, Zafar. So on your first question, it's true that our Avionics business for the first 9 months of 2021 is below, I mean, the level of sales relating to the same period of 2020. And the reason is quite simple. You probably have in mind that, I mean, the sanitary crisis started really to hit as from the beginning of Q2 2020, which means that -- and it was quite obvious in our H1 figures. I mean, we mentioned that our H1 level of sales for our Avionic business was below, I mean, H1 2020. My overall, I mean, recollection was that we mentioned that over in H1, our level of revenue for our Avionic business, I mean Avionic business being our Aerospace segment minus our Space business. We mentioned that our Avionic business in H1 was down something like 7% against last year. And we said that in H2, we would see and we confirm that we would see a positive -- a first recovery as compared to H2 of 2020. So at this point probably a bit too early to be more specific of what should be the level of growth in H2 2021 versus H2 2020. But we expect overall growth against H2 of last year. Supply chain side, I mean, so I've already commented quite extensively in the situations relating to semiconductor supply. This is really, I mean, where we see today some difficulty and very much focused on our DIS business and in particular, our [EMV]. And overall, I mean, smart cards business, including also, I mean, our IoT business. I mean, for the moment, I mean, we don't see other businesses, I mean, a material impact. I mean, very specific issues. Of course, I mean, we are quite vigilant, but at this point, we don't see any difficulties in terms of chip supply in our other businesses. Now relating to other kind of materials or things that we buy. Nothing very specific. I mean this is also the beauty of our business model, which is more based on quite a small proportion of hardware and more and more, I mean, larger proportion of software, which means that, for instance, I mean, we see in other sectors, in other industries, difficulties in terms of logistics, for instance, Maritime logistics, for instance, I mean, at this point, I mean, we have not been impacted anyhow by this type of difficulties. Now -- and it's a bit, of course, a bit different. In terms of supply, it is also, I mean, people and talents. And here, we all know that, I mean, the work for talent is there in many countries. And this is where probably we focus the most at Thales with making sure that we keep attracting the right talents in all countries where we operate. And this is, of course, where we are working quite a lot to keep being the way attractive company. By the way, I've been very pleased to see that, I mean, there has been a service that has been released a few weeks ago by always Interactive showing that Thales was the preferred, I mean, company for young engineers in France, which is a good testimony of our ability to attract new talents in our company. So this is probably more on talent and the white skills that I would focus the attention of the company more of then and putting aside the chip shortage some other difficulties. Your last question was about portfolio adjustments. So I mean, of course, I mean, the disposal of our transport business was a significant move from a strategic standpoint with really the intent to focus the company on only 3 key markets: aerospace, defense, security and digital security and identity really mean to focus the company on those 3 growing markets. We are quite happy with, I mean, the portfolio of Thales as it is taken into account the disposal of transport business. Now, I mean, are we contemplating, I mean, a minor adjustments -- of course, I mean that's always -- I mean, that's the type of thing that we are looking for. But please do consider that, I mean, what we might have in mind is really, I mean, minor adjustments. And that overall, we are quite happy with our portfolio.

[Zafar Khan, Equity Analyst]

Could that results go supplementary?

[Pascal Bouchiat, Senior EVP & CFO]

Sure.

[Zafar Khan, Equity Analyst]

The disposal of the Transportation business, hopefully, when we get the money for that. I was expecting that, that would be going back to the shareholders by form of maybe a buyback or a special dividend, given that you have very good cash-generative businesses. I think what I remember reading was that you will give some back, but most of the retained for developing the group. Can you just expand on that a little bit? I was thinking, given that you are very cash generative. You don't need that money on your balance sheet.

[Pascal Bouchiat, Senior EVP & CFO]

Yes. Okay, Zafar, I mean, at this point, I mean, we shouldn't forget that at this point it's not, I mean, piling up cash on our balance sheet. I mean, we have a net financial debts. And as we all know, we also have a sizable level of pension obligations and pension provision for our balance sheet. Now you are absolutely right and saying that, I mean, we generate a sizable level of cash flow. And of course, I mean, these transactions, I mean, the disposal of transport business always, I mean, the question about the use of proceeds. As you know in proceeds will -- we plan to get those proceeds either, I mean, at the extreme end of 2022 or the beginning of 2023. And yes, I mean, of course, I mean, we will consider on one side, I mean a higher return of cash to our shareholders. You mentioned share buyback. I mean, we could mention potentially exceptional dividend. We could mention increasing the level of payouts. So there are various tools figures that we could contemplate. And I mean that's something that, of course, our board will consider. At this point, I mean, it's probably a bit too early to be more specific. But I mean, the point is well noted, and we will be working on this matter. I don't want also -- I mean to discussing the fact that we might also keep considering, I mean, strengthening our portfolio both from a technology, but also from a geographical standpoint. And it's true that, I mean, our willingness to focus the company on 3 markets where, I mean, there will be opportunities for us to strengthen our existing portfolio. This is also something that we will be considering without, of course, any rush and making sure that what we could consider in terms of acquisitions, we'll meet our key criteria which for me is really, I mean, how can M&A contribute to Thales, I mean, growth trajectory. So looking at assets that really, I mean, could demonstrate a good level of growth, with -- of course, I mean, very much in line with our 3 key markets. Of course, potentially adding a new additional set of technology in our markets together with continuing expanding Thales in geographies, where today our presence is not as strong as it is in other markets. And then, of course, I mean, a key point for us, as always, which will be, I mean, the level of valuations and making sure that it will allow us to generate a positive return on invested capital.

[Operator]

And your next question comes from the line of Celine Fornaro of UBS.

[Celine Fornaro, Head of EMEA Industrials Research]

I'll have 3, if I may. The first one would be on the defense and the Q3 dynamic around sales, if you -- maybe you could provide a little bit more understanding on what is happening there? Is it a slippage of contracts or revenue recognition. And if it's a revenue recognition issue, does that mean you're running late on a program or anything we should be aware of? My second question would be on the DIS trends. You touched on some of the trends like cyber, but could you also provide some color on the other businesses such as smart cards and IoT and what you're seeing into year-end, and for beginning of 2022 in terms of demand there? And finally, as we see the orders picking up more -- sorry, in aerospace and in DIS, do you think that there is potential pressure coming on the margin given the timing, particularly in Aerospace over the next 6 to 12 months, or now is actually just a matter of reestablishing the right levels?

[Pascal Bouchiat, Senior EVP & CFO]

Okay. Celine, so I mean, on your first question about Q3 in our defense business, I mean, please, I mean, we shouldn't over-interpret, I mean, Q3 level of revenues was in the past, by the way, in some up and down per quarter on our defense business. You probably have in mind that Q3 2020 was quite strong in our defense business. And in particular, I mean, reflecting, I mean, the situation in Q2 2020, where, I mean, most of our -- I mean, a number for site was working at a very low rate because of the lockdown. And it's true that in Q3 2020, we took advantage of quite significant overall catch up catch-up effect. So which means that, of course, I mean, Q3 2020 is a more demanding reference base than of course, H1. Now, I mean, I don't anticipate any specific difficulties. I mean, you mentioned about, do we have any difficulties in terms of overall, I mean, program, the situation is really -- I mean, it's pretty good in all our defense markets. I mean you have seen our level of order intake, level of profitability is rather good, very much in line with our expectations or guidance or nothing behind those figures. Relating to the IS and the color on our various segments. So what do we see? First, I mean, if I take the -- I mean, the banking, the EMV count, but, yes, I mean, our banking market, you probably have in mind that overall H1 2020 was quite strong, which explain why, I mean, in H1 2021, overall, it was more of a negative growth because of the reference base. I mean reference base is becoming more modest as, I mean, H2 2020 was less strong than H1 2020, which means that overall, we are expecting, I mean, our banking business to report probably a mid-single digits top line growth in the second half of 2021 versus H2 of 2020. Of course, I mean, this being based on the assumptions that we'll get, I mean, the necessary level of chip from our suppliers. But you -- I guess you understand from my comments that the level of demand is there. Overall, our sim card business is also doing pretty overall pretty well. Our biometrics and identity, which suffered a lot in terms of crisis, has started to recover, but at this point it's still a bit modest, I have to say, still a bit modest. But turning positive and we expect, I mean, this biometrics identity and secure identity business to report a positive growth in H2 versus H2 of last year. And overall, our cyber business is doing extremely well. I mentioned something around double digits. So this is what we expect The IoT business overall. I mean, we expect it to be more modest, probably after H1 which was strong. We expect, I mean, H2 to be a bit weaker. Now all of that is once again under the assumption that we'll get, I mean, the level of chips that we need. And, I mentioned, I mean, overall, I mean, uncertainty about a few tens of million euro of level of revenue driven by these potential issues relating to chip shortage.Your last question was aerospace, but I don't remember, see if you can.

[Celine Fornaro, Head of EMEA Industrials Research]

Yes, the mix of the order book that we're starting to see emerging potentially in the second half. Could that affect the margins over the short-medium term?

[Pascal Bouchiat, Senior EVP & CFO]

No, no, I don't have anything in mind. I mean, our mix in terms of order intake, I mean, you are seeing, and of course, I mean, the larger proportion of Space order intake in the first 9 months of 2021. This is a primary driver of our overall aerospace business. But in terms of level of margin per project, there is nothing specific to report. I mean we're always quite vigilant in terms of gross margin and order intake. Now of course, I mean you probably have in mind that the overall level of margin on Space is lower than what we have on our Avionic business. But it's really a question of mix between Space and Avionics, it's not among each of the 2 subsegments that we have changes in terms of mix.

[Operator]

And your next question comes from the line of Christophe Menard of Deutsche Bank.

[Christophe Menard, Research Analyst]

The first one is on the recovery in the emerging market orders. We've seen they're pretty stable in the 9 months and Q3. Do you have some sort of timing? Do you have a view on when those orders could recover? That's the first question. The second is on cybersecurity. Again, you said high single digit in Q3. There is a very strong growth in that segment over the last 9 months. How sustainable is it and are you doing better than peers in this segment, and what is the driver for that? And the last one is on Space. Can you update us on the Thales order if you have any update that is -- can be communicated to investors?

[Pascal Bouchiat, Senior EVP & CFO]

Okay. Christophe. So your first question about emerging markets. I mean, overall, we see quite a good level of demand. I mean there is a number of requests for proposal has never been so high. Overall, I mean, you mentioned slight growth in order intake end of September. It's 2 -- I mean, overall, I mean 4% increase in order intake for emerging markets as compared to last year. Now of course, we have not -- I guess it was clear for everybody, was not booked. I mean, the -- in Q3 we have not -- was still not booked, the project relating to Rafale in Egypt, which is, as you know, quite a sizable project. And -- and of course, will change overall, I mean, the situation in emerging countries in terms of growth relating to our order intake for 2020 and 2021. Okay. Your second question was about sustainability, of course, in in fiber. So overall, I mean, I do think that I mean, the growth that we are reporting is really, I mean, a sustainable level of growth. So overall, I mean, we have extremely strong position in cybersecurity. And it's true that, I mean, the developments of more and more remote interactions, but also the development of more and more cyber attacks results in all [ISIT] departments in all companies, but also in public institutions were aiming to focus more and more on how to protect the company of the institutions. Again, I mean, threats coming from, I mean, more and more obvious and difficult cyber attacks together with, I mean, more and more people working remotely. So all in all, it represents, I mean, really, I mean, midterms strong growth potential for Thales. And I mean considering now, I mean, the spectrum of our technologies of our offers, I mean, it gives us an opportunities and the associations of Thales with Google Cloud is probably a good demonstrations of how to partner with somebody else in order for us to bring, I mean, cybersecurity system that allow to take advantage of a very flexible and added value Cloud platform from Google to really a trusted Cloud that anybody which operates in particular, critical infrastructure can use protecting themselves against threats from your side, including, by the way, the U.S. Cloud Act. Last point, I mean, we have unique capability in terms of cyber security talent. I mean, as you know, we have today at Thales 2800 cyber engineers. So all of that is driving in the development of a good quality overall. So I'm quite positive about mid- to long-term growth of our fiber security business. Your last point about -- was about Telesat. As I keep saying, I mean, it's a question that you should direct to Telesat, of course. Telesat, I know keep working on putting together the funding as it's a project. I remind everybody that this is a $5 billion-plus project. Maybe, I mean, you might have seen a positive news that occur in August, where the government of Canada has confirmed it's a willingness to fund this project for a month, which is slightly above CAD 1.4 billion, which of course, I mean we view as -- we see as a positive development.

[Operator]

And your next question comes from the line of Jeremy Bragg of Redburn.

[Jeremy David Bragg, Research Analyst]

A couple of questions from me please. Firstly, going back to Aerospace, clearly, the defense part is going well. So my first question on that is, how do we think about the sustainability of that much visibility of continued growth do you have on the Space side. And then looping back to aeronautics please. Is this going as well as you would expected or a little bit slower maybe because of wide-body? And how should we -- how would you comment on the quarter-on-quarter growth versus 2Q 2021? And then the next question, and I'm sorry to come to this on a 3Q results call again is really on potential M&A. And when you say you might make some small additions or changes to the portfolio, are you thinking here acquisitions in the range of EUR 300 million to EUR 400 million projects that were previously on the table before Gemalto? Or are you thinking potentially there could be something bigger or just too early to say -- Sorry to put you on the spot.

[Pascal Bouchiat, Senior EVP & CFO]

Okay. Okay. So Jeremy, first, I mean, on aerospace, I mean, you mentioned in particular, I mean, Space signed. I mean -- How sustainable is it? I mean we're extremely positive about the growth of aerospace business. Overall, I mean, we see our observations, explorations, navigation segments showing we, I mean, an impressive level of demand. And I mentioned in the past, I mean, project like Copernicus, project like Galileo, so all of that is extremely positive with a clear drivers coming from the environmental purpose. And we share with you at -- and ahead of Space, I mean, share with you at our ERG events. A number of examples where we see the potential of growth of this business. So all of that allowing us to confirm that we expect this business to generate EUR 2.5 billion of revenue in 2024. We expect that 2021 should be around EUR 2.1 billion. So you see a continuous growth in this -- overall in this business. Now on our avionics business and sequentially, Q3 versus -- Q3 versus Q2, so overall it is positive really driven by the aftermarket. I don't want to be more specific. But it is -- this is really on the aftermarket that we see a positive sequence and aftermarket really on the domestic market on the single- business. On the widebody, as I mentioned, at this point, it's less visible in terms of growth as compared to what we see on the single bodies.M&A, you know, I mean, of course, I mean, we keep looking at bolt-on acquisitions. It's a matter of fact. I mean, and you mentioned transaction of a few hundreds of million euro. And, yes, I mean, we would be happy to consider this type of acquisitions. Now, you mentioned, would you consider a larger size acquisitions? The answer is, at this point, I mean, we don't have any fine on our table. But I mean we are pragmatic, we're open. So if one day, I mean, we see fine that what represents a level of investment that would be above, I mean, this level of bolt-on acquisitions, of course, we will consider the merit of this type of potential acquisitions At this point, I mean, there is nothing on the table that deserve any comments. So at this point, it's more about, yes, I mean, we're tracking the market. We are tracking various bolt-on targets, and we'll see, I mean, how we progress on this matter. In the next few quarters, once again, without any rush and making sure that the criteria that I've mentioned about potential for growth, but I mean, i.e., and quality of the assets about meeting our criteria in terms of strengthening our technologies, strengthening our geographical scope and also with the valuation that is in line with our standards. So I mean, adding all of that in mind, I mean, serving as key criteria for us to decide to move on potential bolt-on acquisition.

[Operator]

And your next question comes from the line of Tristan Sanson of Exane.

[Tristan Sanson]

I'll be quick. I'm sure you're probably over-running a bit. There are going to be 2. The first one, and it's clarification on orders and on cash. On orders, you mentioned several times that you're expecting large order in Q4. From what I understand, you're assuming that the Greece Rafale order will be placed before the end of the year. you're more cautious on Telesat. Can you remind us what are the other larger are there in the pipeline that have been announced and that are -- that's can be closed before the end of the year? And whether you deem them likely or not likely, I'm especially thinking about the Greece frigates that we have not discussed so far on the call. And the second question is a bit related is on the free cash flow trajectory for this year. If I look at what could be your free cash flow ambition post these orders, including the Greece Rafale and after the consolidation transport, I estimate you probably on a trajectory for going toward something like EUR 1.3 billion for this year. Maybe a bit more to more ambitious on the orders. Can you update us on this centers, whether it's roughly a fair estimate or not and enough stuff here.

[Pascal Bouchiat, Senior EVP & CFO]

Okay. Tristan, I mean, your question probably deserves a bit of clarity because there might be a bit of misunderstanding, I mean first, in terms of Rafale orders. I mean, the Greece order was booked in H1. I guess when you talk about Greece Rafale, you're probably talking about the additional 6 aircraft that Greece mentioned a few weeks ago, but we expect in this project -- those additional 6 aircraft to be booked in 2022 and not in 2021. However, I mean, as I mentioned, what we expect in Q4 2021 is booking the Rafale in Egypt. Yes. Egypt, which represent [13 Rafale], so which is quite a sizable contract for us with the associated level of down payments that, I guess I would mention a level of down payments that for Thales should represent Thales I am seeing around EUR 150 million, that I mean, a good proxy of the type of down payment we could get on such a large project. Now of course, I mean, yes, you're absolutely right in saying that the Q4 orders will be strong as, by the way, as always. So we're expecting large orders in many places. I don't want to be more specific in addition to what I've mentioned on Rafale. I mean about, I mean, the frigate in Greece, which is first, I mean, a project for Naval Group, but which could represent also a sizable amount for Thales as we will supply our equipment and systems on those 3 frigate. I don't know, I mean, at this point, it's probably a bit too early to say whether or not we should, I mean, book this contract in 2021 or 2022, which, by the way, is probably a good illustrations of potential -- a bit of potential uncertainty in terms of level of order intake, as I mean it can be either Q4 2021 or Q1 2022.Now in terms of overall in terms of overall free cash. So overall, as I mentioned, the last time that we discussed quite -- overall quite positive, I mean probably had in mind what we shared with you beginning of 2021 and the fact that we have upgraded our figures 6 months later as we released our H1 level of free cash flow. So originally, I mean, our guidance was more about EUR 1 billion of free cash for 2021, taking into account overall, 95% underlying conversions ratio from net income to free cash, plus a negative reversal of down payments of around EUR 200 million. So a few months later, we said, I mean, we should do better on this front. And overall guidance that was more between EUR 1.1 billion and EUR 1.2 billion. This is a guidance that we shared with you in July based on H1 figure. And this level doesn't take into account, I mean, the positive impact of certain payments that we could get from Egypt. So I mean, overall, if you take between 1.1 billion, 1.2 billion plus, let's say, EUR 150 million, you could end up with a level of cash that could be around EUR 1.3 billion for the full year 2021, which will be quite a strong level of performance. And we are extremely happy with that. Today, I mean, we keep seeing quite a strong performance overall in terms of cash flow. And we don't communicate our cash flow on a quarterly basis, but I'm quite happy with our continuous high level of performance on free cash flow over at Thales, reflecting, our focus on this front, but also overall, a level of order intake, which is overall rather good and which, of course, has a positive impact in terms of payments.

[Tristan Sanson]

Just to be clear, Pascal, this includes upon together as a contribution of transportation? Or do you see it below free cash flow has been discontinued?

[Pascal Bouchiat, Senior EVP & CFO]

No. I mean it includes everything. And my view is that I mean, we'll communicate on our annual figures on the net adjusted income that, of course, will take into account the contribution of our transport business, which will be summarized in a single line of our P&L, but our net income will take into account, the positive contribution of our transport business, and the same on our free cash flow. So I mean, when you will assess the overall conversions ratio from net income to free cash flow, it will be based on all our business, including transport. Now of course, we will be able to give you a good idea of the contribution of transport. And I don't expect, I mean the disposal of transport business to materially change the overall conversion ratio of Thales as a group overall.

[Operator]

Thank you. There are no further questions at this time.

[Pascal Bouchiat, Senior EVP & CFO]

Good. So thank you very much, I mean, a number of questions. So very happy with, I mean, this interaction with you all. So let me conclude very briefly. So overall, I mean, as you have understood, the overall commercial momentum is strong across many of our businesses and the recovery starting in civil aero and biometrics. Of course, I mean, together with Patrice Caine, I will participate in several conferences and investor events in the coming weeks. And of course, in the meantime, I mean, Bertrand and the IR team, Olivier is at your disposal if you have any further questions. Thank you very much. Have a good day, and bye-bye.

[Operator]

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating, and you may now disconnect. If you didn't have a chance to ask your question on today's call, please do not hesitate send it to Thales Group Investors Relations at [e-mail], and we will get back to you as soon as possible. Once again, thank you for your participation and you may now disconnect.