Hello and welcome to the CSG full year 2025 results conference call. Today's presentation will conclude with Q&A session. For those joining by phone, if you wish to ask a question during the session, you will need to press star one one on your telephone keypad. You will hear an automatic message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I will now hand you over to Peter Russell, CSG Head of Investor Relations, to open today's conference. Please go ahead, sir.
Good morning, everyone, and thank you for joining. I've recently joined the CSG team as Head of Investor Relations, and I look forward to speaking with many of you over the coming weeks. It's a pleasure to welcome you to the call to share our first set of results as a newly public company. Today's speakers are Michal Strnad, Chief Executive Officer and Chairman of the Board, and Zdeněk Jurák, Chief Financial Officer.
Michal will start by covering our financial highlights along with demand trends and our visibility on growth. Zdeněk will then take you through the strength of our business model and provide a more detailed review of our 2025 performance. After the remarks, we'll open the line for questions. We ask that you take a moment to review the disclosures on slide two, which outline important information regarding forward-looking statements and the use of non-GAAP measures. With that, I'll hand over to Michal.
Good morning to all of you. I am pleased to share what has been a very successful year for the CSG. In 2025, we delivered operationally, we continued our strategic expansion, and we achieved excellent financial results. Let me start the presentation with the headline numbers for the group. These demonstrate strong performance across all key metrics. We delivered revenue of EUR 6.7 billion above our expectations set at IPO. This represents underlying year-on-year growth of 30%. Our main measure of profit, adjusted operating EBITDA, reached EUR 1.6 billion. This resulted in a margin of 24.1%, fully in line with our IPO outlook. This margin performance places us at the top of our European defense peer group. Our total backlog and the pipeline under negotiation reached a record EUR 42 billion.
This provides exceptional revenue visibility and evidences the long-term structural demand we see in the market. The group remains highly capital efficient. Net leverage at year-end was 1.7 times or 1.3 times including IPO primary proceeds. We maintained strong cash conversion at 7%. CapEx intensity was 3.3%. We have remained disciplined in our capital allocation, but we have also invested significantly in the production capacity expansion, modernization, and robotization. Adjusted net working capital as a percentage of revenue, 44%, once again, firmly in line with expectations. Looking at the revenue composition, Defence Systems drove close to 80% of the group revenue. This segment includes our medium and large caliber ammunition and Land Systems businesses, which made up 61% and 16% of total revenue, respectively. Our business segment, Ammo+, contributed 21%.
From a customer perspective, NATO countries representing 65% of revenues, Ukraine 27%, and other customers 8%. This diversification supports a long-term resilience and growth opportunities for the group. 2025 was also a year of strategic execution. We were successful in winning major long-term contract awards. We were also active in targeted M&A and secured partnerships to strengthen our production capabilities and self-sufficiency. Overall, I am very pleased with this progress we have made across the business. The results reflect decisions we have been making over the past few years. We are now seeing these investments translate into performance. Demand in our markets remains very strong and CSG is very well-positioned to capture this.
We enter the new year with good momentum and we remain focused on continued growth and long-term value creation. On the next slide is a recap of the structural demand that underpins the business. Ukraine has been a visible near-term driver of growth. However, the fundamental drivers are broader and longer-dated. First of all, NATO and partner nation budgets continue to rise. We are seeing commitments that extend well beyond current conflicts. Global instability reinforces the prioritization of defense spending across multiple regions. Ammunition replenishment cycles are long. The stocks that were depleted need to be rebuilt. This is a multi-year structural requirement. CSG is strategically positioned in the areas that NATO and partner nations have identified as priorities. The map on this slide shows expected European defense spending growth from 2025 to 2030.
Many countries are projecting total growth of over 100%, with others in the between 50% and 100% range. After decades of underinvestment, we are seeing a big shift in defense priorities. Evidence of demand and our ability to capture it is seen in our recent strategic wins. We have secured major long-term contracts and just some of these include as follows. Seven-year framework agreement with Slovak Ministry of Defense, up to EUR 58 billion of medium and large caliber ammunition, which is kind of European platform where other countries can buy medium and large caliber ammunition. Next one is a contract valued at several hundred million USD to supply small caliber ammunition to the Ministry of Defense of Southeast Asian state.
The acquisition of 17% stake in Rába Automotive, a deal that positions CSG as a long-term partner of the Hungarian defense industry. This past month, we signed a cooperation agreement with Poland's leading defense company that deepens cooperation across unmanned systems and missiles, ammunition and modern land platforms. As countries invest more heavily in defense and security, CSG is proving it's well-placed to meet this demand. Now I will pass to Zdeněk, who will go through our market positioning and performance in more detail. Thank you.
Thank you, Michal. It's Zdeněk speaking. I will start with the slide number eight, where we are presenting our backlog and pipeline. It has been mentioned EUR 42 billion in a total, and it's pretty much divided into the EUR 15 billion of the backlog and EUR 27 billion of the pipeline. It's growing rapidly from EUR 11 billion to EUR 15 billion year-on-year, and it's just giving us and illustrates a very strong revenue and profitability visibility for us. To be mentioned here, backlog does not consist any commercial revenue or backlog coming from the small caliber ammunition on the commercial market. So on top of that, there is approximately EUR 1.4 billion-EUR 1.5 billion a year coming from the small caliber ammunition commercial business.
Here I would like to underpin what you can see on the left-hand side of the graph. I would like to highlight a few comments here. First one is that you can see already Ammo+, so the small caliber ammunition coming into the defense business and into the backlog. That is simply confirming our strategy, what we were thinking as we acquired the Kinetic Group in the U.S. to bring the defense contracts into the small caliber ammunition production. Second note I would like to underline is the growth of the Land Systems. That has been also one of our strategy, and we've provided within our guidance that we expect the Land Systems growth rapidly in the midterm.
This is one of the confirmation we can provide you with within the backlog and the increase of their pipeline to be commented that it's an advanced stage of the negotiation and it's reasonably achievable to convert it into the backlog going forward. The conversion ratio is very high and we say that throughout our monitoring it's far above the 90%. Wrapping up backlog and pipeline all together bringing a very exceptional visibility over the revenue and profitability going forward, and at the same time, bringing our strategy into life in terms of the small caliber ammunition growth in the Land Systems. On the slide number nine, I would like to briefly go through the business segments and our portfolio.
I would like to also underline a few points here. First would be that we are top two European player in terms of the medium and large caliber ammunition production with the accelerating scale. Second, what I would like to mention is again the growth in terms of systems and production and our strategy we've provided within the guidance. Third point I would like you to take away from this slide is the newly established Advanced Systems segment as a production of one of the critical components for the missiles and drones and anti-drone systems. That's one of our critical component of our strategy. The last but not least is that we are global number one player in the small caliber ammunition.
If we are talking about the Western world, we are increasing defense, as I mentioned on the previous slide, and fulfilling our strategy in there. We are enjoying that we are best in class in terms of the cost of production in the small caliber ammunition, and I will talk about it later on throughout the deep dive into the segments. On slide number 10, and before I turn to financials, as such, I would like to recap our focus on vertical integration as the key driver of our future margin expansion, but more importantly also as a driver of the security of the supply and the security of our further growth.
Throughout the elements of critical components here, we've set up a plan how to be by end of 2027 fully vertically integrated, and that should allow us to, and it's giving us a pricing power as well as a value for the customers in terms of the security of delivery. Well, for this particular case and for medium and large caliber ammunition, as I mentioned, we are targeting the full vertical integration to be done by end of 2027. The propellants are to be maintained through the M&A we have done already in 2025 in Germany, and that's for the critical constituent, which is the energetic nitrocellulose, which we are currently converting from the commercial one, which we acquired to the so-called energetic or defense one.
The conversion is going according to plan and according to our expectation. The explosives should be covered through our newly established joint venture in Greece, where we are commissioning the old decommissioned facility. Again, the plan is to start the operation by end of 2027, and I can only comment that the recommissioning is going according to plan, and we are fulfilling the strategy and the CapEx spendings according to our plans. On the slide number 11, let me take you now through the pro forma in detail. So we reported more than EUR 3.9 billion in 2024 and EUR 5.2 billion when adding the Kinetic Group and account revenue on a pro forma basis.
From that, we grew to more than EUR 6.7 billion as a pure organic growth by end of 2025, which represents 30% year-on-year growth on a pro forma basis. The right-hand side you can see a similar graph for the adjusted operating EBIT and that grew up 31% year-on-year on a pro forma basis, ending up with a more than EUR 1.6 billion of the EBIT. Adjusted in our case means only one adjustment which has been caused by the acquisition of the Kinetic Group and I can confirm and comment only that there are no other adjustments made into the EBIT which we are presenting here.
The market superior margin ending above 24% is driven mainly by the quality of execution and very disciplined cost control. I will comment more on this by segment in detail in the coming slides. On slide number 12, just to repeat, coming back to the margin and underpinning the superior position when comparing to the other players on the market. The key drivers are basically the product mix, the operational excellence and efficiency, and vertical integration strategy and position we've taken. Again, mentioning that except for one, only one coming from the acquisition of the Kinetic, there are no other adjustments in pro forma. On slide number 13, now going to each division separately. Deep diving into the defense system division.
For defense, I wanted to highlight a few important points here. EUR 1.5 billion EBIT with 28% EBIT margin reflects really the operational leverage, and particularly, in the medium and large caliber ammunition we have. Secondly, Land Systems portion of the revenue is growing rapidly according to our expectation, the guidance, and our strategy we are following. Thirdly, performance and the growth by more than 55% year-on-year was underpinned by the continued strong demand across NATO and the allies and the group's scaled manufacturing, which is supported by high volumes and capacity expansion, with, of course, benefits to leverage.
On the slide number 14, I will be focusing now more into the sub-segment, particularly medium and large caliber ammunition, which is the biggest revenue driver. It's what you can see, the 39% year-on-year, it's a pure organic growth. The growth is pretty much reflecting the execution of our backlog, our modernization, our increase of the production capacity and efficiency, which we bring into the production. The NATO requirements remain very strong, and restocking and rearmament supposed to drive the business, as you can see on the bottom right side of the graph of the slide, where we are presenting the new NATO standards and the demand and the stockpiles coming from that going forward.
I would like to also highlight here a significant expansion in the U.S. within the medium and large caliber ammunition business we do, and that is that I can present $630 million contract with the U.S. Department of War to build up the U.S. Army Future Artillery Complex in Iowa. This is a significant milestone and a footprint in terms of medium and large caliber ammunition in the U.S. Again, fulfilling our strategy, not only for the increase of the efficiency, but also geographic expansion. On slide number 15, we will be talking a little bit more about the Land Systems as the next very important sub-segment of our business. Revenue growth 35% year-over-year, and as you can see, is again a pure organic growth.
Few notes to be also highlighted here, if not repeating those. On top of what I already said about our strategy to increase in that, we have a relatively young portfolio of the Land Systems application. Our clear strategy is now to increase our application use worldwide with the NATO customers and NATO allies. We expect that after the warranty period, and this will go beyond our guidance we've provided, but that is still our strategy and expectation, is the MRO spare parts and overall after-sale market coming into our numbers as well. We keep pushing on the vertical integration here as well. We have a few of those, either through M&A or through our CapEx programs.
Throughout M&A, we've recently done a deal and we acquired the hydraulic systems, for example, a military steel producer. Capacity and geography expansion is another topic that we were focusing on in this area, and we can mention here the deal with the 4iG and Rába Automotive, which we've recently signed. In addition to that, we are focusing here particularly on the R&D and developing new platforms going forward to be best in scale and best in the new technologies for our partners. On slide number 16, we are deep diving into the Aerospace & Defence Electronics and the Advanced Systems.
Going from left to right, within the Aerospace & Defence Electronics, it's following pretty much the Land Systems, a significant integral part of the production for the Land Systems and the significant vertical integrator in terms of the defence electronics and the applications for the Land Systems. At the same time, therefore you can see 20% growth is purely organic, and it's pretty much following the Land Systems as such. Establishment of the Advanced Systems back in 2025, which is presented on the right side, is one of our strategic moves, and it's bringing us to UAVs and counter-UAVs and currently being one of the most demanded components, which are the turbojet engines.
It is expected that the production will ramp up in the midterm and delivering mid- to high hundreds of millions EUR in revenue, with the same marginality as presenting in these days. Of course, both of these subsegments are focusing also to the next generation of the defense requirements in terms of the technology. On the slide number 18, we will be discussing a little bit about the Ammo+ division, so the small caliber production. Here, it's a key focus area, where we would like to address that the market has been relatively soft back in 2025, but we were able to still achieve a healthy Adjusted Operating EBIT margin.
At the same time, we started to run a cost efficiency program back in 2025, and what we can currently see is a positive trend in terms of the market recovery in the United States. This is something what we are expecting going forward, and I believe the positive trend will be confirmed within the 2026 numbers. At the same time, we are fulfilling our strategy and bringing a defense act into the small caliber ammunition business next to the commercial one. We can see a significant growth there, and we are presenting that we signed more than $1 billion contract for the production of the small caliber ammunition for the Southeast Asian customer.
On slide number 18, I will be talking a little bit more about the working capital and the seasonality. The seasonality is pretty much visible from the graph we are presenting. Here I would like to mention that this is the key focus and key area where we are really focusing to manage the supply chain and addressing the backlog and the pipeline. The increase in the net working capital in terms of the comparison to the revenues is pretty much following our guidelines. That is according to our expectation and as we planned and guided and ending up below 25% as we guided and as we expected for where we should end in 2025.
The reason is pretty much that we are getting ready for the vertical integration in 2027. At the same time addressing the high demand and including new product mix, whereby I can comment that the shift between the medium- and large-caliber ammunition and the Land Systems is also requiring a higher demand on the inventories and the raw material coming into the production. I will be talking about that later on, but we are keeping the guidance going forward that net working capital in terms of the percentage of the revenue should decrease going below 20% already in 2026. On slide number 19, that's a following slide pretty much connected also to the net working capital I have been presenting on the previous slide.
I can only comment that we are keeping a very high cash conversion at 87% level when talking about EBITDA minus CapEx, I'm sorry. CapEx intensity relatively low at 3.3% of revenue level now. Guidance has been somewhat higher, but I can only comment that number of the CapEx spendings is in accordance to our plan, and we are keeping focusing on that going forward and clearly monitor. Contracts for expansion and increase of the capacities has been even though expensed immediately as well as the R&D. That is one of the reason why we end up with a relatively lower CapEx intensity than previously guided.
On the slide 20, we are coming to the debt and capital allocation policy. The net leverage is still very healthy in accordance with or beating our expectation and the guidance we've provided. The guidance has been mentioning that we should end up by end of 2025 below 2x. The current net leverage position is 1.7x. We were guiding the market that, post IPO, the net leverage position should be below 1.5x, and it's 1.3x post IPO. We have relatively young capital structure, but coming also from the fact that in July 2025, we've successfully issued €1 billion in bonds.
Post IPO, we've received an investment grade update by the rating agency on such bonds, which is giving us possibility and we are keeping eye on a further optimization of the capital structure, mostly in terms of the cost of the debt and as I mentioned, the IG structure of the capital structure going forward. In terms of the capital allocation team, we have the following priorities for 2026 and onwards. Clearly, it's an organic growth CapEx to support the expansion and address the backlog and the pipeline, clearly focusing on current running programs for the vertical integration. Of course, another important point is a disciplined M&A, in case any that always has to be a value accretive, and it has to bring synergies for the group.
We will be focusing on maintaining the leverage together with the working capital going forward and as according to our guidance we've provided. That is bringing me to the slide number 21, where we are recapping the guidance we have provided. Here I would like to summarize again. The revenues for 2026 is expected to end up between EUR 7.4 billion and EUR 7.6 billion. Adjusted Operating EBIT margin 24%-25%. At the same level we are presenting now, the reason is the shift between medium large caliber ammunition and the land system, so clearly driven by the product mix. CapEx intensity somewhat higher at 8.5%.
We expect the majority of the CapEx is for the vertical integration programs coming in in year 2026. Net working capital, as I mentioned, we are focusing on that to be decreased below 20%. At the same time, we believe that we are able to secure the supply chain and the visibility and covering the backlog and the pipeline we do have. At the same time, we slightly changed the guidance for the net leverage. We are keeping the net leverage below 1.55 times. We are now replicating the previous guidance, post IPO net leverage. It's giving us quite a nice headroom, and it's a prudent approach in this case. For medium, I can only confirm what has been already stated within the prospectus and and throughout the IPO process.
In the medium term, mid-teens organic CAGR growth for the overall group. Expected 40%-50% growth for Land Systems. 20% CAGR growth for medium and large caliber ammunition in terms of our own production. Significant growth also in the defense electronics and the newly established Advanced Systems. CapEx intensity to be normalized in the mid-term between 4%-5%, still keeping split between the CapEx for the expansion for the maintenance. That is bringing me to slide number 22 with the overall summary. Let me please summarize the key takeaways from 2025 and what we've presented here.
The first point I would like you to take away from this is that we delivered a strong top-line growth above expectation with the industry-leading margins. Secondly, I would like you to take away that our growing order intake and backlog provide exceptional multi-revenue visibility, whereby with the EUR 15 billion of the backlog and EUR 42 billion of the total opportunities when including also the pipeline is giving us a clear line of sight to sustain growth. The third point I would like you to take away from this is that we enjoy a diversified customer base that position us for long-term program participation and reduced concentration risk.
Fourth point is that we are well-positioned in a priority defense segment as a European rearmament accelerates and ammunition stockpiles are replenished, and those are structural and multi-year trends. The last point I would like you to take away is that our partnership acquisitions and targeted investment are strengthening our capabilities, advancing the vertical integration and expanding our production capacity. I will repeat the Michal's words that for this we see CSG has a strong momentum into 2026 and beyond. It's bringing us to the end of our presentation, and now we are happy to answer any question you may have.
Thank you so much, dear speakers. As a reminder, if you would like to ask a question over the phone, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A queue. This will take a few moments. Now we're going to take our first question. It comes from the line of Sebastian Growe from BNP Paribas. Your line is open. Please ask your question.
Yeah. Hi. Good morning, Charles, Strnad, and Peter. Thanks for taking those questions. The first one would be around the guidance. You reiterated the range of EUR 7.4 billion-EUR 7.6 billion for group sales. With the output stronger than expected sales in 2025 implies growth of around 10%-13%. Can you help us understand why that growth in 2026 should be below the mid-teens growth ambition that you reiterated for the midterm, especially now where the firm backlog has further climbed to €7 billion? Related to this, can you also provide some color on the expected growth dynamics within the Defence Systems segment, so the medium & large calibre ammunition, the Land Systems and Advanced Systems pieces? Thank you. I would have one more.
Okay. I will start with the revenue growth. We are keeping our guidance. We believe that the shift in the product mix may be driving the answer to your question. It is expected that the Land Systems contracts are longer term than the medium and large caliber ammunition. Moving that together with the vertical integration, we believe it may be slower in 2026, as you mentioned, but overall CAGR should be reached throughout the midterm.
Can you be a bit more specific? How do you think about the growth dynamics then in M&L ammo as opposed to Land Systems and also the Advanced Systems parts?
As I said, the growth in the medium and large caliber ammo is expected to high single-digit and 20%, approximately 20% CAGR when talking about our own production and a ramp up of our own capacities. The Land Systems are expected to grow 40%-50% CAGR, and that product mix is coming starting 2026. As you can see in the backlog, the Land Systems is increasing rapidly. We are at the same time increasing our capacities in terms of the Land Systems. You have seen the announcement about the expansion of the production capacities.
It will be driven by the product mix pretty much. At the same time, the CSG Advanced Systems is just starting, so the production capacity ramping up is expected in the midterm, and as I said, it is expected and in midterm it will be delivering mid- to high 100 millions EUR into the revenues from CSG Advanced Systems, turbojet engines particularly and all these systems.
If I understand your comments correctly, then I would conclude that you would be fine with around 10% growth in ML ammo probably this year and then higher apparently in land systems and, well, because of the base effect, much higher in advanced systems. Is that a fair reflection?
Well, again, I would refer to the guidance I just said.
Right. I would move on to Ammo+ quickly. Apparently we have seen the segment reaching a high single-digit margin in 2025. That is however less than half of what The Kinetic Group achieved in the better years. I've noted your commentary on pricing adjustments across the selected product categories, but could you comment on the expected growth and also margin outlook for the segment and in particular the question because of the weak consumer confidence in the U.S. on the one side. On the other side, you also highlighted the small caliber contract with a customer in Southeast Asia. I just wanna better understand the dynamics both on the top line and also on the margin front going into 2026.
Okay. First of all, we can see a positive trend in terms of the recovery of the commercial market, but we are not waiting for that, as I said. We are bringing a defense contract into that. We expect a growth in the defense contract. We would like to definitely end up, and we've provided this guidance, to increase to between 30%-40% of the revenues from small caliber ammo coming from defense in the midterm with the margins accurate to the group margins we are presenting.
That would then also entail that you would see already a growth rate which is meaningfully accelerating again in 2026. I don't know if you are ready to provide any more color around the growth dynamics on the segment in the year 2026, but I guess I'm not the only one who would appreciate any more color.
Well, 2026 will be driven by the contracts we just signed with the Middle East countries. That is the production starting and ramping up of the production is expected in the coming years beyond 2026 as well. At the same time, we should be finishing already the certification of the small caliber ammunition of the U.S. brands in Europe. In the second half of 2026, we expect to be participating in European tenders for the small caliber ammunition as well in defense.
Okay. Thank you very much.
Thank you. Now we're going to take our next question. The question comes from the line of Chloé Lemarié from Jefferies. Your line is open. Please ask your question.
Yes, good morning. Thank you for taking my question. I'll have two, if I may. The first one would be on the framework agreement with Slovakia on large caliber ammunition. Just to clarify, is any of it already reflected in either the EUR 6 billion framework backlog that you provided or in the pipeline seen at the end of 2025? And how should we think about the potential phasing of firming up that framework agreement for your share of the business?
My second question would be on the impact of the situation in the Middle East. You very helpfully provided in your release that you don't see any kind of business implication. Could I maybe check with you in terms of your sensitivity to energy cost? How much of your cost base is actually tied to energy and how protected are you in terms of the contracts you have and how could it impact 2026, please?
Okay, starting from the back, energy costs. Energy costs are not significant part of our production, not in Medium & Large Caliber Ammunition nor in Land Systems. It's approximately 10%. We are also using hedging. For us, the impact from the energy price increase is immaterial if any, in this sense, very marginal. Coming to your second point about the Middle East conflict. Well, what we can say that it is expected to come here. Middle East countries are one of our customers already. We believe that the biggest potential in our case is within the CSG Advanced Systems and the turbojet engines and the demand which is expected for the air defense applications. Remind me, please, what was the first question?
Framework contract.
A framework contract in Slovakia. Yes, got it. Yes, it is visible already in the pipeline. Approximately EUR 1 billion.
Okay, thank you very much. Going forward, how quickly do you expect the next tranches to be recognized, maybe?
Well, look, we have to remind ourselves that it's including a SAFE program, which is for the rearmament. Until we are still under the conflict in the Ukraine, where the artillery ammunition is the most demanded, this will come. Most probably it's coming by stages for the rearmament and for the replenishment of the empty stocks. It is expected that it will come more, but I cannot comment upon now what should be the number.
Perfect. Very clear. Thank you.
Thank you so much. Now we're going to take our next question. The next question comes from the line of Ross Law from Morgan Stanley. Your line is open. Please ask the question.
Hi. Good morning, everyone. Thanks for taking my question. Just to come back on the pipeline, it's increased by EUR 9 billion. It'd be great to get just a better understanding of what's driving that. Obviously, as you mentioned, Slovakia is EUR 1 billion, but what's the rest? The second question is just on CapEx. It came in quite a lot lower than guidance, which was around 5% of sales. It came in at 3.3%. I'm just wondering what the reason for this is and whether it's just timing. Thanks.
Okay. Starting with the pipeline. Well, I've commented in the past that I expect the pipeline to be more balanced between the Medium and Large Caliber Ammunition and the Land Systems, and this is exactly the case. Since we expect a higher growth in Land Systems, that is driven the pipeline growth mostly. About the CapEx, yes, we end up lower than expected, but I commented that in terms of the total volumes and total spendings, we are according to our plan. We may be planned to push upfront some of the CapEx programs, which we plan for 2026, but this haven't happened, so it end up by EUR 3.3. All the CapEx plans and programs are running on time and according to expectations.
Excuse me, Ross, any further questions?
Okay. Thank you. I'm not sure if anyone else didn't hear the end of it. My line seemed to crackle a bit, but I'll come back after the call. Thanks.
Thank you. Now we're going to take our next question, and it comes from the line of David Perry from JP Morgan. Your line is open. Please ask your question.
Yes. Hello, Michal, Zdeněk. Congrats on the IPO and the results. I've got three questions, please. The first one may be for you, Michal. Could you just give us a little bit more information on 4iG Space and Defence Technologies? I'm not quite sure. Is that the listed company or is that a subsidiary of 4iG? And just if you can share any financial info and you know what this is adding to the group. And then I've got two questions please for Zdeněk. The first one is could you help us understand a little bit the evolution of the minorities? I think you're expecting the minority charge to drop quite a bit in 2026. Can you just confirm that and also whether there's any related cash flow to that as minorities reduce their stakes?
My third one please is just on your, Zdeněk, on your guidance for leverage being below 1.5. You've given us the building blocks for free cash flows. That would suggest much lower leverage. There's something happening, I think, between free cash flow and change in net debt. Presumably, that's related either to buying out minorities or other plans. If you could just fill out the bridge there between free cash flow and the change in net debt for 2026, that would be really helpful. Thank you.
Okay, I will. Yeah.
Okay, great. I will try to answer the first question. For 4iG itself, it's a publicly listed company, but we have created the partnerships with 4iG in their, I would say, subsidiary or daughter company level where we have 49% and this SPV acquired Rába Automotive. The structure of the transaction.
Okay. You talk about thousands of vehicles. Is that why the pipeline has gone up? Is it Hungary that's changed the pipeline?
Hungary is not in the pipeline, no. Because first of all, we are not the consolidating entity. Second of all, there is no concrete order yet.
Okay. Thank you.
Yes.
Okay. Now, coming to your first point about the minority stake, I can confirm we expect a decrease in the minority. We are not expecting any cash out connected. This is what I can confirm clearly. It will be pretty much driven by the minority stake which the Slovak government is owning as well as the other small minorities we are still keeping, but no cash flow expected to go out from that. In terms of the leverage, it's a very good question. We've made an internal calculation, so if I can go through it with you. We expected the gross debt to be between EUR 4.5 billion and EUR 5 billion.
It depends pretty much on the working capital lines and when we are able to collect the very late revenues in December. Coming from that, we expect EUR 7.4 billion-7.6 billion revenues with the 24%-25% EBIT margin. We are ending up approximately to EUR 1.8 billion-2 billion EBITDA. With the 8.5% of the CapEx intensity, we should decrease EUR 700 million. I am expecting between EUR 2 million-50 million to be an interest expense on top of that. We are ending up pretty much into the number of approximately EUR 1 billion. Keeping the taxes roughly between EUR 300 million-400 million, we are coming back to EUR 600 million, and it's a very rough calculation.
Of course, I need to work with the net change of net working capital, stating that it will decrease by 5% of the revenues. It's giving me EUR 250 million-EUR 300 million roughly back, if I'm not mistaken. Ending up back to EUR 800 million-900 million on top of cash generated. With the EUR 4.5 billion-5 billion, and I am keeping some headroom, so let's consider EUR 5 billion minus EUR 2.3 billion of the cash, I'm getting EUR 2.7 billion with the EUR 2 billion of EBITDA 1.35. Was I too or does it make sense?
Yeah. If I followed all of that, I think EUR 800-900 of free cash flow, which I think is kind of around the consensus on Bloomberg for 2026 and EBIT.
Yeah.
Obviously you had the primary as well. Doesn't that get you to leverage more like 0.7 or something like that? Or am I missing something? It's just, it's the free cash flow bit is crystal clear. I'm just wondering if there's something else that we're missing.
No, I was just counting that coming from the gross leverage. Look, I expect that, I'm sorry. That was EUR 4 billion to EUR 4.5 billion to EUR 5 billion gross leverage I was counting.
On a net basis, net debt to EBITDA? Do you have that number?
I was counting net debt approximately 2.7-2.8.
The end of 2026?
Yeah.
Okay. I'll take it offline with Peter. I thought it would be a bit lower given the net debt, the free cash flow you talked about.
I commented that I am keeping some headroom. That's true. If we can end up approximately at the same level as we are now post IPO. Yes, that's correct. We are keeping some headroom.
All right. Thanks a lot.
Thank you. Now we're going to take our next question. The question comes from the line of Petr Bartek from Erste Group. Your line is open. Please ask your question. Petr, your line is open. Please ask your question. Are you on mute? Now we'll proceed with our next question. The question comes from the line of Sanjay Bhagwani from Citi. Your line is open. Please ask your question.
Hi. Thank you very much for taking my question also. My first one is on. I think you already alluded to the capital structure optimization, that when you had previously issued your bonds, you were an unlisted company, high yield rated, but now you are a listed company, sizable market cap, and there's an IG rating. So can you please elaborate a little bit more here how you are thinking of the capital structure?
I understand the key purpose is to minimize the cost of funding and your cost of capital. Do you plan to do some sort of like i t's just trying to understand a bit more on the timing. When can you actually optimize this, and how are you thinking about this? Is it more like, do you take out all the bonds outstanding and, then think of something like IG kind funding, which can be at a lower rate? That is my first question.
Yeah. We would like to prepare the capital structure for the 4iG structure going forward. We just issue the bonds back in July 2025. To be honest, it does not make economic sense to refinance those now. Those are under the non-call period, so probably would be not in a cost benefit side. Definitely we would like to be ready for the capital structure combination of the working capital lines together with the bonds. Let's see that. Structurally, we don't have the documentation, especially with the term loans ready. That's what we are working on now.
Thank you. Is it fair to say, before the call date of July 27, the capital structure stays probably as it is now, both on the loans or you can do some bond issues and replace the loans with that?
Well, under current circumstances, I think it's a fair assumption.
Thank you. That's very helpful. That's all.
Thank you. Now we're going to take our next question. Now we're taking the question from Petr Bartek from Erste Group. Your line is open. Please ask your question.
Good morning. Can you hear me?
Yes, we do.
Yeah. Thank you. Thank you for taking my questions. One, technical. If I understood correctly, you are not going to fully consolidate it for 4iG joint venture in Hungary. Second-
Correct.
There are... Yeah. Sorry, go on.
No, I wanted to confirm. Yes, we are not going to consolidate.
Okay. There was an announcement about the joint venture with Eurenco in Slovakia. Can you give us a bit color on what we can expect from that, whether it will be more an impact, for example, on the product mix, or you expect some impact on the margin? Also, the multiple recent announcements about the joint ventures, if it's all included in your CapEx guidance of this 8.5% of revenues or is there something on top of the guidance? Well, I'll speak about the announcements after the year-end 2025.
Okay. Starting with the joint venture with Eurenco, this is not to be consolidated as well. We expect this as a strategic partnership. This should allow us to secure our supply chain throughout the combination with Eurenco, whereby we expect to source nitrocellulose from them, and we expect them to source us with the final product. Yes, there will be a margin increase from, let's say, as a secondary implication from the sourcing, and that is clearly our view in terms of Eurenco.
Thank you, Peter. Now we're going to take our next and the last question for today. The question comes to line of Lorenzo Di Patrizi from Bank of America. Your line is open. Please ask your question.
Hello. Good morning. Thank you for taking my question. I have three. One is on the margins for Defence Systems. Can you help us understand what the drivers behind the margin expansion mid-teens are, especially by segment and in terms of operational efficiency, vertical integration and pricing? Are you at all concerned about the pricing sustainability if more capacity comes to the market as is expected? And then, could you tell us more on Advanced Systems? If I'm not mistaken, you were guiding before for mid-hundred revenues, and now it's more mid- to high-hundred revenue. Has anything changed there? What do you see as the key growth drivers there? Also, how much growth are you expecting from M&A versus organic?
I will start with the defense systems margin. The expansion we've provided for the mid-term guidance is pretty much driven throughout the vertical integration, whereby the majority of the product cost is driven by the propellants and the explosives. Overall, all together is approximately 70% of the production costs, meaning both propellants and explosives together. Throughout the vertical integration, I think we've presented that we will be able to save more than 70% of the explosives costs and approximately 50% of the propellants costs. This is including all the previous questions about the and all the strategic partnership, as well as our own nitrocellulose. This is the key driver. What we assumed for when we were preparing the guidance is that we are assuming a fixed pricing.
This is one of our key advantage when talking about this, because throughout the vertical integration, we are able already now to fix the price for whatever customer is requiring. The requirement from the customers is quite high because they would like to know what the costs of the products will be going forward, and are trying to fix it as much as possible. This is what we are experienced now and what we can see in the technical pipeline. Therefore, we assumed a fixed price. And that is probably answering also your question about the sustainability, right? Throughout the fixed price and the vertical integration, we will be able to protect our and increase those in the defense systems, particularly.
For the Advanced Systems, too, we've provided guidance for the mid-hundreds. I can only comment. It's pretty much on the product mix what we will be operating. The product mix we've guided is at the mid-hundreds. If we are considering the new demand coming also from the Middle East that we can see and where we are more experienced, that might be a shift between the product mix and then we can slightly ramp up the revenues going forward.
Thank you so much, Lorenzo.
Okay. Thank you, everybody for your questions. I look forward to speaking to you soon.
This concludes today's conference call. Thank you for participating. You may all disconnect. Have a nice day.