Hensoldt AG (HAG) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of HENSOLDT AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I know hand you over to Veronika Endres, who will lead you through this call. Please go ahead.

Good afternoon, everybody. A warm welcome to HENSOLDT's Full Year 2021 Preliminary Results Call. Thank you for joining us today. My name Veronika Endres, and I'm Head of Investor Relations at HENSOLDT. With me today are our CEO, Thomas Muller; and our CFO, Axel Salzmann, who will guide you through the presentation before we will enter into the Q&A. And with that, I would like to hand over to you, Thomas.

Yes. Thank you very much, Veronika. Ladies and gentlemen, good afternoon. It's great to see you joining today's earnings call in which we would like to present our preliminary results for 2021 to you. Before Axel Salzmann is going to guide you through our strong 2021 financial performance I would like to give you a brief overview on our business development and key strategic milestones we achieved last year. And we will, of course, provide you with an update of what we will focus on during the year to come and beyond. Following our presentation, we are happy to answer your questions. Yes. Ladies and gentlemen, 2021 was another very successful year for HENSOLDT. In a challenging market environment, we remain consistently on track and accelerated our growth momentum. And you will hear during the call how much emotional we are about this because we are a young company, and we achieved the walk the talk. We managed to reach or even exceed our full year guidance for 2021, with a 49% increase in our order backlog at 22% revenue growth percent revenue growth and an EBITDA margin of 19.4% before pass-through revenues, we successfully further consolidated our leading position as a European pure-play sensor solutions house. This is particularly remarkable given ongoing external headwinds like the COVID-19 pandemic and supply chain challenges. Our strong operational development enabled us to further deleverage and strengthen our balance sheet as you see in the slide. We are now at a leverage level of 1.6x. And with that, well below our initial full year 2021 target of 2x. Axel will elaborate on the financial performance in more detail later on. Now what are our key achievements in 2021? In a nutshell, as I said, we continue to walk the talk. At the same time, we also focus on driving forward our strategic agenda and to lead HENSOLDT into the successful future. A major step in further developing our company was the appointment of Celia Pelaz as a management Board member and Chief Strategic Strategy Officer of HENSOLDT. Having Celia onboard will allow us to elevate HENSOLDT's technological edge and strategic positioning even further. In 2021, we sharpened our corporate strategy with 4 strategic vectors in which we will expand our operations going forward. First, our journey towards an integrated solutions provider for the most complex challenges our customers are facing. Second, the material growth potential we see in data analytics and artificial intelligence. Third, the -- sorry, the strained expansion of our international footprint. And fourth, security areas that are technologically adjacent to our defense sectors. On this journey, we have already made substantial progress over the past 5 years. This allowed us to, once again, secure major contract wins throughout 2021 and to build a record order backlog in a full year perspective. But this is not all we achieved in 2021. As a leading company in the defense industry, HENSOLDT has a special social responsibility, particularly in the field of sustainability. According to an ESG rating by Sustainalytics, HENSOLDT is already a leader, a benchmark within the aerospace and defense industry. We will further strengthen our sustainability pledge and therefore, rolled out a group-wide ESG strategy last year. Our ambition is clear. We want to set the sustainability benchmark for our industry and play a critical role in trailblazing CO2 reductions and sustainable energy storage solutions. We are committed to be carbon neutral within the next decade. What is even more special about our sustainability initiatives, many of them are rooted in our workforce, originating from personal initiatives of our team members. To me, this tells a lot about our HENSOLDT culture of entrepreneurship, commitment and passion. This pioneering spirit is actually the foundation of everything we do and we achieve. With our employee stock purchase plan, first launched in 2021, we further strengthened ties and invited our teams to invest in shared future success. More than 65% of all HENSOLDT employees in Germany, in France, in the U.K. and in South Africa signed up, an impressive response and another testimony of their strong identification with our company. As you know, we also saw substantial updates in our overall shareholder structure in 2021, with the 2 additional anchor shareholders joining KKR, the German government and LEONARDO, we now have a stable and promising shareholder anchor structure in place. And that will support our growth development further in the future. I will give you briefly some more background on our strategic partnership with LEONARDO as it will have strategic implications on our business and the technology development in particular. As you know, today, we already work together in a number of projects. This, for example, includes the Eurofighter radar and sales defense programs. In the future, we can imagine to cooperate in the U.S. markets, in air traffic management systems, in naval solutions and even in next-generation programs like the FCAS, like the Tempest and like the MGCS. Going forward, we aim to deepen this partnership and to build on our existing successful collaboration. This will be an important enabler for future order intakes, technological progress and geographical expansion. Ladies and gentlemen, I want clearly to point out, of course, it is important to underline that both companies, Leonardo and HENSOLDT will follow capital markets and antitrust law and are fully independent. Well, so what comes next on the technology and product side. The most important aspect we remain committed to excellence in execution and delivery of our project pipeline and major European programs. Our project pipeline stays in the order of magnitude of around EUR 10 billion. Let me give you a quick overview of the latest project and program-related developments. Halcon, the Spanish Eurofighter and Eurofighter Mark 1, as previously stated, we expect -- further orders with a volume of EUR 0.2 billion from Spain and further orders on the MK-1 this year and in next future. The F126, formerly known as MK-180 -- MKS180. The contract volume of EUR 0.2 billion -- for the 4 ships are with the respective OEM already, and we expect respective slowdowns in the coming weeks or months. Furthermore, the Eurofighter service contract with a volume of around EUR 0.3 billion matures. And next to this, all the transnational Europe plane programs like FCAS, MGCS, Eurotone continues to evolve, as I already said. Earlier, we briefly touched on our 2021 strategic update. Continuous innovation with our high-tech portfolio is a cornerstone of our plan. We will further strengthen HENSOLDT's position as a technology leader and lay the foundation for profitable lasting growth. This includes our Twinvis passive radar system, the 3-dimensional multi-mission naval radar Quadome as well as other solutions to detect and avoid potential threats. Including data analytics, artificial intelligence and cybersecurity solutions for both the defense and also adjacent security areas. Our geographical growth ambitions are geared towards expanding beyond our core markets with a special focus on the United States and Asia Pacific, beyond Europe. The driving force behind the expansion of our business is an ambition to better serve our customers, our clients globally. Against this backdrop, we also carefully assess on potential M&A opportunities as outlined in last year's Capital Markets Day. However, please bear in mind, our market screening will follow a very disciplined and opportunistic approach with targeted bolt-on acquisition opportunities only. And of course, in case we identify a potential target, any acquisition will be well within our leverage criteria. So as I said, HENSOLDT stays on track and walks the talk. Before I hand over to Axel Salzmann for a more detailed look at our 2021 financials, let me quickly summarize and developing -- our development during the last year. We remain fully on track. We have delivered a more than 20% increase in revenues in the project business. Higher revenues have translated into even stronger bottom line profitability and free cash flow. We are well positioned for 2022 with more than 90%, I repeat, 90% of our expected revenues covered by our firm order backlog and our recurring short-term aftersales business. And most importantly, we have set the baseline for further growth by sharpening our strategic priorities. Thank you very much. And with this, I'm happy to hand over to our CFO, Axel Salzmann. Axel, please?

Yes. Thank you, Thomas. First of all, a warm welcome to this results call of HENSOLDT from my side as well. I'm pleased to provide you with details on our preliminary financials for the full year 2021. As the CFO of this company, I'm very proud of what we have achieved with all our colleagues in the last year. We again transferred our strong momentum of the first 9 months into the fourth quarter 2021 and realized significant growth in our top line. We have achieved a record high order intake with orders summing up to more than EUR 3.1 billion. Compared to the strong full year 2020 order intake, it thereby increased by 25%. This results in a book-to-bill ratio of 2.2x, which is totally in line with our guidance specified in November. The order intake development was strongly driven by the PEGASUS contract and an additional order for the Eurofighter Quadriga program. Also, we received significant orders in the division optronics and customer service. As you can see, our pipeline further transforms into order intake. Our revenues increased by 22% to more than EUR 1.4 billion, which is in line with our guidance. This is driven by sustainable growth in both segments, most notably, of course, to the key programs which developed as planned. Our strong book-to-bill ratio results in a very strong order backlog. At the end of order backlog was at EUR 5.1 billion and thereby EUR 1.7 billion higher compared to full year 2020, a plus of 49%. This covers around 3.5x of our revenues for 2021. We did not only grow top line. We also delivered on profitability and cash flow. Adjusted EBITDA increased by 19% to EUR 261 million, and adjusted EBIT came in at EUR 199 million, which is also an increase of 19% compared to the full year 2020. Relative profitability improved as well. With an adjusted EBITDA margin, excluding pass-through revenues of 19.4%, we are exceeding our guidance specified in November. The positive development is related to higher volumes and a favorable product mix, partly offset by lower margins for projects in early stage of life cycle. In addition, we continue to invest in research and development and increased bid budgets to ensure future growth. In 2021, we also generated a very strong cash flow from operating activities. The adjusted pretax unlevered free cash flow for the full year 2021 rose significantly to EUR 252 million, which is an increase of 28% compared to 2020. The cash conversion rate amounted to more than 95% of adjusted EBITDA and therefore, also exceeds our guidance. This performance further improved our leverage position. In the sensors segment, we booked many contracts following the approvals of several strategically important programs by the German government in 2021. The biggest contract relates to PEGASUS and the orders for the Eurofighter Quadriga program, but also to the delivery of long-range radar for the German air-based surveillance and the monetization of the F124 frigates and a mobile system for tactical radio reconnaissance of 2 NATO countries. In total orders in this segment summed up to more than EUR 2.7 billion and thereby increased our order intake by 24% compared to full year 2020. This results in a book-to-bill ratio of 2.4x. Revenue in the sensor segment by 24% to more than EUR 1.1 billion. Main drivers are the key programs, Eurofighter CAPTOR Mark 1 and PEGASUS our legacy business. And also in customer service, we increased sales significantly compared to 2020. The adjusted EBITDA of the sensors segment was driven by the revenue increase and a beneficial product mix whilst pass-through revenues and projects in early stage of life cycle with lower margin profile developed as planned. Also the optronics segment has contributed significantly to our success in 2021. Order increase increased by 31% to EUR 405 million and was driven by Fennek Netherlands, [ Paris ] code systems for tanks. Further highlights a contract for the equipment of the German Norwegian U212 CD submarines with twin optronics mask and our high-performance optics FFM. Especially the U212 CD contract is a long-lasting program and will boost our new generation of optronics products. Revenue development in optronics shows a sustainable growth with an increase of 15% to EUR 332 million and a book-to-bill ratio of 1.2. The entire business developed as planned with ground-based system and security solution. Adjusted EBITDA at Optronics traded 4% higher at EUR 68 million. In terms of deleveraging, we are fully on track. Thanks to our strong cash flow generation in 2021, we were able to further reduce our net debt to EUR 425 million, equaling a net leverage of 1.6x. In doing so, we did not only confirm, but even exceed the guided net leverage of around 2x. This also results even more beneficially margin reset for TLB and RCF and helps to further reduce capital cost. What does it mean for our dividend proposal? We have guided a payout ratio on a pro rata basis of up to 20% of the adjusted net income. Due to the excellent business development, the Management Board intends to propose a dividend per share of EUR 0.25 to the Supervisory Board and then to the AGM. This corresponds to around 22% of the adjusted net income in 2021 on a full year basis. 2021 was an excellent year for HENSOLDT. As announced during the 9 months analyst call, we have slightly updated and further specified our guidance for 2022 and midterm. Book-to-bill, we expect the book-to-bill ratio to be above 1 for 2022. From 2022 on and beyond, we expect this ratio to stay over 1. Revenue, for 2022, we are highly confident to generate a revenue of around EUR 1.7 billion and thereby achieve a mid-teens growth compared to 2021. This is supported by our very comfortable order backlog that provides an excellent visibility of revenues. For 2023, we expect growth in the mid- to high single digit and then mid-single-digit growth going forward, supported by our strong order pipeline. Adjusted EBITDA, for 2022, we expect adjusted EBITDA to be in the range of EUR 285 million to EUR 300 million. For 2023, we expect an adjusted EBITDA margin of around 19% and excluding pass-through revenues of around EUR 150 million. Going forward, we aim at an adjusted EBITDA margin of more than 19%. This excludes revenue -- pass-through revenues, which we expect to be around EUR 100 million. So when we look at our core business over the medium term, we expect to see the sort of enjoyable margin that we have seen in the past. For the adjusted pretax unlevered free cash flow, we strive for a cash conversion of around 70% on adjusted EBITDA in 2022. For 2023 and beyond, we expect the overall net working capital position to stay relatively stable in absolute terms and to slightly decrease as in a percentage of revenues. Net leverage, we are targeting a net leverage of lower than 1.4x for 2022. Here, we increased our guidance by 0.5%. This approach is taking into account our strong cash generation still having the room for dividends and small bolt-on acquisitions. As you can see from the slide, we have a clear vision and a plan for our business in the future and we are convinced of our ability to deliver these targets. With that, let me go over to my final slide to wrap it up. Coming to a conclusion. Let me mention the key financial key takeaways. In terms of visibility, we see that pipeline and key campaigns matured and a high revenue coverage from our order backlog with a ratio of 3.5x in relation to our fiscal year 2021 revenues. Our strong top line growth of plus 20%, 22% in revenue terms, reflects a step change in growth momentum and a significant development in order intake and revenues. Profitability stays on high level, allowing us to generate high positive net income and enabling further sustainable investment in bid budgets and R&D. Liquidity of the company is in a good shape, reflected by a strong operating cash generation and our deleveraging, which develops even better than planned. Our outlook is promising. Since the short and medium guidance is confirmed for all KPIs, and we stick to our dividend policy and will propose a dividend of EUR 0.25 per share. And now we are happy to take your questions.

[Operator Instructions] The first question comes from Ben Heelan, Bank of America.

So I had a couple. So you made some comments there on M&A and bolt-on M&A. Could you talk a little bit about the pipeline for M&A? Do you have targets that you're currently working on? And then beyond that, is there something that you consider that would be larger than bolt-on M&A.? That would be the first question. Second question would be on social taxonomy. I know the industry has been kind of rallying against potentially being classified as socially harmful. Are there any comments that you can make in terms of how you feel that, that process is going? That would be my second question. And then the third question, obviously, we've had the dividend announcement. The shares are obviously quite cheap at the moment and the cash generation is good and the leverage is low. Have you guys considered other forms of capital return in terms of buyback?

Okay. So Thomas speaking. Thank you for your questions. And I will start with the M&A question. The answer is, as we said, we are very carefully analyzing what are interesting targets to further support our technological goals and to support our global reach. I have to say it is a principle of our company to very, very carefully analyze if the acquisition is accretive from the very first beginning in this respect and all the supporting sustainable profitable growth. For the time being, we are looking on a very opportunistic base on targets. But we have none, which is so, let's say, maturing that we can say, okay, there are the 1 or the other in this area. But we are looking permanently on interesting targets and especially on the bolt-on acquisition strategy. Second, taxonomy. I would like to ask -- to answer too. As we know that in Brussels, there are discussions ongoing on taxonomy. Taxonomy, having the overall defense industry being best, how to say, qualified as being neutral. Here, we have clearly to say game is not over, not at all. During the Munich Security Conference, we just had a discussion with the commissioner, [ Joe Proto ], who is in charge of Defense and Space. And there has been a clear statement that as it has been considered so far up to now, it will not go through because it's contradictory to the targets -- political targets the European Union is currently setting. So we are not at all afraid about this and perhaps ask our CFO, Axel, can give you an idea that we have a very promising outlook for our financing. And third part, I would anyhow like to pass to our CFO, Axel.

Yes. Thank you, Thomas. I would like to ask your third question concerning all considerations around our strong cash flow profile, and how we would like to act. I think right now, we come to the conclusion that the best sense is to pay out EUR 0.25 dividend to our shareholders, at least we will propose that to the AGM, and obviously, we will have a look to all other different options, which we may have. But so far, we have not taken a decision besides the decision proposing to the AGM and the Supervisory Board at EUR 0.25 dividend.

And the next question comes from Christophe Menard, Deutsche Bank.

I had a few questions. The first 1 is on the pass-through revenues in 2021. I have a number around EUR 120 million. Is it something -- I mean, can you confirm that number? And what would be the level in 2022? That's the first question. I'll follow up with the others, if you allow.

Christophe, it's Axel. So you are quite right, EUR 120 million, a little bit higher. But I think this number is something which you could figure into that I would go a little bit higher, but precisely it is correct.

So in 2022, more or less the same number you would expect?

No. For 2022, we expect EUR 150 million.

Okay. That's okay. The second question was on the margin. You are -- I mean you had a remarkable good margin ex past -- ex-PAT at 19.4%. And you are guiding to a level, I mean in 2023, around 19%, but still reading your presentation, I get the impression that your profitability will improve because some programs will move from early phases to more mature phases. So my question is for -- I mean, 2023, in particular, where you guide to around 19% pre ex pass-through, is it a conservative guidance? Or what is the product mix you're talking about in 2021 that was so strong to make that 19%, 24% margin.

So Christophe, as you know me, and I think we have talked a lot. I'm maybe that disadvantage to me as a CFO, but we're on the conservative side, and I would like to stay on the conservative positioning in terms of guidance. What I clearly can say is that the margin and the improvement and the execution of our programs are really satisfying me because I do see clearly in each one of these projects that they are really doing the best to improve margin year-by-year in all aspects of the programs. And that makes me really happy because you may remember, when you're comparing our margin with our peers, then we are really at a very high side of that, not to say benchmark, but we are really clearly in the best of the range.

Okay. So it means there is upside to what you announced and that's my understanding. And the third question was on the customer service business. You are saying in the presentation that you had a strong year in 2021. Can you -- I mean, we don't have the granularity. Is it NEXAYA or is it your recent acquisitions in -- I don't know whether you classify this in artificial -- I mean, artificial intelligence in this. But what does it relates...

Christophe, don't mix it up. It's not related to NEXAYA. It's clearly our core business, our new contracts, our development in terms of Eurofighter, maintenance contracts, they are increasing the revenues quite nicely and the profitability as you could imagine is really on the high side.

Okay. I understand. And last question is, in the press release, you were talking about Asia as a geographical focus. And in this call, you've talked Asia and U.S. Should we understand that U.S. is essentially something you would like to explore with your partner or your shareholder, LEONARDO? Or is it an area where you also intend to set up your own office, I mean sales offices? I mean the question is more about your U.S. strategy.

I can -- I'm happy to answer your question. We had an intensive discussion in our company how to best deploy our products on the U.S. market and to further go ahead. The customer -- the U.S. customer, the DoD anyhow is quite convinced about the performance and quality of our products. But we have to have a footprint in the United States. This is clear to produce and even adapt or further develop our product there. Now we decided to have the best, let's say, way and price and performance relationship, together with our partner and shareholder, LEONARDO. As far as I said, antitrust is possible. But here, we have a clear project, so we can do it and to serve the U.S. market, together with our shareholder and together with LEONARDO as a partner in the U.S., and we are happy to do so.

And the next question comes from Christian Cohrs, Warburg Research.

Just 2 left from my side. First, as some sort of clarification. You were actually guiding for 2021 CapEx in the magnitude of EUR 85 million. now if I'm not mistaken, your 15% to 20% higher. Is this a matter of higher purchasing costs? Or have you simply done some pulling forward? Or is this due to pulling forward effects and so that there would be some sort of relief in 2022? And second question relates to the German defense budget. There -- according to my knowledge, there are currently negotiations between the finance minister and the German DoD. And do you have already heard something? Or do you have some knowledge how the German defense budget is going to going to evolve in the years to come? Is there a further increase? And would this also then be linked to further potential on your -- additional potential on your order pipeline?

Axel, I would say you take the first, and I take the German budget then.

Yes, for sure. First of all, Christian, -- it's nice that you have really my guidance in your mind. But maybe you have not read that is before M&A. So the slightly overrun on CapEx, it's related to M&A costs for a small acquisition, which we did in the past. So we are guiding the CapEx for the total company. And then we are saying, okay, look, we will not -- we do not know exactly if there is something of minor investments in terms of let's say, analytics whatever. And therefore, we have slightly overrun our budget in this structure. But I think what is more essential to me is that these writing is coming up with really interesting business opportunities and new products, which are adding on to our product portfolio. Is that okay for you, Christian?

Yes, it's okay. Fine.

Then I take your question concerning the German budget. As you know, there are quite a lot of big programs in discussion in the German as a requirement from German MoD. We have the clear statement of the German chancellor that we need to have an army, which is operational, Bundeswehr, which is operational German forces, which has been also confirmed by the Defense Minister and beginning of this week by the Finance Minister. Now, no one is really sure about what's happening with the German budget. There are a lot of requirements for increase of the budget. But if you take the decisions which may come in the next couple of weeks even, we, as HENSOLDT, will be within all the programs, which will be decided for the next future. So we are in the one area, in the other area, we are participating in it and this is, I think, something which we can take as I'm extremely careful because up to now, we have based our planning on the existing plan for the next year's defense budget. If the budget will be flat or even if the budget will grow, then for sure, we will participate in. The current plan is based on the original forecast of the interplant fits in of the budget in Germany. So yes, there may be an upside potential because we will participate in decisions, which will come up in the next couple of weeks or months.

That's clear.

And the next question comes from Aymeric Poulain, Kepler Cheuvreux.

Yes. The first 1 relates to free cash flow and the guidance for 70% free cash conversion. First of all, could you tell us if there was any one-off items in the 2021 free cash generation, which was particularly strong? I know you used in the past some factoring. Perhaps there was some effect -- one-off effect like this that you could point to. And also for the 2022 guidance, could you give us a bit more granularity on the bridge to reach that? If I look at your net debt to EBITDA guidance and apply it to the EUR 300 million EBITDA, I get to a very low net debt reduction. So I'm just curious about how you reconcile the 70% free cash conversion and virtually very limited net debt reduction. So that would be very helpful, please. And as a follow-up to that, you have this pass-through sales, and I think you guided for EUR 100 million in 2022. I suppose it's around the PEGASUS project. Could -- are there specific working capital or supply chain risk attached to this project that you manage as a prime? So that would be also helpful to know as the project is ongoing. And last but not least on M&A, what would be the firepower you think you have right now given your leverage capability? And given the low multiple applied to the share price of HENSOLDT, have there also been any consideration for share buybacks in case that could be more value in anything for right now?

Aymeric, it's Axel. First of all, congratulations to you a nice calculation concerning my leverage guidance. I have to say you are right. I'm very conservative. I would like to stay with 1.4x. But I think you are right, then it would mean that we have a very low cash conversion, but we will see how it turns out. So far, I have no doubt that we are clearly below 1.4x. Second, as usual, we have done some factoring, but less than in the year 2020 and that shows our strong ability to transform our EBITDA into cash. I think with EUR 252 million in cash terms, that really shows our ability to generate cash for the total organization. Concerning your question if we have considered share buyback, I can only reiterate what I have said a little bit earlier, we are considering each and any time what we are doing with our strong cash profile, but so far, we have not taken the decision to go for share buyback, which means we have not excluded -- we will not exclude that. But so far, we have not taken the decision, and we will pay out 25% -- EUR 0.25 per share as a proposal to the AGM. Lastly, M&A. I think Thomas has outlined that very clearly that we are looking for bolt-on acquisitions, and we are looking to the ability to strengthen further our organization in all aspects. As you know, we have a strategic set up for M&A. It means portfolio enlargement coverage of countries enlargement and new technology, which will add on to our products. So that is the way how we are looking to that. And I think so far, we do have the firepower in place to serve all these thoughts which we have in mind.

[Operator Instructions] The next question comes from Sean Stewart, JPMorgan.

Yes. Just coming back to the free cash flow and the leverage performance and you obviously came in a lot better or quite a bit better than you guided on the leverage side driven by the free cash performance. I just wondered if you could maybe give a little bit more color on what drove that better cash performance. Just elaborate a bit more on the last question. It looks like you benefited a lot from payables, just looking at the cash flow statement. Should we assume that a lot of that reverses next year in terms of that payables number? And then on R&D, I just wanted to ask what you spent in 2021 on R&D if we compare that to the EUR 87 million that you spent last year. And you're talking about R&D going up in the coming years. And then finally, you still seem to have some of these nonrecurring items in your adjusted EBIT number. And I just wondered if you could just let us know what they are. I mean they seem to be coming down. But if you could just clarify what those items are and then perhaps what we should expect going forward on that as well.

Okay. I will take the question, Sean. First of all, nonrecurring items. They are mostly related to remaining IPO costs. For this year, we have, if I remember correctly, EUR 12 million nonrecurring items. I would assume in your models the same level, but as you know, nonrecurring is something which is not really foreseeable. So EUR 12 million is something which I could bring it to your model as well. Second, yes, we -- the aim for the cash flow for the next year is to further work on net working capital to improve our net working capital structure. That is something which I'm very keen on because I know that I'm not really on a comparable basis with my peers. That brings me more cash flow to my balance sheet. As I have said a little bit earlier, I was really -- I'm really conservative when I'm talking about my deleveraging -- my leveraging target is 1.4x. I think we will see a nice conversion. If you are taking, for example, 70% cash conversion rate, then you can easily calculate that you are really below this 1.4%, but I would like to say with this guidance so far, and we will see how it turns out in the first quarter. So 1.4 is really conservative. Cash flow positioning, I'm fine. I think payables, we are really okay, I would say. We can improve it slightly. What I'm more keen about is how to deal with my receivables and my stocks, where we have some opportunity, especially in optronics, where we can improve that further. You know that in the optronics business, we are a product business, and there we have more opportunities to reduce our final stock positioning. Through -- all these measurements are already in place. We have installed a program, as you know, it's HENSOLDT GO! Wave 2, and that will bring us further improvement in our cash flow positioning, especially in the net working capital.

And on the R&D, just compared to last year, an $8 million to $20 million.

Same level. I think that is what we have guided for since our IPO. And I think that quite the right level to improve and to strengthen our portfolio and to materialize on that. So I feel myself very much comfortable with the investments which we are doing in terms of R&D.

Can I just ask one more follow-up maybe for Thomas? Tom, you spoke a little bit on the defense budget and the potential that the new German government could -- that budget could change under the new government, and we could see perhaps lower defense. I think you also spoke a little bit about upside in the case that perhaps that budget is lowered, but I wondered if you could just clarify what you meant on that? I might have misheard you, but...

Yes, I think I didn't express myself very clearly. Now the current planning is based on what is actually planned for the next years. We are, as you know, enhancing in any case, whatever the budget development will be the content of defense electronics in the platform. And therefore, we will have a growth, even if the budget is flat or slightly decreasing. But as I said, the intention of the German government following the statements of early this week and the weekend shows that there is a certain necessity to increase the budget. And we, as being part of nearly all upcoming new programs, we will benefit from it on top of what we have seen up to now.

And we haven't received further questions at this point. I will hand back to Veronika Endres.

So yes, thank you all for listening, and thank you for your questions. And as usually, should you have any further questions, the IR team is happy to follow up by e-mail or phone. Have a great day. Thank you, everybody, and goodbye.

Thank you very much from the CEO. Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.