Good afternoon, everybody. A warm welcome to HENSOLDT's H1 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.
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. 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 half 2023. As always, following our presentation, as Veronika already mentioned, we are happy to answer your questions. Ladies and gentlemen, first, let us have a look at a few strategic topics. At the NATO, NATO Summit in Lithuania, the Alliance members not only paved the way for the accession of Sweden and reconfirmed their support for Ukraine, but also committed to 2% GDP spending on defense as a lower limit.
While this is certainly a political statement, it also increases the pressure on individual governments to give priority to defense in their budgeting processes. While the regular defense budget sees a modest increase by EUR 1.7 billion to EUR 51.8 billion for 2024, Germany will reach a 2% target with a special fund in 2024 and 2025. The discussion on increases in the outer years intensifies. Just as an example, the Minister of Defense, Boris Pistorius, pledged EUR 20 billion for the purchase of ammunition by 2031. I'm convinced that the budget discussion will become more dynamic in the coming months.
As some of you may have mentioned or realized this morning, the German Minister of Finance also, also confirmed that Germany will stay at a minimum of 2% even after the specific budget has run out in 2025. The recently released German national security strategy clearly underlines the need for a well-equipped Bundeswehr, and I think the important that the strategy also addresses defense exports and highlights their strategic function. We see a renewed dynamic in European programs. A recent meeting of Boris Pistorius and his French colleague, Sébastien Lecornu, removed some of the blocking points in MGCS, you know, the Main Ground Combat System, and we are confident to see progress in this program later this year.
As with the Future Combat Air System, FCAS, we, HENSOLDT, are very well-positioned with our leading sensor and self-protection technology for the future armored platforms in Europe and beyond. Looking at this slide has become a staple in our quarterly presentation by now, and we like to continue showing it for an important reason. Despite the daily discussions on scheduling of individual progress projects, the overall outlook for HENSOLDT regarding the German programs is in the short and medium term, has solidified once again, and HENSOLDT will contribute its leading technologies to many German programs in all domains. Yes, there are the usual timing shifts, with some programs being accelerated while others are delayed. We have highlighted the programs with positive dynamic for HENSOLDT in slate gray. HENSOLDT is very well-positioned for a significant number of projects that will drive our business significantly for many years to come.
To be a little bit more concrete even, we expect a medium to high single-digit billion EUR contribution from Germany to our order intake in the coming years. We see in our half-year figures for 2023, that this is materializing more and more. Please, ladies and gentlemen, dear investors and analysts, take into account that Germany, for us, is the reference market to be successful in Europe and the rest of the world. Now, in the first half of this year, for example, we have, we have received top orders. For example, we have received orders for optronic sights and self-protection of the German Puma infantry fighting vehicle, and we have contracted 6 TRML-4D radars for the German share in the European Sky Shield Initiative.
The 6 TML-4D for the Ukraine, I had announced in our 3M call in May, are booked now, and we expect further orders in the coming months. This is underlined by a letter we received recently from the commander of the Ukrainian Air Defense Forces, who commended the outstanding performance of our radar. This makes us proud and reinforces our commitment to save the lives of Ukrainian citizens. We have also booked orders for self-protection systems of Ukrainian helicopters and for optronics for new Leopard 2 by Norway and Sweden, as well as periscopes and the optronic mast systems for the Norwegian Ula class submarines. In total, these orders amount to more than EUR 1 billion, a record figure for our baseline business.
Before I hand over to Christian, I would like to react to and also firmly reject the allegations raised by the German news magazine, Der Spiegel, in May about improper business practices and insufficient internal controls. The magazine's accusation absolutely lacks factual basis. Our internal control mechanisms are functioning at all levels. However, we have initiated an internal investigation to identify any potential weak points. Ladies and gentlemen, at Hensoldt, we strive for best-in-class compliance approach that aligns with our growth, ambition, and integrity culture. Our compliance program ensures that business practice comply with applicable laws, regulations, and our high ethical standards. A key element of this program addresses corruption risks when working with partners. We are fully aware of corruption risks in our business and follow a business-oriented and risk-appropriate compliance approach, especially in selecting and assessing local representatives and agents.
We are absolutely confident that with all anti-corruption measures shown on this slide, we have mitigated any systematic compliance risk to the absolute minimum. Ladies and gentlemen, Hensoldt, for compliance, we have a zero tolerance in our company. With this, I hand over to Christian Ladurner, and our strong financials, the first half.
Thank you very much, Thomas. I'm happy to provide you now with the details on our financials for the first half year 2023. We again were able to realize significant growth in our top line in the first 6 months of this year. Our order intake summed up to more than EUR 1 billion. This performance was driven by our strong baseline business, as well as the orders for TRML-4D radars and systems for the Puma and Leopard tanks. The distribution of incoming orders was very well-balanced between our home market, Germany and Europe. Our sales increased by more than 6% to EUR 726 million, with an excellent development in both segments. More importantly, with a substantial increase in core revenue of 17%, resulting in improved quality of revenues.
This is driven by the excellent development of our baseline business and a decline of pass-through revenue. The key programs, Eurofighter Mk1 and PEGASUS, develop as planned, with a further successful milestone achievement in the PEGASUS program, which I will elaborate on further. All this, again, is reflected in a very strong order backlog. At the end of the first half of 2023, our order backlog reached a new record high of almost EUR 5.7 billion. This covers 3 times of our guided revenue for 2023, and therefore continues to provide us with an excellent revenue visibility. We did not only grow in our top line, we also delivered on profitability. Adjusted EBITDA increased by 35% year-on-year to EUR 82 million, with an adjusted EBITDA margin of 11.3%.
Our core margin, excluding pass-through, increased as well to 12.8%. Adjusted EBIT amounted to EUR 45 million, with an adjusted EBIT margin of 6.2%, respectively, 7.1% excluding pass-through business, an increase of more than 2 percentage points compared to H1 2022. The significant increase was mainly driven by high volumes and the excellent growth of our core revenue, as described earlier. On top, we were able to realize economies of scale in some programs, such as the TRML-4D. This development was partly offset by investments in our growth ahead and by an ambitious product mix. Adjusted pre-tax and levered free cash flow amounted to minus EUR 136 million. As you know, the typical profile of our business is very much weighted to the second half of the year.
The development was characterized by investments in working capital to prepare for the planned revenue recognition in the second half of the year. Despite higher investments compared to last year, we managed to improve our cash position year-over-year. Let me point out, our overall bottom line developed as planned. Let's now have a look at our segments. In the sensor segment, order intake develops as planned, with orders booked for TRML-4D radars for Ukraine and the German Armed Forces and the MUSS self-protection system for the Puma. In total, the sensor segment was able to even exceed the high order intake from previous years' period. As a reminder, last year's figure included the F126 and the C3 service contract orders with a total volume of more than EUR 400 million.
Revenue in the sensor segment increased by 5% to EUR 603 million. Again, I want to highlight that our core revenue increased even stronger by 17%. This is due to a declining share of parcel revenue and, most importantly, by an excellent development of our baseline business. Our key programs, Eurofighter Mk1 and PEGASUS, are progressing as planned. In the PEGASUS program, the Critical Design Review has been successfully passed in June at the Bombardier site in Wichita, USA. At this important milestone, the detailed design to adapt the aircraft with various reconnaissance antennas and supplemental cooling capabilities has been reviewed from technical, performance, and certification aspects and approved. Based on that, Bombardier Defense has now started to modify the first aircraft.
The margin performance of the sensor segment was excellent, with an increase in adjusted EBITDA of 65% to EUR 86 million. The uplift in absolute margin was driven by higher volumes and by economies of scale in some programs, for example, the TRML-4D. Please be reminded that scaling in our business is limited since lot sizes are rather small. In case of the TRML-4D, for instance, we talk about a production of 9, respectively 15 radars this and next year. In the optronics segment, order intake showed the expected strong momentum in the second quarter of the year and therefore increased significantly. Main order intake drivers were the Puma 2nd batch and the Puma retrofit, the Leopard 2 for Norway and Sweden, as well as periscopes and optical mast systems for the Norwegian Ula class submarines.
Revenue grew by 15% to EUR 125 million, driven by our South African entity, which is benefiting now from the investments in capacity expansions made in previous years. Also the FFM business, periscopes and optronic mast systems for submarines, as well as the laser range finder for the M1 Abrams main battle tank, contributed to the growth. Adjusted EBITDA optronics amounted to minus EUR 4 million. Let me give you more color on this development. On the one hand, we are investing in the ramp-up of the production, as well as into the digitalization of the optronics portfolio to secure the planned growth. On the other hand, the increased revenue volume was affected by a less beneficial product mix in the first six months of this year. This is a temporary effect which will phase out in the course of the year.
Let me point out, the growth effects that currently weigh on our optronics margin are not of structural nature, but necessary to secure planned. Let me give you now an update on our net debt development. As you can see, we have significantly reduced net debt over the past years. Our net leverage decreased from 2.6 in 2020 to 1.2 at the end of the last year. To prepare for the significant growth ahead of us, we have decided to prolongate some of our existing real estate lease contracts in order to secure our production capacities in advance. This leads to an increase of our lease liabilities according to IFRS 16. As a result, we now expect a net leverage of less or equal 1 by the end of 2023.
However, this accounting effect has no impact on our cash and financial liabilities. According to our guidance, we further plan to increase our cash position in 2023 and the years to come. Now let's talk about our guidance for the full year 2023, as well as our midterm outlook. First and foremost, we remain on track to deliver on our full-year targets. Due to a high visibility, we are able to specify our revenue guidance for 2023 to around EUR 1.85 billion, with a continued stronger growth in core revenue, resulting in an improved quality. For net leverage, we now expect a level of lower or equal 1, driven by the lease liabilities effect as explained before. For all other KPIs, we confirm our positive guidance for the full year 2023, as well as for the midterm.
Dear ladies and gentlemen, let me now give you an update on the key enablers, which will help us to handle the growth ahead of us. Early this week, we have decided which measures for the third wave of our efficiency program, HENSOLDT GO!, we will implement in the coming months. The first block of measures deals with increasing our engineering efficiency to meet higher demand and growth. To let our highly skilled Hensoldt engineers focus on high-value core competencies and on-time delivery, we will work with external engineering service providers to outsource standard work packages as much as possible. We will also put emphasis on the modularization of our core components.
This ranges from more complex topics, like using the same transmit and receive modules in different radar antennas, or using one common power supply designs for all our products, up to more standard elements, such as common connectors or semiconductors. The second block of measures focuses on the industrialization of our production process to deliver on time, on costs, and on quality. This already starts in engineering, where we will embed scalability in production at the very beginning of our design processes and give more responsibility to our engineers for production preparation. Russia's war against Ukraine has strongly driven demand for our products, and we start to see positive effects in economies of scale. Therefore, we will raise production efficiency of our key products like TRML-4D through standardization and the use of plug-and-play components.
This will be crucial to increase the production rate up to 15 radars in 2024. Last but not least, our third block of measures revolves around Supply Chain robustness, which is key to ensure the availability of our products. As an example, we have created a Supply Chain Digital Twin of our key products, which creates a heat map that shows which components have the highest impact on our value chain. This will help us to identify alternative suppliers for key components and thus reduce dependencies. This goes hand in hand with a strengthened procurement approach that will focus on strategic and high-value-add activities. Dear analysts and investors, cybersecurity is, and will also remain, a core priority for us. In recent months, we have been working intensively on further optimizing our cybersecurity standards by taking global action.
To measure our performance, we are audited on a regular basis by a renowned cybersecurity ratings agency. We are proud to announce that we recently took over the top position in the cybersecurity benchmark within our peer group. Of course, we will not rest on this going forward, and our goal is to further improve in order to give hackers no attack surface. The second important enabler is the rollout of our harmonized global S/4HANA. This will allow us to handle the next growth wave smoothly and most efficiently across all our entities and regions. As you know, we started the implementation at the beginning of this year, and I'm very pleased that the project is on schedule and progressing as planned. We are fully aware that this is not a simple rollout process.
Consequently, we put several measures in place in order to mitigate the major risks of such a large transformation program. We have decided to have one major business and system integration partner who serves as main support for consultancy, realization, and rollout through all our program phases. This partner will get complimented and challenged by, firstly, a value assurance partner as independent advisory instance, and secondly, by the software vendor, SAP, who provides technical advisory for the solution. This ensures that the entire transformation program keeps a strong focus on the agreed program target, such as timeline, costs, and quality, but also about standardization ratio. Another very common reason for delays or failure of such programs is, it's lacking availability of the required experts.
This is why we have secured the availability of the best experts for this transformation at an early stage, with a strong backfilling agreement of more than 80 FTEs. Furthermore, we invested over 18 months in advance to prepare Hensoldt for this transformation. Together with external advisors, we sharpened and critically reviewed the whole approach without any additional bigger expenses. Finally, the program targets of the One SAP Now transformation are incorporated into incentives plans of our executive management in order to ensure a strong involvement and focus. Coming to a conclusion, let me mention the following key financial takeaways. In the first 6 months of this year, we have achieved an outstanding performance that will form the basis for a successful year 2023. We secured again a strong order intake, resulting in a new record order backlog of EUR 5.7 billion.
This continues to provide us with a great revenue visibility for the years to come. Our efficient project execution supports our excellent profitability. In addition, our core revenue increased significantly. Therefore, we overall confirm our full year 2023 guidance with a specified, respectively, updated revenue and net leverage guidance, 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 expect further orders in the short term. We continue to be in close exchange with the German customer regarding the programs and opportunities from the special fund, and this will generate long-term, sustainable growth. Now, we are happy to take your questions.
Our first question comes from Carlos Iranzo Peris from Bank of America. Please go ahead.
Hi, guys, and good afternoon. Thanks for taking my questions. I actually have two. First one, on your M&A strategy. We have seen a strong, a strong M&A activity through the last quarter report. Could you provide some update on your M&A strategy? I just wonder if the goal to double sales by 2027, including M&A, is still in place. The second one on Optronics. Looks like margins came a bit weaker than anticipated due to revenue mix. How should we think about Optronics margins for the second half of the year and in 2024? I just wonder if 1H 2023 margins are a one-off on the Optronics margin trajectory. Thank you.
Carlos, hi, it's Thomas speaking. Yes, for sure. As we said, you remember that we will double our revenues in the next years. And yes, for sure, if we take the 10%, we have to add some M&A, and it is. Well, I think there, there are some very nice targets in the pipeline. We will see, but for sure, we can't talk about it. And this underlines our strategy, and we will clearly follow our strategy. But as you know, M&A always takes some time, and you never know if finally you are successful, but we will follow our operational performance. I think this is always the basis and key for a successful development and performance in the future. Hi, Carlos. I take over the second questions, the second question regarding margins.
First of all, it is a kind of a one-off due to the revenue mix. We see that this will somehow phase out until end of the year. But what we can say that we see around 2-2.5% lower adjusted EBITDA margins in this year and also in the next 1-2 years because we will now really strongly invest into our future. This will be offset by a stronger margin mix we see in the sensor segment, because here we see these economies of scale already, and this is how you should think about it.
Maybe to remind you, in the last 2 to 3 years, we were investing heavily in South Africa, and we had a same pattern on that, but it really paid off, and this is why we now go for these investments in Optronics. due to also a more short cycle business in order to realize our growth we see in our backlog. Okay, super clear. Thank you.
Our next question comes from Christophe Menard from Deutsche Bank. Please go ahead.
Yes, good afternoon. I had, well, 3 question now because Optronics was indeed of importance, but your answer was very clear. First, the book-to-bill of 1.1-1.2 in the year. In the call, you, you're hinting or you were hinting at the fact that there are a number of orders to be signed soon. Question number 1 is: Is that book-to-bill of 1.1-1.2 not a little bit conservative in the light of what you are seeing unfolding in Germany and elsewhere? Second question is, well, correct me if I'm wrong, but have you quantified the benefits of HENSOLDT GO! Wave 3 more in details? I mean, it's, it's clearly of interest, but any kind of timeline for the, the, the benefits.
Last question is on the impairment, what, what appears in your accounts, the impairment of acquired assets from Hensoldt Cyber and one SAP. Can you just give us a little bit more details on this, and the reason for those impairments?
Yeah, thank you very much for the question. Order intake 1.1-1.2. You know, if you, if you take the range 1.2 or 99, and if you take the 1.1, you, you can calculate that there's quite a big, how to say, a big range. Going to the upper end would most probably be the right one. The 1.2, I think, we can certainly go in this direction concerning what we have seen. It will be anyhow in between 1.1 and the 1.2. I take over the next questions, but first off, always take into account, order intake is bumpy.
We have a good visibility, that's really good news, in our order intake, but we have still six months in front of us, and there are some things to come, which we'll see. We are very happy currently with, with our guidance. Yeah, HENSOLDT GO! Wave 3, we do not see now a concrete figure. I really have to say, HENSOLDT GO! Wave 3 is not at all an efficiency program to save to save money. The first and foremost priority of this program is to really switch the company from a, I would say, manufacturing style of some few systems in a year to a real industrialization.
We see it in TRML-4D, we will see it in the Optronics, we see it currently already in the M1 laser range finder, where we have to scale up. This is the focus, really, of HENSOLDT GO! Wave 3. When we do that, and when we manage that, and I'm convinced that we will manage that, then economies of scale will happen, and we will further improve our absolute EBITDA, which, what is, what is our main focus, but really growing profitable and cash generating. This is how we, how we look at it, and you can be sure that in every quarter from now, we will give you some updates on how the, how the program really works.
Also, finally, at the capital market there, I'm convinced that this will be one of our key aspects. Then your, your two questions. We have a one-off of one OneSAPnow. This is, these are ramp-up costs. We indicated already in our guidance that there will be some one-offs in the next years until 2027, until the program is really done. This is now the start, and I guess we will be in the near of EUR 8-10 million this year. Same pattern in the next years regarding these one-offs. Last but not least, the, the fiber, this is really an impairment.
We have reviewed our strategy already at beginning of the year, and we changed our strategy from the Hensoldt Cyber GmbH, from developing some assets to sell from this, to a more internal consulting for our divisions. Because we see that the topic of cyber hardening is a demand of what our customers will have now and in the future. This is why we see a much more benefit in order for our Hensoldt Cyber GmbH working as internal consultants with our divisions to get there. This is then the reason for the impairment.
Thank you. Okay, thank you. That's clear. Very clear.
You're welcome.
As a reminder, if you would like to ask a question, please press star and one. Our next question comes from Ross Law, from Morgan Stanley. Please go ahead.
Yes, good afternoon. Thanks very much for, for taking my questions. The first is just on your medium-term growth outlook of, of 10% annual growth.
... you know, it's clear that you're very confident in achieving strong order intake over the coming years. Just wondering if there is actually any opportunity to meet this medium-term growth outlook organically, so without M&A? Secondly, just a follow-up on Germany, I'd be interested in your thoughts on the run rate of defense authorizations by the government so far this year, and whether that cadence met your expectations. Also, whether you expect any change to the quite complicated system of authorizations that defense orders need to go through in order to be granted. Thank you.
Hi, Ross. nice to meet you again after our short meeting. I think it was in an American airport 2 or 3 weeks ago. First of all, regarding medium-term guidance, so we see still a 10% growth in average for the next years. We still feel very comfortable with this guidance, as always, in every business, each quarter, we will see how robust this will turn out and if there are any changes, we will keep you updated on that. As far as we stand now, it's very robust and visible, and we feel comfortable with this guidance.
Okay. Ross, Thomas speaking. Well, on the German government and the change of the procurement, I would say all of process. First, the new Minister of Defense introduced a new, much faster process in procurement. This, as I said, now turned out to be very positive for industry in Germany, and we have seen strong how to say, speed up of the procurement processes in the first half of this year. As Christian mentioned, we have seen the first orders coming in now since the new Minister of Defense took over.
Nevertheless, you absolutely rightly mentioned that we still have to go to the German Parliament with EUR 25 million approvals. The German Parliament speeded up significantly. There are a lot, a lot of approvals in the first half of this year. There are even many more to come in the second half of this year. The Zeitenwende has arrived also in Germany.
Thank you very much. Very clear.
You're welcome. Thank you.
Yeah, thank you all for listening to our call today. As always, should you have any further questions, our team is more than happy to follow up. With that, I wish you all a lovely weekend. Thank you, and goodbye.