Rheinmetall AG (RHM) Earnings Call Transcript & Summary

Thank you very much. Good afternoon, ladies and gentlemen. Thank you for your interest in the quarterly call with Rheinmetall, my colleague, Klaus Norman and myself, will put you through now the presentation. Please take care about the disclaimer that we have on Page #2. Let's go to Slide #3. On this slide, you see that in quarter 2, the sales of Rheinmetall is going up to EUR 3.28 billion. This is a plus of nearly 70%. So in the first half year, the growth is around 40%, which is exactly in line to that what we guided. The operational result was plus 115% to EUR 562 million is also in line with us, and for what we see very positive. Operating margin with 7.1% is on a very good level, and we are very happy that the applications with more than 160,000 is still very high. So as you know, we, at the moment, hire about 10,000 people per year, so we can pick up a lot of good people out of this 160,000 applications. What is the reason that the operational free cash flow was minus EUR 1.31 billion is in that figure? So we have in between in quarter 2 supplies of about EUR 6.2 billion. And we need this goods in our stocks. And otherwise, it's impossible to grow. And we wait, and this is only to compensate if we get some down payments, and we wait for some down payments, especially from the big contracts. There is a down payment that will come from Romania, but especially also the down payment that we get from Germany. If we book the Aminus contract, which is the big elephant in the room. So the second point is, we reduced CapEx at the moment and not because we reduced the factories, and you will see that later. We found a way to fit to find synergies and to reduce costs, which is, for us, a very positive signal. So the capacities of our production lines are absolutely in line with what we planned. But on the CapEx side, we can reduce the costs. Rheinmetall nominations with a plus of 476% is, for us, very good with EUR 1.371 billion. And so the Rheinmetall backlog is growing up to EUR 80.4 billion. If you have now a look to Page #4, you see what I said before, the execution is very, very well managed. Same what we told you in quarter 1 is that we had a growth rate on revenues between the first half year EUR 25 million to the second, to the half year in first half year in of 39% from EUR 3.7 billion to EUR 5.5 billion. So the first half year growth rate is so in line with the full year guidance. The margin increase is especially because we have favorable product mix. And we have an operating leverage for sure because of this growth rate -- and the total operating performance is like last year was about 40%, and this supports exactly and is in line with our guidance for the full year. So on the next page, you see a little bit the story that we had on the H1 '26, and we expected as you know, that we can book this contract. But at the end of the day, the minister made another decision. And for us, it was really astonishing, and the reason is also very clear because -- the story is that the government came to us and said, okay, make a technical due diligence. We made this technical due diligence with about 70 people from our Naval Group -- after this technical due diligence, we told that everything is possible. We can make it happen. We made final negotiations with Bing about the contract -- and even was astonished when the program was stopped because we also had the forecasted approval for the F1 26. So the money was there on eighth of July. And then we got the information on the 24th of June that the minister will stop it. What are the reasons? The reasons and I think 1 of the main reasons is, for sure, the litigation issues that the Ministry of Defense had with Diamond but the calculation they had is that the Mike program is faster and to be faster, to have, as you said, still in water on 1 side and to be able to reduce a little bit the cost even if this is a total different ship program and especially the litigation issues are the points that he stopped it. What is the business impact? For sure, we have an impact on the workforce. So we have to load our shipyards now with other programs, we are on a good way. And I come later about our new frigate program and the impact of the revenue and that is the reason that we reduced also the revenue. We cannot overcompensate in so short time EUR 300 million. So that was the reason that we reduced the expectation of about EUR 300 million on the sales side. The long term -- on the long-term side, we really hope that we can compensate these programs with national and international programs and hear how different programs from the German side, we look that we get some mine sweepers, but also some drone ships. We call it -- which is possible over the next year, but also international programs where we offer our new frigate. And this is what you can see on the next slide on Slide #6. So the GMF 140 is designed and we started a year ago on that because it's impossible to design in 5 months a frigate. And it it is designed for operations in highly complex threat scenarios, and this frigate should combine air defense, ballistic metaldefense and anti-submarine -- and this is also very important for us. It is possible to integrate the ages combat systems and the combat management system 330, where we're in cooperation with Lockheed Martin in that program. So this frigate, as the name says, has a length of about 140 meters has a speed of 13 knots and the crew size of around 90 people from the Marine side. And we think it's a good standard for the international business, and we will see the decision of different customers. We are in negotiations with different customers. At the moment, there is nothing official. Therefore, I cannot speak about the nations by themselves. But I believe that this is 1 of the future drivers of the business, of the naval system. By the way, the midterm and also long-term strategy of Naval did not change. So it was -- it is absolutely the right decision to go into the naval business over a period of up to 2030, we believe still that the naval business can grow up to EUR 5 billion. If you have a look now to the next slide, Slide #7. Here, you see the unmanned systems and air defense is that was a focus on Eurosatory and on ELA. And here, you see the innovation and the -- how we structure the company. So if you start with Comodo, which is an unmanned breaching system fully automized, we see a huge potential for that area in different areas. If you only see in the Ukraine, the big need yes, it will be a huge business over the next years. SkyRanger on the HX truck is another opportunity, relatively cost-effective opportunity for our SkyRanger technology and -- but also containerized missile launches where we implemented the F1 our new drones, which we started now also on the international marketing and sales campaign because the production line, and you see that also later will be ready end of this year or in end of Q3 this year here in Dusseldorf or noise. The same is on the SAR satellites. We are now starting the production processes for there. We built it up a capacity of 1 source satellite per week. And very similar is Rotablock 2 and the Grille in cooperation with Destinos, and we are on the way also to start the production end of this year. So it is planned that we really can make the first sales at end of this year with that product. The AT1 motor, the AMOS integrated motor and new technology, the unmanned surface vessel the 8.8 meter vessel. And as you know, we are in development also for larger vessels, but autonomous vessels and the got bad. So this is a part of our product portfolio. of our innovative portfolio, how to enlarge the product portfolio, and we do it relatively riskless because most of that things we do with technology, this is available or with technologies with our partners that we implement into the Rheinmetall product portfolio. If we have now looked to Page 8, you see that the market and the market mechanisms here are valid and are in line. Europe is on track for higher spendings. And you see the tendencies from -- great BitoBritain with 2.56%; Germany, EUR 2.6 billion of the GDP Poland with 4.6%, et cetera, et cetera. You see there is a growth rate in -- but on the right side, you see the total spending. And as you know, over the next years, there is immense growth and they want to grow up to this EUR 3.5 billion I believe that Germany is able to come near to the 3.5%. It will be between 3% and 3.5%, which is a huge amount of money, but a lot of other countries will go also that way, not every country will reach it because of the budget problems, but there is a strong growth rate inside. And if you have now a look to the contracts, and these are the -- only the numbers of the EUR 25 million proposals in Germany, as you know, this is -- if you have a contract of more than EUR 25 million, you have to go to the German Bund stock. And that proposals are growing from 22 where we have 24 proposals to 25 million with EUR 103 million, and it will be even more in '26 because up to July, we still have 25 million proposals to the German Bundestag. So this is also a point that you see that you grow. And in a lot of that contract, over the years, as you know, Rheinmetall has a big part or it's the main company who takes care about this contract. Next page is Page #9. On Page #9, you see the Rheinmetall product portfolio tailored to the Nato apabilities. What is the reason that we show that because we -- what we do is 2 times a year, every 6 months to have a look what is really what NATO is looking for. And so these are the clusters where they have. From deep precision to digital transformation is a lot of different areas where Rimeto is in. And the only missing point that you see is that we are not in the raw materials. But the rest, if it is space technology, ammunition, strike capability, et cetera, et cetera, -- we build up a product portfolio or we have a strong product portfolio in this area. And this is that, and that's very important. And we hear to the customers -- and it's better to hear to the customers and to make him happy then to anyone else, and Rimetal is continuously monitoring what their nature requirements are. And it's not only what we need at the moment in Ukraine or what the Ukrainians need. It's what the nature really needs and what the nature says for a conflict, what is -- what they need, which kind of products they need. This is -- these are multinational procurements. And that is the reason that we make also international corporations that we -- and we must be fast in that area, and our target is usually that we should be able in 1 or latest in 1.5 years to bring new products to the NATO capabilities and the nature gaps. So now have a look to the next page, it's Page #10. And in that, we gave you an overview about the joint ventures, the M&A activities and partnerships and MOUs that we are doing. And here, you see Rheinmetall in comparison to different peers. We picked out 5 peers. And a lot of them are doing partnerships. And I think -- and that's a good signal for us. Rheinmetall is strong and is #1 also on the M&A side, but especially on the joint ventures. And we believe in joint ventures because a lot in joint of these joint ventures. It's very strategic for us, is that we had this joined a lot of that joint venture also with governmental agencies or with companies where the government says, okay, let's do it together. So this gives us a very high customer retention without additional operational complexity. And we believe that this is 1 of the key issues that we are able to grow also as fast together for sure with M&A and our investments that we are doing. And as I said before, investments are absolutely not reduced, but only the fund of the synergy effect. So so for the introduction, and now I take over to Klaus, and he takes care about the financials.

Thank you, Amit. As Oli stated, we to report a very strong result for Q2 and also we did deliver on our promise that we made after our Q1 conference call. We saw an outstanding Q2 growth with 69% to EUR 3.3 billion. And all the segments, and I will go into more detail later, all segments contributed to this very strong growth. Organic growth was above 50% and also important for 2026 numbers, there were no major pull-forward effects from Q3. We -- the Naval system accounts for the bulk of our M&A number and there were limited impacts from FX both on sales and on operating results. Operating results grew even stronger than our sales by 115%. Our sales growth -- our result growth benefited from the higher volumes and also could leverage on this additional scale. Moving on to next page. Now let's have a quick look at all the different segments. Vehicle Systems showed the strongest absolute growth as more programs are now in the execution phase. Sales increased by 53% to nearly EUR 1.5 billion supported by strong truck deliveries to Germany as we had indicated during our Q1 call. The operating margin improved to 12.5% year-over-year due to a more favorable product mix and higher sales volumes. Sales in our Weapons and ammunition segment grew by nearly 60%. Main drivers were deliveries for artillery and medium-caliber ammunition. The sales catch up in our Murcia plant at is ongoing and will continue to contribute to stronger growth in 2026. Operating margin increased significantly year-over-year to almost 26%, benefiting from the increased volumes. Sales in Digital Systems increased by 30% to EUR 470 million, largely attributable to the Tavan program for the German Army and the further production ramp-up and our F-35 production site near Disadorf. Operating result profited from a favorable leverage effect it increased by 80%, pushing margin to 9.6%, an increase of 2.7 percentage points. Air Defense showed the highest percent growth of all segments. The sales grew by almost 80% to EUR 285 million due to strong execution on air defense programs. Operating result increased by 140%, supported by strong leverage effect of around 22%. Margins increased as a result by 4 percentage points to 16.3%. The -- our new Neighbor Systems segment contributed sales at around EUR 260 million. Main drivers were the contracts with Germany on fleet service boat and the naval fuel supply vessel as well as repair and service business. Operating results reached EUR 25 million, which resulted in a margin of 9.7%. On the consolidation line, Sales consolidation increased by to EUR 325 million as a result of stronger intersegmental sales and the result impact was slightly lower than in 2025 at EUR 32 million. Let's turn to Page #14. Our second quarter saw a very strong book-to-bill ratio above 3 with a very high share of term orders. Rheinmetall of EUR 11.4 billion, plus compared to 2025 of almost 500%. The high majority of the nominations firm are orders at a level of almost EUR 11 billion. Main orders were the Romanian package of around EUR 6 billion, the low-tenammunition contract for the German Army and the training program for the U.K. As a result, backlog increased to EUR 80 billion. This is an increase of around 44% and with 70% of fixed orders making contributing to the total of Rheinmetall backlog. The 70% fixed order share is an increase from 58% at the end of Q2 in 2025. Now let's move to Page #15 for a detailed look on our order backlog. Over the last years, our order backlog grew at an average rate of 45%. From 2022, we grew the backlog from EUR 18.4 billion to now over EUR 80 billion at the end of June 2026. This year is also basically the quality of the order backlog increase, and we have a very strong visibility on our sales growth in the coming years as you can see on the top right corner of the slide. For the next 2.5 years, we have already fixed the order backlog that covers the next 2.5 years old is 90% fixed, only 10% of the orders that we anticipate to turn into sales are from frame backlogs. Beyond 2028, we already have strong visibility with an order backlog of EUR 47 billion. Let's turn to Page #16. As indicated, we had a negative operational free cash flow of around EUR 1.3 billion after a negative cash flow in the first quarter that gets us in total for the first half of the year to EUR 1.6 billion. The main driver is an increase of inventory that we are doing to secure supply readiness for the second half of 2026 in the coming years 2027. The buildup is mainly driven by the vehicle systems. As I mentioned, the Myo programs are going into the execution phase and digital systems that we see stronger growth in the years to come. One impact that also basically burden the operational free cash flow is the continuously high level of CapEx that is, in absolute terms, higher even than in 2025. Let's move now to Page #17, for a more detailed look at our CapEx spending and exectations for 2026. During our Capital Market Day at the end of 2025, we indicated that we anticipated and CapEx number of around 16% for 2026 -- and the main driver for this high number were energetics plants that we anticipated to start constructing Several of these contracts, as you may have read in the news have now been rescheduled and will only stop serious construction in 2027 and that significantly reduces our CapEx number for 2026. At the same time, this reschedule does not have an impact on our 2030 sales guidance. And also, we do not expect any impact for 2027 and 2028 because these are long-term construction contracts. There were some other project-related adjustments also as a result of somewhat delayed order intake as discussed earlier, that also has pushed some investment into 2027. And also, we are able to reduce the budget on existing and executed programs that from -- as of today, we anticipate a CapEx percentage of around 8% to 9% for '26. Now let's move to Page #18. We successfully returned to the bond market of more than 10 years of absence with a plain bond issuance in the second quarter. The bond maturing in 2031 offers us financial flexibility for further growth. It opens up a new way of financing our business activities and acquisitions. The equity ratio came down to 28% as a result of the acquisition of the Naval business, but also the expansion of the balance sheet due to the increased buildup of as discussed. Our net financial position is now at minus EUR 2.7 billion, mainly driven by the EUR 1 billion syndicated loan that we took out to finance the acquisition of the Naval business. As an update on our convertible bond, all bonds from the Series A and B are now fully converted that basically increases the number of shares in our business. With this, I would like to hand over Back to Armin.

Thank you, Klaus. So on the next page, in Page 20, you see, first of all, the backlog that we have or the orders that we brought in. So in H1, 26, we are on a level, as I said before, of more than EUR 80 billion. At the moment, the backlog is on about 60% Germany and 40% on the international program. So it changed a little bit because before we had usually 60% or more international programs and the rest was Germany. So Germany is more now in the focus. Now I think a very important information is the information from yesterday also what we see or what we got also from the customer side on Boxer, the minis program. So now yesterday, also from customer side that the final discussion should be end in the second week of September for the Amines program. The Deutsche Bundestag should make a decision in the beginning of December. So the meeting is on the ninth of December. Then over the next 5 maximum 10 days, the contract should be signed -- and like last year, on the Shakal program, the discussion at the moment is that end of the year, there should be also a down payment. So what is in now for Rimeto. There are 2 contracts which are fixed. There is a fixed contract about the vehicles, and this is what we spoke about this EUR 12.4 billion for vehicles and another contract, which I believe could be signed then in January, February is a service contract, which is a total contract of EUR 4 billion. where Ramita gets 50%, so EUR 2 billion. So again, end of the year should be signed at EUR 12.4 billion fixed contract and should be final negotiated a service contract. We expect, if everything runs well, end of December, last year, we got the money on the 30th of December. We negotiated 30% down payment. So that would be more than EUR 3 billion down payment that we could get end of the year or, let me say, in January, maybe also, but this is something in weeks, but this is at the moment what the government told us. There are 2 options. And this is what we also offered and also negotiated. The option #1 is another EUR 14 billion contract -- and on option #2. And this option #1 is then the -- for the next piece from 2030 to 2035 and an option #2 of EUR 12 billion which is -- which are additional vehicles. So this is the offer that we have. At the moment, everything seems in line. We are very careful of the H1 '26, what really can happen, but we are in line that -- and there is no signal at the moment that they want to cancel a program because they need it. And there is no other opportunity that the EUR 12.4 billion fixed contract plus the service contract should be final negotiated end of the year, yes. It's a strong race to do it end of the year, but at the end of the day, the most important thing is that the contract will come. So after having that information, there are more trucks, ammunitions, but also missiles that we negotiate so that the piece from the German side is a big one, but there are also international as you know, the Italian programs where we expect the next lots -- there is a Portugal Boxer program, which is inside the SAFE program from Austria, Caracal, et cetera, et cetera. So these are the international programs. So -- and if you see what we see, so we expect this EUR 135 million, we reduced that with these F126 contract. So that if you calculate it at the end of the day between EUR 100 million and EUR 120 million in this area, should be the backlog that we have end of 2026. And for sure, it depends if we can book in December or if something happens in January, but at the end of the day, -- at the moment everything looks like we want to do it in December. If you have a look now to next page, the Page 21, you see -- and this is only a small part of that, what we are doing, the key capacity expansions, that we have. And where is the status so that we are on track with our expansion. So you see that the only yellow-painted is the Ukrainian auxiliary plant. And the reason for that is that the civils are not ready. There is a special equipment on the servers, and it's a strong delay of 2 years in that area. Lithuania is online. We are in time there. And the start should be in Q2 '27. The capacity that we have on this auxiliary plant is up to 100,000 per year. Then we have the Medium Caliber plant in at. Here is Surgery, there is a failure. It's Albacete in where we produce upper medium caliber plant. And this medium caliber plant is able to produce more than 1 million. So we are in line, and we will, in the middle of 2027, we will have the grand opening there in Spain. On the explosive side, we have an Audi plant in Vaca Lota, which should be ready also next year. Blending facilities in Switzerland. This is for powders. -- especially also for the single-based powders. And as you know, we -- together with the Premier of Bavaria on the powder plant in Asia, we made the groundbreaking ceremony where we are able to produce starting then in Q3 27. So in 1 year's time, up to 4,500 tons of triple-based powder. Then we have a rocket plant in Burgos. -- that's right and the rocket motor plant in Uno the rocket motor plant in doluswill be also ready in Q1 next year. So everything is in line. The only thing that we missed at the moment is the Ukrainian side -- but this doesn't hurt us a lot because what we see is that the plant capacities that we have in that factory is, usually, we can minimum reach 10% more capacity that we planned if the system is really running. Then we have much more. So on AirDefense, the sky range target assembly noise and also the drone production that we do in noise, all of them will -- are in green lights. We will start also middle of next year the target production and end of this year, the production of drones in noise. And on the vehicle side, also noise is that the truck cabin assembly will be ready in Q2 27, where we are able to produce more than 1,200 protected cabins for our protected trucks. By the way, the capacity of the air defense tariff is about 100 targets per year. also in North, which is a huge piece then also on our sales. Now let's have a look to Page 22. A -- and this is only an overview about that with -- on the activities on the United States. I must say we invest at the moment to the United States. This investment cost us at the moment, double-digit millions also this year, but we have to invest it for qualification for new R&D programs where we make -- we have to make an americanization and we need the money also for market development. This is an impact that we have on vehicle systems, but you really don't feel it because the margins are good. But at the end of the day, if the U.S. margins are really growing up then to the level where we are. This is a trigger point for us that vehicle systems can be -- can grow up to our expected 15% EBIT loss. But the programs are very interesting. On the vehicle side, you know the XM 330 program. I think we are -- and last week, we had the program meeting about that. We are on a very good way. The customer is happy with us. The technology is superb that they have -- we know at the end of the day, it's a political decision. CTT is becoming smaller because I think of budget issues also, but X30 has still very high priority on the Army. And a new high priority is also the RCH155,so the new artillery program in the United States. -- we go into competition there. And also on the unmanned ground vehicles, we go into competition. These are highly automized vehicles. And the U.S. is also very happy with the technology that they see because the automization kits, the kit A is from Ramat. It's a Rymal algorithm it's hematic that is inside and the U.S. is very happy about that. If you have a look to weapons and ammunition, there are ammunition programs like the 25-millimeter FAP program. This is for the airport -- this is frangible, 25-millimeter frangible ammunition. So in ammunition, which is if you have an impact that you have a lot of splinters and you destroy the , for example, the whole wing of an airplane. -- but also the CTF 30-millimeter for the Navy, this is the airburst munition that we also have in our air defense systems. This is for the Mark EUR40 million where the Americans support to import to implement the 30 millimeter. The U.S. programs are huge programs, and these are always billions of dollars that they spend. The precision Grande system is a new system that we developed and the U.S. is very interested to use that against the anti-drone fight, especially that the soldiers has a possibility to protect himself against drones -- this is also an Airbus ammunition very similar to the KTF, but on a 40-millimeter caliber. And if that is implemented in the -- on the U.S. side, we believe there is a huge opportunity also in Europe to implement it because at the moment, most of the soldiers are not protected against this category 1 drones. And we gave an offer to the Radford Army ammunition plant -- this is especially for the powder production, and this is what we do in cooperation with Honeywell because you need also a second U.S. source to go forward. If you have now a look to Page 23, and we see that the -- as we said before, the delivery is in line. We have a plus of 40%. But in total, we have, again, this second half year, which is back-end loaded. This is year-by-year the same and Q4 is always what we have to produce for sure, everything nearly everything but in Q4, it comes into the sale, and this is especially because of the contracts that we have on 1 side and that the customers also want to get the deliveries mostly than end of the year. So we are in line with the expectations that we had with our plan. And on the next page, on Page 24, you see that we -- but this is what we told you also in our ad hoc message that we took out EUR 300 million from the naval side because we are not able to overcompensate that. so that the sales is now between EUR 13.7 billion and EUR 14.2 billion. The operating margin of around 19% and could be a little bit better because we reduced EUR 300 million from the lowest profitable business. And the operational free cash flow is a very digital decision. If we get the down payment. And as I said before, it's more than EUR 3 billion down payment of minus it could be higher. If we don't get the down payment, it could be also lower, but we stay on that area of about 40% because at the end of the day, and we really believe that we are very near to get this minus contract, maybe then we would have a delay of 1 month or maximum 2. So, so far, the presentation and now we are very happy to go into Q&A. Thank you very much for your time.

[Operator Instructions] Our first question comes from Alessandro Pozzi from Mediobanca.

First of all, I think it's good to see that we're seeing again a strong growth -- but the first question is on the 126. If we can go back to -- if you can give us your view on exactly what happened because there was clearly a disconnect between the ministry and the procurement agency. And I think this is a key point in the context of big programs that are coming up, being the minus of the 17 million -- and I think on our menus, that has been talked about extensively even in the rancor as well. But can you give us your view of what you think you can book in terms of value by year-end? Is it just the fixed? Or is it a frame contract as well? And maybe an idea of margins for the service contract as well.

Okay. Yes, Alessandro. I will do that. So on the 126, for me, the biggest issue was the liabilities, and it's a big difference between the 126 and the and their mines program. The aminos program was not a program that was fixed with another company. As you know, the 126 is was a diamond program, we wanted to rescue the program, and we gave the opportunity to rescue the program. But the final negotiation between the Ministry of Defense and Diamond, yes, was not ready. And the point was that Diamond is looking for sure that the German government is taking out the liabilities because, as you know, they nearly spend it EUR 3 billion about that. And the government has to take care about that. And this was nearly impossible for the minister to do that. So -- and the second point is, as you know, there was a proposal for the Mako. There is no proposal. There is no other vehicle at the moment than the boxer. So you cannot compare both cases. But the most important thing for me for the 126 is very clear that the minister has to protect the government and has to protect also the money the government spend it, and they could not release the diamond to say, okay, there are no longer reliabilities. And at the end of the day, maybe it's not my job to do this, but maybe at the end of the day, there will be a court case also and they could not reduce that. So this was the biggest problem. Money was not an issue because money was prepared. And as I told you also, and for me, I was convinced 2 weeks before of the decision, I had all the traffic lights on green from Ministry of Defense from everyone was screen. But at the end of the day, the minister, together with the Chief of the Navy has to make a decision and said, okay, I must be politically correct and go the politics correct way. It was not a money issue.

Okay. Understood. And on the minus, you mentioned a couple of options. Can you take us through the numbers again and whether you think Alcan be awarded?

Sure. So we offer -- we offer a frame contract for option 1 and Option 2 of about EUR 26 billion. This is what we offered and a fixed contract of EUR 12.4 billion for vehicle. And these are only the numbers for Rimeto. This is what we offered and the fixed contract of EUR 12.4 billion for me is, at the end of the day, a must. And the frame contract is an option 1 and option 2, that we offered. I don't know if we get everything it's not a big risk for them if they also take the options. But the EUR 12.4 billion at the end of the day, is up to 29%. So then there are all the productions that we have to do is up to 29%. What we want is to have also minimum Option 1 because of the investments that we have to do and then we would be safe up to EUR 35 million. Yes. But what I can say today is that I believe that the EUR 12.4 billion plus the service contract because without the service contract, it will not work, and this is EUR 2 billion for Rimeto. So at least, I believe, 14.5, EUR 14.4 million, EUR 14.5 billion. It's a must, and the rest are the options. And -- it would be unfair if I say it's 100% safe or it will not happen. This is a point which is not finally negotiated with the Ministry of Defense.

Okay. Understood. And when you look at the backlog, the -- and you mentioned the box, you have the full value of the box there, I guess, with the frame as well. And I guess a follow-on.

On the backlog, it's easy if you count the Boxer and the red, and that is the reason that we said it's more than EUR 100 billion. It's between EUR 100 million and EUR 120 million billion. So if everything is going well, we are on this level of 100 to 120 or a little bit more, yes. And if you only have a case of that, it's more than 100. So this is the point.

Okay. That's very clear. And just on the -- just a final 1 on the CapEx. There is a reduction in CapEx in 2026, partly because of some delays in the Energetics facilities in the buildup. Can you assure about the medium-term targets in weapons and munitions despite the lower CapEx in 2026.

Absolutely. The point is very clear. The investment on the energetics side that we do is at the moment on a nitrocellulose, it's in line. We expected that we have a strong cash out also this year for Romania, for example, for the energetic factory there. This will not happen, number one. Number two, we get also from the Romanian side, a down payment on that area. So this is also helping us to reduce on the cash side. And on the CapEx side, we have a lot of synergies that we found. So we can -- if we produce 3 factories, the factory #3 is at the end of the day, also cheaper than #1. And I believe, and this is a point, and you see this also in the planning that we will show you end of the year. that the whole CapEx situation for us is much better than expected in between, but it does not reduce our capacities. So on the capacity side, it's at the moment that we really bring 10% to 15% more out on the big factories. So sometimes in different areas, we must not invest such a lot of money in the smaller factories to -- and that's the reason that we can reduce also the CapEx side.

The next question comes from Sebastian Growe from BNP Paribas.

It's 1 on well and the other 1 on partnerships broadly. On the 1 Systems side, you've reiterated the 2030 sales goal of up to EUR 5 billion. I was wondering whether you could talk us or talk about the margin ambition really of the business and whether this has changed following the reduced margin target for '26 or -- this is only a function of a lack of fixed cost absorption in this particular year. So more broadly speaking, do you see that the overall kind of discussions that you're having with customers for Naval Systems contracts would still allow you to get to the 15% level that you have put out before? And the second question on the partnership side, you labeled the team and partner in your approach to then also satisfy customer requests and also for filabilities. There have been some media reports that the drone partnership with the U.S. partner scale back. So my question there is, can you comment on the root cause? And more broadly speaking, -- are you seeing the risk that there might be more such cases, especially with probably more or less mature companies, I may say so?

So let's go to the naval side. Our margin target is very clear. It's still around EUR 5 billion and around 15% profitability. And for sure, you need the shipbuilding programs. This is 1 thing. And we lost now on, but we will win other programs. I'm sure about that. because I think we have a very good product portfolio. As you see, we have mine sweepers, we have these drone carriers, et cetera, et cetera, and the national and the international need is there. And I also trust that our team is -- will be successful on the new frigate program because the feedback that we got, and we spoke for sure with different customers before we started the development was a very positive thing. This frigate will be in a price level, which is much better or lower price than most of the people expect, but you still can have merchants and we brought in also in this area and will bring in production technologies that Rametal is doing in other areas. So automization of welding, et cetera, et cetera. So yes, we stay on that, that this must be our target, and this is the target that the management team also got. The partnerships, most of the partnerships are running very well. But what we do not -- we will not do that. We said we have in our plan sales fixed with different partners where the products are not ready. And you spoke for example, now about the partnership that we have with Andre, we stay on that point. But at the moment, we have no products that we can sell, which are ready. And if we have ready product and we said we started with Barracuda in this area, -- but the Barracuda, I need parachutes for qualifications than here in Germany. And if they would be ready, we could help there, but they were not. So -- then we stepped into other partnerships also, and this is the reason that we stepped into the also destinos because Destiny is ready. Thousands of that cruise missiles are fired in Ukraine. And we want to get the first contract end of this year also with this cruise missile. So can I say that 100% every partnership is able to be successful? No, it's impossible. But at the end of the day, if you don't be -- you must be agile. And if you don't be agile, you cannot be forced and you see how fast the Ukrainians are in different areas, yes, -- and we cannot go into development programs where we need 5, 6, 7 years. And then maybe we have a product. We need the product in less than 12 months. And this is exactly what we do now. For the cruise missiles, we build up the factory and the factory will be ready next year. And end of the year, as I said, the first cabins are ready to produce MSRs.

Next question comes from Rory Smith from OCP Analytics.

First is just on CapEx. You've already talked a lot about this. So thank you for bearing with me, but I just wasn't clear on what you said the outlook was for CapEx as a percentage of sales going into '27 and 2028? And then how we should think about that beyond the next 2 years just on this kind of phasing there of the energetics. That's my first question.

Yes. Thank you for the question. We will provide a more detailed update on the CapEx expectations during the Capital Market Day. But from what we see today, we see potential that basically the level will be lower than we indicated at the end of last year also for '27 and '28.

Okay. And then my second question is more of a big picture question. I guess we heard the Chief Executive of ranked this morning saying that he was very sure that 99% of German defense suppliers land business would still involves crude vehicles by 2030 and that drones and life munitions would not make heavy armor obsolete.

Now I was just wondering what your sort of thoughts on that were and how that flows into some of these partnership and capital allocation decisions that you're making in land I try to bring that information also with my presentation what we look what nature was -- and I have not to look what some guys and professors or whatever are telling us. So every 6 months, we check what the nature is doing. And NATO is telling us or is telling the different countries, what they have to buy or that they should buy. I believe that drones are important. And you see that in Ukraine also that drones are important. But if you have a look to the chief of the German Army and the former Deputy Chief of the German Army and if you see what they say is drone is 1 effector. We need a mixture of effectors and drones are able to fight against vehicles or against personnel, as you have seen yesterday, also in the videos from where the Russians are hunting people in cities. But at the end of the day, the protection against drones will also go forward. And you need vehicles -- you need also a lot of vehicles, not as much as expected 10 years ago. But you need steel vehicles to have a safe transport also for people. And the next 20, 30 years, there will be no robotic war by themselves. There always will be people in the battlefield. If you see what happens in Russia or wherever, A lot of these drones are still at the moment, 1 in 1 guided with drone bilatpilots. It's -- this is a point where you need -- where you need people, you need you need people, inventory people going to the front line and especially if you not have a stacked war, a store which you have at the moment between Russia and Ukraine, which is, as I always said, it's a more like in the First World War. You have a dead zone there. And then when you go into deadst100 meters in front or 100 meters back, this is not a war that that nature is doing. NATO has Air Forces. NATO has perfect air defense part has a lot of firepower to bring in to have a mobile war and not a static award. And this is the big difference that you see. So I see and the point is from me very clear that we need a mixture. And in that mixture, there are also protected vehicles.

The next question comes from Christoph Laskin from Deutsche Bank.

First, just coming back to minus and your statements on Option 1 and 2. What do you think are the main decisions the is that the the MOD is taking there? And what would be the risk to sign both options basically this year or early next? Could you elaborate on that, what the discussions look like? And what do you think the -- again, the MDs focused on in evaluating taking both options? And then -- the second 1 -- sorry, just a clarification question. I think you stated that despite the CapEx shifts or cuts 27 and 28 revenues will not be impacted. Could you just elaborate again on why there is no impact on revenues despite the shift -- and then the last question, sorry, very short term. You indicated that there's a con impact on Q3 earnings.

Yes.

We said, we probably cannot expect the usual step up Q3 over Q2 margins, but could margins still be flat to up in Q3 versus Q2 or no comment at this stage.

So the -- if you go to the investment side, I try to precise that again. So if you go to the factories that are ready now and that we are becoming ready also next year, like for example, the powder side. On the powder side, the raw materials are fine. So the nitrocellulose is coming also from our factory that we have in North Germany. And we have no gap there on that area. And the Asia plant is overcompensating a lot of other plants. If you see the Asia plant is growing up to 4,500 tonnes. Most of the other things, for example, even if Romania will be delayed of half a year, for example, we can compensate it because the Romanian capacity is much, much lower. We speak then about 1,000 tonnes in that area. So that is the reason that our plan and also a huge amount of money that we invested in Asia, where we grow to the modular charges that you need on the ancillary business, where we have then enough capacity from South Africa, from Spain and also from Asia where we are ready. So the second point is, and this is the second biggest source is the investment that we made in Spain. Spain is also ready next year on the power side. And the third biggest investment was in South Africa. So these are the 3 big pillars. And the rest that we have is, if you see Romania, if you see Bulgaria, if you see Lithuania, -- the Lithuanian plant of about 1,000, we could overcompensate also with Ontolus if we really drive untoufull threat. This is -- that is the reason that we think that we are able to, and as I said, 10% or 15% plus in Intels or in Asia will nearly compensate a full factory -- is that clear?

And 1 additional comment, the construction programs that are being pushed, the big energetic plants would have had a construction time of around 2 years. until we really go into capacity. So simply for the -- because of the construction time, we never anticipated significant sales contributions in 2027 and 2028.

Look, everything what I say at the moment is, I believe that the government wants to sign also this frame contract, but it is not fixed. So therefore, whatever I say now in the point could be right or could be wrong. What I believe, which is very, very safe is that we get, as I said before, the EUR 12.4 billion, plus the EUR 4 billion, which is EUR 2 billion for Ramita, so the EUR 14.4 million, EUR 14.5 billion saved there is a need. And this is, for me, what is positive for me, and there is not a gap of money at the moment, which is also helpful -- so therefore, up to 2030, everything is financed, but up to 2035. For me, I cannot say yes or I cannot say no. And I have to wait what is coming out now in the negotiations and then you get the information. But I'm very careful about this area, and I tried to be conservative in this area because on the other side, I tried to be also always a positive in this area, but I'm very conservative, and we will see what's going on.

And on the Q3 margin question? Want to follow Q3 is in line.

So the margins are good. And as you know, end of the year, usually, the margins are higher than at the beginning of the year because the fixed costs are done -- so we are on a very good way to reach, let me say, at least the targets that is in your expectations.

The next question comes from Clay Lemarie from Jefferies.

Have 1 -- just to confirm on the EUR 100 billion backlog that you target by the end of the year. Would it be achievable without the frame contracts from Arminus, -- and then 1 on the U.S., when do you expect a decision on the RCH 15, please?