Rheinmetall AG (RHM.DE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 2025 Report Conference Call. I'm [indiscernible], call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] The conference must not be recorded for application or broadcast. At this time, it's my pleasure to hand over to Armin Papperger, CEO of Rheinmetall. Please go ahead.

Thank you. Thank you very much. Good afternoon, everybody, and thank you for joining us for the Q3 results call today. With me on the call is our CFO, Klaus Neumann. Klaus will walk you through the financials. Before we start, please be reminded of our legal disclaimer on Page 2. Now let's move on to Page #3. On Page #3, you see that on the sales side, and I focus very strong on the Defence side. We have a growth rate of 17% on the Defence, up to EUR 2.3 billion. The total sales is EUR 2.78 billion. The operating results on the Defence side is EUR 361 million, a plus of 7% and it's EUR 360 million in total of plus 19%. Operating margin is, on the Defence side, 15.7%. And it's lower on the total sales on operating margin is 12.9%. The people still want to come to Rheinmetall. So we had more than 200,000 applications. Operational free cash flow is going down on the Defence side, minus EUR 286 million, total minus EUR 168 million. And CapEx is growing because of all the new factories that we build up at the moment to 8.9%. And Rheinmetall nomination and the issue that we have a minus of 36% is, as you know, the election period that we had in Germany so that we had delayed order intakes. And -- but that's very normal because the government was not able to give these order intakes to us. But Rheinmetall backlog is -- we're still very healthy. With EUR 63.8 million as nearly EUR 64 billion, we have a plus of 23%. Let's have a look to Slide #4. And here, we have shown some innovations. We presented the innovations on the DSEI in London. And we have shown with together with Lockheed Martin, the [indiscernible] tank counter on a new Fox mobile, but it can be implemented also on other vehicles, then we have a growing family of our Skyrangers, the Mission Master, which is skyranger-- and the next-generation ship protection with the Luchs 2, there are a lot of more innovations that we have shown on the DSA. It's a small overview about that, what we did in London. On the right side, you see the Telfort Gancho groundbreaking ceremony. And we will invest in total about EUR 100 million and we will create 100 highly skilled jobs and it's important for us to produce the caliber range of 120 to 155 from the [indiscernible] side. but we are also able to produce medium caliber. The need for that branch over the next year is huge, and we create upper capacity of more than 150 large caliber guns per year in the United Kingdom. Let's have a look to Page #5. And here, you can see that the Parliament made good decisions. So at the end of the day, 2025, finally, we will have a budget of EUR 95 billion. There is a growth rate of 23% and in '26, the draft, and we expect nearly EUR 120 billion, where EUR 83 billion is coming out out of Ansell than the special fund and the Ukraine relief fund. So the decision on the budget in '26 budget has to be passed in November, so that we are able to plan -- really fix then for the next years. Let's have a look to Slide #6. On Slide #6, you see 2 new activities that we have inside the Rheinmetall Group. One activity is that we reached an agreement with Lürssen family. And to take over the naval vessels from Lürssen, so we had the signing. And we expect that the closing is latest end of January in 2026. The potential sales that we see in 2030 is up to EUR 5 billion. Next year, the expectation is that we can grow up to around EUR 2.5 billion, but then double the sales. And the order intake potential that we see over the next 5 years is between EUR 20 million and EUR 30 billion because there are huge programs also from the German Navy but also international navies. On the right side, you see the ICEYE cooperation. We formed a 40-60 joint venture with doing ICEYE and Rheinmetall. So Rheinmetall has the majority. And we signed it on the 23rd of September in '25 -- the first market is Germany, but we look for more markets and the immediate need we see is at the moment, 40 satellites. And Rheinmetall, the expectation on nomination is about EUR 2 billion. And if everything is working well, we can have an order intake also this year of that EUR 2 billion, so the first big contract on satellite for Rheinmetall. Now let's have a look to Page 7. And here you see how Rheinmetall weapon and ammunition is creating this European ecosystem. And the expansion of existing capacities in Spain, doubling or in some areas, tripling capacities in Spain, the same in South Africa and in Australia are in progress. In Germany, we started the trial production for the 155 projectiles. And we are also on a good way, and the first stage is ready on the powder production in Bulgaria. And we will double, and in some areas, triple also the productions in Bulgaria on the powder side. So we are on a very good way in that area. The groundbreaking in Lithuania for ancillary ammunition. And we signed an MOU also for propellant to create a center of competence of propellents in Lithuania signed also where the President of Lithuania was with us. A new ammunition plant in Latvia, signed Bulgaria, joint venture for powder and 155-millimeter is established. And in Romania, a joint venture for powder production is also established. And on the Romanian side, we plan at the moment, and it can be also very fast in the first quarter next year, a package deal with the Romanian government, not only about ammunition, but also about tanks and other equipment for the Romanian Army. Now let's have a look to Page 8. Here, you see what happens now with the Power Systems, the process of selling our automotive business is going forward. And the submission of final offers will be in quarter 4, we expect over the next 4 weeks that we get binding offers. And if everything is running well, we can finalize the process in the first latest in the second quarter of next year. Now I take over to my colleague to Klaus, and he give he will give you an overview about the financials.

Thank you, Armin. Yes, we had a strong quarter in which our sales grew by 13%. Defence sales grew even stronger -- sorry, with which now make up EUR 2.3 billion or 83% of the total sales of EUR 2.8 billion. Our operating results grew even stronger than sales to EUR 360 million, with a margin of 12.9% for the group and 15.7% for Defence. M&A activities, as you can see on the slide, contributed contributed to the sales, but only -- there was only a limited impact to profitability because we still have some integration costs for some of the acquisitions we did this year. Please move on to Page #11. Let's have a look at the development in the different segments of our business. In Vehicle Systems, sales increased by 8% quarter-to-quarter to EUR 1.3 billion, driven by more tactical vehicles, including services. As you know, there are some truck sales was slightly lower than in previous quarter because of the delayed deliveries to the German customers. There's a small negative mix effect and a regional split compared to the previous year, so we have a margin of 12.5% in this quarter compared to 13.1% in the previous year. Let's move on to Weapon and Ammunition. Again, we saw the highest growth rate in this segment. Sales grew by 38% to EUR 691 million, important sales related to tank ammunition and median Calama. As you know, artillery ammunition was held back to some extent by the delay of the new government permission for our production site in [indiscernible] -- the operating margin decreased by 3.3 percentage points to 23.2% in the third quarter. In Electronic Solutions, yes, sales growth was very strong with 32%, reaching EUR 516 million. Main driver was the increasing contributions from multiple digitization programs as well as increased air Defence sales. Operating margin went up to 11.0% after 10.9% in the previous year. Lastly, our Power Systems division showed slightly decreasing sales compared to the previous quarter as the auto market is a very difficult environment at the moment. And -- the division is fighting hard to basically keep its ground in that difficult market. Despite the sales decrease, operating results stayed stable compared to the previous year at EUR 18 million, slightly increasing the margin from 3.6% to 3.9%. Let's turn to Page #12. As mentioned, yes, I mean, our nomination was lower in Q3 2025 compared to previous year due to the delay in order placement, especially by the German customer. Also keep in mind, that last year, we imposed a large framework -- frame contract of trucks of EUR 2.9 million, just to give us a bit of perspective of the development from year-to-year. Overall, everything is going as expected. And you might have seen in our press releases, we are gaining additional order momentum on several big tickets now in the current quarter, Q4. More on this in the outlook section. Our Rheinmetall backlog rose by 23% to EUR 63.8 billion year-over-year. Let's move to Page #13. to look at our cash flow and our working capital development. As order intake in Rheinmetall Nominations was lower than in previous year, -- we also did not see the large prepayments that we enjoyed in 2024 so far. -- as a result and also as a result of the buildup of inventory for upcoming sales in the fourth quarter and in 2026. Our cash flow was negative at minus EUR 813 million million for the 9 months in 2025. Higher inventories again relate mostly to vehicle systems and are also impacted by the later truck deliveries compared to 2024. Let's move to Page #14. While we have a negative operating free cash flow, this year so far, we have a strong support from -- on the financing side. I just want to give you an update on the situation with our convertible. We had no conversion of the Series B convertible bond and our total number of shares is now standing 46 billion shares. Our equity ratio improved and is now at 32.9%. This conversion support our net liquidity position and strengthens our balance sheet. Due to the lower level of customer prepayments, our net financial position, nevertheless, is now at minus EUR 1.9 billion. And just to give you another example of our balance sheet situation, net debt-to-EBITDA ratio of 0.97 is still very strong and puts us in a very comfortable position to finance the upcoming M&A transaction. With this, I would like to hand over back to Armin.

Thank you, Klaus. I want to give you on Page 16, an outlook about the nominations and the expectations that we have in Q4 after having the German government machine running again. So we are in negotiations, and we had the first successful -- the first success on the Jackal. The -- let's start on the vehicle systems side after 9 months. So we had, as Klaus said, also nearly EUR 64 billion. Our expectation is on Jackal, 3.4 is booked. The other point is Puma. And these are always net values that we have only for Rheinmetall, not in cooperation with others. The Puma, the expectation is that on the Puma side, we have a potential of EUR 1.4 billion . On the Lynx side, there is another potential that we have from -- won from the Italian side. but also maybe from Romania, where if everything is going good. Only the Italian side will be a level of about EUR 400 million. On the Leopard side, we see EUR 0.5 billion, EUR 500 million also. And the support vehicles on the Leopard is another EUR 300 million. And there are negotiation on the trucks, but it seems -- it can be that the trucks are also going into '26 into the first quarter into the negotiations. On the truck side, we are in negotiations at the moment to enlarge the frame contracts and which are then fixed contracts of more than EUR 4 billion. A very positive point is also and maybe not in Q4 because it's a huge contract. This is a boxer contract, the government calls it Arminus, -- this minus contract is a total contract number. There will be nominations of EUR 40 billion. from this EUR 40 billion, we expect more than EUR 22 billion also for Rheinmetall. But this will happen very safe in '26 and not longer in '25. But if it happens in Q1 or Q2, I will be very happy. Next one, let's go to weapon and ammunition. On the weapon and ammunition side, there are the final negotiation on the 155 fixed contracts. And there are different numbers at the moment in discussions. First of all, we discussed about 1.7 million rounds than 1 million round -- maybe it's in this year a little bit reduced because they want to bring something to this year and to next year to create fixed contracts. But the expectation in total on the ammunition side is an expectation of around EUR 6 billion. So if you count it up everything, it's EUR 5.5 billion to EUR 6 billion for the vehicles minimum, EUR 6 billion on the ammunition. Then we go to Electronic Solutions. On the Electronic Solutions side, we see the satellite program. And the contract that we expect this can be around EUR 2 billion. The SkyRanger is implemented in the program [indiscernible] -- and then we have Luchs 2 weapons and weapon stations, about EUR 300 million laser light modules, EUR 300 million loitering ammunition. This is what you have seen in the newspapers over the last 2 weeks, the first bigger contracts for drones and also some other smaller contracts so that we see potential of EUR 3 billion that we can reach this year. The rest will be in first quarter and second quarter, and this is the big bunch then, which is coming in the first and the second quarter next year. If you count up everything; so we are still in the range of around EUR 80 billion, how we expected at the beginning of the year. Don't beat me if it is, let me say, 78% or 82% or is the big contract is coming earlier on ammunition, it's a little bit more. But let me say, around EUR 80 billion is a fair value. Now let's go to Page 17 on Page 17 on the outlook. A positive signal is also that 95% or more than 95% of the backlog coverage we have, let me say, in our books. So we are confident about the full year guidance. On the sales side, we think that on the Defence, we can grow between 35% and 40%. There is no growth rate on the civilian business, maybe a little bit shrinking business in that area. And the operating margin will be around 15.5%. And it depends a little bit for sure about the down payments because, as you say, at the moment, the operational free cash flow on Q3 is very negative. But with the new German contract, usually, we expect between 20% and 30% down payment so that then the cash conversion rate would be positive. If the down payments are delayed, we will get the cash in the first quarter. So far, and now we can start the Q&A. Thank you very much.

[Operator Instructions] The first question comes from Sebastian Growe from BNB Paribas.

The first 1 would be on the nominations. -- the chart that you presented on Page -- or Slide 16. So the question here for me is, as you also made reference to the frame contracts in the wake of the trucks business, in particular, on earlier occasions, you said that you were expecting probably upgrading from EUR 20 billion of frame contracts by the 50% option, i.e., EUR 30 billion you have been putting the trucks potentially at 4. So how should we think of the latest developments in this frame contract conversion and then also with regard to the down payments that you mentioned at 20% to 30%, you also said on prior occasions that you are in discussions with the customer to even also think about special timing this way. So what's the latest in this regard? And if you may then finally ask one very quick higher question around the guidance. It seems apparently that on the sales side, things are in flux and it's not these coming down probably to Spain, the restart and then also to the truck deliveries the German customer. So my highlight question is, are you confident to reach the operating profit target of around EUR 2 billion, almost irrespective of what's happening to the top line?

Yes. So let's start with the nominations. On the nomination side, as I said, we are in discussion to get fixed contracts also on the trucks for up to 29%. This is what we are in discussions. And we hope we can reach that. And you are absolutely right. If everything is going well, there is a potential, which is 50% to the nominations that we had. At the moment, I want to reach the first step to change nomination into fixed contracts and also the down payments. This is on the truck side, and this is also on the ammunition side. So this is -- if we -- let me say, have smaller -- this was a discussion that we have. Is it good if we get the huge contracts to have it on, let me say, on -- in one shot, or is it better to get it in 2 or 3 shots also the down payment. At the moment, we take whatever we can get. And we are in negotiations there for everything at the moment, which is going from frame contract to fixed contracts or in new contracts to get between 20% and 30%. And Second point is on the guidance. Yes, there is an impact -- still an impact on the Spanish side because -- we are -- still have not the permission. We are on the -- in the last stage to get it, but the government is -- yes, it's a governmental decision when they give us this step, but we expect we get it. We stay on the sales side because as you know, the impact is an area of EUR 150 million. But I think we are able to compensate in different areas because there are such the businesses in between so big that it is possible to compensate it. But at least, we are able to compensate on the operating margin. This is exactly what we expect, and we expect to go up to this EUR 2 billion target. So that should be possible, if not extraordinary things happen. But at the moment, we are in line. Is that fair enough, Mr. [indiscernible].

Next question comes from Chloe Lemarie from Jefferies.

Yes. So I had one on [indiscernible], but I guess that was already answered. The other one is actually on free cash flow. So assuming you get those 20% to 30%. And obviously, with the reversal of the inventory buildup on over the past 9 months. How high could free cash flow conversion get if you do reach the all the contracts that you expect by year-end?

Yes. Yes. As you mentioned, we did have a negative cash flow until the end of September. It highly depends on what kind of contracts will be placed in 2025. And also what kind of prepayment arrangements we will be able to negotiate. As Armin mentioned, in some cases, the actual cash in might be -- might fall into Q1 2026. So it might -- there's a huge volatility at the moment, and it's quite difficult to exactly predict. But if everything is ordered already in 2025, and we look at all the payments already in 2025. It will be substantially above the 40% that we mentioned.

It's easy to calculate Chloe, EUR 15 billion that we will have in order intake. And therefore, from EUR 3 billion is, let me say, the potential of of down payments.

The next question comes from Sam Borges from Goldman Sachs.

Two, if I may. Firstly, there's obviously been a big pickup in interest across Europe on air Defence over the last quarter. you just talk us through the opportunities you see here? At the moment, your portfolio is quite focused on short-range Defence. Do you see any opportunities to expand the portfolio maybe into something more medium range? And then the second question would just be about, I guess, interoperability between the operational domains. You've got pretty good coverage across 5 operational domains now. Do you see an opportunity here for Rheinmetall to be a prime integrator of Battlefield software?

Yes. So on the short-range air Defence, we are focused at the moment on the gun side. But as you know, we also offer the missile solutions, and we implement the missile solutions into our gun solution. So this [indiscernible], for example, will have also a gun solution, but also our [indiscernible] system has gone and missile solutions. So yes, we focus on both -- the -- on the drone side, and this is the big numbers that you have. As you know, Germany is looking for 600, 650 systems. It's not 100% fixed. But we have now also Denmark. We have Austria. We have a lot of other European partners who buy that systems. And our expectation is that we are able to sell much more than 1,000 Skyranges. Skynet system is very successful. I can give you that information that on the Skynet side in Ukraine, we are also able not to fight against drones. We fight it against midsize -- and we had the first successes also to shut down missiles in the Ukraine. So everybody is very happy about that things. So in a nutshell, yes, we focus on the big pieces, which are the total systems. Second, yes, we focus also on the missile implementation. And we want later, but this will happen in maybe 2, 3, 4 years produce also some missiles and by ourselves if our rocket motor and Missile Center is ready in [indiscernible]. Battlefield, the battlefield management system is, I think, the best thing is what we are doing at the moment in Germany, and we want to implement that also on other European partners. On Germany, we create the infrastructure, we create the battlefield management in total. We have the huge digitization contracts of more than EUR 15 billion to do this digitization from the German side. There are needs in other countries. The Netherlands is looking for such a system, how is looking for such a system. So there are opportunities for us, but we are not at the moment in the situation that we said we will sign over the next 6 months contracts in this area. So -- but yes, we are prepared. And yes, we want to do it.

The next question comes from Sven Weier from UBS.

The first one is just coming back to the the list of projects we had a debate in Germany recently about maybe last minute changes on the Fuchs successor, where, I guess, quite a few local state presidents have no bet in favor of you guys in terms of getting into the project despite the fact that it has been kind of awarded to Patria already. So that would obviously be a big change and a big project. I mean, what is your latest take on this one?

Yes. The Fuchs point is it's an initiative of the Premier, and it's not an initiative for Rheinmetall, and it's at the end of the day, political decision. The minister was very clear to say, okay, we want to have the first lot to do that together with our friends from Finland. And we will see if there is a split or no split, I'm open for everything. We are ready. We are ready to perform and we are ready to perform also on Fuchs. -- but it's a political decision. There are no further news. We are not, at the moment, in negotiations with the government. This -- the Premier initiative is a political initiative. And we are here and we are ready to perform.

So it's not too late for this one.

At the end of the day, I always said it's it's never too late, yes. You always have to try to try your chance. And at the end of the day, you never ever should give up.

Yes. That sounds fair. The second question I had was just -- I mean, there's a bit of discussion lately with the upcoming CSG IPO and competition from Eastern European companies. I mean as a matter of fact, you are striking all the deals in Eastern Europe on the ammunition and powder plants. I mean for the sake of the audience, I mean, what do you think still differentiates you from those kind of competitors, which also seem to be quite a bit aggressive, but you take the contracts, that would be interesting.

I think that -- and it must be because the government, if you see Bulgaria, Romania, Lithuania, Latvia, the government show that the -- I think we are able to show this government that we are very trustful partner. This is number one. The second point is that they see and this is -- this was a good example of what we have shown in [indiscernible] that we are performing that we are able to make it happen in 12 months and maybe not in 3 or 4 years. So this is the second point where we say, okay, we have to hurry up. There is a budget. And the other thing is that the financing, and this is the positive signal also for us from the governmental side will be mostly done via safe money from the European Union. So I think the combination between a huge player, a trustful partner and a company who has shown the performance in different areas are positive. Another positive thing is that we have the newest technologies that we want to produce there. So we produce the -- we have all these technologies on powder. There are not a lot of companies around the world who have these technologies of powder, the newest technologies for triple-based powder or even harder, the surface coated powder technology, nobody has that. But we want to do this also in that countries because we see that all these factories will be guided from Rheinmetall, IPRs are also under Rheinmetall control. So there is a combination of newest projectiles and newest power technologies that we implement in that country and the countries are happy with that. And on the other side, I think that we are able to create all these things because we have our own planning, we have our own real estate company who is going forward in these areas. We can do it very fast, and we can do it for a fair price. I think that's a combination, the 4, 5 aspects that I told you that here that we win the contract. I'm not unhappy about that.

And is it also the input that you have from South Africa from the engineering capabilities that you have down there?

Yes. It's a small part also, but it's part of the ecosystem that we build up that in South Africa with the -- with our companies that we have there because we have 2 companies, 1 company in South Africa is doing the shell production and implement all that things, the same what they also did in [indiscernible]. And the second one is doing that we bought this chemical components. And so we are not dependent from other companies. And there are not a lot of companies also in the world who are able to do this chemical stuff, so how to build all the explants, how to build power plants, how to build these chemical converters, et cetera, et cetera. And this makes us reliable. This makes us fast and I think this is the decision-making process of the government. But at the end of the day, the government, I'm happy if they share if they say, okay, Rheinmetall is a reliable partner, let's do it with them. But at the end of the day, as I said, they are in the driver seat.

Makes sense. see you in 2 weeks.

The next question comes from Christoph Laskawi from Deutsche Bank.

The first 1 on M&A. You just said the idea is to double revenues NVL in 2016, if I understood that correctly. It's obviously quite a big step up -- is that already in the books? Or do you need to see some business wins in Q4 for that 1 to happen as well? And then on [indiscernible], it seems that [indiscernible] is still pointing to some uncertainty if it makes sense to carve out the Defence trucks business and sell it to you. Where do you see the likelihood of that deal coming through next year? And if it makes sense. And then the second question would be on the order intake. With the last quarter in Q2, you said the potential that you highlighted to some degree is conservative. If we think basically today, how does the potential look versus the communication around Q2, was there still more business opportunities that emerged to even better? Or is it essentially unchanged?

The last thing I didn't get, do you think for next year, the up to Q2 next year or...

Yes, correct. Yes. Okay.

Order intake and on business.

Yes.

Yes, let's start with that. On Q2 or up to Q2 in the next year, there is -- I would say every week, there are new businesses coming up. What we told you is still valid, what we want to do also in the next year. And I think the next year will be a very strong year also for order intake. It's not bad what we do this year. And if we can grow up to nearly let me say, EUR 80 billion, I think it's not a bad value. But if my expectation is that up to Q2, and this is always what I thought there is really a potential to grow up -- potential to grow up to EUR 120 billion backlog. So it's a very strong Q1 and Q2 next year. Trucks, on the Italian side is, look, -- for me, it's a point that we have a handshake agreement and that we will, first of all, that Leonardo takes over, and then we have the opportunity to go in. I have no glass ball. I cannot tell you what happens. First of all, there is a process at the moment what going on. I read the comment also if -- how to go forward. Anyway, it's a potential, but we have it not in our business plan. And I still think that the handshake agreements are agreements between gentlemen that work. Next point is N.V.L. On the N.V.L side, yes, it is in the order books and the order book is a good one. and we can grow with the order book, and there are smaller contracts for sure coming in. We are able, in 2026 to grow up to more than EUR 2.5 billion.

And the next question comes from Marie-Ange Riggio from Morgan Stanley.

I just would like to come back on Germany because obviously, we have seen the '25 different it passed, and now we will have a new budget for '26. So I just would like to know if there is any update on the addressable market for you. So what do you see in terms of budget allocation, how much is likely to go through equipment? And if German companies are clearly the priority for the government? And if you still see a potential for 50% market share? So that's my first question. The second question is on capacity expansion because you have announced several capacity inflation in weapon and emission since September with [indiscernible], Romania, I just would like to confirm and to know if it's incremental to your previous target that you gave? And if it's incremental, if you can just update us on the capacity outlook now.

Yes. Let's start with the ammunition side. On the ammunition side, we always said and we calculated and you know when we discussed, Marie-Ange, that we calculated that in 2027, we want to grow up to 1.1 million million around. And we speak always about this affillary technologies. Yes, there is also medium-caliber technologies, but 1.1, in 2030, we will have a total capacity if everything is running 10% to 1.5 million. At the moment, we do not plan more because we think that then we have an overcapacity and we want to fill the factories up, let me say, also up to 2035. So I don't want to have overcapacities in these areas. So no, it is not add on. It is exactly what we expected. This is exactly what we planned. and Lithuania is in the plan, Bulgaria, based on -- these are not so huge factories that we have. So -- and we speak then if you have EUR 1.1 million or EUR 1.5 million, we speak about to 100,000 drones above that. So it's less than 10% of that is going on. Is it possible to do a little bit more? I think yes, but it's not in my expectation. So I stay with the figures that we had before. Is that okay?