Thales SA

PAR:HO

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen and thank you for standing by. Welcome to today’s Thales Full Year 2022 Results Conference Call. There will be a presentation followed by a question-and-answer session [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mr. Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.

[Bertrand Delcaire, Head, Investor Relations]

Yes. Hello. Good morning. Welcome and thank you for joining us for today’s presentation of Thales 2022 full year results. I am Bertrand Delcaire, the Head of Investor Relations. With me today are Patrice Caine, Chairman and CEO and Pascal Bouchiat, our CFO. As usual, the presentation will be in English and followed by a Q&A session. It is webcast live on our website at thalesgroup.com, where the slides, press release and consolidated financial statements are also available for download. A replay of the call will be available in a few hours.

With that, I would like to turn over the call to Patrice Caine.

[Patrice Caine, Chairman and Chief Executive Officer]

Good morning everyone. So as usual, let’s start with the highlights of 2022, Slide 2, starting with the commercial dynamics, which was really strong across the entire portfolio and drove a new record for both order intake and backlog. Our sales growth ended at the top of the guidance range set in July 2022 plus 3.5% to 5.5% organic. In spite of the various operational headwinds, Russia, supply chain tensions, cost inflation EBIT margin reached a new high of above the previous peak of 2019. Last but not least, on the results side and of course, Pascal will come back on it, we materially outperformed on free operating cash flow.

Three highlights on the strategy side. First, we remained quite active from a portfolio management standpoint. On top of the disposal of transport, which kept busy many of our teams last year, we announced two disposals representing around 3% of sales, the IoT connectivity module business and the aero electrical systems. Second, we announced last year – as announced last year, we materially accelerated our capital deployment, which reached almost €1.9 billion in 2022 including €1 billion reinvested in the business through CapEx and acquisitions and almost €900 million in shareholder returns. Finally, we continued to implement the ESG action plan that we presented back in October 2021 and I will come back on this topic later in the presentation.

So, let’s move now to Slide 3. Looking at our financial performance in the future, at €23.5 billion, order intake was up 18%. For the second year in a row, the book-to-bill ratio was significantly above 1, reaching 1.34. As mentioned, organic sales growth was at the top of our guidance range, plus 5.5%. EBIT and EBIT margin continued to improve strongly respectively, up 17% and 80 basis points at €1,556 million. Adjusted net income grew by 14%. This level is 11% above the previous peak, which was achieved in 2019. Free operating cash flow remained very strong, above €2.5 billion. So that even after the capital deployment I mentioned, we ended the year almost net cash. Last chart on the slide, the dividend. This new year of strong financial performance is leading our Board to propose to the next AGM a 15% increase in the dividend at €2.94 per share.

So now turning to Slide 4 and looking at our non-financial performance in 2022. I will come back later on our sustainability priorities going forward, but I wanted to first show you our quantitative progress in 2022 along the four pillars of our action plan. First pillar, our strategy for low carbon future. You remember that in 2021, our operational CO2 emissions were already behind our 2023 targets, but this was partly due to the constraints COVID-19 was then imposing on business trial. In 2022, we managed to offset the partial recovery of business travel, thanks to a further reduction of electricity consumption and an extensive move to renewable energy supply. So last year, we were again significantly ahead of our 2023 targets on this KPI.

Turning to the deployment of eco-design at 84% last year, the percentage of new developments incorporating eco-design remained at a high level in line with our ambitious target to reach 100% this year. Second pillar on the right, Diversity & Inclusion, the percentage of management committees with more than 3 women reached 76% in 2022, meaning that we have already achieved in this 2023 target as well. We have already decided to upgrade it by 2026. We aim to have at least 4 women in three quarters of our management committees. The percentage of women in senior management is well on track to reach our 2023 target at 19.4%. It gained 50 basis points compared to 2021. Since 2018, this ratio has increased by almost 3 points equivalent to almost 20% more women among senior managers.

Turning to Ethics & Compliance. On the top of the extension of our ISO 31000 certification to the UK and the Netherlands, we again mobilized the teams on anti-corruption training of all exposed employees. With more than 6,100 employees trained in 2022, we achieved this target as well. Finally, on health and safety at work, like on operational CO2 emissions, the challenge was to retain the improvements that were achieved in 2020 and 2021 when COVID-19 drove a high volume of work from home. As you can see on the chart, we were successful on this KPI, which remained 34% below 2018, like in 2021. So altogether, as you understand, we are fully on track to deliver on the ambitious sustainability targets we set for 2023.

After this rapid introduction, I would like now to hand over to Pascal, who will comment our financial results in greater detail.

[Pascal Bouchiat, Chief Financial Officer]

Thank you, Patrice and good morning to everyone. I am now on Slide 5. So starting with our order intake dynamics, as Patrice mentioned, we achieved again a very strong order intake in 2023, €23.6 billion, up 16% organically and a book-to-bill of 1.34 and even 1.43 excluding DIS, with book-to-bill structurally equal to 1. With 29 large orders over €100 million in 2022, we achieved an even better performance in terms of large orders than in 2021. In particular, we booked one jumbo contract, the Rafale order from the UAE for 80 aircrafts.

Q4 was again a strong quarter with 13 large orders. Both categories of orders with a unit value of less than €100 million were also robust. Orders between €10 million and €100 million were up 14% and small orders below €10 million were up by an impressive 15% driven not just by DIS, but also by aerospace at plus 9% and also defense and security at plus 14%. The dynamics were strong in emerging countries, up 68% organically and driven by the jumbo contract in the UAE and also remained strong in mature countries. You remember that in 2021, we booked a jumbo contract in France for the so-called Vasco program. So overall, a very solid performance in 2022 in regards to order intake.

Moving now to Slide 6, looking at sales. At plus 1.7%, the currency effect was significantly weaker in Q4 than in Q3 and it represented a 2.3% boost to sales over the full year. The total scope effect represented a bit less than 1% of sales. Turning to organic growth, over the full year, sales achieved the top of the guidance range at plus 5.5% with different dynamics across the three segments and as Patrice mentioned already driven by the very strong performance of DIS over the year. I will come back in greater details on the Swiss segments in the next slide.

So, now moving on to Slide 7, looking at the adjusted P&L from sales to EBIT, as mentioned already, EBIT was up by 17.3% year-on-year with a margin progression, with margin progressing from 10.2% in 2021 to 11% in 2022, which is as Patrice said a new record EBIT margin for the group. As I mentioned at H1, we booked two one-off items that almost entirely balance each other. On the one hand, and this was recorded in the gross margin, a negative impact coming from the economic and trade sanctions imposed to Russia, which represented €52 million of non-recurring expenses. On the other hand, the EBIT contributions of Naval Group, was boosted by the compensation agreements related to the Australian submarines. This item represents an income of €45 million for Thales over the full year.

We will have a look at the drivers of this performance in a minute, but looking at the key items of the P&L. Let me point out that, first, we can see a positive impact on gross margin by 30 basis points, up from 27.2% to 27.5% despite the Russian one-off. We can also see that our indirect costs have increased less than our sales by 110 basis points, 4.4% versus 5.5%. As expected, our restructuring costs remain low around €100 million. And finally, the contribution of Naval Group was boosted by the one-off I mentioned earlier. Excluding it, it was up from €69 million in 2021 to €74 million in 2022.

So Slide 8, now looking as usual into greater details of the drivers of the change in our EBIT between 2021 and 2022. The weakening of the euro had a small positive effect on our EBIT. You see the positive currency impact of €25 million. Our gross margin continued to improve, up by €311 million versus 2021 and was impacted for around €50 million by the negative one-off I’ve just mentioned. Within indirect costs, let me mention that the low increase in R&D expenses doesn’t reflect the change of strategy, but simply the impact of recruitment tension which led us to allocate the available resources to project execution.

R&D remains a key driver of differentiation for Thales and Patrice will come back on the subject in greater details. On the other hand, the increase in marketing and sales was mainly the result of the outperformance on order intake, which boosted the bonuses for the sales teams. Finally, equity affiliates contributed more to our EBIT than in 2021. Putting aside the Naval Group positive one-off, the improvement mostly came from the recovery of our aeronautics equity affiliates, including a small negative one-off we have booked in 2021.

So now looking briefly at each segment one-by-one, I am now on Slide 9 with aerospace. Orders were up at plus 3% organically on the back of an exceptional plus 48% organic growth in 2021. The aeronautics business had robust commercial activity along the year confirming the rebounds of the different businesses, especially the civil aftermarket orders up by 32% of the full year and also with two large contracts over €100 million added to the backlog, the first one since 2019 at the COVID crisis. Commercial activity also remained strong in space with 11 large orders over €100 million and a book-to-bill of 1.28. Sales came at plus 2.4% organically with several factors explaining the soft performance.

As I mentioned at H1, several contracts in Russia had to be terminated with an overall impact of €80 million for aerospace business. The wide-body market remained below expectations in terms of rebound during the year. Of course, this was related to the slower-than-expected air traffic recovery on international clients and also the delays in aircraft production ramp up. Microwave tubes, which normally represent sales around €500 million every year, were down by 11% versus a good performance in 2021. And last but not least, of course, the segments had to face ongoing supply chain and recruitment tensions, which of course didn’t help to accelerate the delivery of our program.

Despite all these headwinds, it’s important to note that aeronautic sales were up 9% organically over the full year 2022, driven by the civil aftermarket, up 23% organically. Now if we look at profitability, EBIT margin continued to increase from 4.5% in 2021 to 5% in 2022. Again, the progression can appear soft. However, please keep in mind that all the headwinds I’ve just mentioned also had an impact on the EBIT margin, especially the supply tensions as well as cost inflation, and of course, the negative one-off related to Russia. Without this one-off, EBIT margin would have reached 6%.

Now, moving to Slide 10, Defense & Security. Order intake amounted to almost €14 billion, up by 23% organically, setting for the fourth year in a row, a new record high. The segment recorded 16 orders above €100 million, including 7 new ones in Q4. Let me point out here that this exceptional performance drives a new record high backlog at €31 billion, which represents €3.4 of sales. It reinforces our confidence on revenue growth on a mid-term perspective. Sales amounted to €9.2 billion, up by 3.8% organically versus 2021, many business units, which again mid to high single-digit type of organic growth, including underwater system, cybersecurity and tactical radio communications. However, the overall business was impacted by ongoing tensions both in recruitment and supply chain. For the latter, we estimate the headwind to be around €100 million on our 2022 sales, which means that the organic growth of the segments would have reached 5% without these temporary operational disruptions. EBIT margin remained strong, once again, in the upper range of the mid-term guidance at 12.9%. This is an additional confirmation of the resilience of our defense business, maintaining basic level of margins despite the supply chain tensions and cost inflations it had to face during 2022.

Last segment on Slide 11 was DIS, Digital Identity & Securities. Sales amounted to €3.6 billion, up by an impressive 14.9% organically versus 2021, the strong 9 months performance extended into Q4, up 12% against high comps. You remember that sales were already up double-digits in Q4 2021, all this despite the ongoing tensions on supply chains, especially in regard to chips procurements. The performance was robust across the board. The cybersecurity activities performance up by more than 15% organically over the full year was driven by our encryption business, where Thales confirmed again its leadership position. Despite challenging supply chain conditions, the biometrics business continued to recover from the impact of the COVID-19 crisis and pass for demand.

And finally, smart cards recorded an exceptional year 2022. In the context of supply chain tensions, the team managed to pass through the high cost inflation to its customers. At €358 million, EBIT was up by almost 38% organically, with an EBIT margin progressing significantly from 11.9% to 13.7%. The segment fully benefited from gross margin improvements compared to 2021, thanks to favorable price and mix effects in spite of the negative global inflation impacts on materials, labor, energy, and logistics costs and also, I mean, the leverage on higher cybersecurity and smart cards sales. As you can see, in spite of the COVID-19 crisis, we have overachieved our mid-term target of an EBIT margin between 12.5% and 13.5% 1 year earlier than planned.

Okay. Now turning to Slide 12, looking at items below the EBIT. So first, taxes, as you can see, the effective tax rate is back at a normalized level after the 2021 decrease, which resulted from two positive one-off items. We expect the tax rate to remain around 20%, 21% in 2023. Second, adjusted net income from discontinued operations this is, of course, the contribution of transport, which was slightly lower than in 2021. Finally, minorities were down. The main driver here is the tax alumina base profitability, which was boosted by a tax one-off in 2021 and affected by the negative one-off related to Russia in 2022. All-in-all, this drove an adjusted net income group share of €1,556 million and an adjusted EPS of €7.35, 11% above the previous peak that we achieved in 19 months.

Moving now to Slide #13. Let’s have a look at the conversions of EBIT into free operating cash flow. First, a word on the usual recurring items, the biggest change here is an equity affiliate, which transforms to the gap between our share in their net income and the actual dividends we received from them. This is where you find the positive one-off at Naval Group. After 2 years of strict CapEx control, CapEx moved above D&A, resulting in the global negative balance of €55 million on our cash conversions. And Patrice will come back later on, on our future CapEx plans.

As usual, the big swing factor was a change in working capital, which represented €966 million tailwind in 2022, boosted by several factors that I will discuss in greater detail to detail on the next slide. Other cash items, not including the EBIT, such as cash restructuring, ForEx, IFRS 16 lease depreciation amounted to a net positive €96 million. The biggest negative effect here is the cash foreign exchange results. Finally, the contribution of transport became negative by €68 million during 2022, including working capital effects and some one-off costs associated with the divestment of the business, so all-in-all, an exceptional strong free cash flow performance above €2.5 billion again in 2022.

So what is the impact of this strong 2022 operating cash flow performance on our midterm guidance? I am now on Slide 14. So to answer these questions, we need to look into the drivers of our 2022 outperformance. There were actually mainly three reasons to highlight. First, the better-than-anticipated order intake over the full year, especially on export market again. Second, we recorded early payments from customers. And finally, the ongoing outcome of our cash action plan with additional positive impacts on items like on-time collection of invoices due and successes controlling the – successes on controlling the level of stocks despite inflation and the higher level of activity overall.

For 2023, we expect a return to a more normalized level of cash conversions, 90% or slightly above. In euro terms, this is roughly equivalent to €6.5 billion of reporting cash flow over the 3 years period from 2021 to 2023 and this represents around €700 million above current consensus. Combined with the already strong performance in recent years and the exceptional performance in 2021 and 2022, this drives a 15 point upgrades to our 2019-2023 cash conversions target from a previous average of 115% to 130% on a reported basis.

Moving now to Slide 15 with a quick look at the evolutions of our net debt position. As mentioned by Patrice, we materially increased our capital deployment last year. You can see that €453 million were spent on acquisitions in 2022. The dividend cash out was also materially up 35% above 2021. The cash out related to the share buyback amounted to €329 million. In 2022, we purchased 2.8 million shares over 9 months, which is fully in line with the target to purchase 7.5 million shares over 24 months. At the end of December 2022, the group almost had a debt-free position at €35 million of net debt.

And now I mean, to finish, a word on dividends on Slide 16. This year, I mean, the Board has decided to maintain the payout ratio at which drives the dividend of €2.94 per share, up 15% versus 2021. As you see from the chart, this corresponds to a 7% per year increase in the dividend since 2018, slightly above EPS growth.

So that’s the end of this financial review. I’m now turning over the call to Patrice, who will address our strategic priorities and our guidance.

[Patrice Caine, Chairman and Chief Executive Officer]

Thank you, Pascal. I’m now on Slide 18, turning to our strategy and outlook. Here are the four strategic priorities we intend to focus on in the near term, and let me address them briefly one-by-one. First, considering the dynamics in our markets and the strength of our backlog, our first priority is ready to ramp up capacity, which, of course, means increasing staff engineering and producing facilities and making sure our supply chain follows us.

I am now on Slide 19, starting with staff. As you can see on the chart, we initiated a major step-up in our recruitment plans early last year. To achieve it and gain efficiency, we set up a global integrated talent acquisition function and increased its scale by 20% or so. We reworked our employee value proposition, which was launched in October last year. In parallel, we maintain a solid retention performance. Global turnover increased by only 1.5 points. Altogether, in spite of tensions on some labor markets, we managed to recruit 11,500 people last year above the target we had set.

Going forward, as announced a few weeks ago, we plan to recruit more than 12,000 people this year to help us deal with the tensions in specific areas. We will further develop our engineering centers in Romania and India, and we will also rely more on our partnerships with external engineering companies. So all in all, ramping up on recruitment is essential to address demand and deliver growth, but this is something we know exactly how to address.

Moving to Slide 20, ramping up also means expanding our facilities and investing more in more engineering and industrial tools. As shown on the chart, we plan to significantly increase our CapEx in 2023 and 2024, and the majority of this increase will serve to extend sites and to buy additional engineering and production tools such as test ventures. For example, by 2025, we plan to more than double our radar production capacity in France. Of course, in parallel, we will continue to work with our supply chain in order to secure its ramp-up. Over the past 2 years, in particular, to deal with the tensions on chips, we have developed a broad action plan with our suppliers. Pascal explained how we managed to limit the impact of these disruptions on customers, and we intend to continue doing so in 2023.

Second priority, R&D investments, which remains a major driver of competitiveness in our markets and I am now on Slide 21. Two weeks ago, Clarivate the innovation analytics company, named us among the top 100 global innovators for the tenth time. Only two other aerospace and defense companies worldwide have been named that many times. So this gives you an idea of the strength of our R&D leadership. To achieve it, we continue to leverage all sources of funding, of course. A good example is R&D grants from the EDF European Defense Fund, we are involved in 21 of the 60 collaborative projects is decided to fund as part of its first batch of brands. This represents €70 million in additional R&D money for us. Second example, we were also very successful in gaining access to upstream research funding from the French MoD, and our 2022 grants were 25% above the average of the previous 5 years. Among the focus areas last year, I had already mentioned that – I have already mentioned quantum technologies, especially quantum sensors and quantum communications and hedge computing. And these remain at the top of the list. New focus areas include brain computer interface and 6G, which could find their way in some of our solutions on a 5 to 10-year horizon.

So moving now to Slide 22 to address the third strategic priority, which is sustainability. As a tech company, we know that our biggest contribution to sustainability is through our portfolio of solutions. You remember how we showcased at our ESG event back in October 2021, many of our products that help make the world safer, greener and more inclusive. From that perspective, we were very active in 2022. December saw the launch of two major environmental observation satellites, Meteosat 12, the first of the sixth third-generation geo weather satellites, Thales Alenia space is building for Europe. And SWOT, the game-changing NASA connected satellite that surveys earth water on which it provides – on which we provide the main instrument. We also booked the next phase of each of the five Copernicus missions we are contributing to. Earlier in the year, Airbus also selected our new FMS flight management system for its core fleet, its flight path optimization capacity will help reduce the carbon footprint of airline operations.

Secondly, looking at inclusiveness. We almost finished the assembly of SATRIA. It’s a VHTS satellite, we are building to bridge the digital divide in Indonesia and it is scheduled to be launched in 2023 this year. Last, our contribution to a safer world was also material in 2022. In the digital space, we recorded double-digit organic growth in cybersecurity and our sales almost reached €1.5 billion. In the physical space, together with the consortium of small companies, we won the development of [indiscernible], the system to provide deployable protection for critical infrastructure against drone sites. This system will provide protection for major upcoming events, such as the Rugby World Cup or the Paris Olympic games. And of course, the tragic war in Ukraine made all the more vivid our message on the importance of different activities to a sustainable future. This is something that European citizens and governments are fully aware of. Against this background, the European Commission recently stressed that it’s sustainable finance framework does not impose any limitation to the financing of the defense sector. This is why we remain confident that in the coming years, more and more European investors will relax their defense exclusion policies.

So going forward and I am now on Slide 23. We have two sustainability priorities for this year. First, we will continue to deliver on our current road map. As I showed on Slide 4 earlier, most of our internal targets were set for 2023. With respect to our low carbon strategy beyond securing our SBTi certification, we will continue the strong push towards our supply chain, considering their complexity and their spread in terms of maturity, supply chain emissions are a big challenge for industrial companies, but they are our second largest source of carbon-free emissions after the use of sale products. So it is key to address them. The engine for us on this topic is to align our supply chain with our own emission goal for minus 50% in 2030. Second, on Diversity & Inclusion, we need to move faster.

Today is the International Women’s Day and on this occasion, I have released an ad on LinkedIn and in the French newspapers, L’Echo. We all know that women remain underrepresented in engineering and technology. This is a societal challenge, which impacts us directly and on which I believe technology companies can and must act. We need to reach out more to young people in their schools and on social media and make them realize that science and technology are collective projects that speak directly to the societal issues of our times.

Second, we are starting to work on our new medium-term sustainability road map with three very simple ambitions: number one, to further embed sustainability in our growth strategy; number two, to set ambitious new targets, mostly quantitative; and number three, more broadly to drive cultural change across the group. The long-term ambitions is simple extend the leadership we have built from an innovation and financial perspective to the area of sustainability.

Final strategic topic, last but not least, of course, capital allocation, and I’m on Slide 24. We are naturally sticking to our balanced approach, combining both investments in the business and cash returns to shareholders. I already showed our ambitious CapEx and self-funded R&D plans. Zooming in on our M&A strategy, let me first reaffirm a few principles. First, our focus remains on bolt-on acquisitions. Second, we have no intention to diversify into markets other than those we already serve. We target assets that complement any of our businesses, in particular, digital solutions and technologies and cybersecurity and assets that help us expand our geographical footprint. And third, we intend to remain very disciplined on both the financial and strategic assessment of any transaction and, of course, on valuation. The only adjustment we are making is that considering the strength of our balance sheet, we are ready to go for acquisitions that are larger than €500 million in EV. At the end of February, we already conducted 45% of our share buyback program, almost €400 million, and we will implement the remainder over the next 12 months or so. And finally, one capital deployment topic, we are starting to investigate as well is pension derisking. The current macroeconomic context may represent a good opportunity to de-risk our UK pension obligations. So this is an area we are going to investigate over the coming months.

Well, cybersecurity provides a good illustration of this disciplined M&A strategy, and I’m now on Slide 25. It is quite – it is quite a large market. And we are focusing on three specific market segments. First, the light blue part on the chart refers to the data protection and identity and access management products. This business is headquartered in Austin, Texas and markets its products on a fully global basis, 40% in North America and 30% each in Europe and in the rest of the world. It is consolidated within DIS. Second, the dark blue part on the chart, which refer to sovereign protection products, products that NIS sovereign security requirements such as servers that encrypt data exchanges or systems that detect cyber attacks. By nature, this business is more difficult to scale on a global basis and in consequence, it has a European focus.

Third, Projects & Services, in this large market segment, we focus on critical enterprise customers in Europe and on the vertical markets we serve, such as space or air traffic management. Typical services include threat and risk evaluation, detection and response and integration projects. By the way, as you understand, military customers only represent a small part of this overall cybersecurity business. And to support the development of these positions, we closed on two bolt-on acquisitions last year. The first one, OneWelcome, had a best-in-class capability in customer identity and access management to our global product portfolio and we are already starting to offer it to our enterprise customers. And the second one, which actually consists of two subsidiaries, S21Sec and Excellium strengthen our product and services portfolio by adding more than 500 cyber experts based in four European countries. For example, it doubles our revenues related to cyber security operation centers. So in conclusion on this slide, when looking at the broad and dynamic field like cybersecurity, clearly selective M&A is an important lever to sustain strong growth and competitiveness.

Let me now give some perspective on each of our operating segments, starting with Aerospace, and I am now on Slide 27. So over the coming 2 years, we clearly expect robust growth in both components of these segments. Of course, on the Aeronautics side, on top of the development of military business, sales will continue to benefit from the rebound of air traffic, which is set to last for several years. The ramp-up of commercial aircraft production may be affected by super challenges. But going forward, production will be materially higher than last year. On the space side, Thales Alenia space benefits from an increased backlog and its market outlook is really strong. For example, last November, the member countries of ESA, European Space Agency committed to a 17% increase in its budget over the coming 3 years. We confirm the target of €2.5 billion in space sales in 2024, which implies an 8% CAGR over 2 years. For the Aerospace segment as a whole, these dynamics will support high single-digit organic sales growth over 2023 and 2024.

Turning to profitability. EBIT margin will benefit from the leverage on sales growth. We sit on track to reach 8.5% to 9% in 2024, even though aircraft production will still be much lower than before the COVID-19 crisis.

So turning to our second business segment, Defense & Security. I’m now on Slide 28. No need for me to come back on the geopolitical context, which has durably changed and will drive sustained defense budget growth in our main geographies. The details of the future French military programming law should be made public in a few weeks now. But the overall envelope has been – has already been announced, €430 billion over the period of 2024 to 2023. So combined with the 2023 budget, it implies an annual growth of 7% per year over 7 years, a trend that has not been seen for the past 40 years. With our leading position in a structurally faster-growing market segments and our record backlog, no surprise that we are facing a unique demand context. As I explained earlier, since the beginning of 2022, we have been actively addressing all the operational bottlenecks that constrain growth, the ramp-up of recruitment the expansion of our facilities and supply chain tensions. Hence, we are targeting mid-single-digit organic sales growth in 2023, accelerating above mid-single digit in 2024. This growth guidance is significantly above other large defense companies in Europe, UK and the U.S. as shown on the chart on the bottom right. From a margin point of view, at this point, we expect to continue to deliver industry-leading margins close to 13%.

I’m now on Slide 29, looking at our third segment, DIS. As Pascal showed earlier, this business delivered a remarkable growth and margin performance last year in spite of the impact of the supply chain challenges it faced. Its margins improved by more than 6 points compared to 2018. The last year is operated as a stand-alone business, making it now our most profitable operating segment. And going forward, its medium-term growth outlook is robust, thanks to its compelling position on each of its markets. The transition from removable SIM to eSIM will progressively weigh on our sales growth, but cloud-based business models come with higher gross margins. In addition, of course, we will continue to seize opportunities to integrate its digital security technologies in our products. And the table on the right shows our main ongoing revenue synergies areas. Looking at the nearer term, 2023 and 2024, we expect its performance to consolidate at the high level of 2022. Most of DIS businesses are short cycle, and the macroeconomic and supply chain context is uncertain. So taking into account the deconsolidation of the IoT connectivity module business, we expect its margin to remain in the 13.5% to 14.5% range, which brings me to our financial objectives for 2023 and considering the strategic priorities and business outlook that I just described.

And now on Slide 30. So with respect to order intake, we expect another year of strong commercial performance, driving a book-to-bill ratio above 1. We expect sales to grow organically between 4% and 7%. And based on the February 2023 scope and foreign exchange rates, this corresponds to sales between €18 billion and €18.5 billion. Incorporating all the drivers we discussed earlier, we expect a further significant improvement in EBIT margin reaching between 11.5% and 11.8%.

So this concludes our presentation. Many thanks for your attention. And now together with Pascal, we are pleased to take your questions.

[Operator]

[Operator Instructions] We will now take the first question. It comes from the line of Olivier Brochet from Redburn. Please go ahead. Your line is open.

[Olivier Brochet, Redburn]

Yes. Good morning to all of you. I would have a couple of questions, if I may. The first one is on the order intake just to see what you have included guidance that relates to both order and cash in terms of jumbo order in 2023, if there is any – that is in there or that you are feeling could happen. Second question is on DIS and 2022 performance. Are you able to split the volume mix on the one hand and the price on the other in the organic growth for us, please? And that will be my questions, please.

[Pascal Bouchiat, Chief Financial Officer]

Good morning, Olivier. Maybe I will start with the first question about order intake and jumbo order. As you know, I mean, jumbo order might be quite volatile in terms of booking. By definition, we are talking about the large-sized projects on which have been dealing with potential customers for quite a long period of time and always a bit difficult, I mean, to anticipate when this can kick in. So at this point, I mean, we are, of course, a bit cautious. And the overall guidance that we provide to you today are, in particular, in terms of cash flow. This is as we see with some quite large size project. But at this point, of course, I mean no jumbo project as the ones that we managed to get 2022. We, in particular, communicated on this famous 80 aircraft Rafale in 2022. And it’s quite obvious to share with you that we have not anticipated in our guidance for 2023, this level of order on this type of project. Second question was about DIS, and I mean the split of our organic growth between price and volume. I mean it’s probably a bit difficult, I mean, to provide this type of split directionally. What I could share with you is that probably something like two-thired of that is more pricing and one-third is more volume. But it’s really, I mean, all of the sums, it can vary across our different businesses. But I guess it is probably, I mean, a good high-level analysis.

[Olivier Brochet, Redburn]

Perfect. Thank you very much.

[Operator]

Thank you. We will now take the next question. It comes from the line of Tristan Sanson from BNP Paribas. Please go ahead. Your line is open.

[Tristan Sanson, BNP Paribas]

Yes. Good morning, Patrice, Pascal. Thanks for taking my questions. I have a few quick questions. The first one is on cost inflation management. Can you help us actually quantify or qualify how cost inflation has been impacting your performance in ‘22? And how much change it is for 2023? Do you still – you already have a material growth or net impact that has or will have to be offset over these years? Second question is on the Aerospace margin. Can you give us a feel for the allocation of margin in ‘22 and the recovery trajectory for ‘23 between space and the other the analytics bids that you with and without the Russian one-off would be useful? Third question, you’ve been mentioning a number of times, the supply chain difficulties that have been faced by Thales for ‘22 and some of these continue in 2023. If you have any comments about the pace of resumption of the supply chain difficulties and when you think you will be able to execute in a normal environment that would be really helpful? And a final quick one on the staffing efforts and the recruitment effort that you want to make in 2023, if you could make a few comments about which divisions and which countries will be the focus of your recruitment efforts that would be also quite useful. Many thanks.

[Pascal Bouchiat, Chief Financial Officer]

Good morning, Tristan, thank you for your question. Maybe I will start with the first two ones, and Patrice on the supply chain. Of course, I mean, I will start with cost inflation, and Patrice will complement. So cost inflation, I mean, there are tons are various ways to look at this topic. My view, I mean, the most relevant one is really to look at a way to keep growing our margin despite this overall inflationary environment. And basically, this is what we have done in 2022 and the guidance that we provide to you in 2020 and 2023 shows that we are going to keep growing our margins at our key businesses. And behind that to give you a bit more granularity, what can we say across our key businesses. I’ve already mentioned in the past that our Defense & Security is, in general, pretty well protected against inflation. I mentioned in the past that when we look at our contract in Defense & Security, three-fourth of them benefit from variation of price escalation mechanism that are – that provides the right level of protections. On the rest, it’s really up to us in terms of, I would say, financial discipline, the way we bid as a level of caution that we take into account, as we bid to make sure that this overall inflationary environment will not weigh on our margin.

DIS, it’s – I think that we have made, I mean, demonstration in 2022 of what pricing power means because in this overall inflationary environment, we managed to keep pricing our margin. Where it was a bit more difficult is in our aerospace business, which is traditionally a more fixed and firm price type of business with, in some cases, a specific contract with vision of price. But in general, it’s more a fixed and firm price type of environment and an environment where we’ve got in our contract vision of price clauses. And this is where, I mean, we had a bit of impact in 2022. But this is also where – I mean, we are keeping – we keep working hard on existing project with our clients, I mean, to be able to pass increase in selling prices and also to make sure that in the bid that we submit today, we are cautious enough not to have an impact in the next years.

Second question was about, I mean, space and Avionics. So overall, we reported in 2022, overall mid-single-digit EBIT margin. So I mean, the split between space and the more Avionics business, space with low single-digit EBIT margin, but that would be mid-single digits if you adjust for this Russian one-off. And the overall, I mean, the Avionics business, it is more in 2022. I mean, let’s say, a 7% overall EBIT margin. And it’s true that we expect the margin of those two businesses to keep pricing in 2023 and 2024 to end up with the overall guidance that we provide to you relative to 2024, which would be between 8.5% and 9%.

[Patrice Caine, Chairman and Chief Executive Officer]

On supply chain, a few words on supply chain. First, I should say that let’s start at with the reasons or the cause of the supply chain, I would say, changes that we have mentioned from time to time. It’s not we say, the state of the supply chain per se is the fact that this supply chain, including us, we all face a strong ramp-up. And this is because – and it’s a good news by the way, the business is growing. That everybody needs to get organized, invest, recruit and so on and so forth. But the starting point is a positive one. If I may say, it’s the business that is really, I would say, buoyed. Number two, to overcome this situation and as I’ve said in the – during my presentation, we have taken many, I would say actions to make it, I would say, neutral for our own customer, anticipation and diversification, optimization. Anticipation means that we order far in advance now our long lead items or critical entrance. Diversification means that, yes, we have developed as much as possible. Second source, alternative design to overcome any shortage or bottleneck that may occur. And thirdly, we have also optimized our own lead time internally to integrate qualify our products. So all in all, it makes, I would say, quite neutral for the – for our own customers all these tensions. Now on your very precise question at which pace these tensions or changes will progressively disappear. Honestly, it’s quite difficult to say. I don’t have any crystal ball. What is sure that is the fact that 2023 will remain probably volatile. So we need to remain as well vigilant on our side. Hence, our actions, as I said, in terms of anticipation, diversification and optimization. Now what lies ahead of us beyond 2023, Honestly, I don’t know. And we will see, let’s take, I say, each changes one-after-one, and we will see.

On the staffing point – the staffing question, Tristan. Yes, we have, of course, internally a quite precise split between countries and, I would say, main activities. I’m not sure that this split will help you to model the – I would say, the economics of Thales. So let’s keep in mind that, yes, the global figure is 12,000. It’s not, by the way, exact science, let’s take it as a kind of order of magnitude. And a large portion of it is proportional to our existing footprint. So typically, large quantity will be in France as our French customers want things to be designed and produced in France. And it is the case for other countries. Now in addition to that, let’s not forget or let’s keep in mind, sorry, that we have flexibility levels on top of recruiting people, which are of twofold, our, I would say, own engineering centers in Romania and India, number one. And also some key partnerships that we have tied with some engineering companies to which we can offload work packages, if we need to do so. So normally, this challenge is well under control. It’s still a challenge, but well under control at Thales.

[Tristan Sanson, BNP Paribas]

And by division, is it going to replicate mostly the revenues, location or division?

[Patrice Caine, Chairman and Chief Executive Officer]

It’s more or less – a good rule of thumb is take it as being proportional to the course of the division now.

[Tristan Sanson, BNP Paribas]

That’s very clear. Thank you so much to all of you for your detailed answers.

[Patrice Caine, Chairman and Chief Executive Officer]

Welcome.

[Operator]

Thank you. We will now take the next question. It comes from the line of Ian Douglas-Pennant from UBS. Please go ahead. Your line is open.

[Ian Douglas-Pennant, UBS]

Yes. Thanks. Thanks for taking my question. Again, I have three questions, please. Again, on the supply chain issues that you are alluding to in defense, can you – are there any localized pockets that you are especially concerned about? Is it general across the piece? And have any of those pressures changed, I guess over the last year? Within DIS – second question within DIS, a very bullish outlook there. Is your sense then, firstly, that this growth can continue structurally. And therefore, the – any discussions of a cyclical risk here can be discounted. And within that is 13.5 to 14.5, the peak potential of this business that we should expect longer term, or is this – or is there a potential for further upside from here? Last question on the – your ability to expand capacity in the civil aerospace business, if the Chinese recovery is significantly faster than perhaps is expected currently and your customers increase their production plans from here? Are you ready to – or will you have trouble meeting any kind of increase in production rates there?

[Patrice Caine, Chairman and Chief Executive Officer]

Yes, I can complement or – yes, complement the supply chain question. I have already given to Tristan and good morning Ian. Ian, if you look at pockets of concern of – honestly, it’s difficult to give a single answer because we supply many different types of entrants, many different types of goods. Last year, it’s true that we clearly discussed with all of you guys, chips and components because there is something that is widely used at Thales. By the way, on this front and for DIS, the situation is a little bit less tense than last year, but it’s too volatile. So, no, I cannot give you any specific area. We just need to be very vigilant across the board. Sorry, not to be much more precise, but that’s the situation we face currently. On the civil aerospace and the China recovery, if I well understood your question, yes, we are ready to serve this market as well if this market accelerate or re-grow again. We have taken, I would say, all the appropriate measures to be in a position to serve our customers, Chinese airlines or directly Airbus in China, if this market picks up again, so basically factored in all our measures that we have taken to serve our customers.

[Pascal Bouchiat, Chief Financial Officer]

Okay. Maybe – good morning Ian. Maybe, I could answer questions on DIS and overall, how we see the situations from a top line standpoint, but also as you mentioned, also in terms of overall margin. So, what can we say on this matter, I mean first, 2022 was a bit exceptional in terms of top line growth. Second, I mean this is as we all know, a short cycle business, and hence, as opposed to what we said on aerospace and particularly in defense, we are of course, a bit cautious when it comes to providing guidance on the mid-term in terms of revenue for this business. Now, what we see for 2023, overall, I mean when we look at the cybersecurity and biometric sub-segments, I mean we are quite comfortable in terms of growth. And we anticipate here, I mean a level of growth that should be between mid-single digits and double digits. So, I mean nothing very special. I mean the demand is there. And we believe that this will continue. On the smart cards, of course, it’s a bit more difficult because here, in particular, in terms of time horizon is very much a short cycle business. What we see today is the level of demand being still quite strong. And when dissipate Q1 that, in our view will be pretty positive. Second point, of course as we compare 2023 against 2022, we need to consider also that as our prices moved up progressively along 2022 will benefit from a positive comparison base in the first half of 2023. So, in terms of growth against last year, we believe that H1 will continue to be pretty positive. Where of course, and even though at this point, there is no early signs. We are of course, a bit more conservative, a bit more cautious when it comes to the level of demand for the smart card businesses in H2 2023. Now, in terms of margin, first, we are very happy with what we delivered in 2022. And reminding all of you is that basically, as compared to our initial trajectory that we provided to you back in 2019, we are a year in advance in terms of delivery for a level of margin, which is above the guidance that we provided to you, so above in terms of margin and 1 year earlier. Now, I mean we keep seeing quite – a good level of margin. We guide you of a level of margins that should be between 13.5% and 14.5%. Is it, I mean the ceiling in the long-term for this business, the answer is no. Now at this point, it’s probably a bit too early. I think it’s quite clear that we would like, I mean to consolidate I mean the level of margin before providing you with maybe one day, even more ambitious target, but at this point, it’s really probably a bit too early.

[Operator]

Thank you. We will now take the next question. It comes from the line of Ben Heelan from Bank of America. Please go ahead. Your line is open.

[Ben Heelan, Bank of America]

Yes. Good morning. Thanks for the question. So, I wanted to see if there was an update first on the transport disposal to Hitachi and what is going on there and if there is any timeline? Second question was on your comments of the defense growth acceleration going from mid-single digit to mid-single digit plus. A couple of your peers have also talked about this inflection of growth in defense in 2024 and the backlog growth that you have seen would really support that. Can you talk a little bit about the visibility and duration of that acceleration? Is this a multiyear trajectory, is it 3 years, 5 years, is there any way we can think of that? And then a final question for me. Thank you for the detail on cyber, splitting that out in the way that you did. Could you talk a little bit about the growth rates that you are seeing in cyber? I know you talked a little bit there about the bit that’s in DIS, but there is obviously other bits in the portfolio. So, what’s the level of kind of through cycle growth that we should be thinking about in terms of your cyber exposure? Thank you.

[Patrice Caine, Chairman and Chief Executive Officer]

Good morning. So, on the transport disposal, I would say nothing new since last time we discussed this topic. I mean, it is positive and we say nothing new. We are on track to close the transaction H2 2023. So, working with these authorities in different countries, in particularly in Europe to get their approval as soon as possible and is a very good spirit, of course, with Hitachi on their side as well to do their job to the part of the job on their side. So, nothing to be worried about on this particular I would say, disposal, it will be closed H2 this year. Defense growth acceleration?

[Pascal Bouchiat, Chief Financial Officer]

Yes. Good morning Ben. So defense, I mean our view is quite simple. I mean 2023 mid-single digits. And as early as 2024, we should go for mid-single digit plus. This is how we see. I guess it’s quite clear for everybody that, I mean the challenge for us is not that much. I mean the overall commercial dynamics, which has been very strong and which we think will continue to be rather strong. It’s more about what we discuss in terms of supply chain, in particular. But yes, I mean we are working quite actively on this matter. We believe that – and also the fact that and Patrice made it clear that we are investing and investing, I mean for us to allow us to ramp up in terms of this internal production capacity. We are quite confident that as early as 2024, I mean we will be able, I mean to deliver on the mid-single digit plus growth for this overall Defense & Security business.

[Patrice Caine, Chairman and Chief Executive Officer]

On cyber, you want me to complement, Pascal?

[Pascal Bouchiat, Chief Financial Officer]

Yes. So cyber, I made the comments as I was discussing about DIS. So overall, I mean cyber and biometrics, we see this business, I mean between mid-single digits and double digits. I mean probably a bit even overall for the cyber components to be more close to double digits. This is overall what we see. I mean as Patrice presented the split of cybersecurity, we see – I mean, in particular, in the commercial cybersecurity being overall pretty strong. The acquisitions that we have completed in 2022 will also be a growth booster. I mean we bought, I mean two businesses where we think that the overall level of growth will be double digits. So all-in-all, I mean high-single digits, double digits for cybersecurity is probably a good rule of thumb of what we expect in the coming years for this beautiful business.

[Ben Heelan, Bank of America]

Okay, great. I really appreciate the color. Thank you.

[Patrice Caine, Chairman and Chief Executive Officer]

Thanks.

[Operator]

Thank you. We will now take the next question. It comes from the line of Harry Breach from Stifel. Please go ahead. Your line is open.

[Harry Breach, Stifel]

Yes. Good morning Patrice. Good morning Pascal. Thank you for taking my question. Can I ask this a little bit maybe about the aeronautics business within aerospace? Can you help us when do you expect the revenues of the aeronautics business to be back at the pre-COVID level of 2019 both in absolute millions of euros and in the underlying volume? Secondly, the joint ventures there with L3 and do you look to this, despite the Russian sanction impact, there was about a – I think Pascal, you said about a €26 million improvement year-on-year in 2022. Are we – ‘23, will these joint ventures be back to a sort of normalized level of margin? Can you give us any sort of feel for the scale of contribution or bridge maybe in 2023? And then final one for me, just again on aerospace, just thinking here, again Pascal, just a bit about hedging, I know that you have said sort of typically you hedge on a sort of rolling 3-year basis. Can you give us any idea of what the hedged rate was for aerospace, euro-dollar in 2022? And what we should expect roughly for 2023 and 2024, please?

[Pascal Bouchiat, Chief Financial Officer]

Okay. Good morning Harry. So, let’s start with your first question about the level of revenue. I mean when do we expect our pure aeronautics revenue to be back to pre-COVID. My view, it’s probably more 2024, 2025, probably 2025 is probably more what we have in mind. I mean overall, today, we are still overall for this business still something like 25% below what it was pre-COVID. We have seen, I mean this growing in 2022 in the single aisle, I mean business. Second point, our IFE business that keeps suffering a lot in terms of revenue, managed to grow its order intake in 2022. So, I mean we are expecting the IFE business to report now, I mean a bit of recovery as early as 2023. But yes, I mean my view is that probably 2025 is probably the best guess that we can provide to you for us to get back to this applicable level of revenue. Hedging, so hedging overall in 2023, I mean our aeronautics business is fully hedged at a level which is quite close to the current spot price. Overall, it’s 1.08, if my memory is correct. So, I mean nothing special to report on this matter. So, I mean to make a long story short, overall, I am expecting I mean the U.S. dollar exchange rate to be quite neutral on our avionics business in 2023 versus 2022, overall. And your last questions, split out of my mind. I guess the JV. So yes, I mean we are – our JV in particular in avionics business, we started to recover as I mentioned. And I think I mean they will keep improving their overall level of profitability. And here again, can expect I mean for them in terms of overall contribution to our EBIT to be back to the 2019 level. I mean this should happen in 2024, 2025 year again.

[Harry Breach, Stifel]

And Pascal, so just the hedged rate in last year in 2022 for the aeronautics business, was it around the same level then around the dollar and…?

[Pascal Bouchiat, Chief Financial Officer]

Yes. It was slightly less positive in my opinion [ph] 1.10. But what I suggest, Harry, in this very specific question, Bertrand and Olivier will come back to you with the exact figure. So overall, in my view, I mean from a high-level standpoint that overall, it would be quite neutral with a level of hedging, which is today quite close, slightly less positive than the current spot price. But overall, something that overall for our avionics business is not material in term of profitability change from 2022 to 2023.

[Harry Breach, Stifel]

Great. And the JVs, just when we think about their recovery in 2023, obviously the impact of the Russian sanctions will not repeat and the underlying volume of business should be better, will there be a sort of significant improvement in their contribution in ‘23?

[Pascal Bouchiat, Chief Financial Officer]

Yes, I mean JV, I mean the continuous recovery. Now, I mean our aeronautics JV has not been that much impacted by the sanctions in Russia. What has been impacted is our own Thales business in Russia. I mean our JV in terms of our exposure in Russia was pretty limited, not to say more.

[Harry Breach, Stifel]

All clear. Now, my mistake then Pascal. Thank you for clarifying.

[Pascal Bouchiat, Chief Financial Officer]

You’re welcome, Harry.

[Operator]

Thank you. We will now take the next question. And it comes from the line of Zafar Khan [ph] from SGCAB. Please go ahead. Your line is open.

[Unidentified Analyst]

Thank you very much. Good morning everybody. Just wanted to go back to the aerospace margin please if I may. If you could help me understand what the margin potential is within this division. Now, if I remember correctly, pre-COVID the avionics side was doing margins circa 14% to 15%. And I know space margin was not particularly good at that time. Can you just please – just remind us of what the margin potential is within the two segments? Can avionics get back to that teens margin and is space structurally a low-margin business?

[Pascal Bouchiat, Chief Financial Officer]

Good morning Zafar. So, I mean when looking back at the pre-COVID level of profitability for these two businesses, avionics was more a 12% EBIT margin, not a 14%, 15%. When I say avionics, the overall avionics business that includes both, I mean line aftermarket, IFE, but also including our microwave tubes with profitability, microwave cubes in particular, microwave tubes, where I mean the overall level of profitability is below the average of this business. So overall, the avionics business back in 2018, 2019, was around 12% and no reason why I mean, you shouldn’t be able to get back to this level. Now, I mean the space business in the past was more a mid-single to high-single EBIT margin. And overall, I mean again, I mean there is no reason why, I mean you shouldn’t be able to get back to this level. All what I have just mentioned is consistent with the guidance that we provide to you relative to 2024 which is 8.5% to 9%. But showing that in 2024, those two businesses will have probably not get – will have not gone back to the pre-COVID level of profitability. So, meaning that there will still be post 2024, I mean a margin expansion potential for us to get back to the pre-COVID level of profitability.

[Unidentified Analyst]

That’s very helpful. Thank you.

[Pascal Bouchiat, Chief Financial Officer]

Thank you, Zafar.

[Operator]

Thank you. We will now take the next question. It comes from the line of David Perry from JPMorgan. Please go ahead. Your line is open.

[David Perry, JPMorgan]

Yes. Hi Pascal and Patrice. Thanks for getting in the call. Three questions, just on DIS, it’s a bit confusing to model the deconsolidation and you have done some small acquisitions. So, just be helpful if you could help me at least with more precise sales and EBIT guidance for 2023, if possible? Second question, I guess it just follows from Zafar’s and some of the other questions. I just wondered why today you are choosing to give medium-term targets or 2024 targets? In the past, you have been more forward-looking with the medium-term. I get that DIS short cycle, but why not commit to a margin target for 2025 or 2026 for aero and defense, just wondered what your thinking is there? And then the third question is on the defense budget, do you have any view on where the equipment piece will come out? What sort of growth we will see on equipment spending in the new plant? Thank you very much.

[Pascal Bouchiat, Chief Financial Officer]

So David, I mean with regard to, I mean the change in scope at DIS, I understand that maybe confusing to you. So, what we are deconsolidating is something like €350 million of revenue with the level of margin which is quite small and with a global effect of around a bit less than 100 basis points on the overall EBIT profitability of DIS business, the first one. Second point, I mean in terms of scope, we purchased last year, the OneWelcome product cybersecurity business that will join – that joins this DIS business. But at this point, this is quite a small-sized business with revenue is between €10 million and €15 million, even though I mean this is a high-speed, high-growth type of business. Of course, it will take a bit of time for this business to have a material impact on the overall DIS revenue mid-term guidance.

[Patrice Caine, Chairman and Chief Executive Officer]

Yes, just a few – hello David. Yes, it’s a very good question. In fact, if you remember well, David, last CMD, Capital Market Day, we held was in 2019. And at that time, yes, we did give some, I would say, mid-term perspective, and we chose 2023 as a timeframe for this kind of mid-term perspective. Now, we are in 2023, this timeframe has disappeared if I may say. We have reached the end of this timeframe. So yes, you do not have any more, say, mid-term, I would say, if not guidance, but let’s say directions for Thales. So indeed, the good question is, when should we or could we organize a new Capital Market Day to share with you as we did in the past again some mid-term perspective, both in terms of growth, in terms of profitability for each of our main businesses. Well, the answer is we do intend to do so, but to do so we need to have a bit more visibility and a bit less volatile environment. And considering all the I would say, economic environment circumstances, inflation, energy crisis, chips components, war in Ukraine, if I may add this on the list, honestly, organizing such Capital Market Day with such a volatile economic environment, would not be professional, will not be reasonable. So, we need to wait a little bit. But yes, we do intend to come back to you guys, to our investors to give you a broader perspective as soon as it is possible. So to compensate, if I may say, to compensate this lack of mid-term perspective, we decided quite exceptionally with Pascal to share a little bit of our vision for 2024, if I may say.

[Pascal Bouchiat, Chief Financial Officer]

And the last question was…

[David Perry, JPMorgan]

Equipment spending as part of the different projects?

[Pascal Bouchiat, Chief Financial Officer]

So overall, I mean we have in particular, I mean this split in France, where overall, I mean if I take and the global 2023 budget in France will grow something the underlying equipment, our investments will be more like 8% of my understanding. So overall, I mean the overall investment capability of the French MoD will be pretty close to the overall defense spendings in France.

[Patrice Caine, Chairman and Chief Executive Officer]

But it will be at least as important as the overall growth of LPM, again, for me is probably more threshold or the bottom of the range, if I may say, than ceiling point. In fact in a few weeks, months ahead of us, so just to be a little bit patient, but of course, we will have all the details once the LPM will be, I would say much more precise. Now, we just have the global figure.

[David Perry, JPMorgan]

Thank you. Can I just ask one follow-up if it’s okay. Pascal, essentially, you are saying last year, you just printed 13.4%, but pro forma for the IoT deconsolidation, it would be 14.4%. Is that the right way to think about it…?

[Pascal Bouchiat, Chief Financial Officer]

Yes. I mean, yes. Yes, you have to take into account the consolidations. I mean we had a bit less than 100 basis points. So, I mean the 13.7% is equivalent to something like 14.5% is equivalent to 14.5%, once we take into account the deconsolidation of the IoT connectivity module business.

[David Perry, JPMorgan]

Thank you very much.

[Pascal Bouchiat, Chief Financial Officer]

Thank you.

[Operator]

Thank you. We will now take the next question. One moment please. It comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.

[George Zhao, Bernstein]

Hi. Good morning everyone. First, on the deceleration of the Defense & Security organic growth from Q3 to Q4, did the supply challenges get worse in the quarter? Is that what kind of explains the deceleration? And secondly, how committed are you to buyback once the current authorization expires next March, especially given your comments on potentially looking at some bigger bolt-on acquisitions? Thanks.

[Pascal Bouchiat, Chief Financial Officer]

First, good morning George. So, on the share buyback, I mean we are fully committed, I mean to execute this 24 months long, I mean share buyback. So, there is no issue on this front. And overall, I mean what we have done in 2022 is very much in line with this – the overall execution of this program, and it will continue on a quite linear way along 2023. And it should be fully executed by the end of March 2024. So, no specific point to report on this matter. On the – your first question was about, I mean, the...

[Patrice Caine, Chairman and Chief Executive Officer]

In Q4 for D&S. But looking at quarter – looking at D&S quarter-after-quarter is not really meaningful. So yes, we do publish or we do communicate because it’s mandatory to do so, but it’s not meaningful. So for D&S, long-term projects, long-term cycle business, what really matters, what really counts is the year-end or the full year figures.

[Pascal Bouchiat, Chief Financial Officer]

Yes. Absolutely.

[George Zhao, Bernstein]

Thanks. Pascal, on the buyback, I was thinking more beyond the next March beyond this ‘24, how are you thinking about that?

[Pascal Bouchiat, Chief Financial Officer]

So George, so we will see. I mean at this point, we are executing this share buyback. So, it’s more – I mean the matter that will be looked at by our Board probably next year at this point. I mean we have not had any additional discussion on this matter with our Board. I think that in this call, we have also discussed about all the elements of capital deployment. So, let’s see, but my comment was very much about no doubt about the full execution of the current share buyback. And I mean for a potential further share buyback I mean it’s not a topic of the day. It’s going to be more tackled by our Board, I mean next year.

[George Zhao, Bernstein]

Thanks.

[Pascal Bouchiat, Chief Financial Officer]

Thank you.

[Operator]

Thank you. We will now take the next question. It comes from the line of Victor Allard from Goldman Sachs. Please go ahead. Your line is open.

[Victor Allard, Goldman Sachs]

Good morning Patrice, Pascal. I guess I only have one question. It’s a follow-up on defense and on whether you could please share the underlying assumptions behind the refined top line growth target into next year. For example, what growth assumptions for France does this reflect? And if the mid-single digit plus implies upside risk into next year or if we should simply see it as being the top end of the 4% to 6% range that you have been guiding for the mid-term so far? Thank you.

[Pascal Bouchiat, Chief Financial Officer]

Good morning Victor. So overall, I mean this guidance for 2023 mid-single digits and for 2024, mid-single digit plus is first. I mean of course, very much consistent with how we see, I mean the overall level of demand. And in particular, I mean what we expect from the new French well deployed I assume [indiscernible]. But also having in mind that today, as I mentioned earlier, our key challenge to our top line growth in Defense & Security, is more about backlog execution, then I mean accounting on a further increase in terms of level dividend from the outside. Now, I mean second part of your question was...

[Patrice Caine, Chairman and Chief Executive Officer]

Top line risk…

[Victor Allard, Goldman Sachs]

Above mid-single digit plus.

[Pascal Bouchiat, Chief Financial Officer]

I mean as I mentioned, we discuss about I mean supply chain. And in my view, I mean probably the key change will be the ability of our supply chain in various countries to follow the ramp-up in terms of demand. And this is where we have been working quite extensively with the supply chain. But this is for me more, I mean what we need to fix in terms of risk, which by the way, is not that much different from what, in particular, I mean prime contractors on aerospace mentioned a few weeks ago, which is our ability to keep pumping up the supply chain in this growing environment.

[Victor Allard, Goldman Sachs]

Thank you very much.

[Pascal Bouchiat, Chief Financial Officer]

Thank you.

[Operator]

Thank you. We will now take the next question. One moment please. It comes from the line of Christophe Menard from Deutsche Bank. Please go ahead. Your line is open.

[Christophe Menard, Deutsche Bank]

Yes. Good morning. Thank you very much for taking my question. I had three quick ones, hopefully. The first one was on the cash conversion rate beyond 2023. Thanks for the update on 2021 to 2023. But how should we be looking at the cash conversion rate beyond? I mean I read in the presentation, you are looking at safety stocks. Well, some CapEx increase quite obviously. So, is 90% still a good metric beyond 2023? That was the first one. Second one is on DIS. It’s a successful integration, I mean from the numbers. What lessons have you learned from that for future acquisitions? What made it possible? I don’t want to make it too long of an answer, but probably there are some good lessons for you. And the last question, very quickly on capital allocation. The pension de-risking you mentioned, is it – what does it mean? Do you want to outsource or sell that – I mean basically, what are the options you are at stake that you have in mind?

[Pascal Bouchiat, Chief Financial Officer]

Okay. Good morning Christophe. Maybe we will start with the first question, letting Patrice for the second and the third one about pension. So first, in terms of cash conversions, I think that 90% is a reasonable figure. But of course, I mean recognizing that of course, quite an important point of our cash conversions ratio is a level of order intake and in particular, relative to large-size export project. And of course, I mean provided that we keep developing large-sized export projects, in particular in defense, I m quite optimistic about the long-term cash conversion ratio. This is by the way, what we managed to do pretty well in the last 5 years overall at Thales. Patrice?

[Patrice Caine, Chairman and Chief Executive Officer]

Yes. As to make it – to make it short, of course, beyond the fact that I think all the team has been very professional to put in class all the – put in place, sorry, all the necessary actions in terms of cost synergies to materialize in terms of revenue synergies and so on and so forth. If I had to give one single answer, is really the human aspect of the deal. When we buy a tech company, be big, be it small, medium, I am pretty convinced that at the end of the day, we buy skills, we buy brains. So having I would say, an amicable approach, having a non-hostile approach, solicited approach for me is mandatory. So, we will never – you will never see Thales doing something that would be, I would say, a style or unsolicited vis-à-vis a tech company. Otherwise, you just lose the brand you tried to acquire and lose the value of the company. And this is for me one of the key success of Gemalto. The fact that we have been able to have, I would say, good discussion with the team, a good I would say, D&A fit between Gemalto and Thales or the ex-Thales to make it a success at the end of the day.

[Pascal Bouchiat, Chief Financial Officer]

Last question, Christophe, was about pension. So, I mean on this matter, we are quite pragmatic. What do we – what today, I mean we see quite unique situations as compared to what was seen in the last 10 years, in particular about, I mean actuarial assumptions. And it’s true that we see today a combination of both as we all know, quite a significant increase in long-term interest rates. And this combined with quite a stability in terms of long-term inflation rate. And the combination of the two has been quite positive overall for our pension deficit, in particular in UK. When you look at our overall pension deficit in UK, it dropped 3x from the end of 2020 where it was €1.5 billion, down to what it was end of December last year at €0.5 billion. And because of that, of course, I mean we challenged ourselves, in particular, when we discuss about capital deployment, would it make sense for us to outsource a part of this risk through what we call a buy-in or buy-out. And this is I mean the type of things that we would like to investigate in 2023. It’s really all about de-risking pension volatility at a time where we see that the overall actuarial assumptions are pretty favorable. We now need to…

[Patrice Caine, Chairman and Chief Executive Officer]

We need to – sorry, I really know that there are a few more questions. But unfortunately, we need to wrap up as we awaited by our journalists colleagues just in a while. So, let me close with a few words of conclusion. And of course, Bertrand, Olivier at your disposal to answer all the questions that we have not been able to take this morning, I am sorry for that. So, as you understood, 2020 was – 2022, sorry, was another year of strong performance for Thales, needless to say. Definitely, we are fully focused on the execution of our profitable growth strategy, number one. And of course, this is supported by rigorous capital allocation. So with Pascal, we really look forward to speaking with you in the upcoming investor road shows or conference or one-on-one. And again, if you have any further questions, please do as with Bertrand and Olivier, there are at your disposal to answer all your questions. Thank you very much, and goodbye.

[Pascal Bouchiat, Chief Financial Officer]

Thank you very much. Bye-bye.

[Bertrand Delcaire, Head, Investor Relations]

Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, if you didn’t have a chance to ask your question on today’s call, please do not hesitate to send your question to Thales Group Investor Relations at [e-mail], and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.