Rheinmetall Ag Unsp/Adr

Good afternoon, ladies and gentlemen, and welcome to the Rheinmetall AG conference call regarding fiscal year 2023 report. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Armin Pappberger, CEO of Rheinmetall AG.

Thank you very much. Good afternoon together. So Dagmar Steinert and myself will give you an overflow about the information and the only information about fiscal year 2023. We start with page number three, and on that we see the tensions, and everybody of us know that we have increasingly globally tensions from US election when nobody knows what's going on about the budget here in Europe via the Gaza conflict and for sure the war in Ukraine down to the South China Sea conflict. And with that conflict, we see that the need for defense and especially the need of the products that Rymetal has will grow over the next years. The next page will show us the figures of the year 2023. On the sales side, we have 7.176 billion. We didn't book about 420 million where we had goods ready in 2023, especially, again, trucks and ammunition. And we will make the sales and we skip the scales to 2024. The EBIT3 PPA is on a level of 968, not what we wanted to reach at the 1 billion, but very near. And operating margins is growing up to 918 million euro and EBITROS of 12.8%. Operational free cash flow is 356, and there is also about 250 million came in also on the 3rd of January, so that the real operational free cash flow is still better. Very positive is Ramital nomination, so we booked businesses of nearly 20 billion. This is doubling the nominations from 2022 to 2023. The Ramital backlog is growing from 26 billion to 38 billion. And I think very positive is we can pay a much higher dividend, and the dividend will be 5 euro and 70 cents. If you have a look to the next slide, we see that especially the chancellor, but also the coalition in Germany is very clear, and a lot of discussions with different European governments that he said, we Europeans, we must do more for our security, we have to invest more, and we have to do something to create our future. The Chancellor is really with us, and if you see what is expected, and very clearly a Minister of Finance, Vice-Chancellor and Chancellor say we have to reach 2%, so that over the next years we expect that there will be spendings of about 80 billion from the German side year by year for defense. So what are the big tickets now for Rheinmetall and what is the future and what do we see over the next 5 to 10 years? And we want to give you an overview about the big tickets of Rheinmetall. The number one for sure is artillery and artillery ammunition. Artillery systems will grow and artillery ammunition. And here we will grow up this year to 700,000 rounds. But with new factories, especially in Ukraine and also Lithuania, our new target is, that we are end of 26 ready to produce one million projectiles per year. If you count that the mean value of a projectile is 3,500 euro, and if you see that we need propulsion systems and the mean value is four modular charges or four modules per one projectile, we have the possibility to grow up to 3.5 billion if the customer is ordering full shots more than 3.5, so it could be 4.5 or 5 billion per year. This is then the capacity that we have and it's by far the biggest producer of, we are then the biggest producer of artillery ammunition worldwide and we are able to produce also the products like RDX and also the propulsion systems by ourselves, so that we have 100% vertical integration. Next slide, page number 7, will show you that. Let me start with Australia. We double the capacity at the moment from the Shell production. We go via South Africa. Here we tripled the capacity of propulsion systems and also doubled the capacity of projectile production. So we will grow up on the projectile side to 150,000 rounds from 70,000 and from 1,000 tons propulsion system to 3,000 tons. Let's go to Spain. After acquiring Expal, we also sometimes dribble the production of powder and we grow up between 350 and 400 thousand rounds on the projectile side. Very strong growth is Germany because we create now in Germany our plant Niedersachsen And this Niedersachsen plant will have a capacity of 200,000 rounds, projectiles, plus 1,900 tons of explosives and 3,000 rocket engines and warheads and other components for that. So the biggest investment at the moment. Hungary, the Hungarian side is now nearly ready. This year the first ammunition will go out. On the Italian side, we increase our capacity, especially on Sardinia, for the warheads and for filling of auxiliary. And there is a decision now also from the European Union that also the plant in Romania, there will be some grants from the European Union for that factory. We will make a decision hopefully tomorrow in Romania to make the first step to build up this factory where we also create another 1,000 to 1,500 tons of propulsion systems. There are two new factories, and with these factories, I told you we are able to make this 700,000. and these 11,000 tons of propulsion. And now Ukraine, where we signed an MOU on the Munich Security Conference, is coming up with a capacity also of 150,000 in Lithuania, with maximum 100,000, so that we grow up to more than one million rounds, if that is ready. It will be ready after 12 days, to 15 months after T0, so that we are at the moment that this is our planning, but I think that the governments go that way and go forward with us. So, auxiliary ammunition, absolutely number one for us. On the next slide, you see that the Chancellor and Defense Minister and the Prime Minister of Denmark was also with us, made the first steps to build up the factory. And on the next page, you see that we have also targets on the rocket auxiliary. So not only a distance of 40 or maximum 60, 70 kilometer, which is barrel-based, the auxiliary is on a good way in Rheinmetall, but also the rocket side. And on the rocket side, we have a medium sales potential of 1 to 1.5 billion. So we are at the moment in cooperation with U.S. partners for the HIMARS systems. but also with Israeli partners for the Pulse system. And we booked also the first 300 million in Spain for the Pulse systems for rockets. And I think it will continue. The need of long-range artillery is huge, a really, really huge need about that, so that we see that is a great potential also for us. Next page. shows the mid-term sales potential on the medium caliber. We made all investments in medium caliber. There are some smaller investments now in Spain to enlarge the case production, but we see a potential of 800 million per year on the medium caliber. We have a very good book business, and it will continue, and it will hurry up because of the air defense business. And you need this medium caliber ammunition and this special ammunition from Rheinmetall, which Airbus technology, and we are at the moment the only producer in the world for that ammunition, and we see a huge potential in the future. The next slide shows that there is an opportunity and the potential of one billion. We have the capacity. It's a done deal. Everything is invested, and we can make this billion without any more investments. Also, all investments are done on the infantry side on the next page, page number 12, and we see 300 to 400 million per year. Also, good order book. a very strong need from Ukraine, but also for restocking on the infantry ammunition so that there is also a good chance for us to grow in that area. On the next page we see now the key technology. And the key technology is not the projectile. It's also good technology which is here inside, but the powder is really the key technology. And the plants that we have in Aschau, South Africa, Spain, but also in Switzerland are outstanding factories. And we are able now with the investments that I told before to build up this powder capacity of up to 11,000 tons. This is enough to fill these auxiliary rounds. If more contracts will come, then we will invest again. But the huge investments are done before. And powder production is minimum investment of 400 million, but everything is there. And the only thing that we have to invest is in Romania, but the Romanian government will do that. So very positive for our cash flow. If you go now to page number 14, this is another point where we see huge opportunities. Now let's go to the vehicles. On the vehicle side, we have now the opportunity that we are in all programs. We have a good contract of Challenger 3 that will continue. We have a good contract on Panta KF51 to make this product ready for serial production. and I expect also that very soon the first bigger contracts are coming there. We are part of the main ground combat system, especially about that, where we have a very special know-how. Leopard 2 upgrade, and I call it Leopard 3 because I believe that between main ground combat system and Leopard 2, Leopard 3 can come and will create also a lot of opportunities for us. And we are part of the European Defence Funds, where we have a 50-50 argument with our friends from Munich and so we see a mid-term sales potential of 2 billion per year with all these programs which are running. Next page gives you an overview about the increasing for infantry fighting vehicle 8x8, 6x6 and 4x4 platforms. So the infantry fighting vehicle over the next 10 years, there is a huge need. And there is not only the U.S. program, but it's a very important program. And without the U.S., we see a midterm potential of $2 billion per year. With the U.S., it's for sure much higher. It could double because the United States needs between 150 and 200 vehicles per year, which is for sure also a minimum $2 billion. But the 2 billion without U.S. pay year is possible. And we booked Caracal. We booked a lot of Boxer contracts. A heavy weapon carrier will come now. We are expecting new infantry fighting vehicle contracts on the Lynx side. And also for the second lot, Puma, there is a chance to book more products. On the next page, you see the acquisition we did last year. And on the acquisition side, we acquired 72.5% of Automechanica Medias in Romania. And this acquisition gives us the potential of another 300 million sales. What is the reason for that? Because it is a huge factory, but they had not a lot of contracts. We filled this factory now. And we filled it with the first contract before Christmas of 350 million from Air Defense side. We expect some vehicle programs, we expect maintenance, and we can produce a lot of components for the Rheinmetall Group inside Romania. In Romania, because the wages are very low, our expectation is that we are able to reach an EBITROS of 20%. So that was a very small investment because we were able to get this company with an investment of less than 20 million euro. I think over the next years it is possible to make between 40 and 60 million profit per year. Page number 17 shows us that there is a huge need of logistic vehicles. Logistic vehicles are the backbone of the Bundeswehr. We have a lot of old vehicles. We delivered in between some thousand UTS and also VLS, but there is a huge need of thousands or ten thousands of vehicles over the next years. The capacity that we have in Vienna is growing up now to 4,500 vehicles. and the price of VLS is about half a million, between 500 and 600 million. So we expect that the mid-term sales potential, and we will reach it, I think, this year, is 1.5 billion per year without United States of America. If U.S. will come again, we are able to double that thing. Page number 18 shows that Rymetal is the European V-SHORAD system house, and on the vSHORAD side, we are the number one in the world, more than 40 customers using our technologies, and with the European Skyshield initiative, where 21 users, European countries, are inside this initiative, we see a multi-billion potential. The first orders came in, and the orders are usually between half a billion and one billion, And the Skyranger 30 for me is a huge opportunity and also the Skyguard next generation. And if the 21 users are inside our books, we have 60 customers around the world. And only the ammunition need that they have over the next years is absolutely huge so that we see a mid-term sales potential, inclusive ammunition of 2.5 billion. Page number 19 is the importance of digitization and all the digitization and Rametal more and more is going into this digitization area. So we started with the soldier system and with the soldier system we step now into the middleware together with BlackNet. and that gives us the opportunity to make the digitization for DLBO, for the land-based operations. Here is a multi-billion opportunity. The first contract will be signed now this year, or the first contract is signed. Second, digitization of the Hungarian armed forces and also Tavan, the tactical wide area network, is where Rheinmetall is inside. We have here cooperation with Airbus, On DLBO, we have a cooperation with KMW so that we are in all these programs, and let me say we have minimum 50% of all that programs. There is also great potential in the Air Force sector, especially if we are able to make the sustainment on the F-35. I think there is a huge opportunity also in the Air Force side, and also on the civilian side we see opportunities. Mid-term sales potential is 2 billion per year. And aviation, as you know, the trigger point for us was the F-35, but also some other sustainments for helicopters and other things. Our target in the field of aviation is sales potential of 1 billion per year, and we think it is possible very soon. Page 21 gives you now an overview about the American defense market. And on the defense market, I'm positive. After some meetings in the United States, I'm very positive that the U.S. boys are doing a great job there. Rametal Vehicle Systems USA is very successful. They are very innovative, and the customers love them. so that I see the final award decision will be end of 26 or 27. And I believe that there is a good chance. We will see. It's nothing at the moment in our calculations. But if it comes, I think we have a huge opportunity to create the next booster for Rheinmetall. The same for the CTT program. There is a need of more than 40,000 trucks and the final award decision is in 26, so that very soon we have a clear picture about the story going forward into the USA. We have a very dominant business at the moment on security, but there is also some civilian business. It's shrinking and shrinking and it's not a strong growing business. And if you see that we have growth rates of up to 40% in the defense side, and the growth rate on the civilian business is maybe 1% or 2%, so you see that this business is going down. And our expectation is that in 2026, we have less than 20% civilian business, less than 10% automotive business. So there is no longer a dependence. on that area and what we did is I think we brought our people on the piston business into a good new home. People who take care about that and in Rheumetal side we cannot longer pay attention on that thing so we found good people and good companies who took over the large bore and also the small bore pistons. We sold the Ricken on the Ricken JV. We closed it in Q2 23 and we sold all three Ram shares and the last shares we sold in February 24. So at the end of the day, we are very happy that our people have a good new home. So on the next page on 23, you see... Then Rymetal has to take responsibility. And our mission, our commitment, and our purpose is very clear. We have to serve our customers. This is the most important thing we have to deliver. That is the reason that we are investing a lot. And we, as you know, we have still firepower, but we invested $1.2 billion in the acquisition of Expal. And we have now valuable stocks of 3.2 billion, which is very important for us to deliver. And over the last two years, we have also CapEx of more than 1 billion, which is good to grow and which is very reachable because our customers give us cash in down payment. Later, Dagmar will give you an overview about that thing. We empower governments, and that's also important, to empower governments to protect the population, to protect the people. That's the number one what governments have to do. We are investing a lot, and we develop also new technologies. And also there is a huge investment program from the Rheinmetall site. And now I'm happy to take over Dagmar. She takes care about the financials.

Yeah, thank you, Armin. So let's move on to page 25. As you can see, the year 2023 really set a new milestone regarding sales growth and profitability. We increased our sales by nearly 12% to 7.2 billion euros, with almost 36% of the sales volume resulting from the fourth quarter. Weapon and ammunition, as well as vehicle systems, were the driving forces behind that growth. Our operating result, which is reported excluding PPA effects, rose by around 20%, including 536 million euro in the fourth quarter to 980 million euro. The high sales share of weapon and ammunition led our operating margin increase to 12.8%. The main driver for the higher EBIT prepay PA is a divestment of the Sriram shares. Let's move on to page 26 for the presentation of our earnings per share and dividend per share. The strong improvement of our operating result lifted the basic earnings per share for the continued operations pre-PPA to 14.665 euro. We propose a dividend increase from 4.30 euro to a record high of 5.70 euro to the AGM. This results in a payout ratio of around 39%, which marks the top of the corridor that we gave you at our Capital Market Day in November last year. So please turn to page 27 for a look at Rymetal's operating free cash flow and, of course, the working capital development. The fourth quarter cash generation increased the operating free cash flow for the full year to €356 million, which reflects our highly seasonal business. Massive customer prepayments in weapon and ammunition and vehicle systems helped to reach this significant improvement of €508 million compared to the previous year. We had cash slipovers effects of around €250 million, as Armin already mentioned. Weapon and ammunition and vehicle systems mainly caused the increase of inventory levels by €1.3 billion to €3.2 billion in anticipation of the upcoming customer orders. Let us move to page 28. Even after the acquisition of XPAL, our balance sheet remains very strong and provides enough firepower for further inorganic growth. Our net financial position of 1 billion Euro came significantly down in the fourth quarter due to a high cash intake. Consequently, our equity ratio improved again to 31.1% in the fourth quarter 23. In the third quarter, it was 29.6%. The maturity profile is pretty relaxed until 2028 and 2030 when the convertible becomes due. Moving on to the next page, Rheinmetall nomination. Our Rheinmetall nomination doubled compared to the previous year to almost 20 billion Euro. A high number of fixed orders, large framework contracts that increased by 7 billion Euro against previous year and a stable number of business from our civil divisions pushed our Rheinmetall backlog close to 40 billion Euro. Let's move to the next page for a detailed look into our backlog. Weapon and ammunition and vehicle systems are the main drivers behind the strong backlog increase to almost 40 billion euro. Two long-term ammunition framework contracts for tank and artillery ammunition from Germany and contracts from Ukraine help weapon and ammunition to achieve a new record high of above 11 billion euro. The Caracal Framework Contract for Germany and the Netherlands, a new framework contract for trucks in Austria, as well as the Second Lot Puma for the German Bundeswehr are only a few projects which are included in the Vehicle Systems Backlog. Electronic Solutions saw major orders for air defense from Austria and Romania. Over the mid-term, we expect more air defense orders within the European SkyShield Initiative, the Rheinmetall backlog for our civil divisions remains stable. Our current backlog volume of almost 40 billion Euro results in a very high backlog coverage for the running year. Please turn to page 31. Vehicle systems grew sales by almost 15% to 2.6 billion euro with an operating margin of 12.4% in 2023. Main driver were the ramp-up of the Hungarian links program and the contribution of the various swap agreements in the context of the Ukraine war. This is an outstanding performance, especially since the fourth quarter did not report any growth as sales were held back by customer agreed delays into 2024. Wepman Ammunition reported the strongest growth of 29% to almost 1.8 billion euro and a great margin of 23%. Germany and Ukraine, as well as other NATO countries, created the highest growth momentum. Former XPAL contributed with 171 million euro, slightly short of the expected 200 million sales due to sales delay into 2024. The operating result increased by more than 100 million euro, 403 million euro, including a contribution from XPAL of 37 million. We reported various smaller one-off effects from the integration of XPAL which had a slight impact on the margin. Increasing volumes and a more favorable product mix caused that development. The fourth quarter reported an impressive sales increase of 43%, ending at €817 million and an operating result of €241 million. Main drivers behind the sales growth were high deliveries to Germany and Ukraine, especially for 155mm ammunition, and margin remained on a very high level of almost 30%, but stayed a bit below previous year's level. Electronic Solution reported an annual sales growth of around 13% to 1.3 billion euro, and a strong improvement of the operating result to 150 million euro, lifting the operating margin to 11.4%. Key sales driver were the ramp-up of the Hungarian Lynx and the German Puma. Additional support came from the delivery of Skynex air defense systems, and leverage created the biggest momentum for the profit improvement. Our civil business recovered from the cyber attack in the second quarter of 2023 and reported a slight sales growth. However, margins were still impacted by cost increases that were not fully passed through to customers. The overall impact of the cyber incident was at the expected level of around 10 million euro. The disposal of the employer business and the restructuring of our Chinese casting business supported our operating result with almost 10 million euro. This closes my part of that presentation. And I'm happy to hand back to you, Armin, for the outlook.

Thanks, Dagmar. On the outlook, you can see, and I think very important is also in 2023, as I told before, that's important for you. We took 420 million over ready products. These were 360 million euro trucks, which were 100% ready, and also 60 million euro ammunition trucks, yourself, Dagmar, told you something about the Spanish side in 2024. What does it mean? It means that we are able on the operations side to produce the products. So we have the capacity, we are able to produce it. Sometimes you are in negotiation with customers to say, okay, we are not able to take it over. I tell you the point on the on the truck side. The 360 million we have to take over to 2024 because the inflation rate was higher and we were not happy with the inflation rate that was calculated five years ago. So we have an agreement now and we made this agreement yesterday with the German government that we can add some costs on the inflation side. And at the end of the day, we have higher prices. And for us, it was better to get these higher prices than only to get the sales and to reduce our profitability. So therefore, number one, we are able to produce. Number two, in 2024, on the sales, because of the investments and the capex we made, very clear that we are able to produce for 10 billion. The growth rate will come from the defense business. It will be a very small growth from the civilian business and that is the reason that the profitability also will grow and the operational margin is going up to 15% EBIT Roth. This usually is the target, as you know, that we wanted to reach in 2026. We are a little bit earlier now about that, but we take care about that we continuously improve our performance. And the other positive thing is that our cash conversion rate should be, even if we grow so strong, on a level of 40%. There is also another trigger point which is important for you. It is still unofficial. But we get a grant from the European Union and the Ramital Group for all the different factories. We have a grant of around 140 million euros, which will help us in growth, in cash, and in also profitability because we did all that investment. All in all, in a nutshell, a very good year 2023, and we expect... and better year 2024. Thank you for your attention.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your phone. If you would like to withdraw your question, please press 9 and star a second time. Please press 9 and star now to register your question. The first question comes from Sebastian Grove from B&E Paribas. You have the stage.

Good afternoon. The first one would be on the order pipeline. I understood that at earlier conferences this year you pointed to a total nomination potential of between 28 and 36 billion this year. However, when I look at the recent order announcements, it seems that this might have further increased beyond those ranges. So the first question that I then have is if you could provide an update, please, on the pipeline and especially also shed some light on how you would see firm orders in comparison with potential frame agreements. And if I may specifically also ask for an update around the 8 to 10 billion artillery contract from Germany, that would be the first part.

Yeah. So the auto pipeline, our expectation is really very optimistic. And there is an opportunity, is everything going right, that only from Germany that we get Rheinmetall nominations up to 30 billion only from the German side. And what is the reason for that? Number one, and the biggest thing is, as I said before also, is artillery ammunition, and we are at the moment in negotiation with the German government for 2.2 million rounds of artillery. 2.2 million rounds, what does it mean? It means that we have only for the projectiles up to 9 billion, and they need also the charges, and they need also the fuses. And if you see that one modular charge price is €250, fuse price usually is about €700, so we can expect that there is a double-digit billion contract only from the artillery side. Heavy weapon carrier, another €2.5 billion fixed contract. From the artillery side, our expectation is that between €1 billion and €2 billion will be fixed, And if it is a 10 billion or 12 billion contract, the rest is frame contract and year by year booked. The reason for this frame contract is that we produce now 200,000 in Germany because the WAC Niedersachsen is especially programmed also for this 10 or 11 years program where we can produce 200,000 rounds per year. And 2.2 million, what does it mean? More than 10 years' work also there. This is exactly what the government wants. This is exactly what the Chancellor says. We have to have long-term contracts to go forward, and this helps us a lot. A very positive thing is also that all the frame contracts that we signed, that we fulfilled or over... It's an over... overfilling about that. So most of the customers said, okay, we need the next frame contract. And this, for example, for the old, if I say old, lost year frame contract for auxiliary of 1.5 billion, which was a much smaller one, we got it after six or seven months. Yes, we got it from a frame contract to a fixed contract. So that my expectation is also for that, that maybe there is a possibility to get two or three years fixed from the 10 years frame contract. Vehicle, from the vehicle side, Boxer, yeah, the medium weight class vehicles, this will be fixed contracts. Other ammunition will be fixed contracts like tank ammunition. We ordered still some tank ammunition. Air defense is huge. These are fixed contracts. These are no frame contracts on the air defense side. And if you have, for the first vehicles, if there is, and the vehicle price, if you have Sky Ranger, it's going up to 10 to 15 million. So if every country needs 30 to 40, as I said, it's always with ammunition between half a billion and one billion. So multi-billion fixed contracts. So I'm, at the moment, yeah, We are on a very good way and you say maybe again we are very conservative in this what we told you last time.

Sounds like that. I can spare you one question and that is around the overall funding situation in Germany is obviously late last week. We had some noise around the potential six billion holes for the current discussions when it comes to the ordinary budget in Germany for the defense side. So can you help us understand how the contracts are structured at your end? So what's the risk eventually that the customer can walk away and push it out? So if you could help us there, that would be much appreciated.

All these contracts I discussed at the moment are coming out of the 100 billion budget. This is a point where we get really a big piece of them. And as I said, if I count up everything, it will be. And maybe you remember two years ago where the people or where we discussed to say, okay, how can you tell us that you can 35 or 40 billion out of the 100 billion you take? It will happen. This is exactly the piece that we will get. So our calculation was not so bad. And we have a good hit rate in that area. But all what I said, artillery ammunition, tank ammunition, Schwerewaffenträger, Boxer, etc., etc., but there is much more. There are now also for Ukraine, for example, out of this 8 billion budget, our artillery staff. This is Boxer with artillery, where our friends from Munich and Rheinmetall share 50-50 on that. It's a multi-billion contract that will come up. So huge opportunities. But I only speak about the German side, but there is also huge opportunities on the international side. I will be tomorrow the prime minister in Romania, so we speak about vehicle programs, we speak about ammunition programs there. Hungary is something coming up. The whole Eastern European part is looking forward. Spain, if you see what we booked now over the last... And in the next two months and over the last two months, if I count everything up, there is more than one billion that we book in Spain. Spain is a new market for us, but it hurries up a lot. So there are huge opportunities. And what we have at the moment to take care is really to bring it into the right direction and to deliver.

Okay, thank you for this. And then the very last question is just around electronic solutions. I recall that at the Capital Market Day, you had pointed to a potential of up to 5 billion when it comes to air defense. talked about the European SkyShield initiative and the related potential. And I've counted around 3 billion of orders since December alone. So can you provide us also here with an update where this can grow eventually? I've seen and noticed obviously the 2 billion that you put in the slide deck as a midterm sales potential. And maybe there's also a relevant question, I guess, in this regard. Help us a bit at least to better understand the profitability around air defense, because my impression is that there's very much deviation between the bits and pieces inside electronic solutions.

Yeah, so if you see long term, my expectation is that, as I said, 50 to 60 countries will be our countries on air defense side. Only with ESEE, with more than 20 countries and every country will order something. And if I say it's very conservative, half a billion, and this is the minimum that they have to order, it's half a billion, so then you see that there is a potential also conservative of 20 billion euro. It's a very simple calculation. The point is that these are the systems. The point is that every nation needs ammunition. And on the ammunition side, we are the only producer of the so-called ahead ammunition of that. And if there is a conflict, they have to fire their ammunition. So at the end of the day, there is a huge potential also from the ammunition side, which is going forward. So I agree with you. that we were on the capital markets day conservative but at the end of the day and you see we booked now really you are right yeah we booked some billions and we will book much more but if we grow up and the big ticket has shown a year by year to 2.5 billion or 3 billion it's good profitability There will be a leverage effect also. At the moment, we are on a level of 15% on profitability. On the EDIFENZ side, there will be a leverage effect. And I think with the leverage effect, maybe it can be a little bit more.

All right. Looking forward to it. Thank you. Thank you.

The next question comes from Sven Weiher from UBS. Mr. Weiher, the floor is yours.

Yeah, thanks for taking my questions. Good afternoon, everybody. The first one, Mr. Pappberger, just to follow up on the introductory remarks you mentioned about the different businesses and the mid-term sales potential. I was just wondering if you could reconfirm that you had those projects in mind when you talked about reaching 15 billion of sales in 26 and 20 billion in the next seven to eight years, if these are still the right numbers. or if we should even see higher than that. That's the first one. Thank you.

I'd love to be higher in that area, but first of all, I want to reach it. The 10 billion this year, 15 billion, and I think we are very, very looking forward over the years if we say, okay, we want to grow over the next seven years to 20 billion. So if it is more, I appreciate that. But first of all, this is what I want to reach. This is our internal targets. And as you know, if it is going better, I'm happy. I'm very happy about that. But I can tell you at the moment, no other figures. And this is where we shape the whole organization. If the order pipeline and if the order backlog is growing stronger and stronger and stronger, and if we have another 10 billion, which we would not expect it because we are so successful, then we have to invest a little bit more also into the capacities and then we have to grow stronger. But at the moment, I think we have to deliver.

And I mean, you already said earlier, you will almost achieve the margin target for 26 to 15% at the high end. I mean, what margin does go alongside the $15 billion then? Are we talking 16% to 17% or what do you have in mind for this?

The point is, I think it's a very simple calculation. The civilian business, which is less than 10%, will be lower and lower and will be, let me say, a very small amount of our sales.

i expect that on the defense side that we are able and that must be our target that on the defense side we are able to make 18 19 percent ebitros okay very clear and then i just wanted to make sure i understood your previous comments regarding sebastian questions about the pipeline that you said 30 billion potential in germany or 13 this year three zero And because you know what I'm wondering, I think in the same report that Sebastian mentioned, there was also mentioned that the special fund is already overbooked the stuff, right? Because everything has gotten much more expensive. Also the weapon carrier, the F-35. So how does it square if the 30 billion are taken from the special fund?

It's not overbooked. It's not overbooked. The only thing what they have is that these programs are financed. There are some things which cost more, but there are some huge programs which are, let me say at the moment, out of priority. And that is the reason that it is not overbooked. That is number one. Number two, and in all the discussions I have, and this is crystal clear, the budget, the regular budget, must grow up to 80 billion of EPL 14, number one, or they need a second Sondervermögen or Sonderdebt, however you call it. And I personally believe that it is much easier to bring the second Sondervermögen to create national security for Germany. And that has to happen, I think, next year. because otherwise they are running out of VAs, Verpflichtungsermächtigungen, and I believe it will happen. Is it a risk for us? No, because we booked all that things. So we are happy for this year. And Dagmar, you have seen what we have for this year. It's nearly 100%. And we book a lot of business also for this year. there is even potential to grow more. But next year, it's also 80% done and without all these bookings that we have in 25. And in 26 is also huge. So I can see up to 26, 27 that our growth story continues. And that gives me confidence that, first of all, we have time. Even if there is a delay of half a year, a political delay to make decisions in Germany and elections, et cetera, et cetera, it doesn't hurt us. And the second point is that there is a need, and all the discussions we have with the opposition, with the Christian Democrats, Social Democrats, Green Party, liberals, all of them said we have to invest in our security and national security is so important. We have to spend the money, full stop.

The final question I have for you, Mr. Papberger, on the U.S. projects you talked about, right? And, you know, you mentioned the decisions are likely falling into a period with a new president. So how able, how willing would you be to team up with your competitors to have like maybe a shared project at the end of the day and a joint project with those you compete against at the moment?

You know, if the customer likes that, I'm always open. For me, it's not a problem to share, but this is a decision from the customer. The point from my side is, first of all, we will fight hard. There is a two-year period where we fight hard, and we can fight hard because we got nearly $800 million from the US government to fight, and they want to see us to fight to give the best technologies into the United States. to show them that the prototypes that we are delivering are great things, to make America great again. So this is exactly what we want. And that is the reason, and we do it with our U.S. boys. There are no European boys inside, only U.S. boys, and we are a U.S. company. And this is exactly what both parties, Democrats and also the Republicans from President Trump, if he is president, or former President Trump sees. He doesn't like imports from Europe to the U.S. We will produce every small screw in the United States, and I think this is the right thing to go forward. And we have, at the moment, good R&D centers, very good R&D centers, and the American customers like it. And when I was last there, I had some meetings with secretaries and Pentagon, and they are very positive. But you never know at the end of the day what happens. But for us, it is a really great experience what we see, and I think we have a good chance.

Understood. Very clear. Thank you, Mr. Papaga.

The next questioner is Sash Tusa from Agency Partners. Mr. Tusa, the stage is yours.

Thank you very much indeed. Good afternoon. I have two questions. The first, your guidance of around 10 billion of revenues for the current year, given that you have 89% order cover and around over 400 million of product already made, which you should presumably deliver in the first half, it doesn't actually seem a particularly aggressive target. Are you expecting or are you concerned that there might be some more cut-off effects at the end of this year and hence that there may be some deliveries that slip into next year? Are you putting a bit of risk into your forecast? And then the second question, which is a rather wider one, could you talk about the supply chain for ammunition and particularly for explosives and where you see the pinch points being and where you see the the supplies being most favorable at present?

Yes, so the point is that this is the calculation that we have and as you said the first quarter, you will see in the first quarter that we are on a very very good way in the growth. We will have a very good growth in the first quarter and a very profitable first quarter. We never ever, it's not the Q1 call today, but we never ever have seen such a quarter like we see now. This is number one. The second point is I'm an entrepreneur. And as an entrepreneur, I'm looking on the profitability. And I can make a bet with you that the profitability will be between 1.4 and 1.5 billion euro. If it is 10 billion, 9.5 or 10.2, this is what we have minimum. And that is for me the importance. That is for me the importance. Are we profitable? Can we create cash? And the other thing is also cash. We don't lose cash. And as you know, if you have a company which is growing 40%, usually, yes, you have to invest such a lot of money that you have no positive cash flow. We will get a positive cash flow again because we get good down payments in this area. So is it so that we make exactly 10 billion? I must say I don't know. But is it so that we make minimum 1.4 billion profit? Then I say yes, I will bet with you.

Is that fair enough? I certainly won't take that bet then, thank you.

And supply chain? On the supply chain side at the moment we have no big problems. And the reason for that is, as I said, we have 3.2 billion valuable goods in our stocks. So we take care about that to buy in early. This maybe is not the optimum for the cash flow.

That's for sure.

But at the end of the day, it's optimal for us to deliver. And this is the right way. I believe it is the right way to, especially if we have war in Europe, to deliver. and not to make an optimization on the cash side, but we have no problems at the moment on the sub, from our subs, and we have no problem at the moment also on the human resource side. This is the next point to say we get people, the people love us at the moment, and the people want to come to Rheinmetall. Okay, thank you very much. It's a pleasure.

The next question comes from Michael Raab from Kepler. Mr. Raab, the line is now open for you.

Hi, everyone. Mike Raab, Kepler Sugar. I'd like to place two questions here. First of all, Mr. Papberger, when I look at the sales potential that you depicted for the individual product groups for the midterm, just doing the simple math, adding them all up, you get to a corridor of between 17.6 and 18.2 billion, to be precise. Now, you're indicating this is for the mid-term. What is specifically your definition for mid-term, if one could say so?

It's longer than 2025, as we said on the capital markets day. And the question before was also, yeah, is this 14 to 15 billion enough? Yes, we won't first of all reach the 15 billion. If everything, this is a potential, If everything which is in the potential is coming up, your calculation is absolutely right. There is more in, but 100% hit rate here usually is not possible.

Yeah, absolutely. That's what I'm asking. Okay, cool. Thank you. Then the second question I'm having, and I'm already done, is why would a panther not qualify as Leopard 3?

Because he has the wrong name. As you know, it's exactly the point. Sorry to say that.

From a technological standpoint, you could rebadge, rename, whatever. So technologically, is there any obstacle?

No. This is a fantastic product and I can tell you also one, it's not a secret because it will be very soon in the newspapers. We signed now the R&D programs in Germany, also for the 130 and for the 130 ammunition. So this is one technological milestone that the Panther has also inside. But that is what I mean. We have the Panther. The Panther is a medium, mid-term tank. And I personally believe that there will be a decision also in Germany because the main ground combat system we need up to 2040-45 that we have in between. I call it Leopard 3. However, the German government will call it maybe Leopard 2 plus or whatever. I call it Leopard 3. And I believe that a lot of technologies that we have in the Panther will be implemented also in the Leopard 3.

Okay, back to the Pantor gap. Thank you.

The next question comes from Christoph Lascavi from Deutsche Bank. Mr. Lascavi, the stage is yours.

Good afternoon. Thank you for taking my questions. There will be three. The first one will be on vertical integration in the US. You expect announcements relatively soon. Would you need to increase your vertical integration before any announcement in the US? So do you need to buy there? Second question then, what's the MO share that's in the air defense business of $2.5 billion? And then a technical question just in Q4. If I understood it correctly, you moved business from MO to electronic solutions. Could you just remind us what that was and why you did it? Thank you.

I didn't get the last question. Say it again, please. I got the last question. You got it? Okay. Then I take the first two and Dagmar takes the last one. So vertical integration, very clever question because you are totally right. We are looking at the moment for acquisitions also in the United States. We want to do that and we have to do that because at the end of the day, we must be a bigger player if you get such big contracts. We need bigger factories and we are looking for that and this is one of our targets to have a decision this year. Second point is ammunition share. So we expect that we have to produce 500,000 rounds per year continuously. And the price of one round will be between 1,100 and 1,200 euro. So you see that we have between 500 million and 700 million on ammunition. Dagmar?

Okay, yeah. The reorganization of the divisions we moved from the Division Weapon and Ammunition Rheinmetall Canada to Electronic Solutions and there we are talking about the sales volume of 110 million.

Thank you. A follow-up, if I may, just on the vertical integration in the US. Is there any potential size that you are looking at or could it be very small up to very big? Any comments there?

It will be not very big, but also not small.

Understood. Thank you.

The next question comes from Carlos Iranzo Perez. Mr. Iranzo Perez, the stage is yours.

Thanks for taking my questions and good afternoon. First one, in the presentation, you have updated the mid-term sales target within weapons and ammo. And all these artillery numbers add up to roughly $7 billion. So this compares to the 2023 CMD guidance of around $4 billion. So could you please help us to understand this material growth post-2026 and the timeline to achieve this? Thank you.

So, yeah, the first thing is that up to 2026, only the artillery ammunition, as I said, if the full package artillery with propulsion systems and also with fuses will come, there is a potential up to 5 billion only on artillery ammunition. It's 1 billion for tank ammunition and the rest is the rest. But it's, I think... a very good figure and we can reach that in 2026. And Spain will be an important driver for that. So as you know that Madrid is the center of competence for indirect fire, so it's the headquarter of indirect fires in Madrid. And so this will be by far the biggest center of competence worldwide for indirect fire, Madrid, because we guide from Madrid the Spanish factories, but also South Africa and Australia.

Super clear. Thank you. And I have a follow up on weapons and ammo as well. On the margin side, you are guiding for margins of 25, 26% in 2024. And at the CMD, you guided for margins of 26 in 2026. So that implies very little operating leverage in 2025-26. So why is that?

Now, look, I think that's a very good margin. That is one point. And on the other point, if you we want to be very fair to our customers. And if there is a leverage, there is a leverage effect for sure also, but there are some investments and we want to pay back also from that side. And we don't want, let me say, to overweight these discussions that we have with our customers. Sometimes you have to give the customers also And in fact, if he buys a lot for some years, you have to give them something. You have to give them some money back. And so therefore, I think if we are between 25% and 30% in this area, it's a very good margin, I think.

Greatly, yes. Thank you. Thank you.

The next question comes from George McWhirter from Berenberg. Mr. McWhirter, the stage is yours.

Good afternoon. Thank you for my question. Just on the aviation midterm guidance of about a billion euros of revenue, it seems a bit higher than the F-35 contract that you recently signed. Please, can you comment on any additional opportunities that you see in the aviation sector just to get to that one billion level? Thank you.

Yeah. So you're totally right. The F-35 will be half of them, about 50%. The others will be the sustainment business, not only on the F-35, but also sustainment on helicopters and other things. And number three is that at the moment, different producers of airplanes are coming to us. If we are with the technology and with everything that we learned now, if we can produce some other components for them. And that is the potential that we see. Thank you. It's a pleasure.

At the moment, there are no further questions. This is the chance for you. If you would like to ask a question, please press 9 and star on your phone. The next questioner is Christian Kors from Warburg Research. Mr. Kors, You can ask your question now.

Yes, hello. Good afternoon. Two questions left for me. First on capex. At the capital markets, I think you stated something like 7% of sales would be capex in 2024. Is this still valid? That would actually mean 700 million. compared to your 10 billion guidance, or do we have also to take into account the 300 million investment in Unterlust, so then a total of 1 billion, maybe you can shed some light on that. And then lastly, looking at your minorities, all your fully consolidated earnings up massively, but looking at the minority line, Air MMV lower earnings, D&L lower earnings. Maybe you can provide a brief explanation for that. Thank you.

Yeah, I take the question with the minorities. And yes, we have lower earnings from Air MMV. Of course, we are missing our trucks, which we didn't deliver in 2023. We see as well lower earnings from Rheinmetall Dennerle Munition, but they had extraordinary high earnings in 2022. And these are both companies which lead to the fact that we have minorities of €52 million in 2023. and compared with 66 million Euro in 2022.

Second point of capex, yes, you are totally right. It will be in that area about 700 million Euro. Positive thing, as I said, we will have a lot of down payments, number one, and maybe I didn't tell it right, but positive thing, very positive thing is we'll get 140 million from the European Union for investments. So this is a grant. This is, let me say, a present from Europe to Rheinmetall because of all the investments that we have. And that helps us a lot, for sure, to pay the bills.

Understood. Thank you.

And by the way, this is not in the calculations in between.

Thank you. The next question comes from Ben Heelan from Bank of America. Mr. Heelan, you can ask your question now.

Yeah, thank you for adding me at the end. I wanted to ask Armin around some of the numbers in the presentation again, because you talk about the mid-term sales potential for artillery, rocket artillery, mid-caliber ammo, tank ammo, infantry ammo. And adding those all up, you get to around $7 billion. for that weapons and ammo as a midterm sales potential. Obviously you've given us 2026 guidance in November of over 4 billion. I think in one of the questions you talked about that potentially being five now. So it is seven where this business can go towards the end of this decade. I appreciate you probably don't want to give like firm guidance for 28, 29, et cetera. But how should we think about that 7 billion if we just simply add up all those numbers in the weapons and ammo? Is 7 billion what that revenue line could be at some point, and how should we think about that? Thank you.

If you calculate up 100%, it's 7 billion. I 100% agree. But if we go, let me say, to be sure, because we speak about potential and about operational planning. On the operational planning, if you see that we are on an area of 5 to 6 billion on the ammunition side, I think that would be very, very realistic. The potential is really 7 billion. But as I said before, you never ever have a 100% hit rate in this area. So what we do is we go through all the countries and these are the potentials and this is the capacity that we build up. We have really a capacity if everything is going forward. If the crisis is going forward that the customers order more, We really can make 7 billion. This is the potential that we have. This is a capacity also. But for my calculations, yes, I said between 5 and 6 billion is a fair value. But if you see that we said between 5 and 6 billion on the ammunition side, and if we make between 25 and 30% profit, it's a great value. It's not so bad.

Yep. Yeah, no, that's very fair. A quick follow-on, obviously, you did the XBAL acquisition last year. It's been very successful. Is there more in the pipeline? How should we think about M&A 24 and 25?

Yeah, as you say, we make M&A year by year. And again, nobody at the moment has really calculated our Romanian business. which I tried to calculate that we will make 40 to 60 million profit also per year over the next years after filling that company. And we try to go into acquisitions. One target is U.S., as we discussed before with Mr. Lascari, but we also have other opportunities also on the weapon and on the ammunition side. But as I said, I cannot go into details about the M&A because we always have NDAs, and you will get the information as soon as possible. And as we always do, if it is a big acquisition, we give you an extra call to inform the investors and the analysts about that.

Very clear. Thank you, Armin. It's a pleasure.

The next question comes from Dario Dickmann from HSBC. Mr. Dickmann, the line is open for you.

Hello, also from my side. Coming back to your comments on the next Leopard generation and the implemented technology, does this mean that your share inside of the new Leopard should be significantly higher compared to the Norwegian Leos, for example? Yes. Okay, and last one. At the CMD, when talking about potentials, you also mentioned mortar potentials of around 600 million and weapons of 1 billion. Do these have to come on top of the ones presented in your presentation?

There are some things which are not at the moment in the presentation, and I can tell you what happens also on the weapons side. And therefore you see for sure, and now you got me, there is for sure more potential also. So the weapon production only in Unterlös and the price of a weapon is between 1 and 2 million Euro if it is an auxiliary weapon or a tank weapon. Only on the weapon side we will grow up to 250 weapons per year. Between 300 and 500 million we can produce weapons for artillery and also for tanks. But I hope that you see that we want to give you an overview about the big tickets and the 250 million is not a real big ticket because this would be the smallest number of all of them. But we have to cut it sometimes and otherwise I for sure can give you a much better overview and there is some potential and this is also invested. So we produced earlier also up to 50 weapons per year and we do have now the capacity of 250 and all the equipment is in place and we are on the way and we need it because we need now a long-term agreement also on the weapon side to help the Ukrainians. So Ukraine will need between 50 and 100 weapons per year because they fire such a lot that the weapons or the barrels for sure are destroyed sometimes. So there are smaller things, but these are not like the big tickets like auxiliary where we have between 3.5 and 5 billion.

Okay, thank you. And last question maybe. You mentioned earlier the artillery system on the Boxer with your partner in Munich being shared 50-50, is that right? So the RCH-155.

Yeah, the reason for that is very clear because we have an agreement with KMW that everything which is coming on the Boxer now, starting from this year, all the contracts will be shared 50-50 between KMW and us. If there is our torrent or if there is whatever is on, we share it 50-50, which is a good solution.

Okay, great.

Thank you very much.

Pleasure.

The next question comes from Sebastian Grover from BNP Paribas. Mr. Grover, the stage is yours.

Yeah, me again. Thanks for taking my follow-up questions. Two quick ones, easy ones, and one more delicate one eventually. So the first one is just on M&A and then this is simply there's no question for the 20 billion that you had put out in the sort of longer term. Is there any M&A included here or not at all as we speak?

The second question is... No, it's not included.

Right. The second one would then on PPA be a question. I think, Mr. Steiner, you said before that you would expect something like an 80 million eventually for 24 and then it would come down towards 30 million or so. and then eventually even 20 million by 26 or so. Would you confirm that today?

I have to revise that number. In 2023, all in, we had 70 million PPA, 40 was XPAL, and 20 million was 4IG, 10% older acquisitions. In 2024, we expect 100 million,

and then it comes down 25 to around 70 million 26 40 million around that okay okay good stuff and the last one is then on the infringement proceedings in spain can you just provide us with an update or your view on the matter with the uh you you think with uh cartella the legal case around yeah exactly yeah

Yeah, we see not a real case about that. What happened is the following thing. So we had a due diligence, and in the due diligence phase, the seller has to fill, as you know, the data, and there was a small company, civilian company, and they got some ingredients from the explosive site, and this was not on the list. They forgot it, and after... the closing or the cartel gave us let me say green lights and after the in this in that process these smaller company said okay but there we need also to protect that you give us whatever it's not a lot it's some hundred kilograms what is going on and so we gave this information now and to the Commission, to Monopoly Commission, Catella, and we think that we can sort it out very soon. There is no, I see no bigger problem. Okay, that's good. All right, thank you. Thank you.

The next question comes once again from Sven Weiher from UBS. Mr. Weiher, you can ask your question now.

Yeah, thank you. Just one on CapEx. To clarify, is the 700 million already after the 300 million down payment you get from the German government, or is that the gross capex? And also related to that, I was wondering about the leasing cash out. I think the total leasing cash out, including interest for 62 million. I was just wondering now with the new beta plant in Hungary, which I think are going to be leased, how that charge is going to develop in the coming years. Thank you.

Yeah, well, regarding the capex, I start with the cash out for capex. In 23, we had 384 million euro cash out for capex and roughly 700 million capex for 2024. They are excluding our new production in Niederwachsen, our new plant. So it will be a higher number. But on the other hand, as Armin already mentioned, we get grants from the government. We will get additional down payments and so on. And of course, there's always a share of leasing capex, but that's not a cash out. You don't see it in the cash flow statement and so on. So that's why we start just reporting as the capex number, the cash out capex.

Yeah, I was just referring to the 62 million you had in total of leasing payback and interest.

Yeah, that's of course including leasing and everything, leasing and development and so on.

Cash out for factory in Inderstaxen will be for this year and for next year. So we have to pay something this year, but for next year, because we will be ready next year, April. This is the idea. And if you have everything finished, then you pay the final bills. So this will be for this year and for next year. But you can see that this 700 million is a very good figure. The positive thing is that for the ammunition contract, we are in negotiation with the German government at the moment, that we get a huge amount of down payment. So that for the cash flow, it's very positive for us.

Understood. Thank you both.

Thank you.

The next question comes from Michael Raab from Kepler. Mr. Raab, the line is open for you.

Hi, thanks. Me again. CapEx is a really good buzzword. Sorry, I also have to ask for that again, just to make really sure someone like me also got it right. This year's, say, 600 million, 700 million roundabout includes already a part of the investment for Interlus, or does that come on top of it?

No, it includes the 700 million roundabout includes a part a part of that and if you see there are three three different stages of our investment the total investment is 300 million from the 300 million you can see there is a forging then there is a filling plant and there is an assembly plant and then this this will be on the level of 200 million and then there will be a missile plant and an audi x plant which is then the other 100 million and so if you if you see that that the the forging and the filling plant will be ready in april next year then it should be let me say around it's a rough calculation 100 million will be this year in okay and then um based on that if we were to move forward on the timeline

would we extrapolate the 7% capex because you have more add-on projects coming? No. Or would the capex to sales ratio trail off again? And if so, to what levels?

5% is our target. But in such a strong growth rate that we have at the moment, I think it must be possible, yes. And if you build such big factories like Werknieder Sachsen, I think that is important that we invest also more. But as I said, at the end of the day, it's, to be fair enough, 50% of VAC Niedersachsen is paid from the European Union, if you count that in total. It's for the whole Rheumatol group, but at the end of the day, if I count that, so this is a political decision that they want to go forward with that investment to protect Europe.

logically we would presume that the absolute capex amount is bound for an increase in the next couple of years say mid term but relative to sales it's going to come down okay thank you five to six percent is my expectation between five and six percent it's my expectation all right yep pretty good thank you there are no further questions thank you very much i hand over to armin papaga for closing words

Yeah, thank you very much. Thanks for your time. Thanks for these very interesting questions and hope I see you soon. And I'm very happy to see all of you soon in the next Capital Markets Day because that is an international Capital Markets Day. And I think I have a look now to Dirk and he will be very happy over the next month to give you information about that. Au revoir. Bye-bye.

Thank you for participating in the conference call.

This call is now closed.