Hensoldt Ag Unsp/Adr

Good afternoon, everybody, and welcome to Henselt's three-month 2024 results call. Thank you for joining us today. I'm Veronika Endres, Head of Investor Relations at Henselt, and with me are our CEO, Oliver Dörre, and our CFO, Christian Ladona. Oliver and Christian will guide you through this presentation today, which is, as always, followed by a Q&A session. And with that, I hand over to Oliver.

Well, thank you very much, Veronika, and a very cordial welcome from my side as well to the audience. I'm very excited to lead you into today's presentation after having formally taken over as CEO on April 1st. During our preliminary full-year analyst call in February, I've already outlined my three focus areas for the medium term, operational excellence, digitalization, and internationalization. Our business performance remains strong and we have achieved a record order backlog of 5.9 billion euros in the first three months of this year. Reliably delivering on this huge order book is the number one priority of the Management Board. As a consequence, we have reallocated responsibilities in the Management Board and nominated Celia Pelas as Chief Operating Officer. Coordinated by Celia, we will massively increase our production figures while at the same time continuously improving the quality of our products. Further, we are expanding our solution expertise for the future. We are scaling and industrializing with progressive determination. This means, for example, that we are systematically expanding our production capacities, further strengthening our supply chains, diversifying our service business and overall continuing to grow along the value chain. A specific example. In the last three years, we have increased production and delivery of the TML4D radar, which is operated in Ukraine and a key element of the European SkyShield initiative, from 3 to 15 units per year, a five-fold increase. I also mentioned in February that our customers are increasingly focusing on the overarching concept of software-defined defense. Essentially, this means an improved combination of software-driven functionality, data centricity, network connectivity, and augmented hardware for edge computing to increase the capabilities of weapon systems. The recent acquisition of ESG that we closed on April 2nd will strongly support our drive towards a more digital and software-driven future. We hit the ground running for the post-merger integration of ESG and all work streams show very promising progress, both regarding synergies as well as operational integration. The next chapter of our success story has started. When we look at our market environment, we see sustainably positive trend in many areas. On the political side, we are in close and constructive dialogue with all political stakeholders in Germany. The exchange between industry and politics becomes increasingly broader. For example, Minister of Economics Robert Habeck recently hosted a meeting with the German defense industry and highlighted the need for an overarching industrial strategy that consistently promotes key technologies. While also the strategic dialogue with the Ministry of Defense is intensifying, the Minister of Defense, Boris Pistorius, initiated a structural reformer of the German Armed Forces to increase operational readiness. One element of this reform is the strengthening of the cyber and information security domain, which ties perfectly with our drive towards more digitalization, enhanced electromagnetic warfare capabilities, and intelligent networks. The increase of the defense budgets in Germany, Europe, and around the globe is structural and long-term. In Germany, there is a broad political consensus to sustainably spend 2% of the GDP on defense. Hence, there shall be no doubt about a future budget increase, and I'm confident that the question of how this increase can be achieved will be resolved by mid-year. Further to our key market, Germany, we see a strong budget dynamic across Europe, with Norway announcing an increase of their defense budget by 80% in the next 12 years. Poland has raised its defense budget ambition to 4% GDP and has recently joined the EFI initiative. The Baltic states are spending more than 2.5% of GDP on defense, and both France and UK have raised their budget ambition beyond 2% GDP. These are only a few examples for a manifesting trend of higher military spending. For the first time since decades, we see large-scale procurements initiative, especially in the area of armored vehicles, where, for example, Germany recently announced intends to buy more than 1,000 vehicles to replace the Fuchs armored personal carriers. Italy has announced to procure more than 100 tanks of the leopard family, and we see a similar dynamic in other European countries. This market situation confirms our still growing relevance and favorable conditions for long-term sustainable growth for hand salt. Let me now have a look at a few business highlights. Our order intake in the first quarter of 2024 was very strong and amounted to an impressive total of €665 million. We booked a big contract from our German customer for short and very short range air defense and received further orders for our TML4D radar, where we now have more than 50 units in our books. Ukraine and Iran's attack on Israel underline the inevitable importance of air defense. Our airborne self-protection systems will be integrated in Ukrainian Mi-24 helicopters, supporting the crews in their dangerous missions. And I am proud to report that we have booked the launch contract for our Quadome naval radar. The Spanish shipyard Navancia will integrate this radar, developed by our colleagues in South Africa, into the British Fleet Solid Support Vessels. This launch contract opens numerous opportunities for Quadom in a wide range of markets. It further strengthens our already strong positioning in the naval radars market based on our top-selling TRS-14. Dear audience, this slide has become a staple in our quarterly earning presentations. The point I would like to make here is that this rich opportunity set across all domains and many platforms stems from our position as holder of national key technology. It shows how deeply Hensoldt is embedded in key German programs and that we are the core of the German defense electronics capabilities. With high visibility of opportunities and close customer proximity, the German programs are our foundation for growth and our launchpad for upcoming next-generation programs. These programs are, besides R&D and new impulses from the ESG acquisition, the workbench for our mid-term priority to digitalize our product and solutions portfolio. Highlighted in yellow, you find the German key programs that have materialized in the past months and laid the foundation for the solid growth of our business. This will continue for the remainder of 2024 with high demand, especially in the area of air defense radars and armored vehicles. In addition to our very strong business in Germany, we continue to develop and expand our international business. We are leveraging our world-class product portfolio in combination with our excellent positioning in key markets and with key OEMs. With a mid-term priority on internationalization, we will more systematically develop our international customer base and our international footprint. Our key countries, France, United Kingdom, as well as South Africa, will be initial focus points in that endeavor. Ground and ship-based air defense under the umbrella of ESSI in Eastern Europe and self-protection for both airborne and ground-based platforms will drive our international order intake in 2024. In addition to that, optronics for armoured vehicles such as a Leopard and M1 Abrams tank and periscopes for submarines will constantly drive our initial order intake in the near as well the mid-term due to our strong relationship with the respective OEMs. Ladies and gentlemen, the market developments remain favorable. First quarter results confirm our progressive growth trajectory. And we have started a comprehensive action plan across operational excellence, digitalization, and internationalization for sustainable success. And on this positive note, I would like to hand over to Christian for an in-depth look at our once again strong figures.

Thank you very much, Oliver. and a very warm welcome also from my side. I'm happy to provide you now with our financials for the first three months of 2024. We again were able to realize a solid top-line performance in the first three months of this year. Order intake developed excellently, with orders summing up to €665 million, hence almost doubling compared to previous year. As mentioned by Oliver, Main drivers were NNBS air defense systems and further orders for the TLM-4D radar. The distribution of incoming orders was again well balanced between our home markets Germany and Europe. Revenue reached 329 million Euro in Q1, which is absolutely in line with our plan. In addition to the exceptionally strong quarter last year, This was due to this year's milestone pattern and a decrease of pass-through revenue. And let me point out that we will see increased revenue dynamics starting now. This will be driven, for example, by our TLM40 radar, of which we will deliver three in the second quarter. With a figure close to 6 billion euro, our order backlog reached a new record level in our history. This continues to provide us with an excellent visibility on our business. The solid performance of our top line is also reflected in our profitability. Adjusted EBITDA increased to 33 million euro with an adjusted EBITDA margin of 10.3%. Our core margin, excluding pass-through revenues, improved by 1 percentage point to 11.4%. The increase was driven by our product mix and economies of scale, partly offset by investments in our growth and into our product portfolio. Adjusted EBIT summed up to €11 million, with an adjusted EBIT margin of 3.2%, respectively 3.6%, excluding pass-through business. This slight decline is driven by increased amortization of capitalized R&D expenses. Cash generation in the first quarter 2024 followed our usual seasonal profile, with an adjusted free cash flow of minus 81 million euro. The significant improvement compared to last year's period was mainly driven by strong cash inflows from our customers. On the other hand, we continued to constantly invest into our planned growth. And let me share the good news. We have received first prepayments of our German customer in April with more to come. To wrap it up, our bottom line remains strong and develops as planned. Let me now give you an update on our net debt development. Over the past three years, we have continuously improved our net leverage. At the end of first quarter 2024, net leverage was at 0.6 times. This figure includes the capital increase we've conducted to partially finance the acquisition of ESG, with net proceeds of €234 million. Excluding the effects on the capital raise, net leverage would be at 1.3 times. As you know, we have successfully closed the acquisition of ESG beginning of April. Reflecting the funding of the acquisition, we've seen it leverage to increase to approximately three times in H1, which we then expect to decrease again to around two times by year end 2024, as outlined in our guide. Let me now have a look at our guidance for 2024, including the contribution of ESG as introduced in the last analyst call in April. First and foremost, we are fully on track to meet our full financial targets and confirm our positive guidance for all KPIs. For 2024, we expect the book to build between 1.1 and 1.2 times in 2024. Revenue to grow to around 2.3 billion euro. And please be reminded with a continued stronger growth in core revenue and a smaller share in pass-through sales than in the years before. Adjusted EBITDA margin before pass-through between 18 and 90%. For adjusted free cash flow, we expect cash conversion of around 50%. Net leverage at a level of two times. And dividend payout ratio between 30 to 40%. adjusted net income. For 2025, we continue to see orders growing faster than revenue. We expect a low double-digit percentage revenue growth rate for the whole group, with an adjusted EBITDA margin of 18% to 19% before pass-through. For the adjusted free cash flow, we expect around 50% to 60% cash conversion, resulting in a further declining net leverage to around 1.6 times. The dividend payout ratio will remain at between 30 to 40% of adjusted net income. We are convinced of sustainable decade-long growth potential which lies ahead of hands out. And this is reflected in our medium-term guidance. We expect a continuously high order intake over the next years with orders to grow significantly faster than revenue. As a result, we see an annual revenue growth of 10% on average for the medium term. We expect adjusted EBITDA margin to increase to above 19% before past revenue for the medium term, reflecting further economies of scale as well as the materialization of synergies. Together with strict working capital discipline, we will generate a cash flow conversion of 50% to 60% that we will be in a position to pay out 30% to 40% of our adjusted net income to our shareholders while maintaining a conservative financial profile. Coming to a conclusion, let me mention the following key financial takeaways. Our impressive order intake of 665 million euro leads to an order backlog at an all-time record level of 5.9 billion euro. This provides us with an excellent revenue visibility for the years to come. Our efficient project execution supports our excellent profitability and cash flow significantly improved year on year due to our successful receivable management. Therefore, we confirm our full year 2024 guidance for all of our KPIs as explained. Our outlook remains promising and we are strongly positioned for the upcoming growth. As mentioned before, we will see increased dynamics in revenue starting from now on. The production of TLM4D radars will continue to accelerate and we will deliver three of them in the second quarter. We have now received first prepayments from our German customer in April and there will be more to come. that underlies again the close and constructive dialogue we have with our German customers. As already mentioned, we are in close exchange regarding the programs and opportunities. This and the large-scale increase of defense budgets globally will generate long-term sustainable growth for Hensel. And now we are happy to take your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Ross Lowe from Morgan Stanley. Please go ahead.

Hi, everyone. Thanks so much for taking my questions. The first one in order is clearly very strong in the first quarter. I booked the bill two times. What would you need to see for this to sort of put upward pressure on your full year guide of 1.1 to 1.2? That's the first one. Secondly, in margins, it would be great to get your thoughts around margin expectations in each division for the full year. And then lastly, in free cash flow, you mentioned there was sort of moving parts between down payments but also higher investments and working capital. Could you maybe just give us some details around that? And lastly, in addition to that question, on prepayments from Germany, you mentioned you received the first of these in April. Could you just give us some idea of how significant these are? Is it a potential contract value? What's the setup here? Thank you.

Hi, Ross. Thank you for your questions. They're all financially related. This is where I take over. So first of all, of course, we have order intake in our industry sometimes bumpy. So I do not see any change now for the full year guidance on the 1.1 to 1.2 times. So this is confirmed, but we see a good development here as mentioned. Further on, in terms of margins, we have guided for 18% to 19% adjusted EBITDA before pass-through, and with pass-through revenues coming down from around 190 to 130 to 140, we see also that our EBITDA margin will also increase by one percentage point in contrast to the last year. And your last question regarding free cash flow, it was a significant down payment in April. It was related to TLM4D radars. And it helps us, of course, to continuously invest into our working capital. We have to prepare ourselves, especially in the optronics segment, to be able to deliver on time. So this, of course, helps us in the cash conversion. still see the guided conversion on free cash flow. But nevertheless, it gives us dynamics and it gives us also dynamics for the complete supply chain that German defense industry is able to ramp up and to fulfill the promises.

Thanks very much.

The next question is from Carlos Iranzo Peris from Bank of America. Please go ahead.

Hi, guys. Good afternoon, and thanks for taking my question. I have one. Could you please comment a bit on what role the week grows in optronics in Q1, and how should we think about optronic growth in the remaining three quarters of the year, please?

Carlos, nice to hear you. Yeah, I think we've commented the last one to two quarters that we're currently really in the investing stage of this business. First of all, production ramp up, but also digitalization. I do not expect a significant growth in the first half year. We should now be focused on the second half year. But we see progress in this stage.

And maybe this is Oliver speaking now on the demand side. I think during the presentation I had outlined that there is a significant dynamics on the land system programs in Germany. So as a matter of fact, so far Germany has ordered the replacement of the tanks they had given to Ukraine. But there are intensive discussion at the moment how to scale the LEPA tanks It's also in the media, especially with regards to the brigade that Germany wants to put in Lithuania. On top of that, I've just mentioned that one of the big contracts has been ordered, the Fuchs succession with almost 1,000 vehicles. We have an order ongoing for reconnaissance vehicles in Germany. And also there is still a discussion to call for a second batch of Pumas as well as equipping boxer armored vehicles with the Puma turret. All of that is really in a very dynamic discussion. So we have close ties with the OEMs, be it Rheinmetall, be it KMW. And from that, I would suspect at least on the midterm, let's see what of these orders can be placed this year, probably a couple of them. But on the mid-term, a very strong trend to be confirmed.

Very clear. Thank you.

The next question is from Simon Keller from HAIB. Please go ahead.

Hello, everyone. Thanks for taking my questions. First, regarding order intake on the TRMF4D. And remember that previously you mentioned orders of 350 million or more I expected for this year. Do you still feel comfortable with this 350 million number or do you think some noticeably larger amount could be possible? I'm asking because you did well in Q1 and another 100 million contract was signed just a few days ago. Then my second question is more general, also an order intake though, and that is, are there any orders that could come this year beyond current expectations that are worth keeping an eye on? Then my third question is on the main ground combat system. There was the news recently between France and Germany that they agreed on how to allocate tasks. How is Hensel positioned and which pillars do you expect to serve and what's the potential order or sales volume and over what time horizon is that viable? And then lastly, what happened in interest income? I saw that there was a noticeable spike. Thank you.

Hello, Simon. First of all, thank you for taking the coverage on Hensoldt. Good choice. And regarding your first question, order intake, NBS is around 300 and TLM4D was around 100. So absolutely in line what we have now said in the press release and now in Q1. It's totally in our expectations also to address question two. I do not see anything currently which goes beyond, but as Oliver has stated before in his answer, there might be some dynamics in the second half year. We should be currently a little bit cautious in this regard, so I expect the guidance fully valid for this year and see what dynamics we will see in the second half year.

Yeah, with that taking over, and I think also, again, maybe as a compliment to Christian's answer, it's very clear at that early stage of the year, we stick to the guidance despite this very positive trend. And with reference to my presentation, the key point will really be the budget discussion in June. So currently, we're digesting the 100 billion extraordinary budget. So I think that gives really substance to the guidance we have. And now it's this big discussion where very clearly Germany is committed to go further either on additional budgets or setting out the debt break, all of that. And I think then we will see how the dynamics in a clear articulated demand from the armed forces, how this dynamics will translate into potential orders for the remainder of the year and next year. On MGCS, very clearly, I think it's more than positive that finally after more or less two years of stalling in this most important European endeavor MGCS, we have a concrete announcement. So we are ramping back on the intensive discussions we had with the OEMs already. Fortunately, we are well positioned also through national R&D activity that while the European discussion or the bilateral discussions with France had stalled, Germany continued on a path for a new tank and especially new electronics equipment for the tanks and that was driven by the land system programs I had mentioned before. So your question, Hansolt, is well positioned, of course, on the sensors pillar, but also now with our additional competences organically, but also with ESG, we look at the C4I pillar as well. So it is very clearly that Thales now as a top company in the setting with KNDS and Rheinmetall and also France will have the lead on these pillars. But I think considering our position as national champion, we are very well positioned. So at that stage, I would not give exact figures on sales potential, but it's definitely a significant potential we're addressing here.

Okay, regarding your last question. So what is all about the interest income is mainly related to our hedging strategies. So we decided already end of 2022 when all the inflation came in that we hedge our interest rate for the 3M Uribor on a level of around 3% on the 620 million loan. So this was the old loan. Currently we have now 450 450 more on the balance sheet to fund the ESG acquisition. But this hatching is related to the 620 million euro at around 3%. And what happened, now we have two components. The one component is the 3M Euribor development, which was always around 2-3%. But currently, when you look at the latest dates, it's around 4%. And the second thing is, of course, that we have hedged this until 2027. And due to the accounting regulations to IFRS 9, we take into account how this interest curve will develop in the next years. And now we see that it's more in our favor what we have assumed in our internal opinion. And this is why you see currently there, again, of around 7 to 8 million Euro in the interest income. And the second aspect is, of course, that we have benefited from the interest we get for our cash and managed this as a further effect. These are the two main effects. And you see that we are carefully reviewing our hedging strategy month by month in order to have here a balanced profile.

That's clear. Thank you.

The next question is from Christophe Menard from Deutsche Bank. Please go ahead.

Yes, good afternoon. Thank you for taking my question. I have three. The first one, I wanted to come back on the optronic sales in Q1. You mentioned in the report that this is linked to South Africa. So my question is, what happened in South Africa? Is it the transition to or is it related to one specific program? And related to this, in the geographical breakdown, there is no apparent sign that cells in Africa are down. Are you reporting South Africa in the Middle East, or just for me, out of interest? So that was the first question. The second question is, again, in the report, you mentioned the European SkyShield program. There are 21 states now interested in this. Can you help us understand how it actually scale up the demand for the TRNL4D? I mean, the more partner you have, the more states you have, the more radar you will be selling and over what time period? And the last question is on the internationalization. You mentioned UK, France, and probably another one, and South Africa. The question is... How do you intend to position yourself on those markets? You have competitors, at least in the UK and France. So what niches are you targeting in those markets?

Okay. Maybe I will combine question one and three and elaborate a little bit on the regional countries. So taking position as a new CEO, I have visited the three countries already two times. So personally, my first summary is we have very strong assets here with the countries. And that is related to human capital. It is related to product, but as well as to the industrial platforms. So as I mentioned, we are operationally scaling. So for sure, part of that is, as I said before, not only looking at international customer, but how as a group can we become more international? And that is part of actually an initiative we have launched to look at these three regional countries. So I take them part by part. So UK, very clear, the focus is on navigation systems, The focus is on smaller radar, so to say, coming from the navigation systems. And the focus is also on combining those solutions together. And as you might know, this is the former Calvin Hughes footprint, where we have streamlined the portfolio, also the footprint. And when I mentioned the Quadome order before for the UK, ships, support ships that is not only the quad home radar, it is also a kind of navigation suite, a bridge system that we will provide from UK and UK will act as a prime vis-a-vis also the British customer on this one. So clearly here for UK, which is a smaller entity, we have a clear way forward. France, I think a good spectrum, so with quite a decent, also very stable across the year service business with a French customer also at the heart of the DGA, the French military services there. France is really helping us and that's where I put a lot of effort to build and also already on a strong fundament into mission systems. So we have a core C2 system called Linsea and also Arcosia for the naval and also air system, which we have delivered to the French customer, also to other customers. And clearly, if we embed that now with our radars, with our sensors, also electro-optical sensors, We have a clear strategy to deliver combined solutions mission systems to smaller ships, support ships, OPVs, petrol ships, and some reference that we have already in place makes us confident that from here we can also develop the French footprint. And one element will be part of that, you mentioned in one of the questions before, MGCS, Of course, it's also an opportunity because these German-French programs are leveraging also on geo-return that as Hensoldt we can scale, and I had a couple of discussions with the French administration already, our footprint in line with those programs running. South Africa, and that is trying to combine the question here and also your first question, South Africa has also a diverse portfolio. So I think Here we have fully integrated the electromagnetic warfare where we are very strong with our business. We see orders and we also see a support from South Africa into our business, which is running in Europe. And I think also with a real growing in demand as Ukraine definitely. Okay, so I try to pick up. So coming back to to South Africa, the diversity of the business, electromagnetic warfare. So this is the business which is really strong, fully integrated. We have the radar business, which is ramping up and now with the launching program of the Quadome in the UK. I see a strong perspective also in that solution framework that I've just outlined before, where we connect France, Germany, UK, and South Africa, that this will be a key potential for the future. For the optronics part, we are switching from one generation of gymbals to the next generation. And that is a topic which we are currently discussing with our teams, also to be more more sustainable in the sense of which OEMs do we work with, because purely this business has to run via OEM platform provided, be it UAVs, be it helicopters. We see strong demand, as I had outlined before, also in regions globally, India and so on. And that is something what we're settling, revamping at the moment with great confidence about the future. But this is also impacting the very current business but this is tackled with a very clear action plan. Ah, okay, sorry. So I think in one of the previous calls, I had outlined a potential that we see at the moment of roughly 2 billion. So I think ESSI is just at the starting point. So we have three customers. besides Germany at the moment, it's Estonia, Slovenia and Latvia. So with regards to those programs ramping up and definitely I see that with TML-4D in combination with the deal missile that this is one of the key elements. Of course We are currently also looking of how can we in a more integrated approach with other radars, with other missiles, position our radar systems. So as I also had outlined that my approach as a new CEO is going more into partnerships. So I am having many discussions with my peers in the market to be even more sustainable beyond only one channel going to the market. What we also see, and that is currently developing part of ESSI, which is a three-layered approach. So in the upper layer, Germany has chosen to go for the aero system. Medium layer, we're going with our TML-4D. But there will also be a low layer in the sense of short-range air defense, where we have also with the Sky Ranger in cooperation with Rheinmetall, Hensoldt has a first contract for our SPEXA X-band radar. So that will, of course, also be part of the SE initiative, providing additional potential. And the third element is that also in this context, you are threatened by radiation missiles, where we are trying to promote as a complementary approach our passive radar, which we have already out with some customers, good experience on operational concepts, And that is where I would assume, and I think I've outlined that with a strong potential, that this will progressively build a pipeline as we go further in the year 2024.

Thank you very much for all the details. That's great. Thank you.

The next question is from Hendrik Starsmith from Stifel. Please go ahead.

Hi, everyone. Thank you for taking my question. This question is for Christian. Part of your plan to increase efficiency is one SAP now. In Q1, we have seen one SAP now related special item of 5 million euro. We've seen that also in the past. Before, my question is, can you tell us what run rate cost savings do you expect related to the implementation of S4 HANA? Thank you.

Hi, Henrik. Thank you much for your question. Of course, we have run a business case. You should assume that the run rate is in a similar amount as the invest we are taking. So there will be on a cash flow basis a saving. But I also have to say and to admit that these efficiency are coming beyond the planning horizon. That means when SAP S4 HANA is fully implemented 2028 onwards, then we will see the benefits, but this will be on a run rate which is close to the investments.

Thank you very much.

You're welcome.

That was the last question. I would like to hand back to Veronika this time.

Yeah, thank you all for listening today. And as always, should you have any further questions, the AR team is happy to follow up via email or telephone. With that, have a great day. Thank you and goodbye.