Letter
from the CEO
to Shareholders

Dear Shareholders and Readers,

Letter
from the CEO
to Shareholders

Dear Shareholders and Readers,

An undoubtedly extraordinary year lies behind us – for the global security order, for Europe, and for our own company. In his speech to the Bundestag on February 27, 2022, just a few days after Russia’s attack on Ukraine, Chancellor Scholz coined the term Zeitenwende (turning point) to describe a watershed moment in German foreign and security policy that also has significant implications for HENSOLDT.

We shed light on the manifold implications of the German Zeitenwende , the increasing development of Europe toward a military union, and the renaissance of NATO in a separate section in this Annual Report.

At its core, the Zeitenwende means taking a realistic look at everything to do with defence and security – namely, recognizing that peace and stability in our world are not simply a given, but must be protected and defended. To achieve this, we need operational armed forces and a strong defence industry, among other things. To put it clearly: In my view, this perspective is a return to normality. For me, the justification and necessity of defence capability has never been in question.

With the Zeitenwende, a wider public now recognizes the contribution we make as a company for a safer tomorrow. With the market position we have built up in recent years, we are very well placed to fill this role comprehensively and to exploit the associated new business opportunities in Germany, NATO, and also worldwide. At the same time, we are very aware that these opportunities come with a great responsibility: The Bundeswehr and the armed forces of our partners must be supplied reliably and much faster than before. As HENSOLDT, we have proven in recent years that we implement complex projects in a disciplined manner and deliver our solutions on time, with high quality, and within budget.

This is also a major reason why our business has again developed excellently in 2022. For example, we are working full steam on the major projects Mk1, the next-generation Eurofighter radar, and the PEGASUS airborne signals intelligence system, which we received in 2020 and 2021, and are reliably converting project milestones into profitable sales and cash flow already today.

All business areas contributed to the renewed strong order intake of around 2 billion euros last year. These included, for example, the order for four TRS‑4D naval radars for the F126 class multi-role combat ships worth 168 million euros, a further long-term tranche to support the Eurofighter electronics systems worth 270 million euros, and radar and self-protection systems for the Spanish HALCON Eurofighters worth 175 million euros. Our civil business with high-performance measurement technology contributed around 45 million euros to order intake in 2022.

Of outstanding strategic importance is the order worth around 100 million euros as part of the “Future Combat Air System (FCAS)” for the development of demonstrators in the core competence fields of radar, reconnaissance and self-protection electronics, optronics, and overarching sensor networking. We are thus laying an important foundation stone for HENSOLDT’s participation in this billion-euro programme for the coming decades and once again demonstrating our role as an active shaper of European cooperation.

Last fall, we delivered the first of four TRML‑4D high-performance radars for the IRIS‑T SLM air defence system to Ukraine in record time. Our employees ensured this with great commitment and particularly close cooperation across all areas – an excellent example of the agile entrepreneurial spirit that has always distinguished us at HENSOLDT and makes such achievements possible in the first place! Today, our radar protects the population in Ukraine so effectively against Russian missile and drone attacks that the Ukrainian government ordered two more TRML‑4Ds from us in early 2023. We will also deliver these swiftly. In addition, the TRML‑4D, also in combination with our innovative Twinvis passive radar, will be an important component of the “European Sky Shield Initiative” launched by Chancellor Scholz and will set new standards for high-performance sensor technology in mid-range air defence. In order to shorten delivery times for our customers, we are moving ahead and have decided to produce a tranche of 30 TRML‑4D radars – a quantum leap that clearly demonstrates the new relevance of our industry!

It was also important for us last year that, after a two-year interruption due to the pandemic, we were finally able to talk to our customers and partners in person again – for example, at trade fairs such as the ILA in Berlin, Eurosatory in Paris, and AAD in Pretoria. The highlights of 2022 for HENSOLDT also included the start of construction of our new technology campus in Oberkochen, the inauguration of the new laboratory building in Ulm for the PEGASUS and Eurofighter programmes, and the agreed cooperation with the Israeli company RAFAEL to equip the Eurofighter with electronic warfare capabilities. With the strategic cooperation agreed at the end of the year with “21strategies”, a leading specialist in “third-wave” artificial intelligence, we are continuing to drive forward the development of artificial intelligence for the next generation of defence systems.

We very successfully combine our high innovative strength with a robust and crisis-proof business model. Before the German 100-billion euro special fund had even taken effect, we were achieving our ambitious targets again in the 2022 fiscal year and even exceeding many of them : With our order intake of around 2 billion euros, we now have a record order backlog of 5.4 billion euros and a book-to-bill ratio of 1.2x. HENSOLDT sales increased by 16 percent last year to over 1.7 billion euros, and adjusted EBITDA by 31 million euros to 292 million euros. With a very pleasing adjusted free cash flow before interest and taxes of 219 million euros, we were able to further reduce our debt-to-equity ratio to 1.2x. So you see, we keep our word and deliver what we promise!

With the appointment of Celia Pelaz as Chief Strategy Officer, with responsibility for all our business development in Germany and globally,, we had already initiated a generational change in our management team in 2021. We continued this process last year, both in our Management Board and our Executive Committee. In addition to Christian Ladurner as Chief Financial Officer and Lars Immisch as Chief Human Resources Officer, Chris Ruffner (Head of the Spectrum Dominance and Airborne Solutions Division) and Alexander Dahm (Chief Supply Chain Officer) also took up their new positions as members of the Executive Committee in 2022. They all know their business inside out and bring valuable experience for our next growth step. All four colleagues are very familiar with HENSOLDT and were able to hit the ground running in their new roles from day one. At the same time, they bring in new impulses with a lot of commitment to realize the opportunities and master the challenges that lie ahead.

These challenges include, among others, the reliable supply of primary products and components in the face of cross-industry disruptions in supply chains. Roughly 90 percent of our suppliers are based in Germany or Europe, which significantly softens these issues for HENSOLDT. In addition, persistently high energy prices and inflation overall are influencing the development of the cost base of our products and their pricing. We have kept a very close eye on all these issues and have set up special expert groups to assess potential impacts on our business on an ongoing basis and recommend and implement measures where necessary.

Above all, however, we will be engaged this year and far beyond in the realization of the Zeitenwende and the associated opportunities. Germany’s special fund of 100 billion euros will boost the order intake momentum significantly over the next three to four years and do a great deal to drive our industry’s “supercycle”. In this context, HENSOLDT will benefit from significant changes in the operational doctrine of the armed forces as well as from key technological developments: the ability to quickly create a comprehensive situation report, to distribute this information in a network of connected sensors and effectors in a way that is appropriate for the mission, the dominance of the electromagnetic spectrum – we are ideally positioned with our portfolio for all of these tasks that are in high demand. From the projects of the special fund and the upgrading of the Bundeswehr, we have defined clear priorities that we are pursuing with vigor. These include, for example, the digitalization of land forces, the Eurofighter’s electronic warfare capabilities, and sensor updates for surface and underwater platforms.

In the coming years, HENSOLDT will benefit significantly from the combination of rising defence budgets and the increasing trend toward networked, intelligent systems, which offers the defence electronics market segment above-average structural growth prospects. Accordingly, we raised our short- and medium-term targets at the end of 2022 and set ourselves an even more ambitious agenda for the development of our key figures. Because today it is paying off that we have created, with HENSOLDT, a long-term growth platform with excellent and easily plannable entrepreneurial perspectives. We will vigorously develop this further in order to continuously expand our market position, also because our intention remains unchanged with regard to the foreseeable consolidation of the European defence industry: HENSOLDT is to play an active role in this process and drive consolidation from a position of strength.

Our corporate strategy points the way to sustainable and profitable growth. We regularly put it to the critical test to reflect current developments and have done so particularly intensively in the past year with a view to the Zeitenwende. It has shown once again that we are on the right track and we have decided that we will implement our strategy even faster in the future. The core of our DNA is and remains the development of cutting-edge sensor and protection technologies for the defence systems of tomorrow. In doing so, we are increasingly combining our deep understanding of our customers’ application scenarios and the enormous volumes of data generated by our sensors with comprehensive competencies in the areas of artificial intelligence and data analysis as well as the further digitalization of our sensor technology. On this basis, we are also intensively driving forward our development into a system provider. This enables us to offer our customers integrated end-to-end solutions, expand our presence on different platforms, and make our business model even more robust. Geographically, Russia’s war against Ukraine is bringing our home markets in Europe back into sharper focus. Of course, we will take advantage of the opportunities that are now available in Europe. At the same time, we want to further expand our international presence beyond this.

Dealing with ESG – namely, sustainability in the areas of environment, society, and corporate governance – is a key strategic issue for us. After all, as a technology company in the defence industry, our goal is to enable the sustainable development of societies in peace and freedom – this also includes our original responsibility for the environmentally friendly use of resources. For young talent, in particular, ESG has become a key criterion for the attractiveness of an employer, but a consistent focus on sustainability also pays off economically.

That is why we are pursuing our Group-wide ESG strategy very systematically and aim to become the ESG benchmark in the defence sector by 2026. As a further milestone, we have set ourselves the goal of becoming carbon neutral by 2035. The fact that we are on the right track is impressively underlined by the second rating from Sustainalytics. In its second year, HENSOLDT is again number one in terms of sustainability in the aerospace and defence industry. We were able to further improve our score and continue to be the only company in the industry to be classified as “low risk.” I would particularly like to highlight the full score we achieved in combating bribery and corruption, a key focus of our corporate governance approach.

As you read this Annual Report, you can experience it for yourself in many stories: Our workforce of around 6,500 employees is highly motivated and passionate about the future of HENSOLDT. That is why it was important to us to offer them the opportunity to participate in the company. To this end, last year we launched a second tranche of our employee share programme ECHO, which was first introduced in 2021 – with overwhelming success once again! More than 60 percent of employees worldwide participated in ECHO in 2022 and are now shareholders of HENSOLDT AG. This demonstrates once again their trust in and commitment to the company.

On behalf of my entire Board of Management team, I can assure you, dear shareholders, that we are aware of our responsibility to you every day anew. The past year has been truly exceptional. We at HENSOLDT have remained true to ourselves, achieved all our goals, implemented our plans, and thus confirmed your trust. I would like to express my particular gratitude to all shareholders who have accompanied us with their trust since the IPO. We will continue to do everything in our power to live up to this trust.

With the warmest regards,
Thomas Müller

CEO
HENSOLDT AG