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Executives

Alessandro Pansa - Chief Executive Officer

Gianpiero Cutillo - Chief Financial Officer

Raffaella Luglini - Head of Investor Relations

Analysts

Nick Cunningham - Agency Partners

Rami Myerson - UBS

Martino De Ambroggi - Equita

Christophe Menard - Kepler Cheuvreux

Massimo Vecchio - Mediobanca

Gabriele Gambarova - Banca Akros

Finmeccanica SpA (OTCPK:FINMF) Q2 2013 Earnings Conference Call August 1, 2013 3:00 AM ET

Alessandro Pansa - Chief Executive Officer

Good morning, everybody and thank you for joining our conference call for first half results. Today, I am here with Gianpiero Cutillo, our Chief Financial Officer, Raffaella Luglini, our Head of Investor Relations, and some other colleagues who has helped us in delivering these results of Finmeccanica Group.

Our main message today is that the group half year numbers are broadly in line or to certain extent better than our internal budget plan. You will see the solid underlying business performance in our core space and defense business in the first half of 2013. You see that we are achieving real progress of results coming out for our industrial restructuring as we told you after the – during the presentation of the 2012 results in April 24 in London. At the same time, we have one major legacy issue which still continuing to wait on our business. The name of this issue is our rolling stock assets of AnsaldoBreda to be very clear and blunt at the very beginning.

Gianpiero will take you through the key points in more detail of business and financial performance. I will spend some time in describing our continued progress in restructuring the group business. And then I will go ahead in discussing with you industrial restructuring in our three big pillars of our plan, which is as you remember, governance, restructuring the business, and portfolio rationalization, but before leaving the floor to our CFO, I would like to underline once again that we all know where we are going and we are on track on what we are doing, and we are satisfied of what we have been able to do in the first six months of 2013. And this is exactly what we were expecting in term of business conduct and business achievement with respect to our plan and respect to our projections, and plan. Gianpiero, up to you?

Gianpiero Cutillo - Chief Financial Officer

Thank you, Alessandro. Overall, our first half results were in line with or better than our budget plan. Before I review the overall and divisional numbers in more detail, some key points. First, we see solid underlying performance in the core businesses. In particular, the aerospace and defense business are tracking slightly ahead of our budget plan. Next, we are achieving progress and results from our industrial restructuring. DRS profitability has held up well. And importantly, we are satisfied with the progress with the Selex restructuring and the real results and benefits we are going to achieve. But some legacy issues are still continuing to impact us, the largest being the AnsaldoBreda rolling stock business. It should be noted that these results for the first half are not fully representative of the entire year, because more than half of our business activities are concentrated in second half.

As you know, free operating cash flow for Finmeccanica tends to be seasonal and it is always negative until Q4. And for the first half of this year, we are actually ahead of plan. Our financial position remains solid and we have financial flexibility to execute our plans. So, overall, our core business are performing solidly. We are proceeding along our intended path, and importantly, we are making real progress on industrial restructuring. So, even with some risks and we are substantially on track for our full year expectations.

I want to start with the overall numbers, then guide you through the numbers by division, and then discuss the cash flow and finish with some thoughts looking forward. Let’s look at the key group metrics. Orders, despite being down year-on-year, overall orders are close to our plan. And in the core aerospace and defense, we are exceeding our budget forecasts. We uphold to seeing a modest fall in our order backlog, the inevitable results of the book-to-bill ratio of less than 1% which are seen these difficult times. But it’s worth saying that the current backlog equates to around two and a half years production for the group. I will talk more later on the order book position and why we are confident of meeting our full-year target here.

Revenues, first half revenues of almost €8 billion were substantially in line with our budgets and not far of the same period last year. Within that, at the space and defense, revenues were up slightly whilst energy and transportation fair by a modest amount. In EBITDA, overall our first half profitability was slightly ahead of last year and much better than we plan with stronger start from the space and defense side and the benefit of reduced head account.

Net income, as effective net income resulted in a loss mainly due to contractual charges related to the legacy programs in Breda and severance costs in defense and electronics businesses. The free operating cash flow, good cash flow in the second quarter was in line with expectation. As you know, our cash flow is normally seasonally weighted to the second half. Overall, for the first half, we were in line with the plan although slightly worse than last year considering the traditional seasonality of our cash flow movement, we expect this to even out somewhat on second half. Net financial position is consistent with the strength of free operating cash flow.

Let’s talk about orders, we are comfortable with the order levels at this stage of the year and we are confident that we are on track to achieve the full year 2013 order guidance. Let me explain why. First, orders in aerospace and defense are ahead of budget. And while aerospace and defense orders were lower in Q2 on an year-over-year comparison, you need to understand that order intakes does not proceed on a linear basis over the course of the year, so quarterly comparison can be sometimes misleading.

Secondly, in July, we made up much of the shortfall in energy and transportation orders. Some major additional orders were signed after the Q2. And including the one signed at the Le Bourget that are not included in the backlog after the end of the first half. A notable example is the major Ansaldo STS order for the new metropolitan system in Riyadh. So, that’s why we are confident that we are on track to achieve the full year 2013 order guidance because of the facing over the year and because of the new orders not yet accounted in our backlog.

Now, turning to the divisions, starting with the core businesses, helicopters, again helicopters business continues to perform strongly. It’s a good profitable business and continue to do well. Some key points as expected orders were lower in the first half, but given the pacing of order in 2012. You will remember that a disproportionate number of orders were received in Q2 last year after 60% in the bid. 2013 will have a more normal shape. And we are confident that our full year order book will match the expectation and exceed last year numbers. Underlying revenue were up 3.5% in second Q, 7% in the first half, mainly driven by delivery increase.

Lastly, the AgustaWestland 139, in the first half, we delivered a total of 120 helicopters compared to 77 last year. The outlook in terms of deliveries remained substantially better than last year. We have seen that the Q2 EBITDA has been affected by a one-off income benefit coming from the closure of the U.S. Presidential Helicopter program, but I would highlight that we – that the underlying profitability of helicopters remain as strong as last year, even excluding these one-off income.

Aeronautics, here we are also seeing continued strong performance on all key metrics. Orders up 13%, second-Q-over-second-Q driven by the civil business mainly ATR, ATR in Le Bourget announced record orders and options for a total of 173 aircraft for a total amount that exceed the $4 billion well ahead of full year target. Revenues increased 8% on year – year-on-year driven by increased activity within civil segment. Profitability continues to grow as per our budget plan due to improved efficiencies as a result of an ongoing restructuring initiatives and commercial activities and in contract renegotiations.

Finally, our 787 Dreamliner program is proceeding well and ramping up towards a 10 chipsets per month by beginning of next year. Into Selex, reduction in order is in line with the budget figures, but I think there are two key points to show you want Selex. First, the sharp decline in sales profitability was caused by over run on traffic control programs where the process of recovering from a repeat level of performance is taking more time than expected. The technical issues are now being carefully addressed and we expect the business to be back on track by the end of this year. Second point is the real and beneficial progress of the industrial restructuring process, and an underlying business trends are good.

All our initiatives are very much on track. We have signed agreements with union for our headcount and site reductions. We monitor this progress carefully on a monthly basis and we see good evidence that we are hitting key milestones. Although at an initial phase of the project, after six months we are satisfied with the results achieved so far and we are more confident that Selex manufacturing plant is going to the right pace with the reduced executional risk and that we will be able to achieve all the objective included in our 2013 plan. And also, there are some additional benefits able to partially offset the extra cost coming from the abovementioned ATC programs. Alessandro will talk more about this in a moment.

Next DRS, order impact slightly better than our forecast, we have got a good handle on how the U.S. Defense budget review is impacting our business. Overall, DRS performed better than with budgeted revenue and operating profits. There was a stronger start to the year delivering higher than budget profitability despite the falling volumes. We expect to be on track for the full year. We are proceeding on our instruction. The business is working exceptionally hard to deliver revenues and to sustain profitability. And I think that through our actions, the business is increasingly well-positioned for the tough operating environment.

On space, orders and revenues are both growing in the first half 2013, with results better than budgeted and as expected both services and manufacturing and showing improvements in terms of profitability, thanks to all efficiency action we put in place.

Moving to Defense System, orders are broadly in line with expectations, and revenues ahead of plan and up 0.5% versus last year, driven by the strong performance, in Oto Melara and the missiles business, EBITDA, ahead of plan and up 15% in the first half of the last year, driven by good profitability in MBD. Now, energy, new orders fell 55% in Q2, but as I said earlier, we had a number of large order in the immediate pipeline. And so, we are confident that we will recover of the shortfall in the second half. Market condition remained tough in the plants and components and service segments. But even in a challenging environment, we expect to maintain the profitability at the high single-digit level.

The last division is the transportation. First, STS is a good business and it continues to perform as we expected and you will have seen the results presented the last week. As I said before, on the 29th of July, Ansaldo STS announced an important contract of $680 million for the longest line of the new metropolitan system in Riyadh. The contract includes also additional option for around $250 million for 10 years maintenance. But AnsaldoBreda rolling stock business is continuing to experience delays in order intake, largely from its domestic Italian customers. But we are still planning towards these orders by the yearend. Revenues are behind schedule in several programs, mainly due to the above mentioned postponement of order intakes and profitability reflects the lower revenues, unabsorbed the coverage and additional cost overrun.

On the Belgium contract, we have taken a €43 million provision, mainly due to the limitation of the collateral. As you know, we are committed to reduce liability in this area with a mid or long-term strategic solution. Now, few words on our full-year guidance, we do believe that full year 2013 guidance is achievable. Regarding our order book guidance, we have already discussed why we think that this target is achievable. And we can confirm revenue guidance and we expect to remain in the same range of €16.7 million to €17 million. And our progress on industrial and business restructuring will support profitability and EBITDA. And our cash flow has also been in line with the plan up to this stage of the year. So, we are on track and on plan in the first half of the year but we have a group with many businesses, weighted to the second half.

We know that we have much work still to do to deliver in the second half. And there are some difficult contractual area that we need to navigate, an example India with helicopters and Belgium-Holland on the transportation side. But we have ongoing actions in place in order to do all we can to manage, address, and mitigate any short-term downside risks here. And lastly, about our financial position, as I mentioned in the full year results for 2012, our financial position remains solid. Net debt around the €5 billion is clearly higher than we and the ratings agencies would like but we reiterated our commitment to reducing it substantially. And meanwhile, we have sufficient financial flexibility, execute our plans and operate efficiently. Let me summarize the key point and overall picture.

Opportunity, at this stage, we are in line with our budget plan. We have seen good solid underlying performance in our core aerospace and defense businesses. And here we have actually ahead of plan in all our key metrics. We had a shortfall in order in energy and transportation, but we have already met up much of these in July. Importantly, we are making real progress in industrial and ambitious research. And we are a group, which has many businesses concentrated towards the second half. And so we know that we have a lot of work to do to deliver our full year targets, an important risk to manage but we do still believe that we can achieve our full 2013 guidance.

And now, I will hand you back to Alessandro.

Alessandro Pansa - Chief Executive Officer

Thank you, Gianpiero. Most of you may remember that of the presentation the 2012 results in the end of April 2013 in London, I told that Finmeccanica plan was based of three main pillars. You remember that we are intensive in governance of the group, restructuring the business of the group, and rationalizing the asset portfolio. I would like now a) to reconfirm that these are the pillar and the element and the world from which we are moving and that we are moving hard and working in a very committal way in order to achieve the goals connected with these targets.

To a certain extent, the result of what we have we done are already embedded in the figures that Gianpiero has described going there, but I would like to be a little bit more precise to give you more color about all of these items in the next few minutes. The first, governance, in the last three months, I mean after we have delivered the full year results, I think we have achieved further important goals. First of all, we have completed composition of the Board of Directors, and now we have a Chairman, which is a really proper Chairman in line with best practice. He is independent of the day-to-day running of the business. He has clear idea of the responsibilities, with the clear division between the CEO role, which is a minor one and the Chairman role, the President one and he is responsible for institutional relationships, group security, and internal audit, and we are coordinating and collaborating very well each other in order to strengthen the restructuring and re-launching process of Finmeccanica.

Secondly, we are on a very significant good track in the centralization of internal auditing, where we have already announced in the last few months as well as the committees who is in charge of defining new use for commercial intellections and commercial engagement of Finmeccanica Group abroad is working very well and the results are expected for the end of 2013. We will be committed to embed this result in the governance rules of Finmeccanica and any organizational changes, which will be connected with this recommendations and suggestions. Into the sense, we are also reorganizing our international sales and commercial organization in order to be more focused on the establishing of efficient structure in order to carry out our international business. We have issued the new group directives connected with the government of relation with sales agent and promoters.

But the most important news of the last few weeks is the new legislation proposed by the government, which is now under the approval of the Parliament connected a creation of the so-called Italian FMS, if you want to call it this way or government-to-government agreement regulation, which will provide very important governmental support for the Finmeccanica commercial activities outside the Italian borders.

This is important for two reasons. First of all, because it fills the gap, which has already existed between our commercial structure and commercial opportunities and that of many of our competitors, not only Americas but also Europeans. Secondly, because it shows the interest that the Italian government has for our group, which is very important side of how much our government is looking at Finmeccanica and how much it is supporting us in our day-to-day business and in our long-term and medium-term strategy. To certain extent, this second consideration is important as well as the technical, if you want, effect of this decision because it’s signing a new age, if you want, to a certain extent, of the relationship between governments and companies for our explicit defense, which has never been so clear in Italy as it is now. For that reason, we believe that we are fully on track of the government’s side. Even if a further initiative will be taken in the future, with a significant importance both organizational and commercial organization viewpoint, of course we will keep you updated on this.

Let’s move now on the second pillar, industrial restructuring. For this viewpoint, I and Gianpiero has already anticipated something connected to the financial effects of our industrial initiatives, I am glad to say that we have made the progresses that we expected to make for most of the areas where we have concentrated our activity. We have been working on cost cutting, strengthening the efficiency and improving the competitive profitability of our products, reducing cost of products, increasing capital efficiency, and increasing efficiency of our supply chain. As you know, we have focused mainly on four areas aeronautics, DRS, defense electronic and security, and rolling stock. I have to be very clear in saying that we have been successful and we are successful. In the first of these three areas, aeronautics, DRS, and defense, I told you and security we are less successful that we wanted to be in one stock. And I’m going to deal with that in a few minutes.

Let’s spend a few seconds about that single business, aeronautics. I mean the three are planned which has been launched at the end of 2011, beginning of 2012, has now become the benchmark of restructuring our business. We have completed the closure of one important plant which is Casoria, so reducing the significant amount, the invested capital, the capital engaged in that business, 1.7 thousand people out of 1.8 are out of the activity. And this is - in this sense, they – it has been completed the process of the treatment of redundancies that we have recently announced. We had made progresses in basically all the areas in which I will now fix has been restructured.

If you want to see the little bit in pessimistic way which is shown by these top designers, I will like to say that with the exception of the performance of some specific platforms, our trainers and terms and our special missions and tactical transportation aircrafts. In all the other areas, the progresses have been significant. And in most of the areas, we achieved most of the targets we have. I would like not – I would not like to bother you with number of figures, just tell you where we are on our most important – well, most important – our largest program, which is 787 which has been our nightmare for a couple of years. Today, we are at nine ships a month, we expect ten ships per month in January 2014 and what it is that’s more important both client Boeing and supplier, Alenia or Finmeccanica are reciprocally satisfied about where we are. We have run a huge risk last year with this program. All the possible risk, which could counted for a problem for this program could it be that you know in respect about where we are, where we were at the end of 2012.

Now, we believe that the ramp-up of B787 might only be positive for the financial figures of Finmeccanica for the next year. DRS, obviously, we are amazed by the success of that, the DRS have reached in dealing with the dramatic shortfall in orders, revenues that has followed to the restructuring of the U.S. Defense budget, but with a particular significance in Army, which for many years has been the most important client of our company.

DRS has launched a first wave of restructuring in 2012, which has been fully completed both in term of redundancies, right-sizing of production plans, business consolidation, and corporate G&A cost reduction. In order to maintain the profitability, which it was in equally relative term to that of the period previous of the reductions in orders, the company has launched a second wave of restructurings, which includes over 700 additional headcount of reduction in the first half of 2013 for the consolidation of business, and another shutdown of seven shops – seven sites during the first half of 2014. You see that the DRS performance today is fully satisfactory with respect – even keeping into account the significant reduction in revenues. And we believe that this is continuing to be and will be even more in the future an asset of strategic importance for Finmeccanica, not only for the operational and technological viewpoint also for the strategic viewpoint connected with the reorganization and the future strategy of our company.

Selex, Selex is our large and highly compressed restructuring, which has started later than the other two. But it’s important to underline that we are on schedule. And notwithstanding the fact that the merger is dated January 1, 2013, we are achieving on a daily basis, I would say on a daily basis, the targets we have assigned to the company’s magistrate. We have signed an extremely important agreement with the trade unions, which by the way has been seen as an example of the way in weak of this redundancy problem as to be dealt in this country and this is very important because we have done it with a very limited degree of conflict with our – with the trade unions, with the employees, this is not damaged productions because there has been not stopped, which has jeopardize the continuity of our business. We have reduced already 8 out of 25 of the sites which we had programmed or which we have planned to close and we confirm that the 25 site closure is our plan of moving from the present 54 sites that we have.

We are closing on a daily basis production lines. Remember that we have to our product catalog is moving for 550 to 350 and we are on track on this. And from this point, we do – we confirm that with global cost of €300 million 2,000 equally spread between 2012, 2013. So 2012, 2013, 2014 and 2015, we expect recurrent and structural €250 million benefits of this program for the Finmeccanica group started for 2016 and onwards.

I would like also to tell you, as far as the sales is concerned that if we look to the three most important business areas, three out of four, sorry, two out of three, has almost on track. We still continue to have problems of ATC and Waste Management System, where we need some more work, some more initiatives, and some intense and important evolution of some specific congruence in order to be on track, also on the ATC and Waste Management business. But as far as Airborne and Space, and Land and Naval division, we are glad of the company’s performance, both of the business streaming activity and on the delivering of the restructuring program. All of this was to show you how we are moving in making Finmeccanica, an ordinary managed company, where we are blending both restructuring and program of improving and re-launching activities. In AgustaWestland, whereas you know, we are performing very well, we also launched further programs of cost reduction and cost program reduction as the one that is involving both 139, 159, and 189, where we use a sort of commonality and commonality approach in order to manage the program all in the same way. All this is giving us good news, what does not give us good news is rolling stock. We have worked very hard on that.

The management of the company is doing all the best in order to reach their assignments that he has received for the headquarters of Finmeccanica, which are always very precise and very clear. But notwithstanding all of our efforts, we have to say that the progress of that we have made are unsatisfactory, unsatisfactory both for contingent and for structural reasons. Contingent reasons has already been managed by – a discussion by Gianpiero, problems with the Belgium contract and others. Structural reasons because we are dealing with the structural and efficiency of this company which is difficult to manage and to handle through ordinary management tools.

Therefore, as we have already told in April, we are moving towards extraordinary management initiatives. We have, as you know, divided the company in two different entities. One we call old entities where are included all the legacy businesses, which do not have significant possibility of being covered given the – very high degree of completion. Holland management contract, IC2, IC4 managed contract, other contract and other assets and the new entities where there are program is contract of variety high-speed mass transit. The most efficient plans where we expect to get better results with respect to the others in order to restructuring the business.

The most important target we are trying to achieve is to reduce or at least 20% the hourly rate of our business, which is higher with respect to most of our competitors of more than 20%. This is due to the inefficiency of the production plan, the inefficiency of some specific business volumes. But however you want to call it, the problem is that is of paramount importance of (indiscernible) for this company to be able to reduce hourly rate of at least 20% in a very short time in order to assure and acceptable degree of efficiencies of the production activity and product deliveries. This can be achieved through restructuring process and capacity optimization. And also thanks to the change in processes, quality assurance programs which has been launched by the management and which is giving some results, particularly in the new entity while the old one is very difficult to get some significant process given the degree of competition. This new entity which for 2013 and ‘14 will be between 45% and 50% of the total business – of the Breda business will be more than 80%, close to 90% in 2015 once that the programs that have a contract connected with the old one will be completed. We do all of this in order to move towards a strategic solution for the long-term future of Breda, which cannot be a continuity future as it has been seen in the business comments and it has been undertaken until now probably in the last years.

Having said that and I hope you appreciate our transparency for this point, I would like to tell you that if we look globally to what we have done this year, you see that we had achieved €260 million of savings, I would say, because given that business is not growing, all of our restructure is connected to cost-cutting and (indiscernible) market, because this is more structural and this is more sustainable and is given the possibility of the company much more significant possibility of the profit in the future. We had benefits of €450 million for the 2013, which has been benefit, which has been established in the plan we deliver and we devised in 2012, to which we have had another €50 million of initiative this year before we expect that the full result of benefits at the end of 2014 of our plan will be €490 million. And I expect that they will be all reached.

Now, let’s move to the third pillar, which I understand is the most sensitive one. And therefore, it’s important that I deal with it. For this new point, I would like to remember that we have been very clear about where we wanted to focus our investment, and I also have been very clear in saying that I will not speak in details of our potential transactions until they occur. These two statements must be kept in mind in order to understand what I am saying right now. I understand that it maybe frustrating for many of you to see that we have not yet completed a number of transactions and a number of the consolidation initiatives that we have announced.

But what I can do and what I can say you is this. First, I can reconfirm the strategic plan of the management team with the full support of the board, the whole Board of Directors, is to make Finmeccanica a more focused company on aeronautic, space, and defense. Second, I can reconfirm our commitments to both investing in the core business and also in restructuring the portfolio, preserving the solid financial structure of group at reducing its financial debt. Third, we are committed to finding in this scheme the best strategic place and solution for all the assets of Finmeccanica, those which are part of aeronautics, space, and defense, those which are part of energy sector, and those which are part of transportation sector. This means that we look after to the strategic future of any assets.

As with regard to the fact that in a scenario where we intend to achieve an adequate return on invested capital and adequate cash generation, we are committed to protect production assets, technological endowment and qualified employment. And we will struggle in order to achieve both of these financial and industrial strategic goals. We are working hard to accommodate the strategic objectives of Finmeccanica, balanced with the long-term strategic interest and value of all the assets, including energy and transportation. And while we understand the frustration of investors about the pace of the progress here, we would like to assure that we are working our hardest in these areas, but to put in very simple and candid way, these are complex situations, in a complex country and it can be harder and take longer to execute transaction which achieve the goals that I mentioned and I listed you before.

For this viewpoint, for us is crucial to have a good and constructive discussions with the stakeholders and with the government with whom we are having a very positive interaction, which we hope will give the possibilities to strike the best strategic initiative – the best possible strategic initiatives. We have, for this view point, we have been making progress. We definitely are in a vast negotiation to settle the issues and we are confident that the proper solutions can be found in a relative span of time. For this view point, please I’m asking you to trust Finmeccanica’s management in order to understand how hard we are working in an environment and in situations which are not dramatically easy.

Nobody likes being downgraded because the changes are seen to be taken too longer and I am as well as you are impatient to get results from this viewpoint. But as Gianpiero said before, we have the strong financial position, we have no liquidity issue and for this viewpoint, our important is the way in which we conduct our business. And not only how the rating agencies are seeing us because we know exactly what is our financial situation, much better than anybody else and please don’t worry about that.

Therefore, just to conclude, we have showed you a (indiscernible) performance. We have showed you that we are continuing to make strong policies on two of three, out of three of our key priorities. And we are dealing very hard with our legacy issue in order to avoid negative impact of this issue on the future of our business. Be sure that we are making all of what we can in order to deliver the results in both of the three pillar of our strategies in time, in order to deliver the necessary value to the Finmeccanica shareholders and in order to deliver the necessary results to all the other stakeholders connected with our business, and it gives out the possibility to make our business better conducting and giving better results.

I would like to thank you for have listening to us. And now, we are ready for any question you might have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question today comes from Nick Cunningham of Agency Partners. Please go ahead.

Nick Cunningham - Agency Partners

Yes, good morning, gentlemen. I have got a few questions, some brief. Firstly on Helicopters, the VH-71 segment, I just wanted to get an idea of how big that is, so that we can get to an underlying; I apologize if you said that earlier, I missed the first couple of minutes of the call. And also on Aeronautics, the renegotiated commercial terms, I am assuming that was on 787, does that cause any variation in the – I think, the €850 million provision that you took about a year and half ago. And then finally and I think a bigger question on Breda, you are transitioning, you’ve said you’re transitioning out the bad bank of Breda and refocus on the good piece. How is that phasing going to work in terms of what actually happened to reported profitability? Are we going to continue to see a run rate of losses for the next several years? And when if you fulfill your plan, can you actually see a way through to Breda making some normal level of profitability relative to peers? Thank you.

Gianpiero Cutillo

Okay, let’s start with the first question, I mean the one-shot income that we got which is being included on the second half results is the related with the VH-71 is around €50 million. Also in the profitability, as we said, of the helicopter business also without this remained at a similar last year, well above two digits, well above 10%. The second question I think it was related with the renegotiation of some contracts on the restructuring around this, I was not specifically be talking about the 77 actually. I was talking about all our restructuring, all the customer we have orders. So European and the U.S. customer, and we didn’t make any change about it. I think you mentioned the fact that if we make some changes on the provision of where we booked, not, not at all, is unchanged for that time. So, we believe as some would say that even if the 77 is now proceeding very well and now we can define as stable the first and as Alessandro was saying, we are now proceeding after seven shipments per month right now ramping up towards the 10 shipments per months by year-end or beginning next year. We didn’t touch the provision. And the other is related with Breda, I think, the third question and well, as you could see on the profitability, it’s seriously affected by the performance of Breda and the performance specific of the old and legacy contracts there. So, it will have affected the first half, but it will hit second half for sure and also at this stage, even in ’14 as you could see on the chart that was showing, the good entity should grow substantially later 2014 and 2015.

Nick Cunningham - Agency Partners

Thank you. And does that imply that by say 2015, you’re starting to make some, say, modest level of profitability and where do you think Breda can get to in the long run?

Gianpiero Cutillo

Yeah, it will depend a lot on the success of all the initiatives that Alessandro was mentioning.

Nick Cunningham - Agency Partners

Okay, thank you very much.

Operator

Thank you. We now move on to our next question from Rami Myerson of UBS. Please go ahead.

Rami Myerson - UBS

Hi. Good morning, gentlemen. Three questions for me and I’ll start where Nick left on Breda. Just curious if in your conversations with different government ministries, they are aware acutely as we are how much Breda is weighing on the performance of Finmeccanica, and even looking at H1 results on the EBIT line probably would have been double. The EBIT ex-Breda would have been double what you’ve actually reported and versus probably large cash outflow as well.

The second issue, also from a top down perspective, looking at the different slides, on the one hand, you have talked about achieving the cost cutting benefit targets. On slide 29, but you’ve kept your guidance for EBIT broadly flat year-over-year. So, if you can discuss where those benefits actually going and why they aren’t coming through the EBITDA adjusted line. And the third question, you provided a very helpful slide at full year results on the free cash flow previous year and there were expectations for 2013. I will be curious to know how you’re performing relative to those expectations, is the vehicles outflow bigger than expected or smaller, and the core business, how is that doing as well relative to your expectations? Thank you.

Alessandro Pansa

Alright, it’s Alessandro Pansa speaking and I will go to the first question, and leave Gianpiero to the second and the third one. Yes, we – the government is aware of how serious it is to avoid the problem. Government as all government has to make and to push general interest. We, as a company has to push the company’s interest and these two interests are going together to a certain extent. Of course, to certain extent not as always happens. We, our dialog with the government is in order to accommodate both of the general interest and the specific company’s interest, in order to find out the best, proper, and attractable solution for a company, which represents an important piece of the Italian rolling stock sector, but at the same time, as is at the moment, not able to perform in an accepted way on a standalone basis. When I say that we had a fruitful discussion with government before, I was including the fact that these discussions were also connected with the problem of our rolling stock assets. Gianpiero, up to you for the other questions?

Gianpiero Cutillo

Okay. I think we have two questions remaining. One is for – was related with the – if I understood correctly to the fact that where all this restructuring capital –or benefit coming from the restructuring goes. And I will answer, we’ll, I think that if we go business-by-business or company-by-company. We can see especially as we said this on our Space and Defense meetings, I think a material growth and improvement between year-on-year at least in most of our businesses, especially in aerospace and defense. Part of these benefits goes to make our product more competitive, of course. Part of these goes to compensate as we explained, when we announced the guidance to reduction the volume, to compensate this. So that’s where – and part of this goes to cover some of the still continue overrun costs that we have in some of the legacy issue. That is about your second question. The third, I think was related with free operating cash flow. As we say, we are largely in line for what we said a few months ago. As you know, the free operating cash flow, it’s really affected by this seasonality and we have really a lot to do on the second half. But we are largely in line of what we say even with respect to the breakdown that we give to you. We have some plus and minuses that you could see. We had some maybe additional cost or cash-out because of the Holland-Belgium, the detective (indiscernible), or some other things. But more or less, we are in line with what we say.

Rami Myerson - UBS

Thank you very much.

Alessandro Pansa

You are welcome.

Operator

Thank you. We now move on to our next question from Martino De Ambroggi of Equita. Please go ahead.

Martino De Ambroggi - Equita

Good morning. Still have question on the divestiture, because you mentioned we are in advanced negotiations, we have constructive discussions with the government. So, that what is exactly missing in order to find the solution, I know it’s a very complex negotiation, but maybe there are one, two, three points which are stopping the process just to have a clearer picture? And on the order side, you are reiterating the €17 billion order intake, but I understand Ansaldo’s contract for Riyadh underground, but you also mentioned other contracts already agreed, but not yet included in the first half. So, a pro forma order intake year-to-date including what you already got, but is not included just to have a better picture on the order intake guidance? Thank you.

Alessandro Pansa

Martino, as far as the first question, Martino, you and I have been working for a number of years in the same investment bank. You know very well that when you wanted to take an M&A deal, you are not in a position to say until when you have signed what are the issue which are pending and what are the issue which has already been sold, you know the use of the game, you know the use of business, so you understand that is a question though to which I cannot answer. About the second one, Gianpiero up to you?

Gianpiero Cutillo

About orders, I mean as we say this we cannot really make a linear growth on orders. I think it was just an example of what we say that if we take the second Q order intake, we had what we already have or in the pipeline all we already sign, we cover much of the gap. And at this stage, the only thing we can say that we really feel confident on achieving the full year guidance that we gave you at the €70,000.

Martino De Ambroggi - Equita

Okay. If I may have follow-up on Breda, just to understand what is the free cash flow included in your guidance related only on Breda’s standalone for the full year?

Gianpiero Cutillo

Yes, we say that around that €200 million is the – or the negative cash outflow was the impact of Breda. And we stated that within this – since this stage, we are largely in line with what we say. We confirm that the full year guidance for the cash flow. That’s it.

Martino De Ambroggi - Equita

Okay, thank you.

Operator

Thank you. We now move on to our next question from Christophe Menard of Kepler Cheuvreux. Please go ahead.

Christophe Menard - Kepler Cheuvreux

Yes, good morning. Two questions. The first one is looking at the performance at the net income in H1, I was wondering if we are running the risk of having a net loss in the full year and especially if you have additional provision on the Breda side and what happened, what would happen to dividend in that case. I guess if, of course, if we are getting to the net loss area, it’s going to be – there would be no dividend in ‘13. The second point is just to get a clarification on the press release, you are mentioning that in the press release that you aim at reducing net debt by undertaking extraordinary operations. Just wanted to have a little bit more detail about this, do you mean here disposals that you mentioned on the call exclusively or are there any other operations you are looking at?

Alessandro Pansa

Well, as far as the second question they give you less by now we are looking at a number of productions. The reductions of which are able to provide us the possibility to at the same time reduce debt and to undertake some invest – some strategic investments which are important for the restructuring of our strategic portfolio. Once again, to announce our target for this point is the best way we have and not to achieve it, the question about the net income.

Gianpiero Cutillo

Okay. About the net income, I know we are confirming the full year guidance and we have in our budget figures still a slight positive net income. It will depend a lot on how we will be able to manage the risk that we will have in the second half of the year. And I think there was also some – a question raised with dividend, I’m not sure.

Alessandro Pansa

Well, honestly, I assume that to speak about dividend today is something, which is totally un-proper from my viewpoint. What is important for us is to achieve the restructuring targets and to achieve the targets connected to the launching of the business. The achievement of potential income, the distribution – or the decision of the distribution of the income is something which is not part of our mind list at this moment.

Christophe Menard - Kepler Cheuvreux

Okay. Thank you very much.

Alessandro Pansa

You’re welcome.

Operator

Thank you. We now move on to a question from Massimo Vecchio of Mediobanca. Please go ahead.

Massimo Vecchio - Mediobanca

Good morning, two questions from my side. The first one, looking from the outside, there is a huge focus on restructuring which clearly I share – I think it’s a must. But again, looking from the outside, there is another huge focus on growth. I was wondering if –what’s your thought on that if from the inside situation looks different and if the answer is yes, if you think you have the resources to finance and support this growth in terms of CapEx and R&D. Second question is on the presidential helicopter tender, there has been rumors on the press that you are not presenting an offer, again I was wondering if you can share your view on that and what’s the situation there? Thanks.

Alessandro Pansa

Well, okay, about the first, as I told several other times, we have a restructuring process, which is not focused on growth. And I am sure that any restructuring process is much more serious, is much more sustainable, is much more structural to the extent that it’s based on significant, achievable, consistent, ordinary, repetitive cost reduction. You can measure exactly the effort we are making in order to make the company more profitable, notwithstanding the fact that growth at the moment is zero, which does not mean that without growth in the future and we hope that we’ll do it. But we are working in order to make the future growth a profitable one and not a dangerous one as it might have been in some past initiative that we have undertaken.

Second, we had a plan, which is self-standing. In our plan, there are these financial resources necessary to achieve our targets, if you look to the slides connected with the use of the cash flow, you see that in 2013, there will be €990 million in CapEx and in intangible items as for R&D, which is also by the way financing the around €2050 million in (indiscernible). And therefore, this which comes from the €1.6 billion of cash flow coming from operations is able to finance our investments and therefore, is able to finance our business. Globally speaking, once again we have to the extent that we are achieving our plan, the financial resources to complete our restructuring, our launching plan. About the presidential helicopters we have wedged that out because of the press and I can confirm the fact that the term of reference or some of the term of reference of the request for proposal connected with this bid do not give us the possibility to be competitive in this bid. And for that reason, we will not submit an offer.

Massimo Vecchio - Mediobanca

The press article was also saying that also your competitors will probably not submit the offer and basically, there’s also only Sikorsky left. So, is there any chance then if there is only one...

Alessandro Pansa

Something which is connected with the choices of other companies and with the decision of the U.S. Administration, I am not allowed to comment on this.

Massimo Vecchio - Mediobanca

But from your experience, there is only one player left in the tender, will the tender be, let’s say, valid and gone or there is some chance that they will change your reference?

Alessandro Pansa

You had to go first to what are the other use of the tenders and which are the use which is applied in U.S. Administration and procurement offices, which I do is we kind of fully respect any decision that will guide.

Massimo Vecchio - Mediobanca

All right. Thank you.

Alessandro Pansa

Thank you.

Massimo Vecchio - Mediobanca

Thank you very much.

Alessandro Pansa

Okay. We’re now answering question coming from the web is about the restructuring cost on the full year 2013. The CFO will answer to that. Thank you.

Raffaella Luglini

Okay. At this stage, we say that when we presented the last year results that we were planning to have around €320 million of restructuring cost. At this stage because of some provisions that we booked already in second call because of the Belgium contacts on the transport, our rolling stock business, we raised this cost in the range of 370.

Alessandro Pansa

Any others?

Raffaella Luglini

We have time for a final – okay, we have time for a final question now from the call, we can take it from the call. Thank you.

Operator

We take a question from Gabriele Gambarova of Banca Akros. Please go ahead.

Gabriele Gambarova - Banca Akros

Yes. Good morning to everybody. I have a couple of questions. The first one is your relationship with the Italian government. You say that it’s very fruitful. I was wondering if – I mean, what you think about the possibility that government will restart the 808 launch aid law, refinance it. I don’t know if there is any chance. And the other one is on Indian helicopters, I would like to have a brief comment on your positioning in that country and specifically with reference to the contract on the AW101 situation, how is it going on?

Alessandro Pansa

Thank you. About the first one, I have to tell you that the late A2As has already – be refinanced in the Stability Law for 2013. The company is being refinanced for €10 million in 2013 €50 million for the other 14 years for the global amount of €750 million. The reason why we are not in a position to take benefits this year is because of this fund has been allowed and has been allowed by a committee, which has expired the end of last year and is up to the government to appoint the new ones, the new committee. The committee has not already been appointed, but for procedural reason, we are not in a position to benefit on this probably in 2013, but we expect that 2014 we’ll still be able to enjoy and at least in the limited part of this endowment. For the second, about India, the Indian situation is a complex one in the sense that we are dealing I’d say a legal level with the Indian authorities.

We are also dealing with them and all that who establish a proper dialog. We understand that there is a trial that process which is in core cement, which is opened in Italy. And for that reason, we have to follow all the necessary guidance given us by the lawyers also because there is a panel investigation in India as well. And therefore any initiative we take has to be connected with those formal investigations, which are in line. We still continue to believe that we will be able to find a proper solution for this counter with the Indian authorities in the due and proper span of time, keeping also into account the evolution of the position of the government of the standards there in the next months.

Gabriele Gambarova - Banca Akros

Okay, just – sorry, if I may just a quick follow-up on the 808. I understand that it is already funded, but do you think that the amount of funding might be increased hopefully or there is no intention?

Alessandro Pansa

We’ll, I will – if you will – I mean I can tell you only that in the stability law for 2014, we will work very hard, in order to extend the dimension of this funding. In order to extend the lot of their allocation of the public fund to this launching as well as to the other laws which are connected with the Finmeccanica business, how much – how successfully we would be this will depend. We will see in the next few months but taking for granted that we are doing all the best for this new point. I tell you that for the moment, we see a very supportive government and therefore, we are confident of that the financing of the technological development in our Space Defense and in our aerospace and defense, will be kept into account in the next allocation decision for the stability laws of 2014 onward of the Italian government.

Gabriele Gambarova - Banca Akros

Okay, very helpful. Thank you.

Raffaella Luglini

Okay. With that, we conclude this call. We thank you all for taking part, and of course Investor Relations is available to answer follow-up questions. Thank you.

Alessandro Pansa - Chief Executive Officer

Thanks everybody and thanks for having been with us for this hour and a half. Have a good day.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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