Thales S.A. (HO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales Q1 2022 Results 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 Mr. Bertrand Delcaire, VP, Head of Investor Relations. Please go ahead, sir.

Yes. Good morning. Welcome, and thank you for joining us for the presentation of Thales' Q1 2022 order intake and sales. My name is Bertrand Delcaire. I am the Head of Investor Relations at Thales. With me today is Pascal Bouchiat, our CFO. As usual, 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 will be available soon after the end of the event. With that, I would like to turn over the call to Pascal Bouchiat.

Thank you, Bertrand, and good morning, everyone. Before moving on to the numbers, as usual, I wanted to highlight a few elements. I'm now on Slide 2. First of all, obviously, 2 months after the start of the invasions of Ukraine by Russia, we're starting to perceive some of its geopolitical consequences. This crisis is driving a major reassessment by European leaders of the need to invest in security and defense and to do so, more in the framework of a common European defense policy. Few European member states have already quantified their investment plans. But as I stressed in the recent disclosed strategic compass and at the [ Verifi Summit ], they have all committed to substantially enhance their defense expenditures. We are convinced that this situation will drive a long cycle of growth, 10 or 15 years, for European defense budgets. In this context, the second point I want to stress today is the evolution of the ESG investment framework, which has been a key concern for our industry over the past 2 or 3 years. Most of you have seen the new report on the social taxonomy, published a few days before invasions of Ukraine, which stopped considering defense activities are socially harmful. A few days before, the European Commission issued an even broader statement. Looking at the topic of the European defense, the commission's trust that sustainable finance initiatives must be consistent with Europe's efforts to facilitate European defense industries' access to finance investments. We are seeing a similar move from investors who realize more and more that it does not make sense to implement blanket exclusions of defense companies. A recent poll showed that 39% of asset owners believe that the recent geopolitical developments will lead to adjustments to their ESG approach. Capitalizing on the ESG Investor Day we organized last October, we'll continue to engage with investors on these topics and showcase our sustainability strategy, which represents an important pillar in our overall equity story. Finally, let me point out that whilst the increase in aircraft production [ trades ] will take time, the recovery of air traffic is starting to boost our IRO aftermarket and biometric businesses. And I will come back on this when I discuss each segment. So let's now have a look at Q1 headline numbers. I'm now on Slide 3. New orders amounted to EUR 3 billion, down 4% on a reported basis, and 6% on an organic basis. As you will see in a minute, this performance was still strong despite the negative growth, mostly explained by an exceptionally good first quarter in 2021. Sales came to EUR 3.7 billion, up 2.7% on an organic basis, and up by 4.4% on a reported basis, i.e., including the positive currency impact. The important point to note here is that at constant scope, our Q1 sales are higher than in the previous 3 years. The strength of defense and security, the IS and space offset the weakness of agents. Looking into details at our order intake, I'm now on Slide 4. As you can see, the negative organic growth by 6% is coming from fewer large orders above EUR 100 million, 2 in Q1 2022 versus 4 in Q1 2021. Both contracts were for space-inspire satellites with SES and also with Intelsat. As you can see, both categories -- actually both categories of contracts between EUR 10 million to EUR 100 million and below EUR 10 million are growing with orders below EUR 10 million, progressing by 6% despite the impact of COVID-19 on both civil, IRO (sic) [aero] and biometrics. Turning now to Slide 5, looking at sales growth. First, a word on currency impacts. As expected, a stronger U.S. dollar generated a slightly positive currency impact of EUR 54 million or 1.5% of total sales. We expect a similar pattern going forward in Q2 and less so in H2. Organic growth by 2.7% was mostly driven by the ongoing performance of the IS and by the Space business, still progressing despite a stellar year in 2021. Turning to the geographical perspective, let me just point out that mature markets are still driving growth with emerging countries below Q1 2021 resulting from anticipated phasing effects on large contracts, especially in the Middle East. Now looking briefly at each segment one by one. I'm now on Slide 6 for Aerospace. Orders were clearly up again by 17% organically, thanks to a dynamic start of the year for the Space business with the 2 contracts above EUR 100 million I mentioned earlier. Avionics orders were also up versus Q1 2021, despite IFE original equipment still being negative with no major win in Q1. However, we expect IFE orders to resume progressively as airlines decide how they will equip their future aircrafts. Sales were up by 4.2% organically, driven by our 2 businesses: Space and Avionics. Space was up again in Q1 2022 despite an impressive 24% growth in Q1 2021. As mentioned in the slides, the aeronautic parts of the business is progressively recovering, driven by the aftermarket, which grew by 15%, again Q1 of last year. Turning now to Slide 7, looking at the Defense & Security segments. Lower order intake down by 29% organically versus Q1 2021 was again an illustration of the natural volatility of large contract signatures. Three were signed in Q1 2021 versus none this year. As announced a few days ago by Dassault Aviation, we have received the down payments on the UAE Rafale order, meaning that we will book this jumbo contract in Q2. So you can clearly expect a very strong Q2 in terms of order intake for Defense & Security. Organic sales growth was slightly negative, minus 1.1% organically after a strong Q1 2021 at plus 12%. So continuing on a very positive trend across most business lines and with an acceleration expected as soon as Q2. Turning briefly to the full year perspective. I know some of you are hoping for immediate effects from the recent European announcements. However, as mentioned in my first slides, we are talking about medium-term impact here, not immediate impacts. Of course, we see a very strong positive perspective for the Defense & Security segments. And I confirm that we continue to see a high level of commercial activity. However, it would be too early to expect an immediate positive impact on our sales for 2022. Plus, please keep in mind that component shortages and supply chain tensions have started to affect all business. So at this point, let's be prudent with 2022 growth expectations, and we'll adjust further messages at H1, if needed. Turning to Slide 8, looking at our last segment, Digital Identity & Security. As mentioned previously, order intake at DIS is structurally aligned with sales for most businesses as they operate on short cycles. Hence, no need for me to comment. At EUR 739 million, sales were up by 12% on an organic basis. The strong performance is due to different dynamics in the DIS businesses. Biometrics have been recovering since Q4 last year with an ongoing growth in passport demand, hence, a double-digit growth in Q1 and similar expectations for full year 2022. Cybersecurity continues to deliver robust growth, high single digits in the quarter, and is also expected to remain strong over the full year. And finally, smart card businesses had a strong performance performed in Q1. There were 2 factors behind this outperformance. We saw some precautionary buying from customers concerned with the chip shortage, but we also managed to pass through our higher supplier costs. It's important to keep in mind that these factors are temporary. So let's not extrapolate them to the full year, which we now expect was at mid-single digits organically. So let me finish here with Slide 9 and a reminder of our financial objective for 2022. So all in all, Q1 is in line with our expectations. In spite of the various uncertainties I mentioned, we confirm our financial objective for 2022. So this concludes my presentation. Many thanks for your attentions, and I will now be pleased to take your questions.

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

I guess first point on the pricing effect on the smart cards. I guess, have you able to fully offset the increase in the purchase cost to protect the margins through the pricing effect there? And second one, real quick, could you share any details on whether you've begun the repurchase program since the start of the buyback program this month?

George, so on the smart card and the pricing effect. So overall, I mean, our intent is really to protect our margin. And I'm quite sure that we will be successful in this endeavor. As you know, I mean, the market is also tight. I mean there is, today, in this business, some kind of imbalance between offer and demand. And it's clear that also the shortage of the chip components, this is also probably a driver for all players to be able to convince clients that they need to increase prices in order to compensate for higher supplier cost. And this is what we have been doing. By the way, this is what we have done in 2021 and quite successfully, if you look at the overall DIS margin in 2021, which was quite close to 12%, probably 2021, quite a good demonstration of our ability to push up prices in order to compensate for inflation on our supply base. And we see this continuing, and I'm quite confident that we will be able to fully compensate for the increase in inflations on this business. The share buyback has started. We announced, as we released our 2021 figures, that we would start our share buyback program as early as beginning of April 2022. So it has started. I'm not going to comment today on how much -- how many shares we bought in April, but it has started. And I would say it's very much in line with what we shared with you. Just to remind everybody that we announced this program, representing 3.5% of our overall equity. And we mentioned that we would execute this share buyback program over the next 24 months, so starting beginning of April 2022. So nothing more to report, except that it has started as presented.

Next question is from the line of Ben Heelan from Bank of America.

Pascal, I had a couple, please. Firstly, can you -- is there any update from you in terms of how we should think about the French defense budget post the election last week, and that would be first question. Second question would be, would you be able to give us some insight into what the conversations are like that you are having with governments in the defense arena? Are they very focused on short cycle demands? Are they focused on more systems and platforms? Just any color around that would be helpful. And then a third question would be, you made some comments at the beginning that you feel you have 10 to 15 years visibility for European defense budgets now. How is that going to impact how you think about M&A? Is this an opportunity to be more aggressive now from an M&A perspective? And if so, what areas are you thinking that Thales needs to grow its exposure to?

Good morning, Ben, thank you for your questions. So first, on the French defense budget. First, probably it's worth for me to remind everybody that we are today operating under a midterm program law for defense in France, which was voted by President, Macron in 2017. With overall, mid-single digits increase in defense spending in the first part of this program law with an expected surge in 2023. So overall, when looking at the overall defense equipment trajectory, it was more a bit in excess of mid-single digits in the first part of this defense program law and some kind of a ramp-up with getting close to double digits as early as 2023. So that was basically the defense program law voted back in 2017. The fact that President, Macron was reelected is probably a good sign about the French government's probably applying what has been voted a few years ago. And in particular, in this new geopolitical context. At this point, of course, it's too early because President, Macron was reelected a few days ago. And of course, at this point, it's really too early to anticipate how all of that will be reconfirmed. Will it come in the second half of 2022? That's my guess today. Once the -- President Macron will have, I would say, fully gathered his new team and probably have performed some arbitrations between various public spendings. So overall, first, it's probably a good thing. I mean, to see President Macron being reelected in the context of what has been voted in 2017 under his leadership. Second, probably a bit too early, I mean, to be more explicit in terms of when will this be reconfirmed. Now also capitalized on the overall statements of the -- both the [ Verifi Summit ], but also the European Summit that took place a few weeks ago. We still, at this point, got qualitative statements but statements that are quite positive about the need from all European countries to increase their overall defense spendings. We're expecting a summit on defense to be held quite sometime in May. This has still not been confirmed, but this could give probably a bit more color in terms of what this means. About our conversations today with -- understood, the French MOD about short-term type of platform. So overall, I think probably top priority of our clients in France, and my view is that it's also the case with other MODs in various countries, is about being able to provide the right level of support in order for our equipments to increase their overall rate of availability. So this is a clear priority for the French MOD with, of course, a level of activity for the French armed forces that, of course, has increased since the invasion of Ukraine. So at this point, it's more about how to get even higher availability of our equipments. Now in terms of will they ask -- will they order more volumes of similar equipments? At this point, it's probably a bit too early. There is, yes, a global feeling and conversations about replenishing stocks, for instance, these type of things. At this point, however, probably not being reflected in higher order intake in Q2. But once again, it was anticipated. We knew that it would take a bit more time to see higher order intake. Now I mean, and probably my tone is quite explicit about the fact that we see overall quite a strong commercial activity in terms of Defense & Security. Last point about -- yes, I mean our conviction that this new geopolitical context will provide a much longer-term visibility in terms of defense spendings. And we all know that defense is a long cycle type of business. We know that building new equipment, it takes time. And us, I mean, European countries, have realized that if we need to step up, overall, their overall capabilities, it will take time for them to achieve this level of step-up in terms of ability to operate. Now M&A linked to this, longer term, with this -- will this be a trigger for more M&A? I don't know. At this point, it's probably a bit -- here again, a bit too early. Probably there will be a push from Europe to favor more collaboration and to provide incentive for European defense companies to work more together on common program. Now going further in terms of M&A is probably a different picture. At this point, we don't see anything that would underpin or would confirm the fact that M&A would increase in defense in Europe at this point. So this is not what we have heard in terms of messages.

Okay. Great. Very clear.

Maybe additional point. We have been also quite clear that in case we would see meaningful finds in terms of M&A in Defense & Security, of course, we would look at potential finds. By the way, probably a good opportunity for me to confirm that we took over in the U.S. the share of DRS in a small size business, representing something like $70 million of annual turnover. We have a 50-50 partner with DRS. And we agreed with DRS for Thales to take over the DRS share in this business, which is quite a fair go-to-market for Thales in the naval business in the U.S. and in particular, a very strong go-to-market for our sonar business, which as you know, is one of our key product lines in our Defense & Security business. And it is, in particular, a niche segment for Thales in the U.S. where we have the right technology and where we expect a good level, of course.

Next question comes from the line of Tristan Sanson from BNP Paribas Exane.

So the first one will be on the supply chain constraints. You started mentioning at some point that it started to impact your businesses across the board. Can you be a bit more specific which businesses are really impacted? What are the type of constraints that you're seeing? How much revenue do you think you lost in Q1? And I'm a bit puzzled by that comment that you made as far as regards to a possible revision of the guidance with H1. On one hand, you're talking about a fairly positive trend in aerospace and civil aerospace and biometrics with these supply chain constraints on the other side. So could you explain a bit the condition that could drive a revision of the top line guidance in H1? What is the kind of deterioration that will be required for you to change that view? The second question is on the management of cost inflation. It's a more generic question following the comments you made on smart card and the ability to pass through some cost increase. Can you remind us today within the portfolio where you have fixed-price contracts and where you have escalation clauses or viable cost contract that allow you to quickly pass through the increase in energy price, labor cost, raw materials, anything? And I'll stop here to leave time for the other ones.

Okay. Thank you, Tristan. Maybe I will come directly on your first question about guidance, because I think maybe I misled you in terms of my message. What I mean is that most probably -- or I mean we could anticipate that based on our H1 level of sales, we might adjust our level of guidance for the full year. And in particular, narrowing our range. We mentioned as we release this 2022 guidance on sales, range from EUR 16.6 billion to EUR 17.2 billion, which is quite a wide range. And we mentioned that when we would see a more stable situation on various elements, we would, of course, seek to narrow this guidance. So this is just what I wanted to -- in no way do I consider only to revise downwards this guidance. It's probably more the opposite. And I think today what I believe is quite a strong level of activity in Q1. Supply chain, yes, I mean, probably a good transition, about your question on supply chain. It's -- what is -- what do we see in the market today. And by the way, it's not just a Thales point because I guess that's -- my comment should probably [ valid ] for most of our peers. In 2021, we have seen quite a difficult situation from a semiconductor standpoint on our DIS business with a clear shortage, which I think that we manage pretty well as at the end of the day. I mean, the amount of sales that we missed in our DIS business in 2021 was quite limited, not to say more, but very limited. As I mentioned in our -- at our call -- at our 2021 results presentations, we said -- I said that we are not seeing an improvement overall on this matter in terms of overall availability of chips in the market. And this is confirmed, I mean we see still quite a tense situation with still a number of tension in the semiconductor supply chain. And we see some of this impact in our other businesses. So I don't want to be more specific, but it is the case in our Defense & Security business, also the case in our Aerospace business. At this point, all of that is very much under control. And you asked me about what was the overall missed sales in Q1. It's probably a few tens of million euro. And yes, so is it EUR 20 million, EUR 30 million. It's probably this order of magnitude. Now, we remain quite vigilant and I can tell you that we spent a bit of time on this matter in order for us not to be penalized. But it will be a matter that -- on which we'll be quite vigilant throughout 2022. Last point about cost inflation and the structure of our contracts. So to make a long story short on this quite important matter, there's, of course, different situations across our various businesses. In general, defense contracts are more based on contract with a variation of price indexation mechanism. And I mean, probably a good rule of thumb would be to consider that in our Defense & Security business, probably 2/3 of our contracts are protected through a variation of price indexation mechanism. The situation is quite different in our civil business. In civil businesses, in general, and in particular when you talk to a pure commercial businesses, in general, there is not that many clauses of this type with variation of price mechanism in contracts. So on the civil business, it's more -- I mean, the balance between offer and demand, which is a driver in terms of being able to pass through increasing prices throughout the supply chain. I mentioned DIS, which is quite a good example. DIS, there is no -- in most cases, at our DIS business, there is no specific mechanism in our contract. But here, it's more about the relationship that we built with our clients and our ability to convince them that in these situations, it is fair to pass our increase in supply to our clients. So this is what I can share with you. Of course, indexations clause are valid for contracts with [ project executions ] that are midterms. Of course, when you execute a project on just on 12 months or 18 months, it's not that much an issue. So this is my comment on your last point. I guess, Tristan, I answered your 3 topics, your 3 questions.

Yes, it was very helpful. Thanks for clarifying, especially the situation on the top line for this year.

Yes. I don't want to convey a message that wouldn't be appropriate.

Next question comes from the line of Chloe Lemarie from Jefferies.

I have a couple, if I may. I'd like to first build on George's question, but at the group level on cost inflation. Just if you had any quantification to share with us on the impact of margin at this point. And what I'm really trying to get at is how confident you are that you can get to the top end of the margin guidance given the current inflationary environment. The second is on defense. On your main challenge in bottlenecks to fulfill that level of demand, would it be component shortages, would it be engineers, would it be blue collars? Any visibility on that would be great. And lastly on M&A again on defense. Are there any specific areas where you see European defense needing consolidation? I mean there were quite a lot of talks in the past about shipyard consolidation and defense. So given the higher volume that we're going to see in the next decade, would operational efficiency trigger that consolidation in EU?

Okay. Thank you for your questions, Chloe. So in terms of cost inflations and our guidance in terms of margin, I mean, I don't have anything specific to report. I mean, inflation is there. I'm quite confident that we will be able to manage this inflation and supply costs, preserving our margin. So now, what does it mean in terms of 2022 guidance? I mean, for me, the inflation that we see today is fully embedded in our overall guidance. And at this point, I don't want to comment about will we be at the bottom part of our guidance or will we be at the higher part. At this point, it's probably too early, Chloe, on this matter. Your question about defense is quite interesting. What is true is that, I mentioned about the overall commercial dynamism on defense and that I can reiterate. I've never seen so many opportunities across the board in our Defense & Security business in many places around the world. And my view is that our order intake in 2022 will be probably a good illustration of this market. Now then it's more about bottleneck in terms of execution. And the challenges that companies are facing in delivering their project, in particular in defense. And one key point for us is, finding the right talent at the right locations. And it's not that much blue collar in defense, it's more high end added value type of business where we are looking for more engineers, software engineers, system engineers, overall digital talents. And yes, we are pursuing -- I mean, we are pursuing various actions in order to keep attracting talents on this business as, by the way, we do on our other businesses, of course. But yes, the challenge relating to attracting, developing tenants is, of course, a top priority for Thales in our overall growth journey. M&A, it's strange, I mean, this is the second question is called about M&A in Europe. I have to say that, at this point, I have not seen anything that would lead us to believe that there's going to be an acceleration about M&A in Europe. Of course, consolidation would make sense. Of course, we would be very happy to take part of these consolidations and keep strengthening our overall position there. By the way, coming back on our key criteria about M&A on defense, in particular -- not just on defense, but in particular in defense. I mean it's really for us, these 2 axes in terms of M&A priorities, one being geographies and becoming stronger in countries where today, our presence is not that large. And where we see quite a positive growth potential. And the second axis is about technologies. And for us, I mean keeping or strengthening our portfolio of technologies within defense is also something that we are looking for. So at this point, this is basically what we would like to pursue. I mean we are open to bolt-on acquisition in defense, as we mentioned. At this point, however, I mean the number of finds that we might contemplate in Europe in particular at this point is quite limited. Now will we see more about that in the next few months we will see. At this point, I have to say that I'm a bit cautious. One thing is to favor collaborations across various players in defense with companies from different countries working together on a program. Another thing is M&A. And we know that -- and probably more than ever, we see governments, countries, not accepting to give up in terms of sovereignty when it comes to, say, mastering -- I mean managing defense assets. So I would be a bit cautious about transborder type of M&A in defense. I would welcome a move of this kind. At this point, I'm a bit cautious about, short-term opportunities that we might see on this matter.

Next question comes from the line of Christophe Menard from Deutsche Bank.

Yes. The first question I had was on the Defense & Security. If there was one part of that business that could outperform in 2022, would it be fair to assume that it is more of the support area, so the operational -- what guarantees the operational readiness? And what share of your Defense & Security sales does that represent at the moment? So that's the first question. I'll follow up with the 2 others.

Okay, Christophe. So yes, I mean, of course, we expect support in our Defense & Security business to be strong in 2022. You probably have in mind that in the last few years, we signed, in particular in France with the French MOD, various contracts relating to support businesses to support various type of equipments. And with the willingness of the Minister of Defense in France to better verticalize the management of support in order to become more effective when it comes to availability of platforms. So if you look back at what we signed in the last few years we signed contracts, either as a prime or as a subcontractor to support, for instance, in the fleet of Rafale, the fleet of Balzac, the fleet of Mirage 2000, the fleet of patrol aircraft. And we start seeing and our clients is starting to see the merits of this new way of managing support in order to overall improve the availability rate of their equipment, of their platform. I would, by the way just, yesterday discussing with one of our key leaders in our defense business about the start of a project that we highlighted in our 2021 figures, which is a project called VASSCO, which designed to support the fleet of Balzac and the overall management of air operations for the French armed forces. And we are discussing about how this project is starting and it's starting pretty well with the client being quite happy with the start of this new program. And the confirmations of the need for this type of equipment to keep improving, its overall effectiveness in terms of availability. So this is good. Overall, services in our Defense & Security support represents something around 20%, 20-plus percent of our level of revenue on this matter, which is especially [Audio Gap]

And the other question was on the -- actually, the discussion you have with emerging markets on defense, you discussed about Europe.

Christophe, unfortunately, the line was cut for a few seconds. So I was not able to hear what you said.

Okay. Earlier it was cut also on my side. Yes. So I repeat. So yes, 2 other questions is, emerging market outlook in defense, if you can talk about the discussions you're having with those markets. And also, I was wondering whether you would consider repatriating some semiconductor production to France at a given point in time, given, I mean, constraints at the moment and the fact that you will probably have more demand for those products. So the supply -- in a way to ease the supply chain, I mean that's -- is it something that you're considering?

No. I mean, I will start with the second question, Christophe, because I think there may be a misunderstanding about managing the semiconductor supply chain. Thales, we don't produce semiconductors. We use semiconductors and semiconductors are made by specific companies like STMicroelectronics, NXP, Infineon, Samsung. I mean, companies that are not a defense company at all. And those companies, by the way, they also rely on funders that are located today more in Asia, in particular in Taiwan, but also in China. So it's not that much a matter where a company like Thales could decide to produce its own chip or semiconductor. Now your question is absolutely valid about the need for this industry to keep investing, which have started to do since beginning of 2021 with massive investments. But a few years in terms of lead time for new plants to be commissioned. So hence, the fact that we believe the situation will continue to be quite tense throughout 2022 and probably the first half of 2023. Now what you mentioned also raised the point of sovereignty of independence of key countries when it comes to semiconductors productions. And it's true that, for instance, U.S. has decided to invest new production plant with regards semiconductors. And also, Europe is considering also this type of investments that are quite major investments, of course. And we know that it will take time. So we know that for the next few years, there will continue to be quite a strong dependence upon supplies that will come from, in particular, Asia on this matter. However, with the key players that I've just mentioned are investing quite a lot in order to take advantage of continuous higher growth, higher demand on this matter. Can you repeat your first question?

Yes, certainly. So the question was on emerging market outlook. I mean, the defense -- the discussions you have with emerging markets, you mentioned about Europe, just anything that you may have had since the events in Ukraine?

Okay. So I mean, as we all know and for us emerging markets, in particular, Middle East and Asia. Middle East, we see quite a lot of activities in these regions, which, in my view, is not linked to the crisis in Ukraine, but which is more linked to the overall geopolitical context in these regions, which continue, as we all know, to be quite complex and difficult. Do we see also the impact of a higher oil price in terms of those countries willing to move ahead even more quickly on key matters? It might be the case. But what I can share with you is that the level of activity in terms of request for proposal in these regions is quite strong here. Asia as well, with various countries, probably a country where we are quite active and where we're pursuing various opportunities. That started, by the way, in the recent past, is Indonesia in particular. Indonesia with -- as you have in mind, some quite key successes in recent past and space. But now this time in defense we've not commented about the Rafale success in Indonesia, which is also something, which is quite recent and quite positive. And we are also pursuing other opportunities in Indonesia, in particular on our Defense & Security business. It's true that Indonesia, which, as you know, is one of the largest countries in the world in terms of number of inhabitants. I think Indonesia is the fourth more populated country in the world with quite a complex geography and with many needs in terms of protecting their country. So we see Indonesia, in particular, as being quite a source of opportunities for Thales in this region. So overall, here again, we see quite a good level of commercial activity and quite positive on this matter as well.

Next question comes from the line of Andrew Humphrey from Morgan Stanley.

I don't have much more to be honest. Maybe a couple of specific questions on shorter cycle items. You've obviously been relatively clear about not seeing orders coming in yet on the defense side. But are you seeing a much higher level of activity, if I think about things like tactical radios, ground-based support, some of the shorter-cycle businesses? And could you give us an indication maybe how much of your defense business you would class as shorter cycle and likely to be deliverable, say, within the next 12 months? And secondly, on potential production disruptions. You've talked about difficulty of getting hold of talents and engineers in the right geographies. Can you talk about where in the world, I guess, you're seeing most constraints or having some difficulty hiring?

Okay. Andrew, so in terms of type of businesses where we see a positive short-term implication. Once again, it's on support. So you mentioned a tactical radio. Yes, but I mentioned also weather, which is a good example. Air defense, I mean, to a large extent, is where we see also more demand. So I don't want to be that much specific. But overall, across the board, additional needs in the short term. In terms of equipment talents, I don't want to make a specific case on a specific country. We know, and this is a matter of fact that this is -- I mean the workforce talent is a global challenge in many places. It is the case in most mature countries, whether it's U.S., whether it's U.K., whether it's Continental Europe. So it's across the board. It's also -- I mean, why we are pursuing also initiatives for us to strengthen to keep developing engineering centers in other regions. I've commented in the past, and I can confirm the fact that we are ramping up our engineering centers in 2 key locations for us, one being present in Europe, which is Romania, the other one being in India with 2 key engineering centers for Thales in India that we're ramping up. One close to New Delhi at Noida. Another one in the south part of India, which is Bangalore. So you see, I mean, a way also, for companies like Thales in particular, I mean to get additional talents is also to seek developing engineering centers where we see a level of supply in terms of a number of available engineers being quite interesting for us in terms of supply. So no specific points. This is absolutely not specific to Thales, of course. This is across the board for all companies, challenge in the field of digital in particular. And Thales with, I think the strength of our brands in some countries, in particular in Europe. And also our initiative to ramp up engineering centers in other regions. I mentioned Romania and India are also way for us to keep growing, managing this overall challenge.

Next question comes from the line of Harry Breach from Stifel.

Yes, Pascal. Just a very quick couple. Firstly, absenteeism because of recent COVID levels has been an issue, I think, for some companies in aerospace and defense on both sides of the Atlantic. How are you finding the level of illness amongst Thales' workforce? Is that something that you're managing through with extra shifts? Is it something that's causing any slippage in revenues? And then just turning over maybe to the availability contracts, Pascal. I think you touched on Rafale, you touched there on Balzac as well and VASSCO. Are there any other major opportunities for verticalized support involving Thales products with the French Ministry of Defense that you would highlight to us?

Okay. Harry, so on your first question about COVID and impact of COVID and how we operate our sites. I guess your question relates to other companies that, in particular, I mean, U.S. companies that have mentioned that they missed sales because of production disruptions driven by COVID. It's not a point that I mentioned in my comments. I think that at Thales, we manage our operations pretty well on this matter. It's true that we organize the companies after the Q2 2021 disruptions in a way that allow us to navigate through some of our employees being affected. But I do think that following the disruptions that we had in Q2 2020, we have taken the right measures in order for us to operate in a pretty effective way despite the constraints that you have mentioned and people being affected by COVID. So no, I have not seen missed sales driven by disruptions of production to the COVID-19 issues. Now, of course, all of that is a permanent challenge, of course. I'm not saying that all of that is easy, but I think that we learned how to navigate through some of our employees being impacted by COVID. Maybe with -- maybe a slight caveat on our DIS business in China. As you know, Shanghai is under lockdown. And we have the IS production facility there, which has been slightly impacted. But here again, it's probably a good illustration of how we can manage this overall environment. We have our colleagues at Thales in this production facility at Shanghai, staying 24 hours a day, 7 days a week in the plant, sleeping in the plant in order to keep producing, as they cannot leave the plant for sanitary reason. So it's probably a good illustration of the commitment of our employees to supporting the companies -- to supporting the company in these situations. A specific case in Shanghai, but showing what I perceive being quite a good demonstration of mobilization of our employees. Availability contracts. Of course, we are discussing the French MOD on this matter as we see the merits of this verticalization in terms of overall effectiveness and improving the overall availability rate. At this point, it's probably too early to be more explicit on this matter. But yes, there will be, of course, in the next few years, some opportunities there. And of course, I mean, it's clearly an opportunity for growth for Thales. I mean, in particular, the various contracts that I've mentioned earlier on support with the French MOD will be clearly, in my view, opportunity for top line growth in the next few years as we will sell more services to the French MOD for the benefit of improved availability of their own platforms.

Next question comes from the line of Aymeric Poulain, Kepler Cheuvreux.

I'd like to just cover the mix in DIS, please, to understand the return to mid-single-digit organic growth for the full year when you start with such a strong double-digit growth. So could you give us a bit more color on the trend you've seen in the biometric passport that is recovering from its trough as well as the sustainability of the momentum in the payments? And also, I'd like to see if you're getting more interest for the eSIM card given the shortage of semiconductor? Is it something that provides an incentive to push this activity? And if so, what is the type of attrition you see when you substitute a traditional SIM card by an eSIM card, please?

Okay. Thank you very much, Aymeric. So overall, I mean, my tone is quite positive on the level of demand at DIS in our various businesses. And we will see in July, whether we upgrade a bit our perspective in terms of level of revenue for DIS for 2022. But it's true that at the start of the year, it's quite strong, it's quite solid with, as I mentioned, a clear recovery in terms of demand for our biometrics/secure documents. So quite a strong level of demand on our secure document/biometrics, quite a strong level of demand in our cybersecurity business, and it will continue. Quite a strong demand in our smart card businesses, in particular in our banking business. So overall, quite a strong level of demand today. Now in terms of a bit of caveat or element of cautiousness for the full year. We have seen probably a bit of precautionary buying from our clients in the bank segment. And we need to see how we'll see the demand developing in H2. First point. Second point, I mentioned that, I mean, DIS is also where, I mean, we might be impacted by the shortage of chip. And we might suffer a bit as it has been the case in 2021, coming from the shortage of chips. But again, this is where we are working quite hard. So overall, I mean, very, very happy with the level of demand in this business. eSIM and the move to eSIM, is there a connection between, I mean, this shortage of chips and the development of eSIM? No, that's not my view. I don't think there is a direct connection. By the way, an eSIM also carries semiconductor. It's not pure software. So there is also a bit of hardware, even though it's quite limited. Now what is absolutely true is that we keep seeing this underlying quite positive move -- of moving from the traditional removal SIM to the embedded SIM, with, as you have seen probably Apple making quite stronger decision on this matter. And we are quite convinced that in the -- for the next 2 years, we'll show a clear increase in the demands from eSIM and these transitions from removable SIM to eSIM, which is overall positive to us with more added value on what we can supply in particular in terms of software. I think that there is no more questions. So probably, let me conclude by stressing that overall, Q1 is very much in line with our expectations. We were focused on the delivery of our financial objectives and, of course, the execution of our strategy. As I mentioned many times in this call, the underlying is strong in across all our markets, and I think that provided various examples, I mean to support this quite positive tone in terms of level of demand. So our next shareholder event is our AGM on May 11. As the [ Sunbow ] trade show will be in the week prior to our H1 publications, I mean we won't be able to meet investors there, sorry for that. But I will be watching with Bertrand and Olivier and I will be participating in conferences in May and June. So I'm looking forward to meeting you in the coming weeks and months. So in the meantime, please don't hesitate to reach out to Bertrand or Olivier if you have further questions. Thank you very much. Have a good day. Bye-bye.

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 [email protected] and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.