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

Good morning, everyone. Welcome, and thank you for joining us on such short notice. This morning, we will discuss our announcement regarding the proposed acquisition of Exail by Thales. I'm Louis Igonet, Head of IR for the firm. With me today are Patrice Caine, Chairman and CEO; and Jeremie Papin, CFO of Thales. As usual, this presentation will be in English and followed by a Q&A session. Its webcast is live on our website at thalesgroup.com, where the slides and the press release are also available for download. A replay of the call will be available in a few hours. With that, I will now hand over to Patrice Caine.

Good morning, everyone, and thank you for joining us this morning. So we are delighted to announce this morning the proposed acquisition by Thales of Exail Technologies. This acquisition represents a compelling opportunity to accelerate Thales' expansion in two fast-growing key markets where Exail is today recognized as a key player, maritime robotics and inertial navigation. The strategic rationale of this acquisition is clear and fits the group's strategic roadmap. Firstly, we gained a critical mass to further expand our mine countermeasure systems footprint and to drive innovation in unmanned anti-submarine warfare. Second, Thales' positioning in inertial navigation will be strengthened, thanks to Exail's multi-platform and multi-domain expertise based on FOG, Fiber Optic Gyroscope technology that is highly complementary with Thales' own capabilities. Finally, combining our R&D capacities with -- will accelerate our joint quantum sensing roadmap to sustain innovation and develop differentiating capabilities over the long run. The deal structure is a 2-step process. We've signed an agreement to acquire the Gorgé family’s 35.51% for EUR 134 per share, subject to customary closing conditions. The closing of that acquisition is expected by Q3 2027. Immediately after the closing, we will file a mandatory tender offer for 100% of Exail Technologies' share. Finally, this acquisition will be value accretive for Thales. We anticipate significant revenue and cost synergies, notably through the mutualization of both commercial and R&D platforms. So I'm now on Slide 4. Well, Exail is a fast-growing tech player with leading positions, in particular, in high-precision navigation & autonomous systems. Over the years, the company has been able to develop a comprehensive portfolio of solutions serving both defense and civil markets. We do value Exail's depth in cutting-edge technologies. Thanks to significant investment in R&D and a deeply embedded culture of drive innovation among its 2,200 employees. Exail has built a broad set of high-tech in-house capabilities from core components to products and systems. The company has notably developed recognized strengths in unmanned and navigation systems with clear differentiators in both areas, including costs and technology. Exail showed an impressive profitable growth track record over the years and generated close to EUR 500 million sales in 2025 with solid growth perspectives underpinned by a growing backlog in defense markets. Moving on to Slide 5. Exail has developed over the years a world-class portfolio of high-tech robotics, navigation and maritime systems. It notably offers critical capabilities and best-in-class products in high-performance navigation and positioning systems with a particularly strong exposure to naval defense and civil maritime markets. Since its inception in 1990, Exail also developed a wide range of recognized maritime robotic solutions, specializing in particular, in autonomous maritime surface and underwater drones. It enjoys notably a strong position in the attractive mine countermeasure segment. Those 2 activities or businesses have been delivering strong 20% plus growth over recent years, driven by sustained market momentum and Exail's differentiating and high-tech offer. Exail also offer a niche expertise in selected high-value components, including photonics, quantum instruments and on-board electronics with various defense and civil applications. This business has also been delivering strong growth over recent years. Now looking to the strategic rationale into more details, and I'm now on Slide #6. Through this acquisition, we intend to capture significant growth opportunities across key markets, seeing sustained demand while combining Thales and Exail capabilities and growth perspectives. First, the mine warfare market. We see mine countermeasures systems as a highly strategic market with growth or growing operational demand and a critical need to increase effectiveness. By bringing together our respective capabilities, we will achieve scale and broaden our offering with a world-class comprehensive portfolio. This will strengthen our ability to win major programs and to serve customers across the full mission chain. Second, we will drive innovation in the emerging and fast-growing unmanned anti-submarine warfare. This market, the anti-submarine warfare market, where Thales is holding a leadership position is fast growing and is a key priority for many navies worldwide. The move to unmanned systems is starting, allowing to reduce costs and also solve the shortage of experienced crews. Exail's technology base and products combined with Thales' broad portfolio will provide us with additional depth while leveraging Thales' positioning and customer relationships to accelerate our ability to capture growth prospects. Third, on inertial system or inertial navigation, Exail and Thales portfolio are highly complementary. The combination of the two will create a comprehensive multi-domain and multi-platform offer, ultimately helping us penetrate key subsegments more effectively. This is [ true ] not only for defense programs, but also for broader mission needs where accurate and resilient navigation is fundamental. Fourth, the transaction provides Thales with attractive growth perspectives. Exail brings a robust financial track record, secured growth outlook with an accretive margin profile for Thales. The combination of our two businesses will accordingly support sustainable profitability as we scale in our markets. And finally, we will deliver significant synergies, both from a revenue and a cost standpoints. Synergies are about translating the strategic fit into measurable value accretion for Thales and its shareholders. The underwater mine countermeasure market is expanding and becoming increasingly strategic and recent events have somehow unfortunately confirmed that. This market is expected to grow fast over the next decade with high single-digit growth between 2025 and 2030, followed by low double-digit growth between 2030 and 2035. In that context, the rationale is clear: materially broaden the offering by combining complementary capabilities. Together, Exail and Thales will leverage four key strategic assets. Number one, a global footprint with the ability to address the requirements of major countries and support customers at scale. Number two, a highly scalable platform, allowing us to grow efficiently and respond quickly to increasing demand. Third, faster development of innovative services by leveraging combined expertise, technologies and operational feedback. And number four, integrated solutions across the full value chain from components to autonomous systems, thanks to greater vertical integration that will allow us to cater to a wide range of needs from our clients. Overall, the combination is about complementarity and growth, expanding capability, accelerating innovation and strengthening our position in a strategic markets. Unmanned anti-submarine warfare is still an emerging market, but it is scaling extremely fast. We expect this segment to grow eightfold between 2025 and 2030. The reason this combination matters is simple. Our capabilities are highly complementary. And together, they give us all the building blocks to move very quickly in robotic undersea warfare. Exail bring a comprehensive range of drone platforms. Thales and Exail are both recognized sonar players. And Thales specifically had strong capabilities in ISR sensors and critically mission systems. So together, we will be create a much more complete unmanned anti-submarine warfare offering. And it is not just about adding assets side by side. It is about enabling new [ commercial ] combinations that were not possible before. A good example is the ability to integrate our towed sonars onto Exail's DriX drones. This is exactly the kind of capability that will shape the unmanned anti-submarine warfare of tomorrow, and that is what makes this combination distinctive. We are not just broadening the portfolio. We are accelerating innovation and creating capabilities that, in most cases, no one else is currently able to offer. Now looking on Slide 10 at a critical area of our respective portfolios, inertial navigation. Inertial navigation, where we plan to capitalize on our highly complementary capabilities to further penetrate key subsegments. Inertial navigation is more than ever a critical technology as it is a key enabler for accurate and precise navigation without relying on any external signals such as GPS. But more than that, it is a highly strategic technology in increasingly contested environments. It is crucial for continuity of operations for resilience and mission effectiveness. In that context, what Exail brings is a full range of multi-domain inertial navigation and subsea positioning solutions based on FOG, Fiber Optics Gyroscope that address and equip a wide range of platforms, surface ships, submarines, drones, land vehicles and satellites. Its offering is particularly relevant in medium to high-performance applications while leveraging strong volume capabilities. On the Thales side, we enjoyed a recognized expertise in high-performance inertial navigation systems across domains and especially in the most demanding environments. We have a strong track record in complex inertial navigation systems in avionics, leveraging advanced technologies such as proven Ring-Laser Gyro technology. So the strategic rationale here is very clear. By combining our strengths, we will strengthen a core technological capability that is relevant across the vast majority of Thales' markets with naval being a key area of expansion.

Good morning. This is Jeremie Papin, Thales' CFO. Turning to Slide 11. This is a detailed look at Exail's financials. Exail has enjoyed a strong financial performance, posting a 20% average annual revenue growth over the past 3 years and a significant recovery in profit margin. The revenue growth is supported by the strong order intake booked over the past years and the gradual ramp-up of the group's production capacities, both in maritime products and in navigation systems. In Q1 of 2026, Exail published a 40% growth year-on-year in consolidated revenue and confirmed solid double-digit growth objectives. In a structurally growing market and leveraging over EUR 1 billion in backlog, Exail can enjoy further revenue growth with a significant step-up in margins anticipated in the coming years. This is underpinned by the ramp-up of new large programs, coupled with strong operational leverage driving margin improvement and an expected acceleration in cash flow generation. Moving on to Slide 12. Let's take a closer look at synergies. The acquisition of Exail and the combination with Thales' existing businesses can deliver significant synergies, both on revenue and cost. First, on the revenue side, synergies will be significant for Thales. We just discussed about the product and technology complementarity between the two companies in fast-growing markets, and this complementarity is breeding ground for revenue synergies. We are targeting about EUR 500 million additional sales within 10 years that will come from significant cross-selling opportunities into Thales' installed base and programs upgrade. We will leverage our global customer reach as we have long-standing customer relationship with over 50 navies worldwide. On the cost side, we expect to generate EUR 60 million run-rate cost synergies to be achieved by 2030. This will be achieved through a deeper shared expertise in new technologies and next-gen systems, the combination of commercial networks and geographical footprint as well as standardized product development and accelerated R&D. SG&A and procurement optimization will also meaningfully contribute to these cost synergies. In total, the contribution to Thales adjusted EBIT from both revenue and cost synergies will amount to around EUR 90 million by 2032 with further upside from revenue synergies in the following years. Moving on to Slide 13. The transaction presents an attractive value accretion for Thales and our shareholders. The transaction is based on a price of EUR 134 per share, implying an enterprise value for Exail Technologies of EUR 3.9 billion. Considering the strong synergistic potential, we believe it is relevant to look at the valuation multiple post synergies. This valuation represents a multiple of 24x the 2027 adjusted EBIT, including cost synergies and 20x, including both the cost and revenue synergies expected at EUR 90 million in 2032. Considering the expected growth and accretive profitability profile, this represents compelling multiple for an asset of high quality. Importantly, the transaction will be accretive to adjusted EPS in the first year post-closing. This operation fits into Thales' disciplined capital allocation, the company will maintain a solid investment-grade profile and our expected pro forma 2027 net financial leverage should reach about 0.7x. In terms of value accretion, the ROCE is expected to exceed cost of capital within 5 years.

So last slide, Slide #14. So in summary, with this transaction, we are creating a world-class player in robotized or unmanned or uncrewed underwater warfare with the scale, the technologies and the capabilities really to lead in a market that is becoming both more strategic and faster moving. Through this transaction, given our strong complementarities with Exail, we are also building a top-tier and a comprehensive portfolio in inertial navigation, covering all key domains, applications and platforms. And behind the strategic fit, the value accretion logic is clear. This combination brings a strong potential for revenue acceleration, supported by market growth and clear opportunities for synergies on both the commercial and operational sides. In short, this is clearly a strategic move that strengthens our position, broadens our capabilities and creates a stronger platform for profitable growth. Thank you all for your attention, and we are now ready to answer any questions you may have with Jeremie. The floor is yours.

[Operator Instructions] And our first question comes from the line of Chloe Lemarie from Jefferies.

The first one was actually be on the sales growth expected for Exail. So you indicated 20% by 2028, but then you talk about synergies in 2030 and then in 2032. So I just wanted to check if we could kind of extrapolate that type of growth beyond the 2028 horizon. And then the second question is on synergies. So EUR 60 million cost synergies by 2030. Should we read from this that the full cost synergy will be realized by then and then you add EUR 30 million of revenue synergies that will flow through a little bit later?

Yes. Good morning, Chloe. So on the growth prospects, we believe that the growth momentum at Exail can maintain a strong double-digit beyond 2028 to which, obviously, we will be adding as they integrate the group. And so this is why we're giving you an indication of this acceleration by indicating that the revenue synergies at a run-rate will be about EUR 500 million within 10 years. Now on the cost side, you are right, assuming an acquisition that is being closed within the second half of 2027 and a controlling stake for Thales, full control, we will be implementing and chasing cost synergies, which we believe will be achieved at a run-rate within 3 years post the acquisition, so probably in 2030, and those would be EUR 60 million. And to help you in your calculation, we gave you a 5-year 2032 outlook where you have the EUR 60 million of cost at a run rate and EUR 30 million from revenue, but obviously, limited revenue gain in 2032, much bigger revenue impact from the EUR 500 million of additional revenue by further beyond 2032. Does this answer your question?

It does.

We now move to our next question. And the next question comes from the line of Aleksander Peterc from Bernstein.

I just have two. The first one is if you could give us the breakup fee. And then secondly, if you could give us the fully diluted share count that you use in your EV calculation and maybe the whole bridge from EV to equity value.

So on the breakup fee, we don't think this will be materializing. So we will not comment on that, but it has been agreed with Exail. On the share count, Alex, it -- we are using 17 million. But obviously, as you point, there are a number of debt instruments that are linked to the acquisition price. And in total, we are assuming a net debt at Exail of EUR 1.6 billion with about EUR 2.2 billion to EUR 2.3 billion in gross debt and EUR 600 million to EUR 700 million in cash. Does this answer your question?

Yes, it does. So you do count the convertibles as part of that, you don't [ lose ]...

Yes. Yes, convertibles and all the instruments, including some management packages that have been put in place. So there are a number of items that build up the EUR 1.6 billion -- the EUR 3.9 sorry, billion of equity value that we are considering -- of enterprise value that we are considering and EUR 2.3 billion of equity value.

We will now move to our next question. And our next question comes from the line of Ian Douglas-Pennant from UBS.

It's great to see capital being deployed into the defense business. Congratulations. What lessons do you take from past integrations, especially from Imperva to this integration of Exail, high-growth business that -- high-growth high-tech business you're bringing on board, please? And secondly, with the significant synergies being discussed on this call, what measures has Exail put in place to motivate employees, especially over the next year before the deal closes?

We can share the answer with Jeremie. Hi, Ian, thanks for your two questions. The first one related to integration. As far as this acquisition is concerned, I really think that this one is quite straightforward. I mean it's the core of the core business of Thales. It's defense. It's a project-based company with R&D largely based in France, by the way. So the cultural fit is also quite straightforward with the other French defense activities that we have at Thales. We share the same customers. We share the same knowledge in terms of typically anti-mine warfare. We are also -- as we explained, as I did explain during the call, the same market in terms of inertial system being complementary, but knowing both technologies and customer requirements. So really, I don't see I would say -- I would say I don't see any difficulty to integrate Exail with or within Thales. Of course, it would be important to keep its agility because clearly, definitely, it's a smaller company compared to Thales. But with the example of Cobham AeroComms, we have demonstrated our ability to integrate much smaller company within Thales, applying, I would say, our rigor, if I may say, but still keeping their agility, their ability to innovate fast, which is, I would say, part of the value of these companies. On the second one, maybe, Jeremie?

Yes. I think, Ian, we are -- we value, again, at Exail, their agility, their speed. We recognize some cost competitiveness in their products. And therefore, we see synergies, again, through R&D optimization, reallocation, obvious commercial synergies. And then I mentioned procurement and some SG&A savings. I think when you look at the growth profile that this business has and that the Thales businesses will benefit from, there is a lot of motivation there for the Exail teams. So once again, this is going to be an integration where we will clearly protect and nurture and feed into Thales some of the agility and speed that we can see at Exail. I hope this answers the question.

[Operator Instructions] And our next question comes from the line of Herve Drouet from CIC CIB.

First question is, do you see -- and for you, what could be the risk you think that may reduce the chance of Thales of making that acquisition? I mean, is there some risk you see? I mean, there has been different press release about certain disagreement with, for example, ICG, one of the financial partners of Exail Technologies about valuations. I mean, could you say a little bit more on how you conducted these agreements? And do you have the green light from all parties, ICG included? So that's the first question. And second question is, why is there, in your view, so much time? I mean you are talking about third quarter of 2027 to finalize the acquisition. Could you maybe elaborate a bit more why that will take so much time, in your view, to get a full closing of that transaction?

Thank you, Herve, and I will share the floor with Jeremie. On the risk side, if I got your point correctly, personally, I do not anticipate, I would say, any significant risk in this transaction. We have tried to explain during the call how complementary we are with Exail. So that leads, by the way, to the second part of your question. We need to -- as for any file, by the way, we need to get the normal authorization from the antitrust bodies in Europe or in different European countries, depending on the threshold of the turnover we do -- Exail does in these countries. Usually, our -- I would say, our experience is that it takes, let's say, 12, 15 months. Hence, the fact that we said a reasonable time frame is Q3 2027. So this is quite, I would say, standard normal. If we can do it quicker, we would be happy to do it quicker. But this is, I would say, a kind of a normal time frame to get all these authorizations. We could mention as well FDI authorizations, but it will be also quite straightforward to my opinion. This is for the first step. And do remember that there is a second step after this, let's say, Q3 2027, the fact that we would be not obliged, but there is a mandatory tender offer that would be launched to buy the remaining shares, the floating shares outside the 35% that we would have acquired from the Gorgé family. Jeremie, any...

Yes. And this is a process that usually takes about three months for the tender offer. So that gives you an idea of why we think we will close by the end of '27 and start full speed integration and working closely with the Exail's teams in 2028.

And could you elaborate a little bit there has been with this potential valuation disagreement with ICG. I mean, in the past, there's been in the press some articles about potential valuation difference view between the ECG and at the holding level at Exail Holding. I don't know if there are anything you can say regarding that?