Czech company CSG reported its results and is currently down more than 20% in Amsterdam.
The numbers 📊
Revenue for the first nine months was EUR 4.8 billion, up 6.1%. Defence was the driver, with the Defence Systems segment growing by 9.5%. But the third quarter alone fell from EUR 1.7 billion to EUR 1.5 billion. The company explains this by saying that Land Systems deliveries were pushed into the fourth quarter. Operating EBIT for Q3 fell from EUR 401 million to EUR 317 million, with a margin of 21%.
The crux 🔍
Demand shifted toward extended-range ammunition. CSG therefore accelerated the sale of standard ammunition from stock at lower prices. It consequently cut its full-year margin outlook from 24-25% to 21%. It confirmed revenue of EUR 7.4-7.6 billion. My calculation suggests this means an EBIT margin of around 17% in the fourth quarter. In addition, it has to generate EUR 2.6–2.8 billion in revenue in a single quarter, more than ever before.
Cash flow and debt ⚠️
Operating cash flow for the first nine months was -EUR 200 million. Debt surged to 2.4× EBITDA, or about 1.6× excluding growth investments. The working capital cap was raised from less than 20% to less than 35% of revenue. That's roughly an extra billion euros tied up in inventory.
What was strong ✅
The backlog is a record EUR 18 billion, up from EUR 15 billion at the end of last year. Refinancing EUR 3.1 billion cut interest rates by 125-150 bps.
I don't see the problem in demand, but in the product mix. CSG is making what the market is starting to want less of, while it still can't make enough of what the market wants. Full in-house production of extended-range ammunition is not expected to be ready until the end of 2027. Until then, I expect margins to remain under pressure. I'd watch to see whether cash is actually released in the fourth quarter. If not, an expensive transition becomes a cash problem.