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.