Thank you for standing by. My name is Jael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Theon International PLC H1 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Christian Hadjiminas, Chief Executive Officer. You may begin.
Good afternoon, everybody, and welcome to the presentation of Theon International PLC interim results for the six months ending 30th of June, 2024 . Joining me today are Dimitris Parthenis, our Chief Financial Officer, and Philippe Mennicken, the Business Development Director. Agenda. First of all, I will run through the key highlights for the first six months of 2024 , including details on our recent acquisition of Harder Digital, which we were thrilled to announce alongside our half-year results yesterday. Philippe will then provide a market and business update, after which Dimitris, our CFO, will cover the financial performance for the first half as well as the outlook for the full year before we open up to questions. So H1 overview. Theon achieved record results in the first half of 2024 in terms of sales and profitability.
The order book going into the second half of this year and into 2025 is strong, providing good visibility for Theon. We benefit from having strong relationships with long-standing customers, which deliver a high volume of repeat purchasing to our business, adding to the strengths of our order book. Critically, we are delivering on our strategy. We have produced solid organic growth in the first half, and as I touched on earlier, we are very pleased to have announced our first acquisition since our IPO with Harder Digital. Of course, we have also announced a small investment into South Korea into a new manufacturing plant. We have also advanced in other acquisitions because we have been working very diligently the last six or seven months in this front, and we believe we will be able to announce something before year-end.
Regarding our financial performance, at the end of June, we generated an order intake of EUR 77 million, which is up 35.1% versus first half of last year, and a soft backlog of EUR 420 million. This soft backlog represents 1.3 times our full-year 2024 revenue, lower range guidance, providing further confidence in our full-year targets. We generated revenues of EUR 152.4 million, which is up 160.7% versus the prior year. This was primarily driven by strong growth on our night vision products, which Dimitris will elaborate on more later. I continue.
We delivered 36.9 million of Adjusted EBIT in the first half of 2024, growing our EBIT margin to 24.2%, as opposed to 71% at first half of 2023, in line with full-year targets. We continue having a solid balance sheet, holding a net cash position of 53.3 million at the end of the first half of 2024. This, as you know, has enabled us to pay an interim dividend of EUR 0.26 per share, in line with our 40% payout ratio target for full year 2024. I continue. Delivering against our strategy for growth.
As a quick reminder, our growth strategy is focused on four key areas: strategic M&A, product innovation, geographic expansion, and strengthening our supply chain, all of which is then further assisted by the tailwind growth of our underlying markets, which Philippe will expand on more later on. We have made good progress in each area during the first half of the year, and as promised. Through our investment in Harder Digital, we will achieve partial vertical integration throughout our supply chain. At the same time, and I need to stress that, after lengthy discussion and negotiations, we have achieved a very good financial deal for the company and its shareholders. In product innovation, we have presented for the first time the augmented reality modular ecosystem of devices, ARMED products, as we call them, as well as the brand's new platform-based optronics equipment.
We also invest heavily in platform-based optronics internally, and we expect the result of this investment to be visible in the coming years, somehow earlier than envisaged. We strengthen our supply chain by strategically building up inventory. Finally, we have also entered new markets, such as Denmark, with a new service center, and South Korea, where we have acquired a small company called Focus Optic, with a new production facility, expanding both our customer base and our geographic reach. I would like to stress the importance of this otherwise very small investment. In particular, regarding this investment in South Korea, we expect to enhance Theon's presence in the APAC region and grant the company with access to local production facilities that will, in turn, increase our ability to participate in local tenders.
I would like to stress here that South Korea is becoming an important country, not just because of this investment, but also because it serves and it will serve as an export base for the region. Furthermore, since we have become sourcing more and more key components from South Korean companies, Focus Optic will act not only as a local production facility for local tenders, but also for exports, but also it will act as our hub center for the very high increase in sourcing of components from South Korea. All this is not reflected in the first half of 2024 results, and I note, and I have to note that such investment is still subject to the necessary regulatory approvals. The same thing applies, of course, for Harder Digital.
So I move now to explain a little bit more the Harder Digital acquisition. Harder Digital is based in Germany, but it has extensive facilities in Serbia as well, and it has started investing in Latvia. Harder Digital, based in Germany, is a specialized manufacturer of image intensifier tubes, a key component in night vision technology. Such tubes are ITAR-free, and therefore can be exported without any restrictions, but with the standard European Union restrictions that are normally otherwise posed to the U.S. manufacturers. This acquisition comes at a critical time, as global geopolitical conflicts and emerging threats have put the supply and demand for night vision technology in a delicate balance. A razor-thin balance, as I said, as we have explained already. Harder Digital acquisition will bring significant benefits to Theon.
Namely, firstly, it will enable us to gain better control of our supply chain, providing increased operational security and flexibility. It will bring us with access to niche technologies that will expand our technological capabilities and support our efforts to develop new products using our R&D program. It will also allows us, and we must not underestimate this, to add manufacturing footprint and strengthening our presence in Germany and in the Baltic region, two key markets for Theon. Regarding the financial aspects of the deal, and as I said before, this deal, aside from vertical integration benefit, it turns out, after lengthy negotiation, it is a very good financial deal for Theon and its shareholders. Let me explain. We have valued the equity of the company, that is, for our investment, on which we based our investment, at 23 million EUR.
While it would cost us, as a comparison, more than EUR 50 million to realize a greenfield investment in this industry. So that is two times the current valuation. But that's not enough to explain why financially this is a good investment. It suffices to say here that quotes to countries in general from other manufacturer or other providers of technology to provide turnkey solution of such a manufacturing plant for tubes tend to be in the range of EUR 80-100 million . That's why this investment is financially an extremely attractive deal for Theon. Furthermore, Harder is currently on track to deliver EUR 17 million in sales with a 10% EBITDA margin in full year 2024, but is expected to triple sales with mid-twenties EBITDA margins by 2028 when the investment is fully operated.
Theon's acquisition of a 60% stake in Harder Digital will be performed through a cash injection of EUR 34 million, which in itself is a very important aspect, implying an evaluation of a mid-single-digit multiple of the expected 2026 EBITDA. Significantly lower than our currently trading multiple at, as Theon in the market. The acquisition is expected to be fully financed with available cash. Majority of the funds will be deployed to revamp the production facilities and increase capacity of third-generation image intensifier tubes, manufacturing lines in Germany primarily, and Latvia. Part of the expanded capacity will be continued to be sold to third-party companies, delivering incremental growth. The remaining funds will be used to financially restructure the company.
Importantly, this expansion is not in competition with image intensifier tubes produced and procured by our existing suppliers, ensuring we maintain a strong partnership with all, with the remaining three tube manufacturer. The investment is expected to have a positive impact to Theon's profitability since the first year of acquisition. That is Harder Digital. We're very excited to have announced this acquisition, and we expect our inorganic expansion to continue as further companies are identified as a potential acquisition targets. With that, let me hand over to Philippe, our Business Development Director, to provide a market and business overview. Philippe?
Thank you, Christian. So let's start by examining the market environment. Theon operates in growing markets, which are driven by several supportive tailwinds. Firstly, the geopolitical landscape globally means there is an ever-increasing demand for defense products. Examples include the ongoing war in the Ukraine, the conflict in Gaza, political unrest in the Taiwan region, as well as the upcoming U.S. elections. Events like these mean governments are placing more focus on their defense measures, which is driving an increase in defense spending globally. In response to these challenges, defense budgets are on the rise. Countries are prioritizing defense spending, with Germany leading by committing to 2% of its GDP. By the end of 2024, 23 NATO countries are expected to meet this target, and further increases in defense budgets are anticipated, especially from the U.S. and various Asian nations.
Theon operates, as you know, in a sub-segment of the defense sector, which is one of the fastest-growing areas of defense. The importance of night fighting capability is now well understood globally, and there is significant attention focused on ensuring troops, including reserves, are fully equipped with this technology. The focus is, thus, on equipping infantry with a one-to-one ratio of night vision goggles to soldiers and 24-hour targeting systems. This is crucial as modern conflicts, like the one in Ukraine, increasingly require nighttime operations. The growing need for effective nighttime combat has led to sustained and potentially increased spending on night vision equipment, despite overall budget constraints.
The market for dismounted night vision systems is expected to grow significantly, valued at $1.1 billion in 2024, and projected to reach $1.4 billion by 2025, implying a 23.1% growth. Interoperability among allied forces is becoming increasingly important, with contracts like OCCAR demonstrating interest in bulk orders for standardized night vision systems. The night fighting procurement cycle is expected to pick up further speed in the coming month, with increased demand for advanced interconnected systems. Now, looking at the global momentum, we see distinct regional contributions to the night vision markets. In the Americas, the U.S. is making significant investments, including a major transition from monocular to binocular night vision systems, expected to begin in 2025.
This presents opportunities for companies like Theon in the area of night vision, but also fire control systems. In Europe, procurement of man-portable electronics continue across various countries, with significant projects on the way in Germany, but also Scandinavia. Despite budget concerns, Germany remains a strong market, and European support for Ukraine continues, albeit with financial constraints. We want to stress that despite any budgetary issues that tend to affect larger defense items, several tenders amounting to several hundred million EUR worth of man-portable products, and where Theon is very active, are being launched with no significant delays. In the MENA region, the Gaza conflict and other regional tensions are accelerating defense procurements. Countries such as the UAE and Saudi Arabia are focusing on modernizing their infantry with enhanced sensor technologies and interconnected operations.
Saudi Arabia's Vision 2030 is particularly noteworthy, as it includes equipping its forces with domestically produced night vision and thermal equipment. In the Asia Pacific region, military budgets are increasing in response to regional tensions and China's assertiveness. Japan's record budget for 2025 for defense spending and several new night vision programs set to launch reflect this trend. Multi-year procurement initiatives in the region offer opportunities for scaling up both equipment and manpower. With this, I will now hand over to Dimitris, who will run through our financial performance for the first half of this year. Dimitris?
Thank you, Philippe, and good afternoon, everyone. Everybody in Theon is very pleased with the progress in the first half of 2024, thanks to our record results achievement. This includes reaching an order intake of EUR 77 million, which was up 35.1% versus H1 2023. It is worth highlighting that we expect our order intake to accelerate in the second half of 2024, in line with our typical split between first and second half, and of course, the pent-up demand in the market. We also delivered revenue of EUR 152 million, which represents a growth of 161%. Night vision devices, which accounted for around 93% of total revenue, rose from EUR 53.9 million in H1 2023 to EUR 141 million in H1 2024.
This increase was driven primarily by new contracts, as well as by the exercise of existing contract options. Our hard backlog remains strong at EUR 291 million, assisted by EUR 136 million newly awarded contracts. This resulted in a soft backlog of EUR 427 million at the end of June 2024. We anticipate that approximately 40% of this soft backlog will be invoiced in 2024, 50% in 2025, and the remaining 10% from 2026 onwards. Added to this, we also have an additional EUR 590 million in contract options, which provide further confidence and security in our outlook and future growth. Moving on to the next slide and profitability.
You can see that we have delivered strong profitability in the half, with a 252% increase in adjusted EBITDA to EUR 38 million and a 270% increase in adjusted EBIT to EUR 36.9 million. Theon has an extremely agile and nimble business model, which enable us to operate with a competitive cost structure and sustain consistently high margins. We have a scalable platform that is well-placed to support our growth and an asset-light business model, which results in a low level of capex. We were very pleased to deliver an adjusted EBIT margin in the period of 24.2%, up from 17.1% in H1 2023.
This increase was primarily driven by a higher gross margin and economies of scale and is in line with our full-year guidance to deliver a mid-twenties EBIT margin ahead of schedule. In H1 2024, our net cash position was at EUR 53.3 million, increased from EUR 0.1 million at year-end 2023. This was, of course, primarily driven by proceeds from the IPO. At the end of H1, our capital expenditure amounted to EUR 5.1 million, in line with our investment plan and of our full-year targets of EUR 10 million. Trade working capital increased from EUR 67.9 million in H1 2023 to EUR 133 million in H1 2024. This is in line with our strong business growth, and of course, it allow us to address the pending demand foreseen in the market.
Also, we had a strong cash conversion rate in H1 2024 of 87% versus 67% in H1 2023, driven by EBITDA growth and normalized capital expenditure as a percentage of revenue. Last, on to outlook, where we are on track to deliver on our 2024 and our midterm targets. Historically, our revenue in second half weighted with around 70% taking place in H2. For this year, a 45/55 split is anticipated based on the bottom range of the guidance, so with EUR 152 million achieved in the first half and a strong order book in place, we remain confident in achieving our full year target. As I already mentioned, we have reached a mid-twenties EBIT margin at the end of the semester, ahead of schedule, and we expect to sustain this level of margin over the midterm as per our guidance.
We will continue to dynamically implement the budgeted EUR 10 million investment in 2024, emphasizing in automations, in the production capacity and new systems, as well as laboratories for the R&D department. To conclude, at the end of the first half, we have paid a total dividend of fourteen point four million, resulting into a dividend of EUR 0.206 per share. In summary, we are pleased to report a strong first half of the year and in addition, our first acquisition since IPO. We remain focused on executing our strategy, and we are confident in our outlook for the full year.
... With that, we would like to open up the line to Q&A, and we welcome your questions. Thank you.
Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. There are no questions on this, on the dial-in side at this time.
Okay, so the first question on the webcast comes from Boris Snyder and is the following: What gives Theon the confidence that Harder can triple its sales by 2028? Is there a backlog, or it's based on your expectations as Harder's main client?
Okay, this is Christian Hadjiminas. Let me answer this question. It's a very good question. First of all, Harder Digital, and that's why we got a very good financial deal. Harder Digital was not in a position, the way it was, to be able to inspire confidence one year ahead for sales from customers. This is what Theon brings to the table, aside from its own purchases, of course. What brings to the table is the certainty that the customers will be... can plan ahead and order ahead. This, by the way, is exactly the same situation with the other European manufacturer in the sense that as we said from the beginning, and you... we have to look at the basics.
The supply and demand between on night vision, in particular for tube supplies, is really on a razor-thin situation. There is, most of the companies, they are fully loaded for deliveries for the next eight months. Harder also has no problem in making sales, ad hoc and three, four, five months ahead. But now, with the advent of Theon's and the restructuring of the company, its clients can with certainty and confidence place orders, you know, eight months plus ahead, like it is the story with all tube manufacturers.
Again, as I said, and that's the most important thing, and that's what drove us to do two things: one, to do this acquisition, which was not just a question of vertical integration, but also to turn to long-term supply agreements with the tube manufacturer, with which we're having currently discussions. Is the fact that we expect next year, with the advent of the U.S. Army, basically, that any slack capacity that comes mostly from the Atlantic side, the other side of the Atlantic, will be very quickly absorbed. Anyway, it's a very small surplus. It will be quickly absorbed, and as a result, it would be very important. It will be on a first come, first served basis with the tube manufacturers. And this is an add-on thing that led us to do this, aside from the benefits of vertical integration.
So the short story is that Harder Digital does not have, did not have a visibility until now, but given the investment plan that has already started committing the financial restructuring and the support of Theon's global access, it will be in a position to start booking orders more than six to eight months ahead, which is the situation with the other tube manufacturer as well. And we see no problem in tripling the sales by 2028.
Thank you, Christian. Next question comes from Ian Douglas-Pennant, from UBS. Do you have plans to buy the rest of Harder? Do you have an option?
No, we do not have an option, because we wanted the current management to stay on board, continue. The current management is just, not just about managing people, managers, it's about actual hardcore technical skills. And as I mentioned with my broadcast earlier, quotes for equivalent of Harder Digital are above EUR 80-100 million. So, the value of the company is also in the people involved, and that's why Theon has selected to keep this as it is. We cannot exclude the possibility down the road to buy more, but right now, we think that it is a very, very strong incentive for the current management to-
Also shareholders.
Yeah, because the current management, as our CFO reminds me, of course, they're still also the current shareholders. The whole management are the current shareholders of the 40%. So I think it's a very wise and prudent approach to continue as we are, having, of course, done the financial restructure that was required, also injecting EUR 34 million, which means that, Harder Digital operations with this EUR 34 million, not only it will invest in Germany mainly, but Latvia, and, but it will also be in a position to be self-sustained, cash flow wise, and be able to support longer term contracts. Again, longer terms, I mean, six to eight months or more. Thank you.
We have two more questions from Ian. The first one is: What capital equipment spend is required to increase capacity utilization of Harder?
... I would say, a very quick answer, it would be in the order of EUR 20 million. The rest will be done to financially restructure the company, but also equally important, to allow the company to order, pre-order enough material so that they can meet eight months ahead orders.
The next one is, you delivered 160% growth in H1 year over year. Why not increase your guidance, which implies only 50% for the full year?
This increase. There's no surprises here. This increase was expected. We've said all along that, and during, before the IPO, but afterwards, after the IPO, we are working diligently to smooth out the delivery time, so that it's not just skewed on one H1 or H2. Because that helps us to plan our production better. It also helps us to help our suppliers, whether they are tube manufacturers or not, to plan their production, and that is one of the benefits that Theon has. Again, it has to do with our market-leading position. We have several contracts now in the books, like last year, which allows us to plan better production delivery.
There's no need to change the guidance at this stage, despite our, our very strong performance, because this strong performance was envisaged from the beginning. In other words, if we want to speak with specific numbers, we're talking about a 45%-55% ratio, as opposed to before, which was-
Thirty-seven.
Which was?
Thirty-seven.
30% first half of the year, and 70% second half. Now, it's 45%-55% remains as it is. So again, no need to change at this stage the guidance, because it's all part of what we have programmed, and so far, it works like a Swiss clock. Thank you.
And we also have a follow-up question from Ian, about Harder again. The question is, "If the EUR 20 million is included in the cash paid for the acquisition, and if we need to add further cash to Harder?
No, no, it... I was very clear. All our planning and the exact amount of the allocation is because we don't think we're going to require to, as I said earlier, it will have no cash flow effect on Theon. Now, the company is very well capitalized. It still has some longer or medium-term debts, but they are fully covered and serviced properly. And the way we have done our projections, we think that even with doubling and tripling the cash flow, we've done exhaustive cash flow exercise, this is more than enough for now. The capital injection, I mean.
Thank you, Christian. Next question comes from Aurélien Sivignon from Oddo: "How is Harder positioned vis-à-vis the competition, product offering and pricing, et cetera? What makes you confident to over-perform the tubes market by 2028 ?
Yes. Thank you very much. That's also a very, very good question. The reason why it, without taxing your time, I need to explain something. To make it very simple, there is Exosens European type of tubes, and then the other three, which is the two U.S. manufacturer, as well as Harder Digital, they produce what we call third generation tubes. It's a different technology, although they are used interchangeably within the night vision products. Harder Digital, and that's why we have built a position, despite the fact that Exosens was, and will continue to be, by far our largest provider of tubes, because our main markets are situated in Europe and in the Middle East.
That's why we have gradually built our position with Harder Digital the last five years, because some customers of ours, they do insist on third generation tubes, but they also insist, like in South America, on higher FOM. And because there are restrictions on the FOM for third generation tubes from the US, these customers, they really prefer to have Harder Digital. So the question is not Harder. Although the tubes are interchangeably used in products, the way the customer mix is and what each customer prefers, there's not really competition, let's say, between Harder and Exosens.
They are two different type of tubes, and for some markets, as I said, they prefer third generation, and that's why we have built this position with Harder Digital all those years, which has helped us penetrate markets, some niche markets, whether they were in, let's say, in Brazil. So there's no really competition. I mean, there is, of course, the level of prices between European and U.S. manufacturers and Harder is, they are due to global supply and demand mechanics that are still functional in this market, they are at similar levels. I would say maybe Harder is slightly more competitive because it has a smaller management structure, and it's by necessity due to its size, but that's about it.
It does not really affect anybody else or our pricing with customers. Just the ability to deliver the type of tubes that our different customers wish to have.
... Thank you, Christian. Next question again about Harder Digital from Henrik Paganetti from Stifel. What will enable the margin expansion until 2028?
Yes. The margin until 2028, first of all, it will happen because of the increase right now, or last year, they were below capacity operating, and this has already been rectified this year with our assistance, I must say. Now, by doubling and tripling and keeping the same management with just some additions, like, a CFO from Theon and a little bit more business development support, the cost structure, we don't think it's gonna change. Plus, a very important aspect is you need to understand that when, for instance, you have two, and I don't want to tax your time with technical stuff.
When, for instance, you have two lines of vacuum cleaning in the process for the tubes, and then when some of them are outdated, and you have to stop in one of them and switch to the other one, it's a really big loss, of course, but an increase in cost. But the investments that, as I already stressed, has already started being done in Harder Digital, and that's why this year they are back to normal already. The cost structure will improve by we will be able to demand better prices because Theon's brand name and supervision is going to have a premium effect on the price. But most notably, the basic cost structure will remain the same in terms of management.
But the actual production cost, given those investments with brand-new machines, which already have been coming slowly into play, and it will come much, much faster now towards the end of the year and next year, will allow Harder Digital to, I would say, safely and to arrive at this at more than 20% EBITDA, in line with Theon's EBITDA.
I would add to what Christian said, that we reasonably expect, let's say, the material cost at Harder level to be improved as we consolidate their supply chains to the one that Theon has.
Thank you both. Moving on to the next question. It comes from Ian Douglas-Pennant from UBS. How many full-time staff do you expect to employ in Korea? Can you give an idea of anticipated sales from this facility?
Okay, right now, as I said, it was a very small investment in Korea. It was, I think, $350,000, which is really nothing. But the know-how was there. If I'm not mistaken, that we were talking about around 10 people, 10-15 people. They will remain, and then we will just add 3 or 5 people. And as I said, these are facilities that we believe can be run leanly as they are with the current management. But the Focus Optic, which is the company we bought, will have much more to do given our export needs.
But also, we are a brand name, as you know, in the world, and the ability to have also a Korean presence, a South Korean presence, allows Focus Optic to be able to participate in local tenders, not as before, but with a different weight, and support. Because Focus Optic has the know-how, but it had an outdated product line, which, of course, it stops right away, and it has in its capability to not only offer the standard Theon products, but also, as I mentioned, and this is very important, there is a big interest also in South Korea for our new armed products.
These ARMED products, I don't know how many of you may have focused on that, but it's really the future soldier elements. And that's why we expect to announce soon a participation in future soldier programs around the world. They are quite advanced, those products, whether they are the Fused Goggle or Head-Up Display. And now, again, to return to the Focus Optic area, we have a platform on which we can offer this to our Far East customers, especially South Korea, and to have them fully assembled locally and offered to the local government, the national government of South Korea.
Thank you, Christian. Until now, we don't have any more questions from research analysts. Again, this as a reminder, whoever has any questions about from media or investors, we can catch up after the webcast.
Okay. I think we can conclude then, or...?
Yes. If there is no more questions, let's give five more seconds.
Yes, I would like to conclude by saying we feel very confident about the ability to have in the last quarter, like we have all those years, to increase the order intake. Just to say that from one country that Philippe mentioned earlier, we already participate in the released tenders, which are worth EUR 500 million. I'm not talking about any options we have on the existing contracts, but new, fresh contracts that have already started, and just now, after holidays, they have just been released, and they have proper budget allocation already. It's EUR 500 million that just from one country that Theon participates. So, plus, we are in negotiation with various contracts, larger contracts in the Middle East.
So that's why we feel that during the last Q4, we will have a much, much better feasibility, which in turn will allow us to give a conservative but a proper guidance for 2025, mostly, and maybe 2026.
Okay, so this concludes today's webcast. Thank you very much for your participation.