Year-end letter to shareholders

Dear Shareholders,

With the arrival of the new year, which I can already say will once again be an exceptionally interesting one for Primoco UAV SE, please allow me to look back on the record year of 2023, summarize the key pillars behind the sixfold to eightfold year-on-year growth in the company’s key indicators, and provide you with current information on the outlook for the coming period.

The current tense geopolitical situation in the world is having an impact on the security industry, which is experiencing the steepest growth in defence investment in several decades. In addition to the need to secure supplies of traditional defence equipment or replenish inventories to appropriate levels, demand is also increasing for technologically advanced systems and services. Keeping pace with market requirements is only possible through the continuous development of production capacities, engineering capabilities and cooperation among various players in the industry. I am very pleased that, in the field of advanced unmanned systems, Primoco UAV was able to meet these ambitions over the past year and thereby strengthen the foundations for its long-term and sustainable development.

Financial and business results
preliminary, consolidated and unaudited

In 2023, Primoco UAV was able to benefit from the continued interest of both existing and new customers and use the growing market demand to support its dynamic growth. The result was a sixfold year-on-year increase in revenue to CZK 598 million. Operating profit EBITDA, with an operating margin of 40%, increased as much as eightfold year-on-year to CZK 241 million. The best financial results in the company’s history reflect growing demand for unmanned aircraft, spare parts, pilot training, comprehensive aerial services and other high value-added services provided by Primoco UAV.

The war in Ukraine undoubtedly plays a role in the growing demand for advanced unmanned aircraft, as do geopolitical uncertainties in other regions. A number of European countries, and not only European ones, have decided to increase their defence spending. Those who had previously often held a sceptical view of unmanned systems are also rapidly reassessing their position, having not yet fully appreciated their irreplaceable role in the equipment of armies as well as other security forces, for which UAVs and their capabilities are important across a wide range of civilian applications — from intelligence services to integrated rescue systems.

At the same time, Primoco UAV provides customers with more than just the One 150 unmanned aircraft, which, thanks to its flight parameters, wide range of standard or optional equipment, and low operating and acquisition costs, ranks among the world’s leading systems in its category. Our solutions are comprehensive and include the option to equip aircraft with dozens of different devices and sensors according to the intended use — EO/IR cameras, calibration sensors, SIGINT/ELINT sensors, communication relay systems and other advanced technologies. All of this is also certified according to European standards.

Primoco’s position on the global market, partnerships and aviation experience

Thanks to Primoco UAV, the Czech Republic is the world’s second-largest supplier of medium-sized unmanned aircraft. According to the renowned Swedish institute for peace research SIPRI, a total of 69 dual-use/military unmanned aircraft with a maximum take-off weight of up to 250 kilograms were sold worldwide in 2022. Data from national licensing registers for defence systems show that the market segment of medium-sized unmanned aircraft was dominated by manufacturers from the United States, which accounted for two thirds, and by our company, Primoco UAV, which accounted for one third. In the category of heavy aircraft with a maximum take-off weight above 250 kilograms, a further 120 unmanned aircraft were delivered. With the exception of the Covid year of 2021, the global market has been growing steadily by tens of percent annually in recent years, and the Czech Republic plays an important role in it.

Our aircraft are currently flying hundreds of hours per month during real reconnaissance combat operations as well as civilian missions of various types. As a result, we continuously have access to a vast amount of real-world data and valuable customer feedback, which enables us to work effectively on improvements and further modernization of our aircraft. Primoco UAV aircraft can therefore keep pace over the long term with current mission needs, adapt to the environments in which they are deployed, and reliably deliver the results that users expect from them.

During the summer of 2023, for example, we completed a new software and hardware version of the Primoco UAV One 150 aircraft control system. This is another step that, based on flight experience, enables us to move toward maximum automation and even higher flight safety. We invested CZK 3 million in this project alone, and customers are already appreciating its results in real missions.

Thanks to our focus on innovation and commercial success, Primoco UAV is attracting increasing interest from major players in the aviation and business sectors. In June 2023, we signed a memorandum of mutual cooperation with Airbus Defence and Space and its subsidiary Airbus DS Airborne Solutions (ADAS). In December 2023, the agreement was expanded to include a commercial representation agreement, opening opportunities for Primoco to approach clients of Airbus Defence.

Orders and outlook for the coming period

In 2023, we manufactured and delivered 33 aircraft, representing an almost threefold increase compared with 2022. At the same time, we created the conditions for further production growth, taking into account the advanced stage of negotiations for additional contracts covering several dozen aircraft, and we expect another significant improvement in performance this year. Since the establishment of Primoco UAV, we have now manufactured more than 150 aircraft, which are in daily operation in many different locations around the world. We intend to continue working on the diversification of our target markets. Alongside dominant Europe, these will include Asia, the Middle East and Africa in particular.

Preparation of project documentation for the revitalization of the Písek–Krašovice airport site is also continuing. In addition to a new assembly hall, the project includes the construction of a control centre for the operation of Primoco UAV aircraft worldwide, a modern pilot training centre and a research department for the development and testing of new technologies. The total planned investment amounts to approximately CZK 750 million. A significant portion of this amount will be directed toward robotization and machinery for the modern factory. We expect the building permit procedure to be launched in 2024, with construction itself to follow in 2026. From 2027, we expect Primoco UAV to gradually move into the new premises and increase total delivery capacity to as many as 250 aircraft per year, which is more than triple the current level. In addition to expanding domestic production capacity, we are also working on a project for secondary production of the One 150 abroad.

Certification and corporate actions

In November 2023, we terminated our contract with the Military Technical Institute, state enterprise, among other reasons due to breaches of contractual terms by that enterprise. At the same time, we newly set up the continuation of the NATO STANAG military certification process with the Ministry of Defence and the Military Aviation Authority, with the aim of completing the One 150M type certificate in 2024. Primoco UAV does not supply any weapons systems for its aircraft.

At the General Meeting held on 1 December 2023, shareholders approved changes to the company’s Board of Directors and Supervisory Board. The Board of Directors now consists of Ladislav Semetkovský, Petr Kováč and Romana Wyllie. Jakub Fojtík, Vladan Ševčík and Jan Sechter were elected as members of the Supervisory Board. Petr Babický, Jan Venglář and Rostislav Kuneš became members of the company’s Audit Committee.

Shares

At the December General Meeting, shareholders approved the submission of an application for the admission of all 4,708,910 ordinary registered book-entry shares of Primoco UAV, representing the company’s entire share capital, to trading on the regulated Prime Market organized by the Prague Stock Exchange. Primoco UAV shares are currently traded on the START market of the Prague Stock Exchange. The planned transfer to the main market of the Prague Stock Exchange, the Prime Market, which is expected in the near future, is associated with the mandatory introduction of financial reporting under the international accounting standards IFRS. Primoco is implementing this in cooperation with the advisory firm EY. At the same time, we plan to increase the proportion of freely traded shares in the company, known as the free float, from the current 18% gradually to a target level of 25%.

Primoco UAV shares recorded significant growth last year thanks to strong financial results and a favourable outlook for the future. While on 31 December 2022 the securities were traded on the stock exchange at CZK 410 per share, by the end of December 2023 their price had risen to CZK 885. The company’s market capitalization now exceeds CZK 4 billion. The increase in Primoco UAV’s market value is also reflected in the volume of completed share trades. According to data from the Prague Stock Exchange, Primoco was the most traded title on the PX START market in 2023.

In conclusion to this review of 2023 and outlook for the coming period, I would like to thank you for your support and trust, which we greatly value and without which we could not succeed together. I would also like to take this opportunity to wish you a successful 2024, both professionally and personally.

Yours sincerely,

Ladislav Semetkovský
Chief Executive Officer and Majority Shareholder
10 January 2024