Leonardo SpA

MIL:LDO

Earnings Call Transcript 2018-Q3

[Operator]

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo Third Quarter, 9-Month 2018 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]

Yes, thank you, good evening, ladies and gentlemen, and welcome to our Q3 and 9 months results conference call. For the presentation today, I'm very pleased to introduce to you our CEO, Alessandra Profumo. He will be talking to you about our recent progress across Leonardo and placing that in the context of the execution of our industrial plans. Then, our CFO, Alessandra Genco, will take you through the detailed financial results for the first 9 months and outlook for the full year. And then at the end, we will welcome your questions.

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

[Alessandro Profumo, executive]

Many thanks, Raffaella. Good evening, everyone, and thank you for joining our third quarter and 9 months results call. Today, I would like to give you some key messages. The first one is that we had another quarter of progress delivering our Industrial Plan, which is clearly the key element on the forefront. Overall, we are on track after the first 9 months of this year. We have a good order intake, booking the significant EUR 3 billion Qatar NH90 helicopter orders. We have a steady revenue growth despite of the ForEx impact. We have a profitability, which is in line with our plan and our cash flow is on track, supported by the -- mainly NH90 Qatar achievement, clearly is on track vis-à-vis the new guidance we gave you in July.

So we are confirming our 2018 guidance, which have been revised upwards in July, with all our businesses performing in line with our expectations. So this is very important for us. While joint ventures are experiencing a lower contribution, mainly ATR and Alessandra will explain later on the reason why.

Let me start looking at where we are in our journey. First of all, as you know, we are fully focused on executing our Industrial Plan, which is the core for our activities. We are experiencing a strong commercial momentum, this is also thanks to the new organization we have defined. In August, we have booked NH90 Qatar contract, signed in March and we also received our down payment.

I have to say that in this case, it's a very clear example on how the system in Italy works very well, every system. Because clearly, we are a significant support by -- sorry, supporting the insurance company regarding on such achievements. So it really has been a great work. Also, the defense system work well with all kinds of program, mainly for the training activities.

In September, we've been selected by the U.S. Air Force to replace the UH-1N program, with the military version of our vertical ascending 139. This is very important because as you know, the 484 Helicopters with a typical American system of indefinite quantity, indefinite delivery but it is very important for us because we are currently based on the U.S. Air Force and where we have recently, just 2 days ago, signed an important contract, an MoU in China in the civil helicopter field. And to be more specific, an overall 15 139 plus an MoU for another period of 5 years, '19 to 2023, [ RS ] 160 Helicopters of different categories.

DRS. DRS is also incredibly important for us because it had a very strong performance. It is well positioned on key programs aligned with the Pentagon modernization priorities that are expected to support growth and I imagine that going forward. And while we did we not win the [ S&P standard ], and we certainly didn't lose because of the product capabilities, we have a very high-quality product and technologies, so in terms of our quality evaluation, we are aligned with the winner. So the entry position is well-recognized and valued by the customer.

We saw that also and that this process has been very well evaluated and we are confident that we can compete successfully and that secure, frankly, commercial opportunities in the future on the right terms. So clearly the -- to be profitable on the program, it is an indicator for us.

We're -- we made very good progress in industrial -- in helicopter side, so we don't have only a good commercial momentum, but we are also tracking the turnaround plan successfully, executed the contract on our expectations. In Aeronautics and Defense Electronics, we are seeing solid contribution from all our businesses. And we have taken a step forward across the businesses focusing on strict cost control. Alessandra later on will give you further information where we are on the cost cutting process and also the long-term sustainable growth.

On sustainability, we are working every day as well. We entered in the United Nations Global contract and that we have been certified, the first company in the defense sector in the Anti-Bribery Certification with the 27001 standard, if I remember correctly, but now the number is 37001 not 27 standard, so it's clearly very important for us as well.

Shall we talk of the backlog? We have, in our opinion, quite the strongest backlog and I want to say that for DRS, this is only the half of the backlog. It is not the soft backlog. You know that in U.S., the way the orders are accounted is different from the European standard, so we move on the standard -- the program but we know that we have also called the soft backlog, so that it would be implemented in the middle of the plan, which is between 4 and 5x as the soft one. So this give us a very strong confidence on the growth rate of DRS as well.

But talking of the order backlog, we have EUR 35 billion of backlog, which high, covers almost 3 years of revenue and it's well-balanced and spread across our businesses, these are 33%, 33%, 34%, which is pretty strange but it's a reality. And it comprise many attractive long-term programs supporting the long-term visibility in terms of both revenues and profitability. I already said, of the soft backlog on DRS, there are also the order for the MH-139 we received from the U.S. Air Force. It is evaluated with the same system.

Another element of our strategy is the sharpen of commercial focus, especially in key strategic international export market. So we are executing our plan, mainly thanks to the CCO organization and we made strong progress in both military and civil side of the Helicopters business.

I think it's important to reassess some key information on the NH90 Qatar contract. It is very big, a significant contract. Indeed, in fact, that's the largest contract we ever received in the Helicopter division. We are the overall prime contractor which is a very important post with the NH90. This is the first time that we are prime. So it's clearly very important as well, not only in terms of profitability but as well in terms of recognition of our capabilities and brand.

We have a workshare of more than 40% on the EUR 3 billion and the first, basically, will be in 2022. The last one will be in 2025. There would be 8 years of assistance -- of customer assistance. The down payment has been received in August, and -- so it is included in our cash flow numbers.

The order in U.S. is a major contract for 84 helicopters. It is, again, a strong recognition of the quality and competitiveness of our product, and it is important because we enter in the U.S. Military market for the first time. This could be -- potentially be even more important for the capability of participating to other business and this is also a demonstration of the strength of the 139, where I remember, we plan to sell the beginning brand of helicopters, we are significantly above the 1,000 helicopters. So the profitability has, basically, turned around. I have already said that this has indefinite delivery, indefinite quantity contract and -- but our workshare is in the range of $1.4 billion.

In China, we have signed this contract for 15 139 and we have -- which is a value about EUR 150 million and we have this memorandum on it for another 160 Helicopters, all brand new, which is higher than EUR 1 billion.

I think that many of you participated to the Amsterdam Aerotech Meeting, where Gian Piero was presenting the numbers. So we are seeing good momentum both in civil and military markets in terms of order intake. And so we are very confident on the delivery of the plan that we have presented to you.

And the last, finance, our execution capability has been demonstrated as expected. By the end of September, the deliveries were 113, vis-à-vis 99 in 2017. So we'll overbeat the 149 number for the year. By the year-end, we will see the number will be significantly higher.

I would move to Leonardo DRS because I think that the key targets for the Helicopter division has been stressed many times. So we continue to have a very good progress in the U.S. market, which is growing but the DRS is overbeating the market. So we think that DRS is very well-positioned with major DoD modernization program both in the Army and the Navy, but as well as the Air Force for instance in the infrared business, we are very strong as well for the airborne system.

There's been a very strong top line growth in order and in revenue, an impressive book-to-bill. Book being soft book of 1.3, which is a record number, EBITA contribution also went up if we exclude the cost from T-X, that's clearly have been charted during the year and the profitability in the plan with the prior year, but we anticipate a continued margin expansion in 2019. So we have a target of a double-digit profitability during the period of the plan that will be achieved by the year-end.

Costs. We made a commitment with you to deliver a cost savings of EUR 200 million in the period of the plan. This was what we said to you when we presented our plan in January. We cannot confirm that we will do slightly better than the target this year, which is, I think, the key message for you in terms of cost. So we are all focused on cost control, which is clearly a very important activity, but we are not working on the investment because Marco Zoff is mainly focused on our supply chain responsible and acquisition -- the cost management and the acquisition is -- in terms of goods, in terms of M&A and procurement. So we're working on a program based on joint work with our supply chain. It's a program, which is called the LEAP 2020, which is Leonardo Empowering Advanced Partnership, which is the meaning of LEAP. And we are working with all our suppliers in order to create the most solid base in the supply chain in order to have benefit in terms of quality, on-time delivery and cost. This is the key program for us on which we are very focused but also satisfied for the first results we are achieving.

So in our opinion, all these things will be the base for sustainability, which we have said many times, is the key base for our future. In this perspective, we have also some external achievement, not only internal achievement. Also we have members of the United Nation Global Compact. We are being reconfirmed for the 9th times in a row in the Dow Jones Sustainability Index. And as I said before, we received the Anti-Bribery Certification. So all these elements are important.

So to summarize, we are on track and remain focused on the execution of our Industrial Plan. We are achieving commercial momentum. We have a top line growing, so -- which is the first results of the action we are putting in place. There is a significant assignment of the 3 helicopter contract, Qatar, U.S. and China, which are very important for us. We continue the recovery in the helicopter division. We have a solid progress as well both in Aeronautics and the Defense Electronics. And we are working as well on strict control for the cost base and a solid financial strategy. I don't know if you already have the time in order to look to our net profit contribution. So the reduction of the interest costs are one of the key element, which is based on the buyback to remainder of the year of our bond -- long-term bond, as a matter of fact, but I think that -- and also on top of that, I'm sure you're also seeing the reduction in financial position, so that we are in line with our expectations.

Now, I leave the floor to Alessandra in order to go into more details on others.

[Alessandra Genco, executive]

Thank you, Alessandra, and good evening, everyone.. We have had another quarter of progress in executing and delivering our plan. Overall, it has been a satisfactory first month and we feel we are on track. We are pleased with the performance and progress in key areas of the group with all business divisions in line with our expectations, while we have seen a lower than expected contribution from ATR.

So in summary, some good results in Q3 and the first 9 months. Order intake at EUR 9.4 billion, up 20% in constant currency on the back of the Qatar contract win, which we booked in August. Steady revenue growth of 4% in constant currency, EBITDA and profitability in line with our expectations and lower than last year because of some weakness in ATR's performance and because of the relative year-on-year comparison of Helicopters. Cash flow on track and also benefiting from the Qatar contract advanced payment.

We are particularly pleased with Helicopters where, as Alessandro mentioned before, the turnaround plan continues to be successfully executed and on track. We're seeing in this segment a strong commercial momentum. DRS also continues to enjoy a good performance in an improving marketplace. At the same time, we had solid contributions from all other divisions, including Aeronautics and Defense Electronics.

Now, let's look in more detail at how the progress in the business has driven the group performance in the first 9 months.

Starting with new order intake, which was EUR 9.4 billion, up 20% over the same period last year in constant currency. In overall terms, the strong performance in Helicopters more than offset lower levels of order intake in Aeronautics and Defense Electronics. And overall, our book-to-bill was healthy and above 1x.

Looking at the individual businesses. Helicopters, EUR 4.7 billion of new orders. That's over double the previous year. The main factor behind the increase was, of course, Qatar. But we also won other new orders for both 169 and 189 as well as for the 139 and for customer support and training.

The EMS and Search and Rescue segments are strong. And we're seeing some positive signs also in the oil and gas market, which is expected to support our results more in the long run.

In Defense Electronics, we also saw a steady commercial performance. Order intake of EUR 3.8 billion was down compared to the same period last year because last year, we booked a major Qatar naval order for approximately EUR 1 billion.

Particularly, noteworthy again was the strong performance of DRS. We are well positioned on a number of programs for the U.S. DoD, which underpins the future revenue growth. DRS has been winning good quality contracts, which we have highlighted to you before, including the first contract for the supply to the U.S. army of active defense system for tanks and the supply of computers and portable electronic devices, again, to the U.S. Army. We are investing much time and effort in the developmental contracts that position us well for subsequent attractive production phases.

On top of that, what is not shown in the numbers is, as Alesandro has highlighted and stressed, DRS enjoyed a significant additional soft backlog of potential orders, which again, underpins visibility and growth in the future.

In Aeronautics, order intake of EUR 1.4 billion compared to 2.4 -- EUR 2.0 billion last year. As we flagged this half year, the Aeronautics business has been affected by some large contracts slippages. But I want to emphasize again that order intake is not linear. The Aircraft Division in particular is active in major commercial campaigns on both the domestic and export side, and meanwhile, in the first 9 months of this year, Aerostructure has won order to supply 155 more fuselage sections for the B787 and 21 ATR sections. And the Aircraft Division won more orders in Poland for the M-346 Stringer plus orders from Lockheed Martin for the JSF program.

So overall, we're really pleased with this level of commercial activities around the order intake and we're comfortable that we remain on track for the full year.

Moving onto revenues. Revenues were EUR 8.2 billion in the first 9 months of the year. This is a good increase of 4% on a constant currency basis year-over-year. The drivers behind the steady revenue growth were spread across the group. Helicopters recovery and more, even performance growing EFA Kuwait activity and strong DRS performance.

You can see Helicopter revenues were EUR 2.7 billion, up 10% from last year, confirming the progress and the recovery with higher production volumes and deliveries. Also, showing a more even less lumpy performance than last year when Q1 was very low and Q2, very high.

In terms of deliveries, we have delivered 113 Helicopters in the first 9 months, definitely higher than the 99 we delivered last year. Defense Electronics as a whole achieved revenues of EUR 3.9 billion, up almost 8% on constant currency.

In dollar terms, DRS achieved 9-month revenue of $1.5 billion, up some 17% of the previous year reflecting higher production volumes.

Finally, Aeronautics had revenues lower at EUR 2 billion, with growing EFA Kuwait contract activity offsetting revenues in Aerostructures and lower volumes in EFA domestic and other military programs.

So in overall, the group had a satisfactory top line revenue performance.

Talking now about EBITA and profitability. We are seeing a solid performance across all businesses, in line with our expectations, but with a lower than expected contribution from JVs, mainly ATR.

Group EBITA was EUR 632 million, with a return on sale of 7.7%. The 2018 results compared to 2017 includes some effects which I want to highlight to you.

First, the softness in ATR, which was greater than we expected. This was caused by a combination of currency, change in mix and lower deliveries. Secondly, Helicopters, which had an unusually strong Q2 last year and which this year is on a more even and upward trajectory. In addition, we had some bid costs for DRS related to the T-X trainer tender.

Looking at the main operating segments in more detail, Helicopters 9-month EBITA was EUR 217 million in line with expectations, down from last year 20 -- EUR 231 million for the reason I just mentioned. We are encouraged by progress here, both commercially in terms of how the market sees our product as well as industrially in terms of achieving deliveries according to plan.

As Alessandro told you before, we are still aiming this year to materially beat the 149 number of Helicopters delivered last year. And then in terms of margin recovery, as per our plan.

Then, in Defense Electronics, 9-month EBITA was EUR 288 million, up 2% on last year. You should appreciate the considerable activity and progress going on across these businesses. Good performance in DRS after adjusting for the one-off big cost for the T-X trainer in the U.S. and noting that the mix in DRS contains a number of earlier stage projects with lower margin at this moment.

Then the results in Defense Electronics, a lot of focused efforts in delivering large important programs in land and naval and avionics.

In Aeronautics, EBITA was lower at EUR 167 million, with strong levels of profitability in the Aircraft Division, which was offset by lower than expected results in ATR. In ATR, deliveries were lowered and currency had an impact. And the mix of sales was at lower margins than in recent years. The contribution from ATR in the first 9 months was EUR 31 million compared to EUR 78 million from the previous year.

In Aerostructures, industrial performance remains weak.

Finally, in Space, in the first 9 months, we saw a contribution slightly down on last year and slightly below our expectations.

Looking at group overall, we see a performance on track with our plan. Looking further down at the bottom line, the net result was almost in line with last year, despite a lower EBITA year-on-year. This is a result of two factors, one negative and one positive.

First, the one-off restructuring cost of EUR 170 million related to the agreement achieved with the Italian Union for the early retirements of up to 1,100 employees and 65 managers, which will have no effect on 2018 free operating cash flow. Then secondly, the release of a risk provision of EUR 99 million reported in discontinued operations. This had been set aside against the guarantees, given on the disposal of Ansaldo Energia.

In addition, we have also recorded lower financial cost as the CEO has highlighted before as we consistently, quarter after quarter, deliver on our financial strategy to lower interest expenses. All this translates into net income in line with last year.

Free operating cash flow is on track for the full year. We have been working hard on working capital while supporting growth and we have taken a series of actions that we feel are driving us towards the right direction.

The receipt of the Qatar NH90 advanced payment led us to revise in July the full year guidance upwards, from EUR 100 million to EUR 300 million to EUR 350 million. We're pushing hard to achieve good top line revenue growth over the next 5 years in line with our Industrial Plan. And in this respect, we are pleased in July to raise our original guidance on order intake for the full year '18 from EUR 12.5 billion to EUR 13 billion, up to EUR 14 billion to EUR 14.5 billion.

We remain comfortable with our full year revenue guidance of EUR 11.5 billion to EUR 12 billion. And as you have heard, our businesses have performed in the first 9 months in line with our expectations.

While we have seen some weakness in the contribution from our joint ventures, mainly ATR and then Space, which are likely to perform below expectations for the full year, at this stage, we remain comfortable with our EBITA guidance range of EUR 1.075 to EUR 1.125 million and our free operating cash flow guidance of EUR 300 million to EUR 350 million as we revised upwards in July, mainly due to the net effect of free operating cash flow of the down payments on the NH90 Qatar contract.

As ever, Q4 is a very important quarter for us, especially in terms of profitability and cash flow. We're pushing hard to execute on our plan and meet our targets.

To sum up, we're continuing to make a series of positive steps and progress in the first 9 months of 2018. Overall, we are on track and where we expected to be.

And with that, I will hand you back over to Raffaella, who will chair the Q&A. Thank you.

[Raffaella Luglini, executive]

Thank you, Alessandra. We're now ready to take your questions. [Operator Instructions]

[Operator]

[Operator Instructions] The first question comes from Alessandro Pozzi with Mediobanca.

[Alessandro Pozzi, analyst]

I have two questions. When I look at the full year guidance, there's a significant step up in Q4 for both order intake and EBITDA. I guess you're confident that you can achieve that given that you have reiterated the guidance for the full year. But just wondering, maybe, if you can give us more color on how you're coming to achieve that?

And also, the second question, on China, you've signed a quite material contract for Helicopters. Maybe if you can give us an idea on the cost rates that you're witnessing in China or perhaps more in general on the opportunity set that you see in the country?

[Alessandra Genco, executive]

Okay, on the -- on guidance. As you have heard, the first 9 months at all levels confirmed that the group is on track and in line with our expectations. Clearly, as you well know, the fourth quarter is a very important quarter for us. And we're working off our debt and focusing all our efforts to deliver the targets both in terms of order intake, revenues, EBITDA and free operating cash flow. At this stage, we remain comfortable that we will manage to achieve our guidance.

[Alessandro Profumo, executive]

We are working on materializing the different options that we have on the plan during the fourth quarter. We have to remember that we are working mainly with an institutional customers. This is set up with [indiscernible] which have confirmed investor in that fourth quarter because on the U.S., is closing the financial year in September. Almost all other customer are closing the financial year in December. So there is a flow of further orders. China -- first of all in China, we have different business lines, helicopter today is the most important one, this customer senior [ UIS ], we're aiming pretty interesting business model for EMS, but it's not utilizing helicopters on -- in EMS. This is key business area and the EMS is mainly funding the activity with the insurance and with system where they settle insurance to repay customers is similar to what we pay when we go see the insurance of Finmeccanica. We are following the per day and we're getting an insurance in order to be rescued if you had an accident by the Helicopters. So in theory, an incredibly low cost per capita but they are already have more [ 6 million cap ]. So they are really growing fantastically. So yes, these are here, thanks to the fact that they have strong prior demand in this market, we are developing with them to other areas. The first line is training center. So that there will be a significant numbers of pilots. Also, could be utilized for other proposals. And on the other side, that is what we call completion center, which means that we send them between helicopter and then the complete the personalization enlarging the market. So the helicopter business is an important business. These days we are talking of the commercial market then there is public market mainly for Asia because now we are not working the military business where we are starting to have some good results. On top of that, in China, we are working on the air traffic management. We had, if I remember correctly, 80 airport that are utilizing our systems so it's another important matter to us. We have secured communication market, so there -- these are the business areas always in the commercial or nonmilitary market, on which we are having significant results.

Then finally, we have signed a joint venture with a company which is called Kangde. They are a company specializing in composite because we then -- we will design and produce some frame of the new COMAC CR929. It is a widebody aircraft that COMAC is developing. It's important because this joint venture is being paid by us with technology. And so, which means that it is a very important signal for our Aerostructure, that we have capabilities that do have a significant value. So we are seeing this joint venture as a positive signal for Aerostructure. On top of that, we utilize the engineering capability in the Aerostructure division, and to be honest, in the Aircraft division as well in order to design this frame of the fuselage. And finally, from 2023 -- and because that first took part in 2021, the first aircraft or the first production -- the beginning of the production for the prototype. 2023 is the first flight. 2025, hopefully, the certification. If this is the time frame, we will utilize also issues of our production capabilities in Italy in order to produce these frames. So we will hire enough our production capability in the Aerostructure factories. So these are the key perspective we're getting in China.

[Operator]

The next question comes from Nick Cunningham with Agency Partners.

[Nick Cunningham, analyst]

A couple of questions on DRS, one on ATR, please. The DRS book-to-bill suggests that the run -- revenue run rate should be around about 25% higher than it is at the moment, so if we look out a year or so. Is there anything wrong with that analysis? Anything will stop that from happening? But on the other hand, margins are low. As you pointed out, you're carrying this T-X costs and it cause an R&D heavy mix. Is there any way you can quantify how much of a headwind that represents? And how much of that headwind goes away again, if we look a year from now?

And then finally, on ATR, that's a very volatile number. We knew that the ATR profit, say, of the last couple of years have been unusually high, supernormal. But they now seem too unusually low, is it possible to give us bit more detail about what's driving that and how it looks going forward?

[Alessandra Genco, executive]

Okay. So let me start with your second question. Yes, so the results of the sales type performance year-over-year over ATR is mainly driven by an element related to the foreign exchange because the dollar devalued in the first 9 months of this year compared to the first 9 months of last year on average, let's say, 1.19, 1.20 compared to 1.10, 1.11 from last year. So that's the first component. Because when ATR sells its product, the sales are denominated in dollars, while its cost base is denominated -- has been denominated in euros to date. And let me figurate what we have done to improve the situation. In a moment, I'll do that.

And the second reason is also an effect of the mix of production. So, you may have recalled that the ATR had planned to sell to Iran a number of aircrafts and it managed to sell only a portion of the target total. So there are going to be lower deliveries -- there will be lower deliveries in the plan in the 9 months and the same is planned to happen for year-end. So there's going to be a volume effect.

And finally, the mix is less favorable, meaning, the activities performed on the contract in '18 -- do not have the same level of profitability than in '17.

So with respect to reducing the volatility in ATR results associated with the effects, what we have done in agreement with Airbus is that we have changed the nomination of the supply that both Airbus and Leonardo do of their own components to ATR into dollars so that, that portion of cost base that is naturally hedged with revenues, dollars against dollars. Nonetheless, there is a portion of late, mainly personnel cost, which remains to be exposed to dollar, euro volatility because the Toulouse employees are paid in euros and revenues are always in dollars.

So that, basically, hopefully will give you a full picture of the drivers. Now going forward, we are -- at the point in time in which ATR also is developing its own budget. What we can say and what I would like to highlight is that ATR remains a tremendously successful product platform with more than 70% market share in the turboprop market, so a leader -- an absolute leader in this market segment.

And lately, there's been a change in the field, Mr. Stefano Bortoli has been appointed as CEO. Stefano is a well-seasoned Aeronautics top manager and we have full confidence that he will work his hardest with his team to put the company on the most favorable track possible, considering all the exogenous elements.

[Alessandro Profumo, executive]

Talking about DRS. If you can go to Page 21 of the presentation, you can see the -- that in the first 9 months that we exclude the T-X cost, the return on sales had been 6.6% vis-a-vis 6.8% last year, so slightly lower, which is mainly due to the fact that the new programs -- the first year they we're -- and which is very typical lower margin. But as I said before, in the field of the plan, we are sure we will achieve double-digit the return on sales. So I think this is a -- the key message on DRS.

Then there are, as well the -- you can corporate the cost on the range of EUR 20 million, EUR 18 million, the cost for the DRS, since the first 9 months and this is more or less -- I'm saying more or less because we have some people that have been hired for the DRS as positives and have to be allocated elsewhere or will leave the company. But again, the answer is above our expectations just to be clear.

[Nick Cunningham, analyst]

And just on the dollar hedging question, do we assume that for the Leonardo will hedge the -- what's effectively a pass-through dollar exposure on itself -- on its Aeronautics business?

[Alessandro Profumo, executive]

So on DRS?

[Alessandra Genco, executive]

No. On the ATR.

[Alessandro Profumo, executive]

On ATR?

[Nick Cunningham, analyst]

On ATR, yes indeed. Yes.

[Alessandro Profumo, executive]

On ATR not because on DRS, no? On ATR, yes. You remember, last year there was no hedging because there was a discussion, because we've -- our partner, but this year it has been hedged.

[Operator]

The next question comes from Christophe Menard with Kepler Cheuvreux.

[Christophe Menard, analyst]

I have two questions. The first one is on Helicopters in Q3. Sounds like growing 25% but you have no operational leverage. I mean, basically, year-on-year, EBIT is stable. Just wanting to understand the reason for that, is it mix? And will that continue in Q4? Is it truly a one-off effect on mix or whatever reason? That's the first question.

The second question is on the talks about the Italian defense budget. I mean, there's been talks of potential NH90 sales cut in 2019. Just -- and also, tornado upgrade program, just wanted to identify what is the respective share? And is it right to -- I mean, would a number of around EUR 100 million as a hit on sales in Helicopters on NH90 be the right number for 2019?

[Alessandro Profumo, executive]

Sorry, I was stuck from the second question. We are not seeing any material impact on our plan coming from the revised budget and the sense that it's mainly a translation of numbers from 2017, 2018. So we are not changing our product due to the revision of the defense budget.

[Alessandra Genco, executive]

Okay. So Christophe, with your first -- with respect to your first question, Helicopters, Q3 in absolute terms as I'm sure you have all -- yes, you know as well, so you have been able to appreciate. Q3, Q4, Leonardo across all businesses is a period where our return on sales goes down compared to the average of the first 2 quarters. That's by virtue of the fact that in Italy, we shut down in August and so, let's say that -- the holiday effect that hits the quarter. So I would not actually focus, specifically, on that element to judge the Helicopters performance. Helicopters, as we said, are clearly performing really strongly commercially and are, from an industrial standpoint, delivering as a faster pace than machines to customers. Margins will come as a consequence at the pace that we are expecting.

[Christophe Menard, analyst]

That means Q4 will be -- will show operational leverage on -- because you're supposed to have also steep increase in deliveries in Q4 so...

[Alessandro Profumo, executive]

Yes.

[Alessandra Genco, executive]

Yes.

[Christophe Menard, analyst]

EBIT should profit from that?

[Alessandra Genco, executive]

Yes, yes, as much as we would all love -- we, ourselves, first to have more of a linear path in quarter performance. That's not the case and Q4 remains to be the strongest quarter and the one that has the highest weight throughout the year.

[Operator]

The next question comes from Zafar Khan with Société Générale.

[Zafar Khan, analyst]

Just got a handful of clarification and just housekeeping questions, please. First one is on NH90, clearly, an excellent order in for yourself. Can you just remind us, please, what share you have in the program? Is it 40%? Is it 40%, 40% and 20% for Aerostructures? And just how much it's contributing to your revenue?

[Alessandro Profumo, executive]

I said that clearly. I'm talking of NH90 Qatar.

[Zafar Khan, analyst]

Yes, I was thinking generally, because you're delivering something...

[Alessandro Profumo, executive]

No, no, no. Generally, you cannot consider, because in relation to each of the orders we are referring internal participation. So you remember, when we won the NH90 Qatar, we were incredibly satisfied because we never had more than the participation we have in the Qatar order, which is about 40%. There are campaigns where we are we are slightly above double-digit. So that is very different from campaign to campaign. So this is something that is specific.

[Zafar Khan, analyst]

Sorry, from -- sorry, carry on, I apologize.

[Alessandro Profumo, executive]

This is very important because thanks to the -- to this discussion we had -- we created a stronger relation with the Airbus, which is the key player on NH90 and the relation on the joint venture. Because in reality, the joint venture is very, very positive. And remember that we have 32% of the joint venture, and Airbus who have 60 -- this is a consortium. Airbus, who have the 64% is a consortium, ad we have 32%. So this is very important for us, that the Qatar contract is unusual, I would say, in a positive way for us.

[Zafar Khan, analyst]

That's very helpful. I'm just trying to understand really the -- what kind of progression we're going to see in the contribution from the NH90 to the helicopter business? So just trying to get some idea of...

[Alessandro Profumo, executive]

No, I do understand but again, there is solo different campaign from campaign that is impossible to say there is an average.

[Zafar Khan, analyst]

But all in all, is the NH90 consortium making a profit at the moment? Because I know this was a difficult contract with...

[Alessandro Profumo, executive]

The profit is not on the consortium, it is on the company that participates to the consortium. For us, it's a profitable program.

[Zafar Khan, analyst]

And is there average margin that you're showing in the Helicopters? Or...

[Alessandro Profumo, executive]

We never provided the average margin over a single program.

[Zafar Khan, analyst]

Okay. Then I'd please wanted to just ask on Aerostructures. It doesn't seem to be getting any better. Alessandra was saying that it's very troubled. Can you just explain what's going on? What you guys are trying to do? And when we might see some light at the end of the tunnel for this one?

[Alessandro Profumo, executive]

I think that, clearly, the Aerostructure division is still negative, but we are seeing a significant change of the performance. But first of all, related to the quality. You remember that we were in probation for the 767 today, we are out of probation for the 767. We have been defined the best performance for the 787 as a supplier by Boeing and as well as we are highly ranked as a supplier for Airbus for the 320, 321. So this is the first thing.

We are clearly reducing the cost because of the fact that we are out of probation. We had different types of costs and one was due to the delivery via airplane being late and now we are back to shift delivery. And we are also having a reduction of cost because we don't have anymore the Boeing people in the factory. So that today we are perfectly in line with our plan in order to have an improvement of the revamp of the Aerostructure division.

There are still discussion with ATR and Bombardier today, Airbus for the 220 aircraft, which are an important discussion but the cost related to the 220 at the time was Bombardier that are implied in our plan. So it's a -- to be honest, we cannot say that we are seeing the light at the end of the tunnel in terms of being back in a profitable situation on that, but if you don't see the change of the signed of the EBITA, we are seeing the light at the end of the tunnel because there has been a change in terms of performance.

[Zafar Khan, analyst]

The restructuring cost for the first 9 months is very pleasing, at EUR 17 million. Can you help us please just understand what the full year number might be? Is there some kind of big cost coming in Q4? Or is this the new kind of level that we should be looking at? That's one question. And just on the R&D, the net capitalization for the first 9 months. Please, Alessandra, if you could help us with that.

[Alessandra Genco, executive]

Yes, so on the restructuring cost, even for that metric, the most relevant referenced here are the 12 months. And what we are expecting as we shared with you during our last earnings call is that the level of restructuring cost will be approximately in the range of EUR 300 million to EUR 320 million for the full year. So the exceptional EUR 170 million related to the agreement reached with the labor units -- union and then the ongoing restructuring, nonrecurring costs, which are around EUR 130 million, EUR 150 million.

On the R&D capitalized, we, domestic, again is over 12 months. And over 12 months, we expect that number simply set around 170 -- EUR 150 million, it's probably going to be lower, and probably more in the range of EUR 100 million.

[Zafar Khan, analyst]

That's the net number, is it? Net R&D capitalized?

[Alessandra Genco, executive]

It is. It is net, yes.

[Operator]

The last question comes from Gabriele Gambarova with Banca Akros.

[Gabriele Gambarova, analyst]

The first one regards financial charges because you -- in the past few guidance for financial charges in excess of EUR 300 million for 2018 and just 9 months, they came in at EUR 177 million. So I was wondering if we could give me an update on this front. And another question was on EBITA because if I look at the Slide 15, I can see corporate and other item, EUR 71 million negative. Sounds like on Page 15.

[Alessandra Genco, executive]

Yes, so Gabriele on your first question, you are correct. Your recollection is correct, we provided guidance at approximately EUR 320 million for interest expense and we can now lower that guidance around EUR 300 million. What happened in the first 9 months that really brought that number down is that we had expected to issue a bond at the beginning of the year and have associated interest expenses while we have not yet issued any new piece of debt today. So that's all beneficial to interest expenses both at income level as well as cash flow levels.

And on the -- on the number on Page 15 for corporate and other, so here, as you recall, during the Industrial Plan presentation in January, we mentioned, that we were going to strengthen the corporate backbone of the organization to strengthen also central governance on the individual functions in order to maximize the efficiencies across countries and across families. So that is one of the effects that you are -- that they captured in that number. There is also some re-perimetering, meaning there were some cost that were before allocated at divisional level and that now have been centralized, mainly related to the CCO structure, the Chief Commercial Officer structure.

[Gabriele Gambarova, analyst]

Okay. Can I ask you if you have an assessment of this item for 2018 -- for the whole year, 2018?

[Alessandra Genco, executive]

No. We are now in a position in which everything is coming together and as always, Q4 will make the difference. So we cannot presently provide more information on that year. Yes, this is really the first year in which we had this new set-up and new corporate structure. So therefore, there will be clearly an increase compared to last year, but we cannot provide you a specific number.

[Operator]

Gentlemen, there are no more questions registered at this time.

[Raffaella Luglini, executive]

Okay. So we thank you all for your participation to conference -- to this conference call and as ever, the Investor Relations team is available for follow-up questions. Thank you. Bye.

[Operator]

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