Hensoldt Ag Unsp/Adr

Good afternoon, everybody, and welcome to Hensoldt's 3M 2025 results call. Thank you for joining us today. I'm Veronika Andries, Head of Investor Relations at Hensoldt, and with me are our CEO, Oliver Dörre, and our CFO, Christian Ladona. Oliver and Christian will guide you through this presentation today, which will be followed by a Q&A session. And with that, I hand over to you, Oliver.

Thank you very much, Veronika, and a warm and cordial welcome to our valued investors and analysts covering the Hensoldt stock. We are at a historic infliction point for defense and security markets, and Hensoldt is exceptionally well positioned to lead this transformation. In this first part of the presentation, I will give you an overview of the recent developments in the political and strategic landscape and how they will drive our business. Christian will then lead you through the details of the financial section, and I will conclude with a first estimate on how rising defense budget will drive our order pipeline and revenue development towards 2030. Tectonic shifts in geopolitics have again accelerated at an unprecedented pace recently, When we presented our strong full year 2024 figures to you, end of February, the speech of Vice President Vance at the Munich Security Conference was still fresh on our minds and gave us a first indication of the potential watershed in transatlantic relations. The dispute at the White House and the initiative of the US administration to end the war in Ukraine through unilateral negotiations with Russia excluding both Ukraine and Europe, showed a dangerous clash of cultures in the Western Alliance and triggered a strong reaction both in Germany and Europe. Commission President von der Leyen announced the Re-arm Europe initiative, mobilizing up to 800 billion euro for security and defense. This clearly underlines the strong ambition that Europe will take responsibility for building a self-sufficient and deterrence and defense capability and Even before the new government coalition has been sworn in we have seen a fundamental shift in Germany's fiscal framework marking the beginning of a site and vendor 2.0 as we call it the German Constitution has been amended to enable a multi-billion euro financing package dedicated to defense and infrastructure investments furthermore defense spending exceeding 1% of the GDP is now exempt from the country's debt break restrictions. In principle, this means there is no formal upper limit to defense spending. Importantly, defense procurement and budget allocations are now fully guided by NATO capability targets, moving from a procure-to-budget doctrine to a much more sustained and strategic investment path. This allows for long-term sustainable commitments covering an eight to 10 year timeframe to secure further ramp up of production and technology developments. Against this strategic backdrop, how will this ambition accelerate and expand defense procurement translate into a concrete timeline? With Friedrich Merz elected as chancellor and his cabinet sworn in yesterday, an important milestone has been reached. Our Berlin discussions confirm that parliamentary approvals for defense procurement projects that have been in the pipeline since last year will be relaunched quickly, even if it will take until after the summer break for the budget 2025 to be approved. Recent media statements by the president of the German Procurement Authority provide further proof that there is a very high level of commitment in the new administration to accelerate defense procurement on all levels. At the upcoming summit in June, we expect NATO to present its force goals to member states, providing additional guidance for the prioritization of new defense procurement projects in Germany in early fall. With the planning and procurement acceleration law passed together with the defense budget for 2026 in the third quarter, we will have high visibility on additional orders by the end of 2025. The majority of revenues, though, from these orders will then materialize in 2027 onwards. Even more important than the timeline is the scope of upcoming defense procurement. In Germany, the fundamental priorities have been set in the coalition treaty, showing a clear push for both mass and class in material. Air defense and the full equipment of the German Brigade in Lithuania have the highest priority, and Tenzolt is ready to deliver at scale in these areas. We are ramping up production of air defense radars and are pushing ahead with digital sites for armored vehicles from Oberkochen. The prioritization of electromagnetic warfare, cyber, AI, and cloud shows that we are on the right track with our software-defined defense strategy. Uncrewed systems and space-based reconnaissance are areas where we see further growth for Hensoldt in the coming years. We are confident that Hensoldt has the right strategy, products, technologies, and operational capacities to play a major role in the upcoming near- and mid-term German and EU procurement programs. As mentioned, many of the upcoming procurement initiatives in Germany center around software-defined defense. These initiatives are well aligned with our SDD roadmap. Already today, our high-performance sensor products provide the foundation, enabling us to add new functionality through software and future-proofing our hardware platforms like the TML4D, for example. With major initiatives, like the digital battlefield and the Bundeswehr new reconnaissance vehicle on the horizon, Hensoldt is set to play a central role in SDD-centric development projects. And at the same time, our R&D investments are paving the way for innovative business models that will sustain our leadership. This increasingly software and data-centric portfolio positions us as a key player in the software-defined defense space both in Germany and beyond. Building a new defense ecosystem that combines the strength of traditional players and innovative startups is one of our strategic priorities. As announced yesterday, I'm excited to share that Hensoldt has entered into a strategic partnership with Quantum Systems, one of the most dynamic players in the defense tech space. In addition to a cooperation framework, this partnership is accompanied by an investment of Hensoldt in quantum systems. This collaboration brings together our strengths in sensors and sensor fusion with quantum's cutting-edge unmanned aerial platforms and mission software. By joining forces, we are accelerating the next generation of software-defined defense, creating faster, smarter, and more modular solutions across land and air domains. This partnership not only strengthens our innovation pipeline, but also positions us powerfully for key initiatives like the future combat air system, while also opening international market opportunities. Before I pass on to Christian, I'd like to have a look at expected orders for 2025. With orders for more than 700 million euros already in our books by the end of the first quarter, we see this strong momentum continuing for the rest of 2025 with a series of key orders on the horizon. We expect major contracts across air defense radars, Eurofighter programs, ground-based systems, and sustainment projects like the German P-8 Poseidon. Notably, we anticipate orders exceeding 500 million for optronics and self-protection systems for platforms such as the new reconnaissance vehicle Leopard 2 and Boxer RCT, so new reconnaissance vehicle named Corsac. Our radars continue to sell exceptionally well with additional orders for TML-4D and SPEXA coming up. New projects for the Eurofighter and Algeria's border surveillance will further contribute significantly. And on this positive note, I would like to hand over to Christian for a deep dive into our financials for the first quarter.

Yeah, thank you very much, Oliver. And I'm happy to provide you now with our financials for the first three months of 2025. Once again, we were able to realize a solid top-line performance in the first three months of this year. Order intake developed strongly, with orders summing up to €701 million. Main drivers were the Eurofighter MK1 rebaselining contract, as well as the Spanish Eurofighter HALCOM program. Last year's fire order intake included contracts for the NMBS air defense system and further orders for the TLM-40 radar. Revenue for the group increased to €395 million, and was driven by a strong performance of our electronics business. As anticipated, the sensor segment had a slower start into the year. This was due to the ramp up of our new centralized logistics center and the resulting slower production start in the first quarter. The impact on production and therefore on revenue is a temporary effect, as we explained in our last analyst call in February. And I'm happy to give you further insight from the ramp up in a few minutes' time. ESG, which was not part of Henselt in the first quarter of last year, contributed to group revenue as planned with 74 million euro. The level of the pass-through revenue further declined in line with our planning. Excluding pass-through, our core revenue grew strongly by 31%. Organically, Core revenue increased by 6 percent. With a book-to-bill ratio of 1.8 times, our order backlog once again reached a new record level of over 6.9 billion euros. This continues to provide us with an excellent visibility. The bottom line met our expectations. Adjusted EBITDA reached 30 million euro with an adjusted EBITDA margin of 7.6%. This development was driven by product mix effects as well as the ramp up of our new logistics center. Consequently, this led to a temporarily lower productivity within the sensor segment during the first quarter. However, these impacts were anticipated and are expected to phase out as the year progresses. Adjusted EBIT was impacted similarly by this effect, amounting to 3 million euro in Q1 2025. Cash flow followed our usual CISO profile with an adjusted free cash flow of minus 107 million euro. The development was driven by investments in our working capital to manage the planned business volume in the following quarters. To conclude, bottom line performed in line with our expectations and we are fully on track to achieve our full year guidance. Let's now have a look at our segments. In a sensor segment, we achieved an excellent order intake of €664 million, surpassing last year's high comparison base by 7%. This corresponds to a book-to-bill of two times and was driven by the Eurofighter rebase lining contract, as well as the Eurofighter HALCON program. ESG also contributed to order intake as planned. Revenue in the sensor segment increased to €339 million. Despite the slower start in our radar production due to the ramp-up of the new logistics center, revenue performance was solid and in line with plan. Excluding the declining share of past revenue, sensor core revenue increased by 31%, including ESG, and by 2% organically. Adjusted EBITDA in sensors amounted to €29 million, Besides product mix effects, the margin development reflected the lower productivity in the segment due to the ramp-up of the logistics center. As mentioned, these temporary effects were anticipated and expected to phase out during this year. Optronics achieved a solid order intake, with orders summing up to €50 million again last year's strong comparison base. This was primarily driven by ground-based systems. And as mentioned by Oliver, we're expecting a number of significant orders in this area over the course of this year. Revenue performance in Optronics was excellent, continuing the momentum from the previous quarter. This was boosted by the sustained strong performance of the German entity, which realized revenue growth of 45%. Main driver were accelerated production and ground-based systems. The South African entity was still muted. While achieving slight growth in order intake, revenue development was still affected by the ongoing technology change and strategic realignment. And as you know, our German electronics business is moving to the new build campus in the second half of the year, which will support the substantial growth in the coming years. To handle this transition smoothly, we have initiated pre-production activities during the first quarter. This will soften the impact from a certain downturn of production during the move, as explained in our last analyst call. In terms of margins, Optronics also showed strong improvement compared to the prior year quarter. This was driven by higher volumes in the German unit, which returned clear profitability. Also, the South African business was still impacted by lower volumes. The action plan we have implemented is starting to show results. Overall, Optronics realized an adjusted EBITDA of €1 million. Let me now share some insights into the successful realignment of our financing structure achieved in April. I'm very pleased that we have completed the comprehensive refinancing of our previous syndicated loan agreements with a new €1.8 billion syndicated loan agreement. This marks a decisive step for Hensoldt towards even greater financial independence and flexibility. Let me point out the key highlights of the new financing agreement. First, we have successfully released fundamental securities from the previous LBO structure, enhancing our financial flexibility. Our financing is now prematurely secured up to 2032, providing long-term stability. Third, we've optimized our margin ratchet, significantly improving our cost structure. And fourth, this realignment enables a more diversified and flexible debt profile, reducing risk and increasing resilience. In a nutshell, With a new financing structure, we are creating the economic basis to consistently pursue our growth targets. At the same time, the high financial flexibility ensures that we can respond even faster in a more targeted manner to new market opportunities. I would now like to give you some more color on the ramp-up process of our logistics center. Two years ago, we decided to build this new centralized hub for our German sites. Together with our new electronics campus, this is forming the basis to ramp up and scale our production both in the sensors and electronics business. Having reached a performance limit on our reverse warehouse, the new centralized setup will significantly enhance both capacity and process efficiency. With the move into the new logistics center end of last year, we initiated a transition phase with key implementation steps, including the optimization of various processes and integrated data management. This also involves the first module of S4HANA going live with the HENZEL group, enabling real-time monitoring of stock levels and tracking material movements. As anticipated, during this transition phase, material flow was temporarily reduced during the first quarter, as illustrated on the slide. This mainly affected radar production in sensors, as Optronix is currently operating independently from the center. This led to a softer Q1 in sensors, which was accounted for in our production planning for the year. Within the second quarter, we established normalized operations at a new capacity level, allowing us to handle noticeably higher material flows than our previous warehouse setup. This enables us to gradually ramp up production sensors. Consequently, we expect an acceleration in sensors predominantly in the last two quarters of this year. This goes hand in hand with the further scaling of our logistics capacity in H2. so that we will be able to increase material flow by at least 85% in total. To summarize, with a new logistics center, we are not only able to meet the current demand, but we are also establishing a significant capacity reserve. This gives us the opportunity to scale up our production well beyond previous levels and to meet the further growth in customer demand that we see ahead. Let me now come to our guidance for the fiscal year 2025. First and foremost, we are fully on track to meet our targets and therefore confirm our guidance published in February. Starting with the top line, we continue to expect strong order intake performance with a book-to-bill ratio of around 1.2 times in 2025. We expect revenue to increase to between 2.5 and 2.6 billion euros. We focused and adjusted EBITDA margin of around 18%. As a reminder, we have simplified the definition of this guidance KPI, which previously did not include pass-through revenue. For adjusted free cash flow, we expect a continued strong performance with a cash conversion target of around 50% to 60%. And that leverage is expected at a level of 1.5 times. Dividend payout ratio will continue to be between 30 and 40 percent of adjusted net income. In a nutshell, in 2025, we expect to continue high demand for our solutions, resulting again in a strong order intake as well as a solid revenue growth paired with excellent profitability. Please let me also give you some color on the business profile that we expect within 2025. As pointed out in our last analyst call in February, we anticipate our growth to be weighted towards the second half of this year. This is driven by the transition to our logistics that I explained, enabling sensors to start ramping up in Q2 and further accelerate production in the third and fourth quarter. Please note that this is in line with our production plan and reflected in our guidance. Beyond the current year, it goes without saying that we see a strong tailwind from the additional defense budgets in Germany and internationally. And I'm pleased to hand back to Oliver, who will elaborate more on our first estimate, how rising defense budgets will drive our order pipeline and revenue development towards 2030. Thank you very much. And back to you, Oliver.

Well, thanks, Christian. solid figures in the first quarter of 2025 and exciting prospects for the coming years, we are, of course, aware of what I would call the billion-dollar question. The question is, what does all of this mean in terms of mid-term revenue development for Ensold? As explained earlier in the presentation, it is still too early to touch our mid-term guidance. Nevertheless, we have run a thorough bottom-up analysis of our pipelines. With the increasing defense budget throughout Europe, we see the pipeline for 2025 to 2027 to increase by roughly 3 billion euro to around 40 billion. For the extended timeframe to 2030, we expect the pipeline to grow by approximately 9 billion to a total pipeline size of 55 billion euro. Using this slide, which you might remember from our Capital Markets Day end of last year, we have identified an additional revenue growth potential that is mainly driven by higher volumes of our key products, an extension of our maintenance and service offering, as well as advanced solutions development floating in. All in all, we see the potential to increase our organic growth from the current 10% CAGR to around 15 percent and achieve revenues of 6 billion euro in 2030. Ladies and gentlemen, to summarize today's 3M 2025 results presentation, here are my key takeaways along our four strategic axes. First, we continue to grow with focus. Our strong foundation in German programs lays the groundwork for expansion across NATO and EU nations. As a result, our regional revenue mix is becoming more strongly anchored in Germany and Europe, exactly where we see both demand and strategic opportunity. Second, we continue to deliver at scale. Our investments, particularly in strengthening our logistics backbone, building the new optronics site in Oberkochen, and upgrading our IT infrastructure, ensure that we have sufficient capacity to support our growth ambitions well into 2028. On top of that, we are prepared to scale further depending on the volumes of orders flowing in. Third, we see increasing proof that our initiative to pioneer software-defined defense starts to bear fruit. Hensoldt is not only providing mass through increased production, but also introducing a completely new class of digital software-defined solutions. At the same time, we are positioning ourselves as a bridge builder, actively connecting startups and innovators to create a next-generation defense ecosystem, and quantum, as described, is one fine example. And finally, we are working hard to lead our team into the future. Defense has clearly become an industry of choice for purpose-driven, high-performing talents. Hence, it benefits tremendously from excellent access to human resources, including top talent migrating from the automotive industry into defense technology. In short, we are scaling responsibly innovating relentlessly, growing strategically, and investing in the people who will drive our mission forward. Thank you very much. I'm looking forward to go to the Q&A session.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchdown 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. One moment for the first question, please. And first question comes from Ross Law from Morgan Stanley. Please go ahead.

Hi, afternoon, everyone. Thanks very much for taking my questions. So the first is just on sensors division and the acceleration of growth throughout the year. What are the main risks or bottlenecks to achieving this ramp up? And the second question is just on the 1 billion of additional revenues in 2030. What does that assume in terms of percentage of GDP spending in Europe by then? And more specifically, what do you expect for Germany over that time period? Thank you.

Hi, Russ. Thanks for this question. In terms of sensors, I do not see substantial risk. I think the processes within... Sorry, are getting much better. So this is happening. This is good. So I do not see a big substantial risk on that. So we progress as planned. And, of course, the weighing towards the second half year is always there, but it's something we are used to in our business.

And the second question, we are not sure if we got it right. So it was the assumption on the GDP spending as far as the $1 billion increase is concerned. So that is currently still looking at a conservative 2.5%.

Okay, so is that 2.5% for both Germany and Europe?

Yeah, as an average. So again, this is the first estimate that we have put in mind. And still, you know, the thriller we went through yesterday with electing our chancellor shows us that we remain cautious on the timeline. but not on the overall spending. And here 2.5 I think is a good assumption as a starting point.

Okay, thank you. And if I may just ask one follow-up. If indeed Europe and Germany go to 3%, potentially Germany above 3%, do we add another billion to 2030?

Nice try.

Yeah, I think, Ross, if I may answer, and maybe also Oliver to elaborate, I think let's be clear. We thoroughly calculate, as we also did this with the $6 billion, in case there is another 0.5% on top. We clearly will start with programs, with capabilities, and then ask ourselves what does it mean for Enzolit. But I think there is no doubt that it will, of course, create further headwind. I think the figure how much exactly is too fast or too early to answer.

Okay, thank you. I'll wait for the next quarterly results.

Thanks. Thanks. And the next question comes from Carlos Iranzo Perez from Bank of America. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. I actually have two, if I may. The first one is on margin. How should we think about midterm margins? If you can reach 6 billion sales by 2030, Should we expect incremental operating leverage and therefore ABDA margins potentially above 19% through 2030?

Hi, Carlos. Nice to hear you. Yeah, I think in margins, we were guiding and performing in the last years always approximately 0.5% per year, then increase. I think this is a fair assumption currently, but we did not really have done some extra work on that. But that we are a business which also increases margin by growing, I think we have shown in the last four or five years. And this would also be a point we will focus on going forward.

Okay, understood. And then any update on potential further orders on the Pegasus program? Obviously, Germany is going to ramp up defense spending significantly. Are further Pegasus orders part of the wish list of the German government?

Thank you, Carlos. This is Oliver speaking again. Indeed, our focus in Pegasus at the moment is clearly on delivering the three birds that we have currently in the scope of our program. So we are still progressing well on these ones. The flight test program from Bombardier is running in the US, and we expect that we will transfer the first bird to Germany in November. At the same time, we all know that this is aiming on delivering a full operational capability mid-2029. And if we consider the German CHOT, who says that they expect a Russian attack aggression against NATO, in a timeframe of 27 to 29, I definitely see a strong focus and a strong discussion, intensive discussion with our customer on the Pegasus program. And this discussion includes the fact that three birds will not be sufficient to cover the full eastern flank. On top of that, I think the pressure will rise with the NATO force goals coming in in June, where definitely ISR signal intelligence is a key requirement. And there's another lever or pressure point rising up that most of these assets today come from the US. So if Europe will develop a sovereign signal intelligence capability, then this will depend on Pegasus, where Germany is most advanced in the program. And we are discussing and are seeing a potential of additional three to six birds as we move forward.

Very clear. Thank you, guys.

Then the next question comes from Sebastian Grover from B&B Paribas Exxon. Please go ahead.

Good afternoon, everybody. Firstly, I would have a question around the sensor segment and a quick recap on the quarter one developments. Would it be fair to assume that excluding the ramp-up costs for the new logistics center that the adjusted EBITDA sensors would have been widely stable year-on-year? And if you also highlighted adverse mix effects, how should one think about mix for the rest of 25 in that segment? I would have two more questions, but please start here.

Hi, Sebastian. Thanks for this question. I think when you look now at the first quarter, I think there was a figure around 10 to 12 million, which was really due to the fact of the ramp up of logistics center. But to be very concrete, what did it mean? So we closed down more or less production for two, two and a half weeks because we had to reconnect this logistics center to our own site, and this is why production was simply down for two to three weeks. Now people are working again, so this is one effect. The project mix effect is, from my point of view, 0.5% on EBITDA in Q1, so this will also phase out during the year so that our margin which we project now for this year will be in a percentage, in a region slightly lower than last year, 0.5, something like that, lower than last year, but still in a very good position.

Okay, that's helpful. And then coming back to the growth ambition through 2030, how does this improved visibility vis-a-vis the five percentage points step up in your organic revenue growth target through the next years impact your capacity planning? So I understand from the logistics center part, you should be fine to also handle materially bigger volume. But are there any other impacts that we should foresee when it comes to capex spending in this sort of production as such? Or what is the thinking here?

Yeah, thanks, Sebastian. So I start and Oliver maybe adds. So what we are currently doing this year, we run three transformation programs. The one is Logistics Center, as we've already know, are in conclusion. The next one is Optronics site. And the last one is S4. with all the measures we have now taken. We have a good visibility on our capacities until 2027, 2028 to be in a good shape. But as Oliver has indicated, as pipeline is growing, as demand is growing, we have to take care and look what does it mean for the period 2028 and beyond. And this is why we have now started our so-called operations 2.0 exercise and program that means going along with the political developments we will closely analyze from now onwards what does it mean for the next 10 years for this company which what which and what do we have to produce compare it with our capacities and then derive what we will concretely do to be prepared for the period after 2028 so this is our overall plan how to progress in this. It's too early now to give concrete figures. I'm also still convinced that we stay a capex-light company. That means if we need more capacities in terms of halls or sites, that it will still be a capex-light business, maybe with the 0.5% to 1% more capex, but not more. But as we move forward in the next month, we will give you some more details on that.

Okay, understood.

Maybe if I just add, because I think that also resonates with the initial question that Russ had put in. I mean, that's part of rather this conservative approach going on 2.5%. Because once we go beyond in volume, but as well on the timeline, I think definitely we have to consider the next step of scaling our production. Today, we take a lot of profit on the, let's say, bold and responsive decisions that Hansolt had taken in the past, the roughly one billion investment in infrastructure, supply chain technology. But I think what Christian mentioned is now we are trying to anticipate the next scenarios. And we are building that really in sense of scenarios. We are well prepared from that because we can take profit from the experience we have from the first ramp up and first scaling. So we know the levers. We just have to know at what scale do we put them. And then on top of that, what is of course helping us also steering CapEx and everything is that politically we see a strong commitment. Last year, the government has put an initiative, a concept in place, a defense security industry defense strategy, which is clearly about building sovereign capabilities. I think that's about Germany, Ursula von der Leyen's plan. And I had three meetings already with the EU Commissioner Kubilius taking care of the defense Europe ecosystem. So we also expect that we get support from the political environment in further scaling infrastructure projects. and supply chain. And then it is clearly based on all the activity we're doing that Christian described, we are well prepared while orders are floating in starting end of the year over the next year to take the next step of the ramp up.

Actually, a good segue to the other question I just wanted to bring in, and that is exactly around the supply chain. So I understand that the sort of bigger, especially listed companies in the sector do have the financial and also the intellectual capabilities and capacities and also the financing leeway to indeed bring up, as in your case, the revenues by a factor of two and others are talking about three and some are thinking about four times or so until 2030. The question over the spinning matters, how can the supply chain, especially more medium-sized companies, smaller companies handle that situation? So I would just be very much thankful for your views around how to make sure that also the kind of overlooked smaller suppliers can equally follow that very, very growth trajectory.

Maybe before I give to Christian to go a little bit more on the details of operations and supply chain, I think one thing is important, also comparing to peers and bold statements on the market. First of all, very clearly, our attitude so far has been conservative and rather scale up once we have the evidence and not being just simply bullish on the market, which of course is quite heated up at the moment. But let's make sure that also we compare apples and peers. And I think it's a big difference scaling, let's say, the production of artillery shells, where short-term we get a massive volume, and I think here we can go two times, four times, whatever, but scaling complex products like a radar is a different story. However, long-term, I would consider that element, the radars as well as the technology inside, as more value creative. And I think that's my point. Yeah, the 2.4, looking at the value compared probably to 1.5 scale that we can promise at that stage. We will do further math as the year continues. But I think let's make sure we compare apples and pears. Yeah, and maybe to add, Sebastian,

What is very important, also Oliver has indicated that, so when we look at our value chain and what we have really in our own hands and what is sourced out, so around 60% is our own value creation. So only 40% is with our suppliers. So it's always a challenge then also to ramp up supply chain, but it's not the case that we buy 70, 80% of our revenues as others do. um and this is why we have a focus on that but the dependency on a very complex supply chain is currently from our point finds it overseable okay appreciate thank you guys ladies and gentlemen as a reminder anyone who wishes to ask a question may press star and one at this time and the next question comes from christoph menard from deutsche bank please go ahead

Yes, good afternoon.

Thank you for taking my question. I have a rather naive question on sensor margin, and you may have answered it. I'm sorry I joined the call a bit late. I mean, you managed to grow sales by 19% in sensors. The margin dropped quite obviously due to the logistic center. In fact, can you, I mean, you still deliver the product. It still went through. You managed to grow the sales, but the margin dropped. What exactly does it correspond to on the ground, I would say, in terms of that loss in margin? The second question to this is, thanks for the slide on page 15, you're getting better scalability. Should we say that in the future in sensors, what you may spend more, you will be spending more on R&D, so it will be a drag on margin, but can that efficiency you're getting on the logistic center actually offset the drag from increased R&D? And the second question or the third question is on On your backlog, have you seen in recent months an increase in the repeat buys of existing programs, or is it still stable? I mean, by that, the programs that you're currently developing, Pegasus would be indeed a good example, but is it something that is growing in your backlog at the moment? Thank you.

Thank you so much.

Hi, Christoph. Thanks for the question. I think that the question on census is not naive at all. So first of all, census is a business out of project and product business. And the project business, what we do, is not affected by this logistics. What was affected is the production. And with that, really, the people who work there. And since we had to reconnect from the old warehouse at Olmsted to the new one, we had approximately two to three weeks downtime in production. So people who are not working, they were staying at home. And this is why they did not book productive hours. And this was then the effect, which is temporary one. And at the moment, when I look at production, they work again. So it's really a temporary effect which will phase out during the years. Then you have mentioned the question of more R&D spending and weighing the margins. Yes, this is clearly a case. We have indicated this also with a slightly lower margin in the census segment as we were used to last year and the year before last year. But you are right. When we are in full scaling up, Our production should add some economies of scale. But as you always know, I'm really careful and conservative on my margin projection. We first work on it and then we realize.

Okay, so the more of the same, I'm not 100% sure to have understood the question really well, Christoph. So please ask if I'm not fulfilling it. more of the same is basically all our products and volume business where I think we have sold those systems to our customer and indeed as you rightfully point at, we are in discussions. I think the first wave based on the budget, the precedent setting decision on the budget is that they will go into the framework contracts and call for more orders. That is Of course, our TML4D, where we see already discussions with Ukraine, with Germany, that on top of the radars we have delivered, they want to go into the geographical dispersion in Germany. And that not only applies to TML4D, also we see some momentum building up on the passive radar at the moment, where Germany so far has bought two. And given the nature of the technology, it's a cost performance, but also speed-wise, something which can bring a very quick intelligence surveillance capability covering the full range geography of Germany. SPEXA is of course a topic as a counter UAV and here based on the Sky Ranger from Rheinmetall. But also we see a strong discussion, for example, with the German Navy that they might want to have a counter UAV capability for their ships. where given the modular design of SPEXA going full, half, and quarter tile with a containerized auxiliary system for the radar, this can be also very quickly fit into German warships. So that's one element talking radar. Then the second element is for sure, and I think I explained it during my presentation, the digital sites based on the Leopard 2, the Puma, where so far we have the German Leopard tanks under contract. We see the RCT-30, the Puma turret on a boxer tank. a platform floating in that has been under discussion, and it's one of the programs in the big pile that we are moving in front of us since last year. And it's not only the digital sites we have delivered to the remotely controlled howitzer, to the vehicle-based howitzer, Our CETA system, see-through armored systems, and we have a lot of discussions. Couldn't we buy more of those systems to increase the capabilities of the German vehicles? And that is also in the light of the Lithuania Brigade. Pegasus has been mentioned, and just as an additional comment, the 326 I have mentioned is only talking Germany. Of course, you are well aware from previous discussions that we are talking to at least three additional countries, in one country already in the RFI phase, where we see additional potential for Pegasus export. Just to drop two more products, it's for sure that we see in self-protection systems where, based also on the first references we have with Russian systems in eastern NATO countries and also in Ukraine, that this could pretty scale up in building legacy or upgrading legacy systems, which would also be a volume-driven business. And last but not least, Precisa, which is now going with the first launching customers, and that is looking also at the UAV, also reflecting with Quantum and other drone suppliers, rather larger drones, where we also take advantage of the very modular design of this antenna and that could also scale up into space surveillance where we have an orbitizer ready and where very quickly on Precisa we could exponentially grow in volume.

Thank you very much. That's very comprehensive. And I would think that repeat business is coming with good margin as well.

Absolutely. Absolutely.

And the next question comes from the line of Christian Koas from Warburg Research. Please go ahead.

Yes, good afternoon and thanks for having me. I have three questions actually. First is the aftermarket business. I hear in the defense industry that there has been recently a strong demand for aftermarket products and services. Can you confirm this? Is this also valid for hand load? Secondly, coming back to the capacity question, what regards the capacity outlook for the years beyond 2027, 2028. At earlier occasions, you mentioned your plans regarding externalizing engineering capacity to free up internal resources. Is this already included in your capacity plan for 2027, 2028, or is this a potential reserve that you still have or has this reserve already been realized? And thirdly, very interestingly, you mentioned that you want to act as a bridge builder for startups and build a defense ecosystem. And you mentioned the quantum deal. Does this actually mean that you have more quantum or deals like the one with quantum in the pipeline or on the agenda? Thank you.

Okay, so Christian, thank you very much. And I would start with your first question after market business. Indeed, I can fully confirm that this is a growth element, which is probably underestimated still today. So as you know, we had a management change in our service division. So with Jens Nielsen, we have now somebody really ramping up the service business. And we take also advantage from the experience we get with our ESG acquisition. So I would just underline that this, what you call aftermarket business is threefold. First one is, of course, we are building a rather tsunami with coming back to the previous question with all the products, the volume business we are selling out. We will, of course, create a massive demand with after sales services. also we have to consider that with everything what we sell out we sell spare part packages which of course looking at margin and all of that is a very interesting business the second element is is is what last year we have reported a three-digit million contract table and which was, I think, the ninth iteration of this contract, where we are deeply anchored into the German logistical system. So together with partners, we will build up a new plant, which will be inaugurated in a couple of weeks. And also here, I think, Looking also at the very tough discussion that the German Armed Forces Minister Pistorius is having on personal, that will be the limiting factors as capabilities grow up. And from several discussions with high-level military and MOD representatives, we get the question, where can the industry help out? And I think with Sebel and the very strong integration into the German logistical system, we are a privileged partner on that one. And lastly, it's of course FDD, where I would see a new set of services after Mark Business, software as a service, data as a service, coming up. And definitely, I can tell you, together with Jens Nielsen and the team, as a matter of fact, we have just discussed that last week in our executive committee, we are building, as we are addressing operations 2.0, we are addressing concepts, how can we leverage on that aftermarket business going forward. And for the sake of time, Einfachheit to easiness, simplicity. I would take your last question as well, Bridge Builder. Yeah, so quantum is the first concrete way. I mean, you know very well we will not disclose details on such discussions, but I have been part of several roundtable discussions also of the German administration where following those discussions and trying to bridge this gap. Because I think the current media debate is a lot about dualism. Do we buy tanks or do we buy drones? And Minister Pistorius made it very clear at one of those roundtables that we need both. And we need companies that bridge And here we volunteered to take that role. And I can tell you, at least as part of these discussions where we took place, where we presented ourselves in this bridge building role, we received a lot of requests from the players on the market. We are in discussions and let's see how it matures. However, and that's my final remark, we will stay focused on the business on our strategy North Star and and very clearly we will not also not delude from that element wherever we see strategic relevance for our business which is very clearly given for quantum we go forward but again in times where we're focusing on scaling our operations delivering on software defined defense we also have to avoid to get distracted from all of this.

Yeah. Hi, Christian. I take the other two questions. So first of all, in terms of sites, when we run through this year and have now logistics center and Oberkochen done, we are good in shape until 2027, 2028. And beyond, I've mentioned the operations 2.0 exercise, which is ongoing. In terms of externalization, we are currently at an externalization rate in engineering of around 10%. And our ambition is, of course, to go further up. So there is still potential to move up. I think a figure of 20% to 25% is a figure within engineering, which is Good, but still manageable. So this should be our target going forward.

Thank you.

And the next question comes from Darryl class from auto BHF. Please go ahead.

Yeah, good afternoon. Thank you for excusing me. Maybe two quick ones. The first one according to Reuters, Pistorius seems to want to increase the budget by let's say 60 billion euros as soon as 2025. So I imagine that you have already had discussions in recent weeks with high-level person at the MOD. So can you give us a little more details about your sensitivity to this increase and about the areas that will be of interest for you? And I will try the last one. I don't know if it's too early, but as you already discussed, the role and the future of Leonardo's take with the team of the new chancellor.

Okay, so let me try, and Christian, you support. So yes, again, the statement of Pistorius, which of course we also read, makes very clear that it was a wise choice to have Pistorius in place as the only minister of the new cabinet who comes from the old government, and I think also that is a strong sign together with clear votes from Friedrich Merz in the German news television in his first interview as chancellor, where we clearly underlined defense and security will be the first priority of the new German government. Pistorius stands for that continuity, and I'm absolutely sure that he will ramp up. What I can confirm at that time, Deroklis, is that, of course, we are in a very close dialogue with our customer day by day. We have also provided at least some ideas what our capabilities are to go forward. And as we have discussed before, I see a two-phased approach. The first one, which hopefully, and that depends on the budget decisions, will float in in 2025, is the increase in framework contracts buying additional volume, and we discussed that during the Q&A. And the second phase is then based on the NATO force goals, the capability discussions, the requirement discussion that is ongoing, the new capability build up, new programs that would probably start 26 and rather move in early 2027. I think also that has been described. Looking rather at the quality of topics, I see from the discussions we are having, air defense is really at the top of the priority. I mean, looking what happens in Israel, Gaza, looking what happens in Ukraine, everybody knows, and I had a couple of quotes, it's about air defense, air defense, and air defense. So that's where I think we are very well positioned, as hands-on with having, and if we take the U.S. debate at the same time, the only really battle-proven non-ITA air defense system is the IRIS-T SLM together with our TML-4D radar. The second topic is the vehicles. I mean, looking at the Lithuanian brigades, probably the NATO force goals that we experience, and it's about the... the middle forces of the army, where we have a big gap of investment in volume of vehicles, where I would see, and that's the discussion we are having, how can we on one hand buy large quantities of tanks and infantry fighting vehicles as we go up, and the second thing is how can we augment, improve the existing vehicles to deliver a better quality in the sense of also self-protection against a potential enemy like Russia. And the last one, and that is probably an element where also I think I leveraged that Hanford is very well positioned, is we see a lot of pilot programs coming in where the customer wants to go into software-defined defense, developing future capabilities for the warfighters, and trying to find Of course, it will be a compromise. I think we will never go to a war-fighting lap as we see it in Ukraine. But I know that the German government had a lot of exchange with the Ukrainian forces. How can we build an ecosystem between industry, armed forces, and the procurement agency to drive in a rather iterative spiral development a new approach? And here we have at least three programs where Hensel today is shortlisted, where I would see the proofs and a reference to that in my presentation for STD as a next wave moving in. The other question, I mean, Leonardo, what I can say, it has been very quiet in the past weeks. I think Leonardo is taking care of their topics. You know that they have a JV with Rheinmetall on the vehicles They are currently settling with Thales Airbus on the space segment. And all of that, I think, is really strategic. We have a very good cooperation with Leonardo on the Eurofighter. Let's see now what kind of G2G agendas. So we had earlier this year a German-Italian roundtable, which was a little bit with a foot on the brake due to the fact that the political landscape is redeveloping. So I think the second half of the year will show what will happen also from the new German government, German-French cooperation, German-Italian cooperation. What is the guardrails? that the new government is giving and that of course will have an impact on our very good dialogue, continuous dialogue with Leonardo. But so far I think everybody is trying to put his focus on delivery and that's what we are doing. And as far as the strategic development of the ecosystem is concerned, I think I mentioned Before in my presentation, and I reiterated a couple of times, I think with our financial performance and with our North Star strategy, we're well prepared to very self-confidently go into the system and take a leading role in shaping the ecosystem in Europe. Thank you, Oliver.

Ladies and gentlemen, this was the last question. I would now like to turn the conference back over to Veronika Endres for any closing remarks.

Thank you, everybody, for joining us today. And as always, should you have any further questions, please do not hesitate and get in touch with the IR team. Have a great day. Thank you, and goodbye.