RENK Group AG (R3NK) Earnings Call Transcript & Summary

Yes, of course, thanks for asking this question. I mean maybe start with a more complicated and most complex about the perspective on the German market. I think if you scroll through all the press release from various media spots, you were checking all the references from various CEOs from the OEMs or even my statements. I think what is clear is that Germany really committed strongly in order to develop towards a leading defense player, I mean, from the defense capabilities, if you talk about the Bundeswehr across the whole Europe. I mean you see this strong commitment if you check the increase of the budget, almost doubling from EUR 80 billion last year up to EUR 150 billion, EUR 160 billion. There's a clear commitment from the government. There's also a clear commitment from the government to speed up the processes. And for this reason, from my point of view, before I start talking about potential volumes and platforms, I do expect that the first frame contracts to the primes like Rheinmetall or like KNDS will be awarded during the Q4 2025. So looking on the programs, I think we always -- and I always communicated for us, for RENK with our focused product portfolio, the key is to what extent how many new platforms will be ordered, which are tracked or armored. So starting Puma and talking about the Boxer, George just asked about it, talking about Panzerhaubitze, talking about the main battle tank, et cetera, et cetera. And one key parameter is, of course, the number of heavy brigades to be installed in order to reach up to 2035, the full requirements and capabilities according to NATO and the German commitment. I think what is important to understand -- and there are, in this context, many numbers in the room. But I think if you talk about this 2,000, 3,000-plus Boxers, if you talk about 500 up to 1,000 main battle tanks, if you talk about a similar range of Pumas and so on, I think this is also from our knowledge, and I would consider our knowledge to have a majority level of 80% is what we see from the industry right now. But it's fair to say that final numbers are, as of today, still not yet communicated. So we always talk at least from rank side about the majority of visibility of 70%, 80%, 85%. But I think what is important is to relate these numbers, if you take, for example, the 3,000 and more Boxers to the time line because the German Bundeswehr has 2 phases. The first phase is actually from today up to 2029, 2030, which is, in fact, getting ready for combat. What does it mean is they have today certain gaps and holes in capabilities and platforms and up to 2029, they are seeking for closing these holes and to have a kind of better readiness capability. Then the second phase is between 2029 and '30 up to 2035, where there will be additional growth in order to enhance and to meet the required capabilities according to the NATO. So this is important to understand because besides this frame of platforms we are currently under discussion, it's important to have this understanding because this is somehow guiding the potential order intake expectations and as a consequence, also the revenue generation over the years because the question is, will there be, for example, one frame contract for 3,000 Boxers for the next 10 years, or will there be 2 frame contracts, first for the first phase up to 2029 and the second for the phase '29 up to 2035. So long story short, it's clear there are significant volumes coming. It's clear that RENK will participate. It's also clear that the numbers who are currently in the market space are most likely going in the right direction, but yet we do not -- no one in the industry has official final figures. And so what we can do is we need to wait, and we need to see during the next 2 to 3 months. And I'm sure there will be significant progress in the data quality and more visibility. And I think it's a perfect timing if you talk about our Capital Market Day on November 20, really to have a strong focus on this and on the operational execution. I hope this helped a little bit to answer your first question. If I talk about the second comment about our approach towards the civil business. I mean, I'm always explained that we at RENK, we have a twofold approach between the 2 sectors. The management approach and the focus is clearly, I mean, manage on profitable growth for the defense sector. If you talk about capital allocation, if you talk about CapEx, if you talk about innovation, R&D is self-funded, if you talk about M&A capital allocation, there's a clear focus on defense, manage for profitable growth or as I'm always saying, full throttle. On the civil side, which includes our bearing business and our industrial transmission business, it's a different approach. Here, the focus is clearly not on growth, but the focus is here on profitability because, I mean, as you know it, some parts of the civil business is diluting compared to our defense business. So we have here for the civil approach, a kind of manage for opportunities and manage for profitability. It's a different approach for the defense. Our business focus clearly is on the defense side in all our business decisions. And if you would ask me what this means, if you look on the share of the civil business in the future, I mean, currently, the share is somewhere in the 28%, 27 percentage range of civil business compared to the whole revenues of RENK. If you would ask me or if we meet in 5 years, I hope we meet before, most likely, this share will be well, well below the 20%. And of course, I'm asking like -- I'm asking all the 3 segments every year, we are doing performance and strategy reviews. We just had a couple of weeks ago our internal group strategy meeting. And every segment, including VMS, but also Slide Bearings had to present measures and approaches and tactics and strategies in order to fulfill certain criteria, which we have set, which I have set from the executive level side. And of course, in order to reach it, everything is on the table. And having said this, I think this is the fairest comment I can give on the 2 sectors.

[Operator Instructions] There are a couple more questions coming. So next question is from Daniel Gleim of Gabelli. We cannot hear you yet.

Can you hear me now?

Yes.

I actually got 2 quick ones, if I may. The first one would be on regional potential. I mean the main focus, of course, is on Germany, and I appreciate the context, but maybe you can rank the top 3 markets in terms of market potential that you see for the next 10 years. That is question number one. And the second question I have is, if you can talk a little bit about phasing. Of course, we are discussing units, we are discussing new equipment potential. But could you comment on the phasing of the aftermarket business? Is that something that we should model in line with the top line momentum on the new equipment side? Or do you see also a shift in between new equipment and aftermarket and not only in between defense and civil business? That is question number two.

All right, Daniel. Thank you very much for asking these 2 questions. I would like to start with the second one because it's a quick one. And what we see, if you look on our current share between new business and all the service aftermarket maintenance, spare parts, MRO business, we are currently at a level fluctuating somewhere around 40%. Of course, we are -- we will bring more new business in the market, but this new business will generate a similar quantity in percentage of downstream business. So what we see is that we do not see a major change of the aftermarket share, neither going significantly up nor going significantly down. It might vary maybe from quarter-to-quarter, but this depends on the product planning if you have more MRO business or sometimes more spare parts or if you have more new business. But overall, I do not see a significant change of the current 60-40 split. Regarding the regional potentials, I mean, you just mentioned Germany is, of course, the biggest one, which is interesting because around about 10 months ago on the Capital Market Day, we declared Germany as almost free of potential. This has, of course, dramatically changed, and we are very positive about this. But if we look around Germany, I mean, of course, starting with India, as you know, we are just doing next week the inauguration of our new Indian plant, our new Indian facility in south of Bangalore. And we see, especially on the defense market, if you talk about the new IFV programs, if you talk about the light battle tank where RENK is the only qualified -- we talk about the second phase or the second batch of the Arjun tank. India is an attractive market, but it's also fair to say it's quite a complicated market if it comes to government and contract structure. But I mean, if you talk about the next 5 years, it's an important market for us. Also, if you look in Europe, I mean, if you talk about all the entire Polish programs, Europe as a region, excluding Germany for the time now, Poland is very attractive for us. Finland is very attractive for us, where we expect the famous APC, this new 15-ton armored personal carrier to kick off somewhere in '27, '28 time frame in large volumes. We are looking forward, of course, for the Italian programs for the IFV and the MBT program. So Europe for us is -- and here, it's important to make a difference even before the entire discussion about increasing the defense budget in Europe since February this year, even before we had this strong potential and project pipeline for these programs I just mentioned. These are not new programs. We are working on them sometimes more than 1.5 years. So Europe is also an important growth driver. If you go to U.S. on the land systems side, on the land side -- Army side, sorry, we are in a very good position for the legacy business for the next 5 to 7 years. What is here for us a growth option and for this reason, we made the strategic acquisition of acquiring Cincinnati Gearing System today called RENK America Marine Industry because the naval market is very attractive. But in order to serve the naval market, especially if we talk about the future new missile destroyers and frigates, FFG, DDG, you need to have a high localization rate as a requirement. And for this reason, we did the step for acquisition. If you see in the budget in U.S., Army is more or less in a steady state with 20%, 21%, which is still a lot if you have EUR 1,000 billion. And -- but you clearly see and driven by the geopolitical tensions in Asia Pacific, a rise of the budget and the spending on the naval side. Yes, I hope this answered a little bit your questions, Daniel.

And the last question is from Carlos Iranzo Peris, Bank of America.

I actually have 2. Maybe if we can touch on a little bit on free cash flow and how should we think especially about net working capital dynamics in Q2? And then I also would like to ask on the EUR 500 million that you plan to invest in capacity and R&D over the next 4 to 5 years. How should we think about the phasing of those investments?

I would like to start with answering your first question -- your second question because it's a quick one. In my statement, when I said RENK is planning in the next 4 to 5 years to invest around about almost EUR 0.5 billion, this is pretty much exactly in line with our statement that in the next years to come, 2028, 2030, we will stay on the CapEx for operations in our 3 -- till the 3% plus adding, of course, R&D. We are constantly doing self-funded R&D in the range between 2.5% and 3%. So this -- adding these 2 guidelines up, it's coming exactly to almost EUR 500 million. So this is not a new crazy number from RENK. This is just doing a cumulative approach to the 3% CapEx target. Regarding the free cash flow, I have to admit that we do not have yet the final numbers for Q2. But like always, we had a start where we had in Q1, a higher net working capital. I think this is normal in the defense industry because we need to prepare and to have enough inventory in stock in order to fulfill the commitments and deliveries from the customer. But we are targeting like what we have achieved, if I make a little swift to the year-end performance also this year, a cash conversion rate in the range of 80% and above. I hope this helps a little bit, Carlos.

There are no more questions in the queue. So with that, we are closing the question-and-answer session for this call. Thank you very much, and I'm handing the floor back over to the hosts.

Thank you for joining the call, and we wish you a pleasant day.

Thank you very much. Bye-bye.