Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the HENSOLDT nine-month results 2023 analyst call. Throughout today's recorded presentation, all participants 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 press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Veronika Endres, Head of Investor Relations. Please go ahead.
Thank you, and good afternoon, everybody, and welcome to HENSOLDT's 9M 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 the presentation today, and as always, this will be concluded 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 nine months of 2023. Let me start by giving you a brief update on strategic topics and key business highlights. Christian will then guide you through our strong financial performance, and as always, following our presentation, we are really happy to answer your questions. Now, ladies and gentlemen, to begin, let us have a look at the global security situation. Conflicts around the world have not only increased in number and intensity in the recent past, but have also become more and more interlinked, creating a global polycrisis. In addition to Russia's war against Ukraine, we have seen a flare-up of ethnic conflicts, both in Caucasus and the Balkans.
The terrorist attacks of Hamas have severely impacted the rapprochement between Arab nations like Saudi Arabia and Israel. This increasing world disorder will be incredibly difficult to resolve any time soon. As a consequence, the need and demand for electronic defense and security solutions, electronic to neutralize a wide range of air, sea, land, space, and cyberspace threats is significantly increasing. The first nine months of 2023, we at HENSOLDT have once again demonstrated that our strategic position is ideal to provide our customers with innovative, high-end defense and security solutions in these challenging times. The significant growth in our core business is a strong signal. Our customers trust our reliability, innovative strengths, and our ability to deliver our solutions rapidly.
To accommodate these demands, especially the demands of our domestic key customer in Germany, we have increased our capacities and are ready to deliver. Now, we, HENSOLDT, are strongly positioned for the future of warfare. With a focused capability in defense electronics, a platform-agnostic business model, and a continuous investment in our portfolio and new capabilities. We see an increase in defense budgets around the world, with an overproportional increase in our market segment of defense electronics. You may remember that I talked about a super cycle 2.0 for HENSOLDT at our Capital Markets Day, and I remain absolutely convinced that we will see a further acceleration of growth in our, our market segment of defense electronics, creating a very strong outlook for our company.
Our German core market remains strong, not only through the special fund of EUR 100 billion, but also through the commitment to spend 2% of GDP on defense sustainably. We also see positive developments in Europe, where the European Sky Shield Initiative for air defense is gaining traction, and we will be positioned both with our TRML-4D and the SPEXER 2000 radars in the middle of it. In addition, we will secure a number of contracts in the international market before the end of the year, and I will come to that a little bit later. Ladies and gentlemen, let me highlight a specific feature of HENSOLDT's business model and the key reason why I believe- no, I can even say why I am absolutely convinced that our business is really attractive....
Sensors and defense electronics are force multipliers and key to the digitization of the battlefield. Sensor solutions transform airplanes, ships, and tanks into mission platforms for reconnaissance, intelligence, situational awareness, target acquisition, tracking, and identification, to name only just a few. It is guaranteed that sensors and electronics content will keep increasing, and with that, also the amount of data and the need for that data to be quickly fused and transformed to actionable intelligence across all domains. The inherent benefit of this is that we, HENSOLDT, sit on multiple platforms in all segments and are working towards getting on many more in the future.
We do not only provide the most performant traditional sensors and sensor systems, but we are also investing in solutions to fuse sensor data and increase the speed of the military commander's targeting loop, and this in all domains: air, sea, land, space, and cyberspace. As a result, we do not just benefit from an increase in quantity of platforms sold, but also from more and higher value sensors per platform, which explains why the growth in defense electronics is outpacing growth in overall defense spend. But to sum it up, at HENSOLDT, one plus one does not equal two, but at least three, if not more. Now, this slide has become a staple in our quarterly presentations by now, and we like to continue showing it for an important reason.
Despite the daily discussions on scheduling of individual projects, the overall outlook for HENSOLDT regarding the German programs in the short and medium term remains solid, and HENSOLDT will contribute its leading technologies to many German programs in all domains. Yes, there are usual timing shifts, with some programs being accelerated while others are delayed. My key message to you is, we at HENSOLDT are well-positioned for a significant number of projects that will drive our business significantly for many years to come. And to be a bit more concrete, we expect a medium- to high single-digit billion EUR contribution from Germany to our order intake in the coming years. And you see in our nine-month figures for 2023, that this is materializing more and more.
Now, this slide shows four important projects of our German customer, where we expect to book the order intake before end of this year. Let me highlight the two biggest items. For the short and very short-range air defense system, NNbS, we contribute our TRML-4D and SPEXER radars to a state-of-the-art short-range air defense systems of the Bundeswehr that will allow protection of troops even on the move. The Eurofighter Mk1 rebaselining is an add-on to the original Mk1 contract, as the customer requires additional features for the radar, which we will certainly develop. This type of add-on or extension contracts are characteristic, characteristics for the big development projects. We have one, and there are high probability that over the lifespan of the projects, more of these add-ons will materialize.
The four topics in this slide alone amount to almost EUR 400 million, and in combination with the many other projects we are chasing, will contribute nicely to our substantial order intake by the year end. We do not only rely on our admittedly strong domestic markets. As mentioned earlier, we see an increasingly strong dynamic in our international business development. For this slide, we have picked five programs, which, with a total contract volume of almost EUR 250 million, where we also are close to the finish line to book the order intake in the coming months. These potential orders are a testament to our state-of-the-art product portfolio and our tenacity and perseverance to never let go of a deal we are chasing. Before I hand over to Christian, I would like to highlight a topic on the execution side of our business.
In October, we have successfully passed the critical design review of Pegasus. This is an important milestone as a critical design review paves the way for the continuation of the project into the implementation phase, and also unlocks payment milestones in excess of EUR 200 million. For me, the CDR is an excellent proof that Hensoldt has the capability to master complex system integration projects and manage them effectively. On this positive note, I'm happy to hand over to our CFO, Christian.
Thank you very much, Thomas, and I'm happy to provide you now with the details on our financials for the first nine months of 2023. We again were able to realize a strong top-line performance in the first nine months of this year. Our order intake summed up to nearly EUR 1.3 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 2 platforms. The distribution of incoming orders was very well balanced between our home market, Germany, and Europe. Our sales increased to EUR 1.14 billion, driven by strong growth in the Sensors segment, and is already seen in the H1 results with a significant growth of core revenue by 15%.
This is a result of the excellent development of our baseline business and a decline of pass-through revenue. The key programs, Eurofighter Mk1 and Pegasus, developed as planned, with a further successful milestone achievement in the Pegasus program, as explained by Thomas earlier. At the end of the first nine months of 2023, our order backlog summed up to almost EUR 5.5 billion. This covers around three times of our guided revenue for 2023, and therefore continues to provide us with an excellent revenue visibility. The strong performance of our top line is also reflected in excellent development of our profitability. Adjusted EBITDA increased by 20% year-on-year to EUR 151 million, with an adjusted EBITDA margin of 13.3%. Our core margin, excluding pass revenue, increased as well to 15%.
Adjusted EBIT summed up to EUR 94 million, with an adjusted EBIT margin of 8.3%, respectively 9.4%, excluding pass-through business. This excellent performance was mainly driven by higher volumes and the significant growth of our core revenue, as described earlier. On top, we were able to realize economies of scale on programs such as the TRML-4D. This development was partly offset by investments in our growth ahead, as well as by an ambitious and beneficial product mix. Adjusted pre-tax and lever-free cash flow amounted to -EUR 126 million. The development in the first nine months followed our typical business profile, characterized by investments in working capital to prepare for the planned revenue recognition in the fourth quarter. The recent milestone achievements in the Pegasus program, and also for Eurofighter Mk1, provide us with an excellent cash visibility now.
The milestones in these programs will result in significant cash inflows of around EUR 350 million in Q4, of which around EUR 100 million are pass-through, meaning that EUR 250 million stay within HENSOLDT. So let me point out, our overall bottom line developed as planned. Let's now have a look at the segments. In the Sensors segment, order intake developed as planned, with orders booked for TRML-4D radars for Ukraine and the German Armed Forces, as well as the MUSS Self-Protection System for the Puma tank. Please be reminded that the previous year's figures included several key orders for the equipment of F126 frigates for the Eurofighter C3 service contract and the HALCON program, with a total volume of more than EUR 600 million.
Revenue in the Sensors segment increased by 4% to EUR 952 million. And again, I want to highlight that our core revenue increased even stronger by 18%. As outlined before, our key programs, Eurofighter Mk1 and Pegasus, are developing as planned, and also contributed very well to our revenue. The margin performance of the Sensors segment was excellent, with an increase in adjusted EBITDA of 47% to EUR 155 million. The uplift in absolute margin was driven by higher volumes and by economies of scale in some programs, for example, TRML-4D. But please also be reminded that within our diversified portfolio, scaling effects in some programs might compensate for investments into growth in other projects. In the Optronics segment, order intake showed still and again, a sustained high momentum.
Main order intake drivers were the Puma batch and the Puma retrofit, the Leopard 2 for Norway and Sweden, as well as periscopes and optronic mast systems for the Norwegian Ula-class submarines. As some of these large orders take some time to convert into sales, they did not yet boost revenue growth in the short term. Revenue, therefore, grew only slightly by 2% to EUR 188 million. Main drivers were our high-performance optics, FFM, periscopes, and optronic mast systems for submarines, as well as the laser range finder for the M1 Abrams main battle tank of the U.S. Adjusted EBITDA Optronics amount to EUR -4 million. On this, let me remind you that on the one hand, we are investing in the ramp-up of the production, as well as into the digitalization of the Optronics portfolio in order to realize the upcoming growth.
And on the other hand, margins were temporarily affected by a less beneficial product mix in the first nine months of this year. So let me point out, the growth effects that currently impact our Optronics margin are not of structural nature, but necessary to secure the planned growth. And we will see increasing revenue and margin dynamics again in Q4. 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. For 2023, we continue to expect the book-to-bill between 1.1 and 1.2 x. Revenue of EUR 1.85 billion, with stronger growth in core revenue, resulting in an improved quality of revenue.
An adjusted EBITDA margin of around 19% before pass-through revenue, and around 70% cash conversion for pre-tax and lever-free cash flow, resulting in a further decline in net leverage to lower or equal to 1. Finally, a dividend payout ratio between 30%-40% of adjusted net income. Coming to a conclusion, let me mention the following key financial takeaways. In the first nine 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 high order backlog of EUR 5.5 billion. This continues to provide us with a great revenue visibility for the years to come. Our efficient project execution supports our very strong profitability. In addition, our core revenue increased significantly.
We have an excellent cash visibility, supported by the successful milestones in our key programs. Therefore, we confirm our guidance for full year 2023 in the term. 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. We expect several international programs to be booked in the near term, and this will generate long-term, sustainable growth. 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 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star, followed by one at this time. One moment for the first question, please. The first question is from the line of Carlos Iranzo Perez with Bank of America. Please go ahead.
Yeah, good afternoon, guys. Thanks for taking my questions. I actually have two. The first one on Optronics. What has been driving the weak performance at the top-line level in the third quarter? Is there any one-off? And then on the margin side, how should we think about margins in Optronics midterm? And then second question on sensors and the percentage of pass-through revenues. Year to date, you have reduced the percentage of pass-through revenues significantly versus last year. How should we think about the percentage of pass-through revenues for 2024? Thank you.
Hi, Carlos. Thank you for your question. So first of all, Optronics performance. We should not forget that the first half year was very strong in order intake at Optronics, and we will see the materializing of these orders in the revenues from Q4 onwards in the next quarters. So, I expect, of course, the growth we have announced also happen in the Optronics. Regarding margins, we've mentioned already in the half year financials that we see an impact out of the necessity to invest in the growth of around 2.5%-3%. We see this now for this year, and we will see it the next one to two years due to this growth.
But this is how you should look at the Optronics segment, always knowing that it will be balanced by sensors and the economies of scale we can realize there. So in total, the group is on track regarding the margins. So this is in the Optronics. Regarding your questions of the pass-through, so for this year, you should assume around EUR 100 million less on a year-to-year comparison. Going forward, we see a pass-through revenue amount of around EUR 100 million-EUR 150 million per year from 2024 onwards, depending on the milestones of the respective projects.
Super helpful. Thank you. I see you in a couple of weeks.
The next question is from the line of Ross Law with Morgan Stanley. Please go ahead.
Hi, everyone, and thanks very much for taking my questions. I've got two, if I may. Firstly, just on order intake, it looks like you need roughly EUR 750 million of orders in Q4 to hit the bottom end of your guidance range. But you've called out several German and international opportunities that could contribute EUR 650 million. So I'm assuming there are other orders out with the big-ticket items you flagged. Should we be thinking more towards the middle end or even the high end of that guidance range for the full year for orders? That's the first question. And secondly, just on FCAS, just regarding recent media speculation that Germany might be to exit that program. I'm just wondering how that would potentially impact HENSOLDT and also your views on that report?
Thank you.
Hi, Ross. Nice to hear you. So first question on order intake, yeah, your calculations are good. You should not forget the baseline. We call it baseline business for small projects and also in the service business. And this brings us to the guidance. We see ourselves still in the EUR 1.1-EUR 1.2. We will see how the year turns out, but as you see, we have a good visibility on upcoming orders. We see ourselves very comfortable with this margin guidance. The order intake guidance, sorry for that.
Yeah. And what you didn't mention, Christian, we already got some of these order we have mentioned in October, November. So we are very confident to be on a good track, as Christian mentioned. So secondly, your question to the Future Combat Air System. Now, we also got the contract on an R&D contract for the next years to work on very, very new technologies for the Future Combat Air System. So whatever is published in the newspapers, I cannot share this because we are working on this as our partners do too. Now, you remember what you always said: We believe that the FCAS program. Again, I have to revise myself, we are very confident that the FCAS program will go ahead.
On top, there may be an additional opportunity for us to have a closer relationship between the UK program, the UK lab program, between U.K., Italy, and Japan, and the Future Combat Air System, which is between France, Spain and us. So if there are two different programs in the future, long term, or it will be merged into one big program, I don't think there's a huge difference. Besides one, the business opportunity is even growing for us.
Understood. Thank you very much, and see you in a few weeks at the CMD.
The next question is from the line of Christophe Menard with Deutsche Bank. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions. I had three, actually. First one is on understanding the core revenue growth, which, correct me if I'm mistaken, but last year you were growing around 7% the core revenue growth. This year it's 15%. What is the sustainable level, in your view, given the order intake? That's the first question. The second, I was wondering, I mean, in terms of the pass-throughs and the level of free cash flow, I understand that the reason for the free cash in the first nine months is linked to, curiously, some milestones that had to be passed.
Should we see a relationship between your free cash flow and the absence of pass-through on a quarterly basis? So if you could just help us understand that dynamic. And the last question is on M&A, if you could update us on, well, on the pipe, basically. And what, I mean, I know it's a regular question, but any update is useful.
Hi, Christophe. Many thanks for the question. So yeah, your calculations were right. Last year, we were at around 7%, this year it's around 14. When you go to our guidance and you see the midterm guidance, we said that we see a growth in average per year of around 10%. Now keeping in mind that the pass-through will stay on a somehow constant level the next one to two years, you see how we think about the growth, and this is also, from my point of view, reasonable. Secondly, I do not see a connection between pass-through revenue and cash flow. It's the method is the same as we do in our normal revenues.
You have some milestones where you recognize revenues on a cost-by-cost basis, and when the milestone is there, you receive the cash. What is really different, according to the last years, that some of our main, some major milestones were now in September. Means that including, charging of the invoice and the payment process ongoing, that most of the cash will arrive at us in the first two December weeks. But the visibility we have makes us very comfortable in this regard, or we already got it.
M&A?
And M&A. Christophe, on M&A, you remember what we always said, strategically, we will grow organically, but also, through acquisitions. That's what we have said, all the time. Now, there is one very, very important thing to mention again. We only go for any M&A, if it's a critical, and if we have a very good benefit of an M&A. For sure, we can't talk about any specific targets.
Okay. Just, if I may, on the first question, on the core revenue growth, going back to it, I mean, yes, that's your guidance, midterm. But I mean, what we've seen in 2023, is it the sort... I mean, is it a new sign of a step up? Or you would say, well, it's kind of where the figures are, and we're sticking to the 10% around? Or does it show some sort of an acceleration materializing?
Christophe, sorry, could you repeat your question, please?
No, yeah, the question is just, I was wondering versus your midterm guidance for the core revenue growth, the fact that it is slightly above in 2023, does it mean that the trend is accelerating so that you may have to revisit that guidance upwards? Or is it just one element of the year unfolding as it is? I'm just trying to understand whether this is a trend or it's some sort of a one-off that we're seeing in 2023.
First of all, I think in terms of structure of pass-through revenue, last year was an enormous, big portion of revenues. Now we go down of around EUR 170, in the next two to three years to EUR 100-150. This is the one. In terms of being more concrete for 2024 onwards, you should give us three months until we publish the year-end figures 2023, and then we are also clear which milestones have materialized and which are ahead of us to give you more details around that.
Okay. Thank you very much.
Thank you.
Ladies and gentlemen, if you would like to ask a question, please press Star, followed by One on your telephone. There are no further questions at this time. I'll now hand back over to Veronika Endres for any closing comments. Thank you.
Yeah. Thank you, all for listening today. We are very much looking forward to meeting you at our Capital Markets Day in Ulm on November 22nd. If you have not registered by now, you still have the chance to do so. Just drop us an email. 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 very much, and goodbye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.