Thales and Hensoldt Report Strong Performance in Defense Sector

Earnings call: Thales reports record backlog surpassing expectations By Investing.com

Thales Group (HO.PA) has announced robust results for the first half of 2024, with a significant increase in its order backlog and improved profitability. The company's sales and EBIT margin have surpassed expectations, bolstered by high order intake and successful acquisitions. Thales also outlined its strategic focus areas and provided forecasts for the coming years, with a particular emphasis on the integration of recent acquisitions and the recovery of its space business. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Thales Group has demonstrated a strong commercial performance in the first half of 2024, with significant growth in sales and profitability. The company's strategic initiatives, including the integration of recent acquisitions and a focus on innovation, are expected to drive continued growth. With a solid order intake and a record backlog, Thales is well-positioned to achieve its financial objectives for the full year and beyond. The company's executives remain committed to executing their growth strategy and capitalizing on market opportunities, as reflected in their positive outlook for the upcoming years. The financial community will be looking forward to more detailed updates at the Capital Markets Day in November. Full transcript - None (THLEF) Q2 2024: Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Thales' First Half 2024 Results Conference Call. The presentation will be held today by Mr. Patrice Caine, Thales' Chairman and CEO; and Pascal Bouchiat, Thales' CFO. It will be followed by a question-and-answer session. [Operator Instructions] I advice you that this conference is being recorded today. I would now like to hand the conference over to Ms. Alexandra Boucheron, VP Head of Investor Relations. Please go ahead. Alexandra Boucheron: Good morning. Welcome and thank you for joining us for the presentation of Thales' 2024 half year results. I'm Alexandra Boucheron, Head of Investor Relations at Thales. With me today are Patrice Caine, Chairman and CEO; and Pascal Bouchiat, CFO of Thales. As usual this presentation is audio webcast live on our website at thalesgroup.com where the slides and the press release are also available for download. A replay will be available soon after the end of the event. With that, I'd like to turn over the call to Patrice Caine. Patrice Caine: Good morning everyone. So, as usual I will start with the highlights of the period. And I'm now on Slide number 2. So, we have enjoyed a strong commercial dynamics aimed in this first half and notably in defense and security where we have recorded three orders in excess of €500 million. This momentum was especially driven by large orders, leading our backlog to reach a new historical record of €47 billion. Sales were also robust, growing by 6% organically, standing at the top of the guidance range set for this year. This growth was fueled by strong organic growth in Aeronautics and Defense & Security ahead of our expectations. Strong achievements in terms of profitability as well with an EBIT up margin 20 basis points compared to last year, while we increased our R&D expenses, notably in Space and Pascal will come back to it and faced high comps for DIS. Last, but not least, we completed the acquisition of Cobham Aerospace and we eventually finalized the disposal of our transport activity. And I would take this opportunity of course to thank all the teams who contributed to this operation. Let's move now to Slide number 3, looking at our financial performance in the future. As previously said, we have enjoyed a strong commercial momentum this semester with order intake increasing by 26% in returns and by 23% organically and reaching €10.8 billion ahead of expectations. The book-to-bill ratio is once more above 1 at 1.13. Sales reached €9.5 billion, growing by 8.9% in real terms and 6% organically. EBIT grew by more than 10%, while EBIT margin improved to 11.5%. This is in returns and Pascal will come back on organic numbers later in this presentation. Adjusted net income grew by 6%, taking into account higher actual expenses as you know and reaching €866 million. Free operating cash flow is positive at €23 million, down from previous year as expected. In a still tight supply chain environment, it reflects higher stocks to face higher demand and the need to build strategic inventories to properly serve our customers. Lastly, our net debt position increased by about €400 million compared to December 2023, taking into account dividends and the completion of share buybacks program. After this brief introduction I now hand over to Pascal who will comment our financial results in greater details. Pascal Bouchiat: Thank you, Patrice and good morning to everyone. I'm now on slide 4. So starting with our order intake dynamics. As Patrice mentioned, we achieved again a very strong order intake level in 2024 at €10.8 billion almost aligned with the record high of H1 2022, which was including the Jumbo Rafale order from the US. Hence book-to-bill ratio stands at 1.13 and in at 1.17 explaining the IS was booked to be structurally equal to one. So strong performance and good support to future goals. As shown on the slide this growth was mainly driven by large orders. 12 orders with a unit value over €100 million were booked in H1. And even three out of these 12 orders at a unit value in excess of €500 million namely an additional order from the German Navy for two more frigates, the execution of the third tranche of the 42 Rafale aircraft order placed by Indonesia in 2022 and also an order for an air surveillance system for military customer-based in the Middle East. Looking by activities. Nine large orders occurred in Defense & Security and from very different countries reflecting an overall strong demand across the board. Turning to orders with a unit value below €100 million. The order increased by 4% versus H1 2023. So overall quite a solid performance again in H1 2024 regarding order intake. Moving on to slide 5, looking at sales. As anticipated, H1 net scope effect is significant at €276 million resulting from the acquisition of Cobham, Imperva and [indiscernible] partially offset by the disposal of the electrical system activity sold to Safran (EPA:SAF). Currency impact is negligible. Excluding scope and churn affects our H1 sales grew up by 6% which is at the top of the guidance range set for this year. On the positive I would say Aeronautics went really well recording a double-digit growth. Defense & Security as well reaching a high single organic growth. And DIS is back to positive organic growth in Q2. Thanks to the good dynamics in both the cybersecurity and the biometric activities. On the other hand space sales have been stable over the last six months as anticipated. Turning to the geographical perspective. Let me point that growth was solid in mature markets and especially in France, UK, the rest of Europe and also Australia. Growth from emerging markets stands at 2.7%. Moving on now to slide 6 looking at the EBIT performance drivers in H1 2024. As mentioned already EBIT was up by 10.4% in real terms and by 4.7% organically year-on-year with margin progressing from 11.4% in H1 2023 to 11.5% in H1 2024. Third driver is our gross margin that went up by almost 13% allowing to hit a new high at 29.2% of sales versus 28.2% last year driven by the combination of relative acquisitions and also good performance from all our activities, but space which keeps suffering. With regard to indirect costs overall a 3.4% organic increase almost half of top-line organic growth meaning indirect costs are well under control. SG&A costs have been contained growing only slightly above 1% despite inflation and a growing top-line. In contrast, R&D expenses are up 7.6% organically reflecting sustained R&D investments. Restructuring costs are still quite low in H1 2024 as restructuring of space just started. Most of the costs linked to the restructuring plan of our space business will be recorded in H2. Finally, we have lower contributions of our equity affiliates down by €10 million compared to last year due to a non-recurring item. Contribution from Naval Group is in line with last year at €44 million. Now, looking briefly at each segment one by one, I'm now on slide 7 starting with Aerospace. Orders stood at €2.7 billion up 16% organically. Avionics order intake very dynamic, recording a solid double-digit organic growth. And more specifically, the aeronautics with one large order in Q2 booked to install our new IFE product for a major airlines. And also new orders related to military avionics and also training and simulation activity. In Space, we booked two large contracts both in Q2 2024 one Exomars 2028 in our observations exploration and navigation business and another one in our telco business, this one relating to our new generation of gestational satellites. Overall, orders booked in H1 2024 for space were slightly below H1 2023. Sales at €2.6 billion increased organically by 4.8%, clearly driven by the double-digit organic growth in Aeronautics, reflecting notably excellent dynamic in our IFE and civil flight avionics businesses. This compensated flat sales in the Space business. Now, if we look at profitability, EBIT margin is down compared to H1 2023 from 6.9% to 6.5%. Again, the Avionics business recorded a strong organic performance at a solid double-digit EBIT margin, in line with where it was before COVID, thanks to operational leverage and the top line growth. On the other hand, space EBIT is negative in H1 2024. For the full year 2024, EBIT level for Space will be negative by around €50 million due to restructuring costs linked to the recovery plan and also the peak of R&D expenses to finalize the development of this new generation of geostationary satellites. Consequently, margin of the Aerospace segment as a whole will be at the same level as last year. And maybe a last word before we move on to the next segment. We completed earlier in April, the Cobham acquisitions and integration is going well. Patrice will come back to that later on. Turning to slide 8, looking at the Defense & Security segment, which is straightforward. Order intake amounted to €6.1 billion, up 36%. Q1 was exceptional, Q2 softer as anticipated because of high comps and also cutoff effect between Q1 and Q2, still showing an excellent momentum with five large orders booked between April and June this year. Our backlog in Defense & Security hit a new high at €36.5 billion, representing 3.7 years of sales. Sales amounted to €4.9 billion, up 8.5% organically versus H1 2023. Many business units reached again strong organic growth. This strong level resulted from the combinations of our strong backlog, as mentioned above, and the efforts put by the group to ramping up its overall production capabilities. So to conclude on the Defence & Security organic sales growth, we are ahead of the confirmed mid-single-digit plus full year guidance. Last point the EBIT margin, as you can see slightly up at 12.9%, again a solid performance. And finally, Digital Identity & Security, I'm now on slide 9. Before speaking about the figures, let me just remind you two significant scope evolutions that you have to take into consideration for 2024. First, of course, integration of Tesserent and Imperva over the 12 months of 2024, but also the transfer of the civil cyber activities from our Defence & Security segments from January 1, 2024. 2023 figures have been restated for this internal transfer. At €1.9 billion, sales are up by 16.1% but almost flat organically, meaning we are back to positive organic growth in Q2 after a 2.5% decrease in Q1. This despite still lower sales at our Banking, Payments and Solutions business. And finally, EBIT is down by 7.4% organically at €272 million with EBIT margin now at 14.1% versus 14.7% in H1 2023, which was, however, quite a demanding reference base. This slight EBIT margin erosions, is due to lower volumes in Banking, Payment Solutions and price pressure on mobile communication. In this environment, we decided to support our pricing policy to protect our margin at the expense of a bit less sales in some countries. The above 14% EBIT margin reflects the successful implementation of this strategy. Turning now to slide 10, looking at items below EBIT. First, the cost of net financial debt, it might be surprisingly low for some of you. It takes into account cost of financial debt for €87 million related to our €4.6 billion net debt at the end of June 2024. And this is in line with our expectations. However, this is partly offset by other financial income, mainly non-recurring dividend payments from non-consolidated investments for around €20 million as well as €10 million positive ForEx results, while it was negative by €10 million last year. So, this ends up in a total amount of minus €55 million for H1, which, of course, cannot be extended for the full year considering what I mentioned about non-recurring items, positive items. The finance cost on pensions and other employee benefits went down by €10 due to the removal of the interest expense following the transfer of our pension obligations in UK that we carried out in December 2023. Then taxes, as you can see the effective tax rate stands at 20.4% versus 20% in H1 2023. The adjusted NAV from discontinued activities is in line with expectations for five months in 2024 relating to this transport activity. So all of that leading to an adjusted net income group share increasing from €819 million in H1 2023 to €866 million in H1 2024 and an adjusted EPS of €4.21, up 7.7% versus last year. Now a few words about our free operating cash flow. I'm now on Slide 11. Since the disposal of transport activity is now effective, we choose to focus on the free cash flow from continued operations. So free operating cash flow from our continued operation amounts to €23 million versus €253 million in H1 2023. As Patrice explained earlier, we had to further increase our inventories, as we have increasing number of orders to execute and we are still facing some supply chain issues on certain components, increasing our inventories, enable us to properly serve our customers in this environment. Of course, cash remains a key focus across the group and we confirm for the full year of 2024, a conversions ratio close to 100% from adjusted net income to free operating cash flow, putting aside the contribution of transport. Finally, moving on to Slide 12, with a quick look at the evolutions of our net debt position. Our net debt end of June amounted to almost €4.6 billion versus €4.2 billion end of December 2023. As you know, we have continued to work on our capital redeployment in H1 2024 on key elements. First from an M&A standpoint, the acquisition of Cobham for about €1.1 billion and the completion of our disposal of our transport activity for about €1.7 billion. And second, the completion of our share buyback program in March 2024, resulting in a cash-out of €176 million in 2024. This came on top of the €534 million dividends payments. For the year-end, we expect a significant drop in our debt, driven by a strong cash flow generation in H2. We also need to keep in mind the expected interim dividend payment in Q4 at a normative level of new IFRS 16 basis. And that's the end of this financial review. I'm now turning over the call back to Patrice. Patrice Caine: Thank you, Pascal. So now on Slide 14, turning to our strategy and outlook. Here now are the four strategic priorities we intend to focus on in the near-term, which are fully in line with what we - what was stated during the full year results presentation. First, ramping up our capacity to address the strong underlying trends in our markets. One of our primary focus in recent years has been to increase our capacities. This includes not only production capacities but more importantly, entering we have the right talent in place to seize market opportunities. Looking back to March 2024, we announced the hiring of approximately 8,500 people for high expertise roles, while continuing to invest in enhancing Thales brand awareness. Second, maintaining our innovation leadership and sustaining excellence in R&D, which remains a major driver of competitiveness in our markets, fully bound of our DNA, as shown by impressive 20,500 patents portfolio as of end of 2023. A key priority for the group this year also, is to deploy and focus on Thales Alenia Space adaptation plan, launched back in March 2024. And lastly, about integration of acquisitions, you know that we proceeded to large acquisitions in 2023 with Tesserent, Imperva, in cybersecurity and with Cobham in Aerospace in April 2024. That is one thing to acquire a company. That's something else to integrate it especially, for large. So let's see where we are on these four strategic priorities, turning now to Slide 15. So first capacity ramp-up, we are fully on track with our recruitments targets. So far we completed 3,900 recruitments, as of end of June 2024. And we're confident in reaching our year-end targets. This hiring campaign, confirm we can relay on an excellent brand awareness. In addition, we've made several announcements in this first half, regarding capacity expansions. In March, we announced that we will multiply by four our missiles production in Belfast between 2022 and 2025. In June, we announced our intention to quadruple our ammunition production, capacity at La Ferté Saint Aubin, namely from 20,000 in 2023 to over 80,000 a year, by 2026. In July, we inaugurated in Herstal Belgium, an assembly line to quintuple the production of 70-millimeter Laser Guided Rockets from 2020 to 2025. And lastly, in Lima, where we produce one of our star products the GM200 radar, the production has more than doubled between 2021 and 2024 from 10 to over 24 radars per year. And we are moving towards a rate of 30 radars per year. Secondly Innovation Leadership, I will focus here more on AI that is already a reality for Thales. Indeed, we have been working on AI for three years now. And we are already at scale with an impressive mass of 300 AI specialists and around 100 doctoral students. But we decided to move further and we launched an AI accelerator. It will include an AI lab dedicated to early stage research and AI factory dedicated to the development of AI systems across all our business and an entity dedicated to foster AI in sensors, the core expertise of Thales of course, relying on synergies between Civil and a Military AI. Thirdly, about Space Recovery, as you know we have announced in March 2024, an adaptation plan in space, first, to optimize its structure, second, to maintain its leadership position, and third to restore of course its profitability. This plan mainly consists in the redeployment of 1,300 positions across the group with no forced departure. Those redeployments have actively started and will take place over 2024 and 2025. This plan is designed to preserve and develop skills within Thales. Thanks to growing opportunities and activities in other businesses of the group. Lastly about the Acquisition Integration, so number one, Imperva's integration is going well. We have started to work on cross-selling opportunities mapping and signed our first deal in cross-selling, showing the capacity for Thales and its partners' network to offer Imperva Security Solutions to Thales' better data customers. In addition, we are working on organizational integration. Indeed, we are carefully preparing the integration of the sales forces and the partners' network to maintain the commercial momentum. This integration will be effective at the beginning of 2025. In terms of R&D, we are committed to retaining talent and fostering collaboration among teams. Starting from the third quarter and in accordance with our plan, we will launch the first features resulting from the integration of Thales and Imperva's data security platforms. Number two, regarding Cobham. So regarding Cobham we intended to proceed with a light integration of this very qualitative and efficient company. Hence it is in our business line fully part of the Avionics business unit. Things are also going very well. So turning to slide 16 about 2024 financial objectives that we decided to refine. Our order intake remains unchanged. We expect another year of strong commercial performance driving a book-to-bill ratio above one. Regarding organic sales growth and taking into consideration, the strong H1 performance we now expect sales to grow organically between 5% and 6% instead of 4% to 6% as announced in March. Based on the July 2024 foreign exchange rates, this corresponds to sales between €19.9 billion and €20.1 billion. In corporate all the elements we discussed earlier, we expect a further improvement in EBIT margin, which now should be part of a range between 11.7% and 11.8%, which is consistent with the consensus and is on our website on the 27th of July. Last slide, slide 17 is for you to save the date of our upcoming capital market day that will take place on November 14th in Paris. We will start the day around 11:00 a.m. with a product showroom and we'll start the presentation around 1:30 p.m. We will be very glad to receive you for a cocktail at the end of the day of course and the event should thus end around 9:30 p.m. Well this concludes our presentation with Pascal. So many thanks for your attention. And now we are pleased to take your questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Christophe Menard from Deutsche Bank (ETR:DBKGn). You may ask your question. Your line is open. Christophe Menard: Yes, good morning. Thank you very much for taking my question. I'm going to start with two questions. The first one is related to recent political mentioning that the LPM could see an adjustment in 2025. Do you have more details on this and how it could impact your business? And the second question is on the free cash flow. The -- and I mean given the level of order intake you had in H1, we could have expected a higher level of prepayments. I understand that there is also inventory buildup. So just wanted to have more color on that inventory buildup whether it's purely defense related whether it's consuming all the prepayments, or whether actually prepayments were not that big in H1 just to understand the different elements here around free cash flow? Thank you very much. Patrice Caine: [Foreign Language] So on the LPM in fact this is not a surprise at all. It was voted in the low. This adjusted in fact vocabulary means that it gives a little bit of flexibility in terms of physical priority, not in terms of financial priority. So it doesn't mean that it will lead to more or less money. It just gives the ability to the ministry of defense to reorganize slightly, I would say, the priorities in terms of acquisition. That's all it means, and nothing more or nothing else. And it was said explicitly by the French President on the 13th evening, when he delivered his speech as usual by the way, in front of the armed forces just before the Bastille Day. On the free cash flow? Pascal Bouchiat: Okay. So [Foreign Language]. So on free cash, I mean first it's important to have in mind that it's a typical pattern for Thales. I mean in general H1, being quite low in terms of free cash and quite a strong level of cash flow on H2. And you perceive that, you confirm the overall guidance for the full year 2024. In terms of, I mean the comments, relating to H1. First, maybe undone payments. You do mean done payments are much related to the nature of the contract that we signed. I mentioned in particular, I mean three quite large project contract in excess of €500 million to outside Europe one Indonesia, the other one in the Middle East and this traditionally comes together, with I mean, some down payments. It's a typical pattern for this type of defense export contract. The last one that I mentioned, was about I mean, the two additional frigates, traditional boats for the F1 2026 project in Germany. Typically, there is no down payment associated with this type of contract. So, you see, I mean it can be quite a different pattern. Now, what we need to have in mind is that overall, I mean we have not seen any change in the way we get down payments from our customers. It's pretty much in line with, what we have seen in the past. All of that also meaning, and I made it clear that we build up inventories in a significant way in H1 2024, as compared to the end of 2023. Prior the level of stocks will go down in the second half and we'll end up 2024, at the level of stock that will be lower than it is end of June 2024. Now, as we mentioned, quite important, also here again to bear in mind that in this quite volatile complex under-constrained supply chain environment, for us it's critical that we can build up strategic stocks on specific, I mean type of components, but also hardware and to that we keep suffering [ph] in this matter. We have also been a bit impacted, by what I call missing parts, which results in I mean product that is fully available for our clients, but was -- is a missing part and that we cannot deliver to our customers, because we keep waiting I mean to get this last missing part. So, still a bit of volatile environment from a supply chain and overall a tight supply chain environment. And overall, I mean this level of increase we spoke, reflect these overall environments, but we expect, I mean a drop in H2 as compared to the level that we got end of June. Christophe Menard: Thank you very much. Thank you. Operator: Thank you. We are now going to proceed with our next question. The question come from the line of George Zhao from Bernstein. Please ask your question. Q - George Zhao: Hi. Good morning, everyone. First, what exactly changed in the guide, with respect to space EBIT? I mean previously, you had expected peak R&D this year. So, is it higher R&D expense now or is restructuring cost higher this year? I guess and what does this all mean for the - path towards the high single-digit margin for space by 2027? And second question, now coming back to defense outlook, can you sustain the mid-single-digit growth over the medium term, given the current government uncertainty? Now the LPM covers the medium term, but we know that the signing those need to be approved annually. So, if we see delays under this government, how do you assess the downside risks Pascal Bouchiat: Okay. Good morning, George. Maybe I will start on space. So first, is that overall, it's quite clear that we confirm the overall guidance in terms of EBIT margin even though, I mean, the range is lower than it was, I mean, of March. It was that we expect today as I mentioned a level of EBIT for space, which is for the full year 2024 below what we had in mind a few months ago. So I mentioned minus 50 for the full year 2024. So with that, I mean, they are -- I mean, two key elements. First, I mean, we mentioned in March that our restructuring costs will be equally split between 2024 and 2025. And overall, we believe that the restocking charge will be higher in 2024 than in 2025. So we tend to go even quicker on the overall, I mean, cost adaptation program for Phase that we had initially in mind. And this coming are on top of the overall, I mean, level of revenue that for 2024 is a bit below than what we expected a few months ago. We're expecting, I mean, space sales to be slightly positive in terms of organic growth in 2024 versus 2023. Today I mean our best guess is that it could be just stable as compared to last year, which means that it's even additional reason for us to go even quicker in terms of the overall restructuring of space. This doesn't change at all, I mean, our mid-term view in particular 2027 in terms of EBIT margin for space. Maybe last point, I mean, on space. I guess, it was clear from the presentation that 2024 the peak of our investments in terms of R&D for space are the developments of our new generation of JSAT station satellite should be finalized by the end of 2024. So this means that 2025 will benefit from lower R&D expenses for the reason I've just mentioned. Patrice in defense mid-term? Patrice Caine: Yes. Hello, George, good morning. So the defense outlook and the question of the mid single-digit growth in the long run or in the long-term. First and foremost, as you know, this defense outlook is mainly linked or correlated with geopolitical situation. It's the least to say that the situation is preoccupying if I may say in many parts of the world and it's not going to change, because of such or such election, such or such country and name France if you refer to the situation in France. There is a war in Ukraine. There is ongoing tensions if not rising day-to-day around Taiwan. There is the conflict of the war between Israel and Palestine. And also it's the least to say that the U.S. election it's another factor of, I would say, volatility if you allow me in this overall environment. Even the new tension by the way as in Europe has reiterated its strong support and strong, I would say, involvement in matters and support to Ukraine in particular or to its own security in Europe. Secondly, as far as France is concerned, there is -- and there has always been by the way a very large content on defense matters and defense budget. So it's true that LPM gives you a multiyear budget planning even though each year there is a look that is devoted to confirm this trend. But clearly this benefit from a large very large consensus in France as far as the French project is concerned. And as the last element to explain why we are confident on this mid single-digit growth long-term trajectory is also that we benefit as Thales and this makes us a bit different from typical US competitors to a highly diversified defense customer base. Unlike our US peers that are mainly exposed to one single market which is a very large growth in US market, we are exposed in a positive sense to many, many markets in Europe, UK, France, Germany, Belgium, outside Europe, Middle East, Asia, South Asia, even further away Australia, as you know. So this highly diversifying customer base also brings a level of resilience to our defense activity. Operator: Thank you. We're now going to proceed with our next question. And the questions come from the line of Herve Drouet from CIC Market Solutions. Please ask your question. Herve Drouet: Yes. Good morning. Thank you for taking my questions. Two on my side. So first one, can you give us a bit more clarity on what you want to do with your space business? Obviously, I mean, it looks like there are ongoing discussion with potentially other partners. But when we looked at for example what you invested in R&D and space, it looks like you are putting money in your space business? Does it mean in the medium term, you are quite keen in keeping that business and potentially consolidating it, rather than spinning it off? So that's the first question. The second question is regarding Imperva. Can you share with us, what was the margins of Imperva in the first half 2024 and if you have taken any retiring or integration cost to include Imperva in your DIS unit? Thank you. Patrice Caine: Okay. Good morning, Herve. Thanks for your question. So Space business, again, we should probably to answer I would say correctly to your question make the difference or take I would say segments one by one, because they deserve I would say probably a detailed analysis. Number one, if you take the first segment which represents two-thirds of tax turnover namely observation, exploration and navigation business segment. So two-thirds of the business is very sound, very robust. We benefit from a strong order book. We have I would say good customers, mainly European Space Agency or some national space agencies. And we enjoy I would say a reasonably profitable business on this third month of the market. And looking forward the outlook is really positive as a need as a willingness to nations to invest in these domains is quite strong. Second segment is the service business, Telespazio is not past per se, but Telespazio contributes as well to the resilience of our space business. It's a nice growing profitable business in terms of service, so clearly a no-brainer for us, a good business to be in. The third one which is at stake at the moment is the telco business, which is clearly under pressure as described by myself and by Pascal for many reasons, we have already explained, so probably not going to come back on this reason this morning. But still, if we take let's say a midterm perspective, the needs in telco is absolutely -- these are absolutely huge. So we are confident in the long run, once we will have I would say finished our peak of R&D in terms of space inspire development that we will recover we say a normalized level of profitability. Hence, overall, our commitment for 2027 that has been recalled by Pascal making this business a good business good and I would say a reasonably profitable business on the long run. Pascal Bouchiat: Okay. Maybe just I mean to complement Patrice. I mean, in particular in this 2027 objective in terms of margin for space of 7%. This level of return on sales allows this business to have a level of returns which is above the average cost of capital of this business. So overall and probably, the best demonstration that this business can be a good business for Thales. The question on Imperva was very specific Herve. So Imperva margin in H1 was pretty strong in excess of 15% even a bit both. I will not detail -- I mean, to give you the exact figures, but in excess of 15%. And you also asked for I mean level of integration cost and restructuring is true. And I confirm that overall, for the full year 2024, we will have integration costs for Imperva. It has been quite minimal in H1. It will be more materials in H2. And we mentioned, I think in the past that overall, I mean, integration costs for Imperva in 2024 should be around €20 million. So I confirm this amount. The bulk of it will be booked in H2. And overall, I mean good to see that, I mean, the integration of Imperva is seamless smooth going well. So overall, we are quite happy with the first seven months after the completion of the acquisition. Herve Drouet: Okay. That's very clear. Thank you. Thank you very much for you answer. Pascal Bouchiat: Thank you, Herve. Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Ben Heelan from Bank of America (NYSE:BAC). Please ask your question. Ben Heelan: Yeah. Good morning, guys. Thank you for taking my question. I just wanted to come back on that space question that you just had. And the question was more like Patrice would you be comfortable seeing or be willing to seeing a European champion in space market? Because I think that's what that question was kind of pointed to. We've seen the headlines around discussions with Airbus following the challenges that they've had. So is that something that you think is an attractive option down the line and even achievable down the line? That would be my first question on space. My second question on the same. So in Q1 you talked a lot about PCBs being a bottleneck on the supply chain and one of the big challenges that you've had to deal with and manage and you talked about things slowly starting to get better. I was wondering if you could give us a bit of update on where you are on that and how things are progressing there? And then the third defense question I had was in Q1 the -- you commented in the presentation that the orders between €10 million and €100 million has grown about 46% organically. And when I look to the half year numbers, it looks as though the overall growth is around kind of 4%. So I was just wondering am I missing something there, if there was a timing effect there. Just any color you can give us around that? Thank you. Patrice Caine: Good morning, Ben. I shall start with the first question, Pascal, on space going back on space. First, I should have said to early before. Our plan -- our baseline is what we have explained. I mean to restructure the telco segment and to continue to I would say run the space business with all the loyal customers that we have in the markets for instance or in other parts of the world. That's really our baseline at the moment. Second, you have referred to some I would say comments here and there or rumors or whatsoever. Let me just tell you that such type of I would say either rumors or talks existing or not have been ongoing during my 10-year tenure as Thales, CEO. So this is nothing new for me. Perhaps it's new for some of you, but this is nothing new. And no need to comment any further. We need to focus on our -- what I call Plan A is to restructure the business and to put it back on track by 2027 as already explained. Now, perhaps last and very theoretical answer on any, I would say a big merger. On one hand, it could bring I would say competitiveness and innovation by optimizing R&D and so on and so forth. On the other hand, you know, all the hurdles or head backs to encounter in such type of big, big mergers. So, now your own opinion to make the plus and the minuses. But again, this is a theoretical answer to any big regrouping in any kind of business you may imagine. Pascal Bouchiat: Okay. Good morning, Ben. So update on the PCB. The situation is still quite tight on PCB in terms of supply in some countries in particular in France, which means that we keep working very hard in terms of increasing the overall supply and dispose that in some cases we also need to allocate, I mean, PCBs within the group in terms of priority. So this reflecting I mean a situation which is not back to normal goal. No, I mean, the -- then it's about I mean what we do. So we keep working very hard, I mean, to get second supply, to provide long-term visibility to sign more longer-term contracts. And all of that is working, because at the end of the day, I mean, you see the old top line growth that we can deliver. Defense is a good example, but aeronautics is also a good example. And those are two businesses that are impacted today by the shortage of PCB, which shows that despite, I mean, all these type of difficulties, we can navigate this type of quite complex environments. It's not easy of course from a day-to-day standpoint for our teams. But overall, we manage, I mean, to deliver growth despite, I mean, this constraint. Now, overall, it was my comments earlier about consequences, not specifically on PCBs, because PCBs were in shortage. But overall, I mean, one outcome is more inventories overall, I mean, to be able to navigate what is quite complex overall supply chain environment, which is not at this point fully stabilized. Your last question, if I understood well, was about between Q1 and Q2 on order intake relating to our project with unit value below €100 million. So I mean, first, I think it's important to remind everybody that, of course, I mean, the bigger the unit volume for order intake, the more volatility we can get across quarters and it's true that large size project order intake can be quite bumpy. But also the same for midsized type of projects, in particular, the ones from €10 million to €100 million and it's true that Q1 was especially strong when it comes to order intake relating to contract of unit value between €10 million and €100 million. Because here, again, we might have some volatility where, I mean, it's more of a linear trend is a small size contract with unit value below €10 million. And this is much more linear. And this is why you commented about something like 4% growth in this matter. Nothing more, I mean, to interpret or to consider from our discussion, but more volatility across quarters than anything else when it comes to, in particular, large-sized unit value contracts. Operator: [Operator Instructions] We are now going to proceed with our next question. And the questions come from the line of George Mcwhirter from Berenberg. Please ask your question. George Mcwhirter: Good morning. Thank you for taking my question. Just one, please, on the Aerospace divisional margin. How do you expect this to trend in the coming years given you've got the challenges in Space? But offsetting that, I think you've got the accretion from the Cobham Aerospace Communications acquisition. So any color you can give there would be great. Thank you. Pascal Bouchiat: Okay. Good morning, George. So I mean the margin on aerospace, I would say, it's quite simple. As I mean, we communicated on our objective relating to our space business with the 7% overall level of EBIT margin in 2027. Now, when it comes to the Avionics business, this is where we have not at this point provided you with mid-terms guidance. This is what we are going to do at our Capital Markets Day in a few months. So you need to be a bit patient. But overall, I mean, what I mentioned is that, we at this point came back to pre-COVID level in terms of profitability for Avionics business, so quite a solid double-digit EBIT margin. And it's true that the integration of Cobham will have quite a booster effect on the Avionics EBIT margin. We said that I mean this business is today operating under our level of EBIT margin, which is 30%, 30% plus EBIT margin. And this is basically I mean what we see for this business in 2025. I mean so - and this is absolutely confirmed. So I mean you've got various parameters of these equations. We'll be even more explicit as we'll share with you. I mean our mid-terms probably 2028, so mid-terms profitability objective for our space business. But those objectives will gather what I've just explained both from space and what we expect from Avionics including this booster effect coming from the acquisition of Cobham AeroComms. Operator: Thank you. We're now going to proceed with our next question. And the questions come from the line of Tristan Sanson from BNP Paribas (OTC:BNPQY). Please ask your question. Tristan Sanson: Yes. Good morning, Pascal. Thanks for taking my questions. Just a couple of simple clarification. I wondered Pascal, whether you could give us a few elements about organic cost trajectories in H1. I'm talking a bit to recoup the organic evolution of the R&D spending, the bidding costs, SG&A that usually you provided a bridge or you provide this that would be useful. And the second question, I wanted to understand how the moving parts in the full year trajectory versus the plan. So you said that you expect space to have a negative contraction by €50 million this year. Can you remind us how much you had in mind initiative beginning of the year? And in terms of offsetting movements, I think you mentioned a non-recurring tailwind from - is it equity still in H1 if you size what it is and how much you gain that could be useful. But we see other mitigating factors that would be helpful to understand the trajectory to the guidance you're shipping it. Many thanks. Pascal Bouchiat: Okay. Good morning. So I mean first on the organic trajectory of our cost. I mean probably better to refer to our presentation on Page 6 of these slides, where we detail the evolutions of our cost I mean from both the total but also from an organic standpoint. And the good thing is that we see on this table once again, it's on Page 6 of the presentation that we have really put our indirect cost under quite a strict control and in particular, when it comes to SG&A. So, SG&A is the addition of both sales marketing and general administrative. Overall, they went up by only 1% from an organic standpoint against H1 2023. And this despite inflation despite I mean the 6% top line growth. This slight -- I mean 1% plus increase in SG&A is a mix of slightly less than 1% increase in sales and marketing expenses and overall something like a 2% increase in G&A. On the other side it's true that we increased quite substantially our R&D expenses overall at a pace of 7.6% in H1 2024 versus H1 2023. So, you see I mean quite a mixed trajectory by strict control of SG&A. And yes investing more in terms of R&D. But overall indirect costs contained at a level which is half the progression of our organic growth. Tristan Sanson: If I may add a quick one. Thanks Pascal, and sorry I missed the table. But the kind of €40 million of organic increase in R&D expense is mostly coming from Space or-- Pascal Bouchiat: No, it's a mix between Space and also I mean the Avionics business, which are the two largest contributor of this increase. And the rest of our business is in terms of R&D expenses, I mean their R&D expenses grew in line with the growth of the top line. Your second question was about our initial expectation for our Space business in terms of profitability for 2024. It was slightly negative whereas today it's towards that we see more like minus €50 million on this matter. So, there's a gap between our initial view and what we see today on space which is let's say between €30 million and €40 million. Tristan Sanson: And just to be comprehensive on that one the mitigating factor of that that alluded to the guidance, you said a non-recurring item versus equity affiliates? Pascal Bouchiat: Okay, I mean your last point was about I mean the contribution of equity affiliates. Tristan Sanson: Yes. Well you said the thermal guidance is not really changed. Now, did the range but it's more or less flat despite like a 40-plus cuts to the outlook of Space. There are other elements that are doing better? And I think you mentioned equity affiliates is-- Pascal Bouchiat: No, no, I mean overall I mean equity affiliates, I mean today I expect I mean this is in line with what we have done last year. I mean that's pretty much what we see. But overall it's true that I mean this less optimistic view on Space is offset by in particular. Overall, I mean more EBIT, better profitability on Avionics and also a bit from our Defense & Security business with overall I mean level of top line and level of profitability, which is slightly above our initial expectations. So, I mean those two elements Avionics and Defense & Security compensating for I mean a less optimist view relating to our Space segment. Operator: Thank you. We are now going to proceed with our next question. And the question come from the line of Christophe Menard from Deutsche Bank. Please ask your question. Pascal Bouchiat: Christophe Menard again. Operator: Hello Christophe, your line is open. Hello Christophe, your line is open. Christophe Menard: Yes sorry. Sorry, I'm back. I had two quick questions I want to ask. On capacity expansion, you mentioned in your presentation, I understand that this is included in your guidance for free cash flow in 2024. Is there any CapEx impact to expect in 2025? That's the first question. And on the Q1 call, I think, Pascal you mentioned quickly that you could be interested in some small site security and defense business at Atos so nothing to do with BDS, or nothing to do with a larger acquisition. Can you provide us any update on this? We know we've been following the news in the press quite obviously about what's going on. But you were mentioning at that time mission-critical businesses, I mean, it's kind of small size. So any update? Thank you very much. Pascal Bouchiat: Okay, Christophe. So we start on CapEx. And as I already answered the Atos questions in April I will leave our CEO I mean to... Patrice Caine: So we'll be able to compare the two of that, Christophe. Pascal Bouchiat: So on CapEx, it's true that, I mean, and we made by the way a few press releases and extending capacities on many items on ammunition, on missile expansion in U.K., in Belgium in particular rockets work on rather extensions in France. So and of course, I mean, behind that it's of course, I mean, capital expenditure. All of that sitting pretty well with our full year guidance that we shared with you, I mean, being of 2024. We said that we should see increase in 2024. Last year 2023, it was €620 million. We mentioned it could go up to €720 million probably still ballpark so €700 million plus is probably a good guidance for 2024. 2025 at this point is probably a bit too early, but we'll still get quite a significant level of CapEx in 2025 significantly above our level of D&A, depreciation cost, of course, I mean, to sustain, I mean, the need for us to keep investing more following, I mean, our backlog what we shared again with you in terms of expectations on order intake. So all of that is for me, I mean, fully consistent. So at this point probably a bit too early to share, I mean, CapEx for 2025. But of course, probably, I mean, €700 million being probably more a floor than a cap ceiling on what we can anticipate for 2025. Patrice Caine: Christophe, thank you for the Question. Again yes, bonjour. As you know Defense & Security is a core business at Thales -- of Thales, -- sorry, definitely. So I would just say that, of course, we look potentially at any opportunity worldwide in terms of Defense & Security acquisition. And in the case you are mentioning and I'm not going to comment it any further. But clearly the case that you are mentioning could fall under this category. They run a very, very small modest defense business at Atos. So if there is one day an opportunity to look at it we'll do our job. We'll look at it and no less no more. So nothing new, if I may say, compared to what Pascal told you during Q1 call. But again, it is the main, I would say, important thing to keep in mind is the fact that in Defence & Security, yes, we look from time-to-time to opportunities here and there, and it may be the case in the case that you are mentioning Christophe no more, no less. Christophe Menard: Thank you. Thank you very much for the color. Operator: Thank you. We're now going to proceed with our next question. And the questions come from the line of David Perry from JPMorgan (NYSE:JPM). Please ask your question. David Perry: Yes. Good morning, Pascal and Patrice. Apologies, I just want to repeat a question and I'm just not sure I heard the answer, which is probably my fault. I think it was from George earlier on the Aerospace outlook. I think it's quite important given you've lost €1.5 billion of market cap in the share price this morning on quite a small drop in EBIT related to space, and some of that seems to be that you're pulling forward restructuring. So I guess, there's a consensus for EBIT in Aerospace on your website. It's €542 million next year in 2025. I mean are you broadly happy with that consensus at the moment for Aerospace or does that need some kind of reset do you think? Thank you. Pascal Bouchiat: Good morning, David. I mean, at this point, I mean a bit difficult for me to comment, I mean, 2025. I think that I said and I'd like to confirm that considering what we shared on space, we expect the level of EBIT margin for 2024 for Aerospace to be stable versus 2023. So, stability in terms of EBIT margin, and this reflecting, of course, quite a positive growth on Avionics but also on the other side, I mean a drop a significant drop on space as space in 2023 was just breakeven. And I mentioned that in 2024, it would be probably something like minus €50 million. Now what can I share for 2025? First on Avionics, I mean we are pretty positive, I mean pretty optimistic on Avionics with the ramp-up of Cobham AeroComm with, I mean, the level of order intake that we see on Avionics with, I mean, the growth coming back quite significantly on IFE. So on Avionics, I mean for me, it's all positive, which means that we expect a margin in 2025 for Avionics to keep growing over what will be already a strong level of profitability for 2024. Now on space and space negative in 2024, it's going to be positive. This is our view in 2025. So we'll get back in a growing territory. And this fueled by, as I mentioned, I mean, lower R&D expenses, less restructuring costs and the first significant impact of our cost adaptations program that we are put in place. So if you take those three elements, you will end up with a level of profitability for space in 2025, which will be a bit too early to say how much it will be but positive. So if you add up what I've just mentioned Avenixplus space benefiting from the three drivers I've just mentioned, I mean I guess that you've got everything I mean to make up your mind but it should be positive yes. David Perry: Well, yeah, just to press you one more time. I could make up my mind. But coming from you is a lot more powerful. So is it going to be a 9% plus margin in Aerospace in 2025? Or do you think 9% will be a struggle? Pascal Bouchiat: At this point it's really - for me it's a bit too early I mean to be so precise David, probably the type of things that we'll be able to share with you in a few months. But at this point probably a bit too early. Operator: Thank you. We're now going to proceed with our last question. And the questions come from the line of Aymeric Poulain from Kepler Cheuvreux. Please ask your question. Aymeric Poulain: Yes, good morning. All of my questions have been kind of answered but following up on David's questions share price reaction, very small adjustment in EBIT guidance, stock looking very cheap. Is there a point where you might decide to resume the buyback program given the valuation that you currently enjoy? Patrice Caine: I think it's a good question for the CMD for next year. It's a Board decision as you know Aymeric. So let me just I would say ask you to be a bit patient and wait for the CMD. It would be the perfect occasion to discuss or re-discuss capital allocation and typically this type of level. It's part of the toolbox now, so happy to discuss that in November. Aymeric Poulain: Perfect. Thank you. Patrice Caine: So if there are no further questions, I think it's time to conclude this call. So as you understood H1 2024 to our opinion was pretty solid. And we, of course, remain focused on the execution of our growth strategy and the delivery of our financial objectives for the full year. Thank you very much for your participation. Have a nice summer break, and see you and talk to you very soon. Goodbye. Pascal Bouchiat: Thank you very much. Bye-bye. Operator: Ladies and gentlemen, if you didn't have a chance to ask your question on today's call please do not hesitate to send your questions to Thales Group Investor Relations at [email protected], and we will get back to you as soon as possible. Thank you all for your participation. You may now disconnect your lines. Thank you.

Hensoldt AG (HAGHY) Q2 2024 Earnings Call Transcript

Ross Law - Morgan Stanley Carlos Iranzo Peris - Bank of America Aymeric Poulain - Kepler Chevreux Christophe Menard - Deutsche Bank Simon Keller - HAIB Christian Cohrs - Warburg Research Ladies and gentlemen, welcome to the H1 Results 2024 Analyst Conference Call. I would like to remind you that, all participants may be listen-only mode and the conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Veronika Endres, Head of Investor Relations. Please go ahead. Veronika Endres Good afternoon, everybody, and welcome to Hensoldt's H1 2024 results call, which we are holding at our ESG site in [Indiscernible] today. Thank you for joining us. I'm Veronika Endres, Head of Investor Relations at Hensoldt. With me are our CEO, Oliver Durbin and our CFO, Christian Ladurner. Oliver and Christian will guide you through this presentation today, which will be followed by Q&A session. Thank you very much, Veronika, and a cordial welcome from my side as well. I'm very excited to lead you into today's presentation after having passed the 100-day mark as CEO and the 200-day mark as a Hensoldtian two weeks ago. When I briefly summarize the first half year at Hensoldt, I can say with conviction that, this company excels in many areas. My three key observations are: Firstly, our technology is really impressive. For example, we received high praise from the air defenders in Ukraine, where our TRML-4D show outstanding detection, performance and high reliability. Secondly, the entire Hensoldt team is extremely motivated and determined to provide our customers with much-needed capabilities. And thirdly, we enjoy a very solid support by our anchor shareholder, the German Government and our stakeholders in the political domain. To drive our company from great to excellent, I have already outlined my three focus areas for the medium-term, operational excellence, digitalization and internationalization in our 3M call. We have defined clear and tangible action plans, which we are now implementing with rigor. Let me outline a few of the measures we are putting in place. In operational excellence, we are focusing on delivery capability in both quantity and quality. We are taking care of the expansion and stabilization of the supply chain, initiating a transformation in engineering and optimizing our approach to bits and project management. Further, synchronization of the ongoing transformational programs is another focus. We are also assessing our international presence with the intent to better align market potential and resource investment. Our clear goal is to do around 50% of our business in Germany, around 30% in Europe and with NATO partners, and beyond that 20% in deliberately selected markets. We will also develop a consistent approach when it comes to sensitive countries and a standardized framework for export regulations, keeping the government-to-government agenda of the German anchor shareholder in mind. We are also developing a conscious focus on establishing our industrial presence. Internationally, a first step is an improved governance to better integrate our national entities, South Africa, France, and the UK. And last but certainly not least, we will make sure that our portfolio will become smarter, more digital and software-enabled connectivity, system or system architectures, networking and AI are elements that will support the transformation of hand thought from a hardware-based to a software-defined provider of integrated sensor solutions. All these measures serve as a means to an end, and I will outline our path towards the handhold 2.0 at the end of today's presentation. It was very rewarding experience for me to meet some of you our investors at our US and Canada roadshow in June. The most frequently asked question at all meetings addressed in defense is the defense spending in Germany. So, let me give you some color on this topic. The special fund introduced in 2022 mainly served as startup financing for several important and strategic defense procurement projects. This trend now stabilizes and is reflected in the midterm budget planning of the German government with a mix of budget increases, finance authorizations, and the special fund the German has government has sent a clear signal for its commitment to spend 2% GDP for defense reaching approximately 80 billion in 2028, and this commitment is underpinned by very concrete procurement plans. For example, the order of 20 additional euro fighters that Chancellor Shaw announced at the Berlin Air Shaw, or two additional F100, 26 figures that have recently approved by the parliament as well as 105 additional leopard tanks also already approved by the parliament. I mentioned this in our 3M analyst call and I can only repeat defense procurement in Germany is no longer a question of if, but how. Naturally breaking up the long-established mechanics of the cameralistic system takes some time. And yet I am confident that we see a continuation of the current dynamics in German defense procurement, and let us not forget that the European market remains favorable as well. Clear shift against Europe, European NATO members plus Austrian Switzerland will spend an additional €700 billion to €800 billion on defense by 2028 and 23 of the 32 NATO nations have reached the 2% GDP defense spend target this year. The alliance reconfirmed its commitment to Ukraine and its recent summit in Washington, authorizing a €40 billion support package and pledging strongly for enhanced air defense capabilities in Ukraine. Let me now have a look at some business highlights. Order remained strong in the second quarter, driving our total order intake for the half year 2024 to more than €1.3 billion and our order backlog to almost €6.6 billion. We reinforced our excellent position both in the Ground Based and Naval Raider segment with orders for further TRML-4Ds within the SE initiative, SPEXER radar for SkyRanger 30, self-propelled antiaircraft gun and the additional two F126 frigates for the German Navy. ESG also contributed to our strong Q2 order intake with a contract for A400M material management worth €45 million. In the second half of this year, we expect further dynamics in the armored vehicle segment, benefiting our optronics division. Our German customer is preparing to order boxer infantry fighting vehicles that will be equipped with a Puma turret, featuring Hensoldt optronics and self-protection as well as also the already mentioned 105 additional Leopard 2 tanks, of course, also featuring Hensoldt Digital optronics. The Eurofighter business once again proves to be a solid contributor to our order intake with another capability enhancement of the Mark I contract worth almost €300 million. ESG has very recently signed the already eighth installment of its contract to operate the Central German Armed Forces spare parts logistics at least at 2028, called ZEBEL. Talking about ESG. Let's have a look at the status of the post-merger integration. I can make this quite short. The PMI is a resounding success, and I see a lot of potential. We have achieved all day 100 milestones and will even advance the integration of central functions from end of the year to October 1. It is important that, our central functions from a strong supportive backbone for the new divisional setup that we communicated a few days ago. As mentioned, I see a huge potential in the integration of ESG and I'd like to have a quick look at the unique capabilities of ESG that will contribute strongly to our multi-domain solutions offering. ESG supports the German Armed Forces helicopters from introduction into service to phase out, offering full product lifecycle support. The portfolio includes the CH53, NH90, Tiger, SeaLink, SeaKing and the future CH-47 Chinook. In 2023, Germany has ordered 60 CH-47F Chinook helicopters, which will form the heavy lift rotorcraft backbone for the Bundeswehr from '27 onwards. In partnership with Boeing, ESG is in charge for several integration service around these helicopters, guaranteeing their seamless integration into the infrastructure of the German Armed Forces. Let's not forget, this is only the first phase, where a new platform is introduced into service with the armed forces with a lifespan of at least 30 years for a platform like the Chinook or the F-35 system support and service business provide us with enormous potential and high visibility of revenues. The strong partnership of ESG with U.S. primes like Boeing, Lockheed Martin is a strong asset for ESG and for Hensoldt, opening new business potential on different platforms. And with that, I hand over to Christian to guide us through the financials. Christian Ladurner Thank you very much, Oliver, and everyone welcome also from my side. I'm happy to provide you now with our financials for the first six months of 2024. To begin with, I'm pleased with our financial performance. The first half year has been very strong and is total in line with our expectations. As we have successfully closed the acquisition of ESG beginning of April, and I'm happy to report that ESG contributed as planned to our group performance. Rupert intake developed strongly with orders summing up to more than €1.3 billion an increase of 27%. As mentioned by Oliver, main drivers were the NMBS air defense systems, TLM-4D and SPEXER radars. And as part of the European Skyshield Initiative, as well as our TRS-4D radars for the F126 frigates. Also, ESG contributed strongly to our order book, for example, with the material management contract for the A400. Overall, the distribution of incoming orders was again well balanced between our home market, Germany, and Europe. Revenue reached €849 million in H1, mark an increase of 17%. This development was driven by sensor and especially TRLM-4D radar. ESG delivered as plan two with a contribution of €82 million. The level of pass revenue further declined by 26%, resulting in an improved quality of revenue with a figure close to €6.6 billion or the backlog again reached a new record level in our history. This continues to provide us with an excellent business visibility. The strong performance of our top line is also reflecting our profitability. Adjusted EBITDA increased to €103 million leading to an improvement of the adjusted EBITDA margin of 1 percentage points to 12.2%. Our core margin, excluding pass revenues further improved to 13.2%. The increase was driven by the accelerated production or radar business leading to further economies of scale. This was partly offset by investments in our growth and into our product portfolio of the electronics business. Adjusted EBIT also benefited from the increased volume and up to €52 million with an adjusted EBIT margin of 6.1% respectively, 6.6% excluding pass through business. This increase was partly offset by amortization of capitalized R&D expenses. Cash generation the first half of 2024 was fully in line with our plan and following our usual seasonal profile. With an adjusted free cash flow of minus €145 million. Despite the growing business volume, we were able to realize a year-on-year improvement and has already teased in our last analyst call. We have received first prepayments of our German customer in April and we expect more to come. To sum it up, our bottom-line further increased and developed as planned. Let's now have a look at our segments. In the Sensors segment, the strong momentum in order intake continued in the second quarter with orders summing up to nearly €1.3 billion exceeding the previous year's figures by 53%. Organically, the year-on-year increase amounted to 33%, driven by TRML-4D inspector radars within SE as well as our radars for the 1F-126 freeways. As previously mentioned, the contribution from ESG was strong as well with €166 million, which corresponds to a book-to-bill of 2 times for ESG. Revenue in the Sensors segment increased significantly by 23% to €745 million. Again, I want to highlight that, due to declining share of pass-through revenue, core revenue increased even stronger by 16%. Key growth drivers were the accelerating dynamics in air defense and our strong baseline business. Revenue for ESG developed as planned and contributed €82 million to group sales. The margin performance of the Sensors segment was again excellent with an increase in adjusted EBITDA of 36% to €117 million. The uplift in absolute margin of 150 basis points was driven by further economies of scale in our Radar business, in particular for 4TRML-4D and the decline of pass-through revenue. In the Optronics segment, order intake developed in line with our expectations and amounted to €139 million. As a reminder, previously included major contracts for armored vehicles as well as for periscopes and optical mask systems for the Norwegian Ula class submarines. In terms of order intake, we expect to put several key orders for the Leopard and BOXER RCT30 in the second half of the year as outlined by Oliver. Sales came at €108 million. Main revenue drivers were ground based systems business and high precision optics FSM in Germany. This was offset by the South African entity, where we are currently conducting a technology change and the realignment of its market strategy. Adjusted EBITDA in electronics summed up to minus €15 million. This development was driven by lower volumes in the South African entity. Let us be clear. We are not yet there where we wanted to be. We have a strong backlog and further orders are expected to come. Nevertheless, in terms of execution, we have to improve. Therefore, we have full management attention on that. First, we are running a monthly steer call with the Optronics leadership team to monitor the progress closely. Second, we are in close communication with our OEMs and the end customer to align on development and production plans. Third, we laid the foundations with our investments in the digitalization of the products as well as internal logistics and sites for further ramp up. We now see first movement in the right direction, and I will give you some color on this now backed with concrete facts and figures. We are building the basis for transforming the record order backlog of €900 million into sustainable growth. The production plans are set up, approved and closely monitored. On this slide, you can see the planned increase in production units in our ground-based systems business in Germany for this year. These are only three examples of many. As mentioned, the business is already growing year-on-year per H1. However, the seasonal profile is rather wait the second half of the year, where we'll see accelerating growth of the German business. For the full year, we expect a double-digit production increase of our land vehicle sites as well as for the M1 Abrams laser range finder. And as you can see in the middle chart, we'll also produce and deliver the first batch of our See-through Armor system to our launching customer KNDS for the remote-control harvester. With the initial integration, we are equipping our first customer with this revolutionary sensor solution, which provides us 360-degree Citral awareness picture for every crew member inside the vehicle. My key message on this slide is our existing order book paired with the current ramp up of our production capacity in Germany, give us visibility and that's a high competence in the business development. And on top of that, the move to the new product side of a [Indiscernible] early next year will further support and accelerate the growth from 2025 onwards. Let's now have a brief look at our net debt development reflecting the partial funding of the ESG acquisition by new debt of €450 million. Net leverage increase to 2.8 times in H1 2024 as expected. Excluding a new debt for the acquisition, net leverage will be at 1.5 times. This shows that we are operationally on track and that we'll further the leverage to around 2 times by year end 2024 as outlined in our guidance. Let me now come to our guidance for 2024, including the contribution of ESG as introduced in April. First and foremost, we are fully on track to meet our targets and therefore confirm our guidance for this year as well as our guidance for the midterm for all KPIs for 2024, we expect a book to build between 1.1 and 1.2 revenue to grow around €2.3 billion. And please be reminded with a continued stronger growth in core revenue and a smaller share and pass through sales than in years before. Adjusted EBITDA margin before pass through between 18 times to 19 times. And let it be more specific in this regard, we expect the margin to be at the mid to upper end of the guidance range. For adjusted free cash flow, we see a cash conversion of around 50% net leverage at a level of 2 time and dividend payout ratio between 30% to 40% of adjusted net income. Coming to a conclusion, let me mention the following key financial takeaways. Our impressive order intake of over €1.3 billion leads an order backlog at an all-time record level of €6.6 billion. This provides us with an excellent revenue visibility for the years to come. Our efficient project execution supports our excellent profitability. We have received first prepayments from our German customer in April and there will be more to come the integration of ESG's fully on track and we are very pleased with the contribution to our group performance. Therefore, we confirm our guidance for all our KPIs as explained with adjusted EBITDA margin before pass through, expected to be at the mid to upper end of our guidance range. Our outlook remains promising and we are strongly-positioned for the upcoming growth. We expect further major contracts to be booked in H2, 2024 as explained. We have set a strong basis and good visibility in Optronics to execute the order book. Last but not least, all planned synergies for 2024 with ESG has been confirmed. This and the large-scale increase of defense budgets globally will generate long-term sustainable growth for Hensoldt. Thank you very much. And I will now hand it back Oliver to give an update on how we will focus on Hensoldt 2.0. Oliver Dorre Thanks, Christian. Dear audience, I mentioned in my introduction that, my three mid-term priorities are first stepping stones in a comprehensive strategic and organizational transformation that will safeguard and prepare our future towards the Hensoldt 2.0. The mid-term priorities lay the foundation for us to deliver capabilities at our customers fast and at scale and develop modular cost-effective products and more integrated and software defined solutions. Together with our leadership team, we decided to use the addition of ESG to the Hensoldt family as an opportunity to also evolve our divisional setup. In the future, we will have four divisions focused on our different types of businesses, Radar, Optronics, Multi-domain Solutions and Services & Training. Our core product divisions, Radar and Optronics will bundle our entire product business, including electromagnetic warfare and continue to focus on developing innovative defense electronic products and drive synergies through optimized cross-project operations. The Services & Training division will mainly maintain its current structure for stability and growth beyond maintenance, repair and overhaul. For example, including training and simulation as well as new service business models. We will create a new division to scale solution capabilities as the growth engine, the new growth engine for our company. This clearly signals to our customers the required separation of our product and the manufacturer and platform independent solution business. This Multi-domain Solutions division will be a docking point for our customers who think across domains and we will combine the strength of our spectrum dominance and airborne solutions with ESG. All-in-all, the changes and challenges in our business environment are nothing but fundamental. And we have launched a project under the name of Northstar to develop a vision for Hensoldt beyond 2030 to support our next strategy cycle. As the name suggests, Northstar will guide us in an increasingly volatile market environment and will prepare us for the next steps in European consolidation that we will continue to actively drive from a position of strength. Dear ladies and gentleman. Our customers expect us to become an reliable partner, delivering much needed capabilities. Our political stakeholders expect us to become an even stronger player in the dynamic European defense and security landscape and the capital market expects us to continue and even accelerate our growth. I am confident that the steps I have outlined today will serve as a transformational road map from a trip from which we will all emerge even stronger, more agile and better equipped to face these diverse challenges and seize the manifold and huge opportunities ahead. Thank you very much for your attention. We will now gladly take your questions. [Operator Instructions]. The first question is from Ross Law with Morgan Stanley. Please go ahead. Ross Law Thanks for taking my questions. A couple for me, please. The first, just on the German defense budget assumption and your confidence in that base budget going from around 50% to 80% over the medium term? And then secondly, on orders, you flagged some key orders in the pipeline for the second half worth almost $700 million. What's the progress on these? And are awards likely to be front or back-end loaded this year? And then lastly, on optronics, you provided some information about issues in South Africa. Can you maybe just give us some more color around what the facility does exactly and what these issues have been. Thank you. Oliver Dorre Okay. Thanks, Ros. Of course, glad to answer. So, we will share the answers. Let me start with the German defense budget. So as a matter of fact, as I showed on the slide, I think we're pretty confident going forward because, first, we definitely see that until 2027, where still the extraordinary budget is phasing in, we are on the level of 2% GDP and coming back to many engagements I have currently with politicians. I'm absolutely confident, as I said before, that it's not about the if that we will then switch to sustaining this level of €70 million to €80 million over the time. What makes me confident, and I think that is actually what is also resonating with you, is first of all, we see, and that is given also my long experience in the German market that is really a paradigm shift. We see that recently, the German Parliament has approved new programs and they're about to run for 100 decisions this year, where we don't see actually the budget lines in the plan, but they are willing to really feed the demand that is clearly articulated from the Minister of Defense on behalf of all the stakeholders of the [indiscernible]. So, the clear evidence is the F126 additional two frigates, which we hadn't planned for this year, but which now came up also with the option deadlines running out. Second evidence is the Eurofighter, which is not yet in the parliament, but with a clear commitment of Chancellor Scholz at the ELA exhibition to buy 20 additional ones. And we have more coming up as far as the vehicles are concerned. And I will come to that with regards to your questions on the orders. The second topic is that fuels my confidence is that, of course many of the programs that we address, I mean, talking a defense, talking the vehicles for the German armed forces are clearly priorities, where I would say, the main direction has been set with some of the programs looking at NNBS in Germany, where we have more batches to come in the next years. I mean, there's no way back on these ones. As a matter of fact, the customer said, a, we will have to say b, c, d as well. In that regard, I think the decisions that have been taken entering prioritize into air defense, into vehicle buildup with regards to ship submarines that the decisions that were taken in the past are normative also on the midterm to walk the talk they are doing. Last is what we should not forget probably, and I introduced that our clear ambition of internationalization. We have concluded Phase I of our internationalization midterm priority initiative. Entering Phase II now, where also we are more systematically within account management, shifting focus to Europe, also selling B2B, B2C and secondly have selected targets in global campaigns where we look for strong alignment looking at Singapore, looking at India, looking at the Middle East, looking at Taiwan, for example, where we can secure from the beginning in line with G2G agenda that export issues will not be the case in these ones. That's my take on the question one. Looking more on the orders. Coming to the land market very clearly, we are in very close discussions with KNDS and of course, also Rheinmetall. But I mean looking at Leopard, looking at Puma, what I've outlined, the infantry fighting vehicles, we definitely see and the 105 Leopard as the first instance. We have the next to come, the Puma BOXER, where we're pretty advanced approaching the decision making. We have additional batch of Puma, where we have aligned already the schedule of deliveries. We aligned on the specifications, we have taken, which, of course, we see our initial preparations in the team on the operational excellence. I'm pretty sure that in the second half and that is the progress, the maturity of the discussions, we will have the orders coming in and probably with that also some first cash milestones advance payments. Same applies for the sea. We recently heard on the orders, submarines, Minister of Pistorius demanding for additional submarines. We have pretty mature discussions now where we leverage on a good relation of ESG looking at the F127, where we expect also decisions this year, early next year, where Hensoldt with the support of ESG could play a major role. Last but not least also on cyber, maturing progressing on our deliveries on the PEGASUS program, we have started also with a backup and that started at ELA exhibition as well together with the Chief of the Air Force looking at G2G agendas. We have three customers identified, where with one of them we're already in the RFI stage. That means also we see that, we can multiply the PEGASUS on the midterm. Christian Ladurner Yes. Lastly, Ross, thank you for your question. First, maybe in terms of structure, we have to understand when you take the Optronics segment, it's 80% Germany and 20% South Africa. In South Africa, we currently see two topics with a technology change. So, the gimbal technology changes in a generation, that means we cannot now do some revenues until the simple is fully developed. And the second one, and we've wrote and commented, we are currently realigning market strategy. That means we are much more thoroughly than the years before in which countries we export the gimbals and this is how it behaves in South Africa. Nevertheless, I have to say, when you look at the H1 business and the Optronics German business, and this is a clear driver and Oliver was mentioning, the orders which are coming in, they relate to Optronics, Germany. We see now the first growth. And going forward, with 80% of German electronics business, we will see growth from a segment point of view. The next question is from Carlos Iranzo Peris with Bank of America. Please go ahead. Carlos Iranzo Peris Good afternoon, and thanks for taking my questions. I actually have two, if I may. The first one on cash flow on PDP. So how should we think about PDPs from Germany in the second half of the year? And then the second one, if you could please remind us the growth outlook for ESG and the midterm margin profile. Thank you. Christian Ladurner Carlos. So first of all, cash flow second half. So, you know that in H1, we are at the deepest level of our cash, so we have guided for 50% cash conversion. So, this is quite good in line. So -- and we expect, of course, more advanced payment. There should be in a region of we have seen in H1. So, this continues. But with that, of course, we invest further in working capital to prepare now for the orders we have gone. So, the conversion of the profit into the cash is in the range of the guidance. So, this is forgoing. ESG. For this year, we see €300 million for 9 months. It means that with the 82 with also a very strong Q4, we are very good in line. And going forward, we see this 10% on ESG, quite similar to our organic business. And when then you recalculate from 9 months to 12 months, and plus the 10%, we see next year around €400 million, which we have guided also for next year. So, this is on a very good track and well in shape. The next question is from Aymeric Poulain with Kepler Chevreux. Please go ahead. Aymeric Poulain Yes. Good afternoon. I just wanted to go back on the German budget initial question and your forecast for 2025, which just increase compared to the €80 billion. And I suppose in early July, there were third of articles suggesting that the budget could be cut, especially the Ukraine part of it, the €8 billion could be cut by half. Just wanted to have you take on that? And -- is there some offset that you see that we're not necessarily put in the draft budget? And indeed, if the Ukraine help is cut, what would be the consequence for the radar business in particular, and the margin outlook? Is there a sensitivity analysis you could give for this type of scenario? That would be the first question. The second question, I think you gave the sales number for ESG, but you didn't give the EBITDA contribution for the quarter. Would it be possible to have that? Looking at the structure, four divisions that you plan to have, when do you think you'll be able to provide a pro forma? Indeed, what benefits should we assume from this new structure? Is it a commercial clarity benefit? Are there some specific cost to add to build this type of new infrastructure? Just clarify the rationale for the new division plan? Thank you. Christian Ladurner So, first question. hello, Aymeric. Firstly, first question on the budget. We have outlined next year 2025. We still see the €8 billion for Ukraine military support. When you look at Page 4, the €4 billion coming from Germany and the rest of the €4 billion shall be funded by the EU or the G7. There were also some discussions on that, that it would be funded from the frozen funds of Russia. This we still see the €8 billion as quite stable, and I do not see now any impact on air defense. This is still vital and I also expect further batches from the Ukraine in this regard. With that, we are on a good track with the margin. We have seen it now last year, we did around 19.9%. We are now 1% ahead and this is why we're quite confident that we are at mid-to-upper range of the guidance, so this develops further and we will see how this outline. The contribution of ESG for one quarter was €9 million EBITDA. This was fairly in line with our margin. Normally you see around 14% EBITDA margin. This is how you should model the ESG business. Last but not least, I think, I've understood it right that, you asked if the new divisional structure will have some additional costs. This is not the case. It's just how we approach the markets and how we organize ourselves internally in order to create value out of the multi-domain solution, what is mainly also customer driven with the new focus also on these topics. Thank you. The next question is from Saks Dusa [ph] with Agencies Partners. Please go ahead. Unidentified Analyst Thank you very much, indeed. Good afternoon. I've really a follow-up to Aymeric's question, I think. I don't think I quite understand the new divisional structure and specifically the multi-domain part of it. Should we expect a program like PEGASUS to be in this and so separate it out from the core radar business? Oliver Dorre This is Oliver speaking again, and great to have you here, Saks. I will give you a bit more insight on the new divisional setup and then Christian will focus a bit more on the reporting segments and all of that. Yes, indeed, as you rightfully say, the multi-domain solutions division, I would say at that stage, and please maybe at an upfront disclaimer, we're in the middle of sorting that out. That is rather giving the guidelines or guard rails for the future setup, and we actually have clicked that off with our senior leadership meeting, which took place 1 week ago. we are working now with the division as very clearly; this new setup is following three priorities. First thing is looking at our customers to be closer linked and looking at B2B, B2C customers to have a clear match. And as I outlined already, that is, of course, also reflecting the request of some of the partners of ESG, also growing in solutions where we have to have a stronger interdependency independency, sorry, between the product and the solution business. So, customer is one thing. Second thing is, of course, the business. And that has, again, two elements, business continuity. Of course, we want to sustain the strong business that we have today, but we also want to open the door strategically to develop the business and agilely answer the dynamics that we see on the market. And last, of course, I mean, looking bottom line, it's also about cost efficiency. And that are the guiding principles together with this four divisional setup that we have shared with our experts, and we are running that exercise now with a top leadership team in the next week with the ambition to rather start in that direction in next year. So, coming back to multi-domain solutions, as you rightfully said that there will be, I would say, two sub pillars in that. One is really looking at the customer where we want to leverage on the very strong conceptual and also system integration-wise capability that we have with ESG in the land, in the air, in the sea, in the cyber and the space domain. So that is also the divisional or in our nomenclature will be rather the business unit structure that ESG has today. And that is what we want to bring in the ESG business units with all their know-how into Hensoldt. That is what we have in this one pillar a very customer-oriented structure, where we look at solutions in the domains and of course, there will be a bracket around that also how do we work multi-domain to get the understanding to interconnect with all the products that we deliver for the various domains. And indeed, as you said, there will be a second pillar where we would bundle our large programs. Together with some transversal elements that we have today, which we will further cultivate on airworthiness, on cyber, on cloud and IT technologies and all of that, so that we kind of encapsulate that know-how in a very strong structure with, of course, operational mindset on one hand, but also the conceptual and customer mindset in order to deliver solutions in the future effectively. Christian Ladurner Yes. First of all, your question on the reporting. So currently, we have two segments, and the Optronics segments we were discussing about that. And in the Sensors segment, we have today, the radar business, and the Despite business, spectrum dominance by PEGASUS is a part of it in the respective service. And ESG is now part of the Sensors segment. So, going forward for this year, we will not change anything on the segments. With the discussions what Oliver has outlined, we will also do a review regarding segments, technology-wise and if we do an adaption for the time being, it will stay constant. PEGASUS as well as ESG will be part of the Sensors segment. If there are any changes, we will inform end of this early next year, if there is a change. The next question is from Christophe Menard with Deutsche Bank. Please go ahead. Christophe Menard Yes. Good afternoon. Thank you for taking my questions. I had actually, I think two left. The first one is on the operating leverage in Sensors. I was positively surprised by the good margin performance. The incremental margin or I think we call it the drop through margin on your new business is 27%. Is it something that is only deriving from TRML-4D? What does it correspond to? I mean, you're not finished in the ramp up. Should we expect more of that operating leverage? That's the question. What is the impact on the midterm guidance? The second question is on the Optronics. I mean, thanks for the detail, the color you provided about the rising volumes. Does it mean that, those Optronics systems, you actually build them when you deliver them? Or is there any progress payment because H1 was actually not great in terms of sales. Should we expect just a bump in revenues as you deliver them, because you're going to build them as you deliver them? Thank you. Christian Ladurner Hi, Christophe. Thanks for your question. In terms of operating leverage, nice when you surprise in terms of profitability. I have to say, we are good on-track in this regard. It remains mainly on aid Defense and also in TRML-4D, but also in specs and other products in this regard that we see good margins. We are on a very good track in this regard. But you also know that Q4 is our heaviest quarter and we will see how this develops, but I'm very confident that, we do a good margin also this year. Going forward, there is potential and we discussed it already several times. For the time being, I stay with that, because as Oliver has outlined that we are a high technology company, I can only reinforce this day-by-day. We have to take thoroughly investments in order to cope with this high technology and stay at the edge. But in terms of operating leverage, we see going forward course opportunities. Let's see how we reinvest this and what is the net impact on the margin. In terms of Optronics, yes, you're right, the revenue is strongly connected to the deliveries. The deliveries now will ramp up in the second half year. It's the Q4 is also here the business is Q4 loaded, because in terms of deliveries also the customer is still very focused on Q4. With that, we will see a growth in Q4, especially in Optronics German business and this will offset then the reductions of Africa. The next question is from Simon Kelleher with HAIB. Please go ahead. Simon Kelleher Hi, everyone. Thanks for taking my questions. I have two and they are both on the air defense area. Firstly, in the news, I read that, there are couple of TRML-4D orders pending in H2, for example, by Lithuania, but I think also Switzerland and Austria seem to be likely candidates. Yet, you did not put them on the expected order slide for H2. Am I wrong in assuming that they are likely to come? Or is there any other reason? And secondly, on the spec or Skyrange opportunity, I was wondering, is your radar always implemented on the platform? Or what's the likelihood that the customer chooses your radar? And maybe can you give some midterm potential like you did in the last call for the TRML-4D, i.e., how many customers are expected to choose the specter radar? And also, how many would they then need? Thank you. Oliver Dorre Okay. As a former defender Simon, I will try to answer your questions. This is Oliver speaking again. So first, on the TRML-4D, I think as we had clearly outlined in the introduction, we have today, the German customer, of course, with NNBS, where now after the developments, we have major batches coming in. And of course, based on also a first batch, which is rather dedicated to surveillance, part of an urgent operational requirements, we also see more possibilities. Then we have Ukraine, as you also know. And yes, indeed, currently, we see that the first customers are moving in on the S. So, this is Latvia, it's Slovenia. It's Romania, we're discussing Estonia. Indeed, also Switzerland has started a tender on a new air defense system, which is, I would rather say orientating in the sense of S. And despite that there is competition out there on the market. I'm proud to claim that our radar is the only one really despite probably U.S. technology. European radar in strong operations day by day, also looking at the quantities we have contracted and deployed to Ukraine. And in that regard, I'm really confident, and I explained that in one of the previous calls that we see only in the medium segment a rather €2 billion potential to be addressed. We are currently doing the math on our future planning where we more detailedly, as now the various nations are dropping in. We had many discussions at Eurosatory at Berlin Air Show where now we are consolidating this picture and see it moving in. And a very clear reference for our confidence is also that we are continuing despite that we have increased from three radars to 15, we are continuing to put efforts in how could we scale also strong discussion with U.K., which also raised a strong interest in the medium segment on TRML-4D. And I think that's just a couple of nations where we are in mature discussions. And on top of that, I think it's a market that is just about to be -- to open. Second question on SPEXER, here at least on the first part, this is linked to the vehicle. And as a matter of fact, as time to market is very decisive today, and we're pretty advanced on the Skyranger, integrating it with Rheinmetall. We saw also in the recent orders that we have announced in the presentation that, yes, there has been a discussion would we choose the Hensoldt radar or are there other options? But when it came to looking at integration risk at time to market, the Hensoldt radar was a natural choice, because it's very well-integrated in the conceptual setup that we see today, and that is what we want to leverage on. In order to secure that for the future, we have, I would say, a very advanced concept that we can have a full antenna, half antenna, a quarter antenna. That also with that looking at different vehicles, different setups, we are very flexible to integrate our SPEXER technology into this short-range air defense environment, which I think is a very unique and strong selling point going forward. For the last part of the question, I'm sorry, I can't give an answer at that time, but we will keep that topic and probably address it also through IR. The next question is from Jan de Roques [ph] with ODDO BHF. Please go ahead. Unidentified Analyst Yes. Good afternoon, everyone. Maybe three left. One maybe on your priority internationalization, because if we analyze your order books, we do not have the full details, but I believe that, Europe and Germany come for more than 80 % of the total order book. I wanted to know whether M&A will be in the future the focus, I would say, to improve the non-European position. Are you targeting 20% of your turnover mid-term? I was wondering if M&A was the option to improve this part of your business. Then a question on ESG. Can you remind me when the earnout will be paid? And what are the main underlying assumptions for this €55 million payment? Maybe the last one for Oliver, we've seen that Leonardo was, I would say, talking with to dry metal about an alliance in land armaments. I was wondering, if this initiative was changing anything in your relationship with Leonardo and Cingolani? Thank you. Oliver Dorre Let me take the first one, internationalization also to put a little bit more meat to the bone. Indeed, you rightfully described the dependencies, I would call it and its positive dependencies on the German and probably Europe now with SE moving in. As I've explained that, indeed, also ESG now with a very high part of the business being related to Germany, I think with Germany, we are at roughly two-third, almost 70% of our business today. The majority of the business despite a couple of customers globally is then in Europe. When I introduced in my presentation the 50/30/20, that is of course kind of guidance, which I would see on the midterm also to guide my international business development team, which so far successfully, but so far has been acting rather opportunistic. How do we want to do that going forward? I think first thing is more focus. Part of the internationalization initiative that we are also doing with a consultant at the moment is to provide, I would call it, a clear metrics, where we outline to our teams, what are the countries that we want to address? And what are the solutions that we want to address, which, again, so far has been very opportunistic. And I think if we apply more focus, and that is somebody who has been quite successfully, I would quote and claim VP Sales and Marketing in Thales for 5 years. I think it's all about focus, really tailoring your efforts, which will help us. In the very strong pipeline. As a matter of fact, we just had our order intake review the first initial kickoff 2 days ago. And I think if we really focus on our strength and the strong leads that we have, we will be far more successful than only diluting across a manifold, a multitude of customers. Second thing, is looking at how do we sell. And I think also coming from Thales, but also with Frequentis before and working a lot in sales and business development. I was very much used to account management. And here is it really about strategic accounts where we go B2C, where we would rather systematically sell and interfacing between a central sales force and divisional sales leads, which naturally have to be with the products and the solutions but I think to bring more efficiency in that cycle and a clear strategy, leading our activities will not only give us efficiency, but also help us to be more successful. And talking key accounts, I think as a product house with two divisions and strong product business today and still a core business of products in the future, it's more important to systematically address the OEM selling B2B, and I think here we can do better addressing shipyards. I think with the vehicle manufacturers, Rheinmetall, KMW have been mentioned KNDS were also General Dynamics. So many of them, we have good relations, but I think we can more institutionalize those relations to bring the scale to the sales of our products especially as also on the product portfolio with [indiscernible]. You saw our recent success in U.K. We are also entering new products, cost performance, not only addressing the high end where definitely we can sell by volume if we really systematically develop our channels. And last but not least, yes, indeed, once we have recovered our leverage and everything, it remains that technology and internationalization remain our criteria for M&A. Christian Ladurner Yan, your question on earn-out. So, there will be a second earn-out component. It relates to the order intake of the ESG business 2024. And will then be paid if they reach a certain amount of orders by 2025 as opposed in the first quarter. Oliver Dorre So, on the last question, I mean, very clearly, it's probably too early to state. We're following the media and definitely, I mean, considering that Leonardo is our shareholder, but also a very good partner since many years. You know Eurofighter, all of that. We are, of course, in close contact close relation. As a matter I can say, I had a good alignment with the management a couple of days ago. So, we are -- and I think I have stated that in one of the previous calls, we are continuously evaluating what could be the cooperation because it's my true belief -- and I said that we want to actively steer the European consolidation. It's my true belief that, that consolidation should be a means to an end, yeah. It's all about cooperation bringing Europe closer, bringing standardization on the market, making it more modular. In that regard, I mean, looking at more than 100 tanks that will be delivered to Italy, which are now of course driven by Rheinmetall, let's make sure as we are the incumbent and the major technology provider for the Leopards that we also engage with Leonardo again as a shareholder, our strong partner to make sure that, we support Leonardo in bringing the best tanks to Italy. That is the discussions we're having, of course, not concluded. That is very clearly to say at that stage as a disclaimer. The next question is from Christian Cohrs with Warburg Research. Please go ahead. Christian Cohrs Hello. Good afternoon. Thanks for taking my question. You're striving for an organizational transformation, you're in the midst of a major integration task with ESG. You are ramping up your business and preparing for future growth. And then your COO resigned a couple of weeks ago, and I assume that the COO is a key management position in the operational phase you are currently in. This, of course, can be a coincidence, but I think it also raises questions and I think it also needs to be addressed. Again, the spectrum maybe you can shed some light on that? Thank you. Oliver Dorre Yes, of course, Christian. First of all, and maybe just to repeat what I explained on the divisional setup. The organizational transformation and the ESG integration is, I would say, a seamless transformation that we're doing at the moment. That is actually why we're doing it. I would not see, I would say, separate building lines for that. Second part of your question was, how does that interfere with the operational excellence with scaling our business in quantity and quality. Again, also here I would say, it doesn't a means to an end. I mean, the operational transformation that we are doing is actually to catalyze many of the efforts that the team before I joined Hensoldt took with Hensoldt Co, which we kind of put in a broader framework now and we're running that in the direction. Coming back to the COO, I think we put a press release on this one. I would just refrain from entering those speculations, which were also in the media that these things are together. Maybe, it's just worse to note that, the COO position that Celia Pelaz took was newly funded. That means the interaction, as you say, your concern that now putting this function out, could put a threat to the system in the sense of discontinuation is not the case, because it was newly funded. We're running a couple of activities in operational excellence, which I think were initiated also on my behalf. I can just assure you that, especially with a very strong alignment between me and Christian, we will sustain these efforts that are ongoing. I don't see any disruption on the case. It's rather a personal decision of Salia looking, and we have full and great respect of hair achievements within Hensoldt successes really that the Hensoldt as we see today takes her handwriting in many cases as she was the Chief Strategy Officer, Chief Sales Officer. But again, now a new setup a very highly motivated team, which we could see at our recent sales leadership team, and I think a very united board here. So, in that regard, no worries, we walk the talk, we run our way, and I definitely think in line with the guidance we have provided. Hensoldt will continue on the success streak. Ladies and gentlemen, that was the last question. I would now like to turn the conference over to Veronika Endres for any closing remarks. Veronika Endres Thank you all for listening today. As always, should you have any further questions, the IR team is happy to follow up. And with that, have a lovely weekend. Thank you, and goodbye.