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Executives

Raffaella Luglini – Head, IR & SRI

Alessandro Pansa – CEO

Gian Piero Cutillo – CFO

Analysts

Monica Bosio – Banca IMI

Nick Cunningham – Agency Partners

Martino De Ambroggi – Equita SIM

Gabriele Gambarova – Banco Akros

Alexi Yannas – PIMCO

Finmeccanica (OTCPK:FINMF) Q4 2013 Earnings Conference Call March 20, 2014 4:00 AM ET

Operator

Welcome and thank you for joining Finmeccanica full year 2013 results conference call. (Operator Instructions). At this time I would like to turn the conference over to Mr. Alessandro Pansa, CEO of Finmeccanica. Please go ahead, sir.

Alessandro Pansa

Good morning, everybody. It's Alessandro Pansa, CEO of Finmeccanica, speaking. Thanks for joining us on the conference call for our 2013 full year results and 2014 perspectives.

Together with me there are, as usual, GianPiero Cutillo, our CFO, and Raffaella Luglini, our Head of Investor Relations.

In our today's conference call, after a brief introductions that will make summarizing the topics we will address later on, GianPiero will take you through the results, the performance of the business, and will go in more detail about our financials.

Then I will take you through the progress we have made on our key priority areas and see how it is in the future.

Of course there will be time later on for question and answer. Having said that, I would like just to remind you that when we met in London on April 24, 2013 maybe some of you remember we said that Finmeccanica's strategic initiatives were connected, were basically based on three main pillars.

They were, structurally improving and building up of our Group governance; the industrial restructuring of the industrial business in order to improve figures and efficiency; and the business portfolio rationalization.

Today, I have to repeat exactly the same things. After one year we have done a lot of things in all these three fields, and we would like to accompany you through a journey understanding what have we done; understanding the positive effects of what has been done; and to see what still we have to do, to tell you in what way and how we will intend to complete the process that we have announced one year ago.

Very briefly, in terms of governance we have worked in order to restore the reputation and credibility of Finmeccanica Group; to strengthen the compliance of our Group and of our single companies; to implement our contract system; to shorten the reporting lines and to address in a more general and complex way the way the Group is managed.

Secondly, we went through the industrial restructuring. We acted in order to make the business more efficient and more competitive; we tried to give solidity to our operational results in a more general and open way in order to make the business more sustainable, which is a very general term but which implies a lot of important meaning and significance.

Third, we have moved very steadily in the line of the business portfolio rationalization, and once I will make a note of the disposals of our (indiscernible), I would like to spend some more time about the issues of transportation.

In a nutshell I would like to let you know and I hope that you agree with me on the fact that 2013 was a year of transition for the Group; a year which has moved from one way to manage Finmeccanica to another one; and a year where we've made so many positive changes which can only be framed in the concept of transition towards more organized, more efficient and more sustainable industrial growth.

Into a sense I will cover all those issues connected with governance, organizational models, industrial restructuring and portfolio rationalization; but before this, given that we are in a full year results conference call. I would like that you hear from the voice of GianPiero Cutillo what we've done last year, what we believe to do in the next year.

Having cleared that, what he will tell you will show you that, first, our aerospace defense business is performing well and is getting better and stronger.

Second, that this is helping us in achieving the upper end of our guidance in terms of orders, revenues and EBITDA and third, that from an industrial viewpoint these results do confirm the quality of our helicopters and aeronautical business and show how committed we are in completing and achieving -- in completing the restructure, the relaunching of defense electronics and achieving the best results even for this very important sector of our business.

And last but not least, this is demonstrated by the fact that we got benefit in excess of the plans we have devised a couple of years ago. And after that of our restructuring we are not only glad of what we have done but we are ready for the new wave of efficiency programs that will be described later.

After having said that I would like to leave the floor to GianPiero, and I will take the word after he has finished his remarks about financial 2013 and guidance about 2014.

GianPiero Cutillo

Thank you, Alessandro. You have just heard from Alessandro the context of our 2013 results. Let me start with the highlights and then review the financials and cover the guidance for the current year.

So, first the highlights, the key point is that A&D business performed well and clearly demonstrated the progress in the restructuring and revitalization, fundamental good business getting stronger. Aerospace and defense delivered strong results, exceeding our expectation in order intake, revenue and even the revised guidance cash flows, while in line with expectation in EBITDA.

But Breda's results within transportation remain disappointing, as expected and has a negative impact on Group profitability and cash flow. But we are doing exactly what we said we would do in November; we are now moving to address these issues. The recent settlement acts in that direction and we’re confident that we have taken an adequate level provision. Overall, we saw remarkable Group order intake; €17.6 billion; up over 10% on 2012 and driving the book-to-bill ratio above one. Group revenues of €16 billion; down 2.9% as expected given cuts in (technical difficulty) of €949 million, down 5.7% which was impacted by the Breda results.

Net profit of €74 million, positive after two years of losses. Group net debt ended the year at €3.3 billion. And the Group pre-operating cash flow was negative €307 million, with positive aerospace and defense cash flow offset by Breda.

So some key points; our aerospace and defense core is performing well and growing stronger, we said. Delivering in a tough market with excellent order intakes and a positive cash flow, even without the influence from the Indian AgustaWestland contract.

And yes, we’re successfully implementing important industrial restructuring. The results confirm our strategy is the right one, and is revitalizing these businesses. We are seeing the structuring progress and benefits across the whole business. And in overall terms, all these make us still positive about the future.

Now, let's look at the 2013 performance. Now, to be clear, the 2013 results and my commentary relate solely to continuing operation, in example, excluding Ansaldo Energia. And the prior year results have been restated in order to be comparable.

I want you to understand the progress that we made in full year 2013 on the aerospace and defense side. First, the order, the 2013 order intake was well above budget, and importantly for me the book-to-bill above one for the first time after five years with a positive contribution of all the four key companies.

Then the revenue, the aerospace and defenses side achieved in full year 2013 revenues of €14.1 billion. That's now 88% of the Group, and it's a good revenue performance given the backdrop of lower defense spending in the key markets, especially in the U.S.

On EBITDA, aerospace and defenses performed well and it demonstrates the progress of restructuring and revitalization of these businesses. Aerospace and defense EBITDA was in line with budget at €158 million [ph]; a good performance driven by helicopters, aeronautics, notwithstanding the fall in volumes in defense and security and electronics which we expected. And you can see on the slide the negative impact of our holding stock on the Group numbers.

Now, let's look at the results by the different businesses. Helicopters, this business achieved a good order momentum and strong profitability. It achieved a double-digit ROS, even before the benefits from the ending of the U.S. Presidential contract. Q4 showed highly impressive order intake and revision Royal Air Force contract win is really significant. It confirms that AW101 is a world beating product platform. And in February 2014 we achieved the EASA certification on the AW189, less than three years after it was unveiled for the first time, confirming an outstanding time to market.

Helicopter revenue up €4 billion for 2013 well in line with budget and down in Q4, as work stopped on the Indian contract. Profitability was also stronger because of a good delivery in AgustaWestland 139 and successful efficiency improvement actions. Looking forward, this is a good business with strong prospects. We expect in 2014 high levels of orders and revenue with profitability to remain firmly double digit, with order portfolios supported by the key new products. We have 87 units of the AgustaWestland 169 and 69 units of the AW189 ordered and already in our backlog. The deliveries should grow over the coming year.

Next, aeronautics, another strong business which has improved significantly year-on-year. The key point to note is that we have successfully executed restructuring that's bringing significant improvement in profitability. In 2013, aeronautics achieved 5.4% return in sales in line with budget, in a significant step-up with respect to last year.

But looking at the turnaround over the last two years, it has been an impressive restructuring and more to go forward. Aeronautics achieved a good full year 2013 sales performance. It received new orders of 250 units from Boeing of the B787 fuselage, of which 200 in Q4. Revenue increased as production rates grew, and the 77 [ph] program is now at production rate of 10 shipsets per month with all the quality requirements fully met.

Our commitment is to consolidate this level of quality after this time and the result achieved so far make us confident. In 2014, we expect a slight decrease in revenues but we expect to continue the gradual improvement in profitability, thanks to the further plan of efficiency improvements and further cost reduction.

Next, European defense electronic and security. The key positive point here is that, in 2013 we successfully launched and are executing, an important restructuring and integration plan. This plan was aggressive, but it has already been reaping benefits ahead of targets. There has been substantial cutting of costs and the first stage of removal of hover locks [ph].

We are rationalizing the product portfolio, we are optimizing the engineering and restructuring base of the business and we are cutting procurement costs. The other key point (technical difficulty) in 2013 achieved a strong commercial performance. Order intake was good, despite the tough market, with a strong Q4 order intake driving the book-to-bill above one.

Improvements in profitability were offset by the already-mentioned air traffic control contract issue. The ATC problem has now been fully provided for, we’re confident that the problems are being addressed and will not have any material impact on 2014 performance.

And the performance in Q4 confirms so far the level of profitability closer to what we expect looking forward. So looking forward at sales we expect higher level in revenues and better profitability as we gain the benefit of efficiency initiatives and the gradual recovery in ATC performance.

Moving to the U.S. side of the DRS, the key point here is that we have successfully continued the restructuring and cut costs in order to make DRS competitive in a very challenging market environment. Orders were lower, but in line with what we expected. Revenues also fell in line with plan with the lower volumes and orders, and the winding down of some U.S. Army programs. EBITDA also declined. But, as promised, we kept profitability at high single-digit level, a good achievement in a difficult market.

In 2014, it will also be a challenging year in terms of volume. Even so the rate of revenue reduction is materially slowing compared to the past, and we hope this negative trend will be coming to an end over the next one or two years.

We do, however, expect to maintain profitability levels of the DRS through additional rationalization efforts. Moving to space, in 2013 space performed in line with our expectations. Again, we saw increased order intake in Q4, margins rose due to better performance on several satellite manufacturing programs and we expect profitability to remain at high single digit level.

On defense system we saw a really strong commercial performance here in 2013. We won significant new orders in Q4, particularly export orders for the missile systems. Revenue was stable and the business hit budget and achieved the double-digit profitability level.

In 2014, the defense system revenue in EBITDA at the end of the day are likely to be softer than in 2013 before the new orders come into production; but performance will remain solid.

Now, next in transportation. For Ansaldo STS you are seeing the results and the 2014 output recently announced by the companies. On AnsaldoBreda the key points are, here, a very disappointing performance reflecting structural operating problems and a significant negative cash impacting Group pre-operating cash flow by over €300 million. But we are working hard to address this issue, and this week we announced an important positive agreement with the Dutch railways supporting the settlement of the Fyra contract.

Under this, for a consideration of €125 million, AnsaldoBreda will retake all the trains which, over time, can be sold to other customers. The substantial effect of the agreement has been already provisioned and are already reflected on the full year 2013 figures.

Looking at the 2013 results for Breda, the order intake fell with postponement by our key Italian customers, and also because we have applied stricter profitability requirements for new contracts. Profitability at Breda continues to be badly affected by the slowdown in production, and absorbed over as well a contractual charge and additional costs of overrun on certain programs.

By looking forward, including the latest settlement, the liabilities from the latest contracts at Breda are substantially over and will have much less impact on the Breda results. In 2014 we will continue to focus on executing the backlog, with the aim to reduce losses. But we still expect a material negative financial impact.

Now I want to move on the full year 2013 below-the-line costs. Our overall below-the-line costs of approximately €900 million were still material. These led to a full year 2013 EBIT of €46 million. Much of the below-the-line charges were in two areas; firstly, restructuring costs, largely layoffs, of €395 million. This we expected and were across the Group, with largest charges in Selex Electronic System, approximately €200 million, due to acceleration of the restructuring, and in DRS with approximately €100 million.

The second main area below the line was the €422 million of non-recurring costs. Out of this, €300m relates to Breda; largely to providing for the settlement of the Belgium-Holland contracts.

Now on to cash flow, the key points here that I want to get across are, the aerospace and defense pre-operating cash flow is positive, even without inflow of some €300 million from the Indian helicopter contracts and we expect aerospace and defense cash flow to strengthen. But Breda has hit the Group negatively, causing the negative movement in pre-operating cash flow.

Let's look at the full year 2013 to complete the picture. You will remember in November we revised our original guidance downwards to expect this negative cash flow, primarily as a result of the Breda losses, then the lack of cash inflows coming from the already said Indian helicopter contract.

You can see this reflected in the Group cash flow from operations, cash costs of restructuring were similar to the previous year and net investment rose as expected. These all resulted in a Group pre-operating cash flow of negative €307 million, but if you exclude Breda the FOCF would have been positive by €33 million.

Now, before I talk about the outlook for 2014, I think it's helpful first to show the changes and impact of our reporting following the application of the new IFRS 11 accounting standard. JVs will no longer be consolidated proportionally, but consolidated and accounted for using of the equity method.

Our JV businesses that will be affected are principally MBDA, ATR and space alliance. So the 2014 results, including interim results, will be based on the new parameter without the JVs and the 2013 results will be restated accordingly. And going forward, EBITDA will include the share of net results of this strategy with JVs and free operating cash flow will include dividends from that.

You can see in the appendix the impact of these accounting changes on our numbers. The restatement is overall in terms that we reduce reported order and revenue by around €2 billion; reduce EBITDA by around a net of €70 million; while pre-operating cash flow, it will be around €90 million higher and the Group net debt will be restated as €3.9 billion.

So, let's look at the 2014 figures. The key points are, we’re confident that our aerospace and defense core business is getting stronger, but the Group level results are still impacted by AnsaldoBreda. The key assumption we are making for 2014 is that the order intake will remain solid, keeping the aerospace and defense book-to-bill ratio above one.

Revenues will be steady or slightly lower, given the soft market in the U.S. and Europe. Profitability will benefit positively from the restructuring and the efficiency gains, helping bring aerospace and defense return on sales close to 9%.

Investment level will be similar to last year, and will support our key products, especially in helicopter and in aeronautics. The cash flow will reflect the improvement in the aerospace and defense core, which will show a stronger positive cash flow, but this, again, will be upset by AnsaldoBreda, in part because of a large increase in working capital due to the Italian high speed contract.

Based on these assumptions we expect the Group to deliver the following results for the full year 2014, reminding you that all these figures are on a restated basis. Full year 2014 Group order intakes is in the range of €13 billion, €13.5 billion, compared to the €15 billion in 2013.

Group revenue is in the range of €13 billion to €13.5 billion, compared to the €13.7 billion of last year. The Group EBITDA is in the range of €930 million to €980 million, compared to the €878 million in 2013, supported by the improving profitability in aerospace and defense.

And the Group pre-operating cash flow close to break-even with a step up in aerospace and defense positive cash flow from €135 million to €250 million – €300 million. These compare to a negative €220 million for the Group in 2013.

Net financial debt at the end of 2013 was restated at €3.9 billion, and it is expected to be in the range of €4 billion at the end of 2014. The above figures assume there is no further negative impact from the Indian helicopter contract. And you saw the favorable ruling earlier this week from the Milan court.

So, to wrap up, as Alessandro said, 2013 was a precision year. But we made significant progress on a number of fronts. We have a good confidence in our businesses. And we have been making good progress in making them stronger. I now want to hand back to Alessandro to cover progress on our strategic priorities.

Alessandro Pansa

Thank you, Gian Piero. So we have seen here from our Chief Financial Officer how we have addressed the main issues connected to 2013 and what we expect in term of financials for this year. Well, now I would just like to address the issue that I mentioned you before. And I remember that I like to talk about governance, industrial restructuring, and organizational portfolio. And then giving you an idea or a glance of what we believe Finmeccanica Group will be over the long haul.

But, first of all, please let me spend a few seconds in framing the environment in which we are moving, which is, basically it's changing a lot. And where the miss -- and the changes of the environment are the main reason for the initiative we are undertaking in order to enhance the structure of Finmeccanica Group. I mean, first everybody knows that the market place is changing. And that actual demand of both civilian and military equipment is increasing or it is steady but is not decreasing but is moving from the rest of the world and namely to the number of 10 countries which are increasing significantly.

I mean, this year, in the last year, the demand for the business -- for the goods and services which are produced by our industry. Secondly, the western industry has changed. There are many movements in terms of the organization or internal organization of companies. But there are also many initiatives connected to rationalization or consolidation of companies on the other side of the oceans and on this side of the ocean in the North American markets and in the European markets.

And don't forget that where any things that we’re doing in countries where demand is growing for the emerging countries in order to get contracts and improve and establish new investments we are helping there and we are accompanying the growing gap of new competitors which will appear in the next year on the international scenario. And we will be the competitors of the western company operating in defense. And I will now demonstrate further.

Third, in this scenario where the market is changing and the industry is moving we believe that Finmeccanica is responding and adapting in the right way. And will be more consistent and robust in the future. In this scenario we have to remember that the European industry, which has been helped by a number of multinational programs for the last decades, I would just like to remind you Tornadoes, Eurofighter, NH90, Meteor, is not enjoying any more or it seems that it will not be as easy as it has been in the past to enjoy any more of these program. And to leverage on the large, financial support of governments.

And therefore it is crucial that there is that aerospace defense industry and the defense industry of our continent will be able to find within itself the financial resources which it gives them the possibility to maintain a certain level of investments.

And to continue to be on the edge of the psychological frontier, which is one of the most important characteristic of the companies operating in the high-tech industry. Having said that and having made it clear that this is an environment is very challenging, it is very -- it is changing a lot. And we are very aware of how important are these changes. And we like just to tell you that the only way in which the traditional aerospace defense company can compete is to afford to be more efficient, to reduce the unit production cost, to be more effective and to maximize the return on the technological investment and obviously to lower both direct and indirect cost.

For this new point Finmeccanica has moved on the three pillars I already mentioned. The first one being corporate governance, where we have done very significant progress since 2013. Further initiatives are expected for this year and for the next years.

And, as most of you know, starting on February 21, 2013, which has been the first Board of Directors which has been held after the appointment -- my appointment as Chief Executive Officer, we have, we enforce the management and coordination of the Company.

We have centralized internal auditing. We have created a business-compliance support function. We have created a Group risk-management support function. We have redesigned, restructured and we published a significant number of directives, policies and procedures connected either to the management of agencies, consultancy. And all the others activities connected with the commercial activities and management, internal activities of the Group, namely investments, use of cash and other things connected with the control of the business.

All this has been accompanied by an examination, an exam, an analysis of the Finmeccanica corporate governance and form undertaken by a committee of five external people, chaired by the former Italian justice minister and the former chair of Italian Supreme Court which has delivered -- which has finalized its report last week. And this report will be examined, analyzed by the Board of Directors of Finmeccanica on next months. But first after this analysis of the report will be made public and therefore everybody will be in a position to know what has been the conclusion and recommendations.

Last but not least, once this process has been completed with appointment of a Chief Operating Officer, well, Group Chief Operating Officer in the Finmeccanica, Mr. Sergio De Luca who has been chosen of a very simple way. Who was the Chief Executive Officer of the best-performing Company of Finmeccanica Group, who's on the next slide. This is another way to moving into this slide. Having said that, we have, I think, once 2013 is done a lot of things. Probably much more than you can do in one single year in internal governance. But we had started to thought in October 2013 (indiscernible) in the environment I have briefly described you. We need a next step and the step forward. The step is or was in term of thought and is in term of an implementation a new organization and operating model.

The Board of Directors of Finmeccanica of last March 6 have resolved to launch a new organizational operation models for aerospace defense and secured sector. If you want, this represents the first time that Finmeccanica after 10 years of trying to grow and some years of progress, in thinking to itself in order to utilize it completely, the structure of the Group, to make it a Group at the same time more attractive and more efficient and I try to go through this for a few seconds.

This is a very exciting initiative. It redefines the rule of the corporate center as strategic controller. Therefore, not only in financial holding or for the strategic (indiscernible) but also strategic controller with this high degree of integration. The new model gives the possibility to better leverage our best practice across the Group. It increases the efficiency further with lower cost. And, last but not least, we can significantly improve through this model the way in which we go to the market. I mean, we are not doing something absolutely isolated or extravagant.

But simply we have leverage of the number of comparable initiatives which has been undertaken by many of our competitors in the last year, even the Americans, (indiscernible) all the Europeans, Palez [ph], Airbus, BAE Systems and for that reason we have tried to adapt a needs which is general view around the industry to the specific characteristics of Finmeccanica and Finmeccanica Group, to its business and to its asset and technology distribution.

The new model implies basically two things.

The first is the creation of the formal networks running across the business; product development, market approach, order execution and service and asset, where there will be some specific function in division operating across the Companies in the specific sectors.

And, at the same time, there will be a rationalization and verticalization of the support function across our business introducing simple lines shared services for all the initiative. And for all the services which can be common thing [ph] in our Group.

These two things or these two main characteristic of this new model are aimed to reduce the distance and to reduce the different role of the holding companies, of the operational companies, restructuring both the operational and the holding company. No one can be safe in this model, but everybody can fill his self with an opportunity. And this, we believe, is the most important message we like to deliver.

And into the sense we expect that there will be much-higher integration between the top of the Group, the operational companies, with other -- making a very -- a much-more limited distinction between these two parts of Finmeccanica Galus.

Into the sense, therefore, I do like to invite you to follow a process which will last at least for the next two years, which will give a lot of significant benefits to Finmeccanica and to its shareholders in terms of more efficacy, more efficiency, less cost. And therefore generate more cash, either for investments or for shareholders. Having said that, I would like just to concentrate with the second pillar of our strategy which, as you know, is industrial restructuring.

Gian Piero has already discussed a lot, I think, about this in talking about 2013 and 2014 so that the result are put in perspectives. What I would like to tell you is simply that we have been able to be more -- to be better than expected in delivering the benefits connected to the national plan in all the sector where we are operating. Just you can see from the slide you probably have in front of you that even in helicopters or aeronautics there is a return to security. DRS, space services. We have been able to achieve all the targets which given to us in this two-year plan. For this reason I do believe that we have to continue in this same process.

And we have launched a new wave of re-launching and restructuring where we expect a further €300 million of cumulative benefits for 2014 and 2015 either in more efficient way to deliver business. And in less cost, direct and indirect, we can get and we can achieve.

And, of course, we will be very happy to provide you further details in the due course about this.

I would like just to remind you that the items on which this plan is based are exactly the same connected with the previous plan, given that we are all working in very ordinary, speedy [ph] and in the order and planning way. Account, segment procurement, cost reduction, operational efficiency, focus on affordability and the modularity of our technology in product.

That the new, simply organized business, the very rigorous stance and very serious commitment to the management committee. Last but not least, of course, portfolio rationalization. I would like now to spend time in discussing with you all (indiscernible) everybody knows it and we have done all on what have to do. I think that the most important thing that we should discuss is about transportation and mainly AnsaldoBreda.

You remember that on November 7 we released a press release saying that -- about Breda first. We were committed to deliver the existing contract, but to focus on the best way to limit associated losses. This is exactly what we have done. Belgium part of the (indiscernible) has been sorted out between the second and the third quarter of 2013.

On March 17, last Monday, we have reached an agreement with the Holland railways system in order to conclude their bid to 150 Fyra contract with a significant level of satisfaction of both parties. And reducing the risk associated with this contract for AnsaldoBreda and with a deal which basically stopped impacting in 2013 financial statement. Secondly, also in December or November, we told that we tend to limit bids onto new orders that will be clearly profitable. And, in fact, we have limited our order intake to those contracts which are either options connected with the old contracts or contracts with business and profit opportunities.

For that reason we have seen reductions in the backlog of AnsaldoBreda in the last few months. First, we have decided that in connection with the Board we would take all necessary action to right size the business. And we are working some other AnsaldoBreda facilities in order to put in place using all the necessary social amortization and without creating -- working so as not to create any social or local production problems, because we like to do all this in a very cooperative way with the trade unions and with the other Italian institutions.

We have worked it on the temporary layoff and we have worked in order to reduce the production cost of assets which are not profitable and basically loss-making.

Last but not least, I like to remember what we have told you on November 7th and before. The stake in Ansaldo STS will-- I mean, is managed in the best interests of the Company, of its shareholders and Finmeccanica shareholders.

Since November we have made policies. And I'm pleased to report you that we have been encouraged, significantly encouraged by the quality and the commitment of sectors' leaders who have engaged us in serious discussions on the transportation business since then or since November 7.

And second, that having received several primary proposals or highly-qualified studies from these parties, we will proceed with them in further active discussions.

As I told many times, I will not commit to timing until it is signed. And I do not intend to provide you any further detail about this, about that, neither directly nor indirectly, because any M&A cannot be discussed until all the work has been completed.

But it's important to know and it's important to underline yesterday our major shareholder has announced in a press release clear support for the Finmeccanica strategic plan, which implies explicitly that the consolidation of our transportation business with a third party.

And it's important to remember that our major shareholder also says that he sees the process as in the best, wider interests of the Italian railways and transportation sectors, aim in the target that one of safeguard the future of the Italian transportation industry that Finmeccanica has very clear and Finmeccanica will act in cooperation with all the Italian institutions in order to achieve this important target.

Given the sensitivity of the topic, you will understand that, of course, I am not in a position to elaborate any more about this today. But I have to tell you that, A, this is possible that we are confident that it is realistic to say that we are able to get some results.

And that we’re moving forward to become a pure, aerospace defense player as our strategic plan says.

Finally and last but not least, I would like just to remind you that we have confidence in our business and how could we not have after all of what we have done starting February 2013. Secondly, that we’re not deterred neither frightened by specific issues impacting 2013 results.

And that we’re successfully and on time executing our restructuring initiatives, both in governance and in industry and in portfolio. And we believe that all of what we have decided to do 13 months ago has been in a significant part and to a certain extent surprising part, even for us to realize and it is on track and all the Finmeccanica management in terms of Finmeccanica SpA and controller Company are committed to go forward.

And to implement the initiative we have still to implement in order to make Finmeccanica a best-practice Company in the aeronautics, space and defense sectors.

Thank you for having had the patience to listen to us. And now I think we are ready for questions to the extent that you want to ask us anything you have heard from this presentation. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Monica Bosio of Banca IMI. Please go ahead.

Monica Bosio – Banca IMI

I would have three, if it's possible? But very quick, the first one is that if I look at your 2013 guidance and the Group guidance in the aerospace and defense guidance it would seem that Breda expected losses would be much lower than current year. Can you just give us some more details? I'm just trying to figure out what could be the EBITDA losses for Breda in 2013.

And the second question is similar. It's related to the free operating cash flow. If I look at the difference between the aerospace and the Group free operating cash flow guidance there is a gap of €350 million, €400 million. Is it, it could be totally attributable to Breda? Or there is another explanation, maybe? Or maybe it’s the working capital from Breda in 2014.

And the very last question is what can we expect below the EBITDA line in 2014 in term of restructuring cost and for the non-recurring cost, mainly related to Breda, once again? Thank you very much.

Gian Piero Cutillo

Okay, yes. I think the perception you have is correct. I mean, the losses of AnsaldoBreda will be materially lower in 2014 and this is also correct for the free operating cash flow that you mentioned. I think that largely you can see that they can be largely related to AnsaldoBreda, the delta between aerospace and defense and the Group in the free operating cash flow.

And also about the 2014 restructuring cost, let's say that there will be even on that respect substantially lower in 2014.

Monica Bosio – Banca IMI

Okay. Is it possible to quantify more or less how much cost we will find below the EBITDA line?

Alessandro Pansa

What we could say it has been put on the presentations.

Operator

The next question is from Nick Cunningham of Agency Partners. Please go ahead.

Nick Cunningham – Agency Partners

Yes, question on helicopters, the guidance talks about solid results, looking forward. And obviously you had a big, slightly strangely, margin boost as a result of not accounting the Indian revenue and having some good profit recognition in Q4. And so you had exceptionally strong margins in 2013. But is it going to be possible to maintain that level of margin looking into 2014?

So the real question, therefore, is could we see some revenue growth but actually see operating profit either stable or even go backwards a little just as a result of those mix factors looking into this year?

Alessandro Pansa

Yes, helicopter, I mean, first of all, remain technically above the double digit, notwithstanding even in 2014 and notwithstanding the fact that we already mentioned last year that this year we have the benefit from the set of the of the presidential [ph] helicopter that, of course, has been one short as it was in the range of €50 million.

So even if we take out this amount, I mean the profitability remain quite solid in height and above the double digit. We don't see any risk -- specific risk on 2014.

Nick Cunningham – Agency Partners

Okay. So just to clarify, therefore, the guidance for ‘14 relative to ‘13 is ex the effects of the VH71 settlements that?

Alessandro Pansa

Yes.

Nick Cunningham – Agency Partners

Right. Thank you very much.

Alessandro Pansa

Yes, the underlying was also.

Operator

The next question is from Martino De Ambroggi of Equita. Please go ahead.

Martino De Ambroggi – Equita SIM

On the new cost saving plan of €300 million I imagine this is gross figure. So I was wondering first what is the net effect. Second, you also mentioned in your presentation there is a price pressure in your segments. And knowing that another company, Group Company SPS, announced significant cost savings in the past and the bulk was used to offset price pressure or it was recognized to clients. I'd like to understand what is the potential upside in terms of profitability. So if you can talk about the potential upside in terms of margins, going forward, thanks to the cost-saving plan.

Alessandro Pansa

Okay. Yes, you are correct. It's a gross number, the €300 million. And I think the environment where Finmeccanica operates is exactly the same of that. So it's a very competitive. It's a very tough market with a lot of pressure, price pressure and a lot of this will be to support our commercial activity.

I think the -- what I can tell you is the benefit of this has been reflected especially because this €300 million is in the aerospace and defense sector and it has been reflected on the profitability improvement that we show on the guidance from the 8.3% return on sale to close to 9% for 2014. That's where we can see the benefit of that.

Martino De Ambroggi – Equita SIM

Okay. So maybe it is more in order to maintain the same profitability, going forward, than adding some upside?

Alessandro Pansa

I think it's more to improve. I mean, it will go from 8.6% to 8.8%, I mean, at least.

Martino De Ambroggi – Equita SIM

But after 2014?

Alessandro Pansa

We will see.

Martino De Ambroggi – Equita SIM

Okay. If I may, two more questions? One is on the amount of residual cash out for no-recurring items, going forward. You used to provide us the total amount to be split over…

Alessandro Pansa

I think it's only appendix.

Martino De Ambroggi – Equita SIM

Okay. And the last question was on Dutch railways dispute because you also stated that rolling stock can be resold and after being adapted. I was wondering if this amount of €120 million plus is already included in your guidance for this year, because you are able to resell the product this year? And what are the costs to adapt the rolling stocks?

Gian Piero Cutillo

Okay, let me be a bit more precise on that. The €125 million that we are going to pay and actually will be paid in two years’ timeframe and, as we mentioned during the presentation that we raised our net debt by almost €90 million on 2013 from the financial side. And this is what we expect is the maximum liability that Finmeccanica is at this stage that we could expect.

So actually we do not believe that since we have two times to resell the -- two years sorry to resell the train we don't see additional liability in that respect and that increase has been already included on the 2013 figures.

Martino De Ambroggi – Equita SIM

Okay, but the cash-in can be considered in the, this year guidance?

Alessandro Pansa

No.

Martino De Ambroggi – Equita SIM

Okay.

Gian Piero Cutillo

So far we put only the -- we have made the difference for 2013.

Operator

Next question is from Christoph Minar [ph] of Kepler Cheuvreux. Please go ahead.

Unidentified Analyst

I had a question on the free cash in 2014 in aerospace and defense. Looking at 2013 you obviously had in aerospace and defense you had €135 million and if you hadn't had the issue with Indian helicopters we could have reached shall we say a number close to €400 million. So I was wondering why in 2014 you're guiding only to €250 million to €300 million in aerospace defense, is it linked to any specific out of cash provision? Or could you cast any light on this please? And I will follow-up with two additional questions if possible.

Gian Piero Cutillo

Okay, let's answer first to this, yes. Mathematically you are correct, you are. But you know that even in 2013 we tried to mitigate this, tried to make some action. So, you cannot simply add the €300 million on and make the simple calculation. The fact is that if we were not affected by the cash inflow we could have reached a much significant higher level of cash flow in aerospace and defense. And I believe that €250 million to €300 million cash flow in 2013 more or less reflects another great level of cash generation.

Unidentified Analyst

Okay. In terms -- another question still linked to the guidance of free cash. Just to make things very clear, the Indian helicopter contract we saw the decision by the Milan court and allowed that €278 million collateral. But just to make things clear for me, if that decision had not been -- the decision had been the contrary you would have had to reimburse €278 million? Or how would it have -- what would have been the impact on the cash actually of that decision?

Gian Piero Cutillo

Yes, the decision of the court has been favorable to Finmeccanica. So, so far for the time being we don't have to pay back this €278 million in case of the prediction of the court of course we would have to act different.

Alessandro Pansa

It won't have any impact on our cash flow because there is no impact.

Gian Piero Cutillo

Okay, yes.

Unidentified Analyst

Okay. And the last question was on the -- we saw that you renegotiated your contract with Boeing on the 787 which was excellent news. I was just wondering whether the -- where you were with regard to the Partnering for Success negotiations with Boeing. Was it included? Or is it something that we should expect you to negotiate in the coming months with Boeing regarding precisely Partnering for Success?

Raffaella Luglini

Christoph, sorry I'm not sure we have understood your question.

Gian Piero Cutillo

We have already signed an agreement with Boeing in December.

Unidentified Analyst

Yes, I'm alluding to the fact that Boeing is currently negotiating with its suppliers to extract some savings. And the name is I guess Partnering for Success. And they are -- my question was whether those negotiations were already included in the negotiations you had with Boeing, so it was a full package you had in December? Or whether there is an additional negotiation you're going to have, like any other suppliers on that Partnering for Success?

Alessandro Pansa

No, okay we settled with everything with the settlement in December last year. So far we are not expecting any harder or partner settlement agreement with Boeing. The relationship actually is going very well and the customer is very satisfied with the way it's preceding, the program. No, no partner as far as we know.

Operator

The next question is from Gabriele Gambarova of Banco Akros. Please go ahead.

Gabriele Gambarova – Banco Akros

Yes, I have a first question on the cash restructuring charges foreseen for the coming years around the €1.5 billion. Is it possible to know what share of this cash cost makes reference to Breda?

Gian Piero Cutillo

Well, actually I don't have exactly the -- I can't tell you, I can be a bit more precise on 2014. In 2014 it's in the range of €470 million so a cash out for the -- linked to the restructuring. And I think that I can say that a large part of this is lay-off and all this is connect -- is linked to the aerospace and defense business and the rest in the -- yes it could be that 30%, 30% to 40% could be related with Breda. But we can come back to this but I know exactly the numbers.

Gabriele Gambarova – Banco Akros

Okay. And another very quick question about Eurofighter program. In recent weeks we knew that the Italian government is considering cutting the number of F35 fighters and that it -- there are some proposals to possibly buy all of the 121 Euro Fighters planned at the beginning of the program. Do you have any comment on these particular proposals?

Alessandro Pansa

Yes, it's Alessandro Pansa speaking, thanks for the questions. Well I think that today there are many hypothesis connected, they with shuffling of the Italian defense budget connected to (indiscernible) that probably is too early to give a clear view about this. As we are always told we of course are very significant supporter of Euro Fighters given that this represents, as I mentioned already before, one of the most important programs in terms of technology, capability, capacity, production results and margins that has where Finmeccanica has participated. And therefore we’re doing everything internally and internationally in order to support the success of this program.

About F35 as I told in the general meeting of the shareholders of Finmeccanica on May 3, 2013 we are what can be called intelligent executors of a decision which has been taken in order to -- shall we say were taken in order to strengthen and to modernize the defense structure, the defense operator of our country. And we are doing -- we always do all the best in order to make this specific military decision to be correctly managed and to deliver with efficiency, with efficacy the aircraft connected to this program. I think at the moment the only thing that we can do is to commit to do all the best in order to serve our most important client, which is the Italian armed forces.

Operator

The next question is from Emmanuel Isola [ph] of Fidentiis. Please go ahead.

Unidentified Analyst

Okay, just two questions for my side. The first one is on emerging markets. I was wondering what’s your exposure also if you can give us a rough image of this exposure. And particularly what's your exposure in Russia? And the second question is about Breda and I was trying to understand what's going to be the total cash burn of Breda in case no M&A materializes. Just to have a rough idea of what's the evaluation of the assets. Thank you.

Alessandro Pansa

Okay, Alessandro Pansa speaking, for the first questions the emerging markets if you take the last three years, specifically in defense market you see that about one third of the total amount of investments in defense has moved from the western world, so to call it, to the emerging markets and namely to 10 countries which are Russia, China, India, Brazil, Saudi Arabia, Turkey, United Emirates, Qatar, Singapore and some other countries which are closer to the South China borders and in the Far East.

Before you understand how is important even for the western companies to be able to be present there and we as Finmeccanica are very active in the number of countries. I would like to mention specifically United Emirates, Qatar, Kuwait, Saudi Arabia. We have a significant and very important relations with Turkey where we’re managing with them an important contract of the P129 which is a helicopter of Augusta Westland. For that reason we are working both on commercial side and on investment side because it's very evident that you can be successful in this country only to the extent that you are in a position to relocate there some activity and assets which might be constituted as a base for the further successful commercial and industrial initiatives. This is about emerging markets therefore we are very confident in the actions we have taken during the last year in order to strengthen and enhance our position in this part of the world.

About Russia we, Finmeccanica, has always considered Russia a very important market. We have over there both investments in our aeronautics given that we are 25.1% shareholders on the joint venture with Sukhoi with the development and production of a Super Jet 100 which is a very well done and we hope very successful regional jet platform.

And we have another JV with Russian helicopters which has collapsed is a company called HeliVert which has built up an important production plant for civilian helicopters in Russia. On top of that we have other less relevant and less large initiatives in this country. But also we have been very successful in achieving or in getting commercial contracts, particularly helicopters and this is something that has been a very celebrated success of Augusta Westland selling 139.

Gian Piero Cutillo

Okay regarding the AnsaldoBreda impact financially but I'll give you some elements. You know that we have been very clear and open between aerospace and defense in the transportation all the elements. You can see that in 2014 the impact of transportation and largely Breda is offset or I would say more than offset the improvement on aerospace and defense. So by making the difference you can see.

The others, I will add some elements to you. According to our visibility of Breda this is the worst year that we can see on Breda. And there is -- because there is the impact of the working capital financial requirement as well in this. And the good thing is that as I was mentioning before at least two of the big and very painful legacy contracts which in the past affect a lot AnsaldoBreda, Denmark and Holland venture basically are all set and has been fully provided even from the financial point of view in 2013. So adding all these elements you can make your conclusion.

Operator

The next question is from Alexi Yannas of PIMCO.

Alexi Yannas – PIMCO

I have two questions please. The first regards net debt. Under the new accounting standards your net debt will increase from 3.3 to 3.9. I'd like to understand what the bridge is and is this 3.9 now more closely comparably to the number you get straight from the balance sheet which is 3.97 of net debt? Or is there something off balance sheet, currently off balance sheet that has been capitalized there? That's the first question.

The second question is one of your assumptions is that U.S. and EU defense budgets are expected to be flat in real terms. Could you elaborate? Given the U.S. sequester how does that square with this assumption? Thank you.

Gian Piero Cutillo

Okay, I'll answer first the question about net debt. Yes the 3.9 is strictly what is from the financial statement and the contribution of between the 3.3 and 3.9 is the cash deconsolidation from two JVs basically, MBDA of about €300 million, 300 something and 200 and something is the Space Alliance.

Alexi Yannas – PIMCO

So then, okay, so 3.9 you've removed some of the cash at the JVs and that largely explains the difference?

Gian Piero Cutillo

Yes.

Alexi Yannas – PIMCO

Okay, so the 3.97 I get from looking at the current balance sheet is representative?

Gian Piero Cutillo

Yes.

Alessandro Pansa

About the second question connected to the U.S. budget. Well, everybody knows what is happening to the U.S. defense budget. Sometimes talking with analysts or people involved in the defense industry in the United States it seems that there is a little bit more optimism than in the past but I do not know if it is my impression or it is reality. But this is what I'm feeling about this.

As far as DRS is concerned DRS has seriously and honestly recognized and acknowledged the problems with the sequestration of the other ministry measures of cutting the budget and has properly addressed this issue, heavily restructuring the company. For that reason the DRS has never missed to meet the budget requirements in the last years.

As far as the DRS -- as far as our business is concerned we today continue to see basically flat perspectives. But keep into account that we have been accustomed to be very, very careful in anything we do in the last year. So I do not know to what extent we are -- we have a little bit more pessimistic feeling of this reality, but we keep the stance at the moment of stability of demand for DRS connected to the U.S. defense budget.

Alexi Yannas – PIMCO

Okay, so to make sure I'm understanding, because DRS is the segment that's most heavily exposed to the U.S., you're saying that you are forecasting weakness in defense systems -- sorry defense security electronics for 2014? That captures the negative effects of the sequestration right there? It's not…

Alessandro Pansa

Yes it does.

Alexi Yannas – PIMCO

Does the DRS captured the sequester?

Alessandro Pansa

Yes.

Alexi Yannas – PIMCO

Okay, understood, thank you.

Raffaella Luglini

Thank you. We're now answering a question coming from the web I'm reading that for you. The corporate governance report takes some measures to strengthen the Company's control procedures. The Company already had an anti-bribery policy and systems in place even before the case with Augusta Westland in India. Which of those measures do you think is most critical in preventing bribery in practice? This question comes from one of our investor Roberco in Netherlands. Mr. Pansa?

Alessandro Pansa

Yes, Finmeccanica has always had in place initiatives and measures connected with bribery. Although what we have done in 2013 has been to make this measure evolved in a much more tighter and stricter way and in a way which is much more connected to the concept of best practice. In order to put this -- all the initiatives which we have undertaken in corporate governance, as I mentioned to you before, is going in this direction. Therefore centralization of all that’s been creation of mismanagement, centralization of procurement and not directly connected to production to strengthen your trade compliance, the basic compliant functions of this.

So I do believe that today and we will see it be confirmed by the report of the free committee which will be released in the next few weeks. We do believe that today we have a system that we believe to be fairly appropriate. If you want to know what is the best things, the most important things that help preventing, that helps in prevention of bribery there is very simple things. People behavior, people mindset, people culture, this is something which can be enforced by regulations but can be created with day-to-day work and day-to-day practice, educational process and management of these efforts.

Operator

The next question is from (indiscernible).

Unidentified Analyst

I've got two quick questions. My first one is on the your credit rating. Is the IFRS 11 increasing the net debt -- published net debt going to affect or amend your credit rating? And when do you expect this credit rating to improve from where it is today? That's my first question. Is it purely linked to the deconsolidation of disposal of the transportation activity? That's my first question.

My second one is linked to the capitalized cost, R&D cost. You capitalized in 2013 I think 110ish, €128 million what is embedded in your guidance, in your EBITA guidance for 2014 in terms of capitalized development cost? Thank you.

Alessandro Pansa

Okay, very quickly on Breda, sorry for that but I cannot provide any answer for this question, because I told you before we are actively working in order to debt consolidated transportation issue. We do it in coordination with other institutions. We want to do it in collaboration with Italian trade unions. We want to be successful in the shortest possible span of time. We believe that we can make a deal over there which will be a win-win deal for everyone. But this is the only thing I can tell you, other information the day when someone will sign the contract.

Gian Piero Cutillo

Okay, let's move to the credit rating, yes absolutely it is a priority for us and it's really important for us the credit rating. We are talking with the agencies and the way we’re going to have the review shortly in the next one or two months. And of course the rating is strictly connected with the level of debt but more with our capacity to generate cash of course. And for this is a critically connected also with our opportunity or possibility to deconsolidate Breda, because we have clearly seen our improvement from the aerospace and defense side compared with the other one. So we will see in the next future but absolutely the credit rating will depend from these two elements.

About the capitalization I confirm that we did capitalize €128 million that was lower than what we expected because of a lump sum cash payment from customers from previously capitalized intangible. And so we expect for next year to be in the range of €200 million to €250 million.

Raffaella Luglini

With this we have no more time for questions. But of course the entire investor relations department is at your disposal for follow-up questions and calls. And the management will be meeting the buy-side community over the following weeks. Let me thank you for taking part in this call. Thank you.

Operator

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

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