Leonardo’s (FINMF) CEO Alessandro Profumo on Q4 2019 Results – Earnings Call Transcript

Leonardo S.p.a (OTCPK:FINMF) Q4 2019 Earnings Conference Call March 13, 2020 6:00 AM ET

Company Participants

Valeria Ricciotti – Head-Investor Relations and Credit Rating Agencies

Alessandro Profumo – Chief Executive Officer

Bill Lynn – Chief Executive Officer-Leonardo DRS

Gian Piero Cutillo – Managing Director-Leonardo Helicopters

Norman Bone – Managing Director-Electronics

Valerio Cioffi – Managing Director-Leonardo Aircraft

Roberto Cingolani – Chief Technology and Innovation Officer

Alessandra Genco – Chief Financial Officer

Raffaella Luglini – Chief Stakeholder Officer

Conference Call Participants

David Barker – Bank of America

Monica Bosio – Banca IMI

Nick Cunningham – Agency Partners

Alessandro Pozzi – Mediobanca

Martino de Ambroggi – Equita

Zafar Khan – Societe Generale

Christophe Menard – Kepler Cheuvreux

Tristan Sanson – Exane

Harry Breach – MainFirst

Valeria Ricciotti

Good morning, ladies and gentlemen, and thank you for joining our Leonardo Full Year Results Presentation. I’m Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. Today, we want to give you an overview of our strategic path and how we see the future along with a clear picture of our 2019 results and short and medium term outlook. We have planned a series of presentation this morning for you to hear this.

First, our CEO, Alessandro Profumo, will talk in more detail about our future strategic path followed by presentation from some senior members of the Leonardo management team. Bill Lynn, the CEO of Leonardo DRS; Gian Piero Cutillo, the Managing Director of Leonardo Helicopters; Norman Bone, the Managing Director of Electronics; Valerio Cioffi, the Managing Director of Leonardo Aircraft; and Roberto Cingolani, our Chief Technology and Innovation Officer.

In part 2, our CEO will set out our updated medium term targets, while our CFO, Alessandra Genco, will present the full year 2019 results, the recent operating performance across the group and the guidance for the current year. We hope you will find this presentation useful and can then join us for the Q&A later this morning, at 11:00 AM CET. This Q&A will be webcast live and will involve both the CEO and the CFO.

And with this, I hand now over to our CEO, Alessandro Profumo.

Alessandro Profumo

Good morning, everyone, and welcome to our full year results presentation. First of all, I want to share with you some thought on coronavirus outbreak. We acknowledge we are living a difficult situation, and our first priority remains safety and well-being of our people. We are working closely with the Italian government and our local authorities, following their directions and taking all of the measure to protect our people and our stakeholders to mitigate and minimize the impact of the outbreak on our business.

The Board of Directors is aware of the likely effects on our activities, and we are doing our best to guarantee our people, while maximizing business continuity. So far, we see some potential effects in areas like the commercial campaigns due to travel restriction, the relationship with the supply chain even if there are no restriction in handling of goods, and we also see a potential effect in terms of slowdown of production or delivery process by our customers.

Our engagement with stakeholders throughout this period is a key priority, and we remain fully committed to executing our programs. It is, of course, too early to assess the eventual level of business and financial impact. On 2020 guidance – our 2020 guidance, sorry, is based on our internal budget planning process built up before the COVID-19 outbreak. But as the situation extends, it is likely that there could be impacts in 2020. We are monitoring and analyzing the situation extremely closely, and we have already taken actions and sensible precautions across the group.

We have given temporary instructions, which include travel restriction and enabling a large proportion of our workforce to work remotely. We’ve also temporarily limited access to Leonardo sites in Italy and suspended all the events. And of course, there’s a strict imposition of hygiene rules and precautions. We have created red areas within selected site perimeter and segregated from the rest of the facilities where to continue production activities in critical programs. But we cannot rule out, there’s a possibility of a partial and targeted suspension of the operation of certain departments within some production sites that do not offer the possibility of remote working. We’ll promptly inform the market once we’ll be in the position to access there’s a potential impact.

We are fully committed to delivering on our medium, long-term plans and goals. And it is important to emphasize our confidence in our core business fundamentals and clear strategic path for the future. This confidence is underpinned by resilience in our aerospace and defense market by our international diversification, the solid fundamentals of our group business and customer demand for our leading product and services.

Now moving to our long term strategy. I can say that two-year after, say, we set out a strategy for Leonardo. We are very clear on the company we want to be, a company, first of all, delivering long term sustainable growth with top line growth at the core, underpinned by a focus on internationalization in customer support and services and supporting the investment in growth by being more efficient. And this company now has increasingly clear targets in our priority sectors, to be a world leader in helicopters with a cutting-edge technology portfolio and in simulation solution and training; European leader in defense electronics with top capabilities in air, sea and land; and the reference partner for the DoD in U.S. primes.

We are increasingly a key player in international cooperation programs in aircraft as part of the European defense programs. We are going to remain a key partners of the space alliance with growth in services and the reference partner for institution for safety and cybersecurity. These ambitions means focusing our efforts and our resources on these key areas of opportunity, underpinned by a strong commitment to innovation for long term sustainability of the business. But there are words and there are actions, and there are significant actions behind those ambitions, with specific actions to deliver fitting under three main strategic priorities.

We will strengthen our core, driving more value from strong fundamentals already across our businesses. We transform to grow from a product seller to product – to solution provider as we evolve to changing market and customer needs and leveraging these capabilities in a more integrated way across divisions, with the target of achieving 100% digital process across the group. And we will master the new with a strong commitment to innovation, investing in key technologies for long-term sustainability of the business, which means mainly digitalization. This is enabler of the future competitiveness of the business, but Roberto Cingolani will talk of that later on.

I’m delighted to have a strong and stable management team that is behind this plan. It’s not Alessandro Profumo, it’s a very strong team. Their presentation show how they are bringing into strategy – the strategy to life in their divisions. And not only division, it’s a corporate center as well. And we are seeing the benefit in our results. We are delivering on our targets, I should say, often or even almost always exceeding expectations. You will hear shortly from Alessandra Genco, our CFO, about how we delivered in 2019. And we have challenging targets for the years to come. But I come back on that later. So strategy first.

Our strengthened international footprint is evidence of our strategy in action, the significant change to a one company approach and the creation of a centralized capability with our Chief Commercial Officer working across our divisions. And you can see the impact of this effort in our results. We have achieved almost €30 billion of orders intake in the past two years, more than 40% of our five years plan target of €70 billion.

In 2019, 84% of the revenues came from outside Italy. This reflects our consolidating presence in international markets like the Middle East and U.S. This is also based on the facts that we won the major NH90 Qatar program in 2018, and we have successfully entered major new markets. For example, U.S. for military helicopters, where in the last two years, we won two key tenders key tenders in the military area, the MH-139 and TH-119.

And for the TH-119, we won as prime contractor. That is on top of our existing very strong presence in U.S. via Leonardo DRS, and Bill will show you our top line growth in U.S. later. We like big transformational contracts, but I’m also reassured by the deep set of small, mid-sized contracts, mainly in Defense Electronics. And you can see it in the breadth and depth of our orders.

You can see it in our strong backlog, which is above €36 billion, balanced across our core businesses, much more balanced geographically that is even higher if we include the so-called soft backlog, mainly in Leonardo DRS, but as well in the Helicopters we have discussed before. And we are committed to further strengthen our presence in domestic market and in key international markets like Middle East, Asia Pacific, Latin America and Africa, playing a global partner role.

Equally important is the growth of our customer support, service and training business. This is a really valuable part of our business. It is higher margin, first of all, but is made also by multiyear contracts, supporting good, long-term revenue and margin stability and visibility. You will hear more this morning from Gian Piero Cutillo on how we are playing to our strengths here in Helicopters. It’s a key growing and very attracting part of our business mix, but I have to say that customer support is very important also in the other divisions.

And we are making significant progress at group level. Support and services made up 22% of revenues in 2019 versus less than 20% two years ago. Look at our civil helicopter support, ProPilot, we have been top-ranked again for the second year in a row, improving on all key indicators, response time, spare availability, cost of parts, speed in emergency services and so on. Gian Piero will provide you with additional details later. We have one of the world’s best flight training school, our international flight training school with the Italian Air Force, providing full training solutions using simulator system. It’s cost-effective and covers the whole training syllabus, as Valerio will show you later.

The customer support and training also creates long-term loyalty and repeat business with our customers. I’m always saying that the pilots that today are training our EFTS, sooner or later, will become Chief of Air Force in their countries. There is more to do to achieve our ambitions of 25% revenues from strong – from customer support and services, but we are very well on track with the goal to increase it further overcoming the coming years. To support this growth, we have retained our strong focus on cost and efficiencies. We have achieved more achieved more than €200 million savings in 2019, ahead of the targets.

We launched the LEAP 2020 program to strengthen our supply chain and make it sustainable in the long term. Building partnership with the best suppliers in a systemic approach. This is incredibly important, and maybe more and more important, as I said before, in this period of time. So far, we have analyzed 1,300 suppliers, out of which about 200 have been evaluated eligible for an advanced partnership. Some of them have been already involved in specific development initiatives with initial focus on capability building, innovation and access to funding to boost growth in performance and dimension.

In parallel, we are exploiting all possible efficiency as one company, achieving more than €70 million savings here in 2018/2019. And we have delivered savings in manufacturing of more than €52 million in just one year, 15% above the target we have set at the beginning of the year, supported by our new Leonardo production system program in place across the divisions.

Our focus on continuous improvement is identifying more opportunities, to grow furthermore our supply chain, optimizing cost and digitalizing processes. To share further, the production model across with a target of 100% digital manufacturing, whilst we’re investing as 80% of the savings achieved to support growth. We are also happy about our return on sales, which is above 9% in 2019 and solidly above 10% if we don’t consider pass-through activities. We are also increasing our focus on return on invested capital, growing from more or less 14.8% in 2017 to 16.2% in 2019 with a solid path confirmed over the coming years. This metric better represents our effort as the return on sales reflects mix impacts and pass-through.

As you know, for us, it’s strategically important to win more roles as prime. And when you are prime, you have pass-through to other important players. And this is dilutive clearly on return on sales. And we have also made conscious decision, picking up orders in strategic markets that can expand our long term opportunities in key areas or provide us follow-on opportunities in profitable customer support activities, but we still expect to make progress towards double digit in 2020. As I said earlier, we have clear long-term ambitions in our priority sectors.

We want to be world leader in helicopters with a cutting-edge technology portfolio, world leader in simulation solutions and training, European leader in defense electronic with top capability in air, sea and land, qualified player in U.S., key player and fully involved in international cooperation program in aircraft, Tempest and Eurofighter are two very clear examples. Key partner of the space alliance with growth in services that is passive to that ambition to grow very significantly in the period of the plan, focusing our efforts and our resources on these key areas of opportunity with a strong commitment to innovation and to support as a business.

We have a – we are very clear on three strategic priorities that will drive our business going forward. First, we will strengthen our core, which means driving more value from the strong fundamentals we have already across our business. It means keep strong focus on our core to fuel the growth, exploiting the full potential of the proven world-class product portfolios across the businesses, executing the significant backlog including the soft backlog and grow customer support and training in key areas.

Looking at examples in our core business, in Leonardo DRS, you will hear this morning, Bill Lynn update on its strong recent performance and how it has been outperforming the strong U.S. market and how he intends to improve profitability. In Helicopters, you will hear Gian Piero this morning talk about how we will drive value from our core strengths through our customer focus. And I would like to highlight two elements in helicopters. First, the ongoing strength of the AW family across military and civil market, which is a great success, but we cannot sit still. And the second, we made the Kopter acquisition. There is a strong compelling rationale for us here. This is a critical, single-engine technology, profitable civil segment.

We are winning in military single-engine with the AWHERO and sophisticated 119, which one has the U.S. TH-119 contract. But last design of a single-engine for civil market is almost 40 years ago. Kopter accelerates the development of capabilities in the light single-engine, thus strengthening our capability to compete in this market and entering in a very large customer base of operators that – who have a single- and double-engine where we have a very small market share today.

In Defense Electronics, to be the European leader, we must focus within a fragmented market and continue to innovate to stay ahead. For example, in radar, we are very strong. Our new radar for Osprey family was enhanced when we developed the solution for the AW101 for the Norwegian customer. As you know, the traditional radar on the bottom of the helicopters would be crashed when they land on snow and ice. So we developed a brand-new radar that – which fitted in the side of the helicopters and it’s working very brilliantly.

Another example is the ATOS surveillance system, which fits well on both aircraft and helicopters. It’s onboard of our AW169, AW149 for the Italian Guardia di Finanza and ATR Special Mission, but as well on platform of other suppliers. Then cybersecurity to be a reference partner for institutions. This is an area where we are investing and where we are seeing a large potential market. We are focused on delivering for a select key institutional customer with a big presence in Italy and in UK. And there are other international countries within the perimeter of international security that are asking for services, and in some cases, are already customers.

In aircraft, very significant roles in attractive international collaboration programs. We have the right platform, the Eurofighter, which has constant upgrades in equipment and systems, like the E-Scan Radar. And we’ll see this activity as a great bridge towards Tempest. We will transform to grow as the second year, we have other exciting additional growth drivers across the group. Market needs are changing, meaning a better, more integrated approach.

That really plays to our integrated strengths across areas like fighters, command and control capabilities, helicopters and so many other areas. We are evolving areas like interconnected system of system to meet changing market and customer needs. We are transforming in exciting ways, like moving from a platform seller to a solution provider, which is really a key request by our customers, playing to our core strengths in areas like aircraft platform, helicopters platform and electronics.

In Defense Electronics, its Managing Director, Norman Bone, will update this morning on how we are changing and transforming this division towards a more efficient organization. And we are using our capabilities to position ourself on the exciting being international program of the future. You will hear more this morning from Valerio Cioffi on the exciting transform to growth strategy in our aircraft business, like the evolving further stages of the European Eurofighter over the next 20 years, the EuroMALE Unmanned program, and of course, the Tempest. You can appreciate that our portfolio is a key strength for us. We have both platform and electronics we can leverage on.

And third, we will master the new accelerating innovation, identifying, developing and leveraging at scale, new technologies, transvection across the group, with a full digitalized engineering, production and offering, a centralized effort critical to delivering enabling technology to the division. And you’ll hear a lot more about this from our CTIO, Roberto Cingolani. With innovation and technology is so – why innovation and technology is so important for Leonardo? Why it matters and is key to our strategic path? How we want to make a serious step in our capability? We can clearly see how to do this. We are already doing it, which means through the creation of Leonardo Labs.

With that, I now hand over to CEO of Leonardo DRS, Bill Lynn.

Bill Lynn

Thank you, Alessandro. My name is Bill Lynn, and I’ve been CEO of Leonardo DRS for the past eight years. My background is in national security, in both industry and government. Prior to coming to Leonardo, I served as the Deputy Secretary of Defense during the Obama Administration and the Chief Financial Officer during the Clinton Administration. I also was a Senior Executive at Raytheon, where I led strategic planning and Washington operations from 2003 until 2009. Over the past year, we have achieved a lot at Leonardo DRS. We have delivered on our financial plan, we have executed on our core businesses, and we have provided top-notch technology to our customers. I am pleased to be able to talk today about how Leonardo DRS has met the goals of the Leonardo industrial plan to strengthen our core business.

Today, I want to make three major points about Leonardo DRS. First, the U.S. defense budget remains robust. Spending is at historically high levels and is stable due to bipartisan support in response to security threats, particularly those from China and Russia. Second, Leonardo DRS is uniquely positioned to outperform the market. Our above-market growth over the past three years has given us a backlog of programs that align strongly with Army and Navy modernization priorities. Third, our profit will grow faster than our revenue, which will drive significant margin expansion.

Specifically, we will achieve 10-plus percent EBITA margins before the end of this plan period. Let me use the rest of the slides to expand on these three points. U.S. defense spending is strong. We face near-peer threats from China and Russia, which require DoD to modernize its force and accelerate the development of emerging technologies in new domains, especially cyber and space. Continued asymmetrical threats in Afghanistan, Iraq, the Horn of Africa and other conflict zones require a significant force presence. These priorities are all present in the proposed future defense budget. 80% of our revenue comes from the U.S. defense budget. That budget grew about 5% from 2017 to 2019 and will grow another 3% this year. Although election years always lead to some uncertainty, there is strong bipartisan support for current spending levels given the security threats we face. What makes Leonardo DRS unique in the market is its strong position in key market segments, which have higher growth than the overall budget.

Leonardo DRS has had double-digit growth over the past three years with a CAGR of 15.9% overall. This is more than double the industry average. We have been able to achieve this above-market growth because of our position as a strong mid-tier player in the U.S. defense market. While the defense market is consolidating, both above and below us, we are finding new opportunities to improve our market position in the mid-tier space. The large primes above us act more as an index fund to the defense market, whereas we’ve been able to target our investments to align our core capabilities with the fastest-growing markets. This has driven that above-market growth. Our mid-tier position has given us other advantages as well. Our management structure is leaner and less layered than most, with eight lines of business reporting to a small corporate office with no intermediate headquarters. This provides us with competitive prices and great agility in our decision-making. We also have the benefit of being platform agnostic in most markets.

We compete to put electronics, computing and propulsion systems on new platforms, or we can pivot our significant installed base and upgrade legacy platforms. Our above-market growth over the last several years has been driven by strong positions in six key markets. Four of these markets are long-standing ones for DRS products: ground vehicle sensors, soldier lethality, network computing and electrical power generation and propulsion. Force protection and electronic warfare are newer pursuits that have grown rapidly over the past several years.

You can see the gray box on the chart includes primarily Army defense electronics priorities, while the red box includes primarily Navy defense electronics and propulsion priorities. Force protection and network computing overlap both the Army and Navy. As the chart indicates, all six markets are growing faster than the 3% to 5% growth rate of the overall defense budget. The left-hand side of this chart shows our soft backlog, which stems from the positions in those six growth markets.

Soft backlog here is defined as two things: One, the future options on existing multiyear contracts; and two, the sole source development contracts, where we have high confidence that the government will enter into a production contract. The right-hand side of the chart gives examples of critical programs that Leonardo DRS has won in each of these six key market segments. In force protection, we are providing the Trophy Active Protection System to the Army for its main battle tanks. We are developing infrared countermeasures for both Army and Navy helicopters, and we are delivering counter unmanned aircraft systems for the Army and the Marine Corps.

For network computing, we are the provider of the mounted family of computer systems that equips all army vehicles with its network computing architecture. As the sophistication of the war fighter and vehicles evolve, so does the need for secure computing, which is at the heart of this MFoCS product and is installed on nearly every army ground vehicle. We also provide modern propulsion systems for the new Columbia-class ballistic missile submarine, which is the nation’s number one defense priority.

Our ground vehicle sensors, soldier lethality and electronic warfare programs also contribute to us maintaining four to five times our revenue base in backlog. These programs will increase substantially over the next several years, giving us confidence in our ability to continue our above-market growth.

Turning to the bottom line. Margin initiatives are on track to drive double-digit EBITA growth over the budget plan period. As we transition our recent development program wins into production, we will see margin improvements. Initiatives to improve our supply chain will consolidate vendors and drive economies of scale. And we will gain operational leverage by growing our revenue faster than our cost structure. These initiatives give us confidence that our margins will steadily expand, and we will have 10% EBITA margins before the end of the industrial plan period.

In conclusion, our growth has been market-leading with a 15.9% revenue CAGR and a 17.5% EBITA CAGR over the past three years. We are positioned to sustain this growth over the next five years in a stable defense market. Our significant backlog is well aligned with major procurement objectives of our key Army and Navy customers. Our lean cost structure and platform agnostic offerings provide us with a competitive edge. Our profitability will continue to expand over the next several years, and we will drive increased free cash flow performance. Together, these initiatives will drive increased shareholder value. For Leonardo DRS, the best is yet to come.

Gian Piero Cutillo

Ladies and gentlemen, good morning. As most of you know, I was appointed the Managing Director of Helicopters back in 2017, and I started immediately to work with together with the – on the nutshell plan together with my team. Now we are two years since then, and I’m very pleased to confirm that we are on track or ahead of schedule. As Alessandro said, today, I will show you how we are strengthening the core of Helicopters by achieving a full customer satisfaction. Our long-term sustainability relies on ensuring customer satisfaction. This is our daily effort and ultimate goal.

First of all, I want to say that also in 2019, we delivered what we promised. Both order intakes and revenue above €4 billion with a book-to-bill well above 1, a double-digit profitability one year before target. Originally, it was 2020. That’s even excluding the extraordinary positive effect of the UK pension scheme. Our position in civil remain strong and the Kopter acquisition is reinforcing our product portfolio with the SH-09. We continue to win in military, leveraging on our dual-use products, customer support and trainings, accounts for approximately 35% of the revenue.

Our target is to keep a strong focus on customers. Therefore, today, I will show how we are improving our outstanding product portfolio and our effort aimed at offering best-in-class services, which constitute our answer to global trend. Our business is undergoing a significant transformation. And so we are continuously adapting our offer to match customer needs. We can see a number of trends. First, operator needs to use helicopters in a more sustainable manner. Meaning helicopter must fly efficiently and be mission-ready. Crew must be trained accordingly and customer needs to rely on partners more than rely on partners more than airframers available anytime and anywhere, of course. And second, we can see more and more devices connected, and therefore, analyzing data becomes crucial. Of course, on top of that, safety is a must. Our response to those trends leverages, as I said, on two main pillars. On one hand, a successful product portfolio; on the other hand, an excellent support services offer.

Let’s now have some insight on the first pillar. The success factor of our product portfolio are its model, featuring state-of-the-art technology and soon we will also include the SH-09, a brand-new helicopter in its class after 40 years. It’s dual-use and mission-ready for both commercial and military roles. Three years ago, it was our target. Now, it’s a reality with key military users for each product. This is proven by our recent market achievement. The AW139 with more than 1,000 deliveries is the most successful civil helicopter program globally in the last 15 years. The AW169 reinforce its role in offshore with the order by LCI on top of its success in EMS, Parapublic and private/corporate. The AW189 entered in services with a number of governments in Asia, leveraging on UK SARP program success.

Finally, our products are the best value for money. We recently won the U.S. Navy Trainer program with the AW119 to supply up to 130 helicopters and services. This was the second military order from U.S. in less than 18 months for the first time as a prime contractor, further proof of our portfolio competitiveness, enabling the new opportunity in the military market.

I will now move to our customer-centric approach. Our fleet includes more than 5,000 helicopters. It keeps on growing, logging more flight hours, increasing by 25% over the last four years. We estimate an addressable market of roughly €2 billion in 2020, steadily growing in the next 10 years at a 4% CAGR for civil and 2% for military. This gives enough indication on how significant is becoming the contribution of the customer support and training to our results over time. It’s our focus on customer satisfaction.

Now, our customer support offer is based on four main streams: our worldwide network, our first-class end-to-end processes, our advanced training solution and digital services. Let’s now drill down into them. We have 1,400-plus customers spreading more than 150 countries with higher concentration in Europe and then Americas. This means that for timely assistance, we must have in place a capillary network. We can rely on more than 90 service centers and over 100 technical representatives globally. We are pushing the penetration of a turnkey services solution to increase the fleet availability, powered by the hour covers more than 50% of our AW framing. This scheme enhances fleet availability while ensures stable and predictable revenues for us.

On training, we cover a full spectrum of services with 13 training locations and five academies and more than 200 instructors. Our community is expanding. In 2019, we trained more than 12,000 students providing 42,000-plus simulator hours and 95% of customer satisfaction. The complexity of our market forces us to aim a first-class end-to-end services. Our effort is well recognized by the market.

As Alessandro said earlier, after 24 years of Bell leadership for the second year in a row, I’m glad to share that Leonardo is now ranked first in the ProPilot Helicopter Product Support survey, the most important survey in the aeronautical press. We excel in all survey indicators, and we will continue to improve through strategic initiatives already launched. Our training services offer evolves from simple flight training to a full mission training solution. This means that we train the entire crew with the right training media.

Distance learning or computer-based training, custom training or virtual reality, and finally, full fidelity simulation training. Digital is playing such a significant role in all lives today and in helicopter, too. In fact, we developed a full range of digital services, as you can see that boost the old customer value chain. I will just mention Skyflight, our mission planning services, which helps air crew to first quickly plan the mission before flight with real-time data; then load mission data onboard saving time for flat clearance; and finally, review the mission after landing.

Heliwise, another tool helping our helicopter to fly safer. This service really benefits in-flight data transmission which I will illustrate. Real-time diagnostic is a good example of exploiting data analytics to increase the flight safety. Through Wi-Fi or 4G or satellite, during flight, our helicopters send health and usage data to Heliwise. This allows to take a maintenance decision on time or even before any issue arises with clear benefits in term of fleet availability and safety of flight.

Finally, we are very proud of these services, because it has been co-developed with our customers. It’s the first prototype in the industry, and it’s now operational since last year. I’m sure that I’ve provided an effective overview in our way to secure a long-term sustainability, thanks to our customer-centric approach. Today, I think the important takeaway are our dual-use product portfolio will allow us to keep our strong position in civil and to secure business in the opportunistic military market. Customer support and training is significantly contributing to our top line, securing a long-term sustainability, also considering the increasing adoption of digital technology as big data and advanced analytics. We will continue to improve our value proposition. Great products rely on excellent services. And we remain fully committed to execute our industrial plan, increasing customer satisfaction and delivering on promises to our stakeholders. Thank you.

Norman Bone

Good morning. My name is Norman Bone, and I have the honor of being the Managing Director of the Electronics division of Leonardo. As Alessandro has already explained, our results for 2019 have been very positive. As a business, we have now outlined a three-pillar strategy to strengthen our core, transform to grow and master the new, being a platform and electronics company provides a great strength to Leonardo in the marketplace.

I intend to focus on the transform to grow strategic pillar, explaining how within the Electronics division, we’ve been focused on this for some time and have positive plans through 2020 to enhance the group results. A short agenda on the transform to grow. The rationale for the change is simply to be a leader in the defense electronics marketplace. The journey so far, our progress and significant achievements to date, an update to the plan that I presented to you last year and the benefits that Leonardo are able to deliver to the market.

Some of my key messages. The global defense market is changing. Businesses are consolidating, budgets are still restricting, national protection and agendas are increasing, competition is broadening across boundaries. European countries have still challenges to spend 2% of GDP. The market is challenging, and we must adapt to prosper. In the aerospace, the European future combat air aspirations are ambitious, and I’ll talk about Tempest a great extent as we go through. Land requirements are similar, yet disparate.

Leonardo Electronics is evolving into the right shape to allow us to grow, both organically and inorganically. We must be both domestic champions with national interest at heart, yet be international in mindset and business operation. In 2019, we spent time bringing together our business units, together we make them stronger. This was a start of a journey with efficiencies and synergies now being extracted.

Contract execution and delivering on our promises to execute to schedule is not optional. Financially, the opportunity is very clear. I said last year, our plan to double-digit profitability would be achieved by the end of 2020. I’m delighted to sit in front of you and tell you, we achieved that one year early. Our cash conversion will continue to be above the group average. Our CAGR will be in excess of the market trend. And we will deliver long-term sustainable growth.

Our strategy starts with a very clear vision to integrate the division and set the strategy for growth, ensuring delivery of performance and synergies, to empower our people, to increase our market share and improve our profitability. We want to reposition our division in the global market space, focused on winning long-term sustainable business by delivering on existing programs, developer partnership approach and simply to maintain and improve our profitability and our cash generation. To create a coherent portfolio of products and services matched to the market needs. Focused on using best practice to drive efficiencies and cost control to deliver bottom line results. We’ll develop a distinctive culture across business units, geographies and professional communities to drive performance through behavior.

Our order intake world map for 2020. Similarly dominated with the domestic countries at 50%, but very importantly, this is an export-driven international division. As Alessandro has already mentioned, working in electronics, it’s a diverse order portfolio, with 90% of our orders accounting less than €10 million in value out of a total of €4 billion. Some focus areas for us will be winning Typhoon contracts in Germany and in the Middle East; to develop the Radar 2 for the UK; to develop our command and control systems into multiple opportunities in Middle East and far east; a KRONOS radar into Qatar; working in tandem with our sister division in Helicopters, as they deliver the 159 into Korea and the 101 for Canada. It is full of our electronics and our sensors.

Our U.S. market strategy built on long-term, sustainable business with incumbency positions on our lasers and surveillance radar. We work with DRS on our infrared countermeasure solutions. And today, we’re developing a break-code solution for the U.S. market. We remain focused on performance. In 2019, we formed a new organization. In 2020, we evolved that organization. We’ve realigned ourselves to a one electronics team within one Leonardo with a joint focus of profitable growth. By combining our air and space and land and naval in Italy has brought the same clarity with the customer that exists in the UK, with one management team, with increased synergies and a common approach to enhancing profitability.

In 2019, we developed a new baseline defense systems budget to ensure the growth was achievable. With automation, we’ve kept it as a stand-alone activity. It is a very different customer base. Product groupings and marketplace. Execution issues are now being addressed and the team are looking at partnering and exploitation opportunities. Vitrociset was added providing a support services dimension we didn’t have before. We intend to keep focused on delivering our plans during 2020. We are transforming the division with greater focus on profitability and cash. How are we transforming the business? You’ll – those that have seen this in the past will recognize this is the way we achieve it. We use a continuous improvement with each part of the operation having a dependency in another part of the wheel.

Some examples, our integrated project teams are mandatory. We are less shifting on our production and engineering plans, greater procurement power and consolidation, customer account management driven in, transnational operation councils to share experiences, single-investment approval chains. We’re evolving our cope culture, empowering our people, flowing responsibility down, having diversity and inclusive policies focused on the gender pay gap, women in defense, flexible benefits to retain and attract staff. We are changing as an employer, making positive improvements to our culture.

Our previously presented 15 live transformational work streams, all aimed to improve performance and focus on synergy. I’m delighted to tell you we’re on track with all of them, and some are ahead. Our innovation and technology is managed across the division with technology councils, innovation forums, project cost review boards and most importantly, to me, a focus on the reduction of duplication of effort. We have great potential to fulfill. But first, we have to bring it together through a number of these transformation plans. And what does this mean? It means our path to double digit profitability. As I’ve already said, I’m delighted we’re one year ahead of that schedule. We still have opportunity. The amount of pass-through that we do in this business suppresses that number to where it currently sits. Without that, this number and our true profitability is higher. Our London Naval has a great degree of pass-through within its numbers, but it gives us the opportunity to continue to focus on our efficiency and delivery to continue to grow.

A short few words on the future, on Tempest, on our existing Typhoon. As Valerio, I’m sure, will discuss in his presentation, I would just like to take a minute to highlight where we are and what it means to electronics. Under any new platform and I’ll remind everyone, Tempest is multiple platforms, not a single one. But for any new platforms that are developed, manned, unmanned, fixed or rotary winged, electronics are at the heart of the system. These sensors can be modified, upgraded, evolved and changed multiple times over the life of the platform.

For Leonardo, this is a great position, as we deliver platforms, and most importantly to me, we supply the electronics. Leonardo has been the electronics leader on the Typhoon program, providing 65% of the avionics, learning valuable lessons over many decades of design, development, production, support and upgrade of the platform. We lead both the Euroradar and EuroDASS consortiums. Leonardo will be the lead on the electronics for both the UK and Italy, on the FCAS activities, leading on the valuable lessons about the future of combat here.

Tempest is our future. Typhoon is our current. We must start from Typhoon and evolve through spiral development to benefit both Tempest in the future and to keep Typhon relevant today. This platform will be relevant till the 2050s. From now, we start work on Tempest. The gestation period of this program is many years, but we already have many hundreds of people working on the program today. We aim to be at the heart of Tempest, building from the inside out.

To summarize, this market is changing at a fast pace. Leonardo intends to be a leader in this change. The electronics market is significant in both its size and relevance to Leonardo. We are transforming to become ever more profitable and even more focused on cash generation. We have brought businesses together to realign our market positioning. We deliver double-digit profitability, and we’ve delivered that a year early. Our cash conversion will continue to be above the group average. Our CAGR is in excess of the market trend. We are delivering long-term and sustainable business. Electronics is transforming to grow and to be fit for the future. Thank you.

Valerio Cioffi

Good morning, everyone. I’m Valerio Cioffi, and I’m Managing Director of Leonardo Aircraft business, a role I’ve been in since beginning 2018. As many of you know, I’ve spent my whole career in working in aeronautical engineering in Leonardo, and I would like to share this considerable experience with you.

This morning, I want you to show how we delivered in 2019 and how we are starting today with a very solid and profitable base position; how our short-term outlook and growth is already strong and supported by our great product range already present in the market; how we are transforming to grow our business, not just in the short term but strongly over the long term; and more importantly, over the long term, how we can transform and grow by using our capabilities for platform and solid solutions to make the most of European and worldwide opportunities in a growing market and being able to use new disruptive technologies to remain competitive.

As I said, today, we are starting with a very solid and profitable base that we can leverage on. A € 2.3 billion revenue business with a very robust double-digit profitability and the strong increase year-to-year. We have a great product range in attractive, high-growth market segment, like fighters and trainers, and we have the potential to take it a lot further as I will explain. We have been and we are set to continue achieving high top line revenue growth, a CAGR of 14% over the planned period. We are highly confident of our short-term outlook prospect because of the strength of our product portfolio because we have achieved order intake across all our product areas because of the strong backlog of over €10 billion, mainly over four years of that we’re in production and because we are delivering major programs like EFA Kuwait. But that’s not all, we have a clear strategy in place to transform the business even further by creating long-term value.

But first, let me remind you of our product portfolio and where the opportunities are. You can see our key product areas and impressive capabilities in combat, trainer, tactical transport and multi-missions, which combine the operational flexibility and ruggedness needed to accomplish military missions. Without a doubt, our wide portfolio satisfied every customer requirement from – for basic to advanced training, from complex defense to peace-enforcing operations. In the attractive fighter markets, Eurofighter program stands out significantly, above 600 aircraft order, and we will complete 600,000 flight hours soon.

It has been chosen by nine air forces in Europe and in the Middle East. We have prime contractor position on the EFA Kuwait program, and we are expecting to deliver the first aircraft later in 2020. The JSF is also a great business for us. We are ramping up production in wing manufacturing and offer final assembly with additional opportunities for our plant. And we are seeing the start of amiable activities. These programs show our strength and capabilities in new international collaborations, like EuroMALE and the future tenders program.

Trainers is yet another high growth market for us, where our product are already ahead of our competition. For the M-346, we have the most modern solution for training the new generation of pilots. But this is not just an integrated training system, it’s an established and proven product with even further opportunities in the light fighter domain. Thus, opening new worldwide market for us.

For the M-345, we have a great basic trainer. It’s simpler, lighter, cheaper and easier to maintain, and we will be making our first customer deliveries in the next months. We then have another high-performance platform in the C-27J with significant growth potential. It has also multiuse capabilities from battlefield that lead to human internal supporting demanding condition including firefighting from command and control to intelligence from surveillance, to recognitions over field. And the great thing is the way the platform is evolving in terms of avionic architecture and requirements.

This gives us many opportunities for growth in the existing fleet as well. You can also see this with the ATR Special Mission, it’s reliable, affordable with advanced feature, well-suited to maritime role with the Leonardo state-of-the-art mission system, Leonardo ATOS, advanced sensors and a complete communication suite. And lastly, all these described product and services are being reinforced with very attractive customer support activities. So let’s now look at our transform to growth strategy. I will show you a couple of examples.

The first area is how we can leverage and evolve in the key solution in the fighter segment, and this creates great opportunities for us. We are key player in European defense that is evolving its future requirement. Tomorrow customer, we want what we have in our strategy, a network at system of system increased by platform resiliency, flexibility and affordability, product interoperability including manned and maintaining platforms to be upgradable and interoperable with legacy assets.

We have the right platform, Eurofighter, which has constant equipment and emission upgrades including a new E-Scan Radar, new weapons and additional new capabilities. And we see Eurofighter evolving and giving us future opportunities over the next 20 years. We expect this program to lay the foundation for a generous new order intake which will keep Eurofighter operationally relevant for decades to come. And we see this activity as being a real and great bridge towards tenders where we are and we will be key player.

Then the new transfer manned EuroMALE which is an attractive addition to our capability, and that represents one of the key technological foundation for the future European defense. Now let’s move to the second example, our leadership position in training solution. It’s a highly attractive growth market and attractive to our customer. Our core strengths are seen in the trainer aircraft, but also in mainly in training solutions, and this opened a new market for us globally. So, we launched the international flight training school in partnership with Italian Air Force to deliver advanced training for next-generation fighter pilot. Also working together with our international partner, CAE. The M-346 fighter attack is the most suitable response for widest range of customer operational need. It’s a multilevel and cost-effective light fighter, keeping all the feature of the M-346 advanced trainer, so providing maximum commonality, operational flexibility and keeping itself advanced training capability. As you can see, we are transforming to satisfy our customer requirement and evolving platforms and exploiting new technologies.

So in summary, we have delivered strongly in 2019, delivering on good order intake, revenues, profitability and cash flow generation using our best-in-class product and solution. And we can look to the future with confidence. Our key platform are already developed that will use much less cost going forward. We have all the internal expertise and skills to be key player in the major European defense program on the basis of existing international collaborations. We can keep our leadership in training solution and expand on this further.

And finally, we can leverage strong internal capabilities, more than 1,500 talented engineers to develop our future, focusing also on the attractive technologies when and where our real game changes. It all adds up to an exciting future in the short and in the strong long-term for a sustainable growth in profitability as well as in cash generation.

Roberto Cingolani

So good morning, my name is Roberto Cingolani. I was appointed the Chief Technology Innovation Officer of Leonardo in September 2019. Well, this, so far has been a technology assessment of the company, and I proposed the research and development master plan for the period 2020/2030 and the sustainability master plan for the same period. Just a few words about my background. I’m a physicist in origin, my background is in nanotechnology, material science, robotics and artificial intelligence. I have experience in academy as well as in industrial research. I was working in Italy, Germany, U.S. and Japan, and in the last 12 years, have been the CEO of a research institution that’s been working at the edge between basic and applied research, called the Italian Institute of technology.

The role of CTO in Leonardo Leonardo is to improve the governance of the engineering and to inject innovation in the company, both in terms of gradual innovation for keeping the competitiveness of the products and in terms of game-changing technologies that are supposed to create the vision of Leonardo for the next 10 years.

Actually, the first thing we did was a benchmark with the aerospace and defense competitors. And I think it’s clear now that we need to reinforce corporate innovation, especially low-TRL research and development. We need a long-term research and technology innovation master plan for the next 10 years. This is really mandatory to be competitive for the future. We need a slight effort to reach the standard of IRAD, so internal research and development investment, which is in the range of 5% for all competitors, and we’re not that far, but I think we need a bit more effort.

And we need a long-term sustainability master plan because we have to face the challenge of the United Nation sustainability agenda and the new European Green deal. So the R&D strategy and the sustainability strategy should be developed simultaneously. The master plan for the year 2030 is based on three pillars. One is to ensure development of current know-how and basically optimizing the product, the existing products. This has to be done primarily through the reinforcement of the intellectual property portfolio. We need a corporate IP office and accelerating the digitalization of the product engineering.

The second pillar is to ensure innovation and to propose new ideas for new markets, possibly opening new markets. So we have to identify high-risk, high-return R&D interdivisional programs, so programs of transversal interest for the entire company. And for this, we will create a network of corporate research and developmental laboratories called the Leonardo Labs. So this is in the standard of most international high-tech companies worldwide.

The third pillar is, of course, sustainability, and this will be in the frame of the sustainability master plan 2030. Now the first action, you can see in Slide number 5, these are the six interdivisional programs that we plan to develop over the next 10 years. So the first two are big data storage and analysis and high-performance computing because we need to improve substantially our competition capability and that analysis capability, then there will be a massive program on artificial intelligence and intelligent autonomous systems.

Quantum technology for cryptography and for quantum devices, electric mobility for drones and electrification of aircraft, so sustainable valuables, aircraft, helicopters and materials and structures for future applications.

Second action has to do – that I want to describe today has to do with the construction of the high-performance computing center of Leonardo. This will be a 10-petaflop machine based on 512 GPU and equipped with 20 petabyte storage capability. This will be a key factor to enable digitalization of the company. So the journey towards the digital twin of our technologies to enable predictive maintenance and advanced analysis of our images from satellites and space application, to have a frontier in silicon design capability, so to design new technologies to evaluate, to predict trends. And this will be, for sure, one of the most important improvement we’re going to produce for the company in the next 12 months.

The third example, the third key action I want to discuss with you today has to do with the intelligent autonomous systems. We believe there is a huge market coming in this field. There are many companies having vertical capabilities in AI, sensing network. But I think Leonardo is one of the few in the world, which is capable to embody an artificial intelligence, to obtain a smart and managed system, which is capable of deciding and activating movement. And this is because we can integrate different technology platforms, like possibly nobody else around the world. So we can integrate AI, deep learning and machine learning. This is because of our improved computational capability and storage capability.

We can integrate advanced sensing network just because we are improving our technology including quantum technologies and new cyber technologies. Fast wire transmission protocols, namely 5G, but also other protocols, actuators and bodies with a massive improvement of our technology in robotics and sensing for sea, land, air and space application. And finally, power sources having to do with battery, supercapacitors, fuel cells, which are mandatory, both for electrification of aircraft and helicopters but also for drones and many other actuating devices.

I think the challenge is shown in the two pictures that you can see in Slide 7, the fantastic demo of the Nanchang Flight Convention where 840 drones were reproducing the shape of an aircraft. And this is a fantastic example of AI squirm motion. We do have technology like those, and we are developing this kind of technology for our future application, future products.

And on the right-hand side, you can see our latest robotic platform. This is – it’s a sentaurus, it’s a quadruped with manipulation capability. This is for extreme environment applications. And this specific picture is in the Jeff Besos garden at the occasion of the Mars Conference. There is a huge movement now in the world to reach the moon, to reach Mars with vectors, but nobody knows what work we are going to bring there. So we need machines that replace humans and create the ecosystem for humans to come. And this is definitely something we should face in the near future.

If you give a look to the net, you’ll see that Internet of Things is now acclaimed to be a business of €210 billion in the next two years. Industry 4.0 is €40 billion. Autonomous cars is more than €50 billion. Space robotics is quartered at a very infancy for €3.5 billion. Flying, land and submarine drone market is about $140 billion. So this is the market we have to take out. And we do have all the technology, the expertise and the capability of system integration to do this.

On the meantime, space companies are rising everywhere, Space X, Blue Origin, ISpace and Intuitive Robotics. They’re all rushing to go to the moon, to go to Mars, but the technology to be transported there is missing. I think we should really place our position there and develop technologies for that specific market.

The fourth key action has to do with electrification. This means reducing carbonization, which is a general trend of international sustainability, increase short-range regional transport. And please remember that we do have one of the most common short and medium-range platforms, the ATR aircraft. Develop human mobility vehicles for 3D traffic. 50% of the world will live in mega cities in the next 30 years.

And the traffic there will never be dimensional anymore. So we should start thinking in 3D with flying cars and the flying cars are going to be very close to the short-range aircraft technology. The range is going to be 100 to 150 kilometers. Everything has to be electrified. Everything has to be not very noisy. And you see, in fact, Hyunday with Uber, Aston Martin with Airbus, Helicopters, Porche with Boeing. There are a number of digital and more – a number of ideas now being developed in this direction. We do have a similar strategy, that’s still not public. But this is a big challenge that we have to face.

Developing controls, developing hybrid electric and new generation propulsion systems, developing a brand-new class of traffic and transportation system is the challenge. And indeed, the Norwegian government invited Leonardo and Airbus recently at a convention because the Norwegian government wants to decarbonize completely aircraft transportation by 2030. And Norway is a case study of great interest because they have 70 airports and 40 heliports and the average distance of flight is 150 kilometers. So this is really a fantastic benchmark, in which we will be challenged together with many other companies in the world.

The last action I want to mention today has to do with the creation of the corporate labs. In the map, you see in Slide 11, these are the first six laboratories that will be launched. By the way, some of those are already up and running, been launched very recently. We will establish their teams, so very young people by – we’re going to hire about 200 people by international calls on a five years contract basis. The most advanced high-risk research will be developed in the corporate labs, will be shared and distributed in all divisions of the company, and we hope this will boost technology and innovation for the next 10 years. And with this, I conclude, and I thank you for the attention.

Alessandro Profumo

Before I hand over to Alessandra to cover our full year 2019 results, I want to remind you of what we have achieved in the last two years and explain how we have updated our planned targets of now for the next five years. Over the last two years, we have been executing the strategy we have presented in 2019, I should say, successfully delivering or exceeding our promises, doing what we said that we would do.

I’m particularly pleased that growth is at the heart of our strong performance, with increasing volumes that are key to reliable growth. We have delivered on our targets and even exceeded them. Total orders of €30 billion over the last two years and a top line growth of 8% in 2019, 2019 versus 5%/6% target in the plan. So we are growing faster than our reference market.

EBITA cumulated annual growth at 8% and cumulated free operating cash flow in the two years of €580 million, above our expectations. Important that we are delivering on our targets, and we have even exceeded them, building confidence that we will deliver on our long-term ambition. So you heard our strategy for the long term, and this underpins our confidence in delivering our targets. We are now moving, upgrading the target in terms of cumulated orders. Now we’re expecting the next five years from 2020 to 2024, a total order cumulated value of €80 billion, which is €10 billion higher than the 2017/2022 expectations

Given time, we would have expected to see the benefit of one company and our investment in the international commercial organization. Also our revenue growth of the plan is tracking in line with our target growth rates. So we are confirming the cumulated annual growth of 5%, 6% revenues, 2017/2024. The EBITA CAGR of 8% reconfirmed in 2020/2024, with the return on sales growing and steadily at double-digit without pass-through.

On plan, with strong revenue growth and continued investment to be the backbone for growth. We are happy with the progress made. In considering our profitability, you should remember that if you look at our return on sales, adjusting for pass-through business, again because of our strategically important brand conductor position, then we will stand now at double-digit return on sales already in 2019.

And we have also made cautious decisions, picking up orders in strategic markets that can expand our long-term opportunities in key areas or provide us follow-on opportunities in profitable customer support activities. The solidity of our approach is reflected into the return on invested capital expected to grow further.

Over the next five years, we also see an improving cash flow profile. Our guidance is also consistent with the accelerating cash flow from 2020 with an average cash flow conversion progressively improving, above 50% on average over the next five years, you remember, was over 50 in the previous plan. But – and in my opinion, is even more important, we are now targeting to stay above 70% in terms of conversion rate at the end of the plan. And as we continue to deliver, we continue to be fully committed in being investment grade. So we are focused on execution of the strategy to achieve targets set with sustainability as a base of plan to create long-term value and ensure the robustness of returns.

With that, I will hand over to Alessandra to go through details of the full year results and 2020 guidance. Alessandra?

Alessandra Genco

Thank you, Alessandro, and good morning, everyone. When we met in Cascina Costa in January 2018, we outlined the plan for growth for Leonardo. We said we were planting the seeds for growth. Now two years later, we can see that those seeds have grown into a well-rooted plant. Over the last two years, we have been delivering on our plan, meeting even exceeding key financial targets and doing what we said we were going to do. We are track to continue to deliver on our plans for long-term sustainable growth. We’re focused on the future, and we have a clear strategic path forward.

As you have heard from Alessandro, this plan is based around strengthening our core on the basis of the many strong business fundamentals across the group, using key drivers to transform to grow further and mastering and leveraging innovative technologies that are transversal across Leonardo.

From a financial perspective, the identified growth path will lead to higher cash flow generation. Now let’s look at the financial picture in more detail, starting with our 2019 full year results. The full year results are a confirmation of the progress on our planned growth trends. We planned and we delivered on our commercial strategy, on operating performance and on cash generation and financial strategy. We achieved solid progress and momentum in our main businesses. And this was strong enough to more than offset challenges in some of our strategic joint ventures. We finished the year strongly in Q4. And this meant we were able to meet and even beat our guidance on all key metrics.

Now you can see the highlights. New order intake at €14.1 billion, well ahead of guidance; revenues at €13.8 billion, up 12.5% and also well ahead of guidance; group EBITA at €1.3 billion, also showing double-digit growth of nearly 12% and giving us a ROS of 9.1%. We met our targets on EBITA and profitability improvements, and a much higher net result was generated at more than €800 million.

Also, our free operating cash flow was better than guidance at €241 million and that translated into a net debt of €2.8 billion, in line with guidance provided. And we have continued to invest in our long-term future in terms of people, skills and innovative technologies. So in overall terms, we met or exceeded our earlier guidance. We’re pleased with progress and solid execution.

I’ll cover the new guidance for 2020 in more detail later. Now let me cover the key group metrics and show you the key drivers of our operating business, starting with new orders. We again delivered a strong performance at group level with order intake of €14.1 billion and book-to-bill above one. We’re pleased with the continuous good momentum in the commercial performance across all our business sectors on the back of our commercial strategy and with a focus on export markets.

Let’s look at the drivers in the businesses. Helicopters achieved good order intake of €4.6 billion, another year of strong performance following 2018 where we booked the NH90 Qatar contract for €3 billion. You will have seen the main orders on the military side from Spain, Poland and Italy. Our successful development of dual use configurations and other variants has brought important new orders on the military side in both domestic and international markets. And we have continued to see and win good customer support and training orders, as you have already heard from Gian Piero.

Then Defense Electronics. Also, this business performed well commercially with new order intake of €7 billion. Again, a very strong order intake at Leonardo DRS, which confirms its strong momentum, also reflecting its excellent positioning on key U.S. DoD programs as you have heard from Bill. DRS won the contract for the U.S. Army new generation mounted family of computer systems and other important programs. For the European side of electronics, we booked export orders for naval combat systems and airborne radars.

Moving on to Aeronautics. We won €2.8 billion of new orders, up 8.5% versus previous year. Around two-thirds of this relates to the Aircraft Division where you have heard from Valerio. Again, that was a good performance by aircraft with good orders for our trainer aircraft for the M-345 in Italy and our first order from overseas for the M-346 light fighter attack version plus orders from Lockheed Martin under the JSF program as well as customer support orders for the C-27J tactical transport aircraft, the ATR maritime patrol aircraft and trainers and further orders for Eurofighter to enhance its operational capability and performance as well as customer support.

The Aerostructure’s division won further orders for the B-787 fuselage sections and the ATR fuselage. So big picture, here is another very satisfactory commercial performance across the group. And we see the benefits of our focused commercial strategy. And it results in a higher, stronger backlog now in excess of €36 billion. This backlog is balanced evenly across the three main business areas. And on top of that, we have the sizable soft backlog in DRS. The important point for me is seeing our continued top line growth, fueled by strong order intake, leveraging export markets, in particular, across all business lines and then delivering on this backlog, which you can see in 2019 group revenue performance.

Speaking about revenues, you see again that the results we delivered in 2019 are above our guidance. Solid growth of 12.5%. Group revenues at €13.8 billion with a currency tailwind of €160 million. It was a strong performance across the whole group, and particular in Defense Electronics and Aeronautics. We achieved further good progress in Helicopters, essentially delivering on what we said we would do. It meant revenues were up 5.6% at €4 billion with a good product mix and higher customer support plus military and governmental revenues, more than offsetting lower revenues on the civil side. Defense Electronics performed strongly as well, delivering double-digit revenue growth. Revenues grew at 12.3% to just under €6.7 billion with another very strong performance at DRS with higher production levels, leading to revenue growth of 16% in dollar terms. The European side of Defense Electronics grew revenues by 6.9%, driven by increased activity in airborne and space systems as well as in land and naval Defense Electronics.

Moving to Aeronautics. We are very pleased with their performance with revenues growing 17% to €3.4 billion, performing really strongly in aircraft. Good progress on the major EFA Kuwait program, where you remember, we are a prime contractor, plus important contribution from customer support. We also saw JSF ramping up and the continued contribution from our other proprietary platforms. At the same time, in Aerostructure, we saw higher production rates for the B-787 program. So in overall terms, a very good group revenue performance, an evidence of our delivering our top line growth targets. Speaking now about EBITA and profitability. Importantly, we saw stronger performance from all the main businesses, which more than offset the lower contribution from some of our strategic joint ventures. The main businesses all finished the year strongly in Q4. That meant that we delivered a full year EBITA of €1.25 billion and a double-digit increase of 11.7% on 2018.

Overall, maintaining a profitability of 9.1%. We’re very pleased that Helicopters delivered our planned step-up in ROS. We have achieved our target recovering profitability a year ahead of our promised target rate. And it’s a great credit to Gian Piero and all his team. Helicopters increased its EBITA by 20% this year to €431 million. Strong increase also excluding the benefit from the review of the terms and conditions of the UK pension scheme that we already mentioned to you earlier in 2019. Higher revenues and higher profitability. Speaking about Defense Electronics. This segment recorded EBITA of €630 million, a strong increase of 17%, with total profitability higher at 9.2%. There is a picture I want to show you and to let you understand more clearly.

There is a real positive momentum at DRS, which achieved its third consecutive year of double-digit top line growth along with growing profitability. And there is also the European side of the business that performed well. Profitability was strongly anchored on some core programs like the EFA avionics. And we are continuing to deliver on our backlog. EBITA grew 8.4% to €394 million. A very good result given some impact from the level of pass-through activities, especially on land and naval and airborne programs.

In Aeronautics, you see that we delivered EBITA of €362 million, up 10.4% and with a return on sales of 10.7%. Here, the highlight was again the very strong performance of the aircraft division. And in Aerostructure where we’re starting to see the positive impact of the actions to improve manufacturing efficiencies. All this more than offsetting the lower contribution we saw in ATR, affected by lower deliveries and worse mix.

Finally, Space. As you know, our manufacturing joint venture is facing a tough environment in the commercial market with revenues falling by more than 10% and higher development costs affecting profitability and where our restructuring plan was launched in Q4 last year. All this partially offset by our Space service business performing well. Then you can see €194 million of centralized activities and corporate costs, growing as a consequence of centralization of functions and investing in building the backbone for growth, in particular on the commercial side and on the digitalization. So big picture, for the second year, we are again delivering on our profit targets.

In summary, in 2019, we had strong order intake, double-digit revenue growth and double-digit EBITA growth. And we also have seen material improvements in our net result, driven by lower level of restructuring as much as an improvement in our profitability already mentioned and lower PP&A, mainly due to the completion of a large part of the purchase price allocation related to DRS. You can see the building blocks here on the slide. Higher start point EBITA, much lower restructuring costs. And remember that 2018 results were impacted by one off – the one-off costs related to the early retirement plan for €170 million, while 2019 benefited from a release of provisions related to the sale of AnsaldoBreda. Similar amounts to the release of provisions accounted for in 2018 and related to Ansaldo Energia.

2019 financial expenses includes cost for the buyback of the U.S. bond for approximately €20 million. And income taxes reflects the higher profitability level recorded in 2019. What all that adds up to is an improved net result of €822 million, materially higher compared to 2018, where we had a €510 million result. I’ve spoken before and in past conversation we’ve had about our focused investment strategy. Put simply, we are investing for sustainable growth, sustainable over the medium to long term, focused on research and development and key technologies and products as well as enabling our industrial sites to operate more efficiently.

You have heard more from Roberto Cingolani, about the importance of our technology and the innovative activities. We have in mind a clear trajectory. Investment priorities will be driven to provide innovative products and solutions. The latest investments we’ve made are a clear evidence of what I’m saying. Namely, the ATR 42-600, the shorter – the short takeoff and landing version, the STOL version; the Falco Xplorer, the large tactical UAS; and the Kopter acquisition that will lead to the development of a new and advanced single-engine helicopter. And we are investing to address our customer requirements through products like the AESA radars for both naval and airborne applications and products and systems that are cyber resilient, and this is a feature that is every day more important in the world we all live in.

We also want to continue to be part of European and international cooperation programs, like Tempest, OCEAN 2020 where we have demonstrated the capabilities of our rotary wing platform unmanned, the HERO, in combination with our advanced command and control naval systems and that was an absolute success. And we’re now targeting investments for the next five years between €600 million and €700 million per annum. As well as on our commercial and operating performance, we have also been delivering on cash flow generation and cash flow conversion. As you all know, cash flow is a key priority for Leonardo.

Two years ago, we outlined the plan for 2018 and 2019. And we have delivered above that plan on both years. In 2020, we expect a material step-up in cash flow and over the plan. We’re seeing a strong underlying improvement, clearly driven by expected order intake and operating profit across the group; increasing contribution of EFA Kuwait starting from 2020, as this year, we’ll see the first deliveries to the customer; working capital management through actions on inventory and accounts receivable optimizations; and overall, industrial process improvements to counterbalance the unwinding of customer advances.

All this leveraging the efficiency plans in place throughout the group and also on the basis of a gradual progress in Aerostructure. With respect to indebtedness in 2020, our plan is to take on further challenges and to further reduce our indebtedness and strengthen our capital structure. In 2019, we are in line with our target of reducing gross debt by 20%. That’s what we did, in fact, refinancing only two-thirds of the expiring debt. Over the next three years, we’re targeting an additional reduction of gross debt in the range of 15% to 20%, refinancing only 50% to 60% of maturing debt.

As shown in the chart, 2022 gross debt will be below €3.1 billion. And we’re tracking ahead of plan in reducing costs of debt, as the reduction between 2017 and 2019 was equal to 35%. Faster than expected and higher than the target we set which was 25% to 30%. We aim to further reduce the cost of funding between 15% and 20%, leveraging on our credit worthiness, which is solid and strong. The target for 2022 is to have a cost of debt around 3%. We continue to be fully committed to investment-grade by the end of our plan.

Also in terms of diversification of funding sources, we’re exploiting market opportunities as proven by the latest funding transactions, such as the €300 million loan by the European Investment Bank and the financing from Cassa Depositi e Prestiti for €100 million. Despite the challenges in making forecast in the current situation due to the COVID-19 emergency, Leonardo believe it is appropriate to provide guidance in a continuity scenario without including COVID-19 impacts.

In this continuity scenario, Leonardo’s outlook is the following. €14 billion in order intake with good momentum confirmed across the group, supported by a strong pipeline, both export and domestic. Revenues in the range of €14 billion to €14.5 billion, further growth driven by both strong backlog and new order intake, mainly in Aircraft, EFA Kuwait, Electronics and Helicopters. EBITA in the range of €1,325 million and €1,375 million, improving across the group and in particular, analyzing by business segments.

Aeronautics increase driven by aircraft volumes, EFA Kuwait with confirmed solid profitability; Aerostructure is gradually recovering. Helicopters, profitability is stable at double-digit, leveraging on solid backlog and strong market positioning. Electronics, volumes and strong focus on execution and efficiency improvement, driving profitability increase, both in Europe and in the U.S., in DRS despite pass- through and development activities.

Space, profitability expected to increase from 2019 bottom supported by gradual recovery of manufacturing and satellite service improvement. All these underpinned by constant focus on efficiency and industrial process improvement initiatives aimed at strengthening competitiveness while continuing investments in central functions and infrastructure to build the backbone for growth.

Free operating cash flow in the range of €400 million to €450 million with a confirmed step-up in 2020, driven by EFA Kuwait cash profile, operating profit growth across the group as well as working capital management focused on inventory and receivable optimization, while supporting growth and counterbalancing and winding of customer advances. Net debt at €2.8 billion, which includes circa €100 million higher IFRS effect compared to 2019 as well as the acquisition of Kopter, together with the forecasted dividend payment.

And with this, I now hand over to our CEO for the final remarks.

Alessandro Profumo

You have seen the key points and themes that we, as a team, were saying in our presentation this morning. First, over the last two years, we have been delivering on our plan and strategy. In fact, we have done what we promised we would do and even over-delivered. Secondly, we have a clear view looking forward, both our vision and longer-term ambition where we take the Leonardo group and our future strategic plan. And thirdly, we, as a team, are fully committed to delivering on this.

We have the full support from our institutional stakeholders, and we intend to continue to build a sustainable business in the long run, doing what we said we would do. You will also have seen in the presentation what I think are the most important elements on our recent progress. We have delivered on our financial targets. But as well as delivering on numbers and targets, we are working much more as one Leonardo.

You can see it in the commercial strategy with the order intake and the export successes. And we are harnessing technology and innovation all across the group. And then we have a clarity and focus on our strategic path. I spoke earlier about three main focus areas: strengthening our core where we are driving value from the strong fundamentals across the group; secondly, the theme of transforming to grow, how we are transforming to gain additional growth drivers across the group; and lastly, the theme of mastering the new, how we are identifying, developing and leveraging and scaling new innovative technologies across the group to remain competitive, one example for all the autonomous system. We are excited by our potential and the opportunities. We have a team determined to achieve our ambitions.

Valeria Ricciotti

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

Alessandro Profumo

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

Our engagement with all the stakeholders throughout this period is a key priority, and we remain fully committed to executing our programs. So far, we see some potential effects in some areas, but it’s really too early to assess this eventual level of business and financial impact. We’ll promptly inform the market once we’ll be in the position to do so. We continue to monitor and analyze the situation extremely closely, and we have already taken actions and sensible precautions across the globe. We are fully committed to deliver on our medium and long term plan and goals, and it is important to emphasize our confidence in our core business fundamentals and clear strategic path for the future. You will have seen the key point and themes that we. As a team – and really, I stress as a team, were saying in our presentation this morning.

First, over the last two years, we have been delivering on our plan and strategy. In fact, we have done what we promised we could do and, in many cases, even over-delivered. Secondly, we have a very clear view looking forward. Our vision and long term ambition, where we want to take the Leonardo group and our future strategic path based on strengthening our core transform, where already have to grow and massive venue accelerating innovation.

And thirdly, we, as a team, are fully committed to delivering on this. We have the full support from our institutional stakeholders, as I’m used to say, we cannot achieve the – in my opinion very good results, we’ve achieved in 2019, without this strong support by our institutional stakeholders, and we intend to continue to build on sustainable business in the long run, doing what we said we do. So we’re really very positive on our potential and opportunities that we have in front us. We’re a team determine to achieve our ambition.

So having said, so and really I think that coronavirus is expansion that do have an impact as I said before, but soon or later, we will be overcome and we have to be ready to take all the opportunities also from the lesson, we’re achieving in terms of flexibility, in terms of capability of managing such a difficult situation will be a base for our strong a positive future.

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

Question-and-Answer Session

Operator

The first question comes from David Barker of Bank of America. David, your line is now open.

David Barker

Good morning. Two quick questions from me. Firstly, on ATR. Could you give a little bit more insight on your planned production for 2020 relative to 2019? And have you seen any early signs of customers wanting to defer these deliveries related to the virus? And then secondly, just a bit more detail on the numbers. With your 2020 cash flow target of €400 million to €450 million, are you able to provide a little bit more detail on the exact contribution from Kuwait, working capital and Aerostructures? Thank you very much.

Alessandra Genco

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

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

David Barker

Okay. Thank you very much.

Operator

The next question comes from Monica Bosio from Banca IMI. Monica, your line is now open.

Monica Bosio

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

And the second question is on Vergiate plant. I know it’s too early to quantify. But I’m just wondering if you are thinking, accounting some provision to face the cost of the containment of the virus at the plant and if you are experiencing some FERC disruption at the Vergiate plant. The third one is on the financial charges, which came below our expectation despite the one-off. Can you please give us some indication, rough indication on the financial charges expected for 2020 and maybe also for the tax rate? Thank you very much.

Alessandro Profumo

Okay. Monica, thanks for your question. I’ll start to answer, and then I leave the floor to Alessandra. On my side, on the role of prime, then clearly, it’s important, in my opinion, to look to return on sales pre and post pass-through, because as I’m used to say, we like a lot the role of prime despite of the fact that this is very clearly dilute the return on sales because on all the activities which are not performed by you.

You have only the prime fees. But to be a prime is always incredibly relevant in terms of relation with the customer. So I think that to talk of return on sales is always to be qualified. And secondly, and this year, we started to communicate to the market it’s also incredibly relevant as a return on invested capital, because at the end, we are paying our dividends on the capital you provided us and what is the return on this capital. Then Alessandra will go more in detail on the numbers.

Talking over Vergiate, as we stated and I stated very clearly, today is really too early to say anything on the potential impact of the virus because clearly, in this very moment, the acceptancy, for instance, of helicopters cannot be realized because the few that – of our customers that have to come in order to accept the helicopters, they cannot fly. But we really don’t know if this will be handed in the first half or before the first half, after the first half.

So today, it’s technically impossible to quantify what will be the impact. And in any case, as you can imagine, if we have a slowdown in acceptancy, we are already thinking on what we will do the day the acceptancy could be realized in order to recover. So we don’t know the impact and we don’t know what could be realized in terms of recovery action. So today, it’s really – we are working on that. We have – we are putting in place all our operational plans, but to quantify them is impossible.

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

Alessandra Genco

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

Monica Bosio

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

Alessandra Genco

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

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

Monica Bosio

Okay. Perfect. Thank you very much.

Operator

The next question comes from Nick Cunningham of Agency Partners. Nick, your line is now open.

Nick Cunningham

Thank you very much. I hope you can hear me clearly. Three questions, quite different, actually. First one, I just wanted to clarify the other line in the segment breakdown of EBITA of minus €194 million. I’m wondering if you could just break that down a little bit for us in terms of what moved and how you expect that to change going forward. And then secondly, I know you can’t quantify the impact of COVID-19, none of us can. But your remarks on helicopters and the difficulty of deliveries is really interesting and helpfully informative. And I’m just wondering if you could talk a little bit about how you’re working through the practical challenges of social distancing in the factory, because notably, aerospace factory seems to be remarkably empty of people these days. Supply chain, whether you’re able to maintain, so far, suppliers and how much inventory you carry and how much buffer you have? And also, the ability to ship. I appreciate you can’t ship helicopters, but can you ship, for example, 787 fuselages? Thank you.

Alessandra Genco

Okay. Good morning, Nick. So, the other line as usual, includes all the elements that are related to the central operations of the group. And the step-up that you see over the two years is mainly associated with centralization of activities that used to be performed at divisional level that now reside within the central functions, an increase of activity from the commercial side. So, as we have expressed in early occasions, there is a backbone that we need to build to support the growth of the business, especially commercial, with openings of new offices, international and making those offices able to proactively address market opportunities. So that is a large share of that increase that you see year-over-year. On COVID-19, Alessandro, you want to address that.

Alessandro Profumo

COVID-19, clearly we have started immediately when the virus started to be present in Italy with intervention in all the different premises we have. In this very moment, we have more than 8,000 people that are working from home. So you can imagine what is “the stress of the infrastructure,” but we have been capable to manage that with a strong also attention to the cyber security topic. So, we are really working significantly on the topic. At the level of factories, we are managing the way the factories are working in terms of rotation of teams, segregation of teams and so on and so forth. We have, in some case, already closed.

In some cases, we are in the process of closing the canteen where, in any case, there are the safety rules in terms of the instances that have to be maintained. We have sanitized all the toilets, sorry, for – but – and we have an extra – we have extra team that are cleaning them anytime that they are used by any employee. So we have different actions in place. We are also considering, in some case, to close some department in order to optimize the activities. So really – and we have a crisis management team that works on a daily basis on the topic with some central function and all the divisional managers plus the divisional HR. So really, there is a significant activity within the company.

On top of that, we have some site that cannot be closed. In any case, for instance, in Fortuna, where we are managing satellites. So in this case, there are significantly stricter rules in terms of segregation of teams in the sense that we have always two teams capable to manage the topic. One is stably at home and the other one comes to work. They cannot meet anyone within the organization. So it’s also outside, really bad – outside are the rules made by the government. But even when they’re working, they are strictly controlled in terms of contacts. So we are really minimizing the risk of contagion. And this is important for this site mainly to one – the one related to satellites and the other related to cybersecurity.

So, we are very active. Today, if we have to talk of the potential impact of the virus, clearly, there is what we were talking before of the acceptancy of our products, not only helicopters by the customers. Today, we don’t have a disruption on the supply chain. The team in charge of managing this topic is clearly part of the crisis management. So – because we don’t have suppliers in the former red zone, we have a very specific monitoring on our suppliers. Clearly, here as well, a huge attention on the inventories we have internally.

In some case, we have asked to receive some components in order to be sure that if one of the supplier will be closed, we have inventories. As you know, good can circulate. So this is really one of the topics on which the government has been very clear. So, we can receive goods from our suppliers. Finally, there is, as I said before, the potential fact that we will create a pause in some of our production sites with the holidays or other activities by our employees. So, we are managing the topics. One of the impacts is also on the commercial campaigns because we have outstanding offers in countries where today, you cannot enter.

So, as you know, many countries have closed travels. So you cannot enter in countries where we have some outstanding offer. And again, when we are saying it’s difficult to forecast the impact, which was if this closing of travels we land in June is a story, if we land in December, I think, clearly, is a completely different story. So – and no one can today forecast what will happen. What we know that is the fact that Italy today is very under observation because we have started the process before others. We know that the Italian government as it governs it today, took the most restrictive position, for sure, in Europe, and we are grateful to our government for having done so. So, we know that other government in Europe are less reactive. And when we analyze in Europe and not only Europe, we analyze the curve of growth of the affected people, there is only one country, which is under the line, which is Japan, mainly and partially South Korea and – sorry, South Korea has been very capable in managing the process afterwards.

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

Nick Cunningham

Thank you. That’s very clear update. Thanks very much.

Raffaella Luglini

Next question?

Operator

The next question comes from Alessandro Pozzi of Mediobanca. Alessandro, your line is now open.

Alessandro Pozzi

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

Alessandro Profumo

Sorry, there is also a fourth option, which is debt reduction. That is what we are considering today.

Alessandro Pozzi

Yes.

Alessandro Profumo

Clearly, as you know, our first priority is to be investment grade. So today, in the plan, in the free operating cash flow, we’ll reduce the debt. What is very important for me to stress is the fact that in the period of the plan. You remember, in the previous plan, we said our average conversion rate will be above 50%. Today – in the previous plan. Today, in the plan 2020, 2024, are almost five year, we are saying within the conversion rate on average. So if you take the five years, we’ll be above 60% and in the two last year of the plan today, the free operating cash flow conversion rate is above 70%. So, this is, in my opinion, the most important element because we are saying that, as we always said, free operating cash flow is a priority, and we will go above the European average in terms of conversion rate.

Alessandro Pozzi

So, we should see net debt coming down from 2021?

Alessandro Profumo

Yes.

Alessandro Pozzi

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

Alessandra Genco

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

Alessandro Pozzi

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

Alessandro Profumo

I said before that, unfortunately, the virus phenomena is unpredictable because if I ask you when we will be at the peak of the contagion, I’m sure you – no one can answer. So it’s really difficult to forecast if and when there will be a slowdown. Today, the factories which are open but as I said before, maybe that we will take the decision to close some department. Today, we have – in Vergiate, we don’t have any case of contagion, but maybe mainly the Italian analysts are aware on the fact that this – in this very moment, as there is a meeting of the Prime Minister with the trade unions, which are worried on safety. And as I said, safety of our employees is the priority.

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

Alessandro Pozzi

Alright, thank you very much.

Valeria Ricciotti

Next question.

Operator

The next question comes from Martino de Ambroggi of Equita. Martino, Please go ahead.

Martino de Ambroggi

Thank you. Good morning everybody. The first question is on the order intake. You mentioned some slowdown in ATR in older discussions. You mentioned some campaign at risk for delay because you cannot travel and so on. What are so far the most promising prospects in terms of geography and divisions? I know you cannot provide names and figures, but just to have a rough idea. And the second block of questions is on the quantitative questions. For 2020, restructuring, if there is an indication, very low in 2019 CapEx, where are you planning factoring? And that in the capitalized balance, which was at the end lower in 2019 than what you projected at the beginning of the year? Thank you.

Alessandro Profumo

Martino. In terms of order intake, as you know, we have a very well balanced portfolio. And in the period of the plan, we continue to have the same balance. So we do see an important presence in U.S. that will continue to be one-third of the group. I’m not talking of 2020, really. 2020 is something that we had some significant commercial campaign, but if we cannot grow in the country, maybe that in July, we can be there, maybe in May, maybe in September. So it’s real important. So I prefer to see a longer perspective. We are – we have a good – we continue to have a good presence in Europe, mainly – so the Italian market plus other European countries with lower presence. UK is relevant, but UK is mainly for the Eurofighter, so it’s not in reality the final customer – the rest of the world is more or less 20% of the portfolio, and we’ll continue to be at this level with some increase in the Middle East that is relevant.

Yes, we are capturing some opportunity in Africa as well with very specific products, mainly the helicopters and C-27J. So it’s a market with some interest and as well in air traffic management. So it’s a very well-diversified portfolio. The organization we have with the Chief Commercial Officer, clearly is important because on the local presence, we have open offices in different countries. We have a higher capability of following the market.

Alessandra Genco

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

On R&D capitalized, our guidance for 2020 is between €100 million and €150 million, which is actually in line with 2019. The 2019 figure that is in the presentation may appear lower, but in reality, there’s been some items that have basically resulted in an offset between liabilities we had on the balance sheet and assets, capitalized assets, always on the balance sheet and that were not included in the income statement. Therefore, that figure is lower. But if you net out those effects, that figure is around €134 million for 2019. So that would be the expectation also within that range that I mentioned before, €100 million to €150 million. On investments, investments are, on average, on the plan time between €600 million and €700 million. So there could be a higher figure in the earlier years because of some programs that we need to bring to completion, both in helicopters as well as in the Aircraft Division.

But on average, during the plan, that is the figure we are targeting.

Valeria Ricciotti

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

Martino de Ambroggi

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

Alessandra Genco

On factoring, the factoring outstanding at year-end 2019 is in line with the value we had in 2018. As usual, we are using factoring to normalize our cash flows because as you know, the role of prime means that in specific situations, we are required to ensure that the supply chain is paid on time even in circumstances when we as prime are not paid on time because of natural slippages in milestone timing or any other reasons. So that is the usage that we make of that instrument, nothing new to add compared to last year.

Martino de Ambroggi

Okay, thank you.

Valeria Ricciotti

Next question.

Operator

The next question today comes from Zafar Khan of Societe Generale. Zafar, please go ahead.

Zafar Khan

Thank you very much and good morning everyone. I have three questions, please. One on Space, one on Aerostructures. And I just wanted to delve into the invoice discounting a little bit more. Could you please just help us understand the outlook for Space in 2020? I think Aless indicated that for their part, the revenues would be under pressure again 2020 versus 2019. So some clarification on that would be very helpful. Aerostructures, you’ve mentioned gradual recovery. What is the run rate? Is it still losing money? Or did it break even in 2019? And from memory, I know it consumed circa €280 million of cash in 2018. What was the cash consumption of aerostructures in 2019? And what is it projected for 2020? And then finally, Martino’s question on the invoice discounting, you’re becoming more enrolled as a prime. So will that number – the invoice discounting number go up quite a bit? And also, is that done mostly in Q4 or do you discount the invoices across the year?

Alessandra Genco

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

On Aerostructure…

Zafar Khan

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

Alessandra Genco

It should be higher versus last year, correct.

Zafar Khan

Thank you.

Alessandra Genco

Your second question was on Aerostructures. So on aerostructure, what we see is that – you’re right, in 2017, we had an extraordinary cash absorption for – in 2018, we had, yes, an extraordinary cash absorption of €280 million in the business. What we saw in 2019 was instead a significant reduction in this cash absorption by approximately €100 million. And the business is on track to gradually increase, both profitability as well as cash flow generation.

Alessandro Profumo

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

Alessandra Genco

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

Valeria Ricciotti

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

Zafar Khan

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

Alessandra Genco

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

Zafar Khan

Okay. That’s brilliant. Thank you very much indeed.

Raffaella Luglini

Next question?

Operator

The next question comes from Christophe Menard of Kepler Cheuvreux. Christophe, please go ahead.

Christophe Menard

Yes, good morning. I have two questions. The first one is on the restructure. The – can you update us on the A220 package renegotiation? I mean we’ve seen that this has intensified the negotiation to lower the cost. The second question is on the LEAP 2020 program, the – namely the net benefits, which I understand are at €40 million. What is the time line for reaping those benefits? And do you have the possibility to do more? And if so, on what are horizon?

And the last question is on digitalization. You mentioned in the earlier presentation that you intend to achieve 100% digital manufacturing targets. Can you share with us if – I mean what kind of savings you could achieve actually on platforms and also on other products that you have? And on what horizon because that could be quite important in terms of improving cash and margins as well?

Alessandro Profumo

Sure. 2020 negotiations. The negotiations are almost finished in the sense that we have a reference of terms for these negotiations now. We are rewriting the contract. So we are positive on that. And I hope that soon we will be capable to announce the results. LEAP 2020 is not only a program in order to save money. As we said, we have overachieved the €200 million, and we have a plan to do more than that.

Clearly, what is relevant is the fact that a piece of this €200 million are stabilized in the sense that partially you have savings that are positive for the year, but are not repeatable in the following year. Partially, you have a piece of this savings, which is slightly less than 50% of this base that will be recurring. So the year after, if you save €200 million, in reality, you have the €200 million the recurring number. So it is something which is very positive.

But LEAP 2020 is mainly a strategic review of our relation with the suppliers. We – as we always said, we have in Italy, more or less 4,000 suppliers. Of them 2,800 are SMEs. Of this 2,800, a portion are very small in terms of contribution. Shall we say that more or less 50% of them contribute by 5% of our procurement. The remaining – out of the remaining part we have – we already had on-site visit with the suppliers for more than 1,300. So almost all the remaining one. Of them, 400 are potential partners. 70 of them are already in development program with ELITE and other activities.

So it’s really a way in order to strengthen our supply chain and if they – our suppliers are stronger, we had a significant benefit. In any – there have been many merger of small companies, our suppliers that have been facilitated by the relation they have with us.

And also – if you can put on mute because we hear someone who is talking, sorry. And is really relevant for us because their margins today are aligned with the benchmark, but thanks to the fact that we optimize the procurement activity. So we have not reduced the profitability of any single name, but we are having a significant benefit in terms of cost reduction, as we said.

Digitalization, this is a process. Clearly, it’s not so easy to have the avatar of all our platform. This at the end will be the target. As you know, we have hired Roberto Cingolani as new Chief Technology Innovation Officer. I’m sure we have seen the presentation he made. It’s important to say that we start with a significant investment, I have to say, not financially, and they’re including the numbers Alessandra provided before, but significant in terms of a program. In computing capability and storage capability, thanks to that, we will have the instrument and the base in order to invest in big data, in simulation.

And clearly, digitalization is based quite a lot on – for us, a simulation is really to have the avatar of our products. There will be something that we’ll work in order to move the old program on the new base. Augmented reality, which is incredibly important for all the maintenance activities. Cybersecurity will be as well a base since simulation also very important for the training activity. So there are many different areas that will fall out from the plan. It’s also quite important to say that we are already working on digitalization for administrative process. For instance, our procurement base is digitalized in a very significant portion.

So we have a digital relation with the suppliers, I was talking before, which clearly is very important in order to optimize that we were discussing before, for instance, of the warehouse as a working capital clearly to have a digital process is important in order to manage that. So it’s a process ongoing, Roberto Cingolani is in charge of orchestrate. The program clearly is not then the person who is realizing it because there are many people involved but – so it’s very relevant for us.

It’s important not only in terms of margins, but for instance, in terms of also time to market because with a strong digital capability, you can work in terms of big data, for instance, for – simulate their needs for predictive maintenance. So it’s really something that we’ll have an impact not only on margins but on quality perceived by our customer as well.

Christophe Menard

Thank you.

Raffaella Luglini

Next question?

Operator

The next question today comes from Tristan Sanson of Exane. Tristan, please go ahead.

Tristan Sanson

Yes. Hi, everyone. Tristan Sanson from Exane. A few questions from my side. So the first one is a few refinement on the free cash flow outlook. As it – your midterm target is based on cash conversion ratio on EBITDA versus the cash tax and cash financial charges, cash tax at least is quite volatile from one year to another and hard to anticipate. But I just want you to have, first, a feel of what is the implied cash conversion rate that you have in your 2022 guidance? Are we at 50%, close to 60% already? And consensus has something like €560 million in 2021 and more than €700 million in 2022. Is it – are these numbers consistent with the EBIT growth and cash conversion outlook that you provided for the plan? Or it’s slightly – both slightly below just to understand it a bit better, how it is positioned?

Second question is, clear confirmation of Aerostructure. Do you – I understand that you confirmed the cash flow breakeven by 2022 for Aerostructure, is that correct?

Third, can you tell me or confirm was there – all the execution difficulties that you confirmed a year ago, which were in air traffic management, speed automation, homeland security, that they are all over and fully behind?

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

Alessandro Profumo

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

On Aerostructure, the free operating cash flow will be neutral one year after the EBITDA breakeven. I said that EBITDA breakeven is in between 2021, 2022, shall we say 2022, so would be the year after. And this is included in the conversion rate of the group. So it is fully absorbed.

Automation and ATM. Automation is technically fixed in the sense that the program where we had a problem has been completely fixed, you remember that we have two business lines within automation, one is luggage delivery in airport. And this is an area where we are a leader. So we are really good.

And the other one is a parcel distribution for customers like DHL and others. This is the area where we have a good product, but we had some execution problems. But today, these problems are fixed and the business line is performing properly. Sorry, from 2020, 2019, we had still an impact from this DHL problem.

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

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

Tristan Sanson

I’m sorry, I think my question was not very clear, but I was talking about balance sheet flexibility. So you have €785 million maturity in 202. If you have a short-term working capital…

Alessandro Profumo

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

Alessandra Genco

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

Tristan Sanson

That’s really useful. And if I can just comment to my initial question, the implied cash conversion rate in your 2020 outlook for EBIT and free cash flow? What is that? Is that 60% or…

Alessandra Genco

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

Tristan Sanson

No. Just for 2020?

Alessandra Genco

Yes. Not one specific, Tristan.

Alessandro Profumo

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

Tristan Sanson

Thank you very much for the answer.

Raffaella Luglini

Okay. Final question, I think.

Operator

The next question is from Harry Breach of MainFirst. Harry, your line is now open.

Harry Breach

Yes. Thank you very much. Can you hear me?

Alessandra Genco

Yes.

Alessandro Profumo

We hear you.

Harry Breach

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

Alessandra Genco

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

Harry Breach

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

Alessandra Genco

Correct.

Harry Breach

Great.

Alessandro Profumo

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

Harry Breach

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

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

Alessandra Genco

Okay. I’ll address your first – last question. Cash taxes, yes, I concur with you, it has been volatile. We have to remember that the Leonardo benefits from net operating losses. Therefore, the amount of cash taxes paid reflects the usage of existing net operating losses. So that is a dynamic that will last for another couple of years. But in general terms, you can imagine and you can expect that as the taxable income progresses and rises over the plan time, there will be an increase also in taxes paid. I leave to Alessandro the question. On DRS, the company, as you have noticed grew top line for the third year in a row at a double-digit rate. So this is a remarkable growth rate. The profitability is increasing gradually. The target is to have it become double digit around 2022. If there are going to be some minor slippages to 2023, we’ll see. But the most important thing is that we are clearly on the right path. There is an important development component of activity that we have to finalize between 2020 and 2021. And there is going to be an increasing level of production activities that will flow through and that will increase the profitability level.

Alessandro Profumo

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

Giancarlo Schisano

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

Harry Breach

And I was trying to say – I was just really trying to say, should we think about oil and gas customer revenues that helicopters as a percentage of the overall civil revenues as being maybe half of the civil revenues last year or something maybe a quarter of them. Can you give us a feeling?

And then cash tax, Alessandra, sorry to press on this, but I think you said after the next couple of years, when you are consuming historic net operating losses, things will become more normal. So should we be thinking about in 2022 and beyond, cash taxes being around the same level as income tax charge?

Alessandra Genco

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

Alessandro Profumo

Sorry, on the helicopters, we have to – because one thing is orders on oil and gas and other story revenues. You remember that in 2018 or 2019, I don’t remember because we sold 21, 139 to Aramco. And you’ll know if they’ve been – so for sure, they are delivered in more than one-year. So again is – we will follow on, on that because, again, usually, we are looking more and Alessandra was referring more to the order book then to revenues. On the revenue side, it’s also important to consider the customer support activity that we are not allocating per sector in terms of final customer.

Then last but not least, that there are customer, for instance in the middle we have two customers that I know pretty well that are operators. They have a huge fleet. A portion of that is utilized for oil and gas customers, but not in the Gulf area, maybe in the Mexican Gulf or in Latin America. So it’s something which is difficult. In the meanwhile I’m receiving a message from Gian Piero, and the weight on revenues for oil and gas is – now is more or less in the range of 5%. So it’s relatively low. Again, the revenues are related also to all the orders. So – because we are delivering helicopters to these customers. In – today, as you know, and as you have seen from the presentation of Gian Piero, for us in the helicopter area, it’s incredibly important customer support and some important programs in the military area.

Harry Breach

Thank you very much.

Raffaella Luglini

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

Alessandro Profumo

Thanks.

Alessandra Genco

Thank you.

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