Hensoldt AG (HAG) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the analyst call of HENSOLDT AG. [Operator Instructions] May I now hand you over to Veronika Zimmermann, Head of Investor Relations, who will start the meeting today. Please go ahead, madam.

Thank you, Kai. Good afternoon, everybody. I warmly welcome you to HENSOLDT's First Half 2021 Results Call today. My name is Veronika Zimmermann. I'm Head of Investor Relations and Group Reporting at HENSOLDT. And with me today are our CEO, Thomas Muller, who will give you an insight into our achievements of the first half of the year; and our CFO, Axel Salzmann, who will then guide you through the H1 results before we will enter the Q&A. And with that, I hand over to you, Thomas.

Yes. Thank you, Veronika. Ladies and gentlemen, I'm very pleased and proud to report that the strong growth momentum keeps continuing as reported and as indicated in our Q1 analyst call. We achieved further strong order intake of around EUR 1.6 billion in the second quarter and increased our order backlog to a new record level of currently EUR 5 billion. Due to our market-leading high-tech platform of independent solutions, we were successful in winning additional high-volume projects and further converting our pipeline into firm order intake. Investment of the German government in HENSOLDT has been closed. The German state-owned bank, KfW, has successfully acquired 25.1% of HENSOLDT shares in May 2021. In addition, the LEONARDO transaction to acquire 25.1% of our shares is subject to the usual approval requirements under antitrust law and the foreign trade act. We expect the transaction to be closed in the second half of 2021. Going forward, we already see multiple opportunities to collaborate with LEONARDO and to further build on our strategy. We certainly will be able to strengthen HENSOLDT's long-term growth with a partner like LEONARDO. It is important for me to emphasize that LEONARDO with its expected 25.1% share will then be on equal footing with our other shareholder, the German government; definitely, both of them 25.1%. Both parties have no direct influence in our operating business and no insight into any operational information. All operational decisions of HENSOLDT are taken solely by the Management Board, which has, of course, also seen very positive change in the 1st of July. With the appointment of Celia Pelaz as Chief Strategy Officer, we have expanded our Management Board. Celia Pelaz will work on the further development of our growth strategy for which we have had the foundation in the past 5 years. Next. HENSOLDT's first half year growth was underpinned by a healthy influx of orders in both the Sensors and the Optronics segments. We already reported volumes for the German Quadriga program in Q1, where we have booked approximately EUR 100 million for the self-protection system and an additional EUR 200 million for the radar system in the first quarter. In Q2, we booked now another EUR 30 million for the production in the radar share, and it will be an ongoing order intake out of the Quadriga and the Eurofighter Mk1 contract and program. Our Optronics segment has also contributed very nicely with a strong order intake by booking a contract of around EUR 70 million on observation and reconnaissance system for the Dutch Army's Fennek scout vehicles in Q1. In Q2, we secured the order intake of PEGASUS, the German airborne signal intelligence system, in the magnitude of EUR 1.3 billion. HENSOLDT will act as a general contractor and will be responsible for the production of the entire reconnaissance technology. This landmark contract will manifest our position not only as a supplier for signal intelligence but also as the champion for airborne spectrum dominant solutions in Germany. Together with our strong baseline business, order intake in the first half year amounted to a total of EUR 2.1 billion, significantly up from the first half 2021 (sic) [ 2020 ]. HENSOLDT's involvement in the 9 procurement programs approved by the budget committee of the German Bundestag in June 2021, where we are involved, marks another significant business milestone in our history. Let me give you some ideas about these decisions. Looking ahead, the FCAS program has moved beyond the political wrangling with a budget approval in June. Our participation in this contract for the development of multiple sensor demonstrators expected later this year will enable us to acquire central system capabilities and puts us in a good starting position for subsequent development and production. And please always remember what we said during the IPO and since then in our analyst calls: starting with FCAS will deliver and provide to HENSOLDT a long-lasting growth potential where we are talking about multibillion-euro contracts to come in the next decade. Together with ELTA, another program, we will modernize the F-124 frigates as well as the long-range air surveillance system in Germany; in this case, with modern S-band radars which will also provide an initial capability for defense against long-range ballistic missiles. Another significant milestone marks our involvement in another project that will be groundbreaking for new platform programs, modernization of the EW suite, electronic warfare suite, of the NH90 helicopter. In this case, in addition to the missile warner and laser warner, the electronic warfare suite of the NH90 will also include the artificial intelligence-based Kalaetron radar warner for the very first time. This means that we have entered the market with a fully digital artificial intelligence-based Kalaetron, which opens further potential for the entire family and future helicopter and fixed-wing programs like the Eurofighter, like the FCAS program and so on. Similarly, if you look at the next page, the equipment of the German/Norwegian U212 CD submarines will boost our new generation of optronics products. The design of the boat includes a twin optronic mast, which moves the program from direct to digital vision. And again, digitalization represents the future of the market. With the experience gained from these programs, we are optimistic to prepare ourselves for all future customer requirements in this area. No less important are the other programs. For the first batch of the PUMA infantry fighting vehicle, we offered a sensor mix of vision systems for commanders and gunners as well as a self-protection system called MUSS. We are also focusing on the sensor mix of cameras and laser sensors for the fleet service boats of the German Navy, virtually the maritime counterpart of PEGASUS. If we look into the other European key programs. The major programs, as I already mentioned, besides FCAS, other programs like MGCS, Multiple Ground Combat System, but also the maritime airborne weapons system. Even if we believe that the maritime airborne weapon system will shift slightly to the right, we already got the first study to it. And we are waiting for a breakthrough in the major ground combat system negotiations between France and Germany. And also here, we are expecting, as you remember, a long-lasting order intake for this decade in a long-lasting business, which supports our growth over 2030. So before I hand over to Axel for a more detailed look at our first half year financials, let me quickly summarize. HENSOLDT is fully on track. We continue to walk the talk and deliver on our guidance. We continue to benefit from the growth momentum in the defense electronics sector. And we further expanded our position in Germany and in European key programs as well as getting more and more in the global business. Thank you. And with this, I hand over to Axel.

Yes. Thank you, Thomas. A warm welcome to this results call of HENSOLDT from my side as well. I'm pleased to provide you with details on our financials for the first half year 2021. In the second quarter of 2021, growth in our top line exceeds our own expectations. We were again able to secure a number of big orders. The most noticeable one is clearly the development and delivery of the airborne electronic signals intelligence system PEGASUS with a contract volume of EUR 1.25 billion. Also mentioned is an additional order related to the Eurofighter Quadriga program worth EUR 32 million. As you can see, our pipeline further transforms into order intake. In total, orders summed up to more than EUR 2 billion and thereby, increased our order intake by 90 percentage points compared to H1 2020. This results in a book-to-bill ratio of 4.3x. That again strengthened our excellent revenue visibility. Revenue is also above our own expectation and increased by 10.4% to EUR 486 million. The ramp-up of key programs developed as planned. All this results, again, in a firm order backlog at record level. At the end of first half year 2021, our order backlog was at EUR 5 billion and thereby, EUR 1.6 billion higher compared to H1 2020. This covers more than 3x our guided revenue for 2021. Overall, our bottom line developed as well above our own expectations. Adjusted EBITDA increased to EUR 44.1 million and adjusted EBIT comes up with EUR 18.1 million. Profitability slightly decreased, which is clearly related to the lower project margin for pass-through revenues. In addition, we further invested in research and development and increased bid budget to ensure future growth. For H1, the adjusted pretax unlevered free cash flow is at minus EUR 57 million. This is mainly driven by a planned increase in working capital, especially in inventories. To remind you, this reflects the typical course of our business, which is very much weighted to the second half of the year, and this year, that effect is additionally reinforced by our key projects in early stage. But let me point out that once again, pass-through business and major projects in an early stage developed as expected. Let me summarize the key takeaways for the first half of the year. Our pipeline further transforms into order intake. Order backlog continues to be at record level. We have a high visibility of revenues. Our KPIs exceed our own expectations in all aspects. And we confirm short and midterm guidance for all KPIs: further growth in top and bottom line, profitability remains on high level due to efficient project execution, further investment in technology leadership, operative cash generation enables further deleveraging. And now we are happy to take your questions.

[Operator Instructions] And the first question we received is from Christian Cohrs of Warburg Research.

I'll ask them one by one, if I may. First, you stated that H1 performance exceeded actually your expectation. You then also confirmed the guidance. But actually -- so did your buffer actually increase then for H2? Or what stopped you then to become more positive on the guidance? Or is it fair to assume that at least we should come at the upper end of your full year targets? That's question #1.

Christian, it's Axel speaking. First of all, as you know, I'm a very conservative CFO, and therefore, my own planning is, let's say, conservative driven. And therefore, I was very happy that I have missed my own expectation. I was really very pleased to see that I was too conservative. I think actually, in this moment in time, I would like to stick with my guidance which we have shared with you. That means EUR 1.4 billion to EUR 1.6 billion, a nice profitability increase and deleveraging to a level of 2.25. I think you have that in your models already. So we are on a very, very good track. And that is what I have mentioned with that. And therefore, so to speak, just in front of the holidays and looking to the figures, I'm very relaxed and very nicely pleased with the performance of the organization.

Okay. Second question then maybe on the Future Combat Air System. MTU Aero Engines just a few days ago, nudged the full year target for its military business slightly upward due to the political approval of budgets. So is it -- do you also expect some first revenues from this project already this year?

Yes. We do indeed. But we also planned for it's a very low level of -- I would say even in the very low 2-digit area. But we will see in the next years much more to come there. And please also take into account that the orders we will get this year in the demonstrator area, these revenues will bump in later than the -- for example, the Airbus, where they have earlier revenues also in France.

Okay. Understood. And then maybe the last question is -- so many companies who were still quite relaxed -- on material prices and the availability of material, who were relaxed in April, May, are now feeling increasingly uneasy about the situation. So what is actually your view on the bottlenecks in logistics and material and also material prices? Are you still relaxed? Or do you also notice some sort of change? And do you feel more uneasy about this current situation?

Christian, it's Axel again. So if we would have a video call, then we would -- you could look into my face. I'm very much relaxed. I have to say we are monitoring obviously, and that is our responsibility, our supply chain very closely. We are not right now seeing really some dark clouds at the supply chain sky. I think as you know, we are a project-driven business so we are not so much involved in the total supply chain. Second is we have -- in our inventories, we have stock level in place which has given me enough buffer time, and we are monitoring it so far. I can only say, right now, we do not see any kind of impact from 2021 year, and we will see what 2022 will bring up. But for me, I'm not really worried or I'm relaxed about the situation.

The next question we received is from Sebastian Growe of Commerzbank .

Three questions from my end. The first one is on PEGASUS. We had a quite material step-up from the about EUR 1 billion to the EUR 1.3 billion that you ultimately reported for this order value. Can you just walk us through the background of that material step-up, where it's originated from and if one can take also that as a blueprint eventually for other projects because of the before discussed raw material escalation, et cetera? Or how should we think about this increase?

Well, as Axel said, Sebastian, we are -- we want to be careful in what we are doing, and better to have positive surprises. But what has been behind the increase of the EUR 256 million, very precisely, to EUR 1.3 billion, if you round it, it's a little bit less, the content has been that the German Armed Forces wanted to have more in the plane than originally has been scheduled. So we are delivering a plane with more capabilities. And even if in the beginning they said, "We have no money to pay for more than EUR 1 billion," they said now, "Well, okay. But this is important, this is important." And therefore, we could increase the overall volume to this amount close to EUR 1.3 billion. Yes -- and yes, you're right. If you look into our programs and our planning for big programs, I think in most of the cases, we are realizing that the customer finally is prepared to pay for more than originally planned because we can convince him that if he pays a little bit more, he gets much more capability. And furthermore, once you are in such a big program, it's a really ongoing machine because a lot of things in these very complicated big programs are added later. And with a good claim and waiver management we have in place, we are earning during the course of such a program even more money. So I would not be surprised if the EUR 1.3 billion, the original contract for the 3 planes, will be -- in the next years until the final delivery, will increase. Yes, that's absolutely true.

Okay. Sounds good. And can I just ask a quick follow-up to that very question? So if one thinks about this very sort of order, quality of the extra revenues that you were able to book here, I don't know if it's really a bit too naive in the way of looking at it, but if I was to compare to the car industry, where, obviously, all the extra features are obviously quite lucrative in the margins perspective, how should we think about the sort of extra features? Would they usually sell at better margins at your end? Or is that simply not applicable because it's on a case-by-case basis?

Yes. It's -- indeed, it's true because all the add-ons which come in later will have a better margin than the original program. And this is going in the direction of upgrades and later, even the MRO, our service business. As far you go in these big programs, it's really -- it's a starting point once you are in to get more and more and more. And there's better margins than the original program, so it will be better in the future. And we have seen it in all our programs. If you are in, it's already with a good margin, but the margin will even improve in the future.

Okay. Sounds encouraging. The next one is on the pipeline on FCAS, Future Combat Air System. Can you give us a rough sense of what the order value might be? And then if you can also provide a bit of conservative number here.

Well, currently, it's difficult for me to say because the current order intake we are expecting for HENSOLDT -- you'll remember we are a part of a team, the FCMS team, Future Combat Management System (sic) [ Future Combat Mission System ] team. While it's a very high 2-digit number, but the real big order intakes will come in the next 3, 2, 4 years. And then we are talking about, well, beyond billions.

Okay. Sounds good. Well, the other question I would have had was more on the implied run rate for the orders. We're obviously seeing now in the guidance being at the upper bound, the EUR 0.5 billion run rate. From everything that I do hear and the comments you made earlier, I think there's a realistic chance that you might rather land at this very upper bound or higher. That is basically how I would summarize what you have been saying so far. That would be okay with you, right?

So Sebastian, it's Axel speaking. I would not like to change my guidance. And I think also Christian asked me the same question. I'm totally aware that you would like to have a more precise figure, but I would like to stick so far with my guidance. That means EUR 1.4 billion to EUR 1.6 billion in revenues and 2x in order intake above the revenues. That is what we are right now doing as a guidance, and I think that it should be also reflected in your models.