Leonardo SpA

MIL:LDO

Earnings Call Transcript 2022-Q2

[Operator]

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo First Half 2022 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 evening, ladies and gentlemen, and welcome to our first half 2022 results conference call. I'm Valeria Ricciotti, the 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 half of this year, the first half financial results and the outlook for the full year 2022. And we will then welcome your questions.

I will now hand you over to our CEO.

[Alessandro Profumo, executive]

Thanks, Valeria, and good evening, everybody, and thank you for taking the time to join us today. Let's start with the key points about our second quarter and first half results, and our recent very positive progress.

First of all, we have delivered a good performance in the first half. We have been further on our group stance through the year. Importantly, we are achieving very good commercial momentum across the group, driving very good growth in new order intake. Our strong commercial machine is successfully capturing good opportunities worldwide. We are demonstrating strength in both domestic and international markets. We are delivering on our solid backlog, driving growth and a solid performance across all our businesses. We are also delivering on our target of setting up cash flow generation, and we are on track for our full year targets.

At the same time, we have been making important strategic moves to position best for today and tomorrow's defense map. Let me give you the highlights of our first half results. Alessandra will give you more detail in a moment of both the results and the performances across the businesses.

You can see a very strong first half commercial performance. New order intake of EUR 7.3 billion, up 9.4% year-on-year with growth in all sectors, both Domestic and International. And very importantly, with no jumbo orders. We are also carrying this commercial momentum into the second half, winning the significant Polish order of 32 AW149 military helicopters with a gross value of EUR 1.76 billion And you saw the announcement made by the U.K. MoD on the planned upgrading of the [ ISR ], which we hope to sign later this year.

We have delivered solid operational progress all across the group, with revenues up 3.6% to EUR 6.6 billion. EBITA is EUR 418 million, up 12% versus first half 2021 restated. With a return on sales at 6.4% or 7.4% without pass-through, and even more importantly, return on invested capital at 10.5% versus 10.3% last year.

Seeing in Helicopters good progress on the Civil side and Defense over continuing strong performance. Seeing a strong performance in Aircraft, good performance across Defense Electronics and DRS on track on its growth path. And we are seeing gradual recovery in area of traction in line with the plan. We are also improving our financial profile, starting to step up cash generation as we said we would, with free operating cash flow at negative EUR 962 million in the first half and an improvement of over EUR 400 million on last year.

We are also financially stronger, and we are especially pleased to see this recognized by rating agencies. In May, Standard and Poor's have revised Leonardo's outlook to positive from stable based on recognition of improving credit metrics. And in July, Moody's also has upgraded the outlook to positive from stable based on the company's strong execution through the pandemic, the favorable industry dynamics and our improving credit metrics. So a good first half performance on track with our plans, and this will support the path to 2022 full year guidance, which is confirmed.

As you heard in our recent ESG Investor Day, we have done all these having in mind our clear and important purpose: helping protect and providing security for people and nations; being a driver of development, technological innovation, security and progress; and keeping ESG and sustainability at the core of Leonardo's industrial plan fully integrated in our operations, decision making and culture and drivers of our commercial and industrial growth. We are fully aware that our industrial future is driven by innovation. And in turn, our innovation is driven by sustainability. For this, we are accelerating the research and development tech focus driven by digitalization, security and sustainability.

You can see that we have made important progress in the past year on ESG. For example, reducing CO2 emission by 19% since 2019; making a big step towards our target of reducing emissions by 40% by 2030; improving energy efficiency with a 6% reduction in area of intensity compared to 2019; focusing on diversity and inclusion over the last 3 years, women in manager roles have increased from 16% to 18%. We have fully aligned our financial strategy and remuneration plan to our ESG strategy. We now have 50% of our total group funding sources linked to ESG and 50% of investments aligned with SDGs. And we have linked our remuneration to ESG factors, including targets on climate change and diversity in the long-term incentive plan.

And looking forward, we have important ESG goals and ambitions. We are focused on significantly reducing our environmental impact further along our value chain, on increasing our positive social impact, and we are focused on maintaining the highest level of governance. At the same time, we made some important strategic moves in recent plans to position us best for today's and tomorrow's defense market, both in Europe and in the U.S.

Early this year, we completed the acquisition of our stake in Hensoldt, building a stronger position in defense electronics, well-placed plays for the German market and European products. In the U.S., we are fully delivering on promises. Leonardo DRS is continuing its growth on a stand-alone basis. We have focused it further on its core business so it can play even better to its trends. With the sale of AAC, which just completed, and the sale of GES, which has received regulatory approval and should complete shortly. And we have reinforced the [ sensors ] through the exciting combination with RADA, which also enables a listing in this volatile market.

Let me now emphasize some key points on Leonardo DRS and RADA transaction. This is an important strategic move for us as we are strengthening our position in a very, very attractive market. The combination of Leonardo DRS and RADA is very well placed to be a leader in rapidly-growing force protection market. This is a key part of both today and tomorrow's defense market. We are creating opportunities in the U.S. and internationally, leveraging Leonardo's global presence. As promised, we are focused on Leonardo DRS portfolio on its core strategic business, increasing exposure to a high-growth and high-margin market segments. The transaction structure also will unlock value for the shareholders and enables us to deliver on our promise to achieve a listing of Leonardo DRS.

I also want to provide additional color on the strategic rationale of the transaction. The combination of Leonardo DRS and RADA will increase the addressable market with a strong fit on diversity program. There are very complementary technologies in the force protection market. We will have a stronger position in the U.S. market and, additionally, international expansion opportunities, leveraging Leonardo's global presence with a strong balance sheet providing flexibility and the exciting value creation opportunities.

In the wider Leonardo Group, RADA will add a complementary tactical RADA portfolio. We'll enhance our market position in the tactical operational environment, enabling an integrated approach. RADA products will allow Leonardo to bring innovative, integrated solutions to the market, adding in Israel, a technology leader and advanced Defense customer, as a new domestic market. And we will support RADA's organic expansion, accessing new export markets and the new programs. And even more importantly, the merger of RADA and DRS provides additional significant opportunities by combining the advanced sensing capabilities of DRS with a tactical radar provided by RADA, which are upside and on top of Israel's baseline cases.

So to summarize before I hand over to Alessandra, we are pleased with our good first half performance, especially the strong commercial machine, capturing opportunities internationally, plus delivering well on our backlog and improving our financial profile. We are on track for our full year target, notwithstanding challenges linked to the supply chain environment and the highly-competitive skilled labor market that we are starting to experience. And we have confidence too in our medium-term growth plan and goal of long-term sustainable growth. And we are also beginning to see exciting future opportunities beyond 2022, including new defense governmental opportunities as market response to recent demands.

Thank you. And now, I will hand over to Alessandra.

[Alessandra Genco, executive]

Thanks, Alessandro. Let me take you through the first half results in more detail and the performance by business.

As Alessandro said, we have delivered a good first half performance across the group, and we're carrying this momentum into the second half. Looking at first half results highlighted, you can see a backlog at EUR 36.4 billion. Orders of EUR 7.3 billion, up 9.4% with a 1:1 -- 1.1 book-to-bill ratio, building further on our backlog. Revenues of EUR 6.6 billion, up 3.6%, and EBITA at EUR 418 million, up 12% year-over-year, restating 2021 for the impact of COVID costs. Free operating cash flow was negative 962, $962 million, with an improvement of over $400 million.

A very strong commercial performance with group delivering, as we said, on plan, and with strong performances across all defense and governmental businesses, gradually seeing a recovery in civil, in line with expectations. We're stepping up cash flow, both increasing quality and reducing seasonality, the evidence of a stronger, more disciplined operating performance. And on track at the half year stage for full year guidance.

Let's look at the performance now across the group on key metrics, starting with new order intake. We have a strong commercial machine, demonstrating strength in both domestic and international markets with good performances all across the group and no jumbo orders, achieving a good book-to-bill solidly above 1. And defense and governmental business is performing very strongly.

Order intake was strong and grew across the group. Helicopters increased to EUR 2.2 billion, up 8.7%. Here, we saw an increase in orders on the civil side as well as on customer support. And also a range of domestic and international orders, including the first order booked for the AW609 TiltRotor. We also booked an order for the AW189 for the Chinese Ministry of Transportation Rescue Department; an order for 5 AW119Kx for Israel and the good momentum for the 139 Commercial segment.

Defense electronics orders totaled $3.8 billion, up 5%. On the European side, higher orders in Defense Systems helped drive new order intake to EUR 2.5 billion, including the orders to supply naval guns and logistical support for Germany Navy brigades and orders for combat systems for special operations and underwater rescue operations.

DRS increased new order intake to EUR 1.3 billion, up 9.8%, showing its strength and positioning on key DoD programs with further orders for its new generation of a mounted computer systems for the U.S. Army mission command. Plus additional orders for the IM-SHORAD short range air defense packages, which allow the neutralization of low altitude area of threats, including drones.

Aircraft delivered another very strong commercial performance with new orders of EUR 1.5 billion, up 20.6%, including the major Spanish order for 20 Eurofighters, the C-27J orders from Slovenia and the first state order for EuroMALE, and further orders for the JSF and logistics support for EFA.

Finally, Aerostructure orders were $158 million, up 18.8%, benefiting from increased orders from Airbus especially for the A220 program.

Moving on to revenues. At group level, they were EUR 6.6 billion in the first half, overall up 3.6%, a solid top line performance, delivering on our backlog and on track with our plan. We saw a strong performance in Helicopters, EUR 2.1 billion in the first half, up 11.6%, delivering on the NH90 Qatar contract and the AW169.

Defense electronics also delivered a solid performance. In Electronics Europe, the division grew revenues driven by Defense Systems, up 4.4% on a like-for-like basis, given the reclassification of the automation business in other activities.

In the U.S., DRS first half revenues were EUR 1.1 billion. And here, we saw some impact from delays to deliveries caused by supply chain pressures and COVID. This was offset by a positive foreign exchange impact, leading to a positive growth in revenues translated in euros of 2%.

Aircraft delivered a solid performance, EUR 1.3 billion, up 2.2% due to C-27J and also increasing logistics activities on the Eurofighter and delivering on major contracts with 2 additional aircraft delivered to Kuwait.

Aerostructures first half revenues were weaker as expected, EUR 234 million down from EUR 254 million last year, with production rates planned to be increasing in the second half in line with customers' demand. So overall, a solid group performance on revenues, confirming our growth path.

Moving to profitability and EBITA, we also delivered very good overall performance here with group EBITA at EUR 418 million, up 12% versus first half '21 restated. And improved profitability in the first half with return on sales of 6.4%, or 7.4% without pass-through. This is on the back of improving performances in all main divisions. So a solid performance in the first half, and we have effectively managed inflation and supply chain pressures in an operating context that remains complex.

Helicopters achieved EBITA of $151 million, up 2%, in line with plan adjusting for asset volumes.

Defense Electronics delivered a strong profit performance with growth in all the main European business areas, and in particular, Defense Systems.

In Europe, driving EBITA to EUR 210 million, up 4.5%, an increase in profitability to return on sales in the first half of 10%.

In the U.S., DRS achieved EBITA of EUR 104 million and group profitability to return on sales of 9.2%, confirming its steadily-improving margins as its programs transition from development to production phase.

Aircraft EBITA was $152 million, in line with plan and up 1.3%, showing continued progress on milestone delivery and confirming strong profitability.

On the civil side, Aerostructure losses increased slightly to $88 million as expected compared to $82 million in the same period last year. The recovery path is expected to be more second-half weighted.

ATR improved its contribution to EBITA and was negative EUR 1 million compared to last year's negative EUR 21 million. ATR's improved financial performance was helped by the efficiency plan and the signing of a customer settlement. Deliveries by the consortium amounted to 6 aircraft in line with last year.

The first half contribution from the Space joint ventures was down $20 million to $3 million. While Telespazio was slightly higher as expected, tax incurred a risk provision on a contract related to Russia in addition to the unfavorable comparison base due to the one-off benefit related to tax regulation changes accounted for last year. This was the main driver for the first half lower contribution. So overall, a good first half performance across the group, very strong commercial performance driving new order intake and solid and growing revenues and EBITA.

This also translated into a better below-the-line performance. You can see an EBIT of EUR 362 million, up 4.3%. And in the first half '22, there were EUR 43 million of non-recurring costs, of which EUR 33 million were due to write-off of assets related to the Russian-Ukrainian conflict. Then we had EUR 2 million of restructuring costs and PPA in line with last year.

Financial charges and taxes had a strong decrease year-over-year, with financial charges at EUR 47 million versus EUR 88 million last year mainly driven by lower interest expense also related to reimbursement of higher interest debt and the effect of the application of the IFRS 9. Taxes were at EUR 48 million versus EUR 82 million last year, all giving an improved net result of positive EUR 267 million.

Now moving on to cash flow. We're delivering improving cash generation, as we said. In the first half, free operating cash flow was negative EUR 962 million with an improvement of more than EUR 400 million year-over-year. This is evidence of a stronger, more disciplined operating performance and the strong focus that our entire organization has developed on cash. Our organic cash flow machine is getting stronger and shows a better quality as expected with reduced seasonality. Our defense governmental business cash flow is getting stronger. And as you well know, this is a key priority for us. It has been a key priority and remains a key priority for us.

I want now to cover our outlook for the full year '22. You can see that we have delivered a good performance in the first half, building further on our good start to the year. We are achieving very good commercial momentum across the group, and our book-to-bill is solidly above 1. We have carried this momentum into the second half, and we are on track with our growth path in revenues and EBITA. As you have also seen, we have been stepping up our cash flow in line with plan, strengthening our organic cash generation and showing the better quality. At the same time, we have been facing and we will continue to face challenges, in particular, linked to the complex supply chain environment and the highly-competitive skilled labor market that we're starting to experience.

But that said, we have remained on track and feel comfortable in reconfirming our full year guidance across all metrics. New order intake growth to around EUR 15 billion; revenue growth to between EUR 14.5 billion to EUR 15 billion; EBITA growth to EUR 1.18 billion to EUR 1.22 billion; and stepping up free operating cash flow to EUR 500 million.

So in summary, good first half results, confirming our growth path, delivering strong commercial and operating and financial performance across the group and on track for full year guidance, plus important strategic moves accomplished.

Thank you. And now, we're pleased to take your questions.

[Operator]

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alessandro Pozzi, Mediobanca.

[Alessandro Pozzi, analyst]

I have a couple of questions, the first one on helicopters. I think in terms of order intake, it looks like you had a very good quarter. I was wondering whether maybe it's an accumulation of contracts materializing in the quarters. Or whether maybe there is a sign that there's actually a stronger recovery especially in the civil side of that business.

And the second question is in the opening remarks, you mentioned the U.K. MoD contractor for the upgrade in radars. I was wondering whether there could be other opportunities within the U.K. potentially upgrading radars for all the Eurofighters? Or maybe within Europe, if you can maybe talk about the potential of upgrading the existing fleet of mechanical scan radar across Europe as well.

[Alessandro Profumo, executive]

Many thanks for the questions. First element, Helicopters. Helicopters is effectively seeing a step-up on the Civil side and that the market is better than expected across the board, really. For instance, the 189 for the search and rescue and emergency and services in China are very important, the 69 and 189, so we are seeing such kind of events. Also the VIP market is rather positive. We don't see yet the significant signals on [indiscernible], but we have seen some movement also in this area. So this is something that we do see as an anticipation of what we were expecting in the next years, so it's happening today.

On radar U.K., when we were talking of the radar in the U.K. for the Eurofighter, it's a development of a new radar. It is MK1. MK1 is in Germany. So maybe MK2 for -- just for U.K. and MK1 for Germany. In any case, we are developing this new radar. Clearly, when we are saying that on the Eurofighter that we have 2 components, one is the aircraft, the platform. And the other one in the electronics side. Saying that electronic side is a sort of -- we cannot say perpetuity, but it's a very, very long-term business because we are sure that this aircraft will fly 'til the second half of this century. And there will be a continuous update of electronics, the radar included. We are not seeing something yet sooner because this is a development contract to complete the development contract. And then there will be the purchase, but it's another story. So it's more related to the long-term evolution of the Eurofighter.

[Alessandro Pozzi, analyst]

Okay. Maybe if I can squeeze in another one on the tax side. I think the -- as you mentioned, the first half tax rate was quite low. I was wondering if you can give us a guidance for the rest of the year.

[Alessandra Genco, executive]

Yes, Alessandro. The tax rate in the first half results reflected also the benefit from R&D credits across U.K. and Italy. The guidance for the full year remains unchanged, around 25%.

[Operator]

The next question is from Virginia Montorsi with Bank of America.

[Virginia Montorsi, analyst]

I had 3 actually. The first one would be still back to the U.K. MoD and the Typhoon order. Would you be able to give us more or less an indication of how much of the over EUR 2 billion you think you're going to benefit from?

And then the second and third question would be on Germany, actually. My second question would be on German gas and the potential of German gas rationing. How exposed are you on that? And do you have any sort of plan that you can implement should the situation with gas deteriorate? And the third question would be on the German budget. As we've seen, Germany has given a bit more clarity on the EUR 100 billion of defense fund. Can you give us any more color on how you expect to benefit on that?

[Alessandra Genco, executive]

Okay, Virginia. So on your first question, yes, you are absolutely right, the contract from the U.K. MoD is approximately EUR 2 billion. As you know, within that framework, we are a key player and we would be expected to perform strategic activities within the work share that we have assigned. Unfortunately, we will not be able to provide a specific number, but it really is a good opportunity for Leonardo to work on.

On the gas rationing, honestly, this is not a concern to us. We are not a big gas user. And in Italy, as of now, Minister Cingolani the other day also reassured all industrial producers that there's not going to be any rationing for the months to come, and that actually Italy is in good shape in terms of replenishment of reservoir and reserves for the winter season.

[Alessandro Profumo, executive]

Then on the German budget, clearly, for us, what is very important is the Eurofighter [ GmbH ], which is [indiscernible]. There are discussions going on to the long-term evolution of the Eurofighter. Also it is an area where we had a potentially significant presence. Partially, we will be present in Germany the programs by -- and so then, we are in the process of presenting to the government, cooperation agreement with them.

So Israel, here, as you know, they will buy as well the F-35. And there are talks on where this F-35 will be produced. It's likely it will be produced in Italy, which again, is important for us. So overall, for us, there is a huge interest on this extra margin.

We are not involved in the transport helicopter. You know that in Europe. There are no such kind of magic helicopters in Germany. They are very interested to that mainly due to the fact that they use this heavy transport helicopter in order to transport armored vehicle, so mainly tank and other things. So this is very important. So we do understand that strategically for semis.

[Operator]

The next question is from Andrew Humphrey with Morgan Stanley.

[Andrew Humphrey, analyst]

Just a couple. One, you mentioned an ATR customer settlement. So I wonder if you could give any more clarity on that and let us know if there are any kind of further settlements we might expect in the pipes. And secondly, like, clearly a strong performance on cash in the second quarter. Can you call out any kind of particular unusual pre-payments or developments on working capital we might have had there?

[Alessandra Genco, executive]

So Andrew, good afternoon. On cash flow mix and composition, nothing to highlight extraordinary. All components are very much in the ordinary scope of our activities. We invoiced more than last year, and we cashed in more than last year. And we also accelerated payments to suppliers as per the plan. So all positive phenomenon coming together.

On ATR, we are not in a position to disclose more. But the situation was one where during the COVID crisis, there was effect of, let's say, a set of machines ordered by the customer. And then there was a revision and the basis of this revision, ATR made a settlement with the company that -- with the client that resulted in this one-off benefit.

[Operator]

The next question is from Harry Breach with Stifel.

[Harry Breach, analyst]

Yes. Alessandro, Alessandra, Valeria. Just 2 simple ones. In Space, and apologies if I didn't hear you clearly earlier on, in terms of what happened there and specifically the risk provisions that were taken. Looking at it previous year, as you said, there was a one-off tax benefit. But the year-on-year change was negative EUR 24 million. Is it reasonable for us to assume maybe half of that was due to the risk provisions?

And then secondly, just with Aerostructures, can you give us any idea, negative EUR 88 million in the first half? Second half, I think you were indicating it should be better than that. But should we be thinking for the full year about negative $150 million, that kind of level? Can you give us some sense of that for the full year, please?

[Alessandra Genco, executive]

Okay. Harry. So there are some phenomenon there are, yes, combined on the split and assumption is 50-50. It's not very far from your feeling. Reality is that we had, as mentioned, a positive effect on taxes last year. And this year, there were a set of drivers behind the underperformance. One is the fact that a key supplier for Thales was affected by a major fire, and it was a circuit board supplier that determined some extra cost in production for Thales. And the other element was also linked to activities that Thales Group had with Russia and Russia, Ukraine.

And in particular, there was a project in conjunction with a Russian customer that had to be halted. And therefore, the cost incurred had to be written off. So these are the key elements that have determined the delta and performance year-over-year of Thales. On Aerostructure...

[Harry Breach, analyst]

Sorry, I was just going to say. So given what you say on Thales, should we assume that the second half of this year will be more or less in line with the second half of last year's performance, which I think was around EUR 39 million?

[Alessandra Genco, executive]

I mean I think for the full year, clearly, the company is clearly undergoing a review of the various dynamics that she is experiencing in the market. There are also important contracts that Thales is bidding for, so I would say that we will develop further a stronger view on the full year as the year progresses.

[Harry Breach, analyst]

And Aerostructures?

[Alessandra Genco, executive]

Aerostructures, well, we do have a performance for the half year that you have highlighted with a loss of EUR 88 million. For the full year, there is going to be an amount that will reflect an improvement in production rate, hopefully on the B-787 as you've heard also from Boeing yesterday. At the same time, there are also going to be some fixed cost to incur. So I would say that there is going to be an element of linearity throughout the year in the end performance.

[Alessandro Profumo, executive]

Yes, what is important for the company vision is the fact that the performance with -- on ATR is continuously improving. The fact that we are doing quite well on the 2 Airbus program, the 220 and the 321, which is both of them are growing significantly.

And last but not least, we continue to read on the media of the fact that Boeing will resume hopefully as soon the deliveries of the 787, and they are starting to talk of an increase of the rate. On top of that, we have continuous discussion with them that will not affect the second half of the year or even in 2023 for a new working package that are very important because we bring other activities to our Puglia presence. And so we are fully confident to achieve breakeven in 2025. As promised we are working in order to give to this division and even more so in the perspective.

[Valeria Ricciotti, executive]

Okay. Let's take a question from the web. It's from [ Peter Black ] from [ Serafim ].

I was wondering if you could speak briefly about your view of the political situation in Italy? Now that Prime Minister Draghi, who was extremely well-respected all over the world has left. And the outlook for the new government that will be formed in September is quite uncertain, do you believe that there is a risk that a new government with the league of [ Prime Minister ] movement with big representation dissuade the Italian budget and friendless towards nature, expansion might go away? And could the government potentially stand in the way of Leonardo's growth runway going forward?

[Alessandro Profumo, executive]

Clearly, for the last has been partially shocked, the fact that this government is punitive. There will be -- we'll stay in place at the end of every, because we have to remember that the government -- so the election will be held at the 25th of September. The new chambers will be organized and we'll have the first meeting, the 13th of October. So it's -- I think that this is a fastest way in order to create the new government has been 30 days in the past. So we go to the end of October.

Having said that, it's very difficult to see what will happen. I should assume that there will be a central government or there will be government similar to the one of the Draghi government. So in both cases, I do not expect any change in the Defense budget because clearly it's centralized. You will dwell in a positive view on Defense expenses and the actual acquisition took a commitment in order to go up to 2%. So I do not expect any major change in terms of Defense expenditure.

[Valeria Ricciotti, executive]

Let's take the next question from the call, please.

[Operator]

The next question from the conference call is from George Zhao with Bernstein.

[George Zhao, analyst]

On the 787, has your production rate been in sync with Boeing's production such that when they're ready to ramp up, your rate will increase in line with it? Or has there been any inventory buildup such that your ramp up will be a bit more gradual than Boeing's?

And secondly, it seems like you're looking to certainly further participate in the European defense validation and also expand the presence in the U.S. given the deals you've done recently. I guess how do you balance these priorities to ensure that you can successfully do both simultaneously?

[Alessandra Genco, executive]

So I'll answer the first question, George, and maybe we'll ask you to clarify this to everyone. So the B-787, we normally have the same track as Boeing. We just need to give Boeing the time to unwind the inventory of the aircraft it has ready for delivery to customers. So once that will be gone, clearly, we will be restarting delivery on a more regular basis.

Maybe repeat your question on EU consolidation from a defense budget standpoint.

[George Zhao, analyst]

Just one thing like we're certainly looking to further push along the European defense consolidation with the deal with Hensoldt. And at the same time, you're also looking to expand the presence in the U.S. with the RADA deal further moving that. So I guess, how do you think about balancing these priorities to ensure you can do both successfully simultaneously?

[Alessandro Profumo, executive]

Listen, I don't think that these 2 things are contradictory. Clearly in USA, we are represented by Leonardo DRS. That is and will remain a second-tier company. This is really a strategic and important for us because we are mainly a supplier of the first year base. So we don't want to be perceived as a competitor by them.

And what we are doing with Leonardo DRS are always very targeted acquisitions as the one we have done with RADA or with the Daylight Solutions. So stronger and innovative technologies that can be properly utilized on our portfolio of activities and portfolio of customers. This is U.S. We always said that we want to keep the majority of the radar, so it's important strategically for us.

Europe. In Europe personally, I don't see a consolidation soon. I think that there's really a rationalization of the portfolios. I don't think that there is a value being larger. Adding up new business lines could be relevant to be stronger and more relevant in what they call verticals. And Defense electronics is a vertical for us, also with specific views, Helicopters and these -- what we've done in Helicopter, Hensoldt a very clear example. And this is our strategic priority with a very strong pivotal element. We want to be investment grade. So for us, the financial basically means really a key element of our strategy.

[Operator]

Next question is from Martino de Ambroggi with Equita SIM.

[Martino De Ambroggi, analyst]

The first question is on the guidance referring to the order intake. Just your feelings following the announcement of the jumbo contract for Helicopters in Poland. Am I right in believing there is a -- not worth revision risk for your guidance, I don't know, with or without the U.K. MoD? That's my first question.

The second is a follow-up on the Aerostructures. If I understand correctly, probably at EBITA level will double the losses recorded in the first half. Am I right in assuming maybe in terms of cash burn and improvement, let's say, EUR 50 million, EUR 100 million for the current year? And very last, connecting my question to the previous one on the political evolution in Italy. Is it fair assuming that OTO Melara and vast potential deal, whatever, could have been, is currently frozen because of the political situation?

[Alessandro Profumo, executive]

Guidance, Martino. We know perfectly that we had this jumbo bond, but as you know there are different dimensions to be considered. For instance, the fact that we have a budget for some orders that can be postponed to the next year due to the fact that the chambers are not fully operational. So we continue to be -- I would say, we have always been conservative in our view with the incredibly strong willingness to deliver the guidance and hopefully doing better. But today, we keep the guidance.

Aerostructure. So I think that we know each other quite well and sometimes then I'm a little bit surprised by the fact that there is a strong focus on the cash flow of Aerostructure. You are asking that EBITA will be more or less double the one of the first half. Since we said we will generate EUR 500 million of cash as a group, so we will give you the numbers on the free operating cash flow absorbed by Aerostructure when we will be at the year-end. What I can say is that it's wrong to foresee an improvement of EUR 100 million. We will deliver EUR 500 million of cash.

[Martino De Ambroggi, analyst]

If I may, Alessandro, it is important in order to understand, believing in the achievement of the breakeven within 2025. What is the additional upside? So this is the reason why.

[Alessandro Profumo, executive]

Yes. We always said that the growth path in order to go there is not linear. Because in 2025, we foresee a rate incredibly higher than the actual one of the 787. So what I can say that the 787 is something which is not in our end. So we are foreseeing not to go to 14, to be lower than 14. And despite of the fact that it will be lower than 14 will be at breakeven.

What we are doing is -- and hopefully, in 2025, we will have operational, some new working package because if we take something today in 2025, we'll be already operational. So we will try to do better. We promise a breakeven, and the way to go there is something that is not linear. But on that, we have been always very, very transparent, Martino. Because unfortunately, for us, the program is -- tomorrow, 787 should be a 10. We would achieve the breakeven, it's very different, more rapidly.

We have to always to remember because also on that, we have been very clear, that the real element is [ user ] at 1,406. This is the reason why it's so important to -- because today, with the projection we have on the rate, we do expect to be at the 1,400 come in 2025. There is a price change because today, even if we should produce 14, we will lose money. But the time frame in order to go to the 1,400 is today, we are at 1,200 something.

We have produced something, so we were some months ago at 1,144. Today, we have 1,000. But with 2 per month, unfortunately, it's not moving very rapidly this time. But I think that we are slightly higher because that could be 2,000, 1,150, so it's not changing a lot. But again, the rate of the changing channel is a key element. All the rest is doing better than the plan. So this is very important.

OTO Melara, we continue to work on OTO Melara. But clearly, we have to wait, a government in place in order to accomplish anything. We have to be sure that we are talking about it right because it's not a disposal, Martino. It is a potential combination with someone else that will create a stronger player at the European level in the armed vehicles. So it's important to -- then there is also potentially a cash component. But this is important to be achieved with a strategic perspective.

[Operator]

The next question is from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

Just a couple of questions from my side. The first is on the AW249, the new helicopters you are developing. I saw that 1 month ago, someone from Leonardo Helicopters stated that the type is going to fly for the first time possibly in September. So I was wondering if this represents an important milestone possibly triggering a further contract, maybe 2022? So this is the first question.

And more in general, I was wondering if the political crisis in Italy, I mean, I understood that it is not expected to affect the budget. But I was wondering if it could, let's say, delay in general the acquisition process for programs that are already in the budget.

[Alessandro Profumo, executive]

On 249, we'll have the first flight in September, it's correct. It's not a milestone for further orders because, today, the orders are related to the development phase. And we do expect the next order beginning next year, this is what we plan to have. This helicopter is very exciting, so it's for sure right around to fly because we can also have -- to discuss of this helicopter with others as well. The second question was on...

[Alessandra Genco, executive]

Political crisis.

[Alessandro Profumo, executive]

The political crisis. I've already said that we do not expect a change in terms of programs because we have always to remember that the programs are designed with Secretary and the General because this is important. We can have a delay of some orders from this year to next year because there is a need of some bureaucratic process that goes also through the commissions of some, it's called the concerto of different meters.

So we are in continuous touch with the ministry involved, mainly the same with the Industry Minister in order to understand what could be considered as ordinary administrative or ordinary course of business and what is not. So today, what I said very clear that we confirm the guidance. So we are fully confident to achieve the guidance.

[Valeria Ricciotti, executive]

Okay. I think it was the final question. So thank you all of you for being with us today, and as usual the IR is available for follow-up.

[Alessandro Profumo, executive]

Many thanks. Bye.