Hensoldt AG

XETRA:HAG

Earnings Call Transcript 2023-Q1

[Veronika Zimmermann, executive]

Good afternoon, everybody, and welcome to HENSOLDT's 3 Months 2023 Results Call. Thank you all for joining us today. I'm Veronika Endres, Head of Investor Relations at HENSOLDT. And with me are our CEO, Thomas Muller; and our CFO, Christian Ladurner. Thomas and Christian will guide you through this presentation today, which is followed, as always, by a Q&A session. And with that, I hand over to you, Thomas.

[Thomas Muller, executive]

Yes. Thank you very much, Veronika, and good afternoon, everyone. Thanks for joining our earnings call today, in which we would like to present our, once again, strong results for the first 3 months in 2023. Let me start by giving you a brief update on strategic topics and key business highlights. Christian will then guide you through our strong financial performance of the first quarter. And as always, following our presentation, we are happy to answer your questions.

Now to our business update. First, let us have a look at a few strategic topics. We see a significant dynamic in the German MOD, where our new Defense Minister Boris Pistorius has initiated a series of structural changes. We welcome his initiative to accelerate procurement programs and focus on operational capabilities. We expect the German Parliament to switch into a higher gear with 70 to 80 defense procurement approval scheduled for this year. And just now, in April and May, they started with the approval processes.

While the decision on increasing the regular given budget is still ongoing, the government has increased the multiple year budget for direct support of Ukraine and the backfilling of equipment that was given to them by EUR 12 billion to EUR 15 billion. This will help to create further opportunities, especially for our Air Defense CML for the radar, as well as the self-protection systems. And by the way, let us not forget that Germany is the second biggest donor of equipment to Ukraine. But Germany is obviously very important for us. We certainly do not forget what is going on in Europe, NATO and the rest of the world.

In Finland, becoming a member of the alliance recently, we see increasing discussion on the spending target 2%, and the NATO Summit in July will give us more clarity on this topic.

Finally, it is not secret for some weeks now that we have appointed my successor, and that's Oliver Dörre, whom I very trust, will take over as the CEO of HENSOLDT by 1st of April 2024. Until then, I'm happy to continue to devote all my energy for our company, its people and obviously getting to what we promised our KPIs. Oliver Dörre will join us in January 2024, and I will ensure a smooth handover to my successor, in order to secure continuity of our entire business. I'm very proud, and that is right to have helped wide the unique success and growth story of HENSOLDT over the past 8 years. And as I said, we'll do it for the next year.

And although it is quite too early for goodbye, I would also like you -- personally, I think to like you personally, dear analysts, very much for your trust and confidence. Now more back to the business in detail.

Right now, all of you will know this site since long it very, very well. And we like to show it for an important reason. Despite the discussions on scheduling of individual projects, the overall outlook for us at HENSOLDT regarding the German programs in the short, medium term is very solid, and not only showed a medium term, as we described, for example, for FCAS also for the next decade. Yes, there are the usual timing shifts with some programs being accelerated, while others being a little bit shifted. We have highlighted the programs with positive dynamic for HENSOLDT in yellow.

HENSOLDT is well positioned for a significant number of projects that will drive our business significantly for the next 5 years and sooner. And to be a little bit more concrete and precise, we expect the medium to high single-digit billion contribution from Germany to our order intake in the coming years. And you see in our figures that this is materializing more and more, as we said. I will go a little bit deeper on our contributions to procurement programs of the German Army in the next slide.

Our company is very well positioned to serve all forces and categories of the German Army. The German Army is in the process of restructuring its forces into 3 categories: a light one, a medium one and a heavy one. The heavy forces will use track [indiscernible], and we offer a significant number of existing and new equipment both for tanks and infantry fighting vehicles. This ranges from vehicle optronics to self-protection systems like our mass and our revolutionary vision systems, see-through armored system, as you know, SETAS.

The medium forces will be equipped with wheeled vehicles to be road mobile, and a number of procurement projects are in the pipeline. A significant one is the so-called Puma Boxer Pubo, which stands for Boxer-wheeled vehicle chassis combined with the unmanned medium caliber turn of the Puma. That is equipped with our optronics. We are also offering self-protection and vision systems for this category.

Our sites and scopes as well as our fire control systems for bazookas are already introduced in the light forces of the German Army as part of the infantry men of the future [ ID set ]. And we expect further business in this area as well.

Now looking for an update on top orders for 2023. And before I hand over to Christian, let me quickly update your major orders for 2023. We have booked already orders for Puma sites, optronics for new orders of the Leopard 2 by Norway and Sweden as well as 2 TRML-4D for the Ukraine. In the very short term, and this means pace, we expect orders for another 6 TRML-4D radars for Ukraine, which will make them the leading operator of this highly advanced medium-range air defense radar in the world.

And you may have heard what the mayor of Kyiv said yesterday, that 100% of the incoming drones and missile has been shut down mainly by our system, which we are delivering together with steel. The same applies to an order for self-protection systems, where we are equipping Ukrainian helicopters, which will help to protect the lives of their crews in dangerous missions. And I want to repeat and remember that we have censored are one of the world market leaders in helicopter self-defensive systems.

In the coming months, we expect planned orders in Eurofighter Radar businesses, TRML-4Ds, especially for the German Air Defense as support the shuffling as well as safe protection systems for the Puma batch 2 and optronics for the German Leopard tech.

With this promising outlook, I hand over to Christian for a look on our strong financials in the first quarter.

[Christian Ladurner, executive]

Thank you very much, Thomas. I'm happy to provide you now with our financials for the first 3 months of the year 2023.

Before I go into detail, I would like to comment on some statements made by LEONARDO on HENSOLDT during the earnings call last week. Other than implied in the LEONARDO call, our start into the year 2023 was anything else, but soft. We, the HENSOLDT management team, are very satisfied with the company's performance in the first 3 months of 2023. We believe there was a misunderstanding as HENSOLDT's inclusion in LEONARDO's financial statements as a strategic investment in equity has been impacted by 2 technical effects.

Firstly, HENSOLDT's figures included in LEONARDO's results are not comparable year-over-year due to a change in accounting, switching from reporting in arrears to reporting on an equal period basis. This is a particular impact on Q1 2023 of LEONARDO because as you're well aware, our business profile is heavily weighted to the second half of the year.

Secondly, the figures too, and also will in future periods, include IFRS accounting effects, notably PPA amortization, which exclusively relate to LEONARDO's financial reporting and hence, will not solely reflect the operational performance of HENSOLDT.

To make it clear, we again were able to realize an excellent development in our top line and also bottom line in the first quarter of this year. Our order intake summed up to around EUR 350 million, with an excellent performance of the optronics business, where we were able to secure multiple orders for the Puma and the Leopard tank.

As a reminder, in the first quarter of 2022, we received the order for the C3 long-term service contract for Eurofighter, in order to equip the free-gate F126 with our TRS-4D radars, with a total volume of more than EUR 400 million. Our sales increased by 18% to EUR 338 million with double-digit growth rates in both segments.

Main drivers in the sensors segment were, of course, the key programs, Eurofighter Mk1 and PEGASUS, which developed as planned.

In the optronics segment, the increase in revenue was mainly driven by the South African entity, which is now benefiting from the vestments in capacity and the expansions made in recent years. All this again is reflected in a very strong order backlog.

At the end of the first 3 months of 2023, our order backlog summed up to EUR 5.4 billion. This covers almost 3x of our revenue for 2023 and therefore, continues to provide us with an excellent revenue visibility. We did not only grow on our top line, we also delivered on profitability.

Adjusted EBITDA increased to EUR 30 million, with an adjusted EBITDA margin before pass-through of 10.3%, respectively, 9% including pass-through business. This is an increase of more than 3 percentage points compared to last year's margin.

Adjusted EBIT came in at EUR 30 million with an adjusted EBIT margin before pass-through of 4.4%, respectively, 3.8%, including pass-through business, also an increase of more than 3 percentage points compared to Q1 2022. The significant increase was mainly driven by higher volumes, in addition, marginal temporary supported by a slower increase in costs compared to revenue. This development underlines our focus on a strict cost and risk management to allow profitable growth.

The adjusted pretax and levered free cash flow amounted to minus EUR 126 million. As you know, the first quarter of our financial year is characterized by investments in working capital to prepare for the planned business volume in the following quarters. Additionally, that effect is reinforced this year by pre-country costs to secure the increase of our production for TRML-4D and Spexer Radars as well as for the optronics for combat and reconnaissance vehicles.

As you can see, we now invest and industrialize key products, anticipating the increasing demand in these areas. So let me point out, our overall bottom line develops as planned.

Let's talk about our guidance for the full year 2023, as well as our midterm outlook. First and foremost, we are fully on track to meet our full year targets and confirm our positive guidance for all KPIs. For 2023, we expect the book-to-bill to be 1.1x and 1.2x; revenue to grow between 7% to 10%; and more importantly, with a stronger growth in core revenue and a smaller share in pass-through sales than in the years before, resulting in improved quality of revenue; An adjusted EBITDA margin of around 19% before pass-through revenue. And for the adjusted pretax unlevered free cash flow, we expect around 70% in cash conversion, resulting in a further decline in net leverage to lower than 1x. And finally, a dividend payout ratio between 30% and 40% of adjusted net income.

To sum it up, in 2023, we continue to expect the budget increases, especially from Germany to result in a good growth in order intake, as well as a higher quality growth due to a stronger increase in core revenue.

Coming to a conclusion, let me mention the following key financial takeaways. Our impressive order backlog of EUR 5.4 billion provides us with great revenue visibility for the years to come. Our optronics segment is growing and is showing a respectable top line. Our efficient project execution supports our excellent profitability. And therefore, we confirm our full year 2023 guidance for all of our KPIs, as explained.

Our outlook remains promising, and we are strongly positioned for the upcoming growth. The procurement plan of the German government is accelerating, and we received first orders from the special funds. We expect further orders from the German government in the next couple of weeks to support the Ukraine with our equipment. As mentioned, we are in close exchange with the German customer regarding the programs and opportunities from the special fund. And this will generate long-term sustainable growth, which will be somewhat backloaded. And now, we are happy to take your questions.

[Operator]

Our first question today comes from [ Carlos EvansO ] from Bank of America.

[Unknown Analyst]

I've got through three. The first one, there was a write as article in which you commented you could receive about EUR 2 billion of orders from the German expansion defense budget in 2023. I just wonder, if these potential orders are included in your 2023 guidance. Second one, you plan to double revenues by 2027, and this implies a substantial inorganic growth. Could you update us on what should we expect in terms of M&A? And the last one, in terms of margins, your EBIT margin came significantly higher than we expected. You mentioned top line growth and better gross margins, but would really appreciate, if you could provide some additional color.

[Christian Ladurner, executive]

Yes. Thank you, Carlos, for the question. Could you please repeat the first question? I didn't really catch it.

[Unknown Analyst]

Yes, sure. The first question, there was a write as article in which you commented that you could receive about EUR 2 billion of orders from the German special defense budget in 2023. And I just wonder, if these potential orders are already included in your 2023 guidance?

[Christian Ladurner, executive]

Yes. So I have to correct this. This is not a true understanding. So we've always stated that in the upcoming years from now, we tend to receive mid- to high single-digit billion amount of orders. But this has to be divided until the next years, until 2027, I would say. So it's not correct that we expect in 2023, EUR 2 billion of orders just from the German government. I personally expected, will be a high EUR 3 million digit number this year, out of Germany for the German key campaigns. And I think this is a solid number. Thomas?

[Thomas Muller, executive]

On M&A, you remember, Carlos, what we said during our recent analyst calls and our road shows, we will double our revenues in the next 5 years as we did in the past. And, if you take our guided growth line, we need also to go ahead with acquisition targets. And this is exactly what we do in the midterm. And to -- I think, to be extremely clear what we, as a company, follow as a wholly way forward, if we solely invest in M&A targets if they are accretive for our company and what our company means for our shareholders.

[Christian Ladurner, executive]

Yes, taking the last question, so the upside on EBIT and EBITDA. Of course, this is a very development we expected. I can only repeat, we have a big focus on growing profitably. Nevertheless, we have to say it's not the first quarter in our books. There are still 3 quarters to come. And with the last quarter, of course, notably the highest one. And therefore, I still feel very comfortable with our guidance we gave for this year at 19%, approximately. I expect some costs also for growth coming in the next 1 to 2 quarters. So we'll see. But in general, our plan to grow profitable is a very good in shape.

[Operator]

The next question comes from Christian Cohrs from Warburg Research.

[Christian Cohrs, analyst]

I have three actually. First, coming back to the M&A issue. Now with the upcoming top management change as of April next year, does this have any impact on the M&A going forward? Is there -- should we expect a break? Or do you pursue with acquisitions also in 2023?

Second question relates to optronics. Despite a very encouraging top line, the EBITDA contribution was negative. Can you maybe shed some light on the background, and what to expect in the quarters to come? And lastly, your financial result was far more negative than in the preceding quarters. Looking at the cash flow, the interest expense seemed more normal. So I assume that there are some special or valuation effects. Can you also maybe shed some light and some background of what happened in Q1 in that regard?

[Thomas Muller, executive]

So Christian, thank you very much for your question. I'm so happy to take the first part of the question, which means do we have a break of logic? Or do we continue very clearly with what we have told you? So for sure, you know that me as a head -- of CEO, as a member of the Board, I'm not the one who is finally deciding on the successor. This is a Supervisory Board. But what I can say that for sure, I have been included in, let's say, at least the fourth list. And one of the key elements which has been -- or one of the key questions, which has been subject to supervisory's evaluation of who will be the best to follow me, certainly has been to what extent are you following, what has been already done in the last 5 to 7 years in the future? And I can tell you, and I can promise to you, that one of the clear selection points for Oliver Dörre has been, he fully supports what has been done in the past strategically and what will be in the future.

So what can I say is, yes, we will have continuity. And please remember that it's -- let's say, it's an ongoing positive change on the old management, which we did and we started 2 years ago with Celia Pelaz, and with our CFO Christian Ladurner, and with our HR Director. And now I am happy to pass next year. Next year, we still have a year in front of us, next year to Oliver Dörre and to ensure that there is a continuity.

[Christian Ladurner, executive]

Yes. Second question goes with me, Christian, happy to answer this question. So for the optronics, there are some costs, and we already commented that the optronics business is more short cycle. That means we see also, now in this quarter, some of the pre-investment costs. We saw it quite similar the last 1 to 2 years in South Africa, where we now benefit from. And I expect that margin comes up by a half year and better quarters to come to a similar and finally, a better margin than last year of the optronics segment.

Last question, your financial result question. What is the effect? So maybe you know that last year, we did an amended extend of our long-term facilities. And in October last year, we decided on top of that to hedge the EURIBOR. That means our payment of the interest rates consists of a margin ratchet plus the 3 months EURIBOR. And last year, we decided to go for a swap, to go for hedging topic in order to secure our very low interest rates. And I think when you now look at the last decisions of the European Central Bank, our strategy was clear. Nevertheless, this cost has a little bit of millions in the financial results. But you are absolutely wrong, Christian. In terms of the cash flow, you will see that it's quite limited in terms of interest similar to last year. I hope this answers your question.

[Christian Cohrs, analyst]

Yes, it does. Actually, that's what I meant. I mean, in the cash flow statement, the amount of interest was pretty low compared to the P&L figure. And I think, you've answered it correctly, and I think I understood it right.

[Operator]

The next question comes from Christophe Menard from Deutsche Bank.

[Christophe Menard, analyst]

I had three, please. The first one on the -- still on optronics, but more on the sales. You may have said it, but I may not have understood it. You mentioned in your presentation that some of the sales included Industrial Commercial Solutions. Can you expand a little bit on this?

The second question is on free cash flow. Quite obviously, it's going to be -- there is a phasing during the year. So which phasing would you expect this year? Again, heavily back-end loaded, I would guess, but kind of if you could give us an idea.

And last question, Eurofighter Radar orders, any chances that you get more of this coming up in terms of upgrades from other markets?

[Christian Ladurner, executive]

Yes, Christophe, many thanks for your questions. Happy to hear you. So first of all, the optronics industrial business relates to final focused methodology. It's really highest tech where we deliver to a similar semiconductor business, our solutions, and help them to ramp up. So this is the business for industrial in optronics.

Second question, free cash flow, you should expect this year a similar pattern, as we did last year. Of course, you also have to take into account that the business is growing. That means the so-called pass-through but it's a little bit lower. And -- but in total, the pattern will be similar than the last years.

[Thomas Muller, executive]

Okay. And to Eurofighter Radar, well, we still see good opportunities for the Eurofighter in itself. And for sure, one of the driving selling forces for the Eurofighter are the new radars, especially the German Mk1 radar, which we are, in Germany, developing together with Indra in Spain. And on the other side, the Mk2 radar, where we also have our stake in the Euroradar Consortium. So yes, we are expecting future Eurofighter Radars to come in the next couple of years. Near term, we are especially expecting some additional upgrade contracts and uplift contracts for the existing development contracts, Mk1, which we are very happy to look forward to it.

[Christophe Menard, analyst]

May I ask the question about Tornado replacements in Germany. I mean it's a topic that seemingly has died down. I mean it's -- is there any chances that -- or have you seen any prospect improving for an extra Eurofighter order? Or should we wait for the current batch, so to say, to be delivered until we see a next decision?

[Christian Ladurner, executive]

Christophe, thanks a lot for this question. I have to say it's a little bit glass for our viewing currently. There are a couple of interests, which are going around in Germany between the stakeholders and also in Europe for sure and with the United States. And what I can cite is out of the Chancellery and the Ministry of Defense, HENSOLDT will play whatever the decision will be a significant role in.

[Thomas Muller, executive]

But frankly speaking, I'm not expecting big orders to come in this year, maybe more next year.

[Operator]

[Operator Instructions] And our next question comes from Aymeric Poulain from Kepler.

[Aymeric Poulain, analyst]

I've got four questions, if I may. The two first one are effective clarification. Did you say that the order intake for this year, you expect it to be more back-end weighted to get to the 1.1x to 1.2x book-to-bill ratio? That's the first question. The pass-through sales, you gave the margin, so we can reconcile it. But obviously, these are low margin, so there is a bit of a range. And you also say that the pass-through sales was in line with last year. So could you give us the exact number for pass-through sales in Q1, please?

And the fourth question are more in the kind of strategic kind of discussion box. You started the financial review with a misunderstanding on the way LEONARDO reports the figure in the account. But, I also noted that there were some differences of view regarding the corporation, the strategic cooperation of LEONARDO, especially regarding 2 deals and transfer of assets from one company to the other. Could you give us a bit more update on the relationship with LEONARDO? What type of synergy you're investigating? And again, in terms of the harmonization of the communication, how is this working in practice?

Perhaps, last one is on the geopolitical situation and the type of market opportunities that you see. You mentioned Ukraine, obviously, as a major customer for your radar. Are there other markets that you see? I think, you flagged about Sweden and Finland entering NATO, but other markets you see that could be really a game changer for HENSOLDT in the coming years apart from Germany, obviously.

[Thomas Muller, executive]

Look, I'm happy to answer your question. So first and foremost, we have based -- and we all know this very clearly, based on the antitrust guidelines stock-listed companies as well as our guidelines, we have as a stock-listed company, we are cooperating very well with LEONARDO. And we have some cooperation programs, which show and start this year already to show synergies.

For example, in the Eurofighter, you know that we are linked in the Euroradar. We are working together in the Euroradar Consortium for the Mk1, Mk2. The corporation is really on a very good status. And I have to say, as already Alessandro Profumo said, the quote which has been given in the media has been taken out of a context. Because I have been very bullish on -- that we want to double our revenues, that we will also look for targets to acquire if they are accretive, as we said initially. And this led to an, unfortunately, misunderstanding because they mix everything up in order to have had [indiscernible].

And then for sure, they ask me what do you think about your cooperation with LEONARDO? Well, it's a very good cooperation combining our efforts in Germany, in Italy and in the U.K. And this led then to this big misunderstanding as it was cited that I want to take over LEONARDO Electronics, which for sure is nonsense.

Now what we always said that we still want to be in a very, very strong position in future possible potential consolidations in Europe. And yes, if you are working good together with well together with LEONARDO, why not thinking that this could be a way forward. But again, this is all vision. There is no specific, no clear discussion on this currently. It's all thinking about what could be next step. And you never know what's happening in Europe.

We have the players [indiscernible]. We have Indra. We have Saab, we have other Germans. We have U.K. players. And I think this is what we have to take into account if you look forward. The only thing that I'm clear about, I don't want not myself. And this is -- you remember the question we had prior to your question. I don't want to be swallowed and even -- and this is clear, my successor, Oliver Dörre, will not be swallowed. So HENSOLDT will stay as an actor in the European field. And whatever happens, only if it's accretive for our company, if it brings our company forward, and therefore is beneficial for our shareholders. I hope it answers your question.

[Aymeric Poulain, analyst]

Yes, on this point, yes, absolutely.

[Christian Ladurner, executive]

Okay. Aymeric, then I proceed. So there was the question of pass-through revenues and our Q1 figure. It's around EUR 45 million, and it's quite similar to last year's Q1. Going forward, we said that the amount we had last year will be significantly lower. So we will be seeing these effects in the upcoming quarter, but this is the exact figure for Q1.

And the last figure in order intake, yes. Also this year, the order intake will be a little bit back-end loaded. So the majority of orders, we expect in the second half of the year. Nevertheless, we will see some dynamics in H1 of this year out of the German Defense.

[Operator]

There are no further questions at this time. And I hand back to Veronika Endres for closing comments.

[Veronika Zimmermann, executive]

Yes. With that, thank you all for listening. And as always, should you have any further questions, the IR team is around all day to follow up. With that, have a great day. Thank you, and goodbye.