Good afternoon, everybody, and a warm welcome to Hensoldt's 9M 2022 results call. Thank you for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt. With me today is our CFO, Christian Ladurner, who will guide you through this presentation today. As always, this will be concluded by a Q&A session. With this, over to you, Christian.
Thank you very much, Veronika. Good afternoon, everyone. It's great to see you joining today's earnings call, in which we would like to present our results for the first nine months of 2022. Before I'm going to guide you through our once again strong financial performance, I would like to focus on our business development in Q3 2022 and our efforts to support the German government with deliveries for the Ukraine. Following our presentation, we are happy to answer your questions. With our leading technologies and sensor solutions, we were again able to book numerous orders in the third quarter of this year. I would like to highlight the contract to equip the Spanish Eurofighters of the Halcon program with our radar and self-protection system. This order, which we booked in September, has a total volume of EUR 175 million.
Overall, our order book develops fully in line with our plan, and I will go into a few more details in a minute. We are also on track in the execution of our key programs for the German customer and achieved major milestones in the third quarter, supporting our stable and steady revenue growth. Let me give you a brief overview of the progress we have made. In the Pegasus program, we received the last of the three planes in September and therefore completed the procurement of the aircraft platform on time. Together with one of our subcontractors, we conducted a successful preliminary design review for the modification of the aircraft and successfully completed the wind tunnel test to optimize the flight behavior. The preparations for the upcoming milestones in the fourth quarter are also on track. Regarding the Eurofighter MK-I program, we are on track as well.
We achieved all planned development and production milestones for 2022, and with this, we also secured the payment flow down in 2022, which give us further visibility on the cash inflow in 2022. As part of the long-term success and planning on the management board announced in March, Lars Immisch took over the Chief HR Officer position from Peter Fieser on first of October. Lars joined us from Airbus Defense and Space, where he had been the Executive Vice President, Human Resources. Our management board will greatly benefit from Lars' over 20 years expertise in the defense industry and his long-standing network with the social partners. Happy to have you on Hensoldt, Lars. As part of the German commitment to support the Ukraine, we have proudly delivered 2 high-performance sensor systems to the armed forces of Ukraine.
Already a few weeks ago, one COBRA artillery detection radar has been delivered and will help Ukraine to boost the efficiency and targeting capabilities of the artillery. Very recently, the first in total of our TRML-4D air defense radars has been delivered as part of the IRIS-T SLM air defense system. The TRML-4D is one of the most advanced ground-based air defense radars on the market today and can track more than 1,500 targets at a range of 250 kilometers. This radar can detect and track a wide range of targets, ranging from cruise missiles and fighter aircraft to helicopters and drones, and has successfully proven its capabilities in defending Ukraine against Russian missile and drone attacks.
IRIS-T SLM, together with TRML-4D, is also proposed as one layer of the new European Sky Shield Initiative announced by the German Minister of Defense a few weeks ago. This opens, beside others, further business potential for Hensoldt. Let's now take a closer look at our financials. We again were able to realize an excellent performance of our top line in the first nine months of this year. Our order intake also showed a strong development, with orders summing up to more than EUR 1.3 billion as of September 2022. This results in a book-to-bill ratio of 1.3 times. As mentioned before, the strong performance in the third quarter was driven by the Eurofighter Halc on program booked in September. Please keep in mind that in our industry, order intake is typically a more volatile KPI.
Last year's orders included the exceptional Pegasus contract with a volume of EUR 1.25 billion. Our excellent revenue performance is reflected in a significant increase of 30% to EUR 1.1 billion. This is driven by sustainable growth in the sensor segment, most notably, of course, due to the key programs and major milestones achieved. All this is again reflected in a very strong order backlog. At the end of the third quarter, our order backlog summed up to more than EUR 5.3 billion. This continues to provide us with an excellent revenue visibility. Overall, our bottom line develops as planned as well. Adjusted EBITDA increased by 14% to EUR 126 million. Adjusted EBIT grew as well by 14% to EUR 76 million.
The increase in adjusted EBITDA was driven by higher volumes and product mix, partly offset by higher passthrough revenues. Excluding the passthrough revenues, our adjusted EBITDA margin remains at prior year level of over 14%. Driven by a very strong cash generation in Q3, the adjusted pre-tax and levered-free cash flow improved to -EUR 49 million as of September 2022. Despite the noticeably higher volume of our major projects and investments in working capital for the planned revenues in Q4, we've already reached the level of the previous year for this KPI. Let me point one out once again. Liquidity is fully in line with our expectations and major programs develop as expected. In terms of deleveraging, we are on track as well.
Following the improved capital structure and strong cash generation in the third quarter, we were able to reduce net debt by EUR 157 million to EUR 551 million compared to last year's number. In combination with our strong EBITDA performance, we could improve the net leverage from 3.1x in September 2021 to 2x. Ladies and gentlemen, let me dive a bit deeper into the focus areas of the German government in light of the Zeitenwende, which will provide significant opportunities for Hensoldt. We are proud to contribute to the support initiatives by the German government with the delivery of our high-performance sensor systems to the Ukraine, as shown earlier in this presentation. We also see additional business potential created through special procurement projects of the German government, like ground-based air defense and the European Sky Shield Initiative.
The third area focuses on the special fund and a potential increase in the regular German defense budget. Let us keep in mind that the German government made a clear commitment to spend 2% of GDP for defense on a sustainable basis. These budgets will be used for the procurement of major programs for the German Armed Forces that were previously unfunded. As we stated before, this focus area is clearly the most relevant for us, given the wide range of order potential for Hensoldt. We are in continuous exchange with the German customer, and we see progress that this broad spectrum of opportunities for Hensoldt is further materializing. At this point, I would also like to clarify some aspects that have been discussed in the media since a couple of weeks now.
Some media reports claimed that a number of projects can no longer be financed through the EUR 100 billion special fund, and the shifts in funding sources were criticized by the Federal Audit Office. It is correct that due to price increases, not all programs can be procured as planned via the special fund. The MOD still has the clear intention to finance all programs, as they are undoubtedly needed to properly equip the Bundeswehr. This requires an increase of the regular defense budget after 2023 for long-term planning possibilities, and the discussion between the MOD and the Bundestag is ongoing. Programs affected by this shift from special fund to regular budget are Navy programs like F-126 and K-130, as well as Army programs such as FOCS and MMBS. The procurement process for some programs has not started yet, or quantities and type selections are still open.
Hensoldt is evaluating all program developments on a daily basis and is in an excellent position to participate in a large majority of the programs from the special fund, as well as the regular defense budget. We further increase probabilities for a potential participation in a couple of programs. This indicates that there is also upside potential. For example, for the F-35, we are in good exchange with industry and German politics to explore a potential collaboration. The possibility of a Hensoldt participation has therefore increased. However, please keep in mind that this is just the current view, and there is still more specification required that we will claim for our stake in this program. Within the European Sky Shield Initiative, we see increased potential for additional radar systems in Germany as well as abroad.
In total, our order pipeline creates a solid basis for sustainable growth at Hensoldt in the coming years. Ladies and gentlemen, this chart illustrates the characteristics of our business and shows quite well where we at Hensoldt excel. Driven by politically influenced decision-making processes, order intake in our industry is often quite bumpy. In our case, very positively driven by landmark projects like Eurofighter MK1 and Pegasus. On this basis, we have built a very impressive order backlog that provides us with great revenue visibility for the future. Through our excellent project execution, we have managed to convert our order backlog into sustainably growing and profitable revenue. Let us keep in mind, though, that a by-product of our landmark projects were increased pass-through revenues. Going forward, we see an increase of core revenues, which will improve the quality of our growth.
Over the coming years, we expect significant orders from the special fund in Germany and increased defense budgets in Europe and worldwide. This combination will pave the way for a continuous and smooth growth of Hensoldt over the next decade. With this long-term visibility, we have high confidence in our overall growth, but would like to remind us that it will be back-loaded. Still, we are very excited about our business. This is the best time to be in defense, to be in Germany, and to be in electronics. To summarize, Hensoldt is on track. Our impressive order backlog of EUR 1.5 billion provides us with great revenue visibility for the years to come. We successfully achieved major milestones in our key projects. Our efficient program execution supports our excellent profitability. Our cash flow develops in line with our expectations, with a strong cash generation in Q3.
With this, we confirm our full year 2022 guidance for all our KPIs. Book-to-bill at 1.1-1.2x. Around 15% growth in revenues to around EUR 1.7 billion. Around 12% growth in absolute adjusted EBITDA to EUR 285 million-EUR 300 million. A further reduction of net leverage driven by our strong cash flow. Our outlook remains promising and we are strongly positioned for the upcoming growth. The procurement plan of the German government is becoming more concrete. We booked first orders from the German government to support Ukraine with our equipment. As mentioned, we are in close exchange with the German customer regarding the programs and opportunities from the special fund. This will generate long-term sustainable growth, which will be somewhat back-loaded. What comes next?
On December the fourteenth, we will host our Capital Markets Day in London. At this event, we will present you more details and an update on our medium-term guidance. Now we are happy to take your questions.
Our first question comes from the line of Virginia Montorsi with Bank of America Securities. Please go ahead.
Good afternoon, everybody. I actually had two. The first one would be on order phasing. I know you mentioned that the kind of impact from the special fund is gonna be more front-loaded, but is there anything specific you can give us on how to think about 2020 specifically? The second question would be on EBITDA. I saw that in, I think it's slide 14 of your presentation, you're providing some targets for 2023. They're a bit more detailed than what you gave at H1. I was just thinking, could you help us understand a little bit more how to think about EBITDA for next year, particularly within the divisions? Or yes, just any more color on that. Thank you very much.
Virginia, many thanks for your question. The first question regarding order intake from the special fund, 2022, 2023. To state it quite clearly, until now, we have not received any order out of the special fund because the discussions and the specialties and all the topics are still ongoing. What we have seen is a very good progress in this regard. We expect no orders in this year, and we expect the first orders coming in from Q1 2023 going on. This is our current picture for the order intake from the special fund. Regarding 2023 EBITDA guidance, I have to put you on the capital markets day on fourteenth of December. We will give the mid-term update guidance, and we will see how this ends up.
Okay. Maybe just to follow up on this. The target.
Yeah.
that you're kind of giving in the slide for, like, mid- to high-single-digit growth in revenues and roughly 19% EBITDA margins.
Yeah.
We should still think about those as kind of the guideline until the capital markets day, right?
Yeah.
Okay.
It's still the old guidance, which we did not update. I would like to mention that in contrast to others, we wanna stay with the facts and indeed, as long as still we have the facts and have our new plan regarding all these orders, then we can rely on our volumes and our EBITDA and to give you more details on this on the fourteenth of December.
Okay, thank you very much. That's very clear.
You're welcome.
The next question comes from the line of Christophe Menard with Deutsche Bank. Please go ahead.
Yes. Good afternoon. Thank you for taking my question. I had a few. The first one would be on what you qualify as smooth top-line growth. I mean, in 2022, it's 15%. Is it for future years also something that you would consider as smooth, or is that wording more to I mean, leaning to a lower level? That was the first question. The second question is on the you mentioned the supply chain issues in Optronics. Is it the only area where you have supply chain issues? Could we see similar issues happening in Sensors in 2023, and what is the horizon in terms of addressing them? The third question is on the pass-through revenues.
I mean, apparently a very high level in Q3 due to the milestones. Could you give us an idea of where we should expect those pass-through revenues in 2023 and beyond? Is it a stable level, or is it versus what we said in the past, a lower level that we should expect? Just if I can squeeze a last one. It's pass-through revenues on special fund orders. I mean, will you be looking at also orders with pass-throughs in the special German fund, or is it all kind of core type of revenues that we should envision?
Hi, Christophe. Thank you for your questions. Let me start with smooth top line. What is smooth top line? First of all, you have indicated that our growth this year is also driven by pass-through. Next year or also 2023, 2024, we will give you an update in our capital market day. Let me phrase that in our industry and especially in our company, we have a very high engineering and development stage in front of each project. That means the growth which we see in general in our business is not a quick step up from one to the other year, but a smooth step up of revenues.
To give you maybe an indication is when you look at our revenues for this in the last years, minus the pass-through should give you an indication about a smooth development. I can currently only indicate that. More details I can give you in 5 weeks from now, and I hope you will join our capital market day. Second question is supply chain topics in the Optronics. This was a small hit in our Q3. I personally was at the Optronics site 2 days ago, and what I can clearly say is that this was a temporary issue, not a structural one. We also disclosed it in our quarterly results. What I also can say that the problems are more or less solved.
That means the electronics start coming from now to a recovery mode, and I expect that this recovery mode will be closed by H1 2023. In the sense of business, we currently do not see any material shortages which are really first sustainable or the material ones. They are very minor, and you will not see or discover it in our segment reporting in the next months or quarters. Regarding pass-through milestones. Yeah, you're right. We had in this quarter ahead of pass-through revenues in this year. Your question regarding this year, I personally expect a pass-through volume of around EUR 200 million to EUR 230 million in pass-through revenues. I personally expect that the volume of pass-through revenues will go down between EUR 50 million and EUR 80 million in the next one to two years.
The volume in the top line of pass-through will of course be lower. Yeah. The core revenues with the high margins will go up, and we will give you some more details at the capital market day on the thirteenth of September. This is from the current point of view and my view on that. Your last question regarding pass-through revenues and special fund. When we looked at all these programs we have currently ongoing, and maybe also remember the slide of H1, when we have shown you all the programs which are currently there, I do not expect a significant pass-through revenue in these programs.
I also have to say we have to wait until we realize the terms and conditions and prime contractors are really chosen, selected, and then we will give you further details on that.
Thank you. Just a precision. You said the pass-through would come down from EUR 200 million to EUR 250 million. They would come 250 to 60, or they could come down by 50 to 60? Just for sake of clarification on my side.
They will come down by EUR 50-80 million.
Okay.
By, not at.
Yeah, yeah. Of course. Yeah, just wanted to clarify. Thanks. Thanks a lot.
You're welcome.
As a reminder, if you wish to register for a question, please press star followed by one on your telephone. Star followed by one. We have a question coming from the line of Aymeric Poulain with Kepler Cheuvreux . Please go ahead.
Yeah. Good afternoon. Thank you for taking my question. The receivable reduction that you reported, is it just a normal seasonal development, or are we starting to see a change in the way your clients are paying you a bit earlier? I think last time you mentioned that there may be some change in the working capital evolution and the financing of project Germany in particular. I remember also you used recourse to factoring in the past. I wondered if there was any specific change on the receivable side and/or on the factoring policy. Please. Thank you.
Hi, Marek. Many thanks for your question. The receivable reduction comes along with our normal course of business. We delivered many milestones in Q3 and had the respective cash in. We also expect in Q4 major milestones coming along with the respective cash ins. This is why we go from a minus to a plus, to a very big plus of 70% cash conversion on EBITDA for full year. Regarding our comments on advanced payments. Currently, we have not yet seen a change in this pattern. What we discuss, of course, with our MOD is if they want to speed up with the procurement of the systems, of the special fund and also for increased defense budgets. We have proposed to the German government and to the MOD to switch again back to advanced payments.
Why? Because currently, our suppliers and also other suppliers, they have, on the one hand many questions from our industry, from the automotive industry and so on. In defense, the materials, the lots of materials are much lower than they are in other industries. If you're a supplier, and you have to choose between a lot coming from the automotive industry and the one from the defense, you clearly go for automotive because you simply can ramp up with your series more faster. In order to secure the supply chain, in order to get a speed in the whole system, we have proposed to the MOD to switch back to advanced payments.
Unfortunately, I cannot give you now an indication when this will happen, but this is what we are discussing with the MOD, quite heavily.
Yeah, with that, thank you all for your question and for listening to this call. We are very much looking forward to see you all in person at our CMD in December in London. If you have not registered by now, you still have the chance to do so till November fifteenth via email. Just drop an email at our investor relations mailbox or capital markets day mailbox. As always, should you have any further questions, the investor relations team is around all day to follow up on your questions. Thank you very much. Have a great day, and goodbye.
Thank you. Bye.