Pre-Close Call

Jul 17, 2025

This conference will be recorded. Good morning ladies and gentlemen and a warm welcome to the RENK Group pre-close call H1 2025. 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, Christian Weiß, Industrial. Thank you, operator. Good morning, everyone, and thank you for joining our pre-curve call today. My name is Christian Leipz from the Investor Relations team. Our CEO, Dr. Alexander Sagel, will guide you through today's pre-growth call and will be available for questions afterwards. With that, let me hand over to Alexander. Yeah, thank you, Christian, and good morning, everyone, from my side, and thanks for joining today's call. Especially, I would like to start by welcoming everyone from the sell side as well as from the buy side. As you know, the purpose of this pre-growth call is to provide you with a summary of public, already communicated information on the second quarter of 2025 as well as a brief operational update on it. Today's update will be provided before the upcoming publication of our Q2 and H1 results on August 30. Consequently, today's call will not address our midterm financial target. Ladies and gentlemen, let's start with a brief overview at group level. From today's perspective, we can simply conclude that we are fully on track and as planned regarding our 2025 guidance. Q2 2025 was a quarter with another good performance and once again driven by our defense business for land and sea platforms. Notably, our VMS segment was again the main driver of growth and profitability within the group. Order intake continues to show a solid momentum while being below last year's strong second quarter, with several important contracts signed during Q2. For example, and I think you have read this already in some press releases, we are very proud about an engine contract for an international customer during Q2. We are also very proud to have two new end customers for our 256 Infantry Fighting Vehicle transmission. You know one of them is Latvia, where we could secure during Q1 the first batch, and already right now in the first week of July, we could secure the second batch for the Latvia Ajax i3, but also 10 Ajax supplying to the second new end customer. This is a customer in Asia. Also, this is a kind of continuing story, we see a continued above average demand for spare parts from European Leopard users. If you look on the Navy side quickly, we secured a new contract for two frigates again for an Asian customer. From a strategic point of view, this is important, we made our first market entry step into the Japanese Navy market. As you know, this market wants to have manage the market entry. This should be the basis for a long-term and sustainable business. For this reason, we are very proud that we could achieve this during the second quarter this year. Revenue, if we continue now, is expected to come in stronger in Q2 and half year one of this year compared to the second quarter and, of course, the first half year of 2024 and clearly above our 15% CAGR midterm target. In terms of adjusted EBIT, we also see a positive development which outperformed last year's Q2 as well as the first half year 2024. Regarding our operational performance, we are also on track and produce and deliver according to our production planning and customer delivery schedules. In fact, we just had a record break in June at RENK America where we produced 91 of the so-called HMPT transmissions in a single month. This is comparable to a daily build rate north of 4 and indicates the good progress we are making in our RENK America plant. Ladies and gentlemen, so much for the group level. Let's talk about the different segments and start with Vehicle Mobility Solutions (VMS), which remains our largest and most dynamic segment. As already mentioned, VMS was again the strongest contributor to all three: order intake, revenue, and adjusted EBITDA in Q2 2025 as well as for the first half year 2025. Order intake of Q2 continues to be on an elevated level but below previous year's strong second quarter. The book-to-bill ratio, however, remains well above 1 for Q2 2025. The revenue growth was clearly above the group average, showing accelerated growth momentum on a quarterly and half-year basis. Even more important, the adjusted EBIT growth outpaced revenue growth, supported by improved operational leverage and efficiency gains. The two largest VMS plants, BTA and RAM, are running according to their planned production rate. As a result, the margins have further improved compared to Q2 2024 and half year one 2024. Moving on to our marine & industry (M&I) segment, the picture here is overall positive or, in short, Navy is on the run. Our industrial business is, however, feeling the overall global soft GDP-related economy situation. Order intake was broadly in line with Q2 of last year, indicating a stable demand. We are satisfied with the overall order momentum in half year one, which is mainly driven by, for the Navy segment, revenue growth in Q2 was clearly double digits compared to Q2 2024. Both for Q2 as well as for the first half year 2025, revenues are in line with current market expectations. The adjusted EBIT for the segment M&I was roughly on par with Q2 2024, and we achieved a sustainable low double-digit margin as it always commonly had. Finally, let me now turn quickly to Slide Bearings. Although the current economic GDP-dependent environment is not really favorable, Slide Bearings has continued to perform very robust for Q2. We see a stable order intake situation. While revenue and adjusted EBIT are all roughly at the same level as in Q2 2024, the adjusted EBIT margin is, like in previous year, slightly above the group level. Ladies and gentlemen, to sum it up, for half year 2025 we are well on track to meet our financial target for this year and the years to come, and we are pleased with our performance in the first half of 2025. Revenues for H1 are clearly above our 15% CAGR midterm targets, and we are seeing a positive margin momentum at group level. The VMS segment continues to stand out, delivering strong top and bottom line performance and solid margin improvement. M&I is also delivering solid growth and profitability, and last but not least, Slide Bearings was also able to contribute with robust results. Having said this, ladies and gentlemen, I would like to thank you for your attention, and of course, like always, I look forward now to your question. Thank you very much. Thank you very much. Dear ladies and gentlemen, if you would like to state a question, please press 9 and the star key on your telephone keypad to enter the queue. I repeat, the combination is 9 and star. To cancel your question, again please press 3 and star. For now, the combination to dictate your question is 9 and the star key. All right, we have questions incoming already. The first question is from George McLeod of Berenberg. Over to you. Good morning. Thanks for the question. Just on the German potential order for Boxer vehicles, can you just comment on what content you expect to have on that order? More generally, what content do you have on the Boxer vehicles across Europe? Thank you. Hi Josh, good morning. Regarding the Boxer, to make a short answer, we are supplying the so-called angle transmission, which is the most valuable part if you talk about the entire transmission system of the Boxer. Of course, having said this, we are really looking forward to seeing what kind of volumes are finally really materializing from the German customer. That's helpful, thank you. Just to follow up, in terms of your Boxer content in general, is that a similar content to the rest of the European Boxer or does it vary by country? Torch, it's usually the similar content independent where the Boxer is produced, so independent. If we talk about Boxer in Germany, if you talk about a MIV, for example, in the U.K., the content for us is always the same. That's great. Thank you very much. You're welcome. Thank you. Office on my side. Dear ladies and gentlemen, a reminder, please press 9 and the Star key now to ask a question. At the moment, there are no questions in the queue, so let's wait a couple more moments. The combination is nine Star. Everything seems to be quite clear. There are no more questions in kind. I would say thank you very much to the audience. A question there from perfect timing from Lucy Fitzgerald of J.P. Morgan, over to you. Hi everyone. Sorry I'm having some problems with my phone. Hope you're well. Two questions if I may. One, I know things are moving very quickly in Germany. I just wondered if you had any more thoughts since you last spoke to us in May. I think that was like a day or two after the new government was sworn in to see if you feel you have any more visibility or anything you can share. Secondly, there was a press report about a potential review of your civil activities. If you could maybe talk about that if you're able to. Yeah, of course. Thanks for asking this question. Maybe start with the more complicated and most complex about the perspective on the German market. I think if you scroll through all the press releases from various media reports, you are checking all the references from various CEOs from the OEMs or even my statements. I think what is clear is that Germany really committed strongly in order to develop towards a strategy leading defense player. I mean from the defense capabilities. If you talk about the Bundeswehr across the whole Europe, you see the strong commitment. If you check the increase of the budget, almost doubling from €80 billion last year up to €150, €160 billion, there's a clear commitment from the government. There's also a clear commitment from the government to speed up the processes. For this reason, from my point of view, before I start talking about potential volumes and platforms, I do expect that the first frame contracts to the primes like Rheinmetall or like KNDS will be awarded during Q4 2025. Looking on the programs, I think we always, and I always communicate it for us for RENK with our focused product portfolio. The key is to what extent, how many new platforms will be ordered which are tracked for armies. Starting Puma and talking about the Boxer. George just asked about it. Talking about Hansa Howitzer, talking about the main battle tank, et cetera, et cetera. One key parameter is, of course, the number of heavy obligates to be used in order to reach up to 2035, the full requirements and capabilities according to NATO and the German commitment. I think what is important to understand, and there are in this context many numbers in the room, but I think if you talk about this 2,000, 3,000 plus Boxers, if you talk about 500 up to 1,000 main battle tanks, if you talk about a similar range of Pumas and so on, I think this is also from our knowledge, and I would consider our knowledge to have a maturity level of 80%, is what we see from the industry right now. It's fair to say that final numbers are, as of today, still not yet commonly stated. We always talk, at least from RENK's side, about a majority of visibility of 70%, 80%, 85%. I think what is important is to relate these numbers, if you take for example the 3,000 Boxers, to the timeline. The German Bundeswehr has two phases. The first phase is actually from today up to 2029, 2030, which is in fact getting ready for combat. What does it mean is they have today certain gaps and holes in capabilities and platforms up to 2029. They are seeking for closing these holes and to have a kind of better readiness capability. The second phase is between 2029 and 2030 up to 2035, where there will be additional growth in order to enhance and to meet the required capabilities according to NATO. This is important to understand because besides this frame of platforms, we are currently under discussion. It's important to have this understanding because this is somehow guiding the potential order intake expectations and as a consequence also the revenue generation over the years. The question is, will there be, for example, one frame contract for 3,000 Boxer vehicles for the next 10 years, or will there be two frame contracts, the first for the first phase up to 2029 and the second for the phase 2029 up to 2035. Long story short, it's clear there are significant volumes coming. It's clear that RENK will participate. It's also clear that the numbers who are currently in the market space are most likely going in the right direction. Yet we do not. No one in the industry has official final figures. What we can do is we need to wait and we need to see during the next two to three months. I'm sure there will be significant progress in the data quality and more visibility. I think it's a perfect timing if you talk about our capital market day on November 20th really to have a strong focus on this and on the operational execution. I hope that helps a little bit to answer your first question. If I talk about the second comments about our approach towards the civil business, I mean I'm always explaining that we at RENK have a twofold approach between the two sectors. The management approach and the focus is clearly, I mean, manage unprofitable growth for the defense sector. If you talk about capital allocation, if you talk about CapEx, if you talk about innovation, R&D, self-funded, if you talk about M&A capital allocation, there is a clear focus on defense managed for profitable growth or as I'm always saying, full throttle. On the civil side, which includes our bearing business and our industrial transmission business, it's a different approach here. The focus is clearly not on growth but the focus is here on profitability because I mean as you know with some parts of the civil business it's diluting compared to our defense business. We have here for the civil approach a kind of manage for opportunities and manage for profitability. It's a different approach for the defense. Our business focus clearly is on the defense side in all our business decisions. If you would ask me what that means if you look on the share of the civil business in the future, I mean currently the share is somewhere in the 28% to 27% range of civil business compared to the whole revenues of RENK. If you would ask me or if we meet in five years, I hope you meet before, most likely this share will be well, well below the 20%. Of course, I'm asking, I'm asking all the three segments. Every year we are doing performance and strategy reviews. We just had a couple of weeks ago our internal group strategy meeting and every segment, including VMS, but also Slide Bearings, had to present measures and approaches and tactics and strategies in order to fulfill certain criteria which we have set, which I have set from the executive level side, and of course in order to reach it. Everything is on the table. Having said this, I think this is the fairest comment I can give on the two sectors. That's great. Thank you very much. You're welcome. Thank you, Osha. For my side at the moment, no more questions. I ask all the ladies and gentlemen, the combination to ask a question is 9. Pistaki, maybe you have a follow-up question. All right, there are a couple more questions incoming. Next question is from Daniel Klein of Berenberg. Over to you, Mr. Klein. Rania, we cannot hear you yet. Please check if you're muted. Good morning. Can you hear me now? Yes. Thank you very much for taking my questions. I actually got two quick ones, if I may. The first one would be on regional potential. The main focus of course is on Germany and I appreciate the context, but maybe you can rank the top three markets in terms of market potential that you see for the next 10 years. That is question number one. The second question I have is if you can talk a little bit about phasing. Of course we are discussing units, we are discussing new equipment potential. Could you comment on the phasing of aftermarket business? Is that something that we should model in line with the top line momentum on the new equipment side? Do you see also a shift in, in between new equipment and aftermarket and not only in between defense and civil business? That is question number two. Thank you. All right, thank you very much for asking these two questions. I would like to start with the second one because it's a quick one. What we see if you look on our current share between new business and all the service, aftermarket maintenance, spare parts, MRO business, we are currently at the level fluctuating somewhere around 40%, or of course we will bring more new business in the market, but this new business will generate a similar quantity in % of downstream business. What we see is that we do not see a major change of the aftermarket share, neither going significantly up nor going significantly down. It might vary maybe from quarter to quarter, but this depends on the product planning if you have more MRO business or sometimes more spare parts or if you have more new business. Overall, I do not see a significant change of the current 60:40 split. Regarding the regional potentials, I mean you just mentioned Germany is of course the biggest one, which is interesting because. Around. About 10 months ago on the capital market day, we declared Germany as almost free of potential. This has of course dramatically changed and we are very positive about it. If we look around Germany, starting with India, as you know, we are just doing next week the inauguration of our new Indian plant, our new Indian facility in the south of Bangalore. We see especially on the defense market, you should talk about the new IFV programs. We should talk about the light battle tank where RENK is the only qualified. We talk about the second phase or the second batch of the Arjun tank. India is an attractive market, but it's also fair to say it's quite a complicated market if it comes to government and contract structure. If you talk about the next five years, it's an important market for us. Also if you look in Europe, if you talk about all the entire Polish programs, Europe as a region, excluding Germany for the time now, Poland is very attractive for us. Finland is very attractive for us. We expect the famous APC, this new 15 ton armored hurtling carrier, to kick off somewhere in the 2027-2028 timeframe in large volumes. We are looking forward, of course, for the Italian programs for the IFV and the MBT programs. Europe for us is, and here it's important to make a difference even before the entire discussion about increasing the defense budget in Europe since February this year, even before we had this strong potential and project pipeline for these programs I just mentioned. These are not new programs. We are working on them sometimes more than one and a half years. Europe is also an important growth driver. If you go to the U.S. on the land system side, on the land side, army side, we are in a very good position for the legacy business for the next five to seven years. What is here for us? The growth option. For this reason we made the strategic acquisition of acquiring Cincinnati Gearing Systems, today called RENK America Marine & Industry. The naval market is very attractive. In order to serve the naval market, especially if you talk about the future new missile destroyers and frigates FSG DDG, you need to have a high localization rate as a requirement. For this reason we did this step for acquisition. If you see in the budget in the U.S. army, it is more or less in a steady state with 20-21%, which is still a lot if you have $1,000 billion. You clearly see, driven by the geopolitical tensions in Asia Pacific, a rise of the budget and the spending on the naval side. I hope this answered a little bit your question, Claudia. Very clear. Thank you very much, Alexander. You're welcome. Thank you very much. The last question is from Carlos Ivan Zapieris, Bank of America, over Chief. Hello guys. Good morning. Thanks for taking my questions. I actually have two. Maybe we can touch on a little bit on free cash flow and how should we think especially about net working capital dynamics in the second Q2. I also would like to ask on the $500 million that you plan to invest in capacity and R&D over the next four to five years, how should we think about the phasing of those investments? Thank you. Hi Carlos, good morning. I would like to start with answering your first question, at least your second question, because it's a quick one. In my statement, when I said RENK of planning in the next four to five years to invest around about almost half a billion, this is pretty much exactly in line with our statement that in the next years to come, 2028, 2030, we will stay on the CapEx for operations in our 3 till the 3% plus adding of course R&D. We are constantly doing self-funded R&D in the range between 2.5 and so this adding these two guidelines up, it's coming exactly to the price, almost $500 million. This is not a new crazy number from RENK. This is just doing a cumulative approach to the 3% CapEx target. Regarding the free cash flow, I have to admit that we do not have yet the final numbers for Q2, but like always, you have a start where we had in Q1 a higher net working capital. I think this is normal in the defense industry because we need to prepare and to have enough inventory in stock in order to fulfill the commitments and deliveries from the customer. We are targeting like what we have achieved. If I make a little swift to the year-end performance, also this year a cash conversion rate in the range of 80% and above. I hope this helps a little bit. Understood, thank you. All right. Thank you very much. There are no more questions in the queue, so with that, we are closing the question and answer session for this call. Thank you very much, and I'm handing the floor back over to the host. Thank you for joining the call and we wish you a pleasant day. Thank you very much. Bye bye. The recording has been stopped.