Leonardo SpA

MIL:LDO

Earnings Call Transcript 2019-Q1

[Operator]

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo First Quarter 2019 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Raffaella Luglini, Chief Stakeholder Officer of Leonardo. Please go ahead, madam.

[Raffaella Luglini, executive]

Good afternoon, ladies and gentlemen, and welcome to our first quarter 2019 results conference call. I am Raffaella Luglini, Chief Stakeholder Officer. Today, our CEO, Alessandro Profumo; and our CFO, Alessandra Genco, will take you through our progress during the first quarter of this year, the Q1 financial results and the outlook for full year '19. We will then welcome your questions on the Q1 numbers. I will now hand you over to our CEO, Alessandro Profumo.

[Alessandro Profumo, executive]

Many thanks, Raffaella. Good afternoon, everybody, and welcome to our first quarter call. It is less than 6 weeks since we gave a very detailed update on the Industrial Plan at our full year results. And as you know, this is our smallest quarter. So we're going to keep this short and move swiftly to your questions.

In first quarter, you can see that we have made a solid start to the year broadly in line with our expectations. Order intake of EUR 2.5 billion, up 16%. Backlog of EUR 37 billion, and we're talking about our backlog, clearly of not the soft backlog on the American -- U.S. orders. Revenues of EUR 2.7 billion, up 11%. EBITA of EUR 163 million, up almost 7%; and free operating cash flow of EUR 1.1 billion, reflecting the usual seasonal trend.

We are very pleased with top line progress, new order intake and our commercial progress in key markets. And overall, we are making steady progress in line with our targets. It is, of course, early in the year, and we are comfortable with our 2019 full year guidance, which we set out in March. We are fully focused on executing our Industrial Plan across the group. Before I hand over to Alessandra to cover the first quarter results and outlook, I just want briefly to touch on these areas of progress and execution of our Industrial Plan.

Looking beyond the quarter, the business remained focused on delivering a sustainable future. I'm particularly pleased to see continuous strong demand for our products, reflecting an order growth across international market. Just a few examples. In Poland, we had recent award of AW101 contract for EUR 380 million for maritime multirole helicopters which include 4 AW101 plus training and support. And you may remember that last year 2018, we book a contract for 4 additional M346 to be delivered by 2020, that will join the existing fleet of 8 aircraft already in service. And we also had an option for additional 4 aircraft and support.

And in U.S., with additional orders for the Mounted Family of Computer Systems for the U.S. Army as part of the modernization strategy. This follows an order for the same program booked last year. And you may remember that last year, we also won the UH-1N bid with MH-139 for U.S. Air Force, an [ IVIC ] contract for up to 84 helicopters for $1.4 billion. I'm also pleased to see the step up in demand for customer support and training in our helicopter business, a long-term driver for this important business. And we are continuing to focus on growing our international presence. So we have been busy and that's a quick update.

Now I want to hand over to our CFO, Alessandra Genco, to talk more about the first quarter results. Alessandra?

[Alessandra Genco, executive]

Thanks, Alessandro, and good afternoon, everybody. It is a 1.5 month since we reported to you in the detailed full year 2018 results presentation. As you know, although Q1 is important to us as we look to start the year in the right way, it is as always our smallest contributor to the full year, and it is important to bear this in mind, therefore, we keep our remarks pretty short. In overall terms, in Q1, we had made a very good start to the year. It's in line with our expectations, and we are pleased that our key businesses are all on track in the first quarter. Our commercial strategy is achieving success as Alessandro mentioned, which is also reflected in order intake and top line revenue growth. And we feel, if we focus and continue to achieve top line progress, this will deliver growth in our profitability and reach its long-term potential.

Looking at the key metrics for the group in Q1, order intake was very good, EUR 2.5 billion, up 16.4% from last year.

Group revenues rose 11.2% to EUR 2.7 billion. After this very strong start, we expect revenue growth in the coming quarters to level off in line with meeting our full year '19 guidance.

We achieved EBITA of EUR 163 million in the quarter, despite lower contribution from our joint ventures with the return on sales of 6% in line with our expectations.

On top of that, our higher net result of EUR 77 million can be seen as further evidence of our more stable earnings, longer restructuring costs, EBITA and financial charges. Meanwhile, our free operating cash flow was negative EUR 1.1 billion at a similar level to Q1 2018. As you know, our traditional seasonality means we are cash negative in Q1.

Our net debt of EUR 4 billion reflects the adoption of the IFRS 16 accounting principle of leases. So we've made a very good start to the year, which we are pleased with, and we are broadly where we expected to be. I want to emphasize that it is still early in the year and Q1 is always the smaller contributor for the full year. That said, we remain comfortable with the full year 2019 guidance that we gave you recently in March.

Let's now go through the key Q1 numbers in more detail. First, orders. Overall, we saw good level of order intake at EUR 2.5 billion, up 11.4%, with especially strong performance in Defense Electronics & Security. We are pleased with the EUR 688 million of helicopters orders, up 12.6% compared to Q1 last year, including the contract for 23 NH90 helicopters for the Spanish MoD, plus the same contribution of customer support. So overall, in helicopters, we made good progress.

In Defense Electronics & Security, we had total order intake in Q1 of just over EUR 1.5 billion compared to EUR 1 billion last Q1. So a very strong performance with very good order intake at DRS, on key U.S. military programs, such as the Mounted Family of Computing Systems and also in electronics division.

Aeronautics achieved order intake of EUR 454 million, mainly related to the Aircraft Division, winning new orders for the EASA Consortium for support services and for Lockheed Martin for the JSF program, plus other support orders.

Aerostructure orders were, on the other hand down. But you need to note that in prior years, we've booked significant orders both for the B787 and the ADR program. Overall, looking at group for Q1, we feel it's a good performance.

Moving on to revenues. Also here, we saw a solid performance with EUR 2.7 billion of revenues, 11% higher than last year. Key points for us are: first, helicopters had a good first quarter, achieving Q1 revenues of EUR 813 million, a year-over-year increase of 8.4%. This provide continued evidence of improved execution and progress on the recovery path. In unit terms, we delivered 19 helicopters, a lower figure than last year, but revenues are not purely related to deliveries. We saw in fact a strong contribution from military and governmental activities, and this means -- this mix meant higher revenues. We remain confident of the underlying progress in the helicopter business, and that is underpinned by good customer interest across our markets for all our products.

Defense Electronics & Security also had a strong first quarter, with revenues rising to EUR 1.3 billion, up 15.7% driven by higher activity in DRS and in Airborne Systems.

Aeronautics was also broadly in line with last year, with Q1 revenues of EUR 644 million.

Now moving to profitability indicators and EBITA. First quarter EBITA was EUR 163 million, up 7% from EUR 153 million in 2018, despite a lower contribution from our joint ventures. This means our return on sales for Q1 was 6% versus 6.2% last year.

Helicopters achieved EBITA of EUR 56 million, up 5.7%, with a loss just under 7%.

Defense electronics also had a good start of the year with EBITA of EUR 100 million, up 37% from EUR 73 million from last year, with return on sales improving from 7.5% to 6.4% -- sorry, improving to 7.5% from 6.4%. All driven by higher volumes and improved profitability across all business areas.

In Aeronautics, EBITA was lower at EUR 37 million. We saw good performance in aircraft with strong profitability and aerostructures beginning to show first signs of recovery in line with our plan. These positives partially offset a lower contribution from ATR, where change in mix and lower deliveries had an impact.

Lastly, Space contribution also fell to EUR 1 million from EUR 7 million last year because of lower activities and higher development cost in the manufacturing segment.

Looking at group overall, we are satisfied with the start of the year in terms of EBITA and profitability.

Now moving to the below the line items. You can see that below the line items are under control with EBIT and net result much better than last year. With no restructuring costs in Q1, lower EBITA and financial charges, partially offsetting higher taxes.

Now moving onto guidance. You have seen Q1 is a solid start and on track with our expectations. All our main businesses are delivering, and the year has started well, especially order intake and in revenue growth. We are reaffirming the full year guidance, and you can see again the numbers on the slide.

As you know, our business is not linear quarter-by-quarter. As we see the shape of the year ahead, we have had a good start in Q1. After a very strong Q1 in order intake and revenue growth, we therefore expect some leveling off in the coming quarters, in line with meeting full year guidance. While profitability of free operating cash flow, as usual, are more related to the second half, later part of the year.

For profitability, this is mainly because of ramping up of Kuwait in the latter part of the year and because of the lower contribution from joint ventures in the first half.

So now to conclude, we are pleased with the start to the year. But it's early, and it's only Q1. The key point is, we are encouraged by good commercial progress in key markets and the performance of key businesses. And we remain very focused on exploiting market opportunities across the group, both domestically, and especially, internationally and delivering on all our Industrial Plan targets. Thank you, and now I will hand over to Q&A.

[Operator]

[Operator Instructions] The first question is from Martino Ambroggi with Equita.

[Martino De Ambroggi, analyst]

Yes. Two quantitative questions. One is on ForEx. I didn't see -- maybe I missed it. But if you could quantify the impact in Q1 across the board? And the second is on the financial costs you guided for the full year in EUR 290 million, EUR 300 million range. I understand it's early, it's Q1, but the trend in the first quarter seems to lead to better performance as it already happened last year. And for restructuring cost 0, in the restructuring line, it's maybe the first time, I remember. So should we expect much less than EUR 100 million that you guided before?

[Alessandra Genco, executive]

Martino. So following the orders of your questions. With respect to the FX effect. The order effect was approximately EUR 60 million on revenues. The FX had an impact of approximately EUR 45 million. And on EBITA, it was really negligible, a couple of million euros. On financial cost, as of now, we reconfirm the guidance we have provided in March. We clearly are working on optimizing the figure as it happened last year, and we will keep you updated as the year progresses. On restructuring cost, we confirm what we told you a couple of months ago, which is that restructuring cost are going to be max EUR 100 million. We will see over the course of the year, but I would not take this 0 number for the first quarter as an indicator of linearity going through the year.

[Martino De Ambroggi, analyst]

Okay. No, I didn't expect the linearity around 0. If I may, Alessandro, my question for the strategy. You recently made statements concerning possible aggregation mergers at divisional level. Is there anything under discussion? Or it's just reasonable long-term potential scenario, because I don't know the context in which you made this kind of statement?

[Alessandro Profumo, executive]

It was at a stock exchange on Monday where we were presenting the lease for 2020. As you know, the journalist as always focused on potential headlines. So what I said there will never be a deal, it's a company that will eventually -- we can do something at the divisional -- it's business line level, I say, not divisional, which is rather different. As you know, we always hope to be capable to finalize it but it doesn't depend on us. A torpedo discussion is not up to us. So that, I already said that other times, but there is nothing more. For the timing, clearly, I think the timing in order to start to think redefinition of our divisional/business line structure can be optimized in order to improve the value for our shareholders.

[Operator]

The next question is from Christophe Menard with Kepler Cheuvreux.

[Christophe Menard, analyst]

I have 3 questions. The first one, I wanted to pick up on what you said, you said, sales will be leveling off in the rest of the year. What about order momentum because you had a pretty good order momentum in Q1. We're seeing contracts also in Q2. Are we also on a good momentum in coming quarters? Or is it suppose to level off? And second question is the DRS margin recovery. You had apparently strong order intake at DRS. Is it changing your view on how fast you could see the recovery in margins at DRS in the coming 3 years? In other terms, is the order intake outlook good enough to be more positive on the base? And the last question is on ATR. You mentioned a negative impact in Q1. I think last time, you mentioned the fact that the mix was not so favorable. Can you give us some kind of view on how long that's going to last? Is it a year? Or is it a bit more, considering also FX, which is bit more favorable?

[Alessandro Profumo, executive]

I will start from the first question, sales and order. As you know, orders, we have many discussion ongoing, you never know when this would be finalized because something which is unexpected can be finalized in a very short period of time and vice versa. Something that you think will close pretty soon is postponed. In any case, we continue to have a good batch of discussion ongoing and so we are fully confident with our guidance, as we said, which is a significant growth vis-à-vis the previous year, if you don't consider 100% of CapEx. So -- and we continue to be very positive.

DRS, clearly the more new program within weighted -- the lower is the weighted average of the margins because when we win, new programs are in the development phase and typically the first 2 years of any new program to have a lower margin. So we're fully confirming today the plan, our target to be double digit. We are winning by far more new programs than expected, which is a very positive news because in any case, at least we'll increase significantly the EBIT and the EBITA. But the return on sales can be slightly lower than expected just because of the weighted average. ATR, Alessandra Genco or I can answer it, not an issue. The plan is to have a delivery during the year, slightly, really, but very slightly above the previous year.

So -- and we continue to be confident in terms of deliveries. The margins can be slightly lower because this is the year where we have the largest number of IndiGo aircraft delivered. And as we always said, IndiGo in terms of order is slightly less profitable than the average of ATR. You remember, IndiGo, there has been taking, in 2015, if I remember correctly, it was not clear that was near or relatively difficult for ATR. So we continue to see a positive trend in the company. At Le Bourget, there will be also Stefano Bortoli, of course, one of you that will be there, we'll organize a direct contact with him.

[Operator]

The next question is from Romain Gourvil from Bank of America Merrill Lynch.

[Romain Gourvil, analyst]

I've got one actually. So you mentioned improvements in your Aerostructure division. I was just wondering if you can give us a bit more color, where the improvements are coming from. And perhaps quantify it in terms of margin impact or something?

[Alessandra Genco, executive]

Yes. So we -- as we discussed in the annual 2018 presentation, there are a number of plans and actions that are taking place within the Aerostructure business to address efficiency improvements. One of the key area is to increase at each of the plants in which the division operates, production efficiencies, which means that you can more effectively use your labor force by increasing both your output and the quality of your output. Those are the main drivers of the improved performance that we are targeting over the course of the plan period. What is positive that we are starting to see the first signs of these actions taking place and bringing in the expected results.

[Operator]

The next question is from Nicholas Cunningham with Agency Partners.

[Nick Cunningham, analyst]

Just wanted to ask a bit about helicopters. The -- if you have any sort of background you can give us on how you see the commercial helicopter market developing, in particular, I guess, offshore oil and gas but also VIP and so on? And also, within the helicopter mix, it was notable last year that the recovery was strongly driven by 139, which is, obviously a very mature helicopter. And 169 and 189 aren't really -- still not really contributing. Is there -- in your order book, are there signs, if that's going to change if the new product is going to come through? And then finally, separate question. Space, obviously, barely contributed in the first quarter. It tends to get forgotten because it's -- it doesn't have its revenues consolidated. But it can be quite a significant delta. Is the EUR 1 million in the first quarter indication of how the year is going to look? Or is there something else that we need to understand?

[Alessandro Profumo, executive]

Helicopters -- commercial helicopters, as we said in March, our plan is not based on growth or at least a significant growth in oil and gas. So the market which -- in which we had some good results in 2018 mainly tends to Saudi Aramco and the Rosneft joint venture in Siberia, where we sold the 189 -- 2 189. But again, it's not the driver for our plan. So we continue to see a good demand on emergency medical services. The VIP market is a market, which is one helicopter per time. Our helicopters are well -- we do continue to see a good trend of demand. But the numbers of VIP helicopters are not -- again, not the driver for the commercial success. The sort of Star Air Show is a flagship for us. We are -- we have 1 customer who just received 139, is already talking of changing with 189. But again are specific events that we continue to follow. What is very important is the fact that we continue to see a very good performance in customer support for helicopters, which is clearly incredibly important in terms of stabilization of the revenue stream and of the profitability. This is mainly the situation in helicopters. On Space, I give the floor to Alessandra.

[Alessandra Genco, executive]

Yes. So on space, as you might have heard from our joint venture partners in their discussion for their first quarter results. What we are seeing is a softness in activity in revenues of approximately 5% to 10%, and we also see from a profitability standpoint, higher R&D costs, higher development costs. The combination of these 2 components is impacting approximately by EUR 7 million in the first quarter year-over-year, not sure where you read the -- okay so the delta is approximately EUR 7 million, ex the manufacturing segment level. We are clearly working very actively with our joint venture partner, Selex, as well as with the management to address the various items, and we'll be able to provide you with more visibility throughout the course of the year.

[Alessandro Profumo, executive]

So one thing on helicopters, the 21st of September, we will deliver the 1,000 139 helicopters, so we will have an event. But the order book is significantly higher than that.

[Nick Cunningham, analyst]

And just one follow-up on the helicopters. I was just asking about the new models, 169, where you obviously have the production issues, and the 189. As to -- obviously, we can't see inside your backlog. And so just some idea as what the growth of those new models looks like compared to the recovery in the classic helicopters?

[Alessandro Profumo, executive]

We have a very good backlog on 169. So the 139 is close to EUR 1.3 billion today. And the 169 is close to EUR 900 million, while the 189 is close to EUR 500 million. So we're seeing a very good backlog on all the different helicopters. Clearly, the 139 with EUR 1.3 billion is still is the king. We think that will continue to be the king. But yes, others are performing quite well as well.

[Operator]

The next question is from Alessandro Pozzi with Mediobanca.

[Alessandro Pozzi, analyst]

I have two questions. The first one is on Defense Electronics. I believe you delivered an EBITA of EUR 100 million in the quarter with improvement in profitability of different business lines, you mentioned. I was wondering how much is -- of that is sustainable throughout the year? And also, looking at the 3 divisions, just wondering whether there is any deviation compared to the plan you've envisaged at the start of the year?

[Alessandra Genco, executive]

So yes, Alessandro. So Defense Electronics has had a good start of the year. We think that overall all the divisions are within the business area are performing well. As always, there are some segments that are not stronger or in the specific quarter, has delivered higher levels than others. But overall, the mix is good. And we feel that we are on track to deliver as expected the year-end performance of the year guidance.

[Alessandro Pozzi, analyst]

Okay. Just -- and maybe perhaps a follow-up on Aerostructure. I think the division had a negative free cash flow of almost EUR 300 million. I know there is a path of recovery there. Just wondering this year, what is your expectations on free cash flow for that division?

[Alessandro Profumo, executive]

We never provided free operating cash flow per division. So we confirm our guidance at the group level of EUR 200 million. The Aerostructure is, as Alessandra said, in line with our expectations, I should say, slightly better. But in any case with a negative free operating cash flow as I said during the year-end presentation. Because I said very clearly that in 2019 and 2020, the free operating cash flow of this division will be less negative than what we've seen in 2018. More or less at the same level in the 2 years, '19 and '20 for different reason because there is an improvement of the underlying free operating cash flow. But in 2020, we will have to repay an installment of the [indiscernible]. In any case, it's perfectly in line with the plan, so -- or slightly better because again it's performing slightly better than the budget. But this difference is negligible overall on the total number. And I think that what is important is the fact that the EBITA, as I said, is slightly better than our plan, which means that the attention that we have on the division is paying off.

[Operator]

The next question is from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

The first one is on Eurofighter Q8. This is a huge and important contract. I just wanted a general comment on how the job is going? Is everything is right? Everything is on time and budget and so on? And the second question, housekeeping one is on PPA amortization. The question is, these are EUR 7 million amortization for Q1, will be the same in the next quarters and in the future, I guess? Just for confirmation.

[Alessandro Profumo, executive]

The Q8, contract is performing in line with expectations, so we are satisfied. But clearly, we think that we still have a cash absorption because we are building the aircraft, and we have to deliver the first aircraft beginning next year. And we have a revenue stream coming from the fact that with the milestone so we can book the revenue. But the cash flow is negative because we have the working capital.

[Alessandra Genco, executive]

PPA. Yes, your interpretation is correct. So the number you're seeing in Q1 will be reflected over the coming quarters as well.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no more questions registered at this time.

[Alessandro Profumo, executive]

Good. So many thanks to all of you. Thanks for being connected, and we will have the second quarter results at the end of July. And so we'll be -- and we'll see hopefully with many of you in Paris at Le Bourget, at the Air Show that usually is a great opportunity in order to have an update and for you as well to meet not only myself and Alessandra Genco, but also our division managers that are participating in the Air Show. So there's an opportunity for you to raise better questions in ordered way and in disciplined way to our divisional colleagues. So many thanks to all of you, and see you in Paris.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. And you may disconnect your telephones.