Hensoldt AG

Veronika Zimmermann: Good afternoon, everybody, and welcome to Hensoldt's 9M 2025 Results Call. Thank you all for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt. And with me today is our CFO, Christian Ladurner. Christian will guide you through this presentation today, which will be followed by Q&A. And with that, over to you, Christian. Christian Ladurner: Yes. Thank you very much, Veronika, and a very warm welcome to all of our investors and analysts following our company. It's great to have you with us today. I'd like to begin with a quick update of this time line, which you may remember from our recent analyst calls. Since then, our assumptions have further materialized. Right after the adoption of Germany's 2025 defense budget in September, the parliamentary sessions for procurement approvals gained strong momentum. By the end of 2025, a total of more than a double -- high double-digit number of so-called EUR 25 million approvals will have been passed, many of them with direct Hensoldt involvement. The first tangible evidence was our recent guidance upgrade for the 2025 book-to-bill ratio published 2 weeks ago. While the majority of expected orders is still anticipated to enter our books in 2026, the increased guidance for this year already reflects the early materialization of these strong dynamics. This sets the stage for a strong finish to 2025 with significant orders to be expected in the near term. Let me start with the Sensors segment. In October, we booked a major sustainment contract for the German P-8 Poseidon program worth EUR 130 million. Alongside the procurement of the German Eurofighter Tranche 5, the contract of our Mk1 radar is now in the flow down, and we expect to book the order with approximately EUR 180 million shortly. The same applies to further orders for TRML-4D air defense radar for Ukraine, for Switzerland with a combined volume of around EUR 200 million. Notably, the Optronics segment will contribute significantly to our order intake in 2025, combining both upcoming and recently booked contracts with approximately EUR 1.4 billion. This is predominantly driven by the land domain. The contract for the new reconnaissance vehicle named Luchs II is currently in the flow down process. This landmark order represents a volume of approximately EUR 850 million for Hensoldt. In addition, we anticipate further orders for the Leopard 2 main battle tank and for the Schakal, the Boxer platform equipped with the PUMA turret. The latter we expect in 2026. Further key contributors are projects for Algeria's border surveillance as well as upgrades for the German U212A submarines, both recently booked. I will give an overview of how these orders will contribute to our raised book-to-bill guidance for 2025 in a minute. Of course, all of you know that ramping up capacity is key to meet increased customer demand. Therefore, we have started our Operations 2.0 initiative, which we have introduced in H1 of this year. Since 2022, we have been expanding production capacity through continuous improvement, automization and outsourcing, integrated into our annual CapEx plan, and this will continue. And of course, we will provide more details at our Capital Markets Day next week. Nevertheless, our first concrete initiative. This is our new production site, which will significantly increase our production capacity for air defense radars. This strategic capacity expansion will enable us to substantially ramp up production from 2027 onwards, especially for TRML-4D and Spexer radars. We are investing around EUR 80 million in this rented site, combining resilience with synergies across our existing footprint. Let me now come to our financials for the first 9 months of this year. After outlining our promising growth outlook, let's now shift to what we have accomplished so far. So let me walk through our financial results for the first 9 months. To begin with, I'm very pleased with the performance we have once again achieved. Order intake developed as planned, reaching more than EUR 2 billion. Also this year's orders placement from Germany are heavily weighted towards year-end, we exceeded the high prior year figure by 9%. Key drivers behind this performance was the Eurofighter program as well as TRML-4D radars. Revenue performance was strong, increasing to EUR 1.5 billion. Optronics continued its strong momentum, while Sensors further gained traction in Q3 as anticipated following a slower start in the first half of the year. Passthrough revenue continued to decline in line with our planning. Excluding parcel revenue, core revenue grew strongly by 14%, reflecting the strength of our underlying business. With a book-to-bill of 1.3x, our order backlog again reached a new record level of EUR 7.1 billion, providing us with an excellent visibility. To sum it up, the increasing investments in defense by our German and international customers continue to translate into higher order intake and revenue. The strong performance of our top line is also reflected in our profitability. Adjusted EBITDA increased to EUR 211 million with an adjusted EBITDA margin of 13.7%. The increase was primarily driven by higher volumes in the German Optronics business. In the Sensors segment, product mix effects partly offset this growth, while the impact on margin from the logistical ramp-up has further diminished. Additionally, we continue to capture cost and revenue synergies from the ESG acquisition, further strengthening our bottom line. Adjusted EBIT increased to EUR 122 million in 9M 2025. Cash generation was excellent in Q3. Adjusted free cash flow increased to minus EUR 119 million per 9M 2025, supported by advanced payments received. While on the other hand, investments in our working capital continued as planned to manage the business volume in Q4. To conclude, our bottom line is on track and set to gain further momentum as the year progresses. Now let's have a look at our segments. The Sensors segment delivered a solid order intake of EUR 1.7 billion, exceeding previous year's high comparison base. This corresponds to a book-to-bill ratio of 1.3x. The development was driven by orders for the Eurofighter re-baselining and Halcon program as well as TRML-4D radars for Ukraine. Revenue in Sensors increased to EUR 1.3 billion. Despite the slower start in our radar production during the first half year, revenue growth was strong and fully in line with our expectations. Excluding the declining share of parcel revenue, core revenue in sensors rose by 12%. Adjusted EBITDA in Sensors increased to EUR 199 million. Product mix effects had a minor impact, while the effect of the ramp-up of the logistics center in H1 is further diluting. This is reflected in the adjusted EBITDA margin of 15.1%, catching further up as the year progresses. As mentioned, cost and revenue synergies from the ESG acquisition contribute to this as planned. Optronics realized a strong order intake with orders summing up to EUR 328 million, resulting in a book-to-bill ratio of 1.4x. This was primarily driven by orders for the U212A submarine retrofit, gimbals and site systems for ground-based systems. Revenue performance in Optronics was excellent, continuing the momentum from the previous quarters. This was boosted by the sustained strong performance of the German entity, which achieved revenue growth of 27% in the first 9 months. Main driver was accelerated production in ground-based systems. At this stage, we are also pleased to have successfully the first step of the move of the ground-based systems business in the Oberkochen, from the former Zeiss building to the new build Optronics campus. This milestone will provide our business with the capacity to continue the strong growth path ahead. In terms of margins, Optronics continued to show a significant improvement compared to prior year with adjusted EBITDA reaching EUR 12 million. This development was driven by higher volumes from the German unit. Let's now have a look how our order book will develop until year-end. In addition to the orders mentioned at the beginning, we are preparing for a broad series of additional contracts across our business areas such as for air defense, the Eurofighter program, our naval business as well as self-protection systems and services and integration. To sum it up, we are very well on track to secure major orders that will drive our order intake from around EUR 2 billion in the first 9 months to approximately EUR 4.4 billion per year-end. Let me now come to our guidance for 2025 updated 2 weeks ago. First and foremost, order intake. Following the recent development, we have significantly raised our book-to-bill guidance from around 1.2x to a range of 1.6x to 1.9x. As highlighted earlier, we expect to book key programs like Eurofighter and Luchs 11 already within this year, pushing the book-to-bill notably upwards. Furthermore, we specified our revenue guidance to approximately EUR 2.5 billion. As outlined in our recent analyst calls, the rollout of our new logistics center represents a strategic investment in long-term competitiveness and operational efficiency. While this go-live has temporarily moderated the pace of revenue growth in 2025, it is a critical enabler of sustainable growth and scalability in the years ahead. For adjusted EBITDA margin, we specified our guidance to 18% or higher. This reflects our focus on sustained strong profitability by investing in our capacity to secure long-term success. For adjusted free cash flow, we continue to expect strong performance with an unchanged cash conversion target of approximately 50% to 60%. And our net leverage target remains at around 1.5x, reflecting our disciplined financial management. Finally, our dividend payout ratio will continue to be in the range of 30% to 40% of adjusted net income, in line with our commitment to shareholder returns. So coming now to a conclusion, let me mention the following key takeaways. The ever-increasing demand for our products and solutions is reflected in substantial order intake across both segments, driving order book to a record high of EUR 7.1 billion. This continues to provide excellent visibility for the years to come. Our revenue performance remains strong, driven by sustained high momentum in optronics and accelerated growth in sensors during the second half of the year. This is reflected in our solid profitability, supported by higher volumes in Optronics, while the impact of Sensors margins from the logistical ramp-up is further diluting. Our outlook remains promising, and we are strongly positioned for the upcoming growth. Germany is taking the leadership role for defense in Europe, and Hensoldt has the right strategy, products and capacities to play a major role in upcoming German and European procurement programs. This is now increasingly reflected in concrete orders, driving our book-to-bill guidance significantly upwards and with further major contracts on the horizon. So in short, Zeitenwende 2.0 starts to materialize. Through targeted investments in capacity and processes, we are safeguarding our delivery capability. We proactively secured the further ramp-up of our air defense production from 2027 onwards, safeguarding our delivery capability and long-term sustainable growth. Thank you very much for listening. And with that, I'm now happy to open the floor to your questions. Operator: [Operator Instructions] The first question comes from Sebastian Growe from BNP Paribas Exane. Sebastian Growe: The first one would be on the Optronics segment. And apparently, the segment is outpacing the earlier indicated 10% EBITDA margin for this year. And against the backdrop, where do you see the segment trending both in '25 and particularly in the midterm, i.e., do you eventually see scope to return to the 20% plus levels that you achieved in 2020? And as a follow-up to this, as Optronics is going to roughly double its order backlog based on your statements. How should we think about the growth cadence in the outer years, i.e., would you agree that optronics might ultimately outgrow the Sensor segment? Christian Ladurner: Sebastian, many thanks for this question. So yes, a very good question about Optronics margin. You're right. So we guided until half year 10%. I have to say, currently, we see with the positive development, a figure which goes more into the direction of 14% EBITDA at the year-end. With having said that, we see every year a figure of around 2% in addition. And of course, in the midterm 2027, 2028, we expect that figures at the profitability of Optronics will be in this year, as you have mentioned, so for sure. And the second question, yes, you're also right. We see more momentum now from the optronics. We have to keep in mind that sensors is a classic project business with heavy also engineering load in the work, whereas Optronics is a delivery business. That means if we have everything in place and industrialized products and the demand is there, which is currently there, we are able to ramp up more intensively. And for, I would say, more concrete numbers, I'm happy to share with you on the upcoming Tuesday that we will give some more insights how the segments will progress. Sebastian Growe: Makes sense. I won't stretch my luck too far. Just one other quick one, if I may, on some comments we heard recently from your second largest shareholder. Those very comments suggest that there might be scope for an expansion of the cooperation between the -- as you referred to legacy part of the product offering. And I was just wondering considering also that there are so many cooperations happening in the defense sector, in which areas might you see headroom for more cooperations and that could either be then with the Italians or then eventually also other partners? Christian Ladurner: Yes. Thank you very much. You're right. The dynamics is quite high currently, and Leonardo has stated that there is a good collaboration with our company up to now, especially we have currently in the Eurofighter and also in the air defense topic. I see within -- with Leonardo, there are, of course, also opportunities in the land platforms to go for more cooperations even if there is nothing material yet. And of course, I think with the increasing budgets coming from Germany and acting Germany as a frontrunner, of course, other companies are interested in participating of this growth and then going to partnerships with German OEMs, but also in Hensoldt. And when you have seen now the Luchs II contract, which is at the end of the day, a cooperation between GDLS (sic) [ GDELS ] so General Dynamics Europe Landsystems (sic) [ General Dynamics European Landsystems ] and Hensoldt gives you also a concrete example where this successfully happened. And going forward, we see also possibilities in the land platforms, for example, also in space, also in air defense in all ranges. So there is more to come. And also here, we will give you some more details on Tuesday in the Capital Markets Day. Operator: The next question comes from the line of Ross Law from Morgan Stanley. Ross Law: So the first one, just on order intake. Obviously, it continues to track strongly. And obviously, you've raised full year guidance quite materially. What's a little surprising is that your cash guidance is unchanged. Can you maybe just flesh out the moving parts there into year-end as I would have thought that you're going to get a reasonable amount of down payments like you've noted for the 9 months? And then just on the outlook, you've confirmed your 2030 sales guidance. Can we also expect you to provide 2030 guidance for other metrics like margin at next week's CMD? And given the strong visibility from Germany specifically, can we expect you to provide some indications of growth for the group beyond 2030 next week? Christian Ladurner: Yes. Thanks, Ross. So in terms of down payments, first of all, it's a good progression we have seen now in the last year when we compare 9M 2025 with 9M 2024, we have EUR 200 million more down payments on balance sheet. On the other hand, I have to say we are heavily further investing into working capital. That means the strategy, and this is also seen in the figures is clearly to go for pre-investments in working capital to further deliver and outbalance this advance payments. So this is why I do not really expect an increase now of cash conversion by year-end. And regarding 2030, yes, we will give some more insights how we think about this EUR 6 billion figure on Tuesday and also some bottom line figures for sure, and also some aspects how we think the company will grow from 2030 onwards. I think it's not a secret when you now currently look how Germany will behave from this and next year onwards that most of the contracts will not only last 5 years, they will 5 to 8 years. And then we are at the beginning in the mid of 2030. And on top of that, there will be service business due to that the availability of services of systems in Germany has to be increased massively. So there is room and there will be more details on Tuesday. Yes, clear yes. Ross Law: Great. Thanks Christian, see you by next week. Operator: [Operator Instructions] Next question comes from the line of Christophe Menard from Deutsche Bank. Christophe Menard: Two questions on my side, just on the updated 2025 guidance. The revenue growth you have in Q4 is actually a bit softer than usual. Is it only linked to the logistical center? You're going to be growing more or less in line with what we've seen in the first 9 months. Usually, it's a stronger quarter. So the question is, is it just that phasing? And will -- should we resume kind of that accelerated growth in Q4 as of next year? The second question is on the margin. You stated 18% plus. As you previously outlined, Sensors was doing very well in the first 9 months and in Q3. What about -- sorry, Optronics, you talked about optronics. And my question is about sensors. We also had a very good performance on sensors. How can we think about the margin performance of sensors in the full year? Christian Ladurner: Yes. Thanks, Christophe, for that. Yes, you're right. It should be a little bit weaker. I think especially in sensors, when I look at the key products such as Eurofighter and TRML-4D, there are fewer figures now planned for Q4. But nevertheless, we see an increase. I think when we talk about 2026, we will be in a normalized Q4 again, which will be stronger from my point of view because then the logistics center effect will be fully phased out next year. So this is the picture I currently have. So in terms of margin, I've outlined 14% for Optronics for this year in the sensors, I expect approximately 19%, which is then in the sum around 18% to 18.2% and which gives us confidence to reach our guidance for the full year. Operator: Next question comes from the line of David Perry from JPMorgan. David Perry: Christian, look forward to seeing you next week. I was just going to ask you to unpick this big jump in the Optronics margin, the 14% so basically you're double year-over-year. Just how much of that is that R&D has dropped? How much of it is kind of one-off self-help, say, South Africa or something like that? And how much do you think is related to the volume? And then just to square the circle on it, can you just tell us where you think the revenue ends up for this year in Optronics, please? Christian Ladurner: David, many thanks for the question. I see currently that it's solely volume-based. So R&D, we are still in the digitalization of periscope and the WAO for the Puma. So this will last until 2027 because these figures go down. We are still at Ceretron. Ceretron is the sensor suit for the Luchs II, which has to be finished until 2027 until the first systems are to be delivered to GD. So this will stay at a high level. And as I said before, this is volume-based. South Africa is more or less on the level of the prior year. So this is exactly volume-based. In terms of revenues, I see approximately EUR 420 million to EUR 430 million for the Optronics segment. I see EUR 2.07 billion to EUR 2.09 billion in the Sensor segment, which then comes up to the group guidance. Operator: We have a follow-up question from Sebastian Growe from BNP Paribas Exane. Sebastian Growe: So the first one is on Sensors, and it's actually then a follow-up to Christophe's question. I think if one looks at the 9-month period, then I take the point that the dilution effects from the logistical ramp-up were quite significant. But if one singles out quarter 3, then apparently it's the first quarter where you're up like 200 basis points year-on-year. So the question that I have -- it's 3 questions actually. So the first one, is this logistical ramp-up fully digested by now as we speak? And conversely, it appears really that the ESG business is performing way stronger than potentially expected. So can you provide some color with regard to the trends in the, a, core and, b, then ESG business, please? Christian Ladurner: Yes, for sure, Sebastian. So first answer is clearly, yes, we have digested that effect. Nevertheless, I see approximately EUR 10 million of effect we will have. We had this EUR 10 million effect in Q1, which is from an absolute term still in the figures. Relatively, it phases out, as you have seen through Q1, H1 now 9M and also Q4. So this is clear. And ESG, yes, we bought this company for approximately 14% EBITDA. We see currently a figure which is around 15%. So this -- the cost synergies have completely realized as we have planned on a pro rata basis. So these are the 2 figures. Sebastian Growe: Okay. That's helpful. And then just finally, again, on the order pipeline and in addition to Ross' question. So I know it's hard to compare you guys with Rheinmetall, for instance, but they hinted at around EUR 20 billion in quarter 4, another EUR 40 billion, EUR 50 billion potentially in '26. And again, I appreciate that apparently, there are differences in both the business mix, the regional mix and whatnot. But from the sort of cadence and general sort of dynamics, would the sort of potential rule of thumb like seeing a doubling or so from the quarter 4 dynamics be directionally also the right yardstick for you? Put differently, what are you seeing recently from the order pipeline perspective going into '26? Christian Ladurner: Yes. Look, I expect in 2026, especially in the land platforms where we currently talk about these thousands of Boxers, Pumas, Leopard and so on. So from my point of view, there will be big dynamics in 2026 in the land platforms also in our business. And I think the book-to-bill we currently guide for this year, I see at least also for next year. This is simply due to the fact how the structure is currently working in the German parliament with having now the budget in place 2025 and 2026. So this is my view currently. We have to keep in mind that, of course, every special land system goes then by OEMs. That means there will be a kind of a flow down process between the OEM to receive the contract. But also next year, I see in terms of book-to-bill, a figure which will be similar as the figure we have now updated for this year. Sebastian Growe: Very helpful, thank you so much, and see you next week then. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Veronika Endres for any closing remarks. Veronika Zimmermann: Yes. Thank you all for listening today. As always, should you have any further questions, the IR team is around all day to follow up. And as Christian mentioned, we are very much looking forward to welcoming you at our CMD event next week. Have a great weekend. Thank you, and goodbye.