Hello, ladies and gentlemen. I would like first to thank you all for being here today with us under very, very short notice, and I would like to apologize for that. We are going to talk this morning about our project to acquire Collins Aerospace Actuation and Flight Control business. Collins is today a leading global provider of hydraulic and electromechanical actuation and flight control systems with a business which is basically around EUR 1.5 billion of sales planned in 2024. We are contemplating this acquisition because it is, for us, a unique opportunity to expand our aerospace equipment activity in another mission-critical segment, which is a segment of flight controls and actuation. Flight controls is indeed a mission-critical equipment for aircraft.
This contemplated acquisition and this business has a strong fit with our DNA because it's leading technologies, it's recurring aftermarket sales as well, and profitable growth. On top of that, this acquisition would position us very nicely for the next-generation aircraft, and I will develop that further. Let me hand over to Pascal for the financial metrics.
Thank you, Olivier, good morning, everyone. Let's have a look at the financial metrics. Enterprise value is $1.8 billion, which represents less than one year of free cash flow generation for Safran. It implies a multiple of about 14x on 2024 EBITDA, pre-cost synergies, or 10x post-cost synergies on a run rate basis. There are no commercial synergies factoring in the multiple, as they will take longer to materialize. We've signed long-term agreements with Collins to continue the supply after the closing of the transaction of their nacelle activities and, to a lesser extent, their missile activities. Collins represents about a quarter of total sales. We've also agreed on favorable price escalation mechanisms to reflect inflation. The $50 million run rate cost synergies represent a conservative view of what we have identified.
It's about 3% of sales, we are confident that we will be able to deliver them by 2028, which is year four after closing. We expect this transaction to be EPS accretive from year one. The transaction is expected to be fully financed by cash in hand. Cost of financing should be around 3%, which represents more or less the returns we currently enjoy on invested cash. The use of cash for this transaction remains compatible with Safran's policy of providing attractive returns to shareholders. Impact on the balance sheet will remain limited, I would expect the impact on leverage to be minimal, more or less, 0.3x or 0.4x on our 2024 EBITDA.
All in all, the transaction is compliant with our M&A criteria, meaning in the internal rate of return and the ROCE in year four, exceeding WACC with a margin. About the timeline, we would expect to close the transaction in H2 2024, subject to obtaining the required regulatory clearances, including antitrust and foreign investment approvals. Regulatory approvals are the main driver of the closing timeline, we would recognize that these reviews and approval processes will take time. You should assume that the first year of full consolidation of that business to be year 2025. Back to you, Olivier.
Let me give you some more color on the business we are talking about and the rationale for us. I'm on page five. The business is well-balanced across commercial and military. It's mainly 2/3 commercial, 1/3 military overall. A key point for us, it's a nice balance between OE and aftermarket. The aftermarket activity does represent overall 40% of the overall activity. Just as a reminder, in our equipment division, overall in Safran, the aftermarket represents 1/3 of our overall business. You see, this is just comparable or slightly up our average aftermarket split of revenues in the equipment business.
I would like to add that we are talking mainly about a European footprint, 3,700 people in the U.K., in France, and in Italy. That's what we are talking about, eight facilities. In terms of platforms, it's a good balance between what I would call as high earners platforms. We are on board the A320 and the A320neo, the A350, the 787, the A220, and also legacy platform, which is fueling the aftermarket revenue. A good balance between legacy and high earners and growth platforms. What we are talking about is also an activity with engineering, production, and MRO. We are talking about large majority of the business is a build to spec.
It's a build to spec activity, basically meaning that in this activity, we would own our own design, which is essential for us to fuel and to ensure the aftermarket revenue. We would own our own design. It's a build to spec activity, essential for us. Now about the rationale of this contemplated acquisition. We have a highly complementary product offerings, as we already are in the flight control and actuation business, but with a much smaller size. With this contemplated acquisition, we would be, from day one, a scale player and with a leading position worldwide among the top three in this market segment. A lot of synergies as well. As I said, an excellent mix of legacy and growth program.
The key point also is that the capabilities of the Collins flight control activity and our own activities is very complementary. Collins has a strong position in hydraulic and electromechanical actuation and flight controls, whilst we have a strong electric and also onboard electronics capability. Combining both will position us very nicely for the next-generation aircraft, where we will evolve smoothly towards more electric actuation and flight controls. On page seven, you have a picture with the comprehensive set of actuation and flight controls products. As you can see, we are talking about what we call primary flight controls. Primary flight controls is really very mission critical, because this is what basically allows to control the position of the aircraft, the pitch, the roll, and the yaw of the aircraft.
This is absolutely critical, mission-wise. Also secondary flight controls, which is a way to ensure the high lift of the aircraft during the landing phase, and also the taking off of the aircraft. On top of that, a lot of other actuation system, especially nacelle actuation system. On page eight, coming back on basically the medium to long term, basically, evolution on flight controls and actuation, like in other equipment segments, we are going to evolve towards more electric actuation and flight controls. We believe that's our evaluation, that for the next-generation aircraft that are going to come mid-next decade to the market, the electrical actuation content will be around 50%.
It's going to be a hybrid actuation and flight control systems combining both electric and hydraulic or mechanical actuation. The fact that you can combine the current, let's say, hydraulic and mechanical actuation capabilities of Ratier-Figeac with what Safran can bring in terms of electric and also electronic capabilities, will, as I said before, position us very nicely to basically offer a very nice proposal to the airframers for the next-generation aircraft. Page nine, I've already commented on that, you can see the rise of the high-runners, A320, A220, A350, 737 and 777, also the set of mature and legacy products fueling the aftermarket revenues. Page 10, today, our flight control and actuation activities is around EUR 0.3 billion.
Today, as we speak today, Safran was not a strong player in that field, whilst Collins brings us, let's say, a scaled position and a leadership position in that field. Page 11 now, coming to the cost, to the synergies. Basically, what we are valued is mainly the cost synergies, and as Pascal has mentioned before, we are confident to be able to achieve a $50 million pre-tax run rate cost synergies progressively with a full rate by 2028. What are those cost synergies about? It's a scale effect on procurement, direct and indirect purchasing, but also research and development complementarities, and also, a nice value stream also is the internalization of some sourcing.
Of course, we will do some footprint optimization as well, between our own organization and what Collins would bring to us. Conclusion, page 12, this is really what I would like you to retain, the two key messages for us. With this acquisition, we would become a global leader in a field where we are not strong today and which is also mission critical, and really with a strong fit with our DNA, which are the flight controls and actuation system. It will position us very nicely for the next-gen technologies and route towards more electric actuation and flight controls.
At the end of the day, with the cost synergies, the ballistic, I would say, the ballistic trajectory on the current in-runners and the current platform where we would have a position established on those big high-runners platform. In the next 10 years, plus the nice position for the next-gen, we strongly believe there's a strong value creation for our shareholders. Thank you. We are now ready to answer to your questions.
Thank you. To ask a question, ladies and gentlemen, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Once again, that's star one one. Our first question comes from the lines of Ian Douglas-Pennant from UBS. Please ask your question, Ian.
Thanks for, thanks for taking my question. Yes, it's Ian Douglas-Pennant at UBS. Given the first question, given the long time until closing, you've highlighted, I think, H2 2024, if I'm not wrong. Does that mean you're expecting robust discussions with antitrust authorities? I mean, can you give us any comments there at all? Then, perhaps you could give us your updated thoughts on capital return to shareholders in light of this deal. Thank you.
Maybe I'll take the first one, and I will ask Pascal to answer the second one. As every deal now, the fact is that we have to get into, you know, the antitrust, let's say, discussion and basically, clearances and so on. The experience that we have is typically that it takes between 12 and 18 months. We will have to go through those, let's say, steps, in the U.S., in Europe, in some other countries. Yes, indeed, we believe it's going to take up to 18 months. It might be a conservative view, but we prefer, you know, to put it that way.
Morning, Ian. On capital allocation, as you can see, this transaction is relatively limited in terms of size to our group, and it's only expected to close, as you say, by the end of next year. As a consequence, we do not expect the transaction to impact any share buyback plans. In terms of capital allocation, we remain or we stick to what we have always said, priority number one will always be organic growth. This is what we do, and we'll disclose our half year results next week, and you will see how quick we grow CapEx, R&D spend. Second one is bolt-on acquisitions. We've made a few in the past, and this one is a new one. It's returned to shareholders.
As I said, that transaction is compatible with, you know, a nice policy from Safran, returning money to shareholders.
Thank you. I think you've limited to two questions, I'll let somebody else ask about the cost synergy split. Hopefully, they will. Otherwise, I'll come back later. Thank you.
Thank you.
Thank you. Our next question comes from the line of Ben Heelan from Bank of America. Please go ahead with your question, Ben.
Yes, morning, everyone. Thanks again for taking the question. I wanted to ask, where do you see this business versus where it was pre-COVID? When I look at these EBITDA margins, 9% is what you're kind of expecting pre any synergies in 2024. They're not that high. I'm wondering, particularly for a business that's 40% aftermarket, is this still quite a depressed margin? How should we think about the growth of this business and the margin potential medium term? If you're putting it within the equipment business, is that going to be diluted to that 15% target that you gave at the CMD? How should we think about that? Thank you.
On the growth profile in the next, let's say five, six years, we would expect I would say mid-single digit growth rate with OE slightly above aftermarket in terms of growth rate. Keep in mind that nearly 40% of our revenues are on in-runners. As Olivier said before, the A320neo, A220, A350, 787. There will be limited commercial synergies before 2028. On the margin profile pre-COVID, if you take 2019 as a reference year, the EBITDA margin, as far as we know, was close to 10% at Collins. 2024 is expected to be back to the same performance.
When you take into account the $50 million synergies we want to deliver by 2028, we should grow the margin profile to let's say mid-teens. When I look at our aircraft equipment EBITDA, today, on average, we are in the range of mid to high teens with different businesses. Some of them have no or little aftermarket content, and they are more in the low to mid-teens, and some have, you know, good portion of aftermarket, and they deliver maybe high teens EBITDA margin. By 2028, that business should, you know, deliver more or less an average margin compared to the other equipment.
Now, with respect to the target we've provided at the CMD 2021, at the group level and at the aircraft equipment level, we gave at the aircraft equipment level an indication of 15% in 2025. For sure, this acquisition will be slightly dilutive to that number, but overall, we have a group margin target of 16%-18%. The impact will be, frankly, quite limited to the group target. We are still committed, Olivier and I, to deliver the 16%-18% target, including this contemplated acquisition.
Thank you. Super clear. Thank you.
Ben, just to add something, I mean, it's implicit in what Pascal has said, but to understand that you'll understand that the current profitability of this business is not normative, because we have not yet come back to the pre-COVID situation.
Okay. Thank you.
All right. Thank you, Ben. Our next question comes from the line of George Zhao from Bernstein. Please ask your question, George.
Number one. I want to get your thoughts on, you know, diversifying the portfolio. You know, Safran, you know, despite all the acquisitions over the past decade, you know, still remains primarily driven by the propulsion business. I think most investors would say that it's a strong business, and yes, flight controls may be mission critical, but why dilute it with more business that are, you know, lower aftermarket mix, lower margins, and potentially, you know, more competition? You know, is it because you want to hedge against long-term risks to the engine portfolio, or how should we think about that? Thanks.
Thank you, George. Yeah, I can only confirm that any business relating to propulsion, our propulsion business today, is dilutive, potentially. This is the case for the overall equipment activities. You know, we are an industrial company, and our strategy is not to limit ourself just to the propulsion activity. I mean, we strongly believe that for the medium to long-term prosperity of our company, we need to have a balanced portfolio, having propulsion on one side, but also a strong aerospace equipment business as well. Defense is a nice addition to that. That's the strategy.
Once again, as Pascal has mentioned, this additional flight control business would not be dilutive within our aerospace equipment division.
Thanks. Maybe just a follow-up on that. I mean, does having a bigger combined portfolio of propulsion and equipment, you know, does that benefit Safran competitively and commercially if we exclude things like cost synergies?
I'm not sure we got your question, George. Sorry. Can you repeat that?
Yeah. Sure. I mean, excluding, you know, benefits like, you know, cost synergies, you know, does having the, a bigger combined portfolio of propulsion and equipment, you know, does that benefit either of those businesses competitively to win more contracts?
No, I would not say that. I would not argue on that. The key point is really, you know, to increase the win rate or the contract is really to bring the best technological solution to our customers, clients. Really this is a rational of this acquisition. To be considered in a given area of aerospace equipment, you need to have the credibility, and you need to have the scale because you need to give confidence. In our business, confidence is key. You know, when an airframer is committing to a given partner, a given equipment supplier for the life of a platform.
This is built on trust and confidence. The combination of the Collins current position, which is Collins is a scale player today in flight controls and actuation. With all what we can bring on top of that with Safran, on this actuation flight controls, as I said, will very nicely position us, you know, for the next game in play by mid-next decade. The decision if the timing for the next-gen aircraft entry into services by mid-next decade, basically, this means that the decision, the key decisions for the equipment supplier of choice will be made by the end of this decade, by around 2030. For me, this is a key argument to position us much more strongly for the next game in play.
It's not a scale effect per se. It's really the combination of capabilities and the credibility, which is given by the position we acquired. Am I clear?
Yes. Thank you.
Right. Thank you, George. Our next question comes from the line of Olivier Brochet from Redburn. Please go ahead with your question, Olivier.
Yes, hello.
Yes, hello.
Thank you very much . Thank you for taking my question, good morning, Olivier . I'm a bit puzzled by the margin, I would like to come back on that if I may. The 10% in 2019 or so that you flag, I suppose it's with the same OE and aftermarket mix. Is there any big difference with the R&D that is spent versus what Safran spends? Is there any FX thing going on in the business? That would be the first question. The second one is very simple one. How much of the sales are done with the U.S. DOD, please?
Okay, Olivier. On the margin side, I would say that the R&D as a % of sales is more or less in line with the Safran metrics. CapEx is slightly below the average that we use in Safran. When we visited their sites, we can confirm that their production facilities are clearly at the state of the art. We would not anticipate, you know, large investment to be made in the future. One positive for us with the margin would be FX, you know, or hedging policies that will come into play to support margins. Now, with respect to the sales in the U.S., to be frank, I don't have the number on top of my head. I don't know, Olivier?
I don't have the numbers in mind, but this business is positioned on the F-35. If we look at the split of the turnover relating to F-35, I think it's I would say slightly below 10%. F-35 and U.S. military, I would say, order of magnitude, 10%. Overall military aircraft is about 20%, and missile actuation, 5%. And this is Europe and the US, so probably the US, I don't have the precise answer, but I would say, you know, probably 10%-15%. F-35 is a significant platform. It's an important platform for this business, out of the U.K.
Still out of U.K. Okay. Okay, that's very helpful. Thank you very much, both.
Yeah.
Thank you. Our next question comes from the line of Hervé Drouet from CIC Market Solutions. Please go ahead with your question, Hervé.
Yes, thank you. Thank you, all. My question is regarding in term of competition. If we consider what you recently announced, so with Raytheon, Thales, for the flight control, and if we combine it now with Collins Aerospace, can you give us an idea on who then will be the main competitors of this group with yourself? Would it be Honeywell, or either, you know? Also, can you share potentially with this group how much market share currently it will weight in the flight control, both electric and electromechanical as well? That would be great. How do you perceive that to have potentially an impact on the acceptance, you know, from a regulatory instance in some countries?
If there are any overlap, you might divest potentially in countries that can be at risk. Thank you.
Specifically on the actuation and flight controls, you know, alongside Collins, we have players like Liebherr, Honeywell, Moog, Eaton, Curtiss-Wright. There are, you know, diversity of suppliers, Collins being one of the top three players in that market segment.
Well, we are going to engage with the antitrust authorities, surely. If anything has to be done, in order to facilitate the acceptance of this deal, of course, we are going to be prepared to do that and to comply. We follow antitrust laws. I would not exclude that we might have some very small-scale divestiture to do in some places. That would not be meaningful in my view.
Yeah. It should not impact the overall, you know, business opportunity presented by this transaction in any case.
Okay. That's very clear. Thank you.
Great. Thank you. Our next question comes from the line of Tristan Sanson from BNP Paribas Exane. Please go ahead, Tristan.
Yes, good morning, Olivier, Pascal. Thanks for taking my question. The first one is on the relationship positive that you will have with Collins. If I understand you said a quarter of the activity is done today with Collins. I get a, I guess a chunk is on the nacelle business, which is competing with yours, and you said you have a deal organized that gives you visibility on a continuing supply. Can you explain a bit how it works and what's the plan thereafter? Can you continue being both a supplier and competitor on nacelle activity regarding Collins? The second question, I think you said that actuators and flight controls were the last missing critical sector in equipment.
With this acquisition, does it mean that the pace of mid-size bolt-on acquisition will slow down, or do you see opportunities to continue expanding the equipment division? Thank you.
Okay. Thank you, Tristan. Yes, indeed. RTX Collins will remain a key customer of us when we will have completed this transaction, and will account for 25% of the turnover. The bulk portion of it being the nacelle actuation. This is why, and I can assure you that that was part. That is part of the deal, and that is a very important element for us of this deal. We have ensured basically the value and the profitability of this business, that basically we are going to keep with RTX for the years to come.
We have negotiated nice escalation formula for the 25% of business that we will have with Raytheon, especially on the nacelle actuation business, and also for the long term. That was really part of our NPV analysis, if you wish. Now, relating to your question, there are many areas where we have a strong interaction, including with other competitors here and there. I mean, being a supplier to our competitors is something that happens, I would say, almost every day in the aerospace world. Even before that contemplated transaction, we were already suppliers to Collins on some of their activities, and same way, Collins is a supplier to us for some of our activities.
This is part, by the way, of the cost synergies, because we were supplying from Collins, so we will re-internalize part of the margin they were making on the.
Yeah
... parts, they were selling to us.
Re-internalization is a part of the game for us. Yes, on the second question, you know, we should never insult the future, but the fact is that with this contemplated acquisition, it's a very nice complement to our equipment division activity, and that was the missing part for us. As always, M&A is always opportunistic, and we will always look at them in an opportunistic manner. Meaning that it has to make sense, technology and strategically wise, as well as economically wise, and we are always going to look at bolt-on acquisition. I recognize that this one is, let's say, a little bit bigger than a small bolt-on acquisition. It's, let's say, it's a meaningful size, yes. That won't happen every day.
I will again reiterate that this is compatible with returning cash to shareholders in the highest forms. It is firmly on the board's radar, and there will be more on that in due course.
Yeah.
Very clear. Thank you both.
Thank you. Our next question comes from the line of Chloé Lemarié from Jefferies. Please ask your question, Chloé.
Thank you. Good morning, thank you for taking my question. I have two, if I may. The first one is to double down on a comment you made, Olivier, on the build to specs. Could you share what's the share of the business on build to print versus build to specs, and how you expect this to evolve over time? What's the end goal once we move to the next gen aircraft? The second one is on the cost synergies. If you could break down the contributors to the $50 million you provided and also the contemplated phasing of the implementation cost, please.
Okay, Chloé, the build to spec does represent around 90% of the current business.
90.
90. 90% is build to spec.
Thank you.
You know, a key point, I really want to highlight that, to stress that was an essential element of our decision here, you know. Once again, the build to spec, and I'm sure you understand that, the build to spec is a key element to ensure a nice proportion of aftermarket revenues, which is our DNA. That has convinced us to move forward build to spec. On cost synergies,
Maybe.
I will let Pascal elaborate.
Chloé, you should refer on slide 11. You see how cost synergy will materialize over time. I will say about 10% starting in 2025, a third about in 2026, three-fourths in 2027, and then full run rate achieved by the end of 2028. As we say, in this chart, it's coming from scale effects on procurement, production, and non-production. R&D, re-internalizing some of the sourcing, as I said, Safran was already procuring from Collins. There will be some footprints rationalization, as Olivier said.
Keep also in mind, because I don't think we discussed, that, is in order to achieve this, cost synergies, there will be obviously, integration costs, which will be in the order of magnitude of, one year of, EBITDA, more or less, which means, $120 million-$130 million.
I see. I was actually more after the split between the different components of the cost synergies, if you can provide a rough idea?
When we look back, for example, at the last large acquisition we've made, typically Zodiac Aerospace, we had put a number on the table at the communication of the Zodiac Aerospace integration. We have exceeded by far that number, but with a different mix. I don't think it would be wise to split, you know, where the cost synergies will come from, because you can have good surprises over time.
Thank you.
You can expect that, of course, we've looked at that. We have our own idea, but basically, we are not going to communicate on this detail. When you look at it's about 3% of the turnover, which is what we have achieved on Zodiac, by the way. 3% of the turnover as cost synergies, this is what we have achieved.
Perfect.
You're welcome.
Thank you.
We'll take maybe a last question.
Certainly. Our last question comes from the line of Christophe Ménard from Deutsche Bank. Please go ahead, Christophe.
It's Christophe Ménard from Deutsche Bank. Thank you for taking the question. May I still ask about the EBIT margin of this business? I'm still struggling a bit. I mean, we talked to EBITDA, but EBIT, it's around 6%-7%. You mentioned several times it's mission critical. Usually, when it is mission critical, you're coming with better margin. I mean, has that business always been around those margins, or do we have a hope to get back to a higher level of margin without your synergies? I mean, is it a kind of three-layer type of synergy business? I mean, the business improving, your cost synergies coming on top, and finally, the sales synergies.
I'm just trying to understand where it's going in terms of those margins. The second question was on the MRO cycle. I mean, we know that aftermarket depends. I mean, the cycles vary, depending on the product. What is the typical cycle of aftermarket here? You said that growth will be slightly below OE in aftermarket in your presentation. Trying to understand what is driving aftermarket in that business.
Christophe, to make it crystal clear, I guess, on EBIT, not EBITDA. EBIT before crisis was? let's say, mid to high single digits, 7%, 8%. The intention we have by 2028 is to up that number to a low to mid-teens. I would say approaching to mid-teens, which is, you know, the target we have for our aircraft equipment overall. Your second question on aftermarket and MRO cycle, Olivier?
I'm not sure I fully understand your question on the MRO cycle. The key point is really to have a, you know, a nice split between the aftermarket revenues and the OE revenues, is to have a well-balanced portfolio between basically a new OE platform rising and legacy platform. So to me, the key element, the key driver for this is what you see page nine, which is really the balance between growth, mature, and sunset platforms. Is it clear?
Yeah. Yeah, it's.
No, no, maybe I would add something. On the aftermarket side, part of it is spare parts. Part of it is maintenance, repair and overhaul. As you can expect, our pricing power is going to be even better on the MRO side and aftermarket side, compared to the OE side, where we have long-term contracts. As usual, same game as, you know, today.
Okay. It's a little bit like, for instance, landing gear, type of, I mean, the, the structure of MRO is a little bit like landing gear [crosstalk] rather than engine, quite obviously.
Absolutely. You're absolutely right. The business which is the most similar to actuation and flight control is landing gear. Absolutely. Okay? Okay. Thank you.
Thank you very much for taking the time and joining under such a short notice.
Thank you.
Talk to you next week.
Have a good day.
Bye-bye.