Leonardo SPA (LDO.MI) reported a year of positive growth and strategic advancements in its preliminary full-year 2023 results. The company, a global high-technology player in Aerospace, Defence, and Security, saw a 4% increase in orders to €17.9 billion, surpassing guidance figures. Revenue also rose by 3.9% to €15.3 billion, meeting expectations. The EBITDA margin improved by nearly 6% to €1.29 billion, and free operating cash flow surged by 17.8% to €635 million, both exceeding the company's guidance. Additionally, Leonardo reduced its net debt by 23% from the previous year and achieved investment grade status from all three rating agencies.
Key Takeaways
- Orders increased by almost 4% to €17.9 billion, exceeding guidance.
- Revenues rose by 3.9% to €15.3 billion, in line with guidance.
- EBITDA margin improved by nearly 6% to €1.29 billion, meeting expectations.
- Free operating cash flow grew by 17.8% to €635 million, ahead of guidance.
- Net debt decreased by 23% from the previous year.
- Achieved investment grade status from all three rating agencies.
- Strategic changes include organizational transformation and new key appointments.
- Focusing on digitalization, AI, cloud computing, and data analytics.
- Formed strategic alliances, including the Space Alliance with Thales.
- Committed to sustainability, reducing CO2 emissions, energy consumption, and water use.
Company Outlook
- Leonardo will present its new industrial plan and guidance at an Investor Day on March 12, 2024.
- The company plans to boost organic growth through new services and digitalization, with a focus on cybersecurity and space observations.
- Division specializing in new space services is projected to generate revenues of around €0.9 billion for 2024.
Bearish Highlights
- SATCOM business facing challenges due to market crisis.
- Supply chain delays affecting the ascent to higher production levels.
- Thales Alenia Space's SATCOM business is in crisis, Leonardo working with partners to find a solution.
Bullish Highlights
- Strong order intake and revenue growth across all divisions.
- Aerospace division continues strong delivery and profit.
- Telespazio joint venture reported positive growth in sales and high-single digit operating margins.
- Reduction in gross debt from €3.6 billion to €3 billion and net debt from €3.1 billion to €2.3 billion.
- Improvement in cash flow generation.
Misses
- The company anticipates reaching break-even point in 2025 but had difficulties providing specific numbers.
Q&A Highlights
- CEO Roberto Cingolani emphasized the transformation into a technology-based company.
- Discussions on cooperation with Bell for tilt-rotor technology and a potential joint venture with Hensoldt.
- Negotiations with Boeing (NYSE:BA) and Airbus ongoing, with a 10% price increase on the 787 achieved.
- CEO Alessandra Genco stated recovery of the ATR consortium is robust with a 44% year-over-year increase in aircraft delivery.
- Supply chain delays are significant in cheaper platforms like ATR but expected to improve throughout 2024.
Leonardo's earnings call highlighted the company's resilience and adaptability in a challenging market, with a clear focus on strategic growth and sustainability. The company's commitment to innovation and strategic partnerships positions it well for the future, as it continues to navigate industry challenges and capitalize on its technological advancements. Leonardo's management remains focused on reducing debt and improving margins, with an eye on long-term growth and shareholder value. Investors and stakeholders are likely to watch closely as Leonardo unveils its new industrial plan in the coming Investor Day.
Full transcript - None (FINMF) Q1 2023:
Operator: Good evening. This is the Chorus call Conference Operator. Welcome and thank you for joining the Leonardo Full Year 2023 Preliminary Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. Please go ahead, madam.
Valeria Ricciotti: Good evening, ladies and gentlemen, and welcome to our full year 2023 preliminary results conference call. Today, our CEO, Roberto Cingolani, will take you through the important progress that we achieved during the last year and how we are positioned looking forward. And our CFO, Alessandra Genco, will then take you through the full year 2023 preliminary results. We will then welcome your questions. It should be noted that the approval of the Leonardo's draft annual financial statements and consolidated financial statements as of 31st of December 2023 is scheduled for 11th of March 2024. Therefore, the information throughout this call is to be considered as preliminary and referable to the current day. The preliminary results of the 2023 financial year have not been audited by the independent auditors. As you know, we will be holding an Investor Day in Rome on the 12th of March to present the Leonardo Industrial Plan, and included in that, we will also then be presenting our guidance plus our medium-term targets. Now, I will hand you over to our CEO.
Roberto Cingolani: Yes, thank you, Valeria. Hello, everybody, and thank you for convening this evening to this call. And once again, thank you for accepting that we anticipate the preliminary results, just because we don't want to accumulate too much information on March 12, when we will have the Investor Day. So, in short, in pills, then I will leave the stage to Alessandra for the detailed presentation, I think we conclude the 2023 with good numbers. The orders have been growing by almost 4% year-over-year, up to €17.9 billion. This is ahead of our guidance 2023. The book-to-bill is in the range of 1.2x bigger than [indiscernible]. And our revenues are growing by 3.9% compared to last year, reaching €15.3 billion. This is in line with the guidance. It's reasonably consistent with our strong backlog. The EBITDA margin has been growing by almost 6%, 5.8% year-over-year, up to €1.29 billion. This is in line with the guidance. And the free operating cash flow has been growing by 17.8% compared to last year, up to €635 million. This is ahead of guidance. Finally, the net debt has been reduced by 23% compared to last year. Also, this parameter is ahead of guidance. In general, we think the results are good, mostly representative of actions that have been taken in the last years. They are for sure promising in view of the forthcoming new industry plan. But we know there is a lot of room for improvement and this is what we hope to achieve with the new plan that will be presented in approximately 10 days. Our key messages for what we've been doing over the year 2023, we have made a number of strategic change in recent months and we have been working a lot over the last few months on the industry plan. Actually, you remember from the previous meeting that we had over the last quarters that we have promoted quite the transformation of the organization. I think we can consistently say that the business has been improved, the numbers have been growing steadily. We are on track for the recovery plan of Aerostructures that has been always a weak point over the last few years. We have a linear organization, stronger and simpler. We have reduced the number of reports from 26 to 10, the first reports of the CEO. We've improved the general balance, by the way. We have appointed new key figures such as the new managing director of the cyber division, the new Chief Innovation Officer, the new Chief Strategy and M&A officer. We are investing a lot on digitalization, artificial intelligence, cloud computing and data analytics and this is turning out to be the tool for improving our products. Concomitantly, we've been cleaning the portfolio of products and also we have stopped the number of businesses and the activities that were off core business given the new directions that Leonardo is taking. As you remember from our recent discussions, we successfully renegotiated the Space Alliance with our partner Thales, so that we were able now to create a new space division. This is the new business division in which we will consolidate the Telespazio Company. The two-thirds of the joint venture that we share with Thales. And on top of that, we have incorporated all the space electronic line of business into the new space division. So this is now a rather robust business unit for – business division for Leonardo that allows us to get into the Space Alliance with a totally different approach. And there is – and in front of us there is a period of transformation. As you know, Europe is discussing quite a lot about the future strategic choices for space, so Leonardo now has a structure, which is dedicated to space activities. Alessandra will show you a new approach and simplification of the financial results, so I'm not taking too much time for that. Let me go a little bit ahead because I would like to mention the work which has been done over the last few months for the international alliances. We are firmly convinced that Leonardo can be a catalyzer for strong international alliances in view of the future European space of defense. Obviously, needless to say, this is going to be under the umbrella of the Atlantic Alliance. It's not a competition. It's just to make a more robust alliance, to be clear. One of the main actions is dealing with the GCAP, the strategic fighter, in collaboration with Japan and the UK. That's a complex initiative, as you know, long lasting with an immense budget. We have gained a significant role in this consortium. We will develop several platforms, so that includes a cross domain capability, radars, electronic warfare, electro-optic infrared sensors, communication systems, system of system technologies, simulation. So this is now under discussion with the partners. There has been a lot of work done for the land defense space, together with KNDS, primarily dedicated to the tank technology, but also into the future for the infantry vehicles and other strategic land transportation systems. I am sure you remember that a few months ago, we have finalized also the new agreement with Fincantieri for maritime applications, primarily dedicated to the development of warfare and electronics for battle ships, and for the submarine applications. This opens up quite a broad market worldwide, definitely well beyond the domestic market. And we have recently reopened the discussion with the colleagues of Hensoldt in Germany. They have change in the top management. So there is work on going. We are still very positive about the potential perspective of the Hensoldt and Leonardo collaboration. More importantly, we have closed or we are exiting products that are off core business, Skydweller, the solar-powered drone are being canceled as a product line. Similarly, we have interrupted our participation into the joint venture for Industria Italiana Autobus for electric buses, which was absolutely out of our core business. Things are doing quite well with DRS. If you remember, we have sold some 8% of our stocks, but now we are discussing with DRS for the further collaboration. Things are running quite well with our American partners. And well, least but not last, the three agencies have confirmed investor grade for Leonardo. So we have to keep this as a very good result. And of course, we have to do our best to keep this aligned for the next three years and possibly to even improve the revenue. Let me give you just a few bits of information about our ESG progress in view of the sustainability balance sheet. Considering emission in Scope 1 and Scope 2, our decarbonization strategy seems to be quite successful. We have diminished by almost 10%, 9.5%, to be precise. The CO2 production in the Scope 1 and Scope 2 emissions, as I said, despite concomitantly to an increase of the production. So not only we increase the production, but we reduced the Scope 1 and Scope 2 emission, that's because we made a lot of work for optimizing, the manufacturing and also investing in the supply chain. We have decreased substantially, energy consumption, primarily due to the efficiency in our manufacturing line. And we have increased the percentage of green energy that we use in the company, partly by sub-production, partly by having new contract with energy suppliers that are selling green renewable energy. We have decreased water use, water consumption and water withdrawal in our manufacturing systems. Concerning focus on innovation, another important ESG KPI, we are still keeping very high our investment capability on research, development and product development up to 14% this year, compared to 12% last year. Of course, it's a considerable part which is product development and product optimization, but this for a high-tech company is quite normal. Data computing power per capita has been increasing by 4.3% as well as data storage capacity per capita underwent a sharp increase up to almost 14%. This means that we are massively investing in digitalization, both high-performance computing, and cloud and sub computing together, and this is a mandatory for developing our AI strategy and product digitization strategy. About diversity and inclusion, we have reached 30% gender ratio. I mean we can do much better than that, but you have to consider where we started from. So we are strongly committed to improve this KPI as much as possible over the next years. And at the moment, 55% of the group funding are ESG linked. So we're careful with the transaction of the funding sources. In summary, of this short overview, I think in 2023 was good. We outperformed or we reached all the targets given by our guidance. We're progressing on strategy, and we're focusing all our efforts on the new strategic plan that will be delivered in the last 90 days. The aim is transforming Leonardo into a strong technology-based company. Let me say something about March 12. Transforming Leonardo into a more technology-based company means basically moving towards multi-domain solutions across geography and across platforms. And this means radically moving from a company that has divisions working vertically on platforms into one company that works on a multi-domain with the digital continuum that essentially covers the interactions among the platforms. It's a part of the change in terms of technology, product and even company organization. The second point is that we are strongly committed in strengthening our core business. Of course, we know that aircraft, helicopters, electronics, aerostructures, represent the core business we need to continue to boost the organic growth of our product to be competitive, including new services, new digitalization to adopting more and more digital twin technologies for the design of the new platforms, including services such as training, simulators or periodic maintenance. But in the meantime, we are now in the presence of a very special window of opportunity. We have seen how defense is becoming a sort of a component of a much bigger challenge, which is global security, and global security means we have to develop a strategy that has to do with cybersecurity signal, monitoring and observational space. So while we are consolidating our core business, we have to develop simultaneously to pave the way simultaneously for future, and the future has to include a very strong capability in cybersecurity and a strong capability in space observations. We will make very selective choices and this will be the core of the plan that we will introduce you in a few days. And I believe that the data of 2023 are promising. In view of what we are going to propose you in a couple of weeks time. At this point, I would like to give the stage to Alessandra, who is going to give you all the details and numbers. And then of course, we'll be very happy to answer and address your questions and comments. Thank you for your attention.
Alessandra Genco: Thank you. Thank you very much, Roberto. And now let me talk you through the group financial results for 2023. The preliminary numbers are good and we have seen very positive results throughout the group as anticipated by Roberto. We have delivered in line with guidance and in some cases above guidance. First, I just want to mention how we are simplifying the presentation of our financial results going forward. Showing a separate space division, reflecting strategic importance and consolidating the contribution of [indiscernible] reflect the greater influence we now have in this joint venture. This is how we will present going forward. And we have set out pro forma numbers to show you how this is going to look from 2023, as well as a comparison with the previous year 2022. So let's look at the key financial highlights for the group. They show a very strong commercial and financial performance. Particularly order intake has been very buoyant and we have seen continued strong commercial momentum across the group, recognizing the fact that we have strong positions in both domestic and international markets and the strength of our products across divisions and across domains. Group order intake was €17.9 billion, up 3.8% and actually ahead of guidance. And resulting again in a book-to-bill well above one-time. group revenues were €15.3 billion. So we have seen top line growth of 3.9% year-over-year, meeting our target guidance with positive performances in all areas. And that's the result of a very strong order backlog that we are starting to deliver at a faster pace than before and being able to navigate around the challenges across the supply chain. We have delivered the group EBITDA in line with where we were planning to be, up 5.8% to €1,289 million with a group return on sales of 8.4%, reflecting a good performance across the entire group. This result shows we continue to manage well the inflationary pressures that were ongoing last year and believe that the worst is now behind us, and it also includes the current negative but improving effect of Aerostructures. Higher free operating cash flow of €635 million was in line with expectations and beating our target with solid cash generation across core defense businesses. Good cash-ins across the group as we deliver on contracts and the cash absorption of Aerostructures falling in line with plans to €264 million from €293 million. Net debt was reduced to €2.3 billion on the back of the improved free operating cash flow and the sell-down of 8% of our shareholding in DRS. So we have seen very positive results throughout the group, in particular in defense electronics and helicopters. These are two driving segments in combination with cyber, where we're seeing growing markets. We're delivering well on backlog, which now stands at a record level of almost €80 billion, and we are improving free operating cash flow trends. And the Aerostructure recovery continues to make progress and we are on track on the plan. Now, let's go deeper into the results and performance at business level. Starting with helicopters which delivers about another year of robust performance. New order intake was €5.5 billion, another extremely strong commercial result. Below the previous year but remembering that 2022 contained the jumbo Polish AW149 order that was €1.4 billion. We saw strong demand on the defense side and further evidence of the civil side steadily recovering well. Notable orders won during 2023 include 18 AW169 for the Austrian Ministry of Defense, 13 MH139 for the U.S. Air Force, and a growing number of orders on the civil side, mainly related to the AW139. Revenues increased €4.7 billion, up 3.9%, with a good buildup of deliveries rising to 185 new helicopters, up from 149 the previous year, offsetting a finalization of deliveries on the NH90 Qatar. All the other lines, especially the dual use helicopters, grew significantly and we also saw a significant increase in the contribution from customer support as the fleets are back in full operations. EBITDA was €400 million to €422 million, up 1.7% with stable margin and return on sales of 8.9%, reflecting the mix and showing our ability to absorb the effects of inflation. In electronics Europe, we saw strong performance and positive growth across the sector, in domestic and international markets and in particular, in defense systems. Very strong order intake in 2023 with 6.5 billion of new orders, an increase of 16%, making it the division that is growing fastest in order intake. We saw growth across all business areas and strong demand continuing for both sensors and defense system solutions where we had an important series of contracts for the upgrade of platforms in airborne layer vehicles for the Italian army, the Ariete tanks and related logistical support. Importantly, we signed the major UK order for the Mk2 new radar for the Royal Air Force Typhoon fleet. We saw orders for the Italian Army Command Post and an order for KRONOS radars for the Italian Air Force. And in the cyber sector, we are pleased to see more orders, including the order for the establishment of the Joint Operation Center, JOC of the Joint Operational Command of the Joint Forces, COVE of Defense. Other orders came from political, military, economic, social, information infrastructure and information knowledge management. Revenues here were €4.9 billion, up 4.1% with positive growth across the sector. EBITDA was €600 million, up 8.5%, with return on sales increasing further to 12.2% on the back of growth in all main domains, plus cybersecurity and greater contribution from our joint ventures. So defense electronics Europe is performing very well at both revenue and profitability level and we're seeing the results of volumes, increasing operating leverage and more attractive cash cycle.
,: Then, speaking about DRS, Leonardo DRS. The company released its results two days ago and here, we have achieved good progress and growing year-on-year in line with expectations with benefiting from key areas of strategic focus, including force protection, integrated sensors and naval power propulsion. Also another very good year in order intake increasing to 3.5%, $3.5 billion in dollar terms. DRS won a number of important contracts in the year. Let me mention to you a couple. Supply of electric propulsion components for the next generation U.S. Navy Columbia-class submarines, which, as you know is a key area of major strength for the company, which covers most of the components for the remaining seven Columbia-class submarines, plus additional orders for the supply of infrared measures for the U.S. military. Revenues grew year-on-year in line with expectation up 2.2% to $2.8 billion, and EBITDA grew to $273 million with a return on sales at 9.7%. All of this is reflecting still the effect of development stage contract not yet at full margin potential, which is typical of the production stage. In aircraft, we saw continued strong delivery and profit and even higher margins. Order intake in the year was some €2.4 billion, down 14.5% as we continue to have a solid contribution from the fighter business and the cargo aircraft. But we saw a slippage of some order in the export market related to proprietary programs, which we now expect to book in the first half of 2024. Revenues were lower by 4.8% at €2.9 billion as the previous year had benefited from the IFA Kuwait ramp up, but profitability continued to be very strong with EBITDA increase up from 13.6% in the previous year, with a leading contribution to profitability coming from the Fighter business. We’re also building up the attractive customer support activities and continue to work on proprietary programs to deliver continued growth and maintain our strong margins. Looking forward, we see growth from export markets for proprietary platforms and ongoing strong contributions from the Fighter business both Eurofighter and F-35. We see a solid outlook for the Eurofighter, Kuwait and all the other Eurofighter programs. There is a pipeline of potential new aircraft as well as spending on Eurofighter capabilities and upgrades. A clear technological roadmap is ahead of us to keep the platform at the forefront of European defense for the next two decades. And on top of this, we have the opportunities in trainers and in cargo aircraft and the new important opportunities to gain key positions in the unmanned domain. Aerostructures continue to make progress on track with recovery plan and reducing losses year-on-year. The shape of the recovery curve is in line with what we had expected and the business is growing as a function of growth in the market and increasing delivery levels on all programs, particularly at the importance Grottaglie site where we manufactured B787. New orders in the year were higher 644 million in line with expectations and a significant increase of 55% from the previous year, reflecting the recovery in the civil aeronautics business across the Board from Boeing to Airbus and ATR. Revenues grew 33% to €636 million and losses at EBITDA level reduced by 20% to €151 million. This includes a contribution from ATR which also made further progress achieving almost €1.2 billion in revenues for the first time since the pandemic and also supported by a record year of services with revenues of over €400 million as platforms are operating – fully operating back to pre-COVID times. ATR saw a strong increase in aircraft sales, which rose 53%. The company delivers 36 aircraft in 2023 versus 25 in 2022, an increase of 44% that shows the appeal of the platform from the market standpoint and ATR’s capability to convert this demand into deliveries. ATR’s contribution grew to a positive €12 million in the year on the back of higher deliveries, good performance in customer support and services and the acquisition of new customers and new routes open with ATR aircraft. I want to spend a bit more time on space in this presentation. As you have seen, we will be consolidating Telespazio in line with our management influence following the recent amendment of the joint venture agreement signed between the two CEOs, Roberto and Tales CEO. Because we see our newly created space division as a strong growth area for the future, I want to give you a sense of our space activities today and explain how we are going to disclose the performance going forward. The Telespazio joint venture specializing in space services with sales of around €700 million and high-single digit operating margins. Then the [indiscernible] joint venture specializes in satellite manufacturing with leading and profitable positions in the growing observation, exploration and navigation market. But a portion is also referring to the commercial telco market, which has been very challenging. On the slide here, you can see full year 2023 figures for the space division restated on a pro forma basis that includes the full consolidation of Telespazio. Sales were €700 million, increasing 7.8% compared to the previous year. Orders were around €760 million slightly decreasing compared to 2022 and EBITDA decreased due to the task performance, negatively impacting margins, mainly related to the development costs in the manufacturing segment of the commercial telco business. While Telespazio grew its operating result compared to 2022, confirming the positive trend. Importantly, we have continued to make progress this year in improving our cash flow generation. You can see our increased free operating cash flow at €635 million for the full year. We met our targets in Q4 and it’s an improvement of almost €100 million year-on-year with strong quality and benefiting as expected from a high level of cash-ins and disciplined working capital management while continuing to invest in our core businesses. This generation is driven by a robust performance on the defense and governmental side, while the aerostructure cash absorption is reduced from €296 million to €265 million in line with the plan. The culture of cash is certainly more ingrained in our organization and across the group. While we are continuing to invest significantly to support growth for the years to come, we are also increasing our free cash flow generation. Another important area of progress in 2023 was increasing our financial strengths and flexibility and this was evidenced by achieving investment grade status by all three rating agencies. We were pleased to see that all three have recognized our efforts and progress in terms of deleveraging. And the latest upgrades are a reflection of the improving financial strength of the group and our strong commitment to use cash flows to reduce debt. As you can see on the slide, in 2023, we reduced gross debt from €3.6 billion to €3 billion and reduced net debt from €3.1 billion to €2.3 billion ahead of target. We also beat our target for our average cost of debt, which was 3.1% for the year. So to summarize the key points, as you have heard from Roberto and myself today, we have delivered our 2023 targets and guidance. Our 2023 preliminary results demonstrate good progress throughout the group. Helicopters continuing to achieve robust commercial performance and higher deliveries and customer support activities. Defense Electronics delivering very strong commercial performance and positive growth across all sectors. Aircraft showing strong delivery of profit and higher margin. Aerostructures continue to make progress on its recovery plan. And Space putting in place the building blocks of our new process. It is a good foundation to move forward on. We have also been making good progress on strategic steps, which will be more reflected in our future results. We are very focused on our new industrial plan, which we will show you in a couple of weeks time. Thank you and now we are happy to take any questions.
Operator: Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alessandro Pozzi with Mediobanca (OTC:MDIBY). Please go ahead.
Alessandro Pozzi: Good evening. I have two questions on margins and another one on JVs. I think in your opening remarks, you mentioned that there was an inflationary pressure of course in 2023, but you managed to offset that. And I was wondering I appreciate that we will have a full plan in a few days, but how do you see those pressures continuing in 2024, vis-à-vis your ability to reprice contracts. And also on margins, you had a good improvement in aircraft. Can you give us more color on what are the moving parts and how much the EFA contributed versus the JFS into the margin evolution year-on-year? And final question on JVs, in the opening remarks, you mentioned partnerships with KNDS and BAE on JCAP and on grand vehicle. I was wondering when will we have an update in terms of the works that Leonardo might have in those big JVs? Thank you.
Roberto Cingolani: [Indiscernible] generally about this last question about the joint venture, this is now an almost daily job we're producing with our partners there. There are different options on the table. We are studying in detail the business case. It could be either a long-term large commercial agreement in which we supply specific electronics, for instance, for the ground machines or it could be a real industrial joint venture where we produce a brand new machine which is 50-50 or so. Of course, we will disclose everything, by the time, it will be clear the cost effectiveness and the advantages of the different solutions. Our strategists and engineers are working on the analysis of the different scenarios, yes, so this will be. I assume that in about four or five weeks, there should be already a first feasibility study that has been started now since a couple of months. So we should understand a bit better what is the situation. Concerning the margin in aircraft, primarily, I like to tell you that we are working especially on the euro fighter. This is the most convenient, the platform having the largest margins for us. And so we are exploring markets that were not explored in detail in the past. So there are a number of actions that we put in place recently, and about the inflation. I think we survived the peak of inflation last year, both as Leonardo and our supply chain, which is, by the way, possibly the most vulnerable component of the production pipeline. Of course, this year and the next, we expect inflation to be less severe, less hard than in the past. It's of course, in our contingencies, it's computed somehow. But I think the fact that we survived properly in the worst moment give us quite a good expectation for the near future. Obviously, more protection is needed for the supply chain very often, it's the weakest part of the pipeline, as you understand. Very often in the supply chain we have small companies and of course for them it's more difficult to sustain the pressure of the inflation wave. But I think the worst moment has been overcome already. But with this very qualitative approach, I'd like to leave the stage to Alessandra. She might be more precise in terms of numbers.
Alessandra Genco: I think you have – Roberto provided the key elements. The inflation pressure that we face in 2022 and 2023 is clearly now has been managed by the group successfully, because, as you can see from the margin levels, we have managed to increase the margins. Notwithstanding these inflationary pressures on both labor costs as well as purchase goods. In 2024, we expect to continue to see a certain level of pressure and increase. That, however, is factored into our pricing. As you know, we have, especially in the commercial side, repriced our portfolio of products, so as to adequately reflect the inflation effects in the pricing. With respect to aircraft margins, yes, certainly the fighter business remains a very good business, and we have also managed to be very lean in the organization. The aircraft division is very concentrated in portfolio of products and managed to lower its controllable costs and further tighten its structure in order to increase margins in 2023, remaining at very best-in-class levels for its business segment.
Alessandro Pozzi: If a contract tails off in the coming years, how should we think about the mix within the aircraft?
Alessandra Genco: Well, the Eurofighter is an important component of the overall aircraft business, both in terms of the four nations as we’re working on the Spanish contract, for example, the German contract, as well as the Export segment, we’re delivering. We have delivered nine aircraft to Kuwait in 2023, and we see going forward a number of opportunities that we are going after in the international market.
Alessandro Pozzi: Okay. Thank you. I’ll turn it back.
Alessandra Genco: Thank you, Alessandro.
Operator: The next question is from Virginia Montorsi with Bank of America (NYSE:BAC). Please go ahead.
Virginia Montorsi: Thank you. Good afternoon. So I have two, actually. The first one would be on your agreements with Telespazio with Thales. You’ve mentioned there’s a new agreement that has been signed with Thales’ CEO. Could you just elaborate a little bit more in terms of what that means exactly? And then the second question would be on debt. You’ve obviously decreased your net debt to €2.3 billion. Are you happy with this level of leverage? Are you thinking of going to an inferior level of debt? How should we think about your leverage profile? Thank you.
Roberto Cingolani: Yes. Thank you. So concerning the Telespazio action, as I told at the very beginning of the mandate, we were renegotiating with Thales’ CEO Patrice Caine, the fact that we could not consolidate the Telespazio balance sheet, as opposed to what they do in Thales with the TAS revenues and the TAS balance sheet. So we made the alliance much more symmetric this way. I have to acknowledge a strong collaborative effort from our colleagues in Thales that was really well managed. In a few months we managed to do something that appeared to be impossible for 10 years. To be honest, I don’t understand very well why, but by the time I talked to Patrice Caine that was quite easy. They understood completely. Now, besides acknowledging the very open and collaborative approach of Thales, I have to say now we do have Telespazio at the core, industrial core of our Space division. This has been reinforced by incorporating the division, the brand new space line of business, space lab that was before existing in the Electronic division. But those are the production lines that are working on robots and the components, hardware components for space applications. So globally these two components are creating a division that is a little bit below €1 billion revenues, maybe €0.9 billion revenues for 2024. So we know this is our starting point. And of course, we still have our participation in TAS, our participation in Avio. But this let us work with a totally different critical mass on the European market, at least for new space services. And of course, in the new plant I will make very clear what is the strategy, what is the priority we give. And I can anticipate there will be a strong prioritization in terms of business. So this is functional to what you will see in 10 days in the strategic plan for space. Forgive me, you had another question besides space…
Virginia Montorsi: Net debt.
Roberto Cingolani: The net debt, yes, yes, sorry, I apologize. We had 7 hours long Board of Directors today. This has been a long day. So you find all that – sorry for that? No, for the debt, well, you asked actually whether we were satisfied. To be very honest, I have a twofold answer. Relatively speaking we are satisfied because if you see where we were three years ago, yes, we are. But we can do much better. And you will see in the guidance and you will see in what we’re going to propose in 10 days. We are much more ambitious about the debt. However, so far there is a steady decrease of the number and this is, let’s say the trend is the one we want, but we will go far ahead.
Virginia Montorsi: Thank you, Roberto. That’s very clear.
Roberto Cingolani: Thank you.
Valeria Ricciotti: Let’s take a question from the web. Christophe Menard from Deutsche Bank (ETR:DBKGn) is asking regarding strengthening international alliances why are you exploring cooperation opportunities in tilt-rotor with Bell and not a European player? Can your cooperation opportunities with Bell go beyond tilt-rotor? If you reopen discussion with Hensoldt, why did you stay out of the capital increase?
Roberto Cingolani: Okay. Christophe, thank you. These are two interesting questions. So without anticipating too much strategic issues, but let me clarify the tilt-rotor business. I think, as you have seen, as you’ve heard, the federal authorities in the United States, they have cancelled the so called FARA program that was dedicated to the fast standard rotorcraft for military applications, so just a normal helicopter with a rotor supposed to be very fast. The reason was that the American authorities and military authorities want to have a vehicle that flies at the speed of an aircraft with pressurized cabin with a range of 1,500 kilometers and it takes off and lands vertically like a rotor. So no standard helicopter can do this. That for us was a super good news, because it actually demonstrated that our efforts over the last year. Our capitalization of our investment over the last year on tiltrotor was good. I mean we – of course, we took our risk, but it was a good choice, because now we are the only European company having a tiltrotor, close to certification, primarily close to civil applications, but to be – that can easily be, not easy, but can be transferred also for strategic rescuing and military applications. And our only partners in the world is Bell, because Bell is the only one having a tiltrotor technology. By the way, we share the original design and we developed independently to synergistic and complementary models. They have a big, heavy payload. We have the light payload machine. Our is more agile [ph], the other one is more, I would say, much bigger, but of course, for heavy duties. And now in the world, only Leonardo and Bell can merge and collaborate or make synergies about tiltrotors. And the reason for our it is because we want to explore how we can take benefit of this synergy and this complementarity. That's one point. Concerning Europe, Europe doesn't seem to have at the moment, a tiltrotor long-term program within the national governmental or European authorities frame. Europe is still investing or still thinking to that. On the strategic NH90 machine Version 2, the new military fast helicopter. In that case, this is good for us, because we have a considerable remarkable capability and scale in military helicopters, and we are, with Airbus, the key players in Europe. There is absolutely no problem in thinking to a Europe machine, a Europe started rotorcraft fast machine for military application. That will be a totally different sport compared to tiltrotor, different functions, different characteristics, everything different. So we can play in both continents with a clear leadership. And this is what we are trying to do now. Concerning Hensoldt, we didn't participate in the increase in recapitalization a few months ago, because at that time, the German government and the previous top management of Hensoldt didn't say clearly whether for them the possibility to make a Leonardo-Hensoldt alliance joint venture was still open. And I'm not sure you remember this. I'm not sure you heard it from me that – but I personally went to the governmental authorities of Germany a couple of times. I spoke to [indiscernible]. So many of the people there, administrative authorities. There were many contracts. And at that time, it was not clear whether this idea of the joint venture was kind of a feasible or not. So we said, okay, it's not good for us to invest €76 million to stay at 25%. We better go to – step down to 22.8%, which means basically the same. But of course, given the good relationship with Hensoldt, we never said – we never closed the recapitalization of the company. We were endorsing this. We understood completely the idea of why they needed this. So it was very collaborative. And I think, Hensoldt and the German government were very – they appreciated very well the position of Leonardo, very transparent, very collaborative. But at that time, putting those €76 million to get 25% participation that we had before would have been – would have not changed very much our strategic design. A few weeks ago, the new CEO of Hensoldt, [indiscernible], and asked for a meeting, a meeting with me. And we have a very long constructive and transparent discussion. He told me that they are reconsidering in a very open way in the possibility of the joint venture. I mean, of course, something might have changed politically, internally with the new management. I don't know, but that was an opening that we were very happy to hear. That's why we are restarting now the analysis of the joint venture creation. I think, if you go back and see our press release when we endorse the recapitalization of Hensoldt without participate in the capital. Our last sentence was, of course, Leonardo is looking forward to see whether there will be any opportunity in the near future to go ahead with the creation of the joint venture. So we leave the door completely open. I should say there was even at the door, we were just there waiting for the progress of the situation. The progress came. We are very happy and always discussing with the new top management what we can do together. The table is open. Our strategies are working together. We'll see. I hope I can give you guys good news in the next month. But for sure, the machine restarted. I hope I answered you completely.
Operator: The next question is from George Zhao with Bernstein. Please go ahead.
George Zhao: Hi good evening. I guess first question on Aerostructures, could you give us an update on your discussions with Boeing regarding the contract negotiations for the 787 you talked about last quarter. Has there been any progress since your last earnings? And second one, could you talk about your decision to sell the small stake in DRS in November. Given that you still hold over 70% stake, significantly more than what will you need to still maintain a majority stake? Would you consider other more sales to general proceeds?
Roberto Cingolani: Yes. Thank you. Thank you for your questions. So concerning Aerostructures, yes, though there is still a negotiation ongoing, both with Boeing and Airbus, I think we got some 10% increase in the price of the 787. I believe this is the renegotiation, right plus 10%. Starting from you have the numbers. Okay, we cannot say more. But yes, there is – we go in that direction, okay? My CFO is look at me with a very bad face, and I'm not supposed to say anything, but okay, this is going in the right direction. Concerning DRS, well, that was a very surgical action that we did because that capital is needed for specific merchant acquisitions that we are now examining and finalizing – those are specific merchant acquisitions in – that will add either new services or new technologies to areas of Leonardo where it is more convenient to make an M&A rather than to develop in-house, the new products or services. Why we keep the 72% of DRS? At the moment, DRS is an important partner for us. It's an important outstation in United States. We believe it's important to be – to have a presence, such a quality and presence in U.S. We have a collaborative program. There is no point at the moment to step back from DRS. And so we plan to continue like this, and we don't have, at the moment, any plan to make other celebrations unless some very brand-new scenario would show up somewhere in the world, but we don't have anything at the horizon at the moment. So here we are, and here we stay.
George Zhao: Thank you.
Roberto Cingolani: Welcome.
Operator: The next question is from Ian Douglas-Pennant with UBS. Please go ahead.
Ian Douglas-Pennant: Thanks very much for taking my question. Yes, it's Ian Douglas-Pennant, UBS. First, on cost inflation, could we get an update on cost inflation, especially within aerostructures? And with regards to the contract negotiations with Boeing. Sorry, I realized my line was cutting out just now. So if you literally just spoke about that, I'll go back and read the transcript. Secondly, on space, it appears from playing back calculations with your results that Thales Alenia Space result was surprisingly strongly negative. Is that correct? And maybe you could talk about the outlook for that business as well. Thank you.
Roberto Cingolani: Okay. Look, considering the aerostructure negotiations, and to be honest, this is very price sensitive and the negotiation is still ongoing, it's doing well. Consider that there's a concomitant crisis with Spirit and with the manufacturing U.S. [ph] So, to be honest, although I anticipated that things are doing well, I do have difficulties at the moment in giving numbers. We hope we can give numbers very soon, but just be aware that we confirm that in 2025 we're going to be at a breakeven point. Okay. Please forgive me if I cannot say more, but yes, this is what I can say now. Concerning Thales Alenia Space [ph], I would like to make clear that the space exploration business, which deals with the 33% ownership of Leonardo within the Thales company is doing very well with high margins, very good revenues. I think they are beyond 1 billion now. So really doing well. And the market is flourishing. Unfortunately, the other two thirds that are basically dealing with SATCOM, both satellite construction and services, they are in the middle of a strong crisis. And to be honest, this is not unique to Thales. This is the same for Airbus. It's same for most of the SATCOM business around the world, with the exception maybe with Elon Musk's Starlink. So I'll be very clear. We are working in a very close contact with Thales and even Airbus, because we are interrogating ourselves about how can we restore the equilibrium in the SATCOM business. To be clear, Leonardo is not involved in the SATCOM business. And I can anticipate that I will make this very clear, the new strategic plan, Leonardo is not going to do SATCOM, but for this strategic SATCOM, which is national security interest, which everybody has to do. But I don't consider this a big part of the business. However, we are in joint venture with our colleagues in Thales and this is the time to get together and try to find a solution that also helps our colleagues in Thales to improve the business, which is a critical business. I mean, don't forget that this market is going towards one euro cent per kilobyte. This is awfully cheap, it's awfully little. And if you have to create the infrastructure, you have difficulties. You struggle in keeping – in undergoing the cost of the infrastructure and of the services. Even Airbus has a similar problem. So at the moment there is a discussion going with Airbus, Thales and Leonardo, trying to see whether there is something European that we can conceive. And of course trying to see what is the future layout of the space activity within the Space Alliance and also taking into account the possibility that [indiscernible] join the collaboration. I can't say more because this is work in progress on March 4. So next Monday we have a meeting, the three of us with our teams, because we are discussing exactly that issue. We are perfectly aware. But I should say Leonardo did the right choice in terms of technology investment. And our [indiscernible] with the space exploration is doing extremely well. We are also a bit sorry that we have to compensate losses. This is part of the joint venture. When you are in the joint venture, obviously, you have to take into account that sometimes things are not good for everybody. And it's our time now to how to say, mitigate the losses. But we hope we can correct this very soon. I hope I answered.
Ian Douglas-Pennant: Yes, that's fine. I'll follow. Thank you. Thank you. Very help.
Roberto Cingolani: Very welcome.
Operator: The next question is from Martino De Ambroggi with Equita. Please go ahead.
Martino De Ambroggi: Thank you. Good evening, everybody. A few questions on the 2023 results, just to have a better understanding. Alessandra, if you could quantify R&D capitalized net effect factoring and MBDA and other joint ventures contribution for what is consolidated at equity. The second question still on 2023 results, because we talk about cyber division. I don't know if you can provide us the starting point of the cyber division in terms of sales and maybe profitability, just to understand what's the size today for this business. And the last question is on aerostructures. So I don't want to talk about price revision. And obviously it's going ahead. But there is already a guidance for 2025 of breakeven point, just to understand what is the path towards 2025 and have an idea on what could be the improvement in 2024 compared to 2023 to achieve the target in 2025? Thank you.
Alessandra Genco: Sure, Martino. Okay, let me start with the list that I've jotted down here on the sheet of paper. So, R&D capitalized was around 200 million in 2023 for the group. Cyber sales and profit, cyber sales were around 0.5 billion, north of 0.5 billion with a good profit level, which is growing significantly over the planned time. So I would say you have to hold your breath and wait until the 11th of March and you will learn everything you want.
Roberto Cingolani: Numbers are good.
Alessandra Genco: Exactly. On the joint venture contribution. So the joint venture contribution has been overall very positive for all the joint ventures with the exception of tax, which we already commented and Roberto told you a lot about. So year-over-year that's the main thing that I want to plug for you. Finally, on aerostructures and the breakeven path. So we're confirming breakeven in aerostructures by 2025. And the path is the one we have identified that the managing director of the division is closely following day after day in 2024 versus 2023, you will see a slight improvement in performance because as you know, the step up and the step change will occur in 2025 once we reach the series number 1,407 when the ship set will be repriced. So the trigger event is temporarily happening in 2025, therefore, 2024 is still in a continuing process of improvement by a higher level of activity that will reduce the under absorption, nonetheless the numbers will continue to be not very far from 2023 levels.
Martino De Ambroggi: Okay. Thanks Alessandra. Just a follow-up on the R&D, €200 million is the capitalized cost and what is the amortized, just to have the balance impacting EBITDA?
Alessandra Genco: That is the net effect, Martino.
Martino De Ambroggi: Okay. Okay. Thank you.
Valeria Ricciotti: Let's take a few questions from the web. I'm selecting the ones that have not been asked so far. David Perry from J.P. Morgan is asking on restructuring non-recurring charges for 2023. The rest have been already asked. And there are other analysts; Christophe Menard and Ross Law asking about 787 and negotiation with Boeing that have been already asked. So it's purely restructuring plus non-recurring for 2023 asked by David Perry.
Alessandra Genco: Okay. So David, the restructuring charges are approximately €60 million, and they are associated with an expansion, expansion of the pre-retirement plan that we have signed in 2022, with respect to the Leonardo or FDA and controlled Italian company, corporate staff functions and a portion is associated with the aerostructure accelerated retirement plan whereby the number of people adhering to the plan has increased. Therefore we have adjusted the provision in our accounts for 2023. On the non-recurring line we are booking expenses related to all contracts, one of which I'm sure – well, you're both very familiar with them, is the Doha Stadium for approximately a combination of €100 million, €110 million Doha Stadium and NH90. Those are the two largest components as we are closing down the position on the Doha Stadium, which was a very old contract signed in 2016, and the arbitration was completed last year with an overall positive effect for Leonardo, the remaining asset base that we had was zeroed out in 2023, in a very prudent manner. We have upside if there are adjustments to the proceedings that are currently enforced. And the other element is the NH90 Norway, which was a 2001 contract, so even more dated, a contract where we deliver 12 out of 13 helicopters for the Norway client and NHI is the prime, and we are with Airbus following the mediation process. And conservatively, we have decided to zero out the outstanding asset position we had on the contract. Notwithstanding that we have a very strong position from a legal process that our claims and our position is very strong, and we're confident that this will be resolved positively for Leonardo and for Airbus and for NHI. I see that I missed a question here for Martino, which was about factoring. So factoring, Martino, as you know, we have basically zeroed out our factoring, in Italy, we have no more factoring facilities and activities outstanding. We had still some level of activity in the U.S., which is, however, going down very nicely year-over-year.
Operator: The next question is from Gabriele Gambarova with Banca Akros. Please go ahead.
Gabriele Gambarova: Yes. Good evening to everybody and thanks for taking my questions. Again, on this aspect of factoring, Alessandra, what was the level last year? Sorry, if I don't remember, but...
Alessandra Genco: Factoring, the group was around €400 million, €500 million, had about €400 million to €400 million of activity or factoring activity. This year we are really close to really material levels.
Gabriele Gambarova: Okay. Very interesting and sorry, again, I checked on this aspect of the Doha Stadium, if I understood well, you should have something, let's say, a positive item in the extraordinary that could be offset by something negative on the NH90 front?
Alessandra Genco: No. So on Doha, we basically have – we have cleared up our position as a consequence of the resolution that the mediation process took last year. And there is a potential upside to the extent that we will be recognized an additional claim that we have submitted to the judges. On NH90, we have conservatively also build out our outstanding position, as the mediation process is still ongoing, however, we have decided to not have any open positions on our balance sheet. We have, at the same time very strong convictions ourselves, NHI and Airbus, that the legal claims that were submitted by our customers have no grounds and therefore our position will be recognized by the third-party budgets.
Gabriele Gambarova: Okay. Okay. Thank you very much. Sorry, just one question, one last question on ATR because it seems to me that the level, let’s say, the pace of the recovery is pretty slow. I don’t know if I’m wrong, but I understood that possibly expectations will be – let’s say, stronger in terms of recovery. Do you agree with this thinking or I’m wrong? I mean, with the situation, what you can see.
Alessandra Genco: No, it’s not slow because it’s 44% year-over-year, Gabriele. So we delivered the ATR consortium, delivered 36 aircraft in 2023 versus 25 in 2022. So 44% outlook. What is slowing down the ascent to higher level is the supply chain, the company is doing well. However, there are key components in the supply chain that are delayed. Therefore, in the assembly line, we are tied up and slowed down. However, the company is working really hard to resolve these issues together with the major suppliers. As you know, this is an industry-wide challenge that all players in aerospace are facing, and we’re confident that we will receive positive news throughout 2024 as these trains will slow down. It will take some time to be realistic, but I’m positive that in 2024, the outlook will be better.
Roberto Cingolani: Gabriele, just for general comment, we know that in all aircraft platforms and even in helicopters, but for those very expensive, super strategic in relatively cheap platforms, even though now the traffic is recovering to pre-COVID levels, the supply chain is late. There is sort of jet lag between the supply chain and the main manufacturer. And the more we’re dealing with a cheap platform, the more this gap is jet lagged important because the supply chain consists of small complex in general. So we have seen this, unfortunately, in many cases. We discussed this also with our partner in Toulouse and also with Airbus. And it was clear that this is – I mean, you feel this problem more on ATR than on a much bigger aircraft.
Gabriele Gambarova: Okay. Very clear. Thank you, Alessandra and Robert.
Alessandra Genco: Thank you, Gabriele.
Valeria Ricciotti: Okay. Other question from the web, again from David Perry, JPMorgan (NYSE:JPM), can we just have 2023 EBITDA of Telespazio France and associates on the 2023 P&L.
Alessandra Genco: Well, David, if we can wait a couple of more weeks, you’ll get all the details with all the results. I’m saying this also in respecting the timing of results presentation of our joint venture partners, i.e., Thales, Thales is going to go out on the 4th of March and – or the 5th of March.
Roberto Cingolani: No, we meet the forth, just because we have to agree the communication strategy for the welcome to joint ventures, we say. So the reason – one of the reasons for the meeting on the fourth is also to give the same vision and view to the investors and the analysts. Sorry for that guys.
Alessandra Genco: It’s a kind gesture that we are typically making between companies. I’m sure we will all appreciate that.
Valeria Ricciotti: Then I have Stefan [indiscernible] asking what was the contribution of working capital to free operating cash flow in 2023? And did you receive net positive customers per payment?
Alessandra Genco: So the contribution of working capital was positive. We invoiced a number of very important milestones across the group, across divisions, and that allowed us to lower the level of working capital that we have throughout the board. So this is all good news. And even though we are actually buying in advance in some areas of the business, i.e., electronics and in some segments of the Helicopters business and adding to inventory in order to make sure that the supply chain shortages are not impacting our delivery path. So notwithstanding the slight increases that we are proportionally putting in place, the level of working capital overall has gone down, thanks to a good delivery of milestone through our old programs.
Valeria Ricciotti: I think final question from Simona Ferrari (NYSE:RACE) [ph], Helicopters Division. What was the underlying EBITA margin trend at development cost, how much development costs and relating to what? And should we assume the underlying margin increase as you deliver last NH90?
Alessandra Genco: Okay. So Simona, the way to think about margins in Helicopters is that we are clearly continuing to invest in the Helicopter business, as we’re building the platforms for the future. So 609, 09 will be the future of the group and the company, the very advanced technological programs and the investment phase will continue throughout 2024 and 2025. With respect to margins, the Helicopter business has increased the absolute value of the margin, and we feel that we have good upside in the plan, also leveraging the significant contribution of customer support, which in 2023 achieved a weight on total revenues of 40% plus. This is an all-time high. And as you know, well, customer support carries really good margins as well as extremely positive cash conversion of margins into cash. So we’re very happy about that. And I do feel that we will continue well on this path.
Valeria Ricciotti: This was the last question from the web. I think there’s nothing else from the call as well.
Roberto Cingolani: If this is all, thank you, guys, for being here and look forward to seeing you in 10 days with the big news. Okay. Thank you. Thank you all.
Alessandra Genco: Thank you. Bye-bye.
Operator: Ladies and gentleman, thank you for joining. The conference is now over. You may now disconnect your telephones.
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