Afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Hensoldt AG three-month results 2023 analyst call. Throughout today's recorded presentation, all participant will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may do so by pressing star then one. Press the star key followed by zero for operator assistance. Now, I would like to turn the conference over to Veronika Endres, Head of IR. Please go ahead.
Good afternoon, everybody, welcome to Hensoldt's three-month 2023 results call. Thank you all for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt. With me are our CEO, Thomas Müller, and our CFO, Christian Ladurner. Thomas and Christian will guide you through this presentation today, which is followed, as always, by a Q&A session. With that, I hand over to you, Thomas.
Yeah. Thank you very much, Veronika, good afternoon, everyone. Thanks for joining our earnings call today in which we would like to present our once again strong results for the first three months in 2023. Let me start by giving you a brief update on strategic topics and key business highlights. Christian will guide you through our strong financial performance of the first quarter. As always, following our presentation, we are happy to answer your questions. To our business update. First, let us have a look at a few strategic topics. We see a significant dynamic in the German MoD, where our new Defense Minister, Boris Pistorius, has initiated a series of structural changes. We welcome his initiative to accelerate procurement programs and focus on operational capabilities.
We expect the German parliament to switch into a higher gear with 70 to 80 defense procurements approvals scheduled for this year. Just now in April and May, they started with the approval processes. While the decision on increasing the regular German budget is still ongoing, the government has increased the multiple year budget for direct support of Ukraine and the backfilling of equipment that was given to them by EUR 12 billion-EUR 15 billion. This will help to create further opportunities, especially for our air defense TLM for the radar as well as the self-protection systems. By the way, let us not forget that Germany is the second biggest donor of equipment to Ukraine. While Germany is obviously very important for us, we certainly do not forget what is going on in Europe, NATO, and the rest of the world.
With Finland becoming a member of the alliance recently, we see increasing discussion on the spending target 2%, and the NATO Summit in July will give us more clarity on this topic. Finally, it is not secret for some weeks now that we have appointed my successor and that Oliver Dörre, whom I very trust, will take over as the CEO of Hensoldt by April 1, 2024. Until then, I'm happy to continue to devote all my energy for our company, its people, and obviously getting to what we promised our KPIs. Oliver Dörre will join us in January 2024, and I will ensure a smooth handover to my successor in order to secure continuity of our entire business.
I'm very proud and satisfied to have helped ride the unique success and growth story of Hensoldt over the past eight years, and as I said, we'll do it for the next year. Although it is quite too early for goodbye, I would also like you personally, dear analysts, very much for your trust and confidence. Now more back to the business in detail. By now, all of you will know this slide very, very well, and we like to show it for an important reason. Despite the discussions on scheduling of individual projects, the overall outlook for us as Hensoldt regarding the German programs in the short, medium term is very solid. Not only short and medium term, as we described, for example, for FCAS also for the next decades.
Yes, there are the usual timing shifts with some programs being accelerated while others being a little bit shifted. We have highlighted the programs with positive dynamic for Hensoldt in yellow. Hensoldt is well-positioned for a significant number of projects that will drive our business significantly for the next four to five years and sooner. To be a bit, little bit more concrete and precise, we expect a medium to high single-digit billion of euros contribution from Germany to our order intake in the coming years. You see in our figures that this is materializing more and more as we said. I will go a little bit deeper on our contributions to procurement programs of the German Army in the next slide. Our company is very well-positioned to serve all forces and categories of the German Army.
The German Army is in the process of restructuring its forces into three categories, a light one, a medium one, and a heavy one. The heavy forces will use tracked vehicles, and we offer a significant number of existing and new equipment, both for tanks and infantry fighting vehicles. This ranges from vehicle optronics to self-protection systems like our MUSS and our revolutionary vision system, See Through Armored System, as you know, STAS. The medium forces will be equipped with wheeled vehicles to be road mobile, and a number of procurement projects are in the pipeline. A significant one is the so-called Puma-Boxer, PuBo, which stands for a Boxer wheeled vehicle chassis combined with the unmanned medium caliber turret of the Puma that is equipped with our optronics. We are also offering self-protection and vision systems for this category.
Our sights and scopes, as well as our fire control systems for bazookas, are already introduced in the light forces of the German Army as part of the Infanterist der Zukunft IdZ. We expect further business in this area as well. Now, looking for an update on top orders for 2023. Before I hand over to Christian Ladurner, let me quickly update you on major orders for 2023. We have booked already orders for Puma sights, optronics for new orders of the Leopard 2 by Norway and Sweden, as well as two TRML-4D for Ukraine. In the very short term, and this means days, we expect orders for another six TRML-4D radars for Ukraine, which will make them the leading operator of this highly advanced medium-range air defense radar in the world.
You may have heard what the mayor of Kyiv said yesterday that 100% of the incoming drones and missiles has been shot down mainly by our system, which we are delivering together with Diehl. The same applies to an order for self-protection systems where we are equipping Ukrainian helicopters, which will help to protect the lives of their crews in dangerous missions. I want to repeat and remember that we as Hensoldt are one of the world market leaders in helicopter self-defensive systems. In the coming months, we expect planned orders in Eurofighter Radar businesses, TRML-4D, especially for the German air defense as support the Puma Batch 2 and optronics for the German Leopard tanks. This is promising outlook. I hand over to Christian for a look on our strong financials in the first quarter.
Thank you very much, Thomas. I'm happy to provide you now with our financials for the first three months of 2023. Before I go into detail, I would like to comment on some statements made by Leonardo on Hensoldt during the earnings call last week. Other than implied in the Leonardo call, our start into 2023 was anything else but soft. We, the Hensoldt management team, are very satisfied with the company's performance in the first three months of 2023. We believe there was a misunderstanding as Hensoldt's inclusion in Leonardo's financial statements as a strategic investment and equity has been impacted by two technical effects. Firstly, Hensoldt's figures included in Leonardo's results are not comparable year-over-year due to a change in accounting, switching from reporting in arrears to reporting on an equal period basis.
This has a particular impact on Q1 2023 of Leonardo because, as you're well aware, our business profile is heavily weighted to the second half of the year. Secondly, the figures tool and also will in future periods include IFRS accounting effects, notably PPA amortization, which exclusively relate to Leonardo's financial reporting and hence do not solely reflect the operational performance of Hensoldt. To make it clear, we again were able to realize an excellent development in our top line and also bottom line in the first quarter of this year. Our order intake summed up to around EUR 350 million with an excellent performance of the optronics business, where we were able to secure multiple orders for the Puma and the Leopard tank.
As a reminder, in the first quarter of 2022, we received the order for the C-3 long-term service contract for Eurofighter and orders to equip the Frigate F126 with our TRS-4D radars with a total volume of more than EUR 400 million. Our sales increased by 18% to EUR 338 million with double-digit growth rates in both segments. Main drivers in the sensor segment were, of course, the key programs, Eurofighter Mk1 and PEGASUS, which developed as planned. In the optronics segment, the increase in revenue was mainly driven by the South African entity, which is now benefiting from the investments in capacity and expansions made in recent years. All this again is reflected in a very strong order backlog. At the end of the first three months of 2023, our order backlog summed up to EUR 5.4 billion.
This covers almost 3x of our revenue for 2023 and therefore continues to provide us with an excellent revenue visibility. We did not only grow on our top line, we also delivered on profitability. Adjusted EBITDA increased to EUR 30 million with an adjusted EBITDA margin before pass-through of 10.3%, respectively 9%, including pass-through business. This is an increase of more than 3 percentage points compared to last year's margin. Adjusted EBIT came in at EUR 30 million with an adjusted EBIT margin before pass-through of 4.4%, respectively 3.8% including pass-through business. Also an increase of more than 3 percentage points compared to Q1 2022. The significant increase was mainly driven by higher volumes. In addition, margin are temporarily supported by a slower increase in costs compared to revenue.
This development underlines our focus on a strict cost and risk management to allow profitable growth. The adjusted pre-tax and leverage free cash flow amounted to EUR -126 million. As you know, the first quarter of our financial year is characterized by investments in working capital to prepare for the planned business volume in the following quarters. Additionally, that effect is reinforced this year by pre-contract costs to secure the increase of our production for TRML-4D and SPEXER radars, as well as for the optronics for combat and reconnaissance vehicles. As you can see, we now invest and industrialize key products anticipating the increasing demand in these areas. Let me point out our overall bottom line develops as planned. Let's talk about our guidance for the full year 2023, as well as our midterm outlook.
First and foremost, we are fully on track to meet our full-year targets and confirm our positive guidance for all KPIs. For 2023, we expect the book-to-bill between 1.1 and 1.2. Revenue to grow between 7%-10% and more importantly, with a stronger growth in core revenue and a smaller share in pass-through sales than in the years before, resulting in improved quality of revenue. An adjusted EBITDA margin of around 9% before pass-through revenue and for the adjusted pre-tax and leverage free cash flow, we expect around 70% in cash conversion, resulting in a further declining net leverage to lower than 1. Finally, a dividend payout ratio between 30% and 40% of adjusted net income.
To sum it up, in 2023, we continue to expect the budget increases, especially from Germany, to result in a good growth in order intake, as well as a higher quality growth due to a stronger increase in core revenue. Coming to a conclusion, let me mention the following key financial takeaways. Our impressive order backlog of EUR 5.4 billion provides us with great revenue visibility for the years to come. Our optronics segment is growing and is showing a respectable top line. Our efficient project execution supports our excellent profitability and therefore we confirm our full year 2023 guidance for all of our KPIs as explained. Our outlook remains promising, and we are strongly positioned for the upcoming growth. The procurement plan of the German government is accelerating, and we received first orders from the Special Fund.
We expect further orders from the German government in the next couple of weeks to support the Ukraine with our equipment. As mentioned, we're 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.
Now we are happy to take your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. Our first question today comes from Carlos Iranzo from Bank of America. Your question please.
Hi. Thanks for taking my question. I've got three. The first one, there was a Reuters article in which you commented you could receive about EUR 2 billion of orders from the German special defense budget in 2023. I just wonder if these potential orders are included in your 2023 guidance. Second one, you plan to double revenues by 2027, and this implies a substantial inorganic growth. Could you update us on what should we expect in terms of M&A? Last one, in terms of margins, your average margin came significantly higher than we expected. You mentioned top-line growth and better cost margins, but would really appreciate if you could provide some additional color. Thanks.
Yeah. Thank you, Carlos, for your question. Could you please repeat the first question? I didn't really catch it.
Yeah, sure. The first question, there was a Reuters article in which you commented that you could receive about EUR 2 billion of orders from the German special defense budget in 2023. I just wonder if these potential orders are already included in your 2023 guidance?
Yeah. I have to correct this. This is not a true understanding. We've always stated that in the upcoming years, from now, we tend to receive mid to high single digit billion amount of orders. This has to be divided until the next years until 2027, I would say. It's not correct that we expect in 2023 EUR 2 billion of orders just from the German government. I personally expect it will be a high EUR 3 million digit number this year out of Germany for the German key campaigns, and I think this is a solid number.
Yep.
Thomas will you?
On M&A, you remember, Carlos, what we said during our recent analyst calls and our roadshows. We will double our revenues in the next five years as we did in the past. If you take our guided growth line, we need also to go ahead with acquisition targets. This is exactly what we do in the midterm. I think to be extremely clear, what we as a company follow as a holy way forward is we solely invest in M&A targets if they are accretive for our company and what our company means for our shareholders.
Yeah. Taking the last question. The upside on EBIT and EBITDA, of course, this is a very, the development we expected. I can only repeat, we have a big focus on growing profitably. Nevertheless, we have to say it's now the first quarter in our books. There are still three quarters to come. With the last quarter, of course, notably the highest one. Therefore, I still feel very comfortable with our guidance we gave for this year at the 19% approximately. I expect some costs also for growth coming in the next one to two quarters. We'll see. In general, our plan to grow profitable is very good in shape.
Okay. Thank you. Very clear.
The next question comes from Christian Cohrs from Warburg Research. Please go ahead.
Yes, good afternoon. Thanks for taking my questions. I have three actually. First, coming back to the M&A issue. Now with the upcoming top management change as of April next year, does this have any impact on the M&A going forward? Should we expect a break, or do you pursue with acquisitions also in 2023? Second question relates to Optronics. Despite a very encouraging top line, the EBITDA contribution was negative. Can you maybe shed some light on the background and what to expect in the quarters to come? Lastly, your financial result was far more negative than in the preceding quarters. Looking at the cash flow, the interest expense seemed more normal. I assume that there are some special or variation effects. Can you also maybe shed some light and some background what happened in Q1 in that regard? Thank you.
Christian, thank you very much for your question. That I am so happy to take the first part of the question, which means do we have a break of logic or do we continue very clearly with what we have told you? For sure, you know that me as a head of a CEO, or as a member of the board, I'm not the one who is finally deciding on the successor. This is a supervisory board. What I can say that for sure I have been included in, let's say, at least the short list.
One of the key elements which has been, or one of the key questions which has been subject to supervisory's evaluation of who will be the best to follow me, certainly has been, to what extent are you following what has been already done in the last five to seven years in the future. I can tell you, and I can promise to you that one of the clear selection points for Oliver Dörre has been, he fully supports what has been done in the past strategically and what will be the future. What can I say is, yes, we will have continuity. Please remember that it's an ongoing positive change on the old management, which we did, and we started two years ago with Celia Pelaz, then with our CFO, Christian Ladurner, and with our HR director.
Now I am happy to pass next year. Next year. We still have a year in front of us. Next year to Oliver Dörre and to ensure that there is a continuity.
Yeah. Second question, goes with me, Christian. Happy to answer this question. So for the Optronics, there are some costs, and we already commented that the Optronics business is more short cycling. That means we see also now in this quarter some of the pre-investment costs. We saw it quite similar the last one to two years in South Africa, where we now benefit from. I expect that margin comes up by a half year and better quarters to come, to come to a similar, finally a better margin than last year of the Optronics segment. Last question. Your financial result question, what is the effect? Maybe you know that last year we did an amended extent of our long-term facilities.
In October last year we decided on top of that to hedge the Euribor. That means our payment of the interest rates consists of a margin ratchet plus a three-month Euribor. Last year we decided to go for a swap, to go for hedging topic, in order to secure our really very low interest rates. I think when you now look at the last decisions of the European Central Bank, our strategy was clear. Nevertheless, this costs us a little bit of EUR millions in the financial result. You are absolutely wrong, Christian. In terms of a cash flow, you will see that it's quite limited in terms of interest, similar to last year. I hope this answers your questions.
Yes, it does. Actually, that's what I meant. I mean, in the cash flow statement, the amount of interest was pretty low compared to the P&L figure. I think you've answered it correctly, and I think I understood it right. Thank you.
The next question comes from Christophe Menard from Deutsche Bank. Please go ahead.
Yes. Good afternoon. Thank you for taking my question. I had three, please. The first one on the still on Optronics, but on more on the sales. You may have said it, but I may not have understood it. You mentioned in presentation that some of the sales included industrial commercial solutions. Can you expand a little bit on this? The second question is on free cash flow. Quite obviously it's gonna be there is a phasing during the year. Which phasing would you expect this year? Again, heavily back-end loaded, I would guess, but kind of if you could give us an idea. Last question. Eurofighter Radar orders.
Any chances that you get more of these coming up, in terms of upgrades, from other markets?
Christophe, many thanks, for your questions. Happy to hear you. First of all, the Optronics industrial business relates to Final Focus Metrology. It's really highest tech where we deliver to ASML, a semiconductor, business, our solutions, and helps them to ramp up. This is the business for industrial in Optronics. A second question, free cash flow. You should expect this year similar pattern as we did last year. Of course, we also have taken into account that the business is growing. That means the so-called pass-through is a little bit lower. In total, the pattern will be similar than the last years.
Okay. To Eurofighter Radar. We still see good opportunities for the Eurofighter in itself, and for sure, one of the driving selling forces for the Eurofighter are the new radars. Especially, the German Mk1 radar, which we are in Germany developing together with Indra in Spain, and on the other side, the Mk2 radar, where we also have our stake in the Euroradar consortium.
Yes, we are expecting future Eurofighter Radars to come in the next couple of years. Near term, we are especially expecting some additional upgrade contracts and uplift contracts for the existing development contracts, Mk1, which we are very happy to look forward to it.
Thank you. May I ask the question about Tornado replacement in Germany? I mean, it's a topic that seemingly has died down. I mean, it's, is there any chances that or have you seen any prospect improving for an extra Eurofighter order, or should we wait for the current batch, so to say, to be delivered until we see a next decision?
Okay. Thanks a lot for this question. I have to say it's a little bit glass ball viewing currently. There are a couple of interests which are going around in Germany between the stakeholders and also in Europe, for sure, and with the United States. What I can cite is out of the chancellory and the Minister of Defense, Hensoldt will play, whatever the decision will be, a significant role in. Frankly speaking, I'm not expecting big orders to come in this year, maybe more next year.
Okay. Thank you. Thank you very much.
Welcome.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one. Our next question comes from Aymeric Poulain from Kepler. Your question, please.
Yes, thank you. I've got four questions, if I may. The two first one are effectively clarification. Did you say that the order intake for this year, you expected it to be more back-end weighted to get to the 1.1-1.2 book-to-bill ratio? That's the first question. The pass-through sales, you gave the margin, so we can reconcile it, but obviously these are low margin, so there's a bit of a range. You also say that the pass-through sales was in line with last year. Could you give us the exact number for pass-through sales in Q1, please? The fourth questions are more in the kind of strategic kind of discussion box.
You started the financial review with a misunderstanding on the way Leonardo reports its the end sale figure in their account. I also noted that there were some differences of view regarding the cooperation, the strategic cooperation of Leonardo, especially regarding two deals and transfer of assets from one company to the other. Could you give us a bit more update on the relationship with Leonardo? What type of synergy you're investigating? Again, in terms of the harmonization of the communication, how is this working in practice? The last one is on the geopolitical situation and the type of market opportunities that you see. You mentioned Ukraine, obviously, as a major customer for your radar.
Are there other markets that you see? I think you flagged about Sweden and Finland entering NATO, but other markets you see that could be really a game changer for Hensoldt in the coming years, apart from Germany, obviously.
Ladies and gentlemen, just one moment, please. Please hold the line. Ladies and gentlemen, we are having some technical issues. Please hold the lines. Thank you. Ladies and gentlemen, thank you for holding. We will continue now.
Hello? Hello, Aymeric, can you hear us?
Yes, I can. Thank you.
Oh, great.
Thank you again.
You know, your question was very, very hot, and therefore-
That's right.
I'm happy, but I'm happy to answer your question. First and foremost, we have, based, and we all know this very clearly, based on the antitrust guidelines as stock-listed companies as well as our guidelines we have as a stock-listed company, we are cooperating very well with Leonardo, and we have some cooperation programs which show and start this year already to show synergies. For example, in the Eurofighter, you know that we are linked in the EuroDASS. We are working together in the EuroRADAR Consortium for the Mk1, Mk2. The cooperation is really on a very good status.
I have to say, as already Alessandro Profumo said, the quote which has been given in the media has been taken out of a context because I have been very bullish on that we want to double our revenues, that we also look for targets to acquire if they are creative, as we said initially. This led to an unfortunately misunderstanding because they mixed everything up in order to have headline. Then for sure, they ask me, what do you think about your cooperation with Leonardo? I said, well, it's a very good cooperation, combining our efforts in Germany, in Italy, and in the U.K. This led then to this big misunderstanding as it was cited that I want to take over Leonardo Electronics, which for sure is nonsense.
Now, what we always said that we still want to be in a very, very strong position in future possible potential consolidations in Europe. Yes, if we are working good together with Leonardo, why not thinking that this could be a way forward? Again, this is all vision. There is no specific, clear discussion on this currently. It's all thinking about what could be next step. You never know what's happening in Europe. We have the players Thales, we have Indra, we have Saab, we have other Germans, we have U.K. players. I think this is what we have to take into account if we look forward.
The only thing what I'm clear about, I don't want, not I myself, and this is, you remember the question we had prior to your question, I don't want to be swallowed and even, and this is clear, my successor, Oliver Dörre, will not be swallowed. Hensoldt will stay as an actor in the European field. Whatever happens only if it's accretive for our company, if it brings our company forward and therefore is beneficial for our shareholders. I hope it answers your question.
Yes, on this, on this point, yes, absolutely. Thank you.
Thank you.
Aymeric, I proceed. That was the question of pass-through revenues and our Q1 figure. It's around EUR 45 million, and it's quite similar to last year's Q1. Going forward, we said that the amount we had last year will be significantly lower, we will be seeing this effect in the upcoming quarter. This is the exact figure for Q1. The last figure in order intake, yes, also this year the order intake will be a little bit back-end loaded, the majority of orders we expect in the second half of the year. Nevertheless we will see some dynamics in H1 of this year out of the German defense budget.
Great. Thank you.
Welcome.
Looking forward to see you again soon.
There are no further questions at this time. I hand back to Veronika Endres for closing comments.
Yeah. With that, thank you all for listening, and as always, should you have any further questions, the IR team is around all day to follow up. With that, have a great day. Thank you and goodbye.
Thanks. Bye.
Bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much.