Good afternoon, ladies and gentlemen, and welcome to the RENK Group AG conference call regarding the 2024 Q1 results. 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, Mr. Ingo Schachel.
Yeah, thank you very much, operator. 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 first of April, is on the call as well. Before Susanne begins the quarterly results presentation, I will briefly hand it over to Alexander to introduce himself.
Yeah, dear Ingo, many thanks for the introduction. Dear analysts, dear investors, I'm very, very happy to be on this call and to introduce myself. Alexander Sagel, 53 years old, and very glad to be now, finally, after almost 19 years with Rheinmetall, to be part of the RENK team. As you might know, I joined RENK in April this year, and during the last six weeks, I had a very intensive but truly great phase into the RENK business and RENK work, 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 am 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 five weeks on the Eurosatory in Paris. Again, many thanks for this opportunity, and over to you, Susanne.
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 2022, 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 long-lasting debate in the U.S., and finally, the U.S. has approved the aid package of $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 war 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 UK together, we have roughly four times more people than Russia, and we have almost ten times more GDP, which we generate. So Europe should be in the 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 a 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 direct involvement of Iran, and not just via proxies like Hezbollah, Hamas, or 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 a strategy by the Israelis, with respect to Gaza after war. So how to, how to stabilize the area, how to, let's say, get that in a, in a, in a peaceful environment later under control.
We see that support of Israel is also under huge criticism and, more and more in debate, which, and partly even shrinking, which, is worrying too, in our view. So, important here is, that Israel is coming up, with a concept how to run and stabilize the Gaza area, after this intensive war and fight. And on the other side, I think we should all not forget, who has started this escalation and this war, 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.
This is something which sometimes is lacking in the discussion about this awful war, which is continuing in the Middle East. We also, unfortunately, do not see a, let's say, a relief of the tensions in that area. The role Iran is playing also in conjunction with Russia and China shouldn't be underestimated, also with respect to their nuclear capabilities, which are obviously far advanced. Mentioning China, I think also release of tension in the area are not visible. We do not have an escalated conflict with respect to Taiwan. Taiwan is ramping up. Also, 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 on 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 Strait of Taiwan to increase and show power of fear. And what we see at the moment is clearly that the old world, which we are used to, is not coming back.
We have conflict of systems, autocratic and dictatorship against democracy, and this will accompany all of us definitely for the next 10, 15, 20 years. 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 aggressors like Putin clearly understand it's not worth to even think about to move into NATO territory and not even try that. So 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 six, let me begin with a summary of the key highlights, Q1 2024. Our order pipeline remained strong, and our total order backlog remained at a high level. We won a large $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 discuss jointly Q2. But 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 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 two 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 trend seen in the second half of last year.
Our order intake in 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 a 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&Ls, as we love it. Very stable cost items as a percentage of sales on most lines. Gross profit is the only notable change with a 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 flows 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 mid-year 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 fixed 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, a 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.
Thank you very much, Susanne, and also a very warm welcome from my side. Please move with me to page number 8 and talk about the group figures. As we've already said in our full year results call, our fixed order intake can be a bit lumpy. The fixed book-to-bill was below one time in the first quarter. In the meantime, we've announced a large order win worth $100 million in April. If we had won this a few days earlier, our Q1 book-to-bill would have amounted to 1.3 times. It is what it is, but Q2, as Susanne has alluded to, gonna reflect this already and show a better development. Revenue growth accelerated in first quarter, driven by a 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 proportionally. 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%-18% adjusted EBIT margin, an improvement of 80 basis points year-over-year. At the midpoint in Q1, we have started well. We delivered a 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 2.3 times. 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 number 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 two 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 $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 highlighted 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 outputs 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 expenditures, 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 -6% to +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 a groundbreaking ceremony for our new plant in India, underlining our commitment to this important market with significant growth for us. Next page, Slide Bearings 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 after-sales activities in this segment, and enjoy the benefits from electrification, driving higher demands 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 number 13.
Adjustments in the first quarter, besides the PPA effects from acquisitions, relate 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 our high-yield bonds. In particular, if you see, number 1 and 2 on this chart, this is rather minor adjustments, so it's, it's a clear Adjusted EBIT number that we are reporting there. Next page, net working capital. We 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, 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 and 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 there, 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 in accordance with our guidance on that KPI.
Despite this, free cash flow was only marginally positive in the quarter, as we had to digest non-recurring 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 non-recurring 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. 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 include an aperiodic real estate tax payment of EUR 3 million.
With these exclusions, let me please hand back to Susanne, who will take you through the outlook before our Q&A.
Thank you, Christian. So, coming to slide 17, guidance for this year, we confirm 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 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 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 margin, 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 thirteenth of August. Since we published our midterm 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 midterm 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 growth scene.
We will not compromise on margin quality, but in our thinking, we will aim to create value for you as 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 you as 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 us for this year. I'd like to conclude with some thoughts on those upcoming months. We have presented these five areas of priority to you on a fiscal year results call in March when we reported 2023.
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.
Supply chain is something which is leveling out and is getting more and more under control, and also our hiring quote in Augsburg for new people and for ramping up our employee space is working very well. During February and March, we were happy with the performance progress. I really have to say that, and thanks also to the entire team who has done that and delivered that, and we have very clear plan 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 12-18 months.
... So we now know what needs to be done. This has been causing in the U.S. some operational pressure that have 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 midterm 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. 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. 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 questions.
Yeah. Thank you, Susanne. And before we go into Q&A, I just wanted to remind you that you find more information on our IR website, and if you've got any questions or want to request a meeting, just drop me an email. 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 eighteenth and nineteenth of June, our Capital Markets Day on the tenth of September. If you've got time, 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.
Ladies and gentlemen, if you would like to ask a question, please press nine and the star key on your telephone keypad. If you would like to cancel your question, please press nine and the star key again. Please press nine and the star to ask a question. So please press nine and star if you would like to ask a question, and press nine and star if you would like to cancel your question. And we have the first question from Christophe Menard. The floor is yours.
Yes, good afternoon to you all. I had three questions. The first one is on the VMS order intake. I understand there is some phasing and comm 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 delays. 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 mentioning R&D, actually, it's the, I mean, my last two questions are linked. So what typically is causing the increase in R&D, what programs?
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 twelve months, apart again from Q4. So can you just give us the moving parts of the margin in VMS? Thank you very much.
Yeah. Hi, Christophe. Let me start, and maybe Susanne's 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 two 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 EUR 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 1.3 times. We wouldn't discuss the topic here. So that's basically the delayed one in here. Nonetheless, we see-
By two weeks delayed.
Yes. I mean, it is what it is, yeah.
Yeah.
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 early on, we would have been on 1.3. On the margin, as you rightly said, we improved operational leverage significantly. We had, we still had a very, let's say, tough January, Susanne and Alexander, but made considerable progress on February and March, really increasing output on a new level in the Augsburg site.
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. 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 products, 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 Susan's point, that we 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?
Yeah, yeah, it's extremely clear. Thank you for the granularity.
Thank you, Christophe.
The next question comes from David Perry, from J.P. Morgan. David, the floor is yours.
Hello, Susanne and Christian.
Hi.
Hi. One question for each of you, if I can. Susanne, thanks for your, your speech at the beginning, which was helpful. One, 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.
I understand that.
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, on the moving parts. Thank you very much.
Oh, 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.
The Green Party, obviously, is voting for giving up what we call the debt brake. 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 that the money needed for 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.
Basically, we all know that because if you see the 2%, we do not spend even 1% to re-equip 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 where do 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 a regular defense budget 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 the question, how to finance this and where to cut the corners, or whether to, let's say, release the conservative policy on making additional debts. This is the situation in which we are in.
Very helpful. Sorry, just to clarify, is there any risk at all on 2024? Thank you, by the way, for the very helpful answer.
No.
But do you... Any risk that 24 orders don't come because of budget issues, or is that in the bag as far as you're concerned?
No, no, 2024, I don't, I do not see a risk at all. Basically, there's an overplanning of the existing budget. So the budget, which is approved, will definitely be spent because there is, at the moment, as I said, kind of an overplanning. So the issue is really on 2025. 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?
I personally expect even that we will not stick to the 2%, but will 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 the election, and I would expect that things are then changing, hopefully to the better. But you shouldn't be worried at all if these, let's say, press headlines and articles remain and continue for the next months, that there is a big budget fight and that they are not in agreement. And Mr. Pistorius, as Minister of Defense, is now making a good proposals how to solve budget, which is the job of Mr. Lindner.
So, Scholz has announced that he will sit together with Habeck, 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 their 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 lists against reality. And that's why it's so important that the 2% is not questioned by nobody.
That's very helpful.
Now down to the boring grounds of cash flow. It's a quite a big lump from the 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 with our efforts, despite the growth, we'll be on that level and strive for some improvements. Of course, 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, 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 give you enough, Connor?
No, that's helpful. I'm amazed you look at my research, not many CFOs do. So just-
I do. Not only on yours, on all of them.
We have read each and every figure and word.
The reason I ask that is I've got a good double-digit in cash flow.
You have 88. You have 80, 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.
It's a lucky number in China, isn't it?
All right, that's, that's helpful. Thank you very much.
But again, David, you know, if we are progressing in Augsburg, and as Susanne has alluded to in the U.S., and output comes, there is no reason why cash flow shouldn't follow the development on the profit side.
Yep.
Thank you.
Thanks.
There's one more question from Sven Sauer. If you want to ask a question, please press nine and the star key on your telephone keypad. Sven Sauer, the floor is yours.
Yes. Hello, everyone. Thank you. I have two 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? Yeah. Thanks.
So maybe first on the lockup. The lockup expires, obviously, in August. Anytime in any point in time, Triton 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, 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 in the Q1 that we might have seen in the due course of the year. And basically, this was more a technical effect that faded out lumps from last year.
I think there's no special topic behind that.
Normal tax rate for the year, 28%?
Exactly.
30, 30%.
In the range of around 30% ±.
... Okay, great. Thank you.
Welcome, Sven.
Yeah, thanks for your questions. We had received two questions from George Verbeck by email. George, I believe the question has been answered already, so we'll ask for another round of questions. Operator, maybe take Victor's question first, and then we'll ask for our last round of questions. Operator, let's take Victor's question.
Victor, are you in the line?
There is a new question from Victor Allard. The floor is yours.
Good afternoon. Seems there is a bit of a lag. I hope you can hear me fine now.
We can hear you well, Victor. Nice to talk to you.
Loud and clear. Good to have you.
Great. Thank you very much. I have a couple of questions. First one is on the supply chain. We see 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 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.
I know the campaigns are often confidential, but yeah, it would be great if you can comment to the extent that you can. Thank you very much.
Maybe I start. Thanks for your questions, Victor. I start briefly with order intake and 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 Italy, in Italy, sorry, Italy. In Italy, and also Czech Republic, we can also expect maybe a further move in Germany with the call of further options of the frame contract, which we have in place in Germany. For your recollection, there's a frame contract of 123 Leopards, new Leopards to be built.
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 had 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 demands for Leopards.
As you are aware, we are working on a larger campaign in India for the main battle tank, K2 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. A minister of defense is hence also clear 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 own designs with respect to their Borsuk infantry fighting vehicle in two 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 into one? No, because we have meanwhile a 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 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 easygoing, not to take care of things, but I would take it off the list of top management priority and issues. 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.
In hindsight, Victor, it was the right thing to put EUR 30 million on inventory as parts, because we saw on the back of these inventories that the pipelines could be stabilized, as Susan has said, and we saw in February and in March this year, that on the back of the smoothing supply chain, we could increase the outputs here in Augsburg, which led to the numbers you have in front of yourselves.
Thank you very much. That's powerful.
Thank you.
Yeah, great. Thank you very much, everyone. I guess there are no further questions at the moment. I mean, if you have a quick last one, just quite quickly, but otherwise, I'm assuming we've answered your questions. And I'd like to thank you very much for joining this call and for your interest in RENK. I hope to see you soon at one of the upcoming events. Thank you. Have a good day.
Thank you. Bye-bye.
See you next week or in Paris. Bye.
Bye-bye.