RENK Group AG (R3NK) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the RENK Group AG 9M 2025 Results Analyst Call. [Operator Instructions] Let me now turn the floor over to your host, Christian Weiss, Investor Relations.

Thank you very much, operator, and good morning, good afternoon, good evening, everyone, everywhere, wherever you are joining us today, and welcome to our 9 months 2025 results conference call. Joining me today are our CEO, Dr. Alexander Sagel; and our CFO, Anja Manz-Siebje. Alexander and Anja will take you through the highlights of the quarter, our financials and the outlook. Afterwards, we will open the floor to your questions. But now I will hand over to Alexander. Please go ahead.

Thanks, Christian. Thank you very much for the this international -- works in order to consider that we are a global community. Ladies and gentlemen, also from my side, a very warm welcome and many thanks for joining today's conference call. Today's presentation consists like always, of 3 parts. Firstly, we will provide a quick review of the highlights and financial performance of the first 9 months of 2025. I will take over this part by myself. Secondly, we will guide you then through our key financials in more detail, including Q3 figures. Anja will take over this part. And thirdly, taking into account that we are only 1 week away from our 2025 Capital Markets Day here in Augsburg, we would like to comment only very briefly on our guidance for 2025 on upcoming key order intakes for the rest of the year, so meaning Q4 2025 as well to have a little look on the first half of 2026 as well as our main focus points for the last quarter of this year. Now ladies and gentlemen, let's move into the presentation. Let me start with the highlights of the past 9 months. First and very important takeaway. The top line remains strong, and we are seeing ongoing growth in the order intake. For Q3 year-to-date, order intake expanded strongly to more than EUR 1.2 billion, corresponding to a solid book-to-bill ratio of 1.3x. On the right-hand side of the slide, you can see the main driver for this positive order intake development and some of them, I'm sure, are quite familiar to you, but I will nevertheless make a little run through this program. Starting with the THOR III framework agreement with our HMPT transmissions in total year-to-date at EUR 235 million, where EUR 56 million came in during Q3. Various international navy orders, EUR 105 million in total with new contracts in Q3, including a larger contract for RAMI, our former synthetic bearing system. VTA spare parts, mainly for Leopard users, but also IFV with approximately EUR 75 million, therefore, EUR 15 million during Q3 booked. Then to Poland, where we do continue our success story and booked a further contract with EUR 50 million during Q3. Following one of our latest press releases, we already booked another batch of the K2 during the first week of October. We also should not forget a few larger contracts for an international customer during the first half year 2025 with a total order intake of EUR 130 million for transmission and engines. Regarding specifically Q3, we also booked a second batch of transmission for the AJAX programs for the Baltics or to be more precise for Latvia as well as engines for the Turkish Firtina Howitzer. Not unexpected and as a logical consequence, the total order backlog continued to grow in the third quarter, reaching a new record level of EUR 6.4 billion and providing increased visibility for the coming years. Looking next to the main driver of our group performance, our defense business. During the first 9 months of 2025, the defense business grew by 48% in terms of order intake and 25% in terms of revenue compared to the same period last year. A major highlight of the third quarter and a very important milestone to prepare for increasing capacity requirements, but also efficiency gains was the launch of our modular production concept here in Augsburg. Our COO, Dr. Emmerich Schiller, will provide more details on this during next week's Capital Market Day. Finally, the launch of our 2 new transmission concepts during Q3, the 076 transmission as well as the 406 transmission was just as important as the new modular production concept and demonstrating the focused execution of our next-gen mobility road map. Going on the next slide, Slide #2, which summarizes the group's performance for the first 9 months of the current financial year. Overall, all presented financial KPIs continue to show a very positive development to new all-time highs. Starting from the left to right and as already mentioned before, order intake increased significantly to EUR 1.246 billion for the first 9 months. Worthwhile to mention that looking at the last 4 quarters, so talking about Q4 2024 up to Q3 2025, we recorded order intake of over EUR 1.8 billion, a very strong performance indeed. Revenue grew year-to-date September 2025 by 19% to EUR 928 million. As mentioned during the pre-close call, revenue in Q3 was somehow softer due to the planned and needed production changeover in Augsburg. In line with previous quarters, adjusted EBIT increased overproportionately by 25% to EUR 141 million and was driven by operational improvements, resulting in a further improved adjusted EBIT margin by 0.8 percentage points to 15.2%. Furthermore, no major changes in our revenue allocation year-to-date regarding our 2 sectors, so talking about defense and civil, with approximately 3/4 of our business related to defense and also our new business versus aftermarket ratio. On the next page, you can see a quick before and after comparison of the main changes in our final assembly line for land transmissions in Augsburg. On the left side, you can see the old somehow chaotic-looking assembly area, while the changes are clearly visible in the picture on the right side, clear back-end loading of the entire part logistics lean and clean. The modular production concept will not only provide us more flexibility regarding the different transmission types, but also will increase capacity, realizing higher efficiency gains and defines a new standard within the RENK production system. Started approximately 12 months ago, we finally managed the change over in our production and again, an as planned and with a plan to reduce output during Q3. And therefore, we are more than happy to present it to you if you want live and in color during our upcoming Capital Market Day in our Augsburg. The execution of our so-called next-gen mobility road map is key in order to secure our leading market position regarding market share and technology. The newly developed 076 transmission was launched in September during the Defense Show in London and is specifically designed for light track platforms between 10 to 20 tonnes, including future track UGVs and showing a superior mobility of up to 90 kilometers per hour plus a compact and lightweight design below 800 kilograms. The modular 406 transmission is setting new performance and modularity standards for future MBT platforms and was introduced to the market during a media roundtable in August. Very important to note that both transmissions are fully prepared for drive-by-wire and autonomous applications by digitalization. Let's move quick on to Slide #5. As you all know, our defense sector is the core of our business and the main driving force behind our crew performance. The top line is strong and order intake increased during the first 9 months by 48% to EUR 932 million, while in the same period, revenue grew by plus 25% to EUR 690 million, converting order backlog into revenues. Now let's move on to Slide #6, if I'm correct, this year at 6 and having a quick look on the segment performance and starting with the VMS segment. VMS remains the largest and most important segments in terms of order intake, revenue and of course, adjusted EBIT. For the first 9 months of 2025, we achieved an order intake of EUR 904 million and a strong book-to-bill ratio of 1.6x. Revenue climbed to EUR 579 million, representing a year-over-year revenue growth of 25%. The going live of our new module production concept was mentioned before, and we can furthermore summarize that all relevant customer projects are performing according to schedules and deliverables. Let me continue now with our M&I segment. The performance was very solid, particularly in Q3. The financial performance was mainly driven by the Naval business, while the industrial business continues to suffer from a GDP-dependent weak overall market environment. Order intake for the first 9 months amounted to EUR 255 million, and revenues rose by plus 18% to EUR 268 million. Positive to mention that also our newly integrated RAMI, RENK America Marine Industry, formerly Cincinnati Gearing Systems, contributed to this positive development, not only with a new contract for the so-called ship-to-shore connector for the U.S. Navy, but also with a solid aftermarket revenue contribution. Last but not least, a few comments to our Slide Bearings segment. The trend from the second quarter has emerged to a certain extent and similar to our Industrial Transmission segment, slide bearings is also suffering from a difficult and GDP-dependent weak overall market environment. As already mentioned in the pre-close call, we were facing certain operational issues, which were mainly related to problems with staffing during Q3 and affecting the output level. We are working to resolve this, having launched a recruitment campaign, and we are positive to regain momentum and return to its usual strength as we move into next year. Now coming to the last slide of my today's introduction, our total order backlog. For the first 9 months of 2025, we could grow our total order backlog to a new record level of EUR 6.4 billion, which is approximately EUR 1.4 billion above financial year 2024 level and corresponding to approximately 5x LTM revenue. Compared to the end of 2024, we could also increase the fixed order backlog by almost EUR 300 million, driven by the mentioned strong order intake, which more than compensates for increased output levels from our operations. Our soft order backlog increased to EUR 3.2 billion compared to EUR 2.2 billion at the end of 2024 and is also including first German programs, but also international programs. Having said this, I would like now to hand over to Anja in order to have a deeper look into 9M and the quarterly figures. Anja, over to you.

Thank you, Alexander. A very warm welcome from my side. In line with our usual format, I will start with our group performance. Then I will guide you through our segments and the 9 months and Q3 metrics. Order intake maintained its strong momentum, increasing by around 45% compared to the same 9 months period of the previous year. In absolute terms, this corresponds to EUR 1.2 billion in new orders, up from EUR 858 million in 2024. This extremely strong performance is primarily driven by our Vehicle Mobility Solutions segment, as previously mentioned by Alexander, and remains consistent with the high levels seen in prior quarters. Group revenue reached EUR 928 million at the end of the 9-month period, reflecting a strong increase of around 19% or EUR 150 million compared to the same period last year. VMS accounted for EUR 150 million of this growth, underscoring its continued and growing strategic importance. The first quarter delivered around 15% revenue increase, reaffirming the solid growth trajectory established in prior quarters. As highlighted by Alexander, we further expanded our fixed order backlog by EUR 303 million over the past 9 months, an impressive achievement in conjunction with our enhanced operational performance and higher output levels. Over the 9-month period, we achieved an adjusted gross profit of EUR 261 million, up EUR 44 million or around 20% compared to last year. This increase once again exceeded revenue growth, reflecting the continued success of our operational improvements, higher production volumes, economy of scale and in particular, the strong performance of our Defense business were drivers for that momentum. Our plans in Muskegon and Augsburg confirms their tangible productivity gains, while M&I and slide bearings provided a solid contribution to our 9-month margin expansion. Adjusted EBIT rose to EUR 141 million, marking a notable 25.5% improvement versus the prior year period's EUR 112 million. This strong performance illustrates the resilience of our cost discipline and the operating leverage embedded in our business model. The adjusted EBIT margin expanded to around 15% compared with around 14% a year earlier, evidence of the group's ability to consistently convert scale gains into higher profitability. In terms of our financial position, net debt increased to EUR 435 million, up 16% from EUR 375 million to year-end 2024, while the leverage ratio remained stable at 1.7x LTM adjusted EBITDA. This development reflects our growth-driven working capital requirements and the elevated activity levels across our operations. Overall, our capital structure remains solid, providing the flexibility needed to sustain momentum into the final quarter. Now let's have a more detailed look into our segments. VMS maintained its outstanding growth pattern and performed well across all key metrics. Order intake for the 9-month period reached EUR 904 million, marking a 65% year-on-year increase from EUR 548 million in the prior year period. This impressive growth reflects ongoing demand related to defense with Q3 contributing EUR 223 million in additional orders. The book-to-bill ratio stood at 1.6x in the first 9 months, underscoring the promising future revenue outlook. Revenue advanced to EUR 579 million, a substantial increase of around 25% compared to EUR 464 million a year earlier, reaffirming VMS' position as the primary driver of the group's top line growth. The positive revenue development was supported by robust volume output and continued high economies of scale at our Muskegon and Augsburg, where operational execution remains a clear strength. Earnings performance also remained very encouraging. Adjusted EBIT rose to EUR 105 million, representing a 36% improvement from EUR 77 million in the prior year period. And as I have already mentioned, the adjusted EBIT margin climbed to around 18% compared to 60.6%, highlighting significant operating leverage and sustained cost discipline. On a quarterly level, Q3 achieved an EBIT margin of 20%, following 17.5% in Q2, underscoring VMS' ability to translate revenue growth into profitability. Let's have a look at M&I. Our M&I segment continued its solid performance during the first 9 months of 2025. Order intake increased to EUR 255 million, up around 18% year-on-year from EUR 250 million in the same period last year. The segment's navy solutions remain a reliable and steady contributor to the group's revenue prospects. The book-to-bill ratio stood close to 1.0x in the first 9 months, confirming a balanced demand pattern and continued stability. Revenue advanced to EUR 268 million, reflecting a 15% increase compared to EUR 332 million a year earlier. Growth was primarily driven by the Navy business, which maintained strong momentum and more than offset the subdued development in industry-related solutions. The third quarter contributed notably with EUR 92 million in revenue, representing a significant 31% quarterly increase. Also, profitability improved significantly. Adjusted EBIT rose by around 35% to EUR 31 million compared to EUR 23 million in the previous year's 9 months period. The adjusted EBIT margin increased to 11.6%, up from 10%, reflecting the positive impact of the business mix shift towards Navy solutions. On a quarterly basis, Q3 achieved an EBIT margin of 13.4%, up from 11.1% in Q2. The key takeaway is that M&I maintained its average margin at the level seen before the second quarter. However, it should also be noted that M&I benefited from a one-off effect of EUR 1.5 million due to an insurance payment received. Let's move to Slide Bearings. Slide bearings produced a solid performance, although we experienced some negative factors. Order intake totaled EUR 96 million, representing a decline of around 9% compared to EUR 106 million in the previous year's period. Demand for E and Marine bearings remained robust overall, though the timing of individual projects led to a dip in Q3 compared to the prior year's quarter. The book-to-bill ratio remains around 1.0x in the 9-month period, confirming a balanced and steady order position. Revenue for the 9-month period remained virtually unchanged at EUR 92 million. This outcome was realized although the sector faces the same GDP-related challenges in the industrial sector as M&I. In addition, some open positions in the operational department put some pressure on our production output, which was addressed by subsequent hiring programs. You can see a corresponding revenue dip in Q3, which contributed EUR 29 million, moderate below last year's level. Adjusted EBIT amounted to EUR 15 million, down around 9% year-on-year from EUR 16 million, corresponding to an adjusted EBIT margin of around 16% versus 17.6% in the prior year's period. On a 9-month basis, this is still above group level average. On a quarterly basis, Q3 reported a margin of 14.9% following 16% in Q2, reflecting a reduced aftermarket share and the lower utilization of our asset base due to the Q3 revenue dip. Now let's update you on our adjustments. Group operating profit came in at EUR 95.5 million after EUR 58.3 million in the prior year. The drivers continue to be revenue growth, economies of scale and cost discipline. After adjusting for the effects of PPA, operating profit was EUR 129.1 million compared to EUR 91.4 million at the end of Q3 fiscal year '24. Adjustment came in at a significantly lower level than the prior year and mainly related to global process and system improvements, whereas the corresponding period of the prior year was mainly impacted by our efficiency program. In total, we recorded an adjusted EBIT of EUR 141 million in the 9-month period against EUR 112.4 million in the comparative period. Let me continue with a detailed look at our net working capital development. Our net working capital at the end of the third quarter stood at EUR 343 million compared to EUR 284 million at the end of December 2024. The main driver of this change was the buildup of inventory, which rose by EUR 86.8 million. Beyond cutoff effects, this increase primarily reflects work in progress from the growing order backlog as well as the stocking of critical input materials. The net impact from other working capital items amounted to around EUR 28 million, also influenced by cutoff effects. Consequently, net working capital as a percentage of LTM sales stands at 26.6% compared to 24.9% at the end of December 2024. We remain comfortable with this level given our revenue growth and foreseeable customer demand. Nevertheless, we are committed to bring this ratio down over time and continue to identify net working capital reduction measures. Let's move to free cash flow. An adjusted EBITDA significantly is in excess of the prior year's level, more than offset the increase in the net working capital, whilst the combined impact of the other factors shown in the chart resulted in a free cash flow over the period of EUR 26 million. Capital expenditure relating to property, plant and equipment amounted to EUR 60 million, representing 1.7% of revenue, well below our benchmark level of approximately 3% and the prior year's level of 3.3%. Once again, I also would like to highlight the positive effects of our reduced tax liability due to the control and profit transfer agreement between RENK Group AG and RENK GmbH. These measures enabled us to make use of the tax loss carryforwards that accumulated in RENK Group AG. The same is true for U.S. interest carryforwards, now usable thanks to a debt-to-equity conversion related to our U.S. entity. Interest payments are significantly down and represent a normalized level. Taking all components into account, free cash flow for the 9-month period was positive at around EUR 26 million. In the prior period, we had seen a cash outflow of around EUR 4 million. Thank you for your attention. Once again, it was a pleasure for me. And now I would like to hand over to Alexander.

Yes. Thank you, Anja, for the good report. Now a few words to our outlook for the rest of the year 2025. Regarding our 2025 guidance and based on our 9 months 2025 performance and what we expect for the remainder of the year, we do confirm both revenues of more than EUR 1.3 billion and an adjusted EBIT between EUR 210 million and EUR 235 million for 2025. Please keep in mind that the export ban to Israel has not yet impacted significantly the third quarter. However, it will affect Q4, resulting in a loss of revenues in the lower double digit. Regarding our new midterm targets for 2030, I would like to refer to our upcoming Capital Market Day next week. Moving to Slide 21, which is quite busy, but I would like to try at least to provide you a very brief overview of some of our key order intake programs for the coming months and quarters. For the last quarter of 2025, we do expect some further important contracts such as for the Puma and the Kodiak recovery tanks for Germany, a major naval R&D project also from Germany, but also aftermarket volumes for Ukraine for the first time and Europe and last but not least, an MBT test rig for the Dutch MOD. Let me comment please on 2 points. First, on this intended Puma contract, we do not talk about new vehicles here. We do talk about additional orders for the existing circular reserve in regards to transmission. The second comment on the Ukrainian aftermarket contracts, which is in this form, we have seen for the first time now, we booked during the fourth quarter already a frame contract between RENK Germany and the Ukrainian MOD for spare parts and spare transmissions in the range. I mean, if you talk about the total range of the frame contract, high double-digit figure, euro figures of revenue. And on top, we expect a further business contract to serve local U.S. components, for example, the HMPT transmission locally in Ukraine with a local Ukrainian partner. So to be really clear, this is the first time that we see and have these kind of contracts regarding aftermarket from the Ukraine. The larger MBT transmission contract for an international customer most likely will shift into Q1 2026. The THOR IV framework agreement certainly has the largest order volume between USD 800 million to approximately USD 1 billion over approximately 3 years and maybe 2 additional years as an option. However, driven by the U.S. shutdown, we do expect to see a delay into Q1 2026. Please keep in mind the order intake of this frame contract will come on a year-by-year basis. Moving into the first half of 2026, we do expect to see some major orders from key customers like Germany. And we discussed this in the past, Poland and Italy, for example. In Germany, we do expect to see the first major orders for new vehicles for main programs like the Puma, the Boxer, the Leopard family, but also the tank haubitze Panzerhaubitze 2000, while we do also expect a further larger contract again for the Polish K2 MBT. The large Italian IFV and MBT programs are scheduled for the middle of 2026, and we also see additional orders from an international customer regarding our AVDS engines. For the Navy segment, we also expect some larger orders for international customers. We cannot disclose these international customers, apologies, during Q1 and Q2 2026. Ladies and gentlemen, we are almost done. So let's move to the next slide. And the statements here, I think, are very clear. The main drivers for the last quarter of 2025 are crystal clear and absolutely straightforward. Full focus on Q4 performance regarding operational performance, output and financial KPIs, capture pending order intakes and proceed on important business development and R&D programs. Ongoing monitoring of potential M&A opportunities and last but not least, preparing for the expected upcoming Bundeswehr and European programs regarding further market intelligence, such as platforms, timings, volumes, budgets, et cetera, but also the consequent execution of our production strategy and capacity expansion. Sorry for my voice, I have a cold, by the way. Before we move to the Q&A session, let me briefly recap the key points of today's call. First, RENK has shown a strong 9 months performance, driven by a strong top line, record order intake and focused operational execution. We, therefore, do confirm our guidance for 2025. Second, we are a defense company, and our growing defense business is the main driver of our group performance. Third, we are getting prepared for the expected increase in volumes in Europe. The execution of our production strategy is key and the launch of our modular production concept in Augsburg during Q3 defines a very important milestone. Fourth and final, technology is driving our business and success. The execution of our next-gen mobility road map is highly important and Q3 also marked an important milestone here. Before we go finally on the Q&A session, a few concluding comments on our financial calendar. Our capital market activities continue to be very busy, and we are looking forward to meeting a lot of you in the next couple of weeks and months. Certainly, a highlight will be our second Capital Market Day next week here in August with hopefully much more color on strategy, financial ambitions, capacity ramp up, production strategy, technology, M&A and much more. And I think some very interesting guest speakers in the evening before, a former -- a former German General and also on the day itself, a CEO from a leading prime from Europe. But I don't want to make more an advertisement for this event. Please join. Thank you very much for your attention, and we are now looking forward to your questions.

[Operator Instructions] So the first question is from Sam Burgess.

I just got 2, if that's okay. Firstly, on CapEx, I think your previous expectations were for CapEx to be between 2% to 3% of sales. I guess unless you have an abnormally high seasonal CapEx in Q4, then you're going to come in right at the bottom end of that range, most likely, if not below. Can you just give us maybe a little bit of color on why this is going to be so low and whether that's sustainable into '26. And the second question, clearly, you are very close with the German customer. At this stage, how much visibility have you been given on their order intentions by platform type, maybe over the next 5, 10 years?

Sam, Did I got you correct on the CapEx -- on the CapEx question?

Yes.

Anja, would you answer?