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Edited Transcript of LDO.MI earnings conference call or presentation 30-Jul-19 4:30pm GMT

Q2 2019 Leonardo SpA Earnings Call

Rome Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Leonardo SpA earnings conference call or presentation Tuesday, July 30, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandra Genco

Leonardo S.p.a. - CFO

* Alessandro Profumo

Leonardo S.p.a. - CEO & Director

* Raffaella Luglini

Leonardo S.p.a. - Chief Stakeholder Officer

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Conference Call Participants

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* Alessandro Pozzi

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Celine Fornaro

UBS Investment Bank, Research Division - Head of EMEA Industrials Research

* Gabriele Gambarova

Banca Akros S.p.A., Research Division - Analyst

* Martino De Ambroggi

Equita SIM S.p.A., Research Division - Analyst

* Monica Bosio

Banca IMI SpA, Research Division - Research Analyst

* Nick Cunningham

Agency Partners LLP - Managing Partner

* Tristan Sanson

Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo First Half 2019 Results Presentation. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Raffaella Luglini, Chief Stakeholder Officer of Leonardo. Please go ahead, ma'am.

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Raffaella Luglini, Leonardo S.p.a. - Chief Stakeholder Officer [2]

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Good afternoon all, and welcome to our second quarter and first half results conference call. I'm Raffaella Luglini, Chief Stakeholder Officer. And for the presentation today, I'm very pleased to have here our CEO, Alessandro Profumo. He will be taking you through our recent progress and placing that in the context of the execution of our Industrial Plan. Then our CFO, Alessandra Genco, will take you through the detailed financial results for the first half and outlook for the full year. At the end, we will welcome your questions.

I will now hand you over to our CEO, Alessandro Profumo.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [3]

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Thanks, Raffaella. Good afternoon, everyone, and thank you again for joining our first half results call. Overall, I'm very pleased to say that we had a good first half of the year. In a moment, Alessandra will go through the financial performance in more detail, but I'd like to highlight some element.

We have achieved a very good first half results, again, in line with our expectations, with a new order intake of EUR 6.1 billion, up 34% from last year. Revenue is up nearly 7% to EUR 6 billion, clearly, year-on-year. And EBITA is EUR 487 million, up 4% year-on-year. Profitability is 8.2% while free operating cash flow was negative EUR 1 billion, in line with the expected seasonal trends.

We have achieved good progress and a strong commercial performance across the group with good commercial success in important export market combined with continued growth order intake in our domestic market, too. It's important to highlight the fact that there are no major orders, so this great growth in the order book is based on a significant number of relatively small order. I think that the largest one is EUR 400 million, so which is very important because it gives you an idea on the pace and the justification we have, which clearly is very good in terms of (inaudible).

We have made further steps forward in executing our Industrial Plans. Helicopters is well underway to achieving our plan. Here, we've further improved our order intake, revenues and profitability in the first half. Helicopter is very well balanced between 3 key areas: civil, military and customer support and training. And perhaps customer support and training is in the same area because it's the service area for customer. And we are seeing the good benefit of this.

We are capturing key opportunities in the attractive military market, the NH90 in Spain, the AW1 in Poland, and we are growing our customer support and training business. As we have already said, the profile of the [financier] -- the leader in terms of quality for customer support.

While we see some softness on the civil side where the market has been recovering at a slower pace than we saw early this year, you can see very good results in the first half, a material improvement compared to last year mainly driven by a robust industrial performance, amplified by a positive [in some] activities and also revised terms agreed on the U.K. pension scheme. We certainly -- we look well on our path to achieve double-digit profitability by 2020.

Aeronautics has also performed well in the first half with our Aircraft business in robust shape; losses in Aerostructure, which have been reduced in line with our plan, which is very positive. And these 2 elements have been offset by softness in our ATR joint venture, which Alessandra will cover later.

The Defense Electronics and Security had a solid first half performance too, both on the European side and in the U.S. where DRS achieved a very good performance, especially in order intake and high revenue growth. As we know for DRS, when we win more program than expected that the weighted average in terms of margins is lower because we have more new programs, which are under development. But this is incredibly important in terms of overall growth of the absolute numbers and in perspective as well of the marginality.

We are confirming our 2019 full year guidance, and we are fully focused on executing our Industrial Plans.

Now I want to focus briefly on an important area of our recent performance, our commercial activity. The recent strong order intake is evidence of how we have intensified our commercial activity, of course, and focus. And this -- it is evidence as well as validation of the strengths of our products and their attractiveness to key customers in both domestic and international markets.

A sharper focus is a key element of our strategy. You heard our 5-year planning in January of 2018 to win over EUR 70 billion of new orders, supporting 5% to 6% range [culminated] on our growth with customer support and training comprising over 25% by 2020. I'm particularly pleased to see continued strong demand of our products reflected in order growth, and this order growth is across all of our business. It's also across both our domestic markets and the important international export market. As you know, we have 4 domestic markets, which is very important. And we are on the export market winning orders in a competitive environment.

Our order intake has also been well balanced between civil and military with a growing element of customer support and training activities.

I'd like to read some of the key products we won: the EUR 300 million contract with Italian Force to supply 13 M-35 -- M-345 aircraft, which includes ground-based training system and a 5-year logistic support package. This is very important because it's -- in order to create the International Flight Training School, which as you know will be a combination of 345 and 346 in order to cover, apart from this training activity, all the different syllabus for training, so that we will have an international flight training school based in -- across the plan in -- sorry, in Galatina and in Puglia and in (inaudible). And by the year-end, we expect to have the first international customer.

Then the recent award of the AW101 contract for EUR 380 million for maritime multi-role helicopters, which includes 4 AW101 plus training and support. There is also an option for other 4 helicopters. So this is very important.

Then in Spain, there's been the order for 23 tactical helicopters, NH90. And also, we won additional orders in Leonardo DRS for the Mounted Family of Computer System for the U.S. Army as part of the modernization strategy, and this follows an order of the same program booked last year.

Then we have just signed the first order for 6 M-346 fighter attack plane, the new version of our M-346 platform with international customer. This is important because we have a large customer for this new order of the 346.

We have built a solid backlog now that are providing us with a very good visibility, and this backlog doesn't include what we call as the soft backlog in the U.S. So the unfunded part of the programs we won in U.S., mainly here in the U.S. but as well, of course, the MH-139 helicopter contract. The soft backlog comprises larger [high return] program and expected to sustain revenue growth in the long run. As you know and as I said before, the program is in development phase where in marginality, which is lower than the running programs after 2 years.

So a solid backlog plus a soft backlog and our expected order intake all make us confident that we will continue to achieve our top line growth path.

We are also continuously focused on the Industrial Plan in terms of cost control and (inaudible) and of course, cash flow generation and conversion.

On that note, I hand over to Alessandra for the details of the first half results. Alessandra?

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Alessandra Genco, Leonardo S.p.a. - CFO [4]

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Thank you, Alessandro, and good afternoon, everyone. You can see a solid fact of first half results. Before I go into the details of the financial performance across the businesses and the full year outlook, let me start with the key big picture points.

In summary, you can see good performance across the group in the first half, delivering on our targets, strong order intake across all main businesses, clear evidence of our big step-up in commercial efforts and activity. Solid revenue growth is clear evidence of firm momentum in our growth plan. We have taken positive steps forward across the group.

We're particularly pleased with Helicopters, which is well underway to achieving our plan; solid performance of Defense Electronics in both Europe and U.S. with DRS, which enjoyed further strong performance in the key marketplace and winning good business as you heard from Alessandro; and Aeronautics where Aircraft continues to be a strong performer and Aerostructures' losses have been reducing.

EBITA for the group has also been growing on the back of this momentum in our main businesses, although at a slower pace than revenues, mainly because of the softer short-term performance which we have seen in our ATR business and the lower contribution of the Space manufacturing joint venture.

Free operating cash flow is on track with cash absorption at the half year of around EUR 1 billion. It's in line with our expectation and our usual seasonal trend. A key driver of cash flow has been the profile of the major EFA Kuwait contract, and this will continue in Q3. And our stated level of net debt includes the impact of the adoption of the IFRS 16 accounting principle on leasing as well as the acquisition of Vitrociset. We are confirming our full year guidance, which I will talk about in more detail later.

Now let's look in more detail at how the progress in the operating businesses has driven the group performance in the first half. Starting with new order intake, which was EUR 6.1 billion compared to EUR 4.6 billion in the first half of 2018. That's an increase of 34%. We have continued to win important contracts in a competitive environment. It is a sign of our increased commercial focus and successful efforts internationally. It is also a sign and an affirmation from customers in our important domestic markets. We saw good performances all across the group and particularly in Defense Electronics both in Europe and the U.S.

In Aeronautics, order intake grew from EUR 1.1 billion to EUR 1.3 billion. The Aircraft Division performed strongly and accounted for about 3/4 of this total, achieving new orders of almost EUR 1 billion, over 50% up on last year. Major orders for support activities for the EFA program are to mentioned as well as the program that Alessandro mentioned, which is a follow-on order for 13 M-345 light trainer aircraft from the Italian Air Force, showing that this versatile and flexible product is really appreciated by our customers. Aerostructures won orders of almost EUR 400 million including orders for 50 B787 and 37 ATR fuselage sections. Helicopters also performed strongly with important order wins. Order intake was up 28% to over EUR 1.7 billion in the first half.

We are pleased with the positive market feedback we're getting on our key products. Notably as mentioned by the CEO, new orders include NH90 in Spain, Polish AW101 and 4 support contracts where we have been making good progress. The civil market generally has been recovering at a slower pace than expected. For us, this has been more than compensated by stronger demand on the military and governmental side.

In Defense Electronics, we saw a good commercial performance and solid order intake across all business areas, including and especially strong order intake in DRS with new orders in the first half of $1.6 billion, an increase of 26% year-over-year. And for DRS, this is the second successive year of double-digit order intake and top line growth.

It is an excellent performance, reflecting its strong positioning on key programs and areas of the DOD spending. As we have said before, DRS has been winning good quality programs, such as the new-generation U.S. Army Mounted Family of Computing Systems. And we are investing much time and effort in developmental contracts that position us well for more attractive production phases. On top of all of this, as you have heard, DRS enjoys a soft backlog of potential activity, which again underpins confidence in the future.

On the European side of Defense Electronics, we won a major export order for a naval combat system and new orders for airborne avionic radar systems. So overall, we can be pleased with the level of commercial activities around the order intake.

Moving on to revenues. EUR 6 billion for the first half, an increase of 6.7% compared to last year. We're pleased with the strong growth momentum, and the key drivers of this growth is our backlog. At some EUR 36 billion, it is large in size and includes key large orders. It covers almost 3 years of equivalent production and is well balanced, as you can see across our core businesses. You can see Helicopter revenues were EUR 1.9 billion, up 3.6% on last year, showing further progress in executing our plan, especially on the military side. We delivered 61 helicopters in the first half compared to 77 last year. But the more important driver in the period was the mix of activities, mainly the attractive military business.

Defense Electronics as a whole achieved revenues of EUR 2.9 billion, up almost 13% with avionics up in volumes and land and naval continuing to build volumes by executing and delivering strong backlog. DRS achieved outstanding growth. In dollar terms, it reported first half sales of EUR 1.1 billion, up 18% on the previous year, reflecting growing production volumes. Aeronautics revenues were flat at EUR 1.4 billion. Aircraft was flat year-over-year as the key important Kuwait activity is more loaded to the second half of the year. And Aerostructures were also flat in terms of revenues.

So in overall group terms, again, a good top line revenue performance, evidence of the growth momentum in key businesses in the group.

Moving to operating profitability where both EBITA and profitability were in line with our plan. Group EBITA was EUR 487 million, up 3.6% year-over-year and return on sale was 8.2% compared to 8.4% last year. Group EBITA is also growing but at a slower pace mainly because of the weaker performance of our ATR and Space manufacturing joint ventures, which we had flat in Q1; and as we are working on many programs in the development phases carrying lower margins, however, positioning us in key contracts for our customers; and because of our investments in corporate costs and centralization of functions as part of building the firm backbone for growth, especially on the international commercial side.

What I would like to highlight here is that EBITA is growing in the key areas of the group: Helicopters, Aeronautics and Defense Electronics. Helicopter further increased its EBITA, mainly thanks to our robust industrial performance, on target to achieve the Industrial Plan objectives, mainly the double-digit profitability by 2020. The solid industrial performance was amplified by the benefit of favorable product mix due to a high contribution from military and customer support activities as well as from the revised terms agreed to extension scheme in the U.K., which generated a net benefit of around EUR 20 million. And these effects are not expected to repeat to the same degree in the second half.

Aeronautics looks flat, but in fact, good performance in Aircraft and progressive recovering Aerostructures were offset by the lower contribution from our ATR joint venture. And Defense Electronics achieved a good increase in EBITA in both Europe and especially in the U.S. DRS.

Looking at the main businesses in more details.

Helicopters. We have had a good start to the year First half EBITA was EUR 200 million, up 30% from last year EUR 153 million for the reasons I've just highlighted. But the key thing here is that these results were well in line with our plan. Then in Defense Electronics, first half EBITA, 2-2-8, EUR 228 million, up 10% on last year. You should appreciate the considerable activity and progress going on across these businesses: strong performance in DRS where profitability is in line with the plan, strengthening the positioning of DRS in its target markets and upscaling its capabilities to develop integrated systems. All of this will secure our long-term position and growth in an attractive market, and we expect to see leverage on this growth to be reflected in profitability. Then the results of -- in Defense Electronics, a lot of focused efforts in delivering large important programs in land and naval and in avionics as well as other programs in the U.K. and the U.S. in our sensor and system businesses.

In Aeronautics, EBITA was slightly lower at EUR 121 million with good level of profitability in the Aircraft Division, a reducing level of losses in Aerostructures, which together only partially offset lower results in ATR where deliveries were lower and the mix worse. We remain confident in the longer-term strength and prospects of the ATR joint venture, and management's priority has been securing a solid backlog of $3.4 billion, 191 aircraft to support a stronger and steadier revenue outlook. And we saw encouraging evidence of this at the recent Paris Air Show with 75 orders, of which 35 firm. Nonetheless, ATR does face short-term challenges with delays in deliveries, and these challenges may get tougher in Q3 before we can see recovery in the final quarter of the year.

We also saw a lower contribution from our Space joint venture in manufacturing. This was the reason why the Space contribution has fallen in the first half from EUR 21 million to EUR 13 million. We expect the slower-than-expected recovery in the commercial space market to continue to weigh on past results in the second half. Over the full year 2019, top sales should see a drop of around 10% on last year, affecting as well its profitability.

Our restructuring plan at the Space manufacturing business is expected to be carried out in the second half to align the workforce to the market context, weighing on H2 profitability.

In overall terms, big picture, we achieved a solid group EBITA performance with all key businesses showing good improvement trends offset by softness in our ATR and Space manufacturing joint ventures.

Looking further down to the bottom line, the net result has improved significantly, rising to EUR 349 million compared to EUR 106 million from last year. There are a number of positive factors here. You can see significantly lower restructuring costs. This fell from EUR 182 million to EUR 11 million in the first half this year with last year's figure including the one-off restructuring cost of the early retirement plan agreed with the unions. PPA expenses were lower as it was mainly linked to the DRS acquisition, and we had a positive effect from the release of a provision set against guarantees given at the time of the disposal of the AnsaldoBreda business.

So now looking at the overall picture of our good progress in the first half of 2019, let's take a look at the full year. We have clearly had a very solid first half performance and a good start to this year. It is still early in the year though, and as always, for us, the second half is more important for the full year performance. That said, we are pleased with the positive commercial momentum, strong order intake with solid top line growth, which means we are comfortable with our full year guidance for order intake and revenues. And our free operating cash flow is on track. Although as you know, this is normally very heavily weighted to the last part of the year, in the last quarter in particular. And for EBITA, given the performance of our key businesses across the group, we expect to be within our EBITA guidance range previously indicated, notwithstanding the tough short-term challenges in ATR and the lower contribution of the Space manufacturing joint ventures, which I have mentioned.

So to sum up, we have made additional progress in the first half of 2019, strong order intake in domestic and international markets, solid revenue growth across the group, Helicopter is well underway to achieving our plan, Aircraft consistently delivering and Aerostructure reducing losses, Defense Electronics showing solid growth in Europe and the U.S. and cash flow on track.

With that, I will hand back over to Raffaella who will chair the Q&A. Thank you.

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Raffaella Luglini, Leonardo S.p.a. - Chief Stakeholder Officer [5]

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Thank you, Alessandra. We're now available for your questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Alessandro Pozzi of Mediobanca.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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Two questions. The first one is on Helicopters. Is it fair to say that -- I mean you had a strong performance at the EBITA level. Is that mainly driven by the military program? Because I've seen that the number of deliveries have come down. So maybe it just is purely a mix effect. And also if you can maybe give us a bit more color on why the -- how you see the deliveries in the second half of the year.

And the second question is -- I think profitability is on the way up year-on-year. Probably Defense Electronics is maybe not increasing as the other divisions. And when you dig deeper, you see that DRS is actually increasing, so probably Europe is dragging a little bit the profitability of the division. And if you can give us a bit more color on that one as well.

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Alessandra Genco, Leonardo S.p.a. - CFO [3]

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Okay. Alessandro, let me take the questions in the order which you have asked them. With respect to Helicopters, Helicopters had a really good performance in the first half, affecting only of the fact that the industrial performance is totally on track as per the plan. The number of delivery, as you know, is an indication of the overall performance because an important part of our backlog today is represented by military and governmental programs. Therefore, a big portion of the activity performed in the first half has been related to this segment of the market, generating a very solid return on sales that we expect to see somewhat diluted over the course of the second half.

With respect to the deliveries for the full year, as you know, the second half of the year, there are many events taking place. Therefore, I would say that we are targeting a number which is more or less in line with last year. However, there may be events that may have a final number, which is somewhat shy of last year. But in any case, that is not a fulsome indicator of the performance of the business because a more complete one is the EBITA composed of the mix as well as the customer support contribution, which is another relevant point for the business because it accounts, as you know, more than 1/3 of the total volume of the turnover as well as a very important contribution to profitability.

And to your second question, Defense Electronics. Defense Electronics is growing significantly both in Europe and the U.S. In Europe, the mix is one that includes some pass-through revenues that are somewhat diluting the margin. That's part of what we have discussed in previous calls, and we have anticipated it's also the result of the backlog we have had both in the land and naval business and the avionics. So that is as per the plan.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [4]

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Yes. But also the weight of DRS clearly in terms of weighted average diluted a little bit the overall marginality. As we know, when DRS is winning new programs, the margins are lower. So the more we win, the lower is the return on sales, the higher in the case is the absolute number in terms of return. And we know that after 2 years, when the program move from being in the development phase to a production phase, there is a significant growth on the margins.

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Operator [5]

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The next question is from Monica Bosio of Banca IMI.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [6]

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Just a follow-up on the Helicopters business. Thanks for giving us the breakdown between civil and military in the first half. I have understood that the second half, this kind of proportion is not repeatable. But I would really appreciate if you can give us an indication for the full year in terms of civil and military breakdown in percentage term. And I was wondering, what is the level that you see as satisfying in terms of breakdown for the future?

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Alessandra Genco, Leonardo S.p.a. - CFO [7]

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Monica, yes, so I think -- starting with the last part of your question. The mix is always -- as much as we would like to predict it very much in detail, it's not so predictable. The portion of the business that we are seeing for this year is Q2 -- was the governmental and military component. I think this is just a result of the fact that we are now -- we have been winning really good programs like the one we mentioned, the AW101 in Poland, the NH90 in Spain, last year, the important NH90 Qatar order. So the pipeline is, these days, very much focused on that side of the business.

What we see on the civil side is that the oil and gas is still not recovering at a fast pace, and it will take some additional time for it to recover. Therefore, we are now focused on delivering the backlog in the governmental component.

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Operator [8]

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The next question is from Tristan Sanson of Exane.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [9]

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It's Tristan from Exane. I have a few technical question. First, can you tell us about the impact of the U.K. pension scheme revision on the Helicopter business? Is it material or not? Second, do you have an idea of the impact of the headwind that you have from ATR on Q2 year-on-year? Third one is on Helicopter. Can you tell us whether you had any impact related to the Chapter 11 process at Bristow? And finally, so you have EUR 44 million EBITA charged in other activities in Q2 '19, so you mentioned some centralization of cost, so can you explain a bit what is going on there? Is it actually implementation of some of the -- some part of the Industrial Plan that you mentioned in the past? And do you have any new allocation of cost away from division to that other activities line? Or is it a totally different topic?

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Alessandra Genco, Leonardo S.p.a. - CFO [10]

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Okay. So on the U.K. pension scheme, we mentioned before that the impact that we recorded in the EBITA line was for EUR 20 million. So that is the element that is included in the EUR 200 million of total EBITA generated by the Helicopter business in the first half.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [11]

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Okay. And is that EUR 20 million in Q2 or contributing in H1?

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Alessandra Genco, Leonardo S.p.a. - CFO [12]

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Yes. In the 6 months, in the 6 months. It was recorded all in Q2. But in any case, it would remain EUR 20 million for the full year. It will remain EUR 20 million for the full year.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [13]

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Just to explain, this is a different way of calculating the pension costs because the employees are asking in order to receive immediately a certain amount of money, reducing the (inaudible). So it's a different contract here today with employees. So it's EUR 20 million onetime, but it's forever. That cannot be reversed because it is a change in the way the pensions would be calculated. It's not due to a statistical calculation. It is the fact that they asked in order to receive more money upfront and less in the future, so the MPV is lower. Is it clear?

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [14]

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Yes, it is.

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Alessandra Genco, Leonardo S.p.a. - CFO [15]

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Okay. On ATR, ATR is, as you know, it's a great business. It has a great product platform with 3/4 market share in its business segment that has recently secured very important contracts with high interest from the market both on the ATR 42 as well as the 72 versions. In particular, we have registered significant interest by the carriers, which after the order of FedEx are really inquiring about the machine and looking to put down more orders for the aircraft.

What the business has been delivering in the first half is the result of a number of deliveries of machine lower year-over-year. And we expect over the course of 2019 for this gap between number of deliveries in Q3 '18 and in Q3 '19 to increase. So there's going to be a year-over-year slower progress in the delivery of machines. Nonetheless, we expect to have in the fourth quarter, similar to what happened last year, a significant increase in the number of deliveries that may be in the range of last year, potentially shy of it. But in any case, we'll keep you posted over the course of the year.

On Bristow Chapter 11, we've not seen repercussions on our Helicopter business.

And the other question, the last question on corporate costs and the other activities, the other activities include, as you were suggesting, investments in corporate costs, some of which have been costs centralized because there were central activities that were before residing in the division that now have been centralized and others mainly related to the expansion of the international presence of the group globally, our investments that are supporting the growth that you are seeing in the numbers.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [16]

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Okay. That's very helpful. Can I ask you, in that case, what would be a proper indication for the full year trajectory of that element of the divisional EBIT? And if I can go back to ATR, you explained whether -- the staying of the issue and what's going on in the business, but I don't see you quantified the headwind that you experienced in H1 and Q2 at the ATR. That could be a useful piece of information.

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Alessandra Genco, Leonardo S.p.a. - CFO [17]

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Yes. In our statement, we actually do provide the full disclosure, and it's roughly EUR 20 million first half to first half for our 50% share.

Now with respect to full year expectation on the other component of the business, I would say that we are clearly continuing to build the infrastructure and the backbone. So what you see reflected in the first half would be a good proxy for what will be accounted for, for the full year, taking into account the time.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [18]

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Sorry, one piece of your question is if there is cost that are related to the investment bank, the answer is a strong yes. I'll give you an example. We created a function, which is in charge of demand in production. And thanks to that, we have in this year a cost reduction of EUR 49 million in the production areas. The major portion in the [central function] but as well as in the other division. Clearly, this production optimization function is a central cost. The benefit are in the division. Then we are adding some people from outside. We are moving someone else from the division. But at the end, we have created a function.

The international, thanks to that -- to which we have a 34% growth in, there is a central cost. So unfortunately, in order to have these results, we have to invest, which is clear. But what we are seeing is that we have a significant payoff of this cost.

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Operator [19]

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The next question is from Nick Cunningham of Agency Partners.

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Nick Cunningham, Agency Partners LLP - Managing Partner [20]

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I wanted to carry on following up on the ATR question and then also about Space a bit. So from what I can understand, ATR is mainly about a short-term volume issue, which gets worse in Q3 and then better in Q4. So the question is having lower profit contribution from ATR in the first half, does it look like the second half left will be lower than the second half of last year? So the first -- so the full year 2019 would be more than EUR 20 million worth than the full year 2018? So just to get a sort of handle if you like on the scale of issue.

And then secondly, on Space, again, a volume issue, probably therefore an operational gearing impact on margin but also restructuring costs. So you're already quite a long way behind last year's contribution. I have 13 in place, 21 by the first half state. Again, is the second half going to be a lot down on the second half of last year? Just to give us a handle on the sort of scale of the anticipated Space contribution for the year. And do you expect -- do you have visibility of that getting better in 2020?

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Alessandra Genco, Leonardo S.p.a. - CFO [21]

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Okay. So Nick, on ATR, as we said the management team, the ATR management team, Stefano Bortoli's first priority as he took the helm of the company was to secure a strong backlog in terms of solid order intake, which he managed to do. And we're now feeling strong about all this pipeline of good commercial opportunities that we had secured.

Profitability is the result of a mix of elements, which are mainly associated with some important number of deliveries from a low-cost airline, IndiGo, and that is impacting the EBITA bottom line. There is also a lower number of deliveries into -- in the first half as well as there's going to be a lower number of deliveries in the first 9 months of the year. Because after what happened with the 737 MAX accident, all airlines have increased the level of scrutiny that they adopt when accepting and testing during the final test of the aircraft that they acquire. This has made the delivery slip to the right.

Our expectation for the full year is that if the plan is met, there might be a lower contribution, absolute lower contribution year-over-year of the business just because of this mix of machines that we just addressed.

On the Space manufacturing joint venture, we are in constant conversation with our joint venture partner, Thales. And what we are seeing now is that the slowdown in order intake, particular in the commercial side of the satellite manufacturing business, will make the revenues for the full year drop year-over-year by around 10%. And this will result in a drop in EBITA, amplified by the restructuring plan that will occur in the second half of the year in order to align the workforce number to the workload. Overall, EBITA in the year will be materially lower than '18 for the Space joint venture manufacturing.

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Nick Cunningham, Agency Partners LLP - Managing Partner [22]

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And in terms of looking ahead, with the visibility that you have from the order intake, does 2020 look any better than 2019 as far as Space is concerned?

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Alessandra Genco, Leonardo S.p.a. - CFO [23]

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Honestly, I think that it's too early to tell. There are a few important bids that the companies out in the market whose result will have a significant impact on performance in the years to come. Therefore, I suggest we have an update on this point in our Q3 results discussion.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [24]

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It's clearly important to say again that we confirm our guidance so because you're talking of Thales, which is a joint venture in which we have 33%. We confirm our guidance. So this is a key element, unless -- I don't want that it can remain some confused view.

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Operator [25]

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The next question is from Celine Fornaro of UBS.

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [26]

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Can you hear me?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [27]

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Yes.

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [28]

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Yes. Okay. My first question would be on Aerostructures and if you could provide us a little bit more color. You said that the losses were reducing year-on-year, so you should provide a little bit of quantification on that. And also in your orders of Aerostructure parts and sections, you mentioned the 787 but not -- in ATR, but you didn't mention the A220. So I was just curious to hear where we are on that and what's the progress on the negotiation.

And then my second question would be on DRS, where we have a margin that is just short of 6%. And I think in very recently as well, you may have said that the ambition is to have a 10% margin in the next couple of years. So I just wonder how we get there given that this would mean that maybe there is a slower growth or a slower order intake. It seems a pretty steep curve to be achieved.

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Alessandra Genco, Leonardo S.p.a. - CFO [29]

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Okay. Celine, so on Aerostructures, what we are seeing is that there is -- there has been a significant improvement in the industrial efficiencies at all plant levels. As you know, there are 4 key plants in Aerostructure, and each plant has registered a significant progress in industrial efficiencies, which is resulting in significant savings as per the plan. So we are in line, and we are comfortable with the progress. On the A220, the team is...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [30]

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Maybe I can intervene on that. There are ongoing negotiations. I should say that overall plan, it is very positive on the A220. I cannot say more, but we are very positive.

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Celine Fornaro, UBS Investment Bank, Research Division - Head of EMEA Industrials Research [31]

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And sorry, just on the Aerostructure losses, I mean do you expect these losses in H2 to be further reducing or maybe there is a timing issue year-on-year?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [32]

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Yes. We are -- the division is doing better than expected in terms of production costs, so it's -- which is very important. We continue -- they continue to work very heavily. So I think that we've always said that we will breakeven at the end of the plan. I hope that by the year-end, we will be capable to give you an update on the A220, more detail, not only the positive mood and we will give you the numbers. In any case, we are better than the plan, which is always good. We never provide the numbers in details apart from the cash absorption. And maybe year-end, we'll give the cash absorption as well.

On DRS, we always said that we will have a double-digit profitability in the plan horizon, and we fully, fully confirm that.

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Operator [33]

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The next question is from Gabriele Gambarova of Banca Akros.

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Gabriele Gambarova, Banca Akros S.p.A., Research Division - Analyst [34]

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Yes. Three...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [35]

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A little bit louder.

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Gabriele Gambarova, Banca Akros S.p.A., Research Division - Analyst [36]

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Okay. Three questions from my side. Can you hear me?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [37]

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Yes.

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Gabriele Gambarova, Banca Akros S.p.A., Research Division - Analyst [38]

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Okay. The first one is on financial charges because your guidance was around EUR 290 million, if I'm not wrong, but as a matter of fact, financial charges were much lower in the first half. So do you confirm the previous guidance? Or could financial charges be lower? This is the first question.

The second question is on the M-346 fighter attack. You said that you've got an international, an export order with a large client. I think this is an important news. So the question is if it was booked in the Q2 new order intake or it's something more recent.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [39]

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More recent. More recent.

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Gabriele Gambarova, Banca Akros S.p.A., Research Division - Analyst [40]

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More recent. Okay. And the third question in regards EFA Kuwait. I was wondering if you can give us a sense of the contribution in terms of revenues in the second half of 2019.

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Alessandra Genco, Leonardo S.p.a. - CFO [41]

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Okay. Gabriele, we confirm the financial charges guidance that we provided. And as the year progresses, we will share with you all the updates, if any.

On EFA Kuwait, EFA Kuwait, as per the plan will be the key contributor of growth within the Aircraft Division as activities are ramping up. We'll ramp actually -- we'll ramp up back-end loaded this year to make sure that we are on time to deliver the aircraft, the first aircraft to our customer next year in the second half of 2020. So I would say we are proceeding as per the plan, and that clearly remains a key contributor to the group.

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Gabriele Gambarova, Banca Akros S.p.A., Research Division - Analyst [42]

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Okay. If I can ask you a quick follow-up. Is it possible to know how many fighters are you going to deliver next year to Kuwait?

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Alessandra Genco, Leonardo S.p.a. - CFO [43]

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Honestly, I think there is...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [44]

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I gave the number. You have the plan now at 3, 4 for the first year; 4, next year.

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Operator [45]

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Ladies and gentlemen, there are no more questions registered at this time. I'm sorry, there's another question from Martino Ambroggi of Equita.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [46]

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Follow-up on the Space division contribution, just to understand if the decline in performance is in line with what you expected at the beginning of the year? Or there is a change compared to the initial visibility you had? And if so, what is the most likely division that will offset this lower performance?

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Alessandra Genco, Leonardo S.p.a. - CFO [47]

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Yes. Martino, so the decline in Space manufacturing was not at all forecasted neither it was in the plan. So there is a new element to take into the equation. This is in the broader picture of the group where the key businesses, Helicopters, Aircraft and Defense Electronics are all performing as per the plan and even better than the plan in some segments, as you have heard earlier. We are also very focused on all the cost efficiency measures throughout the group. And all these actions -- for all of these actions altogether taken, this is the base for our confirmation of our full year guidance range at EBITA level.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [48]

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Okay. And the last question is...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [49]

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It's important to say that Telespazio is performing quite well.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [50]

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Okay. So in the mix, you have more exposure to Telespazio, yes.

The second question is on the, let's say, M&A potential. Let's say that, overall, the business, okay, there are some pluses and minuses but is growing as expected in the sign of improvement recovery and so on. So M&A is still in the sidelines or maybe you are thinking about something?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [51]

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Martino, you know perfectly well that usually M&A is something that is [reported] and then announced. Clearly, the house is in order, so we have some area where we are working heavily like Aerostructure. So -- but the program is very clear and we know well what we are to do. So we are also looking on what the future can bring to us, but there is nothing today that is on the spot.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [52]

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Yes. I know very well nothing can be anticipated. But I remember during the business plan, you mentioned M&A is not on the table because we have something to do. You already did something...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [53]

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It's exactly what I've just said, Martino. The house is in order, and the house is in order. As you know that we -- there is something which is not in order. Aerostructure is a clear example. But we know exactly what we have to do in order to fix that. So there are no problems, which are not under control on the contrary. So I can say that the house is in order.

Good. Thank you all. Bye.

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Operator [54]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.