Electro Optic Systems Holdings Limited (EOS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Electro Optic Systems Holding Limited 2023 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Clive Cuthell, Chief Financial Officer. Please go ahead.

Thank you, Ashley, and good morning, everyone. My name is Clive, and I'm the Chief Financial Officer and Chief Operating Officer of EOS. My background is I've been a CFO for almost 20 years, and I joined EOS back in September '22 as the business was coming out of distress. This morning, we are going to talk through a presentation that we filed on the ASX this morning. So we'll be referring to the page numbers in the investor presentation that was launched this morning. I'm going to hand over to our CEO, Andreas, who is going to do the first part of the presentation, and then I'll go through some of the numbers. Andreas?

Yes. Thank you, Clive. Good morning, ladies and gentlemen, dear shareholders, dear investors. My name is Andreas Schwer. I'm with EOS since August 2022, that was the time when EOS was facing significant distress situation. I was coming in with more than 30 years of experience in global defense and space industries with executive leadership positions in companies such as Rheinmetall, Manitowoc in the U.S., Airbus and some in the Middle East. I was working almost 30 years quite equally distributed in between the U.S., Europe and the Middle East. Before that, I did my PhD in space business, and I have 2 engineering degrees in systems engineering and aerospace engineering. The structure of -- the call is structured in the following way. We first give you an overview in a kind of summary sheet which we cover the main points, and then we will cover each of those main messages, each of those points by dedicated slides coming after. Before we switch to the financial presentation, where I will hand over to Clive to give you deeper insight into all the figures and the financial performance of this year. And then at the end, we give you a summary and an outlook, and then there's time for questions. If you go to Page #7, the summary sheet. So 2023 was for EOS and extraordinary positive year. We generated record revenues, a record cash flow and a positive EBITDA. This EBITDA change from loss to gain from negative to positive came earlier than expected. We have strengthened our market position. Our market position could be strengthened by the fact that we entered into new markets. We have got new clients. We have less dependency on one region, which was made in the Middle East in the past. And we have lots of confidence in those markets staying on the growing side, and we believe that this growth will continue not only over the short, but also at least on the midterm. We've widened our product base. You might remember that in the past, our revenue was mainly based on a single RWS remote weapon station family, the R400. We have now 3 product ranges, 3 products in the range with R150 and R800, and we have a very profitable and growing business in EM Solutions, our satellite communication business. We have been extremely disciplined in terms of our strategic performance. We have not deviated from our strategy. We did what we told you, and we will continue like that. There will be no deviation from our strategic pillars, and we will continue to have a very strict cash control regime. The geopolitical uncertainty is creating a very positive momentum for us. This is continuing, and we believe that this will be the foundation for further growth of the company. I will hand over now to Clive to give you some further information on the key figures before we go into the detailed slide.

So thanks, Andreas. As you can see on Slide 7, so revenue of $219 million. That's an increase of $81 million on the prior year. Pleasingly, the business became EBITDA positive during 2023. And that was attributable to a particularly strong second half that I will talk about shortly. The cash flow information was released in our 4C quarterly cash flow announcement at the end of January. But as you can see, cash received from customers at $325 million is a record level, and that generated significant operating cash flow during the year. We'll come back to the uses of that cash flow in investing and debt repayment shortly. But it's -- from a financial perspective, it's been a year of positive development. Andreas?

So we go to Page #8, market conditions. So again, we are benefiting from 2 major conflicts. One is a conflict in Ukraine. One is the conflict in the Middle East, those 2 conflicts will trigger a very high demand on our classical product line, but also, as we were discussing in previous calls, it's the trigger point for a new type of product cannon-based air defense systems, which is for U.S. a game changer in terms of revenue generation in the mid and long term. The change -- there's also a change in nature of warfare. It became very apparent during the Ukraine conflict that the aerial threat is mainly made up by mass produced drones, [ SLINGER ] commercialized drones, where missile based air defense doesn't give any kind of commercial answer to it. So it was the revival of cannon-based air defense. And that means in return for the U.S. using our remote weapon stations now for counter U.S. for anti-drone warfare. This is a trend which will continue to be in place as we expect future more scenarios and the other scenarios still being pretty much basically controlled by this kind of drone threat. The second bigger trend which is very much playing in favor of U.S. is the trend towards autonomy, towards unmanned ground vehicles in the battlefield. Those unmanned vehicles will continue to replace manned vehicles. What does it mean? A manned vehicle comes typically with a manned turret. In the future, those unmanned vehicles will come with a remote weapon station on top. And those remote weapon stations have to have a very high performance, a very high first hit probability as the number of rounds on the vehicle is limited and they need to be extremely reliable. All those factors and arguments are key arguments for U.S. remote weapon stations, because here we are benchmarking market for those kinds of parameters. And last but not least, the space domain is becoming more and more the decisive element in the interconnected joint warfare of the future. That's one reason why we will transform our business from space awareness into space warfare and I will come back on this point later on, on Slide #12. The markets in figures. If you just look to the NATO market, the NATO market has grown significantly. We continue to grow as most of the Western European countries is now switched to a contribution of 2% of their cost domestic product in the defense. So we expect the European countries to invest into defense about USD 380 billion and don't forget, just the U.S. is investing $910 billion per year in the defense. So just the overall nature is around about $1.2 trillion, which is an enormous amount of market potential for U.S. And on top of that, we still expect a moderate growth in defense expenditures in the Middle East and also to some extent in the far Eastern, far Asian region. So overall, all indicators are very positive for our type of business. We go to Page #9. Just to give you an update on our business turnaround. We do this in each of the calls, and I think it's important to remember ourselves on what we said last time and what we did in the meantime. So to recall, we have continued over in 2022, our restructuring program, we've finished it. We've implemented all measures, which we've announced. We have reduced by more than 100 roles our total headcount. We have taken off lots of indirect positions. We have exchanged the management and ticked off all the boxes which we have promised you to do. We have done the portfolio review. We have [ keyed ] all of our money losing business. It was not only SpaceLink in the U.S. We also stopped other type of business initiatives like entering into the production of satellites in Australia or to become active in the missile business here in Australia. All that we have pieced and we concentrate on our strategic pillars which we will discuss in a minute from now. We also have revised our go-to-market strategy, going more into teaming arrangements with partners in order to limit our CapEx exposure. On the financial side, we have made cash king and this will remain as such in the future. So our strong focus in cash was the main driver why we have such a very positive overall cash flow Clive will come back on that one later on. We will remain very disciplined in the management of cost and capital in the future. Strategic partnerships are key for us to get quicker access to market, it's extremely important. Time is of essence, time is money. In those days where the markets are growing, we cannot afford to introduce ourselves by U.S. into those markets and to wait to build up our own lobby network and to get the position there, need to go through partners who have today the access who help us getting in and to benefit from those short term budget increases. The year 2023 was a year of lots of news, lots of changes. And you can see that on the right side of Page #9. Every month there was something happening and ongoing in a positive way for U.S. So it was either an announcement of a significant order intake or we have announced a new product launch. As such, we have announced in May our counter-drone product SLINGER, which is based on an R400, and we will come with different versions based on other platforms in the next future. We have announced in June last year our Lightweight R150 product and we've announced in October the launch of our R800, the most powerful weapon station on the global market. So lots of things were going on and all those elements were contributing to the turnaround of our business. Let's go to Page #10. U.S. has widened its customer base. And if you see by this graphics here, we have had a significant dependency on the Middle East. This dependency we reduced significantly last year by growing the business in Europe. Obviously we were benefiting by the fact that Ukraine war was asking for lots of systems and several western European countries have donated products which comes to our benefit. But it's not only that, we have also started to realize growth by selling into their own fleet of systems which will not go to Ukraine. And this is a trend which will hopefully, we are very confident that grow significantly from this year onwards. The Middle East has a reduced share in 2023. That does not mean that in absolute terms the business will go back in the Middle East. Obviously, it's a little bit cyclic, but we expect to get significant orders in the Middle East, not on the short term, but on the midterm to stay a very important pillar in our overall business. You might ask us what is ongoing in America? Why is the American share still so low? There are 2 aspects. Aspect number one, donation programs from the US to Ukraine. The US government is in a position to more benefit from huge stocks within the army. So they do not need to purchase and buy equipment. They can more or less take what they have in stock to deliver to Ukraine. That's one aspect which the European entities come to that extent, they need to buy new stuff. Second argument is we have realized some business in the U.S. in our new product range of anti-drone systems, where we are market leader because of our superb performance and accuracy. Those businesses are small in the beginning because usually customers first buy only a few numbers, up to 10, to see, to test, to test them in battlefield. So the Americans are testing those systems now in Syria, in Jordan and in Ukraine, how they defeat drones. And you might remember and recall some recent attacks of camps of the U.S. in Jordan. That's exactly the place where those kind of on its own systems are in test now. And also in the U.S., it's also a very cyclic mass market. So the U.S. army is a cyclic mass market. And we expect large tenders only to come out in the second half of 2025 or later on. That's the kind of normal replenishment cycle. We have to wait for those big tenders to come. But in the meantime, we have to position ourselves in the right way. And again, the best entry door for us into the U.S. market is the anti-drone business and anti-drone market. So overall, we have market-leading products. The markets are growing. We are very confident on that. We will expand our position in Europe. And with this expansion, we will also open our own operations in Europe in the course of this year in order to have our own boots on ground and better traction with our partners in Europe to get more sales and more growth realized than otherwise. So lots of opportunities are being ahead of us, and we are optimistic to announce contracts over the next few months to come. So let's go to Page #11. It's summarizing our product launches in 2023. I think it's also a record year. U.S. has never introduced to the market so many systems within one business year. So again, the R150 is the most modern product in its class. It is the class of hundreds to 150-kilogram systems. It can carry weapons up to 14.5 millimeter or 14 millimeter grenade launchers. So it's very versatile and it can be installed in any kind of vehicle. You can see here in the picture, it's on the backside of a Toyota pickup truck. So it's very easy to integrate on any kind of platform. We've introduced SLINGER in the first half. So you can see on the right side that's the SLINGER based on the R400 with an integrated radar, and specialized software, a 4 axis gimbal sensor unit and a specialized software package. So SLINGER is considered as being the benchmark in global markets and many countries have asked us to come with and to demonstrate and we expect significant growth in this domain in the course of this year and the consecutive years. The R800 we've introduced in October, again R800 is the most powerful weapon station in the market. It competes against unmanned turrets. It has the same firepower as an unnamed turret, but it comes in for 25% of the price and that 25% of the gross weight of such an unmanned turret. So we believe that we have with this R800 a very good position in the market. It's a new market segment for remote weapon stations and as we are the first mover here, we believe we have a very decent position to realize significant growth starting with this year. So we will produce the first units this year at our U.S. facility in Huntsville, Alabama. And last but not least, we are working on laser dazzlers. Those are low-power laser systems, which we can integrate on our more weapon stations, which will be a kind of additional effect on those weapon stations to have another effector in place to combat drones and loitering ammunition by more or less blinding or dazzling, direct optical [ sensor heads ] and causing a mission abort of those incoming or in flying threats. We are the first mover on the market here and we are benefiting from the fact that U.S. is not only a weapon station company, we are also a laser company. That's giving us really a leading edge here. We formally have to qualify those laser dazzlers still, but it's something which we can offer pretty soon to the market and we give a further push to our salesforce. We go to Page #12. Future strategic growth opportunities. So till today, the business is mainly benefiting from our 2 cash [ cost ] and with weapon stations and EM Solutions, our satellite communication terminal business. The future business will benefit from a continuous growth in those 2 domains. But on top of that, we expect to have breakthrough revenues in those 2 domains listed here. One is the High Energy Laser Weapon business and the other one Space Warfare. In the High Energy Laser Weapon business, we benefit from the fact that all the IPs have been created by investing our own money in the past. That means we own all the IPs and we are quite flexible in offering partnerships and in localizing production in key countries. So we have developed a range between 36 and 54 kilowatt lasers. We have built up a demonstrator of 36 kilowatt, which we have showcased last August to clients in the Australian desert. We were shooting down drones. The clients have been impressed and we expect the first contracts to be signed within 2024. So we are in advanced negotiations with potential customers for this type of product. And that's a game changer for the U.S. And not only for U.S., it is a game changer for the directed energy market, because we will be the first country, the first Western country signing an export development on an export delivery contract of High Energy Laser Weapon system worldwide. So it's turning our laser weapon business from a business which has to be subsidized into a business which will generate profits. That's a game changer for the U.S. Space Warfare. As mentioned before, the space domain is becoming increasingly important for military joint warfare. We have decided to transform our business from space awareness to space warfare to be able on the midterm to offer solutions to our clients, which will allow them to dazzle and to disable the optical sensors in space and in the second step to disable even satellites in space. That is obviously crucial in a warfare scenario and it will be a game changer on the battlefield. Those are activities where we are looking for third-party funding. As we were mentioning all over the last few meetings and calls, we will not continue to invest heavily our own money into significantly or into large development programs. Those times are gone. Whenever we need to invest a lots of money we are seeking for third-party funding. We have ongoing discussions, quite advanced discussions with customers and industrial partners here to secure those funding. Those kind of funding we need for both space warfare, but also for the laser business. For the laser business not to go up to 100 kilowatt, but to go beyond the 100 kilowatt, up to 200 kilowatt and more, we need those third-party fundings. It's important to note that the high energy laser business with our power range of, let's say, 30 to 100 kilowatts, we do not want to compete against the U.S. companies, which are quite advanced in laser defense systems, thanks to their multibillion-dollar government support, which they get year-over-year. That's not our ballpark. That's not our game field. We are targeting the non-U.S. market, the non-U.S. market, which is driven by 2 aspects. First of all, U.S. companies usually do not compete in those domains, in those regions because of ITA and export restrictions. And the second point is, in the global western Market, there are only very few other companies who can compete with us in those domains. So we are one of very few movers in those markets, and we believe we have a very good market share to sell our products, in particular, in Western European markets. So that is something which is again starting to generate revenues and to generate profits with this business year 2024. I will hand over now to Clive to give you further insight into our financial performance. Clive, please.

Thanks, Andreas. So Page 14 of the deck shows the P&L highlights. As you can see, our revenue increased 59% or $81 million on the prior year. And that includes growth across the board that I'll come to in a second. We've disclosed gross margin, which, for this purpose is the margin that the company earns on material costs. And you can see that increased from 34% revenue to 44% during the period. That is -- and I'll come back to some of the drivers behind that, but in a moment, but markets are strong, and that is providing us with some significant opportunities. Underlying EBITDA returned to positive territory of $5.7 million during the year. It's underlying, it does it before depreciation amortization and everything else, and it's also prior to a small one-off gain. So positive EBITDA as a result of the revenue growth and the positive margin development coupled with cost control, which is an important feature of the way we run the business at EOS. It is worth noting the second half result, $145 million of revenue in the second half, driven by some legacy contracts that were delivered -- a lot of product delivery during the second half, but also some new contract wins in June and July that were also delivered as well. The EBITDA, the underlying EBITDA in the second half was $20 million. So we are -- I would comment that we are continuing to diversify the customer and product base, as Andreas said, but for the time being, the business does remain a little bit lumpy. But I think what the second half demonstrates is what the business for EOS is capable of generating in terms of results. I'm going to turn to Page 15 and the segment results now. So the Page 15 shows the results of our 2 segments, Defense and Space, which includes our EM Solutions business. In the Defense business, revenue was up 47% and EBITDA for that business returned to positive territory. As I mentioned earlier, there is a strong market and a favorable pricing environment in the market. In some parts of the market customers are demanding urgent deliveries for what we call urgent operational requirements. And we've seen some of them in the second half of '23, and we continue to receive inquiry and interest on that basis. So that is a significant area of future growth opportunity. In Space, 90% of our Space segment is represented by the EM Solutions business, which manufactures satellite terminals such as the one shown on Page 15, antenna for naval vessels. And during the year, you can see that revenue in that segment doubled from $32 million to $64 million and the vast majority of that growth was driven by our EM Solutions business. And that's a business that has a pretty strong stand-alone underlying EBITDA, so [ for ] corporate cost allocations of as much as 33%. And that business is growing well, not just in Australia, but also continues to expand the number of navies that it serves in Europe as well. If I turn to Page 16, and we'll look at the contract backlog. So at December '23, our secured contract backlog was $441 million. Plus, we had $180 million of contracts that were conditional that we'll talk about in a moment. As Andreas has mentioned, markets are growing, and our aim within the company is to increase the size of the order book year-on-year. So by the end of '24, we're not providing guidance, but the direction of travel is clear. We do -- sometimes the contracts we win can be significant and lumpy. So the contract backlog does not always grow in a straight line. But I think you can see what's been achieved in '23 is a significant increase. The table shows the split between different parts of our business. And I might ask Andreas to make a couple of comments now on the Ukraine and conditional contracts because I know they're of interest. Andreas?

Thanks, Clive. So you might recall, we signed 2 contracts with 2 state-owned entities in Ukraine last year totaling up to $180 million. Those contracts were depending on different things. It was depending first on a successful first shooting campaign in the U.S., which we have achieved in August. So they were applauding us. It was much better than expected. And second, then to do a test indicated on their vehicles in Ukraine. So that seemed to be not easy, but something which we can organize on the short term. But then we had to learn that it's not that easy to get the required export licenses from those countries where we need it from. And one of those countries has not provided us the export license because they are afraid that if we ship a demonstration unit to the Ukraine to do this test, we won't get the system back home once the system is in Ukraine, they have a need to keep it. And by that, U.S. would be in breach of export law, because our export permit is only a temporary export permit to do the test and then come back. And once we are in breach of export, we would not get any further export permit for other contracts to come later on. So that was a long lasting dispute with the government, and we found a solution. So the system is now on the way, and we expect to arrive the system in Ukraine within the next few weeks, maybe one or 2 months, and then we can conduct those kinds of tests, and hopefully we pass that. Once we've passed the test. Obviously, to get then effective contracts in place still means that they need to have the required level of funds and that the prioritization on the battlefield is still in our favor. You all have heard that currently lots of money is going into the acquisition of ammunition, in particular, 155 millimeter artillery ammunition. They are still buying systems on the left and right side. And we hope that this trend is continuing, that we have still a good chance to sell those systems into Ukraine and to realize the funding this year. We are optimistic in that, and we are also optimistic in realizing further donation programs by Western European and American countries to be with our systems in much larger volumes within Ukraine. We've also started in the meantime with a partner company in Ukraine to do all the required on ground service and maintenance and repair work. So from that perspective, we can offer an end to end service to our clients in Ukraine. Maybe, Clive, will leave it with that, And I return back to you for cash flow statements.

Thank you, Andreas. So now turning to Page 17 in the deck. This outlines the cash flow for the 2023 year. So first comment would be strategic discipline remains important to us. The 2022 cash flow shown on here includes the $27 million of cash going out in relation to the now discontinued SpaceLink venture. And so that is something that was a big drain on cash in '22, but was terminated in Q4 of that year. The cash flow for 2023, as I think many people are aware, includes significant cash receipts, the benefit of the cost reduction program that the company undertook in 2022. There was a tax refund that we've announced previously in July 2023, and one of the big drivers of operating cash flow is the realization of the contract asset working capital, following the amendment that was announced in February 2023. In addition, as I mentioned, some significant new sales announced in June and July contributed to cash flow in '23. So the operating cash flow of $113 million was used. There was $34 million of investment back in the business, of which $32 million is additional cash security deposits that were provided to bank guarantees and support some of the growth that was delivered during the second half. Capital expenditure itself is going to continue being subject to tight control within the company. It was $3 million cash during the year. Finance remains a big focus of our cash flows and we repaid $26.9 million of debt in September 2023. And I'll just come to the debt portfolio in a second. At the end of the year, we had $71 million in the bank. Significant cash balances are important for us, particularly as the business grows. We do like to manage our cash quite carefully. Maintaining some cash balances helps us have buffers for contract risks. The balance does go up and down. In particular, we'll be looking at applying some of that money to the debt repayment that is due in April. So the page -- over the page, on Page 18, the debt position of EOS is shown. And listeners might recall that the company did a refinancing in Q3 of calendar 2022, when our long standing equity investor, Washington H. Soul Pattinson, lent $70 million to the company to help deal with the stress at that time. The funding rates for that facility are shown on the page. And as many people know, we made a repayment of the first installment of that facility in September 2023 on schedule. The next installment of $20 million is due in April, so in a few weeks' time. And then the final installment, which is due of $52 million, including capitalized interest and fees. That amount is due in 18 months' time, approximately in October 2025. So cash management is going to continue being a key focus as we service and retire that debt portfolio. That covers everything. I was going to touch on, on the financials. I'm going to hand back to Andreas now, who's going to conclude. And I think we're on Page 20.

Yes. Thanks, Clive. Before we come to our commitments, I want to mention one point which we didn't make before, but it's important to say we are also obviously continuing to grow our business in Australia, in our home country here. We have ongoing and advanced negotiations with Hanwha, on the Land 400 Phase 3 program to be able to deliver to the [ common battle 129 ] remote weapon stations, R400 advanced type with very innovative additional features coming with it. So we expect, again we expect this [ compaction chunk ] to happen within the first half of this year. And we are very confident to execute this program according to the expectation of the client and our industrial partners. So let's come to our commitments, and I cannot repeat often enough that what we intend to do, we will communicate with you, and what we communicate, we will execute. So we said over the last few months always that we will execute the new strategy, and we have done so. We have increased our efficiency and we will keep headcount low as much as possible. We will only allow grow in direct areas where it's needed in order to increase production volumes and sales. We have innovated our product portfolio. We launched a couple of new products in 2023 and this is continuing to work, thanks to our huge backlog of IPs sitting on our shelves. We have to grow and diversify further our sales. We've done, I think, one good job in 2023. And you can expect that we will further diversify our customer base in the upcoming months to be less dependent from a single client. And as Clive was mentioning, we will be still very focused on working capital structure which is close to its minimum. And we will focus always on cash, and we will repay the debt as planned. So let's go to Page #21. As a summary of 4 pillars of growth, these are current growth pillars, as mentioned before, that are most demonstration area, where you can see what we have launched in 2023 and what will be the growth factors for 2024 as we go into production now in the large volume production for R150 and R800 and obviously, our SLINGER counter drone system will grow in terms of volumes. EM Solutions, we continue to grow, thanks to a very successful acquisition in 2024 and some forthcoming acquisitions in 2025. So those are our 2 growth pillars, which we generate 2022 -- 2024, 2025 growth and beyond. And then we expect that the future growth will be significantly supportive by our directed energy business, which we call an [ integrated man ] of Titanis, but once it's integrated with remote weapon station and other effectors like missile systems and the launch of our laser systems, 36, 50 and 100 kilowatt class. In terms of financing, I was mentioning before that up to 100 kilowatt we can go by our own means. And thanks to the customer context, we expect to get in the course of this year. If you go beyond the 100 kilowatt, we need third-party funding. We don't invest big amount of money from our own pockets anymore. And Space, we become the other big pillar in the future, where we again convert space awareness into space control and space warfare type of business where we are one of very few, if not the sole mover in the non-U.S. market. There is no Western company which is getting close to us in terms of the required competences to become an [ actor ] in this field. You need to have the laser technology, you need to be able to master the telescope, build technology, and need to have all the capabilities related to adaptive optics to control and correct for atmospheric distortions. This kind of combination of skills is quite unique with U.S. and that makes us very confident that with this new market segment, U.S. will play a major role. But again, that's not on our scope of 2024. This is coming slightly after, but it will be a very important pillar in the long term growth strategy of U.S. I come to the last page, Page #22. To summarize. The management of U.S. is very confident to have the best product portfolio offering in the market for remote weapon stations and in the EM Solutions portfolio. We'll focus on expanding into new markets into the growing markets like Europe and into the U.S. and also to significantly grow our revenue base. We will benefit, in particular, from our strategic IP in laser and space warfare, which will generate the long-term growth. And that makes us over very confident to have a very stable position and a very solid ground in order to grow this company on the mid and long term. With those kind of statements, I want to conclude our presentation, I would like to hand back to the moderator, and I think it's now the time for questions. Thank you very much so far.

[Operator Instructions] Your first question comes from Annabelle Holden with Canaccord Genuity.

Congratulations on the results today. A couple of questions for me. First, you've signed a few small contracts for your counter-drone product. How should we think about how these customers can potentially sign follow-on contracts in the next 2 years? And what's the scale of revenue we could expect for an order of a follow-on contract of this size?

Yes. Thanks for this question. Yes, we signed a couple of smaller contracts with Western European nations. We expect this year that we benefit from the increase in budgets of those countries, which -- budgets which have been allocated for support to Ukraine. I just can recall the German government has increased the budget significantly, I think to EUR 4 billion, as far as I remember, for direct military support to Ukraine. So we are in contact with the German government, as you can imagine. And we try to get a decent share of this budget to sell further counter U.S. systems to them to be donated to the Ukraine. So if we are lucky, in those kind of orders, a single order might have a volume of between 30 and maybe up to 100 systems. It always depends on the availability of platforms of vehicles. They do not want to give away those systems without being indicated. They want to deliver turnkey solutions to the client. So usually the limiting factor are the available numbers of platforms. That was also the limiting factor of our last contract with the German government. It was not the availability of platforms -- or sorry, of the most [ weapon stations ] from our side. But again, they're also donating countries which don't have that much of budget. So we also can expect further contracts in the order of only maybe 5 or 10 systems. In particular, if our remote weapon station is just one effector in an overall indicated counter U.S. system, which comes with missiles and other kind of elements, then you have to imagine that a system price overall, including a radar of that complexity comes up to $10 million, $20 million. So typically those countries then only spend or purchase 4, 5, 6 systems and have then a total bill of $100 million. And for us, it's then only in this case 5, 6 weapon stations. So also that we come into the mix. But again, it depends on the nature of those contracts.

Great. And I might jump in with a second, if that's all right. The EM Solutions business has accelerated pretty strongly against its trend of 20% growth, which we've seen in the past. How should we think about the growth rate for this business going forward? And is the level of uplift in the growth rate you achieved this year sustainable?

Yes. I might answer that one. Annabelle, thank you. So clearly, it's been a big growth period this year, particularly as the new Royal Australian Navy contract comes on stream. That is going to continue to grow, and we will see significant growth in 2024 in this business. We're not providing specific guidance, but I think it will not be -- I don't think we'll be doubling the revenue for that business in 2024. But I think we can assume that the growth rate will be higher than the -- over the next 2 to 3 years will be higher than the 28% annual growth that has been achieved in the past. That's driven a little bit by Australia, but it's particularly driven by the growth into overseas markets, particularly into Europe. So we look to see that continuing. And we expect EBITDA margins to be broadly maintained as that business grows.

Yes. And if I may add to this point, I mean, this short-term growth, again, is realized by existing contracts by the order backlog. EM Solutions was not very aggressive in penetrating new markets in the past. We have done some few -- or we've achieved some few contracts in Europe with smaller countries. We expect now the company to target for the so-called first-tier markets in Europe, which are the key countries like U.K., Italy, France, Germany, where the sheer number of the feed is -- the number of vessels in the fleet is significantly higher, where typically the contractual volumes are significantly higher. And please don't forget, we have never approached the U.S. market, U.S. market, which is bigger than all the rest of the Western European markets together. U.S. markets, we will approach that one in the second half of this year and hopefully we generate then the long term growth through participation in huge U.S. programs. So we are very confident to be able to realize a long-term sustainable growth story line for EM Solutions. Thank you.

Your next question comes from Daniel Laing with Bell Potter Securities.

Andreas and Clive, well done on a fantastic result. I was just wondering if you could provide some more color on the margin growth there. I know you said there was some upside from pricing, and I'm also guessing from EM Solutions. So if you could just talk through that and then, I guess, how sustainable that is and where you see that in future periods.

Thanks, Daniel. Yes, good question. So the primary driver of margin during the year is -- has been project mix. We have, as you know, some legacy projects that are not at a bad margin at all. But we've also had some sales during the year that were our new operational requirements. And in that situation, particularly where we've invested money in having some product available, we do make sure that pricing is appropriate. So we are -- we have, over the last 6 months, been introducing a bit more pricing discipline into the business as we price different bids that come in, and we expect that to continue. The EM Solutions part of our business, as you can tell from the EBITDA margin, that is not a dilutive part of our business. And as we grow that business, we do not expect it to have a dilutive impact on the overall group. So our focus on pricing is going to continue. As you can tell, in a business like U.S., where we're quoting for very large multiyear projects, we will offer the pricing for a baseload may be lower than it would be for urgent operational requirements. But we do expect to target a mix of different work going forward as we diversify the product and customer base. So we -- I think that's an explanation of the thematics. And we would like to see a gross margin staying north of 40% on a sustainable basis. So that's what we'll be aiming for over the next few years. But we don't have any -- we don't have any significant concerns with where we stand today on the margin that we've delivered today.

Your next question comes from David Storms with Stonegate.

Appreciate you taking my questions and congrats on the year. Just hoping I could start with maybe a little more information around the logistics of growing that European footprint and what early indicators of success would look like once that European EOS location is up and running?

So if I understand the question right, you want to have further details on our European footprint. Right? Okay. So we intend to open up a facility in Europe, not in terms of production in the first step, our brands is -- our brands are to open up an office where we can do after sales services to improve logistics, with the capability to do some low level kinds of repairs, where we have spare parts available, an office where we can do sales and marketing, an office where we can conduct project management in the second step. And obviously then on the longer run, if customer are requiring so to go into local production. EM Solutions is also opening their own company in the Netherlands. That is required because it's part of our ongoing contract with the Dutch navy. So we will have then an integrated footprint potentially in Europe if we decide to go into Holland, but it's not decided at which country U.S. will choose. If you're in Holland, it's an integrated company. If not, then U.S. would have 2 footprints in Europe, one for EM solutions in the Netherlands and one of the U.S. group at another location. That's subject of formal selection process, which we will hopefully conclude with in the course of April May, to be in a position to formally start with a rollout in the second half of this year.

Understood. Very helpful.

This is driven by the success which we see in the European market. I mean, again, U.S. was almost not active in the European market and the European landscape in the past. It is a market which is highly fighted for lots of competitors in Europe. But we've seen, and we have been pushed by the recent successes, that it is more than worth investing more money there and taking more attention to the European market. It is complicated, it is scattered, it is highly fragmented. But the potential benefit is huge. And we are very confident to make the European -- a very significant one within our overall sales and revenue generation network. I hope that answers your question, sorry, if I didn't get the point right.

That's very helpful. Thank you. And then just one more for me, if I could. It's great to see your backlog remaining so strong year-over-year and growing. Just curious how this is impacting your lead times and how comfortable you are with current production capacity?

Yes, we are benefiting from the fact that we can draw systems from a program which was called [ PLBMU ], a program which we have assigned with the Australian government. Those systems have been delivered some years ago, and we have an arrangement with Australian government that we can draw from those kind of stocks, modify the system and sell it to donation programs or direct into Ukraine. That stock we are refilling over time continuously. So this kind of evolving stock is giving us the opportunity to be always in a position to deliver in very short time frames. That's a quite unique selling point, in particular, if you have to sell into crisis areas like Ukraine. So that is a continuing asset as we have banished the systems which we have taken off the shelf, and the Australian government is giving us indications that they are ready to support us in this kind of context also in the short term. So that's very positive. In terms of capacity. We are operating in Australia in a kind of one shift operation. We can easily go into 2 shift operations and expand our production capacity by activating all of our assets in the U.S. And we have in Huntsville, Alabama, by far the biggest facility within the U.S. Group, which was so far only used to produce some R600 systems. We intend to produce the R800 in Huntsville, Alabama, and we will also use Huntsville, Alabama to cover the peak of workload and to deliver into countries which cannot be served from Australia, or whether U.S. government is the preferred partner for those kind of clients. So, yes, we have lots of flexibility in order to cope with additional demand.

[Operator Instructions] You next question comes from [ Jonathan Hughes with Penne Holdings ].

Congrats on the result. I just wanted -- I don't know if you saw, there's a piece in ABC Media this morning talking about Elbit Systems announcing a USD 600 million contract with Hanwha, for Land 400. I got the impression earlier you said you guys were still talking to Hanwha. Can you sort of make any comment on that?

Yes, so, as I was just mentioning, we are in advanced negotiation with Hanwha to deliver the remote weapon station on those vehicles. Those weapon stations will be integrated into the turret, so they're physically, they're sitting on the turret. But electronically and software wise, they're integrated into a common battle management system. So it will be a kind of triangular relationship between Elbit as the turret supplier, U.S. as the weapon station supplier, and Hanwha. So that's work in progress, and we expect to sign this contract within the first half of this year.

There are no further questions at this time. I'll now hand back to Mr. Schwer for closing remarks.

Okay. Ladies and gentlemen, thank you very much for your time with us. Thanks for listening to us. As you could hear U.S. is a very fascinating company with a benchmark product portfolio and the strong growth potential. I would like you to stay with us, to stay with U.S. and to be part of this journey. I can give you our commitments, [ price ] to my commitment and the commitment of the entire Board and the management that we continue to do what we say and to execute accordingly. We will not give up on our principles, and we will be 100% transparent with you. Our confidence in the market and the growth of the company is significant, and we hope to be with you on this journey. And we want to encourage you to stay with us. And hopefully, to see you again in the next call. Thank you very much for everybody to be with us, and I would like to return back with those words to our moderator.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.