Leonardo SpA

MIL:LDO

Earnings Call Transcript 2020-Q3

[Valeria Ricciotti, executive]

Good evening, ladies and gentlemen. Hope you are all well. Welcome to our Q3 9 months 2020 year results presentation. 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 9 months of the year, the financial results and the outlook for the full year 2020. And we will then welcome your questions. I will now hand you over to our CEO.

[Alessandro Profumo, executive]

Many thanks, Valeria, and good evening, everybody. Unfortunately, we wear the mask here because we are a bunch of people in this room, so we keep a strict respect of our rules. And clearly, I hope that everyone on the call is well as we are on this side. Before we get into the results presentation, I want to express my thanks to all our people at Leonardo for their commitment and the effort during these very trying times. Especially the successful efforts made by everyone to keep Leonardo operational and productive despite the challenging situation.

We are pleased to be presented a robust and resilient set of results for the third quarter and first 9 months of this year. These results are evidence of 2 key things. First, how we have been successfully responding to 2020 short-term challenges, reacting promptly and effectively to changing market dynamics and taking actions to become even more resilient in moratory. With strong results achieved in aircraft, helicopters, electronics in Europe and Leonardo DRS. And second, how we can have strong confidence in our core business fundamentals, and how we are well positioned for the medium, long-term times.

Also, we see prolonged softness on the civil side, the bulk of our business is in the growing military governmental, which accounted more than 80% of our full year 2019 revenues. And customer support and training, which is clearly one of the strongest of our areas. We have a proven ability to capture opportunities there, and we can also leverage our key presence in international programs. Our significant order backlog at almost EUR 35 billion is providing resiliency and visibility. The operational machine has been performing quite well despite of COVID, and you will see the numbers quarter after quarter. Productivity is continuing to increase, and we have reacted well to an uncertain environment that we currently face.

Anyway, to understand our business better, you need to focus on our medium-term drivers, and we have seen some very strong fundamentals that give us confidence here. So let me expand on these 2 very important things. First of all, the key theme how we have been successfully and effectively responding to 2020 short-term challenges. In the 9 months, business overall performed very well in the current macro environment. Our main businesses, aircraft, helicopter, European electronics and DRS have held up well and remain strong. Results show our response to the COVID challenges have been quick and effective, and we have proved we have flexibility and agility in managing these challenges.

We have reoriented orders from export to domestic, receiving strong support from customers. We have immediately moved to cut costs, reassessing our cost base to respond to the crisis. We prioritize our investment activity without delays in programs. We have reconfigured production lines to address COVID restrictions. We implemented the so-called smart-working, quickly and effectively and continue our operations. And you will see as well some numbers that shows that how quarter after quarters, also the productivity is improving. We managed holidays extra timing shift in order to optimize per capita performance according to workload and business needs. We have right-sized areas of our business in line with demands, in areas like helicopters in the U.K. and ATR.

We have remained commercially strong. Continued good order intake is underpinned by strong domestic orders. Helicopters are up by 41%. And this great support from our core domestic customers in Italy, U.K. and U.S. is a major strength of ours. We are also seeing positive signs in our international markets. These remain vibrant and vital. And on top of this, our customer support and training activities have performed very resiliently, showing how our customer demand remains unchanged notwithstanding with the macro challenges, and it is firmly anchored to our solid fundamentals. We have a stable top line, impressive in current conditions. Pipeline of contracts remain positive into the year-end with good performance in military and governmental business. We achieved solid results in revenues, substantially flat year-on-year. Since the start of the pandemic, we have done a lot, and we are seeing the results are being delivered from the actions put in place to get back to adequate levels of productivity. We have seen a steady quarter-by-quarter recovery operation.

In terms of EBITA, we are down -- we were down 75% in the first quarter versus first quarter 2019, but we have materially recovered throughout the following months, and our EBITA in third quarter is up 3% compared to the third quarter last year. Our EBITA is supported by aircraft, helicopters, European electronics and Leonardo DRS, which are partially offsetting COVID-19 effects and joint venture contribution. And if you take aircraft, helicopters, which includes also a portion of civil business, electronics in Europe and Leonardo DRS, then our EBITA would have been down [ 7% to 10% ] only in the first 9 months and would have been up almost 30% in the third quarter. An outstanding result, taking into account the challenging situation we are living in.

We are seeing higher productivity and we are an increasingly agile business. The system reacted promptly and the operational machine is responding. We have resized for demand and reoriented our commercial effort, leveraging key pockets of demand. Productive hours are improving and recovering shortfall. They were down 15% in the first quarter, while in the third quarter, they are down only 7%, and we project 5% in the fourth quarter. A very good result, also taking into account August that is typically a low productivity month because of holidays.

Industrial efficiency at the end of September is almost back to normal levels. And our cost savings measures are bearing fruits with results in line with the plan. Alessandra will give more detail on that. But in any case, we expect around EUR 450 million savings at year end in controllable cost plus labor cost vis-à-vis our last year. On net investment reduction, we are ahead of expectations. And this is providing further confidence on the support that these actions will provide us in the remainder of the year. We have a strong liquidity and financial flexibility. Our cash flow profile this year is expected to be heavily weighted to the final quarter. We remain fully focused on that, and we have retail clients in place that do deliver the strong fourth quarter and cash inflows required to support progress towards cash neutrality for the full year, as Alessandra will cover later.

We have also a strong financial position and remaining stronger over the past few months, with no additional liquidity needs, no need to raise any additional equity and no short-term refinancing requirements. We are also assessing the best options for where we have the most civil exposure, mainly in Aerostructure. Aerostructure is a high priority. Here, we started restructuring the business a few years ago, and we were ahead of plan before the COVID pandemic.

Now we are seeing more challenges due to COVID and travel bans, but we are working to address them. We will be discussing with unions, a potential for growth at this very moment. And we are considering additional actions to reduce the overcapacity by reorganizing and internalizing some activities in order to reduce the entire cost base. We are enlarging our portfolio to other productions in the civil field as well as exporting our proven skills and capabilities also into artisan markets. I'm referring to the use of composite materials for other applications also outside the civil aerospace. So you can see how we have been successfully responding to short-term challenges.

My second key theme is, we can have strong confidence in our core business fundamentals. And how we are well positioned for the medium/long term plan. There are a number of key things that we make -- make me confident of our future. First of all, our significant backlog and how our customers are looking for our services and products. Our backlog is amounting to EUR 35 billion. It is diversified across business and the cost international market as well as the national one. We've had very good visibility of EUR 2.5 million, and we have continued to add to it. Second, our balance of military, civil and customer support, our business mix is a real strength. Civil softness is inevitable, and we see prolonged softness here. But we have lower risk due to our strong weighting and presence in more resilient military and governmental, customer support and services.

With defense spending expected to increase in many countries, mainly due to political tensions, look at it in other countries. Even during the COVID outbreak, many of them have decided to increase their spending, also launching new programs and accelerating planned ones to support the industry. And I'm referring to France, for example, for programs. And also Italian defense is spending -- spending is up almost 6% this year, with procurement expected to be up 50%. This is a consolidated trend across NATO and European countries. And we have a proven ability to capture opportunities domestically and internationally. Our business is further underpinned by a very strong relationship with domestic customers.

As said, this is not just Italy, but also U.K. and U.S.A. This year, their support made up for export orders delayed by COVID restriction, that invest in helicopters. In U.S.A. Leonardo DRS has a key strength in its close alignment with DoD priorities. It has been growing at more than the market average. It enjoys additional opportunities expected in key programs like electric propulsion systems and ruggedized computer or customer support activities. Then we have another great strengths. We are anchored in key international programs already running and in the future. Our key advantage here is that we can manage our presence in both platforms and systems. Look at Eurofighter, a great example of our multiple strengths and it gives us a lot of visibility of future activities.

Just as yesterday/today, the order extended by Germany on this product. Eurofighter is a cornerstone of the development of Europe aerospace and defense technologies. We, Leonardo, play a key role with both aeronautical components and onboard electronics. In all, Leonardo represents just over 1/3 of the value of the entire AESA program, Eurofighter and over 60% of their avionics. We recently won a contract in the U.K. for their radar upgrade with additional opportunities for the upgrading of existing fleets. There are more than 550 Eurofighters flying. The retrofit is incredibly important because clearly, electronics is a sort of continuous stream of revenues because there are always upgrades.

And we are progressing a Kuwait contract with a major Kuwait contract for 28 aircraft. We are working hard on this program, and our progress means we can mainly achieve revenue and cash flow milestones in the fourth quarter. And we have further opportunities for both the platform and avionics in other countries like Germany and Spain. And don't forget the NH90 helicopter problem, with a large order we booked in Qatar and the opportunities we are seeing here. We are part of EuroMale, the program for the future surveillance capabilities, again, with our platform and our sensors, and we are also part of the important Tempest program. All these international programs are expected to receive strong support and backing. And we have a pipeline of opportunities already identified.

And finally, our business is also underpinned by very high-quality products in strong demand and growing customer support and training activities, adding further resilience. We have a leadership position in key market segments like helicopters, with very good products and resilient customer support and training business. For example, despite a 50% slowdown in civil activity, we are seeing only 15% slowdown in civil customer support because our helicopter fleets are flying and are used by our clients, both in civil and military fields. Our continued technological innovation, leveraging our core competence is driving new business opportunities. And all of this is giving us resiliency and competitive advantage across the board. So COVID-19 is just a slowdown of the speed and timing of our growth plans, but we are fully confident in our fundamentals and our strengths as it makes us very well positioned for the medium, long term.

And with this, I now hand over to Alessandra to run through the financial results. Alessandra?

[Alessandra Genco, executive]

Thank you, Alessandro, and good evening, everyone. You can see in the numbers for 5 -- 9-month results, how we have successfully been dealing with the challenges of this year and how we see ourselves positioned going forward. Let me start with the key results highlights. You can see a very resilient and top line performance with EBITA steadily recovering quarter-over-quarter, while free operating cash flow is reflecting some pressure from COVID factors.

Importantly, we achieved a commercially strong performance through the 9-month period despite COVID, with very strong domestic order intake, balancing lower exports. Revenues at EUR 9 billion held up well and in line with the same period last year, supported by our solid backlog of EUR 35 billion, plus growing activity in major contracts like EFA Kuwait and other key areas like Leonardo DRS. EBITA at EUR 497 million is steadily recovering quarter-over-quarter. It is down 28% year-over-year due to COVID effects, lower level of productivity and lower civil deliveries and materially lower joint venture contributions from ATR and space manufacturing.

Free operating cash flow was negative EUR 2.6 billion in the 9 months, as expected. This is due to the usual seasonality plus higher short-term cash absorption during the COVID period with increased working capital and inventory buildup, mainly in military and governmental contracts, and some postponements towards the rise of cash-ins.

I will explain more on this later and how we expect to unwind with increased cash-ins waiting till Q4 that we had expected. Operationally, we have been impacted by the effects of COVID-19 pandemic, but we're clearly seeing the benefits of the actions taken quickly in response. And we are seeing a positive improvement and recovery quarter-over-quarter.

Let me now walk you through the key metrics. Our order intake has remained commercially strong. EUR 8.5 billion, and it reflects the core strength of our domestic military governmental business. It's a strong performance for the group in the COVID period to achieve the same level of order intake we achieved last year. The big highlight is helicopters. Here, we achieved new orders in the first 9 months of EUR 3.2 billion, a substantial increase of over 40% on last year, driven by higher domestic military and governmental and customer support orders, such as the integrated marine operational support for the U.K, the AW169 and our new exploration and escort helicopter for the Italian Army. And the first order for 32 TH-73A helicopters for the U.S. Navy, the U.S. Navy trainer contract we won.

Electronics Europe achieved new orders of EUR 2.2 billion, including orders for the next-generation radar for the U.K. Eurofighter Alessandro mentioned before. DRS continued its strong and healthy commercial trajectory with new orders of EUR 2.3 billion, including additional orders for the U.S. Army Mounted Family of Computer Systems. Aircraft's order intake was EUR 772 million. Remembering last year had benefited from significant orders for the M-345 trainer, this year, we won new orders for the F-35, the C27J and the EFA programs. We experienced some delays in progressing export campaigns, mainly due to the impact of travel bans. Then in Aerostructures, we began to see the effects of reduced OEM activity given the civil market environment. But overall, a strong group commercial performance. And we are seeing a pipeline of demand and export opportunities that gives us confidence in our future and full year targets.

Moving on to revenues. Revenues in the 9 months were EUR 9 billion, flat year-over-year. We are seeing a solid performance across the group. With our major EFA Kuwait program ramping up and Leonardo DRS continuing successfully on its growth. Helicopter revenues of EUR 2.6 billion were down 3.4%. And we saw lower civil deliveries and lower volumes on some programs because of COVID. This was offset by good activity on customer support and on NH90 Qatar program, plus other military and domestic -- military governmental and domestic contracts. Electronics Europe revenues were flat at EUR 2.7 billion, with expected volume growth slowing down because of COVID. DRS grew revenues by 6.4% to EUR 1.7 billion with higher volumes and activity relating to the upgrading of equipment for U.S. Army. Aircraft grew revenues in the period to EUR 1.7 billion, an increase of 13.4%, with the ramp-up of the major EFA Kuwait contract more than offsetting other production slowdown caused by the virus.

In Aerostructures, revenues fell to EUR 630 million, primarily because of production slowdowns in the B787 and the ADR programs. So overall, a stable top line in a challenging period. Next, EBITA and profitability. Here, we have been successfully improving operationally quarter-by-quarter despite the lower contribution of our joint ventures, ATR and Space manufacturing and despite COVID. As we have highlighted in Q1 and Q2, our profitability this year has been impacted by COVID with slowing down our program execution, lower productivity and deliveries. But we have reasons to be more confident. Recovering productivity, as you have heard from Alessandro is taking place and it is accelerating. Plus, we're seeing the benefits of our quickly implemented actions to reduce costs, which we mentioned before. We can see evidence. Cost reduction plus lower sickness rates from COVID and making up ground during August holiday period are increasing our performance and offering a positive trajectory, which underpins confidence in the fourth quarter targets.

Looking at the 9-month results. Our EBITDA was EUR 497 million and profitability at 5.5%. These levels have been supported by robust and resilient military and governmental activities and customer support and training. Overall, our business has held up well and performed resiliently throughout challenging COVID period in aircraft, helicopters, Electronics Europe and Leonardo DRS. COVID has had an impact, but we have managed our cost base down through good work in the 9-month period. It is bearing fruit and we have seen productivity rise. Labor cost and control of our cost savings to date are in line with the target. And we expect for the full year, total savings in the range of $450 million. Net investment savings to date are approximately 60% and ahead of expectations. All of this makes us confident to achieve all our targets for the full year.

However, we have also seen a drag from joint ventures that has continued to impact our group performance. ATR is facing very tough challenges and is seeing a more significant drop in activity and deliveries. ATR achieved only 1 unit delivery in the 9 months of 2020 versus 29 delivered last year. And we are seeing prolonged softness here as experienced by all the other OEMs at the same time, our space manufacturing joint venture has good order intake and opportunities going forward, but it has been impacted by lower revenues and higher costs, competitive pressures and COVID factors. We continue to review with our partners and coshareholders the situation and undertake appropriate restructuring actions.

Now moving to the below the line items. You can see that in the first 9 months, EBITA was EUR 395 million, reflecting the decline in EBITA and nonrecurring costs related to COVID-19 actions amounting to approximately EUR 60 million. Our net result was affected by EBITA performance and slightly higher financial charges associated with the higher volume of FX hedging. Meanwhile, our free operating cash flow was negative almost EUR 2.6 billion in the first 9 months. It is reflecting the usual seasonality amplified by higher working capital as expected. We experienced a higher cash absorption from increased working capital and buildup of inventory, mainly associated with finalization of program milestones in military governmental programs that have shifted to the right, and to a lesser extent, by delayed civil deliveries. We also registered lower dividends from joint ventures. The increased working capital and significant inventory buildup is associated with military and governmental programs. And we expect this to unwind over the coming months.

More specifically, in aircraft, it relates to major programs, such as EFA Kuwait, which is ramping up and cash receipts are timed for later this year in helicopters and defense electronics for international and national programs. Finally, in civil helicopters, because of delayed deliveries and the need to reconfigure production to address the changing market. In this area, let me highlight that all machines have a defined customers, and there are no white tails. We were already expecting this highly negative cash flow because of anticipated higher seasonality this year with a cash profile of major programs. And we are seeing the second half weighting being increased by COVID and more inflows being shifted to the final plans. I will later talk about the full year.

Moving to the next slide. We maintain a very strong liquidity position despite this short-term squeeze in working capital and cash flow and COVID impacts. We have multiple sources of liquidity, which we can use to meet our financing needs, even in stress case scenarios. It means we have a solid financial position and liquidity remained strong at about EUR 3.6 billion. We have no refinancing needs in the short term and no need to raise capital. We also have a balanced debt maturity profile. In July, we successfully issued a 5-year bond, EUR 500 million of value. Underlying the solidity of our creditworthiness in the financial market, even in exceptional times such as the one we're living through. So as I said before, we do not have any refinancing needs until 2022.

Now I want to cover how we currently see our outlook and the full year. As you have heard, we have shown resilience, and we have remained commercially strong. We have continued to achieve good order intake, and we have maintained a stable top line, thanks to very strong demand for our products. Then our actions put in place to get back to adequate levels of productivity are delivering results. We have seen clear signals of recovery in Q3. Productive hours improvement. Good results, also taking into account that August is typically a low productivity month because of the holidays. Industrial efficiency at the end of September is almost back to normal levels.

And the recovery productivity and savings coming through the actions to reduce costs, both labor and controllable, is leading to a reduced P&L hit from under recovery compared to the half year. All the indicators are in line or ahead of our expectations. At our half year results in July, we provided you with an updated estimate for full year results. We're continuing to progress well towards our full year objectives on orders. Also, thanks to ongoing commercial campaigns. This reflects very strong demand for our products and reinforces our confidence in the long-term opportunities for our business. We're also progressing well on revenues, supported by the delivery of our backlog and the advancement on programs milestones.

Our EBITA, as I said before, is supported by military and governmental plus customer support and training activities across the group. It's supported by productivity improvements and cost control measures. And these trends, we have seen so far confirm our confidence in our full year EBITA guidance. We remain laser-focused on free operating cash flow. We have detailed action in place to address cash-ins on every single program and achieve the full year target, considering the exceptionally high concentration of activity in the last 2 months of the year and COVID-related restrictions. Let me go through this in more detail for you. We're working hard to finalize contract milestones, finalize new contracts with associated advanced payments and support customers in taking delivery of our civil aircrafts. And finally, to monetize government receivables. As of October, we made significant progress in terms of cash-ins on key programs.

Now more generally, going forward into 2021, we continue to see a strong pipeline of opportunities, domestically and internationally across the group. We will continue to execute and deliver our backlog of major programs where we are prime, and our military and governmental business and customer support will confirm to be strong and resilient. At the same time, civil business will continue to be affected by the slowdown resulting from travel restrictions.

Now to conclude, I'd like to summarize the amount of those solid business fundamentals. We have a strong backlog of EUR 35 billion to leverage on. Our business mix is a real strength with resilience from our weighting towards military, governmental and customer support. We can leverage opportunities in growing military governmental markets. And we have very strong domestic customer relationships. We are anchored in key international programs today and future. We are investing in innovation, leveraging our competencies and products to enlarge business opportunities. And we have a leadership position in key segments of helicopters, defense electronics and aircraft, well recognized in international markets at the base of our successful exports. I will now hand over to Q&A.

[Operator]

[Operator Instructions] And your first question from the phone lines we have is from Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, analyst]

Sorry, I was on mute. Strong results on the earnings side. Probably the cash flow, there's a bit more work to do in Q4 to get to the year-end guidance. You mentioned some cash-ins in October. But I was wondering if you -- if you can give us a bit more color on the level of cash-in that you expect to receive in the coming months, November and December, whether the bulk is skewed to December or whether you've already seen those cash-ins?

Also, I think you said several times to military campaigns I believe during the pandemic they've been suspended because of the travel restrictions. But it looks like they are moving ahead and I was wondering if you can give us, again, a bit more granularity on what types of opportunities you see and whether as we look at 2021, do you expect the business of Leonardo to grow in terms of revenues? I know that it's probably too early to have a quantitative guidance for next year. But I was wondering in terms of quality, whether do you expect a growth in top line into 2021?

[Alessandra Genco, executive]

Okay. So starting from the last question, what we are seeing, we are now in the process of building our -- Alessandro, do you want to take it?

[Alessandro Profumo, executive]

Yes. As Alessandra was saying, we are in the process of building the budget. Clearly it is too early to confirm a number. We continue to see a positive trend in the business. We were talking about as the key driver of our company which is -- which are helicopters, electronics, both Italy -- Europe, sorry, and DRS plus aircraft. We have to understand what will be the impact on the civil business on the other side. But again, the numbers, we are starting to see makes us confident on a positive trend.

[Alessandra Genco, executive]

On -- Alessandro, on your question on cash-ins throughout the last quarter of the year. As we have talked before, the buildup in the inventory that we have recorded in our 9-month result is mainly associated with military governmental contracts primarily in aircraft, and they are related to one major contract that you will know in which we are prime. And as such, is more -- can happen that we are -- once there is a slowdown in contacts with the customer, physical contact also with customers, it's natural that the shifting of the milestone towards the right occurs. Then there are some buildups in helicopters, which are associated with also large programs we're working on and a variety of smaller contracts. And for a minor part on the civil side for deliveries that, as we said, do have a clear and definite customer name associated, and there are no white tails.

And in defense electronics, again, military and governmental contracts where we are experiencing delays in finalizing the license. Very simply put, in order to have the final testing and certification of the products that we are selling to our customers, and to be able to invoice you need to meet with your team and the customer team and do the final testing and certification. This is clearly somewhat more challenging in COVID times. However, we are experiencing significant progress. And as we said, in the month of October, significant events have taken place that drive us to believe that we are well positioned with a very detailed plan, which follows every single program with a very tight schedule, addressing the top priority for the group, which is achieving the free operating cash flow target.

[Alessandro Pozzi, analyst]

And on the Kuwait EFA contract, has there been any meaningful shifting in the milestone since the last update in Q2?

[Alessandra Genco, executive]

Well, I mean, in Q2, as you may recall, we have been in -- the ability to move around and travel has been limited. As always, this is a function of how much as Italians we can move and/or British or Americans, we can move and what kind of movements are allowed in the destination countries. So I wouldn't say that in Q2, there's been anything specific happening. Clearly, what we are experiencing is a natural movement to the 2 last months of the year in terms of finalization of contracts. However, again, we are very actively dialoguing with the customer who also understands the need to finalize and complete the final stages of the programs. So it's really a very strong concerted effort for Leonardo's team as well as from the customer side. And hopefully, if the situation on COVID restrictions will be maintained as it is today, we will be able to hit the target.

[Alessandro Pozzi, analyst]

Okay. And on the military campaigns, whether you're seeing those moving, proceeding ahead now a bit faster?

[Alessandro Profumo, executive]

Sorry which campaign? We've not understood.

[Alessandro Pozzi, analyst]

Military campaigns. I believe that...

[Alessandro Profumo, executive]

Listen, we are working on different -- many different areas, both in Italy, U.K., U.S., but not only in the military field. I have to say that clearly, there are problems in traveling, but we have also many negotiations ongoing at the international level in the military field, and we think that we'll sign some new contracts before year-end, not again in the domestic countries. So COVID is still there, but we are seeing a different approach today with other problems we are seeing, but the customers are more proactive. We start -- they started to negotiate also nothing personal, but in video calls and so on and so forth. So we are seeing a more normalized world in this time of COVID. And so -- and clearly, this makes us confident on the guidance that we gave you before.

[Operator]

We now have the next question from David Barker of Bank of America.

[David Barker, analyst]

Just a quick one on free cash flow, just to follow-up. I just wanted to confirm, are you expecting any big step-up in civil deliveries in Q4 to get to your guidance so civil helicopter deliveries and then also ATR. And then, I guess, digging a bit more into ATR. You've obviously only done one delivery this year. Have you got any new forecast you can give to us for 4Q? And then just finally, on ATR, more broadly, I mean, the deliveries this year have obviously been much weaker than other large civil aerospace programs. When can we start thinking about a recovery in that business? Are we seeing customers actually canceling any of those aircraft?

[Alessandro Profumo, executive]

I think we have to split civil programs in helicopters and civil programs in aircraft. Clearly, civil program in aircraft, you have seen the declaration this year of Boeing or Airbus. So -- and we are related to them. So clearly, our plan is very related to what will happen in their business, and we are seeing that they're saying it will go back to normal in '23, '24. So this is what we do expect maybe that there will be some anticipation if -- it's really difficult to forecast because if a vaccine will be found soon maybe the things should be better than expected. If the vaccine will take longer time, it will be longer. In any case, we know perfectly that longer sight will be reduced because for us, we have learned that we can do something in video conference. So there will be less business travel and for sure, less touristic travel as well. But it's difficult to foresee. I think so today, they are stating the worst case.

In civil helicopters, clearly, there is a slowdown, you will see -- you have seen the numbers. We are less worried because helicopters is a very resilient business, where we have as well EMS. We have other activities, the military programs are quite solid because the club is very good. The customer support business is incredibly strong. Now, if I remember correctly, we are slightly above 40% in terms of customer support, or close to 40%. So it's an impressive number. And you have to consider that the value of the customer support is incredibly higher than any other business because it's a sort of annuity that when you sign a contract, then you go ahead for many years. So EUR 1 or $1 in customer support in terms of value, significantly higher than $1 in the OEM business because you have the continuity of this flow of revenues. So at the end, the key topic is what will happen to the commercial airlines for us when we are talking of civil business. And also seeing what's happened to other Aerostructure businesses like Spirit and so on. I think that we have an impact but we are [indiscernible].

[David Barker, analyst]

Can I just follow-up on the implications for the cash. So I just wanted to check. So obviously, you've got a big balance due in 4Q. And I want to understand are you assuming a big step-up in the number of deliveries in 4Q versus 3Q for ATR and for civil helicopters? So is there any risk to your assumptions if you don't do those deliveries or are you not assuming a big step-up at all. So basically that's what I'd like to know.

[Alessandra Genco, executive]

I think -- I mean, I see where you're headed, David. I mean on -- we are seeing a step-up versus 1 unit delivered that's to be taken for granted. But we're not seeing a material step-up in the number of deliveries. On helicopters, again, these helicopters already have a client are signed. So our clients want to take delivery of the helicopters. The question is whether they will be allowed to travel to Vergiate to get hold of their beloved helicopter. I think they're going to do and work their hardest to make this happen. In any event, as Alessandro was saying, because of the wide and balanced mix of deliveries to different customer bases that [indiscernible] has, we do not have a specific concentration in the pure civil domain, in particular, in this year. So there are -- there is no specific concentration risk.

[David Barker, analyst]

Understood. So essentially, in 4Q, you're not expecting a big increase in cash contribution from ATR or from civil helicopters?

[Alessandra Genco, executive]

We are seeing a positive step up, but not a material or huge contribution. Really what makes the difference in the cash-ins is the unwinding of the buildup in inventory associated with milestones for governmental and military programs. This is really what we are planning to see unfold. Some of these contracts are also associated with the finalization of ECA financed, ECA supported, ECA guaranteed financings. And as usual, the lawyers are working very hard, and they're negotiating very hard. We're confident they will come to an agreement. And others are just a mere fact of having people get on-site and do what they have to normally do, the normal procedures and final testing to make things happen. Now what -- may have happened in the last few weeks also is that someone from the testing team turns out to be positive, positive to COVID I mean. So you have to take out that member of the committee of the testing committee and replace him or her with someone else. So that is clearly extending timing. Unfortunately, this is a time of high volatility we are all living through.

[Operator]

We now have the next question from the phone lines from Martino De Ambroggi from Equita.

[Martino De Ambroggi, analyst]

Sorry to bother you on the free cash flow issue, but it's much higher than the equity in the historical Q4 data. Just to qualitative additional comment. So you are confident in achieving it, maybe because you are more prepared than in Q2, probably because clients are more open to discuss with you knowing the difficult time or restrictions are less strong than before. Because the jump in free cash flow is really, really huge. So just to understand, at least if these are huge differences compared to the Q2 pandemic.

[Alessandra Genco, executive]

Well, Martino, I hear your point and the theme you are raising. I think it's a combination of all the things you have said. We feel that in the present status, 6 [ foreign language ] with the current situation on COVID. With the current restrictions in place, we are certainly more prepared. We are definitely very, very hungry to get to the finish line. Our customers want our products because they want to fly in those products, they want to upgrade their platforms. They want to protect their lands with our products, so it's not just that Leonardo wants to get the cash-ins by the end of the year. They also want to use what we're selling. And clearly, this is -- we understand the magnitude of the step-up is material. There are some large programs and large contributor to this delta.

One clearly is EFA Kuwait. So that is making the number larger and potentially more scary in a good way. But on EFA Kuwait, we see that also in this case, the customer is -- we are having constant dialogue with the customer. The customer is very focused on progressing on the payment schedule because he knows that we have been investing in this work in progress, also paying our partners such as Airbus and BAE. As you know, we serve as prime. So one of the responsibilities of the prime, as we've said multiple times, is to step up and face the customer and also absorb the swings. So this is one classical situation, which we are absorbing the swings because we have paid our suppliers, and we're waiting to get paid by the customer.

[Martino De Ambroggi, analyst]

Okay. And the second question is on the Aerostructure. If I take Q3 stand-alone, can we say this is, let's say, normal profitability for this business? Or can it be even worse going forward?

[Alessandra Genco, executive]

Martino, we couldn't hear you very well. On Aerostructure. What was your question again?

[Martino De Ambroggi, analyst]

Yes. On the Aerostructure -- I hope you can hear me. The Q3 stand-alone performance may be taken as a reference point going forward in terms of losses, or can it be even worse going forward? And always on Aerostructure, you mentioned some diversification initiative, but I suppose it will take quite a long time before seeing some positive impact.

[Alessandro Profumo, executive]

Martino, I think that for Aerostructure, the best is to go have a look to the year numbers when -- because, for instance, the third quarter, and we are very clear, there is a one-off for the closing of the [indiscernible] program, so which is positive. So the third quarter is not the right mean in terms of results. Talking of diversification. We have -- but I've already -- always said that we have a very good recoverability in plans in the composite business. You remember that I always said that Aerostructure, our Aerostructure do have 2 key elements, one that vis-à-vis the other European Aerostructure. We have a relevant Boeing contribution.

Today, clearly, the 787 is down but it remains the key program for Boeing. We have to remember that. And so sooner or later, they will go back to normality because the 737 will restart, clearly, but the 787, which is the most efficient aircraft for long flights, for international flights remains clearly key. And the other key capabilities composite. On the composite, we are considering, and we are analyzing the different opportunities. We will come to the market with clarity when we'll have certified some of these discussions we are having. It's important because since one of the main critics is you are only a mono customer product and activity, we are working in order to not to be any more in this situation.

[Martino De Ambroggi, analyst]

Okay. Then very last, you mentioned also additional actions on cost-cutting. I suppose this will be a 2021 event and not for the current year, where the EUR 450 million are confirmed.

[Alessandro Profumo, executive]

Sorry, we always -- we have been always very clear on the cost-cutting. These cost-cutting are mainly related to the COVID event. So we blocked all the travels. We have blocked all the new hiring. We have blocked all the incentive schemes. Clearly, we hope that we will go back to a normal life where people can travel, where the results are as good as we'll self-pay the incentive schemes. But this cost base will remain in further situation, we remain at the actual one. I hope that has been clear enough.

[Martino De Ambroggi, analyst]

Yes. I hoped there was something new coming, but okay.

[Alessandro Profumo, executive]

As we said, we are, and have been very clear that we are opening a discussion to follow.

[Operator]

We now have a question from Nick Cunningham of Agency Partners.

[Nick Cunningham, analyst]

I hope you can hear me clearly. I'm really sorry, I'm going back to the cash flow because, obviously, EUR 2.5 billion of free cash flow in Q4 is unprecedented. And I suppose what I really want to focus on is, is the risk around that purely about timing? Does it come in, in December? Or does it come in, in January? So that's question one. Question two, what is the degree of variation that's at risk, if you see what I mean? Is it EUR 100 million either way, EUR 500 million either way in terms of what could slip over the period end?

And also, in that context, the guidance for cash flow is heading to neutral. And what does heading to neutral mean? Is that plus or minus EUR 200 million? Something to prepare ourselves to understand the degree of risk would be really helpful. And then final question. Again, back to the cost saving point, EUR 450 million or so. And particularly also your cash flow savings on things like CapEx. Presumably, some of that has to bounce back. Even before you get a full recovery in revenue, some of that has to come back. So is there a degree to which costs have to go up year-on-year in '21 compared to '20 sort of almost automatically?

[Alessandra Genco, executive]

Okay, Nick. Well, let me start with the last question. So we introduced a new theme compared to cash flows. So on cost savings going forward after 2020 as Alessandro explained before, some of these cost savings are contingent on the current situation, and we expect not to have -- be forced to use them next year as we should recover next year. Nonetheless, it's too early to tell, meaning that there is going to be a portion of those costs which will be permanent. The way -- the travel expenses will, I think, never go back to the level that we have seen in 2019 because we are now operating in a different way, and we have learned to do without a certain portion of travel at every level in the organization. On labor cost, there is a portion of the variable compensation that we have taken out, as Alessandro said before. Now we're not planning to repeat this in 2021.

However, we do not have yet a view on what is the growth path for the group in 2021 and what is required to make the business sustainable. So I think on the cost-cutting side, we have to adjourn the conversation and the situation once the budget will be more clear at every level. Let's also include the fact that this year, besides the cost savings, we are also having important contributions from net investments while maintaining the level of investments. For the development of our key programs and platforms, we are accelerating the cash-in of brands on those investments, reducing the cash flow impact.

Now for your question on cash flows, Nick. So time -- it's a matter of timing. I mean, we're not debating whether this inventory will be unwound or not. It's a matter of whether we will be able to unwind it all -- it would be possible to unwind it all by the 31st of December or whether a portion of this may occur in 2021. So it's not a matter of if, it's a matter of timing. Again, we are working our hardest to make this happen by the 31st of December. In that respect, to address your second question, we have not run any sensitivity on potential slippages of contracts. This is not the mood of the organization. What we're doing now is we are all growing in the same direction and targeting at every division level, the target that the division has with no assumption of what would be another scenario. We have 2 months of hard work ahead of us. We're not losing any moment.

Again, the customers are supporting us and helping us. We will need also a little bit of general luck because clearly, that never hurts and in circumstances like the one we're living through that is, I think, a contributor that we want to bring to the table. From our end, I can reassure you that we're doing our best. Everyone in the organization is working the hardest from the commercial team, the contract managers, the legal and financial team when there are financing required, and we are just doing the best we can. Clearly, some situations are easier than others. And so on some there is a very high level of confidence. On others, the level of confidence is medium. But that is always the case this time of the year.

[Nick Cunningham, analyst]

Yes. And just -- I suppose it creates a certain amount stress between equity markets and your -- or what equity markets want and what your internal needs are. Because obviously, you want to drive the business to get the cash in. But then equity markets get very hung up about that year-end target, which in the end, doesn't really matter because if the cash is going to come in a week later, in many ways, who cares. But I suppose the difficulty is in communicating in that context.

[Alessandra Genco, executive]

In any case, it's a good cash. That's what I mean, like, yes. I mean, I understand -- we would like to get it by year-end because it's always the sooner you get paid, the happier you are. Nonetheless, if this was not the case because COVID restrictions may impair our ability to go through the finish line, they will come in next year. That's for sure. I mean, nothing is going to be lost. Because, again, we're talking about activities, build-up of inventory with a customer behind those activities. So there is no inventory looking for a customer.

[Operator]

We now have the next question from the phone lines from Andrew Humphrey of Morgan Stanley.

[Andrew Humphrey, analyst]

I'm not sure there's too much left for me to ask. Maybe cash from a slightly different angle. I mean you mentioned the major military program where you're prime, where clearly the ability to meet milestones with COVID has been somewhat compromised. I wanted to ask the kind of Q4 basically EUR 2.5 billion target. Can you tell us anything about other government contracts where there may be challenges on cash? How would you characterize those? Are they kind of pandemic related, are there kind of other things going on with other military contracts other than the big one that we've all been discussing?

Secondly, you highlighted improving fixed cost recovery over the course of the year as being a contributor to better profitability. Could you flesh that out a bit and tell us what parts of the business you're seeing better production in than you might have expected? Is that in part driven by maybe slightly better production rates in civil aero than we had been thinking about in April or May? Or is it something else? And then finally, your commentary around cost savings, you've obviously segmented that between controllable costs and investments and the like. So the kind of bucketing of that around controllable costs, in particular, is slightly different from what it was earlier in the year. Should we interpret that as a sign that some of those saving targets are sort of moving around between buckets, even if the headline target overall is staying the same?

[Alessandra Genco, executive]

Andrew, let me address the last question first. No, I mean the bucket -- we thought it was going to be easier to communicate one single number, but it's making things tougher, let me detail and break down that number for you. We always said that the cost base for HR was approximately EUR 2.9 billion. And out of that cost base, we were planning to have savings in the range of 10%. Controllable cost base was around EUR 1.4 billion. And on that, we had a target between 10% and 15%. So if you apply those figures to those cost base, you will end up around that EUR 450 million if the math is right. Okay.

[Andrew Humphrey, analyst]

Okay. So no change basically.

[Alessandra Genco, executive]

No change. Just maybe more synthesized and summarized one number. On the recovery improvement picture of improvement, well, what we have seen is a higher number of productive hours. You may recall in the first quarter and in probably half of the second quarter. There was an issue. The first quarter, in particular, the last few weeks in March because Italy was the hardest-hit nation, I would say, in the world, possibly, clearly, our employees were just not coming to our sites. I mean, it was impossible to make them feel safe in the work environment. So the lack of productive hours, the fact that people were not on site, they were not producing, was a drain in cash, in fixed cost absorption. The situation changed in Q2 and it almost normalized in Q3.

Clearly, there is a little bit of a difference between the aerostructure world where the number of productive hours has not increased just because of lack of demand while in the rest of the world, productive hours have gone up because demand was there, and we actually had to speed up to try to recover at our best, the completion of the milestones of activity that then, once tested and finalized with the customers, will be invoiced and finally cash-in. So I understand it's a long pipeline. There are many events that basically the first delay was in our activities. We delayed our activities because we had fewer productive hours. So we were not ready to present our milestones to the customer. And then it was challenging to get together with the customer because of travel restrictions and because of what I was saying before, the fact that sometimes in the testing committees there being people testing positive to COVID. And therefore, there had to be changes to the committee members and then starting again from scratch. I hope this helps and addresses your questions.

[Operator]

We now have a question from Sean Stuart of JPMorgan.

[Unknown Analyst]

I have 3 quick questions, please. The EU electronics business performed very strongly in Q3. I think you did a 14.6% margin versus 7.7% last year. Can you just tell us what was driving this performance and whether there were any one-offs at all? And then secondly, could you please share how much receivables factoring you plan to do in Q4 this year and what that figure was in Q4 last year, please? And then thirdly, could you give us any guidance on what we should be expecting in terms of nonrecurring and restructuring costs for the full year? I think you booked EUR 81 million for the first 9 months. So just any color on the full year would be great.

[Alessandro Profumo, executive]

It's not EUR 81 million, it is EUR 20 million plus 60 million which is different because restructuring cost at EUR 21 million, EUR 60 million are partially related to COVID cost. So it's not correct to define it as a restructuring cost. So Alessandra, then one thing on the quarterly results of electronics. As you know, quite well electronics do have a significant, in some instances, they have significant problems where there is a pass-through. And if you book in 1 quarter, for instance, a contract for a combat management system, where there is a sub contract of EBITA, you have a relevant dilution of your contribution. This is the reason why on a yearly basis, we present the numbers with and without pass-through because we like to have a huge contract with pass-through. For instance, in helicopters as a more, the Qatar contract will become effective.

So the more we will book range for the Qatar contact the lower will be the contribution. Because we always said that it's a EUR 3 billion contract where we are not the prime role and the weight for our work share, which is slightly above 40%. Clearly, on the 40%, we have a certain contribution, on the 60% we have a completely different contribution. So if you consider the 40% of the total, you have a different number. This is exactly what is happening with defense electronics, where we have in the naval line of business a relevant pass-through. So it's better to consider an average on a yearly basis and to consider the number with and without pass-through that we can provide you later on. On the cost, Alessandra, you can be more detailed on the restructuring and COVID cost.

[Alessandra Genco, executive]

Well, yes, the restructuring costs that you see are associated with the key readjustment of the operational base that we mentioned. The helicopter division in the European side has done a restructuring of its operations to size it better to the current updated environment. And also, DRS in the U.S. has gone through some minor restructuring plans. On the nonrecurring side, those are costs related to COVID including sanitization of all facilities as well as personal protective devices like the masks we're all wearing or the sanitizing gel, we're all using. So that's what's recorded on the -- in that line. On the receivable factoring, in full honesty, we do not have a figure in mind for the full year. A lot, I'm sure you appreciate, will depend on the speed in which those cash-ins that we have discussed thus far will come in. Clearly, I would expect to see a higher amount of factoring compared to a normal year because this is not a normal year.

[Unknown Analyst]

But should we be thinking that sort of billions more, EUR 500 million more just in terms of order of magnitude on the factoring?

[Alessandra Genco, executive]

I mean honestly it's hard to tell now because some of these cash-ins, as we said, they're being met by December 31. There's no factoring it. Otherwise, there might be factoring. So it's quite a -- I'd love to be more helpful, but unfortunately, it's very much a situation that is evolving week after week.

[Unknown Analyst]

And then just -- just on the nonrestructuring and the nonrecurring and the restructuring costs. Any sense as to what it might -- what you plan in Q4, what we should expect in Q4? And then just for the full year in terms of guidance?

[Alessandra Genco, executive]

I mean as of now, clearly, on a continuing basis, we'll continue to record these kind of costs related to COVID in the line. And the -- clearly, as the year ends, we will reassess everything. As of now, nothing else specific comes to mind, but we will update or you will get updated on this point for the year-end figures.

[Operator]

The final question we have from the phone lines comes from Harry Breach of MainFirst.

[Harry Breach, analyst]

How I just ask a little bit about aeronautics tonight. When we think about ATR, last year, we had 68 deliveries or around that, I think, if my numbers are right. We've had one delivery so far this year. Clearly, they must be building up a lot of inventory. Can you give us a feeling of the delivery expectations for ATR? I appreciate thinking about this over the next 2 months might be difficult. But where do you think it could recover to in 2021, in particular, and in 2022? Next question is just helping us to understand a little more on 787, we have clearly gone through Boeing adjusting its rate plan, production rate plan on 787.

Can I just talk us -- so is that still the take under your global settlement that the repricing takes effect in 2022 and there's no delay on that? And second question, we learned last week that Spirit's pricing on 737 ships at pricing has some variability according to volume. So 787 ships at pricing have any sort of volume variation, do you get better price at lower volumes or anything like that? And then very last one is just, Alessandro, I think last time we spoke at the half year, you said that you expect to breakeven, the cash breakeven for Aerostructures to be delayed beyond 2022, 2023. Can you give us any update how you're thinking about when Aerostructure get to cash breakeven, please?

[Alessandro Profumo, executive]

I will start to answer because, as I said before, today, what we are seeing are the forecast in terms of passengers and travels made by the authorities and by the main OEM. So today, it's very difficult to forecast the events in the next 2 years, mainly because we have to work on what is set by the customer. You were talking about 787, for instance. For 787 we know that they will go down to 6 in terms of rate monthly rate. We know that we are obliged by the contract to keep a capability of 14. So because if suddenly, say we go back to 14, we can't say we are not capable to provide you. So it's a very complex situation that we have always to keep in mind. This is -- then on the 787, we have a variation of the price at the ships at 1,406. We have been always very clear on that.

Today, we are slightly above 1,900. So it depends clearly on the monthly rate that we see in the future. But as I said, today, we have an official communication, which is public and you know better than us by Boeing. They are down to 6 up to 2022, 2022? Yes. Then they will go up to 8 and then back to 12, then up to 14. This is the ramp-up. We have an obligation of keeping a certain capability in any case. So this is very relevant on our side. The 787 in terms of cash today, we are also repaying the loan they gave us in order to be retired. So one thing is the operative cash flow. One thing is the cash flow for the program because we have a repayment of all the financing. We are also right on the media.

We don't have any official communication that you remember that Boeing was considering to launch a new NMA it was called, a medium-sized aircraft. Now they are considering to have a -- not technically, I'm saying, they scaled down the 787, so to reduce the dimension of the 787 and to substitute with 787, the new aircraft but they have decided not to do that. Clearly, in this case, for us, what we heard about today are mainly media news, not official communication. It's the case that this would be very good for us because the technology is our technology.

On ATR deliveries, in the long run, ATR is turboprop for which we do see still an overall need worldwide of between 700, 800 aircraft. And of course turboprop of this I mentioned and there are no competitors. So sooner or later, we will go back to a normal number between 60 to 70 per year. We don't know when. Why we don't know when? Because ATR is mainly an aircraft owned by small airlines because they are regional transportation. The small airlines had a significant financial problem with COVID. So there is a huge number of these airlines that are not anymore alive and there is a huge number of used aircraft on the market. Clearly, the new aircraft are more efficient in terms of consumption, are more green and so on and so forth. But there is a huge number of aircraft on the market. So it's very difficult for us to say this next year will be easy as we said.

We know that the problem is a good problem because again, there is no competitor today for regional transportation between -- in the range of 500 kilometers. So this is incredibly important. We are also handling the mix of 42 versus 72. We have the cargo model, which is very important, and we are very, very -- just now, the first one. You know that we had an order by FedEx. And we are also developing the short take-off and landing, which also is very important because with a short take-off and landing, there will be another 500 new airports that we can sell to with this aircraft. It is an impressive number. In the 42 model that will be short take-off and landing. For this market, we do see, again, more or less 700 aircraft in the next 20 years. We are considering to have a market of about -- above -- in the range of 20%. We are very conservative of this market. It is more or less between 140 to 160 aircraft. So the business case is working quite well.

[Alessandra Genco, executive]

We'll take the final question from the web. And basically, how do you expect the current additional restrictions or partial lockdowns in Europe to affect your business? And how do you expect defense spending in the future in light of large government deficits due to COVID?

[Alessandro Profumo, executive]

What we are seeing is that due to COVID, unfortunately, there are as well, many political tensions which are arising. So till now, what we have seen has been growth in terms of defense spending. In the U.S., we do expect a plateau. We have been always transparent independently from who will win the election. And -- but in any case, DRS continues to take market being second -- a very proactive second tier. So we are very well diversified. Italy is important for us, mainly for development of new programs. But in it is any case, not the largest customer. Yes. So we are not worried in terms of our market share on the total procurement for defense worldwide. Worldwide ex some country where there are restrictions. The COVID, the actual increase of COVID.

As I said before, clearly, this is reducing the ability, not so much vis a vis what it was now. Because as we have seen the lock down is very different country by country. So we continue to have people traveling for some very specific negotiation. We are negotiating as well by video conference. We do not expect any impact. And as you know, in this program, even in what are called Red regions, for instance, in Italy, there are no economic -- no industrial activities which are closed. In the first lockdown, only the defense industry was considered as strategic and remained open. Today, all the industrial activities are open. It's a problem for shops, restaurants, so that's a different story. Clearly, also, we are following very carefully the evolution on therapy and on vaccine, which is important in order to understand how the 2021 will develop.

[Alessandra Genco, executive]

Okay. Thank you, everybody, for being with us today. And as usual, the IR is available for any follow-up.

[Alessandro Profumo, executive]

Many thanks to all of you. Bye.