Rheinmetall AG (RHM) Earnings Call Transcript & Summary

Good morning, everyone. Okay. Due to popular demand, especially from our friends from ESMA, we have changed the format to an open call here for everyone. The call and details are available or were made available to the public. We are not going to disclose any information, which is not known to the public, which has not been released by any press release or so prior. So I think we are here on a very compliant way. And we have seen quite a bit of people during the second quarter, so people who have attended our conferences over the last 3 months, should be familiar with our messaging. We are going to be in quiet period from tomorrow on with the call starting on August the 8th. Again, this will be available to the public via webcast. From the messaging, I think it is important to see that we are very well underway with the order intake in the second quarter due to the German by maybe now signing contracts here in large numbers, especially the ammunition contracts and the load handling system contracts have been signed. So we will here have the strong increase in the second quarter. We had the heavy weapon carrier, the vehicles in the second quarter. And we had some smaller ammunition pieces here. All in all, we would expect here order intake according to the Rheinmetall definition, including the frameworks above EUR 10 billion. We have here given the guidance for the second quarter, where we said that the second quarter will be more in line with the annual growth rate after a growth of 15% in the second quarter and the expectation that the full year will be around 40%. That should give you an indication how we are underway. We have communicated during the second quarter that this is here the way we think about the quarter and that we are confident to be on track to meet the full year guidance for 2024. We have seen that we are now guiding the full year a little bit higher for -- regarding the order intake momentum. Here, press releases have been shared where we have announced an order intake of up to EUR 40 billion. And that backlog shall reach by the end of the year, something above EUR 60 billion due to the strong momentum, especially from the Germans. We have not made any specific communication around the profitability in the quarter. There have been calls around the question, how are we progressing with our capacity expansion, and these are well underway. So we are quite successful in Unterlüß and in Weeze to bring our capacity on time and have them available to start with the ramp-up in '25 for the ammunition and the fuselage production in 2026. We have seen the small-bore piston transaction effectively closed as of April 1. So the announcement was in mid-April, but the effective date is 1st of April. So there is no further contribution here from the small-bore pistons business. It was not reported anyway, but in the full year EPS and so on, we have nothing left from that business. I would like to remind you that last year, we had in the second quarter relatively easy comps in the Civil business due to the slow production here after the cyber incident here that should normalize in this year. However, overall growth rates here in the market have been relatively slow. We are not going to have any documents here uploaded. Here, it will only be the spoken word. We have the second quarter here with the participation of Mr. Papperger and Mr. Steinert to give you an update on the market developments recently. And yes, if you have any questions now, I would be open for your Q&A.

[Operator Instructions] Your line is open, Ben.

Is there any comments that you've made through the quarter on cash flow? And then I was just wondering a little bit around the breakdown between orders and nominations for some of the orders that you've announced by heavy weapons carrier? And how we should think about what's framework, what's order intake in the quarter?

Yes. The order intake was driven obviously by the ammunition contract, which was a frame contract with first call-off. The heavy weapon carrier is a fixed contract. The load handling system contract is a fixed contract. So there will be a good share of fixed orders in that, but the large contribution comes from the ammunition contract. The new truck order here was signed in Q3. So that will not be part of the Q2 order intake. We have not made any comments regarding cash flow. We only reiterated that the German government has now started to change its procedure and provide here cash early in the contract so that we have support, especially now with the contract for the ammunition so that we will have a prepayment that will allow to offset the CapEx for the Unterlüß plant and as well support here the initial working capital requirements. Regarding cash flow, the only comments that we have made is that we have started shipping the trucks from Austria to Germany. Majority of the sales will be happening in the third quarter, but we will have our first contribution here in the second quarter. So the load handling system contract will help to bring the working capital down and finally see here the contribution to the top line.

And is the 10% order PDP kind of roughly a fair starting point to think about these [ Gem ] PDPs coming in?

Help me what's PDP?

Like predelivery payment?

We have said that the German customer would start with 30%. So the initial call-off is around EUR 900 million, and we would see a prepayment here on that term.

Dirk, can you hear me, it's David Perry.

Yes. David.

Just 2 clarifications, please. Sorry, you went quite quick. I think you said full year sales [indiscernible] 40 and we're on track for that. Should we infer from that Q2, you were up 40%, which I think is what you were targeting on the Q1 call. Can you just clarify that, please?

That would be here, the direction here we set that the Q2 top line development is in line with our guided annual growth rate.

Okay. And then you said -- I think you said orders were over EUR 10 billion, I think you were referring to Q2. I mean, over EUR 10 billion could mean any number really. But I thought it would be quite a bit higher than EUR 10 billion. I mean, if you're including that, the EUR 8.5 billion for the ammunition, then why not say EUR 13 billion to EUR 15 billion or something. I just want to understand how I should interpret over EUR 10 billion?

We have -- well, the EUR 8.5 billion is the gross number. So you have always to get down to the net number. And here, the net effect of the German orders is something about EUR 10 billion, but significantly lower than EUR 13 billion here. I do not know the smaller size numbers, I would expect something between EUR 10 billion to EUR 11 billion net effect.

Okay. And just to clarify that just for Q2?

That is just a Q2 figure, yes.

All right. That's very helpful. So just -- sorry, and then just last one. So when you talk about the EUR 40 billion for the full year, is that gross or net?

That is -- that should be a net figure. Okay. I don't see any further raised hands. So if there's no other question from your side.

Yes, I think you didn't say anything on EBIT or earnings generally. Maybe just on ecosystems. Can you just remind us if there was expected any major contribution from ring swap agreements, part one? And the second one is I think in the first quarter, we saw some ramp-up costs in ammunition, which [indiscernible] earnings. I think the run rate for ramp-up costs will basically be the same in the second quarter compared to the first quarter. Should we think differently around that?

The ramp-up topic remains in place here, ring swap agreements here we set in the Q1 period. that the first quarter had a relatively low contribution from ring swap and that they would come in the remainder of the year. So there is some additional ring swap contribution to be expected.

One just follow-up clarification on the prepayment. You mentioned with regards to Germany. Is the implication now that you've already received it? Or could there be a timing difference just between the order and the payment? I guess, there can be a couple of weeks or so. And then I think your CFO said during the Q1 call that we should expect for the year with regards to earnings progression, the usual seasonality. If we take the usual seasonality, obviously, it means the margins move higher in Q2. Did you discuss in the meetings or conference that you attended, anything that would impact the usual seasonality slightly positive or negative in Q2 with regards to earnings? If you could share some thoughts on that would be great.

There was no change to our earlier communication regarding earnings.

And on the prepayment?

We have not -- the contracts were signed relatively late at the end of the quarter. So I cannot confirm whether money was received by now.

The first one is just with regards to Italy, obviously no announcement recently. I was just wondering if, by now, you can share a little bit more around the technicality of that in terms of, I guess, you're now going to develop a customized version for the Italian customer. And I was wondering when you think that's kind of ready to go and when the actual order should be placed. That's the first one.

There has been no further comments regarding here the MOU. So we are currently preparing the MOU for the joint venture with Leonardo. The idea is that we have a 50-50 joint venture, which is going to be based in Italy. Here, we have our Italian headquarter in Rome. The expectation is that we have similar to other international orders that we can provide 60% localized work share with the Leonardo and Rheinmetall providing from Italy. The base for the joint venture is the technical platforms of Lynx and Panther. And then we have to see in -- due to the fact we can here -- integrate here Leonardo technology. The joint venture is designed to create here a competitive platform that then can meet the demands of the Italian customer, but there's no contract yet signed.

But the EUR 40 billion does include a little bit from Italy, I think, right, like maybe a development contract or something, the EUR 40 billion guidance.

We have said that we are expecting here a tender until the end of the year. We did not say that the contract would be signed earlier. So regarding the potential signing of the contract, I have no timeline, no new specifics on the timeline.

The other question I had was just on the ancillary contract because I think there was also another deal awarded to deal and [indiscernible] which surprised me a little bit. given that your capacities are substantially larger. So is there anything you can say regarding this contract and why your contract has been bigger than this?

Yes, I cannot comment on competitors' contract here. What we can say is that we have capacity then -- by 2027, which is backed by contracts. So we will have here not capacity, which is expecting to be filled with contracts, but we have here contracts which can -- which do support here the cash out for the CapEx and the capital requirements and have a relatively quick payback. So relatively low risk profile for the ammunition.

And the very last question, if I may. You already mentioned the VAT regarding the EUR 8.5 billion. Do we also have to subtract the EUR 1.2 billion you received last year already from this? Or is the EUR 8.5 billion a top-up?

The EUR 8.5 billion includes the contract from last year. It was a top-up to the full amount. We are not allowed to mention now the full volume. We gave an indication earlier. The actual number is higher than we expected, but it includes the contract from last year.

First one is around the EUR 40 billion or up to EUR 40 billion. With the quarter 1 at EUR 4 billion, second quarter now EUR 10 billion to EUR 11 billion, as you said before, is EUR 25 billion less. Can you just walk us through the key building blocks? That's the first question. And the second question I have is around the truck order slippage, the [ EUR 4 billion ] from quarter 4. Has it, in the meantime, been recovered? And have you already started executing on that one in the second quarter?

Yes, we have started to execute on that. So there is a smaller contribution here. We are currently shipping 20 to 25 trucks a day across the border to [indiscernible] through. As I said, we have a small contribution in the second quarter, but the main contribution will be happening in Q3. And the contract stipulates that all deliveries shall be done until the end of the -- at the end of November.

If I may quickly follow up on this one because I think there was a bit of a debate of renegotiating the terms of that very, very contract. So I would assume that the real profit chunk then comes into play with what you said quarter 4, so end of November, so, yes.

Since most of the volume is happening in Q3, I would say that this is in line with top line development.

And the EUR 40 billion, yes.

Yes. Regarding the bigger pieces of the top line development. Here, we have from the German customer, the already signed contract for the unprotected trucks. That is the first contribution, which we had in the 1st week of July, then we are expecting some other orders for technical vehicles from the German customer here, the Marder successor vehicle, whether this is additional Pumas or whether this is 8x8 Boxer [indiscernible]. We are expecting here most significance of the digitization orders coming through in the second half of this year. And we have some -- a number of smaller, below EUR 1 billion contracts here for the German customer waiting for the second half.

And sorry, just to clarify lastly on this one. I think you indicated on one occasion that the German loan could be at around, I think, the lower bound of the old range, which was 28 to 36. Now you have raised that to 40. So what is really driving the delta then?

Delta here, we have international orders for Air Defense from various countries. We just signed contracts with Denmark, Hungary and Germany at Eurosatory. We have signed -- or we are expecting to sign contracts for additional trucks in the -- in Canada. And we have a number of smaller contracts here across Europe.

I wondered if you could just say what your comments are currently about the defense supply chain, you've clearly got an enormous ramp particularly in ammunition, but by no means only there. And production ramps elsewhere, particularly in civil aerospace, have really suffered from a supply chain that's much weaker than probably most of us hoped. What do you see as being the key supply chain challenges at the moment [Technical Difficulty] by raw materials or subsystems?

I mean the ultimate objective for Rheinmetall for the ammunition is to have a balanced supply chain here from the propulsion to the fuses. What we are needing here as the key ingredients for the propulsion is cotton linter and nitric acid. We have continued to communicate that we are building up working capital. Here, we have now working capital 3 years for the 1.1 million rounds available. There is here a strategic discussion about a relocation of cotton linter production outside China. Until this has not been solved, we will continue to increase our safety stock for cotton linter. Regarding the nitric acid, we have managed to organize our supply chain around a diversified number of suppliers here in -- especially in Europe, so that we do not see any major impact from that. The other part is explosives. We are currently buying all TNT that we can get hold of in the market until we have our supply chain balanced. We are currently not facing any major issues. We have all the products here in place for the technical vehicles. However, we have not started to have major safety stock apart from the armoured steel, it's simply not possible to manage here the high number of articles here. So for the easier part, the ammunition that is managed for the technical vehicles, we have only the armoured steel here on -- with higher safety stock. The third pocket is some optoelectronics where we started as well to increase our safety stock. We are currently not seeing any major issues for us in the market, which is not being managed by safety stock or diversification of the network. Christoph, your hand was raised?

I have no additional questions, sorry.

So I do not have a raised hand on my screen. George, I saw your hand up earlier, but that has obviously been answered. Okay. So if there is no further questions, I would thank you for your attention and close the call. That's not for the case. So thank you, guys, and have a great day.