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 First Half 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Nevio Quattrin of Investor Relations.

Good morning. Good morning, everyone, and welcome to First Half 2024 Results Conference Call of Avio. I'm here connected from our headquarters in Colleferro together with Mr. Giulio Ranzo, CEO of the company; and Mr. Alessandro Agosti, CFO of Avio. In a moment, we will go through the presentation we just released on our website. As usual, Giulio will go through the highlights and the events of the semester, a pretty important one, I would say. And then Alessandro will go through the financial results. After that, we will open the Q&A session. Thank you for your attention, and I leave the floor to Giulio.

Thank you, Nevio. Good morning to you all. Thank you for joining the call. Starting from this call, I believe we have a new conference calling system. I hope this is convenient for you. You will let us know if everything works well, and we will try to optimize it. So I would, in the interest of time, start from Page 4, which summarizes a bit the highlights of what has happened in the last period, since we last talked. So first and foremost, we very recently had the last flight of the Vega launcher, which was successfully completed, delivering Sentinel-2C to orbit. That's very important for us, an emotional flight, the end of a program where we have engaged for 12 years in a row. So made lots of successes and some challenges, but it was for us extremely important, nothing is better than a very satisfied customer. The launch went extremely well. So we are very happy about that. On the Vega C developments, we are on track to fly Vega C by the end of the year. As we have reported in May, we conducted Zefiro 40 static firing test successfully, which paves the road for a flight of Vega C before the end of the year. Now beginning of October, we will conduct another static firing test, a bit of a repetition, let's say, of the test we did in May for further assurance, but all is on track in terms of planning for a Vega C flight before the end of the year. And it will be another Sentinel satellite, Sentinel-1C, again, for the European Commission. Since July, Avio has also been authorized to conduct Vega commercial operations, which have been kicked off very recently. I will come back to that. And to then become launch operator by the end of next year. We will see what these wordings mean and what this is all about again in a few minutes. One other very important milestone this semester was the successful maiden flight of Ariane 6, long awaited. It was performed very successfully, as you already know. We had a lot of our technology on board, the P120 boosters, the turbopumps on the liquid propulsion engines. So all these technologies work perfectly, and therefore, we are very, very proud of that. And this definitely paves the road for a rapid ramp-up of the Ariane 6 flights in the months to come. Then we have reported to you towards the end of July, some important news regarding our defense business, where our backlog was significantly increased. And in particular, with the signature of 2 new contracts for U.S. customers, which represents definitely a novelty in what we're doing and is the result of our strategy we have put in place over the last 2 years, a significant effort to enter the U.S. defense market. We reported success with signing a contract with Raytheon, the world's largest missile manufacturer, and with the U.S. Army. So that is a very important development, I believe, in our story. I didn't comment much on the financial results. Alessandro will take you over that. I think they are well within our expectations. Probably the revenues were a little bit ahead of our expectations, some of the other numbers, but give or take, we are within what we expected and what we had anticipated to you, out of which we essentially confirm the guidance we had provided you for 2024, which calls for some growth in the revenues and a bit of growth also in the profits. So if I move to Page 5, as I said before, VV24 was the last Vega flight. We will then proceed with Vega C only. So the end of the Vega C -- the Vega experience was an important milestone for us. The deployment of Sentinel-2C, as always, was done with an incredible orbital injection accuracy, as reported by the customer, who was extremely satisfied about this result. And we are quite proud of that. In 12 years, I remember attending the maiden flight of Vega back in 2012. So we have lived this long life with 22 launches. We have launched over 120 satellites on average with about 800 kilograms in mass. So this system was dedicated to small satellites to lower Earth orbit. I hope you can still hear us. Can we have a confirmation that you can hear us because we no longer see the screen?

I confirm, yes, we can hear you.

Can I ask the operator to let us know if everything is working properly?

Yes, I confirm, we can hear you and see you. Yes.

Nevio, can you ask the operator maybe to give us a feedback if everything is working?

Can you hear us?

Yes, I confirm, I can hear you and see the presentation and your -- yes.

I just lost the connection. All right, fine. So some pages here, some photos of the last flight and the payload and so on. I would say this is an important legacy that we will leverage for the future because, as I said, our history with Vega was of several successes, but also challenges, as we know. And I believe this is important because all in all, we learned a lot and consolidated an experience base that will be extremely important for the future of Vega C. In fact, if you go to Page 6, the Vega launcher in 12 years was a mix of successes and first times, I would say, because except from launching lots of earth observation satellites, a bit of a rudimentary work for Vega C -- for Vega. We did a number of unique missions, I believe. For example, with VV04, we launched our IXV, the suborbital vehicle, which reentered atmosphere and landed in the middle of the China Sea. Its evolution Space Rider will fly in the coming years, would be launch and reentry -- reusable system that will land on an airstrip. So Vega enabled to create also new applications that, quite frankly, in Europe didn't exist. And had we not had Vega, we would have not had this application. So I believe this marked a very important landmark in our history. Also, the launch of LISA Pathfinder was important. This was a spacecraft launch to the first Lagrange point, an exploration mission, very important for the European Space Agency and very important for us also from a technical standpoint. In 2020, with VV16, we also launched the first so-called Small Spacecraft Mission Service. So the first in Europe, we have launched 53 satellites in just 1 launch, deployed to 2 different orbital planes. So I think all in all, this demonstrated the flexibility of the system to perform a number of tasks that formerly nobody else had ever performed. And on average, the reliability over the first 22 missions was very much comparable to that of the other systems, which we typically compare in the first -- in the same range of the first flight. So if you take the very first 22 missions of each of these systems, pretty much they had the same success rate. So a very important chapter in our history. Now moving on to Page 7. Let's look at what will happen in the future. We reported, as I said, success for the hot firing test of Zefiro 40 in May, where we have replaced in our nozzle assembly, the carbon-carbon insert using a European supplier. And the motor worked perfectly. So we were quite satisfied about that. Now we are conducting another identical test. The European Space Agency required us to perform a second identical test to just demonstrate the ability of repetitiveness, so to obtain the same results out of the test article. I think this is an important and cautionary approach to quality assurance, which is justified by the challenges we have faced and to assure the customers even more on the safety of flight. So this will be at the beginning of October, the QM4 test, then we will report to you what the results would be. On Page 8, a short summary of the success for the Ariane 6 maiden flight, which was performed on the 9th of July. I attended the flight. It was emotional as well this year to see it. I know it was long waited. The development took longer than expected. But the systems and the technologies we provide performed perfectly, not only the P120 motors, which, of course, we had already flown on Vega C, and they had worked perfectly, but they also worked perfectly on Ariane 6 and of which we are glad, but also our turbopump system is on the main engine systems for the liquid propulsion part of Ariane 6 that worked very well. So that's good to hear. And again, paves the road for what we will have next. We are preparing now the larger version of the P120 boosters, the so-called P160, which would be more powerful and will help Ariane 6 increase performance, in particular, to perform against the Amazon Kuiper contract to launch them to space. So we are quite satisfied with that. So if I go to Page 9, this is a page we had presented to you earlier this year with what we had planned to do in the course of '24 and for '25. And essentially, there's nothing to report here. We are executing as expected. Ariane 6 maiden flight, done; first firing test of Zefiro 40, done; and also VV24, done. Now we are preparing for the next firing test, as we said, of Zefiro 40 and Vega C flight by the end of the year. There will probably be another Ariane 6 flight. I don't know yet what the plan is. This will be reported by Arianespace. But it's clear that the work we are doing both on Ariane and Vega this year is to prepare a higher flight rate next year for both systems to fulfill the expectation of the customers. On Page 10, some of the evolution in the responsibilities for the Vega launcher. You know the Vega launcher was marketed and operated by Arianespace. Since the beginning of July, the European Space Agency has awarded Avio the commercial rights over the sale of the Vega launcher around the world. And therefore, we have started to be commercial operation. In fact, on this page, I forgot to mention some of the very latest developments. As of this morning, the Head of the Vega business unit within Arianespace has joined Avio as Chief Commercial Officer. So it's an interesting comeback. It's a great manager, Marino Fragnito, who has worked on Vega for so many years. He will now continue his work as Avio. And that's important because we will build our commercial team by leveraging all of his experience and knowledge and network and so on. And this will grant also continuity in the relationship with customers and know-how. Arianespace will continue to be the -- support the launch operator. The launch operator in particular means taking care for the launch safety submission to finesse and to hold the responsibility and the liability during flight. Then we'll continue to do so for the next 4 flights until the end of 2025. In the meantime, it is expected that Avio shall take the responsibility as launch operator beginning from VV30, so immediately after the end of 2025. We are working on this path. We do have the competency to do this. We are optimizing our teams. We will run commercial operations from the city of Paris, where we have a representative office and we are building a dedicated team for these activities, which will be led by Marino Fragnito, Chief Commercial Officer. And we will tie together with Arianespace to grant continuity and a smooth transition of roles. But this is definitely an important change in what we do in Europe for sure. On Page 11, some updates on the projects supported by the European NextGen EU Funds. As you know, we are working on 4 main technology development projects in addition to what we do for the European Space Agency. In particular, on the next -- on the left side of the slide, we have 2 important projects to accelerate the maturation of the liquid oxygen-methane technology. One is dedicated to prepare an in-flight demonstrator using our M10 liquid oxygen-methane engine. And the second one is to create a much larger liquid oxygen-methane engine with 60 tons of thrust using pretty much a similar technology as the one that we have developed for M10. On this, we are now, of course, at an intermediate stage. We have conducted the first test on some of the subassemblies. We are at the midpoint in the development of this project, but they are quite promising, and they are essentially consolidating our knowledge in liquid propulsion, which is definitely less developed than the knowledge on solid propulsion, but paves the road for potential future applications on our rockets for the next decade or so. On the right side of the chart insert, we have the other 2 projects funded by the NextGen EU fund, all of which have to do with applications. So first and foremost, we are developing the so-called multipurpose green engine, which is an orbital engine. So it's an engine that we use, for example, today in Vega C on our upper stage to perform orbital operations. And we are developing our own version of that to prepare for even more sophisticated orbital operations. On that, I have to report that we have just in the last few days assembled the first prototype of such engine, and we have finished the commissioning of the test range for this engine, so we will be able to test it on ground. And this is extremely important because in addition to consolidating the liquid oxygen-methane technology now, we will also consolidate that of orbital propulsion, which we have had experience on, but not as much, again, as in solid propulsion. So the intent, as you can very well see of the use of the NexGen EU funds is to consolidate capabilities and competencies across an array of technologies that we need to have available to have new products for the next decade. And then last -- the last project in partnership with Thales Alenia is to create an in-orbit servicing module to offer customers opportunity to conduct missions such as debris removal from space or other in-orbit service missions such as refueling or things like that. So it will be a demonstration project, not yet a service, but extremely important to expand once again the array of applications that we already provide today. Switching gears on Page 12, I'd like to shed a bit more light on what we're doing in the U.S. that we have touched upon in the past but not as much. And the nature of the business we do in the U.S., in particular, for defense, unfortunately, does not allow for full disclosure of every detail of every contract, but one important point is we have put in place our U.S. subsidiary, Avio USA, which is our wholly owned subsidiary headquartered in Arlington, Virginia. We have structured this company in the course of the last 2 years to operate in compliance with the U.S. security and export-control regulation, which is a very complex and structured environment, as you may imagine, to be able to work with U.S. defense. And it is today governed by a U.S.-led Board of Directors. In particular, I'm very proud to have attracted the interest of 2 extremely experienced people to lead this effort, Marty Bollinger as Chairman of the Board. He is a retired senior partner from Booz Allen Hamilton, a well-known defense consulting firm. He has an extensive experience in aerospace and defense and is today a lecturer to Navy Officers. And as CEO, we have been able to hire Jim Syring. Jim Syring Is probably one of the most experienced persons in the U.S. in missile defense. He has long been with the U.S. Navy. He is a retired U.S. Navy Vice Admiral and was the former Director of the Missile Defense Agency in the U.S. He has also been the former President of USAA, which is an insurance company. So an extremely experienced person in the defense field and with lots, obviously, of credibility. And because the effort we are placing in the U.S. is challenging, we needed top players, and I'm very glad to report we have them. So around these managers, we are building, of course, a team. We now have some already in place, who are working on different sides, on commercial side, contractual, operations, compliance, that's a lot of compliance to be done in the U.S. And so they are working at full steam on our new work. In particular, on Page 13, as you may recall, in July, we had reported to have signed these 2 important contracts, one with Raytheon and one with the U.S. Army. These two contracts have nothing to do with each other. We just happened to announce them in parallel, but they are completely disconnected and they refer to different systems. This is as much as we were allowed to communicate for security reasons. So the restriction in communication is very much governed by the requirements of security. So it's not us not willing to share more, but we actually cannot. But it's important to know that, in particular, for Raytheon, we agreed to progress on the development of a solid rocket motor for defense application, which is intended to transition as rapidly as we can towards production of solid rocket motors to support the U.S. Defense missile industry. So we are very glad about that because Raytheon is the world's largest manufacturer, as I said. And given the current market situation, there is a great surge in demand, which significantly goes beyond what the current supply base can provide. And so this hopefully provides Raytheon the opportunity to match some of this gap and us to enter this market, which is extremely attractive for us given the match between our competencies and the needs they have in the U.S. It is also an honor for us to work directly for U.S. Army. That is a testimony of the fact that we had a trust from different types of customer, even directly from the U.S. armed forces. And believe me, this is not very common. So we have been asked to work on fast prototyping, again, of solid rocket motor, which is a bit of our bread-and-butter application for surface-to-air missile applications. And so the intent is to qualify this propulsion systems on a design-to-manufacturing approach with the idea to transition towards production as rapidly as possible. Typically, in this system, the transition from qualification -- I mean, from design, conception, qualification to production is not very fast. So you are not talking about months, you are talking about years, because to qualify a system, whether the system is existing or new, it takes years to conduct tests on ground, to demonstrate that the system works. And it's perfectly -- can be repeated in production and so on, it takes years. So we are trying to compress this time as much as we can, but we need to respect very stringent technical requirements. So -- but I'm very glad we are engaged with these very relevant customers on this task. And I think this is the beginning of our U.S. opportunity. It's not all. We have been partner. There is a lot more. We are working on both on the side of commercial opportunities and operational activities in the U.S., but it's a beginning of a very promising story, I believe. So, in fact, on Page 14, I want to come back to a slide we had presented earlier this year, but that we have updated now. On the left side, you see the speed at which the order backlog in defense is growing. And that is -- quite frankly, it speaks for itself. The market is demanding a lot more propulsion system for missiles than we had anticipated. And therefore, if you roll out such backlog in the years to come, you see that the production volumes of missiles we have today, which tend to grow quite rapidly, probably at a pace of 20%. Here, we are talking about the volumes of production, which is probably not indicative of entirely of the revenues and the profits, but this we cannot communicate. But that gives you an idea of the growth we expect in the next few years, which is already in our backlog. Now the announcement of these U.S. contracts has the effect of not only expanding the expectation for volume production in the next 5 years, that's the expectation to extend it significantly by another 5 or 10 years at least. So the time horizon at which we are now measuring our expectations for the future is definitely a decade from now given the fact that in the next few years we will spend time to qualify the systems, meaning to make them fully compliant for production, and then, we will follow up with production. But this means that the expectation in a decade time is a multiple of the volumes we are currently crunching, for which we are prepared, we -- in terms of capital expenditure, also in agreement with customers and to make sure we have the right skills to do this. So I think this adds to the space business, which we continue with the promising prospects that we have highlighted to you. But this adds on top probably a growth path that was not anticipated in earlier years. We will continue to report on that as we have news, but it's important that we frame this correctly. So I will now move to pass the word to Alessandro to give you more color on the first half financials.

Thank you, Giulio. Good morning, everybody. Let's move to Page 16. We are talking about order backlog. We reported order backlog evolution over the last 5 years, which shows a compound annual growth rate of almost 20%. Backlog of EUR 1.4 billion at the end of the first semester is the highest of the company history. It's about 4x the yearly revenue, thus providing a strong visibility in the medium term. In the first half, order intake amounted to approximately EUR 200 million, half of them related to defense propulsion activity, basically for ASTER missile, intake for our -- intakes for P120/P160 production accounted for EUR 80 million. Also in view of the production ramp-up following the successful maiden flight of Ariane 6 in July, as commented before by Giulio. The remaining orders acquired in the semester were for Vega E development. Following the recent growth in defense order intake, recorded also in '23, we had EUR 120 million of intake. Defense propulsion has almost reached 25% of the total order backlog at the end of the first quarter. Defense backlog is higher than Ariane backlog, waiting for the ramp-up following the successful maiden flight of Ariane 6 in July. And more than half of the Vega backlog waiting for the ramp-up following the return to flight of Vega C confirmed in Q4 '24. 60% of backlog is for production activity and 40% is for development activities. Shall we move to Page 17? We reported the revenues of the half year. Revenue increased by 15% compared to the first half of previous year. Such increase has been principally driven by defense propulsion activities and technology development projects funded by NexGen EU funds. Defense propulsion revenue were almost double than in first half of '23 and accounted for 17% of the revenue of the first half of '24. 50% of revenue comes from production activity and 50% from development activities. Revenue from development activity grew almost 40% compared to previous semester, basically, for the incidence of technology development projects. Production revenues increased by almost 20%. On Page 18, we reported the main financials. The chart recorded the main financial results for the first half of '24 compared to the first half of '23. Increase of about -- a significant increase in revenues of about 15% had been principally driven, as commented before, by defense propulsion production activity and technology development projects funded by NexGen EU funds. EBITDA adjusted is in line with the first half of '23, principally as a result of contribution of higher revenue from the defense propulsion and technology development project, compensated by the slowdown in production of P120 and P160 engines, pending in the semester the successful maiden flight of Ariane 6 at the beginning of July '24 and the slowdown in production of Vega C launcher pending the return to flight now confirmed in the first quarter of '24. Nonrecurring costs were significantly lower than the first half of '23 for -- basically for lower activities and cost for Vega C return-to-flight, as we are now closer to end of the year when the flight is scheduled, and most of the activity were implemented in the first half of '23. This resulted in a positive effect with EBITDA reporting a significant increase compared to the first half of '23. EBIT showed a positive trend, driven basically by EBITDA, but also by lower depreciation following the review of economic useful lives of certain production assets in the second half of '23 in connection with the phase-out of Ariane 6 and phase-in of Ariane 6 -- phase-out of Ariane 5 and phase-in of Ariane 6 and in parallel with the phase-out of Vega and phase-in of Vega C. Shall we move to Page 19? We reported the sources and uses of the Avio. We basically confirm a structurally negative working capital for advance from order intakes. In the first half of '24, where the typical seasonal trend, driven by the cyclical slowdown of advances from customers to subcontractors and suppliers. In addition, the procurement of some strategic long lead items of Vega C continued during the half year to support future production volume expected. Provision decrease in the half year mainly related to the utilization in the first half of -- to offset the cost of Vega C return-to-flight, which were previously provided before in previous years. Fixed assets are substantially in line with the end of '23, as a result of CapEx and equivalent depreciation in the first semester. CapEx amounted to EUR 8 million in the half year that, basically, included increase in -- for Vega cadence technology development project, innovation project, basically artificial intelligence and other extraordinary maintenance. Net cash position. The decrease in net cash position in the half year is mainly due to the commented -- the changes brought in working capital that we commented before. We reported on Page 20, the bridge of the net financial position between December '23 and June '24. What you can see is the positive contribution of EBITDA reported of EUR 8 million, the seasonal decrease in working capital, which absorbed more than EUR 40 million together with the dividend distributed in the first half of EUR 6 million and a CapEx of about EUR 8 million. On Page 21, we reported the quarterly pattern of EBITDA and cash generation, which confirmed the concentration of the contribution towards the last quarter of the -- particularly, you can see that the net cash position was higher in half year '23. And that's the reason why we slowed down in the second part of '24 -- in the second part of '23 and the first half of '24 the slowdown to subcontractors and suppliers. Finally, on Page 22, we reported the guidance. As Giulio commented before, we confirm the guidance that we provided in the market at the beginning of the year. Order backlog is between EUR 1.5 billion and EUR 1.6 billion, with a growth of between 10% to 15% versus '23. Thanks to new orders intake basically from defense propulsion as discussed before. Backlog is expected to start to roll out in the second half of the year. Revenues are expected between EUR 370 million and EUR 390 million, with a 10% growth versus '23. Growth is driven basically in the defense propulsion activities and technology development projects. EBITDA reported is expected between EUR 21 million and EUR 26 million, with again a growth of 10% versus '23, with an implied nonrecurring cost of about EUR 7 million, which led to a EUR 28 million to EUR 33 million of EBITDA adjusted. Net income final is expected between EUR 7 million and EUR 10 million with a growth between 10% and 20% versus '23 to confirm also a distribution of dividends also as we made in -- with the approval of '23 accounts. I have finished the presentation on the finance. I'll leave back the floor to Nevio.

Thank you, Giulio. Thank you very much, Alessandro. We are now more than happy to answer any questions you may have.

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

3 questions. I know there are restrictions not to disclose what I'm asking you, but a question on the U.S. contracts. First of all you are talking about it takes years before getting the qualification. Just if you help us to figure out -- we are talking about 3, 4 years, very, very roughly. The second is on the potential upside from third and fourth client if this is an opportunity going ahead. Maybe you are already negotiating, I don't know. Third, if I remember correctly, EUR 7 million of nonrecurring costs this year are mainly related to the development of the U.S. business. I was wondering if this will continue to be present also next year or the existing contracts in some ways will help to reduce the amount of efforts required for this business in the U.S. starting from next year.

Okay, Martino, I will try to answer your questions, then if needed, Alessandro will follow up. So first of all, to be clear on the schedule, any new product, and you have seen that, for example, when we developed the CAMM-ER missile, goes typically from engineering review, like critical design review and so on, to qualification. What does it mean qualification? Qualification is a milestone you achieve with the customer where you demonstrated not only you can manufacture a certain product, but you can do it at a certain volume. And then once you have done it, all these parts look alike and perform identically. And you do that by conducting a number of firing tests and so on. So besides your capability, there is a number of things you need to do. And it's the same story for space, before flying something you need to perform ground tests and so on. Developing something like CAMM-ER has taken us give or take 5 years, okay, developing -- in developing and qualifying and so on. Now these products will likely take less, but I doubt they will take less than 3 years. So in order to enter production, it will be anywhere between 3 to 4 years to enter production at full steam, so to speak, because even to carry out qualification, we will have to manufacture a lot of parts, a lot of parts. The number of tests we have to perform is in the number of the tens of tests, not in the units. So we will start, allow me to say, low rate production for the purpose of conducting qualification. And give or take, this may take 3 -- between 3 and 4 years, and then, we will go at full steam with production. Of course, the demand from the customer would be that we start production tomorrow morning, but at the same time, we have a requirement we need to fulfill. And this is also in the interest of their end-customer because typically, the systems end up with the U.S. Armed Forces, and the user wants to be assured that the product is perfectly functioned. So that's pretty much the time spend we have to expect. But anyway, in this period of time, qualification is well paid for and accrues revenues and profits as well, not as much as full-fledged production, but it will contribute to revenues and profits as well, of course. Now new customers, new contracts, yes, of course, there are also other customers than Raytheon and U.S. Army in the U.S., as you may well understand. And we are working with some of them to potentially do work for them as well. Now we will see when these things mature. It is typically not a slow process. To reach this success with Raytheon and U.S. Army, it has taken us, give or take, 2.5 years' worth of work. So I have to say at the beginning, the effort was significantly higher because we did not have yet a U.S. subsidiary fully equipped, as we said before, and structured to comply with U.S. regulation. Now that we have this, it will probably be faster, okay? But it doesn't mean it will be easy, so -- but we are working hard to get that. And I think there are additional opportunities, and they are sizable. Keep in mind that the market in the U.S. is huge. It's probably 15x what it is in the U.S., but at the same time -- in Europe, but at the same time, it's also very competitive. So we are not alone in this pursuit, okay? And that is also important to properly understand the meaning of these successes because it means we have been better than others if we have gained the trust of U.S. Army and Raytheon. Regarding the nonrecurring costs, you're right, most of this was until now to support the U.S. team. And then we will transition to remove them from nonrecurring costs and to actually be an expense within the new U.S. contracts because, of course, the U.S. team generates costs and so on, and part of this will be paid for by the U.S. customer contracts, so we will transition in that role. But of course, there has been a very strong initial effort to conduct commercial activities and all of the huge work in compliance to structure the company in a way that can be fully functional to work in the U.S. defense system. So -- in fact, we hope by the end of the year to start to reduce this amount of nonrecurring costs. As you can see now in the first half, they were less than half than what we had expected for the first half. So I'm not anticipating too much saving, but we could have a little bit of tailwind on that as we transition towards normal operations.

The next question is from Andrea Bonfa of Banca Akros.

There is a return of voice in the conference, but I will try to speak slowly if that helps. I mean most of -- some of my questions have been already answered, but I would like to, Giulio, better understand. Looking at the loan schedule for '24, '25 of both the Ariane and the Vega, can we create kind of rule of thumb profitability rule by which for every launch you will make XYZ incremental EBITDA? Or how does it work? I mean you've got 6 launches expected for the Ariane and 4 for the Vega. So let's cross fingers everything goes according to schedule. For every launch, you make EUR 1 million, EUR 2 million of EBITDA. Or how does that work?

A very difficult question, Andrea, for a number of reasons. First of all, 2025 for Vega will be a transition year, in which part of the work that was formerly done by Arianespace will be done by us, part of it will remain with Arianespace. We are returning to flight with Vega C, and then, we need to move to a very rapid flight rate 4 in '25. We will have a mix of launches, some of which are single payload, some of which are dual payload. We need to prepare by the end of '25 to also be operator, so it will tend to be not yet steady state, allow me to say. But in the medium term, I guess, the target would be that in discussions with U.S. analysts, we could somehow point you at a way that you can expect an average profitability from each flight. The reality of things, as always, is that if I take 10 flights, there would be some flights that are more profitable and some flights that are less profitable. And we typically tend to treat them as one project, maybe that comprises something like 10 launches and so on, because this is also the way we contract with our subcontractors. So -- if we have one flight that was a little bit at a loss and one that was at a significant profit, we try to average things out considering also that most of our cost incurred externally is not incurred on a per-flight basis, but is incurred on a batch basis. These aspects we are discussing these very days because now that the responsibility is transitioning between Arianespace and us, we are trying to see the way we account for it. But that's what we can openly discuss maybe offline with you analysts. Regarding the motors for Ariane 6, this will be much more the case because it's so much easier. It's all done here. It's a subsystem that we deliver. If we make 8, this is pretty much the profit. If we make 16, this is pretty much the profit and so on. And on this aspect, we can probably work something out with you. I don't yet have the algorithm with me, but we can work something out pretty much. I mean, as we transition to regular production, this shall be the case because, quite frankly, in particular from the production of P120 motors, we do expect an operating leverage. While this is more difficult to materialize for the Vega launches because every launch is a fact per se. There are some customizations to meet customer requirements and so on. The motors are all identical. So it's a factory-based business. And -- I mean, I don't -- again, I don't have the algorithm with me and nor does Alessandro have, but I think if we have a follow-up meeting with you analysts, we can work something out.

Certainly, we expect leverage -- a better leverage coming from the production of P120, P160, more complex and bigger due to the propulsion and system activity, as Giulio talked before, each launch has a different model to define the profitability.

If I may, is it possible to have an update on the Polish air-defense contract is coming to the backlog a little later or...

It's good that you are asking that question. Yesterday, I signed yet another intermediate agreement with MBDA, which will lead to the full production contract, hopefully, between end of the year, beginning of next year. The contractual chain is extremely long from the end customer to MBDA, to us, because this contract is massive. I mean, for MBDA, as they have publicly announced, it's EUR 4 billion. You understand that this requires the signature of so many intermediate contracts that it's even hard to believe. But yesterday, I signed yet another piece that should lead to, I believe, the full contract between the end of the year and the first quarter, that's pretty much the target. So everything, it's on track, it is in the interest of MBDA as well to expedite, of course, the acquisition of the full backlog. So we are all aligned, I think.

And is it possible -- maybe a rough idea of what's the size of the contract or...

The size of the contract, we have not disclosed this definitely above EUR 100 million. We have not discussed the exact amount for a number of reasons, related also to the fact that we cannot disclose the volumes and such. It's very material, of course, and long distance. MBDA has agreed to release the full contract amount at initial level -- project level, which is in excess of EUR 4 billion. I'm not sure we can disclose the full amount of our contract, but it's for the time being. Yes. As soon as we can do it, we will share with you.

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

The first question is on the backlog. You projected a backlog between EUR 1.5 billion and EUR 1.6 billion by year-end. This will imply more or less EUR 300 million -- between EUR 300 million and EUR 400 million of new orders in the second half. I would like to understand if you can give us some indications of where you expect to -- most of the orders to materialize in the coming months. And second question concerns the margins, if you can give us an idea what could -- what are the moving parts you projected by year-end, a slight reduction in the adjusted EBITDA margin, and the first half results are perfectly consistent with this outlook? But if you can remember us which are the moving parts of this dynamic? And also how the sales mix could change this partner in the future?

Some of your questions are too difficult for me, and I will ask Alessandro to answer. Let me try to answer the last one. How will the mix of the business tend to change the overall profitability? And this is what we are trying to do from a strategic standpoint knowing that the bottom line is the most important one. So the idea of growing as much as we can, motor production for defense and space, so namely the motors for the missiles and the motors for Ariane 6 is to increase margin. Why? Because these businesses have a much higher degree of vertical integration than the launcher itself. As you know, a good half of Vega is not manufactured here in Colleferro. So by nature, that has a lower margin. There's nothing to do about it. And we cannot possibly get to the point where we manufacture 100% of Vega here for a number of reasons. So in the future, meaning in the medium term, our target is to increase the margin by moving the mix more towards P120, P160 production and defense solid rocket motor production. This is a business that is affected by scale. So as much as you grow the volume, you should get a better leverage. And that's the plan so far. Launches, every launch is a fact per se. We are scheduled to increase the flight rate next year and the following years. We have been funded by the European Space Agency to grow the flight rate up to 6. But I don't expect to be so easy to dramatically increase the margin on a Vega flight considering the fact that a chunk of the costs of Vega are outside the domain of what Avio does. So the created value is not within our full control. Therefore, that's pretty much the content in which we are moving. And maybe, Alessandro, you can comment more on these and on the story of backlogs and orders.

Yes. Thank you, Giulio. Yes, going to your first question on backlog, yes, you're right, we accounted for EUR 200 million of orders intake in the first half. We have more or less another EUR 300 million, EUR 350 million expected in the second half. And basically further order intake is expected related to development of Vega C, that we are now finalizing other extension of intakes for Vega C and additional defense orders in the second half, which confirmed the EUR 1.6 billion of order backlog at the end of the year. For what margin is concerned, to go to your second question, yes, in addition, if you may complement what Giulio said before, we confirm the trend of the revenues of the first half, also in the second half. So the contribution of the year-end EBITDA will be driven basically by the defense production activity and the technology development project within the European next-generation funds. We will reduce, as we said before, in the question of Martino that going forward in -- from the next year. The nonrecurring costs, basically, for this year are confirmed what we have in guidance, basically, for the startup of U.S. business. So we expense the cost as nonrecurring for the U.S. business because now we are setting up the company and the activity, so we have costs. Then, as Giulio commented before, we will go into development activities and production activities with revenues, cost and profit. And so we will not have all the nonrecurring, but we will consolidate line by line the contribution of the U.S. business.

The next question is from Carlo Maritano of Intermonte.

I just have a quick follow-up on the U.S. contract. I was wondering if in the future, you will be considering the possibility to open up production cycles in the U.S. if volumes will be becoming relevant? And the second one is on the report presented by Draghi recently to the Commission -- European Commission, where he mentioned the space sector as one of the strategic sector at the European level and especially he speak about eliminate -- putting an end to the geo-return approach at European level. If you think that this could be -- could help you in the future also to eliminate all the subcontractor you have in all the other geographies, currently are penalizing the profitably.

So, Carlos, first of all, production site in the U.S., yes, we are doing work on this because at some point, we will need possibly to have production and operations in the U.S. as well, which doesn't mean that we will abandon what we are doing in Italy on the matter, but we will put these 2 production capacities in parallel and in addition, right? Of course, this is a project that will take years to mature. You do not create a production site in months, but we are doing planning work with a competent team. I have also moved to the U.S. one of my most experienced operations managers in the manufacturing of solid rocket motors. And together with the U.S. team, soon we are working to prepare for that as well. Not only by projecting to have our own production site in the U.S., but also developing partnerships with the U.S. supply chain and with some of the U.S. executions that can help us to have, for example, the availability of test facilities and experimental facilities because, as you know, production is not only about manufacturing parts and so on, but also the possibility to conduct, for example, static firing tests or propellant tests and so on, which require a ton of authorizations and permits. So the way we are dealing with that is not only by developing our own facilities, but also partnering with existing facilities and partners and supply chain to really create a U.S. independent capability to manufacture as well as in parallel to the one that we have here. Regarding the Draghi report, this came out just a few days ago. We will see what following this report will have. I have no idea so far. The story of wanting to eliminate the geographic return in the government investment that was typically done in Europe, it's one topic that has emerged also in the European Space Agency. You will recall that last year, the European Space Agency announced that they want to prepare a so-called European Launcher Challenge. So they no longer want to provide guaranteed return, but some kind of a race where everybody presents a certain project and the winner gets the money basically. I don't really know how this would work, whether the governments are happy to put the money and not know whether the money will come back to the country. That's a little bit obscure to me how it will work. But at the same time, we have our supply chain team across Europe, the ones we have worked with. And so we can very much maintain the same franchise. We can participate to challenges and things together with our own European team. So I don't think this will be black and white, meaning that it used to be a European team to manufacture a bag and all of a sudden it becomes an all-Italian team. And nothing prevents us from maintaining certain partnerships even if the concept of geo-return is eliminated. So if I have a supplier in Belgium that develops for us the thrust vector controls, even if there is no geo-return, that doesn't prevent my Belgium partner to pursue government support from their government to do work for me if we both have the agreement that it's good to work together. So we can do it on a voluntary basis, I'm going to say. So we will see this, how the things unfold in the next few months. But I think there will be room for different approaches. And we have a very clear roadmap, in particular, for Vega for the future, which was built with a certain team. We also have the support of the projects performed with the use of the European NextGen EU funds, which have largely pointed at moving a lot of the competencies to Italy as well. So if we need to play more Italian, we will be able to. If we can maintain our European partnerships, we can. We have met with all the suppliers back in July. And most of them have demonstrated interest to continue in the existing condition. We will see. I don't know what the outcome will be, but we are prepared for any of these scenarios.

The next question is a follow-up from Martino de Ambroggi of Equita.

Two follow-ups. No problem if there is no answer. But I was wondering on the tactical propulsion, you provided an indication of the strong volume growth going ahead. I was wondering if we should assume price, maybe price and mix. Because of the strong demand, maybe there is a discount or maybe there is a lower average price. I understand it's just one client. So it's difficult to comment, but this was my point. And the second, also in this case, I don't know if you can elaborate, but currently, Leonardo, Thales and also Airbus are talking about additional collaborations agreements, additional perimeter on the existing joint ventures and so on. So probably you are not involved today, I don't know, but if not, do you believe that sooner or later Avio could be part of the discussion -- these discussions for any reason, I don't know, but just a flavor?

First of all, on the defense business, really, the last thing we can talk about is prices. But generally speaking, a little bit of logic here. The U.S. Defense is under an extremely severe gap between demand and supply. And this gap has matured over the years, and in particular, over the last few years when new conflicts arise in particularly in Ukraine, in Israel and so on. There is a very urgent need to fill this gap in the U.S., and I have never seen someone who has an urgent need asking for a discount in my life. It may as well be the case, but it's unlikely. So I don't expect this to mean that you can earn a premium price. I would be cautious. We first need to demonstrate that we are capable of doing this and that we are worth spending money on, but there is great interest to receive the product more than to receive a discount. So the primary requirement that we have sensed from the customers is delivery, it's not pricing. It's delivery, it's schedule. This is the challenge we are facing. It's making sure that we help them solve their problems, okay? Regarding the Leonardo, Thales discussion, I honestly have no idea. This is a partner to them, it's not a partner to Avio. We do not have relationships to or joint ventures with Thales. As you know, our partnerships refer broadly to the cooperation with Ariane Group, which is owned by Safran and Airbus. We do not hold corporate relationships with Thales. So I don't know what they are agreeing and so on. And I believe this has very little to do with what we do for a business, to be honest with you. Leonardo does not control Avio. So I do not believe that there is a way to link these aspects in -- from a corporate standpoint that I do not know of because this will need to go to our Board of Directors at a minimum, and I have not discussed any of these topics in our Board of Directors. In particular, we are going in the opposite direction because with the recent transfer of some of the responsibilities of Arianespace -- from Arianespace to Avio, we are actually becoming a bit more independent from our partnerships than we used to be, okay? We are maintaining a very strong partnership with Ariane Group for the production of motors, as you know, but as far as we are concerned, now we are at steady state. We maintain this industrial partnerships we have with mutual satisfaction, I would say, with Ariane Group. We have changed our relationship with Arianespace, but we don't anticipate any other partnership of this kind.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Well, thank you all, and look forward to meet you again in November on the occasion of the 9 months reporting.

Thank you, everyone. Thank you, everyone.

Thank you. Have a nice day. Bye-bye.

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