Leonardo Spa Ord

Good evening, ladies and gentlemen, and welcome to our live first half 2023 results presentation. I'm Valeria Ricciotti, Head of Investor Relations and Credit Trading Agencies. Today, our CEO, Roberto Cingolani, and our CFO, Alessandra Genco, will take you through our progress during the first half of this year, the first half financial results, and the outlook for the full year 2023. Our CEO will start with his initial perspective and outline of priority focus areas, while the CFO will cover in more detail the financial results and outlook for the full year. And we will then welcome your questions. I will now hand you over to our CEO.

Thank you, Valeria. So good evening, ladies and gentlemen. It's an honor to serve Leonardo as the CEO in the next years, and I look forward to meeting you in person as soon as possible. First of all, I'd like to spend a few words about my background, except for the approximately two-year interlude as technical minister in the Draghi government. This happened between February 21 and October 22. I dedicated my entire life to the development of technologies in Europe, US, Japan, as a scientist and as a manager, both in the private and in the public sectors. I started my career in Leonardo in September 2019 as Chief Technology Innovation Officer, launching the company's digital transformation program, the world-class cloud computing facility, and the Leonardo Laboratories. The idea was to accelerate the transfer of the most innovative scientific and technological research in our products and in the marketplace. Also, I launched the sustainability plan that over the last three years placed Leonardo among the top-ranked companies according to the most reputed international ESG ratings. Well, Leonardo is a great knowledge-based company. It's leader across helicopters and defense electronics, and it's for sure a key player in the international cooperation markets. Some of the core capabilities of the companies are really great, but there's also substantial room to improve efficiency and pace in other domains which must be further developed. Today, Leonardo has good financial figures, debt under control, and an order backlog of about 40 billion euros. As a result, it is improving in many key industrial and financial figures. Today, we announced our first half result. So the group new order intake is up by 21% to 8.7 billion. Revenues are up to 6.4%. up to $6.9 billion, EBITDA up to 5.7%, to $430 million. There is a further improvement in cash flow, and we are confirming our full year guidance. Alessandro will cover the results in detail later in the presentation. I will speak a bit longer about the new idea, the new strategy I'd like to implement. And this, for me, is a sort of personal introduction to you guys, the first time we meet. In general, I believe Leonardo is doing well, but it must be capable of delivering better earnings and cash conversion. Our results show that we are improving our performance despite the global difficulties over the last few years. However, looking at future competitors, it is also imperative to compare ourselves with a double-digit overall performance of the new sector operators. Just take, for example, space sectors with launchers, new constellation satellites for internet in space, and many other fields with very high tech content. So what is the new era of defense? The aerospace and defense sector is changing, and as demonstrated by the war in Ukraine, missiles and drones costing a few thousand of euros, suitably guided by a network of private satellites designed for civil use, are capable of destroying another flagship worth billions of euros or thousands of tanks. We're therefore witnessing two very significant changes. Number one, Defense is increasingly made with bytes, data, instead of bullets. Number two, the concept of conventional defense must be incorporated into a more extensive concept of national security that includes, in addition to defense itself, also the production and use of data, cyber security, space control, infrastructure security, energy security, I'm dealing with my recent experience as energy minister that was really something critical. Forecasting capability based on advanced algorithms such as high-performance computing and big data analytics and artificial intelligence applied to attack and defense systems. On that basis Leonardo's product portfolio and the company positions in the international geopolitical scenario must evolve. The next few years are therefore essential to boost and accelerate the transition of the product portfolio and to adapt the strategic vision to the global change underway. So how do we build Leonardo for the future? We operate on three pillars. We already started in this 12 weeks of management. Number one, national and international geopolitical and strategic positioning of Leonardo. Number two, organization. Number three, products and technological choices. Concerning national and international geopolitical and strategic positioning, Leonardo's new competitors are not only the conventional aeronautical and electronic industries, but also space industries, data industries, and digital manufacturing companies. To remain competitive, we will have to ensure continuity in Leonardo's currently strong core business, such as aircraft, helicopters, electronics, which are a primary interest for conventional defense. And at the same time, we have to open as soon as possible to emerging sectors that allow Leonardo to play a significant role in international geopolitical scenarios. Leonardo must be a strategic multinational company in global Atlantic and European alliances, just think to the GCAP with Japan and UK, the strategic sixth generation fighter, defense electronic with Germany and the UK, as well as major NATO programs. But its role and international perception must grow with an increasing attention to previously untapped but potential markets. Our precedent will go around over the next months in Thailand, Indonesia, Vietnam, Turkmenistan, Greece, India, because there is a lot to discover there. There are a lot of opportunities. Also exploiting incremental opportunities generated by government-to-government contracts in line with international best practices that we should nurture much more than in the past. To be successful, there are a few important actions to carry on. Number one, we must rationalize the product business portfolio. We are perfectly aware of that. Number two, we must have the courage to form strong international alliances and to develop new technologies with a greater capacity in research, development, and innovation. There is only one way to ensure competitiveness. and know-how development opportunities, because there is no shortcut to technological leadership. That means R&D at very high level. Third, and this is valid in particular for the most advanced countries, Leonardo must significantly accelerate growth in disruptive market segments, primarily cybersecurity and space services, which are characterized by high technology skills and high cash conversion. Concerning organization, which was my second pillar, Leonardo's new organization aims at simplifying governance to obtain more rapid and data-driven decision-making processes. In particular, we're focusing on a number of key areas. First one is the creation of a leaner organization with the rationalization of the corporate center, focusing its mission on the adoption of strategic decisions with less bureaucracy. This means making it slimmer, more efficient, less people, less expenditure. Second point, greater operational flexibility of the division business units with careful accountability of the results. Third, the creation of complementary and cohesive leadership team in terms of expertise and competence in the new organization has a lower average age and much higher gender balance than in the past. Fourth, the creation of streamlined and deeply rooted local offices in strategic countries. Fifth, the creation of an international culture with a strong sense of urgency for the forthcoming change. That's very important. We should feel the urgency of what's going on in the planet. Sixth, clear strategy of attraction, retention, and development of managerial and technical talents. That was maybe not very much pursued in the past. Business reinforcement will be ensured by the new unit of the co-general director for business and operation led by a colleague and friend, Lorenzo Mariani, who will support the divisions in their international competition and increase their commercial penetration in existing markets with a strong value proposition. This will be based on the improvement of the commercial model with rationalization of marketing sales processes and strengthening of market scouting skills. And of course, the improvement of customer support solutions, increasing the utilization of installed base and generating more recurrent revenues. Lorenzo will work also on the further development of other domestic markets, UK, US, Poland, and priority foreign markets. Finally, greater effort and focus on strengthening performance and increasing cash conversion capacity will be one of the streamline of our and his action. We can also leverage in our role in some successful joint ventures, such as MBDA, an example of a strong, profitable, and cash-generative business we built at the European level. By the way, Lorenzo Mariani was the CEO of the Italian part of MBDA, so he has the right expertise for that. Finally, let me conclude with the third pillar of this global strategy. This is the pillar dealing with the product and technology choices. Leonardo must ensure technological leadership in selected domains by leveraging innovation and competitiveness on strategic products. To this end, it is necessary to boost technological innovation through innovative measures such as, first, strengthening of core products through a massive digitalization using artificial intelligence, cloud and supercomputing technologies, increasing the services offers such as connectivity predictive maintenance, drastically reducing time to market achieved by digital twins, and creating new opportunities in addition markets such as a manned or satellite services. All this should create new margin and revenue opportunities. Second, supporting the country and the communities in which we operate to face major global change. Just think to earth monitoring for climate change, monitoring of the security of critical infrastructures, satellite internet water environment monitoring. All this does not require a complete reinvention of the company, not at all. Just a better, different management, a different vision, and a constant update of the product portfolio. Third, we have to integrate sustainability into the business and product portfolio. This is an additional value. to improve Leonardo competitiveness. There are several actions in place now. Science-based target initiative to reduce emissions, Co-op 3, which is more than 90% of the total emission. We are working on that now. Sustainability of the supply chain. It's a lot of work with the over 1,000 companies that are working in our supply chain, at least the bigger. And finally, a lot of efforts in diversity, equity, inclusion. Our certification of the first Italian gender balance certification is underway and leveraging on our consolidated UK DEI background to attract international talents. Fourth, we need to strengthen R&D activity. In 2022, Leonardo invested around $2 billion in research and development. It's approximately 30% of the revenues, including research, development, and product customization. I believe some extra effort is needed to increase the low TRL research and development to reach the average level of our best competitors. WE DOES NEED TO FOCUS THE RESEARCH OF LEONARDO AT THE FOREFRONT OF A SELECTED LIST OF CUTTING EDGE AND DISRUPTING TECHNOLOGY THAT WILL ULTIMATELY LEAD TO THE DEVELOPMENT OF NEW PRODUCTS AND SERVICES. OUR FOCUSED EFFORT IN R&D WILL ALSO REDUCE THE CURRENT FRAGMENTATION OF INVESTMENT IN INNOVATION INITIATIVES AND THE RATIONALIZATION OF OPEN INNOVATION ACTIVITIES WITH ACADEMIC RESEARCH. THIS IS MANDATORY. WE HAVE TO DO FEW THINGS VERY WELL RATHER THAN MANY THINGS IN A MEDIOCRE WAY. Reinforcing the strength of the core products is, of course, a key point. Today, we have a large and diversified product portfolio with a strong leadership position in intermediate dual-use helicopter, the 139, 169, 189, and with the AW09 covering the light twin segment and the AW609 projected, I mean, the vertical lift, basically. We have a leading position in training and simulation in aircraft, such as the M345, M346, and the International Flight Training School. We also have multi-domain capabilities in electronics, with a unique strategic presence across A, land, sea, and space, distinct to radar, sensor, and many other applications. This ensures a strong role of Leonardo in international programs, such as the well-established IFA, Eurofighter, GSF, GCAP, and the proof of concept of the Euromail development phase. So I confirm the intention to strengthen those core businesses by increasing digitalization, product development, and better commercial organization and customer support activities. In this way, we will address a larger share of customers' needs and bring more recurrent revenues and higher margins with low-capacity requirements with new products such as the pilot training courses at the International Flight Training School. We expect that thanks to the new co-general director of business and operation organization and to the new digital and cloud computing capability of Leonardo, the medium term plan is not only confirmed, but there should be room for some more improvement. We'll see this with the new strategic plan. Concerning other structures, we must recover profitability and ensure economic and financial break even. So we must continue working on increasing volumes and developing distinctive skills. for instance, on composite materials. We know that it will be necessary to explore the possibility of partial conversion to innovative products such as drones for dual use, as well as evaluate future diversification pathway with industrial partnerships. As you will see today, the Aerostructure Division figures continue to improve in line with our plan, and they are progressively recovering after the COVID interruption. Let's go to the future now. I'm going to conclude soon. How can we make space and cyber strategic priorities of the future? If on one hand we consolidate the core business, on the other hand we feel the urgency to evolve into a company offering not only hardware products but also more and more solutions and services. This means developing a so-called servitization model to enhance the value of our product portfolio. In this frame, space and cybersecurity must play a crucial role to position the company in the future. As regards space, the final goal to position Leonardo as a European leader and intercept much larger market shares than the current ones is a key goal. The space economy in 2022 had a total value of $350 billion, of which 70% comprises services and ground equipment. And it is expected to grow to $1 trillion in the next decade. I mean, I've seen forecasts. We expect to launch 2,500 satellites every year in the next 10 years. I mean, this is an immense amount of technology to be launched. We should access this market very soon. We have a duty to grow substantially in this sector. We are working on reorganizing the space activities to create a space division which represents Leonardo at national and European level, also acting as a catalyst for all other national operators. To accomplish such an ambitious target, we will work to unlock more value from the French-Italian Space Alliance and on some acquisitions of small high-tech companies that add specific value to our products or strategic capability to the division. Such M&A will be made without extra cost or new debt for Leonardo. This has to be very clear. Our focus will be on space as a service. Leveraging on our new digital key assets, high-performance computing facility and the new artificial intelligence laboratory, to strengthen the offer of value-added services such as health observation, monitoring of infrastructures, territories and traits, health digital twin and related services like predictive capability, safety and positioning, and navigation-related applications. The second point will be working in application domain of new technologies, such as, again, AI and AI-enhanced products from satellites connectivity for all Leonardo and third-party platform and systems. There's a wide market on robotics for in-orbit servicing, building and transport, and space monitoring of all assets. Finally, driving the market by digital transformation of design, production and capability of the space system produced by Leonardo Groups. This is a system concept of ability, robotics series production for commercial market, on orbit, artificial intelligence and cloud computing enabled by inter-satellite link and onboard advanced chips. Those things do not require a revolution again. They just require focusing of our effort and a proper use of all our skills. to create new high-tech added value services. On the same footing, cybersecurity is a growing market with a CAGR of 8% over the 24-28 period. We must grow substantially with the aim of ensuring the protection of national and partner country data and guaranteeing cybersecurity by design of Leonardo products and solutions enabling new services, as I previously mentioned. We see the Cyber Division playing a key role in supporting all the other businesses in cyber resilience and certification of products, of solutions, and platforms. The final goal is to have Leonardo products which are cyber secure by design, embedding the service of cyber secure maintenance over the years into a high-tech product of Leonardo. The cyber security becomes a service integrated in the product itself. Examples are upgrading of the existing products with a cyber by design approach over the entire life cycle, radars for cost protection, surveillance, and space applications, or natively embedding cyber security in new programs such as the GCAP, or addressing the defense of the future bytes, not only bullets, as I said in the beginning, and institutional customer needs for secure communication, cybersecurity resilience, and global monitoring. Finally, in addition to defense, serving the civil market, the public administration, and the enterprises leveraging secure cloud and data versus valorization platform. We are presently, currently working on the national cloud poll at domestic level. Also in this case, we will consider the possibility of merge and acquisition of small companies, adding specific value to our products or strategic capabilities to the cybersecurity division. Again, without extra cost and new debt for Leonardo. Key takeaways, I'm concluding. These are the pillars we are focusing on. The overall outcome of the combined action described within the three pillars will be rigorously and constantly monitored to assess the improvement of our operational and industrial performance, the revenue stream, and the profitability. We will keep our focus on cash generation and conversion, providing constant returns for our shareholders. Let me summarize with a few takeaway messages. Number one, the core business will be strengthened. Number two, the organization will be more efficient. Number three, the product portfolio will be optimized. Number four, the internationalization of Leonardo will increase. Number five, cash generation and profitability must improve also through new high-tech service-based products. The sense of urgency to face the change and the awareness of a stronger and more focused R&D will drive our evolution. Number seven, we will expand towards new businesses and services in the space and cybersecurity domains, ensuring better cash conversion. We will use the next year to lay the foundation of the Leonardo company of the next decade, a more international, more innovative, more agile Leonardo projected into the future. This will be presented in more depth in the new industrial plan, which will be delivered at the beginning of 2024. And thank you for your attention.

Thanks, Roberto, for this very thoughtful and very impressive presentation about the way forward for Leonardo. Let me now talk you through the first half results and the performance business by business. We have delivered a good first half performance on track and in line with plan and confirming solid and positive trends across the group. We're carrying this momentum into the second half. We can see growth confirming leveraging our continued strong commercial performance with significant levels of new order intake, 8.7 billion in the first half, up 21% on last year, adjusting 22 to exclude the contribution of GES, the business that Leonardo Diarres sold last year. With very strong performances in helicopters and defense electronics and increasing our group backlog to an all-time high of 39 plus billion. Revenues showed solid growth at 6.9 billion, up 6.4% on a perimeter-adjusted basis. Again, a good performance in the wider industry context. EBITDA grew to 430 million in the first half, up 5.7% on an adjusted basis, and profitability slightly improved in line with plan, with return on sales of 6.2%. The defense and governmental businesses have continued to perform well with strong profitability. Aerostructures has continued its consistent and gradual recovery in line with the plan to reach breakeven by N25. The group achieved material improvement in cash flow in the first half, reducing the level of seasonal outflow by more than 450 million, with free operating cash flow of negative 517 million versus negative 973 million last year. All of this underpins our confidence in our full year guidance. Let's now look at the key group metrics for the first half. Starting with new order intake, we have contributed and continued to demonstrate our commercial strength in both domestic and international markets, with good performances across the group and across geographies, and a total order intake of 8.7 billion euros, up 21% year over year on a perimeter-adjusted basis. Again, achieving a good book-to-bill solidly above one. We have seen a smoother pace of order intake, less lumpy and without any jumbo orders. New order intake was strong and grew across the group. Helicopters delivered an excellent performance, increasing new orders to 2.8 billion in the first half, up 28%, well spread geographically, seeing strong demand on defense and governmental, both from domestic and international customers. Plus, we saw an increase in orders on the civil side as well as in customer support. Major orders included 18169 for the Austrian Ministry of Defense, 13 MH139 for the US Air Force, and the number of orders on the civil side, mainly related to the AW139, with further evidence of steadily recovering civil markets. Defence electronics also stepped up new orders to a total of 4.4 billion, up 19.3% on a perimeter-adjusted basis. On the European side, higher orders in defence systems helped drive new order intake to 3 billion, with an increase of 20%. We continue to see strong demand across products, both sensors, systems and defence system solutions. We want to highlight that we signed in June, last June, a major UK order for the MK2, the game-changing new radar for the Royal Air Force that will be utilized on the Eurofighter fleet, which will transform the aircraft control of the air and provide significant additional advanced electronics warfare capabilities. In other domestic markets, we saw orders for the Italian Army command posts with the capability for effective deployment across the full spectrum of multi-domain operations. On the export side, including the supply of defense systems for the Philippine Navy plus the logistical supports. We're also pleased to see more orders in the Cyber Division, including the order for the establishment of the Joint Operational Center, the JOC, of the Joint Operational Command of Joint Forces, COVI, of the Defense Department, through the setting up of operational rooms, data centers, and the development of a joint common operational picture functions. This all shows how we are more and more leveraging our strong electronics capability to provide key cyber solutions for all our customers. On the U.S. side, DRS achieved good order intake of 1.3 billion, showing its strength and positioning on key DoD programs, winning additional orders for the U.S. Navy New Generation Columbia Submarine Program for the supply of electric propulsion components, plus additional orders for the supply of infrared countermeasures for the U.S. Armed Forces. Aircraft maintained its solid order intake at 1.5 billion, with an important C27J export order, and increased orders for the logistics component of Eurofighter, plus orders under the JSF program. Aerostructures continue to improve gradually, with orders rising to 225 million, up from 158 last year, and benefiting from growing demand across a range of programs. So overall, a very strong half year with new order intake of a relevant size. Delivering on track, book to bill above 1.2 times, increasing order backlog to an all-time high of 39 billion plus. We've also continued to grow our revenues. At group level, we're up 6.4% to 6.9 billion, on track with plan, leveraging our strong backlog and the important long-term programs on which we are engaged. In helicopters, the first half revenues were 2.2 million, slightly ahead of last year, with strong contributions from dual-use platforms as well as customer support and training, with a lower contribution from NH90 Qatar as expected. Helicopters continues to deliver well on its major programs, and we are also very focused on the development and ramp up of new programs. Moving on to defense electronics, revenues rose 4.2% to 2.2 billion euros, continuing to deliver well on its backlog. DRS reported revenues at 1.1 billion, up 6.8% on a perimeter adjusted basis. which translates into $1.2 billion, reflecting the change in perimeter after the sale of GS and a strong performance in the first quarter last year due to a non-recurring step up in the Columbia class submarine program. Leonardo DRS concluding these adjusted perimeters sees underlying volumes higher versus last year. Aircraft grew first half revenues by 6.9% to 1.3 billion, with three aircraft deliveries to Kuwait, plus first activities on the Euromail program, and higher production on the JSF. Aerostructures increased revenues from 234 million to 327 million, with volumes benefiting from increased activity in ATR and the resumption of deliveries on the B787 program. Leonardo has also delivered an improved overall performance in EBITDA. Group EBITDA stands at 430 million in the first half, up 5.7% on a perimeter-adjusted basis, with a return on sales of 6.2%. We had solid performances from all our main businesses, with further gradual recovery in aerostructures. Helicopters improved EBITDA in the first half to 157 million, up 4%, and maintaining its return on sales at 7.3%. On the European side, defense electronics EBITDA grew 7.1% to 225 million, and a good performance across its business areas, with strong profitability rising to 10.2%. We also saw a good contribution from MBDA, noting that last year's comparator was very strong. MBDA's underlying trend is very positive looking forward for this year. DRS reported EBITDA lower at 84 million as expected due to business mix. Also, we have to remember that in the first half last year, DRS had benefited from a non-recurring step up in profitability on the Columbia class program, moving from development to production stage. Going forward, DRS expects growth and profitability to step out throughout the year. Aircraft grew first half EBITDA by 6.7% to 160 million and confirmed the robust profitability of its defense business with a return on sales of 11.9%. Aerostructures showed gradual improvement and reduced its loss in the first half to 72 million compared to 88 million last year in line with the recovery plan we outlined. ATR doubled its level of deliveries in the first half to 12 aircraft versus six last year and improved its operating performance. Its contribution in the first half was slightly lower as expected, down from negative one last year to negative five, reflecting a one-off settlement agreement in 22. That said, we feel encouraged by ATR's recent new order intake, its growing backlog and improving market outlook, and confirm their expectation of higher deliveries by year end. The contribution from space was substantially in line with last year at 2 million. The satellite services continues to perform well, delivering consistent good results. On the other hand, in the manufacturing segment, we continue to experience pressures. There had been some R&D extra cost impacting EBITDA. And we're also seeing some production delays caused by persistent supply chain pressures. We're working with our co-shareholder Thales with a view to improving its future performance. Moving to below the line, you can see EBIT is up 1.7% to 368 million. Last year it was 362 million, reflecting the solid performance of the group's businesses and after providing for 31 million of restructuring costs, including 20 million of early retirements in central corporate functions. Also after PPA amortization linked to the acquisition of RADA completed in the second half of last year. The net result was 208 million, reflecting some increase in financial expenses to a more normal level. The higher financial expenses are also reflecting increasing interest rates and the performance of non-strategic equity accounted holdings. while the higher tax charge reflects tax paid on dividend distributions from the group to Leonardo SBA, as well as from joint ventures. We also booked a gain on the disposal of the ATM business in the U.S. In the first half, we also achieved a material improvement in cash flow, as you have heard from Roberto before. The usual seasonal outflow in the first half was much lower at 517 million versus 973 million last year on a perimeter adjusted basis. A good performance on track and in line with plan. This improvement in the first half is in part due to continued strengthening of our cash flow with improved operating performance, much reduced factoring in a lower level of seasonality. It is also partially due to a concentration in the first half of cash-ins or milestones from customers. To be clear, these are receipts related to the delivery of existing programs and are not advance payments on new order intake. So good progress on cash in the first half and underpinning our targets of free operating cash flow of 600 million for the full year. We continue to strongly be committed toward the leveraging process with net debt down over a billion versus June 22. Now, moving on to guidance. You can see that we have delivered a good performance in the first half. We are achieving very good commercial momentum across the group and our book to bill is solidly above one. All this translates into reconfirmation of our full year guidance on all key metrics. Our confidence in the full year guidance is underpinned by the progress we have made in the first half, the sustained demand we are seeing throughout the group and throughout geographies. And we are on track with our growth path in revenues and EBITDA, seeing good progress on delivery of programs. We're confirming our targets with a balanced contribution from all the divisions, with electronics being a key contributor to growth, aircraft maintaining its top profitability levels, helicopters performing in line with plan, and aerostructure continuing to be on track consistently with its recovery plan, and with the contribution from our strategic joint ventures being in line with plan. All of the divisions have been absorbing the macroinflation pressures into their margins thanks to the mitigation measures we have undertaken starting from last year, including pricing on contracts and renegotiation with suppliers, so we can maintain solid control on our profitability. You have also seen we have also been stepping up our cash flow on track and in line with plan, strengthening our organic cash generation and showing a better quality, also progressing on our deleveraging plan. So in summary, good first half results, confirming our growth path and the fundamental strength of our group, delivering stronger commercial operating and financial performances across the group, on track for the full year with full year guidance reconfirmed. Thank you all, and now we are pleased to take your questions.

Can we please take the questions from the call?

Our first question is from the line of Alessandro Pozzi of Mediabanker.

Thank you. Thank you for taking my questions. I have two for Roberto. First of all, congratulations for the new role. The first question is, I believe you laid out a vision for Leonardo, which is quite different from what the company is today. And as you know full well, Leonardo has a lot of inertia, and it will probably take time to achieve those objectives that you have for the group. But I guess there are also low-hanging fruits, which could generate opportunities just by rearranging existing resources. And so the question here is, what do you think can be achieved relatively easily in the short term versus the longer term? And the second question is, it's quite clear that you are putting a lot more emphasis on space and cyber. And I was wondering, in terms of size, what do you think is the potential for these two business lines within Leonardo in the next few years? And how can M&A shape the growth of these two lines? And for space, just a clarification, are you planning to strengthen the JVs, TAS and Telespazio, or are you planning to build a new in-house group? Thank you.

Yeah, thank you for the question. Yeah, I know we need some ambition. for the time being, wouldn't be any useful to go ahead in continuity initially. So we need some change. Actually, it's not so different in the end of the day, because I'm leveraging on the knowledge, on the skill, on the capabilities that are existing. In the end of the day, I made a clear statement. Core products will be reinforced through a specific organization dedicated to reinforcing commercial activity and specific technological investment in terms of digitalization and rationalization of the portfolio. The new part, if we can say really new, because we already work in space and cyber, is to make those two areas synergistic. developing with the specific choice. I mean going towards space services that I think the less capital intensive and more service-based, so brain-based, that means ultimately better cash conversion. I mean, at the end of the day, we have to consider that with this exploding market of space, if you see what Leonardo gathers at the end of the year through the four participated companies, Avio and Telespazio and Igeos, and TASSI, it's about 1.4 billion. And this is nothing on a market of 350 billion. We have to be more ambitious and we have to do more. Of course, we need to reorganize the layout of the participating company. We need to reinforce part of the business for space technologies which is embedded into the divisions. And to go to your last question, so if the size of the space economy market goes from 350 billion to 1 trillion in eight years, well, I think 1.4 billion today is not enough, and we should grow, and we should grow at least linearly with the offer of the market. So, of course, in the new strategic plan, we will put ideas, numbers, and plan. But I think we should think through a serious competitive layout of the space business for Leonardo. You correctly asked me the difference between short and long term. Well, in the short term, of course, you will see in a few months in the strategic plan, we have clear ideas what kind of intervention we have to do. I think it would be highly desirable in three years to have the space division up and running properly with well-characterized programs. And the merchant acquisitions, they have to be not very big. We just need specific technologies to be introducing our products, so completing what we already know. I mean, don't forget that Leonardo has almost the entire pipeline of space application from launchers to AI in image reconstruction, satellite services, and so on. We just need to rationalize and improve what we do. Joint ventures, of course, this is important. We have to analyze. For the time being, I think the most important thing is to recover symmetry with our French joint ventures. Symmetry is very important, and I want to have symmetry in our relationship with the French partners.

Very helpful. Thank you very much.

Thank you. Thank you. The next question from the phone is from the line of Daniela Costa of Goldman Sachs. Daniela, your line is now open.

Hello, can you hear me? Buongiorno, Roberto. All the best for the new role. Hi, Alessandra. This is Victor from Goldman Sachs on Daniela's line, actually. I have a couple of questions. So the first one is relating to statements. I was wondering if you could help us understand the restructuring cost of about $31 million that I think you reported in 1H, first question. And looking also at the net financial expense, which doubled year over year, I was wondering if you could explain the driver of here. I presume that It's driven by floating and the rise in rates that we have seen. But I remember well your guidance for financial charges this year. It's about 230 million euros. So is this 1H figure in line with the guidance that you've told us earlier this year, or should we expect a figure higher than this looking for the rest of the year? So I'm wondering if you could get or help us understand the cost of debt that you're expecting for this year. And if you could frame, like, possibly on how you see the free cash flow bridge and if some parts have changed at all, especially when thinking about working capital. I think you gave some color already in your presentation. But, yeah, thank you very much.

Sure, Victor. So I'll start answering the question in the order in which you have posed them. The restructuring costs of 31 million include mainly for 20 million the extension of the accelerated retirement plan for staff function of Leonardo to a higher number of employees, which now accounts for 490 people totally. and this is the provision that is added to the provision that we booked last year on the balance sheet. The remainder is associated with the restructuring that Leonardo DRS has done in one of its businesses to right-size the workforce and modify the production layout. With respect to financial expenses, the guidance for the full year is unchanged. So the 230 that you have in mind is confirmed. The year-over-year comparison is as planned, so it's no surprise. The delta is mainly accounted by higher interest rates on funding on variable rates. And there are two other elements. One is associated with FX performance. As usual, you know, there are some movements on FX activities done to hedge our commercial business, as well as on a holding that we do not consider strategic and we value with the equity method. Last year, it had a one-off exceptionally positive, which this year is not repeated, and that accounts for a delta of 20 million out of the 50 that we recorded in financial expenses. Finally, on the profile of free operating cash flow, what I would expect is that in the month and in the quarters to come, we will continue to see a relationship between last year and this year, which encompasses the improvement in free operating cash flow that we have experienced in the first two quarters, reflecting the speed at which we are collecting cash-ins from customers, as well as a tight control on working capital. So all of this is progressing in the right direction in terms of operational actions, industrial action, and is translated into a year-over-year significant improvement in cash flow.

Okay, thank you very much.

Thank you. Let's take two questions from the web. The first one is from Ross Lowe, Morgan Stanley. What level of leverage do you expect for the group going forward, given your plans to make investments and potential M&A in the space and cyber domain?

Mixed answer. You can start. I want to say something.

Sure. The plan is to maintain the leverage targets that we have had to date. We have a very disciplined financial strategy that has proved us that has delivered a rating upgrade, an important rating upgrade from Moody's to investment grade, and we want to continue on this path. As Roberto mentioned, all M&A opportunities will be in line with this financial discipline that we have adopted to date. Please, Roberto.

Yeah, yeah. Well, I want to say that there will be no step longer than the leg. We know exactly what we need. This is a kind of improvement of some of our technologies. We're monitoring carefully the market of small and medium enterprises. We will do what we can do, we can afford for. We have some different possibilities, of course. We're analyzing from the financial point of view. But as I said, no step will be longer than the leg. This you can be really sure. We know exactly where we want to go.

Let's take another question from the web. Good afternoon. You mentioned increased spend on R&D. Can you please be more precise? How do you see cash R&D trending at Leonardo? Also, how important is M&A to your strategy? And do you plan to wait and settle in the position of CEO for some time before engaging in M&A? Or do you think that you can go ahead and move ahead sooner versus later?

Good. I like the question. So we invest remarkably on R&D. As I said, I like to see the internal structure of the global investment, which is 13%. As I said in my presentation, there is a part that is real research, another part which is development, and another part, the majority, which is product customization. This all contributes to the global idea of R&D. If you see the peers, the high tech peers, they're not that far from what we do. They invest a little bit more in the R. So this is normally, let's say R&D should be in the range of 5% globally. If you take the real R&D, that means TRL from, two, three, two, maybe six, seven. Don't take this too strictly, just to give you an idea. We don't need to do that much. We need to focus a little bit on investment to redirect some investment on marginal activities, on something which is more core, eventually investing a bit more, but well within our possibilities. Don't forget that we are investing. We're actually, we're making, basing our strategy on a brain-driven technology. I want to make examples so I clarify what I'm saying. These are not simple words. If I make a satellite service interpreting images for infrastructure protection. I want to do the same thing I'm doing now, but with generative AI. So I want to have much more advanced models to evaluate, to get the information, to extract information from images. So this means investing in AI and brains, not investing in hardware or big CapEx. Similarly, when you make a cybersecurity product by design, you're investing on services. So this does not need money. This needs brain primarily. We have to invest more in brain. Second thing, the CIO, the chief innovation officer, that's a very good question. Thank you. You give me the possibility to anticipate. I kept on my, let's say, transitory under my direction, the CTO and CIO, the situation now is fortunately is over. I think already next month I will change the organization, complete the organization. There will be a chief innovation officer and there will be a strategist and a many officer. So with this, the pipeline will be that the organization will be completed. I don't want to wait. We are in a hurry. As I said, sense of urgency is very important. We have three years. We don't have 20 years. And the world is faster than we are, so we need to accelerate.

Let's take, again, another question from the web. I'm putting together two questions, both of them from Monica Bosio in Tessa San Paolo. I know that the details will be given in the occasion of the business plan, but can you indicate a rough percentage of R&D going forward and if you will push on capitalization or not? And the second one is, would you see feasible in the future the disposal of some activities that do not perfectly fit with Leonardo's hire

technological content going forward I answer the first the second question before we're gonna cut things that are outside the ambition and outside the the domains that we have identified this this is already ongoing actually it's in progress I mean today before this meeting we had our board and I anticipated to my board members there are three four activities that will be cut in the next few months to be very frank that money will be recovered to make a bit more research so it's only saving that is transformed into into investment So investment, I mean in brain investment. So I can't give you a number now for the R&D. Honestly, I don't expect to go from 13% to 15%. That would be impossible. And my CFO here, for sure, would kill me. Let's say we can redistribute internally to a specific amount of money what could be mandatory to develop quickly our new products and our new services. But as I said, everything will be under control with a very prudent approach to the change and to the development.

Let's move again, unless you want to add anything. Let's move again from question coming from the call.

Thank you. Next question is from the line of Virginia Montosi of Bank of America. Your line is now open.

Good afternoon and thank you for taking my questions. And Roberto, good luck with this new adventure. I just had a quick question for you. When you talk about portfolio optimization, could you give us a little bit more color on what exactly you're thinking of? Thank you very much. Sure.

A few examples. We're working, investing on specific drones, technologies like the Sky-Dweller. This will be cut. No point. There's no point. Apparently, no big market. It's a little bit outside the focus. There are activities that I found here, like electric buses. This will be cut. It's outside the portfolio. We're going to rationalize a little bit the wide portfolio of electronics, very high quality portfolio, by the way. But we can do some rationalization. Yes, we were discussing with our colleagues in the IRS. There is some overlap. We're trying to optimize a little bit interaction. Of course, these are different defense markets. We are perfectly aware that some technologies, USI only, some others maybe Italy is only, but there is also room for improvement and synergy and refinement of the portfolio. About space, there is a lot of activity ongoing, but maybe some of the, just make an example, I would never invest at the moment on telco satellites. I mean, the market is going towards one euro cent per kilobyte, so this is going to be a tough market, especially for telco operators. I don't think this is in our DNA, so I wouldn't go in that direction. So this is the kind of technical analysis which is immediately connected to the market analysis. And it's very easy to establish, to set the line above which we can go.

Thank you very much. It's very clear.

Very welcome.

Let's take some additional questions from the web. The first one from Nick Cunningham, Agency Partners. Have you talked to Thales about moving to 50-50 control of space? Do you expect to inject capital or more operating assets to get to 50%? Will the French government agree? And probably I will put also another question here, which is coming from Ian from UBS, who says, what does recover asymmetry with JV partners mean? When you were talking about Thales, are you unhappy with the partnership? And then you spoke about the need to rationalize some businesses and not do lots of things but focus Which business lines do you feel are non-core or do not help you achieve your vision? And final one, there is a lot of new information here. When will you hold the capital market day or go through this in some details?

Yeah. So concerning the question about rationalizing the portfolio, I think I answered to the question of the previous speaker from Bank of America. I hope this was enough. Possibly this question came before. I'm, of course, available to give more details. But I hope I gave a clear idea. So I will go over this. But please write again if you want more. Concerning the symmetrization, the collaboration, First of all, I have to say that I met the CEO of Thales, so we started the discussion very frankly and very friendly. Second, I never said I want to have 50-50 joint venture. We don't have 50-50 joint venture. We have participated companies that are two-thirds Thales and one-third Leonardo and vice versa. And the symmetry should be eventually in how we manage budget-wise, balance-wise, and the relationships among the two controlled companies. But this is very simple to be done. So there is maximum agreement. It's something we have to discuss. Over the years, things have been changing. Those are agreements that started 15 years ago. I don't have a legacy on that. I want to see very clear, transparent things. We are all convinced that we have to work together because we have to do much better. But as I said, this is just a... maintenance of agreements that are 15 years old. So honestly, this should never be seen as a sort of competitive behavior, a competition behavior. This is a collaborative behavior. But we have to do very clear and symmetric basis, because we are talking of technology. And technology needs clear agreements as a main point. You will see those things much better over the next few months. We are working on that. In some sense, I keep a little bit confidential, then I cannot say much more. But this is the spirit I'm working on.

Then maybe a question from the call.

Thank you. The next question is from the line of Martino D'Ambrogi of Equita. Martino, your line is now open.

Thank you. Good evening, everybody. All the best, Roberto, also from my side. The first question is from a strategic standpoint. What's your view on DRS as a separate listed entity, second on Hansel, the 25% stake, and the third on Otto Melara which was under discussion in the recent past for M&A and so on. And last question for you is on the risks, because you talked a lot about opportunities, about the strategy, but what are the main risks that you are worried about? And last question is for Alessandra. We are talking about cyber, but what are the starting figures in terms of sales margins and so on for this separate entity? Thank you.

Thank you. So let me ask. Let me let me answer to your basic question about the risks. I'll be very sharp, very clear. The risk is that if we don't evolve, we'll be more and more followers. So this is the risk I see with all the consequences on the long term. So I don't want to talk about the risks because those are evident. Technology, defense, warfare, but even civil applications of technology are growing so fast. Digitalization has changed the pace completely. And no one can work with inertia. 10 years ago, if I had told you that NASA would have stopped launching things and would have collaborated with private organizations, possibly you would have not believed. So things are changing so fast that we have to be fast. So once again, I want to transfer the sense of urgency. There is no risk in feeling urgency. The risk is if you don't feel urgency, to my opinion. Concerning your broad question about the land defense programs, okay, DRS is an asset, prestigious, working very well. At the moment, we control DRS by 82%, I think, if I remember correctly. Good. We are thinking what to do. We are in close contact with our collaborators. We'll see over the next months. Concerning the land, European space of defense, because I'd like to talk in terms of European space of defense, not really Otto Melara versus KDNS or versus Ensold. In Le Bourget, I had the chance to talk to the defense and the secretary of the German government, to talk to the CEO of Enso, to talk to many other stakeholders. And we were analyzing very carefully the situation. And please be aware that, well, no, no, I mean, I know you are aware. You are aware, you know that over the last two years, the geopolitical situation in Europe has changed dramatically so that plans and programs that were anticipated, were designed five years ago, four years ago, all of a sudden became old or eventually impossible. And this is what we were discussing. So we are working now with the German companies and with our experts trying to find, to analyzing all the possibilities to have a stronger European space of defense, but with mutual benefits among the companies. So what I can tell you now is that we are really working every day for many hours on the analysis of those programs. Things have changed a little bit compared to maybe 18 months ago. And we're responsibly analyzing all those things. And in the strategic plan at the end of the year, beginning of 24, you will find the idea that we're developing. Allow me now not to be too explicit, because you understand it will be too early. Whatever I say now could be wrong, potentially. But what you can believe me, we are really focused on this issue, but really focused. There is a task force of people that is doing this 24-24 almost.

Okay, Martino, on... Otto Melara?

Otto Melara is part of the game because, as you know, when you think to land defense, yeah, Otto Melara is a part of the game.

On your final question, Martino, on cyber, the cyber business within Leonardo is a good business that has been growing well at the same pace as the market, which translates, as you know, in a high growth rate. We have been engaged in key strategic programs such as the poll for the national cloud for the public administration, the Italian public administration. There has been an opportunity that we have brought home last year and which we are going to deliver over the coming decade at a fast pace. As I've mentioned at the beginning, commenting the first half results, we have also won orders combining the cyber capabilities with the defense electronic capabilities of Leonardo. and working on the JOC-COVI, the Joint Command Operational Center for the Joint Interforce Center. So that is another important milestone that we have achieved. And going forward, we do see opportunities to leverage the platforms of products as well as the defense electronics capability in combination with cyber and make all the products native cyber with the model that Roberto articulated before.

Martino, let me add something to what Alessandra told you so far. I mean, of course, as you know, during such a fast evolution, a lot of the result depends on people. So cybersecurity was a little bit undersized, let's say, not very performing. And we had a managing team that was really doing a good job. And today, cybersecurity... It works well. But there is a lot of room for improvement. So we have changed now the top management with the new class of people having a different profile, more technical, more market-oriented. And the new cybersecurity division has been moved into new building where there is the high-performance computing facility, the cloud computing facility, the Leonardo Labs, with about 70 experts, young people below in the range of 25 to 30 that are AI experts. And so these people that work all together. I expect the second phase of the cyber division to benefit of this change in terms of vision management. And this is possible because the previous management of cyber division did a good job. So I expect this to be a sort of small game changer within the company. This is why I dare to say we should make cybersecurity products by design. So products that are cybersecurity by design. And we also should have the strength to guarantee the service, because if I sell you an object, And this object is cyber secure. In the end of the day, the value is no longer in the object itself, in the platform, but is in the service to upgrade the cyber security over years and years. And this is one way to increase cash conversion using the same skill we have now. So it's a smart revolution if we manage to make it.

Let's take two additional questions from the web. The first one from . Roberto, how do you feel about the diverse number of JVs and small stakes? Is there some thinking on having more control?

Oh, thank you. That's a very good question. I'm a CEO since 18 weeks. So you imagine, maybe I even don't know everything. I was in Leonardo for two years before having this long parenthesis as a minister. So I might lack a complete vision. However, what I've seen to me needs some work. I don't like very much to have many minority participation in JVs. But of course, this comes from the past. So we had a meeting two days ago, and Alessandro is here witnessing this. We were discussing how to do this. I would like to avoid too many small participation, minority participation in joint ventures, since we cannot make big discontinuous jumps, because we are all reasonable. I like the idea maybe to transform progressively the most important initiatives in something like the MBDA model, where at least we are one-third, one-third, and one-third in the idea of a multi-stakeholder European venture. So that could be a reasonable progress of the most important joint ventures. But in general, I don't like to be the minority part of all the ventures, to be honest. Yeah, I would like to change this. It might require a little bit of time, but I'm gently hostile to the concept to participate in too many things without leaving.

One more again from the web, a follow-up from Ian at UBS. In the release, there is a language within a restructure suggesting demand from Airbus was reduced. I don't see this language in the Q1 release. Did their demand signal change downwards in Q2?

What we are seeing is that the pace at which Airbus is progressing is clearly a good and solid upward trend. Evidently, there are some challenges that all of us in the aerospace and defense business are facing, and that is an element that I think you have heard also from the recent Airbus presentation, where the focus is now more on a medium to long-term objective, versus a 2023 plan to raise production. So in summary, we do see a good increase in demand from Airbus in a context that within the supply chain for our key customers, key customers in their supply chain may be facing some elements of slowdown, which is not represented by Leonardo, to be very clear, but by other suppliers, and that may determine a slower pace in growth, in any case, for the entire system.

Let's take the final question from the call. I think, Gabriele, up to you.

Thank you. From the line of Gabriela Gamberova of Banker Ancoros, your line is now open.

Yes, thank you, and congratulations for the new role, even from my side. I was just wondering if you can share with us your thoughts on the infrastructure business. I mean, how do you see it in general? Yeah, yeah. And regarding... Again, the defense electronic business, even in this case, I was wondering, very generally speaking, if you can share with us your thoughts in terms of size, in terms of presence. I mean, how do you perceive this business?

All right. So let me start with aerostructures. Clearly, aerostructures underwent a dramatic crisis with the COVID because there were no orders of aircrafts. And those people are manufacturing big parts of aircraft. So that was, I mean, it was really difficult for them. However, let's say that ATR orders are increasing. Boeing 787 are increasing. According to our plan and according to the agreement we have with the mother companies, with increasing the number of orders at a given point, I think by 2025, we should reach the limit of, I guess, 10 or 14 fuselage. I don't remember the number. So from that point on, we should be at the break-even point. The good stuff is that people there are growing. with the expected pace, but also this time has been used to improve substantially the quality of the manufacturing. We changed a lot of equipment there and now we have digital systems Very high precision. The quality is really remarkable. We heard about other providers in the supply chain of the big names, Boeing and Airbus, having problems in the quality. So maybe we should on one hand wait for 2025, reaching the break-even point according to the market request, which is fortunately growing. But on the other hand, we should also leverage on this advanced capability. The improvement was remarkable, actually. That was not expected at the beginning. So maybe this could open new perspectives. And as I said in my presentation, we should never stop searching for new applications and new market areas for a group of plants that actually has expertise in assembling fiber-based composites. And this is not only for aircraft. So maybe in the future we could identify other classes of products, maybe unmanned, maybe space applications. So we should seriously consider other opportunities of business. But of course, right now, we have to keep on track. We have to go to the breaking point. And we have to hope that the aircraft market grows as expected. At the moment, the trend seems to be favorable. Concerning electronics, well, these people have revenues for more than $6 billion every year. And they have really excellent products. I know that we can optimize a little bit the portfolio, maybe some overlap or some minor product can be cut. But let me tell you something. I have in mind the challenge for that. In some product like the Hyper Spectral or some of the Raiders, they are really world class. And maybe they are making products that are kind of Ferrari like, you know, state of the art, high end, super top, very expensive. But of course, you don't sell many of those products every year. But if you are able to do very high quality products, maybe you can scale down a little bit to making something cheaper for, let's say, easier applications. That could be something to consider. Especially due to the fact that I told you before, 2,500 satellites will be launched every year in the next 10 years. Those satellites will need spectrometers, sensors, optics, hyperspectral, all those things. So maybe considering the possibility to Occupy part of that market of let's say the low and the low-end market could be a way Could be a pathway to follow for increasing the the revenues and and the margins But this is something we're discussing with our engineers and with a with the top management of the division Anyway, I think this is this is a very competitive division. So I'm not so worried to be honest I think they they have their market and they know where to go. This is some additional idea that we are investigating at the moment and I hope I answered.

Yes, thank you very much, Roberto. Welcome.

This was the final one. Last?

Okay.

Yeah. So thank you very much to all of you for this call. Thanks, Roberto, Alessandra. As usual, the IR team is available for follow-ups.

Thank you, guys. Goodbye.