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Edited Transcript of LDO.MI earnings conference call or presentation 13-Mar-20 10:00am GMT

Q4 2019 Leonardo SpA Earnings Call (Q&A)

Rome Apr 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Leonardo SpA earnings conference call or presentation Friday, March 13, 2020 at 10:00:00am 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

* Giancarlo Schisano

Leonardo S.p.a. - MD of Aerostructures Division

* Raffaella Luglini

Leonardo S.p.a. - Former Chief Stakeholder Officer

* Valeria Ricciotti

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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

* Christophe Menard

Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector

* David Barker

BofA Merrill Lynch, Research Division - Equity Research Analyst

* Harry William Freeman Breach

MainFirst Bank AG, Research Division - Research 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

* Zafar Khan

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Valeria Ricciotti, [1]

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Good morning, ladies and gentlemen, and welcome to our Q&A session. Now before we start taking your question, I would like to leave the floor to our CEO, Alexander Profumo, for some initial remarks.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [2]

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First of all, many thanks for being connected. It's an unusual way to communicate to the market. Usually, it's really good to meet at the personal level. But let's say, specific situation is clearly requiring such kind of organization. So I'd like to say that we acknowledge that we are living in a difficult situation due to coronavirus. And as you can imagine, our first priority is really safety and well-being of our people while maximizing business continuity. Our engagement with all the stakeholders throughout this period is a key priority, and we remain fully committed to executing our programs.

So far, we see some potential effects in some areas, but it's really too early to assess this eventual level of business and financial impact. We'll promptly inform the market once we'll be in the position to do so. We continue to monitor and analyze the situation extremely closely, and we have already taken actions and sensible precautions across the globe. We are fully committed to deliver on our medium and long-term plan and goals, and it is important to emphasize our confidence in our core business fundamentals and clear strategic path for the future.

You will have seen the key point and themes that we, as a team -- and really, I stress as a team, were saying in our presentation this morning. First, over the last 2 years, we have been delivering on our plan and strategy. In fact, we have done what we promised we could do and, in many cases, even over-delivered. Secondly, we have a very clear view looking forward

(technical difficulty)

managing such a difficult situation will be a base for our strong and positive future.

So now we are ready with Alessandra, Valeria to take all of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from David Barker of Bank of America.

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David Barker, BofA Merrill Lynch, Research Division - Equity Research Analyst [2]

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Two quick questions from me. Firstly, on ATR. Could you give a little bit more insight on your planned production for 2020 relative to 2019? And have you seen any early signs of customers wanting to defer these deliveries related to the virus?

And then secondly, just a bit more detail on the numbers. With your 2020 cash flow target of EUR 400 million to EUR 450 million, are you able to provide a little bit more detail on the exact contribution from Kuwait, working capital and Aerostructures?

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

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So David, starting with your first question. With respect to ATR, the plan of production is in line with 2019. Pre-coronavirus, the objective was to slightly increase the number of deliveries versus 2019. What we are seeing now is that there is a temporary slowdown in conversation with customers in the -- in Southeast Asia associated with the slower traffic of Chinese (inaudible) in the region. However, it is too early to tell how the year will unfold because the fundamentals of the business and the strength of ATR as a product remains untouched. Remember that we have approximately 3/4 of market share within the turboprop regional markets, and we continue to see strong interest by all customers, also (inaudible) beyond airlines.

Second question you posed, the free operating cash flow for 2020. You see there is a step-up versus 2019, and that startup is driven by the cash profile of EFA Kuwait. As we told you a couple of years ago in Cascina Costa, there is a specific cash profile of this large contract that clearly affects the overall cash profile of the group, and that is one main driver. On working capital, there are -- all the actions that we are taking in place are direct to optimizing production in the inventory as well as accounts receivable cash-in in terms of speeding up the cash-in terms. All this is expected to support both in 2020 as well in -- going forward, a step-up in cash flow, taking into account that we'll have an unwinding of customer advances over the coming years.

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Operator [4]

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The next question comes from Monica Bosio from Banca IMI.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [5]

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Yes. I put also the questions on the website but just asking it directly. The first one is on the helicopter. Given your increasing role as a prime contractor, maybe I didn't hear you well. Do you confirm a stable profitability for 2020 for the helicopters? And going -- looking beyond 2020, what kind of profitability do you expect for helicopters given these changes in role as a prime contractor?

And the second question is on Vergiate plant. I know it's too early to quantify, but I'm just wondering if you are thinking, accounting some provision to face the cost of the containment of the virus at the plant and if you are experiencing some FERC disruption at the Vergiate plant.

And the very last question is on the financial charges, which...

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Valeria Ricciotti, [6]

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Cut-off. I think we can start answering in any case.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [7]

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So they are connected or the line is down for all the investors? So they are down, all of them. (foreign language) We hear someone.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [8]

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Hello?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [9]

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Hello. Do you hear us?

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [10]

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I do.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [11]

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Okay. Sorry. The third question.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [12]

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So should I repeat that?

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

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The third one because the line fall down when you are -- you started the third question. Sorry for that.

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [14]

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Yes. I'm sorry. The third one is on the financial charges, which came below our expectation despite the one-off. Can you please give us some indication, rough indication on the financial charges expected for 2020 and maybe also for the tax rate?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [15]

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Okay. Monica, thanks for your question. I'll start to answer, and then I leave the floor to Alessandra. On my side, on the role of prime, then clearly, it's important, in my opinion, to look to return on sales pre and post pass-through, because as I'm used to say, we like a lot the role of prime despite of the fact that this is very clearly dilute the return on sales because on all the activities which are not performed by you. You have only the prime fees. But to be a prime is always incredibly relevant in terms of relation with the customer. So I think that to talk of return on sales is always to be qualified.

And secondly, and this year, we started to communicate to the market it's also incredibly relevant as a return on invested capital, because at the end, we are paying our dividends on the capital you provided us and what is the return on this capital. Then Alessandra will go more in detail on the numbers.

Talking over Vergiate, as we stated and I stated very clearly, today is really too early to say anything on the potential impact of the virus because clearly, in this very moment, the acceptancy, for instance, of helicopters cannot be realized because the few that -- of our customers that have to come in order to accept the helicopters, they cannot fly. But we really don't know if this will be handed in the first half or before the first half, after the first half. So today, it's technically impossible to quantify what will be the impact. And in any case, as you can imagine, if we have a slowdown in acceptancy, we are already thinking on what we will do the day the acceptancy could be realized in order to recover. So we don't know the impact and we don't know what could be realized in terms of recovery action. So today, it's really -- we are working on that. We have -- we are putting in place all our operational plans, but to quantify them is impossible.

Now I leave the floor to Alessandra in order to qualify more and better the first answer and then to go to the third question.

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Alessandra Genco, Leonardo S.p.a. - CFO [16]

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Well, I think whereas -- the first answer, I think Alessandro already gave you, Monica, a very thorough and complete assessment of where the helicopters stand and the opportunity behind being a prime contractor. What this will translate into in terms of profitability, our expectations is that for 2020 and for the years forward that there is going to be a stable level of profitability around 10%, including...

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Monica Bosio, Banca IMI SpA, Research Division - Research Analyst [17]

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I'm sorry, Alessandra. I'm so sorry. The line was interrupted. Can you repeat?

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Alessandra Genco, Leonardo S.p.a. - CFO [18]

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Sure. So if we discount the effect of pass-through activity, so if we don't take into account the fact that the increase -- there is going to be a more relevant portion of revenues associated with pass-through activities. If we net that out, then we can expect to be around that 10% level in line with the plan to have a higher contribution from customer support activities.

With respect to your financial questions and tax question. On tax, the tax rate, we can confirm what we told you earlier. 25% is a good rate as a proxy for the future. And on interest expenses for 2020, we plan to be around EUR 280 million, taking to account of the fact that we will need to refinance a portion of the debt coming to maturity in 2021. And we plan to do that in advance of that maturity over the course of the coming year. And there is also going to be an increased contribution associated with the hedges putting in place on our ordinary activities that will entail forward points to be paid, and those are included also in financial charges.

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Operator [19]

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The next question comes from Nick Cunningham of Agency Partners.

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

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I hope you can hear me clearly. Three questions, quite different, actually. First one, I just wanted to clarify the other line in the segment breakdown of EBITA of minus EUR 194 million. I'm wondering if you could just break that down a little bit for us in terms of what moved and how you expect that to change going forward.

And then secondly, I know you can't quantify the impact of COVID-19, none of us can. But your remarks on helicopters and the difficulty of deliveries is really interesting and helpfully informative. And I'm just wondering if you could talk a little bit about how you're working through the practical challenges of social distancing in the factory, because notably, aerospace factory seems to be remarkably empty of people these days. Supply chain, whether you're able to maintain, so far, suppliers and how much inventory you carry and how much buffer you have? and also, the ability to ship. I appreciate you can't ship helicopters, but can you ship, for example, 787 fuselages?

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

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Okay, Nick. So the other line, as usual, includes all the elements that are related to the central operations of the group. And the step-up that you see over the 2 years is mainly associated with centralization of activities that used to be performed at divisional level that now reside within the central functions, an increase of activity from the commercial side. So as we have expressed in early occasions, there is a backbone that we need to build to support the growth of the business, especially commercial, with openings of new offices, international and making those offices able to proactively address market opportunities. So that is a large share of that increase that you see year-over-year.

On COVID-19, Alessandro, you want to address that.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [22]

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COVID-19, clearly started immediately when the virus started to be present in Italy with intervention in all the different premises we have. In this very moment, we have more than 8,000 people that are working from home. So you can imagine what is "the stress of the infrastructure," but we have been capable to manage that with a strong also attention to the cyber security topic. So we are really working significantly on the topic.

At the level of factories, we are managing the way the factories are working in terms of rotation of teams, segregation of teams and so on and so forth. We have, in some case, already closed. In some cases, we are in the process of closing the canteen where, in any case, there are the safety rules in terms of the instances that have to be maintained. We have sanitized all the toilets, sorry, for -- but -- and we have an extra -- we have extra team that are cleaning them anytime that they are used by any employee. So we have different actions in place. We are also considering, in some case, to close some department in order to optimize the activities. So really -- and we have a crisis management team that works on a daily basis on the topic with some central function and all the divisional managers plus the divisional HR.

So really, there is a significant activity within the company. On top of that, we have some site that cannot be closed. In any case, for instance, in Fortuna, where we are managing satellites. So in this case, there are significantly stricter rules in terms of segregation of teams in the sense that we have always 2 teams capable to manage the topic. One is stably at home and the other one comes to work. They cannot meet anyone within the organization.

So it's also outside, really bad -- outside are the rules made by the government. But even when they're working, they are strictly controlled in terms of contacts. So we are really minimizing the risk of contagion. And this is important for this site mainly to one -- the one related to satellites and the other related to cybersecurity.

So we are very active. Today, if we have to talk of the potential impact of the virus, clearly, there is what we were talking before of the acceptancy of our products, not only helicopters by the customers. Today, we don't have a disruption on the supply chain. The team in charge of managing this topic is clearly part of the crisis management.

So in -- because we don't have suppliers in the former red zone, we have a very specific monitoring on our suppliers. Clearly, we have as well, a huge attention on the inventories we have internally. In some case, we have asked to receive some component in order to be sure that if one of the supplier will be closed, we have inventories. As you know, good can circulate. So this is really one of the topic on which the government has been very clear. So we can receive goods from our suppliers.

Finally, there is, that as I said before, the potential fact that we will create a pause in some of our production sites with the holidays or other activities by our employees. So we are managing the topics. One of the impact is also on the commercial campaigns because we have outstanding offers in countries where today, you cannot enter.

So as you know, many countries have closed travels. So you cannot enter in countries where we have some outstanding offer. And again, when we are saying it's difficult to forecast the impact, which was if this closing of travels we land in June is a story, if we land in December, I think, clearly, is a completely different story. So -- and no one can, today, forecast what will happen.

What we know that is the fact that Italy today is very under observation because we have started the process before others. We know that Italian government as it governs it today, took the most restrictive position, for sure, in Europe, and we are grateful to our government for having done so.

We know that other government in Europe are less reactive. And when we analyze in Europe and not only Europe, we analyze the curve of growth of the affected people, there is only one country, which is under the line, which is Japan, mainly and partially South Korea and -- sorry, South Korea has been very capable in managing the process afterwards.

So one of the issues that when Italy will be out, other countries will be where we are today with a delay of 8, 9 or 10 days. So it's really something that we have to consider for the future of our commercial capability, for instance.

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Operator [23]

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The next question comes from Alessandro Pozzi of Mediobanca.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [24]

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The first one is on the free cash flow. The company is going to enter a phase where it's going to be highly free cash flow generative. This year, we're not going to see a major reduction in net debt, I think partially is because of the acquisition that you announced as well. But I was wondering, from 2021, you mentioned that free cash flow is going to step up. How should we think about the use of that free cash flow? Should we go more towards CapEx, potentially inorganic growth or dividend as well or reduction in our net debt?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [25]

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Sorry, there is also a fourth option, which is debt reduction. That is what we are considering today. Clearly, as you know, our first priority's to be investment grade. So today, in the plan, in the free operating cash flow, we'll reduce debt. What is very important for me to stress is the fact that in the period of the plan, you remember, in the previous plan, we said our average conversion rate will be above 50%. Today -- in the previous plan. Today, in the plan 2020, 2024, are almost 5 year, we are saying within the conversion rate, on average. So if you take the 5 years, we'll be above 60% and in the 2 last year of the plan today, the free operating cash flow conversion rate is above 70%.

So this is, in my opinion, the most important element because we are saying that, as we always said, free operating cash flow is a priority, and we will go above the European average in terms of conversion rate.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [26]

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So we should see net debt coming down from 2021?

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

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Yes.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [28]

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Yes. Just one more question on the cash flow for 2020. Can you give us a number for the working capital, underpinning the EUR 2.8 billion debt assumption at year-end? What sort of working capital you assume for 2020?

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

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We don't ordinarily provide guidance on working capital. As you can appreciate the dynamics around the working capital are very, very complex and articulated. So you know that over the plan, we are forecasting to have a level of investments, an average level of investment between EUR 600 million and EUR 700 million per annum. In the working capital, we'll have the profile associated with the dynamics that we discussed earlier in the call today.

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Alessandro Pozzi, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [30]

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Okay. Fair enough. Last question on the -- going back to the Vergiate plan acceptance, you mentioned cannot be achieved now. Can you confirm whether the production remains -- the rate of production remains unchanged? And is there a point of which not having acceptancies becomes a bottleneck? And as a result, you have to slow down production as a result. And when that could be?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [31]

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I said before that, unfortunately, the virus phenomena is unpredictable because if I ask you when we will be at the peak of the contagion, I'm sure you -- no one can answer. So it's really difficult to forecast if and when there will be a slowdown.

Today, the factories which are open but as I said before, maybe that we will take the decision to close some department. Today, we have -- in Vergiate, we don't have any case of contagion, but maybe mainly the Italian analysts are aware on the fact that this -- in this very moment, as there is a meeting of the Prime Minister with the trade unions, which are worried on safety. And as I said, safety of our employees is the priority.

So really, today, we don't have any forecast and nor on the slowdown, nor on the recovery action. As what we promised you is that as soon as we will have the capability of having a sound number, we will provide to the market as we are obliged to do.

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Operator [32]

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The next question comes from Martino de Ambroggi of Equita.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [33]

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The first question is on the order intake. You mentioned some slowdown in ATR in older discussions. You mentioned some campaign at risk for delay because you cannot travel and so on. What are -- what were -- what are so far the most promising prospects in terms of geography and divisions?

I know you cannot provide names and figures, but just to have a rough idea.

And the second block of questions is on the quantitative questions. For 2020, restructuring, if there is an indication, very low in '19 CapEx, where are you planning factoring? And that in the capitalized balance, which was at the end lower in '19 than what you projected at the beginning of the year?

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [34]

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Martino. In terms of order intake, as you know, we have a very well balanced portfolio. And in the period of the plan, we continue to have the same balance.

So we do see an important presence in U.S. that will continue to be 1/3 of the group. I'm not talking of 2020, really. 2020 is something that we had some significant commercial campaign, but if we cannot go in the country, maybe that in July, we can be there, maybe in May, maybe in September. So it's real important. So I prefer to see a longer perspective. We are -- we have a good -- we continue to have a good presence in Europe, mainly -- so the Italian market plus other European countries with lower presence. U.K. is relevant, but U.K. is mainly for the Eurofighter, so it's not in reality the final customer. The rest of the world is more or less 20% of the portfolio, and we'll continue to be, at this level, with some increase in the Middle East that is relevant. Yes, we are capturing some opportunity in Africa as well with very specific products, mainly the helicopters and C-27J. So it's a market with some interest and as well in air traffic management.

So it's a very well-diversified portfolio. The organization we have with the Chief Commercial Officer, clearly is important because on the local presence, we have open offices in different countries. We have an higher capability of following the market.

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Alessandra Genco, Leonardo S.p.a. - CFO [35]

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Martino, going to your financial questions. As you know, the CEO took on the target of reducing restructuring charges on a steady basis. And we guided you last year on a number that was below EUR 100 million. In fact we landed around EUR 70 million, EUR 75 million. I would expect for the current year to be around the same range, always with below EUR 100 million, and it could be around the figure you see in the 2019 statements. But we'll update you as the year progresses.

On R&D capitalized, our guidance for 2020 is between EUR 100 million and EUR 150 million, which is actually in line with 2019. The 2019 figure that is in the presentation may appear lower, but in reality, there's been some items that have basically resulted in an offset between liabilities we had on the balance sheet and assets, capitalized assets, always on the balance sheet and that were not included in the income statement. Therefore, that figure is lower. But if you net out those effects, that figure is around EUR 130 million for 2019. So that would be the expectation also within the range that I mentioned before, EUR 100 million to EUR 150 million.

On investments. Investments are, on average, on the plan time between EUR 600 million and EUR 700 million. So there could be a higher figure in the earlier years because of some programs that we need to bring to completion, both in helicopters as well as in the Aircraft Division. But on average, during the plan, that is the figure we are targeting.

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Valeria Ricciotti, [36]

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Martino, just for reference, the net capitalized R&D is on Page 88 of the presentation.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [37]

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Yes, yes, I saw it. This was the question. And the factoring is the only missing figure.

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Alessandra Genco, Leonardo S.p.a. - CFO [38]

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On factoring, the factoring outstanding at year-end 2019 is in line with the value we had in 2018.

As usual, we are using factoring to normalize our cash flows. Because as you know, the role of prime means that in specific situations, we are required to ensure that the supply chain is paid on time even in circumstances when we, as prime, are not paid on time because of natural slippages in milestone timing or any other reasons. So that is the usage that we make of that instrument. Nothing new to add compared to last year.

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Operator [39]

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The next question today comes from Zafar Khan of Societe Generale.

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [40]

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I have 3 questions, please. One on Space, one on Aerostructures. And I just wanted to delve into the invoice discounting a little bit more. Could you please just help us understand the outlook for Space in 2020? I think Tyler's indicated that for their part, the revenues would be under pressure again 2020 versus 2019. So some clarification on that would be very helpful. Aerostructures, you've mentioned gradual recovery. What is the run rate? Is it still losing money or did it break even in 2019?

And from memory, I know it consumed circa EUR 280 million of cash in 2018. What was the cash consumption of Aerostructures in 2019? And what is it projected for 2020? And then finally, Martino's question on the invoice discounting, you're becoming more enrolled as a prime. So will that number, the invoice discounting number, go up quite a bit? And also, is that done mostly in Q4 or do you discount the invoices across the year?

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

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Okay. We missed your third question, but let me start with the first question on Space. So we confirm what Aless shared with you earlier in the year. There is going to be another step down in revenues on the manufacturing side of the business or the Space alliance. What we expect, though, is that at bottom line, the business is going to recover gradually over the plan years. And at the end of the plan, we expect it to come back to the levels that we had before, let's say, the disruption of 2019. Remember that 2019 had also some one-off costs associated with restructuring. But clearly, there is going to be a gradual recovery, and we can't expect year-over-year to see any sizable increase. On Aerostructure...

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [42]

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So if I take disruption -- sorry, it's just if I take that disruption out, it won't repeat in 2020. Does that make 2020 EBIT should be higher, the contribution?

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

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It should be higher versus last year, correct. Your second question was on Aerostructures. So on aerostructure, what we see is that -- you're right, in 2017, we had an extraordinary cash absorption for -- in 2018, we had, yes, an extraordinary cash absorption of EUR 280 million in the business. What we saw in 2019 was instead a significant reduction in this cash absorption by approximately EUR 100 million. And the business is on track to gradually increase, both profitability as well as cash flow generation.

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

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Sorry, I got it. Today it's still losing money is what we always said because we always said that we will achieve breakeven in 2022. So it's been -- so we have been always very transparent on that. The division is slightly better than the plan. Its performance is slightly better than the plan. This is a key element. So this is where we are at the end of 2019. But Alessandra?

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Alessandra Genco, Leonardo S.p.a. - CFO [45]

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Sure. I mean going forward, the plan is to have a gradual recovery. And as of now we do not see any specific elements. We'll clearly have to monitor the situation, not short term, but more in the long-term with respect to what the major OEMs are declaring and are planning to do.

The last question, on factoring. What specifically on factoring do you want to address...

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Valeria Ricciotti, [46]

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Zafar Khan, could please repeat the question? If I'm not wrong, it was on the Q4 phasing and also on the prime contractorship that are increasing. So what is the impact going forward. Am I correct?

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [47]

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Yes, indeed. It's just your prime contractorship is increasing. So I wondered if that would mean a higher level of factoring. And then secondly, I just wanted to understand across the year, is factoring fairly consistent across the 4 quarters? Or is it concentrated largely in Q4?

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Alessandra Genco, Leonardo S.p.a. - CFO [48]

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Okay. So I mean, honestly, as of now we would expect to have a factoring level, which is quite stable over the years. Quarter-by-quarter, typically, the year-end, so the fourth quarter is the quarter where we have higher activity. Probably in 2019 because of some slippage to the right of timing of order signing and finalization, we have had to do some factoring throughout the course of the year. But that is, again, very, very usual and normal in order to stabilize and make more homogenous the cash flows.

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Operator [49]

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The next question comes from Christophe Menard of Kepler Cheuvreux.

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Christophe Menard, Kepler Cheuvreux, Research Division - Head of Aerospace and Defense Sector [50]

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I have 3 questions. The first one is on the restructure. The -- can you update us on the A220 package renegotiation? I mean we've seen that this has intensified the negotiation to lower the cost. The second question is on the LEAP 2020 program, the -- namely the net benefits, which I understand are at EUR 40 million. What is the time line for reaping those benefits? And do you have the possibility to do more? And if so, on what horizon? And the last question is on digitalization. You mentioned in the earlier presentation that you intend to achieve 100% digital manufacturing targets. Can you share with us if -- I mean what kind of savings you could achieve actually on platforms and also on other products that you have? And on what horizon, because that could be quite important in terms of improving cash and margins as well.

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

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Sure. 2020 negotiations. The negotiations are almost finished in the sense that we have a reference of terms for these negotiations now. We are rewriting the contract. So we are positive on that. And I hope that soon we will be capable to announce the results. LEAP 2020 is not only a program in order to save money. As we said, we have overachieved the EUR 200 million, and we have a plan to do more than that. Clearly, what is relevant is the fact that a piece of this EUR 200 million are stabilized in the sense that partially you have savings that are positive for the year, but are not repeatable in the following year. Partially, you have a piece of this savings, which is slightly less than 50% of this base that will be recurring. So the year after, if you save EUR 200 million, in reality, you have the EUR 200 million plus the recurring number. So it is something which is very positive. But LEAP 2020 is mainly a strategic review of our relation with the suppliers. We -- as we always said, we have in Italy, more or less 4,000 suppliers. Of them 2,800 are SMEs. Of this 2,800, a portion are very small in terms of contribution.

Shall we say that more or less 50% of them contribute by 5% of our procurement. The remaining -- out of the remaining part we have -- we already had on-site visit with the suppliers for more than 1,300. So almost all the remaining one. Of them, 400 are potential partners. 70 of them are already in development program with ELITE and other activities. So it's really a way in order to strengthen our supply chain. And if our suppliers are stronger, we have a significant benefit.

In any -- there have been many merger of small companies, our suppliers that have been facilitated by the relation they have with us. And also -- if you can put on mute because we hear someone who is talking, sorry. And is really relevant for us because their margins today are aligned with the benchmark, but thanks to the fact that we optimize the procurement activity. So we have not reduced the profitability of any single name, but we are having a significant benefit in terms of cost reduction, as we said.

Digitalization, this is a process. Clearly, it's not so easy to have the avatar of all our platform. This, at the end, will be the target.

As you know, we have hired Roberto Cingolani as new Chief Technology Innovation Officer. I'm sure we have seen the presentation he made. It's important to say that we start with a significant investment, I have to say, not financially, and they're including the numbers Alessandra provided before, but significant in terms of a program. In computing capability and storage capability, thanks to that, we will have the instrument and the base in order to invest in big data, in simulation. And clearly, digitalization is based quite a lot on -- for us, a simulation is really to have the avatar of our products. There will be something that we'll work in order to move the old program on the new base. Augmented reality, which is incredibly important for all the maintenance activities. Cybersecurity will be as well a base since simulation is also very important for the training activity. So there are many different areas that will fall out from the plan.

It's also quite important to say that we are already working on digitalization for administrative process. For instance, our procurement base is digitalized in a very significant portion. So we have a digital relation with the suppliers, I was talking before, which clearly is very important in order to optimize that we were discussing before, for instance, of the warehouse as a working capital clearly to have a digital process is important in order to manage that. So it's a process ongoing, Roberto Cingolani is in charge of orchestrate. The program clearly is not then the person who is realizing it because there are many people involved but -- so it's very relevant for us. It's important not only in terms of margins, but for instance, in terms of also time to market because with a strong digital capability, you can work in terms of big data, for instance, for -- simulate their needs for predictive maintenance. So it's really something that we'll have an impact not only on margins but on quality perceived by our customer as well.

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Operator [52]

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The next question today comes from Tristan Sanson of Exane.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [53]

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Tristan Sanson from Exane. A few questions from my side. So the first one is a few refinement on the free cash flow outlook. As it -- your midterm target is based on cash conversion ratio on EBITDA versus the cash tax and cash financial charges. Cash tax at least is quite volatile from 1 year to another and hard to anticipate. But I just want you to have, first, a feel of what is the implied cash conversion rate that you have in your 2022 guidance?

Are we at 50%, close to 60% already? And consensus has something like EUR 560 million in 2021 and more than EUR 700 million in 2022. Is it -- are these numbers consistent with the EBIT growth and cash conversion outlook that you provided for the plan?

Or it's slightly -- both slightly below, just to understand it a bit better, how it is positioned? Second question is, clear confirmation of Aerostructure. Do you -- I understand that you confirmed the cash flow breakeven by 2022 for Aerostructure, is that correct? Third, can you tell me or confirm was there -- all the execution difficulties that you confirmed a year ago, which were in air traffic management, speed automation, homeland security, that they are all over and fully behind?

And finally, it's a question about balance sheet flexibility. If we assume that you may have a couple of quarters of delivery disruptions with work being completed, but the raising possibility, you may have some ballooning of your working capital. What is the kind of balance sheet flexibility you can have credit plan that are accessible? It's exceptional funding you can access? And how confident are you that you can overcome that difficult situation even if it lasts a bit.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [54]

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Starting from -- we never provided any guidance for free operating cash flow in 2022. What we said, I think, and I hope in a very clear way that if you take the period, 2020, we provided guidance for 2020 up to 2024, the average conversion rate will be above 60%. And I said that in 2023, 2024, we'll be above 70%. This is what we said. So we cannot -- nor confirm nor deny the number you gave because we have not given any number. So -- and we have been very clear.

On Aerostructure, the free operating cash flow will be neutral 1 year after the EBITDA breakeven. I said that EBITDA breakeven is in between '21, '22, shall we say '22, so would be the year after. And this is included in the conversion rate of the group. So it is fully absorbed.

Automation and ATM. Automation is technically fixed in the sense that the program where we had a problem has been completely fixed. You remember that we have 2 business lines within automation, one is luggage delivery in airport. And this is an area where we are leader, so we are really good. And the other one is parcel distribution for customers like DHL and others. This is the area where we have a good product, but we had some execution problems. But today, these problems are fixed and the business line is performing properly. Sorry, from 2020. 2019, we had still an impact from this DHL problem.

ATM, air traffic management is an area where we continue to have some weakness, but is a very important area because we have an installed base, which is very relevant. We have completely renewed the management team. So I'm confident that they will follow the path we had in other areas where we were -- we had problems, as aerostructure, where with the new management team we have. We are in the process of fixing the problem. So we are perfectly in line with the plan or slightly better automation, where we have a new management team. And again, we are working on that. And ATM, as I said, we have changed the management team as well.

Flexibility for the recovery. Clearly, the trade unions will work on flexibility. We have a good relations with the trade unions. As I said before when I was talking of the virus, the price that we don't have yet the idea on what could be the need in terms of flexibility to recover. If we will anticipate holidays for employees in this period of time, clearly, we will work in August, for instance, usually because the factor is in August, considering that we think that in August, the problems for the virus will be over. So we'll work also with extra time as soon as there will be the need and there will be a recovery plan. Today there is not yet a definition of the potential needs.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [55]

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I'm sorry, I think my question was not very clear, but I was talking about balance sheet flexibility. So you have EUR 785 million maturity in 2021. If you have a short-term working capital...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [56]

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Yes. We have -- in terms of -- Alessandra will provide you. We have a significant amount of revolving credit facilities and committed lines, but Alessandra will give you the numbers.

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Alessandra Genco, Leonardo S.p.a. - CFO [57]

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So Tristan, we have added what liquidity. We started the year with about EUR 2 billion in cash on the balance sheet, and we have EUR 1.8 billion of revolving credit facilities committed, an additional EUR 0.7 billion of uncommitted credit lines. So we feel that we do have enough flexibility to absorb potential working capital swings.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [58]

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That's really useful. And if I can just comment to my initial question, the implied cash conversion rate in your 2020 outlook for EBIT and free cash flow. What is that? Is that 50% or...

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Alessandra Genco, Leonardo S.p.a. - CFO [59]

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As the CEO said before, we are providing guidance on cash flow conversion, on average, over a certain period of time and not related to one specific year...

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [60]

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No. Just for 2020.

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Alessandra Genco, Leonardo S.p.a. - CFO [61]

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Yes. Not one specific year, Tristan.

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Tristan Sanson, Exane BNP Paribas, Research Division - Head of Aerospace & Defence and Equities Research Analyst [62]

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But for 2020 you said...

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [63]

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For 2020, we provided the number between EUR 400 million to EUR 450 million, so it's pretty clear. And then if you consider this number and you have an average, so we gave the growth rate of EBITDA, so we can -- you can calculate also numbers. So when we said that the average will be above EUR 60 million. So you have all the element of the equation.

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Raffaella Luglini, Leonardo S.p.a. - Former Chief Stakeholder Officer [64]

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Final question, I think.

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Operator [65]

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The next question is from Harry Breach of MainFirst.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [66]

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Can you hear me?

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Valeria Ricciotti, [67]

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Yes, yes, yes.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [68]

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We hear you.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [69]

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Can I just ask 3? Firstly, in response, I think, to an earlier question about restructuring. Alessandra, did I hear you say the 2019 restructuring number? I see in the press release, I think the restructuring cost was EUR 28 million, but did you refer to a EUR 75 million number? Was that what you said? And then I have a couple more questions after that. Yes.

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Alessandra Genco, Leonardo S.p.a. - CFO [70]

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Yes, if you combine restructuring or recurring, what we call -- the guidance is always on below-the-line costs.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [71]

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Okay. Okay. And you were saying, in 2020, expect around the same level as 2019?

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Alessandra Genco, Leonardo S.p.a. - CFO [72]

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Correct.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [73]

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Great. And then a couple more sort of more operational ones, if I can.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [74]

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Sorry, if you go to Page 66 of the presentation, there are the numbers Alessandra is referring to.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [75]

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And just a couple of operational ones. Can you help us with DRS, with the plan? I think that previously, in the plan that ran until 2022, Bill Lynn talked about getting above 10% margins before the end of that period. And then we have the new plan to 2024, and he's talking about 10% plus margins before the end of that period. Can I just clarify with you, are we still expecting to get DRS to 10% or better in 2022? Or is it looking a little bit later?

And then just last question, helicopters. I think in 2019, you have disclosed to us 32% of revenues from civilian helicopters, I guess, including support as well as new helicopter deliveries. Can you give us a feeling of how -- what percentage of that was to oil and gas customers? Oh, and last one, sorry, last one was just, Alessandra, just the cash taxes. As Tristan said, cash tax has been volatile historically. Can you give us some idea, should we expect cash tax to be similar to the income statement cash charge in future or what sort of proportion of it should it be?

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Alessandra Genco, Leonardo S.p.a. - CFO [76]

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Okay. I'll address, Harry, your first -- your last question. Cash taxes, yes, I concur with you, has been volatile. We have to remember that Leonardo benefits from net operating losses. Therefore, the amount of cash taxes paid reflects the usage of existing net operating losses.

So that is a dynamics that will last for another couple of years. But in general terms, you can imagine and you can expect that as the taxable income progresses and rises over the plan time, there will be an increase also in taxes paid. I leave to Alessandro the question. On DRS, the company, as you have noticed, grew top line for the third year in a row at a double-digit rate. So this is a remarkable growth rate. The profitability is increasing gradually. The target is to have it become double digit around 2022. If there are going to be some minor slippages to '23, we'll see. But the most important thing is that we are clearly on the right path. There is an important development component of activity that we have to finalize between 2020 and 2021. And there is going to be an increasing level of production activities that will flow through and that will increase the profitability level.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [77]

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I would like to qualify what Alessandra just said. The real question mark is the growth rate of DRS because if DRS will slowdown the growth rate, the return on sales will be higher. If DRS will continue to grow at this pace, the return on sales will be lower. Why that? Because when we win a new program, we know that for the first 2 years, the new program is in the development phase and do have a structurally lower profitability. So this is clearly a good problem to have. We will slow down, and we will have an higher return on sales -- sorry, the return on capital. If we slow down, we'll go down. Because clearly, today, in order to grow DRS is not asking for new capital. So it's really a topic that we are continuously discussing. Today, we are very happy with the growth rate of DRS, we have to be very clear, despite of the fact that it's slowing down a little bit as the return on sales.

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Giancarlo Schisano, Leonardo S.p.a. - MD of Aerostructures Division [78]

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I would -- that was it. Now the -- on the restructuring, yes, we addressed that on helicopters, yes, there is a component of civil helicopters. Oil and gas remains an area where we see, honestly, a market that is still pretty weak. Clearly, the recent trends in the oil prices is not supportive of big purchases or big orders coming from customers in this segment. On the other hand, on the civil component of the business, what we see really strong on a continued basis is the EMS and the search and rescue.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [79]

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And I was trying to say -- I was just really trying to say, should we think about oil and gas customer revenues that helicopters as a percentage of the overall civil revenues is being maybe half of the civil revenues last year or something maybe 1/4 of them. Can you give us a feeling? And then cash tax, Alessandra, sorry to press on this, but I think you said after the next couple of years, when you are consuming historic net operating losses, things will become more normal. So should we be thinking about in 2022 and beyond, cash taxes being around the same level as income tax charge?

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Alessandra Genco, Leonardo S.p.a. - CFO [80]

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Yes. That would be a fair assumption. I would also include some fair amounts of cash taxes paid in 2020 and 2021 because 2018 and 2019 benefited from some other not ordinary cash-ins in the tax line. So those are not repeatable over the coming years.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [81]

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Sorry, on the helicopters, we have to -- because one thing is orders on oil and gas and other story is revenues. You remember that in 2018 or '19, I don't remember because we sold 21 139 to Aramco. And you'll know if they've been -- so for sure, they are delivered in more than 1 year. So again, is -- we will follow on, on that because, again, usually, we are looking more and Alessandra was referring more to the order book than to revenues. On the revenue side, it's also important to consider the customer support activity that we are not allocating per sector in terms of final customer.

Then last but not least, that there are customer, for instance, in the Middle East we have 2 customers, that I know pretty well, that are operators. They have a huge fleet. A portion of that is utilized for oil and gas customers, but not in the Gulf area. Maybe in the Mexican Gulf or in Latin America. So it's something which is difficult. In the meanwhile I'm receiving a message from Gian Piero, and the weight on revenues for oil and gas is -- now is more or less in the range of 5%. So it's relatively low. Again, the revenues are related also to all the orders, so -- because we are delivering helicopters to these customers.

In -- today, as you know, and as you have seen from the presentation of Gian Piero, for us in the helicopter area, it's incredibly important customer support and some important programs in the military area.

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Raffaella Luglini, Leonardo S.p.a. - Former Chief Stakeholder Officer [82]

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I think this was the last question. So thank you, all of you, for being with us today. And of course, the IR team is available for follow-ups. Thank you.

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Alessandro Profumo, Leonardo S.p.a. - CEO & Director [83]

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Thanks.

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Alessandra Genco, Leonardo S.p.a. - CFO [84]

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Thank you.

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Operator [85]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.