Hensoldt AG

XETRA:HAG

Earnings Call Analysis

Record Orders and Positive Guidance Lead Hensoldt's Q1 Growth

Hensoldt achieved strong financial performance in Q1 2024, with revenue of EUR 329 million and a record order intake of EUR 665 million, nearly doubling year-over-year. This resulted in an order backlog of EUR 5.9 billion. Adjusted EBITDA rose to EUR 33 million with a margin of 10.3%. The company projects revenue growth to EUR 2.3 billion in 2024 and 10% annual growth in the medium term. Despite increased R&D amortization, Hensoldt maintains a solid financial outlook, driven by expanding international markets and significant defense contracts.

Strong Performance Amid a Rising Order Backlog

In the first quarter of 2024, Hensoldt reported an order intake of EUR 665 million, nearly doubling from the same period last year. This impressive surge was primarily fueled by demand for NMBS air defense systems and additional orders for the TLM 4D radar. Notably, this resulted in a record order backlog of EUR 5.9 billion, providing strong revenue visibility for future quarters. The balanced distribution of incoming orders between Hensoldt's home markets, Germany and Europe, highlights robust market confidence and operational execution.

Revenue Performance and Future Growth Outlook

Hensoldt achieved revenues of EUR 329 million in Q1 2024, aligning well with company expectations despite the strong revenue base from last year. While pass-through revenues saw a decline, there are indications of increased revenue dynamics moving forward, especially with scheduled deliveries of the TRML 4D radars. For the full financial year 2024, Hensoldt anticipates revenue growth to reach approximately EUR 2.3 billion, representing a shift towards a smaller share of pass-through sales compared to prior years.

Financial Health and Margin Improvement Strategies

Hensoldt's adjusted EBITDA rose to EUR 33 million, corresponding to a margin of 10.3%. The core margin, excluding pass-through revenues, improved by 1 percentage point to 11.4%, driven by a favorable product mix and economies of scale. Investors should note the projected adjusted EBITDA margin for 2024 is expected between 18% to 19%, showcasing ongoing operational efficiency improvement alongside initiatives in digitalization and internationalization.

Cash Flow and Net Debt Developments

The cash flow situation showed an adjusted free cash flow of minus EUR 81 million, an improvement driven by strong customer inflows more than offsetting continued investments in growth. Following its acquisition of ESG, net leverage stood at 0.6x, and Hensoldt anticipates an increase to approximately 3x in the first half of the year, with expectations to reduce it back to 2x by year-end. This commitment to leveraging and managing debt positions Hensoldt favorably as it navigates its growth strategy.

Guidance Reaffirmed with Positive Market Indicators

Hensoldt remains on track to meet its full financial targets for 2024, with a book-to-bill ratio projected between 1.1 and 1.2. The company aims to maintain adjusted free cash flow conversion around 50% and confirm a net leverage level of approximately 2x. These expectations align with broader trends in defense spending, especially the structural commitment from Germany and European nations to enhance military budgets and capabilities.

Promising Market Dynamics and Strategic Initiatives

The defense sector is experiencing significant growth prospects, highlighted by increased budgets and procurement initiatives across Europe. Countries like Norway, Poland, and the Baltic states are raising their defense budgets, providing ample opportunity for Hensoldt. With a strategy focused on operational scaling, digital solutions, and internationalization, Hensoldt's enhanced capabilities will likely position the company to capture a sizable share of this growing market.

International Expansion and Key Product Launches

As Hensoldt seeks to expand its international footprint, key markets identified include the U.K., France, and South Africa. The company is strategically positioning itself to leverage its advanced technology in radar and defense systems. With favorable demand for air defense systems and ongoing partnerships for projects like the Quadome, Hensoldt is well-placed to capture significant opportunities in these regions and strategically align with defense modernization initiatives.

Conclusion: A Compelling Investment Opportunity

Hensoldt's strong operational performance, coupled with a robust order backlog and favorable market dynamics, presents a compelling investment opportunity. The company's focus on improving margins, generating cash flow, and strategic international expansion indicates a solid growth trajectory. As defense budgets rise globally, investors may find Hensoldt uniquely positioned to capitalize on these trends and achieve sustainable long-term prosperity.

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Hensoldt AG, 3 Months Results 2024 Analyst Conference Call. I am Myra, the Chorus Call operator. [Operator instructions] And the conference has been recorded. [Operator instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Veronika Endres, Head of Investor Relations. Please go ahead, madam.

[Veronika Zimmermann, executive]

Good afternoon, everybody, and welcome to Hensoldt's 3 months 2024 Results Call. Thank you for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt. And with me are our CEO, Oliver Dorre; and our CFO, Christian Ladurner.Oliver and Christian will guide you through this presentation today, which is, as always, followed by a Q&A session. And with that, I hand over to Oliver.

[Oliver Dorre, executive]

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

[Christian Ladurner, executive]

Thank you very much, Oliver, and a very warm welcome also from my side. I'm happy to provide you now with our financials for the first 3 months of 2024. We again were able to realize a solid top line performance in the first 3 months of this year.Order intake developed excellently with orders summing up to EUR 665 million, hence, almost doubling compared to previous year. As mentioned by Oliver, main drivers were NMBS air defense systems and further orders for the TLM 4D radar.The distribution of incoming orders was again well balanced between our home markets, Germany and Europe. Revenue reached EUR 329 million in Q1, which is absolutely in line with our plan. In addition to the exceptionally strong quarter last year, this was due to this year's milestone pattern and a decrease of pass-through revenue. And let me point out that we will see increased revenue dynamics starting now.This will be driven, for example, about TRML 4D radar, of which will deliver free in the second quarter. With a figure close to EUR 6 billion, our order backlog reached a new record level in our history. This continues to provide us with an excellent visibility on our business.The solid performance of our top line is also reflected in our profitability. Adjusted EBITDA increased to EUR 33 million with an adjusted EBITDA margin of 10.3%. Our core margin, excluding past revenues improved by 1 percentage point to 11.4%. The increase was driven by our product mix and economies of scale, partly offset by investments in our growth and into our product portfolio.Adjusted EBIT summed up to EUR 11 million with an adjusted EBIT margin of 3.2%, respectively, 3.6%, excluding parcel business. This slight decline is driven by increased amortization of capitalized R&D expenses. Cash generation in the first quarter 2024 followed our usual seasonal profile, with an adjusted free cash flow of minus EUR 81 million.The significant improvement compared to last year's period was mainly driven by strong cash inflows from our customers. On the other hand, we continued to constantly invest into our planned growth. And let me share the good news. We have received first prepayments of our German customer in April with more to come. To wrap it up, our bottom line remains strong and develops as planned.Let me now give you an update on our net debt development. Over the past 3 years, we have continuously improved our net leverage. At the end of first quarter 2024, net leverage was at 0.6x. This figure includes the capital increase we conducted to partially finance the acquisition of ESG with net proceeds of EUR 234 million.Excluding the effects from the capital raise, net leverage would be at 1.3x. As you know, we have successfully closed the acquisition of ESG beginning of April, reflecting the funding of the acquisition, we've seen that leverage to increase to approximately 3x in H1, which we then expect to decrease again to around 2x by year-end 2024, as outlined in our guidance.Let me now have a look at our guidance for 2024, including the contribution of ESG is introduced in the last analyst call in April. First and foremost, we are fully on track to meet our full financial targets and confirm our positive guidance for all KPIs.For 2024, we expect the book-to-bill between 1.1 and 1.2x in 2024. Revenue to grow to around EUR 2.3 billion. And please be reminded with a continued stronger growth in core revenue and a smaller share in pass-through sales than in the years before.Adjusted EBITDA margin before pass-through between 80% and 90%. For adjusted free cash flow, we expect cash conversion of around 50%, net leverage at a level of 2x and dividend payout ratio between 30% to 40% of adjusted net income.For 2025, we continue to see orders growing faster than revenue. We expect a low double-digit percentage revenue growth for the whole group with an adjusted EBITDA margin of 18% to 19% before pass-through. For the adjusted free cash flow, we expect around 50% to 60% cash conversion, resulting in a further declining net leverage to around 1.6x.The dividend payout ratio will remain at between 30% to 40% of adjusted net income. We are convinced of the sustainable decade loan growth potential, which lies ahead of Hensoldt, and this is reflected in our medium-term guidance.We expect a continuously high order intake over the next years with orders to grow significantly faster than revenue. As a result, we see an annual revenue growth of 10% on average for the medium term. We expect adjusted EBITDA margin to increase to above 19% before past revenue for the medium term, reflecting further economies of scale as well as the materialization of synergies.Together with strict working capital discipline, we will generate a cash flow conversion of 50% to 60%, that we will be in a position to pay out 30% to 40% of our adjusted net income to our shareholders whilst maintaining a conservative financial profile.Coming to a conclusion, let me mention the following key financial takeaways. Our impressive order intake of EUR 665 million leads to an order backlog at an all-time record level of EUR 5.9 billion. This provides us with an excellent revenue visibility for the years to come.Our efficient project execution supports our excellent profitability and cash flow significantly improved year-on-year due to a successful receivable management. Therefore, we confirm our full year 2024 guidance for all of our KPIs as explained.Our outlook remains promising, and we are strongly positioned for the upcoming growth. As mentioned before, we will see increased dynamics in revenue starting from now on. The production of TLM 4D radars will continue to accelerate, and we will deliver 3 of them in the second quarter. We have now received first prepayments from our German customer in April, and there will be more to come. That underlies again the close and constructive dialogue we have with our German customer.As already mentioned, we are in close exchange regarding the programs and opportunities. This and the large-scale increase of defense budgets globally will generate long-term sustainable growth for Hensoldt.And now, we are happy to take your questions.

[Operator]

[Operator instructions] The first question is from Ross Law from Morgan Stanley.

[Ross Law, analyst]

The first one on orders, clearly very strong in the first quarter book-to-bill 2x. What would you need to see for this to sort of put upward pressure when your full year guide of 1.1 million to 1.2 million? That's the first one.Second, on margins, it would be great to get your thoughts around margin expectations in each division for the full year. And then lastly, on free cash flow, you mentioned there was sort of moving parts between down payments but also higher investments in working capital. Could you maybe just give us some details around that?And lastly, in addition to that question on prepayments from Germany, you mentioned you the first of these in April. Could you just give us some idea of how significant these are? Is it a potential contract value? What's the setup here?

[Christian Ladurner, executive]

Hi, Ross, thank you for your questions. They're all financially related. This is Christian while I take over. So, first of all, of course, we have order intake in our industry, sometimes bumpy. So, I do not see any change now for the full year guidance on the 1.1 to 1.2x. So, this is confirmed, but we see a good development here as mentioned.Further on, in terms of margins, we have guided for 18% to 19% adjusted EBITDA before pass-through and with pass-through revenues coming down from around EUR 190 million to EUR 130 million to EUR 140 million. We see also that our EBITDA margin will also increase them by 1 percentage point in contrast to the last year.And your last question regarding free cash flow. It was a significant down payment in April. It was related to TRML 4D radars. And it helps us, of course, to continuously invest to our working capital. We have to prepare ourselves, especially in the optronics segment to be able to deliver on time.So this, of course, helps us in the cash conversion. I do still see the guided conversion on free cash flow. But nevertheless, it gives us dynamics, and it gives us also dynamics for the complete supply chain that German defense industry is able to ramp up and to fulfill the promises.

[Operator]

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

[Carlos Peris, analyst]

I have one. Could you please comment a bit on what drove the weak growth in optronics in Q1? And how should we think about optronic growth in the remaining 3 quarters of the year, please?

[Christian Ladurner, executive]

Hi, Carlos, nice to hear you. Yes, I think we've commented the last 1 to 2 quarters that we're currently really in the investing stage of this business, first of all, production ramp-up, but also digitalization. I do not expect a significant growth in the first half year, we should now be focused on the second half year, but we see progress in this stage.

[Oliver Dorre, executive]

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

[Operator]

The next question is from Simon Keller from HAIB.

[Simon Keller, analyst]

First, regarding order intake on the TRML 4D. And remember that previously, you mentioned orders of EUR 350 million or more expected for this year. Do you still feel comfortable with this EUR 350 million number? Or do you think some noticeably larger amount could be possible? I'm asking because you did well in Q1 and another EUR 100 million contract was signed just a few days ago.Then my second question is more general, also on order intake, though. And that is, are there any orders that could come this year beyond current expectations that are worth keeping an eye on?Then my third question is on the main ground combat system. There was the news recently between France and Germany that they agreed on how to allocate tasks. How is Hensoldt positioned? And which pillars do you expect to serve? And what's the potential order or sales volume and over what time horizon is that viable?And then lastly, what happened in interest income? I saw that there was a noticeable spike.

[Christian Ladurner, executive]

Hello, Simon. First of all, thank you for taking the coverage on Hensoldt, good choice. And regarding your first question, order intake. NBS is around 300 and TLM 4D was around 100. So, absolutely in line but we have now said in the press release in Q1, it's totally in our expectations also to address question 2.I do not see anything currently which goes beyond. But as Oliver has stated before in this answer, there might be some dynamics in the second half year. We should be currently a little bit cautious in this regard. So, I expect the guidance fully valid for this year and see what dynamics we will see in the second half year.

[Oliver Dorre, executive]

Yes, with that taking over, and I think also, again, maybe as a complement to Christian's answer, it's very clear at that early stage of the year. We stick to the guidance despite this very positive trend. And with reference to my presentation, the key point will really be the budget discussion in June, yes.So, currently, we're digesting the EUR 100 billion extraordinary budget. So, I think that gives really substance to the guidance we have. And now it's big discussion where very clearly, Germany is committed to go further, either on additional budgets or setting out the debt break, all of that. And I think then we will see how the dynamics in a clear articulated demand from the armed forces, how these dynamics will translate into potential orders for the remainder of the year and next year.On MGCS, very clearly, I think it's more than positive that finally, after more or less 2 years of stalling in this most important European endeavor MGCS, we have a concrete announcement. So, we are ramping back on the intensive discussions we had with the OEMs already. Fortunately, we are well positioned also through national R&D activity that while the European discussion or the bilateral discussions with France had stalled, Germany continued on a path for a new tank and especially new electronics equipment for the tanks, and that was driven by the land system programs I had mentioned before.So, your question, Hensoldt, is well positioned, of course, on the sensors pillar, but also now with our additional competencies organically but also with ESG. We look at the C4I pillar as well. So, it is very clearly that Thales now as a top company in the setting with KNDS and Rheinmetall and also France will have the lead on these pillars. But I think considering our position as a national champion, we are very well positioned.So, at that stage, I would not give exact figures on sales potential, but it's definitely a significant potential we're addressing here.

[Christian Ladurner, executive]

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

[Operator]

Next question is from Christophe Menard from Deutsche Bank.

[Christophe Menard, analyst]

I have 3. The first one, I wanted to come back on the optronic sales in Q1. You mentioned in the report that this is linked to South Africa. So, my question is, what happened in South Africa? Is it the transition to digitalization? Or is it related to one specific program?And related to this, in the geographical breakdown, there is no apparent sign that sales in Africa are down. Are you reporting South Africa in the Middle East? Or just for me out of interest. So, that was the first question.The second question is, again, in the report, you mentioned the European Skyshield. There are 21 states now interested in this. Can you help us understand how it actually scale up the demand for the TRML 4D? I mean the more partner you have, the more state you have, the more radar you will be selling and over what time period?And the last question is on the internationalization. You mentioned U.K., France and probably another one in South Africa. The question is, how do you intend to position yourself on those markets? You have competitors, at least in the U.K. and France. So, what niches are you targeting in those markets?

[Oliver Dorre, executive]

Okay. Maybe I will combine question 1 and 3 and elaborate a little bit on the regional countries. So, taking position as a new CEO, I have visited the 3 countries already 2 times. So, personally, my first summary is, we have very strong assets here with the countries, and that is related to human capital. It is related to products, but as well as to the industrial platform.So, as I mentioned, we are operationally scaling. So, for sure, part of that is, as I said before, not only looking at international customer, but how as a group can we become more international, and that is part of actually an initiative we have launched to look at these 3 regional countries.So, I take them part by part. So, U.K., very clear, the focus is on navigation systems. The focus is on smaller radar, so to say, coming from the navigation systems and the focus is also on combining those solutions together. And as you might know, this is the former Kelvin news footprint where we have streamlined the portfolio, also the footprint.And when I mentioned the Quadome order before for the U.K. ships support ships, that is not only the Quadome radar. It is also a kind of navigation suite, a bridge system that we will provide from U.K. and U.K. will act as a prime vis-a-vis also the British customer on this one.So clearly, here for U.K., which is a smaller entity, we have a clear way forward. France, I think, a good spectrum. So, with quite a decent also very stable across the year service business with a French customer, also at the heart of the DGA, the French military services there. France is really helping us, and that's where I put a lot of effort to build and also already on a strong fundament into mission system.So, we have a core C2 system called LYNCEA and also COSIA for the naval and also air system, which we have delivered to the French customer also to other customers. And clearly, if we embed now with our radars, with our sensors, also electrooptical sensors, we have a clear strategy to deliver combined solutions, mission systems to smaller ships, support ships, OPVs, patrol ships and some reference that we have already in place makes us confident that from here, we can also develop the French footprint.And one element will be part of that. You mentioned in one of the questions before MGCS. Of course, it's also an opportunity because these German French programs are leveraging also on geo return that as hands told, we can scale, and I had a couple of discussions with the French administration already, our footprint in line with those programs running.South Africa, and that is trying to combine the question here and also your first question. South Africa has also a diverse portfolio. So, I think here, we have fully integrated the electromagnetic warfare, where we are very strong with our business. We see orders, and we also see a support from South Africa into our business, which is running in Europe.And, I think also with a real growing in demand as Ukraine definitely. Okay. So, I try to pick up. So, coming back to South Africa, the diversity of the business, electromagnetic warfare. So, this is a business which is really strong, fully integrated.We have the radar business, which is ramping up and now with the launching program of the Quadome in the U.K., I see a strong perspective also in that solution framework that I've just outlined before, where we connect France, Germany, U.K. and South Africa, that this will be a key potential for the future.For the optronics part, we are switching from one generation of Gymble to the next generation. And that is a topic which we are currently discussing with our teams, also to be more sustainable in the sense of which OEMs do we work with because purely this business has to run via OEM platform provider, be it UAV, be it helicopters.We see strong demand, as I had outlined before, also in regions globally, India and so on. And that is something what we're settling revamping at the moment with great confidence about the future, but this is also impacting the very current business, but this is tackled with a very clear action plan. Sorry. ESI, so, I think in one of the previous calls, I had outlined a potential that we see at the moment of roughly EUR 2 billion.So, I think ESI is just at the starting point. So we have 3 customers besides Germany at the moment, it's Estonia, Slovenia and Latvia. So, with regards to those programs ramping up, and definitely, I see that with TML 4D in combination with the deal missile that this is one of the key elements. Of course, we are currently also looking of how can we, in a more integrated approach with other radars, with other misses, position our radar systems.So, as I also had outlined that my approach as a new CEO is going more into partnerships. So, I'm having many discussions with my peers in the market to be even more sustainable beyond only one channel going to the market.What we also see, and that is currently developing part of ESI, which is a 3 layered approach. So, in the upper layer, Germany has chosen to go for the Aero system, medium layer, we're going with our TML 4D. But there will also be a low layer in the sense of short-range air defense where we have also with the Skyranger in cooperation with Rheinmetall.Hensoldt has a first contract for our Spexer Expand radar. So that will, of course, also be part of the SE initiative, providing additional potential. And the third element is that, also in this context, you are threatened by radiation missiles, where we are trying to promote as a complementary approach, our passive radar, which we have already out with some customers, good experience on operational concepts, and that is where I would assume, and I think I've outlined that with a strong potential that this will progressively build a pipeline as we go further in the year 2024.

[Operator]

The next question is from Henrik Stachmidt from Stifel.

[Henrik Stachmidt, analyst]

This question is for Christian. Part of your plan to increase efficiency is OneSAPnow. In Q1, we have seen OneSAPnow related to special item of EUR 5 million. We've seen that also in the past before. My question is, can you tell us what run rate cost savings do you expect related to the implementation of S/4HANA?

[Christian Ladurner, executive]

Hi, Henrik, thank you much for your question. Of course, we have from a business case, you should assume that the run rate is in a similar amount as they invest we are taking. So, there will be on a cash flow basis a saving. But I also have to say and to admit that these efficiency coming beyond the planning horizon.That means when SAP S/4HANA is fully implemented 2028 onwards, then we will see the benefits. But this will be on a run rate, which is close to the investments.

[Operator]

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

[Veronika Zimmermann, executive]

Yes. Thank you all for listening today. And as always, should you have any further questions, the IR team is happy to follow up via e-mail or telephone. With that, have a great day. Thank you, and goodbye.

[Operator]

Ladies and gentlemen, the conferences are over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.