Hensoldt Ag Unsp/Adr

Good afternoon, everybody, and welcome to Hensoldt's 9M2025 results call. Thank you all for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt, and with me today is our CFO, Christian Ladone. Christian will guide you through this presentation today, which will be followed by a Q&A. And with that, over to you, Christian.

Thank you very much, Veronika, and a very warm welcome to all of our investors and analysts following our company. It's great to have you with us today. I'd like to begin with a quick update of this timeline, which you may remember from our recent analyst calls. Since then, our assumptions have further materialized. Right after the adoption of Germany's 2025 defense budget in September, the parliamentary sessions for procurement approvals gained strong momentum. By the end of 2025, a total of more than a high double-digit number of so-called 25 million approvals will have been passed, many of them with direct hands-on involvement. The first tangible evidence was our recent guidance upgrade for the 2025 book-to-bill ratio, published two weeks ago. While the majority of expected orders are still anticipated to enter our books in 2026, The increased guidance for this year already reflects the early materialization of these strong dynamics. This sets the stage for a strong finish to 2025, with significant orders to be expected in the near term. Let me start with the census segment. In October, we booked a major sustainment contract for the German P8 Poseidon program worth 130 million euros. Alongside the procurement of the German Eurofighter Tranche 5, the contract of our MK1 radar is now in the flowdown and we expect to book the order with approximately 180 million euros shortly. The same applies to further orders for TLM-4D air defense radar for Ukraine for Switzerland with a combined volume of around 200 million euros. Notably, the optronics segment will contribute significantly to our order intake in 2025, combining both upcoming and recently booked contracts worth approximately €1.4 billion. This is predominantly driven by the land domain. The contract for the new reconnaissance vehicle named LUX2 is currently in the flow-down process. This landmark order represents a volume of approximately €850 million for Hensoldt. In addition, we anticipate further orders for the Leopard 2 main battle tank and for the Chakal, the boxer platform equipped with the Puma turret. The latter we expect in 2026. Further key contributors are projects for Algeria's border surveillance, as well as upgrades for the German U-212A submarines, both recently booked. I will give an overview how these orders will contribute to our race book to build guidance for 2025 in a minute. Of course, all of you know that ramping up capacity is key to meet increased customer demand. Therefore, we have started our operations 2.0 initiative, which we have introduced in H1 of this year. Since 2022, we have been expanding production capacity for continuous improvement automation and outsourcing integrated into our annual CapEx plan. And this will continue. And of course, we will provide more details at our Capital Markets Day next week. Nevertheless, a first concrete initiative. This is our new production site, which will significantly increase our production capacity for air defense radars. This strategic capacity expansion will enable us to substantially ramp up production from 2027 onwards, especially for TLM4D and SPEXA raters. We are investing around 80 million euros in this rented site, combining resilience with synergies across our existing footprint. Let me now come to our financials for the first nine months of this year. After outlining our promising growth outlook, let's now shift to what we have accomplished so far. So let me walk through our financial results for the first nine months. To begin with, I'm very pleased with the performance we have once again achieved. Order intake developed as planned, reaching more than 2 billion euro. All for this year's orders placement from Germany are heavily weighted towards year end. We exceeded the high prior year figure by 9%. Key drivers behind this performance was the Eurofighter program as well as TLM40 radars. Revenue performance was strong, increasing to 1.5 billion euro. Optronics continued its strong momentum while sensors further gained traction in Q3, as anticipated following a slower start in the first half of the year. Pass-through revenue continued to decline, in line with our planning. Excluding pass-through revenue, core revenue grew strongly by 14%. reflecting the strength of our underlying business. With a book-to-bill of 1.3 times, our order backlog again reached a new record level of 7.1 billion euro, providing us with an excellent visibility. To sum it up, the increasing investments in defense by our German international customers continue to translate into higher order intake and revenues. The strong performance of our top line is also reflected in our profitability. Adjusted EBITDA increased to €211 million with an adjusted EBITDA margin of 13.7%. The increase was primarily driven by higher volumes in the German optronics business. In a sensor segment, product mix effects partly offset this growth, while the impact on margin from the logistical ramp-up has further diminished. Additionally, we continue to capture costs and revenue synergies from the ESG acquisition, further strengthening our bottom line. Adjusted EBIT increased to 122 million in 9M 2025. Cash generation was excellent in Q3. Adjusted free cash flow increased to minus 119 million euro per 9M 2025, supported by advanced payments received. While on the other hand, investments in our working capital continued as planned to manage the business volume in Q4. To conclude, our bottom line is on track and set to gain further momentum as the year progresses. Now let's have a look at our segments. The census segment delivered a solid order intake of 1.7 billion euro, exceeding previous year's high comparison base. This corresponds to a book-to-bill ratio of 1.3 times. The development was driven by orders for the Eurofighter rebaselining and HALCOM program, as well as TRM-40 radars for Ukraine. Revenue in sensors increased to 1.3 billion euro. Despite the slower start in our radar production during the first half year, revenue growth was strong and fully in line with our expectations. Excluding the declining share of parcel revenue, core revenue in sensors rose by 12%. Adjusted EBITDA in sensors increased to €199 million. Product mix effects had a minor impact, while the effect of the ramp-up of the logistics center in H1 is further diluting. This is reflected in the adjusted EBITDA margin of 15.1%, catching further up as the year progresses. As mentioned, cost and revenues energies from the ESG acquisition contribute to this as planned. Optronics realized a strong order intake with orders summing up to €328 million, resulting in a book-to-bill ratio of 1.4 times. This was primarily driven by orders for the U-212A submarine retrofit, gimbals, and side systems for ground-based systems. Revenue performance in Optronics was excellent, continuing the momentum from the previous quarters. This was boosted by the sustained strong performance of the German entity, which achieved revenue growth of 27% in the first nine months. Main driver was accelerated production in ground-based systems. At this stage, we are also pleased to have successfully the first step of the move of the ground-based systems business in Oberkochen from the former size building to the new build Optronics Campus. This milestone will provide our business with the capacity to continue the strong growth path ahead. In terms of margins, Optronics continued to show a significant improvement compared to prior year, with adjusted EBITDA reaching 12 million euro. This development was driven by higher volumes from the German unit. Let's now have a look how our order book will develop until year end. In addition to the orders mentioned at the beginning, we are preparing for a broad series of additional contracts across our business areas. such as for air defense, the Eurofighter program, our naval business, as well as self-protection systems and services and integration. To sum it up, we are very well on track to secure major orders that will drive our order intake from around 2 billion euro in the first nine months to approximately 4.4 billion euro per year end. Let me now come to our guidance for 2025, updated two weeks ago. First and foremost, order intake. Following the recent development, we have significantly raised our book-to-bill guidance from around 1.2 times to a range of 1.6 to 1.9 times. As highlighted earlier, we expect to book key programs like Eurofight and Lux2 already within this year, pushing the book-to-bill notably upwards. Furthermore, we specified our revenue guidance to approximately 2.5 billion euro. As outlined in our recent analyst calls, the rollout of our new logistics center represents a strategic investment in long-term competitiveness and operational efficiency. While this go-life has temporarily moderated the pace of revenue growth in 2025, it is a critical enabler of sustainable growth and scalability in the years ahead. For adjusted EBITDA margin, we specified our guidance to 18% or higher. This reflects our focus on sustained strong profitability by investing in our capacity to secure long-term success. For adjusted free cash flow, we continue to expect strong performance with an unchanged cash conversion target of approximately 50% to 60%. And our net leverage target remains at around 1.5 times, reflecting our disciplined financial management. Finally, our dividend payout ratio will continue to be in the range of 30 to 40% of adjusted net income, in line with our commitment to shareholder returns. So coming now to a conclusion, let me mention the following key takeaways. There'll be increasing demand for our products and solutions as reflected in substantial order intake across both segments. driving order book to a record high of 7.1 billion. This continues to provide excellent visibility for the years to come. Our revenue performance remains strong, driven by sustained high momentum in optronics and accelerated growth in sensors during the second half of the year. This is reflected in our solid profitability, supported by high volumes in optronics, while the impact of sensors margins from the logistical ramp-up is further diluting. Our outlook remains promising and we are strongly positioned for the upcoming growth. Germany is taking the leadership role for defense in Europe and Hensel has the right strategy, products and capacities to play a major role in upcoming German and European procurement programs. This is now increasingly reflected in concrete orders, driving our book to build guidance significantly upwards and with further major contracts on the horizon. So in short, SiteInventor 2.0 starts to materialize. Through targeted investments in capacity and processes, we are safeguarding our delivery capability. We proactively secured the further ramp up of our air defense production from 2027 onwards, safeguarding our delivery capability and long-term sustainable growth. Thank you very much for listening. And with that, I'm now happy to open the floor to 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 headsets while asking a question. Anyone who has a question may press star and one at this time. First question comes from Sebastian Groh from BNPA Paribas Exxon. Please go ahead.

Yeah, good afternoon, everybody. Thanks for taking my questions. The first one would be on the optronic segment. And apparently, the segment is outpacing the earlier indicated 10% EBITDA margin for this year. And against the backdrop, where do you see the segment trending, both in 2025 and particularly in the midterm, i.e., do you eventually see scope to return to the 20% plus levels that you achieved in 2020? And as a follow-up to this, as Optronics is going to roughly double its order backlog based on your statements, how should we think about the growth cadence in the outer years, i.e., would you agree that Optronics might ultimately outgrow the sensor segment?

Hi, Sebastian. Many thanks for this question. So, yeah, very good question about optronics margin. You're right. So we guided until half year, 10%. I have to say currently we see with the positive development, a figure which goes more into the direction of 14% EBITDA at the year end. With having said that, we see every year a figure of around 2% in addition. And of course, in the midterm, 2027, 2028, we expect that figures at the profitability of optronics will be in this year, as you have mentioned. So for sure. And the second question, yes, you're also right. We see more momentum now from the optronics. We have to keep in mind that sensors is a classic project business with heavy also engineering load in in the work, whereas optronics is a delivery business. That means if we have everything in place, and industrialized products, and the demand is there, which is currently there, we are able to ramp up more, more, more intensively. And for I would say, more concrete numbers, I'm happy to share with you on the upcoming Tuesday, that will give some more insights how the segments will progress.

That makes sense. I won't stretch my luck too far. Just one other quick one, if I may, on some comments we heard recently from your second largest shareholder. Those very comments suggested there might be scope for an expansion of the corporation between the, as you referred to, legacy parts of the product offering. And I was just wondering, considering also that there are so many corporations happening in the defense sector, And in which areas might you see headroom for more corporations? And that could either be then with the Italians or then eventually also other partners.

Yeah, thank you very much. You're right, the dynamics is quite high currently. And Leonardo has stated that there is a good collaboration with our company up to now. Especially we have currently in the Eurofighter and also in the air defense topic, I see within with Leonardo, there are, of course, also opportunities in the land platforms to go for more corporations, even if there is nothing material yet. And of course, I think with the increasing budgets coming from Germany and acting Germany as a front runner, of course, other companies are interested in participating of this growth and then going to partnerships with German OEMs, but also in Hensoldt. And when you have seen now the LUX2 contract, which is at the end of the day a cooperation between GDES, so General Dynamics Europe Land Systems, and Hensoldt, it gives you also a concrete example where this successfully happened. And going forward, we see also possibilities in the land platforms, for example, also in space, also in air defense and all ranges. So there's more to come. And also here, we will give you some more details on Tuesday on the Capital Markets Day.

All right. Thank you very much. I go back to the queue. I have some more, but let others first.

The next question comes from the line of Ross Lowe from Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for taking my question. So the first one, just on order intake, obviously, it continues to track strongly. And obviously, you've raised for your guidance quite materially. What's a little surprising is that your cash guidance is unchanged. Can you maybe just flesh out the moving parts there into your rent? As I would have thought that you're going to get a reasonable amount of down payments, like you've noted for the nine months. And then just on the outlook, you've confirmed your 2030 sales guidance. Can we also expect you to provide 2030 guidance for other metrics like margin at next week's CMD? And given the strong visibility from Germany specifically, can we expect you to provide some indications of growth for the group beyond 2030 next week? Thanks.

Yeah, thanks, Ross. So in terms of down payments, first of all, it's a good progression. We have seen now in the last year when we compare 9M 2025 with 9M 2024, we have 200 million more down payments on balance sheet. On the other hand, I have to say we are heavily further investing into working capital. That means the strategy, and this is also seen in the figures, is clearly to go for pre-investments in working capital to further deliver and out balance this bad ones payment. So this is why I do not really expect an increase now of of cash conversion by year end. And regarding 2030 Yes, we will give some some more insights how we think about the 6 billion figure on Tuesday, and also some bottom line figures for sure. And also some some aspects how we think the company will grow from 2030 onwards. I think it's not a secret when you now currently look how Germany will behave from this and next year onwards that most of the contracts will not only last five years, they will file five to eight years. And then we are at the beginning in the middle of 2030. And on top of that, there will be service business due to that the availability of services of systems in Germany has to be increased massively. So there is room and there will be more details on Tuesday. Yeah, clear.

Yes. Great. Thanks, Christian. See you next week.

As a reminder for any further questions, please press star and one. The next question comes from the line of Christophe Manard from Deutsche Bank.

Please go ahead. Yes, good afternoon. Two questions on my side, just on the updated 2025 guidance. The revenue growth you have in Q4 is actually a bit softer than usual. Is it only linked to the logistical center? You're going to be growing more or less in line with what we've seen in the first nine months. Usually it's a stronger quarter, so the question is, Is it just that phasing? And should we resume kind of that accelerated growth in Q4 as of next year? The second question is on the margin. You state 18% plus. As you previously outlined, sensors was doing very well in the first nine months and Q3. What about, sorry, you talked about electronics. And my question is about sensors. We also had a very good performance on sensors. How can we think about the margin performance of sensors in the full year? Thank you.

Yeah, thanks, Christoph, for that. Yes, you're right. It should be a little bit weaker. I think especially in sensors, when I look at the key products such as Eurofight and TLM4D, there are fewer figures now planned for Q4. But nevertheless, we see an increase. I think when we talk about 2026, we will be in a normalized Q4 again, which will be stronger from my point of view, because then the logistics center effect will be fully phased out next year. So this is the picture I currently have. So in terms of margin, I've outlined 14% for optronics for this year in In the sensors, I expect approximately 19%, which is then in the sum around 18 to 18.2, which gives us confidence to reach our guidance for the full year.

Thank you very much.

Next question comes from the line of David Perry from JP Morgan.

Please go ahead. Hi, Christian. Look forward to seeing you next week. I was just going to ask you to unpick this big jump in the optronics margin, the 14%, so basically your double year over year. Just how much of that is that R&D's dropped? How much of it is kind of one-off self-help, say South Africa or something like that? And how much do you think is related to the volume? And then just to square the circle on it, can you just tell us where you think the – revenue ends up for this year in optronics, please. Thank you.

Hi, David. Many thanks for the question. I see currently that it's solely volume based. So R&D, we are still in the digitalization of Periscope and the WOW for the PUMA. So this will last until 2027 because these figures go down. We are still at Seretron. Seretron is the sensor suite for the LUX2, which has to be finished until 2027, until the first systems are to be delivered to GDE. So this will stay at a high level. And as I said before, this is volume-based. South Africa is more or less on a level of the prior year. So this is exactly volume-based. In terms of revenues, I see approximately 420. To 430 for the chronic segment, I see 2 billion 70 to 2 billion 90 in the sensor segment, which then comes up to the group guidance. Thank you very much. You're welcome.

We have a follow-up question from Sebastian Groh from BNP Paribank Fund. Please go ahead.

Yeah, thanks for taking the follow-up. So the first one is on census, and it's actually going to follow up to Kasar's question. I think if one looks at the nine-month period, then I take the point that the dilution effects from the logistical ramp-up were quite significant. But if one thing is out quarter three, then apparently it's the first quarter where you're up like 200 basis points year-on-year. So the question that I have, or it's three questions actually, so the first one, Is this logistical ramp-up fully digested by now as we speak? And conversely, it appears really that the ESG business is performing way stronger than potentially expected. So can you provide some color with regard to the trends in the A core and B then ESG business, please?

Yeah, for sure, Sebastian. So first answer is clearly yes, we have digested that effect. Nevertheless, I see approximately 10 million customers of effect we will have we had this 10 million effect in q1 which is from a absolute term still in the figures relatively it phases out as you've seen through q1 h1 now nine m and also q4 as it is clear and ESG Yeah, we bought this company for approximately 14% EBITDA we see currently a figure which is around 15 So the cost synergies have completely realized as we have planned on a pro-rata basis. So these are the two fears.

Okay, that's helpful. And then just finally, again, on the order pipeline and in addition to Ross' question. So I know it's hard to compare you guys with Ramitar, for instance, but they hinted at around 20 billion in quarter four, another 40, 50 billion potentially in 26 And again, I appreciate that apparently there are differences in both the business mix, the regional mix and whatnot. But from the sort of cadence and general sort of dynamics, would the sort of potential rule of thumb, like seeing the doubling or so from the quarter four dynamics, be directionally also the right yardstick for you? Or differently, what are you seeing really from the auto pipeline perspective going into 2016?

Yeah, look, I expect in 2026, especially in the land platforms where we currently talk about these thousands of boxers, pumas, leopard and so on. So from my point of view, there will be a big dynamics in 2026 in the land platforms also in our business. And I think the book to build we currently guide for this year, I see at least also for next year. This is simply due to the fact how the structure is currently working in the German parliament with having now the budget in place 2025 and 2026. So this is my view currently. We have to keep in mind that, of course, every special land system goes then via OEMs. That means there will be a kind of a flow down process between the OEM to receive the contract. But also next year, I see in terms of book-to-bill a figure which will be similar as the figure we have now updated for this year.

Okay, that's very helpful. Thank you so much and see you next week then.

Thank you.

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

Yeah, thank you all for listening today. As always, should you have any further questions, our team is around all day to follow up. And as Christian mentioned, we are very much looking forward to welcoming you at our CMD in Ulm next week. Have a great weekend. Thank you and goodbye.