Good afternoon, everybody. I warmly welcome you to Hensoldt's First Half 2021 results call today. My name is Veronika Endres. I'm Head of Investor Relations and Group Reporting at Hensoldt. With me today are our CEO, Thomas Müller, who will give you an insight into our achievements of the first half of the year, and our CFO, Axel Salzmann, who will then guide you through the H1 results before we will enter the Q&A. With that, I hand over to you, Thomas.
Yeah. Thank you, Veronika. Ladies and gentlemen, I'm very pleased and proud to report that the strong growth momentum keeps continuing as reported and as indicated in our Q1 analyst call. We achieved further strong order intake of around EUR 1.6 billion in the second quarter and increased our order backlog to a new record level of currently EUR 5 billion. Due to our market-leading high-tech platform-independent solutions, we were successful in winning additional high-volume projects and further converting our pipeline into firm order intake. Investment of the German Government in Hensoldt has been closed. The German state-owned bank, KfW, has successfully acquired 25.1% of Hensoldt shares in May 2021. In addition, the Leonardo transaction to acquire 25.1% of our shares is subject to the usual approval requirements under antitrust law and the Foreign Trade and Payments Act. We expect the transaction to be closed in the second half of 2021.
Going forward, we already see multiple opportunities to collaborate with Leonardo and to further build on our strategy. We certainly will be able to strengthen Hensoldt's long-term growth with a partner like Leonardo. It is important for me to emphasize that Leonardo with expected 25.1% share will then be on equal footing with our other shareholder, the German Government. Both of them 25.1%. Both parties have no direct influence in our operating business and no insight into any operational information. All operational decisions of Hensoldt are taken solely by the management board, which has, of course, also seen a very positive change since the 1st of July. With the appointment of Celia Peláez as Chief Strategy Officer, we have expanded our management board. Celia Peláez will work on the further development of our growth strategy for which we have had the foundation in the past five years. Next.
Hensoldt first half-year growth was underpinned by a healthy influx of orders in both the sensors and the optronics segments. We already reported volumes for the German Quadriga program in Q1, where we have booked approximately EUR 100 million for the self-protection system and an additional EUR 200 million for the radar system in the first quarter. In Q2, we booked now another EUR 30 million for the production in the radar share. It will be an ongoing order intake out of the Quadriga and the Eurofighter MK1 contracts and program. Our product segment has also contributed very nicely to the strong order intake by booking a contract of around EUR 70 million for an observation and reconnaissance system for the Dutch Army's Fennek scout vehicles in Q1. In Q2, we secured the order intake of PEGASUS, the German airborne signal intelligence system, in a magnitude of EUR 1.3 billion.
Hensoldt will act as a general contractor and will be responsible for the production of the entire reconnaissance technology. This landmark contract will manifest our position not only as a supplier for signal intelligence but also as a champion for airborne spectrum dominant solutions in Germany. Together with our strong baseline business, order intake in the first half year amounted to a total of EUR 2.1 billion, significantly up from the first half 2021. Hensoldt involvement in the nine procurement programs approved by the Budget Committee of the German Bundestag in June 2021, where we are involved, marks another significant business milestone in our history. Let me give you some ideas about these decisions. Looking ahead, the FCAS program has moved beyond the political wrangling with the budget approval in June.
Our participation in this contract for the development of multiple sensor demonstrators, expected later this year, will enable us to acquire essential system capabilities and puts us in a good starting position for subsequent development and production. Please always remember what we said during the IPO and since then in our analyst calls. Starting with FCAS will deliver and provide to Hensoldt a long-lasting growth potential, where we are talking about multi-billion EUR contracts to come in the next decade. Together with ELTA, another program, we will modernize the F124 frigates as well as the long-range air surveying system in Germany. In this case, with modern S-band radars, which will also provide an initial capability for defense against long-range ballistic missiles. Another significant milestone marks our involvement in another project that will be groundbreaking for new platform programs.
Modernization of the EW suite, electronic warfare suite, of the NH90 helicopter. In this case, in addition to the missile warner and laser warner, the electronic warfare suite of the NH90 will also include the artificial intelligence-based Kalaetron radar warner for the very first time. This means that we have entered the market with a fully digital artificial intelligence-based Kalaetron, which opens further potential for the entire family and future helicopter and fixed-wing programs like the Eurofighter, like the FCAS program and so on. If you look at the next page, the equipment of the German-Norwegian U212 CD submarines will boost our new generation of optronics products. The design of the boats includes a twin optronic mast, which moves the program from direct to digital vision. Again, digitalization represents the future of the market.
With the experience gained from these programs, we are optimistic to prepare ourselves for all future customer requirements in this area. No less important are the other programs. For the first batch of the Puma infantry fighting vehicle, we offered a sensor mix of vision systems for commanders and gunners, as well as a self-protection system called MUSS. We are also focusing on a sensor mix of cameras and laser sensors for the fleet service boats of the German Navy. Virtually the maritime counterpart of PEGASUS. If we look into the other European key programs, the major programs, as I already mentioned, besides FCAS, are the programs like MGCS, Main Ground Combat System, but also the Maritime Airborne Weapon System, even if we believe that the Maritime Airborne Weapon System will shift slightly to the right.
We already got the first studies for it. We are waiting for breakthrough in the Main Ground Combat System negotiations between France and Germany. Also here, we are expecting, as you remember, a long-lasting order intake for this decade and a long-lasting business, which supports our growth over 2030. Before I hand over to Axel for a more detailed look at our first half-year financials, let me quickly summarize. Hensoldt is fully on track. We continue to walk the talk and deliver on our guidance. We continue to benefit from the growth momentum in the defense electronics sector. We further expanded our position in Germany and in European key programs, as well as getting more and more in the global business. Thank you. With this, I hand over to Axel.
Thank you, Thomas. A warm welcome to this results call of Hensoldt from my side as well. I'm pleased to provide you with details on our financials for the first half year 2021. In the second quarter of 2021, growth in our top line exceeds our own expectations. We were again able to secure a number of big orders. The most noticeable one is clearly the development and delivery of the airborne electronic signals intelligence system, PEGASUS, with a contract volume of EUR 1.25 billion. Mentioned is an additional order related to the Eurofighter Quadriga program, worth of EUR 32 million. As you can see, our pipeline further transforms into order intake. Orders summed up to more than EUR 2 billion, and thereby increased our order intake by 90 percentage points compared to H1 2020. This results in a book-to-bill ratio of 4.3x .
That again strengthens our excellent revenue visibility. Revenue are also above our own expectation and increased by 10.4% to EUR 486 million. The ramp-up of key programs developed as planned. All this results, again, in a firm order backlog at record level. At the end of the first half year 2021, our order backlog was at EUR 5 billion, and thereby EUR 1.6 billion higher compared to H1 2020. This covers more than 3x our guided revenue for 2021. Overall, our bottom line developed as well above our own expectations. Adjusted EBITDA increased to EUR 44.1 million, and adjusted EBIT comes up with EUR 18.1 million. Profitability slightly decreased, which is clearly related to the lower project margin for pass-through revenues. In addition, we further invested in research and development and increased bid budget to ensure future growth. Page one , the adjusted pre-tax unlevered free cash flow is at - EUR 57 million.
This is mainly driven by a planned increase in working capital, especially in inventories. To remind you, this reflects the typical course of our business, which is very much weighted to the second half of the year. This year, that effect is additionally reinforced by our key project in early stage. Let me point out that once again, pass-through business and major projects in an early stage develop as expected. Let me summarize the key takeaways for the first half of the year. Our pipeline further transforms into order intake. Order backlog continues to be at record level. We have a high visibility of revenues. Our KPIs exceeds our own expectations in all aspects, and we confirm short and mid-term guidance for all KPIs. Further growth in top and bottom line. Profitability remains on high level due to efficient project execution. Further investment in technology leadership.
Operating cash generates an EBIT further deleveraging. Now we are happy to take your questions.
Dear ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for our speakers, please dial zero one on the telephone keypad now to enter the queue. Once the name has been announced you can now ask the question. [audio distortion]. One moment please for the first question. The first question received is from Christian Cohrs of Warburg Research. Your line is now open, sir. Please go ahead.
Yes. Good afternoon. Thanks for taking my questions. I ask them one by one, if I may. First, you stated that H1 performance exceeded, actually, your expectation. You then also confirmed the guidance. Did your buffer actually increase then for H2, or what stopped you then to become more positive on the guidance? Is it fair to assume that at least we should come at the upper end of your full year targets? That's question number one.
Hi, Christian. It's Axel Salzmann speaking. First of all, as you know, I'm a very conservative CFO, my own planning is, let's say, conservative- driven, was very happy that I have missed my own expectation. That was really very pleased to see that I was too conservative. I think, actually, in this moment in time, I would like to stick with my guidance, which we have shared with you. That means EUR 1.4 billion-EUR 1.6 billion A nice profitability increase and deleveraging to a level of 2.25. I think you have that in your models already. We are on a very good track, what I have mentioned with that. I'm, so to speak, just in front of my holidays and looking to the figures, I'm very relaxed and very nicely pleased with the performance of the organization.
Okay. Thank you. Second question maybe on the Future Combat Air System, MTU Aero Engines, just a few days ago nudged the full year target for its military business slightly upward due to the political approval of budgets. Do you also expect some first revenues from this project already this year?
Yeah. We do indeed. We also planned for, it's a very low level of, I would say even in the very low two digits area. We will see in the next years, much more to come there. Please also take into account that the orders we will get this year in the demonstrator area, these revenues will bump in later than the, for example, in the Airbus, where they have earlier revenues also in France.
Understood. Maybe the last question is, many companies who were still quite relaxed on material prices and the availability of material, who were relaxed in April, May, are now feeling increasingly unease about the situation. What is actually your view on the bottlenecks in logistics and material and also material prices? Are you still relaxed, or do you also notice some sort of change, and do you feel more unease about this current situation?
Hey, Christian, it's Axel again. If we would have a video call, then you could look into my face. I'm very much relaxed. I have to say we are monitoring, obviously, and that is our responsibility, our supply chain very closely. We are not, right now, seeing really some dark clouds at the supply chain sky. I think, as you know, we are a project-driven business, so we are not so much involved in the total supply chain. Second is, we have in our inventories, we have stock level in place, which has given me enough buffer time, and we are monitoring it so far. I can only say right now, we do not see any kind of impact for the 2021 year. We will see what 2022 will bring up. For me, I'm not really worried or unrelaxed about the situation.
Okay. That's clear. Thank you, and then happy holidays.
Thanks a lot.
Thanks, Christian.
The next question we received is from Sebastian Growe of Commerzbank. The line is now open. Please go ahead.
Good afternoon. Hi, Thomas. Hi, Axel. Three questions from my end. The first one is on PEGASUS. We had a quite material step up from the about EUR 1 billion to the EUR 1.3 billion that you ultimately reported for this order value. Can you just walk us through the background of that material step up, where it originates from, and if one could take also that as a blueprint eventually for other projects because of the before discussed raw material escalation, et cetera, or how should we think about this increase?
Well, as Axel said, Sebastian, we want to be careful in what we are doing and better to have positive surprises. What has been behind the increase of the EUR 256 million, very precisely, so EUR 1.3 billion if you round it's a little bit less. The content has been that the German Armed Forces wanted to have more in the plane as originally has been scheduled. We are delivering a plane with more capabilities. Even if in the beginning they said we have no money to pay for more than EUR 1 billion, they said, "Now, well, okay. This is important. This is important," and therefore we could increase the overall volume to this amount closely to EUR 1.3 billion. Yes, you are right.
If you look into our programs and our plannings for big programs, I think in most of the cases, we are realizing that the customer finally is prepared to pay for more than originally planned because we can convince him that if he pays a little bit more, he gets much more capability. Furthermore, once you are in such a big program, it's a really ongoing machine because a lot of things in these very complicated, big programs are added later. With a good claim and waiver management we have in place, we are earning during the course of such a program even more money. I would not be surprised if the EUR 1.3 billion, the original contract for the three planes will be in the next years until the final delivery will increase. Yes, that's absolutely true.
Okay, sounds good. Can I just ask a quick follow-up to that very question? If one thinks about this very order quality of the extra revenues that you were able to book here, I don't know if it's really a bit too naive in the way of looking at it, but if one was to compare to the car industry, where obviously all the expert features are obviously quite lucrative in the margin perspective, how should we think about these sort of extra features? Would they usually sell at better margins at your end? Or is that a thought that's simply not applicable because it's on a case-by-case basis?
Yeah. Indeed, it's true. Because all the add-ons which come in later will have a better margin than the original program. This is going in the direction of upgrades and later even the MRO or service business. As far as you go in this big program, it's a starting point once you are in, to get more and more and more and more, and with better margins than the original program. It will be better in the future. We have seen it in all our programs. If you are in, it's already with a good margin, but the margin will even improve in the future.
Okay. Sounds encouraging. The next one is on the pipeline, on FCAS, Future Combat Air System. Can you give us a rough sense of what the order value might be? You can also provide us with a conservative number here.
Well, currently it's difficult for me to say because, the current order intake, we are expecting for Hensoldt, you remember we are part of a team, the FCMS team, Future Combat Mission System team. While it's a very high two-digit number, the real big order intakes will come in the next three to four years. Then we are talking about beyond EUR billions.
Okay, sounds good. The other question I would have had is with more on the implied run rate for the orders we have obviously seen now in the guidance, even at the upper bound, the EUR 500 million run rate. From everything that I do hear and the comments you made earlier, I think there's a realistic chance that you might rather land at this very upper bound or higher. That is basically how I would summarize what you have been saying so far. That would be okay with you, right?
Sebastian, here it's Axel speaking. I would not like to change my guidance, and I think all the questions are asking the same question. I'm totally aware that you would like to have a more precise figure, but I would like to stick so far with my guidance. That means EUR 1.54 billion-EUR 1.6 billion in revenues and 2x our order intake above the revenues. That is what we are right now doing as a guidance. I think that it should be also reflected in your models.
No, that's fine. Let's wait for the next surprise in November. Thank you.
As you know, and maybe Sebastian, sometimes it is maybe a little bit boring, our story. I am really convinced as CFO of this company, as well as the CEO, we walk as we talk and we simply deliver. That is all about the story.
Boring can be beautiful. That's perfectly fine with me.
Yeah. I hope so, Sebastian. I hope so.
Yeah, well, I need to catch me, so yeah. That's fine. I get taken to the queue. Thanks for that.
Okay. Thanks, Sebastian.
Ladies and gentlemen, before we take the next question, just a reminder, if you would like to ask a question, please press zero one on your telephone keypad. The next question is from Benjamin Heelan of Bank of America. Your line is now open, sir. Please go ahead.
Yes, afternoon, guys. It's Ben from Bank of America. I wanted to try on the guidance again, but ask it kind of in a different way. How should we think about the risks and opportunities in the second half of the year that could mean you would be at the lower end or at the upper end of that guidance range? A second question would be on the cash, where you obviously had a fairly sizable outflow in the second half of the year. Sorry, in the first half of the year. What drove this, and how should we be thinking about cash flows in the second half of the year? Thank you.
Hi, Ben. It's Axel. Yeah. I do not know how I should right now rephrase my answer to the guidance, not to really to be boring. Simply I would like to stick. We have balanced our risk and chances for the second half. We are very confident that we can achieve all aspects of our KPIs. I would not like to go in further details. Concerning your cash flow question, as you know, our seasonality pattern is very much driven by the second half, and especially in the Q4. That is normal process in our projects. They are year-end driven. When I'm looking right now to my cash profile, to all the revenues which we will deliver and all these things, then I can say we are clearly good in shape, and we will deliver what we have said.
Just keep in mind that I have guided for 2.25 leverage target. I think we will clearly manage that maybe a little bit better. We will see how it turns out. Yeah. It's maybe not the best answer you can receive, but for me it's the best answer to give you. I confirm all KPIs, we will simply deliver what we have said. That is very simple.
Okay. No, that's very clear. Thank you.
Thanks, Ben.
The next question received is from Sash Tusa of Agency Partners. Your line is now open, sir, please go ahead.
Thank you very much, indeed. Good afternoon. I've got a follow-up question to Ben's, and frankly, this probably reflects my poor forecasting of the first half results. It's really just trying to get an understanding of how you think the first half, second half splits of revenues and profitability will either develop or remain over the coming years. I know you've probably got a slightly more extreme second half waiting than some of your other European peers, which probably reflects the fact that you have a higher proportion in your home country. Do you see any ability in the medium term to balance the financial results a little bit more towards the first half? Should we always expect it to be roughly a 1/3, 2/3 split, first half, second half, possibly even a sort of slightly less than that three bit?
Hi, Sash. It's Axel. Nice to hear you again.
Thank you.
It's a pleasure. Hi, Sash.
Knowing each other for such a long time, huh? Great. To be very honestly, I would love to balance between H1 and H2 more. Unfortunately, when you're looking to the budget and the budget release and the milestones which are predefined, it's very much driven by the H2. Could we change it? I do not think so, and I know that that is, from investor perspective, not the best solution. I can only follow how my business and my business development is structured, and that is very much driven by our governmental customers, and therefore, we are not really able to do something different from our perspective. Simply, you are totally right, I would love to balance it more. More H1 driven, more H2 driven, more balance in the structure. We do not see any kind of possibility.
Simply to give you some things, sometimes we are receiving an order in October for delivery in December. When we are starting the new project, it's starting with the development and it's starting in January. Then the first milestone will be seen in the second half of the year. We are following that very crucial from a operational perspective. We are following the milestones which have to be achieved in a certain moment in time, and that we are really delivering in time, in budget, what we have promised to our customers. Unfortunately, in our financial reporting, it goes with the second half.
Okay. That's understood, sir. Thank you for that. I just wondered whether, particularly if you started to get any more international business over time, it might smooth a bit, but it sounds like that's a very long-term outlook.
Yeah. From midterm perspective, I think we have a very good pipeline in place also on the net international side. It will kick in, and will that balance a little bit more our seasonality? I do not know. Actually, I will see what the milestones, the contract will show us, and then we will place it in.
Yeah. What we are currently experiencing is a very good development in our optronics division. Really better than I expected. Here we have this more volume-based business, like the Fennek program we have won in the Netherlands. These kind of businesses will support the more balanced situation over the years, but it takes time. The big programs are always back loaded. You know this cameralistic system, especially in Germany.
Okay. Thank you very much.
Thanks, Sash.
Ladies and gentlemen, as we receive no further questions, I hand back to Veronika Zimmermann for closing remarks.
Yeah. Thank you very much all for listening to this call today. As usual, should you have any further questions, I'm quite happy to follow up via email or via phone. With that, I would like to close the call. Have a good day. Thank you very much, and bye-bye.