RENK Group AG (R3NK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, a warm welcome to the RENK Group AG Full Year 2024 Results Analyst Call. [Operator Instructions] Let me now turn the floor over to Christian Weiss from Investor Relations.

Thank you, operator. A very warm welcome from our side. Our financial year '24 investor and analyst call is hosted by our CEO, Mr. Dr. Alexander Sagel; and our CFO Anja Mänz-Siebje. Now I would like to hand over to our CEO, Mr. Dr. Sagel, Alexander. Alexander, please go ahead.

Christian, thank you very much. Ladies and gentlemen, good morning, and thank you very much for joining today's call. My name is Alexander Sagel, and I took over as CEO of RENK at the beginning of February and having been the CEO of the company before since April last year. I'm joined today by my dear colleague, Anja Mänz-Siebje, our CFO. Ladies and gentlemen, today's presentation has 2 parts. Firstly, a quick review of the 2024 figures. Most of them are already known, so we will try to keep it focused and comprehensive as much as possible. Secondly, we will provide you with an update on 2025, which includes not only a discussion on our top priorities, and the first indication how we started into 2025 during Q1, but also our full year 2025 guidance. Very important to mention, we are reporting at a time of significant developments for the whole defense sector and RENK is, as you all know, very much at the heart of this. There's much to talk about the implications from increasing defense budgets across Europe on industry and company level, and we are very happy to do so. Fair to say that for the time being, a more concrete or tangible evaluation of business effects for RENK will take time to formulate due to the early process regarding the NATO planning and subsequent budget allocation to different domains and programs across the European nations. However, it is also fair to say that these potential business effects are not included in our current midterm targets such as the 15% CAGR, the EUR 2 billion revenues for 2028 and also not in the current order. But I will touch this point -- this important point later during the presentation. I would propose now, ladies and gentlemen, we move forward to go into the presentation. So let me start with a high level approach on Page #4 on our most important key financial key metrics for 2024. To sum it up and without going through all figures shown in all relevant key metrics, RENK realized significant improvements in 2024 compared to 2023. Needless to say that we are very proud about this achievement and that we are also very proud about the performance of the entire RENK team. The strong focus on operational performance and execution in our lead plants, VTA and RAM in U.S. And the realization of leverage effects from increased volumes were driving significantly year-over-year revenue and adjusted EBIT improvement. At the same time, we continued our careful and thoughtful allocation of capital, for example, by staying in the 3% level of our CapEx spending due to our well-invested industrial base, with a clear focus on capital return and cash generation during this growth period. For example, with a ROCE of almost 20% and a net leverage of 1.7x, we are almost hitting our medium-term targets for these 2 key metrics. As a result, the proposed dividend will increase 14% year-over-year to EUR 0.42 for 2024. As you can see in the pie chart on the right side, our business model remains unchanged. Strong and growing defense share to now 72%, a strong aftermarket business of 40% and a diversified regional customer base. On top, to secure our leading #1 position in mission-critical drive technologies, we realized significant progress during 2024 in our key technology fields, but also in key customer projects. I mean, you know from previous calls, we are always looking and working very closely with GD, for example, on the M1E3 [indiscernible] program. You know about the cooperation acquisition of the IPs from Kinetics. You heard about our Eurosatory ATREX, main battle tank and the focus on hybridization. But I will touch this point later on during the presentation. If we now go quickly to Page #5. You can see that our total order backlog has again increased to a level of strong EUR 5 billion, which is about 4.3x last 12 months revenues level. Our fixed order backlog increased by EUR 266 million compared to Q3 '24 despite our strong output in Q4 '24. As you already know, the main drivers of this growth were 3 major orders just before Christmas last year with a total value of more than EUR 350 million. I think you all know -- I mean, we are talking about the KNDS order, we delivered 2 [ A8 K2 Poland by Hanwha ] and a third international customer. On top, we maintain a highly visible soft order backlog with the current level of around about EUR 2.2 billion. But as said before, this does not include, for the time being, any upside from the expected increasing defense budgets in Europe. Having said this, I would like now to hand over to my dear colleague, Anja, in order to have a deeper look into our 2024 figures. Anja, over to you.

Thank you, Alexander, and hello to everyone. I'd like to have the opportunity to guide you through our financials. Let's start with the group perspective. During the fourth quarter, we achieved a very high level of our intake, reflecting the successful acquisition of surge orders, which Alexander already mentioned just now. Our book-to-bill ratio stood at 1.6x in Q4, demonstrating strong order momentum, while the full year fiscal year 2024 book-to-bill ratio reached 1.3x further reinforcing our solid market position. With a look at revenue, we delivered significant growth of 23.2% year-over-year, primarily driven by strong BMS performance especially in Augsburg. In addition, we stabilized operational efficiencies in Muskegon, both of which contributed to improved profitability, especially in the second half year. Despite higher output levels, we achieved a considerable increase of 16.8% in our fixed order backlog for the group. Let me continue with our profitability and other key metrics. Our strong revenue growth has translated into a significant increase in adjusted gross profit demonstrating the robustness of our business model and operational efficiency. We experienced solid volume growth benefiting from successful improvements, particularly at our Augsburg facility. These efforts have enhanced the higher operating leverage and so our cost structure and overall profitability. Our margin mix was favorable, driven by an increased share of aftermarket business, which continues to be a key contributor to our profitability. Adjusted EBIT for the fourth quarter of fiscal year 2024 showed a significant increase and so made an important contribution to our full year performance. For fiscal year '24, adjusted EBIT reached EUR 189 million, representing 16.6% adjusted EBIT margin, positioning us at the upper level of our guidance range and underscoring our strong financial performance. Our leverage ratio declined sharply to 1.7x of LTM adjusted EBITDA compared to fiscal year '23, supported by high revenue level and a higher cash balance. This improvement reflects our disciplined approach to capital management. If we turn the page, let's focus on VMS. In the fourth quarter of fiscal year '24, order intake was driven by 3 large order wins as alluded by Alexander earlier, resulting in a 27.2% increase for the full fiscal year compared to fiscal year '23. This strong order momentum reflects our ability to secure key contracts and reinforce confidence in our long-term growth perspective. In Q1 '25, RENK America has received 2 significant orders totaling over USD 150 million to supply transmission for 2 projects. Alexander will provide further more details later on. Let's move to VMS revenue trajectory. VMS achieved significant revenue growth of 39.9% in Q4, driven by operational improvements and higher output levels, especially in Augsburg, and RENK America stabilizing at an output level of 3.5 transmissions. This performance underscores the effectiveness of our efficiency initiatives and operational execution throughout fiscal year '24. Margins also improved significantly as a result of strong operating leverage and continued operational enhancements. Additionally, efficiency at our Muskegon facility has stabilized, further supporting our overall profitability. The year-over-year adjusted EBIT margin comparison was impacted by one-off items recorded in fiscal year '23, namely the release of guarantee provisions. However, on a like-for-like basis, adjusted EBIT increased from EUR 98 million, representing 18.5% adjusted EBIT margin in fiscal year '23 to EUR 140 million, representing 20% adjusted EBIT margin in fiscal year '24. Let's turn to Marine & Industry. In fiscal year '24, M&I order intake remained at a high level, though it showed a year-over-year decline, particularly in Q4 fiscal year '24 compared to Q4 '23. This was primarily due to order shifts toward fiscal year '25. You may be aware of our press release in February, stating that M&I successfully secured orders with a total value of almost EUR 50 million. On this topic, Alexander will provide more further details later on. So our pipeline remains strong, supporting future growth, and we view the dip compared to fiscal year '23 as a timing effect. M&I revenue growth trajectory remains firmly intact with a particularly strong performance in Q4 '24. The primary drivers of this growth were new business and increased share of aftermarket, both of which continue to provide a stable and recurring revenue base. Adjusted EBIT saw a strong increase outpacing revenue growth on a year-over-year basis. In Q4 fiscal year '24 adjusted EBIT remained on the prior year level. For the full year '24, adjusted EBIT margin is at a very good level at 10.6%, driven by the expansion of higher-margin new business and a growing contribution from aftermarket activities. A few comments on slide bearings. Slide bearings continues to experience strong demand for e-bearings as well as aftermarket sales, particularly related to spare parts. While order intake for horizontal bearings remain solid, some orders have been shifted towards fiscal year '25, impacting near-term intake figures but reinforcing our long-term growth perspective. In fiscal year '24, slide bearings achieved considerable revenue growth of 12.6% year-over-year, primarily driven by increased aftermarket activities. Demand for bearings in electronic motors, generators and maritime applications has been a key contributor to this expansion. So our revenue growth remains on a substantial trajectory following the strong momentum established in previous periods. This reflects both the resilience of slide bearings core business and its ability to capitalize on emerging market opportunities. Profitability remained at a high level with 17.2% and is above group level with a significant year-over-year improvement. This was achieved through enhanced margins in new equipment sales and a higher share of aftermarket, both of which continue to strengthen our overall earnings profile. Let's continue and talk about the adjustments made to reported EBIT and the underlying reconciliations. We closed fiscal year '24 with EUR 160 million operating profit, representing a 30% year-over-year increase from fiscal year 2023. This growth rate reflects our continued operational efficiency, I mentioned earlier, combined with the disciplined cost management. When adjusted for PPA effects, our operating profit reached EUR 159.9 million, compared to EUR 135.9 million in '23. For Q4 '24, we saw an operating profit of EUR 57.7 million, more than 80% higher than Q4 2023's EUR 31.9 million, reflecting strong year-end performance. Most of our reconciling items are well known already, with capital market readiness costs reflecting the remainder of our IPO process earlier this year. Other adjustments primarily relate to the ramp-up program, which enhanced the RENK America operating model as well as consultancy costs for refinancing our long-term debt. For further details on this, please refer to Page 27 in the appendix. Let us continue to a detailed look at our net working capital development. Our net working capital as a percentage of sales decreased by 190 basis points. This favorable development was primarily driven by higher customer prepayments in Q4 2024, reinforcing our liquidity position. At the same time, due to operational requirements, we have increased our inventory levels to execute our strong 2025 production pipeline. Please keep in mind that customer advanced payments may not offset such increases as of the end of reporting quarters. Looking to the future, we will continue our efforts to further optimize our working capital through the initiated net working capital optimization program to achieve a net working capital ratio of around 20% in the midterm. Moving to our cash flow statement. In fiscal year '24, we generated a strong unlevered free cash flow of EUR 177 -- sorry, EUR 137.7 million, nearly 3x higher than fiscal year '23. Let me highlight the following. This increase was primarily driven by higher EBITDA and the net working capital improvements mentioned, especially when looking at Q4 and its customer prepayment. CapEx is slightly below our 3% target, including expenditures for intangibles acquired from Kinetic. Other reconciling items primarily includes cost reimbursement linked to our IPO and the neutralization of the increase in pension obligation. In total, free cash flow post interest payments stood at EUR 87 million for the year, a significant increase from EUR 21.1 million in '23. The increase in interest expense primarily relates to a one-off for early bond redemption in half year -- in the first half year of '24 that amounts to around EUR 7 million. In summary, RENK delivered a strong free cash flow performance in '24, significantly improving our financial flexibility and leading to a significant increase in our cash conversion rate. A 3-year average, our cash conversion is above 60%, underscoring our ability to convert earnings into cash. In line with our earlier communication, we will track our capital efficiency based on ROCE. With a look at the '24 development, we are already close to our communicated midterm target greater than 20%. Besides our operational performance denominated in adjusted EBIT, we managed to keep our capital basis stable. This is due to our fully invested platform that enables us to make best use of our resources and which is in line with our net working capital and CapEx midterm guidelines. At this point, let me thank you for your attention. It was a pleasure for me, thanks to the outstanding year with many challenges, but even more achievements. And with that, I now will hand over to Alexander, who will take you through our 2025 guidance, key highlights for Q1 and our strategic priorities of 2025.

Anja, thank you very much for this. Ladies and gentlemen, during recent weeks and events, such as, for example, the Munich Security Conference. It became obvious that we in Europe finally are responsible for our own security and deterrence capabilities. Europe is not anymore in the prime geopolitical focus of the United States of America. And as a consequence of this fundamental change, Europe and Germany, in particular, have reacted by deciding on significant increases on future defense budgets. While the exact amount and allocation of these new budgets are not clear yet, it is obvious that the defense spendings of the European NATO nations will increase from 2024 level of approximately EUR 440 billion to somewhere between EUR 600 billion to EUR 900 billion annually for the years to come, always depending on the defense spending as a function of the GDP. The key question is, what will be the implications for ramp from this new situation? There are basically 3 effects, which could drive RENK's business. Number one, additional new platforms for the domains, land and sea, for example, as a consequence from NATO requirements on Germany regarding the number of heavy additional brigades. Second, an increase of the circular reserve for the land platforms; and third, finally, an increasing demand for spare parts and overhauls simply due to increasing equipment used due to increased trainings, et cetera, et cetera. While the first effect is simply increasing the number of new armored vehicles or ships during the next years and depending pretty much on the capacity ramp-up of our primes, the last 2 effects are for securing mission readiness of today's platforms. We, as RENK, will therefore follow and observe in the upcoming weeks and months very carefully the defense budget allocation decisions regarding domains and projects while staying in a very close contact with the various MODs and primes, and we will try to quantify this additional business potential. Lastly, and in parallel, we are currently conducting different scenarios for capacity increases and supply chain in order to be prepared in case of significant additional volumes on top of our current midterm growth scenario. Ladies and gentlemen, I would propose now let's move on to Page #18. How was the start for the year 2025? First of all, it's important to note that we did continue with our strong order situation from Q4 '24 into the first quarter of 2025. As you all know and just mentioned by Anja, we had several new orders right in the beginning of the year for the Navy segment for different international customers and for different applications such as patrol boats, frigates or the support ships. And this continues because also during the last weeks, we received new orders for further international customers also for offshore patrol vessels and high-speed patrol [ cohort ]. Same for the VMS segment, where we received several new orders such as the SAR 3 contract mentioned before by Anja, more than $150 million, mainly for the Bradley and the AMPV transmissions and further contracts from different European and international customers, including several new spare part contracts from level 2 user nations, such as Germany, Austria, Switzerland and Sweden. Looking on the operational performance, we are also here in a good shape. RAM just continues on the 3, 3.5 transmissions per day rate from Q4 '24, and also VTA as our largest plant is running with a strong performance. You are all aware about the very recent leadership change at RENK Group by appointing Emmerich Schiller on March 1 as new COO to the Executive Board. I have to say that I'm very happy with this decision given the high importance of operational performance and excellence on our overall company performance and the proven capabilities and track record of analysts during 2024. In February, Moody's raised our RENK Group's rating to Ba2, which also reflects our solid financial structure. And finally, I would like to mention our promotion to the German index. Just a little bit more than 1 year after the IPO, we are now listed in the second-tier German stock index, thanks to an increasing freehold level due to the reduction of Triton shares, but also thanks to our shown very good performance during the last 12 months. Walk to talk, this is our clear and most important guiding principle. Last and not mentioned here on this chart because it's simply brand new, our strategic R&D cooperation with the leading European Microchip developer and producer, NXP, in the field of autonomy and remote control driving capabilities as published yesterday. We are very happy about the strategic collaboration with a leading microchip producer and it will support clearly our digitalization strategy to provide superior new mobility capabilities to our customers or how we call it software-defined defense mobility. Now we come to our guidance on Page #19. In summary, for 2024, we successfully achieved our narrowed guidance for both, for revenue as well as for adjusted EBIT. For 2025, we do expect revenues of more than EUR 1.3 billion and an adjusted EBIT of between EUR 210 million to EUR 235 million. Our medium-term targets remain for the time being unchanged, meaning a 15% CAGR for revenue growth and EUR 300 million adjusted EBIT for 2027. As explained earlier, it is still too early to quantify additional business opportunities due to the increasing NATO Europe defense budget. As the year progresses, we hopefully get more visibility on how these budgets might be allocated to different programs, for example, here in Germany, and therefore, if and how we would need to adjust our midterm targets. Let's go on Page #20, please. And now some final words on our top priorities for 2025. As you all know, operational performance in excellence is a central element of our strategy, and we were able to realize important improvements during 2024, not only in our lead plant VTA here in Augsburg, but also in our RAM plant in Muskegon after a very challenging first half year. In 2025, we will further enforce our efforts and continue with our excellence programs, not only in our lead plants but also along the entire internal value chain, including, of course, procurement. Furthermore, and as mentioned before, we will prepare for potential ramp-up scenarios of our production capacities in case of significantly higher volumes above our current midterm 15% CAGR and EUR 2 billion revenue target. Furthermore, a number of key order intake programs are on our, we call it, hunting list for 2025, which need to be secured or where we have to achieve major programs for future order intake beyond '25. Just to give you a bit of color on these programs, if you talk, for example, about the VMS segment in 2025 relevant order intakes, we talk about additional K2 options for Poland, I mean, up to 160 additional vehicles possible. I mean, an engine program of our RAM facility, our AVDS engine for the IDF by FMS programs in the U.S. The next round saw 4 programs for U.S., we talk about various IFV programs for Latvia, for Italy and even for Romania. And also, if you talk about main battle tanks, clearly, Italy and Romania are on our target list. If you talk about -- and just as an example, future order intake programs, I mentioned before the M1E3 [ Phoenix ], NextGen Abrams in cooperation with GDLS. And also, a very prominent program because we always mention it, our 15 tonnes tracked ATV or ATC platform for a European client, which I will explain later. But we also need to make progress on R&D projects in our key technology fields such as electrification, hybridization, digitalization and autonomy in order to secure our leading technological position for the future and also to develop new future revenue streams. The NXP corporation fits in this regard perfectly into our overall technology strategy. Furthermore, capital allocation and returns is also high on our agenda for this year with a specific focus on net working capital optimization by the implementation of strict structural measures to optimize inventories through all our operations and also by executing our 3% CapEx spending limit. Last but not least, I would like to address M&A as an important task, not only for 2025, but also for the upcoming years. In short term, we are focused on the PMI process of Cincinnati Gearing system and the realization of first synergies during 2025. For your information, closing is expected soon during the first 2 weeks of April. But I also want to point out that M&A is, for RENK, an important strategic lever for future business development and organic profitable growth and therefore, capital allocation. We are constantly monitoring the market for value-accretive acquisitions. And if you are looking back in the recent history of RENK, you will see that we have a good track record with M&A transactions every 1 to 2 years. Having said this, thank you very much for your attention, and we are now looking forward to your questions. But before we enter into the Q&A, please allow me to give you a little bit more of the update on our -- one of our most important development programs I just mentioned before. As you all know, we signed a development contract with the European prime on last year's Eurosatory in order to develop a new mobility class for a 15-tonne vehicle. Now finally, after we got the approval of the customer, we are happy to communicate and to give you a little bit of insight on the vehicle. You see the picture right here taking on the Arctic event of Patria last week on March 19. The current name of this vehicle is the famous APC concept, where the market introduction and the start of the low rate initial production is scheduled for the first quarter of 2027. This is a quite unique platform. It has a 15-tonne weight. It has a load capability of 3.5 tonnes. So you could upgrade this platform with additional turret or weaponize it. But the key capability of this vehicle is the high mobility and the high speed and driving through very challenging environment like [indiscernible] high snow or through muddy terrain or soft terrain. So everything what you need from the North Cup up down to the Black Sea, and we are very happy that with our totally newly developed transmission, we could support our customer. And for us, for RENK, this development is important because it provides the perfect starting basis for unmanned, for autonomy and for further UGV developments in the future. And by the way, it was a perfect exercise to train us in regards to target costing and efficiency. And we are very proud that we could show this today. Thank you very much. And now I would like to hand over to the Q&A session.

[Operator Instructions] And first up is Sebastian Growe from BNP Paribas Exane.

The first one would be around demand. Dr. Sagel, Did I hear you correctly that you consider it unlikely to receive any additional orders related to the approved debt break easing in Germany in '25? And if so, how should one think about potentially faster call-offs via the soft order backlog? Maybe we can start there.

Yes. I'm very happy to give some insight. I mean, as I said before, from today's point of view, it's almost impossible to really to derive out of the given intentions to increase the European defense spendings, any concrete figures. But I will try to make a kind of guess from a more clear direction talking about Germany. As I said in my little presentation before, most likely during June this year, NATO will come up with a new set of requirements for each of the NATO European members. And if you talk about Germany, there are certain capabilities, which are urgently needed. For example, one of these capabilities is the question to increase the number of the frigates. There are different numbers existing from 3 to 5 to 6 to 10. For us, it's important to understand how many of these new additional frigates will be so-called the heavy armored frigates because each of these heavy armored frigates consists of a certain number of main battle tank, a certain number of IFVs Puma, a certain number of Pandur and [indiscernible] 2,000 and certain family vehicles. And if you take, for example, just this one parameter, the number of potential heavy frigates, 3, 4, 5 or whatever to be discussed. And to increase on the other side, the today's level of this circular reserve by, for example, 10 percentage points, the level today is between 10% and 20%. In Israel, it's 50%, just to give you a kind of flavor, we could estimate a potential order intake potential between EUR 400 million to EUR 800 million out of this very straightforward [ analysts ]. But when this comes on the time line and how this converts on revenues depends pretty much on the progress on deciding on these additional budgets, on the progress of the ramp-up of capacities on our price and also how fast the German customer, for example, is trying to increase the mission readiness of the existing platforms. And this will, of course, impact if we have a higher visibility. This will also impact not only maybe our medium-term targets, if you talk about the growth rate, for example. But then it would, of course, also impact our soft order backlog. But as I said, Sebastian, please excuse me that I cannot give you a different answer. For the time being, it's still too early really to quantify this and to formulate it.

Welcome to our world. It's the same here. And then quickly on the pipeline. Other countries are probably in a less good shape from a pure financial and credit worthiness perspective. So the question that I'm simply having with this is we are assuming here that there is no problem in order to go to 3%, 3.5%, and the situation is very different between various member countries in the European Union and elsewhere. So the question I'm simply having is, to what extent could there be a risk that some countries might ultimately not be willing or able to go ahead with key projects? And I'm thinking out now of the EUR 23 billion project there in Italy, I don't hope to put you in a difficult spot. But if you can -- want to comment on this, that would be very helpful.

I mean, first of all, and to start maybe with this point of view, as you all know, we always communicated and started on the Capital Market Day that independent of the entire discussion which took place since 4 or 5 weeks now to increase on 3%, 3.5% or whatever percentage, we already could see EUR 10 billion of addressable market in the next 6 to 7 years. In these addressable markets, we also had, of course, included the Italian IFV programs. And I'm pretty sure that these Italian IFV programs, here, we talk about the link spaces, and we talk about a little bit more than 1,000 vehicles over lifetime. I think they are financed and -- or the majority of this business is already budgeted by the Italian government. And I do not see them as a risk. I think what is interesting for us is really what is coming on top. And if we look on RENK ourselves. And if we recall what we presented on the Capital Market Day, the slowest, smallest business potential, what we could see until 2031 was exactly in Germany because we got everything. So when we talk about additional requirements coming from NATO and building up additional heavy brigades. I think this is clearly for us an additional potential -- business potential. But coming back to other European nations, I think the current programs are more or less financed, and they will come if and how fast they will ramp up, if you look on countries like Spain, for example, on a 3% level, needs to be seen. For Germany, my gut feeling is that in the next 3 to 4 years, I mean, over '26, '27, '28, that most likely, '28, '29, I could imagine that we are going on 3% above the 3.5% maybe on this level, but it will take time to ramp up simply. Does it answer your question, Sebastian?

Yes, it does. The very last one, if I may, just quickly on operating profit and the guidance for '25. So I can totally understand why you have put the revenue guidance as a minimum number or greater than number. I'm a bit surprised to see you guiding them for an absolute EBIT range though. And why am I saying this is simply that if I was to assume the revenue guidance was EUR 1.3 billion to EUR 1.35 billion or so, then there's fairly any margin expansion really compared to '24. And that in wake of the fact that you have Muskegon and Augsburg with the operational efficiency improvement is indeed surprising. So maybe if you could comment on this.

Yes. Sebastian, it should not be surprising. I mean we are very early of this year. We are in the first quarter. So I think it's a fair approach to provide a certain spend range, I mean, for this year guidance. Please be sure, our ambitions are, of course, to beat our last year, I mean, 2024 performance. Also on the EBIT side, we are working on this. And I mean if you look back on the history of last year, I mean, we started with a bigger range. And then during the second half, we had a higher visibility, so we could narrow the range again. And I could see it will happen this year. And as I said, we touched 16.6% margin in 2024, and our clear target is to exceed this. Please be sure. Otherwise, we would not be in our spotted constitution. And by the way, we also need to see what happens with the tariffs. You never know what kind of interesting proposals could come from U.S. government on the tariff side. But again, I think we have currently a decent range. And if you look back, we could see that also in the future, we are going on a level above the 16.6%, close to the 17%.

Next up is David Perry from JPMorgan.

I think you're very clear about the uncertainties and not knowing about the time frames, but do you think there's a possibility of material ramp-up this year or even next year? Or do you think we're going to have to wait a little bit longer for that? That would be the first question. The second is, can you just talk a little bit more about the things you're going to do to make it happen. So CapEx, building inventory may be R&D, stuff like that. And then, Anja, sorry, boring one, can you just break down that EUR 25 million of other exceptionals, I think it's on Slide 27, and just tell us if there'll be any other exceptional items going forward? And in particular, on SAP or anything else?

David, I would start first, good to hear you, by the way. I hope I can give you a straightforward answer. And I would like to start with your first question. Do we see any materializing on 2025 or 2026? From the order intake side, to be honest, I could imagine this, maybe not in 2025, but in '26, if we take Germany, for example, as the -- one of the attractive countries if it comes to additional increases of defense spending and going into heavy armor, it all depends pretty much how fast the German government finally come to conclusion and starting to operate. And if there are some quick fast decisions, for example, a clear commitment after the June time frame on the NATO that Germany will build up that amount of heavy brigade. There might be from the order intake side, maybe this year or also next year, some first order intake really materializing. On the revenue side, I mean, I could imagine that we have, and this is what we see, by the way, during the last 2 months, increasingly incoming spare parts overhaul and aftermarket orders. I mean, as I said before, this is something what is at least for the last 2 months. I'm not saying it will continue now for the next 9 months, but at least for the last 2 months, this was exceptional and might be an indication that the governments are trying to increase the mission readiness of today's platforms. On our preparation for the increasing -- potentially increasing volumes, I just said in the presentation, we are doing currently with Emmerich Schiller and the entire COO organization kind of health checks. So we are doing excessive capacity planning in certain scenarios. And for us, it's important, and I think this is also important for you, if we stay within our 15% CAGR for the next year, so ending up in 2028 on a EUR 2 billion level, this is covered in our planning, and this is absolutely under our control. If these volumes would increase dramatically, if you talk about -- I mean, just to give you a figure, David, 1 to 200 or 300 additional transmissions per day -- sorry, per year, starting in, I don't know, '27, '28, then we would need to expand our capacity. We are leveraging -- I mean, we started leveraging today our European production footprint by outsourcing certain production steps to our M&I plant in northern part of Germany to [indiscernible]. We have the option to use our transmission plant in France in order to gain space and capacity here. In Augsburg, we will, for sure, go sooner or later in a second shift mode. But for additional volume, significantly additional volumes, we would invest. We are getting a rough understanding how much this would need, for example, by adding another capacity here in Germany for 100 and 200 transmission per year. And of course, we are doing intensive supply health checks by working with our suppliers in order to understand how their capabilities are beyond our current planning to run on a 15% CAGR range in the next year. In regards to R&D, I mean, R&D is a little bit independent of this. We need to secure our leading #1 position what we have today in the market. And as I just said before, RENK is now going further and further into digitalization, not for today's platform, but to provide to our customers relatively easy upgrade potentials and for us, new value streams in the years to come. David, this was my part of the answer. Was it -- so is it fair to assume this was exactly what you asked? Or do you miss something before I hand it over to Anja?

No, no. It was very helpful.

So I would hand over to Anja.

Okay. So you asked about the CapEx. For CapEx, we really stay with what we said for midterm that we are around 3% of revenue. And especially for 2025, that is basically also very what Alexander just explained that we do not have, at the moment, a really good site for the future on really doing something there. So this is around 3% of revenue. Inventory here, we have set up a net working capital optimization project because it's clearly one of our biggest task to get to our midterm 20% in that region. The optimization clearly also focuses on inventory. However, as we already have seen, we do need to have enough material in order to get the operations going and get the revenues. So -- and also in last year, we once explained that we will not compromise our revenues in order to optimize the inventory. And for R&D in the last 2 years, like 2022 and '23 and '24, we were around like the 2%, 2.5% of revenue for R&D. And this is also what we envision for the future. This is like our kind of direction. Then you asked for the EUR 25 million other exceptional adjustments. That is mostly made up of the EUR 12 million consultancy fees, which we spent for the ramp-up project in order to the Muskegon side of RENK America back to the 3.5% production rate of transmission. We basically reorganized it to get the supply chain issues in place and so on, that is the most biggest chunk. Then we had a refinancing due to our IPO in February 2024. That cost us around 2 million legal fees. And the remainder actually is really made up of a lot of tiny topics compared to these 2, and that really relates to, let's say, knowledge which we needed to acquire because we didn't have it because we weren't a listed company before. It's like legal advice for an [ ADM ] or like a tax regulation what we needed to support because we needed to be compliant by the end of 2024. And so we basically quite quickly acknowledged.

Okay. That's all clear. And then my last one was just going forward because have you made a decision yet on SAP and whether you will do it and how -- and whether it will be above or below the line?

This is a very good question. Actually, we are right in the middle of starting a concept phase in order to determine scope and time line. And once we have that, then we can really see on where are these costs relate to and how we will manage these. And we will definitely share that.

Okay. Just one follow-up, if I may, Alexander. You gave us in the accounts, your German sales of 27% of sales in '24. Do you have a -- it's probably very hard to answer, but do you think that's going to go meaningfully up in the next few years? Sort of relates to the earlier gentleman's question, whether other countries can really keep up with Germany. How do you think that will evolve?

David, did you just say 27% of share for Germany? Or did I...

Yes. 27% of group sales were from Germany. That's across the whole group. Do you think that's going to get much, much bigger?

I think we do not have the 27% share. I mean if we look...

No, 27% of your sales, sorry, 27% of your sales were from Germany.

I think from what we see here is that we slightly have depending really pretty much on the decisions on the NATO requirements and what this means additionally. There might be an additional push into an increasing absolute figure of the German -- to our sales to Germany. But at the same time, we are strongly growing on the international business. So I do not see, David, that we will get significantly change or increase of our German budget or of our German sales percentage. I think this will overall stay on this level, maybe a slightly increase, but not significantly going to levels like 40% or 50% like other companies. Clearly not.

And next up is Christophe Menard from Deutsche Bank.

I had 3 questions. The first one is on aftermarket. You mentioned during the presentation that aftermarket growth was quite solid, notably in M&I, in bearing -- slide bearings. Can you -- I mean, it represents 40% of your sales in 2024. Can you give us a little bit more details per division, whether it was VMS or the other divisions pushing for the increase? And where are you seeing this going into 2025, what is the target midterm for aftermarket, given what you also mentioned in the call, a strong order intake? Second question, I think on the last call, you mentioned book-to-bill could be not necessarily at 1.3x in 2025 since you had some orders in Q4 that you were probably expecting in 2025. I mean, now it seems that you're also getting a number of key orders, should we assume a book-to-bill for the coming year below the 1.3x or it's still something up to -- we still need to wait to make our own view? And the last point was on free cash flow guidance. You had a very strong push in 2024. You guided to some sort of a midterm conversion at the CMD. Can you just share with us what is the evolution of cash conversion or your view on cash in the coming year and years actually.

Christophe, [indiscernible] for the questions. I tried to write them down in the speed how you were talking, so I hope I catch everything. If not, you must please jump in. Talking about the aftermarket, I think we have seen through all the 3 segments through VMS, through slide bearings into M&I, we have seen an overall significant positive development of the aftermarket and service business. I think overall, if you look on the current level, what we have achieved on the group level by 40%, what I do see in the future is that, of course, we will grow and fill the pipeline by the new business, especially driven by VMS, but also if you go on a segment level, it's exactly the same on the slide bearing business. But I do not see that we are dramatically increasing our overall share of the aftermarket service business on the RENK Group performance. So it will stay on a level, as I'm always saying, somewhere between 35% and 40%. And it might be also you have some favorable years where, for example, for a customer A, you have in 1 year, 80% of aftermarket spare parts or overhaul business and only 20% of new business. But in other years, it might change because this is simply the customer -- the same customer is ordering new transmissions and things like this. So please expect that in the years to come, the aftermarket service part will be somewhere on the 35% to 40%. Regarding the order intake level, your observation is perfectly correct. We had -- I mean, we started extremely well, extremely well, very good in the year 2025. So we are at the end of this quarter, and we are adding up the numbers, which I will not disclose, of course, today, but it looks really, really positive compared to the last quarter. And as I try to bring a little bit more color, the projects here are both on the M&I segment, on the Navy segment, on the VMS land segment, but even on the slide bearing on a much smaller level, we see increasing and very positive demand. And so please allow me to wait a little bit more in order to confirm if we are running on the 1.3x or 1.4x factor or whatever. Overall, I see the overall situation for order intakes, not only driven by the discussion about additional market potential, business potential coming from increasing defense funding. I see it positive. I see that also in the year 2025, we will have a good order intake level. As you perfectly pointed out, we had, I mean, more or less the entire 3 programs, which we booked or signed before Christmas, KNDS, Hyundai and the third customer, they were all scheduled for us to be contracted during Q1, Q2 in the year 2025. But nevertheless, we are looking very, very positive in the future for order intake. Could you just repeat the last question? I mean I think the last question was on the free cash flow and the cash conversion rate, right?

Yes, that was on cash conversion rate and the progress you expect to be making over the next years. If my memory is right, you were guiding to, I think, a cash conversion rate of 80% to 85% midterm or within 3 to 4 years. What is the kind of path to this, whether it's linear one or whatever level of guidance you can give in '25 and beyond actually.

I think you have seen a pic shown by Anja before in the chart that we had in last year, a quite good conversion rate for 2024. And this is pretty much the same level what we are trying to realize in the years to come. It always depends on, at least, I think you are all experts about the business. There might be some years where we have -- especially with the customer payments, we have a variable super good run, I mean, like we had, for example, at the year end of 2024, but it also could happen, and I know this personally from my former job that by a sudden, the customer is paying 8 days later, and it moves into the next year. So this is how we always consider it in a kind of lumpy business. But I mean, our overall target is to have a kind of average, if you talk about average cash conversion, and this is in the range of what we have achieved so far for the year 2024. Anja, do you want to comment on this?

I fully agree with you, Alexander. And that -- what Alexander just alluded, and that's really the reason why we do not have a term guidance here. And what we have been disclosing in this call is really that over the past 3 years, and that's why we take an average because we do have this point in time. It's really tough to get all the advanced payments really in because it's as Alexander explained. So therefore, we said -- and for the last few years, we have a cash conversion rate of around 60%. And if you look at what we've just said already about order intake coming in and also net working capital like the 20%, I mean, we do not expect any things which would significantly reduce these things. However, it always can be that on a quarterly-quarterly basis, there might be some timing effects and some of the payments will slip.

And the next question comes from Marie-Therese Gruebner.

All right. I have a couple, if I may. The first one is how come we have a strong aftermarket activity in M&I because I thought that, that's the business where aftermarket is probably lowest considering that once you put the transition in a ship, it's there -- and that's what was in my mind. So I'm surprised to hear about strong aftermarket business in M&I. So maybe you can elaborate on that a little bit. That will be my first question.

Marie-Therese, always a pleasure talking to you and getting good questions, by the way, like from everyone here in this round. The -- I mean, just to give you some insights into our M&I business, if you take, for example, our EUR 330 million level what we had and have last year in this range somewhere, you can approximately count 1/3 of this to aftermarket business. And this aftermarket business, this 1/3 of the entire M&I business stream or revenue stream is consisting out of industry aftermarket business, and it's also consisting out of Commercial Marine aftermarket service business and also, of course, from the Navy application. And it's a good business.

Okay. Great. That was the first one. The second one is on slide bearings in Q4. There's a bit of a margin compression year-on-year. What is it due to? And does this bode anything bad for '25 altogether in that business?

No, no. I mean there is nothing bad behind. It was simply that we had less aftermarket business as expected because we had, I mean, just before Christmas, and this is not related to Christmas, but we couldn't bring and deliver the output in time as it was requirement in order to realize this aftermarket business. So this was just, I mean, an effect of, if you want to call it a weak operational moment, I mean, before Christmas, but it is not a fundamental change in any demand or whatever related to the new business of bearings, and of course, not to the spare parts and aftermarket service. So nothing special.

Nothing special. Okay. The next one has to do with the potential one-off costs in '25. I think one of my colleagues asked about the detail on '24. But in '25, is there an envelope you wish to share to -- for us to put in our models in terms of nonrecurring items?

I would like to hand over trustful to Anja.

So basically, the IPO-related one-offs, they will -- they have already disappeared in Q4 '24, so they're gone. The EUR 12 million ramp-up exceptional topics we had regarding to the consultancy, they are gone. They were already also finalized. This full project was finalized in Q4 2024 already. However, that does not mean that we do not have anything. So there is potential topics related to our S/4HANA project coming up. As already stated, we are in the conceptional phase. So we do not know. Obviously, we do have a planned figure. And if I look at the numbers, like prior years in 2022 or '23. And if I look at this, I would think that we would be a little bit lower, but maybe a little bit higher than in 2022.

Okay. I can -- I don't -- do we have the number for '22? I mean what would it mean in terms of -- was it EUR 20 million or something?

Yes.

So roughly EUR 20 million -- around EUR 20 million. Okay. Excellent. Great. Okay. Superb. The next question, Kinetic, the intangibles, the price you paid for the intangibles, is it disclosed? Could we get a...

Yes, it's around EUR 7 million. It's disclosed in the annual report.

All right. Sorry, I didn't get to -- sorry about that. And then last but not least, the impact in Cincinnati Gearing systems in terms of sales? And maybe if you could guide us a bit on the EBIT after the synergies. I mean, first of all, the sales impact of '25. What is it roughly in terms of top line, incremental top line? And then in terms of margins, if at all possible if you can guide us on what could that bring?

Yes, I will take over, Marie-Therese at this point. I think we -- when we disclosed our acquisition last year or in the beginning of this year from Cincinnati Gearing systems, we said that the size of the business was similar or is similar to General Kinetics, and I think did a good starting base to assume for the incremental -- somewhere in this range for the incremental turnover or revenue this year. And on the margin side, I think it will be somewhere in line for the time being without improvements because the improvements will start, of course, during the PMI phase, which is -- we have prepared quite in detail and to run a long operations, business development, finance and IT. So we will take it over and it will be maybe a little bit in the beginning, at least, a little bit below what we have seen in the year 2024 for the M&I segment. But yes, I think that's a good guidance.

And the next question comes from Joe Orchard from Redburn Atlantic.

Just one from me. And that is, do you have a target volume output for transmissions in Augsburg in 2025? I believe your targets for 2024, 650 transmissions. So if you could provide any additional color there, that would be fantastic.

Joe, thanks, and good talking to you. You always have the right numbers. I should not talk too much maybe. No, but we are planning to have also again in the year 2025, a quite good improvement of our output. I mean, as we said in the year 2024, we were in the range of EUR 650 million somewhere. And we see that also in 2025, if you look on our customer demand and what we need to deliver, we will be above -- well above the EUR 700 million.

Next up is Christian Cohrs from Warburg Research.

Maybe first, I think it is absolutely fine and prudent that you refrain from updating your midterm financial target at this point in time for the latest geopolitical development, but maybe could you please provide the share of group revenues related to the -- to your European defense business so that we can assess ourselves what the [ Triton vendor ] 2.0 would actually mean for RENK? Second question relates to your North American operations. So just in case there is an escalation of the tariff dispute between the U.S. and Canada and Mexico. Is there any potential harm for your supply chains and your operations there? And lastly, assuming another boost in European defense spending. I mean, this will obviously offer plenty of opportunities for you, but it would also impose a challenge since you must manage the ramp up, manage the higher business volume. Therefore, are you happy with your portfolio? And in the case of a second boost, would you evaluate changes to your portfolio, for instance, a divestment of your slide bearings business?

Christian, thanks for the good questions. I will try to run you through. I mean, I think what I -- regarding the first question about the importance of our European business and the German business, I think it's fair to say, as we discussed before, and if you look on the potential, I mean, from the future and coming from whatever increases on the defense spending, the biggest potential, as I see today is really coming from Germany because in our -- I mean, from the share, but also if I look on our soft order and if I look at what we have as an addressable market, the smallest potential here, it was before the Triton [indiscernible] clearly, for Germany. If Germany, I mean, as I just explained before, will increase, and I'm sure they will do it. The question is only to what extent they will increase the number of frigates and therefore, the number of heavy frigates, this has immediate implications to RENK, but not also to RENK also to the platform provider. Just to give you an idea, I mean, a typical heavy frigate has around about 66 main battle tank, 66 IFV Puma, 16, whatever, Pandur [indiscernible] and a couple of family vehicles. So I think the impact as I can see today and where I have the kind of reasonable gut feeling is -- will be higher on the European side compared to Germany. But I think it's simply we need more time to understand it really. The second question on the U.S. tariffs, very early when we -- very early in this year when we recognized that the new U.S. administration is talking and maybe have executed, and then again, [indiscernible] or whatever. I mean the challenge on the tariffs, we made a very detailed analysis. And I think the good part is that we have a high localization rate on the U.S. side. I think this is very, very positive, driven by acquisitions and driven by the fact that most of our suppliers are coming straight out of this. I mean, in a very worst-case scenario, what we evaluated this was a single -- 1-digit single EBIT number, I mean -- or cost number in the worst case, in case there would be a massive 25% on everything for procurement, for selling between Europe and U.S. or Mexico and Canada. But I think we would rate it as digestible or we can manage it to put it in this form. I hope this is a fair answer. And yes, the third question, this was a very smart question because I thought you come about capacity, but it ended up with a portfolio question on our business. We are really, really happy with the fact that we have M&I. Why? If you would go to our plant, and I hope you do this in northern part of Germany. In [indiscernible], you would see 2 things, plenty of space and a lot of highly motivated people. So -- and this is the same if you would go to our plant in France. So we have by our second division, M&I, enough capacity. I mean, of course, in case the volumes are going up, we would need to invest, but we would fix it within our given footprint in Europe. And there's also no need, if you take the second or the third segment, there is no need currently to do and to think about any sell of our bearing business. I mean as you have seen in the numbers of 2024, I mean, they are outperforming our group margin. This is number one. And number two is, I know the budget, you don't know it, but I can tell you, they will go from EUR 100 million and EUR 110 million towards the EUR 200 million. And the main task they have is just to improve the operational delivery, OTD, on-time delivery, in order to realize this super positive development. And for this, there is currently, no rush and no need to make any selling activities. Does this provide you a fair answer?

And the next question comes from Yan Derocles from ODDO BHF.

Well, in fact, thank you very much for the Slide 28 on your operational excellence at DTA. But I was wondering if you could also potentially share your targets for '25 for RENK America and potentially in terms of OTD, in terms of output, what are you expecting? And in terms of efficiency, obviously, what are you expecting for 2025 at Muskegon.

Good talking to you. I mean, as I said, and I think you all know the story quite perfectly. RAM had a, how to say, very challenging first half year 2024. It was a disaster by a super distressed supply chain. We fixed it. It's fixed on a 3, 3.5 transmission build rate per day. And this is exactly we are running through and do expect that we're running through this year. And you did not ask me about volumes, but I see that at the end of 2025, we would be well above the EUR 600 million transmission what we are currently scheduling for the year 2025. I mean if we talk about on-time delivery, it has improved during last year by nature because if we cannot deliver the first half year, then we can deliver in the second half year, and there is a significant improvement, but it's the same like here in Augsburg. We have set us very, very high targets in regards to operational performance, on-time delivery, et cetera, and we will strive to reach them, yes. But I think we are overall on a very good way. If we talk about, I mean, a different key metrics to put it in this way. I mean, it was also obvious or it's obvious that the EBIT ROS performance of RAM in the year 2024 was not satisfying, absolutely clear for good reason and was in a 1-digit level. You all know the former levels of the EBIT margin, I mean, on the RAM side in the year '22, I mean, during the time of acquisition. And this is clearly where we see and this is where we're striking for during the next year to come back to this level. And 2025 will mark an important milestone in order to develop well in the 2-digit profitability margins on the way to former profitability. Does this help your model?

Yes. That's very clear, yes. And potentially 2 questions for Anja. The first one regarding the pure modeling, regarding the effective tax rate for 2025 because '24 was potentially slightly higher than my expectations.

Yan, I'm sorry, can you repeat that, please, because we had some background noise? We couldn't really understand it.

The effective tax rate for '25.

Yes. Okay. Effective tax rate. Yes, our effective tax rate for 2024 is quite high. That's basically driven because of 2 reasons. The first reason is that we have the RENK AG, which is a holding company, we are not able to include that in our German tax group. And as it's a holding company, and it does contain basically the Executive Board as the, let's say, investor relations function and communication function and so on, it's basically adding cost, yes. And it doesn't have any revenues to it. We're trying to charge it out. However, because it's not included in our German tax group, we cannot realize on the losses, the RENK Group AG is doing any deferred tax assets. So we are trying actually to change that in 2025. It really heavily depends on the AGM because here in Germany, it's a legal requirement. We need to set up a contract, which is basically allowing a loss carryover of GmbH from the AG and that needs to be approved by the AGM. So if we get that approval, we can definitely improve our effective tax rate here already in 2025. And the other effect what we have is that we do have an intercompany loan in the U.S., and there is a tax group. However, in the U.S., there is a law which is very similar to the law in Germany, which is called [indiscernible]. So it basically means that the interest related to that loan are not 100% tax deductible. And so we are looking into that topic, but that's not so easily solved. So we're looking into that and we need to see how we can do that.

Okay. And potentially, the last one on my side. In the annual report in the risk metrics, the category for financial risk has increased since last year. I was just wondering if it was related to the, I would say, to the tenant or to the link with Triton or it was, I would say, linked to other items.

You mean our risk bucket in our risk management report?

Yes. Yes, you've got the risk metrics from the annual report and there is a line for the financial risk. And you've mentioned that the financial risk is, in fact, higher in 2025 than in 2024. So I was just wondering if it was linked to the fact that you are pretty much cutting, I would say, the link with Triton or not.

No, this is really -- it's not linked to Triton. It's like only tiny topics. It's nothing really material.

There are no further questions. And with this, I hand it back to the company for some final words.

Now we finish our webcast. We wish you a pleasant day and until next time. Thank you very much. Bye-bye.

Bye.