Thales SA
PAR:HO
Earnings Call Analysis
Q2-2023 Analysis
Thales SA
The company's Space business has been navigating a headwind of supply chain challenges, particularly in hardware devices throughout the first half of the year (H1 2023). Despite these difficulties, the business shows resilience, as management expects an improvement as the year progresses. Investors can feel cautiously optimistic with the forecast of a high single-digit organic growth for the entirety of 2023, remaining consistent with previous indications.
A remarkable increase in EBIT margin from 4.4% in H1 2022 to 7% in H1 2023 has been observed, propelled by the Avionics business's recovery, which achieved a low double-digit EBIT margin. However, investors should be aware that the sales are still grappling with inflationary pressures and supply chain issues, which highlights the robustness of the margins amidst a challenging cost environment. For the Defence & Security segment, despite a 36% organic decrease in order intake compared to a robust H1 2022, sales organically increased by 5.3%. The company appears on track to hit its targeted mid-single-digit organic growth and aims to maintain an EBIT margin close to 13% for the full year.
For the Digital Identity & Security segment, an organic sales growth of 11.7% was registered, showcasing a mixed dynamic with a robust Q1 and a softer Q2. There is an expectation of a slight decrease in organic growth within smart card sales throughout the second half of the year. EBIT rose significantly by almost 36% organically, with a notable increment in EBIT margin from 12.3% to 15.9%. Nonetheless, this high EBIT margin is anticipated to normalize as price erosions and decreasing demand, especially in the telecommunications sector, are expected to come into effect.
The company has successfully navigated financial nuances with net financial debt remaining positive in the first-half of 2023, benefiting from improved returns on its cash position relative to H1 2022. Adjusted net income reached €819 million, translating to an adjusted earnings per share (EPS) of €3.91, up by 15% from the prior year's first half. This represents a robust bottom-line performance that should encourage investor confidence.
Despite a significant stock build-up, explained by revenue growth, inflation, and a strategic choice to mitigate supply chain tensions, the company projects a strong cash conversion rate of around 90% for the full year. They anticipate a free cash flow nearing €1.5 billion in full-year 2023. Additionally, the net debt has been reduced by €130 million compared to June 2022, with the company following through on its capital allocation plans, including a 12% increase in dividends paid out and progress in its share buyback program.
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Good morning, ladies and gentlemen and thank you for standing by. Welcome to today's Thales H1 2023 Results Conference Call. [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.
Yes. Hello, good morning. Welcome and thank you for joining us for the presentation of Thales' H1 2023 results. I'm Bertrand Delcaire, the Head of Investor Relations at Thales.
With me today are Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales. As usual, the presentation is in English and will be 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. Before handing over the call to Patrice, let me share a brief personal note. This is my 30th and final quarterly results as Head of Investor Relations at Thales. It has really been an honor documenting the transformation of the group over the past 7 years and engaging with investors and analysts globally. I will really miss the quality of our interactions over the years.
I also wanted to take the opportunity to thank my team, [indiscernible] who played a major role in the design, production and delivery of all these interactions. In a few days, I will be joining [indiscernible] our Secure Communications and Information Systems Global Business Unit which has remarkable teams and many growth opportunities.
I leave you in good hands with [indiscernible] who will join the group in September. With that, I would like to turn over the call to Patrice Caine.
Good morning, everyone. So let's start with Slide number 2, as usual, the highlights of our robust 2023 results. So starting with the commercial dynamics. It was again strong across the portfolio. When you exclude the Jumbo UAE Rafale booked in Q2 last year, the performance was actually in line with last year record high.
Over 12 months from June 2022 to June 2023, our backlog is up by 7%, further increasing our long-term visibility. Secondly, our organic sales growth remained strong, driven by the ongoing recovery of the avionics business and the remarkable performance of DIS during the first quarter. Third, our EBIT margin, driven notably by the strong DIS performance is in line with the full year guidance. Considering our year-to-date performance and the perspectives for H2, we have decided to upgrade our full year sales guidance and I will come back on this at the end of the presentation.
And finally, of course, from a strategic perspective, we were very active in the first half and I wanted, in particular, to mention the acquisition of Cobham Aerospace Communications that we announced last week. This acquisition will reinforce our position in cockpit connectivity. This represents a perfect example of the larger bolt-on acquisitions that we mentioned in the past.
So let's move now to Slide number 3, looking at our financial performance in a few charts. At €8.6 billion, order intake was down 23% organically versus a very strong H1 2022. As mentioned, organic sales growth remained strong at 7.7%, ahead of our full year guidance.
EBIT and EBIT margin continued to improve strongly, respectively, up 13% and 60 basis points. At €819 million, adjusted net income grew by 13%. It's a new record high for our first half. Free operating cash flow remained positive at €99 million and Pascal will come back in detail on the explanation of the drop compared to last year.
Last chart on the slide, the net debt position which ended the half year at €781 million, down a little more than €100 million over 12 months.
Okay. Thank you, Patrice and good morning to everyone. So I'm now on Slide 4. So starting with our order intake dynamics. As Patrice mentioned, we achieved again a strong order intake in H1 2023. The total amount was lower than last year because we booked this Jumbo UAE Rafale order in Q2 2022.
Please let me also remind you here that 2022 order intake, even without this UAE Rafale, was our record high H1. So we booked 9 large orders over €100 million, of which 6 during Q2. Four contracts in Defence & Security, including the jumbo contract for the production and delivery of the warfare, fire control and sensor suites for the 4 new Dutch and Belgium frigates. And also 2 large contracts in space, confirming the commercial momentum in institutional space. As usual, we have more details on all the large contracts in the press release. Orders between €10 million and €100 million were up by 28%, notably driven by Defence & Security.
And finally, orders below €10 million progressing by 8%, reflecting the ongoing rebound of our civil aero aftermarket and also Passport production. So overall, another solid performance in 2023 in regards to order intake. Turning now to Slide 5, looking at sales growth. First, a word on currency and scope. The currency impact became material in Q2 at minus €73 million for the dollars minus €79 million over H1 2023.
Let me take the opportunity to flag that the ongoing weakness of the U.S. dollars will represent a negative impact on our sales over the full year. Based on our estimates with U.S. dollars at 1.12, the total impact could be somewhere between €250 million and €300 million over the full year 2023.
Now in terms of scope, there's also a significant impact to model over the full year 2023 resulting from the acquisition of transfer activity carried out in 2022. The biggest factor was a transfer of our IoT connectivity module business to which drove a negative €184 million impact in H1. This impact is expected to be at around €360 million over the full year.
On top of this, there were 2 smaller disposals impacting H1 by €14 million [ph]. And the positive signs, we had the bolt-on acquisition we closed last year and Excellium in the Defence & Security segments and welcome in DIS. Overall for a total of approximately €120 million over H1 and an estimated €150 million over the full year. So as you can see on the right, a net negative scope impact of €76 million in H1. And you should expect a clearly more negative impact in Q3 and Q4 as acquisitions were closed in Q2 and Q3 last year.
Over the full year, the overall negative impact should be around €250 million and this doesn't include the expected disposal of our electrical systems business. Now the important point is the fact that our organic growth reached 7.7% ahead of the full year guidance with all 3 segments performing well. Turning to the geographies, our robust half year across the board with most geographies strongly up.
So overall, quite a solid first half in terms of sales. So now moving on to the EBIT bridge, looking at the drivers of the change in our EBIT between H1 2022 and H1 2023.
I'm now on Slide 6. The mechanical impact, scope, currency and pension net each other with pensions up by €50 million, thanks to a lower level of liabilities over the period. More importantly, you can see the solid progression of our gross margin, up by €248 million or 130 basis points moving organically from 26.9% to 28.2% of sales. And you have more details on the P&L in Appendix, Slide 19. Let me also point out the solid control of indirect costs stable at -- as a percent of sales. In particular, as you can see on the chart, G&A expenses were only up €11 million i.e., 3.8% in the period. Marketing and sales costs were slightly up by 20 basis points, mostly resulting from the strong performance of DIS over H1.
Finally, equity affiliates contributed less to our EBIT than in H1 2022 but this was fully expected since last year. We had a €50 million positive one-off coming from Naval Group. So all in all, the EBIT margin at H1 was in line with our full year plan.
Now looking briefly at each segment one by one. I'm now on Slide 7 for Aerospace. Orders were slightly down by 4% organically despite 4 institution contracts above €100 million in space over H1 and the ongoing rebound of small orders in civil IO [ph]. The large space contracts signed during H1 2022 were for a value above the total value of the one signed during H1 2023. Sales were strongly up 10.1% organically, driven by the robust growth in aeronautics, up at a double-digit organic growth in both OE and aftermarket activities.
The Space business remains impacted by supply chain challenges over H1, especially on hardware devices but the situation is expected to improve progressively during H2 2023. Overall, we are confident that the segment will achieve a high single-digit type of organic growth over the full year 2023 as indicated already in the past.
Now if we look at profitability, EBIT margin continued to increase from 4.4% in H1 2022 to 7% in H1 2023, driven by the performance of the Avionics business. The improvement is mostly driven by the recovery of Avionics which delivered a low double-digit EBIT margin. Sales, however, remain impacted by higher cost due to inflation and the supply chain challenges, as mentioned before.
Turning to Slide 8, looking at the Defence & Security segment. Order intake amounted to €4.6 billion, down by 36% organically but versus a very strong H1 2022, as mentioned before. Five large orders above €100 million were booked in H1, including 4 in Q2, bringing our overall backlog to €31 billion at the end of June.
Sales amounted also to €4.6 billion, up by 5.3% organically versus H1 2022. Many business units contributed to this steady organic growth, like integrated airspace protection system, electronic combat solutions network and infrastructure systems and also cyber defence solutions, just to give you a few examples. This steady organic growth over H1 is obviously a positive sign in regard to our ability to deliver the mid-single-digit organic growth we committed to for these segments over the full year 2023. Last point; the EBIT margin, as you can see, in line with the H1 2022 performance. As you know, there is some seasonality, I can confirm that this 12.3% in H1 is fully aligned with our objective of reaching an EBIT margin at or just below 13% for the full year 2023.
And finally, Digital Identity & Security. I'm now on Slide 9. At €1.6 billion, sales were up by 11.7% organically. The strong performance combines 2 different dynamics between Q1 and Q2 in terms of organic growth. A very strong Q1 at 20% and a softer Q2 at 4.7%. This slowdown of growth was very much in line with expectations. It is driven by the lower demand and lower price effect on which benefited from 5 exceptionally strong quarters. In addition, after a Q1 that was very strong, the Biometric business normalized in Q2. We anticipate that over H2, smart cards will probably turn slightly negative in terms of organic growth versus high comps in H2 2022.
All in all, it means that for DIS, you should expect H2 sales that would be comparable to the very strong level achieved last year and hence, a full year around mid-single-digit type of organic growth.
Now EBIT at €253 million was up again by almost 36% organically with an EBIT margin progressing significantly from 12.3% to 15.9%, of course, including the relative impact of the deconsolidation of the IoT module business. Outside this impact, the segment also benefited from a net gross margin improvement compared to H1 2022, thanks to favorable price and mix effects and also the leverage on higher cybersecurity and smart card sales.
Let me also here that this very high level of EBIT margin at almost 16% will not be sustained in H2 as we start seeing some price erosions combined with lower demand, notably in the telco segment.
Turning now to Slide 10, looking at items below EBIT. Two points to be mentioned on this slide. First, the cost of net financial debt is standing positive at H1 2023, benefiting from higher return on the group's cash position compared to the first half of 2022. Second, on the other side, finance cost pension increased in line with the rise in interest rates. All in all, bottom line, this drove an adjusted net income group share at €819 million and an adjusted EPS of €3.91, up by 15% versus adjusted EPS at H1 2022.
So finishing up with a few words on free cash flow. I'm now on Slide 11. As you know, our working capital is usually negative in the first half of the year, mostly due to strong seasonality. This year was the case again with also a €600 million negative impact coming from a higher level of stocks at the end of H1 2023 versus the end of 2022.
The main reasons behind the stock increase are the mechanical impact of higher revenue, the impact of inflation but also a proactive decision at group level to authorize teams to build up additional level of stocks for some strategic items in order to deal with supply chain tensions. You can also notice that CapEx went up significantly versus H1 2022, notably to ensure the ramp-up of our production capabilities in order to support our future growth. We remain very focused on cash management so that over the full year 2023, we expect to return to a more normalized level of cash conversions overall 90%, reaching a free cash flow around €1.5 billion for the full year 2023.
Finally, moving on to Slide 12, with a quick look at the evolutions of our net debt position. You can see that €468 million were paid as dividends in H1 2023, up by 12% versus H1 2022.
The cash out related to the share buyback amounted to €210 million. At June 2023, we purchased 4.4 million shares over 15 months which is fully in line with the target to purchase 7.5 million shares over 24 months. At the end of June 2023, the group had a net debt of €781 million, hence, €130 million less than at the end of June 2022. And that's it for this financial review.
I'm now turning over the call back to Patrice.
Thank you, Pascal. So turning now to our strategy and outlook. So this morning, I will limit myself to an update on the 4 strategic priorities that I presented back in March.
So you can see them on Slide 14. So where do we stand on each of these initiatives? And let's move to Slide 15 now. So number one, first priority, capacity ramp-up. Back in March, I stress that considering the dynamics in our markets and the strength of our backlog. This was our first priority and it meant increasing staff, engineering and production facilities and securing the ramp-up of our supply chain. So during H1, we made good progress regarding staffing with 5,300 recruitments. We are well on track to achieve our full year target of 12,000 recruitments. In parallel, our turnover rates which peaked in September 2022, has started to decline. So all in all, we are very confident on this topic. Pascal mentioned, our CapEx were strongly up in H1, plus 40%. And as you may imagine, the bulk of this increase is coming from investments in engineering and production.
And last, supply chain is a key channel at this point and it drives some of our cautiousness for the second half of 2023. Second priority, technology leadership. Once again, in H1, our long-term investments in R&D delivered remarkable successes.
Just 2 illustrations; number one, on the defence side, in H1, we have done an impressive list of wins in ground radars. On top of the 13 GM400 radars ordered by Indonesia, we sold the smart radar to Sweden. And of course, the new generation of SMT incorporates one of our flagship radars, the GF300. All these radars belong to a single dream product line building on many years of sustained technology investments. Another example on the Civil side, let me mention the announcement we made with Qualcomm regarding integrated SIM. You do remember that integrated SIM represents the next stage in the evolution of SIM cards when a separate chip is no longer required to deliver their functions. The certified the cybersecurity of the we integrated on Qualcomm's latest high-end smartphone chip making it the first commercially available iSIM solution for smartphones.
Third, when a third strategic priority, taking our sustainability performance to the next level. Well, number one, on the first business opportunity side, on the business opportunity side, let me stress that space will lead a consortium to deliver an in-orbit servicing mission to the Italian space agency. The long-term goal is to be able to refuel, repair and move satellites to other orbits which will represent breakthroughs for sustainability in space. Second and Pascal had highlighted it back in May, we received our SBTI certification earlier this year. And we are one of the very first large aerospace and defence companies to have obtained it.
Finally, as planned, we have stepped up our capital deployment actions. Year-to-date, we have announced 2 bolt-on acquisitions, projects, for more than €1 billion, an Australian cybersecurity company and Cobham Aerospace Communications focused on the delivery of secured connectivity to aircraft cockpits. Both of these acquisitions are fully in line with our M&A strategy. In parallel, we made good progress on our share buyback plan which is almost 60% completed. In H1, as mentioned by Pascal, we repurchased a little more than €200 million in shares.
So moving now to Slide 16 and finishing with our 2023 outlook. As you saw in the order intake figures Pascal presented, market demand remains robust across the portfolio. Recruitment and CapEx are in line with the plan while global supply chains remain under tensions.
On the macroeconomic side, the dollar which peaked against the euro in Q3 2022, is now materially weakening. As you understood, considering the strength of our sales year-to-date and the perspective for H2, we have decided to upgrade our full year guidance. Now we expect an organic growth between 5% and 7%. Taking into account the negative currency impact to expect over H2. This corresponds to €17.9 billion to €18.2 billion in absolute terms. We keep a change the other objectives. So we expect a book-to-bill above 1 and a full year EBIT margin between 11.5% and 11.8% which will represent a significant improvement over last year.
So this concludes our presentation. Many thanks for your attention. And together with Pascal, we are now pleased to take your questions.
[Operator Instructions] We will now take the first question from the line of Victor Allard from Goldman Sachs.
Congrats, Bert, on the new role. First question is on margins and DIS for which the performance was obviously very strong in 1H. And I was wondering if you could please help us assess the EBIT performance in 1H, in particular, if there was any one-off or mismatch that we should be aware of? I think you mentioned pricing and mix with the pricing contribution lately fading out in 2H. But I'm wondering if you could share a bit more color on this in the context of your guidance of around 14%? And the second question will be on orders and it seems that you have slightly changed the language of your guidance from significantly above 1 to just above 1. So should we read something here? And if so, what has changed in your assumptions in terms of orders?
So maybe I will start with your second question because there's a bit of misunderstanding. I mean we keep saying that book-to-bill should be above 1. That was our guidance at the end of 2023 [ph]. We confirm this guidance as we released our Q1 figures. And we just reconfirm this guidance. So no change at all on our overall order intake, book-to-bill guidance for the full year. Now on your first question about DIS margins. So first point, I think it's quite useful for all of you to have in mind that the level of EBIT margin that we delivered in H1, almost 16% shouldn't be what you should factor for the full year.
No specific one-off I mean answering your questions a predictor. However, I would mention, I mean, alignment of planets with overall quite a good mix across our various businesses. And also, I mean, taking advantage of today, a very strong overall gap between level of prices and level of cost of materials in our P&L. So we have got this expansion of margins that we took advantage of throughout H1. And as we see, as I mentioned, as we start seeing some price erosions we believe that overall, this positive gap between the trajectory of our prices and the trajectory of costs of materials, cost of goods sold in our P&L. This gap will narrow as we'll progress in H2.
Now, I mean, probably a bit difficult to give you a magic numbers in terms of overall level of EBIT for the full year. Now my condition today is based on our overall midterm target for DIS, a level of EBIT margin that will be between 13.5% to 14.5%. This is basically what we shared with you a few months ago being our target for 2023, 2024. My view today is that we should be at least at the upper part of this range for the full year of 2023, confirming, I mean, the quality of DIS business.
We will now take the next question from the line of Ben Heelan from Bank of America.
The first question I had was on the book-to-bill in Defence was around 1x in the first half of the year. Should we expect to be both onetime this year? I'm just a little bit surprised that orders have plateaued a little bit versus, obviously, there was a very difficult comp in last year but I was expecting a little bit better from an orders perspective. Second question for me was on aerospace and in particular, the space performance. And what you're seeing there from a margin perspective through the period? And then finally, could you give us a bit of an update on where you are in the supply chain for Avionics? Are you seeing any challenges there? Are you keeping up with the requests from the OEMs? How are you feeling about that?
So, thank you very much for your 3 questions. First, about book-to-bill in particular on Defence & Security. What we all need to have in mind is that, overall, we, at Thales, overall, we get -- we book more in the second half than in the first half as compared to a revenue profile that is more linear across the year which means that first, I mean, we are quite happy with the level of order intake and defence for H1 2023 which if you put aside this exceptional UAE Rafale orders in 2022. If you put, I mean, this contract aside, H1 2022 was really a record level and H1 2023 is comparable to this record level in H1 2022. Now the fact that it is slightly below 1 on defence, it does that mean that we're expecting a book-to-bill below 1 for defence in 2023. I do expect a book-to-bill which, overall for the full year 2023, that will be above 1. And all of that reflecting our view on the fact that we see quite a continued commercial momentum and defence across the board.
Second question about aerospace and in particular, your question was more on space. So yes, I mean, with those -- I mean, the combination of both supply chain attentions, difficulties on space together with inflation. And you probably remember that last year, we commented quite a lot about the impact of inflation on Thales, making a long story short positive for DIS, neutral on defence and potentially a negative for aerospace. Today, I mean, we see, I mean, inflation being also well mastered and, I would say, no specific constraint on our avionics business. However, we see in space, some impact. So it proves that we see today at our space business combination of -- I mean, some difficulties is combined with overall impact of inflation, all of that driving a level of EBIT margin in H1 that is quite modest.
And we expect for space overall for the full year 2023 level of EBIT margin that should be probably low single digits on EBIT margin. Now from a commercial standpoint, we see quite a strong momentum, in particular, as I mentioned and the institutional segments. So overall, I mean, it's true that at this point, we see, I mean, some pressure on margin. But for those 2 temporary effect, the inflations and difficulties on supply chain. I mentioned, as I made the presentation, that we should see some improvements in H2 on the supply chain intentions. But once again, those 2 effects are quite temporary and this shouldn't hide the fact that overall, we keep seeing quite a strong overall commercial momentum on space.
Your third question about supply chain, I will leave the floor to Patrice.
Yes. So supply chain in avionics, in particular but also globally speaking, I would give up, I would say [indiscernible]. On one hand, we have seen that the situation on components and chips are, I would say, improved. Clearly, it was much more difficult in 2022, even 2021. So -- and in particular, you can see that -- we see that in DIS. So the situation is, I would say, under control on components and chips aspects. At the same time, we have seen other, I would say, entrants under pressure or becoming the pressure like PCB, electronic boards or mechanical parts. But as you know, first, we have managed the situation always to meet OEM expectations, Airbus, Boeing, Dassault, the big OEMs. So we have always been in a position to deliver them what they needed to produce typically the aircraft as far as Arena is concerned. And we have also -- let me say that again, a very strong and professional supply chain and procurement team. So to mitigate this tensions, we have, I would say, increased the resilience of our supply chain by looking for systematic double sourcing intense area, redesigned from time to time some electronic boards.
We've made one necessary some strategic starts. Hence, our inventories that have increased but that's for a good reason, of course. Anticipation as well is another level that we have activated. Typically, we have decided, in some cases, to order with, let's say, 18 months visibility instead of 6 months visibility. So that's -- it gives a good visibility to our own suppliers. So you see many, many levers with the professional team to mitigate the situation which is, I would say, changing but under control.
[Operator Instructions] We will now take the next question from the line of Milene Kerner from Barclays.
Bertrand, thank you for your support over the last 7 years and I wish you all the best for your new function. I had just one question on space as a follow-up. You have been targeting in the past €2.5 billion of sales for 2024. Are you still confident in this target?
Okay. So I think this guidance was relative to 2024. So overall, as I see today, I mean, a level of revenue and tension and supply chain the impact of inflation let's consider that probably 2.4%, 2.5% is probably the best view that I could share with you on this business relative to 2024, that's probably the best I can give you at this point. But also, I guess that you understood that we are facing today I mean, in particular, the supply chain challenges. Once again, I mentioned that it should improve gradually. So let's see at the end of 2023, where we'll be standing on this matter, I mean, to give you probably a better view on how we see 2024. I think in mind, Milene, that, of course, I mean, we are discussing here about space. Now, I mean, knows probably more positive -- are quite positive on avionics, in particular, our Civil Avionics business which is today clearly ahead of our plan, both from a revenue standpoint and from a bottom line standpoint.
Overall, what we shared with you in terms of growth for this segment for 2023, 2024 which in my recollection, was a high single-digit organic growth is fully valid. So I mean -- and this is how it works. I mean, we will have probably a level of performance on above our expectations. And for the reason I mentioned, space, a bit slightly below what we had in mind. But overall level.
We will now take the next question from the line of Ross Law from Morgan Stanley.
All the best Bertrand in your new role. First question is on avionics. And just interested to hear whether you're still comfortable in achieving the ramp-up plans targeted by the airframers? And also whether you actually receive purchase orders in line with those production targets? Secondly, on the full year margin outlook which is unchanged despite the strong first half, you've obviously called out DIS margin as unsustainable and some uncertainty around space performance in the second half. But just wanted to check whether there's any other factors driving your caution around the margin for H2?
Well, for Avionics, I thought I was clear but I can reconfirm that, yes, we do follow the ramp-up of -- it's mainly Airbus for us but let's say, the OEMs in general, it's also the case for the Rafale or the Dassault we say production line. And we do meet all the deals we receive from them, no doubt. Pascal, on the second point?
Yes. I mean, overall, I mean, on margin guidance, so I was quite clear on DIS space. What can I share with you? I mean I mentioned that on Defence & Security, I mean, a level of margin, I mean, close to 13% is basically what we have in mind overall. And all of that is very much consistent with the overall guidance, 11.5% to 11.8%. So, now it's that I do think that H1 will give us even more confidence in our ability to deliver on this overall guidance. Yes, I mean, showing -- as you are seeing a 60 basis points above H1 last year. And basically, I mean, this is probably this type of margin improvement that we also expect for the full year. I mean reflecting this 11.5, 11.8 guidance. So no specific items, no one-off. No, I mean, at this point, no specific elements to share with you on H2.
Which is good.
Which is good.
We will now take the next question from the line of Herve Drouet from CIC Market Solutions.
Two questions. The first one on DIS and again, on the margins. Sorry to ask again on that. I mean this improvement of margin, we've seen quite significant in H1, where is it really coming on? Were there some significant price increase that was put in DIS during H1 that may explain that? While maybe the cost line with inflation did not increase as much. So do you think there is some of that? I'm aware that the IoT business which was the consolidated help the margin but it looks like the margin improvement is more than expected. So if you can be a bit more specific, it will be great. And the second question is on interest you get on the cash. I was wondering on the prepayment you received and if you can highlight how much prepayment you received for some of your order -- how can you account for the interest you have on the cash you received? Do you have to share the interest you received on that cash with the client afterwards or can you keep it?
Thank you very much, Herve, for your 2 questions. So on DIS, as I mentioned, it is true that H1 2023, quite a unique alignment of planets, quite strong level of demand across the board overall in all our subsegments. We discussed about recovery on biometrics. But when I look overall H1 2023 against H1 2022 quite a positive overall volume growth against last year. And second, as we manage to keep pricing our prices along 2022, it's true that today in H1 2023, we're probably at the peak of our overall level of prices as compared to H1 '22 weapon space which has not benefited from all the prices that we managed to get throughout 2022.
Now, I mean, a bit more cautious on H2. As I mentioned, I mean, we have started to see some price erosions in particular in our telco business which is on the -- more on the SIM count. And also, I mean, we think that the cost of goods sold which reflects the cost of materials in our P&L coming from our supply chain will in H2 2023 as compared to H1 2023. And of course, will be significantly above what it was in H2 2022. So if you combine a first, I mean, some kind of price erosions even though at this point, is quite limited. Together with cost of goods sold in our P&L that will grow. I mean the combination of the 2 will result in probably some -- a bit of tension on margin. This is really what explained. I mean my tone about being a bit cautious on H2. But as I mentioned, overall a level of EBIT margin for the full year that will be at the upper part of our overall guidance in terms of EBIT margin for the DIS.
Your second question, I mean, of course, I cannot share with you the details of our contract with all of our clients. But overall, I mean, in this industry, when you get down payments, you get those down payment and it's really up to you to manage those down payments. And if you can get some -- a bit of return on those payments, it is, of course, positive. And this is also basically what we benefit from, in particular, as we see interest rates moving up.
We will now take the next question from the line of Olivier Brochet from Redburn.
Yes. I will have 2 questions, please. The first one on the €250 million to €300 million FX headwind for the full year. Could you just maybe clarify how much of that will be from U.S.-based subsidiaries and how much will be from revenues that are naturally hedged? That's the first question. And the second one, Dassault yesterday announced or indicated that some suppliers on the Rafale received some down payments from them in H1. Can you confirm whether this had an impact on your free cash flow for H1, please?
So good morning, Olivier. So I mean the FX that we report for the full year, it truly, I mean, measures the pure accounting effect of the level of sales that is reported by our subsidiaries that report in U.S. dollars. So it doesn't reflect, I mean, transactional effect which is overall hedge for 2023. So we don't expect any significant transactional effect on U.S. dollar to euro. Second point about down payment. I mean we don't disclose, I mean, the level of down payment that we get in -- I mean, from our contracts. No, I mean, we got some down payments in first half of 2023. Yes, it's a matter of fact. However, at a level which is below what it was a year ago.
We will now take the next question from the line of Christophe Menard from Deutsche Bank.
All the best to Bertrand. Also, 2 questions on my side. The first one is, in terms of order intake, where the Telesat order to be booked in 2023? I mean we've seen that there's been some progress on this program recently. Would it be for you a greater risk considering the supply chain issues that we're seeing at the moment I mean, it's just to understand the framework of what you reported today? And second question is the mix in aerospace precisely. I mean it's better in Avionics both and support. Does it change anything to the guidance you gave us for 2024 of 8.5% to 9% EBIT margin. Should we be more looking at the high end of this guidance or even above?
So I take the first one on Telesat. First, as you know, Telesat is a listed company, so I do not intend to comment too much Telesat. However, they have not changed their sense vis-a-vis the right speed, I would say, initiative. So they are still looking for, I would say, closing the financial scheme for this project. So if and when they announced the closing of this project, then we will be ready for that, of course and be sure that we would not take any commitment that would not be backed by our supply chain, of course. So there is no, I would say, additional risk in case of -- now it's really -- the ball is really in their camp, not in ours.
Okay. Christophe, on your second question about the expected organic growth relative to our Aerospace segment for 2023, 2024. I mean our view today is really to confirm this high single-digit overall organic growth for this reporting segment in 2023, 2024 on this matter. I mean I don't see anything special in this matter. Your question was also on margin. So margin wise, I mean nothing specific on this matter. So here again, I mean, high single digit overall EBIT margin for 2024, yes, I mean, that's basically what I think we should be able to deliver at this point, yes.
There are no further questions at this time. I would like to hand back over to the speakers for final remarks.
Okay. Thanks. So there is -- there are no further questions. Just a few words of conclusion. So as you understood, H1 2023 demonstrated once again the strong performance of our group and we are fully focused on the execution of our profitable growth strategy, supported by rigorous capital allocation, of course. So I'm really looking forward to speaking with you in the upcoming investor roadshows and conferences after the summer break. Of course, if you have any further questions, do not hesitate to contact the IR team Olivier, Florian and for a few days, Bertrand, for few more days. And now I hand over to Pascal for a very last word of conclusion.
Yes. Thank you very much, Patrice. So as you have understood, it was the last presentations that Bertrand prepared with Olivier and Florian. So I would like to thank him for his invaluable contributions to the development of what I think is overall quite a good practice of financial communication at Thales.
Bertrand has been an outstanding Head of Investor Relations. Since he joined Thales in 2015, he managed to develop with all of you, a trust full level of relationship based on transparency, anticipations. But also, I think providing you for the right insights on our businesses. as well as on all our drivers that underpin our profitable growth strategy. We are very happy that Bertrand is taking over a new operational senior position. within our information and communication system, GBU. And I wish him every success in this new challenge. I'm also delighted to welcome succeeding Bertrand and we will join us beginning of September.
Once again, Bertrand thank you very much for everything you have done since you joined Thales in 2015 and good luck for your new challenge. Thank you to all of you.
Thank you. Ladies and gentlemen, if you didn't have a chance to ask your question on today's call, please do not hesitate to send your question to Thales Group Investor Relations at ir@thalesgroup.com and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect.