Rheinmetall AG (RHM) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Rheinmetall's Q2 2023 Conference Call. I will start with the market update. Dagmar will provide the details on the quarterly financials, and then I will conclude with an outlook for the remainder of the year. As usual, please be reminded of our legal disclaimer on the following page. Let's go to Page 3. We have a very solid Q2 on the financial side. Sales rose with 6%, but the more important information is the defense growth was 12%. So the driver of our business will be the defense business. Operating results improved in -- to EUR 118 million, and the margin softened to 7.9%. The reason for that is some issues, for example, the IT incident that we had, but other issues in detail. Dagmar will give you that information on the financial part. Operational free cash flow lowered to minus EUR 219 million, which is much better than Q2 yesterday, also more details on the financial side. A very important information is we have a very heavy back-end loaded year this year. So -- and even if that is heavy back-end loaded in the first half of the defense business has a growth rate of 12%. The growth rate in the second half will be more than 30%, so nearly 35%. And the biggest driver will be our ammunition business, which have a growth rate in the second half of about 48%. So you see from the profitability, the Q3 and the Q4 side, especially Q4 is the most important quarter this year, and it's even more important than the years before. So is it possible to make it happen? Yes, we are producing all the products at the moment, but the customers want to have the in Q3 and Q4. And as I told you before, most of them in Q4. So Rheinmetall backlog and Rheinmetall nomination tripled. This is also very good for the future. The Rheinmetall nomination grows to EUR 4.46 billion, mostly driven from German orders and also from orders from Ukraine via Germany. So orders that we get from the Ukrainian government and mostly of them paid from the German government so that we are safe also from the cash side. The Rheinmetall backlog jumped to EUR 30 billion -- around EUR 30 billion. In between, now 1 month later, we have now a backlog of EUR 40 billion. So that 2 weeks ago, it was the best week ever inside the Rheinmetall history, only in 1 week, we got $7 billion order intake. The third information is Expal deal is closed. We are very grateful also to the Spanish government that we could close in July 31st, the Expal deal. We had a pre-closing adjustment of EUR 1.2 billion. We had a cash out of about EUR 1.1 billion, and we see now further growth of this core business. One information over the last weeks, we only gave to Expal and we will give also over the next 2 weeks, about EUR 600 million orders to Spain, which really helps us to grow the business and make Expal more profitable than they were before. Let's have a look to the next page. On the next page, we see some statements from 3 very important people for Rheinmetall on the German market. On one side, it's Minister Pistorius. It's -- the second one is General Director of BAAINBw, Annette Lehnigk-Emden and State Secretary, Zimmer. And what is the focus they give us, and they tell us also in our meetings. The priority is at the moment in time. And the companies who are able to deliver, they get the contracts and they get the contracts very fast. I have 1 example for that. Last week, we had a negotiation about another ammunition contract that Rheinmetall will get. It's a triple-digit million for ammunitions and the expectation is that we can do it in 2 weeks. So the government is very fast at the moment, number one. The second point is that the Minister Boris Pistorius said, there is a need of more than EUR 20 billion, as we know, it's nearly EUR 30 billion on ammunitions. So if you have a combination of an ammunition portfolio -- of a modern ammunition portfolio and a qualified portfolio, this is also very important, no developments. We are able to deliver inside Rheinmetall. And if we are delivered, we can grow now also our sales. On the next page, you see that this is not only a trend in Germany, it's also a trend in the whole NATO. So NATO increased its target and the target now is we have to invest more than 2% of the GP for defense inside the NATO. What does it mean? Over the next 2.5 years, a very clear statement also from the Office of the Chancellor to say, okay, we need now EUR 100 billion. And there is a replanning at the moment in the German government, and they want to spend mostly the EUR 100 billion in the next 2.5 years. There are some projects and programs where it is not impossible. For example, the F-35 because it's a very long-term program. But all these programs, ammunition, vehicles -- the logistic vehicles are coming back now into the EUR 100 billion budget so that we can use, on one side, the money of EPL 14, but also, we can use the money of the hundred -- EUR 100 billion. What does it mean for us? It means that for the next 2.5 years, an imminent growth rate on the ammunition and on the vehicle side will be -- and from the governmental side, there must be a decision then from 2026 on that the EPL 14 has to grow up to EUR 75 billion, which is at the moment a gap of more than EUR 25 billion on one side, or on the other side, and this is my expectation, but it's a pure expectation of myself, that there is a need of a second money injection or as we say, in Germany [Foreign Language]. If that not happens, the next coalition, yes, we'll have a problem. And because they cannot fulfill what the nature is forcing them. The need at the moment, and this is also very clear, it's not only EUR 100 billion. The total need that we have here in Germany is up to EUR 350 billion. And that will help us, for sure, for the next 10, 15 years to make the Bundeswehr strong as it should be the strongest army in Europe as Chancellor Olaf Scholz said. Rheinmetall can offer a lot of solutions in -- for the German Army. As you know, we are the biggest producer on ammunition and you will see it later. So -- and on this very successful week, 2 weeks ago, the ammunition contract for artillery and also for tank, EUR 4 billion for tank ammunition, EUR 1.5 billion for artillery ammunition, very helpful to have this frame agreements. On the vehicle side, we booked also the Caracal vehicle digitization, a lot of new projects are running up like a new project called Varan, but DLBO will bring us over the next 12 months a lot of order intake. And air defense. Air Defense is very, very new investment on gun-based and short-range missile-based air defense. And for Rheinmetall, it is, on one side, the Skynet technology that we will give now very soon to Ukraine and the Skyranger technology. On the Skyranger, for Ukraine, for example, we will have a combination out of a Leopard 1 chassis and also our Skyranger technology. That opens us new markets, and at the end of the day, my expectation is that this is also a market much more than EUR 1 billion that we will see over the next years. So Rheinmetall is best positioned to support the German Army, and we have products all ready, and we are able to deliver. So next page, Page #6, you see what happened over the last weeks. So in quarter 2, we booked the second lot of Puma. Then the 57 heavy tractor units with EUR 50 million. Puma was more than EUR 500 million and EUR 367 million [indiscernible]. This is delivery fulfilled for Q3 and 2023. So it's EUR 1 billion, but -- and this is the positive thing in July. It's not part of that quarter, but it's worth of information. We booked EUR 7 billion in 1 week with Caracal and the different ammunitions from artillery down to Puma ammunition. So a very successful quarter 3, but a more successful quarter 3, but we speak first about quarter 2. On the next page, you see what happened on the Ukrainian side. So Rheinmetall is a strong enabler also for the German government to help the Ukrainians. And as you see from Air Defense Systems, wire ammunition systems, 105-millimeter ammunitions, all of them are booked, different vehicles on motors in between 60. My expectation is that we can deliver up to 120, 14 Leopards. And as you have seen in the news today, we will also deliver another nearly 30 Leopard 1s to the Ukrainians. So expected is Leopard 1, mobile air defense, Fox to produce the first production line here in Ukraine, and additional ammunition contracts. A very clear message from the German government is every ammunition you have ready, we will buy, and we will help the Ukrainians. So EUR 1 billion orders from the Ukrainian side where we signed the contract with Ukraine and at the end of the day paid from the German side is EUR 1 billion. My expectation for the whole year of '23 that we nearly book EUR 2 billion only from the Ukrainian side this year. For the next page, Page #8, you'll see -- you have an overview about the activities that we have in Ukraine. At the moment, the first 12 people are trained here in Germany for our common joint venture. Rheinmetall will have always 51% of that joint ventures. The first joint venture is with Ukroboronprom. And it is, from our side, expected by end of Q3 '23 that we are able to start work. The people are very well educated and they get an education now on vehicles like Leopard, like Marders and all the other vehicles we have in the Ukraine, for example, also the trucks, and we can start immediately now the activities. The opportunity I see is that this business can grow -- only this factory, this business can grow up to EUR 200 million per year in maintenance and sustainment. And the reason for that is because they need a lot of spare parts, we will give the spare parts to Ukraine and some of the spare parts we will produce also there. Point number 2 is ammunition. And on the ammunition side is our expectation that end of the year, we will have also an agreement with the Ukrainian government on that. They won't produce medium and large caliber ammunition. And number 3 is air defense. Expectation is quarter 1 or quarter 2 next year that we will have factory for assembly minimum and assembly of air defense equipment in Ukraine. The need from the Ukrainian side for air defense at the moment is after ammunition, I think the second biggest need to protect the soldiers of the Ukrainian forces. So let's go now to the next page, Page #9. And there is really -- it's really a success story what our U.S. boys are doing there. We are XM30 finalists. You know this was the old name was OMFV. It is the first time that a German company is able to go into the end fight and highly appreciate that we get USD 700 million for American Rheinmetall for the prototypes and there are, at the end of the day, around 14 prototypes that we have to produce. And I think a very good business for us and a very good step forward in the U.S. market. Let's go to Page 10. On Page 10, we see now the international orders. We won in Australia, the Navy ship protection systems. This is for the Hobart-class and also for the ANZAC-class. There is, at the moment, a business of EUR 125 million, but an option up to EUR 600 million. And we won also, as you know, in Australia, the CMI contract, which is about EUR 400 million. So this is EUR 1 billion. We lost the Land 400 Phase 3 program. Australian government gave us the information that they go into the final negotiations with our competitor. The reason is not technology or technic, the reason was also not price. What I understood of all the things, it's a very clear political decision that we can give as Australian government, not 100% of the eggs into 1 basket. But Rheinmetall remains committed to the Australian market for sure because we got a lot of billions. Australia is one of our home markets. You can -- I really would appreciate to win that, but you cannot win everything. So we have a hit rate of more than 90%. So we win 90% of the contracts that we offer. This was one of them that we didn't win. The next point is Norway. On the Norwegian side is now a large single call from the existing contract from Norway. Very successful story for our RMV people, more than EUR 150 million for around 300 trucks, TG3 military. A very good starting point that will come more Norwegian and also Swedish customers in Scandinavia are very happy now with the vehicles that we are very happy with the team in Munich and Vienna. And second, supply of key components for the Leopard 2 A7. This is a EUR 130 million contract for 54 tanks. These are guns, fire controls, sensor units and the delivery starts in 2024. An even better story is Austria because it was very, very fast deal from our team in Vienna and Munich. And we have a frame agreement with Austria of EUR 525 million. Also for trucks, so you see this truck is a military truck of well standard, and we enlarged at the moment of our portfolio on one side, but also the market on the other side. Now let's go to Page 11. And on Page 11, I think a very interesting page. You can see the user of smoothbore guns -- of Rheinmetall smoothbore guns because all of these guns, the 120-millimeter smoothbore guns are produced by Rheinmetall or are produced under license. So the interesting calculation of that is you see that they are at the moment in Europe with smoothbore are about 2,700 tanks. And we calculate it now of the NATO standard that 1 tank for 30 days -- for 30 fighting days should have about 400 grenades. If it is kinetic energy or high explosive grenades, usually, you have 60% kinetic energy and 40% high explosives. If you calculate that, and if you see that the mean value of tank ammunition -- of high-tech tank ammunition is about EUR 7,000. You see that there is a need of 1 million rounds and as we know, the stocks are empty of 1 million rounds of 120-millimeter -- for the 120-millimeter smoothbore gun. If you calculate the whole value, then you see it's EUR 7 billion. So there is a need of EUR 7 billion because the stocks are empty and we calculate, we fill it over the next 7 to 10 years. It's a huge opportunity. And if we can do it in 7 years, it's a EUR 1 billion market per year. Rheinmetall is the only full qualified producer. We will not get 100% of the market, but a signal -- a very clear signal is the EUR 4 billion frame agreement from the German government that you see that the calculation that we have is very realistic calculation. Let's go to the next page on Page #12. We show you that the Expal acquisition is closed now on July 31. Very important for us because with that acquisition, we enlarged our product portfolio on one side, and we enlarged very strong our capacities on the other side. And we told you several times that we now have an additional -- for next year, an additional capacity of 350,000 rounds. And the good news is all of that 350,000 rounds are booked. We have orders. We got orders last week or some days ago, we got the last orders, the last for next year, the lost 120,000 rounds of ancillary. And so we are fully booked for next year. So then the expectation is, and as Rheinmetall brought, as I told you before, EUR 600 million order intake, EUR 200 million for medium-caliber and EUR 400 million for artillery. So for the full year 2023, we expect -- the expectation is EUR 400 million sales. This is exactly right. We will come to that figure. What does it mean for Rheinmetall between my expectation is between EUR 180 million and EUR 200 million with the new contracts that we booked sales for the last 5 months with higher profitability than expected. So very profitable, very good business. Let's go now to Page #13. On Page #13, we see the operational updates of our civilian business. You know the civilian business at the moment is a relatively very small growing -- a relatively flat business but we take care about that. And we -- I will give you some information about our emission reduction, the alternative powertrains and also our innovations. On the innovation side, we really start our pilot project of the curbstone. So Cologne, we'll start with that. There is an opportunity medium term to make more than EUR 100 million sales in this area. If we have a breakthrough strategy in different cities. The second is on the alternative powertrain that we have new customers on the hydrogen recirculation blower. And we have launching customers for the high-voltage cooling pump and the cathode flaps, which now have an order intake of triple-digit million backlog. Ammunition reduction on the strategic truck contract for the valves, we booked and also the lightweight engine block. If you see the figures, you will see that the driver will be defense and the civilian business will, let me say, will go back into the second line. Now I will hand over to Dagmar for the presentation of the Q2 financials. Please, Dagmar.

Thank you, Armin. So let me start with the presentation of the financials on Page 15. Overall, we can report a second quarter sales growth in line with the expected seasonality. Sales grew, as Armin already mentioned, by 6.4% to almost EUR 1.5 billion. Currency had a slightly negative impact in the second quarter. All divisions, except Material and Trade grew or at least held their sales level year-on-year. Our operating result rose by EUR 5 million to EUR 118 million, while the margin slightly softened by 20 basis points to 7.9%. Weapon and Ammunition delivered an outstanding contribution. Negative is our at equity contribution from 4AG and our Chinese casting joint venture that continued to be a burden on the operating result. Reported earnings per share from continuing operations rose from EUR 1.21 to EUR 1.27. That is a 5% increase. Please turn to Page 16 for a look at our operating free cash flow and working capital development. Operating free cash flow declined in the second quarter year-on-year by EUR 40 million to minus EUR 219 million. In the first half of 2023, operating free cash flow improved by EUR 317 million to minus EUR 325 million. This year's development resulted mainly from the necessary buildup of working capital. And as we already told you, we are continuing to build up stock in order to secure our future growth potential. As a result, inventories increased by over EUR 800 million in the first half of the year. Collection of receivables and customer prepayments helped to mitigate a further working capital buildup. Our divisions, Vehicle Systems and Weapon and Ammunition account for most of the buildup. Both divisions shall be the backbone of our expected Q4 sales increase. Moving on to Page 17. I don't want to go into all the details of our balance sheet. I think the most important message is that the balance sheet remains very strong even after the payment of the purchase price for Expal on July 31. So let's continue on Page 18 for the divisional breakdown. Vehicle Systems reported a very strong quarter with an increase in sales of 22% to EUR 550 million. Again, tactical vehicles had an excellent performance. Deliveries of low-tending systems started to contribute towards the end of the quarter. The operating result rose to EUR 57 million, with an improved margin of 10.3%. Operating free cash flow decreased by EUR 237 million to minus EUR 253 million, mainly as already someone mentioned, due to the increased inventories especially for logistic vehicles. Weapon and Ammunition sales progressed from EUR 207 million to EUR 360 million, driving the operating result by 68% to EUR 65 million in the second quarter. So you see cost inflation was overcompensated by leverage effect and a favorable product mix. Margins accelerated to 18.2%, which brings us a big step closer to fulfill our margin targets. The operating free cash flow development benefited from higher customer prepayments, and despite the ongoing inventory buildup, jumped by EUR 100 million to EUR 49 million in the second quarter. Our division, Electronics Solutions, reported a small sales growth of around 3% to EUR 249 million. Larger sales for solar systems and air defense contracts are still expected in the running year 2023. Less favorable product mix with a lower share of air defense projects explains the margin drop from 8.7% to 6.6%. Again, customer prepayments helped the operating free cash flow to improve to minus EUR 17 million. Let us now move to the cyber business. As you might recall, we experienced a cyber attack on our cyber business early in the second quarter, which affects on both divisions. We expect roughly EUR 10 million burden for the full year. Although we expect the impact to be limited for the full year, sales execution in the second quarter was affected and operational processes slowed down. However, we are confident of making up almost the entire sales shortfall in the second half of this year. Sensors and Actuator sales remained stable at EUR 344 million, but were held back by the cyber attack mentioned above. The operating result dropped from EUR 24 million to EUR 9 million. The operating result was hit by additional raw material cost increases that have not yet been passed on to customers and mitigation costs for the cyber incident. Materials & Trade suffered a sales decline of 16% to EUR 154 million. The operating result came down to just EUR 5 million after EUR 11 million in the second quarter last year. A negative impact from lower sales, negative equity contribution of around minus EUR 1 million and additional mitigation costs for the cyber incident burdened the operating result. Non-divisional consolidation reports higher sales elimination due to increased intercompany business activities and includes a negative equity contribution from [ FID ] of almost minus EUR 4 million. The operating free cash flow of the non-divisional consolidation line includes a number of different factors. These include delayed VAT refunds from the first quarter, increase in trade payables and finally, reduction of tax prepayments for the German companies, altogether resulted in a lower payment burden in the second quarter of 2023. Let us move to Page 19. Rheinmetall nomination tripled year-on-year to above EUR 4 billion. Order intake for the Defense business increased on the back of strong demand from Germany and Ukraine. This includes call-offs from existing framework contracts in the division Vehicle Systems. Frame nominations jumped to EUR 546 million. Book business remained below previous year's level, but saw a strong shift in the composition away from light vehicle combustion engines to trucks and alternative powertrains. The Rheinmetall order backlog has exceeded EUR 30 billion, including recent orders from Germany for ammunition and Caracal for wheel drive. The order backlog is approaching the EUR 40 billion threshold. So this close my remarks, and as you can see, driver of the business as the heavy back-end loaded defense business this year. And I hand back to Armin for the outlook.

Thanks, Dagmar. So on Page 21, you see we start the outlook. And on the outlook, you see, first of all, on this page, the picture of the grand opening of the new dimension for Rheinmetall on the air side. We had a groundbreaking of greenfield production plant in [indiscernible], and a lot of politicians and also the premier of Northern Australia was with us. Very important for that is that the German government made negotiations with Lockheed that this production should produce at least 400 F-35 fuselage sections. And if you see that contract in total, the contract of minimum 400 fuselages will be over a period of 10 years, EUR 4 billion contract. We will add Service man and woman, and we will ramp up now on the personnel side. We are very happy for the first 20 jobs, we got 500 CVs. So very positive, no problem to get people. Let's have a look to Page 22. Here, you will see that we are investing in our future. We have to invest into our future and as discussed also last time. It's very important that we have enough material in our stocks. So on one side, working capital will grow. It's on one side, very good because we can deliver. On the other side, there is a burden also on the operational free cash flow, for sure. And on the other side, the CapEx has also to grow. And 2 things where we -- the target of 2023 was about EUR 600 million. It will grow up to EUR 650 million and EUR 700 million, and this is on one side, EUR 60 million investment in Bavaria in Aschau for the powder production. So we made a clear decision not to invest totally in a new factory. There was always a long-term discussion about this factory in Saxony. We invest now EUR 60 million. And with that EUR 60 million investment, we are able to enlarge 600 tonnes of triple-based powder, a very fast return of invest because this is for tank and ammunition and for ancillary ammunition, which are very profitable contracts. And the second CapEx side is, for sure, the investments that we have to do on the F-35. And on the working capital side, it is very important that we still fill our stocks because as we told you -- as I told you before, it's a back-end loaded business. And for that, we need materials. But again, here, it's very fast-turning and we will get the money back very fast. On the next page, we see that we have a back-end loading business. And if you have a look to Q1 and also to Q2, you see that in the Q4 on the sales side, on Q4, we will have more than 40% of our annual sales in the quarter #4. And I told you the figure before with a growth rate of more than 25%, and with more than 30% in Q4, we will make more than 50% of our operational results in Q4. So therefore, I'm very happy from the profitability of the company that I have no doubt that we fulfill our guidance and hopefully be better than that. So what are the main projects in Q4? This is on one side on Weapon and Ammunition is what we have to supply to Germany. And the risk is relatively low because it's more from the same. It's tank ammunition, medium-caliber ammunition, it's artillery ammunition. And it will be also deliveries to Ukraine. And Germany only in Q4 will be more than EUR 300 million, Ukraine more than EUR 100 million with good profitability. Vehicle Systems or the ramp-up of projects in Hungary, these are the Lynx programs and the PzH 2000. In U.K. is the ramp-up coming up now for Challenger 3 and for [indiscernible] and also the LAND 400 Phase 2 program, the Boxer. And Ringtausch Leopard 2 and also Marder for Czech Republic and the Slovakia for the Leopard and the Ukrainian for the Marder. All of them are a very profitable product, and that is the reason that in Q4, we will make more than 50% of our profit in only 1 quarter. Very positive also that we have more trucks on [indiscernible] for various nations. And our expectation is that we can make more than EUR 200 million for [indiscernible] U.K., more than EUR 170 million in Norway and Sweden, more than 43 and also Ukraine in a double-digit millions to deliver. We are on the way to make them ready because it's also no-risk. And because it's always -- they are always the same trucks, and it's no technical risks inside. So the outlook is now we have a very strong book-to-bill ratio. This was nearly 3x on the sales, and it will grow in the second half. German contract award makes noticeable progress. Expal integration offers us significant capacities. And we have a very successful diversification in new markets as discussed on the F-35. So Rheinmetall is fully committed to timely capacity and also increase and in order execution. We want to be the enabler for the different governments who trust in us, and I'm sure that we will do. So if we go now on the last page on the outlook of the guidance. So without Expal, we say on the sales side, between EUR 7.4 billion and EUR 7.6 billion. Ticking the box operating margins with all the contract is -- allow me to say more than 12% and operating free cash flow between 4% and 6%. Because of the investments, it can be that we are on the lower level. It depends a little bit about the down payments but we are also very successful on the down payment side, but our range of 4% to 6% operational free cash flow will stay. If we have now a look to Expal, as I said, here is between EUR 150 million and EUR 190 million. With the newest contract from Expal, my expectation is between, let me say, a little bit less than EUR 200 million on sales and an operating margin of more than 25%. So next year -- sorry, next quarter, we will give you then a new guidance. And to -- if we have a full overview about the Expal business. But at the moment, everything sounds very, very well. Thank you very much. And now we are open for Q&A.

And the first question comes from Sash Tusa of Agency Partners.

I've got some questions about -- a question about Expal. The margins that you're forecasting for this year are very significantly higher than the sort of margins you indicated it had done in the past. And I wondered whether that was because you were effectively only seeing the best bit of the year in terms of deliveries and profitability? Or is Expal actually more profitable than you expected at the time that you bought it? And tied into that, do you expect any integration costs for Expal?

Yes. Thanks, Sash. So first of all, as you see, it's a leverage effect that we have. It's at the moment, fully filled. The profitability is better because of this leverage effect. And on the other side, we could book some businesses, which have higher profitability than Expal booked before. These are the 2 points. The second point is post-merger integration process that we have. There is something, but it's not a lot of money that we have to implement because we do it very slowly. IT integration and the other things, we do slowly. There are some costs, but this is on a very, very minor level.

Okay. Great. And then just another unrelated question. You didn't mention, I think, in the presentation the German [indiscernible] requirement, where you've announced that there's been a -- Germany and Australia have agreed on some sort of deal. But when do you expect that to come into your backlog?

Yes. So at the moment, our -- first of all, the Chancellor and the Prime Minister made a handshake agreement about that. Then the German delegation was in Australia, together with the Chief of the Army and the Armament Director, there is also a very clear agreement. Now there is -- there are the contract negotiations between Australia and between Germany because this contract should go from the German government to the Australian government. And back-to-back, the Australian government will give this contract to Rheinmetall, Australia. The expectation is that the order will come end of the year. You never know what happens if governments go into negotiations, but the expectation is that the order is coming end of the year.

The next questioner is Mr. George Mcwhirter of Berenberg.

Just more on Expal, please. Firstly, please can you provide some additional detail on the audience take and backlog trends in Expal since the closing. I think you mentioned you planned EUR 600 million order here recently? And secondly, what sort of growth do you expect in Expal systems for the next financial year?

Yes. So first of all, yes, George, we gave EUR 600 million order or it will be -- it will happen over the next 2 or 3 weeks, EUR 600 million to Expal so our expectation is that -- and this is exactly what we had in our plan. In '23, we told you that we have EUR 400 million next year, we will have EUR 600 million, hopefully EUR 600 million plus sales for the full year. And this -- the main orders we have at the moment are these ancillary orders. Then there is a EUR 200 million order of medium-caliber ammunitions. And we are at the moment in negotiations also to give some more contracts inside and mostly -- nearly all of them is help for Europe -- from European countries to Ukraine. So I want -- so we fill for 2024. And now we are on the way to fill for 2025, the order book for Expal. In 20 -- another 200 -- minimum 100, but it would be better, and I think it is possible to go up to another EUR 200 million. So I think in 2 years' time, is also what we expected that Expal can make about EUR 800 million sales.

The next question comes from Mr. Ben Heelan of Bank of America.

First one, I wanted to touch on the F-35 contract. Obviously, it's a big win. Can you talk a little bit through the potential there in terms of the financials? Is there a significant CapEx expenditure? Do you receive any prepayments to support that? How should we think about the revenues of medium term? And then secondly, on the Civil business, obviously, it was quite weak in the first half of the year. Is there any gauge in terms of how that is going to trend into the second half of the year and into 2024?

So first of all, on the F-35 contract, as I told you that the German government made a very good negotiations also for us, with Lockheed that 400 of these parts should be produced in this factory. So if you calculate over the next 10 years, it's a potential of -- only for that piece -- of EUR 4 billion. But what I think is there is more in because the F-35 will be over the next 25 years, the most successful plane like the F-16 was before. And so we think there is more potential. And all the fuselages outside the U.S. should be produced here in our production line in Weeze but the minimum, let me say that we expect EUR 4 billion. We prepare ourselves to produce also other pieces inside. This is a very high-tech production line. And in that high-tech production line, our toolings that we have, our flexible tooling. So we can produce also other pieces and maybe we can help also in other airplane programs to produce components for them. From the investment side is -- there is a strong investment from the United States. So we get the tooling from the U.S. side. So this is an investment of more than EUR 100 million from the tooling side. There is no cash out from us. This is 100% coming from Northrop. Northrop get mostly surely inside the contract paid from the German government. But our partner is Northrop Grumman. And on the other side, we have investments then into the factory by themselves. This is another EUR 100 million. And our calculation at the moment, the biggest negative cash flow that we have is EUR 15 million because we get some down payments. And I think this is a very fair value in such a big program. Is that fine for you for the F-35?

Yes. That's very clear.

Second point. On the civilian business, at the moment, the problem that we have, we couldn't drive our business because of the IT, of the cyber incident. That was the reason that for example, materials and trade is really dropping down on the sales side. And without sales, in the civilian business, like in every business, you can make no profit. Our expectation on the civilian business is still, and that is our clear target that we are -- that we will be in a range between 6% and 7% profitability on the civilian side. It -- the growth rate on the civilian side will be not absolutely not comparable to that what is going on the defense side. It will be a very small growing business or a flat business. But I think the target that we have must be possible that we are -- have a profitability between 6% and 7% EBIT.

Okay. Very clear. Can I just ask one follow-up on Weapons and Ammo from a margin perspective? It was very, very strong in the second quarter. I know you mentioned it benefited from mix and it benefited from drop-through. Is that the right level of margin we should be thinking about in that business in the second half of the year? Or was there anything particularly exceptional in Q2 that will kind of normalize in the second half of the year?

It should be much better in the second half than in the first half.

The next questioner is Mr. Yan Derocles of ODDO BHF.

Couple of questions on my side, maybe the first one on cash -- on free cash flow without, I would say, deferring the mid-November C&D. Does this, I would say, EUR 650 million to EUR 700 million, call into question your vision of CapEx at around EUR 450 million, excluding Expal beyond 2023? And maybe the second question is, I would say, is a modeling question because I was surprised by the consolidation line in Q2. So what kind of what is the magnitude of the consolidation headquarter line, which would anticipate for '23? And maybe the last one for me. Can you come back on the -- on Ukraine? Because you mentioned during the call that you were expecting I think nearly EUR 2 billion of order intake only for '23. So could we have a rough indication of the timing regarding the conversion of those orders into sales?

If I start, and Dagmar will give you an overview about the -- on the financial side. I give you an overview about the Ukrainian side. I told you EUR 1 billion is booked, another EUR 1 billion is expected. So the order intake and on the sales side -- on the ammunition side is the -- let me say, the lowest -- the minimum time is between 4 and 5 months from order intake to delivery time. This is possible, for example, for medium-caliber round. It -- we are between 6 and 8 months for large-caliber because we have the materials now inside. For example, for the tank ammunition, if they need Leopard, for Leopard they have tank ammunition or they can use it also for the short-caliber ones. From the Vehicle side, we have for the inventory fighting vehicles, usually 12 months. And the reason is because we build up the inventory fighting vehicles totally new. But the bulk of deliveries that in Q3 and especially in Q4, there will be a bulk of Leopards and motors that we will deliver now. So that in the quarter 1 and quarter 2, the relatively good margins that we will have on this Ukrainian deals is very, very low. And the content in Q3 and Q4 will be very high. So therefore, that is the reason that the profit -- that more of 50% of the profitability will be in quarter 4. So that is the reason that we said we will fulfill the guidance and hopefully be better. So forward to that, is that fair enough for you? Can I give to Dagmar?

Sure.

Okay. So starting with your question regarding the free cash flow and the consolidation line. As I explained in the second quarter, it was like extraordinary positive because we had these positive effects from a shift in VAT payments, which we received from the tax authorities in the second quarter as well as a reduction of tax prepayments. And therefore, overall, it was a positive figure. And of course, some buildup of payables. For the full year '23, in the last year, we had in this line consolidation, a negative impact on the operating free cash flow of EUR 164 million and this will be exceeded this year. It will be definitely more because, first of all, we changed a little bit the structure of intercompany payments. And on the other hand, regarding our F-35 CapEx, that's something what we will see in this line as well. So that are the, let me say, major points or bigger points regarding the development of operating free cash flow in consolidation. Does it help?

Yes, perfect. And well, my question on the free cash flow is linked to the year to beyond '23 because I understand that you will need maybe a bit more CapEx maybe for the F-35 but also for some other programs?

It's a propulsion system. One thing is we invest at the moment, EUR 60 million into the enlargement of our propulsion systems. This is mainly an investment in Germany in Bavaria where we enlarge 600 tonnes of triple-based powder, and we need that because the customers at the moment, they buy full shots on ancillary side. So you need the propulsion systems also for that. You cannot only produce the round by themselves, but also the propulsion system. So we enlarge that. This is one of the trigger points that we can enlarge next year, our capacity in ancillary up to 600,000 because forging capacity is there, filling capacity is there, but we need for the whole round the full shot also these. This is 1 investment. It's about EUR 60 million. We added that because this was not in our calculation, and this was not in our first investment program because -- yes, it was not planned, very simple. It was not planned. So second point is an investment -- another investment, not the same size, but another investment is also into the high explosive in South Africa and a little bit also into the propulsion side. In total, Rheinmetall, if I add everything has now about 7,000 tonnes of propulsion after that investment, this helps us a lot to create full shots for our ammunition. And number 3 is F-35. On the F-35 side, as you said, there are some investments. It's -- this is a minor investment in comparison to the ammunition. But we do now these investments on the ammunition side, yes, because I must say, we have a very, very fast return of invest in this area, and we would be stupid if we are not investing now if we have the market.

[Operator Instructions] We are moving to our next questioner, which is Mr. Sebastian Growe of BNP Paribas Exane.

I hope you can hear me well. The first one is on the order pipeline in ammunition. You mentioned, I think, on prior calls, beget there's more than EUR 100 billion potential in Europe. And the question that I have is simply how much of this has been placed by now you made also in an earlier answer the comment that the return on investment is slight -- very, very short. So obviously, that will all play into this, that there is either already a good load or there's much more to come either way. In Germany, we have seen big contracts coming through. So I would be interested in your commentary around the European side of things when it comes to ammunition?

Yes. So what I -- on the EUR 120 million we have now between EUR 4 billion and EUR 5 billion because only EUR 4 billion from the German side, what we have as a frame agreement. To be clear in this area and you know this frame agreements are that you -- they order year-by-year. The positive thing is that they have to go not longer to determine Bundestag for the 25 million. If they give more than 25 million orders, so they can be [ fought ]. So Minister made it very clear and as I told you, it's a triple-digit million we can do in 2 weeks now to get the orders. But the frame is EUR 4 billion on the -- EUR 4 billion to EUR 5 billion on the tank side. It's EUR 1.5 billion to EUR 2.5 billion, EUR 1.5 billion is from the German side, the rest is EUR 1 billion from the others on the ammunition side is for the international business. And it's about -- this is out of my mind now. Now don't ask me if it is right, EUR 50 million up, down or so, but it's about EUR 1 billion for the medium-caliber. And I will say maybe EUR 300 million for the rest. So if you see it positive, it's 5, 7, 8 nearly the area 8-plus is what we have at the moment. But we are in negotiations with a lot of other countries. And for example, a positive thing is it's not in the books at the moment, but there are negotiations at the moment with Spain. And Spain wants to fill up their stocks. And there are negotiations or there is potential at the moment in Spain of an up EUR 800 million contract also with Spain for -- only for ancillary. But there is -- there are the Netherlands, which are coming up. There is U.K. which is, at the moment, not inside. The need from the U.K. side is also EUR 1 billion also for the smoothbore because they have no ammunitions for the smoothbore. So if you asked me and said, okay, what do you think over the next years? What will be the backlog? I think -- if I think very conservative on the nomination side, there will be around EUR 10 billion.

Okay. That's super helpful. And then if we can move on to Vehicle Systems and unfortunately, a bit more of an unpleasant topic, following the inference in the vehicle decision -- fighting vehicle decision in Doñana against billings. This now, obviously, then the next contract unfortunately that you lost for whatever the political reasons, but that was on the situation with the Czech Republic and Slovakia. So I was just wondering how you assess the commercial impact on potential still for the very, very platform if you could comment on that.

Yes. So first of all, it's not helpful. That is very clear, and I'm not very happy about that, that we lose contracts because the vehicle has shown a very good and successful in -- when they test it, a very successful testing. But anyway, the point is that there are a lot of other countries who, for sure, are looking there. It's not easy to bring this vehicles inside, but I'm sure because these vehicles usually have a period of 25 to 30 years to come into the market. I'm very sure that now very soon, end of the year, the first vehicles will be on NATO trials from the Hungarian side because we delivered the first vehicles fully functional to Hungary. And I believe that there are a lot of other countries where the Lynx is successful. The interesting thing was really the feedback that they said, look, the price is fine. This is not a problem. And also, the technical solution is a good solution. So this is very positive from my side that we did nothing wrong. So I still believe in the inventory fighting vehicle side. And sometimes, yes, there are political issues. It was the same on the Slovakian side. It was -- there are sometimes are political issues that you cannot win. And I understand very clear the government if they make such a political decision, and we must be fair and we have to look for the next contracts, and there will be a lot of next contracts, I'm sure about.

It's a nice segue to my next question because I think you mentioned on earlier occasions that there's a total installed tank fleet of around 8,000 units across Europe. And you said with the Ukraine war, it's obviously an obvious need to replace some of those, which will never come back. And there will also be an imminent need before the main ground competition comes through at some point in time to fill the gap so to speak. So where are we in that very, very journey? You mentioned that other countries are looking into the Lynx platform. I would also assume this goes for the Leopard. Any color on where you are in this discussion when it comes to tanks -- be it better tanks, be it other vehicles?

Yes. So first of all, the Leopard 2 at the moment, the orders coming to the Leopard 2 because Leopard 2 is a ready tank. It's developed in the '70s. It's ready. It's a war-proof and it's a good tank. So that is the reason that these contracts are going at the moment to Leopard. What we did on the Panther side is to install new technologies in the main battle tank. I think this is absolutely the right way. So the booking of the Leopard is helpful at the moment also for the German industry, very helpful in different areas also for Rheinmetall. You have seen this in the presentation on the Norwegian side. We will book also hundreds of millions or more on this side. We stay on our strategic way to say, okay, we need also new technologies on main battle tanks. And these new technologies are implemented in the Panther. So this is more firepower, this is less weight, as you said, more than 10 tonnes less weight, better protection systems, which are inside and better connectivity. So -- and also other like laser technologies, et cetera, also other technologies on this tank. Now let's go to the main ground combat system. And if you see the comments that Minister Pistorius and also the French Defense Minister said, they spoke about 20-40, 20-50 in between. So for Leopard and for Panther, I see for the next 25 years, a lot of space of -- to do something because more than this 8,000 main battle tanks, yes, they have to do something. And so therefore, the main battle tank business and the infantry fighting tank business will be over the next 20 years, a very fruitful and very good business.

Any indication as to when this cycle not really start coming through? Or is it several years down the road, rather, how should we think of this in terms of order placement?

No. Yes. As you see, the Leopard is coming now. So there is -- at the end of the day, from the Norwegian side, from the German side, Lithuania, et cetera. Let me say, 200 -- maybe 300 of the Leopards, I see very near, which is a good business for the German industry and also for Rheinmetall.

The next questioner is Mr. Christian Cohrs of Warburg Research.

Just very few left. First for the civilian business, you mentioned also the margin decline attributable to difficulties to pass on higher material costs, is there any chance for recovery? Do you have negotiated any escalation clause, et cetera, so that any insight would be helpful. Secondly, on CapEx, I fully understand the need to invest. But for 2024 and the years beyond, is it fair to assume that CapEx will be roughly back at the 5% of sales ratio?

Dagmar will give you an overview on the CapEx side. And on the material side, I said we have a delay of 4 to 5 months in our escalation clauses to get from the OEMs the money if the material costs are going up. The -- at the moment, that as you know, the trend is going that the costs are really going up. So we have still in our books not, but we hope end of the year, we have it done in our books. Also, we have a better profitability so that we get a compensation from the OEMs on the material side.

On the CapEx side, we definitely have a peak in the running year in 2023. I mean, we already had a high percentage of sales announced of CapEx. Now we increased that again. And then, of course, yes, we will come down, but it's too early to give you any guidance on the CapEx of the next year.

Okay. Understood. And then maybe just a follow...

Maybe 1 more information for that. And the reason for that is also very clear because we get at the moment, order intake that is not in our planning. There are a lot of orders where the customer is calling us and said, okay, I give you a contract in 3 weeks. So that is the reason that the backlog is growing so strong in these areas. And because of -- we have a lack of positive, it's a positive information if the customer is coming in and give you more contracts. But we cannot make, let me say, we cannot make the final calculation on the CapEx side. But CapEx will not explode, but the investments that we do at the moment on the ammunition side, for example, yes, this will be, let me say, stop next year. We will not invest more. The only investment that we would do more invest, let me say, in another ammunition factory or whatever, only if the government is giving us then another 10 years' contract, which has such a lot of value that we have a return of investment, let me say, 1 or 2 years in this area. But otherwise, we will stop the investments there. This is point number one. But there are other things, yes, where we are not -- we won't go back on a level of 5. This is our target. That is very clear, but we can give you not the exact figure. Is that helpful?

That's very helpful. Maybe just a follow-up on that. I mean, besides investing into new capacity, it is maybe also able to or possible to acquire capacity as you have done with Expal, and that's actually my follow-up question. You will be most likely be very cash-generative in the years to come. So do you have further ideas on the -- further ideas or maybe even country targets already on the radar screen with regards to M&A?

Yes, there is something. There are a lot of things at the moment. And the point is that we are -- I cannot give you the details because we are still in negotiations with them, but there is a company in Romania at the moment, which is very helpful on -- inside the vehicle production. And the idea is -- or the mission that we gave the people is that in Romania, we want to have a company between EUR 300 million and EUR 500 million sales per year. We are in negotiations, and we hope that we can have a final decision end of the year. It should be vehicles and air defense systems especially through the Eastern European part. This is number one. There are also discussions on the ammunition side. If there is something because as you said, there is at the moment as there is a center of gravity, which is Rheinmetall at the moment, as you can see, especially on the ammunition side. There are some discussions about that, but we only do it if the business model and the business case is on the same level that we have on the Expal side, where both partners, our own capital and also Rheinmetall are very happy with the deal.

And we have one last question. It comes from Hemal Bhundia of UBS.

Two quick questions. Firstly, you mentioned that the guidance back-end loaded, of course. How much of the guidance is under your control? And how much visibility do you have for Q4 call-offs now already? And is there any risk of slippage? And secondly, on the free cash flow guidance of 4% to 6%, which end should we aim for?

Yes. I will start with the answer on the free cash flow guidance. We confirm the range of 4% to 6%. But looking at exceeding CapEx and the strong growth we see, so we have to build our working capital, not only to assure this year's performance, but also as well, of course, the next quarter in the year '24. And therefore, we see it more at the lower end of that range but the cash is not gone. The cash will come and I'm very confident that we will deliver soon.

Is that helpful?

Yes.

And from my side is the back-end loaded business that we have is as I told, the annual sales of ammunitions will be about 45% in Q4. So nearly 50% of our sales will be in Q4. How is that possible? It is only possible because we are still in production in all of those things. So we started production in July, for example, for the 35-millimeter for the Gepard. And we are in -- and we will deliver that in Q4. We started all the ammunitions of 120-millimeter and the customer wants to have most of them in Q4. There is a lot -- there are a lot of ancillary productions at the moment from Spain, from South Africa, from Germany, wherever we are. And most of them is Q3, but most of them is Q4. So we are in production. So the risk from the production side is very low because we have all of the materials in our stocks. This is number one. The second point is Electronic Solutions, for example, will make 40% of the sales also in Q4. And the reason for that is because the delivery of the vehicles, the sensors and the fire control systems, et cetera, will be delivered in Q4 or in Q3, yes, to the Vehicle Systems and then will be implemented and then we get it into sales. Little bit less has Vehicle Systems, but also Vehicle Systems delivers all the Leopards for the Ringtausch, most of the motors and most of the Hungarian Lynx in Q4. This is because it's in one side in the contracts. And on the other side, it's in negotiation. It was negotiated with the customers because of the material income and the ramp-up that we made over the last 12 months in our different factories. So as you know, there is always a risk. That's very clear. But at the end of the day, if I think as an entrepreneur, so it's there. The contracts are there, the material is there. So -- and even if it would be -- I'm very fair about that, it would be the delivery in 1st of January, so as an entrepreneur for me, the 1 week does nothing happened because the business is at the moment, so good and the profitability is so good. But I expect that we can fulfill it end of the year.

There are no further questions in the queue. Back to the company.

Thank you very much for your time. Thanks for the interest in Rheinmetall. I hope we see you soon. All the best. Stay healthy. Thanks. Bye-bye.

Thank you. Bye.