Rheinmetall : Capital Markets Day 2019, (Group CFO, Helmut Merch), 20. November 2019

CMD 2019 Financial Update

Helmut Merch

Unterlüß | 20 November 2019 CMD 2019

Segments perform with different momentum

Group

 Independent business cycles

 Increase synergistic potential by leveraging technologies

Defence

• Super cycle with sustainable momentum
• Long-termproject cycles with backlog already until second half of next decade
• Political risk mitigated by increased sales to uncritical customers (GER, AUS, UK)

Automotive

• End markets with flat/negative growth
• Engine cycles with currently limited visibility
• Regulation increased as a key positive business driver
• Raise powertrain independence (product and market diversification)

Automotive

3

Industry is wary of likely mid-term flattish development

Continental AG, CFO W. Schaefer:

"Like other market participants, we do not expect global production to pick up significantly in the next five years. In the best case scenario, we expect global automobile production to move sideways in 2020."

Bosch Group, CEO V. Denner: "We are cautious and assume that automobile production will not grow until 2025."

Audi, Nov 12th 2019	VDMA, Carl Martin Welcker:	Q3 call:
AUDI decides to pause the night	"We now expect production to fall
shift at Neckarsulm plant	by 2 percent in real terms in 2019".	"We expect a flat 2020"

4

IHS revised 2019 LV volumes repeatedly and provides weak outlook

• IHS 2019 forecast

IHS swings almost 8% within last 12 months

+2.0%

Oct Nov Dec

Jan

Feb Mrc Apr May Jun

Jul

Aug Sep

Oct

20182019

-5.8%

• IHS Mid-term outlook with growth on low level

					?
				+2.3% CAGR
	-6.7%							102
							100
	-5.8%
				97
95
94				94
				92
		89	89
2017	2018	2019	2020	2021	2022	2023	2024	2025

Latest industry comments are very cautious short to mid-term!

5

Automotive impacted by special effects beyond market deterioration

 Sales bridge	 Operating result
in €m	in €m and %
731	69

9.4%

level '19 Q3

~5%

Q4 2018	Market	GM Strike	Negative	Q4 2019	Q4 2018 Market	GM	Ramp	Malware Q4 2019
	decline		Ramp effect				effect

6

2019 reports biggest market decline post the financial crisis

Avg. cycle margin ~7.5%

Operating margins	-2.5%	7.0%	8.4%	8.9%	~6.5%	5-7%	~8%
		2009	2013	2016	2018	2019	2020/21	2024/25
Market	Financial crisis
	market decline -12.2%
Growth in CAGR			6.4%	-1.0%	-5.8%	2.3%

Market trend	Recovery	Growth	Decline	Flat	Slow growth
					IHS November 2019

7

Early installation of self help in 2018 successful

 Self help measures to protect the margin
			General cost
	Efficiency		reduction programs
		Eliminate quality issues
	improvements

	Selective R&D	 Prioritization of R&D projects
	 Reduction of external R&D
		 But: Pedelec R&D affects P&L 2020 with €12-15m
	 Reduction of leased workers (-40% per 10/2019)
HR Measures	 Reduction of time accounts and weekly working hours from 40-35
	 Reduction of direct personnel cost (short-time work at 3 sites)

 Normal fluctuation (-1.6%) and recruitment stop

8

From internal innovations project to market entry

One Rheinmetall	Design make		Production
award for Pedelec	over		setup
2016	2017	2018	2019	2020	2021	2022

Total Development cost ~€30m

First market	Presentation at	Start of
presentation at	Eurobike	production
Eurobike	Customer
	acquisition

	-€12-15m
	in 2020
Group R&D expenses	Division R&D expenses

9

Defence

New record year ahead for Defence

• Defence sales and operating margin in €m and %

15	+9% sales
growth
	3.221
10

~9.5% 7.9%

5

0

20182019e

Sales Margin

4.000

3.000

2.000

1.000

0

• Growth across all three divisions
• Margin improvement continues
• Project pipeline is filled and diversified

Prepare for solid program execution

11

Project delays or shifts are part of the business

2018

2019

2020

2021+

2018 - late formation of German government

German KSA ban Italian export ban

RSA export issues

Challenger order intake delayed into 2020

plan	actual
potential

12

Military procurement projects enjoy long lead times

Large orders typically turn into sales after 12-24 months!

2018

2019

2020

2021

2022

2023

2024

Activity

Q4 Q1 Q2 Q3

Q4 Q1 Q2 Q3

Q4

Q1 Q2

Q3

Q4 Q1 Q2 Q3

Q4 Q1 Q2 Q3

Q4

Q1 Q2

Q3

Q4

Request for tender

Phase

24.08.18

Risk Mitigation

1.4.19

Phase

Order value

€30m

16.09.19

Government Decision

Delivery

21 quarters lead time

2024-2031

Order value

€4.5bn

13

German commitment to increase defense budget affirmed

• German Defence Budget in €bn and % of GDP

1.2%	1.4%	1.5%	2%
Trough!

~80

~55

45

32

2014

2020

2024***

2031***

November 2019:

Chancellor Merkel* and Defence secretary Kramp-Karrenbauer** renew commitment to 1.5% defence spending in 2024 and a further increase to 2% in 2031

*NATO 70 anniversary speech

**Grundsatzrede Bundeswehrhochschule; both Nov 7 2019

• 1.5% on ~€3.600bn (Bundesbank estimate); inflated by 1% until 3031

14

Promising super cycle pipeline

USA:

Ammunition

Fuzes

OMGV

Green: booked business / black: potential

UK:	Sweden
	
MIV Boxer	Trucks
Challenger
France:
MGCS	Germany:
	Trucks	
	IDZ	
	VJTFPuma	

80 Leopards3. Boxer lot 2. Puma lot 2. IDZ lot Fox Boxer variants TEN (D-LBO)Indirect fire Ammunition

MGCS

Lithuania:	Boxer	
Poland:	Leopard II	
Hungaria:	Leopard, Howitzer,

	IFV (wheeled/tracked)
Czech Rep:	IFV (tracked)
Slovakia:	IFV
Bulgaria:	IFV (wheeled)
Romania:	IFV (wheeled)
Slovenia:	APC (wheeled)

Australia:
Land 17 1 C.2	 Ammo
Land 121 3a, 5b	 Trucks
Land 400 II	 Boxer CRV
Land 400 III	Lynx
Simulation	M1

© Rheinmetall AG / Capital Markets Day 2019

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Mastering the challenge for smooth execution of large programs

• Programme execution

Capacity

expansion

• Set up MilVehCoe in Australia
• Ammo plant Australia
• Prepare RBLS for Boxer production

~€100m thereof ~€60 IFRS 16

<€10m

~€10m

∑ ~€120m

Personnel

• Recruitment of 1.600 personnel in 2019/2020 thereof Australia: 650

Supplier base

• Smooth integration of new supplier base into Boxer value chain
• • Australia
  • UK

16

Profitable growth lasts into the next decade

• Operating margins

in %

11.7%

6.7%

-0.4%

Avg. cycle margin ~4.4%

Market

2010

2012

Annexation

Crimea

2014

5.0%

7.9%

~9.5%

>9%

9-10%

Avg. cycle margin ~5.5%

			2021/22
		2020	Super cycle intact
		
	2019		Favorable book to bill ratio
	2018 Increase of global		Steady top line growth
2016	defence budgets		Margin improvements across
			the divisions

Market trend Decline

Slow growth

Growth

17

Group

18

Capex peak in 2020 due to IFRS 16 effect in Australia

• Capital expenditure

in €m resp. margin in %

Ratio	4.6%	5.6%	4.4%		~5.0%		~6.3%
	Average		4.8%
	`13-19
							5.6%
		263	262
	204
		5.5%	5.5%		5.6%
	6.3%						7.0%
									UBA
	2.9%	3.7%	3.1%	IFRS 16	4.2%	IFRS 16		IFRS 16		UBD
				€24m		~€50m		~€85m
	2013	2015	2018		2019e		2020e

R&D remains in the 5 ̶ 6% range

• R&D expenditure

in €m resp. margin in %

Ratio	5.2%	5.0%	5.0%	~5.6%	~6.0%
		Average		5.1%
		`13-19
				309
		228	259	5.8%	6.8%	~7.0%
			4.8%
		5.0%
Net R&D expenses with			4.4%	4.4%	~5.0%		UBA
5.3%				UBD
Defence figures incl.	5.1%
Research&Technology
		2013	2015	2018	2019e	2020e

OFCF within target range

• Operating Free Cash Flow

in margin in %

Ratio

2.9%

4.7%

-0.5%

>2%

>2%

2-4%OFCF

TARGET

2016

2017

2018

2019e

2020e

Our capital allocation policy is geared towards further growth

Funding of growth (organic and M&A)

9.4%

Dividend to shareholders (Payout ratio 30-35%)

Improvement of pension funding via CTA	(target level
50-60%)

22

Group margin guidance held stable

GROUP

AUTOMOTIVE DEFENCE

Sales		Operating margin
2018	2019e	2018	2019e
Growth y/y in % at	Growth y/y in % at
in %	in %
constant FX	constant FX
6.1	Around 1	8.0	Around 8

4.2	-7	8.9	Around
			6.5
7.9	Around 9	7.9	Around
			9.5

Operational growth at constant FX	23

Sales growth and earnings improvement targeted

AUTOMOTIVE

DEFENCE

Mid-term	Mid-term
Sales growth	Operating margin

Short-term setback to 5-7%

Flat to slow growth(incl. Pedelec -€12-15m in 2020); mid-term recovery to around 8%

6-8%

9-10%

Operational growth at constant FX	24

© Rheinmetall AG / Capital Markets Day 2019

25