CSG Walks a Tightrope as Defence Orders Surge and Working Capital Balloons

CSG's Q1 revenue rose 13.8% driven by defence, but operating cash flow plunged to €6M as working capital hit 31.7% of sales. Ammo+ profits cratered, stock up 3%.

CSG’s first-quarter numbers delivered the headline growth investors wanted, but the fine print exposed a familiar tension: a booming defence order book is consuming cash faster than operations can generate it. The defence and ammunition group posted a 13.8% revenue increase to €1.544bn, with operating profit up 8.7% to €372m and a margin steady at 24.1%. Yet operating cash flow before tax stood at just €6m, while working capital swelled to €2.2bn – equivalent to 31.7% of trailing twelve-month sales. Management described the build as intentional, linked to stockpiling and advance payments, but the target of bringing that ratio below 20% by the end of 2026 makes the coming quarters a crucial test.

The engine of the quarter was once again Defence Systems, which generated €1.251bn in revenue – a 26.5% jump – and an operating margin of 28.4%. A key milestone within that division was the company’s own medium- and large-calibre ammunition programme reaching 800,000 rounds of capacity. CSG deepened its vertical integration by ramping up internal production and highlighted two major contracts signed after the quarter ended with European NATO clients worth around €550m in total. Additional strategic moves included a new joint venture for artillery propellants in Slovakia, the acquisition of a 49% stake in Hirtenberger Defence Systems in Austria, and the start of 155mm production in Lavrio, Greece, under a 25-year partnership. The order book swelled to €17bn, while the pipeline of deals under negotiation hit €27bn. The company also flagged a Patriot armoured vehicle order worth over $300m in Southeast Asia and an air defence contract valued at $2.5bn in the same region.

But the spotlight fell on the laggard: the Ammo+ division, which supplies small-calibre ammunition mostly to the US civilian market. Revenue there slipped to €291m, well below the prior year’s level, while operating profit collapsed from €40m to €13m, leaving a razor-thin margin of 4.3%. CSG blamed tough conditions in the US trade channel for most of the quarter, though demand began recovering in February and March, with margins reportedly returning to 2025 levels by March. The unit has been investing in headcount and capacity to catch up with the rebound.

A structural shift within Ammo+ offers some comfort. The Kinetic Group, CSG’s US ammunition arm, expanded its relationship with the FBI and scaled up 5.56mm production for US defence and law enforcement customers. Roughly 80% of Ammo+ revenue comes from the US, and 82% from civilian buyers, but the growing share of government contracts provides a more stable base. That pivot is slowly re-positioning the division as a capacity provider for the public sector rather than a pure consumer cyclical play.

The stock responded to the mixed picture with a gain of 3.06% on Thursday, closing at €19.54, extending a recovery from the early-May low of €15.73. Still, the shares remain more than 42% below the January peak of €33.81, reflecting the market’s cautious stance on the cash conversion story.

Net debt stood at €2.2bn, or 1.3 times operating EBITDA. Capital expenditure reached €31m in the first quarter, with the bulk of the annual budget penciled in for the second half as CSG continues to build out capacity to service its NATO supply contracts. The company reaffirmed its full-year 2026 guidance for revenue between €7.4bn and €7.6bn and an operating margin of 24–25%, as well as its medium-term targets.

The macroeconomic backdrop offers a powerful tailwind. Europe’s SAFE instrument provides up to €150bn for joint defence procurement, the EU has agreed a €90bn credit package for Ukraine across 2026 and 2027, and NATO’s 2% spending target remains firmly in place. For a munitions supplier with a strong defence focus, the structural demand story is hard to argue with.

The real question, as always, is execution. Whether Ammo+ can regain its lost margin will become clearer when CSG reports half-year results on 7 August. By then, the working capital trajectory and the pace of cash generation from the bulging order book will be under even closer scrutiny. For now, CSG is balancing a surge in bookings against the financial strain of turning those contracts into free cash flow – a tightrope walk that will define the stock’s next leg.