Leonardo S.p.a. (LDO) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, and welcome to our live first half 2023 results presentation. I'm Valeria Ricciotti, Head of Investor Relations and Credit trading agencies. Today, our CEO, Roberto Cingolani; and our CFO, Alessandra Genco, will take you through our progress during the first half of this year, the first half financial results and the outlook for the full year 2023. Our CEO will start with his initial perspective and outline of priority focus areas, while the CFO will cover in more detail the financial results and outlook for the full year, and we will welcome your questions. I will now hand you over to our CEO.

Thank you, Valeria. So good evening, ladies and gentlemen. It's an owner to serve Leonardo as the CEO in the next years, and I look forward to meeting you in person as soon as possible. First of all, I'd like to spend a few words about my background, except for the approximately 2-year, interlude, the technical minister in the [indiscernible] government. This happened between February '21 and October '22. I dedicated my entire life to the development of technologies in Europe, U.S., Japan as a scientist and as a manager, both in the private and in the public sectors. I started my career in Leonardo in September 2019 as Chief Technology Innovation Officer, launching the company's digital transformation program, the world-class cloud computing facility and the Leonardo laboratories. The idea was to accelerate the transfer of the most innovative scientific and technological research in our products and in the marketplace. Also, I launched the sustainability plan that over the last 3 years placed Leonardo among the top ranked companies according to the most reputed international ESG ratings. Well, Leonardo is a great knowledge-based company. It's a leader across helicopters and defense electronics and it's for sure, a key player in the international corporation markets. Some of the core capabilities of the companies are really great, but there's also substantial room to improve efficiency and pace in other domains, which must be further developed. Today Leonardo has good financial figures, debt under control and an order backlog of about EUR 40 billion. As a result, it is improving in many key industrial and financial figures. Today, we announced our first half result. So the group new order intake is up by 21% to EUR 8.7 billion. Revenues are up to 6.4%, up to EUR 6.9 billion. EBITDA up to 5.7% to EUR 430 million. There's a further improvement in cash flow, and we are confirming our full year guidance. Alessandra will cover the results in detail later in the presentation. I will speak a bit longer about the new idea, the new strategy I'd like to implement, and this is for me, is a sort of personal introduction to you guys, the first time we meet. In general, I believe Leonardo is doing well, but it must be capable of delivering better earnings and cash conversion. Our results show that we are improving our performance despite the global difficulties over the last few years. However, looking at future competitors, it is also imperative to compare ourselves with a double-digit overall performance of the new sector operators just take, for example, space sectors with launches, new constellation satellites for internet in space and many other fields with very high tech content. So what is the new era of defense? The aerospace and defense sector is changing. And as demonstrated by the war in Ukraine, missiles and drones costing a few thousands of euros, suitably guided by network of private satellites designed for civil use are capable of destroying a novel flagship worth billions of euros or thousands of tanks. We're therefore witnessing two very significant change. Number one, Defense is increasingly made with bytes of data instead of bullets. Number two, the concept of conventional defense must be incorporated into a more extensive concept of national security that includes, in addition to defense itself, also the production and use of data, cybersecurity, space control, infrastructure security, energy security, dealing with my recent experience as Energy Minister, that was really something critical. Forecasting capability based on advanced algorithms such as high-performance computing and big data analytics, and artificial intelligence applied -- artificial intelligence to attack and defense systems. On that basis, Leonardo's product portfolio and the company positions in the international geopolitical scenario must evolve. The next few years are therefore essential to boost and accelerate the transition of the product portfolio and to adapt the strategic vision to the global change underway. So how do we build Leonardo for the future? We operate on three pillars. We already started in this 12 weeks of management. Number one, national and international geopolitical and strategic positioning of Leonardo; number two, organization; number three, products and technological choices. Concerning national and international geopolitical and strategic positioning, Leonardo's new competitors are not only the conventional aeronautical and electronic industries, but also space industries, data industries and digital manufacturing companies. To remain competitive, we will have to ensure continuity in Leonardo's currently strong core business such as aircraft, helicopters, electronics, which are a primary interest for conventional defense. And at the same time, we have to open as soon as possible to emerging sectors that allow Leonardo to play a significant role in international geopolitical scenarios. Leonardo must be a strategic multinational company in Global Atlantic and European alliances just think to the GCAP with Japan and U.K., the Strategic 6th Generation Fighter, defense electronics in Germany and the U.K. as well as major NATO programs. But its role and international perception must grow with an increasing attention to previously untapped but potential markets. Our president will go around over the next months in Thailand, Indonesia, Vietnam, Turkmenistan, Greece, India, because there is a lot to discover there, there are a lot of opportunities. Also exploiting incremental opportunities generated by government to government contracts in line with international best practices, that we should nurture much more than in the past. To be successful, there are a few important actions to carry on. Number one, we must rationalize the product business portfolio. We are perfectly aware of that. Number two, we must have the courage to form strong international alliances and to develop new technologies with a greater capacity in research, development and innovation. There is only one way to ensure competitiveness and know-how development opportunities because there is no shortcut to technological leadership. That means R&D at very high level. Third, and this is valid in particular, for the most advanced countries. Leonardo must significantly accelerate growth in disruptive market segments, primarily cybersecurity and space services, which are characterized by high technology skills and high cash conversion. Concerning the organization, which was my second pillar, Leonardo's new organization aims at simplifying governance to obtain more rapid and data-driven decision-making processes, in particular, by focusing on a number of key areas. First one is the creation of a leaner organization with the rationalization of the corporate center, focusing its mission on the adoption of strategic decisions with the less bureaucracy. This means making it slimmer, more less people, less expenditure. Second point, greater operational flexibility of the division business units with careful accountability of the results. Third, the creation of a complementary cohesive leadership team in terms of expertise and competence and the organization has a lower average age and much higher gender balance than in the past. Fourth, the creation of streamlined and deeply rooted local offices in strategic countries. Fifth, the creation of an international culture with a strong sense of urgency for the forthcoming change. That's very important. We should feel the urgency of what's going on in the planet. Sixth, clear strategy of attraction, retention in development of managerial and technical analysis. That was maybe not very much pursued in the past. Business reinforcement will be insured by the new unit of the Co-General Director for Business and operation led by a colleague and friend, Lorenzo Mariani, who will support the divisions in their international competition and increased their commercial penetration in existing markets with a strong value proposition. This will be based on the improvement of the commercial model with rationalization of marketing sales processes and strengthening our market scouting skills. And of course, the improvement of customer support solutions, increasing the utilization of installed base and generating more recurrent revenues. Leonardo will work also on the further development of other domestic markets, U.K., U.S., Poland and priority foreign markets. Finally, greater effort and focus on strengthening performance and increasing cash conversion capacity will be one of the streamline of our and his action. We can also leverage our role in some successful joint ventures, such as MBDA, an example of a strong, profitable and cash-generative business we built at the European level. By the way, Lorenzo Mariani was the CEO of the Italian part of MBDA. So he has the right expertise for that. Finally, let me conclude with the third pillar of this global strategy. This is the pillar dealing with the product and technology choices. Leonardo must ensure technological leadership in selected domains by leveraging innovation and competitiveness on strategic products. To this end, it is necessary to boost technological innovation through innovative measures such as: first, strengthening our core products through a massive digitalization using artificial intelligence, cloud and supercomputing technologies, increasing the services offer such as connectivity, predictive maintenance, drastically reducing time to market achieved by digital twins and creating new opportunities in additional markets such as a managed or satellite services. All this should create new margin and revenue opportunities. Second, supporting the country and the communities in which we operate to face major global change. Just think to earth monitoring for climate change, monitoring the security of critical infrastructures, satellite Internet water environment monitoring. This -- all this does not require a complete reinvention of the company, not at all. Just a better, different management, a different vision and a constant update of the product portfolio. Third, we have to integrate sustainability into the business and product portfolio. This is an additional value to improve Leonardo competitiveness. There are several actions in place now. Science-based target initiative to reduce emissions Scope 3, which is more than 90% of the total emission, we are working on that now. Sustainability of the supply chain. It's a lot of work with over 1,000 companies that are working on our supply chain, that is the bigger. And finally, a lot of efforts in diversity, equity inclusion. Our certification of the first Italian gender balance certification is underway and leveraging on our consolidated U.K. DI background to attract international talents. Fourth, we need to strengthen R&D activity. In 2022, Leonardo invested around EUR 2 billion in research and development. It's approximately 30% of the revenues, including research, development and product customization. I believe some extra effort is needed to increase the low TRL research and development to reach the average level of our best competitors. We just need to focus the research of Leonardo at the forefront of a selected list of cutting-edge and disrupting technology that will ultimately lead to the development of new products and services. Our focused effort in R&D will also reduce the current fragmentation of investment in innovation initiatives and the rationalization of open innovation activities with academia and research. This is mandatory. We have to do a few things very well rather than many things in a mediocre way. Reinforcing and strengthening the core products is, of course, a key point. Today, we have a large and diversified product portfolio with a strong leadership position in intermediate dual use helicopter, the 139, 169, 189, and with the AW109, covering the light twin segment and the AW609 projected -- I mean the vertical lift basically. We have a leading position in training and simulation aircraft such as the M345, M346 and the international flight training school. We also have multi-domain capabilities in electronics with a unique strategic presence across air, land, sea and space, just in to rather sensor and many other applications. This ensures a strong role of Leonardo in international programs such as the well-established IFA, Eurofighter, JSF, GCAP and the proof of concept the EuroMALE development phase. So I confirm the intention to strengthen those core businesses by the increasing digitalization, product development and better commercial organization and customer support activities. In this way, we will address a larger share of customers' needs and bring more recurrent revenues and higher margins with low CapEx requirements with new products such as the pilot training courses at the international flight training school. We expect that thanks to the new General Director business and operational organization and to the new digital and cloud computing capability with Leonardo, the medium-term plan is not only confirmed, but there should be room for some more improvement. We'll see this with the new strategic plan. Concerning Aerostructures, we must recover profitability and ensure economic and financial breakeven. So we must continue working on increasing volumes and developing distinctive skills, for instance, on composite materials. We know that it is -- that it will be necessary to explore the possibility of partial conversion to innovative products such as drones for dual use as well as evaluate future diversification pathway with industrial partnerships. As you will see today, the Aerostructure division figures continue to improve in line with our plan, and they are progressively recovering after the COVID interruption. Let's go to the future now. I'm going to conclude soon. How can we make space and several strategic priorities of the future? If on one hand, we consolidate the core business, on the other hand, we feel the urgency to evolve into a company offering not only hardware products but also more and more solutions and services. This means developing a so-called servitization model to enhance the value of our product portfolio. In this frame, space and cybersecurity must play a crucial role to position the company in the future. As regards to space, the final goal to position Leonardo as a European leader and intercept much larger market shares than the current ones is a key goal. The space economy in 2022 had a total value of $350 billion, of which 70% compresses services and ground equipment. And it is expected to grow to $1 trillion in the next decade. I mean I've seen forecast. We expect to launch 2,500 satellites every year in the next 10 years. I mean this is an immense amount of technology to be launched. We should access this market very soon. We have a duty to grow substantially in this sector. We are working on reorganizing the space activities to create a space division, which represent Leonardo national and European level, also acting as a catalyst for all other national operators. To accomplish such an ambitious target, we will work to unlock more value from the French Italian Space Alliance, and on some acquisitions or more high-tech companies that add specific value to our products, or strategic capability to the division. Such M&A will be made without extra cost or new debt for Leonardo. This has to be very clear. Our focus will be on space as a service, leveraging on our new digital key assets, high-performance computing facility and the new artificial intelligent laboratory to strengthen the offer of value-added services such as earth observation, monitoring of infrastructures, territories and trades, earth digital twin and related services like predicted capability, safety and positioning and navigation-related applications. The second point will be working on application domain of new technologies, such as again, AI and AI [enhanced] product from satellite connectivity, connectivity for all Leonardo and third-party platform and systems. There's a wide market on robotics for in-orbit servicing, building and transport and space monitoring of all assets. Finally, driving the market by digital transformational design, production and capability of the space system produced by Leonardo groups. This is a system contactability, robotic series production for commercial markets, on orbit, artificial intelligence and cloud computing enabled by inter-satellite link and onboard advanced chips. Those things do not require a revolution again. They just require a focusing of our effort and the proper use of all our skills to create new high-tech added-value services. On the same foot in cybersecurity is a growing market with a CAGR of 8% over the '24, '28 period. We must grow substantially with the aim of ensuring the protection of national and partner country data and guaranteeing cybersecurity by design of Leonardo products and solutions enabling new services, as I previously mentioned. We see the cyber division playing a key role in supporting all the other businesses in Cyber Resilience certification of products of solutions and platforms. The final goal is to have Leonardo products, which are cyber secured by design, embedding the service of cybersecure maintenance over the years into a high-tech product of Leonardo. The cybersecurity becomes a service integrated in the product itself. Examples are upgrading of the existing products with cyber approach over the entire life cycle, radars for cost protection, surveillance and space applications or natively embedding cybersecurity new programs such as the GCAP or addressing the defense of the future bytes, not only bullets, as I said in the beginning, an institutional customer needs for secure communication, cybersecurity resilience and global monitoring. Finally, in addition to defense, serving the civil market, the public administration and the enterprises, leveraging secure cloud and data valorization platform, we are presently currently working on the national cloud pole at domestic level. Also in this case, we will consider the possibility of merging acquisitions, more companies, adding specific value to our products or strategic capabilities to the cybersecurity division, again, without extra cost and new debt for Leonardo. Key takeaways, I'm concluding. These are the pillars we are focusing on. The overall outcome of the combined action described with the three pillars will be rigorously and constantly monitored to assess the improvement of our operational industrial performance. the revenue stream and the profitability. We will keep our focus on cash generation and conversion, providing constant returns for our shareholders. Let me summarize with a few takeaway messages. Number one, the core business will be strengthened. Number two, the organization will be more efficient. Number three, the product portfolio will be optimized. Number four, the internationalization of Leonardo will increase. Number five, cash generation and profitability must improve also through new high-tech service-based products. Number six, the sense of urgency to face the change and the awareness of a stronger and more focused on R&D will drive our evolution. Number 7. We will expand towards new businesses and services in the space and cyber security domains, ensuring better cash conversion. We will use the next year to lay the foundation of the Leonardo company of the next decade and more international, more innovative more agile and a projected into the future. This will be presented in more depth in the new industrial plan, which will be delivered at the beginning of 2024, and thank you for your attention.

Thanks, Roberto, for this very thoughtful and very impressive presentation about the way forward for Leonardo. Let me now talk you through the first half results and the performance business by business. We have delivered a good first half performance on track and in line with plan and confirming solid and positive trends across the group. We're carrying this momentum into the second half. We can see growth confirming, leveraging our continued strong commercial performance with significant levels of new order intake EUR 8.7 billion in the first half, up 21% on last year, adjusting 22% to exclude the contribution of GES, the business that Leonardo DRS sold last year. With very strong performances in Helicopters and Defense Electronics and increasing our group backlog to an all-time high of EUR 39-plus billion. Revenues showed solid growth at EUR 6.9 billion, up 6.4% on a perimeter adjusted basis. Again, a good performance in the wider industry context. EBITDA grew to EUR 430 million in the first half, up 5.7% on an adjusted basis, and profitability slightly improved in line with plan, with return on sales of 6.2%. The defense and governmental businesses have continued to perform well with strong profitability. Aerostructures has continued its consistent and gradual recovery in line with the plan to reach breakeven by end '25. The group achieved a material improvement in cash flow in the first half, reducing the level of seasonal outflow by more than EUR 450 million, with free operating cash flow of negative EUR 517 million versus negative EUR 973 million last year. All of this underpins our confidence in our full year guidance. Let's now look at the key group metrics for the first half. Starting with new order intake. We have contributed and continue to demonstrate our commercial strength in both domestic and international markets with good performances across the group and across geographies and a total order intake of EUR 8.7 billion, up 21% year-over-year on a perimeter adjusted basis. Again, achieving a good book-to-bill solidly above 1. We have seen a smoother pace of order intake, less lumpy and without any jumbo orders. New order intake was strong and grew across the group. Helicopters delivered an excellent performance, increasing new orders to EUR 2.8 billion in the first half, up 28%, well spread geographically, seeing strong demand on defense and governmental, both from domestic both and international customers. Plus, we saw an increase in orders on the civil side as well as in customer support. Major orders included 18, 169 for the Austrian Ministry of Defense, 13, MH-139 for the U.S. Air Force and the number of orders on the city side mainly related to the AW139 with further evidence of steadily recovering civil markets. Defense Electronics also stepped up new orders to a total of EUR 4.4 billion, up 19.3% on a perimeter adjusted basis. On the European side, higher orders and defense systems help drive new order intake to EUR 3 billion with an increase of 20%. We continue to see strong demand across products, both sensors, systems and defense system solutions. We want to highlight that we signed in June -- last June, a major U.K. order for the Mk2, the game-changing new radar for the Royal Air Force that will be utilized on the Eurofighter fleet, which will transform the aircraft control of the air and provide significant additional advanced electronics warfare capabilities. In other domestic markets, we saw orders for the Italian Army command posts with the capability for effective deployments across the full spectrum of multi-domain operations. On the export side, including the supply of defense systems for the Philippine Navy plus the logistical support. We're also pleased to see more orders in the Cyber division, including the order for the establishment of the joint operational center, the JOC of the joint operational command of joint forces, COVI fort of the defense department through letting up of operational rooms, data centers and the development of a joint common operational picture functions. This all shows how we are more and more leveraging our strong electronics capability to provide key cyber solutions for all our customers. On the U.S. side, DRS achieved good order intake of EUR 1.3 billion, showing its strength and positioning on key DoD programs, winning additional orders for the U.S. Navy, new generation Columbia submarine program for the supply of electric propulsion components plus additional orders for the supply of infrared countermeasures for the U.S. armed forces. Aircraft maintained its solid order intake at EUR 1.5 billion with an important C-27J export order and increased orders for the logistics component of Eurofighter plus orders under the JSF program. Aerostructures continue to improve gradually with orders rising to EUR 225 million, up from EUR 158 million last year. and benefiting from growing demand across a range of programs. So overall, a very strong half year with new order intake of a relevant size. Delivering on track, book-to-bill above 1.2x, increasing order backlog to an all-time high of EUR 39 billion plus. We've also continued to grow our revenues. At group level, we're up 6.4% to EUR 6.9 billion, on track with plan, leveraging our strong backlog and the important long-term programs on which we're engaged. In Helicopters, the first half revenues were EUR 2.2 million, slightly ahead of last year with strong contributions from dual-use platforms as well as customer support and training, with a lower contribution from NH90 Qatar as expected. Helicopters continues to deliver well on its major programs, and we are also very focused on the development and ramp-up of new programs. Moving on to Defense Electronics. Revenues rose 4.2% to EUR 2.2 billion, continuing to deliver well on its backlog. DRS reported revenues at EUR 1.1 billion, up 6.8% on a perimeter adjusted basis, which translates into $1.2 billion reflecting the change in perimeter after the sale of GS and a strong performance in the first quarter last year due to a nonrecurring step-up in the Columbia Class submarine program. Leonardo DRS concluding these adjusted perimeters, these underlying volumes higher versus last year. Aircraft grew first half revenues by 6.9% to EUR 1.3 billion with three aircraft deliveries to Kuwait, plus first activities on the EuroMALE program. and higher production on the JSF. Aerostructures increased revenues from EUR 234 million to EUR 327 million, with volumes benefiting from increased activity in ETR and the resumption of deliveries on the B787 program. Leonardo has also delivered an improved overall performance in EBITA. Group EBITA stands at EUR 430 million in the first half, up 5.7% on a perimeter adjusted basis with a return on sales of 6.2%. We had solid performances from all our main businesses with further gradual recovery in aerostructures. Helicopters improved EBITDA in the first half to EUR 157 million, up 4% and maintaining its return on sales at 7.3%. On the European side, Defense Electronics EBITDA grew 7.1% to EUR 225 million and a good performance across its business areas with strong profitability rising to 10.2%. We also saw a good contribution from MBDA, noting that last year's comparator was very strong. MBDA's underlying trend is very positive looking forward for this year. DRS reported EBITDA lower at EUR 84 million, as expected, due to business mix. Also, we have to remember that in the first half last year, DRS had benefited from a nonrecurring step-up in profitability on the Columbia class program, moving from development to production stage. Going forward, DRS expects growth and profitability to step out throughout the year. Aircraft grew first half EBITA by 6.7% to EUR 160 million and confirm the robust profitability of its defense business with a return on sales of 11.9%. Aerostructures showed gradual improvement and reduced its loss in the first half to EUR 72 million. compared to EUR 88 million last year, in line with the recovery plan we outlined. ATR doubled its level of deliveries in the first half to 12 aircraft versus 6 last year. and improved its operating performance. Its contribution in the first half was slightly lower as expected, down from negative 1% last year to negative 5%, reflecting a one-off settlement agreement in '22. That said, we feel encouraged by ATR's recent new order intake, it's growing backlog and improving market outlook and confirm they're expecting of higher deliveries by year-end. The contribution from space was substantially in line with last year at EUR 2 million. The satellite services continues to perform well, delivering consistent good results. On the other hand, in the Manufacturing segment, we continue to experience pressures. There had been some R&D extra costs impacting EBITDA. And we're also seeing some production delays caused by persistent supply chain pressures. We're working with our co-shareholder, [Thales] with a view of improving its future performance. Moving to below the line, you can see EBIT is up 1.7% to EUR 368 million. Last year, it was EUR 362 million, reflecting the solid performance of the group's businesses and after providing for EUR 31 million of restructuring costs, including EUR 20 million of early retirements in central corporate functions. Also after PPA amortization linked to the option of RADA completed in the second half of last year. The net result was EUR 208 million, reflecting some increase in financial expenses to a more normal level. The higher financial expenses are also reflecting increasing interest rates and the performance of nonstrategic equity-accounted holdings. While the higher tax charge reflects tax paid dividend distribution from the group to Leonardo Spa as well as from joint ventures. We also booked a gain on the disposal of the ATM business in the U.S. In the first half, we also achieved a material improvement in cash flow, as you have heard from Roberto before. The usual seasonal outflow in the first half was much lower at EUR 517 million versus EUR 973 million last year on a perimeter-adjusted basis. A good performance on track and in line with plan. This improvement in the first half is in part due to continued strengthening of our cash flow with improved operating performance, much reduced factoring and a lower level of seasonality. It is also partially due to a concentration in the first half of cash-ins or milestones from customers. To be clear, these are receipts related to the delivery of existing programs and are not advanced payments on new order intake. So good progress on cash in the first half and underpinning our targets of free operating cash flow of EUR 600 million for the full year. We continue to strongly be committed to our deleveraging process with net debt down over EUR 1 billion versus June '22. Now moving on to guidance. You can see that we have delivered a good performance in the first half. We are achieving very good commercial momentum across the group, and our book-to-bill is solidly above 1. All this translates into a reconfirmation of our full year guidance on all key metrics. Our confidence in the full year guidance is underpinned by the progress we have made in the first half. The sustained demand we are seeing throughout the group and through our geographies. And we are on track with our growth path in revenues and EBITA, seeing good progress on delivery of programs. We're confirming our targets with a balanced contribution from all the divisions with Electronics being a key contributor to growth, aircraft maintaining its top profitability levels, Helicopters performing with plan and Aerostructure continuing to be on track consistently with its recovery plan and with the contribution from our strategic joint ventures being in line with plan. All of the divisions have been absorbing the macro inflation pressures into their margins. Thanks to the mitigation measures we have undertaken starting from last year, including pricing on contracts and renegotiation with suppliers. So we can maintain solid control on our profitability. You have also seen we have also been stepping up our cash flow on track and in line with plan, strengthening our organic cash generation and showing better quality, also progressing on our deleveraging plan. So in summary, good first half results confirming our growth path and the fundamental strength of our group, delivering stronger commercial operating and financial performances across the group on track for the full year with full year guidance reconfirmed. Thank you all. And now we are pleased to take your questions.

Can we please take the questions from the call?

It our first question is from the line of Alessandro Pozzi of Mediobanca.

I have two for Roberto. First of all, congratulations for the new role. The first question is, I believe you laid out a vision for Leonardo, which is quite different from what the company is today. And as you know for well, Leonardo has a lot of inertia and it will probably take time to achieve those objectives that you have for the group. But I guess there are also low hanging fruits and could generate opportunities just like we are arranging the existing resources. And so the question here is what this thing can be achieved relatively easily in the short term versus longer term? And the second question is it's quite clear that you are putting a lot more emphasis on space and cyber. And I was wondering, in terms of size, what you think is the potential for these two business lines within Leonardo in the next few years? And how can M&A shape the growth of these two lines? And for space, just a clarification. Are you planning to strengthen the JVs, TAS and Telespazio or are you planning to build a new in-house group?

Yes. Thank you for the questions. Yes, I know we need some ambition for the time being, we wouldn't be any useful to go ahead and continuity initially. So we need some change. Actually, it's not so different in the end of the day because I'm leveraging on the knowledge and the scale and the capabilities that are existing. I mean in the end of the day, I made a clear statement, core products will be reinforced through a specific organization dedicated to reinforcing, commercial activity and specific technological investment in terms of digitalization and rationalization of the portfolio. The new part, if we can say really new because we're already working space and cyber is to make those two areas synergistic, developing with a specific choice, I mean, going towards space services that I think there's less capital intensive and more service base or brain based, that means ultimately better cash conversion. I mean at the end of the day, we have to consider that with this exploding market of space, if you see what Leonardo gathers at the end of the year through the four participated companies, Avio and Telespazio and [indiscernible] and Thales, it's about EUR 1.4 billion, and this is nothing on the market, $350 billion. We have to be more ambitious, and we have to do more. Of course, we need to reorganize the layout of the participated company. We need to reinforce part of the business for Space Technologies, which is embedded into the divisions. And to go to your last question, so if the size of the space economy market goes from $350 billion to $1 trillion in 8 years, Well, I think $1.4 billion today is not enough, and we should grow and we should grow at least linearly with the offer of the market. So of course, in the final -- in the new strategic plan, we will put ideas, numbers and plan. But I think we should think to a serious competitive layout of the space business for Leonardo. You correctly asked me the difference between short and long term. While in the short term, of course, you will see in a few months in the strategic plan, we have clear this, what kind of intervention we have to do. I think it will be highly desirable in 3 years to have the Space division up and running properly with well-characterized programs -- And the merger and acquisitions, they have to be not very big. We just need specific technologies to be introduced in our products. So completing what we already know. I mean, don't forget that Leonardo has almost the entire pipeline of space application from launchers to AI in imagery construction, satellite services and so on. We just need to rationalize and improve what we do. Joint ventures, of course, this is important. We have to analyze. For the time being, I think the most important thing is to recover symmetry with our French joint ventures. Summit is very important. And I want to symmetry in our relationship with the French partners.

The next question from the phone is from the line of Daniela Costa of Goldman Sachs.

Roberto, all the best for the new roles. This is Victor from Goldman Sachs and Daniela's line actually. I have a couple of questions. So the first one is so relating to statements. I was wondering if you could help us understand the restructuring cost of about EUR 31 million that I think you reported in 1H, first question? And looking also at the net financial expense, which doubled year-over-year. I was wondering if you could explain the drivers there. I presume that it's driven by floating and the rising rates that we have seen. But I remember well your guidance for financial charges this year it's about EUR 230 million. So is this 1H figure in line with the guidance that you've told us earlier this year? Or should we expect a figure higher than this looking for the rest of the year? I was wondering if you could get -- or help us understand the cost of debt that you're expecting for this year? And if you could frame like possibly on how you see the free cash flow provision hit some parts of change at all, especially when thinking about working capital, I think you gave some color already in your presentation?

Sure, Victor. So I'll start answering the question in the order in which we have posed them. The restructuring cost of EUR 31 million includes mainly for EUR 20 million the extension of the accelerated retirement plan for staff function of Leonardo to a higher number of employees, which now accounts for 490 people totally. And those are -- this is a provision that is added to the provision that we booked last year on the balance sheet. The remainder is associated with the restructuring that Leonardo DRS has done in one of its businesses to rightsize the workforce and modify the production layout. With respect to financial expenses, the guidance for the full year is unchanged. So the EUR 230 million that you have in mind is confirmed. The year-over-year comparison is as planned. So it's no surprise. The delta is mainly accounted by higher interest rates on funding on variable rates. And there are two other elements. One is associated with FX performance. As usual, there are some movements on FX activities done to hedge our commerce business as well as on a holding that we do not consider strategic, and we value with the equity method. Last year, we had a one-off exceptionally positive, which this year is not repeated, and that accounts for a delta of EUR 20 million out of the EUR 50 million that we recorded in financial expenses. Finally, on the profile of free operating cash flow. What I would expect is that in the months and in the quarters to come, we will continue to see a relationship between last year and this year, which encompasses the improvement in free operating cash flow that we have experienced in the first two quarters, reflecting the speed which we are collecting cash in from customers as well as a tight control on working capital. So all of this is progressing in the right direction in terms of operational actions, industrial action and is translated into a year-over-year significant improvement in cash flow.

Two questions from the web. The first one is from Ross Law, Morgan Stanley. What level of leverage do you expect for the group going forward given your plans to make investments and potential M&A in the space and cyber domain?

Mixed answer, you can start, if I want to say something in there.

Yes. Sure. The plan is to maintain the leverage targets that we have had to date. We have a very disciplined financial strategy that has proved us right, that has delivered a rating upgrade, an important rating upgrade from Moody's to investment grade, and we want to continue on this path. As Roberto mentioned, all M&A opportunities will be in line with this financial discipline that we have adopted to date. Please, Roberto.

Yes. Yes. Well, I want to say that there will be no step longer than the leg. We know exactly what we need. This is a kind of improvement to some of our technologies. We're monitoring carefully the market of small, mid-enterprises. We will do what we can do. We can afford for. We have some different possibilities. Of course, we're analyzing from the financial point of view. But as I said, no step will be longer than the like this, you can be really sure. We know exactly where we want to go.

Let's take another question from the web. You mentioned increased spend on R&D. Can you please be more precise? How do you see cash R&D trending at Leonardo? Also how important is M&A to your strategy? And do you plan to wait and settle in the position of CEO for some time before engaging in M&A? Or do you think that you can go ahead and move ahead sooner versus later?

Good. I like the question. So we invest remarkably on R&D. As I said, I'd like to see the internal structure of the global investment, which is 13%. As I said in my presentation, there is a part that is real research, another part, which is development and other part the majority, which is product customization. This all contributes to the global idea of R&D. If you see the peers, the high-tech peers, they're not that far from what we do. They invest a little bit more in the R. So this is normally -- let's say, R&D should be in the range of 5% globally. If you take the real R&D, that means TRL from 2%, 3% to maybe 6%, 7%. Don't take this too strictly, just to give you an idea. We don't need to do that much. We need to focus a little bit the investment to redirect some investment on marginal activities on something which is more core, eventually investing a bit more, but well within our possibilities. Don't forget that we are investing -- we're actually -- we are making -- basing our strategy on a brain-driven technology. I mean, I want to make examples, so I clarify what I'm saying. These are not simple words. If I make a satellite service interpreting images for infrastructure protection, I want to do the same thing I'm doing now, but with generative AI. So I want to have much more advanced models to evaluate to get the information, to extract information from images. So this means investing in AI and brains, not investing in hardware or big CapEx. Similarly, when you make a cybersecure product by design, you're investing on services. So this does not need money. This needs brain primarily. We have to invest more in brain. Second thing, the CIO, the Chief Innovation Officer, that's a very good question. Thank you. Give me the possibility to anticipate. I kept on my, let's say, transitory under my direction, the CTO and CIO. The situation now is fortunately is over. I think already next month, I will change the organization, complete the organization. There will be a Chief Innovation Officer, and there will be a strategist M&A officer. So with this, the pipeline would be -- that the organization will be completed. I don't want to wait. We are in hurry. As I said, sense of urgency is very important. We have 3 years. We don't have 20 years. And the world is faster than we are, so we need to accelerate.

Let's take again another question from the web. I'm putting together two questions. And both of them from Monica Bosio, Intesa Sanpaolo. I know that the details will be given an indication of the business plan. But can you indicate a rough percentage of R&D going forward? And if you will, push on capitalization or not? And the second one is, would you see feasible in the future, the disposal of some activities that you -- that do not perfectly fit with Leonardo's higher technological content going forward?

I answered the second question before, we're going to cut things that are outside the ambition and outside the domains that we have identified. This is already ongoing actually. It's in progress. I mean today, before this meeting, we had our Board, and I anticipated to my Board members, there are three, four activities that will be cut in the next few months. To be very frank, that money will be recovered to make a bit more research. So it's saving that is transformed into investment. So investment, I mean in brain investment. So I can't give you a number now for the R&D. Honestly, I expect to go from 13% to 15%, that will be possible. And my CFO here, for sure, would kill me. Let's say, we can redistribute internally to a specific amount of money, what could be mandatory to develop quickly our new products and our new services. But as I said, we'll be -- everything will be under control with a very prudent approach to the change and to the development.

Let's move again unless you want to add anything. Let's move again from question coming from the call.

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

Roberto, good luck with this new adventure. I just had a quick question for you. When you talk about portfolio optimization, could you give us a little bit more color on what exactly you're thinking of?