Welcome to CSG's nine months 2026 earnings presentation. Today's presenters are Michal Strnad, CEO and chairman of the board, and Zdeněk Jurák, CFO. Michal will begin with an update on the group strategy delivery and the financial highlights. Zdeněk will then cover the performance in more detail. Q&A will follow the prepared remarks. For those joining by phone, if you wish to ask a question during the session, you need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a question, please press star one one again. Be advised that today's conference is being recorded. Please also familiarize yourself with the disclaimer information at the start of the presentation deck. I'll now hand you to Michal Strnad. Please go ahead.
Good morning to all of you, and thank you for joining us. We will shortly discuss our financial performance. However, I want to first step back and look at how we are shaping the business for the long term. This year, we have taken important steps to build a broader and stronger CSG. Let me start with medium and large caliber ammunition. Demand is moving towards long-range ammunition. These rounds need more propellants and explosives and longer lead times, so control of the supply chain is critical.
That is why we are investing in vertical integration. It makes us more self-sufficient in these key inputs. In the third quarter, we acquired the Gnaschwitz site in Germany, where we are investing more than EUR 100 million. Together with our MSM Walsrode site, it is the cornerstone of our German energetic platform. It will serve our own businesses as well as external customers.
We remain on track to produce our own propellants and explosives in-house by the end of 2027. This is the main driver of our future margin growth. But CSG is much more than an ammunition company. Land Systems has continued to grow well. It now represents 57% of our order backlog. It is up from 40% in 2025. In the second half of the year, we have secured further orders and partnership. In Latvia, CSG was awarded to lead on a major program for the armed forces. It includes MORANA self-propelled howitzers and multi-rocket launchers. The total value is in the hundreds of millions of euros. In Poland, we signed three contracts worth more than EUR 50 million. They cover vehicle chassis and are financed through the EU's SAFE program. Our partnership with PGZ is now at a strong strategic level.
We also won bridge-laying vehicle contracts for five customers across Europe, Middle East, and South Asia. As we expand, our overall customer base continues to diversify. Ukraine is now 17% of the group revenue. At the end of last year, it was 27%. Our U.S. footprint keeps expanding. In the third quarter, we broke ground on the future artillery complex in Iowa. We established CSG Land Systems North America in Michigan, and we announced jet engine production with Firecrest Aerospace in Wisconsin. Together with our Ammo+ business, this makes CSG a long-term industrial partner in the United States. Last week, we shared another significant achievement for our group in the U.S., where we were selected as one of the US Army's qualified contractors. This enables us to compete for projects under a five-year ammunition plant modernization program worth up to $4.2 billion.
Unmanned systems are a fast-growing part of defense spending. CSG is building strong positions in this market. Firecrest Aerospace will produce jet engine for drones. We also have a technology center for these engines in the Czech Republic, so we can produce on both sides of the Atlantic. We also made a strategic investment in North Vector Dynamics in Canada. This gives us a position in missile interceptors, counter-drone systems, and hypersonic technology. In October, we joined two U.S. partners to develop SwarmShot, an autonomous system to defeat hostile drones. We also signed a cooperation agreement with the EU company Bavovna. Bavovna develops autonomy and navigation technology for unmanned vehicles in the air, on the surface, and underwater. CSG will help bring technology to international markets. At the half year, I said we are exploring opportunities in space. We have now delivered on that.
In October, we invested in MDA Space, a leading global space technology company. We have become its largest shareholder. Security demands more and more on space for communication, navigation, and intelligence. For CSG, space is a natural next step from our defense and aerospace businesses. Over time, it will let us offer our customers a wider range of capabilities. We have also created a dedicated space team with experts in the space strategy, investment, and the Canadian market. We are winning contracts across a broad range of products, from ammunition to vehicles and engineering systems. At the same time, we are securing new partnerships and expanding into new markets. Our awards from customers such as the U.S. government show we can compete at the highest level. As a result, CSG is becoming a more diversified global defense group. Our core businesses are strong, and we are building for the future.
Let's now turn to our numbers. The headline figures demonstrate a good performance overall for the first nine months of the year, as revenue was up 6.1% to EUR 4.8 billion. This was driven by the group's core Defence Systems businesses, which grew by 9.5%. Adjusted EBIT for the first nine months improved slightly to EUR 1.1 billion. This gave a margin of 23.1%. Q3 revenue and margin were lower than expected. Zdeněk will discuss the moving part shortly. In short, this was a result of delivery timing and business mix. As revenue we had planned for Q3 will now be delivered in Q4. We therefore retain confidence in our full-year revenue guidance of EUR 7.4 billion-EUR 7.6 billion. Third quarter EBIT margin of 21% reflects our accelerated sale of standard range ammunition from inventory at lower market prices.
Full vertical integration of ammunition production remains the key lever for reaching our medium-term EBIT margin target. Importantly, demand remains robust. Our total backlog and pipeline reach a record EUR 47 billion. This provides strong revenue visibility and evidences the long-term structure support we see in the market. Looking at our revenue composition for the nine months, Defence Systems, the 80% of the group revenue. Medium and large caliber ammunition made up 64% of total revenue. Land Systems made up 14% of total revenue. Our other business segment, Ammo+ contributed 20%. The chart also shows CSG diversification away from Ukraine, with the revenue share from NATO and other allied countries, excluding Ukraine, increasing to 83% from 73% at year end. Turning to the balance sheet and cash flow. Net leverage period end was 2.4 x on a reported basis.
Adjusting for the strategic investment and sub-supplier financing, it was 1.6 times. Capex intensity was 5.3% as planned. We continue to invest significantly in production capacity and modernization to service demand. Net working capital percentage of revenue was 42%. As expected, this was driven by planned inventory restocking. We will cover working capital and leverage in depth later in the presentation. Overall, this was a good set of results. Demand remains robust, and we are well-positioned to capture the opportunity ahead. Now, I will pass to Zdeněk, who will take you through our performance in full.
Thank you, Michal. I would like to start on slide seven with some context to the performance by briefly looking at the accelerating market shift towards extended-range ammunition. While this shift is currently having a temporary impact on margin, CSG is well-positioned to capture and benefit from its upside. As you know, the group has been at the forefront of this trend, and this year, we have realigned our production facilities to meet market demand. In Q3, almost all in-house production was for extended-range ammunition. This means that by the end of 2027, we expect to be producing around 1.1 million own large caliber rounds, up from 850 this year.
However, while we have completed the operational pivot of our production lines, the pace of transition toward extended-range ammunition has created industry-wide challenges in scaling up the sub-supply chain quickly enough for certain components required to deliver on market demand. As the market shift toward extended-range ammunition, there has also been a notable decrease in the market price for conventional standard range ammunition, particularly in Q3. While we have been actively selling down our existing inventories of standard range ammunition, a combination of lower realized prices and longer lead time for sales of extended-range ammunition is creating a temporary negative effect on M/L Ammo margins. We are confident, however, that this impact is only short-term, and that as one of only a few European players with its own in-house capabilities, CSG is well-positioned to capture market demand.
Extended-range pricing is stable and at the attractive levels, and at a substantial premium to standard range. Moreover, our vertical integration drive, which will see full in-house production of energetics by end of 2027, is key to scaling our extended-range ammunition. We expect the standard range sell-off to continue during this quarter, with inventory expected to be largely sold through 2027. CSG's shift to 100% in-house extended-range production will support our mid-term margins in line with the guidance. This is the backdrop of our revenue and operating EBIT numbers for Q3 and for our guidance for the full year as presented on slide eight. The group performed strongly in the year- to- date, and we are reaffirming our revenue guidance for the full year of between EUR 7.4 billion-EUR 7.6 billion.
While revenue for the first nine months was up by 6%, Q3 revenue was down [inaudible] at EUR 1.5 billion. Crucially, however, this was a result of timing and not of demand. Approximately EUR 300 million of deliveries have moved from Q3 to Q4, mostly due to the long lead time and delays in the sub-supply chain that I mentioned previously, but also because large number of Land Systems orders milestones will be recognized in Q4 compared to Q3 last year. Excluding this timing effect, Q3 revenue would have been up 6% at around EUR 1.6 billion. Accelerated sales of standard range inventory at lower realized prices resulted in a Q3 operating EBIT margin of 21%, a figure we are also now guiding towards for full year 2026. We are confident, however, that this impact on the margin is only temporary.
Long lead times have meant delivery times of our high-margin extended-range ammunition have moved into Q4 2026 and into 2027. Land Systems is now a major growth engine for the group, and margins are expected to build as programs ramp up, particularly once aftermarket revenues become a more meaningful contributor to the revenue. At 8%, Ammo+ margin remains below the normalized level. The business, however, is showing signs of recovery with a doubling of EBIT EUR 28 million in Q3 2026. Finally, the benefits of our vertical integration initiative are not yet reflected in our margins. On slide number nine, I will talk in more details shortly about net working capital, debt, and capital allocation, but I just want to summarize the steps we have taken in Q3 to support CSG's growth and the impact that they have had on leverage.
Regarding net working capital, we have continued to invest to secure long lead time components for extended-range ammunition and chassis for Land Systems. This has resulted in some delivery time moving into 2027, together with working capital unwind and cash release. We therefore now expect net working capital to be below 35% of revenue for full year 2026, rather than below 20% as previously guided. Our reported net debt includes over EUR 1.4 billion of strategic growth enabling investments. This comprise firstly, EUR 731 million of capital we have deployed into joint ventures and strategic stakes such as MDA Space to broaden our capabilities and supply base. Secondly, EUR 700 million of short-term financing that we extended in Q3 to key sub-suppliers to support them in expanding capacity of the long-term components needed to support the group's growth.
This temporary move will ensure that the markets can accelerate in line with our ambition. We simply focus on delivery to our customers and secure the delivery revenues. Therefore, you don't see any change in the top-line guidance for 2026. We expect capital intensity to increase in Q4, primarily to support our vertical integration strategy according to plans. Our guidance for full year 2026 capital intensity remains, and therefore, at around 8.5% of the revenue. Finally, we expect our higher Q3 net leverage position to unwind in Q4 as working capital goes to cash. In terms of guidance then, this combination of a slower unwind of net working capital and significant growth, enabling investments, means that we are now targeting full year 2026 reported leverage below 2x and adjusted net leverage below 1.5x.
Adjusted net leverage is excluding the EUR 731 million capital deployed to joint ventures and strategic stakes, and also excluding EUR 700 million short-term financing of sub-supply chain. Next slide, number 10, sets out how our backlog has contributed to expand over the first nine months of 2026, with diversification across the group sub-segments. Total order backlog increased to a record EUR 18 billion at the end of September, up from EUR 15 billion in December 2025, led by gains in Land Systems. That is 24% year-to-date growth and equates to a coverage ratio of 2.6 times of our nine-month revenues. in Q3, we saw approximately EUR 1 billion in billings and EUR 1.5 billion recognized as revenue. Fixed backlog, which consists of signed effective contract, was EUR 7 billion. Frame backlog, which are longer-term framework agreements, stood at EUR 8 billion. The backlog breakdown confirms CSG's transformation beyond ammunition.
Land Systems comprised 57% of our backlog, followed by M/L Ammo at 32%, Ammo+ made up 8.5% of backlog, and Aerospace & Defence Electronics and Advanced Systems 2.5%. Pipeline under negotiation increased to EUR 29 billion for a total opportunity of EUR 47 billion. As I highlighted back in August, our sizable and growing backlog gives us unprecedented multi-year revenue visibility. Our active pipeline, combined with our demonstrated track record of converting pipeline opportunities into firm contracts, drives our long-term growth momentum. On slide 11, I've already touched upon some of the points on this slide, but very briefly. Nine months revenue growth was driven by strong momentum across our Defence Systems business, and this reflects the sustained demand we are seeing both with our core European and NATO markets, and increasingly in other global markets.
With Defence Systems, the revenue mix continues to shift towards Land Systems, where revenue was up 16%. Group operating EBIT margin was 23.1% for the first nine months of the year. As mentioned, reflect the evolving product mix towards Land Systems and extended-range ammunition in M/L Ammo sub-segment, combined with the slowdown of standard range ammo. Defence Systems achieved a margin of 27.9% for the first nine months, while after a difficult start to the year, the Ammo+ margin has recovered well to stand at 8.1%. To reiterate, vertical integration here remains the key lever for margin expansion. Let me now turn to performance and operational development across our two core business segments, CSG Defence Systems and CSG Ammo+. On slide number 12, starting with Defence Systems, which made up about 80% of group revenue. Across Defence Systems, execution remains our primary operational focus.
Order intake remains good, with continued effective management of the supply, logistics, and export license timing. Revenue was EUR 3.8 billion for the period, up 9.5% year-on-year. Operating EBIT increased 6% year-on-year to EUR 1.1 billion, supported by operational leverage. This resulted in a margin of 28%. The segment's revenue split by geography continues to diversify. We've seen growing demand from both NATO members and South Asia. The revenue contribution from outside of Ukraine stands at nearly 80% for the first nine months. In parallel, the strong growth enjoyed by Land Systems means that this sub-segment now represents 18% of our Defence Systems business. Across the business, we continue to expand our capabilities across propulsion, unmanned systems, counter-UAS, autonomy, radars, and systems integration. Q3 saw a number of operational highlights, which I will expand upon over the following slides.
Moving to our medium and large ammunition segment on slide number 13, where revenue is up 7% year-on-year. Vertical integration of key components remains central to margin development in medium and large ammo, and we are making good progress. We are on track for fully in-house production of propellants and energetics by end of 2027 or early 2028, a target supported by analysis from the Renaissance advisory. Renaissance analysis also supports our target of 1.1 million large caliber rounds by end of 2027, an increase of approximately 250,000 rounds upon 2026. in Q3, we strengthened our energetics platform with the acquisition of the site in Saxony. Our initial investment of more than EUR 100 million will establish a production of nitroglycerin, ammunition, and components.
Together with the MSM Walsrode nitrocellulose site, which remains on track on the end of 2027, Gnaschwitz forms the cornerstone of our German energetic base, serving both M/L Ammo and Ammo+ as well as external customers. Elsewhere, Lavrio in Greece is already producing 155 mm ammunition, with base plate production being this year and TNT output targeted for the year of 2027. The EURENCO joint venture in Slovakia is set to start producing at the beginning of second quarter of 2028. We also signed an agreement worth more than EUR 100 million with the Dezamet, part of PGZ Poland, 155 mm ammunition components, including pyrotechnics components and fuse sub-assemblies. Land Systems, on slide number 14, is meeting our expectation of becoming the group's primary growth engine. It now contributes to over half of overall group backlog and project under negotiation, with backlog up 77% in the year to date.
Revenue increased 16% year-on-year to EUR 678 million. Operating EBIT margin was approximately 16%, still weighted towards the production phase, although production capacity is running slightly ahead of our schedule. Q3 saw further order intake across several products and markets following the sizable wins in the first half of 2026. This included a major MORANA-led program in Latvia, chassis contract in Poland that took the PGZ partnership to a strategic level, and bridge-laying vehicle orders across Europe, the Middle East, and South Asia. We are expanding our international footprint with the U.S. as a growing focus. Through CSG Land Systems North America, we expect to build CSG's position in self-propelled artillery and high mobility tactical vehicles as part of our broader plans to localize production in the U.S. Moving now to slide number 15.
As you know, Aerospace & Defence Electronics and Advanced Systems is where we are building for the next phase of growth. While Aerospace & Defence Electronics contributed EUR 77 million in revenue in the first nine months, and Advanced Systems EUR 4 million, they are becoming increasingly important strategically to us. During 2026, we have continued to expand our capabilities across propulsion, unmanned systems, counter-UAS, autonomy, radar, and systems integration. With our entry into space, we have taken a significant strategic step into technologically advanced industries. Building on first half partnership with Ukrainian Armor and PGZ, the group strengthened its propulsion base in the third quarter. Engine production for unmanned aerial systems, including target and loitering drones, will come from Firecrest Aerospace, a new U.S. joint venture in Wisconsin. Together with a companion technology in Czech Republic, this gives CSG propulsion capability on both sides of the Atlantic.
Several U.S. tenders are underway, and U.S. revenue is expected from 2027. We also added missiles, interceptor, counter-drone, and hypersonic technology through a strategic minority stake in North Vector Dynamics in Canada. in October, we added autonomy and alternative navigation to a cooperation agreement with Bavovna, and autonomous counter-drone systems through the SwarmShot project with Mossberg and Palladyne AI. As Michal has already flagged, CSG entered the space sector in October, becoming the largest shareholder in MDA Space. Space is increasingly central to security and is a natural extension of our defense and aerospace capabilities. Moving now to slide number 16, to look at Ammo+, the largest small caliber producers in the Western world. After market weaknesses into the first quarter of 2026, renewed U.S. commercial demand remained strong through the end of the nine-month period, despite inflation concerns, with run rate volumes close to peak levels.
Revenue was EUR 971 million in the first nine months, or 30% of group revenue. Operating EBIT was EUR 79 million, with a margin of 8.1%. Q3 revenue was up 11% year-on-year. Investment in source and production capacity and copper price volatility weighted slightly on profitability. However, robust demand enabled further pricing progression over the period, underpinning the margin. In Q3, placed beyond the U.S. commercial market. Following the FBI rifle ammunition award in the first half, Federal was selected in the third quarter to supply duty and training ammunition to police force across all five Nordic countries.
Turning now to slide number 17 about the working capital, which remained broadly flat in Q3, increasing with a pretax operating cash flow of EUR 211 million in Q3. Net working capital stood at just over EUR 2.9 billion at the end of the nine-month period, representing 42% of last twelve months revenue.
We are now focused on converting and build into deliveries. Consistent with the pattern described at Q1 and first half of 2026, net working capital reflects pre-stocking of components, primarily within the M/L Ammo segment, through both direct inventory purchase and advance to suppliers. CSG also provided material advances to secure chassis supply for the Land Systems. Typically, net working capital builds through the year and release within fourth quarter deliveries. This year, however, with longer lead time on both extended-range ammunition and Land Systems inventories, part of delivery timings into 2027, together with the related working capital unwind and cash release. As already mentioned, as a result, we now expect net working capital of below 35% of revenue for full year 2026, rather than below 20% as previously guided.
On slide number 18 about the cash flow and CapEx funding strategy, operating EBITDA less CapEx was [inaudible] in the period, down from EUR 1.1 billion for the first nine months of 2025. Capex more than doubled to EUR 255 million, or 5.3% of revenue, as investment in capital accelerated through Q3. Cash conversion stood at 79% compared to 90% in the previous year, driven by mentioned CapEx. I would reiterate that rather than reflecting low depreciation, these movements reflect the investments made to support our strategy to modernize infrastructure, scale up production capacity, and invest in technological upgrades to sustain the group's long-term operational competitiveness and support the on-time delivery and no delays in the top line. Free cash flow improved by EUR 418 million year-on-year, reflecting significantly lower working capital outflow in Q3, making a clear turning point.
Interest paid of EUR 209 million will benefit from our July refinancing. Now about the capital allocation on slide number 19. The steps we have taken to optimize our financing profile. Our reported net debt of EUR 4.3 billion and respective reported net leverage 2.4 x mainly includes long-term investments rather than operating cash needs, and we expect leverage to cash and earnings growth. Adjusted net debt at the end of September was EUR 2.9 billion, with net adjusted leverage of 1.6 x on LTM EBITDA, which is nearly EUR 1.8 billion. This is reflecting continued investment in net working capital, and adjustment consists of EUR 731 million capital deployment to acquisitions and strategic co-stakes, and also EUR 700 million of short-term financing to sub-supply chain.
The short-term financing has been provided to several suppliers or sub-suppliers, where the assessment of their availability has been one of the key criteria when providing such financing.
As I touched upon earlier, during Q3, we extended financing to key sub-suppliers in order to support them expanding capacity of long-term the group growth. As I mentioned, the total value of financing extended is EUR 700 million. This is a temporary move, ending in September 2027, to ensure that the market can accelerate in line with CSG's ambitions. We continue to manage the capital structure actively, and in July, took further steps to optimize our financing profile when we announced the refinancing of [inaudible] under a single syndicated facility. This reduced our cost of debt and extended the group's senior debt maturity profile to six years. At the same time, it significantly increases our flexibility to address net working capital demand through a new and increased revolving credit facility. The group now has a well-diversified, long-dated funding base. Now turning to slide number 20 about the guidance.
To confirm then, we are reaffirming our midterm outlook and updating our full year 2026 guidance as set out on this final slide, and as we already mentioned during the presentation. CSG has performed well over the first nine months of 2026. We have confidence in the final quarter of the year and our position moving into 2027. The demand environment remains strong. Our drive towards vertical integration is on track. We are successfully expanding our U.S. footprint, and we continue to broaden our capacities in advanced technologies. At the same time, we are securing our top line and delivery on time to our customers through the temporary levels of working capital and net leverage position. That concludes our presentation. Michal and I would now be very happy to take your questions. Thank you.
Thank you, dear participants. As a reminder, if you wish to ask a question, please press star, one one on your telephone keypad and wait for name to be announced. To withdraw a question, please press star, one, and one again. Please stand by while we compile the Q&A roster. This will take a few moments. Now we are going to take our first question. The question comes line of Chloé Lemarié from Jefferies. Your line is open. Please ask your question.
Yes. Good morning, Michal and Zdeněk. Thanks for taking my question. If I could start on M/L Ammo, please. Could you maybe share how the pricing evolved in magnitude in standard range during the quarter? Also, why was this something you haven't been able to anticipate earlier in the year? I guess I'm trying to understand what left you with a large inventory of standard range ammunition that you now have to discount. If I could ask about the strategy around MDA Space. Would you seek a board member seat with them, and have you found an agreement on how you could work together operationally? Thank you.
Okay, I will start with point number one, and then I leave Michal to answer the second question about MDA. Chloé, hello again. It's been quite a fast one because we've been delivering for the price and for the standard price we have seen in the backlog, even during the summer and beginning of September. Whenever we entered new tenders and new orders were coming, it was not possible to pass it through a standard price or the price we've set up throughout the tenders. We realized that the prices are going down, and we started to sell for the lower price to be able to serve the customers, basically. Our key focus is, we have two choices.
Either we will be serving the customer, which we want, we don't want to lose our credibility and our relationship with our customers, or we will be waiting and we will be starting to play again with the deliveries, which we don't want. True is that it's been quite fast, faster than we expected, and we discussed that during our discussions. It's a matter of fact. [inaudible]
Yeah, and regarding the MDA, look, we have accomplished what we aim for entering the space sector and building the path for the cooperation. Our hope is [inaudible] our investment and on building a strong long-term relationship with MDA. That's all what I can comment now.
And Chloé, you were also asking about the deliveries and the release of the stocks. Look, we still do have some production of the standard range ammunition. It's not that there would be no demand for the standard range ammo. The move, the shift between the standard and the long range, just in the value, simply have more than the overall demand could be. The demand is there, it's been going, but it's somewhat shifted through the time.
This is what is causing now the demand. We will try to sell out, obviously, what we have on stock. Our production completely shifted, and this I already mentioned, 100% to extended-range ammunition production only this time. If the demand will be there, then going forward, we may be still using either recommissioning or we will continue the production in a more efficient way. For the time being, we are now focusing to deliver to customers and to deplete the stocks with the standard range ammo.
Can I just ask, in terms of the pricing that you have had to cut, are we talking about a 30%-40% cut to pricing that you were experiencing before?
It is variable now. It is really variable. First, we have seen around 20%, but it is volatile now.
Okay. Thank you very much.
Thank you. Now we are going to take our next question. The question comes line of Ross Law from Morgan Stanley. Your line is open. Please ask your question.
Hi. Good morning. Thanks for taking my question. The first is on margins. Your Q4 implied margin to meet your 20% or 21% new guide for the full year is mid-teens in the Q4, which is another material sequential step-down. Can you just run us through what's driving this, and can you also provide a more granular assumption at the subdivision level? Secondly, on ammunition demand, it looks like ammo backlog fell by about EUR 700 million to about EUR 5.8 billion at the end of Q3. If you could just give us your updated expectations in terms of orders in the Q4, and whether you are still comfortable with the capacity and production rate targets that you set. Thank you.
Okay, starting with the performance, the operating EBIT margin guidance. As you know, this year we have been changing the profile of the business. Land Systems and long-range ammunition now make up a larger share of the product mix. The impact of this change will be extremely positive for CSG, both financially and strategically. But this evolving product mix has consequences for margin in Q3. The accelerated sale of standard-range ammunition from inventory at lower realized prices lowered margin to 21%. Together with the greater contribution of Land Systems and continuous sell-down of this, it is expected result, and will be driver for the EBIT margin for the full year. As I mentioned, we expect quite a sizable milestones in terms of the Land Systems, where the margins are between 15%-18%, or even 20% sometimes. So this will be the key driver of this in fourth quarter.
Can you remind me the second question, please?
Yeah, it was just a kind of a broader comment about ammunition demand. So it looks like your ammo backlog fell in Q3. So I am just looking to understand what your expectations are in terms of order intake in Q4, and also whether you are still comfortable with the ramp-up you are projecting.
No, it has not fallen. The movement is only in the sub-supply chain. What you can see, the net working capital has not moved, and it is still stable. Simply, we had to replace the advanced payments and inventories we provided in the first half of 2026 with another down payments and payments for the delivery of the inventories, just to meet the top line and serve our clients. This is for us the key. We do not see any drop in the order intakes in Q3. It is just the protecting because you do not see the milestones in the Land Systems.
Okay. I will follow up. Thanks.
Yeah. Pleasure.
Thank you. Now we will take our next question. The question comes line of David Perry from JPMorgan. Your line is open. Please ask your question.
Yes. Hello, Michal, Zdeněk. One strategic question first for Michal, and then maybe I will come back with just a few technical questions for Zdeněk, if that is okay, on cash and debt. Michal, one of the things that has become apparent through this results season, I think, with other companies is governments are clearly looking for better value for money from their suppliers, which is both a challenge, but maybe also an opportunity. I just wondered, as a lower-cost producer, what you see the opportunity, and in particular, whether you think you would have an opportunity to sell vehicles into Germany. Can we start there, please?
We can definitely start with that, and thank you for the question. Look, you are right. We have the, I would say, detailed strategy for the German market. We are having multiple conversations with different partners and also the customer or the customer base. Definitely big opportunity is there, but that is all what I can say now. We do not have these opportunities in the backlog or in the pipeline, so it is on the top. We are obviously working on it. We would like to be there, and we would like to do our best to serve also to German army. Yeah.
Okay. Then apologies, because the phone line is not great. I am not sure if you answered Ross's question. If you did, apologies if I missed it. Have you said what you expect for M/L Ammo orders in Q4?
It still continues. We expect the same path as we are continuing during the year. Well, order intake should be relative, and we will be meeting the guidance for the revenue. So, it is according to expectation.
Okay. Zdeněk, a couple of questions for you, if I may. You've guided on working capital and CapEx, but not the exact free cash flow. Could you just tell us exactly what you expect for free cash flow in 2026? The second part of the question, maybe it's a bit early, but 2027 as well, any ideas on free cash flow? Then just a clarification. I'm not sure I understand the loan to suppliers. Is that just part of the working capital and included in the free cash flow, or is that a separate item? Thank you.
Starting from the It's a separate item. It's not included in net working capital. It's a really simply loan provided. We didn't want to finance the sub-supply chain by using the advanced payments, basically. We wanted something which is more secured, even towards us and meeting our strategy. Second point, about the free cash flow. Well, if we calculate now the free cash flow, definitely we were not counting in a free cash flow with the strategic investments into Alzchem and MDA when we were calculating this altogether. So for now and for the time being, I expect net leverage to be below 2x, which is implying me that the total cash level on the balance sheet should be approximately around EUR 1.5 billion, EUR 1.5 billion, EUR 1.6 billion.
Just to be clear, free cash flow, which I think for most people on this call, would probably exclude the strategic investments. I think previously that number you'd said positive EUR 800 million-EUR 900 million. Is it just a case of taking off, say, EUR 1 billion of worse working capital, so that number is now EUR -200 million, like free cash flow before MDA?
I'm not sure I followed you precisely, but definitely the strategic investments or the loan, EUR 700 million, will be excluded from this. So it's a question of unwind from the working capital.
Okay. All right. Thank you.
Thank you. Now we are going to take our next question. It comes to line of Sebastian Growe from BNP Paribas. Your line is open. Please ask your question.
Yeah. Hi, good morning. Well, I am genuinely surprised that you have not pre-released these results or the new guidance. Allow me to ask a couple of questions. The first one on the guidance itself. As there are so many moving parts here with regard to the Q3 revenue shift, ramp-up costs all across the business, it feels, mixed effects, et cetera, I was wondering if you could give us more color for what you expect by segments, both with regard to the revenue contribution and the margin for the full year. For M/L Ammo, you shared apparently the pricing for standard shells and said that was volatile now. Can you also indicate what pricing you are seeing in long-range artillery shells, if this is stable or if there have also been changes to the worse?
As you also mentioned, Zdeněk, that you expect inventory to be largely sold through 2027 only, how should we think of the margin progression going then into the next year at M/L Ammo in particular? Lastly, to follow- up again on the supply chain and the financing the loan that you mentioned, the EUR 700 million here, can you walk us through the root cause in more detail, i.e., which business areas and regions are we talking here, and what gives you the confidence that this will not occur again going forward?
Okay. Starting from the prices, I will then ask you to, if you can remind me, so that I will clearly answer your questions. With the prices for long-range ammo, we see it stable. We ask and search for this several times. Our expectation that it will be stable or even slightly increase. The drivers will be the energetics mostly. The energetics are also area, most of the area where we invested the EUR 700 million and where we provided to enable the sub-suppliers to increase the capacities and deliver on time to us. We agreed not to disclose the names specifically, but it's several investors. It's several sub-suppliers, sorry. It's not only the one. Regionally, mostly Europe, but it's this is about ammo. Then unwind for next year was the second question, right? And the expected margin.
Correct, yeah.
Look, we haven't guided for the next year. We will be properly guiding this at the year end. But anyway, I feel this is a real temporary thing. Our focus is on vertical integration. We try to provide you with the split of the production cost on one of the slides for the long-range 155 mm ammo, where you will see the importance of propellants and the explosives vertical integration. By this one, we affirm the guidance in the midterm to be 26%-28%. Based on the current circumstances and assumptions we do have now in front of us, we pretend that we are there.
For the guidance and the composition by segments, can you give any more details as to what the expectation is at your end on the revenue contribution from M/L Ammo, Land Systems, and Ammo+?
Well, in the fourth quarter, it will follow pretty much the split you can see in the backlog and the pipeline.
Okay. And the last comment then-
That is the expectation.
The last comment then on margins, I would assume Ammo+ about flat from what we have seen probably in the nine-month period, and then we can figure out what the rest is mainly then from M/L Ammo. Is this a fair assumption?
Sounds to me like a fair assumption, yes.
Okay. Thank you.
Pleasure.
Thank you. Now we are going to take our next question. The question comes line of Sriram Krishnan from Deutsche Bank. Your line is open. Please ask your question.
Thank you so much for the opportunity. My first question is actually to do with the net working capital for the medium term. Clearly, the business has moved towards the extended-range ammunition and also towards the Land Systems part of the business. What does it do to your net working capital as a percentage of sales over the medium term? Should we now assume that this should consume more net working capital overall at a structural level? What percentage are we looking at in the medium term? That is the first question. The second one is coming back to your M/L Ammo margin. I think there was a helpful slide in this nine-month release where you just said the average EBIT margin for extended-range ammo is close to 30%.
Does it mean that this, given all your revenues going forward, is likely to be for extended-range ammunition and the pricing is stable? How do you see this margin evolving? Is it a peak? Should we look at it as a peak, or is it likely to increase any further? The final question would be, and apologies for coming back to MDA, just trying to understand how exactly you are trying to monetize and by when. Are you trying to become a supplier to MDA, or are you trying to become something else? How exactly are you trying to monetize with your investment with MDA? Thank you.
I will start with the MDA. We are basically taking MDA to our markets where we serve now. There is a huge synergy in terms of the sales and in terms of ISR and all of our, I would say, ISR systems which we have in the group and many other areas. As I said, it is a strategical investment, and we are now discussing even more and more additional, I would say, strategical partnerships.
I will answer your questions. If I understood well, net working capital, you are looking for the guidance in the midterm. Look, in the midterm for after the vertical integration, I think the net working capital should normalize pretty much. What we have guided in the previous below 20%, that pretty much included also already an increase, including the Land Systems. I believe it is very hard to predict now because all the sub-supply chain, but I think the stabilized level around this level as we guided is probably a fair assumption as we can see now in the midterm. Therefore, we have not guided, but if you ask my personal expectation based on the assumption I do have in front of me, I would say it should be at 20% area level going forward.
For the M/L Ammo margins, if the 30% average is a peak or how to understand it, now I want to be more prudent than whatever else, but after the vertical integration, I feel very confident to protect the margins at the current level of the prices or even increase prices to be at this level for sure.
Sorry for coming back to this one. The line wasn't great. Did you say the net working capital should come down closer to 20% of sales? Is that what you said?
From the long-term perspective, I would now say yes. After the vertical integration, I would be expecting to go down definitely into 20% area.
Okay. Got it. Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take our next question. The question comes line of Michael Raab from Kepler Cheuvreux. Your line is open. Please ask your question.
Yeah. Thanks for taking my question. Mike Raab from Kepler Cheuvreux. Good morning, gentlemen. I have to get back to Chloé's initial question regarding M/L Ammo, and I'd like to ask it from a different angle. In terms of what your short-term strategy there is, are you clearing your inventories of standard range artillery just to get rid of them because you see this trend accelerating to extended-range ammunition, and you think that the longer you wait clearing your inventories of standard range ammo, the worse the pricing for it is going to be?
Or is it simply that in view of the inability of the upstream supply chain to ramp up accordingly, you're not able to produce enough long-range ammo due to the lack of key components, and as a result of that, you're selling as much standard ammo as you can to sort of mitigate the impact on the top line and fixed cost absorption? Or is it a combination of both?
It's a combination of both, in fact, starting from the end. The truth is that we are not selling the standard ammo because we just want to deplete it to zero and then going out. It's not the case. The case is that we are now selling according to our plan to the customers. The new orders are coming, and we have to play with the new assumptions in terms of the pricing. That's true. Now we are analyzing and focusing how much of the standard range production will go forward, if any, or if we will be using back some type of recommissioning or something. We should not jeopardize our long-term strategy and view. We always wanted to shift to the extended-range ammunition, and I think we guided this quite clearly. We will see.
The vertical integration will help in this case for sure as well, but we will see what the demand will be. It still continues. It's rather now, we expected this to be still around, I don't know, 40%-50% of the demand for the artillery ammunition. Now it decreased already to the level 30% or maybe even slightly lower, what has been our long-term expectation, and it moved faster. We are addressing this point, and it's a combination of both. I wouldn't say that we don't have capacities to produce the 155 mm ammo. We are investing heavily to be ready. Once we are vertically integrated, then we are totally independent on the sub-supply chain, and that's the goal we want to achieve.
Zdeněk, I fully understand that. Thank you. I was not insinuating you didn't have enough capacity. It was more about-
No, no. I'm just clarifying that point.
-the shortage of precursors, right?
Yeah.
But going forward, I mean, when we take into consideration that in the third quarter, as you claim on one of the charts in your slide deck, the in-house share of long-range ammunition was 100%, significantly up versus what it used to be at the end of the second quarter. How would we envisage the sourcing mix of 155 mm artillery going forward? I mean, one could argue from the standpoint of fixed cost absorption, if you have the choice, you try to produce as much range-extended ammo as you can. But obviously, I take from your comments, there continues to be demand for some standard range ammunition too. So, how would we imagine this shaping up going into 2027? What is the sourcing mix of the long-range or standard range ammo going to be from today's standpoint, please?
Well, the short range is quite not a demand on the propellants. It is less demand on the propellants than the long-range ammunition. Simply, we switched to 100% long range because we had enough production of the standard range in our stocks for all the orders and all the demand we have been facing for a certain time. So, we were focusing on the long range according to the plan, according to the CapEx program and everything, and that is basically it. I think it will continue also next year. We have a flexibility in our production line to switch between standard and long range whenever we want. It is just a matter of tooling rather than rebuilding it.
Got it. But would it be a fair assumption to say that next year, the vast majority of your in-house capacities for 155 mm is going to be dedicated to long range?
Yes, that is a fair assumption.
Okay. Thank you.
Thank you. Now we're going to take our next question. It comes from the line of Pavel Ryska from J&T Banka. Your line is open. Please ask your question.
Good morning to everybody. I was listening through the webcast, and the line wasn't very clear. It was interrupted all the time. I'm sorry if I'm re-asking something that was already asked. First, I want to revert to your acquisition of the stake in MDA Space. I would just like to see your thinking or reasoning about this acquisition. So how exactly will this help you increase your revenues and your profits in the segments that you already have? That means, for example, are you going to resell the services that MDA Space provides to your current customers, or will it be a different form of engagement? That's my first question, then I will follow- up.
It will be through different kind of JVs, probably, and it's because that we can be potentially the prime contractor for different kind of constellation or constellations of the satellites in the markets where we are strong.
So prime contractor means that you will be the main supplier of this service to some of your customers?
Yes, correct.
Okay. My second question, a very different one. Recently, there has been talk in the Czech media that the Czech government might be preparing a sector tax, some kind of maybe surcharge on the corporate tax on profits in the armament sector. I would like to ask you whether you have some information on this, and if this was levied by the Czech government, how would you adjust your company to minimize the additional cost?
We haven't heard anything concrete unless these speculations in media. I don't know what our government will do. I think they will do some windfall tax for the banks and others. We haven't heard anything concrete about the defense companies yet. Obviously, if it is the case, we will analyze it, and we will see what we can do to basically maximize our financials.
If I get it right, you haven't had any talks or you haven't been contacted by the Czech government for some talks on a proposed windfall tax or something?
No. No.
Okay. Thank you. My final question. At the time of the IPO, you set out a dividend policy which should start from the fiscal year of 2026, so maybe some payment of dividends from next year. Now, given that there has been some worsening in the outlook for cash flows, or in other words, the increase in the net working capital requirements, do you see this dividend, let's say, commitment, do you see it anyhow changed, or do you think that the company will have the capacity to follow this dividend policy?
For the time being, we do not change any guidance in terms of the capital allocation policy. We will analyze this properly going forward during the year-end and we will decide then.
Okay. Thank you. That is all from my part.
Thank you.
This was the last question. This concludes today's conference call. Thank you for participating. We may now disconnect. Just a small note, some questions presented online, and trust they have already been addressed. We will therefore close the call at this point. Thanks again.