Good morning, ladies and gentlemen, thank you for standing by. Welcome to Today's Thales Acquires Cobham Aerospace Communications to Strengthen its Avionics Portfolio Conference Call with Yannick Assouad, Executive Vice President, Avionics, and Pascal Bouchiat, Senior Executive Vice President, Chief Financial Officer. There'll be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to turn the conference over to Mr. Bertrand Delcaire, Head of Investor Relations. Please go ahead, sir.
Yes, hello, good morning, and welcome, and thank you for joining us on such short notice. This morning, we will discuss the announcement regarding Cobham Aerospace Communication, AeroComms in short, and I suggest we stick to this shorter name. I am Bertrand Delcaire, the Head of Investor Relations at Thales. With me today, Yannick Assouad, Executive Vice President, Avionics, and Pascal Bouchiat, our CFO. The presentation will be in English and followed by a Q&A session, as explained. It is webcast live on our website at thalesgroup.com, and the slides and the press release are also available for download. A replay of the call will be available as from tomorrow morning. With that, I would like to turn over the call to Pascal Bouchiat.
Thank you, Bertrand, and good morning, everyone, and thank you for joining us on this call. Starting these presentations with slide 2. I'm very delighted to announce that Thales has signed a memorandum of understanding with Cobham Limited, owned by Advent International, to acquire AeroComms for enterprise value of $1.1 billion. AeroComms is a leading supplier of advanced, ultra-reliable, safety cockpit communication systems, and Yannick will explain in a minute what they exactly do. It will enable Thales Avionics to establish itself as a leader in the very attractive and fast-growing cockpit communications and connectivity market.
With this acquisition, Thales aims to pursue its strategy to strengthen its Avionics portfolio when forcing its global leading positions, adding recently developed cutting-edge products to its portfolio, while consolidating its solid positions with major OEMs and gaining access to strong aftermarket retrofit opportunities. AeroComms, which is expected to generate around $200 million in revenue this year, also has a very attractive financial profile. Double-digit type of growth expected in the midterm, and solid operating margin, and hence, significantly accretive to our aerospace segment profitability. From a value creation standpoint, this transaction is also compelling. The acquisition enterprise value of $1.1 billion represents 17 times expected full year 2023 EBIT price synergy, and 15 times expected full year 2023 EBIT, post one-way cost synergies. This multiple reflects AeroComms' superior growth profile and is consistent with comparable deals multiples.
The team have already identified one weight pre-tax net cost synergies of around $10 million and incremental revenue synergies of up to $40 million. This deal will be EPS accretive from year one. After this brief introduction, let me now turn over the call to Yannick, who will tell you more about AeroComms and the strategic rationale for this deal. Yannick?
Thank you, Pascal. Good morning, everyone, and thank you for being with us today, with short notice, as we said. I am now on slide three. As Pascal explained, AeroComms is focused on aircraft safety communication system. It has three main product families: L-band Satcom system, dedicated to cockpit communication, digital audio and radio management solution, and passive antenna system, all enabling connectivity, communication, and navigation of an airplane. It serves a broad set of customer, both civil and military, and benefit from both OEM production ramp-up and significant retrofit opportunities. It benefits from strong growth opportunity, driven by two clear pillars, the market itself. As you know, we are in a period where we have ongoing OEM delivery ramp-up, but also from a wave of operating fleet retrofit opportunity.
Product themselves, this growth is also fueled by the recent launch of state-of-the-art products. AVIATOR S for L-band Satcom. It is today the best-in-class product, already adopted by major OEM, like Airbus and Dassault, and the brand new DRAIMS, which is a digital audio radio communication system, also adopted by Airbus. Thanks to this unique position, its 2023 sales are on track to be already above pre-COVID level. Overall, we expect it to sustainably grow at double-digit, thanks to these new products, and above market growth, meaning gaining market share. On top of superior growth, AeroComms is also generating robust profitability, and will thus have a negative impact on our Avionics business and group margins. Moving on to slide 4.
Slide 4 provides more detail on each of AeroComms 3 main product lines. Let me just stress here the first column, SATCOM. AeroComms address a major trend in safety-critical cockpit communication, namely the replacement of low bandwidth HF solution by L-band Inmarsat SATCOM. Its product, AVIATOR S, is already very well adapted to this market, being very compact and low cost. Looking at the narrow body fleet in service today, we expect the penetration rate of L-band SATCOM to increase from around 20% today, to 50%-60% in the coming 3-4 years, driving a major retrofit opportunity. Moving on to slide 5.
The reason of the strategic move for us is really the trend on connected cockpit, which is really at the heart of the future of aviation. At our ESG Investor Day back in 2021, I had stressed how the principle of air traffic management are still today based on pre-authorized routes that follow the location of ground beacon, dating back to the middle of the 20th century. Optimizing flight trajectory and airspace supervision is a major CO2 reduction opportunity for aviation, and connected cockpits are essential technology to deliver on this vision. It's a clear enabler. Actually, this requires two key technology: a permanent, secure, high bandwidth connectivity, powerful cyber security across the full connectivity spectrum, and digital audio and radio management inside the cockpit.
This technology open a use case opportunity beyond flight operation opportunity. For example, they allow the introduction of digital solution to reduce crew stress and workload. In the longer term, they support the introduction of increased automation in the cockpit for improved safety. Moving to slide six. This is where the combination of our current avionic business and AeroComms is really a perfect match to address this opportunity. AeroComms brings L-band Satcom, digital audio, radio control, and radio navigation and radar, strongly complementing our portfolio in glass cockpit computers, navigation, and cyber security. You have on the slide what is the current status of an airplane today and where we will be moving in the near future.
Near is clearly not long term, way before the end of the decade, to really allow what I said in term of optimizing route of any airplane on the planet. Moving on to slide 7. Slide 7 is another way to illustrate the strength of the combination. You have a cockpit in front of you. Clearly, you see what actually Thales provide in term of glass cockpit navigation, computer, and cyber secure line. You see on the top, what Cobham AeroComms is providing today.
Clearly, Thales and AeroComms will be in a position to provide a full range of cockpit solution for a fully connected Avionics offering, with the integration of AeroComms DRAIMS, their digital audio radio management system, with Thales' FlytX cockpit display system. Which is already a reality on some platform, like the Guépard program. Thales radio navigation solution will be effectively supported by AeroComms antenna portfolio. Last but not least, AeroComms SATCOM AVIATOR S, with a connection with Inmarsat and Thales FlytLINK SATCOM Iridium, which we are developing right now, could lead to the best-in-class redundant SATCOM solution. Strategic fit is really built on a unique state-of-the-art product portfolio of both companies.
With that, I will now hand over to Pascal, who will comment on synergies and the financial impacts of the transaction.
Okay. Thank you, Yannick. I'm now on slide 8, cost and revenue synergies. Starting with cost synergies on the left. The team estimate that the combinations will generate run rate pre-tax net cost synergies of around $10 million, representing 5% of current sales, and is driven by the usual levels. Consolidation of Thales Avionics, SATCOM, and Audio and Radio control activities within AeroComms. On the third and technology roadmap alignment, some level of vertical integration and purchasing optimizations, as well as convergence in support and spare and repair activities. We forecast that the vast majority of these run-rate cost synergies will be achieved by the end of 2026. We have already identified meaningful revenue synergies. First estimate correspond to a run rate of around $40 million in incremental revenues.
As usual, with revenue synergies, they will take a bit more time to materialize, as they will notably depends on product development roadmaps. Still, around half shall already capture in 2027. All these positive effects resulting from the combinations will improve the growth profile and EBIT margin of Thales Avionics and the group overall. Moving now to slide 9. I already mentioned the transaction terms. Let me stress here that because of its superior growth profile, the valuation multiples are slightly above Thales. Beyond being financially compelling and the strong strategic rationale detailed by Yannick, this acquisition will offer significant shareholder value creation potential, as the transactions paid in cash is expected to be EPS accretive from year 1.
These transactions abides by all the M&A criteria that we have articulated with Patrice over the past few months, strengthening one of our core businesses with an easy-to-integrate acquisition. This is really a plug-in approach that we mentioned previously. A deal that will clearly reinforce our technology portfolio with state-of-the-art products. Transaction that is accretive to our financial profile, looking at both revenue growth and also profitability. Valuation that is consistent with its financial profile, in line with our discipline, capital deployment strategy. I will finish the presentation with highlights of the timetable and next steps. I'm now on slide 10. Transaction signing is subject, as usual, to works consultations processes of both Thales and the target signs. Closing will be subject to customary merger control and regulatory approvals as always.
Under these conditions, closing of transaction is expected sometime during H1 2024. This concludes our presentations. Many thanks for your attention, together with Yannick, we now welcome your questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star one and one again. Once again, please press star one and one if you wish to ask a question. We will now go to our first question. One moment, please. Your first question comes from the line of George Doe from Bernstein. Please go ahead. [George,] your line is open.
Yes. Hi, guys. Good morning, everyone. I guess first is on the margins. You know, the financial valuation, I think, that implies close to 30% margins. You know, are there unique commercial contract types that allow this business to generate that level of margins? How sustainable is that going forward? Second one on the top line. Regarding this double-digit medium term growth, you know, how do you think of that in terms of the market growth versus, you know, your share gain versus new products? Certainly we're in an environment where, as you said, we're seeing ramp up in OE production aftermarket growth already in the market. How do you distinguish that versus, I guess, the growth premium you expect in this business? Thanks.
Okay, good morning, George. Maybe I will start with your first question and then leave the floor to Yannick, and to complement and maybe to discuss about any supplying growth.
Mm-hmm.
I mean, we mentioned, I mean, getting market share, and why is it that we believe that this business will grow a bit quicker.
Mm-hmm
... than the market? I guess, George, that you run the math, and, I guess, I mean, your assessment of profitability is clearly correct. I mean, what we need to have in mind is that, I mean, AeroComms really, I mean, have developed a state-of-the-art and a new, unique, type of products, with quite strong positions, at key OEM. It's really, I mean, the unique situations, in terms of products that allows also, I mean, this type of margin, first point.
Second point, I mean, what is also quite important to consider, and this is, this is presented, I guess it's on page 3 of the presentations. You will notice that, I mean, the aftermarket and retrofit proportions is quite significant, representing almost 50% of AeroComms. As we highlighted, and as we all know, of course, level of margin on aftermarket and retrofit, is significantly above what it is on line fit. This is really, I mean, what is underpinning, I mean, this, quite favorable level of profitability, which we do believe, is sustainable.
Here, again, I mean, driven by new products that have been developed in the last few years, both on high bandwidth SATCOM, but also on the digital radio and audio. Maybe, I mean, Yannick will comment a bit about, I mean, the development of those two new products that are really quite unique in term of their positioning as compared to the world competition. Yannick, maybe on this point?
Yes. So to complement what Pascal said, first of all, the sales today of AeroComms is based on, one, their legacy product that they produce for line fit, and they maintain them. Recently, they introduced those two new product that I described, the SATCOM, the L-band Inmarsat SATCOM, and DRAIMS. Progressively, those two products are going to replace the legacy product. So that's one, and they have better margin on those new products than they had on the former one. That's one of six explanation of the sustainability of those of this margin. The other one is that on SATCOM, and you see it again on slide 3, you see that the SATCOM is only today 30% of their sales.
That share is going to increase vastly, because today, as I said, certainly a small percentage of airplane that are equipped with a high bandwidth communication equipment, and we see it coming line fit. There is more and more airline that ask for SATCOM communication on their new airplane. In addition, when usually they ask for communication in their new airplane, they are going to want to retrofit their legacy fleet. There is a huge potential of retrofit of fleet of airplane with this SATCOM product. Really, you see the share of SATCOM growing in the coming years. It so happens that they have also better margin on the SATCOM itself than the AeroComms.
Mm-hmm.
That's really the reason why it is very dynamic in term of growth potential. That's why we believe as well that they're current very attractive EBIT profile can be sustained in the future.
Maybe, I mean, to complement, George, if you allow, on top of, I mean, this overall positioning, with the wide products, it's also the fact that, clearly, I mean, AeroComms is a well-managed business. They manage, I mean, to drop their overall cost structure, in particular throughout the COVID 19 crisis. They have put in place a quite a significant optimization of their industrial footprint.
Mm-hmm.
It's clear that, as, I mean, they see, and this is has really started, maybe we mentioned that, the level of revenue in 2023 is expected to be above the pre-COVID level. They are now taking advantage of this overall leverage, effect.
... with a low cost and taking advantage of quite a strong top line revenue. This also explain, I mean, this level of margin. In term of superior level of growth, I guess, I mean, Yannick started to mention this point with, in particular, I mean, the SATCOM and also on SATCOM developments, also driven by this change in regulations that opens the door for, I mean, increase of SATCOM solutions on airplanes. Overall, yes, I mean, we do believe that this superior level of growth reflects the quality of the portfolio.
This level of margin reflects both, I mean, this unique positioning from a product standpoint, but also, I mean, the aftermarket component, and also the overall cost structure of AeroComms, which has been well streamlined in the recent past.
Very helpful. Thank you.
Thank you. We'll now go to the next question. One moment, please. Your next question comes from the line of Tristan Sanson from BNP Paribas. Please go ahead.
Yes, good morning, Yannick. Good morning, Pascal, Bertrand. Thanks for taking my question. Congrats for the deal. A few on my side, can you first talk about the track record of execution and supply chain management at AeroComms? Is there anything we should focus on in the first stages of integration on these points? Second one, can you tell us a bit more about the track record on top line generation, especially how what was the pattern of revenues generation throughout the crisis? How much did it drop? How fast did it recover? How cyclical was it?
When you're talking about double digit going forward, double digit can be anything from 11 to 99, are we talking about more like 10, 12 or 15, 20? Or what's the type of pattern? Maybe someone would be, are there technology synergies that you're seeing for the Thales group beyond computer avionics? Many thanks.
Okay. I'll start with the supply chain question also, if you, if I may.
Mm-hmm.
There is a difference between Avionics as it stands today and then in the fact that they are much more vertically integrated. We are not as vertically integrated as they are, and clearly, we had less visibility on the inventories that our tier one had on electronic component that they have themselves, because they are procuring direct, because they are building everything either in France or in South Africa, including the printed circuit board they make themselves. They see it coming much earlier, and they manage it very well, to such a point that they had no major on-time delivery performance during the worst of the component crisis for us, which was, let's say, end of 21 to mid-22.
Which was really, the period in which we had many decommitment from all the components, manufacturer. They had inventory prior to that period, and therefore they were able to navigate that period of 6-10 months, which was really bad for all the electronic manufacturer. They were able to navigate it, I must recognize, better than we did. Clearly, today, the fact that they are very vertically integrated, helps tremendously, both the management of their supply chain, which is not as deep as ours, but also their cost, I must say, as well. Clearly, it's value added. Do you want to answer Yes?
Yes, or both.
Profile?
Yes.
Yeah.
About the, I mean, the sales profile system. Yes, I mean, of course, AeroComms, as all, I mean, aerospace companies have been affected by the crisis. This being very, being very temporary, temporarily, I mean, impact. When you look at the, their top line profile, 2020 was around 20% below pre-COVID level, below 2019. In 2022, they've already, I mean, fully recovered, which is good. I mean, 2022, very close to the pre-COVID level in terms of top line, showing that how quick they managed to get this level of rebound. We expect 2023 to be probably double digits above pre-COVID level.
You see, I mean, a level of impact for the crisis, which has been quite modest, and quite a swift recovery in terms of top line. Today, our level of 2023 expected to be significantly above pre-COVID level. Now, going forwards, and for the reasons that Yannick mentioned, we are quite positive. What does it mean in the next few years? I would consider that a low chance to meet things-
CAGR is basically what we might have in mind for the next few years. Which you see is.
Above.
is pretty good, and which is above-
Above.
market trends on this.
Yes
on this, on this matter.
Uh, and, and-
[Yeah.]
Another question on further synergy, product synergies. You know, we clearly I described the main synergy and really the fact that our product line are very complementary, between what we do in Avionics and what they do in communication and connection of the cockpit, cyber secure communication of the cockpits. We have synergies of sell associating the two products. We have synergies of cost, because as you know, moving forward, to have secured info going through a cockpit, a connected cockpit, you will have to have redundancy in the communication.
In the years to come, probably it will be a dual SATCOM that will be needed, both Iridium and Inmarsat to cover the entire Earth. Clearly we see synergy since on our side, we have further progress on the Iridium SATCOM, and they are further progress. Already, you know, producing Inmarsat SATCOM, which is why they were ahead of everybody in the market, and they take, as a consequence, a good market share. To come clearly, this communication channel will have to be redundant, and this is where there is a lot of synergy, because they were starting an Iridium development, so there's a lot of synergy there. Do I see further synergies? Clearly, we didn't look at what it could give in the cabin.
Will there be one day, communication for the airplane, globally, cabin plus cockpit? It's a big question mark.
Mm-hmm
Sanson, because of the safety matter, of the cockpit communication, but clearly a future that we need to watch, of course.
Okay, that's clear. You're not talking about, like, synergies with the rest of the group's portfolio, like Thales Alenia Space or the different business?
Uh-
After all those years, [you] can call me Tristan, please.
Yes.
It's all right.
Clearly, the connectivity expertise is also very important as well for all our defense businesses. Clearly, they are specialized in airborne system. Therefore, it's probably more towards our, you know, different business on airplane rather than on ground equipment, that there is also synergy with the rest of Thales. The synergy with Thales Alenia Space is already something that we are taking benefit, you know, already in Avionics, and they will benefit from that clearly. Having a link with the satellite business is useful when you talk about SATCOM connectivity.
Mm-hmm.
Okay.
Very clear. Thank you very much.
Thank you very much, Tristan.
Thank you. We will now go to our next question. Your next question comes from the line of Ben Heelan from Bank of America. Please go ahead.
Yeah, morning. I hope everybody is well. Thank you for the question. I wanted to ask a couple. Firstly, who do you think of as the big competitors in this space? Is it Honeywell, or are there other people that we need to be thinking about? Secondly, do you think or do you foresee any potential risks from a regulatory process? Just are you going into that process quite confident that you're not gonna need to make any remedies, et cetera? I think, Pascal, for my third question, you mentioned that the revenue synergies, I think you said around half by 2027. That seems to be quite a significant digestion period.
Why are you not able to cross-sell aftermarket, upsell aftermarket, you know, leverage the product from a revenue synergy perspective earlier than 2027? Thank you.
Okay, maybe I will let.
Yeah.
... Yannick on the first one-
[and]
I will answer the last one.
Yep.
Yes.
Yeah. The main player in this arena is Collins, actually, it's not only one, it's Collins that have, you know... Collins, I don't know if you recall, but has acquired ARINC, or ARINC, as you said in the U.S., like 10 or 12 years ago. They started, you know, the communication on ARINC standard, the cockpit communication on ARINC standard. That was a very low band. They are in this since the acquisition of ARINC. When the era of satellite communication started, of course, Collins looked at it and clearly decided to invest in the SATCOM, and they are developing an Iridium SATCOM module right now as we speak.
It so happened that AeroCom took a position earlier than Collins, but Collins is the main competitor in that type of communication today.
On regulatory, I mean, issue, I mean, at this point, I mean, we don't see anything specific on this matter, Ben. Now, of course, I mean, we have to be a bit cautious, but nothing specific to report on this, on this, on this aspect.
Maybe to add, the reason why we are not seeing any big hurdle is that, today, ourselves, have really little sales, little sale on SATCOM equipment, because we were in the process of developing our equipment, but we have no significant sales today in that arena. Clearly, we don't see any major hurdle because we are not very present today on Thales side.
Now, on the revenue synergies, yes, it's my message was that it was more backloaded than frontloaded. And it's so that when we discuss about synergies, of course, we are very clear, including on the short terms, on the cost synergies, because it's a bit easier. And of course, as in any acquisitions, and I guess that we have demonstrated our ability to get cost synergies on previous transactions. Of course, I mean, there's no issue on this matter. Hence, I mentioned that by the end of 2026, I mean, we'll have executed virtually all our cost synergies. This, I mean, on the assumptions that closing will take place in H1 2024.
I mean, revenue synergy, of course, we are always a bit more, a bit more, bit more cautious. Of course, we'll not wait until 2027, by definition. What you also need to do is that, we will, of course, develop cross-selling, upselling as quickly as possible, and this will start, I mean, quite quickly. It's more about, when it comes to, I mean, going to the market with combined offering, where it takes, of course, a bit, a bit, a bit more time. Yes, we might be a bit cautious in term of timetable for our revenue synergies. Once again, it's not just in our hands, it's also product development.
It's also, I mean, relationship with customers, and the fact that, I guess, it makes sense for us to be a bit on the safe side on this matter, Ben.
Product certification, product development.
Okay.
and certification. You know, it's, we are in the civil aerospace, you know that everything need to be certified. It takes usually, for line fit, 3 player to certify something. The equipment manufacturer, the aircraft manufacturer and the authority, either EASA or FAA. Then for retrofit, it takes an STC, a Supplemental Type Certificate, so that we need to get from the authority. That has a lead time that is, that you count in months, clearly, rather than days or weeks. That, that's why we are a little bit cautious as well.
Okay. Okay, great. That was super clear. Thank you. One quick follow-up. You mentioned the business is very vertically integrated. That's one of the reasons they managed so well through the pandemic. Is that something that you're going to look to keep, or do you think that you are going to change the supply chain strategy on this business more in line with how you do the rest of avionics?
To tell you the truth, clearly, we are going to keep it, because.
Yeah
... with Thales, given what happened in 2021 and 2022, we are looking at our own model of industry, I must say. AeroComms has a different model of industry that was more, finally sustainable, navigating the crisis, the supply chain crisis we are going through. Still today, the component crisis, the electronic component crisis is behind us, but we are in front of a mechanical component crisis right now. Clearly, we see them navigate a bit better than we do, in those crisis. It's, those are the big questions that within Thales, ourselves, we are asking the questions.
Clearly for them, we are going to keep it for the time being and use their experience to fuel our thinking on our industry model ourselves.
Super clear. Thank you both.
Thank you.
Thank you, Ben.
We will now go to our next question. Your next question comes from the line of Christophe Menard from Deutsche Bank. Please go ahead.
Yes, good morning. Thank you for taking my question. I had two questions. The first one is on R&D. If my memory is right, it's pretty R&D-intensive activity. The question is: Where are you in the R&D phase? You mentioned the iIridium development. What will be essentially the cost of developing such a solution for AeroCom? The second question is: Can you comment on the free cash flow performance? Again, any R&D capitalize, and what is the conversion of this division? Thank you.
Okay, on the R&D, clearly, it's R&D-intensive, like any aerospace product, civil aviation product, you need not only to develop the product, you need to certify it. It's R&D intensive. By the way, you know, out of, you know, their total crew, like Thales, their model is that they work with a large engineering group, clearly, to develop those products. The great thing about it is that the AVIATOR S is, of course, fully developed, fully certified, so this is behind them. They had barely started their Iridium SATCOM development. We are further progress on that one on our side, and we are going to eliminate, clearly one of those two development.
I cannot tell you which one yet. It would require further analysis that we won't be able to do before we close the deal. Clearly, this is what we foresee, and therefore that will probably slow down their Iridium development, or not start it fully, as it is not started as we speak. Clearly it's helping their R&D cost by a substantial amount as it takes EUR several tens of million to develop a SATCOM product, huh?
Okay, Christophe, maybe on the free cash? Yes, I mean, it's a solid cash flow contributor. Having in mind that as this is it's more a business of sales of recurring products, more than a pre-funded type of project as we have in defense. We also need to consider that growing this business will require a bit of additional working capital, first point. In term of overall level of CapEx, it's a business where overall, I mean, the level of CapEx represent between 2% and 3% of the revenue.
Probably it's gonna be a bit more, in the first two years, as, I mean, we'll spend a bit more CapEx I mean, to deliver on our synergies. For instance.
Mm-hmm.
there will be a CapEx on IT system.
Yeah.
A bit more CapEx in the first 2 years. When you put all of that together, I would consider that, based on a CapEx, that would be slightly above a D&A, and also a bit more additional working capital, probably 85%-90% of EBIT converted to 85%-90% of EBIT conversions. Of course, based on unlevered and pre-tax, I mean, cash flow would be what I have in mind. Which means that post-tax, unlevered, it would be probably 60%-65% of EBIT. This is what I've got in mind overall for this business. Overall, post-tax, probably tax around 25% of pre-tax profit.
Post-tax and levels 60%-65% conversions ratio, based on what I've just mentioned, a bit more working capital as we grow the business, and probably at least the first, two or three years, probably a bit of CapEx that will be exceeding the level of D&A.
Thank you very much. Just a follow-up, if I may. There is no R&D capitalized, I would assume, from this. What is the typical R&D as a percentage of sales? Is it between 10% and 15%, or is it below 10%? Does it change anything to your group level R&D as a percentage of sales guidance?
No.
in the future?
No. No, no, even though, I mean, the level of self-funding R&D as revenue is not something I want 10% to make.
In avionics.
Yeah.
In avionics, it's around 10%.
Yeah, this business is also.
Yes
... at this level.
Yes.
It doesn't.
Yes
... that much, the overall level of self-funding R&D for Thales Avionics.
Yeah.
Overall, at group level, considering the size of this acquisition,
Yes.
It will not change the overall.
Yeah
... how you say? R&D trajectory, expressed as a % of revenue. It will not be materials in term of self-funded R&D as a proportion of Thales, level of revenue, and no specific, capitalized R&D.
Okay. Thank you, I'm very clear. Thanks.
Thank you. We'll now take your next question. Your next question comes from the line of David Perry from JPMorgan. Please, go ahead.
Yes, thank you. I've got three questions. They're all really on the same theme, they're for you, please, Pascal Bouchiat. The first one is, are you financing this from your gross cash, or are you gonna take on some debt? The second question is, it would be quite helpful, given what's going on in capital markets, could you just update us on what you think your current average interest rates are on your cash and on your debt?
Lastly, to help us judge the accretion, can you tell us what you think your net interest expense or income is, both pre and post the deal, please? Thank you.
Good morning, David. Good morning. It will be funded through available cash on our balance sheets, so we don't plan to raise any debts to fund these acquisitions. Overall, I mean, you could consider that interest rate today at Thales, it seems like 3.5%. We raised about a few weeks ago with a coupon of 3.62%. Overall, this is what I can share with you.
Pre and post interest expenses overall at Thales, I don't have it on top of my mind, but I mean, to have a good, I would say a good rule of thumb in term of computing, the I would say, the interest expenses associated with these acquisitions. I think, taking into account a 3.5% of the acquisition price, will give you, in my view, quite a good understanding of, I mean, the impact on our financial expenses PNL lines, and allowing you to calculate the overall accretive bottom line impact of the acquisition.
Perfect. That's exactly what I need. Thank you very much.
You're welcome, David.
Thank you. We will now go to your next question. Your next question comes from the line of Amrit Paulen from Kepler. Please go ahead, your line is open.
Yes, good morning, all. Thank you for taking my question. The M&A pipeline, you said, not long ago was quite rich, are there other acquisition you may consider, and particularly Avionics, are you now pretty much set in terms of the product that you have in your portfolio following this acquisition? Or are there other target that may be of interest for you? In particular, I think, L3Harris has put its Avionics business for sale. Is this a kind of deal that you would consider, for example?
Perhaps as a follow-up question on the revenue synergy, are there other acquisition, be it in digital security or space or defense, that could be complementary and enablers to your revenue synergy targets? Last, what would be the highest level of financial leverage Thales would be ready to take today? Thank you.
It's a long question, I'm going to start, and then I need to Pascal, for sure.
Mm-hmm, mm-hmm.
I'm going to answer for Avionics. First of all, clearly, we as said by the group, by Patrice and Pascal, we are looking at bold turn acquisition that can bring either product, complementary portfolio to our Avionics portfolio. We have still things we can do in that arena. That's the first objective that we have. Second, as you know, Thales is Thales Avionics, customers is centered more on the European aircraft OEM than it is on the American airplane OEM. As the leader of Avionics, I feel I should re-calibrate that a bit towards the U.S. aircraft OEM.
Again, if there is an acquisition in our field that fulfill one or the other of this objective, obviously, the group will look at it. Is there anything that we like that is available in the market today? Yes, but it's not available as easy as that. Clearly, we don't have a clear target as we had with Cobham that is predefined as of now, but we'll be looking at any opportunity. Maybe a word about L3Harris, since you've talked about it.
It so happen that we have a JV with L3Harris, that is dear to our product line, because they are producing TCAS, you know, proximity warning on board the cockpit, that we integrate into our Avionics offering. Clearly, we cannot ignore that part of that, and the share of L3Harris into that JV is for sale. Of course, we are monitoring that process very closely. This is what I can comment on this one.
Okay. Amrit. Outside Avionics, I mean, I would stick to, I mean, what we shared with you about our overall M&A policy. Really, I mean, what we're presenting today is really, I mean, part of the M&A strategies that we presented to you. With, I mean, a few quite important criteria for Thales to decide moving on, potentially on acquisition. Once again, making sure that any acquisition will strengthen our existing core businesses at Thales. We are not interested at all in buying diversified type of businesses or adjacent businesses, the first point. Second point, what we call plug-in type of acquisition, so easy to integrate.
I mean, a business within any of our existing GBUs overall, within Thales. Third element, making sure that acquisitions will strengthen our existing portfolio of technologies. We are a technology-driven company, which means that anytime we look at the target, we assess, and we spend a lot of time assessing the quality of the technology. I mean, Cobham Aerospace Communication is really, I mean, a business that we, and click all these boxes. Now, it's about, I mean, level of contributions of any acquisitions in terms of boosting our profile, in term of growth and profitability. This is what we are also looking for.
Last point, probably, I mean, rebounding on your last questions about financial leverage. It's about valuation and of course, size. I mean, you probably have in mind that, end of 2022, we reported overall at Thales a net zero debt situations. By the way, I mean, post IFRS 16, and with, I mean, this overall message of Thales willing to keep in the medium terms, a strong investment grade status overall. This is how we want to manage our balance sheets, which means that, I mean, this transaction, which is quite significant in term of investments, but really, I mean, it's very much in line with the overall level of flexibility overall at Thales.
Does it mean that we will no longer consider any additional acquisition? Of course not. We keep tracking the markets on potential acquisitions that would meet, I mean, the various criteria that just mentioned. We made it clear that, in particular, I mean, digital assets would be of interest for us. I mean, we have not changed our mind on this matters, while always having in mind a disciplined capital allocations overall for Thales. I guess this example of today also illustrates what it means overall for us.
Revenue synergies?
Yes, sir. There was a question about, would, potential additional M&A would favor revenue synergies on these transactions? This is how I understood your question, Amrit.
Oh, sorry, apologies, sir. I am just bringing him back.
Are there acquisition that you need to do, perhaps in space or in digital securities, that can enable the synergy or even enhance them, as indeed, there may be some additional service that can be extracted from?
We will see, but it's not part of what we have reported in terms of commitment on revenue synergy.
No, no.
It's a commitment from Thales that is really based on the merits of these specific acquisitions. We not get back to you, telling you that we need to make an additional.
Another move.
Another move, I mean, to deliver on the synergies that we presented to you today.
Yeah.
Now, if one day there is a, I mean, additional opportunities that would enhance the possibility to make additional revenue synergies, of course, we'll consider the case, of course, in a positive in a positive way.
Okay. Thank you.
Okay, okay, I guess that we need to, we need to wrap up. I think that, I mean, first, we are delighted by this, by these acquisitions. First point, once again, I mean, helping Thales to keep developing a more and more qualitative portfolio of assets. I guess next time we discuss will be as we release our H1 2023 figures. I guess it's next, it's Friday next week, Bertrand?
Yes.
Okay. Thank you very much for your attention, and thank you very much for having participated, it's such a short notice. Thank you, and bye-bye, yeah.
Thanks.
Bye-bye.
Bye.
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.