Leonardo SpA

MIL:LDO

Earnings Call Transcript 2022-Q4

[Valeria Ricciotti, Head, IR]

Good morning, ladies and gentlemen and welcome to our full year 2022 results presentation. I’m Valeria Ricciotti, Head of Investor Relations and credit trading agencies. Today, our CEO, Alessandro Profumo, will take you through the important progress that we achieved during the last year. Our Group General Manager, Valerio Cioffi, will provide an update on the opportunities for the group driven by market trends and technology in the medium and long run as well as on the progress made in the Aerostructures. Our CFO, Alessandra Genco, will take you through the full year 2022 results and the outlook for the full year 2023. And then our CEO will provide an update on how we are positioned looking forward. That will follow a live Q&A session starting at 9:00 a.m. CT where we will welcome your questions. Thank you.

[Alessandro Profumo, CFO]

Thanks, Valeria, and good morning, everybody, and thank you for joining us today. 2022 was an important year of delivery, solid execution and growing commercial success, and we are pleased to report today a strong set of full year results.

We have continued to deliver on our promises, meeting our -- or exceeding all our key targets once again, while making the group stronger, more resilient and sustainable. And importantly, as a group, we are in a better and stronger position to capture new opportunities.

We have stepped up and we are accelerating our commercial momentum with group new orders of €17.3 billion, that’s a significant increase of 21% adjusting 2021 to exclude the contribution of GES, beating the original guidance set last year and also well above the updated guidance, impressive even without the major Polish AW149 order with a book-to-bill of 1.2x.

We have grown our top line and continued strong program delivery with group revenues up 4.7% at €14.7 billion on a perimeter adjusted basis. We have also continued to improve our profitability with EBITA up 14.9% to €1.2 billion on a restated basis, adjusting for COVID cost within EBITA, which last year were previously accounted for below the line and reflecting the changes in perimeter, the deconsolidation of GES and the inclusion of Hensoldt.

Then importantly, we have also delivered on our target to step up cash flow generation and conversion, delivering free operating cash flow of €539 million, well over double the previous year and not just higher but an improved quality of cash flow with lower seasonality and less factoring. We are reiterating the €3 billion cash flow generation over ‘21-’25 within -- with 2022 strongly contributing to this medium-term target.

Now we are prioritizing deleveraging while maintaining constant shareholders’ return. In 2022, we redeemed on our 2039 and 2040 bonds, and early repaid €500 million term loan. And this year, we are proposing again the payment of a dividend of €0.14 per share. We ended the year very strongly in the final quarter with our core defense and governmental business delivering a very strong and robust performance while at the same time, our recovery plan for Aerostructure is on track. We’re reducing cash absorption and increasing operating performance.

And finally, we have also continued to make important progress on ESG, carrying out our deep commitment to sustainability. We have strengthened our decarbonization plan by formally committing to SBTI. We achieved important results in our social impact and diversity and inclusion. we have demonstrated our commitment to sustainable finance. And all of this is, again, well recognized also by third parties.

I’ll give you more details later. So 2022 was a year where we have continued to deliver and make the group stronger, more resilient, sustainable and set up to capture best growth opportunities. It’s important to appreciate as the major progress we have made as a group over the recent period 2018, 2022. These results are also important as they demonstrate the solidity of the group in a more challenging external scenario with inflationary pressure, showing Leonardo’s resilience and ability to respond challenges, which as a group, we have already demonstrated during the pandemic period.

The last 5 years have been important years of delivery strategically and financially. We have been delivering and successfully executing our industrial plan through a stronger international presence, a sharper commercial presence, leveraging on capabilities throughout Leonardo, one company and faster innovation and digital capability. We have transformed key areas of the business like helicopters, strengthens the core business of defense electronics while focusing on the restructuring plan in Aerostructure and we have delivered group results in line or exceeding targets year-over-year in the last 5 years.

We have successfully navigated through the COVID pandemic and period of unprecedented uncertainty. And we are emerging stronger commercially and financially, structurally more solid as a group with a more resilient and sustainable business model and strong and growing backlog, providing greater revenue visibility, good program delivery, improved profitability despite changing mix with and without pass-through with and without a restructure, better return on invested capital.

Improved cash flow ahead of guidance and improving cash conversion with and without a restructuring, reduced gross and net debt while strengthening our core business. Our commercial strength and momentum is confirmed. We are moving faster in key areas. Look at the recent outstanding commercial performance of Helicopter driven by defense, governmental and CV is recovering too. Electronic is also exciting vibrant market.

They need to upgrade electronics capabilities for land system and their defense. The need for protection, strengthening sector, sensors, communication, cyber-resiliency and achieving information superiority. We remain anchored in important international programs using our platform strength and our key strategic partnerships. And we see significant long-term opportunities like the GCAP among international cooperation programs.

And the key point is our ability to capture demand and opportunities across the board because we are using our strong domestic and international presence and because we can leverage capabilities and opportunities throughout Leonardo. So we have made significant progress in delivering our strategy, and we are on the right path to our goal of long-term sustainable growth. We are focused on strengthening our core making important moves to drive more value from our strong fundamentals already across our businesses, increasing critical mass in strategic areas.

Our investment in Hensoldt, which is now a key partnership in sensors, enabling us to access as the German market debtor, play a stronger role at European level in key programs and it’s creating significant development opportunities with our electronics activities. We have seen our rationale for investing in Hensoldt being fully confirmed, and we are also pleased to its current share price of more than €30 compared to our purchase price of €23 per share.

The merger of Leonardo DRS and RADA is creating a world leader in advanced sensing and integrated mission system with growing international opportunities. Then we are increasingly a key player in major international cooperation programs like GCAP, levering our group platforms and system trends across aircraft and helicopters.

And the KOPTER acquisition has added to our Helicopter world class product range and has created important opportunities for future technological development. Then we have also focused on transforming to grow, making the business more modern and agile, changing from a product seller to a solution provider to meet changing customers’ needs and capture new opportunities and leveraging our capabilities in a much more integrated way across divisions.

Our Leonardo production system program has helped optimize efficiency and productivity of Leonardo’s industrial sites, and we are taking further designing the digital production processes of the future. Then we are executing a recovery plan to position our structure for the future. Also focusing on upskilling and risking of our people, we are on track to reduce the restructured cash absorption and are confirming our target of breakeven by end 2025. Valerio will talk in more detail on our progress here in a moment.

And we have focused on mastering the new, creating advanced technological solution. Knowing that our future competitiveness is driven by our technology innovation, which in turn is driven by digitalization, cyber resilience and sustainability. We have significantly transformed our research and development. Leonardo labs are at the core of this effort driving research and development in the most innovative technologies, prioritizing key areas most important to our customers, and we are -- where we can leverage across the group.

We have built world-leading computing power capabilities and our world-class, the DAVINCI-1 HPC gives us a unique edge in product development, meeting the most demanding needs in the complex simulation use, for example, in the design of aircraft and helicopters. And we have key enabling capabilities in areas like digital green, big data, cloud and artificial intelligence.

Our core defense businesses have grown stronger and are better positioned to capture exciting new opportunities. We can see clear value drivers of the future, also leveraging on commercial success. Helicopter in 2022 achieved an excellent commercial performance with €6 billion of new orders, impressive even without the major Polish AW149 order, showing its leading position in the defense and governmental markets and in customer support, simulation and training, and it’s proven business winning ability to gain large defense orders.

The division has increased its impressive backlog to €13.6 billion, also thanks to its world-class product portfolio. We have delivered a major transformation turnaround in helicopters over the past 5 years with much improved execution, a big step up in results, restore profitability back to double digit, excluding pass-through, improved cash generation and major commercial success, all achieving results ahead of our expectations. It is driven by Helicopters’ world-class product portfolio, which is technologically leading with key customers for all products across geographies. And it’s a result of our successful strategy focused on dual use and future technologies with customer support and training, representing a core strength and additional growth drivers.

We are very excited by the strong commercial momentum, seeing growing opportunities in the defense and governmental markets and seeing demand recovering faster than expected in the civil market. We are investing in exciting new generation products in the uncrude area like the AW249, it is a state-of-art specialized platform for exploration and the stock missions, featuring advanced digital solution and connectivity, embedding a moderate and truly open architecture capability to support future multi-domain scenarios interoperability. A great example of how we are synergically leveraging expertise and technologies among our divisions embedding in our helicopter platforms, digital native capabilities with integrated state-of-the-art sensors ensuring cyber resilience.

It all makes us confident transitioning Helicopters from €4 billion to €5 billion business, solidly at double-digit profitability over the plan horizon, then Aircraft. Continues to achieve strong performance and program delivery and high best-in-class profitability. It has key growth drivers, great position on both international cooperation programs and proprietary platforms. And with a leadership position in trainers and strong position in special mission and transport aircraft, and we have successfully added a new business model with our international flight and school. We are excited by the future year 2.

We also see follow-on opportunities for Eurofighter across Europe. We have been expanding our role on the JSF program, seeing strong demand for the core platform and becoming the EMEA leader on the MRO side.

Aircraft has a solid backlog and a strong order pipeline and we are steadily leveraging its customer support activities. It all means we see good visibility for the future performance of the Aircraft. And looking further forward, we are very excited by the GCAP next-generation program. All this provides stability and continuity for business into the long term for the case to come and great examples of how we are leveraging capabilities across both platforms and electronics.

Electronics continues to be a growth driver for us in 2022, performing well for us again, delivering more than 4% revenue growth and 9% EBITA growth over the past 5 years. We expect this growth to continue. And we are confident of transitioning electronics from €5 billion to €6 billion business, also material increasing EBITA and profitability over the planned horizon.

In Electronics, we are a European leader. We have top capabilities and strong positions across all the key domains: air, sea and land. And all these domains have strong potential, too. The need for electronics is growing more and more with the value element on platforms rising materially. We have key capabilities to meet new customer needs and priorities, for example, integration across domains.

We are a leading-edge solution sensor and the capability to integrate and combine sensors data with other radars and equipment and provide to customer information superiority.

We are taking advantage of growing opportunities to establish our position on key programs, for example, in sensors and electronics warfare and electronic softwares. And we are also excited by the potential of our partnership with Hensoldt. All this makes us confidence of continued sustainable growth, leveraging on our key enabling technologies and execution track record.

Leonardo DRS is another part of the group we have transformed in recent years. We have successfully rebuilt its profitability and growth trajectory and we have focused its portfolio on 4 key technology areas. It’s a world-class supplier of advanced sensing and computing solutions and integrated mission system. It has great proposition on key DoD priority programs and we’re set to grow both top line and profitability as its programs transition from development to production.

The recent combination with RADA is very exciting as well. It brings together the advanced sensing capabilities of GRS with a world-class tactical radars provided by RADA. The enlarged business is well placed to be a leader in the rapidly growing force protection market, and there are significant additional opportunities.

Customer support, service and training is increasingly becoming a key revenue and profit driver for Leonardo, and this is a driver of long-term sustainable growth. It’s a key part of our business now in Helicopters and Aircraft, but also in Electronics, too, with the need to upgrade system, for example [avionics]. This represents a huge opportunity. Our existing fleets of flying aircraft and helicopters will need support and upgrade into the long term. That’s already a significant installed base of 4,000 helicopters and over 1,000 aircraft flying and with circa 10 years electronics useful life of equipment.

And these customer support revenues are recurrent with multiyear visibility, and they are attractive and profitable and get us closer to our customer. Overall, the group customer support and training is steadily growing. In 2017, it contributed less than 20% of total revenues. We targeted for 2022 a contribution of more than 25% and in 2022, it grew to 28%, thus exceeding the target set.

We have successfully been growing this customer support and training activities across divisions and they now account for 35% - 40% of Helicopters revenues per year and 30% - 35% of Aircraft revenues per year. In 2022, we delivered approximately 48,000 hours of training through flight simulators, we have trained over 13,000 helicopters and aircraft pilots and operators. Last week, we were ranked again as #1 in ProPilot’s Aftersales Service Quality Ranking. It is the fifth year in a row that we are the #1. And we estimate that the value of customer support needs relating to our current fleet base over the next 30 years is some €5.5 billion in cash net present value.

As a group, we have a significant advantages. Integration is a key strength, and it is what makes us succeed competitively. And from right across our group we can work and integrate across all domains, and so let’s meet the present and future needs of our customers. We can drive innovation and development in a digital and sustainable way. We are adding to that our key strengths in digitalization, which is now at the heart of the group, and it is having a transformational impact across all businesses.

It provides a bridge to link all our businesses together platforms, electronics and the key strategic joint ventures.

We have a strong and unique portfolio that has the capability to address multi-domain solutions for our customers with our products, services and solutions being interoperable. This all means we can play a key role in the evolving international development of the aerospace and defense sector. We can also achieve leadership position in major programs of European collaboration, it means we play important roles industrially in our domestic markets.

We have also continued to make important progress on our ESG license in 2022. We have strengthened our decarbonization plan. First, we have further reduced our CO2 emission by 15% this year, mainly thanks to this replacement of SF6 in helicopters and energy efficiency initiatives. Then we formally committed to SBTI. And then we reviewed our decarbonization target, making it more ambitious and aligned with the Paris agreement.

Now we are committed to reduce CO2 emission by 50% by 2030. We achieved important results also in our social impact and diversity and inclusion. We increased the percentage of women with a STEM degree hired accounting now for 22% of the total STEM degree hiring and the percentage of female managers now accounting for 19% of the total managers.

We now have more than 50% of our investments targeted to initiatives that impact on SDGs and 55% of our financial sources are ESG-linked, with objective fully aligned with our strategy and long-term incentive plan. And with this, I will now hand over to Valerio and I will talk later about the group’s medium-term outlook.

[Valerio Cioffi, Group General Manager]

Thank you, Alessandro, and good morning, everybody. Today, I would like to cover some key areas. First, the growing upside trends in our core defense governmental markets, especially in the medium and long term with strong fundamental drivers that underpin growing new order intake over the short and medium term. At the same time, we see greater opportunities, driven by our technological innovation, which excitingly are transversal across the group. Lastly, I am pleased to report that we are on track with the Aerostructures recovery plan.

We see a positive outlook in our core defense markets. Due to increased geopolitical tensions, governments are reassessing their needs for security, leading to increases in defense spending. Across the board, the main global defense markets are set to see sustained growth in demand with an overall market CAGR expected of around 6%. Our addressable market remain at around 15% of the overall Aerospace, Defense and Security, annual average market value of around €800 billion.

In our domestic markets, we see increasing level of expenditure with Italy expected to reach the NATO target of spending 2% of GDP by 2028. The U.K. increasing its spending towards 3% by 2030, and Poland towards 4% in 2023, this year. There is also a strong level of spending in the U.S., and we are very well positioned to benefit from this increase in defense budgets across all these markets.

Furthermore, we are also seeing growing levels in geographies like the Middle East and North Africa, where we have been building stronger positions to create new opportunities. So across our markets, we are now noticing increased demand levels while the precise impact on our budgets are being allocated will take time to play out.

To summarize, we are confident that our current position allows us to greatly benefit from higher overall defense spending, customer accelerating orders and also spending to replace or upgrade equipment and systems that have become obsolescent.

We have a strong track record with an impressive commercial performance in recent years with new order intake of almost €75 billion, of which 62% in main domestic markets, Italy, U.K. and U.S., 20% in Europe, including Poland and 18% in the rest of the world. We are currently planning on exceeding our previous new order intake target of €80 billion for the period ‘22 - ‘26 and our new target is around €90 billion over the same time horizon, 10% more. We can leverage from our key group strength, our solid spending in key domestic markets where we have such deeply established customer relationships. Our enhanced position across international export markets, our role on large, long-term international programs plus our unique ability to combine key interoperable and multi-domain capabilities across the group, from platform to electronics to synergistic partnerships throughout our strategic joint venture.

We see growing commercial opportunities across all our core business areas here. Only a few examples, the short-term pipeline in Helicopters based on a wide dual-use product portfolio. Opportunities in proprietary aircraft programs like trainers and training systems, additional follow-on activity for Eurofighter involving our Aircraft division, electronic sensors and products as well as customer support activities. Lastly, there is also an exciting opportunity involving all our core business areas among the international cooperation program, which is the Global Combat Air Program, the GCAP.

We are also proud to mention concrete results and opportunities enabled by the Italian National Recovery Plan. We are managing partner of the National strategic hub, which will drive cloud digitalization right across the Italian public sector. We are strongly positioned in the field of global monitoring for civil applications such as critical infrastructure cultural heritage, environmental protection and agriculture indeed. With reference to the specific segment of road infrastructure monitoring, we operate as an industrial lead of the national consortium called Retail infrastructure, supporting high-tech solutions for critical infrastructure. We are on the right path to aid our country in achieving the ambitious target posed by the Italian National Recovery Fund, and we will identify any applicable end-to-end solution and service.

Innovation is the key to our future. We are selecting, focusing and connecting key technological areas to achieve benefits and address opportunities. Our focus is transversal. This means that we are building capabilities that can be used group-wide and will allow us to capture commercial opportunities for multiple businesses of the group at the same time. We are developing disruptive dual-use technologies, not just for maintaining up-to-date our existing products, but for major new programs in domestic market as well as even opening up new markets for the group.

Leonardo labs is at the center of these efforts to address specific needs such as digital twin, new materials, sustainable aviation fuel, hybridization, while our DAVINCI-1 HPC is a key driver of innovation. Here, our investment is now driving important leading-edge benefits with many applications. We have built our own cloud, developed our own data capabilities and specific engineering codes. We are at the forefront of digital twin applications. And this means that we can now give all our divisions a digital twin framework, all this is significantly reducing design and certification times, development risks and costs, optimizing our time to market.

To give you a simple example of one of the many applications of the HPC capability, we have extended the digital twin to engineering design process. And it computes the accurate flow field around helicopter in extremely reduced processing time assuring accuracy while minimizing wing tunnel experimental needs and then greatly reducing development cost and times.

I also want to talk briefly about a very significant future opportunity. The global combater program. Leonardo is a key strategic partner in GCAP, a system of systems covering and fully connecting all domains, air, land, maritime space and cyber. It’s a major international program with industrial partners in Italy, the U.K. and most recently in Japan, aimed at the development of the sixth generation platform for multi-domain in the defense sector to be operational by 2035.

It will have a groundbreaking combination of technologies and capabilities from aeronautics to electronics, from cyberspace to power and propulsion, leveraging on artificial intelligence, big data analytics, quantum computing, digital twins and cooperation between managed and managed platforms in a subsecure environment. It represents an exciting long-term opportunity for us, strengthening our technological and industrial lead while ensuring, at the same time, sustainability, prosperity, safeguarding specialty skills and core competencies, generating STEM employment and improving competitiveness.

The GCAP will also involve the entire national value chain, including universities and research centers, start-ups in an open innovation concept and small- to medium-sized industries.

Then in Aerostructure, we are on track. And we are executing our recovery plan after making further progress in 2022. We are now seeing an improving civil aviation market as a tailwind with their traffic level increasing, especially in the short haul, aligns growing financially stronger and better place to purchase and take deliveries of aircraft, especially as they look to replace older and less fuel-efficient fleet and driving rising volumes of our future activity in the civil customers, Airbus, ATR and Boeing.

For Airbus, we are seeing increasing volumes under the A321 and the A220 combined with renegotiated and improved terms for the A220. ATR is increasing its commercial opportunities. And we have a clear strategy to strengthen leadership in the regional market, providing sustainable and affordable configuration, while leveraging on new state-of-the-art assembly line, reducing production times and ensuring higher quality level standards.

On the B787 program, Boeing has resumed deliveries in July 2022. Our level of activity last year was lower than 2 fuselages per month. In 2023, we expect to produce 4 to 5 ships per month. But under Boeing latest plans, this level is forecast to rise to around 10 shipsets per month within 2025. And this increase, together with new pricing per contract will be a key factor allowing us to break even.

On the defense side, our work on Eurofighter and JSF remain robust and profitable. And we, at the same time, are also pursuing new commercial opportunities by new work packages with our existing customer and new initiatives like EuroMALE, where we have just received the first design phase order for the wing. At the same time, we have made our structure more efficient, reducing a count by 20% and manufacturing costs through automation and digitalization. and completing our investment plan to achieve greater manufacturing efficiency.

We have made significant changes to our restructure business. And all this gives us strong confidence in the path of our recovery. Having seen the 2021 as the bottom year, therefore, we expect to make further progress this year, considering that our volumes and production rates are on an upward trajectory. And we have a lower cost base, while we are effectively managing wider cost pressure. This means we are confident in achieving our breakeven target by 2025, even though the benefits of our progress will be more back-end loaded.

And with this, I will hand it over to Alessandra, and thank you for the attention.

[Alessandra Genco, CFO]

Thank you, Valerio, and good morning, everybody. As you have heard, 2022 has been a year of delivery, solid execution and growing commercial success. We have delivered on promises once again, meeting or exceeding targets, making the group stronger, resilient and sustainable and showing how we can successfully capture a growing level of new opportunities.

We have stepped back and accelerated commercial performance with new orders at €17.3 billion, up 21%, beating both the original and our increased guidance, even excluding the €1.4 billion AW149 Polish order. Our backlog has grown to over €37 billion, and we achieved a book-to-bill of 1.2x. We grew top line and continued strong program delivery with revenues at €14.7 billion, up 4.7% on a perimeter adjusted basis. And we have continued to improve profitability, notwithstanding the cost pressures in the current macro scenario.

EBITA was €1.2 billion, up 14.9% on a restated basis for treatment of COVID costs above the line, and we increased our group profitability from 7.9 to 8.3. Our core defense and governmental businesses has performed well strongly. We can also see the important contribution from our strategic joint ventures. Our civil business is recovering faster than expected. We have been delivering in ‘22 on our target to improve cash flow from €209 million to €539 million. It’s also higher quality with reduced seasonality and lower factory.

We met our target of slightly lower cash absorption in Aerostructures and are on the path to breakeven by end of ‘25. We have finalized the acquisition of 25.1% stake in Hensoldt entirely self-funded, while decreasing debt. At December 22, the net debt was €3 billion, around €100 million lower than last year. So we ended the year strongly and are carrying our momentum into 2023.

Now let’s look at the key metrics across the businesses, starting with new order intake. We have stepped up and accelerating our commercial momentum with group new orders of €17.3 billion. That’s a significant increase of 21% with a book-to-bill of 1.2. And we saw increased order intake across all our divisions. Helicopters had orders of €6 billion, up 38.7%, achieving very strong commercial success even without the major AW149 polish order for €1.4 billion.

The business won a good spread of new orders across defense, governmental, showing the strength of our world-class product portfolio, including the Cormorant midlife upgrade program for the AW101 search and rescue fleet, the fourth order under the U.S. Navy TH-73A program with 26 additional helicopters and additional Italian orders for 20 AW119, 10 AW139 and 4 AW169. We have also been seeing confirmation of accelerating recovery demand on the civil side and the Helicopters backlog has now grown to €13.7 billion.

Then Electronics Europe also performed strongly. New orders increased to €5.6 billion, up 4.3% with high levels of demand and good order intake across all the main domains. Enable electronic for both domestic and export, including guns and logistics support for the German Navy frigates and in air for the avionics of the 20 typhoon aircraft for the Spanish Ministry of Defense.

At Leonardo DRS, new orders increased to €3 billion, up 36.6%, demonstrating its great positions on key priority DoD programs. We continue to see growing new order intake across the 4 key technology areas of advanced sensing, network computing, force protection and electric power and promotion.

At Aircraft, new orders were €2.8 billion, up 4.9%, thanks to the Eurofighter Typhoon program with 20 aircraft for Spain, for the first C-27J for Slovenia and the first design phase of the Euromale remotely piloted program. Plus good customer support and logistics orders for Eurofighter and upgrading avionics for C-27J program.

Aerostructures achieved new orders of €420 million, up 15.1%, improved but still reflecting the softer market. We saw an increase in orders from Airbus under the A321 and A220 programs and the first order from the aircraft division for the early phase of Euromale for the production of the aerostructure. So overall, a very strong group performance in new order intake.

Moving on to revenues. The group grew top line by 4.7% to €14.7 billion and continued strong program delivery. In Helicopters, revenues increased to €4.5 billion, up 9.4%, a strong performance driven by program delivery and increased activity on NH90 Qatar, U.S. Navy TH-73A and AW169 as well as customer support.

Electronics Europe grew revenues by 4.3% to €4.7 billion, driven by the strong backlog with an increasing contribution from avionics activity on Eurofighter.

Leonardo DRS revenues were €2.6 billion, with volumes down slightly because of slippages related to supply chain, although more than offset by the positive currency impact. At Aircraft, revenues were down slightly at €3.1 billion because of the production phasing under the Eurofighter Kuwait program and some shift in export contract, partially offset by JSF, Airlifter initial activities on Euromale.

Aerostructures recorded revenues of €475 million, up 7.5%, thanks to increased delivery to ATR and higher demand from Airbus. So overall, a solid group revenue performance.

With respect to EBITA and profitability, we also achieved a step-up in EBITA, up 14.9% to €1.2 billion on a restated basis for the treatment of COVID-related costs, which were accounted for below the line in ‘21. We also improved profitability with return on sales increasing to 8.3%.

Talking about specific sectors. Helicopters EBITA was €415 million up 2.3% on the back of higher volumes with a return on sales of 9.1%, excluding pass-through activity on major programs being delivered.

Electronics EBITA grew 14.2% to €556 million with a return on sales of 11.7%, driven by strong performances all across the division and across all domains.

Leonardo DRS EBITA grew 15.2% to €252 million, and improved profitability from 9% to 9.8%, in line with plan.

Aircraft EBITA was slightly lower at €421 million and a return on sales slightly higher at 13.6%, with a very strong profitability maintained driven by its fighters business line.

Aerostructures reduced its operating losses from €203 million to €183 million, reflecting higher activity with lower underabsorption of overhead and some efficiency gains, confirming progress on our recovery plan.

ATR is improving its financial performance. And in ‘22, we saw its contribution improved to negative €6 million versus negative €24 million, helped by higher customer support and the signing of a customer settlement, which mitigated a lower level of deliveries impacted by some supply chain delays. We expect ATR to make further progress in ‘23.

Then the contribution from our space activities, which fell from €61 million to €31 million. Our satellite services joint venture performed well with good new order intake, growing revenues and solid profitability. It has a solid backlog giving revenue visibility for future years. On the other hand, the manufacturing joint venture performance last year was impacted by a risk provision on a contract related to Russia in addition to the unfavorable comparison base due to the one-off benefit related to the tax regulation change accounted for in ‘21. So overall, a positive performance across the group, increasing EBITA and increasing profitability, delivering on our targets and successfully managing a more challenging external environment where we were able to contain inflationary pressures on costs and largely limit supply chain pressures.

Looking now at the below the line. Our EBIT of €961 million benefited from an improving EBITA in ‘22. Nonrecurring costs were slightly higher, €114 million including the Russia-Ukraine related write-down of €36 million and transaction costs related to the many transactions occurred in the U.S., the acquisition of RADA and the subsequent listing of Leonardo DRS as well as the divestiture at Leonardo DRS level for approximately €35 million.

Restructuring costs at €119 million were also higher than in ‘21 and include the cost of early retirement for corporate and SaaS functions as per the agreement signed with the unions in December ‘22 which is an NPV positive project.

Then net financial expenses includes the cost of the make-whole charge for the U.S. bond redemption last year. Lower taxes mainly benefited from utilization of carryforward losses. And the capital gain from the disposal of GES and AAC completed in August, accounting for €235 million, giving a net result of €932 million.

We are also on track in meeting our targets to structurally improve cash flow generation. In ‘22, we stepped our free operating cash flow from €209 million to €539 million, and our cash conversion at 55% is in line with the target we set last year. And that’s even after the still significant cash flow absorption from Aerostructures for €296 million. So excluding Aerostructures, free operating cash flow would have been around €300 million higher with a cash flow conversion at 70%.

And it’s not just a higher cash flow generation, it’s also quality that has improved significantly. We’re seeing a reduction in seasonality with nominal levels of factoring of €404 million, a much reduced level compared to the circa €700 million in ‘21 and an even lower outstanding. And we’re also seeing better working capital management.

Improving cash flow generation further remains a key priority target of ours. We maintain our target of €3 billion cumulative cash flow over the 5 years to ‘25 with group cash conversion improving to circa 70% and with Aerostructures at breakeven expected by end of ‘25, all of this driving strong deleveraging. We see the key drivers of our cash flow as follows: First, our increasing revenue and EBITA performance, which we target to improve over the coming years. Second, increasing our conversion of profit to cash, benefiting from continued cash discipline in our core businesses, accelerating the timing of cash-ins from customers while maintaining strict control on working capital. Improving ratio of depreciation on investments combined with the consistent contribution from joint ventures.

At the same time, it will benefit from a recovery in our structures to breakeven cash flow by end ‘25. In ‘22, we reduced the cash absorption to €296 million, delivering and exceeding our target. In ‘23, we expect slightly lower cash flow absorption in Aerostructures and we remain on track with our recovery plan, which as we have said previously, is back-end loaded, seeing the major improvement in ‘25, helped by increasing volumes and pricing per contract on the B787 program.

Now moving on to investments. We’re continuing to invest well for the future and for growth. Our current future level of investment spend is in the range of €700 million to €800 million per annum and that focus on the development of innovative products and solutions as well as setting up our engineering and manufacturing setups for the future through digitalization. Reducing also natural resources utilization and increasing efficient and greener processes. And around 50% of our investments are targeted to initiatives that impact on our SDGs.

At the same time, ESG remains a key priority in our financial strategy. This remains for us fully aligning an integrated both our financial strategy and ESG. You can see how ESG is driving our funding strategy. And now 50% of Leonardo sources of funding are linked to ESG targets including CO2 emissions and number of STEM-qualified women. This is fully in line with our ESG strategy and long-term incentive plan.

And this year, in ‘22, we also signed €260 million of sustainability-linked financing from the European Investment Bank, including an innovative KPI. This is the first loan in the aerospace and defense sector, where the selected ESG target includes a KPI linked to technology. All of this also enables us to reduce our cost of funding in line with our disciplined financial strategy. Deleveraging for us is a key priority. We made progress in ‘22, reducing our year-end net debt to €3 billion, delivering on our targets. That is also after the acquisition of the 25.1% stake in Hensoldt, the make-whole cost on the U.S. bond redemption, thanks to the higher-than-expected sale proceeds from GES and AAC and a strong cash flow generation while continuing to pay dividend to shareholders.

And that adds to progress made in recent years on gross debt and cost of funding. Since 2016, we have reduced gross debt from €4.6 billion to €3 billion even after strategic acquisitions and continuous investment in future projects for growth. And in ‘22, we have repaid in advance of maturity circa €800 million of debt with the redemption in full of circa €300 million of the U.S. dollar bond and the early repayment of the €500 million term loan. And over ‘26 to ‘22, we have also reduced our cost of funding to with 3%, with 70% of this bond -- of this debt at fixed rate.

And deleveraging is written on the cards. It remains our key priority in terms of capital allocation going forward. Put it simply, we’re driving strong deleveraging of the group. We will use our cash flow to reduce debt as priority #1, while also providing stable returns to shareholders through dividends.

I want to finish today by covering our guidance for ‘23. ‘22 was an important year of delivery, solid execution and growing commercial success. We finished the year strongly with very strong commercial momentum, which we expect to continue in ‘23. We can see growing commercial opportunities across all our core businesses in both domestic and international markets, where we are strong plus selected new markets.

In Helicopters, we’re seeing a strong short-term pipeline of opportunities in defense and governmental including customer support, plus a rising demand in CV market. Aircraft has a whole range of potential opportunities and sizable campaigns. There is further Eurofighter follow-on activity in the pipeline and the delivery of the Euromale development. And we see opportunities in proprietary programs such as trainers and airlifters. Electronics is seeing very strong demand, both domestically and internationally and is seeing growing opportunities and potential across all main domains: air, naval and land.

Here, we are confident of leveraging on our very strong domestic markets in Italy and the U.K. and on our positions on key major programs. We see opportunities coming from the partnership with Hensoldt especially in Europe and also growing international opportunities across defense electronics on top of that.

Leonardo DRS is also seeing growing opportunities across all its 4 key technology areas of advanced sensing, network computing, force protection and electric power and propulsion. It’s already anchored on key DoD programs and it’s also looking to leverage on its and radars product strength internationally.

So overall, we expect a group level new order intake in ‘23 of circa €17 billion This, together with our strong backlog will continue to fuel top line growth across the group, and we expect ‘23 group revenues to rise to €15 million to €15.6 billion. At the same time, we see margins and profitability continuing to improve across the board, leveraging on high volumes and driven by efficiencies to balance cost pressures.

In Helicopters, solid margins anchored by customer support and higher volumes despite pass-through effect. We continue to see excellent margins from Aircraft, making progress on continuing program delivery. And again, Defense Electronics being the highest contributor on the back of its higher volumes and higher profitability. We also see some reducing Aerostructures losses with consistent performance on our joint ventures. And we expect all of this will translate into group EBITA of €1,260 million to €1,310 million.

We also expect to further increase free operating cash flow to approximately €600 million, reflecting the positive operating performance across the group, driven by the consistently stronger core defense business as well as a slightly lower cash absorption from Aerostructures.

As said, we have a laser focus on deleveraging so we expect net debt to decrease to approximately €2.6 billion, thanks to cash flow generation while continuing to maintain a constant shareholder return and including signing of circa €100 million of new leasing contracts.

So to sum up, ‘22 was a year of delivery with solid performance across all key metrics. We saw growing commercial success and stronger financial performance and we’re confident of our path forward. Thank you. And I will now hand it back to Alessandro.

[Alessandro Profumo, CFO]

Thank you, Alessandra. So you’ve heard today about our further progress and strong set of results. It reinforced our confidence in the short- and medium- and long-term targets. Our commercial momentum is strong. We have stepped up order intake.

We are now targeting a higher level of new order intake, a total of €90 billion over 2022-2026 horizon, versus €80 billion under our previous plan as we leverage off our strong position in our 4 domestic markets, our product portfolio and our stronger international presence.

We are confirming mid-single-digit top line revenue growth over the plan. We expect a total of circa €85 billion over ‘23-’27 horizon as we deliver on our backlog, seeing growth across all areas of the business.

On top of this, we expect to see high single-digit growth in EBITA as we continue to make progress in profitability, leveraging volume growth and greater efficiencies that will balance cost pressure. We are also targeting continuous improvement in our cash flow confirming our target of €3 billion cumulated operating flow over 2021-2025, rising cash conversion to around 70% by 2025, including Aerostructure and targeting breakeven in Aerostructure by end of 2025.

So we are driving strong deleveraging of the group. We will use our cash flow to reduce debt as a priority number one while providing stable returns to our shareholders through dividends, and we are fully committed to reduce CO2 emission by 50% by 2030.

So in summary, our results today are showing a group that is stronger, more robust, resilient and sustainable, steadily growing year after year. We are successfully capturing increasing opportunities. We are continuing to meet our backlog. We are achieving top line growth across all defense governmental sectors. We are improving profitability, benefiting from increasing volumes and solid industrial performance.

We have structurally more solid increasing cash flow. We are laser focused on deleveraging. We have invested well in technology and digitalization. We have ESG at the core of our business, and we are fully committed to creating value for all our stakeholders. Thank you.

[Valeria Ricciotti, Head, IR]

Good morning, everyone, and welcome to our full year 2022 results slide Q&A session. Before taking your questions, I would like to hand you over to our CEO, Alessandro Profumo, for some initial remarks. Thank you.

[Alessandro Profumo, CFO]

Many thanks, Valeria, and good morning, everybody. Before starting our Q&A session, I would like to highlight some key messages. 2022 was an important year of delivery, solid execution and growing commercial success, and we are pleased to report today a strong set of full year results showing a group that is stronger, more robust and resilient, sustainable, steadily growing year after year. We have continued to deliver on our promises, meeting or exceeding all our key targets once again.And as a group, we are in a better and stronger position to capture new opportunities. We have stepped up and we are accelerating our commercial momentum.

We have grown our top line and continued strong program delivery. We have also continued to improve our profitability. We have a structurally more solid, increasing cash flow, and we are laser focused on deleveraging. On ESG, we have also continued to make important progresses. And finally, we are fully committed to creating value for all our stakeholder.And with this, we are ready to take your questions.

Many thanks.

[Operator]

[Operator Instructions] Our first question comes from Alessandro Pozzi of Mediobanca.

[Alessandro Pozzi, Mediobanca]

If I look at the 2023 guidance and if I take the midpoint, we could see maybe a slight progression in margins, and I think that’s a good data point given that concerns around inflationary pressure. And I was wondering how should we read this in 2023? I mean, assuming that we are going to see stabilization of inflation, is -- if our inflationary pressures as worse as they could get in 2023. And then we should see an improvement from ‘24 also because you are maybe renegotiating some of the contracts in defense or you are able to pass on price hikes to the end customers, especially in defence program. So I was wondering if you can give us maybe a bit more color on that? The second question is on order intake.

Obviously, came much above guidance, despite having raised the guidance over the Q3. And I was wondering perhaps if you can give us some indication of why it was so strong even after you raised the guidance? Maybe was it some of the orders that were supposed to come in 2023, both forward in 2022, given that the order intake guidance is around €17 billion for next year? And also on the order intake for 2023, can you give us a sense of how you built it up? I guess, we already -- potentially you already included some of the big orders like the one in Brazil.

I was wondering, does you rely on jumbo orders? There could be a lot of opportunities in 2023? And if so, how much?

[Alessandro Profumo, CFO]

I think that Alessandra will start talking of inflation. It’s very, very important -- if you consider the fact that we also gave a view on the longer-term future, so we will continue to grow also after 2023. I think that the number in 2023 is very important because you remember the idea you had that we were not able to face the inflation pressure. While here with this guidance, we demonstrate that we are capable to manage that, and we will continue to do so also in the longer-term perspective. But I leave the floor to Alessandra.

[Alessandra Genco, CFO]

You highlighted the key elements, Alessandro. Certainly, ‘22 at an EBITA level, double-digit growth over ‘21 testifies that the group was able to manage inflationary pressures, and ‘23 is another step forward in profitability, in line with the plan that we had, capturing all the opportunities that we have in the top line, and managing well for another year the supply chain and the inflationary pressures.Honestly, I think your view is well drafted and well crafted. ‘23 would have been a year of even higher growth in profitability if we had not to manage the pressures on inflation. And clearly, ‘23 is a year where this impact is the highest. Going forward, there is going to be an opportunity to reprice contracts with customers as well as we are embedding starting from ‘22 in the new bids, and this is the key, the new curve of cost that will be factored into our bids to customers.Therefore, we will be, again, naturally hedged from ‘24 onwards and will accelerate the pace of profitability growth.

In any case, ‘22 and ‘23 are evidence of the fact that inflation is well managed and has been more than offset by the actions taken by the group.

[Alessandro Profumo, CFO]

On order intake, Alessandro, In 2022, we had the €1.4 billion order from Poland. So in reality, this was expected to come in 2017, so -- sorry, in 2023. So the €17 billion number is in reality €15.6 billion, which is higher than the guidance we gave to the market at the beginning. But in this order, there is as well this €1.4 billion. The €17 billion of 2023 is composed by small orders.

There are no jumbo orders. So it’s very, very solid. And I think it’s a clear demonstration of the fact that we continue to grow. It’s also important what we said for the plan.Overall, we are seeing [10 billion] more of orders on same lines in terms of years vis-a-vis the previous plan, giving review that we are really managing well the growth. We do expect that the market overall with the 2% expected expenditure on defense by all the NATO countries will realize.

So I think is the 2023 number is really a solid number, again, without jumbo orders.

[Alessandro Pozzi, Mediobanca]

And just going back on the contract renegotiations. Are you able to have discussions on existing contracts or you need to wait for the roll-off and the start of new ones to pass on price hikes?

[Alessandra Genco, CFO]

Well, Alessandro, it depends on the individual contracts. But I think the key message here is that, overall, at group level, we are weathering inflationary pressure as well, and we’re continuing to grow profitability year-over-year, ‘22 over ‘21 and ‘23 over ‘22.

[Alessandro Pozzi, Mediobanca]

And just a last one for me, if I can. In terms of guidance on free cash flow, you reiterated the €3 billion, if the starting point is 2021 when net debt was €3.3 billion. It means that -- and if we adjust it for Hensoldt, by the end of 2025, we should see a net debt around €1 billion. Is that a fair assumption?

[Alessandra Genco, CFO]

The way I would look at it is that our guidance is focused on cash flow generation, Alessandro. So over the 5-year term, ‘21 to ‘25, we are confirming cumulative cash flow generation of €3 billion, of which 2 years are already delivered. The third one is, as per guidance, plan to be at [€600 million] and the other 2, clearly, you run the math better than us. We continue, at the same time to pay a consistent return to our shareholders.As you have seen, the Board of Directors yesterday decided to submit to the EGM in May, the proposal to confirm the dividend payment for €0.14 per share, same as we had in ‘22. And our focus in the capital allocation principles that we have set for the group is to be absolutely prioritizing net debt reduction over the plan time, as we have demonstrated to be doing and capable to be doing in the past few years.

[Alessandro Profumo, CFO]

I think that it’s also important why we decided to confirm as the numbers are showing the 2021-’25 cash flow generation because we received hundreds of questions on Aerostructure. So this is -- this cash flow generation is included Aerostructure, that, as you know, has been different due to the 787 program. And then later on, maybe that Valeria will say something more on that. So this is -- these numbers, which is quite a good number, is included Aerostructure, which means, I’d say, all the rest is really quite strong.It’s important to say that if we would crystallize Aerostructure in 2022, the conversion rate would be already 70%, which is quite a relevant conversion rate. So I think it’s a very clear demonstration of the fact that our group is capable to generate a significant cash flow.

We are delivering on cash flow. The counter of the companies focus on cash flow. So I think it’s the most relevant element for all of us.

[Alessandro Pozzi, Mediobanca]

And the disposals were included in the free cash flow guidance?

[Alessandro Profumo, CFO]

No. Disposals are not free cash flow.

[Alessandro Pozzi, Mediobanca]

The U.S. disposals are excluded. Okay.

[Alessandro Profumo, CFO]

It’s not the cash flow. The operating cash flow is a reduction of debt, but it’s not a free operating cash flow, clearly. Here, we are talking of the operating cash flow.

[Operator]

Our next question comes from Virginia Montorsi from Bank of America.

[Virginia Montorsi, Bank of America]

I have 2 quick ones. The first one is, could you just tell us if -- or confirm to us if going back to investment grade remains kind of one of the key priorities in 2023? And if you’re confident about that? And then just to confirm, the EBITA CAGR you’re providing for the medium term, would that be still 2023 to 2027? Am I correct?

[Alessandra Genco, CFO]

On investment grade, Virginia, absolutely becoming investment grade -- we are already investment grade for Fitch. Becoming investment grade for the other 2 rating agencies is a priority for the group, and we are confident in saying that we are delivering with these results in ‘22 on the plan that we have set to the agencies, and we are having clearly a very constructive and engaged dialogue that will have an appreciation of the results achieved to date. On the CAGR, the CAGR is a ‘22 to ‘27 CAGR. So it’s basically the 5-year plan CAGR accumulated for the time being. I think yes, we’re talking about double-digit, yes, at plan end, starting from ‘22 levels going up to ‘27 levels.

[Operator]

Our next question comes from Martino De Ambroggi of Equita.

[Martino De Ambroggi, Equita]

The first question is on free cash flow again. Focusing on 2023, am I right in assuming that the improvement basically comes from the Aerostructure division improvement? And could you specify what are the underlying assumptions on factoring CapEx, net working capital and dividends from unconsolidated assets?The second question is on the order intake, that you increased the cumulated order intake in ‘22-’26. I was wondering what are the divisions that you expect to benefit more from this trend? And what regions -- presumably it will be western countries, but I don’t know if you have some comments on this?And still on the free cash flow, you are providing the €3 billion cumulated free cash flow for the group.

Could you specify what is the underlying assumption for the Aerostructure accumulated cash burn in the same period?

[Alessandra Genco, CFO]

Martino, I’ll take the first one. So free operating cash flow of 2023 and improvement drivers. The main improvement are associated with our core business, defense and governmental. Aerostructures, as we said, will slightly improve year-over-year, but this is not going to be the determinant factor. What you see is that we are going to grow top line.

We’re growing profitability while maintaining a strict control of working capital. We have expedited significantly timing of cash-ins from our customers, and that’s a key element of the culture of cash that Alessandro was referring to before. And in ‘22, we also managed to accelerate the payments to suppliers. So these drivers will continue to make a difference in delivering cash. While the CapEx level is around €700 million to €800 million per annum CapEx, meaning both tangible and intangible investments.

And the dividends from joint ventures will be consistent throughout the plan for the group. Alessandro, do you want to take the second question?

[Alessandro Profumo, CFO]

Yes. On order intake, we do see a growth in order division. The one which will grow more is Defense Electronics, which is clearly incredibly important in order to manage interoperability and multi-domain request we are seeing from different customers. In terms of geographies, is very well spread. So really, we do have a significant growth in all the geographies.

So there is not one geography which is more relevant than the other one. So what we have seen in the period ‘18-’22 is more or less reflected in the following period.Here, you can see where we received the different orders. There is not a single country, which is really dominating U.S.A. The most relevant one in terms of single country is, by far, the largest market worldwide, and we will continue to move in this direction. But all the others are also relevant.

U.K. clearly is not only U.K., but -- since for us, U.K. is very, very important for the Eurofighter, the end customer in some case are in the Middle East, which is the area in where we have the strongest export in terms of Eurofighter from U.K.If I can add, I think that the balancing that you have seen, so mainly 62% in our domestic markets, the 20% that we have in Europe, including Poland and 18% -- 20% in the rest of the world will be maintained also in the new order intake that we are presenting now. And we will have some new opportunities which are in the Middle East and in North Africa where we have built and are building several potential opportunities and that are markets in which we are investing on.

[Alessandra Genco, CFO]

Finally, Martin, on your question on free operating cash flow for Aerostructures, as you know, year-over-year free operating cash flow is improving in the division and is improving at a good pace. We had an absorption of cash of €339 million in ‘21, which went down to €296 million last year. And for ‘23 we’re projecting a slightly lower cash flow absorption, but again, not material with the goal to achieve cash flow breakeven at the end of ‘25.And as we have always said -- Valeria reminded about this several times, that this is going to be a back-end loaded profile considering the mix of programs and level of production that the division will follow, mainly on the B787 program.

[Alessandro Profumo, CFO]

Alessandra, I should correct a little bit you, it’s not mainly is due to the 787 program. As we know, the 787 program will have a completely different profile from the fuselage 1,407. So maybe that -- Valerio can elaborate on that.

[Valerio Cioffi, Group General Manager]

You have seen -- as you have heard, we are mainly doubling all the numbers year-by-year on the 787. Last year, we delivered 2 fuselages per month. While this year, we are expecting 4 to 5. And on Boeing latest plan, we will arrive at 10 ships per month within the 2025. So we are doubling year-by-year.

On the other program, we are on a clear upwards trajectories. For any program we are already on levels higher than in 2019 for the A321, the A220. We are restoring higher level on ATR. But, as Alessandro said, we need to arrive as soon as possible to 1,406 serial number of Boeing in order to increase profitability as per contract and restore higher volumes, such as we had before the COVID.

[Martino De Ambroggi, Equita]

If I may, just 2 quick follow-ups on the accumulated cash burden for Aerostructure. Am I right in assuming €900 million, €1 billion over the plan period? And on the division that is benefit more from this current improvement in the accumulated orders, being Defense Electronics, which is the most profitable. Am I right in assuming some positive mix effect on the EBITA margin going forward?

[Alessandra Genco, CFO]

Martino, I have to say, the way I’d look at it is widely spread improvement in cash flow generation and profitability throughout the group, with the qualifier for our restructure that we discussed with a clear target to break even and a consistent improvement year-over-year. The mix is clearly an element that plays into the equation.But honestly, what we’re seeing is that, overall, throughout the group, we do see consistent strengthening of cash flow generation and improvement in profitability, being in Defense Electronics, in helicopters, in aircraft that maintain, for example, a top margin level in absolute terms and even relative to peers. So we are capturing all of these effect at divisional levels and embedding this in the plan for group, which we are delivering to you today.

[Operator]

We now have a question from the webcast.

[Valeria Ricciotti, Head, IR]

Yes, exactly. Before moving on with questions from the call, let’s take a question from the web that is coming from Monica Bosio at Intesa Sanpaolo.Can you please provide us a rough indication on financial charges as for 2023 and going forward? And do you expect further restructuring above the EBIT line this year?

[Alessandra Genco, CFO]

Sure, Monica. Financial charges for ‘23 are expected to be around €230 million. The number you see in ‘22 reflects some one-off effects, including some FX -- fair value FX as well as some actualization of balance sheet accounts that has dropped the number significantly. So ‘23 is going to be in the range of €230 million with a figure that over time will clearly decline as we decline net debt in the plan Horizon.On restructuring, what you do see recorded in ‘22 is the effect of the pre-pension plan signed with the unions in December, focused on a change in mix in corporate functions and staff functions of the group. Going forward, we do not see any specific restructuring happening, therefore, guidance for below the line and the restructuring line will be below €100 million.

[Operator]

[Operator Instructions] Our next question comes from Gabriele Gambarova of Banca Akros.

[Gabriele Gambarova, Banca Akros]

The first one is on DRS. I saw that in the first 9 months, the margin -- EBITA margin in absolute term was almost flat, and then there was a nice acceleration in Q4. So I was wondering if you succeeded in fixing the supply chain issues, or even, let’s say, you passed higher costs to clients. Basically, I was wondering how it could perform in 2023? This is the first question.Then I saw that in the press release, you made a reference to reduce the factoring.

Is it possible to have a number on this item?The third one is on the new Medium Helicopter contest in the U.K. Any update on the timing of the RFP would be very useful because there are no more -- not many information on this. And that’s it.

[Alessandro Profumo, CFO]

DRS. In U.S.A., as you know, there are still some -- probably not for us, but for the overall industry in terms of supply chain. So it’s not something related to Leonardo DRS. In any case, DRS is working quite well with the customer base. The profitability of DRS is going up, as we said, 2 years ago, and we will -- is continuing and will continue to happen, because many programs are moving from development to production.

So there is -- and there will continue to be a good growth in terms of marginality of DRS. Again, it’s included in, what is already on the book, because we know and we were saying that when we were talking of the listing of DRS, we have been capable to grow in a very significant way in terms of new programs. This is also one of the reason why I’m so positive on the proxy contract because, thanks to the proxy, we can bid in any classified program. Clearly, there is a significant program, the Ohio replacement program, so-called, that is moving forward. And while before was absorbing cash and was also negative in terms of marginality, today is positive, and we are talking -- working on second rounds of opportunities. So it’s clearly very relevant. But there are many other programs on which we are in a similar position.

So DRS will continue to move positively in terms of marginality. I will talk of the last question on helicopters and then I will leave the floor to Alessandra for factoring. We don’t have any news on the new Medium Helicopter in U.K. in terms of time frame. We continue to have a continuous contact with the customer.We have a platform, which, in our opinion, is incredibly strong. It’s a 149, is helicopter we just sold as well to Poland, is the military version of the 189.

So we think that this is the most ready for sure. And in terms of readiness is really -- we are sure that there are no doubts on that, that we are the ones most advanced. We think that it’s also an incredibly good helicopter for this type of mission. So we continue to see -- to be confident, but we don’t have any news in terms of time frame. Alessandra, factoring?

[Alessandra Genco, CFO]

Yes, Gabriele. Factoring has been decreasing in the last 2 years consistently. And at year-end ‘22, we were below €400 million.

[Operator]

Our next comes from Ian Douglas-Pennant of UBS.

[Ian Douglas-Pennant, UBS]

Yes, I’ve got a couple left, please. So in helicopters, very strong order growth there, even accounting for the jumbo order from Poland. Should we -- and clearly, some Polish language from you as well, should we see this as evidence of a structural turnaround in helicopters? Do you believe that the market outlook longer term has improved?Secondly, following up on a previous question on factoring. Apologies if I missed the answer, but you gave some guidance on CapEx spending and dividends from JVs, cash flow next year and in future years. There was also a question on factoring in that question. I’m not sure I heard the answer.

[Alessandro Profumo, CFO]

Because I think it’s incredibly important to stress some concept. First of all, the -- you talk of restructuring, the, I would say, redesigning process of helicopter is completed. So am really incredibly satisfied by what [indiscernible] and his team did in this 6 years. You remember that when I joined Leonardo in 2017, we made the profit warning on helicopters. Today is completely behind us that time.

So the team is strong. The way they manage the programs is incredibly relevant. And so, we are very solid and very positive in terms of forward-looking, what we do see in the helicopter world.On the military side, we will continue to see a demand which is not incredibly growing. So the growth rate is not very relevant, but we are sure that, as Leonardo, we are capable to increase our positioning in this market. What we have done in U.S., I think, is a clear demonstration of that.

We are the only foreign company, non-U.S. company present on the defense system in U.S. with 139 -- the MH-139. Just in these days, we started the production after the first prototyping and this is very, very relevant. AD139 we will deliver to the U.S. army and this is relevant.Then we have the 135 order, which in reality is not yet in the backlog because, as you know, in U.S., we book as a yearly order, but the total number of the TH-73, which is 119 for training, the total order is 135. And we are delivering. The customer is incredibly satisfied. We assume that there will be something more in the future in the FNC, so very confident on that. On top of that, you know the FLRAA tender how has been completed where the TiltRotor technology has been the one who has been the winner of this tender.This is, again, incredibly relevant for us because we are close to the certification of the 609, and we already received the 4 first orders.

This is incredibly important because the technology is solidly accepted. And thanks to that, we do see a very good perspective also for us. So this is the military award and the 609. On top of that, we are seeing a more dynamic market in the civil domain.Search and Rescue is very important. You have seen, I think yesterday or the day before yesterday, a very important order from THC, the helicopter company in Saudi.

This is very, very relevant. Emergency Medical services is another important market. We do expect some improvement as well in Oil & Gas, is not in the plan, but we are positive as well on this domain. So overall, we are very positive on our Helicopter division. I hope that I answered to your question.

[Ian Douglas-Pennant, UBS]

And the assumption of factoring in 2023, please?

[Alessandra Genco, CFO]

Ian, as you know, and I’m sure you have not missed, the quality of free cash flow generation has significantly strengthened. So not only the absolute value, but also the quality. And you must have appreciated the lower cyclicality throughout the year, as on a quarterly basis, our cash flow absorption profile has significantly smoothen out throughout the last 2 years. With respect to factoring, the answer for ‘22 is that we have a level which is below €400 million.

[Ian Douglas-Pennant, UBS]

Sorry, the question was a follow-up on the prior question on 2023. So you said CapEx, €700 million to €800 million. You said dividends from JV consistent throughout the plan, and I missed the answer on factoring 2023.

[Alessandra Genco, CFO]

Yes. I mean factoring ‘23 would be around the same levels of ‘22. We’re clearly continuing to work throughout the group to accelerate cash in from customers, and we’re confident that the quality of the free cash flow will continue to improve year after year.

[Ian Douglas-Pennant, UBS]

Just following up on helicopters, sorry. The U.K. NMH has been delayed. Do you expect to hear something soon after the integrated defense review is published or maybe I could ask you expect to hear something this year?

[Alessandro Profumo, CFO]

We don’t know. We think that will come next year, but you never know. So we don’t have -- it’s not in the 2023 numbers, just to be clear.

[Valeria Ricciotti, Head, IR]

Let’s take another question from the web. It’s from Yan Derocles from Oddo.Can you give a little bit more color on the negotiation with your unions in terms of wage increases in your main geographies? Then he asked again about factoring. I think we have already answered.And the third question is, unlike peers, gross customer advances did not grow strongly in 2022. Given your expectation of a book-to-bill greater than 1, can we anticipate an increase in down payments in 2023?

[Alessandro Profumo, CFO]

Negotiation with -- there are no negotiations, in the sense that there are the contracts, so is -- the trend is very clear. So we don’t expect a pressure higher than the one are implied in our numbers. because the contracts are already signed. Clearly, this is one of the piece of the inflation pressure, because, if you have a step up in 2023, then this increase will remain also the following year, will not increase furthermore maybe. But -- So overall, we are incredibly satisfied with the capabilities we have in terms of offsetting the inflation pressure, because you have seen the guidance, and also -- we will continue to grow also after 2023 in terms of marginality, offsetting completely this increase. Because if you have a 5% increase in one country and you don’t have another 5% the following year, but in any case, the base is higher. So you have a higher cost, which will continue to be there.Despite of that, we will continue to improve our marginality. So this is, I think, a demonstration of the strengths we have. So this is very important. As you know, in Italy, we have a contract for which we have an increase -- an expected increase of salary related to the core inflation. Today, the inflation is mainly important. So this is the reason why in Italy we have a lower impact in terms of salary increase. Alessandra?

[Alessandra Genco, CFO]

Yes. So on customer advances in ‘22, the flow of cash-in was ordered, I would say. Nothing material to report. And this is honestly good news, again, going back to the quality of the cash flows because we have delivered increasing cash flow year-over-year, more than double cash flow organically, with no jumbo contribution from any single order and from no contribution from customer advances, which over time need to be repaid as we all know. So we’re really happy with the mix of this cash flow generation in ‘22, and we’re projecting a similar composition also in ‘23.

[Operator]

[Operator Instructions] Alternatively, you can submit with a question via the webcast.

[Valeria Ricciotti, Head, IR]

Let’s take another question from the web. Could you please provide us with an update on the B787 and the other programs within the Aerostructures division?

[Alessandro Profumo, CFO]

Valerio?

[Valerio Cioffi, Group General Manager]

As I have already anticipated for the other question, we are on an upward trajectory. We are -- have already volumes higher than in 2019 for the A321 and the A220 and the A220 has also renegotiated terms in order to increase profitability by the end of this year. ATR is strong with large potential portfolio also due to sustainable configurations. We have the cargo version. We are near to deliver the store version.On the 787, as I anticipated last year, we delivered 2 fuselages per month.

We are planning to deliver 4 to 5 this year, and latest Boeing plants are foreseeing 10 ships per month within 2025. So doubling year-by-year. At the same time in Aerostructure, we have also -- on the military side, we are robust and profitable. On Eurofighter and JSF, we have several new opportunities, which have not been included in the plan, relevant to newer packages. We have in the plan EuroMALE, where the first order for the wing in terms of design has been already finalized. And in top of all these commercial potential contracts and opportunities, we have reduced our cost base.

You know that we reduced the headcount 20%. We reduced our manufacturing cost with automation, digitalization. This year, we will have our first fuselage in terms of production for the ATR in Pomigliano, which grant us higher quality level standards and profitability. So I think that our volumes are coming back to previous one and the 2021 was the bottom year as confirmed also by number that you have in 2022.

[Operator]

Our next question comes from the telephone lines, and it’s that of Harry Breach of Stifel.

[Harry Breach]

Can I ask you maybe 3 simple ones. Firstly -- and Alessandra, forgive me if I misunderstood. MBDA -- the cash that you own through MBDA, I think increased by €50 million around that number in 2022. Clearly, with the level of orders and down payments, the cash position at MBDA should continue to get very strong. Do you expect to increase your debt to MBDA or effectively your withdraws of cash from MBDA?

In 2023, should we think about the same level as in 2022?Second question, Defence Electronics, guys, overall, a very impressive full year margin performance at Electronic EU, particularly. How do you think about margins at that business overall following what you’ve reported? Are we kind of at a natural ceiling level for the EBITA margins at Defense Electronics at the current level, 11.7%? Or do you think it could get even higher, especially as the equity income from MBDA continues to rise?And then final question, maybe more for Alessandro, supply chain. We’ve spoken about it more in the past in the context of DRS but over in Europe, in Italy and the U.K. as well over the U.S., is the situation in terms of on time, on quality and health of supply chain about the same as it was maybe 3 months ago? Is it stabilizing? Is it getting better? Can you give us any idea, please?

[Alessandra Genco, CFO]

Sure. On supply chain, starting from -- sorry.

[Alessandro Profumo, CFO]

No, he didn’t ask on supply chain. From MBDA.

[Alessandra Genco, CFO]

MBDA. MBDA cash is basically projected to be stable. Now the company has ended ‘22 with a high level of cash, absolutely. We are currently in discussion the treasury committee level with the other shareholders to understand, how to best utilize this cash that is available in the joint venture. And in any case, for us, is honestly quite neutral because we -- as you know, we get that cash, it’s accounted for as debt.

So from a net debt perspective, it’s absolutely nil impact. And the group has strong liquidity. So clearly, the cash from MBDA is one of the component, but is one of the multiple components of this liquidity base.

[Alessandro Profumo, CFO]

On Defence Electronics, we do see a continuous growth in terms of profitability during the plan. So clearly, this is in terms of contribution to the group in the period of the plan, the one -- the division with the highest growth rate in terms of volume but as well in terms of profitability of contribution in absolute terms. So this is clearly the area with the highest the group level, which is positive for us because do confirm the view we had in the past being -- saying for us, as the 2 platforms are relevant, helicopters and aircraft, also because they are receiving a lot of benefit and the Defense Electronics division is learning a lot from these platforms in order to be capable to grow furthermore.And today, there is no one in this market which is as strong as we are in terms of integration of the system. I learned in these 6 years how much it’s difficult to have the right integration process, in the area where any program is more risky. So the fact that we have these 3 divisions together is really a strength for us.

By chance, I open and close a bracket. When we made the investment in Hensoldt that [€23 billion] -- at the timing Hensoldt was in the market at the price of [€16 billion]. I remember quite clearly, someone were saying, why are you paying so much? Now let me have a look today and so this at [€34 billion] so -- which is, in any case, not bad. So Defense Electronics really is in credit with relevant.

And nevera.

[Harry Breach]

Just to be clear, sorry, in the plan, the margin for the Electronics EU business, it is continuing to increase in the plan period, the margin?

[Alessandro Profumo, CFO]

Yes. The answer is yes.

[Alessandro Profumo, CFO]

For me, clearly, it’s relevant. The margin in percentage, but if you are reducing the volume is not good. So we are increasing the margins and we’re increasing also in absolute terms, which is clearly at the end relevant for you because it’s the value of the company. So in order to be very clear, we will have an increase in terms of percentage, so -- and in terms of volumes so that at the end, the bottom line will grow quite significantly. It’s clear.

Having said that, supply chain area. You remember that we started -- today, the situation is better than 3 months ago. But also, what is very relevant is what we have done on the supply chain in Italy since 2018. So I think that Valerio, -- since the procurement structure belongs to the area of Valerio can say some word on the results of our program on the supply chain.

[Valerio Cioffi, Group General Manager]

Yes. We started -- as Alessandro said, in 2018, we are creating real partnership in which obviously we are assuring to our supply chain a future, a strategic view. We are creating a stronger supply chain. They are obviously putting on the table stability -- financial stability, sustainability of their competencies. Now we have created a taxonomic-mapped supply chain, which for the future is strong, not only for the Leonardo but for the supply chain in international programs, and we are moving on with supply chain towards sustainability and digitalization.

So we have done a lot of work, and our supply chain is stronger and stronger again more with respect to previous year. You shall take into account that, for example, in the international programs, cooperation programs, supply chain is one of our building block in order to create a value chain.

[Operator]

I will now hand back over to the team for the webcast question.

[Valeria Ricciotti, Head, IR]

Yes. Again, from the webcast, they’re asking for a little bit more color on our role in the GCAP.

[Alessandro Profumo, CFO]

Valerio?

[Valerio Cioffi, Group General Manager]

I think that my answer will also cover a few points that Alessandro said before. We are strong because we have electronics and we have platforms. Really, these are the reason for which we are a leading partner in the GCAP. The GCAP is an exciting new adventure, is the demonstration that Leonardo is strong in international cooperation programs such as Eurofighter, EuroMALE , and other program.And the GCAP with U.K. and most recently, Japan, it’s the program dedicated to a system of system, which will cover all the domains, air, land, maritime, space and cyber and will take advantage not only by our divisions portfolio, but also will take advantage from our labs and the choice to have internal labs developing disruptive dual-use technologies.So we will leverage on artificial intelligence, Big Data analytics, quantum computing, digital twin, which is now a framework that we have in all our divisions and the program, which that now is not really in the number of the plan without only a technological activities that we are planning in next 2 years will provide the sustainability and prosperity, above all, will also provide capability to preserve and safeguard our competencies while generating STEM employment.So in our value chain that starts from universities and reserve centers with the startup in an open innovation contract.

We will have really a strong opportunity being a leading partner in a new program that will arrive to an higher combat new platform in 2035, but covering a real system of system interoperable and in multi-domain.

[Valeria Ricciotti, Head, IR]

Thank you. Actually, it was the last question. So thank you all for having been with us this morning and for your attention. As usual, we are available for follow-ups.

[Alessandro Profumo, CFO]

Good. Many thanks.