Hensoldt AG

XETRA:HAG

Earnings Call Transcript 2022-Q2

[Veronika Endres, Head, Investor Relations]

Good afternoon everybody. I warmly welcome you to Hensoldt's Results Call for the First Half of 2022. Thank you for joining us today. My name is Veronika Endres and I'm Head of Investor Relations at Hensoldt. With me today are our CEO, Thomas Muller and our CFO, Christian Ladurner who will guide you through the presentation today. And as always this presentation will be concluded then by a Q&A session.

And with that I hand over to you Thomas.

[Thomas Muller, Chief Executive Officer]

Yes. Thank you very much Veronika. Good afternoon everyone. It's great to see you joining today's earnings call in which we would like to present our results for the first six months of 2022 to you. It's my great pleasure to deliver this presentation together with our new CFO, Christian Ladurner who has taken over this position since 1st July.

Christian is going to guide you through our once again strong financial performance. Before that, I would like to focus on the effects and consequences of the war in Ukraine on defense spending by NATO, Europe, and particularly, Germany. Following our presentation we are happy to answer your questions.

Dear ladies and gentlemen, Russia's belligerent actions are once again bringing NATO countries much closer together and are renewing the alliance's mission. This is underscored not only by the membership applications of Sweden and Finland, but also by the latest NATO strategic concept. It calls for an increase of high-readiness forces from 40,000 to over 300,000 troops with Germany committing to a full army division with 15,000 troops as well as at 64 airplanes and 20 ships.

NATO puts high emphasis on an increase in air and missile defense capabilities and the secure use of space and cyberspace. As a consequence, the alliance calls for further increases of national defense spending.

NATO has launched a number of high-visibility projects like the next-generation rotorcraft capability for a modular ground-based air defense system, which will create business opportunities for our company.

For our deep involvement in NATO bodies like the industrial advisory group and the scientific and technology organization, Hensoldt is well aware of current and future development in NATO.

With our leading technologies and sensor solutions we will be able to confirm our positions as a leading partner for important defense projects in the NATO [indiscernible] for years to come.

Dear ladies and gentlemen, we in Europe, are confronted with a completely new and complex security situation that has numerous implications for all aspects of our lives from politics over economics to the whole society.

Russia's war against Ukraine marks a turning point in European and German security policy within a very short time, especially in Germany. Germany and several European peers have announced to strengthen their armed forces and to invest in new or additional equipment which will translate into a material expansion of Hensoldt's addressable market for the years to come.

As you remember three fields of action have been defined by the German government. And those of you who attended our previous earnings call may remember this slide. In the meantime, the €100 billion special fund as well as the increase in the German defense budget to a sustainable €50 billion per year has cleared political and legislative hurdles and has been enacted.

As the first result, we have a more concrete outlook on the fields of action, one and two; immediate support for Ukraine and short-term support to increase combat readiness of the Bundeswehr.

In May, we assessed the business potential on these two areas at a low double-digit figure. Since then additional prospects have materialized and we expect orders in the higher double-digit million euro range.

The third field of action has a much higher impact on our business, and we see a very broad spectrum of opportunities here.

Many programs that could not be pursued or were delayed in the past due to budget constraints have now been accelerated to secure the medium and long-term operational readiness of our German key customer and the German armed forces specifically. This results in a wide range of order potential for our company Hensoldt, as a sensor solution provider and supplier of niche national key technologies. And I want to remind you that the German government two years ago in its strategic paper specifically, defined Hensoldt as a key strategic player in this field, and we at Hensoldt are able to contribute to a large scale of future major projects for the German armed forces.

Let me give you a few examples. This a dense slide, but it gives you an idea how many prospects we are looking for. We expect significant order intakes from the €100 billion special fund, primarily in the years 2023, 2024 and perhaps 2025. Let me give you just a few examples. In the air domain, we are well positioned to provide an [indiscernible] for the Eurofighter, as well as avionics and self-protection for future helicopter programs. We can supply radars, both active and passive for high-performance air defense, thus creating an iron dome based on our own German technology.

In the land domain, we can supply the German Army with night vision goggles at short notice and equip the whole range of additional and new armed vehicles with our sensor technology. The naval domain is a traditionally strong area for us. Hensoldt will continue to leverage the leading market position with radars for additional F126 multipurpose combat ships and the third batch of K130 corvettes, as well as our revolutionary digital optronic mast systems for additional 212 class submarines.

And we at Hensoldt are also very well positioned in the more long-term programs. These include the major European programs such as future combat air system and major ground combat system, as well as our contribution to the long-term electronic warfare and self-protection capabilities of the Eurofighter. The sensor fusion as part of the digitalization of the army and the new F127 air frigates are on top, a very good opportunity.

In total, our order pipeline creates a solid basis for sustainable growth at Hensoldt in the coming years. However, since most of those projects are planned to start in 2023 and 2024, we are not yet able to quantify reliably, the concrete impact of our business today.

Dear ladies and gentlemen, let me conclude with a swift update on our cooperation with Leonardo. In recent months, the working groups of both companies have identified four specific areas, radar and self-protection systems for Eurofighter, where we are traditionally well aligned; future naval combat systems as for the upcoming German 127 frigates or the Italian DDX; sensors and electronics for land-based combat systems; as well as advanced air defense systems capable of ballistic missile defense including hypersonics.

We, Hensoldt and Leonardo, aim to create new business from these areas of collaborations that will be beneficial to both companies. Dear ladies and gentlemen, obviously, and I have clearly to state this, the entire cooperation framework is solely governed by antitrust and capital market law and both companies remain independent.

Going forward, Hensoldt and Leonardo intend to deepen their cooperation in various strategic fields. Our goal is crystal clear. We want to be a key driver of the necessary consolidation of the defense electronics sector in Europe and support the armed forces of our European and NATO partners, with the best possible equipment.

The strategic partnership between Hensoldt and Leonardo has the potential of becoming a nucleus for broader European cooperation, which may also include other partners to jointly develop the sovereign technologies of the future and contribute towards more safety and more security in Europe.

I have once again clearly to state, we are cooperating. It is allowed and we are beneficial to both of our companies, which remain independent. With these exciting prospects, especially the huge prospect we have in front of us, I would like to hand over to Christian, who will give you more details on our figures for the first half of 2022.

[Christian Ladurner, Chief Financial Officer]

Thank you, Thomas. Good afternoon, ladies and gentlemen and a warm welcome also from my side. This is my first results call as the CFO of Hensoldt, since I took over from Axel, and I'm very pleased to provide you now with the details on our financials for the first half of the year 2022. We again were able to realize significant growth in our top line in the first six months of this year: in total, orders summing up to €948 million in the first half year. Order intake thereby increased by 10% compared to a normalized basis according to H1 2021. This results in a book-to-bill ratio of 1.4 times.

Our excellent revenue performance is reflected in a significant increase of 40% to €682 million. This is driven by sustainable growth of the sensor segment, most notably of course, due to the key programs, which develop as planned. The optronics segment remained flat in terms of sales in the first six months of the year but we will see growth here in the second half of year 2022. All this is reflected in our very strong order backlog.

At the end of the second quarter our order backlog summed up to €5.4 billion. That again strengthens our excellent revenue stability. Overall, our bottom line develops as planned as well. Adjusted EBITDA increased significantly by 38% to €61 million and adjusted EBIT grew even stronger by 73% to €27 million.

Increase in adjusted EBITDA is mainly driven by higher volumes. Despite increased pass-through revenues, our adjusted EBITDA margin remained at prior year level. The adjusted pre-tax unleveraged free cash flow is at minus €157 million. Despite the seasonality of this key figure, it reflects the planned realization of our major projects and related increase in working capital and contract balances.

To remind you, the typical course of our business is very much weighted to the second half of the year. This year that effect is additionally reinforced by our key projects in early stage. But let me point out once again, pass-through business and major projects in early stage develop as expected.

Also in terms of deleveraging, we are fully on track. Following the improved capital structure, we were able to reduce net debt by €59 million to €640 million compared to last year value. In combination with our strong EBITDA performance, we could improve this net average from three times in H1 2021 to 2.3 times. This also results in a beneficial margin ratchet for Term Loan B and RCF and helps us to further reduce capital costs.

Let me also give you a short update on the financing side. In the past quarter, we completed an amend-and-extend transaction. With this new agreement in place, we improved the financing conditions for both our senior facility agreement as well as for the bonding facilities. On the one hand, we extended the majority of the SFA and the bonding facilities until 2027. With this, we secured our financing conditions for the medium and long-term.

On the other hand, we improved the margin ratios for SFA and the bonding facilities by extending the margin grid for lower leverage ratios with correspondingly lower interest margins and we reduced the maximum margin payable for higher leverage ratios. We also increased the volume of our bonding facilities to almost €100 million. The expansion of this facility gives us a greater financial headroom and therefore, will support our sustained growth path.

Beyond that, we refined our lender structure by adding further renowned commercial banks to our lender portfolio. And here I want to highlight, that despite the currently challenging macroeconomic environment, the transaction was significantly oversubscribed by the banks. This again shows the attractiveness and the solid position of Hensoldt.

Let's now talk about our guidance for the full year 2022 as well as our mid-term outlook. First and foremost, we remain on track to meeting our full year targets. Due to high visibility of the order pipeline after the first six months of this year, we are able to increase our guidance on our book-to-bill from above one times to between 1.1 times to 1.2 times. For all other guided KPIs, we currently confirm the outlook for the full year 2022.

We leave our mid-term guidance currently unchanged, but as already stated by Thomas we see significant tailwinds based on the €100 billion special fund and the increase in defense budgets not only in Germany. Please keep in mind, Hensoldt always forms the guidance based on facts and we will not change that in the future. As soon as we have a better visibility on the development of the procurement plans, we will reflect this in our guidance. We expect this to happen during Q4.

To summarize, our very strong order backlog provides us with a good revenue visibility for the years to come. Our efficient project execution supports our excellent profitability. Our cash flow is in line with our expectations to ensure further growth. Our outlook remains promising. We increased book-to-bill for 2022 and confirm short to medium-term guidance for all other KPIs. Book-to-bill at 1.1 times to 1.2 times around 15% growth in revenues to around €1.7 billion, around 12% growth in absolute adjusted EBITDA further deleveraging, and we stick to our dividend policy of up to 20% of adjusted net income.

And now, we are happy to take your questions.

[Unidentified Analyst]

Yes. Good afternoon. Thanks for taking my question. I have four actually. Maybe first on FCAS, you mentioned, the project in your presentation. Well, there are various disputes among the industrial partners about the leadership, and do you think that the project could come at risk? And have you budgeted any revenues from FCAS in 2022 and beyond already?

Question number two relates to Leonardo -- your Leonardo cooperation. Is there also a chance that you could become involved in the Tempest project, especially if FCAS should fail? And do you also think or possibly assuming FCAS will not fail, do you see chances for commonality of parts and technology so that you could actually benefit in that regard, because economically it would actually make sense to avoid parallel developments?

Question number three relates to M&A. If I'm not mistaken you intend to enhance your footprint in markets abroad, so maybe can you provide us with an update?

And lastly, coming to free cash flow and working capital deeply negative in H1. I'm fully aware that you face a big business ramp-up, but with potentially even a stronger business ramp-up in the years to come. Have you thought or have you made preparations that you will -- in negotiations will ask for more regular milestone payments in order to have a more balanced cash flow profile among the quarters? Thank you.

[Thomas Muller, Chief Executive Officer]

Yes. Thank you. Thank you very much, Christian. Thomas speaking. I'm starting with your last question actually free cash flow and I will later on pass back to our CFO, but I'm starting with this question. We are currently talking to the political environment in order to speed up the overall defense industry development and production areas. Especially to secure our supply chain in Germany and in Europe, we need to be much more advanced finance than it has been in the last 10 years.

But if you look back to the years before when this has been usual that we got 30% to 40% prepayments without interest rates that's something we are currently struggling -- not struggling, but we are trying to convince the German Government if you want to speed up the €100 billion spending and to produce and develop faster then we need upfront payments, which would help us significantly. And I won't go so far to say that's already a given, but there are a lot of people who are convinced that this is a good idea.

Now coming back to your question on FCAS. As you all know, FCAS is under heavy dispute between the Germans and the French, less on a political level, but more on an industrial level. We didn't plan significant. There's only lower -- really lower two-digit volumes of revenues, which are not material for our planning. But if it comes, it has a huge upside potential.

And now, I'm coming to a very important point. If it doesn't come, there will be a huge pressure on the development of a future more performance Eurofighter which then leads to your second question: the Tempest program. And yes, you are absolutely right. With the cooperation we have with Leonardo, we are talking about an involvement of all the Hensoldt sensor solutions in the Tempest program in order to support Leonardo there.

And then finally, to have synergy between the two fighter programs, if there remain two fighter programs in Europe. And we will be at the core of the core of these sensor solutions together with Leonardo. As you know, we are Franco-German, Leonardo is Italian-British, so it will perfectly fit and we are also -- we are already in discussions.

On your question on M&A, we are strictly following the rules which we outlined in the past. We are only investing in regional enhancement if this is accretive from the very beginning. And what we are also doing, we are investing on a string-of-pearls strategy in absolutely high technology like artificial intelligence and you here will see in the next couple of weeks and months to come that we are very active in this field. But we are not going for a huge acquisition, a several-hundred-million-euro acquisition in the upcoming near future. And for the free cash flow, Christian, I would ask you to comment.

[Christian Ladurner, Chief Financial Officer]

Yes. First of all, what Thomas said: the policy seems changing by our national procurement agency, but we will see how this turns out. Currently, of course, our milestones they are fully in plan.

They are also aligned with our customers, so we follow clearly here the project milestones and I do not see any topics how to change that or why to change that. So I think we have a good visibility in our cash flow in place. We stick to our guidance for the full year. And this makes me see -- makes me very comfortable in this regard.

[Unidentified Analyst]

That’s clear. Thank you, very much.

[Christian Ladurner, Chief Financial Officer]

Thank you.

[Operator]

We will now take our next question from Sean Stewart from JPMorgan. Please go ahead.

[Sean Stewart, JPMorgan]

Yes. Hi. Good afternoon, everyone. I actually had four questions as well, please. Now I know, the first one is -- I know, you aren't able to give precise guidance, but when I look at Bloomberg consensus today, it shows that analysts see your sales up 15% in 2023. Now, do you think that's too conservative, given the increase in the German defense budget?

The second question is, you've raised your order intake guidance, but you've left your free cash flow guidance unchanged. I was just wondering around -- would you not expect to receive some down payments on the higher orders that you're now expecting and therefore, might it be fair to assume some upside risk to the free cash flow guidance this year?

And then thirdly, looking at the opportunities from the €100 billion special defense fund, how much additional work do you think you have capacity for today, based on your current manufacturing footprint and the capital expenditure guidance that you've given us? And then the final question is, could you perhaps give us a quick update on execution on the two major contracts, the PEGASUS contract and the MK1 radar contract, please? Thanks, very much.

[Christian Ladurner, Chief Financial Officer]

Okay. So thank you for the question. So, first of all, regarding guidance, so we currently feel comfortable with the guidance. As we said, I think, it's not a good approach to speculate in this regard. We wait for the facts and then we will give you a concrete update in the guidance, if it materializes.

Regarding order intake, as you say, yes, we raised the guidance for this year, but as Thomas has already laid out, so the policy regarding prepayments did not change up to now. So for this year I do not expect major down payments by the customer regarding our order intake. That means, I also want to stick to the guidance for this year.

Regarding capacities and CapEx -- and I think we have to look now in our business model. Regarding capacities from the production side, we are more than very good secured. That means we can really raise production capacity very easy and it does not mean a big amount of additional CapEx. It will be very minimum, but not a change of a complete business or cash flow model in itself.

When we talk about further capacities -- and I think we discussed it already also in the last quarters -- there might be a burden on getting enough engineers for development programs. But in this regard, we have to be clear how the structure also, in terms of procurement of the agency, takes place.

The policy is not only focused on pure development of programs, but to really be keen on developed programs and procure in this regard. And this is why we are currently very relaxed in terms of capacities, so we are able to raise them. And in terms of key programs, Thomas, will take over.

[Thomas Muller, Chief Executive Officer]

Yes. One last word, on the additional capabilities. As we have seen the biggest part of the €100 billion is to take existing programs, and to speed them up and to double or triple even the procurement of these programs like new Leopard 2, like new Puma armored vehicles with our center systems, which is an upgrading of -- not upgrading it's a lift up, of our production capabilities. And the same for the radars -- the air defense radars and for the fighter radars.

And here as our CFO pointed out, the machines are there and if you go to double shift, we can quite quickly ramp up our production as long as a supply chain stays. And we are working heavily, as I mentioned previously, on the German or European supply chain, to secure that if we are going up that we have the supplies secured.

Now on the execution of the two big programs, as I mentioned earlier, in our investor calls last year already, these two programs are representing programs where we are very well -- or where we very well know what we are doing because in the Mk1 where we are subsystem prime, we have been part of the Euroradar for decades and now the prime from Leonardo switches to Hensoldt.

And what we are doing on a regular basis once a year, is a kind of wrap team [ph] approach that we really check these big programs if everything is well going. We just did it for the Mk1, we will do it in autumn for the PEGASUS program and the first results are very promising. We know what we are doing. But you know, if you have a wrap team approach with a curious [ph] that what you believe is on track, is really on track that's something which is reassured. And I can tell you, we are very assured. I hope so this answers your question.

[Sean Stewart, JPMorgan]

Yes. Thank you very much

[Thomas Muller, Chief Executive Officer]

Thank you.

[Operator]

We will now take our next question from Christophe Menard from Deutsche Bank. Please go ahead.

[Christophe Menard, Deutsche Bank]

Yes. good afternoon. Thanks for taking my questions. I had also four, if I may. First, going back to the recruiting plans or engineers you've just mentioned, may I ask you by what percentage you intend to increase your number of employees, over the next two to three years -- engineers and non-engineers? Second question is on the guidance. I mean clearly H1 was very strong on -- well on sales and EBITDA growth. What would make it possible for you to arrange, the higher end of your EBITDA range? What would be the ideal conditions?

And third question, is precisely on supply chain. You said I think in the last call, that there were no issues if I remember well. In between we've seen Airbus, Defence and Space having some issues apparently on supply chain and some of the contracts. I know it's a different company, but just wanted to have your view on whether the supply chain situation has changed. And the last question is on the Page 7, which is very helpful. Can you quantify the total opportunity of those green dots? I can't see the -- I think 12 out of 27 programs. What total amount of orders could it be?

[Thomas Muller, Chief Executive Officer]

Christophe, thank you for your question. Thomas, speaking. Well, quantifying the green dots what I can tell you is, that it's really significant. But as you know, us very well and as our CFO already said, we first wait what are the precise numbers than giving something to our investors and analysts, which at the end of the day may be not as precise, as you have wished it. So we wait until -- as Christian said, until fourth quarter before we more detail these numbers and before we better know also from the German MOD, what they really intend to do.

If you currently listen to the German MOD, the only thing what they know that they now have €100 billion to spend. But they know quite precisely, if you look into the list where they want to spend it. The precise numbers, if you go into the MOD and ask 'But how many tanks, do you want now to order as new tanks? How many planes do you want to have?' [indiscernible] this is not for sure yet. The €100 billion are sure and the lines are quite sure and that we are in the middle of everything, as you know as a national, well I would say exclusive sensor solutions house.

So there is a lot to come, but please don't ask us now and we will specify it later this year, what our guidance will be for the future. Supply chain issues -- your third question. For sure, we had supply chain issues. We would not be transparent to you, if we would say we have none. But up to now, we could very well manage it and we have a program in place which looks for critical supply chain issues and materials up to 1.5 years upfront. In our business it's possible because we have a long-term business.

And we know that for the moment very well, what's in front of us and if we have issues from what are the mitigations in place and we have no real problems up to now. We don't see them, but we are very -- we have a process in place to be very, very clear on this point. It's one of my and CFO's -- the two of us one of our key elements to secure the business of our future.

For the recruiting plan, your first question and then I would pass to Christian for the strong first half of the year. The recruiting plan, please remember that Hensoldt in the last five years nearly every year hired 500 to 600 new people and we grew from 3500 now to 6400 people. Yes, there have been acquisitions, but the acquisitions don't count for more in total than 1000 -- 1000 max, 400 people.

The rest is a real increase of hiring new people and replacing people for sure which are retiring. So we are absolutely used to the fact that we are hiring every year 500 people in our company. And for sure, the key element is engineers and highly skilled technicians.

Now just please remember what we said. The €100 billion that Germany will spend is mostly in existing programs and I have to say, recurring and production area. Here we need technicians and we get quite – technicians, we get quite well. Highly skilled radar engineers, highly skilled electronic warfare engineers, system engineers for sure it's difficult, but we have a lot of processes in place with universities and yes with headhunters to have the right people at the right moment in our company. Up to now it's working quite well. It's not have me on the road [ph], but I would never promise such kind of thing, but we are well on track. And now for the H1.

[Christian Ladurner, Chief Financial Officer]

Yes Christophe, many thanks for the question. So understood our H1 was really strong. First of all, we keep the guidance as we have laid it out for this year, but just to remind you how we do our plan and our forecast. And you know that we are a project business, that means we depend on the project milestones. That means every month we look at our project milestones and the execution and the respective revenues margin and cash flow out of it and this is how we do then our forecast.

And when I look now at the H1, plus the outlook what is really going well then, I'm in line with our guidance and I'm quite happy with that currently. Yes and so this -- as I've said, the order intake, we can increase for revenues and results and also cash flow remains the guidance.

[Christophe Menard, Deutsche Bank]

Okay. Thank you very much.

[Christian Ladurner, Chief Financial Officer]

Thank you, Christophe.

[Operator]

[Operator Instructions] We will now take our next question from Virginia Montorsi from Bank of America. Please go ahead.

[Virginia Montorsi, Bank of America]

Hi, good afternoon. I actually have three as well. The first one would be on guidance again. So, in your slides you say the mid-term guidance is unchanged and that you also mentioned substantial tailwind from the special fund and also that guidance will be updated when the materialization of procurement plans happen, what is the risk do you think that those procurement plans slip to ride and don't get a clear picture by the end of the year? That would be my first question.

Second question still speaking on procurement, a big part of procurement seems to have gone to the US contractors. How do you think of the EU contractors in terms of what they will get? And then the third one, I think, it's been discussed already but when you talk about the potential coming from the €100 billion fund, is there any sort of number that you can give us in terms of the total value that, this could mean for you?

I know you said you don't want to give anything specific, but it's hard for us to gauge for example the jamming part of the Eurofighter or any other major program. So is there anything or any information in terms of how you we should think about that? Thank you.

[Thomas Muller, Chief Executive Officer]

Virginia, thank you for your question. Thomas speaking. The last point, I leave to our CFO. The only thing what I can tell you, yes there's a lot to come. And on the guidance this is exactly the problem that we have not yet defined together this -- or the armed forces together with the MOD, what will be the real output.

But let's take it from another point. We are the one and only sensor solutions house in Germany. There's very, very few exceptions on this. And therefore, there will be a big chunk, which is landing with us. This is inevitable.

And you're speaking about the procurement in the US. We have two key elements which are currently procured in the US, which is a heavy transport helicopter and the F-35. In both programs, we and the German government are discussing the participation of German industry in maintenance, maybe even in licensed production or not of the whole F-35, but of some key areas and how do we want to go and to let participate the German industry in the future.

So, yes, there is still opportunity, but if you take these absolute numbers of the F-35 and the heavy transport helicopters, it's max -- and other American programs -- its maximum 20% of the €100 billion. It's not more. It's a huge amount -- €20 billion is always a huge amount, but it's more than 22, max 25% of the €100 billion. So we should not over exaggerate the US part.

And as I said for us it makes a big opportunity in the future. But, yes, again if you ask me, but Thomas what is your participation in these American programs as German industrial part? Again, I can't tell you today because we are really in discussions with the government where, how and to what extent we are participating. And for last point would pass to you Christian.

[Christian Ladurner, Chief Financial Officer]

Yes, thanks, Virginia. So I think, Thomas has also based out that the values will be significant. So, first of all, I think we have to state that we are in close communications with our partners in the Government so this is really on a weekly basis. So volume increases now, but please keep in mind the administration processes cannot change overnight. Maybe you've heard from the B3G law or the [Foreign Language] in Germany yes?

[Thomas Muller, Chief Executive Officer]

As slowly as…

[Christian Ladurner, Chief Financial Officer]

So it gives us a good impression. There are good signs that everyone has understood that this has to be faster in order also to place all the contracts, but currently we are still in this administration processes. And this is why we just want to rely on our policies. So we will speak to our partners and as soon as we have really facts, we will put it into our plans and then put another guidance, and we'll tell it to you immediately.

[Thomas Muller, Chief Executive Officer]

Yes.

[Virginia Montorsi, Bank of America]

Okay. Thank you very much. That’s very clear.

[Operator]

We will now take our last question from Sash Tusa from Agency Partners.

[Sash Tusa, Agency Partners]

Good afternoon. I've got two questions. One is purely on procurement and then the other is slightly more focused on sort of governance issues. Just on procurement, first of all, can you confirm that the MEADS program to replace or to upgrade German air defense system has effectively been recast so much that it gives a higher level of domestic content?

And then the second question, which is really a sort of governance question. I mean, I think I'm quite struck by the degree that neither your presentation nor your reported accounts or your half-yearly statement mentions the FCAS program at all, whereas clearly you had an entire page looking at the upside for that in your Capital Markets Day last year. Do your major shareholders or indeed does the German Government see your statements before they are put out? And are they aware of the significance, perhaps for investors of the fact that you do not mention FCAS as a living program certainly at present?

[Thomas Muller, Chief Executive Officer]

Hi, Sash, Thomas speaking. My pleasure to plan the question 20 years, 25 years something like this you know, Sash. Thank you very much for your question. So - and coming to the question on MEADS, yes unfortunately, I have to say, the MEADS program as far as we know will not be revived. But there will be something like as we said, ballistic missile defense. The Germans are currently considering with whom to cooperate and so we are also asked to give our opinion what is the best way ahead.

Leonardo and we tried – and together with MBDA to revive the MEADS program but the Germans are quite reluctant to do it. There may be some parts of the MEADS program, which are products or which are parts in the future and one is definitely alive, which is the ground-based air defense system medium range, which has been developed further together with Diehl the Airbus – former Airbus colleagues and ourselves. And this system, the medium-range air defense system which has been part of the MEADS, if you remember is now on a procurement path on higher numbers and also in discussion for the Ukraine, so this gives us a good opportunity in the future.

Now this is – but it's only a part of MEADS but the ballistic missile defense will be different than in the MEADS program. Now on FCAS, FCAS is – it's like a traffic light. It's in out, in out, in out. But we all have to be absolutely aware about the following situation.

The huge numbers we are talking about FCAS – the €300 billion to €350 billion even €400 billion necessary spending in the next decade on the future combat air system will remain without any change. If we call FCAS – Future Combat Air System, if we call FCAS, EVO [ph] Eurofighter, the evolution of the Eurofighter, which gives us basic technologies for future combat air system or if we go even as we had the question in the beginning – Christian, you asked a question – on the future combat air system and the potential synergies with the Tempest program, we are absolutely sure and the Germans are starting to discuss already with the British about key technologies, which could be used on both sides on the Tempest program.

So overall, what we maintain is the huge opportunity for our company in a Future Combat Air System, whatever it looks like then. Is it a Franco German? Is it a German British? Is it even a tri-national, quadri-national program, or is it first a German program with an enhanced Eurofighter, where we will participate for sure also with some key elements. Business opportunity stays on a lasting basis for the next decade Sash.

[Sash Tusa, Agency Partners]

Thank you very much.

[Veronika Endres, Head, Investor Relations]

Yes, and thank you everybody for listening today. As always, should you have any further questions, the Investor Relations team is around all day to follow-up. And with that have a great day. Thank you everybody, and goodbye.

[Thomas Muller, Chief Executive Officer]

Thank you. Thank you very much.

[Christian Ladurner, Chief Financial Officer]

Thank you.