Leonardo SpA

MIL:LDO

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo First Quarter 2020 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. Please go ahead, madam.

[Valeria Ricciotti, executive]

Good afternoon, ladies and gentlemen, and welcome to our first quarter 2020 results conference call. I'm Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. 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 what we are seeing so far. And we will then welcome your questions.

I will now hand you over to our CEO, Alessandro Profumo.

[Alessandro Profumo, executive]

Thanks, Valeria, and good afternoon, everybody. First of all, I hope that everyone on the call is well. Thank you for all taking the time to join us today, and we know these are unprecedented times for everyone around the world.

Today, we want to cover the following: our first quarter results; and secondly, how we are actively managing the current short-term challenges presented by COVID-19 over the last 2 months, what we have seen, what we are doing and how our organization has been responding, in our opinion, quite well. And just before we get into the results presentation, I want to say how proud I've been on all our people at Leonardo, proud of their commitment and support, proud of the role we are playing in the current crisis, supporting the product initiative and many other activities, where we are doing everything we can from our side towards the fight against the pandemic and support institutions.

Our Helicopter fleet in an emergency medical service role is moving patients between hospitals. Both our C27J and ATR aircraft are moving medical equipment, and we thank our customer for allowing us to utilize them. Our satellite services have never stopped guaranteeing connectivity, and our cybersecurity activities are supporting all the cybersecurity risk and mainly the risk related to remote working.

In a moment, Alessandra will take you through the first quarter results and performances in more detail, but I just want to emphasize some key points. We began the year well and on track. In first quarter, we achieved a strong commercial performance, carrying the strong momentum from last year into the first quarter in order intake. We started to see the impact of COVID-19 measures on our operations in March, and it began to cause production slowdowns and to affect revenues and profitability.

We took quick actions. And as an organization, we have responded well. The safety of our people has been a paramount priority. We have followed all our -- all government measures aimed at battling the virus. We have successfully adapted our working practices in Italy and other countries, which means we can keep running our operations safely.

We have been the first company signing an agreement with Italian trade unions, and we have contributed wherever we can to fight the pandemic. We've been making a difference, and we are proud of that. We have a solid business mix. We benefit from our more resilient military and governmental activities, the larger management of our group, accounting for more than 80% of the revenues. Our facilities are being strategic and all -- have all remained open and operating also in places running slower with lower productivity. And we enjoy a substantial total backlog now at EUR 37 billion.

We are seeing the civil side of our business, only 18% of the revenues, in 2019 is going to be impacted to a greater degree. Clearly, ATR and civil Helicopters will be impacted as well as Aerostructure, as Alessandra will explain later on.

We are actively managing all these short-term challenges. We are implementing mitigation actions and recovery plans. As Alessandra will explain shortly, we have strengthened our liquidity position so we have a solid balance sheet and added liquidity to further strengthen it. And we have the strong support of our key stakeholders.

We cannot yet quantify the full economic and financial impact of the pandemic on our full 2020 year guidance. We don't know yet how much we can make up later in the year. It is clear that the impact will be felt more fully over the second quarter. But we are starting to see some sign of stabilization, which is very important so that we have some visibility year-to-date.

Clearly, excluding any further lockdown, we expect to reaccelerate our activities in the second half of the year. This is very, very important. The second derivatives, in our opinion, has already changed this time. But we can have confidence because of the way we are responding well in the short term and because of our key long-term fundamentals, the backlog we have, the market and customer we serve, the products we have and that we are developing, and the longer-term strategic partners. So what we are seeing and now as the COVID-19 has great impact at Leonardo so far.

In our key domestic markets, such as Italy, U.K. and U.S., our operations are seen as strategic, and therefore, we have been allowed to continue operations. Italy has been the first European country affected, and we took the decision to close our facilities for 2 days for the sanitization of all our premises, setting up protective measures for all our employees. And we have successfully managed business continuity by keeping plants open and running. Also, this has had some impact on productivity and profitability as we have seen from our EBITA.

But the key point is that the organization has adapted, and all our people have shown an incredible support and commitment. We have more than 40% people working from home in Italy and U.K., and people working in our facilities at the end of April comprised an additional 40%, while there were only 14% at the beginning of the crisis on the 20th of March. And this is a sign of the confidence in our safe working practices.

As we said in mid-March, we expected to see our business being impacted in some areas, and we're actually seeing that. First sign of slowdown in demand relating to the civil side of our business, while military governmental is clearly more resilient. We have seen impact in operations across the group in terms of inability to finalize deliveries, program execution slowdown and lower productivity. While we have not actually seen any major impact on our supply chain, also, it remains one of our alert areas, which we continue to monitor daily prices.

Let me cover each of these: first, demand. It's no surprise that we expect to be more impacted on the civil side while we remain fully engaged in the military and governmental side. On the civil side, remaining impact is going to be Aerostructure. All of us, we have seen the decrease on civil flights everywhere in the world. ATR, which is exactly as the other OEM, and the civil side of Helicopter -- sorry, on ATR, there is a key difference that we are being in the turboprop market. We do see them as -- this is a market that will restart before August. Alessandra will cover later that what we can say at the present time above the expected demand impact in these areas of our group.

Moving from the demand side to operations, we have largely been able to continue all of our operations and site, but we have also seen some RSO impact. The main consequence operation has been a shortfall in productivity and program execution slowdown, which are large drivers of our profitability. On some military program, activity and progress has been lower. And some of our key functions have moved to home, smart working plus some other business disruption, for example, dispensing on production lines. On our major Kuwait program, the travel ban has inhibited our progress to some degree. This could delay some of the milestones, but we are working harder to recover later in the year while we expect Aerostructure to be impacted heavily in 2020 and 2021, thus affecting the ability to reach breakeven in 2021.

On deliveries. The travel ban is affecting the [indiscernible] and delivery process, mainly in the civil areas of business. In first quarter, we have delivered 11 Helicopters compared to the 19 last year and no ATR. We expect deliveries to be done this year, but we are working to increase the so-called smart deliveries, leveraging on our digital capabilities already applied to customer support and service activities.

Finally, on our supply chain. So far, as I said, we have not seen any major disruption, but we have a general concern, and we continue to monitor closely the supply chain, especially to the key suppliers included in the mid-2020 program. So that's the impact we are seeing across our business.

And how we have responded? We have been quick to take actions all across our business to protect them, from a health perspective and operationally and financially. We moved fast to quickly establish protective measures at our plants to make employees safe. We have successfully adapted working practices. To date, we have not seen any sign of the contagion coming from within our plans. And we have not furloughed our key operations or production site.

Our organization system is working and holding up, and that's a really important point. We are actively managing the areas where we see COVID-19 impacting our performance. We have put in place a task force using all available levers to protect our business. We are actively working with our domestic customers. We are making great efforts through our commercial teams in gaining new governmental orders, especially in our key domestic markets also through remote work. We are leveraging institutional support, and we are aligning our full area of technologies to catch up opportunities arising, for example, in electronics, in command and control, in EMS, in cybersecurity, in our clone system for different medicine. Our technologies can be used in segments that are now emerging which previously we haven't considered.

Second, we are working on the recovery of our operating and industrial performance to go back to normality while respecting rules in place, maximizing the efficiency of remote working. We put in place the rules that focus on security. And the way we manage the process guaranteed the same level of security of information even working from home. We invest in digital equipment to give all our people the necessary tools and make the smart working more efficient. We are reassessing our production and delivery plans and aligning purchase plans.

Third, we are working on the supply chain management. As I said, we are actively monitoring the situation and assessing all the potentials.

Fourth, we are very heavy in investment. We are going ahead with investments that are demanded to meet customer needs or to respond quickly after the COVID outbreak, for instance, the digitalization, while we are reducing or delaying those that are less important at this moment. And we expect to reduce gross investment by circa 20%, 25%.

This said, we are working on cost reduction, and Alessandra will explain. We are reviewing costs on all programs and all expenses. And we expect to lower comparable cost by 10%, 15%. There are also some natural cost reduction like travel expenses that are due to travel ban. And finally, we expect around 10% savings coming from labor cost.

Fifth, we are focused on strengthening our liquidity and improving our financial flexibility, as Alessandra will talk in a moment. So I hope that gives you a picture of what we are seeing and what we are doing.

Just before I hand over to Alessandra, let me emphasize some key points. In the first month, we started the year well from the commercial perspective. Yes, we've been affected by the pandemic in Italy first. And we slowed down production, but we are responding well. We're being affected in civil, but we have a large exposure to the more resilient government and military markets.

Our system is holding up. That's really important. We are actively managing everywhere we can. Yes, there is high uncertainty, uncertainty is a present, but we do have a reason to be confident in our longer-term fundamentals. They are key markets and customers, the strength of our products, the backlog we have, which is about EUR 37 billion. We have added liquidity and financial strength and, importantly, strong support from our key stakeholders.

So now I really thank you, and I hand over to Alessandra.

[Alessandra Genco, executive]

Thanks, Alessandro, and good afternoon, everybody. And I also hope you are all safe and well. I want to cover the Q1 results and the performance across the businesses. Where you can -- you can see that we have had a good start to the year, especially commercially, but we began to see the COVID impact on our numbers in March.

As you know, Q1 is the smallest contributor to the year. And even in more normal circumstances, it is not a basis for predicting the full year. We expect the level of COVID impact will be greater in our Q2 numbers, but we have responded quickly as an organization to adapt and mitigate while keeping fully engaged with customers.

In the second half, we expect to see the benefits of these actions. I also want to update you on how we have strengthened our liquidity positions and financial flexibility. And lastly, I want to set out what we can say and what we cannot say yet about the outlook for the rest of the year.

So starting with Q1, in overall terms, we started the year well on the back of good results in 2019 and continued focus on delivering against our industrial plan. You can see this is a strong order intake. We began to see in March the COVID outbreak having some material impact on our industrial performance, first in Italy and then in other countries. We began to start seeing that travel ban led to the delay in some deliveries on the civil side, namely ATR and Helicopters, and the implementation of measures to protect our workers' health while keeping production plants open led to slowdowns in program execution and productivity.

Looking at the key metrics for the group in Q1. Order intake was very good at EUR 3.4 billion, up 36% on last year, continuing the strong momentum we were building in 2019 and giving us a total backlog of EUR 37 billion. Group revenues were EUR 2.6 billion, and here, we did see impact from COVID-19. EBITA of EUR 41 million in the quarter, down from EUR 163 million the previous year, both because of lower revenues from delivery delays and slowdown on programs, which impacted our fixed cost base but also because of lower productivity.

Meanwhile, our free operating cash flow was negative almost EUR 1.6 billion. We were already, in large part, expecting this higher negative cash flow absorption because of anticipated higher seasonality, while we also saw the impact of some COVID-related delivery slippages in March.

Let's now quickly go through the key Q1 metrics. First, looking at new orders. Overall, we saw a strong level of order intake of EUR 3.4 billion with an especially strong performance in Helicopters on the military side. Helicopters won almost EUR 1.5 billion of orders, really strong performance with major contracts, namely the customer support contract win for the UK MoD's AW101 Merlin fleet and the first order of 32 TH-73A Helicopters for the U.S. Navy.

In Defense Electronics, we also saw a continued good commercial performance in both electronics and DRS, together achieving new orders of EUR 1.5 billion, again, almost all on the military and governmental side. Aeronautics achieved order intake of 6-4-4, EUR 644 million, up from EUR 454 million the previous year, mainly related to aircraft winning orders from the EFA consortium for support services, and from Lockheed Martin for the F-35 program, plus other support orders. So a strong Q1 commercial performance with very good order intake. But as I said earlier, in current circumstances, it cannot be a prediction of the full year performance.

Next, revenues. Also in revenues, we began the year well, but we started seeing some of the impacts of COVID-19 in March. Group revenues in Q1 were EUR 2.6 billion, nearly 1% lower than last year. With the COVID-19 affecting the civil side of Helicopters, it's impacting the level of deliveries, 11 Helicopters delivered versus 19 from last year, mainly down in the 139 line. Overall Helicopter revenues were down around EUR 100 million to 7 -- 600 -- sorry, to EUR 704 million in Q1.

Defense Electronic revenues were actually up 2.2% to EUR 1.4 billion, where DRS continued its strong growth with revenues up 13%. Lastly, Aeronautics revenues were flat at EUR 644 million. And we also saw Aeronautics business volumes affected in March by the effect of COVID-19 and the ramp-up of EFA Kuwait offsetting lower volumes elsewhere.

Moving to EBITA and profitability. Here, we saw a greater impact from COVID-19. First quarter EBITA fell to EUR 41 million versus EUR 163 million from last year, caused by the reduction in revenues against our fixed-cost structure. It meant our return on sales for Q1 was 1.6% versus 6% last year. Helicopters EBITA fell from EUR 56 million to EUR 18 million due to COVID effects causing both lower productivity and lower civil deliveries. Defense electronics EBITA fell to EUR 80 million from EUR 100 million with Electronics being affected while DRS actually grew EBITA in Q1. In Aeronautics, EBITA fell from EUR 37 million to negative EUR 17 million in Q1 because of COVID-19 effects with delivery postponements affecting API. Lastly, Space contribution also fell to negative EUR 2 million because of lower activities in manufacturing and lower profitability, partially due to COVID outbreak.

Now moving to the below-the-line items. You can see that Q1 EBIT fell to EUR 30 million, reflecting the fall in EBITA and slightly higher restructuring costs. And our net result was affected by EBITA performance and higher financial charges associated with FX, fair value and hedging activity.

I just want to touch on our financial position and liquidity. We started having a strong liquidity position, and we have made it stronger with signing yesterday EUR 2 billion of additional credit lines. We've done this to have additional financial flexibility and to bolster liquidity also in case we have to absorb larger working capital streams.

The facilities have a maturity up to 24 months and have no financial covenants. So in liquidity terms, we are in a strong position. As of March 31, proforma for the addition of the new facilities, our total liquidity position was over EUR 5 billion. And on that, we are in a safe position. As I said, we do not have any maturities in 2020, and we have a balanced debt maturity profile.

Let me now summarize what we have seen in our main businesses in Q1. Travel bans and rules to reduce viral spread resulted in inability to finalize deliveries, program execution slowdown and lower productivity. Starting with Helicopters. Remember that we enjoy a favorable business mix in Helicopters with a high proportion of military and governmental and customer support activities. And we have a very strong order backlog, so all resilient trades.

As you heard, we did see Q1 COVID impact in Helicopters. Specifically on revenues, the impact was driven by deliveries as customers didn't want to come to Northern Italy to pick up their machines, their Helicopters since February, and to a minor part by program execution slowdown. And profitability impacted by lower revenues as well as lower productivity as we switched to safe manufacturing.

In Defense Electronics, which, as you know well, is our largest business, there was a heavy weighting towards a more resilient military and governmental markets, which clearly represents a key trade for the business and very resilient. In Q1, however, we did see in Europe the impact of COVID-19. Revenues slowed down because of project execution delays, while DRS in U.S. was not yet affected. On EBITA, the impact was driven by revenue decrease and lower productivity.

In Aeronautics, the businesses are affected to different degrees. Aircraft is a predominantly military business and in a resilient position. Revenues here were affected by program execution slowdown while EBITA reflected both the decline in revenues as well as the operational disruption. In the Aerostructures, on the other hand, we're seeing the impact of production slowdown, which affected both revenues and EBITA. Clearly, this is a business which has high exposure to civil markets. Finally, our ATR joint venture, again, pure civil exposure, and here, we see the effect of clients' inability to do final testing and take delivery of aircraft.

Now moving to what we are currently seeing, which will have an impact on the coming quarters. Our business is being affected by the measures being taken to combat COVID-19 pandemic globally. We currently are facing unusually high levels of economic and business uncertainty. But Leonardo has been considered strategically relevant for its customers in all domestic markets, Italy, U.S. and U.K. Q1 performance reflects the initial impact of COVID-19 while we expect Q2 to be affected the most because travel restrictions will limit our ability to finalize orders and clients' ability to take deliveries of our products and systems.

Lockdowns will curb presence on sites with a negative impact on productive hours and productivity as well as on program execution. And our cash inflows will be shifted to the second half of the year, while cash outflows will reflect procurement plans only partially adjusted to the downward revised production plans. Anyway, we are starting to see signs of stabilization in Q2. And as Alessandro said, excluding any further lockdown, we expect a reacceleration in the second half of the year.

Taking into account all these elements, we cannot say at this moment in time what the full financial impact on our group for this year will be. This will depend on the severity and the duration of the global pandemic and on how much we can recover in the second half of the year when the mitigation and recovery plans we have enacted will take full effect.

For this reason, it is prudent to suspend the guidance that we set out in March. We will provide you with a new outlook later in the year when we will present the results for the first half. We can also say that we're actively managing everywhere we can, and we promptly put in place mitigating actions to face short-term challenges. We pursued and we are pursuing alternative business opportunities. We're addressing the cost base and targeting a reduction of 10% to 15% of controllable costs and approximately 10% of labor costs.

We're prioritizing investment initiatives, reducing 2020 investment level by circa 20%, 25%, and we have strengthened our liquidity position with EUR 2 billion of additional credit lines. So yes, there is high uncertainty at present. But as Alessandro said earlier, we do have good reason to be confident in our long-term fundamentals. They are fully intact. The solid markets we are in, the customers we serve around the world, the strength of our products, our EUR 37 billion backlog, which covers 2.5 years of equivalent revenues, are all testament of what I've just said.

Thank you, and now I'll hand it over to Q&A.

[Operator]

[Operator Instructions] The first question is from David Barker with Bank of America.

[David Barker, analyst]

Three questions from me. Firstly, on the labor bill. You mentioned that no employees had been furloughed in Q1, which seems to be different to what many of your peers have been doing. What is the reason...

[Alessandro Profumo, executive]

Sorry. Sorry. Can you repeat because maybe that you are too close to the mic, but it's incredibly difficult for us to hear. We are 5 people, and no one is capable to follow your question. Sorry for that.

[David Barker, analyst]

That's okay. Can you hear me okay now?

[Alessandro Profumo, executive]

Yes, yes, yes.

[David Barker, analyst]

Okay. I'll slow down. So in Q1, you said that there were no employee furloughs. I just wanted to ask why was that and how do you plan to get to the 10% cost savings on employee cost? Is that something more permanent in terms of cuts? That's my first question.

And then my second question was on the Aerostructures negative year-on-year EBIT contribution, can you break down the split between ATR, 787 and A320 or give us any flavor there?

And then my final question. On free cash flow, given the prepayment we were expected to get this year, do you have any visibility today on whether you can generate positive free operating cash flow for the year at group level? And let me know if that was unclear.

[Alessandra Genco, executive]

Okay, David. So on following the order of your questions, we did not furlough any employee in Q1. And the target that we have set for cost savings on labor is driven by reducing the variable component of the compensation as well as a lower number of headcount in general. So we had contemplated to have a number of new entries in the workforce, which we are not anymore planning. So it's a volume effect as well as a price effect.

On Aerostructures, we -- well, as much as we would like to be helpful, that level of detail by program is not something that we would discuss.

And on free operating cash flow for the full year, as Alessandro said earlier, we will adjourn and update all of you in the second half result discussion on all the metrics on which we are defining guidance for the year.

[Operator]

Your next question is from Nicholas Cunningham with Agency Partners.

[Nick Cunningham, analyst]

Yes, a few questions. On liquidity, the additional headroom you've given yourself, in a normal year, say, last year or the year before, how much headroom would you have at the worst parts of the year so that we can see, if you like, what your normal surplus headroom is and then add the EUR 2 billion to it? So -- it gives us comfort, if you like.

And secondly, sort of connected to that, the -- how much of the either net additional debt that you're adding or the facilities that you've added, how much will that cost in terms of incremental interest or fees?

And then final question, the restructuring plans, I can see there's a lot about hiring freeze and so on that doesn't really cost anything. But if there's a headcount reduction, is there likely to be any meaningful cost attached to that?

[Alessandra Genco, executive]

Okay. So on the liquidity mix, last year, we ended the year with a cash balance of EUR 1.1 billion, and we had fully undrawn revolving credit facility for EUR 1.8 billion, an additional undrawn uncommitted credit line for another EUR 700 million approximately. The new facility will have a margin of 110 basis points.

And on your last question, we're not talking about any restructuring plans. Unless I've missed what you said, the restructuring plan is not under the table -- on the table as of now.

[Alessandro Profumo, executive]

Alessandra said basically that the cost reduction is coming -- for HR, is coming from different areas. So we are utilizing all of the holidays not utilized. We are utilizing some day -- holidays we can plan centrally. We add -- so there's a reduction with the budget. We were planning hirings that won't happen, so there are many different tools.

And also, we foresee a different salary system vis-à-vis the one was expected to be implemented in a normal year. So there are contribution that we pay when we achieve the target contribution, sorry, salary bonds. So there are different areas. There are no layoff. So we don't have a restructuring cost related to this production.

[Nick Cunningham, analyst]

And just one brief follow-up. The liquidity headroom, the solvency headroom you had at the end of the year, is that indicative of what you have all the way through the year? Because normally, there's some seasonality, and in particular, one tends to expect cash to come in at the end of Q4.

[Alessandro Profumo, executive]

Sorry, you know that we always had a cash utilization in the first -- to be on 3 quarters of the year. And then there is a positive cash-in in the fourth quarter. We have never communicated the budget. But our free cash flow in the first quarter has been better than the budget. Just to give you an idea on -- so it's in line with the usual trend. So -- and also, internally, we are seeing that it's better than the budget we had.

[Nick Cunningham, analyst]

I suppose what I'm driving at, and I got to -- I'm pretty comfortable about your liquidity, but just to reassure others, if you like, how much of the normal facilities would you draw at the worst point of the year? So how much headroom do you have at the worst point of the year before what you've already added now in terms of your additional facilities? I'm just sort of trying to get a feel for how far we could stress-test Leonardo before you run out of headroom.

[Alessandra Genco, executive]

Yes. So I mean, last year, the RCF was really almost every quarter, and there was no utilization of the line. As of 31st of March, also the revolving credit facility EUR 1.8 billion was not utilized. I hope this helps, Nick.

[Operator]

The next question is from Alessandro Pozzi with Mediobanca.

[Alessandro Pozzi, analyst]

I have a question on the productivity of your plants. I appreciate we are in so unprecedented time, and the visibility remains very low. But I was wondering where we are at the moment compared to where we were pre-COVID-19 levels in terms of operating capacity? And whether do you expect that to improve soon, given that Italy has just entered the Phase 2 of the lockdown?

[Alessandro Profumo, executive]

I can give you some indicator just to have some number talking of people not present for different reason. So it would that they are -- what we say in Italian [Foreign language] other reasons. So the 10 of March, and we have to remember that the 10 of March, we were already with a red zone in the Northern Italy. We had people not present by 19%. On the total we have in Italy, 31,000 people. The 20 of March were 44%. The 30 of April were 17%. Yesterday night, we were down at 14%. So we have continuous improvement. These are people absent.

Then people present on site, which is important because, for instance, for the engineers to be on site is reliant in terms of coordination of the cost to cost program. The 10 of March, we had 60% present on site. The 20 of March, were 14%. Now we are at 40%.

But in the meanwhile, the smart workers were 29%, the 10 of March; were 42%, the 20 of March; and are 43% at the end of April, so which means that people present on site and smart workers are 83% at the end of April. And the people not present were 17%. Yesterday night, we were at 14%. Now I don't remember the split between people present on-site or smart workers.

In the 20 of March, as I said, we had 44% of people not present, 14% on site and 42% in smart work, so which means that we reacted very rapidly. We -- the people are coming back on site, which is incredibly important. And the smart workers are a huge amount of people.

Today, we have to be transparent. The people in smart working don't have 100% of efficiency. So this is very important. Our estimation from an initial indicator we are utilizing is that, today, the level of efficiency is around 75%. So clearly, one of the projects we are ongoing is how to improve efficiency of people in smart working.

I hope that I've answered to your question.

[Alessandro Pozzi, analyst]

Yes. That's helpful. I have a second one on the -- on your comment about the softness in demand in the civil market, I know I mentioned -- I believe you mentioned you started to see that in March, the second end of March. Just wondering what kind of softness, in what areas do you see that?

[Alessandro Profumo, executive]

Sorry, on Aerostructure, I think that the -- basically, that you will look to the OEM numbers. I think that all the major OEM have already presented their production plan and the numbers they have in terms of market really is not exactly 1 to 1. Our activity vis-à-vis the [ N1 ] because, for instance today, we are still at rate 10 on the 787, while we know that they will go down to 7 in 2021, if I remember correctly -- in 2022, sorry, not 2021, in 2022. So it's -- but clearly, the Aerostructure area is an area which is significantly impacted.

Then, we have the Helicopters. Helicopters, as you know, the civil Helicopters, I say immediately that, today, we don't have major impacts from oil and gas because there is a reduction, but you remember that we had the order by Saudi Aramco for 21 139. So we're in the process of deliveries. So it's not impacting oil and gas, but we are seeing any impact in the other areas so the similarly the civil transportation and such kind of things.

[Alessandro Pozzi, analyst]

And given the weakness in Aerostructures, do you still expect to be -- to break even in 2022 in the Aerostructure business?

[Alessandro Profumo, executive]

I said before, we don't have visibility. The other day, I heard that NASA said they think that the civil market will go back to normality in 2025. So today, it's impossible to say anything. What I can say, stress, confirm, push on and whatever else is the fact that, in Aerostructure, before COVID, we were better than the plan. So this is, in my opinion, incredibly important because it means that we are doing pretty well. The Aerostructure then will have an impact, which will be higher in 2021 than in 2020. This is the actual expectation with the visibility we have because, as I said before, the 787 will reduce the rate in '21 and '22. 787, we are almost certain that it is 1/2 of the revenues of Aerostructure. This is the situation. So maybe that Aerostructure will be the added in terms of HR or will require some reason in terms of utilization of tools that can reduce the cost.

[Operator]

The next question is from Martino De Ambroggi with Equita.

[Martino De Ambroggi, analyst]

The first question is on the cost-cutting measures that you are presenting in Slide 5 because I can figure out the 10% labor cost. But could you provide us the order of magnitude for the overall amount, including the controllable costs, which I'm unable to understand [indiscernible]

[Alessandro Profumo, executive]

Controllable cost and other cost is more or less EUR 4.2 billion.

[Martino De Ambroggi, analyst]

Okay.

[Alessandro Profumo, executive]

Oh, sorry. It is close. Not -- so it's not 2.9 plus...

[Alessandra Genco, executive]

2.5 to plus 3.5, so it's 5.

[Alessandro Profumo, executive]

So it's close to 5.

[Martino De Ambroggi, analyst]

Okay. Perfect. So we have an order of magnitude. The second question is on the bottlenecking delivery. If you can provide just a size of what was the impact in Q1? And just to know if the situation is still totally frozen today or, because of the Phase 2 in Italy, you are starting to at least discuss with your customers to fix a potential timetable to restart deliveries, or is still totally frozen?

[Alessandro Profumo, executive]

Can you repeat the beginning? Because we lost at the beginning.

[Martino De Ambroggi, analyst]

Yes, yes. So the bottlenecks on deliveries, what was the impact in Q1. So what was not delivered because the impossibility to -- for your customers to get the products. And the second part of the question were referring to the current situation. Are you still totally frozen in deliveries? Or you are starting to discuss with your customers some potential date?

[Alessandra Genco, executive]

Martino, we are -- on deliveries for the Q1, we have had, for example, in Helicopters, we lost 7 deliveries on mainly 139 machines. So we did have an impact material, both on revenues and EBITDA.

Clearly also ATR had a shutdown in travels that prevented customers from leaving their own homes to which to lose. So I would say the situation is gradually improving. Having said that, as of March -- as of April, there have not been major updates. May, the situation seems to be moving in the right direction. But honestly, I don't think that there will be any ability to really travel across countries in a material way. But what we can count on and what we are doing also in Helicopters, for example, is to -- we're getting ready to do smart deliveries, meaning using the digital setup to transfer to the customers all the data related to the final testing that we do on the machine and that makes them comfortable that the machine is in good shape as if their own pilots had tested personally and, therefore, on that basis, take delivery of the Aircraft. This is something that we are working on. Things are proceeding well. Nonetheless, we don't expect any significant speed-up in the month of May, possibly more in June. And that's one of the reasons why also we're saying that Q2 is going to be the toughest one.

[Martino De Ambroggi, analyst]

Okay. And just a follow-up on this issue. If you are continuing the production, but you do not deliver part of your product, there will be a quite significant absorption of net working capital in the second quarter. So I clearly understand it's impossible to predict for the full year. But in second quarter, do you have an idea what could be the -- prepared as to what could be the impact on the free cash flow, which typically is not as bad as it used to be the first quarter?

[Alessandra Genco, executive]

Yes. I mean, on the second quarter, the free cash flow will have the double dynamics of having a push to the right of the cash-ins and a production plan which is not perfectly aligned -- the purchase plan that is not perfectly aligned to the production plan. So we will continue to have some expenses -- cash expenses for a good purchase, which are not adequately reduced versus what we are -- what the market can absorb in terms of final products. This is going to be, you're right, a driver of cash absorption, higher than normal cash absorption in Q2.

[Operator]

The next question is from Monica Bosio with Banca IMI Intesa Sanpaolo.

[Monica Bosio, analyst]

As for the civil segment, I understood that civil segment as for the order intake at a very low weight in the first quarter. Can you just remind me the weight of the civil segment on your total backlog? And as for the backlog of Helicopters and if you see some risks in term of cancellation on this side.

And my second quarter is referring to the Slide #10. I know that the second quarter -- the first quarter is the smallest contributor in term of EBITDA. But maybe if you can give us an indication of the trend just for March of the Aerostructure, ATR and Helicopters, just to give a sense of what happened in March and for April and May, it could be worse.

And the very last question is...

[Alessandro Profumo, executive]

Sorry for interrupting, we have never seen the number by month by month.

[Monica Bosio, analyst]

I'm sorry, I cannot hear you well. Can you...

[Alessandro Profumo, executive]

We have never seen the number of EBITA month by month.

[Monica Bosio, analyst]

Okay. Yes, yes. I know...

[Alessandro Profumo, executive]

The main discussions is this value quarter, and as you know, the regulation now has changed also on the quarterly result.

[Monica Bosio, analyst]

Okay.

[Alessandro Profumo, executive]

It will be -- we can't go -- we should go month by month. As we said, the second quarter will be worse than the first one because, if you take the lockdown in the first quarter has been mainly March, but we have to remember that, in reality -- so some problems started in February because some travel ban were already there in February -- at the end of February. But the main impact on the factories started in the North from the 8th of March when there had been the red zone. And mainly, afterwards, the 15 of March when there had been the lockdown. In the second quarter, we have April of lockdown, May of partial lockdown. We gave you the numbers that there is an improvement in terms of presence and so on, but many activities are still blocked so it's clear that the second quarter will be worse than the first one.

[Monica Bosio, analyst]

Yes, yes. I was trying to feel out the magnitude of the impact.

[Alessandro Profumo, executive]

Sorry. In fact, it'll be a little bit unpolite, it's useless.

[Monica Bosio, analyst]

No, no. Okay. It's fine. Can you just give me an update on the civil weight of the backlog? And maybe if you just can give us an update on the financial charges for the fourth quarter, if you can give us an idea for the full year because I've seen that they have increased in the fourth quarter year-on-year?

[Alessandro Profumo, executive]

So the financial charges are exactly the same. There is a fair value change of EUR 30 million that we assume during the year will be absorbed. So the first quarter is exactly the same as the previous quarter. But the chart, I think, is pretty clear.

[Monica Bosio, analyst]

Okay.

[Alessandra Genco, executive]

Yes. And on split between civil and military government, Monica, we can refer to Page 18 of the presentation, where we do have the split for the revenue base. And that is basically the way we've always, as you know, represented the business, and we had approximately 30% of deliveries of revenues associated with civil -- the civil portion of the market.

[Operator]

Your next question is from Christophe Menard with Kepler Cheuvreux.

[Christophe Menard, analyst]

I had 3 questions. The first one is, I may have missed it, but could you remind us what is the proportion of fixed cost versus variable cost in your cost structure at the moment?

The second question is on the Aeronautics division. Trying to understand the drop in EBITA, while I understand where it's obviously fixed cost, ATR, you mentioned that, if I remember well, ATR last year was already -- had a difficult Q1. So is it bearing most of the impact? Or is it already Aerostructure as well? I'm asking the question because I looked at the volumes of delivery. And indeed, I mean there's been a drop, yes, on 787 fuselage, but it's 36 versus 40 last year. You actually delivered more stabilizer than last year for the 787. But it could be ATR fuselage. Just trying to understand where is that coming from in terms of the EBITDA drop?

And the last question is more on defense actually. It's -- have you seen any impact from the drop in oil price from your Middle Eastern clients for defense-related programs? I understand Kuwait is proceeding well, but have you seen any kind of, I mean, less appetite for your defense products in terms of potential order intake?

[Alessandra Genco, executive]

Okay, Christophe, I'll take the first 2, and Alessandro will take the third. The fixed variable cost structure, what we can say is that we do have approximately EUR 400 million per month of costs associated with labor as well as costs that are part of the operational machine of the group, so rents that you pay electricity to run the factories, cleanup and all the rest. Then clearly, there is a big portion that is connected to the amount we produce. As you know, being a project company, the fixed variable subdivision is not fully applicable because the portion that is variable in reality is the one linked to how much we produce for today or for our stock. But I hope the first answer -- the first part of my answer will give you a hint of where we are.

On second question on Aeronautics. Aeronautics, well, the -- we have laid out the breakdown of Aeronautics as a sector performance by division and what was the driver of this delta year-over-year was mainly in Aerostructure the fact that we had lower productivity because, as Alessandro described to you, there were fewer people in the factories for a number of days/weeks. And that determined a reduction in -- an increasing cost, basically. As well as on Aircraft, we have the 2 drivers, one, because we had a slowdown in program execution that impacted both revenues as well as consequently margins. And we had an issue, both with the lower presence and lower productivity in the sites. For example, the engineering smart workers, Alessandro referenced before, a large portion of them was in Aeronautics, in Aircraft, and those were, at the beginning, didn't have, for example, full IT equipment to operate from home, therefore, the productivity was improvable.

[Alessandro Profumo, executive]

On -- sorry, going back to Aerostructure. Out of the EUR 26 million, EUR 15 million is what we call the inefficiency of under cover of the activity, so which means that people present but not fully utilized for activities. So it's an inefficiency due to COVID. So this is -- so which is a major portion of the EUR 26 million reduction we are seeing. Talking of the reduction we are seeing.

Talking of the demand from customer today, we are not seeing changes for sure on the program ongoing but as well on the negotiation were on the table at the beginning of the crisis. So we have not opened a new negotiation in these countries for the time being because, for us now, it is really key to close the negotiation we are ongoing.

We do not expect, at least at the beginning, an impact on pricing could be a delay of programs. This is what could happen. That's something which was expected to happen as a new order, this year will be postponed the following year, or we have seen Korea already with some change in terms of allocation. But for the time being, for sure, we don't have anything on the existing order.

[Operator]

Your next question is from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

On Slide 10, you were so kind to detail the EBITA between Aerostructures, ATR and Aircraft. I was wondering if you could provide us -- provide me the number for Q1 '19 in order to understand what was the dynamic of these 3 businesses -- subbusinesses, if possible?

[Alessandra Genco, executive]

Sure. Sure, Gabriele. So in '19, Aircraft was EUR 59 million, while Aerostructure was minus EUR 8 million, and ATR was minus EUR 14 million.

[Gabriele Gambarova, analyst]

Okay. Fantastic. And then I wanted to ask you about the B787. You said that the number of deliveries -- the rate of deliveries is going to come down in 2021 and 2022. Do you have already in mind a number of shipsets for month by month for 2020, '21, 2022? Because we have read many statements from Boeing, and sincerely speaking, I don't know what kind of number I should put in my spreadsheet.

[Alessandro Profumo, executive]

Sorry. For the time being, you have to utilize the official numbers from Boeing. Clearly, we have a different -- slightly different perspective because they want to have -- so we -- I think that you've seen the official statement of Boeing.

In reality, we deliver something more. And this is what you have to consider because they want to have some "spare" capacity. But Boeing gave to the market the rate for per year. So you have to consider that we will deliver something more than what we are seeing there.

[Gabriele Gambarova, analyst]

Okay. And if I may, the price for any shipset is going to be revised considering that the volumes will come down, or they are affected strongly?

[Alessandro Profumo, executive]

No, no, no. Sorry. We have been always very transparent.

[Gabriele Gambarova, analyst]

Yes

[Alessandro Profumo, executive]

That's saying that we have a price up to the 1,407 -- 06 -- 06 or 07, I don't remember -- shipset. And then there will be a different price. So if there is a slowdown in terms of production, we have a lower price for a longer period of time.

[Gabriele Gambarova, analyst]

Okay. Okay. And last question, very quick on EFA Kuwait is a very important program for you. You mentioned some slowdown, but you also said that you will be able to pick up and to recover this slowdown. So I mean, the delivery, the milestones, you don't think are at risk, I guess?

[Alessandro Profumo, executive]

Sorry, the point that we are working, and we will achieve the milestone. So the issue is this will be delivered there or not.

[Gabriele Gambarova, analyst]

Okay.

[Alessandro Profumo, executive]

Because we had a period in which we had some spare parts, which were ready to be dispatched to Kuwait. But no one could enter Kuwait, so we cannot send the spare part. So in reality, we're not achieving the milestones because you can't go there. And so I'm not capable -- and so we think that we'll recover some of this delay, but it's not only up to us. It's also up to them.

[Gabriele Gambarova, analyst]

Yes. So it's a problem of delivery, more than -- okay.

[Alessandro Profumo, executive]

No. No, delivery -- there is a scenario in which we have to work together. So there could be some delay. But for the time being, the milestones are expect.

[Operator]

Gentlemen, there are no more questions.

[Alessandro Profumo, executive]

Okay. So I would like to thank all of you. Many thanks for your attention. Clearly, it is a tough time, but we are very positive because, as I said, the reaction of all the team has been really good. We continue to have a strong franchise with customers. We continue to have a very strong product portfolio and, last but not least, a very high backlog, which is not bad.

The commercial capability of the company, I think, has been shown by last year where we beat the guidance in terms of orders and the first quarter of this year. So we are fully sure that the medium-term perspective of the company are not affected by these events. Thanks a lot.

[Alessandra Genco, executive]

Thank you.

[Alessandro Profumo, executive]

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