By Cristina Gallardo

Rheinmetall Chief Executive Armin Papperger said he expects members of the North Atlantic Treaty Organization to ramp up their defense spending quickly, following talks with the alliance's secretary general.

The head of Germany's biggest arms manufacturer said Thursday that NATO chief Mark Rutte told him last week that the alliance's 32 member states should increase their military spending to 3.5% of their gross domestic product.

Rheinmetall backed its sales and operating margin view for the year, but said guidance could still be upgraded in the coming months if NATO confirms such an increase at its June summit, triggering a surge in orders for military equipment.

The spending negotiations come as Europe discusses how to reduce its reliance on U.S. military equipment and personnel, spooked by threats from President Donald Trump's administration to reduce the U.S. military presence on the continent and increase it in the Indo-Pacific. NATO also aims to strengthen its deterrence against Russia in order to prevent any potential attack against NATO territory in the coming years.

NATO's press office did not immediately respond to a request for comment.

The Frankfurt-listed company continues to expect an increase of 35% to 40% in sales this year and an operating margin of around 15.5%.

Rheinmetall, which had posted preliminary results at the end of April, confirmed first-quarter sales of 2.3 billion euros ($2.6 billion), up 46% compared with the same period of 2024, beating a consensus estimate of 1.95 billion euros compiled by Vara Research.

Papperger said during a call with investors Rheinmetall has "numerous major orders in the pipeline that will secure further sales growth in the coming years", adding that Germany's three military equipment priorities--air defense, digitalization and ammunition--match Rheinmetall's strengths.

The Dusseldorf-based defense contractor, also known for its armored vehicles, is expanding its manufacturing capacity via acquisitions and new plants in countries such as Germany, Lithuania and the U.K., to cope with the additional demand. Discussions for a new gunpowder factory in Romania are advanced, he said.

Rheinmetall is also creating a new joint venture with Lockheed Martin to create a missile and rocket manufacturing center in Germany, in which the German manufacturer will probably hold a 60% stake, while its U.S. peer will own the remaining 40%, Papperger said.

The two partners expect the center to start producing rockets in 2026 and missiles in 2027, churning out up to 10,000 rocket motors and 10,000 missiles per year. After a ramp-up phase, Rheinmetall expects to make up to 5 billion euros in annual sales at this plant, he added. That compares with revenue of 4.9 billion euros made by the European missile manufacturer MBDA last year.

The Rheinmetall-Lockheed Martin center will help European governments get access to missiles--including ATACMS, GMLRS and Hellfires--much quicker, with some potentially being exported to the U.S., Papperger said.

"Sometimes you have to wait 10 years to get some missiles from America which is much too long," he added.

Rheinmetall on Thursday also announced plans to form a satellite-production joint venture with Finnish startup ICEYE, in which the German company will also have a 60% stake. Production is scheduled to start in the second quarter of 2026.

First-quarter orders jumped to 11.04 billion euros from 3.93 billion euros, driven by an increase in contracts with the German armed forces. Rheinmetall's order backlog stood at 62.6 billion euros at the end of March.

Sales in its Vehicle Systems division almost doubled, reaching 952 million euros in the first quarter, with Loc Performance, a U.S. vehicle specialist acquired by Rheinmetall last year, contributing 116 million euros in sales.

Weapons and Ammunition achieved record sales of 599 million euros, up 66% on the same quarter, as Europe continues to rebuild its stockpiles and support Ukraine in its war against Russia.

Net profit reached 84 million euros compared with 48 million euros a year earlier.

Operating profit--more closely watched by analysts and investors--was 199 million euros, resulting in an 8.7% margin.

Analysts had expected profit of 166 million euros and an 8.6% margin.

Write to Cristina Gallardo at cristina.gallardo@wsj.com

(END) Dow Jones Newswires

May 08, 2025 10:52 ET (14:52 GMT)

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