Theon International Plc (THEON) Earnings Call Transcript

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to H1 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Nikos Malesiotis, Head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to THEON's Half Year 2025 Results Conference Call. Thank you for joining us today. I'm Nikos Malesiotis, Head of Investor Relations at THEON. Today, I'm joined by our Founder and CEO, Christianos Hadjiminas; our Deputy CEO and Business Development Director, Philippe Mennicken; and our CFO, Dimitris Parthenis. In this order, they will take you through the most important developments and the financial results for the first half of 2025. After the presentation, there will be an opportunity for questions. With that, I hand you over to Christian.

Thank you, Nikos. Good afternoon, everyone, and thank you for joining this call. Before providing an overview of the first half of the year, I would like to note once again the work and efforts contributed by our team towards achieving our organizational goals. Without our team, we will not be in the position we are today. First half of 2025 performance was characterized by robust order intake, achievement of financial targets and solid progress in THEON's growth strategy. Since June, we have announced several new strategic acquisitions, investments and partnerships, which support our THEON Next Vision & Strategy, which we announced a few weeks ago. This encapsulates THEON's ambition of becoming a trusted market leader in the next generation of optronics and a global player in the modern warfare era. At our announced Capital Markets Day to be held in Athens shortly, we will showcase the key growth drivers on the THEON Next at what promises to be an exciting event. And I would like to add here that these acquisitions also underline the fact that whatever we promise, we deliver. When we did our IPO where we raised, as you very well known, EUR 100 million, we said we will complete our acquisitions within 18 months, exactly within this frame, working of course very cautiously to find the right cost efficient but also accretive to the extent possible acquisitions, we delivered them exactly at the end of the 18th month. This, for us, underlines THEON's credibility and whatever we say we do. I will now provide an overview of THEON's exceptional results in first half of the year as well as a strategic milestone achieved so far in 2025 before handing you over to Philippe Mennicken, who will highlight why we are in a prime position to drive continued growth by capturing the momentum of rising global demand. First half of the year performance this year has been underpinned by robust top line growth and sustained industry-leading profitability reflecting the strength of our business model and disciplined execution. As a business, we continue to benefit from a healthy order book, particularly in first half of the year, when we saw a strong pipeline of contracts, providing clear revenue visibility. As you already know very well, Q4 is always the best for booking new business in our business. So in the 4 months until the year-end, we expect accelerated order intake that is expected to be over 2x the revenues of the year. During the period, the business successfully executed on its strategic priorities, advancing growth through disciplined M&A, driving product and innovation initiatives and accelerating geographic expansion to strengthen its competitive position through an impressive, I would add, industrial global footprint. In first half of the year, we made clear progress on all fronts. Our order intake saw an impressive 118% uptick on the previous years, highlighting the growth we have experienced, supported by new contract wins and deployments of existing contracts, resulting in a soft backlog of EUR 622.2 million, despite, of course, the deliveries already, after taking account the deliveries in the first half of the year. We are fortunate to have strong relationship with long-standing customers which delivers a high volume of repeat purchase into our business, adding to the strength of our order book. We generated revenue of EUR 184 million in the period, which is up 20% versus the prior year. We delivered EUR 47 million of adjusted EBIT in the first half, growing our EBIT margin to 25.8% from 25% at first half of 2024. We have strengthened our balance sheet, holding a net cash position of EUR 34.7 million at the end of first half of '25. This has enabled us to pay dividend of EUR 0.34 per share in June, in line with our guidance. Now I will let Mr. Mennicken, our Deputy CEO, to take you through more detail on our recent acquisition of Kappa Optronics, while I will explain our other strategic initiatives. Philippe?

Thank you, Christian. I would also like to extend a warm welcome to everyone. Kappa was founded in 1978 and is headquartered in Göttingen, Germany, home to both its design and assembly functions as well as management and administrative teams. Kappa operates an R&D-driven asset-light model focused on design, assembly and quality assurance, closely aligns with what we do at THEON. With a team of 60 highly skilled engineers and a strong technological edge in platform products, the company is well positioned to contribute to THEON's innovative pipeline. Together with its subsidiaries in the United States and Spain, Kappa employs approximately 200 people and operates out of approximately 3,000 square meters of operational space. Now Kappa brings not only cutting-edge technology, but also a culture of innovation that aligns with our vision at THEON. We expect meaningful top line synergies, accelerated product co-development and valuable knowledge exchange across the companies alongside an AI-ready integration potential. This acquisition instantly expands our electrooptics product offering, particularly for land and aerial platforms, which are key focus areas for THEON's strategy. In addition, acquiring Kappa provides immediate accretiveness with strong potential to scale sales rapidly through THEON's business development capabilities, complementing our Athens based team of around 80 engineers ultimately highlighting the revenue and supply chain synergies, which lie ahead. Kappa is on track to exceed EUR 37 million in revenues in the financial year 2025, with an EBITDA of approximately EUR 8 million, primarily driven by defense mobility and autonomous machines. In August 2025, the group through Theon International Plc acquired 100% of the shares and voting rights of Kappa Optronics GmbH for an enterprise value of EUR 75 million and consideration value of EUR 69 million through a mix of cash and debt contribution. This transaction is subject to regulatory approvals and is expected to be completed in the fourth quarter of 2025. Now back to Christian to tell you more on our other strategic investments in the context of THEON Next initiative.

Thank you, Philippe. Until today, we gained 5 new strategic investments across the group. And as I said, exactly within the 18-month deadline that we have put ourselves and we have announced during the IPO. In July 2025, we acquired a 10% strategic equity stake in Andres Industries AG based in Berlin, Germany, through a EUR 1.1 million share capital increase with options to increase its stake up to 24.99% within 2 years for a total consideration of EUR 4.5 million in order to expand further our presence in Germany. I need to stress here that Andres is a partner of THEON in several business opportunities that we expect to soon announce, particularly regarding our new thermal clip-on IRIS. So this investment is related to our day-to-day business. In August 2025, we launched our THEON Next initiative, a platform designed to drive the development of next-generation soldier systems through targeted investments, collaborations and co-development projects. The following investments in strategic operation form part of the THEON Next initiative. At the end of July 2025, we invested EUR 5 million in Varjo Technologies, a Finnish virtual reality, mixed reality specialists, through a convertible loan with an option for an additional EUR 5 million. I have to say here that this has opened the door for us in Finland, a very promising defense market. And it's not going to be the only initiative of THEON in Finland, where there is a very rich ecosystem of technologies that can drive the growth of THEON in the future. In August 2025, we entered into a strategic partnership with Kopin Corporation, a U.S.-based defense microdisplay and subsystem specialists through a total investment of $15 million. The investment will serve as the basis for a new European joint venture focused on augmented reality-enabled systems and microLED display production. This transaction is subject to regulatory approvals and is expected to be completed in the fourth quarter of 2025. At the same point in time, we signed a renewable 2-year supply agreement with eMagin Corporation, a U.S. also based manufacturer of OLED microdisplays securing the supply of high-resolution displays used in its products, including IRIS, our new thermal clip-on, for which we stated several times, we see a lot of business prospects and a lot of new contracts being generated. Again, at the same time, we entered into a strategic partnership with Alereon, a U.S.-based leader in ultrawideband technology to integrate UWB into its A.R.M.E.D. product line with production increase and exclusive promotion rights in Europe and the Middle East. More details will be provided at our Capital Markets Day taking place later on this year. Regarding the last 2 points I mentioned and investments, it's key to understand that this time, THEON has done a very cost-efficient vertical integration at the same time for its future and current A.R.M.E.D. product line. In other words, we have secured our supply chain through those partnerships by also being able in a position to produce in Greece some very, very critical component. So we don't experience any future supply issues. Last but not least, I would like to stress that all those initiatives with a total cost of less than EUR 25 million complement the almost EUR 70 million acquisition targets -- acquisition price of Kappa and the EUR 35 million acquiring Harder Digital. So that's about EUR 125 million roughly in total investment, which is in line with what we have raised in the IPO. Also, I need to stress that -- and I'm very proud of this and our team that we have managed regarding the THEON Next initiative with a total consideration of less than EUR 25 million to -- being able as THEON to have access to key elements of the future at a very low investment level. While at the same time, being in a position to recover even this investment through the equity appreciation of companies like Varjo and Kopin. Thank you very much. With that, I will now hand you over to Philippe.

Thank you, Christian. And moving on to brief market and business overview, starting by giving an overview of the markets by regions. The world continues to face new situations globally. The world has changed and previous values and alliances are not necessarily guaranteed anymore. This has an impact on all regions in the world, and for sure, on Europe, Asia and the U.S. and provides further opportunities for THEON. As you know, THEON operates in growing markets, which are driven by several supportive tailwinds. Firstly, the geopolitical global landscape means that there is a continuous and increasing demand for defense products. Governments are now placing much more focus on their defense capabilities, which is driving an increase in defense spending globally. Starting with the U.S., defense expenses have been and are still, to a certain extent, being reviewed, but this is temporary. Global challenges require instead increased, if not more efficient spending and for sure, we don't anticipate any decreased spending in the U.S. in the coming years. The U.S. is continuing to position itself as the one and only military superpower, marking a significant investment in developing next-generation military systems. Europe sees defense spending increases in almost all countries, in light of the continuous Russian threat and the realization that it must be able to defend itself independently. This especially applies to Northern and Eastern European countries, while countries in the Southern and Southeastern Europe must contend with both Russian and border threat emanating from the area. The situation in the Middle East is still fragile and dynamic with possible continuous local strikes remaining still below the threshold of declaring war. In the absence of efforts to improve relations, countries in the Middle East with ongoing disputes are likely to invest in systems that provide early warning and increased domestic stockpiles. Countries in the Asian Pacific region are continuously concerned by potential short-term conflict with China over disputed territory and in essential waterways. The Chinese-Taiwanese conflict could draw in regional players with battles fought by large navies, air force, but also land and marine infantry troops. I'm now going to focus a little more on Europe specifically and its defense budget outlook. NATO states have agreed to raise the target for core defense requirements from 2% to 5% by 2035, with 3.5% to be spent on defense expenditure that includes procurement, sustainment and personnel costs. Countries already meeting or nearly meeting NATO's 2% target in '23 to '24 are set to experience more limited growth in hitting the new 5% goal, while others are expected to strongly boost spending at much higher speed to ensure earlier readiness than 2035, like, for example, Germany. Europe is expected to remain our main customer based for the foreseeable future, and we continue to strengthen our presence in our core focus area. At the same time, we remain alert to new markets and opportunities to capture rising demand. Turning now to our total addressable market by region and product. Our total addressable market is expected to grow by 13% annual growth over the next 5 years. Europe is obviously the largest accessible market with countries investing in the recapitalization of capabilities, upgrading legacy systems in the short term and procuring modern systems in the mid- to long term. The North American market growth is mostly driven by the U.S. and continued investment in armed forces, though due to political reasons and make in U.S. initiatives, procurement shall focus on United States designed and manufactured products. Yet this will tie up capacity of U.S. defense companies and specifically in our business, for critical components like image intensifier tubes. As a result, this will strengthen the position of European companies outside the U.S., such as THEON, Harder Digital and Exosens, which remains our largest supplier of image intensifier tubes. APAC and MENA customers are rapidly increasing investments as regional security worsens, but begin from a smaller baseline than the European market. The optics market for vehicles, both stand-alone and for weapon-mounted fire control systems, will grow as a larger pool of countries adopt advanced systems that require a greater range of sensors. Overall, there has been dismounted market growth driven by an increase in frontline military personnel and growing investment in sensors for specialist units to increase lethality. Now providing a breakdown on the dismounted product category, helmet-mounted devices account for the majority of the total addressable market value. Whilst fire control systems drive growth, complemented by targeting systems. Within the vehicle mounted product category, armored fighting vehicles dominate forecast while investments into main battle tanks and infantry fighting vehicles, recouping platforms donated to Ukraine and reorientating toward land warfare. Patrol and reconnaissance vehicles and sensor package increasing focus within fleet investment as users seek to maximize situational awareness. I look forward to speaking with all again of you at our Capital Markets Day later this year, where we will provide more information on our THEON Next initiatives as well as further details on the business outlook. Thank you for your time, and I will now hand you over to Dimitris.

Thank you, Philippe, and good afternoon, everyone. On to our summary of financial highlights now. THEON's order intake reached EUR 168 million, marking a notable increase from the prior year comparative period. We anticipate an acceleration in our order intake as we go into second half, which is in line with traditional waiting and pending demand in the market. Revenue grew by more than 20%, landing at EUR 183 million. This growth is driven by both new contracts and the deployment of existing ones. As at the end of the half, around 42% of our full year guidance is already delivered in line to what we had recorded at the same time last year. As a result of our strong performance and continued high levels of new contract wins, we stand well positioned to address any year-end ad hoc demand that might appear as it typically occurs. Moving to our backlog where we have achieved significant growth of 45%. This translates to a soft backlog of EUR 622 million at the end of H1 2025, which provides solid visibility for the year ahead with an additional EUR 378 million of contractual options providing further headroom for growth. We are already experiencing strong traction in Q3 with additional orders expected to be announced. This will more than replace orders invoiced in H1 as well as those expected to be invoiced in H2 2025. Of our current soft backlog, we expect to deliver approximately 40% in 2025 and the remainder in 2026 and beyond. H1 this year marks another period of strong profitability with adjusted EBITDA of EUR 49 million, up 25.7% compared to the previous year. Our adjusted EBIT levels grew 24.4% to EUR 47.4 million. This adjusted EBIT translates into a margin of 25.8%, in line with our guidance. Please also note that from H1 2025, share of profits from core equity accounted in the space are recorded within adjusted EBIT. Our net cash position as of the end of June 2025 was at EUR 34.7 million, marking a slight decrease primarily as a result of an earlier dividend payment of EUR 23.8 million in June, while last year dividend was paid out in the beginning of H2. We continue to invest in company's growth in accordance with our strategy. In H1, CapEx increased to EUR 6.7 million, in line with the guidance of EUR 20 million for full year 2025 to support the acceleration of the growth strategy. This amount includes investment in capacity expansion of Harder Digital and development of new man-portable and platform-based products. Given financial strength seen in the first half of the year, THEON has a strong cash conversion rate of 85%, in line with H1 2024. Turning to the next slide, where I will take you through our guidance. Here, we reiterate and confirm our 2025 targets alongside with our medium-term ones. For 2025, we have strong confidence in reaching revenue of EUR 430 million, at the top end of the originally presented guidance of EUR 410 million to EUR 430 million. We remain focused on maintaining an EBIT margin in the mid-20s, and we expect to spend EUR 20 million CapEx this year, the highest ever, supporting our strong organic growth plan investing across the globe. In June 2025, the company paid out dividend totaling EUR 23.8 million, in line with our dividend distribution policy articulated at the time of our IPO. In the midterm, we expect to continue growing in line with our addressable market and to maintain an EBIT margin in the mid-20s. CapEx is expected to reach a maximum of 3.5% of revenue, and we aim to maintain a 30% to 40% dividend payout ratio. Thank you for your time today, and we are now ready to take your questions.

[Operator Instructions] I will now pass it to the team for questions.

Thank you all for attending today's call once again. We just have received -- receiving a series of questions. The first one is the following. What's the current status of your negotiations to extend the supply agreement with your main tube producer, Exosens?

Yes. Thank you. This is Christian Hadjiminas. Thank you for the question. Mr. Ozkan. We -- our supply agreement with Exosens is a renewable contract. So as soon as we approach the end of the year, then we extend this for 1 more year or 2 more years depending on the situation. So we don't expect any change on that at all.

The second one is the following: Did the post ABB 90-day lock-up period of your controlling shareholders, Venetus or CHRE Investment expired? Is there any indication by Venetus, CHRE about further potential sell-downs in THEON in the near future?

Hello. This is Dimitris. I believe it's expiring in a few days, if I'm not mistaken. And at the moment, we don't have any indication by Venetus or CHRE about any further potential sell-down in the near future.

And given our share repurchase program has been activated recently, have we already started share buybacks, Dimitris?

We have, but very small amounts. Of course, we are going to announce the amount of shares that have been purchased based on the regulatory framework.

The next question is the following. Given your recent Kappa and Harder Digital acquisitions, are you planning further M&A transactions in the second half of 2025 or in 2026? Or you will mainly focus on integrating and expanding recently acquired assets?

No, we have not finished the acquisitions. It's a good opportunity for me to state the following: as I mentioned earlier, when we started the IPO where we raised -- just to remind everybody, we raised EUR 100 million to do acquisitions in vertical integration, in expanding our range of products and in fire control systems, and above it all, of course, on platforms, on electrooptics products, where we want to become a leader position in a leading position, just like we have become on man-portable. At the time of IPO, we said exactly 18 months. And I'm very proud because we really -- what we say we do. And on the 18th month exactly, which was in the -- in August frame from the February starting point of our IPO. During the summer, and this may have come at a cost to us because during the summer, as you know, there's -- the people are less focused on reading news from companies. However, since we have given a promise to the market for 18 months -- within 18 months, we will complete the acquisitions, we announced them, and with a total expenditure of a total of about EUR 125 million in total, Harder Digital, Kappa and the THEON Next initiative. So we are spot on, near the levels with minimum increase in our leverage ratios. We were -- we delivered exactly what we said exactly at the time within the time frame we set. Having said that, the company still has a lot of -- has ability to raise debt quite a bit because we have not really used these facilities. We do look into a couple of acquisitions, especially which are coming slowly, slowly, but they will mature definitely before the end of the year. We're always -- these are smaller, as we have promised the IPO, smaller further acquisitions, but we do not exclude any major acquisition as well. We are -- again, we are driven by the needs of our company, the needs of what we have right now and how we can cement it like with vertical integration or how we can strengthen our products. And that's why the THEON Next initiative, if I may say so, although I'm sure maybe some will ask us, that's why the THEON Next initiative although it is for a midterm, we expect results in terms of finished products, these technologies are already being implemented and being incorporated in our existing A.R.M.E.D. products. For instance, the Alereon, the UWB, which is a way to transmit data within short range approved by the National Security Agency of the United States, and it is a U.S. company. It's already being incorporated as we speak in our THEA product, which involves our heads-up display and eventually a fused goggle. So all these technologies that we have acquired, are all technologies that will be used right away being incorporated in our products, while at the same time, talking about midterm, while at the same time, we are preparing the versions of the future, the future, which may come much faster than the market believes. Thank you.

The next one is Kappa specific and is the following: does Kappa need any capacity or R&D investments in the near term? And do you see any cost synergies to be unleashed in the future, such as moving some of the production to Greece?

First of all, I need to tell you that -- and again, this is an accomplishment. We have, as you know, investment plan with HENSOLDT, which is a leading, as you know, German defense manufacturer. And we have a joint venture where we have, of course, 49% in Wetzlar. And this facility, we have managed to make it as competitive as our Greek facility is. This gives us maximum flexibility depending on the orders to produce in -- either in this joint venture or in Greece. Kappa, I have to tell you, is really a spot on acquisition in terms of what we were looking to expand on the platform-based electrooptics, is a very reputable company. And the interesting thing is, even with the existing portfolio, THEON's global industrial foot and commercial foot very soon results of our supporting business development-wise, Kappa. And then at the same time, the process of integrating our R&D teams is -- has already commenced. I have to tell you that the synergies are already apparent with a different expertise. Kappa has 200 people, of which 67 are R&D engineers. As a comparison, THEON is about to reach the number of 80 people. So you can imagine how important it is to add another 67 people with a different type of electrooptical experience and the ability to launch those products in a very demanding environment. Just like, for instance, the -- which is one of the main business of Kappa with air refueling for Airbus. And so these are really very valuable human resources, R&D capabilities that's being added to THEON.

Thank you, Christian. The next question is the following. Will the supply of tubes be a bottleneck for growth?