Rheinmetall shares drop as 2026 profit, cash flow forecast falls short

Adds CFO quote in paragraph 4, updates share price in paragraph 6, adds Lockheed in paragraph 10

By Miranda Murray and Matthias Inverardi

DUESSELDORF, Germany, March 11 (Reuters) - Rheinmetall RHMG.DE reported a softer-than-expected outlook for profit margin and free cash flow on Wednesday, driving its shares nearly 8% lower as investors focus on how the German company performs as a pure defence player.

For 2026, Rheinmetall said it expects an operating profit margin of around 19%, slightly above the 18.5% it achieved last year but below expectations for 19.6% in a company-provided poll of analysts' forecasts.

It also forecast free cash flow conversion of more than 40% of operating profit $(EBIT)$, which was short of market expectations of around 70-90%.

"We see potential to generate significantly more cash, but it's highly volatile," CFO Klaus Neumann told an analyst call.

Its 2026 sales guidance of 14 billion euros to 14.5 billion euros ($16.29 billion to $16.88 billion), after 2025 sales of 9.9 billion euros, was roughly in line with the Vara poll.

Shares in Rheinmetall were down close to 8% at 1508 GMT.

"Investors are wholly focused on execution and Rheinmetall's ability to convert a compelling order book into sales and EBITA in line with market expectations," said JPM analysts, adding that they assumed Rheinmetall was being conservative on the timing of deposits.

RHEINMETALL MOVES TO CASH IN ON DEFENCE BOOM

The company plans to sell its civilian automotive business before the second half and concentrate solely on providing land, air, space and naval systems for the armed forces to meet higher demand linked to the wars in Ukraine and Iran.

It is "inevitable" that countries will spend more on air defence for the U.S.-Israeli war on Iran, Rheinmetall said, adding that it is well-positioned to help replenish U.S. inventories.

Rheinmetall is in talks with Lockheed Martin LMT.N, as well as European firms, to build up air defence capacity, said CEO Armin Papperger.

He said growth momentum was strong across other NATO countries, including Germany. It was also strong in Ukraine, he said, adding that Rheinmetall would focus more on the Middle East in future.

SPACE, NAVAL DIVISIONS IN FOCUS

The company expects its order backlog to more than double to 135 billion euros this year from 2025's record of 63.8 billion euros.

Papperger, who sees mergers and acquisitions as key to meeting demand, said the German Naval Yards Kiel (GNYK) shipyard could be an option as the company expands into the naval sector.

Rheinmetall is also in talks with Airbus AIR.PA about a joint venture that should be signed soon with Germany's OHB OHBG.DE for a military satellite system, he said.

Rheinmetall plans to propose a dividend of 11.50 euros, up from 8.10 euros.

(Reporting by Miranda Murray and Matthias Inverardi, Editing by Linda Pasquini, Louise Heavens and Alexander Smith)

((Miranda.Murray@thomsonreuters.com;))