RENK Group AG

XETRA:R3NK

Earnings Call Analysis

Strong Q1 Performance Driven by Defense Sector Orders

In the first quarter of 2024, the company saw accelerated revenue growth, particularly in defense-related business, leading to a 22.5% overall revenue increase. Despite a slight decrease in fixed order backlog in Q1, a significant $100 million order was secured from the U.S. Army in April. Cost control and operational efficiency improvements at the Augsburg plant contributed to a 180 basis point expansion in adjusted EBIT margin. The company is guiding for a 16% to 18% adjusted EBIT margin for the full year. Adjusted net income rose by 25% year-over-year to €8.1 million, with net debt reduced to 2.3x. Further improvements are expected in Q2.

Strong Start to the Year

In the first quarter of 2024, the company delivered better-than-expected revenue growth, with year-over-year revenue increasing by 22.5%. This outperformance is attributed primarily to the robust demand in their defense-related businesses, which continue to flourish amid ongoing geopolitical tensions. Significantly, the aftermarket segment also contributed positively, indicating strong operational performance across various business divisions.

Operational Excellence and Margin Expansion

The adjusted EBIT margin is guiding for 16% to 18% for the full year, showing an expected improvement of 80 basis points year-over-year. The first quarter saw an impressive margin expansion of 180 basis points, largely driven by higher gross margins, operating leverage, and a favorable mix of revenue sources. The management remains committed to maintaining quality margins, even as they pursue capital-efficient growth strategies.

Order Backlog Confidence

The total order backlog remained robust at EUR 4.6 billion, maintaining high levels and reflecting strong client relationships and long-term contracts. The frame order backlog grew to EUR 0.7 billion, supporting future revenue expectations. Following the recent awarding of a significant $100 million contract from the U.S. Army, the company is optimistic about its order intake improving in subsequent quarters.

Supply Chain Resilience

The management reported significant improvements in their supply chain management, with reduced pressures that previously inhibited operational capacity. Over the previous months, supply chain issues have lessened, enabling better predictability in operations. This has positively impacted cash flow, with net working capital decreasing as a percentage of sales despite strong revenue growth.

Geopolitical Tailwinds and Future Outlook

With the ongoing conflicts and military escalations globally, particularly in Europe and Asia, the demand for defense-related products is expected to remain strong. The company anticipates that these geopolitical dynamics will bolster their business growth over the foreseeable future. Furthermore, the leadership has expressed confidence in achieving greater order intake in the upcoming quarters, particularly as discussions concerning defense contracts gain momentum in Germany, Italy, and Poland.

Positive Momentum and Strategic Actions

As the company moves into the second quarter, they remain focused on enhancing output and capturing growth opportunities efficiently. The management's strategic initiatives, particularly operational improvements at their Augsburg facility, position them to leverage current market opportunities effectively. Stakeholders can look forward to upcoming financial updates, where the management plans to provide refined guidance based on Q2 performance. This proactive approach reflects a commitment not only to enhancing operational metrics but also to delivering shareholder value.

Earnings Call Transcript 2024-Q1

[Ingo Schachel, executive]

Hello. Our Q1 investor analyst call is hosted by our CEO, Susanne Wiegand; and CFO, Christian Schulz; Dr. Alexander Sagel, who has joined the Board of Management on the 1st of April is on the call as well.

And before Susanne begins the quarterly results presentation, I will briefly hand it over to Alexander to introduce himself.

[Alexander Sagel, executive]

Thank you, Ingo. Many thanks for the introduction. The analysts, the investors, I'm very happy to be on this call and to introduce myself. Alexander Sagel, 53 years old, I'm very glad to be here now finally, after almost 19 years with Rheinmetall, to be part of RENK. As you might know, I joined RENK in April this year. And during the last 6 weeks, I had a very intensive but truly great phase-in into the RENK business and RENK Group, including various business and technology reviews as well as visits to our key plants in North America, but of course, also here in Germany.

Maybe as a kind of first summary, I have to say that I'm really impressed about, first, the dedication and truly the passion of our RENK employees, outstanding; second, also regarding the quality and technologies of our truly unique product portfolio. And this is valid for both for defense as well as for the civil market. I'm also happy to see that we still have sufficient improvement potential in the area of, for example, operational excellence, but to be fair from an already high level of performance today.

Having said that, I'm really looking forward to meet you in person on the next events. For example, in 5 weeks on the Eurosatory in Paris. Again, many thanks for this opportunity. And over to you, Susanne.

[Susanne Wiegand, executive]

Thanks, Alexander. Thanks, Ingo, dear investors, dear analysts. Happy to provide you with our key financial data in Q1. I will rather soon hand over after some introductory remarks to Christian, who will go with you into all the details.

On the slide of our snapshot, which you hopefully all see and have in front of you, you can see concise summary of a few key financial metrics and revenue splits by the end of last year. Most of you will recall that we had 70% of the revenues generated with defense-related applications. And our aftermarket share has increased to 36% last year. You recall in '22, we came from 31%. So very good improvement here on the aftermarket side.

The defense-related part of our business activities has continued to be a key source of growth in the first quarter with a market presence of 75% in tracked vehicles, we are present in the majority of those tracked vehicles in the Western world and our EU and NATO partners and related third-party allies.

Our mission and purpose of powering freedom has become ever more important during these days. You recall, I think, and you also follow the daily press and the situation in Ukraine, but also in the Middle East and also in the Indo-Pacific, I would like to spend 2, 3 minutes on the update as we see that. Situation in Ukraine is critical. Ukraine has a bad year in front of them in 2024. Why is it? So I think the aid and the support the Western world has provided came too late and too little. However, we have seen a long-lasting debate in the U.S. And finally, U.S. has approved the aid package of USD 61 billion, which has allowed all of us to gain some time but will probably not put Ukraine into the position to really change the situation.

However, on the positive end, if you reflect that, the invasion of the Crimea dates back more than 10 years, then Russia has also not managed to take over Ukraine entirely within that 10 years, although they are military-wise, clearly in the better position. So this is maybe the little hope in the situation we will see. We will see a wall continuing definitely in this year and most likely also in the year of 2025.

What we will also have to note is that sanctions from the Western world are not really effective. This is one of the crucial reasons in our view that the Russian defense and military production is able to work on the level they are doing. They're producing about 200 vehicles per month, and they by far not produce everything for the war in Ukraine, but also build up stocks and inventory to prepare potentially for a second step, which should be a high alert for all of us.

And ultimately, to sum up on Ukraine, there is, I think, no doubt anymore that Europe has to increase its support for Ukraine, also in light of upcoming elections in the U.S. and in light of the difficulties we have seen to approve support for Ukraine in the U.S. administration. And in our view, Europe is able and should be able now to accelerate, to ramp up its military capabilities. We have about, if you put Europe and U.K. together, we have roughly 4x more people than Russia, and we have almost 10x more GDP, which we generate. So Europe should be in a position to sort out the European problem and to stop the Russian aggression now in Ukraine and not allow them to go any further.

With the view to the Middle East, I think what we see is a continuous highly intensive war in Gaza. We have seen first time a direct involvement of Iran and not just via proxies like Hezbollah, Hamas, the Houthis, but with a direct aggression towards Israel, which might be seen as a new level of escalation and quality of conflict. What we also see is obviously a lack of the strategy by the Israeli with respect to Gaza after war. So how to stabilize the area, how to, let's say, get that in a peaceful environment later under control.

We see that support of Israel is also under huge criticism and more and more in debate, and partly even shrinking, which is worrying to in our view. So important here is that Israel is coming up with the concept how to run and stabilize the Gaza area after this intensive war and fight on the other side, I think we should all not forget who has started this escalation and which was not Israel. And clearly also, we think that there is not enough focus on the fact that Hamas is misusing or using their own people as a shield of protection, and this is something which sometimes is lacking in the discussion about this awful war, which is continuing in the Middle East.

So we also unfortunately do not see, let's say, a relief of the tensions in that area, and the role Iran is playing also in conjunction with Russia and China shouldn't be underestimated also with respect to the nuclear capabilities, which are obviously far advanced.

Mentioning China. I think also release of tension in the area not visible. We do not have an escalated conflict with respect to Taiwan. Taiwan is ramping up also the companies -- sorry, the countries in the area, in the Asia Pacific are all, let's say, increasing defense budgets and ramping up their equipment. We see that in South Korea, we see that in the Philippines, we see that in Taiwan and India and Japan, just to name a few. And ultimately, I think China will closely watch what's going on in Middle East and Europe and most likely use windows of opportunity whenever they feel strong enough and prepared for potentially a sea blockage or a barrier to start the conflict.

We do not expect that as a first step, they would invade Taiwan, but probably a blockage of the straight of Taiwan to increase and show power off here. And what we see at the moment is clearly that the old world, which we are used to, is not coming back. We have conflicts of systems, autocratic and dictatorship against democracy, and this will accompany all of us definitely for the next 10, 15, 20 years. And last comment to that, the only way to avoid war is deterrence. So we all need to be prepared and ramped up in a way that aggressive like Putin clearly understand it's not worth to even think about to move into NATO territory and not even try that. So -- and this must be the aim and the acting from all political sides of the Western world.

Going to Q1. Thanks for listening to my speech here, but we thought it's relevant to put everything into perspective into what's going on in the market and geopolitically.

On Slide 6, let me begin with a summary of the key highlights Q1 2024. Our order pipeline remains strong, and our total order backlog remained at a high level. We won a large USD 100 million order from the U.S. Army shortly after the end of Q1. We booked the order in April into our books. So you will see this order intake when we discussed jointly Q2. But I think it's a good message here since order intake was not specifically high in Q1, but in the area of what we have expected.

Our fixed order intake, it came in below the revenues this time, but we anticipate that book-to-bill will improve going forward. And book-to-bill was not the strongest in Q1, but also thanks to a good increase on the top line and our capabilities to translate orders into revenue. So good news here as well. And we have won last year in Q1, 2 big U.S. contracts, which we couldn't directly repeat this Q1, but there's nothing to worry about and order intakes are anyhow quarter-over-quarter, a lumpy business. So we have multiple sizable order opportunities. Anyhow, we see in Germany, we see in Europe, we see in the global market in Asia Pacific and are very confident with the tailwinds we have on the market side.

M&I revenue and earnings growth was strong in Q1, showing a continuation of the positive trends seen in the second half of last year. Our order intake and the higher-margin Navy unit has improved and revenues are following suit. Overall, defense-related businesses in the M&I segment contributed more strongly to revenue growth than the civilian business this quarter. So the overall revenue growth of 22.5% was outperformed by the defense-related part, which grew more and also the aftermarket part. So all within the expectation and clearly matching what we see is going on in the marketplace.

VMS growth came in strong as well. This is, amongst others, a result of our operational improvement measures bearing fruit and the continued progress in ramping up output of the plant in Augsburg. Aftermarket revenues increased more strongly than new equipment revenues on the VMS side as well.

Gross margin improvement, also very good. Overall, our P&L is quite boring this quarter. I think, and we hope you like boring P&L as we love it, very stable cost items as a percentage of sales on most lines. Gross profit is the only notable change with the considerable improvement, very positive here to note, operating leverage, margin quality of our backlog and mix are driving the gross margin improvement.

With respect to cash flow during first quarter, cash flow was -- the positive highlight for us, really, we are a little bit proud of that, while industrial companies often print negative free cash flow during first quarter of the year, and we also see that in the entire Defense segment. Ours was marginally positive, thanks to reduction of our net working capital ratio, predominantly also improved by our ability to draw down payments from customers showing that we have strong business going on there.

With respect to the total order backlog on the next slide, we saw during 2023, continuous growth of our total order backlog from EUR 4.2 billion at the end of midyear of June last year. You recall that which grew to EUR 4.6 billion at the end of last year, 2023, in Q1 2024, our total order backlog remained at a high level, including a pleasing increase of our frame order backlog to EUR 0.7 billion, which is good news here as well because this is all backed by long-term customer relationship and contracts and linked to aftermarket share, which is enjoying attractive margins.

Our fixed order backlog remained largely stable at EUR 1.8 billion. We won. I already mentioned that the large U.S. contract at the end of April and see good short-term commercial opportunities in Germany and Europe. So that the fixed order backlog should be higher at the end of Q2, at least this is our expectation. I would like to hand over to Christian now to guide you through a more detailed look at our Q1 financials.

[Christian Schulz, executive]

Thank you very much, Susanne. And also a very warm welcome from my side.

Please move with me to Page #8 and talk about the group figures. As we've already said on our full year results call, our fixed order intake can be a bit lumpy. The fixed book-to-bill was below 1x in the first quarter. In the meantime, we have announced a large order wins worth $100 million in April. If we had won this a few days earlier, our Q1 book-to-bill would have amounted to 1.3x. It is what it is, but Q2, as Susanne has alluded to, kind of reflect this already and show a better development.

Revenue growth accelerated in first quarter, driven by strong growth in our defense-related business as demand remains strong and as we have improved our ability to execute. We are particularly pleased with the operational progress achieved at our main plant in Augsburg. You might recall that this was one of the main initiatives for the year and progress is indeed very good.

Also across our businesses, aftermarket activity continued to grow and supported our revenue growth more than proportionately. Our fixed order backlog decreased slightly during Q1, but the large order win in April as well as the higher soft order backlog make us very confident that the backlog will continue to grow over time for the foreseeable future.

Next page, please. For the full year, we are guiding for 16% to 18% adjusted EBIT margin, an improvement of 80 basis points year-over-year. At the midpoint, in Q1, we have started well. We delivered 180 basis point margin expansion. This was driven by higher gross margins and thanks to the operating leverage and good mix.

Our cash flow performance in the quarter was pleasing and allowed us to reduce net debt ratio down to 2.3x. Our adjusted net income in the quarter amounted to EUR 8.1 million. This was up 25% year-over-year. And keep in mind that this number still includes the EUR 10 million interest payments and prepayment fees triggered by the refinancing of the high-yield bond during the IPO process. That said, period-end cash flow is difficult to predict and can fluctuate from quarter-to-quarter. But as Susanne has said, we are quite pleased with our achievements here in Q1.

Slide #10, let's move on to a more detailed view of the individual segments, and let's start with the heavyweight VMS. The VMS segment experienced a substantial decrease in order intake. I think it's referred to last year's number included the 2 large orders we combined with an amount of EUR 270 million, while we don't have that in Q1. Again, we touched upon this, and Susanne did it as well.

In addition to the already announced USD 100 million U.S. contract, we see several tangible larger commercial opportunities that should support order intake in Q2 and ongoing. Overall, we are very confident that the year-over-year growth rate and book-to-bill should improve going forward. Revenue growth is particularly highlight for us. Execution was a challenge, remains to a certain extent for the entire defense industry, and it's been an area of strategic focus for us to our operations to improve our output levels and in particular, at our main plant in Augsburg.

In February and March, the measures were bearing full fruit, and we are very pleased with the output that we achieved during these months and aim for further improvement in the quarters to come. Adjusted EBIT on the VMS segment increased considerably, thanks to higher volume and despite higher R&D expenses because we also invest into the future of the company and, in particular, this core segment.

If you follow me to Page #11, let's talk about the M&I segment for M&I, order intake developed favorably with high book-to-bill and solid growth from already high level in the Q1 2023. Like we said for VMS on the last quarterly results call, order intake can be a bit lumpy. And for the M&I segment, we've seen that in the past. We wouldn't rule out that Q2 order intake is at a little bit lower level than Q1. But as Susanne has alluded to in her introduction, the sentiment in the Navy segment, in particular, in the light of the tensions in the Asia Pacific remains very supportive and strong for that segment.

The adjusted EBIT margin showed the continuation of the full turnaround here from minus 6% to plus 6%. Keep in mind, our Navy business is of higher margin quality than the segment average, so that the Navy growth is margin accretive for us. Q1 is our seasonally weakest quarter in this segment. In the following quarters, our margin and M&I should rather be higher than in the first quarter of 2024.

A strategic milestone in the segment has been achieved recently as well. At the end of April, we performed the groundbreaking ceremony for our new plant in India, underlining our commitment to this important market with significant growth for us.

Next page, slide bearing business continues to experience strong growth, with increases in order intake, revenue, adjusted EBIT compared to previous years. We are particularly pleased with that strong performance also in our aftersales activities in this segment and enjoy the benefits from electrification, driving higher demand for e-bearings and strong demands of marine bearings. Our adjusted EBIT margin continued to expand materially driven by a higher share in aftermarket.

Page #13. Adjustments in the first quarter, besides the PPA effects from acquisitions related to capital market readiness costs as we completed our listing in Frankfurt Stock Exchange as well as some consultancy costs relating to our operational excellence measures as well as costs relating to the refinancing of high-yield bonds. In particular, if you see #1 and 2 on this chart, this is rather a minor adjustment. So it's a clear adjusted EBIT number that we are reporting here.

Next page, net working capital. You know that this is in focus for this management team and the entire company. Net working capital reduction has progressed in the first quarter. We are pleased to have been able to work here. Thanks to the inflow from prepayments, as Susanne has alluded to, net working capital decreased as a percentage of sales and remained largely stable compared to the end of last year despite the strong volume growth, which obviously is a challenge in a really growing business to maintain the right level of the inventories in particular. They increased by only 5% compared to the end of December, less proportional than to the revenue growth. So we see that, obviously, progress is made in thinking in acting of our operations.

Compared to other industrial companies, we believe that net working capital reduction in the first quarter of this year is a good achievement. As mentioned on the full year call, we are in an environment of high growth. And in such an environment, project ramp-ups might require us to selectively build up project-specific inventories at certain points in time. Despite this, we clearly strive to reduce our net working capital as a percentage of sales at the end of the year, but on the way the quarter end net working capital can naturally be volatile.

Moving on to our cash flow statement. Our conversion of EBITDA into operating cash flow was strong. Thanks to small net working capital release of EUR 4 million, which is a good achievement in the light of the revenue growth exceeding 20%. As a reminder, our business model is asset lean and CapEx as a percentage of sales remained at a low level of approximately 3% in Q1 and thus accordance with our guidance on that KPI.

Despite this, free cash flow was only marginally positive in the quarter as we had to digest nonrecurring payments relating to our refinancing and repayment of the high-yield bonds, which are included in interest expense line in the table you see here. We repaid our high-yield bond in February, and this transaction triggered repayment-related nonrecurring payments of EUR 10.3 million to be specific interest payments for January, February, which would otherwise have been due in Q2 and a customary early redemption charge of an amount of EUR 7.5 million.

And I say this, in particular, to have you focusing on the operational cash flow, which indeed is performing. The tax payments in the previous year included aperiodic real estate tax payment of EUR 3 million. And with this exclusives, let me please hand back to Susanne, who will take you through the outlook before our Q&A.

[Susanne Wiegand, executive]

Thank you, Christian. So coming to Slide 17, guidance for this year. We confirmed our guidance. Our revenue growth based on the solid progress, which we have made in Q1, I should say that it's the basis for us to confirm guidance. And in the course of the year, when we have Q2, we will most likely then narrow the guidance down in the course of this year.

And just to comment a little bit on the figures we have received. Our revenue growth in Q1 was higher than the 13% growth implied by the midpoint of our fiscal year guidance. The margin expansion is higher than the 80 basis points margin expansion implied by the midpoint of our margin guidance, so outperforming here on both key financial metrics.

Overall, we are happy with the progress in Q1. Not happy we are really proud of what we have achieved. I would like to say that, and we believe the quarter marks a really good start into the year since, as Christian has alluded to, the first quarter is typically the weakest quarter of the year, and this gives us lots of encouragement going forward.

During Q2, we are continuing to work hard on improving output and profitable growth. As you know us already, this is besides the net working capital, one of our key and the most key priorities of the management is working hard and output, output and profitable growth. The operational progress in Augsburg will be a key swing factor for our margins, and we hope to be able to give you a more precise view on that in form of a narrowed group margin guidance with Q2 results, which we will report on the 13th of August.

Since we published our mid-term targets, we have seen very strong market dynamics, especially in the defense market, and some of you have asked how this impacts our targets. The mid-term growth target may appear a bit more conservative than it did a year ago. We are convinced it creates value for our shareholders if we capture extra growth opportunities that are there or at least if we pursue them in a capital-efficient way with a high ROCE.

We will not compromise on margin quality. But in our thinking, we will aim to create value for U.S. shareholders by growing EBIT and cash flow provided that we can do this in a capital-efficient way. The high-growth environment might allow us to grow more strongly on an absolute basis. Adjusted EBIT on an absolute basis and consequently adjusted net income on an absolute basis and dividends paid to U.S. shareholders are important metrics for all of us as well.

Let us flip to Slide 18 and discuss the priorities and key challenges for the months ahead of, yes, for this year. I'd like to conclude with some thoughts on those upcoming months. We have presented these 5 areas of priority to you on a fiscal year results call in March when we reported 2023. And from today's perspective, we are glad to see that we have made good progress in all of these areas.

Let me recap what we are doing and what we have achieved. In VMS, a crucial swing factor that will determine our magnitude of year-over-year margin improvement is the Augsburg site. We have mentioned it several times, and you are well aware of that. With the recent strengthening of our operations functions, we see ourselves in a strong position to further improve and scale our production. We have enough sheds and cranes and space to increase output considerably in the next years.

You recall, we are well invested, and our challenge is and has been people and parts and supply chain. And supply chain is something which is leveling out and it's getting more and more under control and also our hiring quote in Augsburg for new people and for ramping up our employee base is working very well. During February and March, we were happy with the performance progress. I really have to say that and thank also to the entire team who has done that and delivered that, and we have very clear plans how we want to increase output further.

On a similar note, we see further potential in our Americas business. Similar to Augsburg in the U.S., our business was affected by a combination of shortage of certain parts, certain raw material price increases and increased demand from our key customers, which is, in my words, a luxurious problem that we have increased demand of key customers, but this is also coming with the extra challenge of delivery in our order to cash processes. So we have in small a repetition of what we have faced and managed in Augsburg, I would say, in the last 12 to 18 months.

So we now know what needs to be done. This has been causing in the U.S. some operational pressure that has prevented the business from delivering its full potential, and we are working on steps to take the operational excellence to this unit to the next level and are well on track with respect to that. But it remains a top management focus for the year 2024.

Regarding order intake, this is not only a general mid-term statement, but specifically Q2 order intake could be strong. This is at least what we are expecting as per today, as we see multiple large commercial opportunities in North America as well as in Europe. The dialogue with you as analysts and investors is important to us, and we hope to see many of you at the upcoming conferences or also at the Eurosatory Trade Fair in Paris in the 18th and 19th of June.

So looking forward for the next personal touchdowns with you, at Eurosatory by the way, we will present world's first innovation, hybrid transmission for main battle tanks. So please stay tuned and enjoy the continuous journey with us on the way of growth and successful margins, which we will deliver.

I would like to hand over back to Ingo to give you the opportunity then later to ask your question.

[Ingo Schachel, executive]

Yes. Thank you, Susanne. And before we go to Q&A, I just wanted to remind you that you find more information on our IR website. And if you've got any questions and want to request a meeting, just drop me an e-mail. You can also see our financial calendar in this presentation where we would, of course, especially like to draw your attention to the Eurosatory on the 18th and 19th of June, our Capital Markets Day on the 10th of September, if you've got time or already save the date in your calendar. But until then, let's move on to Q&A. And operator, please open the line for questions.

[Operator]

[Operator Instructions] And we have the first question from Christophe Menard.

[Christophe Menard, analyst]

Yes. I had 3 questions. The first one is on the VMS order intake. I understand there is some [ phasing in comms space ], that's clear. In the report that you published this morning, you also mentioned that some orders were deferred. What is the reason for those delays? I mean we would expect more an acceleration in order placement rather than delay. So just that's the first question.

Second question is on the margin momentum in VMS. It is -- I mean it's an improvement clearly versus Q4 last year. But you're mentioning R&D, actually, the -- I mean, my last 2 questions are linked. So what typically is causing the increase in R&D, what programs? And where do you see -- I mean do you see a pickup in margin in the rest of the year for VMS? Looking at the performance over the quarters apart from Q4, Q1 is still a bit below what you performed in the last 12 months, apart again from Q4. So can you just give us the moving parts of the margin in VMS.

[Christian Schulz, executive]

Christophe, let me start and maybe Susanne is going to chip in. So first of all, on the VMS order intake, I think we alluded to that last year we've had those 2 contracts that we haven't had this year, in particular on the U.S. side. The delayed orders we were talking about this morning is basically the USD 100 million that slipped into the Q2. That's what I mentioned. If they would have been a couple of days earlier on, book-to-bill would have been 1.3x. We wouldn't discuss the topic here. So that's basically the delayed one in here. Nonetheless, we see...

[Susanne Wiegand, executive]

By 2 weeks delay.

[Christian Schulz, executive]

Yes. I mean it is what it is, yes. But we do see a continued strong order pipeline also in the soft order backlog going forward that will drop down. And VMS remains the core. Europe, in particular, is very much a heavy-tracked vehicle business order backlog. And again, I mean, if we would have been a couple of days early on and the order would have come earlier on, we would have been in 1.3.

On the margin, as you rightly said, we improved operational leverage significantly. We had -- we still had a very, let's say, 10 January, Susanne and Alexander but made considerable progress on February and March really increasing output on a new level in the Augsburg side. So we do see having in mind that Q1 is, in particular, our weakest quarter, we do see for the rest of the year further potential, and we'll give you the next update, hopefully, in the same positive tone we have today. In second quarter, on the R&D side in there, you might recall that besides the self-funded R&D, we also sometimes have shared R&D with customers.

Costs in the first quarter are related with customers in Northern Europe and also in Germany where we jointly develop in their product, new things. This is in light of our overall R&D guidance that we do give, and it's not something that comes extraordinary on top but it's a sign that we invest into our future, to Susanne's point of view also then show a new product on the Eurosatory. And hence, this could be seen not as something extraordinary, but customer related to those customers in Europe, in Germany and in Northern Europe. Does this answer your questions in particular?

[Christophe Menard, analyst]

Yes. It's extremely clear. Thank you for the granularity.

[Christian Schulz, executive]

Thank you, Christophe.

[Operator]

And the next question comes from David Perry from JPMorgan.

[David Perry, analyst]

Just one question for each of you, if I can. Susanne, thanks for your speech at the beginning, which was helpful. One thing you didn't mention was the situation in Germany, and it's a bit difficult for us in London to follow the politics sometimes, especially if you don't speak German, like me.

[Susanne Wiegand, executive]

I understand that.

[David Perry, analyst]

There's been some press in the last week about a bit of an argument maybe between Lindner and Pistorius and about the funding of the budget this year. I just wondered if you could share some thoughts on that, please? And then for Christian, I know you don't officially guide on free cash flow, but perhaps you could give us a few comments on how you're seeing the outlook for the year, please, some of the moving parts.

[Susanne Wiegand, executive]

Thanks for your questions, David. Happy to comment on the German situation. Good news here is all parties of the government and the coalition and also the opposition, meaning the Christian Democrats are in agreement that we have to spend the 2% even a little bit more in the next years to come on defense.

The only debate we have in Germany, which is a tough debate is how to settle and finance the overall budget situation. So we have obviously, a longer wish list from all the ministries with respect to the 2025 budget, which is not yet, let's say, approved and agreed upon, which is the open point at the moment in the discussion. And the -- let's say, the Green Party obviously is voting for giving up what we call Schuldenbremse, so they opt for more debts, whereas the liberals clearly said, no way, we have to cut corners somewhere else and have to reallocate budgets and will not, let's say, step away from our strict and very conservative debt policy.

I think the Social Democrats obviously try to find a middle ground and say that there should be kind of a moratorium on social services. But the good thing is there is agreement from everybody, the money needed for the defense needs to be spent. But to put that, honestly, into a light, we even have started a discussion that 2% is obviously not sufficient. And basically, we all know that because if you see the 2%, we do not spend even 1% to reequip and strengthening the Bundeswehr.

So within the 2%, there's pensions for soldiers and there's Ukraine aid and so there is many things in, which are very important, but which are not enabling and strengthening at all the level of equipment of Bundeswehr. That's why the -- not officially discussed, however, also acknowledged and known by everybody discussion is whether we really have to end up specifically in the year 2028, and forward going on when the special fund is entirely consumed up at the moment.

The budget of the special fund is to a super large extent, let's say, bound and fixed in contracts. So money outflow will then be over the next years. But we are not covered with the regular defense budget from latest from year 2028 onwards. Also, Germany is at the moment preparing and discussing to increase the support for Ukraine, potentially trying to compensate a little bit of, let's say, things which we expect to lack from the U.S. side and will be reduced. So there is a huge debate on budgets generally, which we expect will not be sorted out before summer and definitely not during summer break of this government, but in the course of probably Q3 or even Q4.

So we will have a continuous discussion in Germany about budgets. But honestly, and this is, I think, ultimately, for all of us, the good news is there is no debate whatsoever between all the parties that we have to spend the money for defense. It's just a question how to finance this and where to cut the corners or whether to, let's say, release the conservative policy on making additional debt. This is the situation in which we are in.

[David Perry, analyst]

It's very helpful. Sorry, just to clarify. Is there any risk at all on '24? Did you see any risk that '24 orders don't come because of budget issues? Or is that in the bag as far as you're concerned?

[Susanne Wiegand, executive]

No, no, '24, I do not see a risk at all. Basically, there is an over planning of the existing budget. So the budget which is approved will definitely be spent because at the moment, as I said, kind of an overplanning. So the issue is really on '25. And then the question is what is the next package after the full consumption of the special fund? Is that a special fund 2.0 kind of thing? Or is it another, let's say, instrument from the budget side to increase that?

And I personally expect even that we will not stick to the 2%, but we'll further increase defense budget latest in light of potentially new government after election in September next year. So it looks like that we are facing a change with this election. And I would expect that things are then changing hopefully to the better. But you shouldn't be worried at all if this, let's say, press headlines and articles remain and continue for the next month that there is a big budget fight and that they're not in agreement and Mr. Pistorius, as Minister of Defense, is now making good proposals out of those budget, which is the job of Mr. Lindner.

So Scholz has announced that he will sit together with Habeck, so the Vice Chancellor and Lindner as Minister of Finance in his Chancellor's office and all the other ministers have to come one by one, present the long wish list. Argue that, and then they will sort it out in the course of Q3. This is my expectation and dictate on budgets.

I don't expect at the moment that the Liberals will use this situation to let the coalition break and force elections earlier than planned. This was also something which we have heard, but I don't expect that at the moment because nobody who's in the government now acting at the moment would win by that. So that's why the motivation to break it up, I think, is limited. So this is a process like in kindergarten where you have to sort out wish list against reality. And that's why it's so important that the 2% is not questioned by nobody.

[Christian Schulz, executive]

Now down to the borrowing grounds of cash flow. It's quite a big lump from German government down there. To your point, cash flow levers, CapEx was around 3% in Q1. We assume that we will be on that 3% or even below for the full year, net working capital down to 25.4%. We assume that without our effort, despite the growth, will be on that level and strive for some improvements. Of course, you need to see there how Q2 develops.

Traditionally, Q1 is the weakest quarter we do have on the EBIT side, assuming that on the back of the very strong order book that we do have and that Susanne has alluded to, we are confident that we improve in the quarters to come and hopefully can then on the back of the second quarter and for the first half, narrow the guidance. Hopefully, if we continue to be successful as we were in February, March and April now to the upper part of the guidance. Thus, I would say that the number that, for example, you have in your report, I'm very positive about that number. And if things fall into play, we might even be a little bit more positive there. Does that...

[David Perry, analyst]

No, that's helpful. I'm amazed you look at my research, not many CFOs do.

[Christian Schulz, executive]

I do...

[Alexander Sagel, executive]

Not only on you, on all of them...

[Susanne Wiegand, executive]

He has read each and every figure and word.

[David Perry, analyst]

The reason I asked that is I've got a good double-digit free cash flow...

[Christian Schulz, executive]

You have 88. And I think based on this, we are positive and more, I think I can't say without giving forward-looking statements.

[Susanne Wiegand, executive]

It's a lucky number in China.

[David Perry, analyst]

All right. That's helpful.

[Christian Schulz, executive]

But again, David, if we are progressing in Augsburg, and as Susanne has alluded to in the U.S., an output comes, there is no reason why cash flow shouldn't follow the development on the profit side.

[Operator]

There's one more question from Sven Sauer. [Operator Instructions]

[Sven Sauer, analyst]

I have 2 questions. The first one is just a technical question. The income tax expenses were quite high in Q1. I was just wondering why? And the second question would be the lockup period will be over in a couple of months? Do you have any expectations on what could happen and if the existing shareholder could take some of those new shares? Yes.

[Christian Schulz, executive]

So maybe first on the lockup. The lockup expires, obviously, in August. Anytime -- in any point in time, [ Susanne ] would be able to talk to the banks to get it waived. We are not in such discussions because they're just an ordinary investors like all other investors that we value at the very same level. So we could assume that there might an action given the performance of the company, but we don't really know.

To your point, on taxes, basically, obviously, we've had on the tax side on deferrals this year a better assumption and booked already a couple of things into Q1 that we might have seen in the due course of the year. And basically, this was more a technical effect that paid it out lumps from last year. So I mean there's no special topic behind that.

[Sven Sauer, analyst]

So normal tax rate for the year, '28, so 30%...

[Christian Schulz, executive]

Exactly. In the range of around 30%-ish plus/minus.

[Ingo Schachel, executive]

Yes. Thanks for your questions. We had received 2 questions from [ George Mcwhirter ] via email. George, the question has been answered already. So we'll ask another round of questions and operator, maybe take Victor's questions first, and then we will ask for last one of questions.

[Christian Schulz, executive]

Victor, are you on the line?

[Operator]

So there is a new question from Victor Allard.

[Victor Allard, analyst]

Seem there is a bit of a lag. I hope you can hear me fine now.

[Susanne Wiegand, executive]

We can hear you well, Victor. Nice to talk to you.

[Christian Schulz, executive]

Loud and clear. Good to have you.

[Victor Allard, analyst]

Great. I have a couple of questions. First one is on the supply chain. Obviously, good improvement in the first quarter operationally. I was wondering if you've seen any particular improvements on the supply chain that you were surprised about and also possibly some areas which remain challenging. So that's the first one.

And the second question is on order intake. Again, you mentioned the visibility that you have on the pipeline, and I think it was pretty clear along and probably to push a bit further, I was curious if you would have some pointers in terms of the key tenders that we could keep an eye in the coming quarters. So I know the campaigns are often confidential, but it would be great if you can comment to the extent that you can.

[Susanne Wiegand, executive]

Maybe I'll start. Thanks for your questions, Victor. I'll start briefly with order intake, visibility of pipeline. So referring specifically to what we have in the soft order backlog. There is, let's say, the bigger portion is Leopard demand, which we see in the market. So we should follow campaigns like decision on in Italia -- in Italy, sorry, Italia, in Italy and also Czech Republic, we can also expect maybe a further move in Germany with the call for the options of the frame contract, which we have in place in Germany for your recollection. There is a frame contract of 123 Leopards, new Leopards to be built.

Existing, Germany has drawn 18, first 18 as an option from this. So there is 105 new Leopards remaining, and there is, at the moment, a debate in Germany, whether Germany is taking the full potential of the 105 subject to the budget discussions. We said that earlier today already in this call, but there is definitely a need of at least 35 or 36 additional Leopards to equip the brigade for Lithuania, which is compulsory needed.

And as said, the discussion is at the moment that Germany is going for the full amount of the remaining 105 of the frame contract. Italy, I've mentioned. Czech Republic, I've mentioned. So those are the immediate upcoming demand for Leopards. As you are aware, we are working on a larger campaign in India for the main battle tank in June, second batch. India is now in the election process. So no decisions to be expected now. However, we all know and expect that government will not change so Modi will run for next period. Minister of Defense is hence also clearly nominated. And we have a good chance. I don't promise anything here, but we have a good chance in the course of this year in Q4 to get a larger contract for India into the books.

Furthermore, we have upside potential, which is not covered by soft order backlog in our discussions with the Polish partner. And the government, as we all know, Poland is significantly investing in the armed forces and specifically also in The Land Forces With respect to a number of different platforms following their own design and also bought in designs.

We are executing the K2 order, which is known to you. Further batches are also in discussion and in progress at the moment, but also on designs with respect to the Borsuk infantry fighting vehicle in 2 different versions. So there is additional upside potential, which we see here.

And I think those were from the land side, the biggest ones to mention and to follow. With respect to your supply chain questions, specific surprises in Q1, no, because we have meanwhile very good visibility. So there is nothing to surprise us, hopefully, and there was nothing. But what we can clearly say is that the tension and the issues are leveling out. So we have much, much, much, much, much, much less parts on the list of missing parts and critical parts. So we are down to a normal level and number of things we have to expedite and we have to follow in the ordinary course of business.

Supply chain is in these days and will not be an easy going not to take care of things, but I would take it off the list of top management priority and issue. So it's back in the hands of our operational guys and for daily, let's say, management, our involvement here on top management is not required anymore. And this is the good news here, and this is reflected with the top line growth, we could deliver in Q1, and we expect also to continue to stabilize further in the months to come.

[Christian Schulz, executive]

In hindsight, Victor, it was the right thing to put EUR 30 million on inventory as part because we saw on the back of these inventories that the pipeline could be stabilized, as Susanne has said, and we saw in February and in March this year that on the back of the smoothen supply chain, we could increase the output here in Augsburg, which led to the numbers you have in front of yourself.

[Ingo Schachel, executive]

Yes. Great. Thank you very much, everyone. I guess there are no further questions at the moment. I mean if you have the big last one, ask quite quickly. But otherwise, I'm assuming we've answered your questions, and we'd like to thank you very much for joining this call and for your interest in RENK. And hope to see you soon at one of the upcoming events. Thank you. Have a good day.

[Susanne Wiegand, executive]

Thank you. Bye-bye.

[Christian Schulz, executive]

See you next week or in Paris. Bye.

[Susanne Wiegand, executive]

Bye-bye.