Rheinmetall AG (RHM), the German defense and automotive company, reported a strong financial performance for Fiscal Year 2023, with CEO Armin Papperger highlighting significant growth in sales and profitability. The company's sales increased by 12% to €7.2 billion, with an operating result of €980 million. The operating margin rose to 12.8%, and the company proposes a dividend increase to €5.70 per share.
Rheinmetall's backlog surged to nearly €40 billion, driven by demand for weapon and ammunition and vehicle systems. The company is capitalizing on global tensions by focusing on defense products and plans to expand its footprint in various international markets. With a solid order pipeline and strategic acquisitions, Rheinmetall is positioned for continued growth in the defense sector.
Key Takeaways
- Rheinmetall's sales reached €7.2 billion, a 12% increase over the previous year.
- Operating result improved to €980 million, with an operating margin of 12.8%.
- The company proposes a dividend of €5.70 per share, reflecting confidence in financial performance.
- Backlog increased significantly to nearly €40 billion, indicating strong future revenue potential.
- Rheinmetall is focusing on defense products and plans to expand its international presence.
Company Outlook
- Rheinmetall aims for an operational margin target of 15% EBIT ROS in 2024.
- The company expects to take over €420 million in ready products in 2023.
- A strong order pipeline, with potential contracts from Germany reaching up to €30 billion.
- Long-term air defense sales target of €20 billion.
- Rheinmetall plans to reach €15 billion in sales by 2026, with an aspiration to grow to €20 billion.
Bearish Highlights
- The civil business faced a cyberattack recovery and margin impacts due to cost increases.
- Rheinmetall DNL Munition reported lower earnings.
Bullish Highlights
- Vehicle Systems sales increased by almost 15% to €2.6 billion.
- Weapon and Ammunition sales grew by 29% to almost €1.8 billion.
- Electronic Solutions sales increased by around 13% to €1.3 billion.
- The company is the sole producer of ahead ammunition, with high demand expected during conflicts.
Misses
- A due diligence issue was discovered where a small company did not disclose obtaining ingredients from an explosive site.
Q&A highlights
- Rheinmetall has no current supply chain or human resource problems.
- The company is focused on maintaining positive cash flow.
- Plans for vertical integration in the US and potential acquisitions were discussed.
- The infringement proceedings in Spain were described as a minor issue that can be resolved soon.
Rheinmetall AG, with its ticker symbol RHM, has demonstrated resilience and growth in a challenging global market. The company's strategic focus on defense products, bolstered by global tensions, has translated into a robust financial performance and a strong order backlog. With plans to expand its international presence and capitalize on growth opportunities in the defense sector, Rheinmetall is set to continue its upward trajectory in the coming years.
Full transcript - None (RNMBF) Q4 2023:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Rheinmetall AG conference call regarding Fiscal Year 2023 Report. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Armin Papperger, CEO of Rheinmetall AG.
Armin Papperger: Thank you very much. Good afternoon together. So Dagmar Steinert and myself will give you an overflow about the information and the only information about fiscal year 2023. We start with page number three, and on that we see the tensions. And everybody of us know that we have increasingly globally tensions from U.S. election, when nobody knows what's going on about the budget here in Europe via the Gaza conflict, and for sure the war in Ukraine, down to the South China Sea conflict. And with that conflict, we see that the need for defense and especially the need of the products that Rheinmetall has will grow over the next years. The next page will show us the figures of the year 2023. On the sales side, we have $7.176 billion. We didn't book about $420 million where we had goods ready in 2023, especially, again, trucks and ammunitions. And we will make the sales and we skip the scales to 2024. The EBIT pre-PPA is on a level of 968, not what we wanted to reach 1 billion, but very near. And operating margins is growing up to €918 million and EBIT ROS of 12.8%. Operational free cash flow is 356 and there is also about 250 million came in also on the 3 January, so that the real operational free cash flow is still better. Very positive is Rheinmetall nomination, so we booked businesses of nearly 20 billion. This is doubling the nominations from 2022 to 2023. The Rheinmetall backlog is growing from 26 billion to 38 billion. And I think very positive is, we can pay much higher dividend and the dividend will be €5.70. If you have a look to the next slide, we see that especially the Chancellor, but also the coalition in Germany is very clear and a lot of discussions with different European governments that said we Europeans, we must do more for our security. We have to invest more and we have to do something to create our future. The Chancellor is really with us and if you see what is expected and a very clear Minister of Finance, Vice-Chancellor and Chancellor said we have to reach 2% target, so that over the next years we expect that there will be spendings of about 80 billion from the German side year-by-year for defense. So what are the big tickets now for Rheinmetall? And what is the future and what do we see over the next 5 to 10 years? And we want to give you an overview about the big tickets of Rheinmetall. The number one for sure is auxiliary and auxiliary ammunition. Auxiliary systems will grow and auxiliary ammunition. And here we will grow up this year to 700,000 rounds, but with new factories, especially in Ukraine and also Lithuania, our new target is that we are end of 26 ready to produce 1 million projectiles per year. If you count that the mean value of a projectile is €3,500 and if you see that we need propulsion systems and the mean value is 4 modular charges or 4 modules per one projectile, we have the possibility to grow up to 3.5 billion if the customer is ordering full shots more than 3.5, so it could be 4.5 billion or 5 billion per year. This is then the capacity that we have and it's by far the biggest producer of, we are then the biggest producer of auxiliary ammunition worldwide and we are able to produce also the products like RDX and also the propulsion systems by ourselves so that we have 100% vertical integration. Next slide, page number 7 will show you that. And let me start with Australia. So we double the capacity at the moment from the shell production. We go via South Africa, here we triple the capacity of propulsion systems and also double the capacity of projectile production. So we will grow up on the projectile side to 150,000 rounds from 70,000 and from 1,000 tons propulsion system to 3,000 tons. Let's go to Spain. After acquiring Expal, we also sometimes we tripled the production of powder and we grow up between 350,000 and 400,000 rounds on the projectile side. Very strong growth is Germany because we create now in Germany our plant Niedersachsen and this Niedersachsen plant will have a capacity of 200,000 rounds of projectiles plus 1,900 tons of explosives and 3,000 rocket engines and warheads and other components for that. So the biggest investment at the moment. Hungary, the Hungarian side is now nearly ready. This year the first ammunition will go out. On the Italian side, we increase our capacity especially on Sardinia for the warheads and for filling of auxiliary. And there is a decision now also from the European Union that also the plant in Romania, there will be some grants from the European Union for that factory and we will make a decision hopefully tomorrow in Romania to make the first step to build up this factory where we also create another 1,000 to 1,500 tons of propulsion systems. There are two new factories and with these factories I told you we are able to make this 700,000 and this 11,000 tons of propulsions. And now Ukraine where we signed an MOU and the Munich Security Conference is coming up with a capacity also of 150,000 and Lithuania with maximum 100,000 so that we grow up to more than 1 million rounds if that is ready. It will be ready after 12 to 15 months after T-0 so that we are at the moment that this is our planning, but I think that the governments go that way and go forward with us. So auxiliary ammunition absolutely number one for us. On the next slide you see that the Chancellor and Defense Minister and the Prime Minister of Denmark was also with us, made the first steps to build up the factory. And on the next page you see that we have also targets on the rocket auxiliary so not only a distance of 40 or maximum 60, 70 kilometers which is barrel-based auxiliary is on a good way in Rheinmetall, but also the rocket side. And on the rocket side we have a medium sales potential of 1 billion to 1.5 billion. So we are at the moment in cooperation with U.S. partners for the HIMARS systems but also with Israeli partners for the PULS system and we booked also the first 300 million in Spain for the PULS systems for rockets and I think it will continue the need of long-range auxiliary is huge, really, really huge need about that so that we see that is a great potential for us. Next page shows the mid-term sales potential on the medium caliber. We made all investments in medium caliber. There are some smaller investments now in Spain to enlarge the case production but we see a potential of 800 million per year on the medium caliber. We have a very big book business, and it will continue, and it will hurry up because of the air defense business. And you need this medium caliber ammunition and this special ammunition from Rheinmetall which is air-based technology and we are at the moment the only producer in the world for that ammunition and we see a huge potential in the future. Next slide shows that there is an opportunity and the potential of 1 billion. We have the capacity, it's a done deal, everything is invested and we can make this billion without any more investments. Also all investments are done on the infantry side on the next page, page number 12, and we see 300 million to 400 million per year. Also good order book and a very strong need from Ukraine but also for restocking on the infantry ammunition so that there is also a good chance for us to grow in that area. On the next page we see now the key technology and the key technology is not the projectile. It's also good technology which is inside but the powder is really the key technology and the plants that we have in Aschau, South Africa, Spain but also in Switzerland are outstanding factories and we are able now with the investments that I told before to build up this powder capacity of up to 11,000 tons. This is enough to fill these auxiliary rounds. If there are more contracts will come then we will invest again but the huge investments are done before and the powder production is minimum investment of 400 million but everything is there and the only thing that we have to invest is in Romania but the Romanian government will do that so very positive for our cash flow. If you go now to page number 14, this is another point where we see huge opportunities. Now let's go to the vehicles. On the vehicle side, we have now the opportunity that we are in all programs. We have a good contract of Challenger 3 that will continue. We have the good contract on Panther KF51 to make this product ready for serial production and I expect also that very soon the first bigger contracts are coming there. We are part of the main ground combat system especially about that where we have a very special know-how. Leopard 2 Upgrade and I call it Leopard 3 because I believe that between main ground combat system and Leopard 2, Leopard 3 can come and will create also a lot of opportunities for us. And we are part of the European Defense Fund where we have a 50-50 argument with our friends from Munich and so we see a mid-term sales potential of 2 billion per year with all these programs which are running. Next page gives you an overview about the increasing infantry fighting vehicle 8x8, 6x6 and 4x4 platforms. So the infantry fighting vehicle over the next 10 years there is a huge need and there is not only the U.S. program but a very important program. And without the U.S., we see a mid-term potential of 2 billion per year. With U.S., it's for sure much higher. It could double because the United States needs between 150 and 200 vehicles per year which is for sure also a minimum 2 billion. But 2 billion without U.S. per year is possible and we booked Caracal. We booked a lot of boxer contracts. Heavy weapon carrier will come now. We are expecting new infantry fighting vehicle contracts on the Lynx site and also for the second lot Puma there is a chance to book more products. On the next page, you see the acquisition we did last year. And on the acquisition side, we acquired 72.5% of Automecanica Mediaș in Romania. And this acquisition gives us a potential of another 300 million sales. What is the reason for that? Because it is a huge factory but they had not a lot of contracts. We filled this factory now. And we filled it with the first contract before Christmas of 350 million from air defense side. We expect some vehicle programs. We expect maintenance. And we can produce a lot of components for the Rheinmetall Group inside Romania. In Romania, because the wages are very low, our expectation is that we are able to reach an EBIT ROS of 20%. So that was a very small investment because we were able to get this company with an investment of less than €20 million. I think over the next years it is possible to make between 40 million and 60 million profit per year. Page number 17 shows us that there is a huge need of logistic vehicles. Logistic vehicles are the backbone of the Bundeswehr. We have a lot of old vehicles. We delivered in between some thousand UTFs and also WLS. But there is a huge need of thousands or ten thousands of vehicles over the next years. The capacity that we have in Vienna is growing up now to 4,500 vehicles. And the price of WLS is about half a million, between 500 million and 600 million. So we expect that the mid-term sales potential, and we will reach it I think this year, is 1.5 billion per year without United States of America. If U.S. will come, again, we are able to double that, I think. Page number 18 shows that Rheinmetall is the European V-SHORAD system house. And on the V-SHORAD side, we are the number one in the world. More than 40 customers are using our technologies. And with the European Sky Shield Initiative, where 21 users, European countries, are inside this initiative, we see a multi-billion potential. The first orders came in, and the orders are usually between 0.5 billion and 1 billion. And the Skyranger 30 for me is a huge opportunity, and also the Skyguard Next Generation. And if the 21 users are inside our books, we have 60 customers around the world. And only the ammunition need that they have over the next years is absolutely huge, so that we see a mid-term sales potential inclusive ammunition of 2.5 billion per year. Page number 19 is the importance of digitization. And on the digitization, and Rheinmetall more and more is going into this digitization area. So we started with the soldier system. And with the soldier system, we stepped now into the middleware together with Blacknet. And that gives us the opportunity to make the digitization for D-LBO, for the land-based operations. Here is a multi-billion opportunity. The first contracts will be signed now this year, or the first contract is signed. Second digitization of the Hungarian Armed Forces and also TAWAN, the Tactical Wide Area Network, is where Rheinmetall is inside. We have here cooperation with Airbus. On D-LBO, we have a cooperation with KMW, so that we are in all these programs. And let me say we have minimum 50% of all that programs. There is also great potential in the Air Force sector, especially if we are able to make the sustainment on the F-35. I think there is a huge opportunity also in the Air Force side and also on the civilian side we see opportunities. Mid-term sales potential is 2 billion per year. And aviation, as you know, the trigger point for us was the F-35, but also some other sustainments for helicopters and other things. Our target in the field of aviation is sales potential of 1 billion per year, and we think it is possible very soon. Page 21 gives you now an overview about the American defense market. And on the defense market, I'm positive. After some meetings in the United States, I'm very positive that the U.S. boys are doing a great job there. Rheinmetall Vehicle Systems USA is very successful. They are very innovative, and the customers love them. So that I see the final award decision will be end of 2026 or 2027. And I believe that there is a good chance. We will see. It's nothing at the moment in our calculations. But if it comes, I think we have a huge opportunity to create the next booster for Rheinmetall. The same for the CTT program. There is a need of more than 40,000 trucks, and the final award decision is in 2026. So that very soon we have a clear picture about the story going forward into the USA. We have a very dominant business at the moment on security, but there is also some civilian business. It's shrinking and shrinking, and it's not a strong growing business. And if you see that we have growth rates of up to 40% in the defense side, and the growth rate on the civilian business is maybe 1% or 2%, so you see that this business is going down. And our expectation is that in 2026, we have less than 20% civilian business, less than 10% automotive business. So there is no longer a dependence on that area. And what we did is, I think we brought our people on the piston business into a good new home, people who take care about that. And in Rheinmetall's side, we can no longer pay attention on that thing. So we found good people and good companies who took over the large bore and also the small bore pistons. We sold the Riken, on the Riken JV, we closed it in Q2'23, and we sold all Shriram shares, and the last shares we sold in February'24. So at the end of the day, we are very happy that our people have a good new home. So on the next page on 23, you see that Rheinmetall has to take responsibility. And our mission, our commitment, and our purpose is very clear. We have to serve our customers. This is the most important thing we have to deliver. That is the reason that we are investing a lot. And as you know, we have still firepower, but we invested $1.2 billion in the acquisition of Expal. And we have now valuable stocks of 3.2 billion, which is very important for us to deliver. And over the last two years, we have also CapEx of more than 1 billion, which is good to grow, and which is very reachable because our customers give us cash in down payments. Later, Dagmar will give you an overview about that thing. We empower governments, and that's also important to empower governments to protect the population, to protect the people. That's the number one what governments have to do. We are investing a lot, and we develop also new technologies. And also there is a huge investment program from the Rheinmetall side. And now I'm happy to take over Dagmar. She takes care about the financials.
Dagmar Steinert: Yes. Thank you, Armin. So let's move on to page 25. As you can see, the year 2023 really set a new milestone regarding sales growth and profitability. We increased our sales by nearly 12% to €7.2 billion was almost 36% of the sales volume resulting from the fourth quarter. Weapon and ammunition as well as vehicle systems were the driving forces behind that growth. Our operating result, which is reported excluding PPA effects, rose by around 20%, including €536 million in the fourth quarter to €980 million Euro. The high sales share of weapon and ammunition led our operating margin increase to 12.8%. The main driver for the higher EBIT pre-PPA is a divestment of the Shriram shares. Let's move on to page 26 for the presentation of our earnings per share and dividend per share. The strong improvement of our operating result lifted the basic earnings per share for the continued operations pre-PPA to €14.65. We propose a dividend increase from €4.30 to a record high of €5.70 to the AGM. This result in a payout ratio of around 39%, which marks the top of the corridor that we gave you at our capital market day in November last year. So please turn to page 27 for a look at Rheinmetall's operating free cash flow and, of course, the working capital development. The fourth quarter cash generation increased the operating free cash flow for the full year to €356 million, which reflects our highly seasonal business. Massive customer pre-payments in weapon and ammunition and vehicle systems helped to reach this significant improvement of €508 million compared to the previous year. We had cash flip-overs effects of around €250 million, as Armin already mentioned. Weapon and ammunition and vehicle systems mainly caused the increase of inventory levels by €1.3 billion to €3.2 billion in anticipation of the upcoming customer orders. Let us move to page 28. Even after the acquisition of Expal, our balance sheet remains very strong and provides enough firepower for further inorganic growth. Our net financial position of €1 billion came significantly down in the fourth quarter due to a high cash intake. Consequently, our equity ratio improved again to 31.1% in the fourth quarter. In the third quarter it was 29.6%. The maturity profile is pretty relaxed until 2028 and 2030 when the convertible becomes due. Moving on to the next page, Rheinmetall nomination. Our Rheinmetall nomination doubled compared to the previous year to almost €20 billion. A high number of fixed orders, large framework contracts that increased by €7 billion against previous year and a stable number of booked business from our civil divisions pushed our Rheinmetall backlog close to €40 billion. Let us move to the next page for a detailed look into our backlog. Weapon and ammunition and vehicle systems are the main drivers behind the strong backlog increase to almost €40 billion. Two long-term ammunition framework contracts for tank and artillery ammunition from Germany and contracts from Ukraine helped weapon and ammunition to achieve a new record high of above €11 billion. The Caracal framework contract for Germany and the Netherlands, a new framework contract for trucks in Austria, as well as the second lot Puma for the German Bundeswehr are only a few projects which are included in the vehicle systems backlog. Electronic solutions saw major orders for air defense from Austria and Romania. Over the midterm, we expect more air defense orders within the European Sky Shield Initiative. The Rheinmetall backlog for our civil divisions remains stable. Our current backlog volume of almost €40 billion results in a very high backlog coverage for the running year. Please turn to page 31. Vehicle systems grew sales by almost 15% to €2.6 billion with an operating margin of 12.4% in 2023. Main driver were the ramp-up of the Hungarian Lynx program and the contribution of the various swap agreements in the context of the Ukraine war. This is an outstanding performance, especially since the fourth quarter did not report any growth as sales were held back by customer agreed delays into 2024. Weapon and ammunition reported the strongest growth of 29% to almost €1.8 billion and a great margin of 23%. Germany and Ukraine as well as other NATO countries created the highest growth momentum. Former Expal contributed with €171 million, slightly short of the expected 200 million sales due to sales delay into 2024. The operating result increased by more than €100 million to €403 million, including a contribution from Expal of 37 million. We reported various smaller one-off effects from the integration of Expal, which had a slight impact on the margin. Increasing volumes and a more favorable product mix caused that development. The fourth quarter reported an impressive sales increase of 43%, ending at €817 million and an operating result of €241 million. Main driver behind the sales growth were high deliveries to Germany and Ukraine, especially for 155-millimeter ammunition and margin remained on a very high level of almost 30%, but stayed a bit below previous year's level. Electronic Solution reported an annual sales growth of around 13% to €1.3 billion and a strong improvement of the operating result to €150 million, lifting the operating margin to 11.4%. Key sales drivers were the ramp-up of the Hungarian Lynx and the German Puma. Additional support came from the delivery of Skynex air defense systems and leverage created the biggest momentum for the profit improvement. Our civil business recovered from the cyberattack in the second quarter of 2023 and reported a slight sales growth. However, margins were still impacted by cost increases that were not fully passed through to customers. The overall impact of the cyber incident was at the expected level of around €10 million. The disposal of the Ampere business and the restructuring of our Chinese casting business supported our operating result with almost €10 million. This closes my part of the presentation, and I am happy to hand back to you Armin for the outlook.
Armin Papperger: Thanks Dagmar. On the outlook you can see and I think very important is also in 2023 as I told before that's important for you. We took 420 million over ready products. These were €360 million trucks which were 100% ready and also €60 million ammunition sales. Dagmar told you something about the Spanish side in 2024. What does it mean? It means that we are able on the operation side to produce the products. So we have the capacity, we are able to produce it. Sometimes you are in negotiation with customers to say okay we are not able to take it over. I tell you the point on the truck side. The 360 million we have to take over to 2024 because the inflation rate was higher and we were not happy with the inflation rate that was calculated 5 years ago. So we have an agreement now and we made this agreement yesterday with the German government that we can add some costs on the inflation side and at the end of the day we have higher prices. And for us it was better to get these higher prices then only to get the sales and to reduce our profitability. So therefore number one, we are able to produce. Number two in 2024 on the sales because of the investments and the CapEx we made very clear that we are able to produce for 10 billion. The growth rate will come from the defense business. It will be a very small growth from the civilian business and that is the reason that the profitability also will grow and the operational margin is going up to 15% EBIT ROS. This usually is the target as you know that we wanted to reach in 2026. We are a little bit earlier now about that but we take care about that we continuously improve our performance. And the other positive thing is that our cash conversion rate should be even if we grow so strong on a level of 40%. There is also another trigger point which is important for you. It is still unofficial but we get a grant from the European Union and the Rheinmetall Group for all the different factories. We have a grant of around €140 million which will help us in growth, in cash and in also profitability because we did all that investment. All in all, in a nutshell, a very good year 2023 and we expect a better year 2024. Thank you for your attention.
Operator: [Operator Instructions] The first question comes from Sebastian Growe from BNP Paribas (OTC:BNPQY). You have the stage.
Sebastian Growe: The first one would be on the order pipeline. I understood that at earlier conferences this year you pointed to a total nomination potential of between 28 billion and 36 billion this year. However, when I look at the recent order announcements, it seems that this might have further increased beyond those ranges. So the first question that I then have is if you could provide an update please on the pipeline and especially also shed some light on how you would see firm orders in comparison with potential frame agreements. If I may specifically also ask for an update around the 8 billion to 10 billion artillery contract from Germany, that would be the first part.
Armin Papperger: Yes. So the order pipeline, our expectation is really very optimistic and there is an opportunity. Is everything going right that only from Germany that we get Rheinmetall nominations up to 30 billion only from the German side. And what is the reason for that? Number one and the biggest thing is, as I said before also, is artillery ammunition and we are at the moment in negotiation with the German government for 2.2 million rounds of artillery. 2.2 million rounds, what does it mean? It means that we have only for the projectiles up to 9 billion and they need also the charges and they need also the fuses. And if you see that one modular charge price is €250, fuse price usually is about 700. So we can expect that there is a double-digit billion contract only from the artillery side. Heavy weapon carrier, another 2.5 billion fixed contract. From the artillery side, our expectation is that between 1 billion and 2 billion will be fixed. And if it is a 10 billion or 12 billion contract, the rest is frame contract and year-by-year booked. The reason for this frame contract was that we produce now 200,000 in Germany because the Werk Niedersachsen is especially programmed also for this 10 or 11 years program where we can produce 200,000 rounds per year. And 2.2 million, what does it mean? More than 10 years work also there. This is exactly what the government wants. This is exactly what the Chancellor says. We have to have long term contracts to go forward and this helps us a lot. A very positive thing is also that all the frame contracts that we signed, that we fulfilled or it's an overfilling about that. So most of the customers said, okay, we need the next frame contract. And this, for example, for the old, if I say old, last year frame contract for artillery of 1.5 billion, which was a much smaller one, we got it after 6 or 7 months. Yes, we got it from a frame contract to a fixed contract. So that my expectation is also for that, that maybe there is a possibility to get 2 or 3 years fixed from the 10 years frame contract. From the vehicle side, Boxer, the medium weight class vehicles, this will be a fixed contract. Other ammunition will be fixed contracts like tank ammunition. We ordered still some tank ammunition. Air defense is huge. These are fixed contracts. These are no frame contracts on the air defense side. And if you have, for the first vehicles, if there is, and the vehicle price, if you have Skyranger, it's going up to 10 million to 15 million. So if every country needs 30 to 40, as I said, it's always with ammunition between 0.5 billion and 1 billion. So multi-billion fixed contracts. So I'm, at the moment, we are on a very good way. And you will see, maybe, again, we are very conservative in this, what we told you last time.
Sebastian Growe: Yes, sounds like that. I can spare you one question. And that is around the overfunding situation in Germany. So obviously, late last week, we had some noise around a potential 6 billion hole for the current discussions when it comes to the ordinary budget in Germany for the defense side. So can you help us understand how the contracts are structured at your end? So what's the risk, eventually, that the customer can walk away, kind of push it out? So if you could help us there, that would be much appreciated.
Armin Papperger: All these contracts I discussed at the moment are coming out of the 100 billion budget. This is a point where we get really a big piece of them. And as I said, if I count up everything, it will be. And maybe you remember two years ago where the people or where we discussed to say, okay, how can you tell us that you can 35 billion or 40 billion out of the 100 billion you take? It will happen. This is exactly the piece that we will get. So our calculation was not so bad. And we have a good hit rate in that area. But all what I said, artillery ammunition, tank ammunition, schwerer Waffenträger, Boxer, et cetera, et cetera. But there is much more. There are now also for Ukraine, for example, out of these 8 billion budget are auxiliary stuff. This is Boxer with auxiliary where our friends from Munich and Rheinmetall share 50-50 on that. It's a multi-billion contract that will come up. So huge opportunities. But I only speak about the German side, but there is also huge opportunities on the international side. I will be tomorrow with the prime minister in Romania. So we speak about vehicle programs. We speak about ammunition programs there. Hungary is something coming up. The whole Eastern European part is looking forward. Spain, if you see what we booked now over the last and in the next two months and over the last two months, if I count everything up, there is more than 1 billion that we book in Spain. Spain is a new market for us, but it hurries up a lot. So there are huge opportunities. And what we have at the moment to take care is really to bring it into the right direction and to deliver.
Sebastian Growe: Okay, thank you for this. And then the very last question, if I may, just around electronic solutions. I do recall that at the Capital Market Day, you had pointed to a potential of up to 5 billion when it comes to air defense. You also talked about the European Sky Shield Initiative and the related potential. And I've counted around 3 billion of orders since December alone. So can you provide us also here with an update where this can go eventually? I've seen and noticed obviously the 2 billion that you put in the slide deck as a midterm sales potential. And maybe there's also a relevant question, I guess, in this regard. Help us a bit at least to better understand the profitability around air defense, because my impression is that there's very much deviation between the bits and pieces inside electronic solutions.
Armin Papperger: Yes. So if you see long term, my expectation is that, as I said, 50 to 60 countries will be our countries on air defense side. Only with SE, with more than 20 countries, and every country will order something. And if I say it's very conservative, 0.5 billion, and this is the minimum that they have to order, it's 0.5 billion. So then you see that there is a potential, also conservative, of €20 billion. It's a very simple calculation. The point is that these are the systems. The point is that every nation needs ammunition. And on the ammunition side, we are the only producer of the so-called ahead ammunition of that. And if there is a conflict, they have to fire their ammunition. So at the end of the day, there is a huge potential also from the ammunition side, which is going forward. So I agree with you that we were on the Capital Markets Day conservative. But at the end of the day, and you see we booked now. Really, you are right. Yes, we booked some billions and we will book much more. But if we grow up and the big ticket has shown a year-by-year to 2.5 billion or 3 billion, it's good. Profitability, there will be a leverage effect also. At the moment, we are on a level of 15% on profitability. On the air defense side, there will be a leverage effect. And I think with the leverage effect, maybe it can be a little bit more.
Sebastian Growe: All right. Looking forward to it. Thank you.
Operator: Thank you. The next question comes from Sven Weier from UBS. Mr. Weier, the floor is yours.
Sven Weier: The first one, Mr. Papperger, just to follow up on the introductory remarks you mentioned about the different businesses and the midterm sales potential. I was just wondering if you could reconfirm that you had those projects in mind when you talked about reaching 15 billion of sales in 26 billion and 20 billion in the next seven to eight years. If these are still the right numbers or if we should even see higher than that. That's the first one. Thank you.
Armin Papperger: Mr. Weier, I love to be higher in that area. But first of all, I want to reach it. The 10 billion this year, 15 billion. And I think we are very, very looking forward over the years if we say, okay, we want to grow over the next seven years to 20 billion. So if it is more, I appreciate that. But first of all, this is what I want to reach. This is our internal targets. And as you know, if it is going better, I'm happy. I'm very happy about that. But I can tell you at the moment, no other figures. And this is where we shape the whole organization. If the order pipeline and if the order backlog is growing stronger and stronger and stronger, and if we have another 10 billion, which we would not expect it because we are so successful, then we have to invest a little bit more also into the capacities. And then we have to grow stronger. But at the moment, I think we have to deliver.
Sven Weier: And I mean, you already said earlier, you will almost achieve the margin target for 26% to 15% at the high end. I mean, what margin does go alongside the 15 billion then? And are we talking 16% to 17% or what do you have in mind for this?
Armin Papperger: The point is, I think it's a very simple calculation. The civilian business, which is less than 10 percent, will be lower and lower and will be let me say, a very small amount of our sales. I expect that on the defense side that we are able and that must be our target, that on the defense side, we are able to make 18%, 19% EBIT ROS.
Sven Weier: Okay. Very clear. And then I just wanted to make sure I understood your previous comment regarding Sebastian's questions about the pipeline that you said 30 billion potential in Germany or 13 this year.
Armin Papperger: 3-0. 30.
Sven Weier: And because what I'm wondering, I think in the same report that Sebastian mentioned, there was also mentioned that the special fund is already overbooked the stuff, right? Because everything has gotten much more expensive. Also, the weapon carrier, the F-35. So how does it square if the 30 billion are taken from the special funds?
Armin Papperger: It's not overbooked. The only thing what they have is that these programs are financed. There are some things where which cost more, but there are some huge programs which are, let me say at the moment, out of priority. And that is the reason that it is not overbooked. That is number one. Number two, and in all the discussions I have, and this is crystal clear. The budget, the regular budget, must grow up to 80 billion of EPL 14 number one, or they need a second Sondervermögen or Sonderdebt, however you call it. And I personally believe that it is much easier to bring the second thing to the second Sondervermögen to create security for national security for Germany. And that has to happen, I think, next year, because otherwise they are running out of Verpflichtungsermächtigungen, and I believe it will happen. Is it a risk for us? No, because we booked all that thing. So we are happy for this year. And Dagmar, you have seen what we have for this year. It's nearly 100 percent. So everything which is, and we book a lot of business also for this year. So there is even potential to have to grow more. But next year, it's also 80 percent done. And without all these bookings that we have in 2025, and in 2026 is also huge. So I can see up to 2026, 2027 that our growth story continues. And that gives me confidence that, first of all, we have time. Even if there is a delay of half a year, a political delay to make decisions in Germany and elections, et cetera, et cetera., it doesn't hurt us. And the second point is that there is a need, and all the discussions we have with the opposition, with the Christian Democrats, Social Democrats, Green Party, Liberals, all of them said we have to invest in our security and national security is so important. We have to spend the money, full stop.
Sven Weier: The final question I have for you, Mr. Papperger, on the U.S. projects you talked about. And you mentioned the decisions are likely falling into a period with a new President. So how able, how willing would you be to team up with your competitors to have like maybe a shared project at the end of the day and a joint project with those you compete against at the moment?
Armin Papperger: If the customer likes that, I'm always open. For me it's not a problem to share, but this is a decision from the customer. The point from my side is, first of all, we will fight hard. There is a two-year period where we fight hard, and we can fight hard because we got nearly $800 million from the U.S. government to fight. And they want to see us to fight to give the best technologies into the United States and to show them that the prototypes that we are delivering are great things to make America great again. So this is exactly what we want. And that is the reason, and we do it with our U.S. boys. There are no European boys inside, only U.S. boys, and we are a U.S. company. And this is exactly what both parties, Democrats and also the Republicans from President Trump, if he is President or former President Trump sees. He don't like imports from Europe to the U.S. We will produce every small screw in the United States, and I think this is the right thing to go forward. And we have at the moment good R&D centers, very good R&D centers, and the American customers like it. And when I was last there, I had some meetings with secretaries in Pentagon, and they are very positive, but you never know at the end of the day what happens. But for us, it is a really great experience what we see, and I think we have a good chance.
Operator: The next questioner is Sash Tusa from Agency Partners. Mr. Tusa, the stage is yours.
Sash Tusa: I have two questions. The first, your guidance of around 10 billion of revenues for the current year, given that you have 89% order cover and around over 400 million of product already made, which you should presumably deliver in the first half, it doesn't actually seem a particularly aggressive target. Are you expecting or are you concerned that there might be some more cutoff effect at the end of this year and hence that there may be some deliveries that slip into next year? Are you putting a bit of risk into your forecast? And then the second question, which is a rather wider one, could you talk about the supply chain for ammunition and particularly for explosives and where you see the pinch points being and where you see the supplies being most favorable at present?
Armin Papperger: Yes, Sash. So the point is that this is the calculation that we have. And as you said, the first quarter, you will see in the first quarter that we are on a very, very good way in the growth. We will have a very good growth in the first quarter and a very profitable first quarter. We never ever -- it's not the Q1 call today, but we never, ever have seen such a quarter like we've seen now. This is number one. The second point is I'm an entrepreneur. And as an entrepreneur, I'm looking on the profitability. And I can make a bet with you that the profitability will be between €1.4 billion and €1.5 billion. If it is 10 billion, 9.5 or 10.2, this is what we have minimum. And that is for me the importance. That is for me the important stuff. Are we profitable? Can we create cash? And the other thing is also cash. We don't lose cash. And as you know, if you have a company which is growing 40%, usually, yes, you have to invest such a lot of money that you have no positive cash flow. We will get a positive cash flow again because we get good down payments in this area. So is it so that we make exactly 10 billion? I must say I don't know. But is it so that we make minimum 1.4 billion profit? Then I say yes. I will bet with you.
Sash Tusa: Fair enough. I certainly won't take that bet then. Thank you. And supply chain?
Armin Papperger: On the supply chain side, at the moment, we have no big problems. And the reason for that is, as I said, we have 3.2 billion valuable goods in our stocks. So we take care about that to buy in early. This maybe is not the optimum for the cash flow. That's for sure. But at the end of the day, it's the optimum for us to deliver. And this is the right way. I believe it is the right way, especially if we have more in Europe, to deliver. And not to make an optimization on the cash side. But we have no problems at the moment on our subs. And we have no problem at the moment also on the human resource side. This is the next point to say we get people. People love us at the moment. And the people want to come to Rheinmetall.
Operator: The next question comes from Michael Raab from Kepler. Mr. Raab, the line is now open for you.
Michael Raab: Hi, everyone. Mike Raab, Kepler Cheuvreux. I'd like to place two questions here. First of all, Mr. Papperger, when I look at the sales potential that you depicted for the individual product groups for the midterm, just doing the simple math, adding them all up, you get to a quarter of between 17.6 billion and 18.2 billion, to be precise. Now, you're indicating this is for the midterm. What is specifically your definition for midterm, if one could say so?
Armin Papperger: It's longer than 2025, as we said on the Capital Markets Day. And the question before was also, yes, is this 14 billion to 15 billion enough? Enough, yes. We want, first of all, to reach the 15 billion. If everything, this is a potential, if everything which is in the potential is coming up, your calculation is absolutely right. There is more in, but 100% hit rate here usually is not possible.
Michael Raab: Yes, absolutely. That's what I'm asking. Okay, cool. Thank you. Then the second question I'm having, and I'm already done, is why would the Panther not qualify as Leopard 3?
Armin Papperger: Because he has the wrong name. As you know, yes, it's exactly the point. Sorry to say that.
Michael Raab: Okay, but from a technological standpoint, you could rebadge, rename, whatever. So technologically, is there any obstacle?
Armin Papperger: No. This is a fantastic product, and I can tell you also one, it's not a secret, because it will be very soon in the newspapers. We signed now the R&D programs in Germany, also for the 130, and for the 130 ammunition. So this is one technological milestone that the Panther has also inside. But that is what I mean. We have the Panther. The Panther is a mid-term tank, and I personally believe that there will be a decision also in Germany, because the main ground combat system we need up to 2040, 2045, that we have in between, I call it Leopard 3, however the German government will call it, maybe Leopard 2+, or whatever I call it, Leopard 3. And I believe that a lot of technologies that we have in the Panther will be implemented also in the Leopard 3.
Michael Raab: Okay, back to the Panther gap. Thank you.
Operator: The next question comes from Christoph Laskawi from Deutsche Bank (ETR:DBKGn). Mr. Laskawi, the stage is yours.
Christoph Laskawi: There will be three. The first one will be on vertical integration in the U.S. You expect announcements relatively soon. Would you need to increase your vertical integration before any announcement in the U.S.? So do you need to buy there? Second question then, what's the MO share that's in the defense business of 2.5 billion? And then a technical question just in Q4. If I understood it correctly, you moved business from MO to electronic solutions. Could you just remind us what that was and why you did it? Thank you.
Armin Papperger: I didn't get the last question. Can you say it again, please?
Dagmar Steinert: I got the last question.
Armin Papperger: You got it? Okay. Then I take the first two and Dagmar takes the last one. So vertical integration, very clever question because you are totally right. We are looking at the moment for acquisitions also in the United States. We want to do that and we have to do that because at the end of the day, we must be a bigger player if you get such big contracts. We need bigger factories and we are looking for that. And this is one of our targets to have a decision this year. Second point is ammunition share. So we expect that we have to produce 500,000 rounds per year continuously. And the price of one round will be between €1,100 and €1,200. So you see that we have between 500 million and 700 million on ammunition. Dagmar?
Dagmar Steinert: Okay. The reorganization of the divisions, we moved from the division weapon and ammunition, Rheinmetall Canada, to electronic solutions. And there we are talking about a sales volume of 110 million.
Christoph Laskawi: Thank you. A follow-up, if I may, just on the vertical integration in the U.S. Is there any potential size that you are looking at? Or could it be very small up to very big? Any comments there?
Armin Papperger: It will be not very big, but also not small.
Christoph Laskawi: Understood. Thank you.
Operator: The next question comes from [Carlos Iranzu Perez] [ph]. Mr. Iranzu Perez, the stage is yours.
Unidentified Analyst: First one, in the presentation, you have updated the mid-term sales target within weapons and ammo. And all these artillery numbers add up to roughly 7 billion. So this compares to the 2023 CMD guidance of around 4 billion. So could you please help us to understand this material growth post-2026 and the timeline to achieve this? Thank you.
Armin Papperger: So, yes, the first thing is that up to 2026, only the artillery ammunition, if the full package artillery with propulsion systems and also with fuses will come, there is a potential up to 5 billion only on artillery ammunition. It's 1 billion for tank ammunition, and the rest is the rest. But it's, I think, a very good figure, and we can reach that in 2026.
Unidentified Analyst: Okay, very clear. Thank you.
Armin Papperger: And Spain will be an important driver for that. So as you know that Madrid is the center of competence for Indirect Fire. So it's the headquarter of Indirect Fires in Madrid. And so this will be by far the biggest center of competence worldwide for Indirect Fire, Madrid, because we guide from Madrid, the Spanish factories, but also South Africa and Australia.
Unidentified Analyst: Super clear. Thank you. And I have a follow-up on weapons and ammo as well. On the margin side, you are guiding for margins of 25%, 26% in 2024, and at the CMD you guided for margins of 26% in 2026. So that implies very little operating leverage in 2025, 2026. So why is that?
Armin Papperger: Look, I think that's a very good margin. That is one point. And on the other point, we want to be very fair to our customers. And if there is a leverage, there is a leverage effect for sure also, but there are some investments, and we want to pay back also from that side. And we don't want, let me say, to overweight these discussions that we have with our customers. Sometimes you have to give the customers also an effect. If he buys a lot for some years, you have to give them something. You have to give them some money back. And so therefore I think if we are between 25% and 30% in this area, it's a very good margin, I think.
Operator: The next question comes from George McWhirter from Berenberg. Mr. McWhirter, the stage is yours.
George McWhirter: Just on the aviation mid-term guidance of about €1 billion of revenue, it seems a bit higher than the F-35 contract that you recently signed. Please, can you comment on any additional opportunities that you see in the aviation sector just to get to that €1 billion level? Thank you.
Armin Papperger: You are totally right. The F-35 will be half of them, about 50%. The others will be the sustainment business, not only on the F-35, but also sustainment on helicopters and other things. And number three is that at the moment different producers of airplanes are coming to us. If we are with the technology and with everything that we learned now, if we can produce some other components for them. And that is the potential that we see.
Operator: At the moment, there are no further questions. This is the chance for you. [Operator Instructions] The next questioner is Christian Cohrs from Warburg Research. Mr. Cohrs, you can ask your question now.
Christian Cohrs: Two questions left for me. First on CapEx. At the Capital Markets Day, I think you stated something like 7% of sales would be CapEx in 2024. Is this still valid? That would actually mean 700 million compared to your 10 billion guidance. Or do we have also to take into account the 300 million investment in Unterlüß? So then a total of €1 billion. Maybe you can shed some light on that. And then lastly, looking at your minorities, all your fully consolidated earnings are up massively. But looking at the minority line, [indiscernible] lower earnings, DNL lower earnings, maybe you can provide a brief explanation for that. Thank you.
Dagmar Steinert: Yes. I take the question with the minorities. And yes, we have lower earnings from [indiscernible]. Of course, we are missing our trucks, which we didn't deliver in 2023. We see as well lower earnings from Rheinmetall DNL Munition. But they had extraordinary high earnings in 2022. And these are both companies which lead to the fact that we have minorities of €52 million in 2023 and compared with €66 million in 2022.
Armin Papperger: Second point of CapEx, yes, you are totally right. It will be in that area, about €700 million. Positive thing, as I said, we will have a lot of down payments, number one. And maybe I didn't tell it right, but positive thing, very positive thing, is we'll get 140 million from the European Union for investments. So, this is a grant, this is, let me say, a present from Europe to Rheinmetall because of all the investments that we have. And that helps us a lot, for sure, to pay the bills.
Christian Cohrs: Understood. Thank you.
Armin Papperger: And by the way, this is not in the calculations in between.
Operator: Thank you. The next question comes from Ben Heelan from Bank of America (NYSE:BAC). Mr. Heelan, you can ask your question now.
Ben Heelan: I wanted to ask Armin around some of the numbers in the presentation again because you talk about the mid-term sales potential for artillery, rocket artillery, mid-caliber ammo, tank ammo, infantry ammo. And adding those all up, you get to around €7 billion for that weapons and ammo as a mid-term sales potential. Obviously, you've given us 2026 guidance in November of over €4 billion. I think in one of the questions you talked about that potentially being five now. So, is €7 billion where this business can go towards the end of this decade? I appreciate you probably don't want to give firm guidance for 2028, 2029, et cetera. But how should we think about that €7 billion if we just simply add up all those numbers in the weapons and ammo? Is €7 billion what that revenue line could be at some point? And how should we think about that? Thank you.
Armin Papperger: If you calculate up to 100%, it's €7 billion. I 100% agree. But if we go, let me say, to be sure, because we speak about potential and about operational planning. On the operational planning, if you see that we are on an area of €5 billion to €6 billion on the ammunition side, I think that would be very, very realistic. The potential is really €7 billion. But as I said before, you never, ever have a 100% hit rate in this area. So, what we do is we go through all the countries, and these are the potentials, and this is the capacity that we build up. We have really a capacity if everything is going forward. If the crisis is going forward, that the customers order more, we really can make €7 billion. This is the potential that we have. This is the capacity also. But for my calculations, yes, I said between €5 billion and €6 billion is a fair value. But if you see that we said between €5 billion and €6 billion on the ammunition side, and if we make between 25% and 30% profit, it's a great value. It's not so bad.
Ben Heelan: Yes. No, that's very fair. And a quick follow-on. Obviously, you did the Expal acquisition last year. It's been very successful. Is there more in the pipeline? How should we think about M&A '24 and '25?
Armin Papperger: Yes, as you say, we make M&A year-by-year. And again, nobody at the moment has really calculated our Romanian business, which I tried to calculate that we will make €40 million to €60 million profit also per year over the next year after filling that company. And we try to go into acquisitions. One target is U.S., as we discussed before with Mr. Laskawi. But we also have other opportunities also on the weapon and on the ammunition side. But as I said, I cannot go into details about the M&A because we always have NDAs, and you will get the information as soon as possible. And as we always do, if it is a big acquisition, we give you an extra call to inform the investors and the analysts about that.
Operator: The next question comes from Dario Dickmann from HSBC. Mr. Dickmann, the line is open for you.
Dario Dickmann: Coming back to your comments on the next Leopard generation and the implemented technology, does this mean that your share inside of the new Leopard should be significantly higher compared to the Norwegian Leos, for example?
Armin Papperger: Yes.
Dario Dickmann: Okay. And last one, at the CMD when talking about potentials, you also mentioned mortar potentials of around €600 million and weapons of €1 billion. Do these have to come on top of the ones presented in your presentation?
Armin Papperger: There are some things which are not at the moment in the presentation, and I can tell you what happens also on the weapon side. And therefore, you see for sure, and now you got me, there is for sure more potential also. So the weapon production, only in Unterlüß, and the price of a weapon is between €1 million and €2 million if it is an auxiliary weapon or a tank weapon. Only on the weapon side, we will grow up to 250 weapons per year. So between €300 million and €500 million, we can produce weapons for auxiliary and also for tanks. But I hope that you see that we want to give you an overview about the big tickets, and the €250 million is not a real big ticket because this would be the smallest number of all of them, but we have to cut it sometimes. And otherwise, I for sure can give you a much better overview, and there is some potential in that. And this is also invested. So we produced earlier also up to 50 weapons per year, and we do have now the capacity of 250. And all the equipment is in place, and we are on the way. And we need it because we need now a long-term agreement also on the weapon side to help the Ukrainians. So Ukraine will need between 50 and 100 weapons per year because they fire such a lot that the weapons or the barrels for sure are destroyed sometimes. So there are smaller things, but these are not like the big tickets like auxiliary where we have between €3.5 billion and €5 billion.
Dario Dickmann: Okay, thank you. And last question maybe. You mentioned earlier the artillery system on the Boxer with your partner in Munich being shared 50-50. Is that right? So the RCH-155.
Armin Papperger: Yes, the reason for that is very clear because we have an agreement with KMW that everything which is coming on the Boxer now starting from this year, all the contracts will be shared 50-50 between KMW and us. If there is our [turret] [ph] or if there is whatever is on, we share it 50-50, which is a good solution.
Operator: The next question comes from Sebastian Growe from BNP Paribas. Mr. Growe, the stage is yours.
Sebastian Growe: Two quick ones, easy ones, and one more delicate one eventually. So the first one is just on M&A, and then this is simply a no question. For the $20 billion that you had put out in the sort of longer term, is there any M&A included here or not at all as we speak?
Armin Papperger: No, it's not included.
Sebastian Growe: The second one would then on PPA be a question. I think, Ms. Steinert, you said before that you would expect something like an $80 million eventually for 24, and then it would come down towards $30 million or so, and then eventually $20 million by 2026 or so. Would you confirm that today?
Dagmar Steinert: I have to revise that number. In 2023, all in we had $70 million PPA, $40 was Expal, and $20 million was for IG, 10% old acquisitions. In 2024, we expect, yes, $100 million, and then it comes down $25 to around $70 million, $26 million, $40 million, around that.
Sebastian Growe: Okay, good stuff. And the last one is then on the infringement proceedings in Spain. Can you just provide us with an update or your view on the matter?
Armin Papperger: You think with [indiscernible]?
Sebastian Growe: The legal case around, yes, exactly.
Armin Papperger: Yes, we see not a real legal case about that. What happened is the following thing. So we had a due diligence, and in the due diligence phase, the seller has to fill, as you know, the data, and there was a small company, civilian company, and they got some ingredients from the explosive site, and this was not on the list. They forgot it, and after the closing, [indiscernible] gave us, let me say, green lights, and in that process, this smaller company said, okay, but we need also to protect that you give us whatever. It's not a lot. It's some 100 kilograms what is going on. And so we gave this information now to the commission, to the monopoly commission, [indiscernible], and we think that we can sort it out very soon. I see no bigger problem.
Operator: The next question comes once again from Sven Weier from UBS. Mr. Weier, you can ask your question now.
Sven Weier: Yes, thank you. Just one on CapEx. To clarify, is the 700 million already after the 300 million down payment you get from the German government, or is that the gross CapEx? And also related to that, I was wondering about the leasing cash out. I think the total leasing cash out is including interest for 62 million. I was just wondering now with the new beta plant in Hungary, which I think is going to be leased, how that charge is going to develop in the coming years. Thank you.
Dagmar Steinert: Yes, regarding the CapEx, I start with the cash out for CapEx. In 2023, we had €384 million cash out for CapEx, and roughly 700 million CapEx for 2024. They are excluding our new production in Niedersachsen, our new plant, so it will be a higher number. But on the other hand, as Armin already mentioned, we get grants from the government. We will get additional down payments and so on. And, of course, there's always a share of leasing CapEx, but that's not a cash out. You don't see it in the cash flow statement and so on. So that's why we start just reporting as a CapEx number, the cash out CapEx.
Sven Weier: Yes, I was just referring to the 62 million you had in total of leasing payback and interest.
Dagmar Steinert: Yes, that's, of course, including leasing and everything. Leasing and development and so on.
Armin Papperger: Cash out for factory in Niedersachsen will be for this year and for next year. So we have to pay something this year, but also next year, because we will be ready next year, April. This is the idea, and as you know, if you have everything finished, then you pay the final bills. So this will be for this year and for next year. But you can see that 700 million is a very good figure. The positive thing is that for the ammunition contract, we are in negotiation with the German government at the moment that we get a huge amount of down payment. So that for the operation, for the cash flow, it's very positive for us.
Operator: The next question comes from Michael Raab from Kepler. Mr. Raab, the line is open for you.
Michael Raab: CapEx is a really good buzzword. Sorry, I also have to ask for that again, just to make really sure someone like me also got it right. This year's, say, 600 million, 700 million roundabout includes already a part of the investment for Unterlüß, or does that come on top of it?
Armin Papperger: It includes. The 700 million includes a part of that, if you see, there are three different stages of our investment. The total investment is 300 million. From the 300 million, you can see there is a forging, then there is a filling plant, and there is an assembly plant. And then this will be on a level of 200 million, and then there will be a missile plant and an RDX plant, which is then the other 100 million. And so if you see that, that the forging and the filling plant will be ready in April next year, then it should be, let me say, around, it's a rough calculation, 100 million will be this year in.
Michael Raab: Okay. And then based on that, if we were to move forward on a timeline, would we extrapolate the 7% CapEx because you have more add-on projects coming?
Armin Papperger: No.
Michael Raab: Or would the CapEx to sales ratio trail off again, and if so, to what levels?
Armin Papperger: 5% is our target, but in such a strong growth rate that we have at the moment, I think it must be possible, yes, and if you build such big factories like Werk Niedersachsen, I think that is important that we invest also more. But as I said, at the end of the day, it's, to be fair enough, 50% of Werk Niedersachsen is paid from the European Union, if you count that in total. It's for the whole Rheinmetall Group, but at the end of the day, if I count that, so this is a political decision that they want to go forward with that investment to protect Europe.
Michael Raab: So logically, we would presume that the absolute CapEx amount is bound for an increase in the next couple of years, say mid-term, but relative to sales, it's going to come down. Okay, thank you.
Armin Papperger: 5% to 6% is my expectation, between 5% and 6% is my expectation.
Operator: Very good, thank you. There are no further questions. Thank you very much. I hand over to Armin Papperger for closing words.
Armin Papperger: Yeah, thank you very much. Thanks for your time. Thanks for these very interesting questions, and I hope I see you soon. And I'm very happy to see all of you soon in the next Capital Markets Day, because that is an international Capital Markets Day, and I think I have a look now to Dirk, and he will be very happy over the next months to give you information about that. Au revoir, bye-bye.
Operator: Thank you for participating in the conference call. This call is now closed.
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