Hensoldt AG (HAG) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to Hensoldt Full Year 2023 Preliminary Results Call. Thank you all for joining us today. I'm Veronika Endres, Head of Investor Relations at Hensoldt. Today, our CEO, Thomas Müller; our designated CEO, Oliver Dorre; and our CFO, Christian Ladurner, will talk you through the results presentation. And as always, this is followed by a comprehensive Q&A session. And with that, over to you, Thomas.

Thank you, Veronika. And ladies and gentlemen, a very warm welcome from my side, too. Well, 2023 was another good year for Hensoldt and we have fully delivered on our full year 2023 guidance and even exceeded in some of our KPIs. I'm especially proud of the increase in revenue quality where our core revenues have increased by 16% compared to 2022. EBITDA grew by a healthy EUR 37 million, once again highlighting our ability to convert our order book of currently EUR 5.6 billion into profitable business. Our excellent cash conversion allowed us to further deleverage our company to 0.9x before the capital increase. I'm proud to say that we have once again walked the talk delivered on our promises and continued to strengthen Hensoldt as a long-term high-growth investment platform. Ladies and gentlemen, 2023 was again rich in important milestones and strategic achievements. Right at the beginning of the year, our Federal Chancellor Olaf Scholz, visited our site in Ulm to gain his own impression of our company's innovative products and key technologies. This visit by the Federal Chancellor underlined the significantly increased importance of our industry and supports my conviction that the Titan vendor can only succeed with a wide political framework, a well-equipped [indiscernible] and an efficient defense industry. And by the way, Hensoldt has been the first defense industry, the Chancellor officially visited last year. Our mission to the second highest German share index, the MDAX in March 2023, is the result of the good share price performance in recent months. The record order backlog and the increase in our company's turnover. With this promotion, we are now one of the 90s large listed companies in Germany in terms of free float market capitalization. In April, we announced the nomination of Oliver. Oliver Dorre as my successor in the role of Hensoldt's CEO. Oliver is with us today and will introduce himself later. Overall, we continued the generational change in the top management of our company last year. And I'm very, very happy and proud to have Oliver as my successor. And last, but certainly not least, shortly before Christmas, we announced the acquisition of ESG. This acquisition, the 9th and largest in our company's history fits perfectly with our overall strategy and accelerates Hensoldt's development into a comprehensive defense and security solutions provider. Christian will dive a little bit deeper in this part of the presentation, and we are very happy to give you a new guidance starting in the second quarter of this year under the leadership [indiscernible] including ESG for sure. Now our center segment contributed significantly to our 2023 order intake. For example, we sold more than 20 of our world-class TRML-4D radars to various customers and booked a landmark contract for short and very short-range air defense called NNbS with our German customer in January. And dear ladies and gentlemen, this is only the first milestone. This is a development and first deliveries of a long lasting decade and even more along air defense short-range program we are embarking upon with our partners. Further on, we expanded the contract for the Eurofighter MK1, with an order worth EUR 100 million and booked a number of R&D contracts for the future combat air system amounting also closely to EUR 100 million. And there is much more to come there, too. In the Navy business, we sold TRS-4D radars. You remember TRS-4D is the same family as our TRML-4D, both to Taiwan, very first time with a huge further outlook in Indonesia, highlighting our ambition to further grow in the future, our international business specifically also in the APAC region. Now Optronics. Our Optronics segment had a record year in terms of order intake and booked more than EUR 0.5 billion worth of contracts. And here, you see the investments in our Optronics business are really paying off. At the year-end, as you see, there has been EUR 0.5 billion, even more than EUR 0.5 billion order intake for them. The high demand for armored vehicles like the Puma infantry with fighting vehicle and the Leopard 2 main battle tank contributed about half of this order intake, showing proof that the Titan vendor now really materializes for us. Our civilian business was high end precision measurement technology for the chip manufacturing industry again contributed nicely to our orders and our periscopes and Optronic mass systems generated orders in the international market. Dear, ladies and gentlemen, dear analysts and investors, let me give you some color on defense spending in Germany. Some of you remember our Capital Market Day last year when the German government announced a budget fees after the ruling of the Constitutional Court. I'm happy to report that this budget fees had 0, I repeat, 0 impact on our business and we are now operating on an agreed and validated budget for 2024. Defense spending in Germany is at a historical high of around EUR 80 billion taking into account the regular defense budget, the special fund and the additional budget for military support of Ukraine. It's numerous political statements underlining the need for growing defense budget beyond the special fund. We are confident that Germany will continue to spend around 2% of GDP for defense on a sustainable basis. And I can tell you, this has been reconfirmed again and again in various discussions with senior German political leaders, Oliver Dorre and myself had at the Munich Security Conference last week. Ladies and gentlemen, you know very well this slide. We talked about all quarters, and I don't want to step into the details. The point I would like to make here is that this rich opportunity set across all domains and many platforms stems from our position as a hold of national key technology. It shows how deeply Hensoldt is embedded in key German programs than we are the core of German defense electronic capabilities. With high visibility of opportunities and close customer proximity, the German programs are a foundation for growth and our launch pad for upcoming next-generation programs. And please always keep in mind as stronger our national market is more we have a reference on the global markets. Highlighted in yellow, you'll find the German key programs that have materialized in the past year and led the foundation for the solid growth of our business. As we continue again in 2024 with high demand, especially in the area of air defense radars and armored vehicles. In addition to our very strong business in Germany, we are continuing to develop our end, ladies and gentlemen, not only continuing, we are expanding our international business. We are leveraging our world-class product portfolio in combination with our excellent positioning in key markets and with key OEMs, ground and ship-based air defense under the umbrella of the European Sky sheet initiative known as Asian Eastern Europe and airborne self-protection mainly in the Asia Pacific region will be the driver to our international order intake in 2024. In addition to that, Optronics for armored vehicles such as Leopard and M1 Abrams and periscopes for submarines, we constantly drive our international order intake in the near as well as the midterm due to our strong relationship with respective OEMs. And I want to remind you that we have Hensoldt, our world market leader in self-protection on flying platforms and in classical traditional nonnuclear submarines. Now top orders we are expecting in 2024 and beyond Oliver will talk about it. Now air defense radars. TRML-4D and Spexer Radars, we expect only in this year beyond 2024. But I think, Oliver, you can say a word on the future as the TRML-4D?

Well, of course, thanks, Thomas, and a warm welcome from my side as well. Looking at my military background, I can state that air defense, of course, resonates very well. So far, 20 nations have joined [ SE ], and you just mentioned the Munich Security Conference where I think with some testimonials of President Zelenskyi and also a couple of testimonials of military leaders. It is very clear that air defense is at the top of the requirements of our customers. TRML-4D is battle proven in Ukraine. And I think that guarantees us, as Hensoldt, a huge market share in this current upstream for air defense. So just as a background, if you look at the nations and of course, depending on the geography, we can assume 3 to 6 radars per country. At least. So -- and more nations would joint and hence, beyond what is denoted on the slide, I definitely see a market potential that would significantly exceed EUR 1 billion. That is clearly a target for Hensoldt. And with my former background as an Air Defender, it's a clear target for me as well.

Thank you, Oliver. This is the future. And we will continue to grow across all domains and especially in different geographies. Europe will continue to be strong. And also Spexer 2000 will be one of our close and very close air defense radars going into absolute serial production. On top of this, Eurofighter business will again contribute significantly to order intake, both in radar and self-protection as well as armored vehicles like the Leopard 2 and the Boxer. We also see good potential in international markets, for example, with our airborne self-protection systems, as I mentioned, being a market leader. And this is a positive outlook, I hand over to our CFO, Christian Ladurner.

Thank you very much, Thomas. And I'm happy to provide you now with the details on our preliminary financials for the full year 2023. As a CFO, I'm proud of what we've achieved with our challenges in the past year. Once again, we were able to realize an excellent performance of our top line in 2023. Order intake developed strongly with orders summing up to almost EUR 2.1 billion and has exceeded the previous year's high figure. The book-to-bill ratio amounted to 1.1x, and hence, fully in line with our guidance for 2023. This performance was mainly driven by our Optronics business with orders for the Puma and Leopard 2 platforms as well as by new contracts for TRML-4D radars and the Eurofighter MK1 program in the Sensors segment. The distribution of incoming orders was very well balanced between our home market Germany and Europe. Our revenue increased in line with our guidance by more than 8% to EUR 1.85 billion. And more importantly, with a significant growth of core revenue by 16%. This is a result of the excellent development of our baseline business and a decline of pass-through revenue in our 2 key programs, Eurofighter MK1 and PEGASUS. Both programs developed as planned and contributed to strong performance as well as our TRML-4D radar. All this is reflected in a very strong order backlog. And at the end of the financial year 2023, our order backlog summed up to more than EUR 5.5 billion. This corresponds to around 3x our revenue in 2023 and therefore, continues to provide us with an excellent revenue visibility. The strong performance of our top line is also reflected an excellent development of our profitability. Adjusted EBITDA increased by 13% to EUR 329 million, with an adjusted EBITDA margin of 17.8%. Our core margin, excluding pass-through amounted to 19.9% and therefore, exceeded our guidance of around 19%. Adjusted EBIT summed up to EUR 246 million. With an adjusted EBIT margin of 13.3%, respectively, 14.8%, excluding pass-through revenues. The increase was driven by higher volumes and the significant growth of our core revenue as described earlier. On top, we were able to realize economies of scale on programs, such as the TRML-4D. This development was partly offset by investments in our growth and into our product portfolio. Our cash generation in 2023 was excellent, too. Supported by the achievement of major milestones in our key projects, the adjusted pretax unlevered free cash flow reached EUR 259 million, an increase of 18%. Despite the continued investments in working capital to support the upcoming growth, cash conversion amounted to around 79% of adjusted EBITDA and therefore, well above our guidance of 70%. Looking ahead, we will simplify our cash flow KPI, as already announced at our Capital Markets Day. From this year onwards, we will guide and report on the KPI adjusted free cash flow. And to already give you some flavor, adjusted free cash flow for full year 2023 amounted to EUR 198 million. To wrap it up, our overall bottom line developed excellence and outperformed our guidance. Let's now have a look at our segments. In the Sensors segment, we again realized a strong order intake. The biggest contracts were the before-mentioned TRML-4D radars, the Eurofighter MK1 rebaselining contract and national R&D studies for the FCAS program. In total, orders in this segment summed up to more than EUR 1.5 billion. And as a reminder, last year's order intake included key orders for the equipment of F126 free gates, the Eurofighter C3 service contract and the Eurofighter Halcon program with a total volume of more than EUR 600 million. Revenue in the Sensors segment increased by 10% to EUR 1.5 billion. And again, I want to highlight the significant growth of our core revenue with an increase of 20%. Main drivers of this performance were our baseline business as well as our TRML-4D radars. Our key programs, Eurofighter MK1 and PEGASUS are developing as planned and also contributed very well to our revenue. As explained in our last earnings call, we successfully passed a major milestone in the PEGASUS program last September, once again demonstrating our capabilities to manage and deliver these complex projects as a prime contractor. The margin development of the sensor segment was excellent, with an increase in adjusted EBITDA of more than 30% to EUR 306 million. The uplift in absolute margin was driven by high volumes and by economies of scale in some programs. For example, TRML-4D. In the Optronics segment, we achieved a record order intake of EUR 510 million, which corresponds to an increase of more than 50% to the previous year. Key drivers were the second batch in retrofit for the Puma, Optronics' systems for the Leopard 2 main battle tank, periscopes and optical mass systems for the Norwegian newly class submarine and our high-performance Optics FFM. Sales and Optronics were at previous year's level. As the large orders will take some time to convert into sales, they did not boost revenue growth. At the same time, we continuously ramped up production in 2023 in order to prepare for the upcoming growth. However, with a record high order intake, we have set the basis and excellent visibility for a smooth and sustainable revenue growth in Optronics in the years to come. Main revenue drivers in 2023 were again our high-performance optics FFM. The M1 Abrams laser rangefinder as well as periscopes and Optronic mass systems for submarines. Adjusted EBITDA of Optronics amounted to EUR 24 million. Please be reminded that the decline was driven by investments in the ramp-up of our production as well as into digitalization of the Optronics portfolio in order to realize the upcoming growth. So let me point out again, the growth effects that have weighed in Optronics performance in 2023 are of structural nature, but necessary to secure the upcoming growth. Let me now give you an update on our net debt development. Over the past 3 years, we have continuously reduced our net debt. At the end of 2023, net leverage was at 0.2x. This figure includes the capital increase we conducted to partially finance the acquisition of ESG with net proceeds of EUR 234 million. Excluding the effect from the capital increase, net leverage would be at 0.9x, fully in line with our guidance of lower or equal than 1x. For the full year 2024, we expect net leverage to be at a level of around 2x, taking into account the financing of the ESG acquisition and further effects from lease liabilities. As already announced in our H1 2023 call, we have decided to prolongate some of our existing real estate lease contracts in order to be prepared for the significant growth ahead by securing our production capabilities in at once. This leads to an increase of our lease liabilities according to IFRS 16, but has no impact on our [indiscernible] cash generation. Let's have a look at our dividend proposal. We have guided a payout ratio of 30% to 40% and the adjusted net income in 2023. Adjusted net income in 2023 summed up to EUR 119 million. This is slightly below last year's figure. Main driver of this development is a negative valuation of our interest hedge derivative, which is a pure accounting effect with no impact on cash. And quite the opposite, until today, the hedging of our interest rate has already saved us almost EUR 2 million. Despite this effect, we will continue to pay a healthy dividend. Due to the excellent business performance and a strong cash generation, the Management Board intends to propose a dividend per share of EUR 0.40 at the Supervisory Board and the AGM. This corresponds to 39% of the adjusted income 2023 and thus is at the upper edge of our dividend guidance. Let me now present our specified guidance for the financial year 2024. And as you know, we are still in the closing process of the ESG acquisition. And therefore, this guidance is purely organic, excluding any contributions of ESG. I will give you more details about the process in a minute. We are aware that the consensus currently reflects a mixture of estimates on an organic basis as well as estimates already including the ESG acquisition. Ignoring the ESG contribution in these estimates, consensus will be broadly in line with our 2024 preliminary guidance, which overall confirms what we already have communicated to the capital market back in November. For book-to-bill, we continue to expect strong order intake performance with a book-to-bill ratio between 1.1x and 1.2x in 2024. We expect revenue to grow to around EUR 2 billion in 2024 and very important to highlight with the continued stronger growth in core revenue and a smaller share in pass-through sales than the years before. For adjusted EBITDA margin, we specify our target to a range of 19% to 20% before pass-through revenue. As explained earlier, we are simplifying our cash flow reporting. From now on, we will report on adjusted free cash flow as our new KPI, replacing pretax unlevered free cash flow. For this KPI, we expect a cash conversion of around 50% on adjusted EBITDA. But please note, this change in reporting has no impact on our financial performance. The dividend payout ratio will continue to be between 30% to 40% of adjusted net income. And in the nutshell, in 2024, we still expect a continued high demand for our sensor solution, resulting again in a strong growth of order intake as well as a higher quality growth to a stronger increase in core revenue. We are convinced of the sustainable detailed loan growth potential that lies ahead in Hensoldt. This is reflected in our updated medium-term guidance until 2026, which you can see on this slide. Again, this guidance is organic only. So before any contributions of ESG. Let me highlight the following items. Firstly, we continue to expect order intake to grow significantly faster than revenue over the next years. As a result, we see an annual organic revenue growth of 10% on average for the medium term with a further decline of pass-through revenue. Secondly, we expect the adjusted EBITDA margin in a range of 19% to 20% before pass-through revenue also for the midterm. To secure this, we will continue to have a strong focus on cost management. With a continued strict work capital discipline, we will generate an average adjusted free cash flow conversion of 50% to 60%. So that we will continue to be able to pay out 30% to 40% of our adjusted income to our shareholders, while maintaining a conservative financial profile. Let's now talk about ESG by starting with a quick recap on the financials of the company. ESG is a strong business with a compelling growth and cash flow profile. This is backed by a strong pipeline with order intake opportunities of around EUR 5 billion in the next 5 years. Revenue is expected to be around EUR 330 million in 2023 with a low double-digit annual growth rate. ESG will already be accretive to our growth. EBITDA margin is expected to around 14% for 2023, with the high cash generation due to the CapEx-light business model. In addition to this very attractive financial profile, we see sizable cost and revenue synergy potential that will nicely contribute to our common growth ambitions. In terms of business seasonality, revenues of ESG are more balanced during the year than a standalone revenue profile of Hensoldt. The cash profile of ESG is heavily weighting towards Q1 while the cash generation of Hensoldt is very much Q4 weighted. Let me briefly summarize the strategic rational of the transaction. The acquisition is a decisive step for Hensoldt and will support our positioning as a leader in Europe. With the state-of-the-art innovation, software engineering and system integration capabilities, the company is highly complementary to our portfolio and fully plays into our sensor solution strategy. With its position as a partner to the German Air Forces and internationalize, ESG will strengthen our position for current and future defense programs, both nationally and internationally. ESG has proven across domain capabilities that will boost us to achieving our strategic aim to be the enabler for multi-domain operations. The combination of our skills, resources, expertise, market positioning and platform access allow for significant cost and revenue synergies. And the combined strong order backlog, large opportunity pipeline and a great cultural fit and shared vision, we will achieve our common vision for accelerated profitable growth. Let me now elaborate on the time line and the next steps. After we have signed the transaction on 5th of December, we have submitted the required filings to the respective authorities. We have made very good progress in the process and have received the required German approvals. Only one further approval is still outstanding, and we are confident that this outstanding approval will be received in due course. Against this backdrop, we expect that the closing of the transaction is likely to happen by end of Q1. Once the closing has been completed, we will provide an update of our guidance, including ESG to the capital market. Since the signing, we have started preparations for the PMI. And as soon as closing is take place, we will start the PMI process. Based on our experience from past acquisitions and the strong portfolio and cultural fit of ESG, we are very confident that the integration proceeds smoothly and successfully. Looking ahead, our priorities for capital allocation remain unchanged. Very clearly, our first priority is to fund and to prepare for the upcoming growth. This means above all investments in our workforce in our technology, in our IT systems and to a lesser extent, to upgrading our factories as these are not so much the limiting factors for expanding our capacity. Second, we want our shareholders to participate in our growth. So dividends are our priority #2. We will ensure this with a dividend payout ratio of 30% to 40% of adjusted net income. And third, we will continue to participate in M&A to strengthen our strategic pillars where we can. Also after the acquisition of ESG, we continue to be in a strong position to drive the consolidation in Europe and to pursue very accretive M&A. However, our focus of today is clearly a smooth integration of the ESG acquisition. Coming to a conclusion, let me mention the following key financial takeaways. In 2023, we have achieved an outstanding performance that will form the basis for another successful year 2024, driven by the high visibility of our business, the strong top line growth, an excellent profitability and liquidity in a great shape and a promising outlook on a long-term sustainable basis. And now I'm very happy to give the floor to our designated CEO, Oliver Dorre for his introduction. Oliver, please.

Thanks, Christian. And a cordial welcome to all of you from my side. Allow me first to briefly introduce myself prior to being nominated as the next CEO of Hensoldt. I was the Country Director and Chairman of the Management Board of Thales Germany, which is 1 of the 6 major country organizations of the Thales Group. In this role, I gained valuable experience in a large international group, including a number of transformational projects and tangible business successes. Both in Thales as well as my previous assignment with Frequentis, I have developed a passion for sales and business development. As Vice President, Sales and Marketing at Thales, I doubled the order intake from 2016 to 2020 to exceed EUR 1 billion, and I have transformed the sales and account management. Geographically, I have a strong background with the German market as well as a sound track record with customers across Europe, the U.S.A., Asia Pacific and the Middle East. Before starting my industrial career in 2010, I served with distinction for more than 20 years as a general staff officer in the German Armed Forces. My military expertise, rests on 2 pillars: armament and air defense. And now you understand why I highlighted the importance of SE looking at the future market potential. So 2 themes that in themselves resonate very well with Hensoldt. Based on my strong military heritage, I can say with confidence that I have a good understanding of the defense and security environment of the concepts of operation of our customers and the capability needs of the military and public safety markets. I'm most dedicated to provide our soldiers and security forces with the best equipment, thus delivering in time, in cost and with the best quality. Concluding my professional background, it is worth to mention that I studied computer science. I've gained practical experience managing real-time software development for air defense systems. I've pioneered the German Armed Forces IT system and lately serving Thales as a renowned digital thought leader, I have built up deep knowledge on connectivity, big data and artificial intelligence as well as cyber. Hence, I'm very determined and keen to boost Hensoldt's digital agenda. Let me now have a quick look at the key topics, which our Hensoldt management team will focus in 2024. Short term, Thomas and I, I have a strong and unwavering commitment to ensure a smooth transition and handover of the CEO role thus assuring business continuity and focusing our company's future success. I can say with full conviction that we have managed this task extremely well so far, and I would like to thank Thomas for your trust, for your openness and dedication in handling over your responsibilities to me. The potential I've discovered with Hensoldt is nothing short of extraordinary, setting the stage for a very promising future. The vibrant energy and spirit exhibited by the [ Hensoldtonions ] have really captivated me and my mission is to transform Hensoldt from great to excellent. Our robust business figures, as they have been presented so far and well-defined strategy provide in this regard, a very solid foundation. Now we stand on the threshold of a new phase for Hensoldt where our focus shifts to consequently implementing key elements of our strategy. While defense and security markets are continuing to show a huge growth potential, but also challenges remain complex and partially unpredictable. We will continue, as Thomas rightfully said, in the beginning, walk our talk and secure the growth path, which is clearly ahead of us. Based on my initial observations, I see 3 priorities on which we will focus our intention and concentrate our energy in 2024. All of this in a comprehensive and well-structured plan balancing 2 major dimensions. First, actively securing and sustaining our ability to deliver. And second, not just only achieving our growth ambition, but pushing even beyond. Therefore, our first focus area is on operational excellence, which means execution and delivery. With an order backlog of almost EUR 6 billion, our commitment to transforming these orders into profitable revenues is not only an expectation from our customers, but also from you, the stakeholders in the capital market. Successful execution hinges on the dedication of our divisions augmented by cross-functional support in areas such as bids and project management, supply chain, engineering and industry. in this focus area, I would also like to mention the integration of ESG in the coming months. Let us not forget that with the integration of ESG, Hensoldt will grow to more than 8,500 employees, and we have clearly defined an integration plan in mind once the transaction is going to be closed. The second focus area is on internationalization, which is a cornerstone to support and sustain our growth. Our ambitious growth target of at least 10% in organic revenues annually requires a strategic shift beyond our significant market share in Germany. We aim for a more balanced split between geographies, ideally reaching each 1/3 of the business in Germany, Europe and the rest of the world. Focusing on key international markets is imperative. We thoroughly look at our international setup comprising countries and regions as well as sales and business development teams. And we make sure that processes and responsibilities are finally tuned to deliver a maximum effect. Let me mention another example on top of the SE example that I already shared with you. This is that many European nations have started to backfill their equipment that has been given to Ukraine. And that is also the background of the growing vehicle business as it has introduced by Thomas. And here, definitely, we see an element of quantity on one hand and also the quality of new digital capabilities entering those vehicles, and that is a huge business ahead of us. We're also in the international campaigns, we can leverage on the strong successes, success stories that we share with our German national customer. Third and last but for sure, and you know it, not least, is the digitalization. The disruptive influence of digitalization on our business requires the development of a concrete road map for the next generation of products, aligned with our customers' evolving needs. While today our business is strong, we need to anticipate tomorrow. Emphasis is on increased connectivity between our products, on data centricity, intelligent integration of artificial intelligence. System of systems, software-defined defense are paramount. Smart partnering is crucial for agility and rapid market entry, allowing us to concentrate internal resources on key technologies. In summary, we will rigorously drive an effective evolution of our business, thus preparing and writing the next chapter of our Hensoldt's success story. While growing organically and inorganically, recently with the acquisition of ESG, we need to make sure that we stay lean and competitive, agile, innovative and attractive to the talent on the market, but also to our teams, which are running our business with passion. Together with this team, we will continue to deliver on promises. We will continue to deliver and boost our profitable growth while sustainably preparing Hensoldt for the future. Dear analysts and -- dear ladies and gentlemen, I'm really looking forward to meeting you, our investors, during the course of this year and to continue our exchange personally. And for closing words, I hand back to you, dear Thomas.

Thanks, dear Oliver. Ladies and gentlemen, dear investors, dear analysts, this is indeed my final appearance in this floor. And I would like to close with a heartfelt thank you. Thank you very much for your trust in the Hensoldt management team. Thank you for your commitment to our company and our teams. And thank you for your support over the past years. The generational change in Hensoldt has reached an important milestone, and I'm grateful, proud and very, very happy to hand over the baton to you, Oliver.

Baton taken. Thomas, with great honor and full determination, really, I'm very proud and highly motivated to steer this great company into a bright future. I close with thanking you, dear Thomas, for your personal support, but all what you did for the company. And as a sign of continuity, I will close this presentation with your already iconic words that the Hensoldt or that -- or Hensoldt, the best is still to come.

[Operator Instructions] And the first question comes from Ross Law from Morgan Stanley.

Welcome, Oliver and all the best, Thomas. First is on Optronics. So how should be thinking about top line growth and margin recovery over the next few years? And linked to that, the medium-term adjusted EBITDA margin guidance before pass-through of 19% to 20%. It essentially indicates no margin expansion versus 2023 despite double-digit top line growth recovery in Optronics and lower pass-through revenue. So maybe if you could just give us a 1/3 of the main drivers there? And the last one on defense spending, is Germany spending 2% of GDP consistently from 2024 what is assumed and baked into your medium-term guidance?

Thank you, Ross, for your question. Thank you very much. On Optronics, as we have seen and you have seen in our presentation, we had the biggest order intake ever in our business due to our customer belief in the capacities and skills of Optronics. And you will see a very positive development this year already. And the investments we made in our business will pay off this year, especially coming from a manufacturer or manufacturing to seal production, and this will pay off very, very positive this year in revenues and in EBIT and for sure, also in free cash flow. And over for the next part of the question to you, Christian.

So regarding pass-through, Ross, first of all, thank you very much for your question. So in pass-through revenues, you should assume that this portion is again going down as we also went down from 2022 to 2023. So we could assume around EUR 120 million to EUR 140 million in pass-through revenues, and thus the margin before pass-through will stay on this 19% to 20%, whilst the recorded EBITDA margin adjusted will be again going up.

Then I would take the second part of the question, which was on the defense spending. So maybe I share with you because the discussion, I think is, will Germany spend more? What about the [ Ziten ] vendor? Does it really lift off? So a couple of KPIs I can share with you from the recent [ Haldensleben ] Conference. So 2023, we saw 25 parliamentary approvals and roughly an order volume of EUR 29 billion. So for 2024, by MBW, the MOD plan for roughly 100 parliamentary approvals factor 4 and a volume of roughly EUR 48 billion, which is almost a factor 2 compared to the spending in 2023. So the Haldensleben Conference, the recent Munich Security Conference, where we had very clear words from our Chancellor and also from our minister, Pistorius. And if I also put that in line with many of the initial meetings I had in my introductory phase, I would definitely confirm that there is no question at all if Germany is ready to allocate more budget as we move forward this year. This is a key topic for the midterm planning, which is currently on its way. The current debate is only on the how. And here we see that a couple of partners in the coalition would prefer an extraordinary budget, additional second extraordinary budget because they see that the spending deficit is still too high to cope with the increasing critical security situation in Europe and across the world. And/or to also increase the annual defense budget also to give a sign to the industry and the soldiers that really here we see a sustainable path also coping with the OpEx cost that are implied by the additional spending. So to me, it is very clear. And if you ask my personal opinion, it will be rather a hybrid between the bots that we would be facing in the future. But again, no doubt that this defense spending will continue to grow up.

Okay. Just maybe one follow-up on Optronics. How should we be thinking about the margin recovery here? Do you expect to get back to roughly the 20% mark? And if so, what time frame?

Thanks, Ross, for this question again. So I expect that from 2024 to 2025, we'll back at the margins we had in the past 2021, 2022. So this will take us another 1 to 2 years to come back to the margin.

And the next question comes from Carlos Iranzo Peris from Bank of America.

How should we think about CapEx investment in 2024 and 2025? Just wondering if we should expect an increase in CapEx as a percentage of sales in '24, '25 as a result of the new campus that you are building for Optronics?

Carlos, thank you for your question. So you've seen maybe in 2023, that our CapEx for PP&E was around EUR 35 million to EUR 40 million, something like that in this amount. You should assume for the end of 2024, because the movement window start in the last quarter, around 25 million in onetime CapEx for the removement and for the first, for the initial investment into the new building.

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

Just 2 questions left for me. First of all, looking in the appendix of your presentation on the EBIT to net income bridge. You mentioned EUR 19 million interest on pensions. This appears a bit overdone. I think you have pensions in the balance sheet, not disclosed, but it should be in the magnitude of roughly EUR 240 million to EUR 250 million, I suppose. So maybe you can shed some light on that. And secondly, Mr. Muller mentioned in his presentation, a contract from Taiwan, I assume that this is very special. And I wonder whether this is more of an exception? Or is Taiwan now also a potential customer for Hensoldt and for the German defense industry? Would be interesting to know in light of the current geopolitical environment.

Christian, nice to hear you. Thanks for your questions. So the first question to the interest expenses, the EUR 19 million. You're right, there was an increase from 2022 to 2023. But you should also keep in mind that the increase in interest income that we have on the planned assets was also plus EUR 6 million. So in total, the balance between the increase of interest expenses and the interest income more balances out. Since the peak in the pension interest was now in 2023, and we expect, I would say, a slight decline. You should also assume that in the coming year a slight decline in both ways and expenses and income and the more moderate basis a balance.

Yes, Christian. And for your -- the second part of your question, you're right, Taiwan, a historical very good market for us, opened up again. We equipped the submarines with the periscopes. Now we have 2 TRML-4D in Taiwan. And there is a huge upside potential there because they are absolutely convinced about the performance of our radars and air defense systems. And I think, as you mentioned, Oliver, there is a huge additional opportunity there. We don't talk about details, that's for sure.

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

I've got 4 questions, if I may. The first is on the order intake guidance, which has not changed, is still 1.1 to 1.2 book-to-bill. And that is despite what you flagged the kind of 30-plus percent increase in the German budget. And you also highlighted the growing opportunity of international orders. So how can we reconcile this very strong momentum in German orders and the translation of that into your book-to-bill? That would be the first question. The second question is on your new adjusted free cash flow definition. Could you just make sure we have the right definition, give us the difference with the previous one? And also, does that include some exceptional cash cost? Cash items? That will be useful to have the clarification there. And then the third question is on the export of your radar and other equipment to Ukraine. Do you have a quantification of how much this contributed to your 2023 sales? And last, I think Germany lifted the ban -- export ban to Saudi Arabia. And I wondered if you had any indication of whether it would drive the deliveries of Eurofighters that were ordered by these countries?

Thanks, Aymeric. So a bunch of financial questions, happy to answer them. So we feel quite comfortable with the current guidance of our order intake for the future years. I think we've also outlined in the Capital Market Day 2022, of course, needs a [ third period ] of time from budget allocation due to all the specification of the systems until we book the figures. So this is why we do not see now a structural change in order intake and book-to-bill performance. In terms of free cash flow, guidance 50% to 60% to have an impression between the difference of the adjusted pretax unlevered and the adjusted free cash flow. Please take a look at the table. And when you then subtract the interest and the income taxes which were around EUR 60 million in 2023, we have a good figure also moving it further for the next years. Regarding cash items exceptional -- exceptionals, I expect, and this is what I also answered to Carlos that due to the movement into the new building, you should assume exceptional CapEx of around EUR 25 million. They will be in the last quarter of this year. And this is a good figure to go with that. Fourth figure, fourth question, Ukraine, how much revenue you should assume that around EUR 100 million to EUR 150 million was according to Ukraine. And this is the figure we see in 2023.

Okay. So maybe up to me, Aymeric to answer the fourth question on Saudi Arabia. Yes, indeed, we had recently the approval or at least the pre-approval of the German government regarding the Eurofighters for Saudi Arabia. And it clearly shows that in the, let's say, critical security situation across the world and other challenges in energy and the economic situation that indeed, we see a kind of shift to a more real politic approach, also understanding that exports are a means of foreign policy. And in that regard, it was quite surprisingly that even the speaker quoted that it was the right decision. Do I see it as a paradigm shift? Actually, I would be cautious with my political background that this is really a change. Of course, we -- as with our people, frequently in this region and everything we will monitor the developments and as part of our internationalization initiatives that I have outlined as one of my priorities, we will definitely adapt our strategy according what we see the German government decides on their foreign policy.

And as you know as well, Aymeric, we always are conservative, which means we want to deliver our figures. We want to work the talk. This is a good traditional already for Hensoldt. And you're right, if we look all together into what is currently coming up, there is upside potential for sure. But let's stick to what we have done and said, and we want to better surprise you positively.

And the next question comes from Sash Tusa from Agency Partners.

I've just got a question for Christian. I'm still a bit confused about the finance results in total up from negative GBP 37 million to negative GBP 72 million last year. And I just wondered if you could clarify, certainly for me, how much of that was one-off noncash effectively mark-to-market? And how much of that is the ongoing cash costs of the financing of the business because 2 million for a group where leverage is under 1x, seems to be quite high to me.

Thanks, Sash, for your question. Yes. So indeed, the financial result is driven by noncash related interest expense. When we go to a cash forecast for our funding, you should assume a figure of around 4.25%, which we have for our long-term facilities. This consists of the 3 [indiscernible], which is hedged for around 3% plus the margin registered, which is around [ 1 to 1.5 ]. And then what are, of course, further items, which are noncash relevant. And here far and foremost, this is the hedge we did. So on the one hand, this hedging saves us cash quarter-by-quarter. At the other hand, due to the fair value of IFRS 9, we have to take into account that the current estimation, which is 2027, is that the interest rate goes back again. What will we do now, we will see how this will develop in 2024 and then react, but this is far and foremost one of the biggest amounts with this EUR 13 million, and we have shown it in the backup of the presentation. Another one is, of course, the interest on the pension. This has also effect on cash. And these are mainly the 2 biggest items. So the difference between the cash and the noncash are mainly due to interest on pensions and devaluation.

And the next question comes from Yan Derocles from ODDO BHF.

So maybe 3 or 4 questions on my side. The first one for Christian. When you're looking at the P&L, you've managed to contain the selling and distribution costs perfectly well in 2023, but the general and administration expenses increased by, let's say, something like 30%. So what is the explanation? And what should we model going forward? And maybe there's another one for you, Christian, on the sell finance R&D, down 15% in '23. Does this mean that you've been able to obtain more funding from government and consequently that we should expect a little below the 2% of the -- of sales going forward. And then on working cap. So I believe that you'll still have some buffer inventories everywhere in order to guarantee the ramp-up. But do you think that the supply chain will have improved sufficiently by 2024 in order to release part of those buffers? And maybe the last one for Thomas or Oliver, and I'll try this one on Leonardo. Can you update us on the relationship with Leonardo, where do we stand? Do you have any specific projects that you will launch in the near future?

Yan, thanks for your questions. So first of all, versus the increase in the G&A driving is the one-offs, which we have shown in the back also of the presentation. When you compare it like-for-like, this is -- it's more on a flattish basis. This is exactly the strategy we see growing in the business without growing the costs. These are the one-offs which are driving the G&A. And this was, of course, due to our efficiency program Hensoldt S4, and also keep in mind, please, we have to have some transaction consulting with the acquisition of the ESG. Regarding R&D, yes, you're right. The trend is that we come from 7% to 8%, 7% last 2022, 6% now. You see the trend that the customers are more and more investing and giving us customer-funded R&D. Nevertheless, we are absolutely convinced that a figure of around 6% of revenues of our R&D is a good figure because we are a high-technology company and to invest into our technology on a constant basis is the foundation for long-term success. And regarding inventory, as you're all right, we had some -- had built up some buffers. You know that we decided already for another batches of TRML-4D to be well prepared for this and also for the specs and now the specs also come into the place for the Skyranger, which is the contract for Rheinmetall, and we will deliver also SPEX and pay to Rheinmetall. All in all, I expect that inventory will stay on this level in terms of percentage of revenues, but we will see this year the first advanced payments being made from the customers. So more and more advanced payments come in, and this is why we will be able to again balance our working capital as we did in the last year.

So I'll try the last one. So first of all, bottom line upfront, as we say, we have a traditionally strong and trustful relationship with Leonardo, and that is definitely a topic which is also on my agenda to sustain. I can state at that time that in the very early days of my introduction with Hensoldt, I met Roberto Cingolani, and we have really had a very good conversation. So I think strategically, Leonardo amongst all the other top players in Europe will play a key role. And for sure, you followed the quotes of Roberto. There is an intent of Italy, and that is making it more concrete on a programmatic level we know and read about the intent of Italy to buy a Leopard 2 tanks. And here, of course, Hensoldt and we showed it to you as our past successes and also perspective has a very strong share also with KNDS, the company that Leonardo is talking to. On top of that, it's the Eurofighter, where traditionally we cooperate very strongly with Leonardo. And at least we have agreed in this programmatic context to look further at the agenda because I think -- and here I would put a quote that also our Minister of Defense, Boris Pistorius, put on the table at the Munich Security Conference. If we want cooperation in Europe, and I think with the security situation we are facing, it is absolutely necessary that we strongly cooperate in Europe. If we want to have cooperation, Minister Pistorius said, we have to climb from our high horses. And in that regard, it's clearly also a target for me as we go forward that we will talk to those partners in Europe that we build alliances, which I think from the business, but also in managing R&D, driving digitalization is a key element of bringing us forward.

And we do have a follow-up question from Ross Law from Morgan Stanley.

Just a couple of follow-ups. Firstly, on ESG. Why is the cash profile have with Q1 weighted? And then secondly, you've obviously highlighted the very strong visibility that your backlog provides for 2024, what proportion of your revenues are already covered for the backlog? And how does that compare to the same time last year?

Thanks, Ross. The ESG is heavily in Q1. Cash, they have a strong maintenance business, and it seems, as we have seen now in the books that this is mainly driving this topic. And we see some local gap invoices also there by end of the year, which are then paid in this year. We will see then how this profile turns out in the IFRS conversion, but this is currently the profile we think of. Regarding coverage, so I refer now to the Hensoldt coverage of revenues, and we've also outlined in the Capital Market Day that we have a coverage of 85% from firm order backlog plus the service business. This figure is again a little bit higher, 1% to 2% in comparison to 2022. But this is from us a very comfortable figure regarding coverage. And this is, as we stated the last quarter, the focus now is execution, execution, execution.

So there are no further questions at this time. And now I would like to turn the conference back to Veronika Endres for any closing remarks.

Yes. Thank you all for listening today. And as you know, the IR team is around all day to follow up on further questions. And with that, have a lovely weekend. Thank you, and goodbye.