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.