Dear ladies and gentlemen, a warm welcome to the RENK Group AG full year 2024 results analyst call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. Let me now turn the floor over to Christian Weiß from Investor Relations.
Thank you, Operator. A very warm welcome from our side. Our financial year 2024 investor and analyst call is hosted by our CEO, Dr. Alexander Sagel, and our CFO, Anja Mänz-Siebje. Now, I would like to hand over to our CEO, Dr. Sagel. Alexander, please go ahead.
Christian, thank you very much. Ladies and gentlemen, good morning, and thank you very much for joining today's call. My name is Alexander Sagel, and I took over as CEO of RENK at the beginning of February, having been the CEO of the company before since April last year. I'm joined today by my dear colleague, Anja Mänz-Siebje, our CFO. Ladies and gentlemen, today's presentation has two parts. Firstly, a quick review of the 2024 figures. Most of them are already known, so we will try to keep it focused and comprehensive as much as possible. Secondly, we will provide you with an update on 2025, which includes not only a discussion on our top priorities and the first indication of how we started into 2025 during Q1, but also our full year 2025 guidance.
Very important to mention, we are reporting at a time of significant developments for the whole defense sector, and RENK is, as you all know, very much at the heart of this. There is much to talk about the implications from increasing defense budgets across Europe on industry and company level, and we are very happy to do so. Fair to say that for the time being, a more concrete or tangible evaluation of business effects for RENK will take time to formulate due to the early process regarding the NATO planning and subsequent budget allocation to the different domains and programs across the European nations. However, it is also fair to say that these potential business effects are not included in our current midterm targets, such as the 15% CAGR, the EUR 2 billion revenues for 2028, and also not in the current.
I will touch this important point later during the presentation. I would propose now, ladies and gentlemen, we move forward and go into the presentation. Let me start with a high-level approach on page number four on our most important key financial key metrics for 2024. To sum it up, and without going through all figures shown, in all relevant key metrics, RENK realized significant improvements in 2024 compared to 2023. Needless to say that we are very proud about this achievement and that we are also very proud about the performance of the entire RENK team. The strong focus on operational performance and execution in our lead plants, VTA and REM in the US, and the realization of leverage effects from increased volumes were driving significantly year-over-year revenue and adjusted EBIT improvements.
At the same time, we continued our careful and thoughtful allocation of capital, for example, by staying in the 3% level of our CapEx spending due to our well-invested industrial base, with a clear focus on capital return and cash generation during this growth period. For example, with a ROSI of almost 20% and a net leverage of 1.7, we are almost hitting our medium-term targets for these two key metrics. As a result, the proposed dividend will increase 40% year-over-year to EUR 0.42 for 2024. As you can see in the pie chart on the right side, our business model remains unchanged: strong and growing defense share to now 72%, a strong aftermarket business of 40%, and a diversified regional customer base.
On top, to secure our leading number one position in mission-critical drive technologies, we realized significant progress during 2024 in our key technology fields, but also in key customer projects. I mean, you know from previous calls, we are always looking and working very closely with GD, for example, on the M1E3 Phoenix program. You know about the corporation acquisition of the IPs from Kinetics. You heard about our user story ATREX, main battle tank, and the focus on hybridization. I will touch this point later on during the presentation. If we now go quickly to page number 5, thank you, you can see that our total order backlog has again increased to a level of strong EUR 5 billion, which is about 4.3 times last 12 months' revenues level.
Our fixed order backlog increased by EUR 266 million compared to Q3 2024, despite our strong output in Q4 2024. As you already know, the main drivers of this growth were three major orders just before Christmas last year, with a total value of more than EUR 360 million. I think you all know this one. I mean, we are talking about the KNDS order for the Leopard 2A8, K2 Poland by Hanwha, and a third international customer. On top, we maintain a highly visible soft order backlog with the current level of around EUR 2.2 billion. As said before, this does not include, for the time being, any upside from the expected increasing defense budgets in Europe. Having said this, I would like now to hand over to my dear colleague, Anja, in order to have a deeper look into our 2024 figures. Anja, over to you.
Thank you, Alexander, and hello to everyone. I'm glad to have the opportunity to guide you through our financials. Let's start with the group perspective. During the fourth quarter, we achieved a very high level of order intake, reflecting the successful acquisition of three large orders, which Alexander already mentioned just now. Our book-to-bill ratio stood at 1.6 times in Q4, demonstrating strong order momentum, while the full year fiscal year 2024 book-to-bill ratio reached 1.3 times, further reinforcing our solid market position. With a look at revenue, we delivered significant growth of 23.2% year-over-year, primarily driven by strong VMS performance, especially in Augsburg. In addition, we stabilized operational efficiencies in Muskegon, both of which contributed to improved profitability, especially in the second half year. Despite higher output levels, we achieved a considerable increase of 16.8% in our fixed order backlog for the group.
Let me continue with our profitability and other key metrics. Our strong revenue growth has translated into a significant increase in adjusted gross profit, demonstrating the robustness of our business model and operational efficiency. We experienced solid volume growth, benefiting from successful improvements, particularly at our Augsburg facility. These efforts have enhanced the higher operating leverage and so our cost structure and overall profitability. Our margin mix was favorable, driven by an increased share of aftermarket business, which continues to be a key contributor to our profitability. Adjusted EBIT for the fourth quarter of fiscal year 2024 showed a significant increase and so made an important contribution to our full year performance. For fiscal year 2024, adjusted EBIT reached EUR 189 million, representing a 16.6% adjusted EBIT margin, positioning us at the upper level of our guidance range and underscoring our strong financial performance.
Our leverage ratio declined sharply to 1.7 times of LTM adjusted EBIT compared to fiscal year 2023, supported by high revenue levels and a higher cash balance. This improvement reflects our disciplined approach to capital management. If we turn the page, let's focus on VMS. In the fourth quarter of fiscal year 2024, order intake was driven by three large order wins, as alluded by Alexander earlier, resulting in a 27.2% increase for the full fiscal year compared to fiscal year 2023. This strong order momentum reflects our ability to secure key contracts and reinforce confidence in our long-term growth perspective. In Q1 2025, RENK America has received two significant orders totaling over $150 million to supply transmissions for two projects. Alexander will provide further more detail later on. Let's move to VMS revenue trajectory.
VMS achieved significant revenue growth of 39.9% in Q4, driven by operational improvements and higher output levels, especially in Augsburg, and RENK America stabilizing at an output level of 3.5 transmissions. This performance underscores the effectiveness of our efficiency initiatives and operational execution throughout fiscal year 2024. Margins also improved significantly as a result of strong operating leverage and continued operational enhancements. Additionally, efficiency at our Muskegon facility has stabilized, further supporting our overall profitability. The year-over-year adjusted EBIT margin comparison was impacted by one of the items recorded in fiscal year 2023, namely the release of guarantee provisions. However, on a like-for-like basis, adjusted EBIT increased from EUR 98 million, representing 18.5% adjusted EBIT margin in fiscal year 2023, to EUR 140 million, representing 20% adjusted EBIT margin in fiscal year 2024. Let's turn to marine and industry.
In fiscal year 2024, M&I order intake remained at a high level, though it showed a year-over-year decline, particularly in Q4 fiscal year 2024 compared to Q4 2023. This was primarily due to order shifts towards fiscal year 2025. You may be aware of our press release in February stating that M&I successfully secured orders with a total value of almost EUR 50 million. On this topic, Alexander will provide more further detail later on. Our pipeline remains strong, supporting future growth, and we view the dip compared to fiscal year 2023 as a timing effect. M&I revenue growth trajectory remains firmly intact, with a particularly strong performance in Q4 2024. The primary drivers of this growth were new business and increased share of aftermarket, both of which continue to provide a stable and recurring revenue base. Adjusted EBIT saw a strong increase, outpacing revenue growth on a year-over-year basis.
In Q4 fiscal year 2024, adjusted EBIT remained on a prior year level. For the full year 2024, adjusted EBIT margin is at a very good level at 10.6%, driven by the expansion of higher margin new business and a growing contribution from aftermarket activities. A few comments on slide bearings. Slide bearings continues to experience strong demand for E-bearings, as well as aftermarket sales, particularly related spare parts. While order intake for horizontal bearings remains solid, some orders have been shifted towards fiscal year 2025, impacting near-term intake figures but reinforcing our long-term growth perspective. In fiscal year 2024, slide bearings achieved considerable revenue growth of 12.6% year-over-year, primarily driven by increased aftermarket activities. Demand for bearings in electronic motors, generators, and maritime applications has been a key contributor to this expansion. Our revenue growth remains on a substantial trajectory following the strong momentum established in previous periods.
This reflects both the resilience of slide bearings core business and its ability to capitalize on emerging market opportunities. Profitability remains at a high level with 17.2% and is above group level, with a significant year-over-year improvement. This was achieved through enhanced margins in new equipment sales and a higher share of aftermarket, both of which continue to strengthen our overall earnings profile. Let's continue and talk about the adjustments made to reported EBIT and the underlying reconciliations. We closed fiscal year 2024 with EUR 160 million operating profit, representing a 30% year-over-year increase from fiscal year 2023. This growth rate reflects our continued operational efficiency I mentioned earlier, combined with a disciplined cost management. When adjusted for PPA effects, our operating profit reached EUR 159.9 million, compared to EUR 135.9 million in 2023.
For Q4 2024, we saw an operating profit of EUR 57.7 million, more than 80% higher than Q4 2023's EUR 31.9 million, reflecting strong year-end performance. Most of our reconciling items are well known already, with capital market readiness costs reflecting the remainder of our IPO process earlier this year. Other adjustments primarily relate to the RENMA program, which enhanced the RENK America operating model, as well as consultancy costs for refinancing our long-term debt. For further details on this, please refer to page 27 in the appendix. Let us continue to a detailed look at our working capital development. Our working capital as a percentage of sales decreased by 190 basis points. This favorable development was primarily driven by higher customer prepayments in Q4 2024, reinforcing our liquidity position.
At the same time, due to operational requirements, we have increased our inventory levels to execute our strong 2025 production pipeline. Please keep in mind that customer advance payments may not offset such increases as of the end of reporting quarter. Looking to the future, we will continue our efforts to further optimize our working capital through the initiated working capital optimization program to achieve a working capital ratio of around 20% in the midterm. Moving to our cash flow statement. In fiscal year 2024, we generated a strong unlevered free cash flow of EUR 137.7 million, nearly three times higher than fiscal year 2023. Let me highlight the following. This increase was primarily driven by higher EBITDA and the working capital improvements mentioned, especially when looking at Q4 and its customer prepayments. CapEx is slightly below our 3% target, including expenditures for intangibles acquired from General Kinetics.
Other reconciling items primarily include cost reimbursement linked to our IPO and a neutralization of the increase in pension obligation. In total, free cash flow post-interest payments stood at EUR 87 million for the year, a significant increase from EUR 21.1 million in 2023. The increase in interest expense primarily relates to a one-off for early bond redemption in the first half year of 2024 that amounts to around EUR 7 million. In summary, RENK delivered a strong free cash flow performance in 2024, significantly improving our financial flexibility and leading to a significant increase in our cash conversion rate. On a three-year average, our cash conversion is above 60%, underscoring our ability to convert earnings into cash. In line with our earlier communication, we will track our capital efficiency based on ROSI.
With a look at the 2024 development, we are already close to our communicated midterm target greater than 20%. Beside our operational performance denominated in adjusted EBIT, we managed to keep our capital basis stable. This is due to our fully invested platform that enables us to make best use of our resources and which is in line with our networking capital and CapEx midterm guidelines. At this point, let me thank you for your attention. It was a pleasure for me. Thanks to the outstanding year with many challenges, but even more achievements. With that, I now will hand over to Alexander, who will take you through our 2025 guidance, key highlights for Q1, and our strategic priorities of 2025.
Anja, thank you very much for this.
Ladies and gentlemen, during recent weeks and events, such as, for example, the Munich Security Conference, it became obvious that we in Europe finally are responsible for our own security and deterrence capabilities. Europe is not anymore in the prime geopolitical focus of the U.S., and as a consequence of this fundamental change, Europe and Germany in particular have reacted by deciding on significant increases on future defense budgets. While the exact amount and allocation of these new budgets are not clear yet, it is obvious that the defense spendings of the European NATO nations will increase from 2024 level of approximately EUR 440 billion to somewhere between EUR 600 billion-EUR 900 billion annually for the years to come, always depending on the defense spending as a function of the GDP. The key question is, what will be the implications for RENK from this new situation?
There are basically three effects which could drive RENK's business. Number one, additional new platforms for the domains land and sea, for example, as a consequence from NATO requirements on Germany regarding the number of heavy additional brigades. Second, an increase of the circular reserve for the land platforms. And third, finally, an increasing demand for spare parts and overhauls simply due to increasing equipment use, due to increased trainings, et cetera, et cetera. While the first effect is simply increasing the number of new armored vehicles or ships during the next years and depending pretty much on the capacity ramp-up of our primes, the last two effects are for securing mission readiness of today's platforms.
We, as RENK, will therefore follow and observe in the upcoming weeks and months very carefully the defense budget allocation decisions regarding domains and projects while staying in very close contact with the various MODs and primes, and we will try to quantify this additional business potential. Lastly, and in parallel, we are currently conducting different scenarios for capacity increases and supply chain in order to be prepared in case of significant additional volumes on top of our current midterm growth scenario. Ladies and gentlemen, I would propose now let's move on to page number 18. How was the start for the year 2025? First of all, it's important to note that we did continue with our strong order situation from Q4 2024 into the first quarter of 2025.
As you all know and just mentioned by Anja, we had several new orders right in the beginning of the year for the Navy segment, for different international customers and for different applications such as patrol boats, frigates, or support ships. This continues because also during the last weeks, we received new orders for further international customers, also for offshore patrol vessels and high-speed patrol corvettes. Same for the VMS segment, where we received several new orders such as the SOAR III contract, mentioned before by Anja, more than $150 million, mainly for the Bradley and the AMPV transmissions, and further contracts from different European and international customers, including several new spare part contracts from level two user nations such as Germany, Austria, Switzerland, and Sweden. Looking on the operational performance, we are also here in a good shape.
RENK just continues on the three, three and a half transmissions per day rate from Q4 2024, and also VTA, as our largest plant, is running with a strong performance. You are all aware about the very recent leadership change at the RENK Group by appointing Emily Schiller on March 1 as new CEO to the executive board. I have to say that I'm very happy with this decision and given the high importance of operational performance and excellence on our overall company performance and the proven capabilities and track record of Emily during 2024. In February, Moody's raised our RENK Group's rating to Ba2, which also reflects our solid financial structure. Finally, I would like to mention our promotion to the German MDAX.
Just a little bit more than one year after the IPO, we are now listed in the second-tier German stock index, thanks to an increasing free float level due to the reduction of Triton shares, but also thanks to our shown very good performance during the last 12 months. Walk the talk, this is our clear and most important guiding principle. Last and not mentioned here on this chart because it's simply brand new, our strategic R&D cooperation with the leading European microchip developer and producer NXP in the field of autonomy and remote control driving capabilities, as published yesterday. We are very happy about the strategic collaboration with the leading microchip producer, and it will support clearly our digitalization strategy to provide superior new mobility capabilities to our customers, or how we call it, software-defined defense mobilities. Now we come to our guidance on page number 19.
In summary for 2024, we successfully achieved our narrowed guidance for both for revenue as well as for adjusted EBIT. For 2025, we do expect revenues of more than EUR 1.3 billion and an adjusted EBIT of between EUR 210 million-EUR 235 million. Our medium-term targets remain for the time being unchanged, meaning a 15% CAGR for revenue growth and EUR 300 million adjusted EBIT for 2027. As explained earlier, it is still too early to quantify additional business opportunities due to the increasing NATO Europe defense budgets. As the year progresses, we hopefully get more visibility on how these budgets might be allocated to different programs, for example, here in Germany, and therefore if and how we would need to adjust our midterm targets. Let's go on page number 23 . Now some final words on our top priorities for 2025.
As you all know, operational performance and excellence is a central element of our strategy, and we were able to realize important improvements during 2024, not only in our lead plant VTA here in Augsburg, but also in our REM plant in Muskegon after a very challenging first half year. In 2025, we will further enforce our efforts and continue with our excellence programs, not only in our lead plants, but also along the entire internal value chain, including, of course, procurement. Furthermore, as mentioned before, we will prepare for potential ramp-up scenarios of our production capacities in case of significantly higher volumes above our current midterm 15% CAGR and EUR 2 billion revenue targets.
Furthermore, a number of key order intake programs are on our, how we call it, hunting list for 2025, which need to be secured or where we have to achieve major programs for future order intake beyond 2025. Just to give you a bit of color on these programs, if you talk, for example, about the VMS segments and 2025 relevant order intakes, we talk about additional K2 options for Poland. I mean, up to 160 additional vehicles is possible. I mean, an engine program of our REM facility, our ABDS engine for the IDF by FMS programs in the US. The next round for SOAR IV programs for US, we talk about various IFV programs for Latvia, for Italy, and even for Romania. Also, if you talk about main battle tanks, clearly Italy and Romania is on our target list.
If you talk about, and just as an example, future order intake programs, I mentioned before the M1E3 Phoenix next-gen Abrams in cooperation with GDLS, and also a very prominent program because we always mention it, our 15-ton tracked ATV or APC platform for a European prime, which I will explain later. We also need to make progress on R&D projects in our key technology fields, such as electrification, hybridization, digitalization, and autonomy in order to secure our leading technological position for the future and also to develop new future revenue streams. The NXP cooperation fits in this regard perfectly into our overall technology strategy.
Furthermore, capital allocation and returns is also high on our agenda for this year with a specific focus on working capital optimization by the implementation of strict structural measures to optimize inventories through all our operations and also by executing our 3% CapEx spending limit. Last but not least, I would like to address M&A as an important task not only for 2025, but also for the upcoming years. In short term, we are focused on the PMI process of Synthetic Gearing Systems and the realization of first synergies during 2025. For your information, closing is expected soon during the first two weeks of April. I also want to point out that M&A is for RENK an important strategic lever for future business development and organic profitable growth and therefore capital allocation.
We are constantly monitoring the market for value accretive acquisitions, and if you are looking back in the recent history of RENK, you will see that we have a good track record with M&A transactions every one to two years. Having said this, thank you very much for your attention, and we are now looking forward to your questions. Before we enter into the Q&A, please allow me to give you a little bit more on an update on one of our most important development programs I just mentioned before. As you all know, we signed a development contract with a European prime on last year's Eurosatory in order to develop a new mobility class for a 15-ton vehicle. Now, finally, after we got the approval of the customer, we are happy to communicate and to give you a little bit of insights on the vehicle.
You see the picture right here taken on the Arctic event of Patria last week on March 19th. The current name of this vehicle is the famous APC concept, where the market introduction and the start of the low rate initial production is scheduled for the first quarter of 2027. This is a quite unique platform. It has a 15-ton weight. It has a load capability of 3.5 tons, so you could upgrade this platform with additional turret or weaponize it. The key capability of this vehicle is the high mobility and the high speed and driving through very challenging environments like 1 meter and 50 high snow or through muddy terrain or soft terrain. Everything what you need from the North Cape up down to the Black Sea. We are very happy that with our totally newly developed transmission, we could support our customer.
For us, for RENK, this development is important because it provides the perfect starting basis for unmanned, for autonomy, and for further UGV developments in the future. By the way, it was a perfect exercise to train us in regards to target costing and efficiency, and we are very proud that we could show this today. Thank you very much, and now I would like to hand over to the Q&A session.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to withdraw your question, please press 3 and star. Please press 9 and star to register for a question. First up is Sebastien Plourde from BNP Paribas CIB. Over to you.
Good afternoon, everybody. Thanks for taking my questions. The first one would be around demand. Dr. Sagel, did I hear you correctly that you consider it unlikely to receive any additional orders related to the approved debt break easing in Germany in 2025? If so, how should one think about potentially faster call-offs via the soft order backlog? Maybe you can start there.
Hi, Sebastien. Yeah, I'm very happy to give some insights. I mean, as I said before, from today's point of view, it's almost impossible to really derive out of the given intentions to increase the European defense spendings any concrete figures. I will try to make a kind of guess from a more clearer direction talking about Germany. As I said in my little presentation before, most likely during June this year, NATO will come up with a new set of requirements for each of the NATO European members.
If you talk about Germany, there are certain capabilities which are urgently needed. For example, one of these capabilities is the question to increase the number of the brigades. There are different numbers existing from three to five to six to 10. For us, it's important to understand how many of these new additional brigades will be so-called the heavy armored brigades, because each of these heavy armored brigades consists of a certain number of main battle tanks, a certain number of IFVs, Puma, a certain number of Panzerhaubitze 2000, and certain family vehicles. If you take, for example, just this one parameter on the number of potential heavy brigades, three , four , five , or whatever to be discussed, and to increase on the other side the today's level of this circular reserve by, for example, 10 percentage points, the level today is between 10% and 20%.
In Israel, it's 50%, just to give you a kind of flavor. We could estimate a potential order intake potential between EUR 400 million-EUR 800 million out of this, very straightforward, analyst. When this comes on the timeline and how this converts on revenues, it depends pretty much on the progress on deciding on these additional budgets, on the progress of the ramp up of capacities on our primes, and also how fast the German customer, for example, is trying to increase the mission readiness of the existing platforms. This will, of course, impact if we have a higher visibility. This will also impact not only maybe our medium-term targets, if you talk about a growth rate, for example, but it would, of course, also impact our soft order backlog. As I said, Sebastien, and please excuse me that I cannot give you a different answer.
For the time being, it's still too early to really quantify this and to formulate it.
Welcome to all our world. Hello to Sam here. Welcome. Thanks for the call anyways, honestly. Quickly on the pipeline, other countries are probably in a less good shape from a pure financial and creditworthiness perspective. The question that I'm simply having with this is we are assuming here that there is no problem in order to go to 3-3.5%, and the situation is very different between various member countries in the European Union and elsewhere. The question I'm simply having is, to what extent could there be a risk that some countries might ultimately not be willing or able to go ahead with key projects? I'm thinking loud now of the EUR 23 billion project there in Italy. I do not hope to put you in a difficult spot, but if you can want to comment on this, it would be very helpful.
I mean, first of all, and to start maybe with this point of view, as you all know, we always communicated and started on the capital market day that independent of the entire discussion which took place since four, five weeks now to increase on 3%, 3.5%, or whatever percentage, we already could see EUR 10 billion of addressable market in the next six to seven years. In this addressable market, we also had, of course, included the Italian IFV programs. I am pretty sure that these Italian IFV programs, here we talk about the Lynx basis, and we talk about a little bit more than 1,000 vehicles over lifetime.
I think they are financed, and the majority of this business is already budgeted by the Italian government. I do not see them as a risk. I think what is interesting for us is really what is coming on top, and if we look on RENK ourselves, and if we recall what we presented on the capital market day, the slowest, smallest business potential, what we could see until 2031, was exactly in Germany because we got everything. When we talk about additional requirements coming from NATO and building up additional heavy brigades, I think this is clearly for us an additional potential and business potential. Coming back to other European nations, I think the current programs are more or less financed, and they will come if and how fast they will ramp up.
If you look on countries like Spain, for example, on a 3% level needs to be seen. For Germany, my gut feeling is that in the next three to four years, I mean over 2026, 2027, 2028, that most likely 2028, 2029, I could imagine that we're going on 3% above the 3.5% maybe on this level, but it will take time to ramp up simply. Does it answer your question, Sebastien?
Yes, it does. Thank you very much for this and then the very last one, if I may, is just quickly on operating profit and the guidance for 2025. I can totally understand why you have put the revenue guidance as a minimum number or greater than number. I'm a bit surprised to see you guiding them for an absolute EBIT range, though. And why am I saying this?
It's simply that if I was to assume the revenue guidance was EUR 1.3 billion-EUR 1.35 billion or so, then there's barely any margin expansion really compared to 2024. That in wake of the fact that you have Muskegon and Augsburg with the operational efficiency improvements is indeed surprising. Maybe if you could comment on this.
Yeah, Sebastien, it should not be surprising. I mean, we are very early of this year. We are in the first quarter. I think it's a fair approach to provide a certain span range, I mean, for this year guidance. Please be sure our ambitions are, of course, to beat our last year, I mean, 2024 performance. Also on the EBIT side, we are working on this.
I mean, if you look back on the history of last year, we started with a bigger range, and then during the second half, we had a higher visibility so we could narrow the range again. I could see it will happen the same this year. As I said, we touched a 16.6% margin in 2024, and our clear target is to exceed this. Please be sure. Otherwise, we would not be in our sportive constitution. By the way, we also need to see what happened with the tariffs. You never know what kind of interesting proposals could come from the US government on the tariff side. Again, I think we have currently a decent range. If you look back, we could see that also in the future, we are going on a level above the 16.6%, close to the 17%.
Okay, sounds good. Thanks.
Next up is David Perry from JP Morgan.
Hi, Alexander and Anja. Thanks for the presentation. I think you're very clear about the uncertainties and not knowing about the time frames. Do you think there's a possibility of material ramp up this year or even next year, or do you think we're going to have to wait a little bit longer for that? That would be the first question. The second is, can you just talk a little bit more about the things you're going to do to make it happen? CapEx, building inventory maybe, R&D, stuff like that. Anja, sorry, a boring one. Can you just break down that EUR 25 million of other exceptionals? I think it's on slide 27. Just tell us if there'll be any other exceptional items going forward, in particular on SAP or anything else. Thank you.
I love it. I would start with good to hear you, by the way. I hope I can give you a straightforward answer, and I would like to start with your first question. Do we see any materializing on 2025 or 2026? From the order intake side, to be honest, I could imagine this, maybe not in 2025, but in 2026, if we take Germany, for example, as one of the attractive countries if it comes to additional increases of defense spending and going into heavy armor. It all depends pretty much how fast the German government finally comes to conclusions and starting to operate.
If there are some quick, fast decisions, for example, a clear commitment after the June time frame on the NATO, that Germany will build up that amount of X heavy brigades, there might be from the order intake side, maybe this year or also next year, some first order intakes really materializing. On the revenue side, I mean, I could imagine that we have, and this is what we see, by the way, during the last two months, increasingly incoming spare parts overhaul and aftermarket orders. I mean, as I said before, this is something what is at least for the last two months. I'm not saying it will continue now for the next nine months, but at least for the last two months, this was exceptional and might be an indication that the governments are trying to increase the mission readiness of today's platforms.
On our preparation for the increasing, potentially increasing volumes, I just said in the presentation, we are doing currently with Emily Schiller and the entire COO organization kind of health check. We are doing excessive capacity planning, certain scenarios, and for us, it's important, and I think this is also important for you. If we stay within our 15% CAGR for the next year, ending up in 2028 on a EUR 2 billion level, this is covered in our planning, and this is absolutely under our control. If these volumes would increase dramatically, if you talk about, I mean, just to give you a figure, David, 100-200 or 300 additional transmissions per year, starting in, I don't know, 2027, 2028, then we would need to expand our capacity.
We are leveraging, I mean, we started leveraging today our European production footprint by outsourcing certain production steps to our M&I plant in northern parts of Germany, to Rhine. We have the option to use our transmission plant in France in order to gain space and capacity here in Augsburg. We will for sure go sooner or later in a second shift mode. For additional volumes, significantly additional volumes, we would need to invest. We are getting a rough understanding how much this would need, for example, by adding another capacity here in Germany for 100-200 transmissions per year. Of course, we are doing intensive supply health checks by working with our suppliers in order to understand how their capabilities are beyond our current planning to run on a 15% CAGR range in the next years.
In regards to R&D, I mean, R&D is a little bit independent of this. We need to secure our leading number one position, what we have today in the market. As I just said before, RENK is now going further and further into digitalization, not for today's platform, but to provide to our customers relatively easy upgrade potentials and for us new value streams in the years to come.
David, this was my part of the answer. Is it fair to assume this was exactly what you asked, or do you miss something before I hand over to Anja?
No, no. It was very helpful. Thank you.
Thank you. I would hand over to Anja.
Hi, David. Okay, you asked about CapEx. For CapEx, we really stay with what we said for midterm that we are around 3% of revenue, especially for 2025.
That is basically also in complementary to what Alexander just explained, that we do not have at the moment a really good sight for the future on really doing something there. This is around 3% of revenue. Inventory here, we have set up a networking capital optimization project because it is clearly one of our biggest task to get to our midterm 20% in that region. The optimization clearly also focuses on inventory. However, as we already have seen, we do need to have enough material in order to get the operations going and get the revenues. Also in last year, we once explained that we will not compromise our revenues in order to optimize the inventory. For R&D, in the last two years, like 2022 and 2023 and 2024, we were around like the 2-2.5% of revenue for R&D.
This is also what we envision for the future. This is our kind of direction. You asked for the EUR 25 million other exceptional adjustments. That is mostly made up of the EUR 12 million consultancy fees which we spent for the REMA project in order to get the Muskegon site of RENK America back to the 3.5% production rate of transmissions. We basically reorganized it. We got the supply chain issues in place and so on. That is the biggest chunk. We had a refinancing due to our IPO in February 2024. That cost us around EUR 2 million legal fees. The remainder actually is really made up of a lot of tiny topics compared to these two. That really relates to, let's say, knowledge which we needed to acquire because we did not have it because we were not a listed company before.
It's like legal advice for an AGM or like a tax regulation what we needed to support because we needed to be compliant by the end of 2024. We basically acquired quickly knowledge.
Okay, that's all clear. My last one was just going forward because have you made a decision yet on SAP and whether you will do it and whether it'll be above or below the line?
This is a very good question. Actually, we are right in the middle of starting a concept phase in order to determine scope and timeline. Once we have that, then we can really see on where are these costs relate to and how we will manage these. We will definitely share that.
Yeah. Okay. Just one follow up for me, Alexander. You give us in the accounts your German sales are 27% of sales in 2024. Do you have a it is probably very hard to answer, but do you think that is going to go meaningfully up in the next few years? Sort of relates to the earlier gentleman's question whether other countries can really keep up with Germany. How do you think that will evolve?
David, did you just say 27% of share for Germany or did I?
Yeah. Yeah, 27% of group sales were from Germany. That is across the whole group. Do you think that is going to get much, much bigger?
I think we do not have the 27% share. I mean, if we look...
No, 27% of your sales, sorry. 27% of your sales were from Germany.
I think from what we see here is that we slightly have, depending really pretty much on the decisions on the NATO requirements and what this means additionally.
There might be an additional push into an increasing absolute figure of the German to our sales to Germany. At the same time, we are strongly growing on the international business. I do not see, David, that we will get significantly in change or increase of our German budget or of our German sales percentage. I think this will overall stay on this level, maybe a slight increase, but not significantly going to levels like 40% or 50% like other companies. Clearly not.
Okay. Thank you very much, Indy.
Pleasure.
Next up is Christophe Menard from Deutsche Bank. Over to you.
Hi. Thank you for taking my question. I had three questions. The first one is on aftermarket. You mentioned during the presentation that aftermarket growth was quite solid, notably in M&I, in bearings, slide bearings. I mean, it represents 40% of your sales in 2024.
Can you give us a little bit more details per division, whether it was VMS or the other divisions pushing for the increase? Where are you seeing this going into 2025? What is the target midterm for aftermarket, given what you also mentioned in the call, strong order intake? The second question, I think on the last call, you mentioned that book-to-bill could be not necessarily at 1.3 in 2025, since you had some orders in Q4 that you were probably expecting in 2025. I mean, now it seems that you're also getting a number of key orders. Should we assume a book-to-bill for the coming year below the 1.3, or it's still something we still need to wait to make our own view? The last point was on free cash flow guidance. You had a very strong push in 2024.
You guided to some sort of a midterm conversion at the CMD. Can you just share with us what is the evolution of cash conversion or your view on cash in the coming year and years, actually?
Thank you. Christophe, merci for the questions. I tried to write them down in the speed how you were talking, so I hope I catch everything. If not, you must please jump in. Talking about the aftermarket, I think we have seen through all the three segments, through VMS, through slide bearings, and to M&I, we have seen overall significant positive development of the aftermarket and service business.
I think overall, if we look on the current level, what we have achieved on the group level by 40%, what I do see in the future is that, of course, we will grow and fill the pipeline by the new business, especially driven by VMS. Also, if you go on a segment level, it's exactly the same on the slide bearing business. I do not see that we are dramatically increasing our overall share of the aftermarket service business on the RENK Group performance. It will stay on a level, as I'm always saying, somewhere between 35% and 40%.
It might be also you have some favorable years where, for example, for customer A, you have in one year 80% of aftermarket spare parts or overhaul business and only 20% of new business, while in other years it might change because this is simply because the same customer is ordering new transmissions and things like this. Please expect that in the years to come, the aftermarket service part will be somewhere on the 35-40%. Regarding the order intake level, your observation is perfectly correct. I mean, we started extremely well, very good in the year 2025. We are at the end of this quarter, and we are adding up the numbers, which I will not disclose, of course, today, but it looks really, really positive compared to the last quarter.
As I try to bring a little bit more color, the projects here are both on the M&I segment, on the Navy segment, on the VMS land segment, but even on the slide bearing on a much smaller level, we see increasing and very positive demand. Please allow me to wait a little bit more in order to confirm if we are running on a 1.3 or 1.4 factor, whatever. Overall, I see the overall situation for order intakes not only driven by the discussion about additional market potential, business potential coming from increasing defense funding. I see it positive. I see that also in the year 2025, we will have a good order intake level, as you perfectly pointed out. I mean, more or less the entire three programs which we booked or signed before Christmas KNDS, Hyundai, and a third customer.
They were all scheduled for us to be contracted during Q1, Q2 in the year 2025. Nevertheless, we are looking very, very positive in the future for order intake. Could you just repeat the last question? I mean, I think the last question was on the free cash flow and the cash conversion rate, right?
Yes, that was on cash conversion rate and the progress you expect to be making over the next years. If my memory is right, you were guiding to, I think, a cash conversion rate of 80-85% midterm or within three to four years. What is the kind of path to this, whether it's a linear one or whatever level of guidance you can give in 2025 and beyond, actually?
I think you have seen shown by Anja before in the chart that we had in last year a quite good conversion rate for 2024. This is pretty much the same level what we are trying to realize in the years to come. It always depends on at least, I think you are all experts about the business. There might be some years where we have, especially with the customer payments, we have a super good run. I mean, like we had, for example, at the year end of 2024. It also could happen, and I know this personally from my former job, that by a certain customer is paying eight days later and it moves into the next year. This is how we always consider it in a kind of lumpy business.
I mean, our overall target is to have a kind of average, if you talk about average cash conversion, and this is in the range of what we have achieved so far for the year 2024. Anja, do you want to comment on this?
I fully agree with you, Alexander. What Alexander just alluded, and that's really the reason why we do not have a midterm guidance here. What we have been disclosing in this call is really that over the past three years, and that's why we take an average, because we do have this point in time. It's really tough to get all the advance payments really in because it's, as Alexander explained. Therefore, we said, and for the last three years, we have a cash conversion rate of around 60%.
If you look at what we've just said already about order intake coming in and also networking capitalized, networking capital like the 20%, I mean, we do not expect any things which would significantly reduce these things. However, it always can be that on a quarterly, quarterly basis, there might be some timing effects and some of the payments will slip.
Thank you very much. We're coming to the next question. The next question comes from Marie-Thérèse Grübner. Over to you.
All right. Good afternoon. Thanks for taking my question. I have a couple, if I may. The first one is how come we have a strong aftermarket activity in M&I? Because I thought that that's the business where aftermarket's probably lowest, considering that once you put the transition in a ship, it's there. That's what was in my mind. I'm surprised to hear about strong aftermarket business in M&I. Maybe you can elaborate on that a little bit. That would be my first question.
Marie-Thérèse, bonjour. Always a pleasure talking to you and getting good questions, by the way, from everyone here in this room. I mean, just to give you some insights into our M&I business, if you take, for example, our EUR 330 million level, what we had and have last year in this range somewhere, you can approximately count one-third of this to aftermarket business. This aftermarket business, this one-third of the entire M&I business stream or revenue stream, is consisting out of industry aftermarket business, and it's also consisting out of commercial marine aftermarket service business, and also, of course, from the Navy application. It's a good business.
Okay. Great. Thanks a lot. That was the first one. The second one is on slide bearings in Q4. There's a bit of a margin compression year on year. What is it due to? Does this bode anything bad for 2025 altogether in that business?
No, no. I mean, there is nothing bad behind. It's more simply that we had less aftermarket business as expected because we had, I mean, just before Christmas, and this is not related to Christmas, but we couldn't bring and deliver the output in time as it was required in order to realize the aftermarket business. This was just, I mean, an effect of, if you want to call it a weak operational moment, I mean, before Christmas, but this is not a fundamental change in any demand or whatever related to the new business of bearings, and of course, not to the spare parts and aftermarket service. Nothing special. Nothing special.
Okay. Thank you. The next one has to do with the potential one-off cost in 2025. I think one of my colleagues asked about the detail on 2024, but in 2025, is there an envelope you wish to share for us to put in our models in terms of non-recurring items visible as a?
I would like to hand over trustful to Anja.
Thank you, Alexander. Anja. Hi, Marie-Thérèse. Basically, the IPO-related one-off, they have already disappeared in Q4 2024, so they're gone. The EUR 12 million ramp-up exceptional topics we had regarding the consultancy, they're gone. They were already also finalized. This whole project was finalized in Q4 2024 already. However, that does not mean that we do not have anything. There are potential topics related to our S4HANA project coming up. As already stated, we are in the conceptual phase, so we do not know.
Obviously, we do have a planned figure. If I look at the numbers like prior years in 2022 or 2023, and if I look at this, I would think that we would be a little bit lower, but maybe a little bit higher than in 2022.
Okay. Okay. Do we have the numbers for 2022? I mean, what would it mean in terms of was it EUR 20 million or something?
Yeah. So roughly EUR 20 million, around EUR 20 million.
Okay. Excellent. Great. Okay. Super. The next question, Kinetic, the intangibles, the price you paid for the intangibles, is it disclosed? Could we get a?
Yes. Yes. It is around EUR 7 million. It is disclosed in the annual report.
All right. Sorry. I did not get to.
Oh, that is fine. Everything is fine.
Sorry about that. Last but not least, the impact since synthetic gearing systems in terms of sales and maybe if you could guide us a bit on the EBIT after the synergies. I mean, first of all, the sales impact for 2025, what is it roughly in terms of top line, incremental top line, and then in terms of margins, if at all possible, if you can guide us on what could that bring?
Yeah. I would take over, Marie-Thérèse, at this point. I think when we disclosed our acquisition last year or in the beginning of this year from Synthetic Gearing Systems, we said that the size of the business was similar or is similar to General Kinetics. I think this is a good starting base to assume for the incremental somewhere in this range for the incremental turnover or revenue this year.
On the margin side, I think it will be somewhere in line for the time being without improvements because the improvements will start, of course, during the PMI phase, which we have prepared quite in detail and to run along operations, business development, finance, and IT. We will take it over, and it will be maybe a little bit in the beginning, at least a little bit below what we have seen in the year 2024 for the M&I segment. I think that's a good guidance.
Okay. All right. Thank you very much. I think those were all my questions. Thanks a lot.
Marie-Thérèse, merci.
The next question comes from Joe Orchard from Redburn Atlantic. The floor is yours.
Good afternoon. Thank you for taking my question. Just one from me. Do you have a target volume output for transmissions in Augsburg in 2025? I believe your target in 2024 was 650 transmissions. If you could provide any additional color there, that would be fantastic. Thank you very much.
Joe, thanks. Good talking to you. You always have the right numbers. I should not talk too much, maybe. No, we are planning to have also again in the year 2025 a quite good improvement of our output. I mean, as we said, in the year 2024, we were in the range of 650 somewhere. We see that also in 2025, if you look on our customer demand and what we need to deliver, we will be well above the 700.
Okay. Fantastic. Thank you very much.
You're welcome.
Next up is Christian Cohrs from Warburg Research.
Yes. Hello. Good afternoon, and thanks for taking my questions. Maybe first, I think it is absolutely fine and prudent that you refrain from updating your midterm financial targets at this point in time for the latest geopolitical development. Could you please provide the share of group revenues related to your European defense business so that we can assess ourselves what the Zeitenwende 2.0 would actually mean for RENK? Second question relates to your North American operations. Just in case there is an escalation of the tariff dispute between the U.S. and Canada and Mexico, is there any potential harm for your supply chains and your operations there? Lastly, assuming another boost in European defense spending, I mean, this will obviously offer plenty of opportunities for you, but it would also impose a challenge since you must, yeah, manage the ramp-up, manage the higher business volume.
Therefore, are you happy with your portfolio? In the case of a second boost, would you evaluate changes to your portfolio, for instance, advancement of your slide bearings business? Thank you.
Christian, thanks for the good questions. I will try to run you through.
I mean, I think what I, I mean, regarding the first question about the importance of our European business and the German business, I think it's fair to say, as we discussed before, and if you look on the potentials, I mean, from the future and coming from whatever increases on the defense spending, the biggest potential, as I see it today, is really coming from Germany because in our, I mean, from the share, but also if I look on our soft order and if I look on what we have as an addressable market, the smallest potential here was before the Zeitenwende 0.2, clearly for Germany.
If Germany, I mean, as I just explained before, will increase, and I'm sure they will do it, the question is only to what extent they will increase the number of frigates and therefore the number of heavy frigates, this has immediate implications to RENK, but not also to RENK also to the platform providers. Just to give you an idea, I mean, a typical heavy frigate has roundabout 66 main battle tanks, 66 IFV, Puma, has 60 whatever Panzerhaubitze 2000, and a couple of family vehicles. I think the impact, as I can see today, and where I have a kind of reasonable gut feeling, is it will be higher on the European side compared to Germany, but I think it's simply we need more time to understand it really.
The second question on the US tariffs, very early this year, when we recognized that the new US administration is talking and maybe has executed, and then again, we stopped or whatever. I mean, the challenge on the tariffs, we made a very detailed analysis, and I think the good part is here that we have a high localization rate on the US side. I think this is very, very positive, driven by acquisitions and driven by the fact that most of our supplies are coming straight out of this. I mean, in a very worst case scenario, what we evaluated was a single one-digit single EBIT number, I mean, or cost number in the worst case in case there would be a massive 25% on everything for procurement, for selling between Europe and US or Mexico and Canada.
I think we would rate it as digestible or we can manage it to put it in this form. I hope this is a fair answer. Yeah, the third question, this was a very smart question because I thought you come about capacity, but it ended up with a portfolio question on our business. We are really, really happy with the fact that we have M&I. Why? If you would go to our plant, and I hope you do this in northern parts of Germany, in Rhein, you would see two things, plenty of space and a lot of highly motivated people. This is the same if you would go to our plant in France. We have, by our second division, M&I, enough capacity.
I mean, of course, in case the volumes are going up, we would need to invest, but we would fix it within our given footprint in Europe. There is also no need if we take the second or the third segment, there is no need currently to do and to think about any sale of our bearing business. I mean, as you have seen in the numbers of 2024, I mean, they are outperforming our group margin. This is number one. Number two is, I know the budget, you do not know it, but I can tell you they will go from EUR 109 to EUR 110 towards EUR 200 million. The main task they have is just to improve the operationally delivery, OTD, on-time delivery in order to realize this super positive development. For this, there is currently no rush and no need to make any selling activities. Does this provide you a fair answer?
Yes. Yeah. Fair answers. Thank you.
Thank you very much.
The next question comes from Yan De Rottle from ODDO BHF.
Yeah. Good afternoon. Thank you for stopping me. In fact, thank you very much for the slide 28 on your personal excellence at ETA. I was wondering if you could also potentially share your targets for 2025 RENK America and potentially in terms of OTD, in terms of output, what are you expecting? In terms of efficiency, obviously, what are you expecting for 2025 at Muskegon? Good.
Hi, Yan. Good talking to you. I want to interrupt you. I mean, as I said, and I think you all know the story quite perfectly, REM had a, how to say, a very challenging first half year 2024. It was a disaster by a super distressed supply chain.
We fixed it. It's fixed on a 3, 3.5 transmission build rate per day. This is exactly we are running through and do expect that we're running through this year. You did not ask me about volumes, but I see that at the end of 2025, we would be well above the 600 transmission what we are currently scheduling for the year 2025. I mean, if you talk about on-time delivery, it has improved during last year by nature because if you cannot deliver the first half year, you can deliver in the second half year. There is a significant improvement, but it's the same like here in Augsburg. We have set us very, very high targets in regards to operational performance, on-time delivery, etc. We will strive to reach them. Yeah. I think we are overall on a very good way.
If you talk about, I mean, a different key metrics to put it in this way, I mean, it was also obvious or it's obvious that the EBIT ROS performance of RAM in the year 2024 was not satisfying, absolutely clear for good reason, and was in a one-digit level. You all know the former levels of the EBIT margin, I mean, on the RAM side in the year 2022, I mean, during the time of acquisition. This is clearly where we see, and this is where we're striking for during the next year to come back to this level. 2025 will mark an important milestone in order to develop well in the two-digit profitability margins on the way to former profitability. Does this help your model?
Yeah. That's very clear. Yeah. Potentially two questions for Anja.
The first one regarding the pure modeling regarding the effective tax rate for 2025 because 2024 was potentially slightly higher than my expectations.
Can you repeat that, please? Because we had some background noise. We could not really understand it.
The effective tax rate for 2025.
Oh, yeah. Yeah. Okay. Yeah. Okay. Effective tax rate. Yeah. Our effective tax rate for 2024 is quite high. That is basically driven because of two reasons. The first reason is that we have the RENK AG, which is a holding company. We are not able to include that in our German tax group. And as it is a holding company, and it does contain basically the executive board as the, let's say, investor relation function and communication function and so on, it is basically adding cost, yeah, and it does not have any revenues to it. We are trying to charge it out.
However, because it's not included in our German tax group, we cannot realize on the losses the RENK Group AG is doing any deferred tax assets. We're trying actually to change that in 2025. It really heavily depends on the AGM because here in Germany, it's a legal requirement. We need to set up a contract which is basically allowing a loss carryover of GmbH from the AG, and that needs to be approved by the AGM. If we get that approval, we can definitely improve our effective tax rate here already in 2025. The other effect what we have is that we do have an intercompany loan in the US, and there is a tax group. However, in the US, there is a law which is very similar to the law in Germany, which is called a Zinsschranke.
It basically means that the interest related to that loan are not 100% tax deductible. Yeah. We are looking into that topic, but that's not so easily solved. We are looking into that, and we need to see how we can do that.
Okay. Okay. Okay. Potentially the last one on my side. In the annual report, in the risk matrix, the category for financial risk has increased since last year. I was just wondering if it was related to the, I would say, to the dependence or to the link with Triton or if it was, I would say, linked to other items.
You mean our risk bucket in our risk management report?
Y eah. Yeah. You have the risk matrix on the annual report, and there is a line for the financial risk.
You mentioned that the financial risk is in fact higher in 2025 than in 2024. I was just wondering if it was linked to the fact that you are pretty much cutting, I would say, the link with Triton or not.
No, this is really not linked to Triton. It is only tiny topics. It is nothing really material.
Okay. All right. Okay. Thank you.
There are no further questions. With this, I hand it back to the company for some final words.
Now we finish our webcast. We wish you a pleasant day, and until next time.
Thank you very much. Bye-bye.
Bye.