Rheinmetall AG

XETRA:RHM

Earnings Call Analysis

Firm on Track to Surpass Sales Guidance

The company forecasts EUR 2.6 billion in sales from backlogs and an additional EUR 400 million over the next three months, primarily from service business, booked civilian chemicals, and materials and trade. The total sales are projected to meet the fiscal year guidance of EUR 7.4 to EUR 7.6 billion. The operating margin guidance of around 12% is expected to be surpassed, and the operational free cash flow is anticipated to be on the higher end of the 4% to 6% guidance, with Q4 showing positive trends.

Solid Growth with Strategic Expansion and Restructuring

The company is experiencing swift growth through multiple ventures and strategic shifts. A significant joint venture ramps up, expected to generate EUR 200 million in annual sales. The enterprise architecture is also undergoing changes to centralize sensors, actuators, and materials into a single division to leverage synergies and focus management resources. These initiatives, underpinned by nearly 25% sales growth predominantly in ammunition and vehicle systems, have led to an improved operating result of EUR 191 million, indicating a robust financial health.

Quest for Efficient Margins Amidst Industry Challenges

The enterprise has set a target for an operating margin surpassing 25%. Yet, they face headwinds from pre-financed material costs due to OEM delays and being over capacity in the face of reduced industrial activity. Nevertheless, a future spike in electromobility from 2024 with full ramp-up by 2025 presents an avenue for margin improvement.

Strategic Contracts Nearing Completion Bolstering Sales Predictions

The company is on the cusp of finalizing substantial contracts, including a EUR 2.5 billion deal with Australian and German governments for vehicle provision that could be secured either by end of the year or early next. With another agreement close to being signed with the Hungarian government, and given the current sales performance after nine months stand at EUR 4.6 billion, the outlook seems optimistic.

Guidance on Financial Targets Emphasizes Strength and Growth

Based on a sound nine-month performance, the company reaffirms its guidance with sales projections between EUR 7.4 and EUR 7.6 billion and anticipates an operating margin of around 12%. They also maintain a confident stance on operational free cash flow, expected to be on the higher end of the 4% to 6% range.

Healthy Order Backlog Secures Future Growth Trajectory

A robust order backlog is pivotal for sustained growth, and with a backlog of over EUR 36 billion, they are well-positioned. The company expects this strong backlog, complemented by forthcoming orders in the fourth quarter, to secure their growth narrative for the future.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, ladies and gentlemen, and welcome to the Rheinmetall AG Q3 2023 Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Armin Papperger.

[Armin Papperger, executive]

Thank you very much for your kind introduction. Welcome, everyone, to Rheinmetall's Q3 2020 Conference Call. Like in the last call, I will, together with my colleague, Dagmar Steinert, to you update on the latest market development. Dagmar will share further details on the quarterly financials and finally, I will present our year-end outlook with you. Please be reminded of our legal disclaimer on the following Page 2. Now let's flip to Page 3. In Page 3, in quarter 3, 2023, it was a really good quarter for the Rheinmetall Group. We had a sales of EUR 1.758 billion. It's a plus of about 24%. The very positive thing is that the operating result of EUR 191 million is a plus of nearly 60%. So we have a really good leverage in our business. And the operating margin is with plus 2.3% up is growing up to 10.8%. The operational free cash flow is still with minus EUR 102 million, not in the range where we want to be, and that is very positive. We will have a very, very strong Q4. That we can see because most of the customers now will pay the bills there, and our expectation is a very, very high free cash flow in Q4. Positive also for the quarter is that we have an outstanding Rheinmetall nomination. And the backlog is growing up to EUR 36.5 billion. Very positive also is that the Expal integration is very successful. We had the first integration workships, we had the welcome days, and we see now after checking the factories and having 100% detailed information about that, that we have a strong growth potential. So our expectation is that we can grow up to more than EUR 650 million next year and the total potential we see EUR 1 billion sales with very high profitability on Expal. Another point which is very positive is that the tank factory in Zalaegerszeg in Hungary is now working. End of this year, the first link will be ready. So 6 months since the grand opening, we are producing on that vehicle. So end of this year, first vehicle and then next year, the serial production of the vehicles of links will start. And we are on the way also to implement some other technologies I will tell you later. So the R&D contract about the punter Main Battle Tank will be there and also the integration of Steyr production in Salage, so this is very successful. We had a groundbreaking ceremony and the machines are running at the moment. So we are on the way to build up the plant in Wise. It will be the most modern Rheinmetall plant worldwide, full digitized, full climatized for the F-35 in Germany and we see a potential over the next year for us because we are able to produce the fuselage for Lockheed to have a potential between EUR 4 billion and EUR 5 billion over the next year for the F-35. Let's flip to Page #4. If we go to Page #4, we had 2 big events. So trade fairs, some of you visited us in London. So in London, we have a heavy focus on unmanned systems and also items solutions. We got a very positive feedback from European customers about that. and we had a presentation of our vision for the digitalized battlefield, where later on the German side, especially, we will tell you that there are no opportunities to book very, very soon, good contracts. The second show is was the USA in Washington. On the USA, as you know, there are 2 main programs at the moment. This is the inventory fighting vehicle on one side. And on the other side, the CTT program, the truck program. But we are looking at the moment also for other programs, and this is the new ancillary system. And here, we could show the 155-millimeter Halitsa technology that we have, especially on the barrel side, barrel and ammunition, the Skyranger and the XM30 and I think it's also good to have the autonomous unmanned systems. I believe that the U.S. Marine Corps, we will have a good chance to get order about that. So let it now go to Page #5. In Page #5, you have now an overview about Q3. And sorry, we had a title insight for the figures, but these are now the real figures. We speak about gross figures. This is exactly what the reporting from the German government is. In Q3, we had without Ukraine because the Ukrainian business is also paid from the German side, I'll give you the figure later. Only for Thurman, EUR 7.5 billion booked and the it was especially Caracal, then tank, auxiliary ammunition and also LUNA and G. There are some smaller contracts, and we are looking also for Q4, this is an expectation of about EUR 1.5 billion. And this EUR 1.5 billion is at the moment, is current, heavy weapon carriers, so Scherer we are in negotiations. Maybe we are able also to book it. This will be a EUR 2.6 billion contract. But it could be also possible that we switch into Q #1, which is for us not really important, but as a preinformation from your side. So what we told you a lot of time from the German side is that we have a potential of about EUR 13 billion. This is still in place. And we booked another 2. in between. We booked another EUR 2.1 billion from Germany for the Ukrainian forces. So contract is going from Ukraine, but the bill will be paid from the German government. And we see this year a potential of EUR 2.5 billion for the full year for the Ukrainian business. Our expectation is that we are very stable in Germany also next year. So an order potential for 2024 is also again EUR 13 million to EUR 15 billion where we see EUR 10 billion to EUR 12 billion for Germany and the rest is for Ukraine. And this is especially for ammunition tactical logistical vehicle and also digitization. Later, I will give you the information that the Ukrainian joint venture is running and the first sales are coming in. It is possible that there are some approvals may be delayed because of a lot of work at the moment in Bundeswehr in Germany, there are heavy weapon carriers. There are short systems, and there are the Gladia system. Their digitization is a program Taba, which has a potential of, as I said, EUR 1 billion up to EUR 1.5 billion. Vehicle like Codiak of EUR 600 million 66, etc. So that our expectation is that the potential is on the same level of order intake that we had this year. So that end of the year, we will see a total backlog Rheinmetall nomination of nearly EUR 40 billion. Let's go to Page #6. And here, we see that the business with Ukraine is already materialized. Sorry, we have here an order intake from EUR 1.9 billion but 3 days ago we have had another EUR 200 million which is now EUR 2.1 billion, which is the newest figure, and we want to give you for sure the U.S. figure. And the expectation next year in 2024 is that we can book EUR 2.5 billion to EUR 3 billion. This is discussed at the moment with the German government about the budget for Ukraine. The sales of this year will be at the moment, about EUR 400 million, but we will have a significant stronger impact in 2024. So from if you count up 2023 and 2024, it will be more than EUR 5 billion for Ukraine and most of them will be delivered 2024 and 2025, which is very positive for the next year. But this year, will also a very good year. So we have further contracts prepared also for this year. And there is an expectation of another EUR 200 million, EUR 300 million that we can book with Ukraine this year. We approved Rudy. Rudy is Rheimetall Ukrainian defense industry. It's a cooperation between Ramita and Udi. Udi is the Ukrainian defense industry. The UkropronProm gave them a new name because this was very difficult for most of the Europeans to remember how the name is. And we launched the first Ukrainian joint venture. As you see on the right side, the Chancellor Schultz and the Prime Minister had the first Rheinmetall company, the Prime Minister gave the license to the Chancellor. This joint venture is working now. And on the first phase now, we do maintenance and repair in vehicle. And the point is that our expectation is that we can start next year with the production of Fox, the 6x6 vehicle from Rheinmetall that we bring Fox in a box to Ukraine, and we assemble that on the Ukrainian side and that we can implement the first inventory fighting vehicles links. This is discussed with the German government. I think it will be positive, and we will get a permission about that things. And our expectation is that we can get contracts up to EUR 250 million for these vehicles for that company. This joint venture is able to grow up very fast, and there is an expectation that after a ramp-up phase that we are able to make about EUR 200 million sales per year. Let's go to Page #7. On Page #7, we see now the negotiations between Germany and Australia. As you know, the letter of cooperation is signed in Q3. The negotiations with both governments are in the final stage, and it will be a contract for Rheimetall Australia with a back contract also to Rheimetall land systems here in Germany, more than 100 vehicles, and it will be about EUR 2.5 billion. At the moment, as I said, if we are very lucky and because there is only one possibility from the parliament, yes, to give the permission, we can get it end of the year but otherwise, it will be in the first meeting, the parliament next year so that it will be in December or January, February next year. This is a boxer-based solution with Cementart and this is also very important for the medium heavy forces in the German Army because the expectation is that Germany needs hundreds of that vehicle, and we are also in the prediscussions with the German government about that possibilities. Let's flip to Page #8. And in Page #8, what happened in Q3 is that we are in the final stage, and the government of Hungary told us they want to sign it now. End of November, the development contract for zero production of the Punter. And it will between EUR 250 million and EUR 300 million contract from the Hungarian government to Rheinmetall Hungary. And the point of that the Punter will be then also Hungary will be the first customer for the output is a very positive thing. And you see the Prime Minister, he said we are producing a link. We are buying a Leopard, and we have joined in the development of the Punter. So a private meeting is on so now I have a small so. And I think it's very positive that the first customer has really made that decision. Let's go to Page #9. In Page #9. You see that the Rheinmetall group structure will change. On the reporting side next year, we will bring sensors and actuators and materials and trade together. We create a new division in 2 weeks' time, we will give it officially into the market with the new name of the division. The importance is that we want to do it, first of all, to have synergy effects because we have to find synergies also to bring up the profitability on one side. The next point is that we can focus management attention if we have one division. Very important is also but also for the capital market that both together are now in a size where, for example, electronic solutions is and because over the next year's webinammunition electronic solutions and vehicle systems will grow much stronger. So vehicle systems will grow much stronger than the rest also, and that is the reason that vehicle systems, and that is already in place. We have 2 subdivisions, -- there is the main division vehicle systems where we are reporting. And then there are 2 subdivisions, one is Vehicle Systems Europe and the other is Vehicle Systems International. The reason for that is because over the next 2, 3 years, this division will grow up to EUR 5 billion, and this is an Amdocs company. So we said, we split it, and we can focus more to our customers. And so one subdivision is really focusing on Germany, which is now our absolutely our main customer with very strong order intake. And U.S. and U.K. over the next years, has the ability to grow very strong. And especially U.S.A. will be so strong that at the end of the day, maybe in some years, it's an own division if we are able to win some of these contracts. So far, the organization and now I take over to the financials to Dagmar.

[Dagmar Steinert, executive]

Thank you, Armin. Before I start to present the key financial data, I would like to point out that we have adjusted our financial KPIs after the closing of the EPA acquisition. The present operating result is now reported excluding PPA effects. Historically, PPA effects amounted to just below EUR 10 million per annum. The preliminary monthly PPA effect from Expal is currently estimated to account for around EUR 7 million. You find the reconciliation in the appendix on Page 22. Let's move on to Page 11, the key financial data. Rheinmettal ammunition as well as vehicle systems were the driving forces behind the sales growth of nearly 25% and the jump in the operating result to EUR 191 million. We also see a first positive sales contribution of EUR 41 million from Rheinmetall Expal systems. The relative strength of these 2 divisions contributed heavily to the 2.3 percentage point group margin improvement. The strong improvement on the operating result lifted earnings per share for the continued operations to EUR 2.31 despite an increase in the interest expenses. Let's move on to Page 12 for the divisional breakdown of our key financials. In our divisional reporting, we see that the sales increase was predominantly driven by the strong performance in our divisions, Redman ammunition and vehicle systems. In the division Redman ammunition call off from existing framework contract and a better product mix pushed the positive sales development as well as operating results margin. Projects for tactical and logistic vehicles explain the favorable development in our Vehicle Systems division, strong sales, but stable operating result in our Electronic Solutions division resulted in a lower margin development, which can be explained by an adverse product mix. The performance in our Civil division is slowly recovering from the cyber attack in the beginning of the year. The operating result in our Sensors & Actuators division is, however, still burdened with price pass-through issues for certain raw materials, ag plastic semiconductors and so on. The division Materials & Trade had a strong operational improvement, including the recovery of the Chinese casting joint ventures, but also profited from one-off effects for material price adjustments, which included prior periods as well. The effect in our non-divisional consolidation line results mainly from higher IT costs and a negative equity contribution from our joint venture for IG in Hungary. Please turn to Page 13 for a look at Rimeto operating free cash flow and working capital development. Our operating free cash flow improved by EUR 251 million year-to-date, mainly driven by a strong first quarter, which was characterized by slipover effects from the fourth quarter last year. Inventory levels have increased to around EUR 1.3 billion, while received prepayments helped to mitigate the further working capital buildup. Our divisions vehicle systems and electronic solutions account for most of the buildup in anticipation of the upcoming customers' orders. Let's move on to Page 14. Our net financial position is now fully reflecting the purchase price payment for Expal. As a consequence, the equity ratio came down to close to 30%, but this is still a very comfortable level with undrawn credit lines of EUR 900 million and a strong cash position of around EUR 400 million, our balance sheet remains very strong. Moving on to the next page. To provide a better understanding of the backlog development, we created the following overview. We start with the order backlog at the beginning of the year. Then we add the 3 components of derinet nomination for the 9-month period. And then we subtract the cumulative sales in 2023. So the result, the last column presents the order backlog per end of September, whereas the first half year saw a modest increase in line metenomination, the start of the second half year benefited from accelerating German orders, as Amin already told you. This lifts our Rimeto backlog to a record high of more than EUR 36 billion. And with that, and of course, the upcoming orders in the fourth quarter, our growth story is secured for tomorrow. With that, I would like to hand over back again to Armin.

[Armin Papperger, executive]

Thanks, Dado. So I like to flip to Page #17. And here, you see the outlook. We had a sales now after 9 months of EUR 4.6 billion. The expected sales from the backlog is EUR 2.6 billion. And there is another for the last 3 months is the way to go, and these are about EUR 400 million. This is service business, which is an ongoing business, then civilian chemicals, which we monthly book and especially 3 months on materials and trade and especially on the trade side where that you do not have on the backlog. So we have only about EUR 400 million to go to meet the fiscal year sales. And the that our expectation is that, first of all, we are safe on our sales guidance. Let's go to the next page to the guidance in total. So we spoke about sales between the EUR 7.4 million and EUR 7.6 billion. We have the operating margin where we said this is about this 12%. We have an impact, but not a very big impact also from the export side, but the impact is there, so that my expectation is that we are better than 12% on the operating free cash flow, we stay also on the level between 4% and 6%. And what we can oversee at the moment is that the Q4 is very positive, so that my expectation is that we are more on the upper than on the lower level of the operational free cash flow. So as we told before, Rheinmetall ammunition is now fully consolidated for the period from August to December. And the expectation is that we make more than 190 went on more than EUR 200 million and with an operating margin of more than 25%, which is a very positive result. So thank you very much for your attention, and now we are ready for Q&A.

[Operator]

And the first question comes from Sven Weier from UBS.

[Sven Weier, analyst]

The first thing I was hoping that you could help me to reconcile the contribution of Expal in the third quarter because when I look at the quarterly report, you said there was a EUR 41 million impact on revenues, but EUR 28 million were internal revenues, so that the net impact was EUR 14 million on the top line and EUR 17 million on EBIT. So could you just help me to reconcile those numbers?

[Dagmar Steinert, executive]

And yes, we have EUR 41 million revenue or sales from Expal. And out of that EUR 41 million, EUR 28 million was intercompany sales, which was taken over from Rheinmetall WM. And there, we used in a case Expal as a supplier and WM just had the external sales and therefore the earnings number, the operating earnings of EUR 17 million for Expal is the right number. But just to remind you, that's before PPA effects.

[Armin Papperger, executive]

This is a point which is very important. The sales force that we have in Ramita for sure is much bigger than the sales force than we have in Expal. And we brought over the last month to Expal, about EUR 400 million from ammunition business from Rheinmetall weapon in ammunition, Germany to Rheinmetall Expal in Spain and that is the reason that we can fill Expal a lot, and that is the reason that as Dagmar said, that there are difference in the figures. This will be also in the future because a lot of contracts will come into the headquarter of weapon nomination.

[Sven Weier, analyst]

The other question I had was just on the bridge you've given for the full year, the 2.6 million additional from the backlog and the $0.4 million from the in-for-out because when I look at last year, right, you had it was EUR 1.5 billion from the backlog and you had EUR 2.3 billion of sales then eventually Q4. So it was EUR 800 million for out. Is that the right way to look at it? Am I comparing apples with payers here or what would be the like-for-like comparison?

[Armin Papperger, executive]

Yes, I think you are right. And what we want to show you is that it never ever like its risk class, but we have a smaller risk than last year because of this EUR 400 million, as you see, the service business and the trade business especially is coming year-by-year. And usually, we are nearly, nearly fully booked. So this should be the information that we give to you. So the risk is not very high. This is number one, if not something extraordinary happens, for example, that a lot acceptance will not run or whatever, which always can happen. But at the moment, we are in a good way.

[Dagmar Steinert, executive]

And maybe to add from my side, we started to report in the year '23 Rheinmetall backlog and dry metal ammunition. And in '22, it was a different way to present it.

[Operator]

And the next question comes from Sebastian Growe from BNP.

[Sebastian Growe, analyst]

The first set of questions is from Vehicle Systems and goes to you, Mr. Papperger. You obviously had a fantastic margin in the quarter 3 was almost 13%. So I would be interested if you could walk us through the key levers that led you to that great margin. So how much is related to operating leverage with growth of more than 40% in the quarter. But how much might also be then related to mix effects Gringspop agreements?

[Armin Papperger, executive]

On one side, it's for sure that, and if you see what happened, growth of 40% on the vehicle systems side, for sure, there is a leverage effect insight. And on the other side, is it because, as you said, as you know, that we depreciated the vehicles that we had inside that we also have good margins on these areas because we paid the bill over the last 10 years when we had the vehicles here inside. And now we are here in a harvesting phase. So it's a mixture. And this is exactly over the next time what we want to continue.

[Sebastian Growe, analyst]

And can you remind us of how much is still sitting on the order backlog when it comes to those contracts that you referred to as you on the harvesting mode now?

[Armin Papperger, executive]

Let me say, most of the growth is still there.

[Sebastian Growe, analyst]

And the other question is related to your comment that you made on the vehicle systems revenues going forward, so to grow into a EUR 5 billion territory. What sort of time spend to get there? And can you also help us better understand how quickly that massive order backlog might convert into revenue?

[Armin Papperger, executive]

Yes. So the expectation is on the defense side, first of all, let me say, from the whole defense side, that we have a good growth rate. This year. We will have a better growth rate next year. And the expectation is that in next year, the growth rate is between 25% and 30% on the defense business. A strong growth rate on vehicle systems and we happen in ammunition, what we told you before. Weapon and ammunition will up to, and we have very soon a Capital Markets Day, so we give you detailed figures about that. Weapon and ammunition and vehicle systems will be the main drivers. But also electronic solutions will grow up over the next years very strong. So next year and the year after next year, so '24 and '25 will have a very, very strong growth rate on the defense side, so that we are still at the beginning of the performance.

[Sebastian Growe, analyst]

Then moving on to the order pipeline you made reference to also expectations for the next year at the EUR 13 million to EUR 15 million level for Germany. Obviously, we have been going through, we can say, walk you right that was not always kind of coming through when it was expected to come through. What sort of the kind of safety net in a way? Or would you really think that the EUR 13 billion to EUR 15 billion, especially the lower bound is this in a way will it prove when it comes to 24 orders from Germany?

[Armin Papperger, executive]

Yes. So I must say that most of them, what we told you also what is coming in is coming, as you said, will be booked a loss, yes. And if you see the Q3 and also the Q4, which will be for the Q3 never ever seen before inside the Rheimetall history that we have an order intake from the German side, which is on the level of EUR 7.5 billion. And as we said also that also this is coming on the Ukrainian side in total, EUR 2.1 billion, which is also Q3 was very strong. So my expectation is that we fulfill the potential that we told you before. And if you count up what happened this year, -- we are still on a level of EUR 10 billion with Ukraine of EUR 12.1 billion. And we told you it will be between EUR 13 billion and EUR 15 billion. And next year, it will be the same. So our expectation is that the government will fulfill their plan, and I'm absolutely fine with that. So what does it mean? It does mean that end of this year, our Rheinmetall ammunation, so the total backlog of the group is on a level of 40%, but my expectation is that next year, we will go up to EUR 50 billion.

[Sebastian Growe, analyst]

And the last one, more housekeeping one for you, Ms. Steinart. You pointed to the expiry related PPA charges of around EUR 7 million per month. So taking it to 80 million or so for the full year. Can you give us a better sense of how these PPAs should move over time, i.e., what's the rough annual levels for the period '24 to '26?

[Dagmar Steinert, executive]

Well, first of all, it's really preliminary PPA, so there might be changes. And as of today, with the EUR 7 million PPA effect per month, we expect for the full year '23, an amount of EUR 35 million for the year 2024. It will be something around EUR 80 million. And then it comes down because, of course, we have effects on order backlog, on inventories and so on. Therefore, the number changes in the years to come. And the best indication you could provide, so like stepping down by EUR 20 million per annum so just that we covered it correctly in our models. I would say stepping down roughly EUR 30 million per annum until you reach a level of around EUR 20 million. But as I said, it's preliminary and we might see some time in the full year figures.

[Operator]

Next question comes from Christoph Laskawi from Deutsche Bank.

[Christoph Laskawi, analyst]

Those will be on the ammunition business. Could you comment on the current utilization that you have in Expal and the Rheinmetall Axpal business for the major product groups. It seems like you're ramping up quickly also in Expal? Is there still far more room to grow? Because when we look at what Germany plans to spend on ammunition and others are leading in '24, there seems to be, and you commented on that significant growth ahead. So is there a need to increase capacity in the short term or are you well covered with the current setup?

[Armin Papperger, executive]

So in 2024, our expectation is that we can make more than EUR 650 million sales. in Expal totally covered for 2024. In 2025, we will grow. We are investing small numbers, not big numbers because the factories are in good shape. And in 2025, we will make more than EUR 650 million, maybe up to EUR 750 million. And in total, we want to grow up. And this is the total capacity with a small investment at the moment. This is a small double-digit million investment that we have to do to grow up to EUR 1 billion. So this is the ammunition that we have at the moment. Then another information, which is, I think, also new. We gave an offer now also to the Spanish government about the long-range of tilery system. And this is another opportunity to enlarge the product portfolio to produce the rocket motors and to produce also the missiles and with a very small investment because we also have mixes and all the other things for rocket motors inside Expal. There is an opportunity for some EUR 100 million also only for the Spanish market for long-range auxiliary systems. So with that together, maybe there is also a possibility to make more than EUR 1 billion. But the good thing is we are nearly fully booked '24, '25 and also nearly '26.

[Christoph Laskawi, analyst]

And following up, excluding or putting Expal aside the production footprint that you have in Germany and other regions, the utilization there is also pretty high and you're fully booked or if you could comment on that.

[Armin Papperger, executive]

We are not fully booked in that area. So I would say we are on a level on the tank ammunition side. We are on a level at the moment of 70%, 75%. On the medium caliber side, we are at the moment on the level of up to 80%, I think, worldwide now, yes, what is going on. On the ancillary side, we are very strong booked. I will say that over the next 3 years, we have a booking level of more than 90%. As I said, Expal pool, South Africa, then we are waiting for a contract, but then we are also nearly fully booked for the next 3 years from Australia which is going on so we are here in a good shape. But what we are doing is we make investment programs. So what are the investment programs now? There is an investment in our power technology to produce propellant for artillery. This is an investment program that we do in Germany. There is an investment program that we do in South Africa. These are the 2 main producers of modular charges for the ancillary side. And with the smaller investments, we are able to bring plus, let me say, 30% to 40% more capacity also inside that factory. So this is done. We are on the way. We gave that investment fee. This is part of our investment program next year that we will present you also now on the Capital Markets Day. But it's in a very simple range because it's not a lot of money. And as you know, the profitability of this product are fine. So we are in very good shape. The next point is, as you know, to enlarge our capacities is that the AdX production in Hungary and the ammunition production. That is in our books also. So we booked the order intake for we produce on one side, the factory. On the other side, we have this nearly EUR 900 million contract from Hungary for the ammunition contract. And now we are on the way into other countries, one Baltic country where we want to build up a production line for ancillary rounds with a maximum capacity of 100,000 extra rounds per year, which is a very fair model between this Baltic country and Rheinmetall. And on the other side, Eastern European country, which want to build up a factory for propulsion systems, where we are able to produce another 1,000, 1,500 tonnes of triple-based and double-based powder. And all that together, stabilize us or gives us the situation. We are very, very fine with up to 26%, but we want to grow. And the sales expectation is that in 2026, the weapon and ammunition sales will be now more than EUR 4 billion.

[Operator]

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

[Virginia Montorsi, analyst]

Just a quick one because I think all my questions on Expal have been answered already. Can you give us any update on supply chain, specifically if you plan on ramping up production this much? Is there anything that awards you is there anything that has improved significantly over the last couple of months, anything we should be aware of?

[Armin Papperger, executive]

Yes. So on the supply chain, on the ammunition side, the beauty is that the vertical integration inside Rheimetall is really done. So we produce the propulsion systems, we produce the primers, we produce the fuses, everything is internally. And we only have to buy in raw materials. The most critical raw material, as I always said, is linters to produce nitrocellulose about that. But this is one thing what we did. We now have in between a 3-year stock for linters for our production. So '24, '25 and '26 is absolutely safe and we order more. And we have no problems at the moment from our sources to get it. But this is the biggest thing because we have it not under control. On the vehicle side, we have this 5-year contract with our chip producers. So the microchips are, I would say, 99% under control. You cannot have 100%, but most of them are absolutely under control. Another bottleneck is armored steel. But on the armored steel, we also made a good job. I think that our purchasing guys made a great job that we have minimum for 2 years almost also in-house. So that it is always possible that one, and if one piece, especially on the vehicle side, if one piece is missing that we buy in, we will have a problem at the moment, I think that we would have it very, very good on the control.

[Operator]

The next question comes from Sash Tusa from Agency Partners.

[Sash Tusa, analyst]

I just had one last question actually about sensors and actuators and whether you think with the current structure, it's possible for that to get back to the historic 7% to 8% margins or does that need such a fundamental reorganization as part of the new division?

[Armin Papperger, executive]

Yes. So sensors and actuators at the moment is suffering with 2 things. The one thing is that we have a prefinancing of the material costs where the OEMs at the moment has a strong delay and some of them we are still in negotiations with the OEMs that the material price is that we get, let me say, the real pricing. So this is one thing where we are suffering. The second point is that we have higher capacities in our factories. Then at the moment, the nomination letters are coming from the OEM side. The reason for that is that the European car industry is not working as we as expected. And point number three is that we booked a lot of electromobility, but most of them are starting in '24, but are really the ramp-up curve is done in the year '25. So a mixture of all that 3 things at the moment is bringing us in the situation that you see in Q3. I think that in Q4, we will get some of the material pricing as I told you, where we are in discussion with the OEMs, is coming back. And the other thing is on the sensors and actuators side that that are the synergies that we are looking at, that we have to find the synergies to find another 1, 2 percentages in this area, and that is the reason that we bring with the 2 divisions together.

[Operator]

And the next question comes from David Perry from JPMorgan.

[David Perry, analyst]

Can I just make sure I understand Slide 22 just on the PPA. And I'm sorry if I this wrong, but just to be clear, if there's a new definition of EBIT now or Romael that we haven't had before, I guess that's the first question?

[Dagmar Steinert, executive]

Yes, there is a new definition of operating earnings. We report our operating earnings before amortization of PPA and the historic numbers we adjusted as well but better for the full year 2023, were just below close to EUR 10 million. Yes, we corrected, of course, the year 2022 as well to compare apples with apples

[David Perry, analyst]

The second part is staying on Slide 22. If I look at the graph on the right-hand side, what's the difference between the 16 and the 5, please? Is the 5% just Expal and 16 is all previous PPA effects?

[Dagmar Steinert, executive]

So 16 million is PPA effects from Expal and historic effect for Q3. And the 5, that's just some other one-offs, which we normally adjust in our operating earnings.

[David Perry, analyst]

And so I think you said Expal 7 a month. So in the 16, is it 9 of other and 7 of Expal. Is that how we think about that?

[Dagmar Steinert, executive]

We have 2 months for Expal. So it's 14% for Expal and 2 for others. And these 2, if you multiply by 4 for the full year, you have 8 to 9, and that's what I said, it's just below EUR 10 million per annum, the historic PPA.

[David Perry, analyst]

Is your policy to adjust EBIT for PPA, but not to adjust net income and EPS?

[Dagmar Steinert, executive]

Well, in our external communication, we adjust all these figures because that makes sense for us. In the report, of course, you find as well the numbers as reported after PPA effect.

[David Perry, analyst]

Across the sector, some companies will leave PPA out of net income, some don't. Most do, the vast majority do I can only think of Leonardo that doesn't. But I mean you deal yourself, you just gave us that GBP 80 million number for 2024 pretax, obviously. You're going to just take that down. That will be in your reported EPS number. You've got no plans to adjust for that. Rheinmetall adjusted EPS number.

[Dagmar Steinert, executive]

Well, our capital market will give you more insights, but we will have an adjusted number for our external communication. But of course, you find the real number after all these accounting and bookkeeping always in our report, quarterly reports full year reports and to make up your own mind.

[David Perry, analyst]

My sense throughout much of this year was you were trending to the lower end of the working capital for the ramp-up CapEx ahead of the ramp up. So I'm just curious why amino said you now think you'll be at the upper end of the range. That seems to be a different message.

[Armin Papperger, executive]

Yes. The reason for that is that at the moment, some of our customers gave us a signal that they want to give in Q4 also huge numbers of down payments. And that is the reason that we are not longer on the lower, but it is possible to go to the upper range. That is the reason.

[Dagmar Steinert, executive]

And in addition, we might have some slipover of CapEx into the next year.

[David Perry, analyst]

And just as a follow the customers are now saying they'll pay more. Would that include Germany? Is this a structural change in the market? Or is this just a one-off with an export customer?

[Armin Papperger, executive]

It's also Germany. Especially for the contract also that we have from Ukraine. And you should know, and this is also very important that 50% of our ammunition sales, 50% will be in quarter 4. And there is a lot of cash, which is coming in. So this is a double effect that a very profitable business, the most profitable business will make 50% of the sales. And our expectation is at the moment that the customers are also paying that things and the second thing is the down payment.

[David Perry, analyst]

And do you think this is the new normal from Germany? Or is this something that's just for this year that you're going to get sort of more favorable.

[Armin Papperger, executive]

The Germans changed their strategy because it is a clear decision from the government, especially also from the office of the Chancellor that we said we have to give more cash to the industry. Otherwise, the industry is not able to grow as much as we want as they grow and they need all the stuff. And the point is, as you see, they bring now all the orders also of the EUR 100 billion into the industry. So I think it's a long-term trend.