Avio S.p.A. (AVIO) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Avio Full Year 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giulio Ranzo, CEO. Please go ahead, sir.

Good morning to you all. Thank you for joining the fiscal year '22 Avio results call. I hope you all have the presentation of our results. I will start from the highlights on Page 3. So mainly 2022 ended in the -- within the guidance, but with a better long-term visibility than we had anticipated. In fact, we reached the revised guidance that we gave in September after the sudden surge of the energy cost, if you may recall. And then in the last part of the year, we achieved a better-than-expected backlog into cash position which provides a much better long-term visibility than we had anticipated. Profits in 2022 were impacted by an unforeseeable surge in energy costs, which were driven by the Russia-Ukraine conflict as you very well know. In the course of the 2022 year, we also reached the successful Maiden Flight of Vega C and the successful testing of M10, the first liquid oxygen Methane engine in Europe that will equip Vega E by 2026. Unfortunately, towards the end of the year, we also suffered the loss of the Vega C second flight. We then performed work with the inquiry commission and defined return-to-flight plan which will have Vega coming back by the summer of '233 and Vega C coming back to flight by the end of the year. In the course of '22, further delays in the Ariane 6 program were announced by the European Space Agency. Now the latest information is that the Maiden Flight of Ariane 6 shall flip towards the end of 2023. At the same time, the positive aspect was an unexpected, to some extent, a higher-than-expected order intake in the defense business, which we don't talk about much, typically, but as a result of the overall situation, the defense business started to pick up more rapidly than expected. In the course of the year, we also completed the share buyback program that was voted at the previous shareholders' meeting. And for the time being, we have provided indication for a suspension of the dividend. On Page 4, we have a summary of the main results, which we compare here not only with the revised guidance we gave in September, but also with the original guidance we gave in March, when we announced the results of 2021, for you to be able to compare. So backlog reached a record level, above EUR 1 billion. The company never reached this level of net order backlog, was well ahead of the guidance which was unchanged between the initial and the revised one. And revenues also were slightly above our expectations. EBITDA reported and adjusted was affected, as we commented earlier by the sudden surge in the energy costs and therefore, reached EUR 21.4 million in terms of EBITDA reported and 27.8 in EBITDA adjustment. As a consequence of this, also the net income went down to EUR 1.3 million, which was within the revised guidance, but as we expected, obviously, impacted by the energy costs. The positive news on the backlog also came along with a much wealthier net financial position, which reached EUR 74 million which compared with an average consensus, I would say, between EUR 30 million and EUR 60 million and with EUR 57 million of last year. It's important to look at these results in light of the fact that inevitably 2022 had an impact on profit due to contingent situations, but the commercial activity went pretty well, providing substantial improvement on the visibility. So on Page 5, we illustrated the flight schedule for 2022 and 2023. As you know, in '22, we had 3 Ariane 5 flights and 2 Vega C flights, 1 of which unfortunately ended in failure in December. So what we expect to do in '23 is 2 more Ariane 5 flights, which would represent the end of the Ariane 5 program. And then the Ariane 6 Maiden Flight should be by the end of the year as per the announcement of the European Space Agency. For Vega and Vega C, we should have a Vega flight by the summer and then a Vega C flight by the end of the year. On Page 6, a quick recap of the analysis post payer of Vega C second mission. So the Independent Inquiry Commission announced the results on March 3. And their conclusions were the anomaly was caused by an over-erosion of the Zefiro 40 Carbon-Carbon nozzle throat insert due to a due to the inhomogeneity/weakness of the material. In the photograph here, you see what is the nozzle of the Zefiro 40. It's the part of the motor where all of the hot gases come out from the combustion chamber. It's a very delicate part of the rocket where hot gases are at more than 3,000 degrees, so there is a substantial stress on the material. And unfortunately, in the acceptance criteria that were defined to detect the defect were unable to properly detect this type of defect, although they were correctly applied, the defect was such that it was impossible to detect. However, the analysis showed that there is no weakness in the design of the Zefiro 40 nozzle, and this is a very important point because it means that what needs to be done is to fix the execution and all different materials, but not the design. Also, the launcher of system level behaved nominally. So the Safety System did what it was supposed to do and in the self-destruction mode when the trajectory went beyond the nominal. So this is also important because as you know, Vega C is a completely new launcher. It was very important to make sure that the Safety System would react as designed. So as a consequence of the above, the failure does not affect the Vega launcher, the previous version of the rocket, which is now later to fly by the summer. And in this way, we will try to fulfill the expectations of the customers to launch their satellites as early as we possibly can. The Vega C launcher will come back to flight by the end of the year once we introduce a new Carbon-Carbon material for the nozzle throat insert, which we had already ordered in early 2022 from a different source and in delivery exactly now by the end of the month. So what we will do between now and year-end flight is we will perform a number of analysis and a static firing test of Zefiro 40 to check the performance of the motor with this new Carbon-Carbon Material, which is, by the way, of the same nature that we already used in Zefiro 23 and Zefiro 9. So we know the material pretty well. So the return-to-flight plan defined by the Commission was then embraced by a European Space Agency announcement of a dedicated program to cover the costs. So the cost of the return-to-flight will be covered by a European Space Agency program with about EUR 30 million, which will be drawn from available resources already subscribed at the last European Space Agency Ministerial Conference. We believe that this amount is sufficient to perform all activities required for a safe return-to-flight. Nonetheless, we have accounted for any potential risk in the implementation of such plans within our provision for risk in our accounts. So I would say that the return-to-flight plan is well funded and supported and reasonably provisioned that we should be financially safe in its execution. On Page 7, so 2022 marked a very important strategic achievement for the company with the successful test of the first European liquid oxygen Methane engine, M10. No one else in Europe has successfully fired a Methane engine as we have done with 24 firings completed last year accumulating over 1,300 seconds of successful testing and knowledge. As a result of that, the Vega E program, the M10 engine will equip the Vega E program, since the Vega E program was fully funded at completion at the European Space Agency Ministerial Conference of '22. And we will now enter in 2023 on a new set of tests on an improved model of such engines. Why is this particularly lay around? First of all, because this is a new liquid propulsion technology, which is way more efficient than previous ones and less expensive in many ways. It requires smaller tanks and cheaper solutions. This engine is completely 3D printed. So it's much easier to manufacture and shall provide substantial improvement in performance. We are particularly satisfied to have been the first in Europe to successfully demonstrate this technology, and we are now eager to make progress on the Vega E program and on the development of such technology towards full fruition. On Page 8, we recap something that we talked about in early December, immediately after the European Space Agency Ministerial Conference. The Ministerial Conference for Italian, Italy and for launchers was particularly successful. Italy decided to invest over EUR 700 million in launchers, something that it had never done in the past. We reported here the funding from Italy on the European Space Agency launchers budget over the last 6 years. You see that the funding at Ministry of Conference '22 is almost 3x what it was in '23 -- in '16. So Italy has taken very seriously that this sector is strategic and has launched -- provided funding to launch a number of important initiatives some of the creation of Vega C to make sure that we can fly at a higher cadence. So rather than flying 3 to 4x a year, we shall be able within let's say, in the next couple of years to upgrade to a launch rate between 4 and 5. And then substantial funding was also provided for the Vega E program at completion. Plus together with France, we launched the Vega -- the P160 program, which is a performance upgrade of P120 to provide more performance to both Ariane and Vega. Then we also have the Space Rider program funding at completion and a new revolutionary program to start developing a reusable upper stage. So this is effectively the possibility for us to enter in the world of reusability with a very innovative approach, whereby the stage to be reused will be the second one, meaning the 1 that goes to orbit. A very challenging development but very, very worth engaging on. On Page 9, we report the extraordinary commercial success of Arianespace in the course of '22. Arianespace has reached sales for Vega and Vega C representing record levels. So at present, I believe there are something more or less in the order of magnitude of 17 launches already booked, something that we have never had in the history of the company. So a very long-term visibility where, as you can see, flights are booked pretty much all the way to 2027. Some of them are still under negotiations and prospects are identified. It is just a question of negotiating them and finalizing the deals, but they should count. So in line with principle, there could be the possibility to increase the flight rate. The actual possibility to do so with depend also on our ability to execute. But we must congratulate with Arianespace for a very, very successful commercial activity all across the European commission as a customer. You recall we announced the important Copernicus launches. But also with the Korean Space Agency, KARI for some export sales, I would say, and other customers, including the Italian government for the Italian Constellation. So a remarkable year for the sale of Vega and Vega C. On Page 10, we also report the progress on Ariane 6 as it was communicated by the European Space Agency and Ariane Group in their press briefing in October. So they are making progress on their final steps towards the Maiden Flight with the upper stage -- Vinci upper stage testing in Germany, the beginning of the so-called combined test in the main stage in French Guiana. At the same time, in October, as [indiscernible] towards the end of 2023 was announced, this does not surprise us. We recall very well that also for Vega C in the course of last year when we were about to go for the Maiden Flight, we had sort of last-minute slippages and issues. This is normal at the end of a development program. But hopefully, we should be towards the end of this effort. On Page 11, some very, very recent news. Yesterday, we finally signed the Next Generation EU projects with the Italian government which we had already announced partly last year and that we were expecting. But now this has taken shape with contracts at completion, in particular, 2 relevant contracts, one, to develop a new space transportation system completely powered by our liquid oxygen Methane technology. This is why the result of '22 is very important because it now allows us to enter into a new dimension of development for products of Next Generation to be able to capture the customer requirements way better. What we will do with this program is a couple of experimental launches, 1 in single-stage configuration and 1 in two-stage configuration. And this prototype, I would say, a rocket, this is a technological demonstrator, not yet a commercial product, a technological demonstrator but will feature substantially innovative technology, not only the liquid oxygen Methane engine, but also composite cryogenic tanks, simplified Avionics and non-pyro separation system. So if you want, it's a concentrated effort to put a lot of innovative technology in what hopefully will be a more efficient and competitive transportation system for the future. In parallel, we work on a second project, which was dubbed High Thrust Engine, which has the objective of developing a 60-tonne thrust class liquid oxygen Methane engine. So this is something 6x larger than what we have done so far but it uses pretty much the same technology. So it's a huge effort of scaling up the technology to a different size. It will have a very innovative thermodynamic cycle, which has the objective of delivering a particularly efficient performance in what we call the high specific impulse range. One other important news of '22 on Page 12, was the somewhat unexpected surge in the demand for defense products. First and foremost, on our relationship with MBDA, we had a substantial increase in the ASTER-30 Boosters demand. So we received production orders in excess of EUR 80 million in 2022, which is a very substantial number. So production rate for us will increase by more than a factor of 2 between 2022 and 2023. And there's probably more to come. This is also partly the result of what has happened around the world and the different scenario that has emerged in the course of 2022. But in parallel, we also had the beginning of the CAMM-ER Solid Rocket Motor, which we finished the development of in 2021, 2022, and now we will be entering in '23 in production mode with the first batch of production for the Italian Armed Forces. Even if this is only an initial production order more are expected to come also from export customers. So there is more orders coming, and this is very important because it will help us to diversify the business portfolio more towards defense than it was in the past. In parallel, we have also some other projects such as the Teseo Anti-Ship Missile system, for which we have a development contract and also some undisclosed activity in terms of research and development for a new training system, where we performed the -- we developed the propulsion systems for a European defense program. So a lot of stuff happening in the defense business, which I think is important to diversify the risk of the company and leverage the very same technology that represents the core of our knowledge, meaning the solid propulsion capability. So all in all, this is what was 2022, a mix of positive success on the commercial side and a contingent, a difficult situation with high energy prices, high inflation and unfortunately, the anomaly on the Vega flight. But in aggregate, I would say that the results allow us to look at the future with a better confidence than before. I would now pass the word to Alessandro Agosti, our CFO, to review in detail the financial results.

Yes. Thank you, Giulio, and good morning to all. Shall we move to Page 14. We start with talking about net order backlog. We reported first of all, all the backlog evolution over the last 4 years. Backlog has grown, as you can see, especially over the past 4 years, with the compound annual rate -- grow rate of 15%, which is consistent with grow rate of launches and market growth. At the '22 year-end order backlog reached the record amount of EUR 1.014 billion, exceeding guidance indication between EUR 670 million and EUR 920 million. The 2022 order intake amounted about EUR 500 million basically composed of Vega C production for about EUR 200 million. Development of Vega C adaptation and Vega E completion, as Giulio commented before for about EUR 80 million. P120 production development for about EUR 100 million. Net capital for ASTER Booster -- capital production for ASTER Booster and development of [indiscernible] for about EUR 50 million. It is important to underline that this order intake does not include Next Gen EU contract fund net as commented before by Giulio for export and entry of new material made in Italy for over EUR 385 million within the National Recovery and Resilience Plan. And also these sales does not included the effect of ESA November '22 Ministerial Conference, which will up for the 2023. Shall we move to Page 16. We reported the trend of our net revenue. In '22, net revenue amounted to EUR 367 million, 15% higher than previous year, and slightly higher than the '22 guidance range between EUR 330 million, EUR 350 million. Increase is basically diluted to both the development of Vega C Maiden Flight and development activities related to M10, Methane engine and Space Rider Program. Also, P120 development and production contributed to the growth of [indiscernible], partially compensated by [indiscernible]. In '22 -- it is important to underline that in 2022, Vega line of business accounted for 65% of total revenues and nearly 45% of revenue came from development activities. Let's move on Page 16 on results. The commercial increase in revenues maybe come from development of Vega C base price and also Vega E. Reported EBITDA of $21.4 million is in line with '22 guidance provided in September '22 between EUR 17 million and 35 million. But lower than prior year due to sharp increase in energy costs. EBITDA reported has been also affected by nonrecurring costs of EUR 6.4 million, mainly for extra cost incurred in the Maiden Flight of Vega C, and including EUR 3.2 million one-off positive contribution resulting from other revenue from settlement of Law 808/85 payables, extraordinarily provision for risks for Vega C return-to-flight activities following the sale in December '22. And for us, there is a execution Vega E programs. Law 808/15 concerns the public financial support for development of certain projects in the aerospace and defense sector. EBITDA results substantially reflected the dynamics of [indiscernible] with lower depreciation in the P80 motor. Net income of EUR 1.3 million in line with guidance released in September and lower compared to prior year primarily due to the factor mentionable related to EBITDA. Net income also show effect of an infrastructure, thanks to the contribution of the deferred tax assets [indiscernible] carry forward. Shall we move on the next page. We commented at the trend of gas price in 2022 and actually over the last 4 years. The increase in energy cost of particular gas as an impact on margin, particular for the cost of gas that is used for -- to produce the steam, which is then used in the industrial production processes, particular [indiscernible], and then for the energy cost for large size building. The price of the gas -- trend in price in the last 4 years. Gas price increased starting from the second semester of '21, reaching a peak in the central part of '22. We can note that the price of gas in particular increased 6x compared from the beginning of '21 to the end of '22. And talking about the average yearly price, you can see that the gas average price increased from EUR 46 per megawatt hour in '21 to EUR 123 per megawatt hour in 2022, about almost 3x results. Ongoing actions for what we are doing is following the partnership with Cogenio Enel X that we got last year. We have invested in new thermoelectric generation plant and an assessment is in progress with investments in photovoltaic and solar plant. Expected in the near future is the trend of decreasing gas price we can forecast from the Italian electricity market authority, expected at EUR 55 per megawatt for the year 2023. Shall we move on to the next page, 18. We reported the decrease of our nonrecurring costs. In '22, nonrecurring costs amounted to EUR 6.4 million maybe consisting of extra cost of Vega C, as we commented before, for Maiden Flight record in July '22. [indiscernible] plan, COVID-19 [indiscernible] employee protection and one-off positive contribution of EUR 3.2 million resulting from other revenue for settlement of Law 808/85 payables, extraordinary provisions for risks for Vega C return-to-flight, following the period of last December and for the execution of future programs. In the next page, 19, we reported the suit of -- suits and uses. Cash from new contracts contributed to a positive trend of structural negative working capital, increase in provisions of extraordinary accrual for risks for Vega C return-to-flight activities, net of ESA, the expected compensation and for the execution of future programs. Increase in fixed assets is mainly attributable to CapEx, basically for Vega cadence increase, infrastructure for liquid propulsion, IT licenses, improvement programs and other intangible assets. Change in increase is principally driven by dividend distribution last May '22 for EUR 4.5 million and completion of program of share buyback in '22 again for EUR 4.5 million and movement is completed by net income of 2022. On Page 20, we reported net cash position ratio. The chart shows a cash generation of about EUR 30 million on operating cash flow despite the sustained level of CapEx and cash absorption of about EUR 14 million of nonoperating cash flow, maybe for dividends, treasury shares and other minor movement. Finally, on Page 21, we reported the quarterly pattern of EBITDA and cash generation, which compared also in 2022 as it was in previous years, so the concentration of contribution in the last quarter of the year. I give back the floor to Giulio our outlook comments. Thank you.

Thank you, Alessandro. So following on Page 23, what we have done is a very simple comparison of what we have ahead of us in terms of challenges and opportunities. And I will start from reviewing the challenges. So first of all, we will face a slower-than-expected P120 production ramp-up probably in 2023 and 2024, as a result of our further slippage of the Ariane 6 program. This is inevitable because we -- if the program sleeps, we will have to manufacture less than we had expected in terms of production rate increase. And so this will unfortunately deal with the same fixed costs. So that's 1 challenge. The other challenge is that the Vega C return-to-flight in 2022 will temporarily slow down the production activity of Vega C, here doesn't get profitability as typo. I meant slow down the production activity of '23. But in essence, the slowdown in production activity also has to deal with the same level of fixed costs. And so will partly affect profitability. In the meantime, we have that energy prices are not yet stable, even if Alessandro was saying, prices in 2023 could be in the range of about EUR 50 per megawatt hour, this is still 5x what it was in 2020. So it's not exactly cheap. And we also have that inflation has a substantial volatility. In the course of the last 12 months, inflation moved from 2% to 10%, and that affects any nature of costs. So these are challenges that we kept in mind and by the way, Alessandro mentioned, we also provisioned partly for the risks associated to these challenges. But now when we look at opportunities, we had some extraordinary things ahead of us. First of all, the whole road map of Vega C improved, Vega E and Space Rider is not only defined now, but it's fully under the completion as a result of the recent Ministerial Conference of '22, which means that we have full visibility on our product improvements for the future to be able to deliver to customers more and more effective solutions for their needs. Then we have an unprecedented backlog for Vega, which we have never had. We are now in excess of 15 flights sold. More of them are coming soon, which means we are fully booked until the end of '27. And visibility is extremely important to be able to manage costs properly and to extract profitability. A similar situation is on Ariane 6 where Arianespace has secured substantial sales for Ariane 6 for the next several years. So now we await the Maiden Flight but we know that past the Maiden Flight, there is a huge number of flights that have been sold and that will fill the backlog. In the meantime, luckily, we also had an unexpected growth of the defense business. In the past, we have had significantly more defense business, I mean, 10 or 15 years ago. We are very happy to see that more defense business is coming to diversify the portfolio. And on top of it, we have a unique opportunity with the European recovery fund or the so-called PNRR in Italy to further strengthen the product and the technology base through new programs that will add visibility on the long term in terms of what type of products we can provide to customers to capture also new segments of the market, new customers with new, more effective solutions. So on balance, I would say that the medium-term opportunities are playing the short-term challenges because when we look at what the future will bring in the next 5 to 6 years, there is substantial growth coming from secured backlog and ability to manage costs in a way that we can attract profitability. So looking at 2023 on Page 24, we resolved to provide a cautious guidance on revenues and EBITDA and net income pretty much in continuing with what we had in 2023 as a result of what we said before, because we will have headwinds in terms of ability to carry out production activities because both on P120 and Vega production, we will face headwinds in production growth. But at the same time, we will work on new development projects for Vega E, for Space Rider, for Vega C plus, for new liquid propulsion programs. So the mix of activities will shift from production to development temporarily, I would say. And then in the years to come will swing back to production as we finally ramp up with Vega C and Ariane 6. Also on costs, we have to keep an eye on the story of inflation, which will inevitably impact any costs in any company. And this is why we resolved to partially provision for that to make sure we have a safe future. And then 1 surprise that we hope to be able to deliver to the market is a further substantial increase in net order backlog. If we succeed in doing that by some 20% with respect to the current net order backlog, we hope to be in the range of about EUR 1.2 billion by the end of 2023, we will have even more visibility than we have today on the future of cash flows and on the future expectation for earnings. So this is pretty much what we see in the short term for 2023. If we go to Page 25, we also try to imagine what is beyond 2023. So the increase in backlog that we will attain in the quarter of '23 and the strong cash position will support an expectation for a double-digit revenue growth in the period 2024 to 2027. So we do expect in that period, finally, we will be able to convert all of this backlog increase in revenue growth. In fact, the market demand, we have said it for months, if not for years, it's extraordinarily growing and doubling our underlying market is expected by the end of the decade. And you very well see that now in our backlog, which anticipates what will happen in our revenues in the years to come. In fact, the testimony of this is the fact that the commercial backlog for Vega, Ariane and the ASTER are completely full for the next few years. We also see that having secured the European Commission and the European Space Agency budget for the next few years, we provide for both Ariane and Vega development and production support activities are great certainty. So now on this project, we really have to focus on execution more than on commercial activities. And then as we said, the Next Generation EU project will unfold between now and 2026, as defined by the European Commission. So the next 4 years will be particularly relevant in terms of a peak in development activities. But I would say that the next new projects are strategic in nature because they will bring new technologies and products, all revolving around with propulsion technology, potentially reusable, which really helps us to open opportunities in new markets and new customers with hopefully more and more competitive products. And then the years beyond 2023 should see further opportunities coming in the defense business, in particular, in tactical propulsion, which is the core of what we do in defense. The geopolitical situation has evolved in a direction where substantial increase in defense budgets have been put in place pretty much everywhere in the world. So we do expect this business to grow. We will do our utmost to grow in this business, and we believe we can spend out our capabilities in solid propulsion much more effectively. Then we hope for an improved scenario on energy prices, it is now slightly better than last year. But we do still see challenging times for inflation. We don't know yet whether inflation will come back to a more normal range in the next few years. But of course, a 10% inflation rate is not a very sustainable 1 in the long term. We will do, of course, the utmost to counterbalance that. And as we have commented, we -- given the unprecedented surge in inflation, we have also provisioned relative to the cost of our projects for the future. But at the same time, we have to recognize that we are facing an unprecedented change in scenario, which has occurred in the course of the last 12 months that we need to keep in mind. So all in all, I would say we are confident on the future in spite of the short-term challenges, and we are now happy to receive any questions you may have. Thank you.

[Operator Instructions] The first question is from Martino De Ambroggi of Equita.

My main question is on the '23 guidance. If you could split what are the most important blocks in the bridge? I'm referring, number one, to the energy cost, if you could provide '22 impact? And what is embedded in your guidance for '23? Second, what is the estimated impact, if it's possible, even a rough figure, of the delay caused by the Vega C failure? Third, the impact of inflation, I'm trying to understand what's your ability to pass through and fourth, the R&D fiscal benefits. So what are -- I don't know if I forget something in the bridge for profitability in '23.

Thank you, Martino. I think we will respond together myself and Alessandro on these things. I will say a few things and then maybe Alessandro can complement. So first of all, on 2023, expectation for energy costs, we have shared, we expect what the Italian energy authority effect, which is in the range of EUR 50 to EUR 55 per megawatt hour. That is not bad, I would say, definitely better than last year. But again, it's 5x what it was in 2020. So we expect some relief versus 2022 but still not an ideal situation. So on this front, we had an impact last year from 2020. In '21, we had an impact of EUR 5 million versus 2020. This year, we have an impact in '22 versus '21 of another EUR 4 million. Hopefully, we will go back to more or less 2021 results with the release of a few million on energy, but we will not restore the condition of pre-COVID level selling. So that's 1 point. On the other side, meanwhile, the inflation has gone up to 10%, and this impacts pretty much any cost, okay? So on some of these costs, we will be able to pass this through the customers, but not entirely. Why? Because some of the contracts that we had signed before such an increase in inflation and a cap on inflation rate does not go beyond 3%, which at the time was considered a very high inflation rate. So unless we negotiate each and every contract, it's not so easy to adjust. And it's also somewhat commercially sensitive. That's why we don't want to speak too much detail about it, okay? But this is also the reason why we partially provision for that to make sure that we will have some room for conducting the right negotiations to incorporate that. It is also true that such a commercial success in particular on Vega came along with -- and some will say, fair prices, good prices for the future. So given that we had such an unprecedented demand, I would say Italian space was pretty good are capturing good produces. So such prices should be sufficient for us to extract the expected profit even at the current inflation rate. Now regarding the delays of Vega C, but the situation is very simple. In 2023, we were expected to have a production rate for Vega C but this year, we only have a production rate 1 for Vega C and 1 for Vega. So at a minimum, the production rate is cutting half. Why? Because, of course, before manufacturing new motors for Zefiro 40, we have to wait until we conduct the tests, we decide that everything is fine and so. So we have some idle time in production activities of the Zefiro 40 production and Zefiro 9 production can be the store. On the other side, we have the P120 suffers an additional year in delay of Ariane 6 with respect to what was announced last year. So we cannot continue to manufacture P120 and put on the stock because the stock is nearly full. And so we will manufacture as much as we possibly can until we can hold it within stock. So also on that front, we would likely have a lower production level of P120 compared to 2022. So that is why also on this front, lower production activities in our plants, we face the fact that we have nearly the same fixed cost. And so we will have some underabsorption of fixed costs. Then I will leave to you, Alessandro, maybe to comment something on the R&D tax benefit.

Yes. Thank you, Giulio. Martino, R&D tax credit [indiscernible] 2022 for about EUR 4 million in 2023. We were a little bit prudent in expectations. So we expected R&D tax credit in a range of EUR 2.5 million. But we should also consider that additional possible litigation could come from government initiative that are still in discussion. R&D tax benefit now include also not only the effect on development revenues but also incentives on industry for people. So this could add a further positive effect.

Okay. And just the second question is on CapEx. If you can provide an updated projections for CapEx?

For CapEx in '23 or '22?

No, no, '23 and going on.

So I think CapEx, we will have pretty much to maintain a substantial level of CapEx. And as a matter of fact, we believe that we shall do this to make sure that in 2024, '25, '26, we can sustain the growth that is already embedded in the backlog we have today. So we had an unexpected growth in the backlog, way beyond expectations. So now if we do not invest now, we will not be ready by 2024, '25, '26 to execute on the growth that we expect. So we expect a fairly high level of CapEx, EUR 35 million, up to potentially even EUR 40 million worth of CapEx. But we think it is crucial and by the way, it's possible given the cash position that we have today. So we have to use that cash to invest in CapEx to secure the growth of '24, '25, '26, '27 and so on. So I hope I answered your question.

Yes. So EUR 35 million, EUR 40 million for '23 and going on a similar amount?

Going on, we will see quite frankly, at some point, the upgrade for Vega C and Ariane 6 production means to them because at some point, this needs to turn into depreciation. So we don't expect to go with this high level of CapEx very much beyond '24, quite frankly. All these efforts in CapEx is devoted to securing the growth in flight rate of Ariane 6 and Vega C, to secure that we can do that with adequate production needs. So we've done [indiscernible] such a high level, very much beyond '24, I would say.

But with that Martino, in considering the high level of backlog. As you know, this backlog will unfold in revenues and capital payment in the next year. And in the next year, when we will have the big level of CapEx to sustain the future effect or the development of -- so this is balancing the cash position also in [indiscernible].

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

Three quick ones from me. The first 1 is, could you give us more color on how to think about overall group tax rate for 2023? The second one, apologies if I missed the number in your financial release, but could you give your overall number of shares at the end of the year? And then last question is, could you just quickly recap the amount of launches for just the Vega program in 2022?

So what was the last question, the amount of -- for Vega C??

The total number of launches. So not just Vega C, the whole Vega program.

For '23?

'22.

Okay. So let me start from this last question. In '22, we performed the Maiden Flight of Vega C and the second mission in December. So 2 Vega C missions, 1 of which is the anomaly. In terms of the own share we have today a stock of nearly 4% of the share capital, okay. And we have, as such, just recently completed the acquisition of stocks. And maybe Alessandro on the tax rate.

Yes. So the tax rate '23 is consistent with '22. As you know, we have a deferred tax asset, which at the end of the day, will compensate the current taxes this is when '22, but also expected in 2023. And profit before tax will approximate the net result.

[Operator Instructions] The next question is from Bruno Permutti of Intesa Sanpaolo.

I had a few questions. The first 1 concerns the -- if you can give us a little bit more granularity on the cost to return-to-flight of Vega C. If I had 1 understood, EUR 30 million will be sustained by the European Space Agency. And so how much will be the remaining costs to be sustained in 2023? And do you expect the provisions made in 2022, will completely cover the risks? So if you can give us more clarity on this point. The second question concerns the possible M&A, you were considering a few months ago, for above all, if I well remember, vertical integration, if you have something still in mind? And third point, if you can give us an indication of what could be the rate of consumption of the advanced payments you have in your hands? So more or less what could be a normalized net cash position we can expect by 2023 or even in the longer period, if it will be sometimes to normalize? And the last point was on the current backlog on Vega C. Do you see any possibility of alternative launches? So I mean, is there some of the customers that need to launch in a short period of time and so could be constrained to -- could be obliged to look for alternatives. And so if you see this kind of risk in the current backlog of Vega C?

Thank you, Bruno. So let's start from your first question. So the referring to flight costs, what is the nature of this cost just for you to grasp how these costs are born. So first of all, we have to conduct a static firing of Zefiro 40, which means that there is the cost of that Zefiro 40 plus the cost of the test, plus the cost of all the engineering that goes with it. Then we have the cost of retrofitting, some of the Zefiro 40 nozzles that we had already manufactured with the nozzle throat insert that we now need to substitute with the new ones. So we have to dismount those nozzles, take away the part that we can no longer use, substitute that part with the new Carbon-Carbon insert and all this process, of course, takes another part of the cost. Then we have some other additional analysis to be conducted on the remaining part of Carbon-Carbon inserts that we have in stock to further improve the understanding of the performance of the material that we sell, so that we have a full and deep understanding of this complex performance of the material. And so all of these will burn pretty much more or less EUR 30 million. These costs will be covered by the European Space Agency. And of course, we have at least this -- we have provisioned for risk because we don't know what is the outcome of probably everything goes well or not. So we have partially provisioned for risk according to accounting principles. So yes, with these the provisions we have put are adequate, and therefore, we should not have any risk of additional unforeseen costs, okay? If our estimates are right, we should not because we have on 1 side, the coverage from the gains is agency. On the other side, we have slightly provisioned for this so we should be fine without any further net negative effects. On the M&A, yes, we have a couple of small investments in pipeline for minority participations to some technology companies that we believe may add to our technological portfolio. So this will be minorities. However, with strategic agreements that will complement our technology portfolio. So this will be only a few millions. Still, it would be a very strategic element in the context of the development that we have to carry out in the next few years. So working in strong partnership with some technology companies and start-ups will help us a great deal to implement the new environment projects. Now -- on -- I will skip the third question and leave it to Alessandro, but on the story of alternate launches for Vega C for our customers. Well, of course, I am state will do its best to keep all the customers. You are right that some of them had an urgency to fly. At the same time, there are not very many alternatives because, as you know, Soyuz is no longer in operation. Ariane will not be in operation in '23 and likely in '24 if we'll only have performed the main flight. So I don't know. And Falcon 9 is apparently full, in terms of launches already booked. So there are not very many alternatives in the short term. As a result of that, we will do the best to keep them, and I do not anticipate many, many cancellations. And at the same time, I have to tell you there is such a continuing demand growth in spite of all that happened that the last thing I'm worried about is the backlog. I'm actually worried that the backlog is big compared to our ability to execute. And this leads me to the point that Alessandro will expand on, the necessity to invest in CapEx to secure production rate capability. Maybe, Alessandro, you can comment on the consumption of cash?

Yes. Thank you, Giulio. Yes, record level of backlog, as we discussed before, with above EUR 1 billion with unfolding contracts and advances, which will maintain working capital structural negative in the next year. In terms of net cash position, considering the big level of CapEx expected discussed, we, however, would foresee like lower level of net financial position compared to again the record at year-end of EUR 74 million. But even in a sustained positive level, let's say, we will have like a slightly low level in the next year '23 or a couple of years, but then we will recover as that works.

[Operator Instructions] Gentlemen, there no more questions registered at this time. Excuse me, we have another question, a follow-up from Martino De Ambroggi of Equita.

Yes. My follow-up is on the defense business. Could you provide a long-term projection and maybe a very rough indication on the profitability for this business? And still on this during your speech, Giulio, you mentioned that export contracts could come. So when do you expect this could materialize? And should be material or just a minor contribution to this business? And 1 more question, just -- this is just a housekeeping question, but you already signed a EUR 280 million yesterday. You are projecting EUR 80 million, EUR 100 million of tactical propulsion system orders in the first half this year. So that means that the Euro Space -- the European Space Agency, EUR 700-plus million will be split half in '23 and half in '24, '25, just to match the projection of your growth in order backlog?

So first of all, on the defense business, yes, we do expect the growth in the past few years, we have had annual revenues on this business of order minus EUR 10 million. I mean something that was even below the ratio screen in a way. Now we expect this number to grow substantially to maybe EUR 30 million, EUR 35 million per year, which is substantially more than in the past to be able to sustain this level for the next 3 to 4 years at least. And we will continue to have orders in the course of 2023 and some of the export with [indiscernible] at the beginning of '24. This we don't know. It depends on our customer also what they succeed on doing in terms of the procurement cycle. Today, the situation is quite foggy, as you can imagine, because the conflict has created a situation where there is a lot of interest to rapidly grow this orders than passing from intentions to signature takes a little bit of time, but there is no doubt that in the next 3 to 4 years backlog will grow. And revenue will grow too. So also on this front, we will confront ourselves in 2023 with a production capacity upgrade for our tactical missile solid rocket motor manufacturing activities, most of which will be supported by the customers and part of which will be represented by some of our CapEx because, of course, the customer pays for a certain part, but another part we have to invest on our own. And this is the reason why we are keeping quite some CapEx. So I don't have a full -- it is difficult to do a full forecast of the revenues because these things are just materialized over the last few months and weeks. So we will update you maybe in the next few months between now and the summer, what the situation on defense looks like when we have a better picture. But yes, we do anticipate at least until 2026 a significantly higher level of revenues compared to 2022. In terms of how the Ministerial Conference budget will unfold, perhaps your expectation is that is number one, I mean, house this year out next year, more or less, I believe it's reasonable. There may be a little tail in 2025. But then at the end of '25, we will have yet another Ministerial Conference. So I would expect most of it to be captured in '23 and '24 and a minor portion may be coming towards beginning of '25. That said, I expect the order intake for 2023 and 2024 to be quite substantial. So on average, even above the level of revenues. So this means that the net order backlog will continue to grow in '23 and in '24. And hopefully, in 2025 we will start to consume that because we will hopefully have converted that into revenues pretty much.

Okay. And the defense, if it's possible to have a rough idea of the profitability? Is it accretive? Well, probably not compared to the current one, which is quite depressed because of the well-known reasons. But considering the normal 10% EBITDA, if not more, that you had in the past, the defense business is accretive in line dilutive?

So considering that we have a fairly concentrated customer base that will refrain from telling you exactly what we expect on the business. But the profitability on this project is pretty good. So I think it is accretive. The problem is it's still relatively small compared to the total revenue pool. So unless we have in the next couple of years, the next year or in the next 1.5 years, a substantial, as you call it a material change in orders, meaning that we have all of a sudden and unexpected very material increase in backlog, this is, yes, accretive but not substantial in terms of the overall profitability. However, the trend is very, very interesting because if we proceed with the expectations we have today, now this starts to be an interesting component of our EBITDA, I would say.

[Operator Instructions] We don't have any other questions registered at this time. Do you want to add any further comments?

Thank you very much to you all. And I think for now, we have no further news, we will have the shareholders meeting by the end of April -- April 28. So we anticipate no more news in particular between now and then. We will keep you informed on the progress of other projects, in particular for the Next Generation EU projects, which are set to come to conclusion very soon. And if there are any further updates on customer orders for Vega C, we will obviously keep you informed. Other than that, I would say, in the next few weeks and months are very much down to execution. So we expect between now and, let's say, May, end of May, beginning of June to perform our tests on Zefiro 40 and then sometime by the time if we get ready on the part with Vega, and we will provide new updates on this project. And then, most probably, beginning of May we will have first quarter results, even though, as you know, the first quarter results are not very challenging of what happened in the course of the year. Thank you.

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