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

With me today, Lorenzo Mariani, our CEO and General Manager; and Giuseppe Aurilio, our CFO. They will do a presentation of our strategy results and guidance. Then we will have a Q&A session, so [indiscernible]

Of course, I'm happy and proud to be here today with all of you. I [indiscernible] group not only if we compare it to what it was -- so products, portfolio, in terms of market and in terms of state of mind. I will spend just some minutes to go through the scenario we are -- plan, and then I will hand over to our CFO. First of all, something I think we all know, lesson learned. We are in a new paradigm in our world and in our markets. Lesson learned from recent conflicts show -- together with new cyber threats based on advanced technologies. It's just an example for -- change completely the need, the requirements of our customers, creating the need for faster and more residents and mostly very integrated solutions. A [indiscernible] acceleration. This is definitely true in the United States, although with some slightly different -- we are really convinced that we are in a structural long-term defense spending trend. Leonardo is in a good position to take advantage and benefit of this situation, thanks to the breadth of the portfolio. We have platforms, helicopters, aircraft, after acquiring Iveco, also [indiscernible] We are in the new domains such as cyber and space, and we have to be really present in this new multi-domain requirements. In addition, we are also geographically distributed, Italy U.K., U.S., Poland and many other geographies, and this is also an additional opportunity for capturing new orders and acquiring new customers. Then our vision, first of all, continuity, we have an industrial plan, and we are sticking to that industrial plan. The only real point that I would like to stress is acceleration. We need to accelerate many of our initiatives because the world outside, based on what I just said, is really going at a different pace, and we have to be capable to meet the requirements, the changing, and quickly changing requirements of our customers. This means also accelerate execution [indiscernible] something really different from what it was a few years ago. Of course [indiscernible] capability, sometimes investing in CapEx, sometimes working on efficiency in order to have some additional capacity from the means we already have in-house. Then technology, technology is always a cardinal point for Leonardo, and in order to fulfill those operational new requirements we have really to invest and to strengthen mostly new technologies, so data management using IA, for sure, cyber and many other high-technology domains. At the same time, and related to this, also expanding strategic partnerships. We need to do that to access new markets, to guarantee in some cases, sovereignty and also to accelerate our entrance into new domains and new technologies. What does it mean in terms of specific initiatives we are following, quite a big number, and all of that -- all of these, we are stressing acceleration. First of all, technology footprint and multidomain capabilities. I can see three main dossier that we are treating at the moment. GCAP, the sixth generation system and aircraft, where we had recently a great success signing the first big contract, international contracts, so between the GICO organization and Edgewing, an additional observer has been added with Canada who has requested to be part of the program, and for the moment, will be an observer. That is a very good sign for the follow-on of the program. Then Michelangelo, air defense, integrated air defense, strong focus on new threats. This is the basis on which Michelangelo has been conceived. All the activities are proceeding in order to have a demonstration for dead zone protection -- have one is the missile and antimissile competence through MBDA. The second one is the link to our Guardian constellation, the Leonardo constellation we are developing that despite being conceived initially for security reasons, can be extended -- then rough acquisition. As I said, there is an important -- we declared an important acquisition in U.S. through our subsidiary, DRS. It's a company -- a medium-sized company, that operates in new technologies, namely IA applications through software for C2 in defense systems that can be easily matched with the need we have in Michelangelo as well. Then the partnerships, LBA, Leonardo Baykar. A few days ago, we signed the final agreement for this JV after receiving all authorizations from regulatory bodies in Italy and Europe. We have the first aircraft ready and be already integrated in our Ronchi dei Legionari plant, and we will -- and we are going to deliver those before year-end to the first customers. As well as we are preparing presentations and demonstrations for different applications to other customers in Italy and abroad. Bromo, we are preparing together with Thales and Airbus partners, our filing to antitrust. We're working already as a team ready to build a space domain giant factor in this developing scenario. The running contract for Italy on the first requirement for the A2CS -- the coming months. Then the action to optimize and scale up our industrial footprint and capacity. This means, as I said, restructuring our available capacity, building new one and sometimes acting on M&A. Iveco, for sure, provides us entrance in a new domain that is the land battlefield, gives us the capability to have a new division that is made by the joint capabilities of Iveco and Oto Melara, addressing this strong market. And at the same time, provides us with some industrial footprint and manufacturing capacity that can be made available also to other businesses. Aerostructures, last but not least. Aerostructures for us is an important business, and we are following two ways that are proceeding according to our industrial plan. First, restructuring. We need to make this business better and we need to improve the results and we are doing that through finding additional work packages with existing customers, moving work package from one plant to another where this can be made more efficiently, reducing in some cases the footprint, acting on subcontractors that can be duplicated, double sourcing can always help on that and also working on our quality systems in order to make the reworking to zero. At the same time, we are following the path with the prospect or the partner in order to build a JV that should enhance the footprint of this business abroad and at the same time, allow us to deconsolidate progressively it from our accounts. So this was just a very quick overview. You can see that all the initiatives I see are accelerating and, in any case, supporting our ambitions in the industrial plan, and this was clearly seen in the half year accounts and where the basis for my optimism that led also to the revision of guidance, not only for orders where it was evident, but also on all the other parameters. Thanks to the contribution, as you will see with -- from Giuseppe Aurilio of all the divisions, the business divisions. Now I will leave the floor to Giuseppe Aurilio who will go through the details of the different businesses.

Thank you, Lorenzo. I'm very pleased to comment our Q2 and first half results for 2026, a very good performance, outstanding first half of the year. We see a very strong commercial momentum with orders at plus 40% compared to first half of 2025, free operating cash flow, plus 40% again, which is the KPI we are focusing a lot on and where I see the difference compared to my previous experience in Leonardo, so very strong performance now also on the cash generation. Profitability has increased up to 7.6% in terms of ROS -- 24%, so very solid results, very good performance. We see a strong commercial momentum and that is leading us also to upgrade our guidance as we will discuss in a second. So now let's focus for a while on our results. So we see that, as you can see, I mean, we are providing all the data without IDV, IDV has been consolidated in all of our financial flows and income statement since April 1, so it is contributing for 3 months to the results. To allow you to make a like-for-like comparison, we have provided all these tables and included the following ones without the contribution of IDV, which is separately disclosed. So as said, orders. Orders are at around 16 billion, a strong increase over all the division. Revenues are plus 10% compared to 2025. Again, it is a positive contribution from all the divisions, perfectly in line with our expectation for the full year. You may remember that we projected a plus 8% on a year-by-year basis. EBITDA, we closed the quarter at [ 0.73 ], so around plus 30% compared to previous year. And free cash flow, it is negative as it is usual in our business, but much less compared to the past. So it is around plus 50%, 45% compared to the previous year. And it is very, very improving compared to the past. So our net debt has increased, obviously, as a consequence mainly of the acquisition of Iveco Defence Vehicles. So let's focus on orders. We said that we see a very strong commercial momentum, orders up by around 40% total backlog, including Iveco of around EUR 59 billion and the book to bill at [ 1.6 ], so very strong compared to the previous year, it was 1.3 in 2025. So if we look at the different divisions and the performance of the different division, we can see that we had a very strong performance in defense electronics, helicopters and aeronautics, of course, but also on the smaller division, cyber and space, the performance was very good. So defense electronics, we had a very significant results, both in Europe and in U.S. If you look at the euro comparison, Leonardo DRS sounds flat, but of course, it is only because of the negative impact of the translation of the U.S. dollar into euro. So excluding that impact, DRS has increased by 7%. So very, very significant performance. A number of very important orders to us. So in electronic defense, same for Italy. We had ballistic missile defense, Griffin. So a number of significant orders. Helicopters. Helicopters, we have a peak clearly like for aeronautics and we will discuss in a second. Here, we booked the NMIH order for U.K. MOD, so there -- commercial plan because of the situation on the [indiscernible] side, so it was fundamental for us to get this order in the first half as we did. Aeronautics, here, we have the aircraft component, which has recorded an outstanding performances, a number of significant orders, M346 for the Austrian efforts, M346 again, for the Italian acrobatic team, but also orders on, IFA Germany and IFA in Italy. So some very significant orders driving the division up by 2 billion compared to the 2025. See on the table, but it is just because of a different phasing compared to 2025, the phasing was different and more concentrated in the first half of the year. Cyber space has had very good performance. So we are at around plus 15% and plus 12% compared to 2025 with a number of important orders distributed over the different business. And this is leading to a very good performance also in terms of revenues. So excluding, again, the negative impact from the translation of the dollars, we have a plus 10% compared to last year. Again, we are projecting a plus 88% on the full year, so a very positive performance. We see electronics. Again, we are here affected by the negative impact of the dollar, so we see again DRS flat. But instead in dollars, it is growing by 8%, so very significant performance. Electronics Europe is growing by 15%, and we will see this point also when commenting about the profitability. You can understand how brilliant this performance is. Helicopter is growing at a 4% pace, which is perfectly in line with the target that we have for the full year. As you may remember, the past, helicopters division has experienced a significant growth, both in '24 and in '25, plus 11%. As to improve our profitability, as we will discuss in a second and very good performance in terms of deliveries, up from 72% to 81% with a different mix also bigger helicopters compared to the deliveries we made in 2025. Aeronautics, we had a very strong contribution from the Aircraft Division, a solid performance. So we know on our key programs, so we are performing very well. So -- GCAP, we see a small defense compared to 2025, which is mainly due to the lower -- but not an issue for the full year, but just reducing slightly the contribution of aircraft in terms of revenues in Q2 2026. On the contrary, aerostructure is marking a significant progress compared to 2025, plus 44%. This is mainly due to the increase in the rates of production of B787, how key it is the rate of production on that program for us in aerostructure. So in 2025, we started the year at four deliveries per month, four fuselages delivered per month. Over the year, we increased up to seven. This year, we started seven, then up to eight and we target 10 by year-end. So significant progress on deliveries on B787, clearly implying a plus 44% in terms of revenues for the semester. Cyber space, again, growing a lot like for orders, plus 17% in cyber also due to -- which is doing very well both in the payload robotics business and in the service activities. So overall, strong performance in terms of revenues, plus 10% year-on-year. Profitability as said, we have increased our return on sales by 110 basis points from 6.5% to 7.6%. As you see, most of the increase in terms of EBITDA is the margin effect that only 1/3 is driven by the additional volumes we were commenting earlier, so very good improvement in profitability. If we look at the breakdown by segment, starting from defense electronics, outstanding performance, plus 20% compared to the previous year with outstanding performance in all the different building blocks. You may remember that inside the EBITDA of electronic defense, we have four building blocks. We have electronics Europe, strong performance plus [ 16% ] the results. And we have the contribution of our strategic JV investments, MBDA and Dassault, again, plus 20%, very strong results in MBDA, very good results of [indiscernible] Helicopters, we have an increase, which is linked to the increase in volumes [indiscernible] Aeronautics, we see a big increase, plus -- almost plus 100% aircraft stable for the mix, I said earlier. So very good performance on our key programs, some lower activities on -- well, programs in the Gulf area. On the contrary, aerostructure, that's the benefit that you are seeing on the net income of the division. On the contrary aerostructure is partially recovering its loss. So if we compare to 2025, thanks to the -- mainly to the increase of the rates of production, both in B787, but also on we are reducing the loss by around 30 million. The same applies to ATR, where we have reduced the loss by around -- Cyber is benefiting from a positive mix in terms of programs, so it is growing by 34%, but also by operational efficiency. So we are increasing scale without increasing the cost in a corresponding way and that's driving such a big increase. Space is increasing by 6%, very good performance, again, on payload, robotics and service, solid growth. In Thales Alenia Space, which is the manufacturing portion of our space alliance JV with Thales, we see still a loss, operating level profit is improving. We see here the net result, which is instead in line with last year, mainly because of below-the-line items, which are higher compared to the corresponding period of the previous year. So as said, we see a very significant improvement, so up 45% year-on-year. A number of actions to make our management -- it is still negative. I said that -- it will always be negative in the first portion, even better if we consider that this year as planned, it was in the plan, so it is not a surprise. We had to offset a couple of significant negative items. At the end of 2025, you may remember that we discussed about this point, so 113 million cash out in the past in Italy, we had a significant amount of tax losses which now we have fully used. So we are starting to pay taxes without any tax shield. And so we had around 100 million of additional taxes paid compared to previous year. So very good performance, even better if we consider we have been able to more than offset these two negative items. And now let's focus for a second because we have been commenting the results without IDV, but IDV as well is performing very well. So if we look at the results, we see that they are contributing to Leonardo, a backlog of 6 billion, around 6 billion and orders at 0.6 billion, 0.7 billion which are in line with our full year expectation of 1.2 billion for the 9 months. You may remember that we will consolidate with different margins -- so the mix in Q2 was different from the mix that we're assuming for the full year for which we confirm a 11% return on sales over the 9 months. Free operating cash flow was negative, as we said, the same thought applies also to Iveco, of course. So it is a business where it is normal to be negative in the first half of the year, much less compared to the Q1 of Iveco, which was not consolidated by Leonardo, but it was significantly negative. On the same time, we are working a lot to integrate IDV in our business. So there is an integration program team project team, which is working to fully integrate Iveco Defence business with our activities. And the consideration paid for Iveco is driving [indiscernible] so fully compatible, very solid balance sheet. We think we are perfect in line also with our target of leverage we gave for the 3 years -- EUR 400 million with a tax benefit of around EUR 50 million. That was part of our capital allocation, we presented during our industrial plan. You may remember that we said that we were setting up a budget provision of around 1.8%, which included also some potential opportunities in [ Europe ]. Of course, we think it can make -- bring potential very significant benefits for DRS, but also for the wall and wider Leonardo Group. Closing is expected in Q4 2026. So guidance, now let's focus on the guidance. I will walk through for a while because it is quite complicated this year because of the inclusion also of IDV, we started with a guidance of [indiscernible] which is fully confirmed of the contribution for the 9 months 2026 coming from IDV. And this is leading to the updated guidance that you see in red. So new orders, 26.2%, revenue is 22.1%. Now as you know, given the very solid performance of the first half of the year, the strong commercial momentum we are seeing, the significant pipeline also we have and we are seeing, we have decided to upgrade our guidance. So on orders, we have increased from EUR 26 million to EUR 28.2 billion, we see revenues stable compared to our budget assumptions. So we confirm the 22.1% guidance. We see that EBITA is increasing and therefore, we have upgraded our guidance up to 2.21, which is a double-digit return on sales. So we are targeting to anticipate, the target to be a double-digit EBITDA company in 2026. It was supposed to be 2027. And that's a very important milestone. Free operating cash flow has been a consequence of the good momentum in orders and the improvements that we see on profitability, we are increasing the guidance up to 1.37%. And as a consequence of that, of course, we see a reduction also in net debt down to 2.2%. So this is our updated view about the year and the situation in June was very good and so [Audio Gap]

On IDV. So you mentioned the strong quarter 2 profitability, which was owing to a favorable mix. So my question is if you could comment on the phase mix between technical vehicles and trucks in the quarter? And also how you see that mix evolving for the full year? Comes to potential divestment of the truck business to Rheinmetall, and then lastly, if I may, on the order pipe line, the guidance implies a meaningful slowdown in orders in the second half compared to H1 but also compared to the prior year, so I was just curious to hear your thoughts around the order pipeline that you see out of here.

We see the full year at around 50% or 55%. We have a higher margin. So you may remember, we commented in the past, there is a difference in terms of profitability between the two business, and so that's why we see a full year still at 11%. On Rheinmetall for trucks, I think, as you know, there was -- the Rheinmetall, for them to look at this opportunity it is still one of the options. So not the only one. It is one of the options. We are seeing that the business -- the truck business is growing. It is profitable. We have been working as part of that integration which was an area of concern for us not being an automotive group. So I think we are now in a position to better evaluate -- we can have.

If I may add, Giuseppe [Audio Gap] We mentioned an M&A -- so orders are not linear.

So the first is on Aerostructures, which is obviously -- in your initial remarks, spoke first about restructuring and then about the potential JV. So I'm just wondering if we should interpret this as a more positive view on the business and maintaining that as of this call, given that things are clearly dragging on with your preferred partner? And then secondly, just on the guidance, obviously, you've raised EBITDA but not -- or maybe efficiency gains.

As far as Aerostructures, the plan is still the one-off finding and an agreement with a potential partner in order to build the JV to have a branch in the second country -- delayed a little bit due to the conflict in Middle East that prevents detailed rating even more on making that business less money losing. And this is also provided -- less problematic business. It is -- it's unchanged.

And we think the benefit can be higher compared to our initial execution, I think the main driver for the increase that we're seeing on the full year results is [indiscernible] spread across all the business.

First of all, congratulations. Any comment on your thoughts about how orders will develop, where do you see most demand? And if you can maybe elaborate especially on the Middle East? And also on the Michelangelo dome in your opening remarks, you mentioned that you want to accelerate on a number of programs. I guess, the Michelangelo is one of them. The second question on the pipeline is the defense spending in Italy -- about whether Italy is safe [indiscernible] potentially related to programs on the land platform with -- can you give us an update on what you are [indiscernible] program, whether you think accessing this will brief anyway.

I think there is a positive outlook on all divisions. There are even a few jumbo orders as an opportunity -- we tend to factor them and not to put it -- to put them entirely. In terms of divisions, if I had to rank them, I would say that the biggest opportunities for orders, I can see in electronics. Electronics includes today also the armament Oto Melara and all the armament component is -- has seen a strong increase in the market following the raise in defense spending. Middle East, yes, Middle East is one of the regions where we are pushing -- with prospects in aeronautics, in helicopters and in space. Also in space, we have significant opportunities that we think will materialize in the coming months, maybe within the year, maybe just after. But in any case, the outlook is very positive. Michelangelo dome, I think I lost part of the question, but the acceleration is both on some streams that had already been launched. I was talking about the dead zone protection system that has been launched as a demo to be performed before year-end is a component, a vertical component of Michelangelo, but at the same time, adding to critical element of a dome was to protect from such threats, a nation or large geographical areas that are the missile component to MBDA. And the space division, where we are investing a lot in our Guardian constellation, that is a good basis for Earth observation, even if the final -- the third one was on SAFE. We could not hear very well, but I will provide our understanding on the status of SAFE. First of all, SAFE is a different source of funding. So it's not necessarily an additional amount of money that could be used by the Italian government. It could even be substituted to other sort -- in the use of partial or total of the EUR 14.9 billion that have been booked, but -- that we have -- covered by the defense budget that is in place. The procedure for excessive deficit in Europe that would allow Italy to invest more over 3% of deficit in defense. And this is a debate that is probably taking place towards the end of the year. And that would allow additional spending for energy and for defense. So we're not talking about SAFE taking out money from our programs, but potentially Italy putting more money in defense and security and in energy.

Yes. I saw the SAFE was supporting the contract for the Italian Army the land platform contract? .

I'm optimistic with signing the contract in the coming months, both contracts, the follow-on of the links for A2CS and the new main battle tank based on part. These are two different contracts. They have an hypothesis of partial coverage by SAFE, but there is the concrete possibility to...

We proceed with David Perry from JPMorgan.

Just a high-level question, if I may, for you. The -- you talked about accelerating and I think sharpening up the industrial plan. Just in terms of the -- and I'm not asking you for new guidance, but in terms of the medium-term -- ambitious, do you think the scope to do better? Just be interested in your thoughts. And just a small detail -- the first half what they are and what you're expecting for the full year?

The industrial plan I have inherited for me, it's a realistic and sound in terms of initiatives and figures. Of course, we are going to review that towards the end of this year, beginning of 2027, the fact that we are revising our guidance, improving them is a good sign, but it's not a commitment to an improvement of the plan. Not because it is not possible, but because we have not yet looked properly at that.

Okay. And David, on the nonrecurring, that amount includes a couple of items M&A-related cost of actions on that side, and so we are including there the cost related to M&A, assess whether there are areas of efficiency. So there are some noncash write-off in that item -- all what we see, usually, we have around EUR 100 million in total for the year.

So we will proceed with Afonso Osorio from Barclays.

A few from my side as well I may. The first one is on the [indiscernible] program. You mentioned some delays in the second quarter, so can you quantify that impact? And also, if you can share with us if you expect a catch-up in the third quarter because of that? That's the first one. The second one, in terms of the order intake in the second half, can you remind us if the Eurofighter order to Turkey has been already booked, and if not, would you expect that to fall in the second half? And the last one, just to keep on the exceptional charges on the second half...

Was not so clear. I think you were referring to the delays on the [indiscernible] programs. It is not a big number, so -- it is something we will recover in the second half, not a big number. Of course, the situation there has been critical. And so some of the activities have been deferred to the second quarter. On Turkey, so it is not booked at the moment. Of course, it is in our estimates for the full year.

And IFA is one of the areas where we see opportunities for -- not for this year, but for the remaining part of the plan.