Exosens (H8Y.F) Earnings Call Transcript & Summary

Good day, and welcome to today's Exosens' H1 2025 Results Conference Call. My name is Serge, and I'll be your coordinator on today's event. [Operator Instructions] And now it is my pleasure to introduce your host for today, Mr. Laurent Sfaxi, to begin today's call. Thank you.

Thank you. Thank you. Good morning, everyone, and thank you for joining us today. I'm Laurent Sfaxi, Head of Investor Relations at Exosens. I'm joined today by Jerome Cerisier, CEO; and Quynh-Boi Demey, CFO, who will present you Exosens' first half 2025 results and our outlook. This presentation will be followed by a Q&A session, so we can take your questions. I will now hand over to Quynh-Boi.

Thanks, Laurent. So good morning, good afternoon to all. So our full year 2024 results in our first year following our IPO were very strong. As you recall, we outperformed the guidance provided at the time of the IPO. Now the first half of 2025 has also started with strong momentum. And in a very dynamic defense market environment, we remain fully on track to meet our full year 2025 guidance. Let me share with you a few highlights. Revenue first. We are targeting a high-teens revenue growth for the year. And in H1 2025, we delivered EUR 224.5 million of revenue, which is up 20% versus H1 2024. And our organic growth remains also robust at plus 13%. On profitability, we are targeting low 20s EBITDA growth. For half year 2025, our adjusted EBITDA came in at EUR 69.5 million, up 24% year-on-year. So this represents a 30.9% EBITDA margin, which is a 92 basis points improvement versus H1 of last year. On free cash, we generated nearly EUR 24 million during the period with a cash conversion ratio of 76%, slightly above our guidance of 70% to 75%. Finally, our balance sheet remains solid. So with a leverage ratio of 1.3x our EBITDA and strong operating cash flow generated from operations, we have the financial flexibility to support our organic growth for R&D, but also for capacity increase, but also to fund our bolt-on M&A operations. I will now hand over to Jerome, who will briefly recap who we are and what we do and the key trends that shape our markets. And after that, I return to provide deeper insights into our financial performance.

Thank you, Quynh-Boi. Good morning, everyone. First, let me summarize briefly what we do at Exosens, that will be very brief. At Exosens, we make use of physical and chemical phenomenas that are invisible to the human eye to create sensing data information useful to our OEMs and end users. We hold leading positions in our niches that are part of 4 value-added fast-growing verticals: Defense, Industrial Control, Life Sciences and Nuclear. We are a global player as our customers can be OEMs or armed forces anywhere around the world. We focus on applications that -- more than on geographies, and our technology is used globally. We are a technology-driven company with 7.7% of our revenue invested in R&D. We have an active portfolio -- well, a historical portfolio of over 230 patents. And we achieved, just as a reminder, last year, revenues of close to EUR 394 million, active in 2 segments that are Amplification and Detection & Imaging, both reflecting our high-end technology differentiated positions on fast-growing markets. I assume for now, most of you know a lot about Exosens already. So I propose that we focus on the current understanding of our markets. And if you need more information, you'll be able to find it in the presentation that we will not cover entirely today. So let me perhaps focus on our markets and starting with the market around Amplification. The night market vision benefits from strong underlying trends in different budgets. It was made officially that now NATO countries, while not all of them had reached a 2% threshold that was the pre-existing threshold before the conference in June, a new target has been set for NATO countries as 3.5% of GDP with additional 1.5% for, let's say, security related that we will retain here, 3.5% defense-related investments as a percentage of the GDP. This 3.5% should be reached by the mid-2030s, and it will fuel, the increase will fuel the short, the medium and the long-term growth in defense. In Amplification, we provide massive, effective and differentiated capacities to armed forces. As a reminder, we are the sole sizable non-ITAR provider of image intensifiers. And we have by far the fastest growing capacity in the world as we have demonstrated over the last few years. So next page. We see massive demand in the coming years. With the growing budgets, not everything is set yet, we see already some armed forces considering changing their format, adding new troops or talking about adding new troops. But for the time being, already, we see over 1 million night vision devices coming over the next few years with 3 main areas: North America, where the penetration rate today is estimated to be close to 100%, but it's mainly -- it's a replacement rate with more modern, more advanced equipment and more performing devices. Europe, where the night vision penetration rate is increasing and going to continue to increase from 30% to 50% as a target to 50% to 70% in some countries. Certain countries like Germany already targeting 100% of the troops being equipped. In Middle East and Asia, where the penetration rate is more in the range of 10% to 30%, but it is far from being reached as of today. Furthermore, in NATO countries, we start seeing consideration around reserve forces. So we do not talk anymore about only armed forces and land forces, but really about global forces, and reserves are now being considered to a certain level for being part of the defense efforts. So in the coming years, we consider Exosens is very well positioned to capture an increasing demand in Europe, in Middle East and in Asia, but we aim at also gaining traction in the U.S. market. First, concerning the U.S., it is by far the largest single market in the world. It represents about 45% of the whole market. It's a very dynamic market where efforts of modernizing land forces are constant and where we understand there is sort -- a form of a constrained production capacity. This is why we have chosen to implement a new factory for several reasons. First, to free up capacity in Europe so that Europe factories serve countries where ITAR-free is required and these countries could be served from these countries where ITAR-free is required will be served from Europe and countries where it is not required could be served from our U.S. factory. Second is on the U.S. market itself, U.S. is targeting -- U.S. is launching and having multiyear contracts. But also, we also know penetrating the U.S. market could take time, and we believe being on the ground there in the country will be a change for the longer term in this country. Second, concerning Europe, a few countries like Germany, like Poland, like Finland have plans to increase their armed forces. I mentioned that, but also their reserves. Other countries are already entering full multiyear programs with large volumes that have not been seen in the past. It is the case, for example, in Spain, in Italy, in the U.K., in Greece. And so we see these large volumes progressively being more frequent. Finally, in the Middle East and in Asia, there are a few large countries that will constitute the bulk of the upcoming volumes. And here, Exosens enjoys a very strong position, a key position as a supplier of high-quality exportable tubes. The group, for example, has a 30-year or close to 30-year-old partnership with BEL in India. So now when we consider capacity, we are facing a growing demand. And we have had since 2020, a staggered capacity approach with stages of capacity increases that have been decided over time. So between 2020 and 2026, our capacity will -- 2024, sorry, our capacity will have nearly doubled, but our output will have more than doubled, and we did that in several stages. The last stages, already announced, considered -- consists, sorry, in increasing our capacity by 25% until end 2026, beginning 2027 in the unit in Europe. However, we are facing a growing demand because these announcements were made before the announcement of the GDP increase before the European, let's say, consideration about increasing budgets following the Munich conference. So we are evaluating our further increase in capacity, and we will make announcements in due time as we consider necessary. But obviously, in end 2024, the market was seen stronger at the time of the IPO. And today, we see -- we continue to see a growing trend in this market. We have demonstrated that we have the ability to increase our capacity. We have the cash and the financing necessary to do so. We have a staggered approach, and so we will adapt constantly to the market and to the demand. And furthermore, our capacity to -- our ability to increase our capacity is also -- will be increased in the future because we will also be able to do that not only in Europe with our 2 factories in Europe, but also in the U.S. with this new factory we're setting up. Concerning our D&I segment, the D&I segment is also enjoying a strong tailwind coming from the defense. On that market, we are targeting 4 main applications. Let me start perhaps with the 2 first ones, drones and counter-drones. Drones and anti-drone devices have become a pillar of modern warfare following the lessons learned, let's say, from the return of high-density conflict, especially Ukraine and -- between Ukraine and Russia. And we see this segment as a very fast-growing subsegment of our business in defense. Our technology is a very good fit for short- and medium-range surveillance. Actually, the thermal and the cooled and -- cameras are perfectly fit for long range, shorter range more invisible -- in a visible world. That corresponds to medium-sized tactical drones, which units or programs counts in the range of a few thousand units or few tens of thousands units in case for larger programs perhaps concerning certain countries. But the use of infrared and cooled fits perfectly the purpose and it requires differentiated, well-integrated, high-performance technology that Exosens has provided. So we have made significant design in sales to yet undisclosed customers in Europe, and we see these programs and these subsegments really continue to picking up. We expect, in fact, a significant part of the increasing budget to fuel this drone and consequently, the anti-drone warfare in the NATO countries. Our other applications in defense, the 2 remaining ones are really around platforms and missile warning systems. That is these programs come either through modernization of existing programs with optronics technologies of a new generation or for new programs, generalization of optronics on all types of platforms together with large equipment programs. So the visible low light cameras and the thermal cameras are becoming part of any new or recent platform. And the demand of these platforms is expanding rapidly, aligned with the budget increases, the reinforcement of the troops or the reinforcement of the land forces and the push-in capacity of the armed forces. Key customers design wins adds to the expansion of our business, together with expansion within existing and current customers. Rheinmetall's drivers enhancement systems, for example, as well as Hensoldt missile warning systems in Germany and other NATO countries are fueling and will continue to fuel the growth in the medium to long term. In D&I, our markets are generally supported by strong underlying factor. As a reminder, we estimate that the medium-term growth for this market in the high single digits range between 7% to 10%. And specifically in nuclear, we are -- we have started a sort of, I don't know, a super cycle. The word is a little bit a buzzword, but this is what it is. And supported by the renewal of safety standards into the existing platforms or the existing plants, the increase in electricity demand that is rising everywhere due to the electrification of industry, of our societies, of transport, and the emergence of new business models of SMRs, all of that has made nuclear inevitable and totally part of any modern energy mix, amongst other things, but nuclear is renewed because of these few but strong factors. In Nuclear, we enjoy a strong position on all type of reactors, especially large reactors, but also SMRs we announced and we have made -- had some win in 2024, but also research reactors. We have a unique radiation technology, and we continue to develop and to invest into new developments, new products especially on high-temperature detectors for SMRs with new technologies of SMRs imaging. What is now today's study, feasibility, qualification studies will be followed in a few years by production, and we see that starting by the end of the decade for some projects. Industrial Control enjoys a certain market recovery, but -- and prospects remain strong until the medium term. As we speak, the rise of artificial intelligence applied to production is showing growth, requiring more data, more information. And we see we're starting the end to the destocking in some industrial markets like sorting as well as a restart to a certain level in CapEx investments that should translate into a renewed interest for optronics controlling -- control systems. This market is tempered for the time being still with the current reshaping of the U.S. scientific market. But overall, we see the trend in industrial markets as being more positive moving forward, and we remain -- we see that remaining high single-digit growth for the next few years. Last, on our Life Science vertical. We see still some softness with sustainable drivers for the medium term. But when the uncertainties around the U.S. research will have resolved. It's more about uncertainty rather than absolute levels. So Exosens maintains a huge strategic differentiation, ensuring that we remain at the leading edge of the technology, the most adapted provider of detectors to our customers' instruments. And in the short term, the Chinese market remains soft- to medium-oriented. The U.S. Inflation Reduction Act slightly impacted pharmaceuticals. And some of our customers are actually seizing the opportunity of this market status to invest into new generations of instruments that will probably come to the market in the few years. We see them kicking in, let's say, in 2 years, and the interest for Exosens' progress is massive. So thanks to our unique technological edge and our strategic choices, we see this market as continuing to fuel the growth over the medium term. So overall, the perspective for growth for the group on the business remains strong. And perhaps it's time to go a little bit more into details on how we did during H1. And I think Quynh-Boi will -- you will lead us through that.

Thanks, Jerome. So now let's look how these market trends have translated in our financial performance for the first half of full year 2025. As I mentioned in the beginning, we continue to deliver strong growth, but we also improved our margin. Revenue is up 20%, adding EUR 38 million of revenue overall. EUR 24 million from amplification and it's driving by very solid defense investments. And our backlog is strong at the moment and give us a very good visibility for the months ahead. And we also combine this with excellent execution with our factories running at full capacity and very high yield. EUR 20 million (sic) [ EUR 11.9 million ] of additional revenue is coming from Detection & Imaging, mainly thanks to our acquisition. Centronic that we closed on July 31, 2024, LR Tech that we closed on September 1, 2024, and more recently, Noxant that we closed in March 2025. Our adjusted gross margin has also grown by 22%, reaching 49.6% of sales. That's up 89 basis points compared to last year. This adds about EUR 20 million in gross margin, of which EUR 16 million from Amplification and EUR 4.5 million from D&I. Now let's dive into the details by segment in the next slide. First, Amplification. The revenue grew by almost 18%, and it's driven by 3 main factors. The first is sustained market demand, as Jerome mentioned. Second is increased capacity, thanks to additional CapEx that we consistently invested since 2022. And third, by our sustained high yields. On the demand side, our growth is largely due to increased volumes of night vision goggles for land forces. And these night vision goggles are powered by our Image Intensifier Tubes. The war in Ukraine and the high-density combat operations have made all armies realize that night missions are critical and give a real competitive advantage to the armies that are properly equipped. Now thanks to the industrial investment that we have made since 2022, we've been able to gradually increase our production capacity. And at the same time, our industrial yields have remained very high with limited scrap and rework as our interim workforces is now fully trained and fully effective. So it shows how our industrial excellence is delivered at Exosens, while we are able to grow capacity while maintaining a very high quality of our products with low return rates from our customers and very low scrap at the same time. We are also seeing steady demand for higher performance products, and this translates into a better product mix for us. All of this leads to an improvement in our gross margin in Amplification of 276 basis points improvement year-over-year. And the gross margin stands now at almost 50%, more precisely 49.8%, which is a record high for us. Second, on the Detection & Imaging, we also grew by 23%, 23.6%, and driven by 3 factors, 2 positive and 1 more adverse one. The first is, as I mentioned earlier, the external acquisitions that fuel our growth. Second is the negative impact from reduced U.S. scientific research spending, as Jerome mentioned earlier. And third is the increased market demand for defense imaging and detection applications. As I mentioned earlier, a big part of our D&I growth is coming from our acquisitions closed in H2 of 2024 or H1 of this year. On a like-for-like basis, H1 growth is actually down by 2.5%, mainly due to the decline in the U.S. scientific research investment. This caused a drop in Q1, which still affects Q2, by the way, but to a lesser extent. If we exclude the U.S. scientific research cameras, our underlying growth would have been in the low single digits in H1 2024, which is more or less what we had in H1 of 2024. In Q2, we have seen a recovery in D&I with a 7% like-for-like growth. We have experienced a growing demand for imaging and protection systems in defense applications. For example, camera and drones, long-range surveillance cameras that detect massive drones attacks and also missile warning systems on aircraft or on tanks. We have also benefited from positive pricing and product mix, which has helped us partially offset the negative volume impact. All in all, our D&I gross margin came in at 48.7%, which is roughly flat compared to full year 2024, which was at 48.6%. However, this is almost a 3 point decrease compared to half year 2024, which was at 51%, which was very high. This drop is mainly due to the dilutive effect of our acquisitions, which are on average about 10 points below our group's margin. The EBITDA margin is around 20%. Next page, EBITDA and EBIT. So we delivered best-in-class EBITDA margin of 30.9% and EBIT margin of 26.1%. That reflects our strong position in a market that demands high technology and very good industrial expertise. While we drive both growth and margin expansion, we also kept control over our fixed costs and as we benefit from scale effects. This has led us to improve our EBITDA margin by 92 points and our EBIT margin by 142 basis points. And both EBITDA and EBIT margins have reached record high levels for us. Net income. We delivered a net profit of EUR 27.9 million, which is a significant improvement versus last year, which was at EUR 2.9 million. And 3 points that I would like to highlight here. First half of 2024 included one-off impact due to our IPO. We had close to EUR 4 million of operational cost -- IPO consulting fees that were booked in other income and expenses, as you can see in the Note 1. We also booked EUR 13 million of one-off costs related to the financing -- refinancing of our debt. This is close to EUR 17 million of one-off costs related to the IPO. We also restructured our debt following the IPO and have significantly reduced our financial costs. The third impact is our income tax, which has significantly increased compared to last year as we increase our profitability. Now on R&D, next page. So we are an industrial tech company and at the core of the model is our strong commitment to R&D, which is a key lever for innovation and to sustain our future growth. Over the period, we have continued to prioritize our R&D investment, and we maintain a very solid 7.1% (sic) [ 7.6% ] of sales for R&D, which is consistent with our guidance of 7% and 8%. And this ratio is also very comparable to last year's 7.9%. So in absolute terms, this is a gross R&D spend of EUR 17 million, which is up EUR 2.3 million versus last year. So it's an increase of R&D spend by EUR 1.6 million, of which EUR 0.5 million is due to our scope effects, primarily linked to acquisitions. As you know, technology is critical to our M&A strategy. And the integration of this M&A has also a direct impact on R&D spending. And the remaining EUR 1.1 million increase reflects our continued investment in R&D strategic initiatives. And among the other, there is the 5G project for night vision that is almost complete and for which we will commercially launch in September of this year. We also continue to leverage external funding mechanism for our R&D spend. Over the period, it represented EUR 3.5 million of subsidies and grants received either from tax credits or from customers, and this is an increase of EUR 0.7 million versus last year. And this is fully in line with our strategy to co-develop solutions with our customers as it helps us derisk innovation and also secure repeat business with our customers and strengthen long-term partnerships. Our second pillar of our industrial tech model lies in industrial excellence. As a process manufacturer, we transform raw materials into high-tech components and in order to maintain best-in-class industrial assets, and this is critical for us to keep good yields and operational efficiency. On CapEx, 2 points I would like to highlight. First, we made strong investment in '22 and '23 to meet rising demand, and we ramped up production throughout 2024. While we expected a normalization of our CapEx, the sustained strength in the defense environment has led us to maintain high level of CapEx. And as you can see, our growth CapEx has increased from EUR 7.2 million to EUR 9.7 million. This reflects our commitment to scale. Let me -- give me a few examples. At our Brive facility, construction is underway for a new building that is designed to house additional equipment, and this is a key enabler for our future capacity expansion. And in parallel, we have also made targeted investment in critical tooling and machines that will directly increase our output and operational efficiency. Second point I would like to highlight, our strategic investment plan of EUR 20 million that we announced in January. This plan is progressing fully on track. Technical engineering studies are underway and assets are currently being built. We expect the initial commissioning to begin during 2026 with the full capacity coming by mid-2027. And this time line will allow us a smooth and scalable capacity increase. Free cash. Our performance was once again a strong performance. We generated EUR 24 million of free cash, which is in line with the level that we achieved in the first half of 2024. So as we increase our EBITDA, this positive impact was offset by higher working capital needs, which was expected given the 20% growth in our activity. A large part of this working capital is due to inventory buildup for H2 deliveries in response to our sustained demand. Importantly, we control our CapEx carefully even as we scale operations. And as a result, we achieved a cash conversion ratio of 76%, improving from the 74% of last year and exceeding our guidance of between 70% and 75%. Finally, leverage ratio. At the end of 2024, our leverage ratio stood at 1.2x our EBITDA. And even after the closing of the Noxant acquisition in March 2025, we've managed to maintain it at a conservative level of 1.3x our EBITDA. So with solid cash generation from our operations, the refinancing at the time of the IPO with undrawn RCF of EUR 100 million, we are very strong -- we are in a very strong position to fund our organic growth ambitions, but also our bolt-on M&A strategy. So this concludes my first review of first half results, and I will now hand over to Jerome, who will briefly discuss our outlook for 2024 -- 2025, sorry, and the '24-'26 period.

Thank you, Quynh-Boi. So let me perhaps just remind you what we expect for 2025 and 2026. For 2025, we expect a continuing strong performance with revenue growth in the high teens and adjusted EBITDA growth in the low 20s compared to 2024. This implies a mild improvement in our adjusted EBITDA margin year-over-year on the full year basis. Until 2026, we expect '24, '26 adjusted EBITDA CAGR to be in the high teens. On investments, with the additional investment capacity -- additional investment of EUR 20 million announced, we expect the cash conversion to be between 70% and 75% over '24-'26 period. And on the M&A, we continue -- we will continue our selective M&A strategy while maintaining a leverage ratio of about 2. So as a conclusion, our H1 results show a strong performance. We are very pleased with this performance that showed sustained revenue, sustained profit growth driven by different tailwinds. But looking ahead, we expect these positive trends to continue throughout the remainder of 2025. And we consider today we remain fully on track to deliver our financial guidance for the year with this performance and the upcoming perspectives. This concludes our presentation. And so I think we will now be happy to take any questions you might have concerning this publication.

[Operator Instructions] And our first question is from Aleksander Peterc from Bernstein.

The first one would be on Amplification, on -- I would like to understand to what extent you're now becoming very capacity constrained in this business. So if you could give us an idea as to how far out you are currently booked, I suppose it's into -- well into 2026. If you could give us an idea of what is the capacity by end '25. Is it midway between 190,000 and 240,000 that you have for end '24 and '26? The second question would be on your intention to grow D&I through M&A. Would you not consider to put this on pause a little bit and direct all of your efforts into increasing capacity in amplification where you have the biggest constraints at the moment? And just finally, just a housekeeping one for Quynh-Boi on tax for the year, what will be the P&L tax rate and the cash tax rate?

Okay. Let me perhaps first answer on capacity. So our capacity is growing, as we speak, under several factors. First is, we have -- we work continuously on the improvements of our processes, our yields. So as we speak, the capacity is increasing. On top of that, yes, we had investments and we have machines and parts that we have to train. Let me perhaps illustrate the fact that the EUR 20 million additional investment for capacity increase of 25% is shared between U.S. and Europe. Europe capacity increase will come a little bit earlier because the, let's say, the infrastructure is more or less it's already in place, in fact. So we consider that the capacity for the European part will be hitting earlier than the U.S. part, as soon as 2026. And meanwhile, until that, yes, we have this continuous improvements on capacity that should also be translated into our production output at constantly yield, which we always work on, but we have to be careful about yields that can evolve over time. Then reaching beginning of 2027, the U.S. capacity will fully kick in. And meanwhile, we have the ability, as I mentioned, to decide further capacity increases that would hit simultaneously Europe and U.S. from there on. Okay. So I hope that translates your question. But we expect -- we do not expect, let's say, a one-off capacity increase by 2027, but something more regular, especially -- well, it's already starting, in fact, but it will add on and accumulate over the course of 2025 and mainly 2026. Concerning CapEx, capacity increase is mainly driven by operations in our -- by operations. We have the financial means to both finance our capacity increase, which is our R&D, which is our priority. We self -- we finance in priority our organic growth. And also, at the same time, continue our bolt-on strategy. In terms of internal resources, the CapEx investments are driven by operations in an established organization and do not -- and are mainly in Amplification, while we still consider Detection & Imaging is a priority for any potential M&A. So we consider that these topics can be run in parallel without impacting each other. The group has the capacity to run these 2 strategic axis simultaneously.

And I would add, even if we wanted to, I mean, increasing capacity is not possible. It doesn't mean that if you invest EUR 20 million in organic growth for industrial CapEx, you would accelerate investment because there are also physical limits to it. Now on your last question on the tax rate, P&L tax rate and cash tax rate. Cash tax rate is around 20%, depending on the jurisdiction where we pay our taxes. As you know, in France, we don't pay taxes and we still have deferred tax losses. But our industrial footprint has also changed with increasing D&I that is mostly outside of France. In terms of P&L tax rate, we are normalizing around 25% more or less depending on the jurisdiction where we pay our taxes as well.

[Operator Instructions] Our next question is from Aurelien Sivignon from ODDO BHF.

Just a follow-up on production capacity increase. Could we start seeing an impact from Q4? I mean, will it be possible to exceed quarterly revenue of EUR 81 million, EUR 82 million in amplification as early as Q4? Or is that still a bit too early? And then on the financial results, so it was sharply down year-on-year in H1, but it increased versus H2 '25, I believe. So could you maybe provide some context or color around the evaluation?

Okay. So we expect H2 to be not smaller than H1 despite the intra half seasonality that we always see during the summer period. So that means that the answer to your question is, yes, we expect -- in fact, the threshold you mentioned is not a threshold, in fact, and will be -- we expect it to be -- I don't know how to say it, but we expect, let's say, our sales to be higher than this value over the last part of H2.

We have a pop-up question from [ Paul Valentin ] from Stifel.

So congratulations on the good results. My first question is about Detection & Imaging, specifically the Life Science, Industrial Control and Nuclear segment. I was wondering how much visibility do you have with your customers in this sector? I mean, how long does it take to clear your order book with them on average? And then maybe you answer first, and then I will ask my second and third question.