Rheinmetall AG

XETRA:RHM

Earnings Call Analysis

Rheinmetall's Q1 2024: Strong Growth and Strategic Moves

Rheinmetall began 2024 with a robust 16% sales growth to nearly EUR 1.6 billion and a notable margin improvement to 8.5%. The company’s operating result surged by 60%, driven by significant contributions from Expal. However, higher working capital and CapEx led to a negative operating free cash flow of EUR 187 million. Key orders included nearly EUR 4 billion for Skyranger Air Defense Systems and a heavy weapon carrier service contract. The backlog exceeded EUR 40 billion for the first time. The company expects to meet its 2024 guidance, with major revenue contributions anticipated in the second half of the year.

Strong Start to 2024

Rheinmetall AG has begun 2024 on a solid note, showcasing double-digit revenue growth and improved margins. The first quarter's revenue jumped by 16% year-over-year to nearly EUR 1.6 billion, with the margin increasing by 2.4 percentage points to 8.5%. This positive performance was primarily driven by significant contributions from Rheinmetall Expal and a 70% increase in the Weapon and Ammunition segment revenue, thanks to higher ammunition call-offs from key projects in Germany and Ukraine .

Backlog and Key Orders

A notable milestone for the quarter was Rheinmetall's backlog surpassing EUR 40 billion for the first time, a 42% increase year-over-year. Key orders included nearly EUR 4 billion worth of Skyranger Air Defense Systems and a significant service contract for the heavy weapon carrier. This strong order intake builds confidence in achieving the year's guidance, anticipating continued strong performance in subsequent quarters .

Operational Cash Flow and Capital Expenditures

Despite the robust growth, the operating free cash flow showed a deficit of EUR 187 million. This negative cash flow resulted primarily from higher working capital, which reached nearly EUR 2 billion, and increased capital expenditure activities. Rheinmetall is actively expanding its capacity with projects like the new plant in Niedersachsen and the F-35 plant in Weeze, expected to start production in 2025 .

Segment Performance

The Weapon and Ammunition segment saw a substantial 70% rise in revenue year-over-year, driven by higher ammunition demand. Electronic Solutions also reported impressive growth, with a 26% rise in sales and improved operating margins, majorly fueled by Skyranger Air Defense Systems and deliveries for the Puma project. The Vehicle Systems segment experienced moderate growth in sales, increasing by nearly 7%. The company’s civil business, now called Power Systems, had a flat revenue but saw a nearly 30% improvement in the operating result .

Strategic Moves and Future Outlook

Rheinmetall completed the disposal of its small bore piston business and sold all remaining Shriram shares, marking a strategic realignment for the group. Looking ahead, the company plans to establish a powder factory in Romania and a plant for 155-millimeter artillery ammunition in Lithuania. For the second quarter, Rheinmetall expects sales growth to align with yearly guidance, driven by anticipated orders from Germany. The company maintains a robust balance sheet with a net debt-to-EBITDA ratio of 1 and a strong credit rating, providing flexibility for future strategic opportunities .

Earnings Call Transcript 2024-Q1

[Operator]

Hello, ladies and gentlemen, and welcome to the Q1 results call 2024 of Rheinmetall AG. [Operator Instructions] Let me now turn the floor over to Dagmar Steinert, CFO of Rheinmetall.

[Dagmar Steinert, executive]

Thank you for the kind introduction. Good morning, everyone, and welcome to Rheinmetall's Q1 '24 Conference Call. Before I start on Page 3, I would kindly remind you of 2 things. First, as we are hosting our virtual AGM later this morning, we have a hard stop at 9:15. I will try to be brief so that I have time to answer your questions in the Q&A. Second, please be reminded of our legal disclaimer on the second page.

Let us now move to Page 3, please. The first quarter marks an excellent start to the year and was characterized by double-digit top line growth and a solid margin improvement. However, higher working capital and CapEx activities affected our operating free cash flow. As in previous years, I would like to remind you that we are expecting a heavy back-end loaded business. We didn't book business with the military trucks, which we are expecting to be called off in Q2 and in Q3 this year. Rheinmetall's backlog surpassed the EUR 40 billion mark for the first time.

The main driver for Rheinmetall nominations of nearly EUR 4 billion were orders for Skyranger Air Defense Systems. Another significant contribution came from the service contract for the heavy weapon carrier, which unlike the heavy weapon carrier itself, was already booked in the first quarter. The strong start to the year and the progress that we are currently seeing in our second quarter gives us high confidence to achieve our '24 guidance. Lastly, we successfully closed the small bore piston disposal on April 15, and we were able to sell all remaining Shriram shares in the first quarter. With this, we fully accomplished the exit of the piston business, and overall, it marks an important milestone for the realignment of the Rheinmetall Group.

Please turn to Page #4. we are conducting several capacity expansions across Europe. All of them are well on track. The new plant, Niedersachsen, and the F-35 plant in Weeze are both expected to start production in 2025. Next to that, we are in advanced discussion with the Romanian government to establish a new powder factory in Romania with a potential annual capacity of up to 1,500 tons. Furthermore, on April 16, we signed an MOU with the Lithuanian government to establish a new plant for 155-millimeter artillery ammunition with a potential annual capacity of up to 100,000 rounds. Lastly, although not mentioned on the slide here, another interesting acquisition we completed in March was REEQ in the Netherlands, of which we acquired 100%. REEQ gives us access to promising hybrid technologies, which can be used in light tactical vehicles.

Please move on to Page 5. In the first quarter, we witnessed the sales increase of 16% year-over-year and a solid margin expansion. Sales rose to nearly EUR 1.6 billion, and the margin improved by 2.4 percentage points to 8.5%. The operating result improved significantly by 60% year-over-year, thanks to a great contribution from Expal. The EBIT pre-PPA stood at EUR 138 million.

Please turn to Page 6. Our operating free cash flow came in at minus EUR 187 million. This had 2 main effects. First, we continued to increase our working capital to nearly EUR 2 billion. A major share of this are the military trucks, which we are expecting to be called off in the second and the third quarter this year. Second, we kicked off multiple new CapEx projects like, for example, the artillery plant, Niedersachsen. As I said earlier, a continued driver for the working capital buildup is a pronounced seasonality of the Defense business, which is heavy back-end loaded.

Moving on to Page 7. Our balance sheet remained strong and unleveraged. Our net debt-to-EBITDA ratio stood at 1, well below our target of 3. As a result, Moody's confirmed our credit rating on April 23 at Baa2 with a stable outlook. With a cash position of EUR 515 million and undrawn credit lines of more than EUR 1 billion, we have amplified power to stay opportunistic.

Moving on to the next page. Rheinmetall's backlog jumped by more than 42% year-over-year and crossed the EUR 40 billion mark for the first time. A number of Air Defense orders were the main driver for a strong jump in Rheinmetall nominations to more than EUR 3.9 billion in the first quarter. As mentioned before, a significant building block came from the service contract for the heavy weapon carrier with the contribution of more than EUR 600 million net in Q1. The vehicles, however, will be booked in the second quarter.

Please turn to Page 9 for an update on our segments. Vehicle Systems grew sales by almost 7% to nearly EUR 500 million with an operating margin of 7.7% in Q1. Different seasonality of the ring swap agreement affected the operating margin in the first quarter. Weapon and Ammunition saw a significant revenue increase of around 70% to EUR 362 million year-over-year as a result from higher ammunition call-off. Key projects included several artillery orders from both Germany and Ukraine.

Rheinmetall Expal generated sales of more than EUR 100 million in the first quarter and thus made a decisive contribution to sales growth. The operating result more than doubled to EUR 53 million, and margins expanded significantly to 14.7%. However, an organic increase of more than 400 full-time equivalents and adverse FX effects when compared to the previous year burdened the leverage effect in the first quarter in anticipation of further growth. Typically, Weapon and Ammunition has a very strong seasonality, as more than 40% of annual sales are expected to come in, in the fourth quarter.

Electronic Solutions reported sales growth of around 26% to EUR 287 million year-over-year and a great improvement of the operating result to EUR 17 million, increasing the operating margin to 6%. Germany was a key sales driver with Skyranger Air Defense Systems, further delivery sales for the Puma as well as delivery of combat helmets. Our civil business, which is now operating under the new name, Power Systems, had a flat quarter in terms of revenue growth, but was able to improve the operating result by nearly 30%. Sales growth in the U.S. and Asia offset the weak development in Europe. Higher sales prices and a better product mix, together with the equity result of our Chinese joint venture, led to a margin increase to 5.8%.

Please move to Page 10, where I would like to give you a bit more color on the consolidation line. Whereas our sales consolidation increased to minus EUR 101 million year-over-year, we saw a significant improvement in the operating result consolidation to minus EUR 6 million, which represents an increase of around 20 percentage points. There are 3 driving forces behind this. First, an improvement and -- first, an improved operational performance of 4iG. Second, a change of the allocation logic for holding related cost back to the segment level. And third, the disposal of all remaining Shriram shares. For full year 2024, we expect a sales consolidation effect of around 6% of sales. And for the operating result, a consolidation effect of around 5% of operating result. Of course, all these figures are minus.

Let us move to Page 11. As we discussed in the last earnings call, we have guided for a CapEx spend of around 7% of sales. There are multiple large CapEx projects across all segments, which we have listed here. If there are any new major projects coming up in the next month, we will finance them in a cash-neutral manner. This could happen via down payments, grants, subsidies, et cetera.

Please turn to Page 12 for a brief outlook on the current quarter. As half of the second quarter already lies behind us, I would like to give you a bit of color on the current development. Our Q2 sales are expected to increase in line with our guided annual growth rate. Next to that, Rheinmetall nominations will double year-over-year, mostly as a result of German orders. Lastly, while Q1 CapEx spend stood at 6% of sales, we are seeing an acceleration, including the groundbreaking ceremony for our new artillery plant, Niedersachsen, only took place in mid-February. To sum it up, Rheinmetall reports a strong start to the first quarter of 2024 with ongoing sales growth and significant higher income.

And with this, I would like to conclude my presentation, and I'm now happy to take your questions. But again, please be reminded that we have a hard stop today at 9:15 due to the AGM.

[Operator]

[Operator Instructions]

And the first question comes from Sven Weier, UBS.

[Sven Weier, analyst]

The first one is following up on your order intake guidance. I just wanted to get the wording right here. Are we talking about firm order intake or nominations in total? And the other question I had, because you're expecting EUR 30 billion orders from Germany this year, I was just wondering if -- to where that takes you by the end of Q2, what percentage of the EUR 30 billion you expect to have in by the end of the quarter? That's the first one.

[Dagmar Steinert, executive]

Yes, Mr. Weier, thank you for your question. Of course, we are talking about Rheinmetall nomination. And for the second quarter, our nomination from Germany, what we expect, will be just around EUR 7 billion.

[Sven Weier, analyst]

And you had how much in Q1?

[Dagmar Steinert, executive]

In Q1, we had from -- you're asking on which -- how much...

[Sven Weier, analyst]

Just Germany.

[Dagmar Steinert, executive]

On German -- German nomination in Q1 was not that much. I mean, our nomination was 3.9 in total in the first quarter. And from Germany, it was roughly a little bit less than EUR 2 billion.

[Sven Weier, analyst]

Okay. So meaning that the majority of the EUR 30 billion is then for the second half, I would guess?

[Dagmar Steinert, executive]

Yes. That's correct.

[Sven Weier, analyst]

And then if I may, just the other point I had was on the organic performance of the Weapon and Ammunition business because Q1 last year was a relatively soft start as well. And now I think the organic sales were up low double digit and EBIT went back. Is that also just a timing issue in terms of the client taking delivery? Because I guess it's not you. I mean, you're producing probably full steam on the ammo side. Is it also just a timing thing and you're seeing those deliveries in the second quarter, just like on the truck side? Or...

[Dagmar Steinert, executive]

Well, looking at Weapon and Ammunition, of course, it's a timing issue. And as we have a very strong growth in the running year, of course, we have to build up capacities and, therefore, our cost increase, and that's a burden for the leverage. And as I mentioned, especially Weapon and Ammunition is heavy back-end loaded business and, therefore, we are just talking about a timing issue.

[Operator]

The next question comes from Virginia Montorsi, Bank of America.

[Virginia Montorsi, analyst]

A follow-up to something that has been mentioned already in the presentation. But if I look at your full year guidance for revenues and what you just said for Q2, it does imply over 40% growth in revenues for the second half of the year. So could you help us understand a little bit more how to think about the divisions, what's driving that? And is it mostly going to be Q4 related? Is there anything we should keep in mind?

[Dagmar Steinert, executive]

Well, of course, our seasonality of the business applies to every segment, except of course, Power Systems. And we expect call off of the -- for the military trucks already in the second quarter, but more in the end of the second quarter, a bigger portion we expect in the second half of the year. Therefore, the vehicle systems business is back-end loaded as well. And looking at our -- Weapons and Ammunition is back-end loaded, as already mentioned. But of course, with Expal, which we included in our group in the third quarter last year. Therefore, compared with the second quarter, there will be a strong growth as well from Expal seen in Weapon and Ammunition. And yes, that's the development. And Electronic Solutions will have the same development regarding seasonality like last year.

[Operator]

The next question comes from Sebastian Growe, BNP Paribas Exane.

[Sebastian Growe, analyst]

The first one would be a follow-up to Sven's question, when it comes to the nomination from Germany, can you shed a bit more light around what is behind the EUR 7 billion that you expect in the second quarter? I'm referring to the mix by segment and backdrop of the question clearly is, you had obviously the slippage of both Weapon and then clearly Ammunition, I have to say. And then also trucks into '24 from '23. And my understanding is that this is a function of frame contracts that you still need to sign in order to get the shipments done. So if you could be a bit more specific around what's behind the EUR 7 billion. That's my first question, then I have 2 more.

[Dagmar Steinert, executive]

Of course, one order intake, which we expect is the heavy weapon carrier, where we just got the service part in the first quarter. Then of course, we expect our ammunition for -- yes, for our Weapon and Ammunition business, where we built our new plant in Niedersachsen that are the, let me say, biggest order we expect from Germany.

[Sebastian Growe, analyst]

To be precise here, the heavy weapon carrier, that's about, what, like EUR 1.5 billion, EUR 2 billion-ish for the vehicles as such?

[Dagmar Steinert, executive]

No, the heavy weapon carrier is, in total, a little bit less than EUR 3 billion. And then, of course...

[Sebastian Growe, analyst]

Okay. EUR 2.4 billion, then if you add EUR 600 million in the first quarter, right?

[Dagmar Steinert, executive]

Yes. And then, of course, we expect other order intake from trucks.

[Sebastian Growe, analyst]

But the large frame contract for large calibers for artillery, that's not yet in scope for the second quarter? Is that a fair understanding?

[Dagmar Steinert, executive]

It's in scope for the second quarter.

[Sebastian Growe, analyst]

Okay. And then the second question, I didn't really catch what you said around the ring swap agreement impact. You made some comments around it for the first quarter. And if you could repeat those. And my question is also what you would expect from ring swap agreement in the entirety of '24?

[Dagmar Steinert, executive]

Well, the ring swap agreement usually have quite a high margin, and we have booked sales in the first quarter '23. Therefore, if you compare our margin year-on-year, we have a lower margin in this business in '24. It's just a question of product mix in the segment vehicle systems. And of course, we have seen in the first quarter '23 as well sales from material kits with Fuchs [ Agaria, ] and that was a high-margin business as well.

[Sebastian Growe, analyst]

Okay. Got you. And the last, very last question then just on the reallocation of the overhead costs. Will you provide and also sort of readjusted figures for the first quarter of '23 to get a better understanding what the impact is at the operational level?

[Dagmar Steinert, executive]

Well, we reallocated mainly overhead costs regarding IT. And with that, of course, there is in the first quarter '24, and that will remain, of course, in the future, higher IT costs are seen in the segment. And there, we are talking about a single [indiscernible] million number.

[Operator]

The next question comes from Christoph Laskawi, Deutsche Bank.

[Christoph Laskawi, analyst]

The first will be a follow-up just on the ammunition frame contract. If we think about the scope that has been mentioned previously, which was around EUR 10 billion, could you comment on the technicalities of the booking there? Because the implied would obviously be lower in Q2. That will be the first question. And the second one would be on consolidation. Obviously, your CEO highlighted recently in an interview that he's very open for that, and you stress that the balance sheet is healthy, to be opportunistic. Is this opportunism or basically your strategic setup there just for a deal that you discussed in the U.S.? Or should we also think about Europe being in continued focus and you're actively on the hunt for a deal here?

[Dagmar Steinert, executive]

Yes. Well, regarding the ammunition nomination or contract, which we expect, of course, overall, it's over EUR 10 billion. But it will be in a little bit split in separate frame contracts. And therefore, we just expect in the second quarter from Germany, like EUR 7 billion and, of course, a call of around EUR 1 billion. Regarding our M&A activities, yes, we have a very strong balance sheet. We are open for further consolidation. And as we mentioned, we are looking at targets within the U.S., but there is nothing more I can mention today.

[Christoph Laskawi, analyst]

Just a follow-up on the ammo side, but you do expect the full EUR 10 billion in '24, right?

[Dagmar Steinert, executive]

Yes. Definitely.

[Operator]

So at the moment, there seem to be no further questions. [Operator Instructions] And the next question comes from Sash Tusa, Agency Partners. Over to you.

[Sash Tusa, analyst]

Just a very quick question. Could you just confirm what the capital gain was on the share of the Shriram shares in the first quarter? You said that was included in the Power Systems results.

[Dagmar Steinert, executive]

It was EUR 4 million.

[Operator]

The next question comes from Michael Raab, Kepler.

[Michael Raab, analyst]

Mike Raab from Kepler here. I'd like to get back to your targets of the order intake and order backlog for the full year. Just first of all, to reconfirm, you're looking for an order intake between EUR 28 billion and EUR 36 billion. As you mentioned, you were going to look for an order backlog of between EUR 50 million and EUR 60 billion, respectively. Is that correct?

[Dagmar Steinert, executive]

That is correct, yes. But just to clarify, nomination and -- it's Rheinmetall nomination and not...

[Michael Raab, analyst]

It's nomination. It's not firm orders. It's nominations overall.

[Dagmar Steinert, executive]

Yes, yes.

[Michael Raab, analyst]

Okay. So just -- okay. Yes, that probably explains it because I was going to ask, if we take EUR 38 billion as an order backlog that you had at the end of last year, we take the midpoint of your order intake range of EUR 32 billion. We're going to get to EUR 70 billion. We deduct EUR 10 billion in sales right about, so we get to an order backlog of EUR 60 billion, which would already be at the upper end of the range. So let's say, if you got into the mid -- if you got to the upper end of the order intake range, then you could easily accumulate an order backlog in excess of EUR 60 billion, but what you're saying this is including nominations, right?

[Dagmar Steinert, executive]

Well, you made a perfect calculation. I couldn't have done it better.

[Michael Raab, analyst]

Okay. Okay. Good. Good. So no mistaking my thinking. Thank you.

[Operator]

So that seems to be it for the moment. There are no further questions. So I'd like to hand it back to you, Mr. Steinert, for some closing remarks.

[Dagmar Steinert, executive]

Yes. Thank you very much. Thank you very much for your open and interesting questions, and I'm looking forward to the performance of our second quarter and, of course, for the full year 2024. And I'm sure we will deliver and we will fulfill our guidance. So thank you very much, and goodbye.