Rheinmetall AG (RHM) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody, or good morning, wherever you are. Welcome to the Rheinmetall Recap Call. It's going to be a rather uneventful call here, since we are only repeating the messages from the latest weeks. I think most excitingly, we have some decisions on the macro level, which were favorable for the overall defense industry. Now with the move and the NATO Summit confirming that we're talking about 3.5% core defense spending and 1.5% infrastructure. And in addition to that, we are basically here at the upper end of our expectation that we presented in the first quarter during the full year call. Apart from that, you have noticed that the order intake in the second quarter was on the low expected level due to the fact that the German government transition took place at the beginning of the month and that we had here a situation where the nomination of all subcommittees took some time. The expectation is now that we will see an acceleration of orders in the second half more towards the fourth quarter. But recent discussions with the customer here in Germany suggests that they are going to take advantage of the possibility to convert the contracts to fixed contracts and to take advantage of the 50% upgrade potential. And the second thing is that we are now seeing that more and more countries are coming up, that discussions with customers are accelerating, but the expectation is now that with the finalization of the German budget discussion in September, all order intakes led by Germany will be more geared towards the end of the year. We have already said that -- the second thing is we have now successfully started operations in our new plant in Unterlüss. We just had the inauguration in Weeze. So we are actually putting some concrete and steel to the money that we have spent, and we are really happy that we can now start with the production in the plant in Unterlüss and that we can pick up production here at the F-35 plant in Weeze. Regarding the Q2 sales development, I think here already in the Q1 call, we have mentioned that we had some pull forward effect to the first quarter that were quantified to be around EUR 140 million and that we had some delay in the Weapon and Ammunition business due to the Murcia incident where a fire had destroyed some of the equipment and where we have had situation that we had to replace the production, that will now take place or has taken already place and expectation is that we will be able to catch up the delay until the end of the year. We quantified that effect in the call -- in the Q1 call to be around EUR 200 million from Q2 in Q3. The situation on the operating free cash flow, obviously, is related to the order intake. We -- since we have not seen major order intakes here in the second quarter, there hasn't been any major prepayment activities in that quarter either. We have seen in the civil business here, a relatively slow market demand in the relevant market with almost minus 4% here and the business could not here work against that overall negative trend. Apart from that, I think, here, we are looking forward that we are going to see here the strong acceleration of the order intake over the next quarters with an expectation that this is going to increase up to EUR 70 billion over the next 12 months and that we are expecting here in total for the full year to be on a very good track to achieve the full year guidance. We have had some discussions around potential updates on the guidance. And obviously, we are looking here to integrate all the information that we have available once the orders are in with the time line of the orders, so that a very likely moment here to upgrade guidance and midterm guidance as well will be later in the year, most likely during the Capital Market Days. That would be my -- the summary of my introduction. And if you have any questions, I'm now open for your questions. Sven, you are the first.

Thank you, Dirk. I hope you can hear me.

Yes.

Good. That's good. I was just wondering, just coming back on what you just said on the guidance for the year. So does it mean that even if the German customer orders like end of September, October, it would be still in time to give you some additional revenues for this year? Is that fair to say?

We are continuing to produce here, for some of the products, a full range like for the truck business, where we have said that we keep up the high level. So we are ready for any call-offs.

And then the other question I had just on the Q2 impacts, right? You mentioned some of the negative effects, but sometimes there may be also other pull forward, also some compensating positive effects for Q2 or nothing worth mentioning.

Nothing worth mentioning.

First one is also around these one-off effects. So you said, I think, the pull forwards were EUR 140 million in the quarter 1 from quarter 2 that I understood. And then you said for the Murcia impact, it was around EUR 200 million, if I understood that correctly.

Yes.

So a very simple question is you have this guidance for the defense activities of 35% to 40% of our top line growth. So how should we think about the offset between sort of what the pull forward is eating into that very growth against what you might see as a catch-up or offset on the positive side than from this Murcia incident that you might [indiscernible] the second quarter?

Here, the expectation is clearly that the acceleration of sales in the second quarter once we have the capacity in Murcia fully back online. The point is that we have here components, which need to be ready, that is basically some energetics. The rest of the product of the delivery is already sitting on our books. So once we have solved that issue, we can immediately get the product to the customer since the customer is asking for full shots and not for separate delivery. We're now waiting to finalize here the step of the energetics production.

Okay. So overall, about the 35%, 40% minus a haircut, that would be fair summary probably. Okay. And the other question because I think you haven't touched at all, to be honest, on the profitability side. Could you at least directionally provide some color what to expect?

I think the only indication here would be that given that one of the larger effects was in the Weapon and Ammunition business, the mix in the quarter will have an impact here on the group margin. Pull forward was mostly in the ammunition supply and the delay as well is in the ammunition supply.

Okay. And then the last one goes back to also Sven's first question around are you ready to benefit from any step up. You also mentioned in the prepared remarks, the conversion of frame contracts and also the very likely usage of the 50% step-up option. That would all apply in quarter 4 after the talks are done in September and very likely then everything falling into the fourth quarter. So that is basically the way to look at it.

Given the discussion that we have to present the budget in September to the parliament, it's very likely that the decisions on additional orders will only start in September. So there is a very high likelihood that it will be end of September and maybe only starting in Q4. But discussions with the customers are very good. We have very active communication right now. And we do see that on the political side, but as well as on the actual procurement and administrative side, there is now a strong wish to accelerate here the procurement and get the power on the street. Currently, there is one question from David. David, I can't hear you, you have to unmute yourself.

Can you hear me now, Dirk?

Yes.

You gave some help on Weapon and Ammunition and also on Power Systems. Can you just talk a little bit about the Q2 growth in Vehicles and in Electronics? Is that on a steady growth trajectory? Or is there a bit more lumpiness there?

There hasn't been any further details to be shared on that respect in all those 2 divisions. Here, we are on a normal development path. I mean last year, we had a relatively slow quarter in the logistical vehicles, which only picked up at the end of June when the call-off was actually placed for the trucks. We have continued to produce the trucks. And as soon as we have here orders in place, we are able to release the vehicles similar to last year that we can send like 100 vehicles per week to the customer.

Okay. And you said -- I think you said the full year guidance was on track, but just to check, I heard, were you just referring to orders? Or are you referring to everything, sales, EBIT, cash?

Everything. There are two hands still up in the air from Sebastian and from Sven. I don't know whether this is new hands or is it the old hands. New, okay. Sven, then unmute yourself, please.

I was just wondering, I mean, the momentum from the German customer is pretty clear, right? I mean the plan is clear. The ambition is high. Activity is high. But what are you seeing from the others? I mean, is it much lower? Do you expect those orders to move ahead then?

I think what we have as well communicated here during the recent road shows is that the easy approach is to look at actual defense spending, a deeper look in what is actually being ordered here really reveals the potential for us. And here, clearly, we can say that, for example, Spain and Italy, where customers are starting to spend here heavily in the renovation of their armored fleets that this is coming. Italy is expected to sign here the first contract for Panther and for Lynx in the second half. That is all as expected and as communicated. The Spanish development, here, we have had some discussion around the upgrade of the Leopard fleet together with Spanish Indra, following a similar pattern to what we have seen in Italy, where we formed a joint venture with Leonardo. So we do see acceleration here in those activities. You just read the press release about a new customer for ammunition orders here that is in one of the geographies we have mentioned earlier here where we did not deliver historically and where we now have seen first orders. So it continues that there are new customers here approaching us with additional either buildup of capacity in the respective countries or with additional direct orders. The expectation is that for the second half, we will continue to see here Southeastern European countries to place orders. So we are here confident that we're going to see some activities as well in that region. So no slowdown here. I think the summit in the Netherlands here put some clarity to where the direction is. Some of the countries will be slower to achieve the 3.5%, but that does not necessarily affect the actual programs, which might here like in the case of Italy and Spain follow a completely different time line than the overall GDP targets.

I mean we all read these reports the other day, right, that U.S. probably pulling back on 155 deliveries for Ukraine. I mean is there also, aside from the EUR 50 billion contract that you're obviously probably still discussing, also an opportunity to do something more short term in terms of additional deliveries? Or are you kind of maxed out for now?

Well, to the extent that we are possible here, we would, of course, help. I cannot quantify the additional potential for new deliveries to Ukraine.

And then the final point for me is just, I mean, you mentioned at the beginning that this could be a quick call because you flagged those factors like the pull forward and the fire, a ton of times. So I guess you feel we have listened to you. Is that fair?

I just want to make sure that you have understood the messages here. Yes, absolutely. These were placed in the call and sometimes there are so many things going on that it just slips your attention.

Because consensus just has a low double-digit revenue growth rate for Q2. So I guess that seems to reflect a lot of the factors that you've just mentioned.

Sebastian, your hand is still raised, or raised again?

It's still risen, the old hand, but it's fresh in the year. So on the free cash flow part, you just made the comment that there is no major prepayment activities in the quarter. At the same time, there was most recently also an article in the German press saying that especially smaller suppliers would have some issues eventually on getting financing, et cetera. So the similar question I simply have is how should we think about how that might impact you guys as the larger players apparently in the country, the largest player, actually, in the sense of do prepayments terms or working capital terms, more generally speaking, change for you? Would you have to support more strongly, especially smaller companies or this is kind of a wash because it's safeguarded that you would get the respective support from the German Army and then you pass it along?

Yes, the expectation is that with the order flow here in the second half, prepayments will again start to come in. And one thing here for the supply chain is really to have a max transparency for the smaller suppliers here to plan their capacities and their operating working capital and to help them as well with prepayments from our side to the sub-suppliers here to enable them to prepare for the deliveries on time. So long-term contracts here are really key with corresponding payment terms. We have seen that this is a good argument and a good mechanism here to help the industry and to have everybody on board for the increase of the output.

Okay. Understood. And if I may just push my luck here around the free cash flow commentary that you can make at this juncture. We had apparently this tailwind from working capital in the first quarter. You mentioned this had the prepayments. But when we think about quarter 2, would you then rather believe it's fair to assume sort of a seasonal step-up in working capital and with that free cash flow rather turn in again into more the reddish spectrum?

Yes. I mean typical seasonality would suggest that there is here a continued investment in operating working capital. We have now seen the finalization of the investment into the plants in Unterlüss and in the Weeze. And at the same time, we have 8 additional sites where we are spending. So CapEx is relatively higher at the moment. Sebastian -- Okay. I don't see any other hands being raised right now. Sesh, you raised your hand.

Okay. I'll try now. I want to just reflect on another press release that you sent out, I think, yesterday or the day before about the MARTE armored vehicle project. Should we read this as being something that is complementary to Panther? Is it replacing the main ground combat system? Where does it fit in your spectrum of heavy armored vehicles? And what do you see as being the costs and the likely profile of the program? The press release was very interesting in terms of the whole industry group involved, but didn't provide a huge amount of financial detail.

Yes. I think MARTE is an additional initiative here to improve the main metal tank landscape here with a lot of countries signing up to this initiative. Mostly -- well, differently put, I think there is no French participation in that program, but it's an initiative led by the European Union to speed up development of technology here for main battle tank. And I think clearly, as one of the leading producers of technology, which is relevant for main battle tanks, we, of course, have to be interested in participating in that business. And they have already been low to mid-double-digit million support or investments and development here from the European government be ready for that initiative.

I'm interested that you noticed that France didn't seem to be involved. That would seem, therefore, to suggest that MGCS is dead.

It's an additional initiative here. I think MGCS, we had just seen the announcement of the joint venture here in April. It's -- MGCS is clearly a German -- or Franco-German corporation here for the replacement of the Leclerc and Leopard in the 2045. I'm not exactly sure what the time line for MARTE looks like, but it is an additional initiative to strengthen the main battle tank technology in Europe, supported by the European government -- parliament. Sven, your hand is up.

Yes. Last not least, I think Mr. Papperger has talked about EUR 40 billion of order potential in Germany in the next 12 months. I was just wondering, I mean, to what extent is this just ramping the equipment level of the existing fighting brigades to 100%? And because we all know there's going to be 6 or 7 additional fighting brigades under the capability requirements. I mean, is that possible to say how much of the 40% is just ramping the existing brigades to 100 and the others would come on top in the long term?

Since we are currently at levels of 50% to 60% equipment of the existing troop, a lot is still required to equip the German Army and the existing structure. I do not know the quantitative structure of the additional brigades and what is here required.

But could be a fair share of the 40% just for the existing ones, I guess.

The point is that we have currently not only a supply to the existing troop, there is as well a discussion to have here a reserve here because we have seen that the -- due to the limited capacity, reserve of armored vehicles is necessary to keep up the fighting levels like the Russians are taking their armored vehicles from depots. So there is an additional element of reserve now being introduced. I don't know yet how big those -- this reserve is, but that plays into that -- those orders as well. Okay. I don't see any raised hand. So then I would like to thank you for your attention, and all the best. Talk to you soon.