Hensoldt AG

Good afternoon, everybody and welcome to Hensoldt’s nine months 2024 results call. Thank you all for joining us today.

I'm Veronika Endres, Head of Investor Relations at Hensoldt and with me is our CFO, Christian Ladurner. Christian will guide you for this presentation today, which, as always is followed by a Q&A session.

And with that, I hand over to you, Christian.

Thank you very much, Veronika. Good afternoon, everyone.

Thanks for joining our earnings call today in which we would like to present our once again strong results for nine months of 2024. Let me start by giving you a brief update on strategic topics and key business highlights before I guide you through our strong financial performance of the first three quarters.

And as always, following our presentation, I'm happy to answer your questions. Let's have a brief look at our business highlights first.

I'm pleased to report that all our divisions have made significant progress showcasing their capabilities and contributing to our strong results. The PEGASUS program reached a critical milestone with a successful completion of the first flight of the modified aircraft.

This marks a key milestone in this project, where we demonstrate our solution and system integration capabilities. On the civil aviation front, we signed a landmark cooperation agreement with the German air traffic control, certify the Twinvis passive radar for civil use.

This cooperation is reinforcing our commitment to enhancing air traffic safety through innovative technology. Having already been successfully deployed in the military sector, the system offers significant market potential also for civil air traffic control.

In international business, we have signed a contract with the Space Center Australia to deliver two high-performance air surveillance radar systems, along with a 20-year sustainment plan, to bolster Australia's critical air surveillance capabilities. Finally, the Optronics division achieved a major accomplishment with the successful completion of the critical design review for the Ula class submarine.

This paves the way for the modernization of the submarines, which will significantly extend the operational capability. Before I come to the European and NATO defense budgets, let me highlight some key messages about defense spending in Germany again.

The special fund introduced in 2022 mainly served a start-up financing for several important and strategic defense procurement projects. This trend now stabilizes and is reflected in the midterm budget planning of the German government.

With a mix of budget increases, finance authorizations, and the special fund, the German government has sent a clear signal for its commitment to spend 2% GDP for defense reaching approximately €80 billion in 2028. And this commitment is underpinned by very concrete procurement plans.

For example, the order of 20 additional Eurofighters, the Chancellor Scholz announced at the Berlin Air Show, ordered two additional F126 frigates as well as the 105 additional Leopard 2 tanks. While Oliver and myself have mentioned it many times, and I can only repeat defense procurement in Germany is no longer a question of if, but of how.

Naturally, breaking up the long established mechanics of the catalyst system takes some time yet I'm confident that we see a continuation of the current dynamics in German defense procurement. Globally, we are seeing a broader sustained trend in increasing defense spending, in particular with the NATO as member states respond to increased security threats.

NATO has led out plans to significantly bolster its military capabilities. This includes increasing the number of combat brigades from 82 to 131 and rebuilding ground-based air defense systems from 293 to over 1,400.

Importantly, 23 out of 32 NATO states are projected to meet or exceed the 2% GDP difference spending target by 2024 and beyond. In Europe, defense budgets on a long-term growth trajectory with Germany, the UK and France leading the way.

Countries like Poland and Spain are also experiencing rapid increases in military investment with Eastern European and Baltic states expected to raise the defense budgets by an average of around 30%. At the same time, this is growing pressure to reduce Europe's reliance on the U.S.

for its defense needs. This has accelerated efforts to strengthen European defense capabilities.

Even in the event of a cease-fire resolution of the conflict in the Ukraine, the commitment to defense spending remains robust, as many nations including France, the UK, and Norway have already announced further increases, extending well into the next decade. This ensures that defense spending will remain at elevated levels as countries continue to prioritize national and regional security.

It's also worth noting that Hensoldt's direct exposure to the Ukraine is relatively limited, accounting for around 3% of our order backlog. Therefore, the growth trajectory of our company is not dependent on the ongoing conflict in Ukraine.

Let me now have a look at the key orders for the second half of 2024. Dynamics in order intake remains positive with orders now summing up to more than €1.8 billion.

In the third quarter, ESG secured the contract to operate the Central German Armed Forces spare part logistics with an order volume of around €100 million. And in the Electronics segment, we booked orders for FSM, summing up to around €19 million in total, and these are only two examples for the third quarter.

In the last quarter of this year, we expect further dynamics in the Armored Vehicle segment, benefiting our Optronics division. The order for 105 additional Leopard tanks has already been rewarded to KNDS, but we expect a slowdown in the next weeks.

The Eurofighter business once again proved to be a solid contributor to order intake with another capability enhancement of the MK1 contract worth almost €300 million. Coming to ESG and the status of the PMI.

In October, we have passed day 200 and I can proudly say that we have achieved all milestones. The next step is now the merger of the ESG and the spectrum dominance division to form our multi-domain solutions division, as already announced in the H1 Analyst Call.

And of course, we will further work on all value streams to materialize cost and revenue synergies and make this integration a resounding success. Let's now come to our nine months financial results.

To begin with, I'm very pleased with the business performance that we have once again achieved and we are very well on track for the full year. The strong dynamics in order intake continued with orders summing up to €1.86 billion.

Organically, orders increased by 21% and were driven by the NNbS Air Defense System, TRML-4D and Spexer Radars as well as FFM business and Optronics. ESG also contributed strongly to our order book with €305 million, for example, with the ZEBEL contract mentioned earlier.

Overall, the distribution of incoming orders was again reasonably well balanced, with Europe excluding Germany, accounting for more than 40%. This shows that the rising European defense budgets are well reflected in our order intake.

Revenue reached nearly €1.4 billion, marking an increase of 21%. This development was driven by sensors and especially TRML-4D radar but also by our strong baseline business.

The level of past revenue further decreased by 25%, resulting in an improved quality of revenue. Excluding pass-through business, organic revenue grew by 10%.

ESG now is now half year in our books and delivered as planned with sales of €172 million. Compared to previous year's period, order backlog increased by more than €1 billion to €6.5 billion.

This continues to provide us with an excellent visibility. The strong performance of our top line is also reflected in our profitability.

Adjusted EBITDA increased by 24% to €187 million with adjusted EBITDA margin of 13.6%, slightly above last year. The increase was driven by accelerated production in our radar business, leading to further economies of scale.

This was partly offset by investments into our growth and into our product portfolio in the products business. Adjusted EBIT grew by 18% to €111 million, also benefiting from economies of scale and volume effects but offset by higher amortization of capitalized R&D expenses.

Adjusted EBIT margin is at around previous year's level with 8.1%. Cash generation was fully in line with our plan and following our usual seasonal profile, with adjusted free cash flow of minus €157 million.

Despite the growing business volume, we were able to realize a year-on-year improvement, supported by good working capital management. And to sum it up, our bottom line further increased and developed as planned.

Let's now have a look at our segments. In the Sensors segment, we again achieved an excellent performance.

Orders summed up to €1.6 billion, exceeding the strong figure of previous year by 66%. The organic increase amounted to 35% year-on-year, driven by NNbS as well as TRML-4D and Spexer Radars.

Contribution from ESG was strong as well with over €300 million. Revenue in the Sensors segment increased significantly by 27% to €1.2 billion.

Key growth drivers for accelerated dynamics in air defense and our solid baseline business leading to a strong organic sales growth. And as mentioned, ESG also contributed to group revenue as planned.

The margin performance of the Sensors segment was solid with an increase in adjusted EBITDA of 26% to €194 million. The increase was driven by further economies of scale in our radar business, in particular for TRML-4D and the realization of cost synergies at ESG.

These effects were partly offset by project mix effects. In the Optronics segment, order intake amounted to €297 million driven by strong order intake in Q3, Optronics nearly matched the excellent previous year, which included major contracts for armored vehicle as well as periscopes and optical mass systems.

We expect continued dynamics in Q4, especially in the armored vehicle segment with the main owners of German Leopard 2 tanks as previously outlined. Sales amounted to €182 million.

As you can see with the stacked pillars, our various initiatives in the Optronics business have started to pay off. We see first results reflected in revenue margins growth particularly in the German segment of the business with a year-on-year revenue growth of 17%.

Main drivers were the increased production units in Ground-Based Systems and high-precision optics FFM. This was offset by the South African entity, where we are currently conducting a technology change and the realignment of the market strategy to focus more strongly on which countries we are active in.

Adjusted EBITDA of Optronics summed up to minus €7 million. The margin is still impacted by the lower volumes in the South African entity on the one hand.

And on the other hand, by investments in the ramp-up of production as well as into the digitalization of the Optronics portfolio. However, the growth in the German business is driving margins already into the right direction and we realized an increase of €7 million compared to the H1 2024 figure.

With a further acceleration of production, margin will clearly improve further by year-end. Let's now have a brief look at our net debt development, reflecting the partial funding of DSG acquisition by new debt of €450 million, net leverage increased to 2.9 times in 9M 2024 as expected.

Excluding the new debt for the acquisition, net leverage should be at 1.7 times. This shows that we are operationally on track and that we will further deleverage.

On top, we expect IFRS 16 liabilities to be slightly lower than previously planned. Therefore, I'm pleased to specify our guidance for net leverage, which we now expect at a level of below or equal to times for the year in 2024.

Let me now come to our guidance for 2024. First and foremost, we are fully on track to meet our 2024 targets and beyond that, driven by the continued order dynamics I'm happy to announce that we are raising our guidance for the book-to-bill ratio to 1.2 times.

Furthermore, we continue to expect revenue to grow to around €2.3 billion and please be reminded of the continued stronger growth in core revenue and a smaller share in pass-through sales than the years before. Adjusted EBITDA margin before pass-through between 18% and 19%, and as specified at our H1 results, we expect the margin to be at the mid to upper end of the guidance.

For adjusted free cash flow, we see a cash conversion of around 50%. For net leverage, we specify our guidance to lower or equal to times as described earlier.

And we confirm our dividend payout ratio between 30% to 40% of adjusted net income. Coming to a conclusion, let me mention the following key financial takeaways.

Our once again, strong order intake of nearly €1.9 billion leads to another backlog of €6.5 billion. This provides us with an excellent revenue visibility for the years to come.

Our project execution supports our excellent profitability. Our various initiatives in the Optronics business have started to pay off in Germany.

The integration of ESG is fully on track, and we are very pleased with the contribution to our group performance. Therefore, we raised our 2024 book-to-bill guidance to 1.2 times and specified the lever target to lower or equal two times.

And confirm guidance for remaining KPIs as explained. Our outlook remains promising, and we are strongly positioned for the upcoming growth.

We expect further major contracts to be booked in 2024 as explained. We have set a strong basis and good visibility in Optronics to execute the order book.

And last but least, all planned synergies for 2024 with ESG have been confirmed. This and the large scale increase of defense budget globally will generate long-term sustainable growth for Hensoldt.

Thank you very much, and we are now happy to take your questions.

This is Carlos. Hey guys, good afternoon.

And thanks for taking my questions. The first one is on sensor margins, it have been down year-over-year despite lower pass-through revenues, presumably higher TRML-4D deliveries, correct me if I'm wrong here.

But I just wonder what dropped the weaker margins year-over-year in sensors in Q3? And then if I may, the second one on Optronics, really appreciate you gave us a breakdown of Germany versus South Africa.

So the high teens growth that we have seen in Germany in the first nine months of the year, is this sustainable midterm? Thank you.

Hi Ben or is it Carlos.

It is Carlos.

Your name is on the call but the voice is from Carlos. Okay.

Hi Carlos. First of all, the margin in sensors, yes, you are right.

In general, we realize economies of scale. There are some projects in -- especially in the neighbor region, but also in electronic warfare which are lower in March and this weighs a little bit on the Q3.

But in total, I think we are on good progress also towards year-end to be in our guided percentage in this regard. Secondly, Optronics, I can say, yes, we expect that the growth in the German Optronics business will also be then visible by end of this year that we have a growth also on a segment basis be it in the revenue, but also be it in the margin where we expect between 10% and 12%.

So this is on a good way, and we now see that units are increasing and with that revenues and margins. So I think it's a very good start.

We have paved the way for it. And now we move on to realizing revenues and margin increases.

Very clear. Thank you.

[Foreign Language].

Hi Christian, thanks for taking my questions or basically it is now one as one was answered already. It's on the Eurofighter rebase lining order, and I noticed that you basically said it could slip into Q1 2025.

And I was wondering whether you would miss your book-to-bill target if that were to happen? Thanks.

Thanks, Simon. Thanks for the question.

Good one. No, even if rebar slips into Q1, we are on the 1.2 book-to-bill, and I think this shows that it's a very solid book-to-bill guidance.

Great, thank you.

Yes, good afternoon. I had three quick questions.

The first one on the order intake, you specified in the presentation that ESG had an accelerated order intake, so to say, I mean, actually better than what you expected. Can you just provide us a little bit more details on this because it's obviously something incremental, you mentioned the across Ula submarine design completion in electronics, when should we see an impact on sales, I mean, presumably not in Q4 since you mentioned essentially land vehicles?

And last question is on PEGASUS. There's been discussion around additional aircraft orders.

Is it something that we should consider as a tangible prospect going into 2025 or 2026? Thank you very much.

Hi, thanks for the question. So let me first start with PEGASUS.

I think we have now a remarkable success with the first flight. Nevertheless, the program is in the midst of the execution.

So -- and this will last until 2027, 2028. Yes, of course, in order to operate 24/7 and not only in one region, but maybe also in two or three regions, the German customer needs more up to nine or even more and we see this demand coming up, be it the national customer, but also we see now demand coming up from other countries who are very interested in the system.

So in general, we see increasing demand, but I also have to say that the project is currently not mature enough. I think that we could now already take further customers on board.

So we have to grow in majority of the program. But then I have said, I think we have set a real good milestone with one of very few companies in the world who can even manage this technology that we can really then have further customers in this project.

The Ula class submarine program, yes, it's -- it paid off quite well. So this is good.

But the driver of revenues in Q4 and also in the next years would be clearly coming from ground-based systems. We will strongly work together with KMW or Prime and also from other vehicles.

This is now really ramping up so the growth is much more based on ground-based systems. And your last question, order intake at ESG, we have mentioned ZEBEL.

It manages not -- it happens not every year so it's a big logistics contract, which only happens every five to six years. So this is still one.

But you see already now that we have said that ESG is the main integrator of foreign platforms into the German landscape. And this is what we see now and which we also will see during Q4 and beyond that this is currently the capability what Germany needs and also what other OEMs from other countries who provide their systems into the German landscape needs, and this is why we are very happy to have these orders and to further fulfill them.

It means that you've been surprised by the better-than-expected order momentum at ESG, if I understand correctly?

Yes. You know we did a very good due diligence last year, Christophe.

So there were some ups and downs planned. I would not say we were surprised.

It's a good momentum I think we see but I cannot really say that it was a big surprise for us not having a strong order intake.

Okay, thank you very much.

Hi, thank you and good afternoon. I wonder whether you could just explain why the finance costs seem to jump so much in Q3, but also the tax charge that you report in each quarter fluctuate quite a lot and again, Q3 seemed to have a very, very high tax charge on adjusted earnings, I just wondered whether you could provide some color on those two?

Hi Sash, happy to do that. So in finance costs, of course, we have higher interest expenses due to additional loans.

We have now on balance sheet for the ESG acquisition, this is one. Another effect of around minus €2 million per line that the interest swap we did -- so we hedged the interest for our loan due to the high interest rates and now interest rates go back.

And due to the mark-to-market accounting, we have a minus 2%, but savings in cash flow and the tax is really temporarily. So what is currently happening, we create earnings in the operational legal entities but the upper legal entities of the Hensoldt AG, whether a [indiscernible] is not yet part of the fiscal unit.

So we have done all preparation. One of course was that we have an agreement from our shareholders from the Annual General meeting that we can do that.

We are currently preparing on that, that in November, December, then we will close this fiscal unit, the tax fiscal unit for the German entities, and then the tax percentage will then be in the range of 25% to 28% again. So this is temporary and will phase out until end of the year.

Great, thank you. So just to -- just to check then, it looks like your ongoing run rate for finance costs is running at around probably annualized €60-odd million or so.

Is that the right way to think about it or was Q3 exceptionally high, even stripping out the swaps?

Yes, that's a good estimate.

Thank you very much.

Yeah, hi Christian. Hope you are well.

Just two questions. One, could you just tell us this year, what percent of your sales do you think are direct to Ukraine, maybe you might want to make some comments on the indirect exposure?

And just on your special items, are there any changes to your expectations for the full year, I think it's at the back of your deck, I just haven't been through yet, but is it all as expected? Thank you.

Hi David, thanks for your question. So first question, revenue is around 7% direct exposure to the Ukraine.

And the special items, no change in expectations. We've guided for them, and the range is still valid, which we have in the -- in some backup slides of the Analyst presentation.

Perfect, thank you very much.

Hi, good afternoon Christian. Maybe two questions left for me.

Another one regarding Ukraine, if I may. Again, you mentioned that about 3% of your backlog is exposed to this country.

But could you tell us when you would have consumed those, let's say €200 million of orders and maybe I think it's -- obviously, it's early days, but with the potential end of the U.S. funding, do you think that those contracts are at risk?

And maybe the last question regarding your strategy in South Africa. I understand the point about the transition in terms of technology, but you mentioned something around the focus on specific countries and from its a bit less clear.

So could you elaborate a little bit regarding what you are doing in South Africa? Thank you.

Hi Yan, thanks for the questions. So first, Ukraine.

We have various -- we have 3% of our orders in our order backlog at the Ukraine, you can assume that most of them is regarding Air Defense TRML-4D. And when we deliver as planned, I think in 2025, 2026, we will have delivered them.

In the same time, I have to say we get more orders, we see that additional air defense is needed. And I have to say, I do not see at all that air defense will not be a topic anymore if there is a ceasefire.

So defending then the Eastern border somehow of NATO or of the EU or of Ukraine will be an ongoing topic, and this is why the [indiscernible] initiative was founded. And also, when I look at the order books we now got from the SE members of 22 states, which are now materializing, expecting Bulgaria in December and with coming further states I do not see at all that a cease fire in Ukraine will then stop our challenge of air defense since there was no air defense anymore two to three years ago, we should keep this in mind.

So we have to ramp up it now. Second question, South Africa, it's much referring to the optical business, where we are still currently very careful.

There was some business going to the Middle East, where we are now careful whom to deliver our products and this is -- well the policy we have slightly changed during this year. And there was a third question, I don't remember it.

Maybe you can repeat it.

No, no, no, that was okay. Thank you.

Okay. Thanks.

Yes, with that, thank you all for joining today. As always, should you have any further questions, we are around all day to follow-up.

And we are very much looking forward to meeting you at our CMD in London on December 12th. And if you have not registered by now, there's still the chance to do so, just send us an e-mail and you can join in December.

And with that, have a great day. Thank you, and goodbye.