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Executives

Pier Francesco Guarguaglini - Chairman and CEO, Finmeccanica

Analysts

Ed Stacey - HSBC

Nick Fothergill - Lehman Brothers

Joseph Campbell - Lehman Brothers

Alessandro Pansa

- CFO and Co-General Manager, Finmeccanica

Mark S. Newman - Chairman of the Board, President and CEO, DRS

DRS Technologies, Inc. (DRS) F1Q09 Earnings Call July 31, 2008 4:00 AM ET

Unidentified Company Representative

[Starts abruptly] Finmeccanica's First Half Results presentation. As usual, we will be presenting our results with Mr. Pier Francesco Guarguaglini, Chairman and CEO, who will make a short introduction, followed by the financial and business review by Alessandro Pansa, CFO and Co-General Manager and then we will... it will be rounded up with the outlook and business strategy by Pier Francesco Guarguaglini, then we will take questions and answers and we hope to be able to close the first half presentation and Q&A by before 10 O'clock because we are very glad to have today with us Mr. Mark Newman, CEO of DRS Technologies together with Mr. Rich Schneider, CFO of DRS Technologies and we will be giving you an update on the DRS Technologies transactions. So we have a packed agenda and therefore without anymore ado I will handover straight away to Mr. Guarguaglini for a short introduction.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Good morning to everyone. I'll try to be very short. First of all, I'd like to outline the fact that Finmeccanica has a clear strategy in place since September 2004 with new... with a clear track. We maintain this strategy in order to have a success in Aerospace, Defence & Security. Okay, so we can go to the second slide, well this present how we want to use our investment. As you know we want to use our investment in order to increase our position in dense market to have a very innovative part to increase our profitability in order to create value for our shareholders.

Finally, I would like to say what we have done during the first semester. In Russia we spend more than 95% on research and development investment in Aerospace, Defence and Security. Our EBITDA is growing from 5.8% last year to 6.2% this year. We got some very important helicopter... an order to like helicopter in Turkey for the regional SuperJet we already have more than 100 pieces and then we got a very important contract in Pakistan for the missile deals. The revenues are up to 6%. And final EVA is increased from negative 32 to positive 17. Thank you very much.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Good morning everybody. Actually I'd like to start with a couple of comments about the fact that in the last months I see, everybody was very much worried by the turbulence on the financial market and the crisis and recession so on and so forth. This is something, which mainly concerns sectors different from the one Finmeccanica operates. We have been hurt by the crisis of the stock market because our stock went down and we have to thank banks for that… we thank the bank for that and those who are creating the subprime crisis. But frankly speaking when we talk about our business, we are what we were, what we have told in the past to do is what we will do in the future. Our guidance will remain the same and you can see that hopefully there will even be better the results with respect to the guidance that we have communicated to you.

And therefore honestly speaking, today Finmeccanica is not being affected very much by the turbulence of the financial markets. We have as you know, we see an absolutely surprising and outstanding results from the syndication of a loans which is connected with DRS acquisitions, over €3.2 billion of demand we received proposal for €7.2 billion, so more than two times, which means the liquidity exists in this market. The problem is that you must have a certain credit to reach it and to collect it.

That all our economic and financial guidance are confirmed and we hope that we would be able to be in the right end on our guidance, therefore we do probably know, we will close the year not far from the best guidance we gave you. And also, this is something, which is very important, we do not talk only about DRS. The rest that... Finmeccanica is a great company, it is a large group where management is basically and it is not being destructed by any acquisition, which is very important. But ordinary business has to be carried out and as you will see most of our attention is paid to the day-to-day activities, getting contract, delivering them, delivering cash flows and making profits which is the bread-and-butter of any large company.

We have not yet been very much impacted by the increases of the demand for oil and because of the consequent price increase before 8, we have not we have limited exposure to the civil aeronautics which might be the sectors of the mechanical operation which is more affected by the [inaudible].

On some part of our commercial business like ATR, there is probably some opportunities due to the high dollar prices. The Turboprop has received a significant boost in the last year or so for this view point. Longer term, our worldwide business, most signalings and oil in stock might benefit from an increase in oil price but of courses it's a long-term trend. And then finally [inaudible] of course is experienced in a significant boom of demand from our power generation plants and turbine, particularly in the countries where the oil demand is higher because oil demand and prices I think needs more energy production.

Finally, last but not the least, even the defense budgets or defense procurement of budget are all indirectly affected by recessions and also only over the long-term because as most of you know the defense procurement budgets is something that is very difficult to change over night, over a short time given that the commitment which has been taken by the clients with companies in terms of [inaudible] we undertake.

That being stated, you might see that the results of Finmeccanica for the first half of the 2007 are definitely good, is nothing particular new... or nothing in particular... or nothing was special. We have been able to have... to score revenues hike over 6% with respect to the total of 2007. The same and EBIT or EBITDA increase of 14% which means that you are making more money and for that and from this view point, you see that our total sales has moved up to 6.2%, which is one of the highest percentage of interim report we have ever reached. The net profit is close to 300, but even if we would not consider €54 million of the capital gains that's coming from the disposal of 26 million on STM shares at €1 per share. It will be definitely higher with respect to the 177, which has been the net profit of the first half of the 2007.

Orders as always, very important part of our business went up over 5% and we got close to €7 billion, this is in the first period of the year. And therefore you see a backlog which is close to be €40 billion. It depends on how you calculate it. And... this is a clear example of the fact that we have a predictable and profitable long-term future for this view point, which will be profitable also thanks to the fact that we will be able to control and to tie the working capital which basically have been flat with respect to 2007, notwithstanding the growth in production with a positive economic value-added of €17 million and a return on invested capital project of €15.5.

All these figures, honestly are a little bit better than our budgets for the first half of 2008 was and therefore are giving us a certain confidence about the possibility to close the proceed to reach the guidance for 2008 and to reaching the best possible... the possible way.

I would have to spend a few minutes about the sectors, but I would like not to spend so much time, not only because I would like not to spend time from the sense of the presentations connected with DRS, with our friends Mr. Newman and Mr. Schneider and their colleagues, but also because frankly there is nothing we are marketing new. There was no bad news, there were no very good news other than the ordinary news of the fact that we have been able to turn it out profits into the business on an ordinary basis. And therefore for this view point you see that... you will not see dramatic increase of dramatic decrease with respect to what... you are expecting above this periods.

Helicopters has done a good business, particularly in the civilian business, profits is still higher than 10% and we expect that significant profitability would be maintained by the end of the year. Although intakes is still very significant at both of the civilian and on the military part, the Turkish order which has been mentioned by Mr.Guarguaglini which is going to be recorded on the first year results is an example of how leaders... how... watching the shift as our companies continue to exercise in the worldwide market.

Defence electronics has performed a little bit lesser than the last year namely and precisely because of the fact that a couple of companies, particularly SELEX Communications still continuing the structuring process and therefore they have not done exactly. We probably had the chance to reaching the first [inaudible] restructuring isn't going well and therefore we hope that by the end of the year, we'll be able to maintain the targets. The revenues should increase more in the second half of the year than in the first one, as well as [inaudible] take place in all the Finmeccanica sectors and therefore, we have confidence about this sector's able to reach a significant results in the period. Aeronautics has suffered from some of the postponed delivery of ATR… our ATR vehicles, but this is something which has been completely we [inaudible] in the month of July and also the recovery in August as well. It is important to remember that the first order, 122 aircraft has been reached by SuperJet and definitely this is an important step together with the signing of the general agreement between Alenia Aeronautica and some Russian partners about these programs which definitely should have a very significant perspectives and prospects for the next few years.

We expect margins to be in line with those that we have scored at the end of the 2007 and we hope we will better with respect to that by the end of 2008. Space had a very significant increase in revenues with basically a maintenance of the profitability over the periods and we expect further orders on defense and has observation and for this viewpoint, the profit should be in the quarter sort of 6.5% to 7% by the end of the year as we have told.

The first system that namely... thanks to the underwater business and WFS [ph] and the missile business NBDA [ph], the company which we own a 25% together with DSMEA System [ph] has a significant increase in profitability and at the same time a slight increase in revenues that we trend the line as increase in orders which has been higher than the revenue shows. We expect then missiles would do even better than second half of the year while WFS the torpedoes business, which is now negotiating an integration agreement with DCN in France, will be able to maintain margins between 40% and 50% EBIT as they should do for the longer period of time.

Civilian activities, I would like not to spend a lot of time with outstanding results [inaudible], both company have done very well, but the most important news here is the fact that the changing.. the change between 70 millions in EBIT and 50 million in 2008 is due to the fact that [inaudible] EBITA has significantly reduces losses as we have told to use several times in the past and the company is underway to... in order to become a slightly profitable company in the foreseeable future. We could not hope more for the moment, but the agreement which has been already signed as a preliminary and this is going to be closer with Bombardier for the development of new high-speed train and that we hope we will able to complete on important international standards including the Italian one, we should come out shortly as very important step toward a complete restructuring of AnsaldoBreda as standalone company. Ansaldo Energia Ansaldo STS has done better than the budget both in term of EBIT, with a economic viewpoints and financial view points and we expect that Ansaldo Energia will continue in this way also keeping into account the programs of IPOs that is underway and that is going to be executed in the next few months by Finmeccanica as we report you to later on discussing about the financial dealings.

This is why we believe that we will be able to fold in the right end of the guidance for the 2008, and look forward to meet the guidance but to the best of what the guidance says. But from an economic viewpoint and financial viewpoint. And... the capital structure of Finmeccanica and Ansaldo we do not expect that until the end of the quarter or the financial leverage, we will be much higher than we have right now. And you know well... that we believe that the quality of the balance sheet today in the present financial conditions more important from our viewpoint [inaudible] because of this, there is only one thing which we guarantee a long-term business as defense and our announcements are to be financially sustainable and to be financially funded.

This is while we continue to maintain the targets of 10% as Finmeccanica on a standalone basis is concerned for the 2010. And every day we believe this is more achievable. Of course the individual U.S., will give us further opportunities for this viewpoint but we will discuss it later, by Mr. Guarguaglini and Mr. Newman. I now will leave to Mr. Guarguaglini the floor for the second part of the presentation. Thank you.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Pansa presented you in detail results of the first semester, I would like to point out regarding our objectives. As you know earlier there are seven objectives here presented, now going to some details regarding this in... regarding the acquisition we acquired in December 2007 VEGA in U.K. and in Europe, Eurotech, which is a small company, but this is very strong Unitech [ph] and is growing very fast. Then, we have... going to try to acquire DRS Technology I think that would be the most important acquisition done by Finmeccanica, since it's the beginning I would like to say and then we have... there was a discussion regarding this. Regarding order, we are going to present the expected order. In the helicopter, we continue the President's helicopter, and are waiting for the incremental order. Then we have a lot of possibility for 101 in export.

The same thing regarding the 139. In Defense Electronics, practically we have a lot of discussion regarding Eurofigher where our electronics is well represented. The Forza Nec, the Italia Forza Nec is proceeding well and we expect an order within this year beginning next year. For the data, we are ready for an order regarding three regions originally for the figures; we have order for the future frigates. And finally, we are near to sign a large order for civil protection in Italy. Regarding aeronautics, C-27J export is growing fast and now have discussion in Qatar and maybe in Saudi Arabia, in other countries regarding the 77… we have a very large backlog, we are expecting other orders in future for the, the Italian order near Tuapin [ph] and we hope to get within this year another order, and these are the main expected orders. Then we have an opportunity for the combat, search and rescue in US, for the CH47 and the ordinary.

In Defense Electronics, we have a lot of... regarding border control and regarding avionics equipment. In Aeronautics, we are discussing for M346 with other country like Singapore, Chile and we hope in future with Saudi Arabia. Eurofighter, as you already say, is the opportunity in Japan, Brazil. Brazil, I presume that that will be by the September, they will present the shortlist. They will choose two possible suppliers. For the JSF, we are working with Lockheed and it's clear that it would be a large program for the next five years. Regarding Space, we have the Sycral, [inaudible]. Regarding Telespazio, we are promoting the COSMO-SkyMed service around the world. Regarding defense system, it is clear that they participated Forza Nec to the Fremm. Finally, regarding the torpedoes, we expected large orders in the Black Shark. In Energy you have a lot of possibility, the same thing in transport. I would like to outline the fact that we are near to conclude the discussion with Russia railways not only for the regional trains, but also regarding the association with Olympics Games. Regarding opportunities, it's clear that we have some opportunities in commercial segment of satellite and also in the security and [inaudible] submission. For Europe, [inaudible] Mid-East. Then we hope to increase our presence in Saudi Arabia for Eurofighter. In Energy, we have possibility in Russia and we want to increase our service categories. Finally, as you know, the Italian government decide to start once again the nuclear activities. This means that if this coming in place outside the [inaudible] we would be involved in this larger program.

For transport, we are near to reach agreement with Bombardier regarding high speed and this will open us the markets. Now regarding our mission as Pansa already told you, we are discussing with Russian [inaudible] and we are pursuing to reach an agreement with them within the end of the this year. This allows us to have a stronger company both in underwater and in the torpedo. At the same time, we have discussed with [inaudible] in order to better integrate the Italian side and the French side of Telespazio. At the same time to make the possibility to test and Telespazio work together in the following market. In energy, as you know we're near to present the revenue and the IPO for Ansaldo Energia. And regarding the [inaudible] the company is going very well, so they are proceeding very well.

Now, as you know we are interested to increase our presence outside U.K. in order to get this one to be present not only from the commercial point of view but also from the manufacturing and end user point of view. So we have discussion with Turkey in order to increase our presence in the T129 is a good example because, I was making agreement with the Turkish company and now they are proceeding in order to [inaudible] Turkey. In the Gulf region, we are discussing with some [inaudible] to establish our presence. The same thing regarding so many countries over the Mediterranean. We are seeing discussion with the Tata Group and in Japan we are ready to have a presence in the helicopter field.

Regarding our international solution, I would like to say that we are... as you know we are present both in defense and its only case in the platforms. This give us the possibility to present a complete solution both in the defense field but there is more very important in the security field and we assume that this field will increase a lot in the future. So this will give us a very high possibility to increase our presence.

Regarding our critical situation I think we have two critical companies, one is Ansaldo Breda and the program is proceeding very well and we are on track and we assume that at the end of this year we reach the breakeven point. Regarding the Aeronavali, which is located in Venice. We have now an induction plant where we define a new mission from them. So this facility will be devoted to the Sukhoi-Alina [ph] activities and to the helicopter activities. So we reduced our presence in the... the aeronautics field. So I'd like to say that 2007 was an year of strong achievement. But I assure that the 2008 will be better than this, especially if we will get as I hope in November the acquisition of DRS. This will let us in order to reach our target in 2010. Thank you very much.

Unidentified Company Representative

Thank you very much Mr. Guarguaglini, Mr. Pansa and we can now hand over for the Q&A. If you could just mention your name and whoever you are working for, the bank you are working for, we'd appreciate it.

Question and Answer

Operator

Let's take the first...first questions. [inaudible] there are no questions today? No. Yes.

Ed Stacey - HSBC

Hi, can you hear me now.

Unidentified Company Representative

Yes.

Ed Stacey - HSBC

It's Ed Stacey from HSBC with just one question. The Aeronavali plant, to reorganize that activity, are there some charges that will be in the P&L for that.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Thank you, the Aeronavali restructuring plan has been discussed and then examinated and resolved with the management of Alenia Aeronautica. Now we have restructured... the company is under restructure, it would imply a redefinition on the activity of the plants in Venice where also which will we used by Agusta and Westland in order to solve one of the problem [inaudible] which is the fact that they need to deliver more [inaudible] that they are currently able to do in the facilities in [inaudible] Milan and therefore those significant part of the business will be done. Secondly, Aeronavali will be the headquarters of Superjet International, which is the joint venture company, made by Alenia Aeronautica our Russian partners about the certification and commercialization of our maintenance and after sale service for the Superjet 100, our Eurojet, the field developed in together with Sukhoi.

Last but not least the company will continue to... to produce or to work on the cargo transformation on a... basically on a phased out structure or phase our programs and said that we understand it very clearly on that... that is a kind of business which is not... it cannot be performed in an area where we have very high, very experienced custom label for this report. So we expect that in the next couple of years the company will be completely transformed and therefore we will be much more integrated in the most helicopters aeronautical business. There would not be any more a stand-alone business in the sector which is any not any more very profitable [inaudible]. No, you are not secular, behind you there is a first. I'm joking.

Unidentified Analyst

Collin [ph] from UBS. A couple of questions from me. There has been a number of trade press articles about helicopter programs in UK being pulled back, clearly [inaudible] is one but a number of other ones, maybe you can give us some comments about that? There is also a number of comments about the Italian defence budget also being cut, give us some thoughts on that relative to your expectations? And the last one just relates to the 787 production. Boeing were quite cautious on their last call in terms of problems there, maybe you can give us an update on how you see your revenue progressing over the next couple of years and any problems maybe there that we need to be aware of?

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Regarding super links, future links future links partner that they are on the [inaudible] the program is doing well and as you know, the... and with the financial investment is distributed, but their production requirements provided by future link is absolutely necessary. So, we're working with our client as a potential partner in order to find a solution. And so, I presume that at the end of September they will decide and from a point of view in the positive way. If you want to add something.

Unidentified Company Representative

I think you can hear me. [inaudible]... I mean I think the issue here is... I mean, there has been I think excessive press speculation about this particular program. The fact of the matter is that the totality of the UK equipment program is being examined as is known. There is only one program which has been formally confirmed and that's the carrier program. Everything else which includes rotorcraft is all in a thorough examination which we guess is going to be finished around the end of September and then the MoD will make decisions about the whole of its program in relation to its financial position. So, links carries on and is moving ahead as a program, and there's no question about it at this stage. The whole of the program is what's under review, not links itself.

Unidentified Analyst

[inaudible]

Unidentified Company Representative

That's...that's not the issue, sorry.

Unidentified Analyst

[inaudible] affect the guidance? If it... if the program, the Superlinks program gets cancelled, does it affect the guidance?

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

To the standard, we are going to be careful.

Unidentified Analyst

Yes.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

[inaudible] as a series of... I assume as a possibility. Honestly, the short-terms nothing will take place. Over the longer term that will be a problem, but for the foreseeable future it has come to two or three years. So nothing that will change.

Unidentified Analyst

So no change for two or three years...?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Guidance for the next couple of years, any cancellation [inaudible].

Unidentified Company Representative

We are discussing, we're discussing the totality of the rotorcraft area because we have a strategic partnership with the Ministry of Defense [inaudible], it's the only strategic partnership at present in the Ministry of Defense area. So, we are discussing the totality of the MoD's rotorcraft requirements.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

But as far as the budget, defense budget...?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Defense budget, as you know, we are today... to point out the fact that the budget... they have the budget. In the defence ministry but they were also in [inaudible] ministry. Now, regarding the budget allocated in the ministerial [inaudible] there are no capital. This means, that you'll find friends, and the [inaudible] Forza Nec will follow their path. Then we have the some capital in the Defense Ministry. But this will affect mainly new programs that they'll do. And until now, we have no impact or few impact in Finmeccanica. If this way we continue Q2, just as who would have the same program, because this is a big investment Italian defense is assumed that this will be done inside the Ministry of Defense, not inside the Ministry of [inaudible].

Alessandro Pansa - Chief Financial Officer and Co-General Manager, Finmeccanica

As far as the [inaudible] is concerned which is your last question, if I remember. Well, honestly, I mean, this is something... this is a program which doesn't worry us very much. The same that as the Boeing CEO said, there is a very great program, which is going to be a little bit better organized, this is what he said in a press interview. Boeing yesterday received 900 orders, we already spent 100, where we received already 300 orders for our chipset. Of course, there are some delays, and they'll be some delays. We think that these delays was necessary to refit or refix to a certain extent the production of additional structure. We have discussed with Boeing in the sense. We do not expect to have a significant reduction in the profitability of the program as far as Finmeccanica is concerned. Don't consider the fact that in any case we are talking about programs which has an impact between 3% and 4% overall revenues in the next three for years.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

I would like to say that this year of Boeing it was a growth [inaudible] about the numbers. The last day of June or beginning July and it was a very [inaudible]. So, we are confident that as Pansa said we have no problem in the future.

Nick Fothergill - Lehman Brothers

Yes. Nick Fothergill from Lehman Brothers. Just a one quick on Defence Electronics. Can you let us know how the SELEX Communication restructuring is performing and what confidence levels you have of it recovering in the second half to raise your full margin for the defense electronics for the year?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Well, the restructuring is underway. I mean, the point was [inaudible] fact that, this is a company, which has to move from a equipment producer, basically to a system developer to a certain extent, leaving to someone else, the wall open you say, equipment and center pieces. We have to exploit much better the number of engineers, which is a large number on the other lines of the company and we have also... we focus in the role of that and this company, which has to be with [inaudible]. The number of people has been already reduced to a certain amount. We expect that this year the company, will be significantly much more popular, busier and by 2009, this focus will be completed before the company will be able to reach [inaudible] state-of-the-art.

Unidentified Analyst

[inaudible] two quick questions. DRS, is it involved anyway in the JSF program and the second question is on the combaxar [ph], I remember you said you were expecting some fine on the season in September. Some member of the US defence ministry said in July, can you give an update on when you expect any kind of news on the combaxar? Thank you.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

[inaudible] we have another presentation. So, we talk that [inaudible]. Regarding the combaxar, we pursue that today we delay the decision beginning of the next year. This is... will happen.

Unidentified Company Representative

I think we'll take at least one question from the conference call. We are connected by the conference call.

Operator

Yes. We've got a question from the line of Joseph Campbell from Lehman Brothers.

Joseph Campbell - Lehman Brothers

Yes good morning. I wondered if you could give us an update on the status of the C-27J facilities in the United States. We've read that the negotiations with Boeing have been kind of on and off, and I wondered if you could give us a brief update on how that is going and the C-27J in general? Thanks very much.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Regarding this program, we reached an agreement... complete agreement with Boeing and with F3. So the program, we proceeded well. I...if you could remembered that towards the 24 of September, we will deliver three pieces to the Army in U.S. So, we don't see problem because now they... they have a complete agreement with Boeing and with F3.

Joseph Campbell - Lehman Brothers

One quick question on your backlog. I would like to know what these, the expected order backlog at the end of 2008. So just to understand if your order intake will be higher or lower than the revenues...?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Yes, ordered intake will be $17 million... $17 billion. Actually... of course, we expect also a little bit... something about 8 billion of the present backlog will be delivered, as I said that otherwise it'll be a problem. Therefore we expect to have backlog, we should be little bit higher than 14 billion US.

Joseph Campbell - Lehman Brothers

So the backlog growing more than revenues?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

The backlog is going a little bit higher ways than the revenues, not too high hopefully, because otherwise one way or the other, you have to deliver the contract, and also we can get that.

Joseph Campbell - Lehman Brothers

Thank you.

Unidentified Company Representative

Okay. I think we will take our last question.

Unidentified Analyst

Okay. Well...

Unidentified Company Representative

Go ahead. Go ahead, please.

Unidentified Analyst

[inaudible] with Banca Akros. I have just three very quick questions. Your tax rate in the first half was rather low, do you conform you are 40% near... nearly 40% tax rate?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Yes, we do it.

Unidentified Analyst

Okay. And the NTC over restructuring charges for 2008?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

For all the year or...?

Unidentified Analyst

Yes.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Frankly, don't ask me. I know that they, I do not expect huge restructuring charges for the year, but as definitely it's difficult to tell you now what the stake is... what will be done in the next few series, and what will be basically decided in the their policy [inaudible].

Unidentified Analyst

Okay. And the third one was about the KC45 contract in the US, the stratotanker contract. In Italy there was much confusion about the role of Finmeccanica together with Boeing over this contract, could you clarify if there is any involvement?

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

In Italy not U.K.?

Unidentified Analyst

U.S.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

U.S. because we got in past an order in Italy. We have an agreement with them because we have to participate in this trial, if they redo it in U.S. it's clear that we'll get some order in order to beat [inaudible], that's all.

Unidentified Company Representative

Okay next Mr.[inaudible] with your question and we'll finish if we to move on to the other.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Okay, that's Mr.[inaudible] with the question and we'll then finish this.

Unidentified Analyst

Thanks Harry Rich [ph] JP Morgan. Just two questions. First on the joint cargo aircraft program, will the margin on that be in line with the overall margin there in '06? I've heard there are some cost challenges on the JCA. And secondly the SuperJet program clearly we've seen some delays in first delivery, I read a story that the... unfortunately the wing in static test failed far beneath where it needs to for certification, I'm not sure if that is true or not, but will the developments and delays of the SuperJet have any effect on the recovery of Aeronavali?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

As far as the JCA, yes there is a program aimed to... redeploy a part of the... the part of the puzzle is in order to have more efficiency in... more efficient industrial cost pattern, and we expect that the margins that will be in the TOA [ph] program as it is will be basically consistent to what we have always thought should be in the profitability over the longer term, for our aeronautical business. Therefore we do not expect that this programs we would use the value creation of the group of [inaudible] and CIB, BIC and gross margins.

It will of course be important that this cost control programs would be very effectively done in the proper way. As far as the SuperJet, no the delay which probably has been even lower than the typical delays of an aeronautical programs, few day's ago we are seeing a letter of [inaudible] say that the production of [inaudible] if they are waiting for another couple of months to deliver this and this was taken in 1940. This has not been changed significantly... our value. Of course any delay is forecasted in every long-term plan of any platform in our notice to that.

Unidentified Company Representative

Okay I think on that happy note, we should move on and of course we can take... we will take further questions afterwards from query of investor relations on any more issues you have with our first half results but I think in the interest of time and the fact that we do have today with us the senior management of DRS Technologies. I would like to move on to that presentation now.

I would at this point invite, we are very happy to have with us Mr. Mark Newman, President, Chairman and CEO of DRS Technologies. We also have with us Rich Schnider as I said before some of you may have met in the last couple of months, who is the CFO of DRS Technologies and I would invite Mark Newman and Rich Schnider to join Mr. Guarguaglini and Alessandro Pansa onstage. Rich?

Prepared Text

Richard A. Schneider - Executive Vice President and Chief Financial Officer

Okay. So let me ask you, is that like...

Unidentified Company Representative

Just to clarify how we're going to proceed with this presentation. Mr. Guarguaglini will present an update on the strategic rationale of the acquisition of DRS Technologies. This will be followed by a discussion of the acquisition, the financials of the acquisition an update on that and where we are in terms of the timetable, some of the financing and also some of the opportunity... the combined opportunities that we foresee and we forecast for DRS and Finmeccanica together. Then Mr. Newman will talk about the prospects of growth in DRS Technology and also the combined opportunities of Finmeccanica and then we will have concluding remarks by Mr. Guarguaglini. So I would ask Mr. Guarguaglini to join us.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Okay. Regarding these topics as you know Finmeccanica, three main pieces, in the industry pieces, as we are not staying through present aeronautics, helicopters [inaudible]. So our strategy is to implement the businesses is to be very stronger also in United States. This way we were looking for a company and we decide that our target would be DRS Technologies because they are stronger defense in terms of technology together with superior performance and a stronger management team remaining committed to further grow the business.

What is very important... they have a direct access... relationship with U.S. customers especially with the army. I would like to also immediately [inaudible] also have other access the client also on the land [ph] security. So if you look at the Finmeccanica and their assets, you see that there is very good fit because we are present in the four main important fit, at the same time Finmeccanica own platforms, we own helicopters, we own planes, but we own also armed vehicle like Centauro, Dardo. And finally we have a very strong in system and in fiber. There is a precise our presence in that field.

Now if you go to the next one you see that the Finmeccanica plus DRS will be well located with respect to the other stronger and the Boeing near to the general dynamics not far from the assistance. If we look at Defense Electronics after the acquisition, we will be at 34% over the Finmeccanica revenue is represented by nearly the strongest field of the Finmeccanica in the future and this acquisition will combine the strength of Finmeccanica which is very open to the market, global market with a balanced portfolio of products. We have very high revenue and as you know, we are increasing our profitability in order to reach the 10% EBITDA margin in 2010. At the same time, DRS Technology, and Mark will present you more detail in Q2 and every plan in order to grow very fast. They have a good project report for many platform. They have a very good margin, the EBITDA for them is [inaudible] and the work is very important, stronger free cash flow. Thank you and now the floor is to...

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Before we are combining through... great companies and probably the sole combination of this companies would be sufficient to justify the integration between Finmeccanica and DRS as for this reported and of course there is something more. I would spend few minutes discussing about the financials in order to try to show you what kind of gains we hope that we'll be able to get it for this kind of initiatives and then of course, the way in which they will be gained nevertheless Mr. Newman and Mr. Guarguaglini which will be more consistent and precise about the strategy opportunity which can be got.

As most of you know we are going to pay $5.2 billion which is equal to €3.4 billion or 1.55 exchange rate and [inaudible] by the end of... during the fourth quarter of this year. Initiative signed due course the positive statement as we already filed to the Securities and Exchange Commission, which has come back with some questions. The question that we see proper answer and as we recently sent it to SEC and we expect shortly a positive answer of SEC in order to help the shareholders meeting of the DRS shareholders which we hopefully resolve for the Finmeccanica proposals. [inaudible] notice has a brief filing, which has been already noticed to the CFIUS, commission for foreign investment in the United States at the beginning of July and the final filing is expected... was submitted sorry, on July 29th, a couple of days ago.

At the same time, we have together with the U.S. consulting with the diversity of the service about the mitigation plan for the management of the classified and confidential information and technologies which as you know is an important issues connected with this transaction, many of you have discussed also with Mr. Newman before when you were talking about CFIUS and other things.

Finally, we have notified the antitrust U.S. authorities, Italian and German antirust authorities. We have already got the green light of Italy and Germans, while we have where we expect to have it in due course characterization of the U.S. authority as well. Moving to a few of the financial issues, most of you know that, we have resolved to finance our positions to one-third with debt, one-third with capital increase, one-third with disposal of assets, which include also the IPO of the stock market of the share of the majority of the share capital of Ansaldo Energia.

The loan which has been raised, that managed to be raised through the two year loans of €3.2 billion and successfully completed we've seen the [inaudible] over subscription of more than two times. And tomorrow there will be the shareholders with you of Finmeccanica in order to resolve with the capital increase. All the directors of Finmeccanica will set up the terms of the capital increase likely on September the 8th. After that, the prospectus will be submitted to the Italian Financial Authorities Council and we hope that by the end of October, middle of November will be completed this transaction.

As far as Ansaldo Energia is concerned we have selected both [inaudible] advisors and the work... all the work has started in order to define the parameters, define the financial structure of the company in order to optimize that for the financial market and the listing strategy and the drafting of the prospectus are also underway. At the same time we are completed the documentation for 144 exemptions in order to be able to reissue a long-term maturity dollar bonds issued by Finmeccanica, and to find those, the remaining part of the transaction.

The acquisition of DRS enhanced the Finmeccanica presence in what we always call our three strategic pillars of our helicopters, aeronautics and defense electronics. After this acquisition the first [inaudible] will become the largest and the most important. And among the three, our strategic success of Finmeccanica with more than 35% of assets invested in the sectors over the total assets invested by Finmeccanica in it's business.

Defense electronics represents not only the fastest growing sector in the defense market around the world but it also represents one of the sector with a low... with a relative low risk level. And this is a way this reductions from a financial viewpoint will contribute [inaudible] through a significant reduction to the cost of capital of Finmeccanica, once that transactions will be completed.

This is... you don't fancy figures because our lawyers are frightening us everyday about the fact that we shouldn't talk to any one including our children about the interest rate, the cost of capital, the profitability of Finmeccanica and DRS. But because and I already know a couple of people, who are awaiting me or be back to home tonight bringing me some places that I don't like. But what I can tell you is that as most of you know today the [inaudible]of Finmeccanica is 8.9%. We expect that only through the transaction this should reduce to 8.4 and over time, but on the over time, thanks to the fact that Finmeccanica will become a more U.S. based company where the risk profile of the company is lower, therefore the mid-stream results are lower we expect to move between 8.4% and 8% over the years. The vast and specific drivers of this was... for this was reductions, one, of course is intimately connected to the DRS on a standalone basis which is expected to have a strong revenue growth in the next couple of years says Mr. Newman and Mr. Schneider always they discussed with others in the industry in the last few weeks.

The Finmeccanica group wins this UK integration, which have a higher exposure to define the government defense budget, which are substantially uncorrelated with another. If you are [inaudible] of the correlation between defense at European procuring budget is very low, less than 0.3%. Therefore some budgets are not procyclical but uncyclical from this viewpoint.

The increased exposure to the first electronics business something I've already mentioned to you, but also remember that this kind of business has a lower volatility. To... with respect to other business of Finmeccanica and civil aeronautics and defense, the cycles... the historically the cycles of defense is a 17-year-old since 1911, the cycles of commercial [inaudible] is about seven years old since 1911 as well. So you understand the predictability is higher than before the revenue stream should be lower.

Finally, of course, our capability [inaudible] also through the fact that Finmeccanica will leverage on DRS as the U.S. domestic company, on the stable US defense budget is something, which we have. From this viewpoint, we expect to have not only reductions over time in our cost of capital, but also an increase in the return in invested capital over the next few years. What we expect... this is another typical low years slide where there are many illustrative and examples and other things [inaudible], but the reality is that we expect that the pure acquisition of DRS is dependent on synergies, which could be obtained will meet over our target investment of WICC for less than half the rate of 3% than most of the analysts and investors has already seen as a most important investment guidance of Finmeccanica.

If we assume, the fact that the integration between these two company will be able to bring over the next years an increase in revenues, and this increase will be up to €600 million in 2013, but of course has to be deployed over the next... over the next five-years there should be a benefit on EBITDA assuming an EBITDA margin between11% and 12% which is based on the assumptions of the DRS revenues revenue growth, and this means that our returns would be 1.0% higher which is 4% with respect to our present WICC. Of course if we will be able to do some more, and we are confident that we will be able to do some more those should be between 4.5% to 5% higher than our present one. This is the way we expect this kind was also because even as a notion illustrative of the viewpoint, you see that's... it's a 2009 aggregation of this two companies would bring to a profitability with instead of between 8.6% and 8.9% of the Finmeccanica stand-alone basis should be between 8.9% and 9.2% to the extent that we will be able to combine DRS and Finmeccanica altogether. Why... why all these group results can be achieved and undertaken. Mr. Newman in a while will be... will discuss you about the competitive advantages and the outstanding perspectives, outstanding perspective of DRS, as well as estimation of a couple of things.

When Mr. Guarguaglini said a few second ago that we are putting together two very significant, great and outstanding group already on a stand-alone basis was meaning that the combination of this is giving us significant opportunities that will market products and technology. In terms of markets, of course, there will not only be the possibility of DRS to exploit the international prices of Finmeccanica, but we at Finmeccanica hope not to be consider anymore a foreign company in the United States, which, of course, will present for us a very exciting market because we need a very small slice of the pie of a government investments and procurement in order to increase significantly our revenues and to boost our profitability. Therefore, there is a both way opportunity from this viewpoint, which has to be explained.

In several products, as I will show you in a while the next slide, the fact what will take place is that we expect to create a combined product portfolio, which we will be able to not only be more attractive for the U.S. clients, but also that we will be able to be so complete in order to increase the revenues of Finmeccanica and DRS all over the world and to be able to increase the competitive advantage over the long term that leaders have on the market. Finmeccanica and DRS can become leaders in specifically Defense Electronic segment and this is, of course, is something, which is increasing the absolute profitability of the business as [inaudible]. This leadership comes from... these market leaders come from technology, technological leadership, which, of course, is the route and the necessary conditions in order to be able to increase our offer and to be successful in winning wining contracts in countries where one of this company was considered a fall in domestic one. And for this viewpoint, we expect that they... sharing of technology will have a very... will have a very important effects and positive effects on our value creation. You may see that we believe that 60% of our portfolio as based on products and technology which are complementary to each other and before they can go they together can bring both things a) an improvement in the offer to the clients or b) a significant rationalization and similarity, estimates and cost finances in procurement and manufacturing and other 40% for those which could strengthen one another for this new point. Why I assume that Mr. Newman and Pier [ph] would be able to be much more foresight on this.

The complementarity is something which is very important not only for the development of the offers but also for the cost benefits which can be the life of this transactions which would come precisely for the combined R&D benefits in the office and network-centric programs, home loan security and communications which could benefit from not only the streamlining of some product line but also they combine chasing of the subsystems basically as a combined procurement which is one of the most important sources of savings and therefore of increasing profitability to this company.

And last but not least by the streamlining or central cost connect with the fact that there was significant other activities in Defense Electronics of Finmeccanica in United States and definitely can benefit from the fact that our company can be seen as a domestic company from these two quarters. That being stated, I would like that we are not only hoping to get these kinds of benefit but we are actively working on this even in this period which is called of a sort of it is interim period between the signing of the agreement and the closing of it.

A lot of working group are operating, which and they are at the moment supervised by the steering Board and deposit office which is in six specific working group which are selected on the basis on not only all the problems of specific initiatives which is to be undertaken that which are at the moment devising, discovering or calculating all the initiative, which has to be undertaken in calculating the benefits which can come out.

You see that someone of them are connected with [inaudible] some other of our connecting specific markets, Home Land Security, some other connected with something which can be done between Finmeccanica and DRS and I can refer specific to platform integration which is something which is very much connected with the effect of that. A platform [ph] company as partially Finmeccanica is... can be integrated with a equipment and system company as DRS is.

I think that I've already taken too much time and I will leave the floor to Mr. Newman, which definitely will be able to excite you much more with real things so with respect to that a very cold and [inaudible] figures I would give you. You'll go by yourself?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

I'll go by myself. Good morning, it's a real pleasure to be here and to maybe convey to you a little bit of the excitement that we feel that DRS over this pending transaction. That last slide that you saw is a very significant slide at least to us because we've had a lot of experience in acquiring businesses and integrating businesses. And our expertise over the years has been in systems integration of companies, integrating the two businesses. Anyone can go out and acquire a business, all you need is money and guts, you pointed down and but to just leave it the chance is to how the companies will integrate, always is doomed to failure. And I can tell you that our team has been very impressed with the approach that the people of Finmeccanica have taken integrating these businesses. It's a tremendous approach and they are all in our side, very, very excited about it. What I want to do today in just a few minutes is basically show you the DRS as a stand-alone company, is on a growth path.

We're pleased with where we were in the industry, we're in the top 20 companies in the world in defense doing very well. We have a leadership position in the markets we serve. We are generally number one or two in those markets. We have one of the highest revenue growth rates, internal growth rates in the industry. Last year, we grew at over 14%, over 14% the year before that. We are going to report our first quarter next week, probably end of next week, so you'll see how we did in the first quarter. Our fiscal '09, remember DRS has been on a March 31, fiscal year.

Our operating margins have been very very strong, EBITDA is... I'm now learning about is well over 11%. We got great cash flow conversion and finally our book-to-bill ratio is tremendous. We've always strive to hit 1 to 1 in book-to-bill and as you'll in a slide later on done a lot better than that over the last five years. We are not a platform manufacturer, in fact the only two platforms that we produce are two unmanned vehicles. They tend to be air vehicles and we're looking forward to our future together with Finmeccanica because of their expertise in aero structures, but we do have two platforms. But, otherwise everything we do goes on platforms, one platform or another. So, we're kind of platform independent if our military decides to change from one to the other, we're ready with technology to apply to that platform and that's why we've seen the kind of growth that we've had.

If you take a look at our growth rate over the past number of years, past five years, obviously it's tremendously high. It's been brought about by acquisition and strong organic growth. You should note that our backlog at the end of March was very strong. We continue this... hopefully to see the strong backlog throughout the rest of the year and we're pretty confident about this year that we're in. What's important about our backlog is it's all funded backlog and it generally represents a multiple of about three to four timings that number that you see there in terms of business going forward. So, even if we never won a new program not an add-on to existing programs but a new program, we have a very strong business stretching out three to five years and that's without winning new programs and we're constantly winning new programs.

You can see in the middle there '06, that's when be closed the engineered support transaction that we did, it was the biggest transaction we've done to date over $1 billion in revenue. And, that's why we jumped up to $1.7 billion in revenue in end of '06. We had a couple of months with that transaction and then we carried on from there. So, when you look at that period, the strong top line growth wasn't just because the U.S. has been involved in conflicts, in fact it's been a combination of acquisitions and organic growth. But in terms of where we can go from here, the U.S. has an enormous defense budget, people can't comprehend the size of this defense budget. And what Finmeccanica is trying to do with this transaction is to take two very strong companies, put them together but more importantly gain a presence in the U.S. defense market.

We would have a tough time as a standalone company selling into Italy, because Italy has its own industry and they want to keep that industry going. We do pretty well selling into the U.K because we have a presence in the U.K, but it's not the same as BAE let's say in the U.K. or maybe even a SELEX or a [inaudible] in the U.K. But in the U.S. the same is true, so a foreign company trying to sell into that huge U.S. market has difficulties. And they've down pretty well with a few platforms, no question about it. But to really be a U.S. company they have to have a U.S. presence. And as you know this is the first major acquisition of a continental European company of a U.S. defense company in the United States. So this is really big time.

When you look at this budget $665 billion this past year, we're looking at $700 billion next year, if you've all been reading the House Appropriations Committee just approved about $487 billion or something. What you see here is $515 million that the President asked for, that actually includes construction, if you took that out, it's about $491 billion and so far there is $487 billion. But as far as we're concerned it doesn't matter because we are deployed all over the world. The United States is not just about Iraq and Afghanistan. The United States is about forward presence in the world. And you see 1.2 million people serving throughout every world theatre.

And when you take a look at the budget, what you see is a very strong procurement in O&M budget and that's where DRS plays a very strong role. So, whether the budget is a few billion higher or of a few billion lower it makes no difference to us. Congress goes through it saying they put money in different pots, the fact is we're in procurement in O&M and that is the sweet spot of the defense budget.

Let me just take you very quickly through some of the growth avenues that we've identified as an independent company and then I'll show you a few things that we think we can do together. We take a look at the Army and you look at the current baseline of the Army in the Marine Corp in the United States, what you see is the Army growing from what we call 42 Brigade Combat Teams to 48 Brigade Combat Teams by 2012, that's a significant amount of business that's going to come our way. Same thing with the Marine Corp, you can see growth in manpower and a lot of that growth is because of the kinds of deployments that we've asked of our troops and they've got to start slowing those deployments down. So that means they need, new troops, more troop, when they have more troops they need more equipment.

This is a sample platform that we're on it's a Bradley Fighting Vehicle and you can see on this slide all the different things that we produce for that vehicle. No matter what vehicle the U.S. buys they're going to end up with DRS equipment on it somewhere along the line. Right now we've got an inventory of about 320,000 vehicles in the U.S. That number is going to grow to over 400,000 vehicles by 2020 and some of those vehicles are going to be different. So, we are going to reset equipment that's already in the field that's going to come back and when we reset it, in some cases, we use existing equipment, in other cases, we're going to put new equipment on those platforms. But this is an enormous marketplace for us to be chasing. Take a look at the Navy, the Navy uses ships, ships get old. We have a huge position on every ship in the United States Navy. These are some of the ship classes. This shows you some of the content that we have on each of those ships. They are going to be future ships like a CGX. But on the other hand, you've been reading about the DDG 1000, which is the Navy's newest destroyer and it looks like the Navy would like to stop that program at two ships. Well, two ships is going to take us through the next three to four years to complete all the equipment that we're building for that. What was very interesting for us is they are going to stop the DDG 1000, but they are going to start building more DDG 51. But it's not going to be just DDG 51, you'll have a few coming off the line like that, then they are going to begin to build an enhanced version of the DDG 51, because they have to keep the industrial base going. And in that enhanced version, they're going to take lot of technologies that we've been developing for them on the DDG 1000, and they're going to translate themselves into the DDG 51. And the other ship that's going to be coming down the pipe is the new cruiser, which they are now calling CGX and there is some significant work that we do on that as well. So, we see a very long-term navy business ahead for us.

This is the planned ship construction, very high and I think what you can get from that, we just looked at Army, Marine Corp, and Navy is that there is a lot of building going on in the U.S. defense arena, and it really has nothing to do with Iraq and Afghanistan, although we are probably going to keep our presence there for quite a while.

Let me just take a couple of seconds and talk about one of the real growing markets in the industry right now which is homeland and defense and borders security. You can take a look at a map of the world, what you see there... a lots of countries that are very nervous about their borders, you all know about the SPI net program in the U.S., which is to protect the Northern and Southern borders of the United States. But if you go around the world, everybody else is concerned about their borders. And they are concerned about terrorism, they are concerned about trafficking in women and children, they are concerned about drug trafficking. This is a worldwide concern and more, more countries are trying to find better ways of protecting their borders and that's where we're going to play a big role, both as DRS alone and now more importantly as DRS combined with Finmeccanica. We're seeing the homeland defense market growing from about $80 billion now to $146 billion by 2013, that's a 12% growth rate and we're very involved in programs around the world addressing that market.

Let us take a look at exports. DRS historically exported about 7% to 8% of our total sales. We have a lot of opportunities, but we just haven't had the machinery to go after all of those opportunities. So, what you see here are listings of types of things that we do for land, sea and air and what we see going forward is a great market as a stand-alone business, but combined with Finmeccanica, an incredible market, because we'll now have a gateway to the rest of the world and we are going to see a lot of growth from that. So basically, if you take a look at our business and we are going to... of course going to answer questions, you're seeing a growing demand for all the products and services that we produce, we're very aligned with where the U.S. military is going both from a modernization and what we call transformation point of view. We've got lots of long-term contracts in our backlog, which bodes well for years to come.

We've got critical scale throughout the company, we'll see more with Finmeccanica and that allows us a lot of cross-selling, we can take parts of our business, put them together to go after a new program, we've draw disciplines from varying parts of the company. And we've got an incredibly diverse portfolio of programs and customers. In fact, I don't think our largest program is more than 5% of our total revenues and I think if you looked at our top 10 are programs probably less than 30% of our total revenue. So it's a very, very diverse business.

If we take a look at some identified opportunities that we've seen, these represent actual programs that we are working on and that we are starting to partner with Finmeccanica on. And by the way we've known Finmeccanica for quite a long time and we've talked about teaming on programs in the past. This isn't a new thing, they didn't just look us up somewhere and say hey, let's go after that. I mean they've known us for quite a while.

And so now, some of the programs that we've thought about in the future we are actually beginning to look to partnering on and I'm not go through all of these with you, but suffice it to say these are ongoing significant programs that we can actually address as a joint company. There are new programs though that we're starting to identify that we never thought of before in terms of working together. So when we say SBInet, DRS has already partnered with Boeing on SBInet. That's a secure boarder initiative I talked about.

But now they're going to look at the Great Lakes area. There's the first part of SBInet was to cover 6000 miles of land border. But what about the oceans, the Great Lakes, its an enormous border around the U.S. and there are technologies that reside at Finmeccanica, that we can begin to use to address some of those problems.

And the same thing for all of these other... we're priming for example, right now something called the JLTV, that is a new vehicle, you have heard about MRAP, the MRAP was an interim vehicle to protect troops in a RAP. But with the army and the Marine Corp really wanted was the next-generation vehicle to replace the [inaudible] and we they call the JLTV the Joint Light Tactical Vehicle.

And we are priming that with forced protection, we are teamed with them. A combination with Finmeccanica would make us a much stronger contender for a program like that for example. So there are a lot of new programs that we think we can change. Now, remember that you don't win new programs in this business over night, but the good news is that you don't lose programs over night, generally either.

So the programs go on for many, many years and then as you begin to build a relationship you start to fold in some of the new programs. So this is an incredible opportunity because you're looking at a great standalone business in DRS, a great standalone business in Finmeccanica, but you should have seen the eyes of our people when they just participated at the Farnborough Air Show and saw the incredible systems capability that exist in Finmeccanica that they can start to bring into the United States market.

And when... and if you saw that the brilliance of what Mr. Guarguaglini is achieving here, would really come to light because, now he will have access to the biggest defense market in the world. And with that I will turn over the program.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Mr. Newman presented the roadmap of DRS as a standalone, but at the same time, he presented the opportunity that DRS with Finmeccanica has in the future. And as already shown, we have good opportunity and the short terms. But I would like to point out regarding the four main field, the value of this field. Again, the homeland security... as you know, we have a good product regarding cost of control, cost of security and the border control. This marked the... this marked the... for the next five years starting 300 billions of dollars... euro. Regarding the C4I, as you know, we have programs in U.K. and all around the world in U.S. too regarding the future [inaudible] possible communication like soft radio.

We have a... the diffusion is C2 and this market represents practically 400 billions of euro. Regarding global and [inaudible] logistic and mainly regarding the platforms in this case, the market is 80 billions of euro. Finally, net-optics, the markets is €60 billions. And I would like to point out the fact that Finmeccanica is very strong in airborne avionics, while DRS is very strong in land and ship airborne... ship and electro-optics. So, this is why I... our goal is that today practically the two company has 60% of the market share and our goal is to reach 7% of the market share in 2012. This means to be roughly near €10 billions.

So the final, regarding possible or the primary contact of the last few months, [inaudible] very important contract. When regard the US Postal service where [inaudible] started to work with DRS in order to stay in this position in U.S. But at the same time, to enlarge its presence around the world. Then the rest is present in the Jordan or border control with specific products. We are confident to present new products in order enlarge this activity. [inaudible] increase for this port security. Then in U.S., DRS represents our product in the communication. At the same time, we are confident to enlarge our activity regarding the Coast Guard. We have other opportunities and then we're confident that in Greece, Turkey, Germany, Egypt and Romania, Bulgaria, and Afghanistan. And also in Iraq, because the Prime Minister was in Italy last week, I met him and then we met the Minister of Defense, the Minister of Italy [ph] we presented the Finmeccanica product and DRS product and we're confident that in the next future, very soon, we'll present some offer to get some order next year.

In conclusion, I am very confident that we'll achieve a level of benefits fully supported investment that we have made in US. So, I repeat that this move for Finmeccanica is very important but that I am confident that this is very important also for DRS because this will permit DRS to be present worldwide to increase its revenue, Thank you very much.

Unidentified Company Representative

Thank you very much Mr. Guarguaglini and Mr. Newman, Mr. Pansa and we also have Mr. Schneider with us as well. We can now hand over to the floor for questions on DRS.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

We're ready for questions from the conference call.

Question and Answer

Unidentified Analyst

Good morning, [inaudible]. Just a couple of question. The first one what are the main risk you can see when integrating Finmeccanica and DRS? And then a question on Finmeccanica about the asset disposal. What are you thinking about? Are you also considering [inaudible] and if you have already a good upturn on the disposal of SPM shares? Thanks.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

The answer is that we do not consider [inaudible] Avio is a stake of 15% with another shareholders who has 85%. We will sell the Avio shares the moment when our majority shareholders we have decided hope you get the results of that. There will be the best possible condition for [inaudible]. We have no put options on existing micro shares, our majority shareholders, Italian shareholders [inaudible] has a very short time to ensure rights on the shares that we could sell. Therefore, the day when we will decide to sell shares in the market we'll give them the right and the right will be long if I remember, 48 or 72 hours to match with the market price as we'll sell it, that's it.

Unidentified Analyst

Sorry, the first part of my question about the main risk you can see in integrating DRS and the Finmeccanica if any?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

From whose perspective? We can all... I mean from DRS' perspective, we don't see any risk at all mainly because DRS is a standalone business. It's a very, very strong business and the big thing that we're going to get involved with is in marketing products and trying to bring them into the US but when you think about it, they didn't need even synergies to make this, make financial sense is such a big market that they're going after here and the fact that they have a management team that's seasoned and is staying with the business. So I don't really see any big risks, from our point of view.

Unidentified Analyst

[inaudible] you don't see any risk too?

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

We see opportunities, not risk?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

Yes challenges, not risks.

Unidentified Analyst

[inaudible] Morgan Stanley. Just a very quick question for Mr. Newman. You talked about the strength of the Defense budget in the U.S. How do you see that going forward, given the upcoming elections and what is the level of reliance of your business from supplemental funding versus the base budget?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

Right. First of all we see a strong budget going forward no matter who is elected whether it is McCain or Obama. The democrats tend to want to strengthen the existing force with sprinkling of money for our future programs because they recognize they need. The Republicans probably would see more of the same that you've had through the Bush era. In either case I think, we're going to probably see a moderate increase maybe in the 3% to 6% range in terms of increases.

Now, one of the things they're trying to do from a supplemental standpoint is the Military has used a lot of the supplemental money to fund not only the war, but also equipment purchases because of things that are wearing out due to the war.

What they're starting to talk about in this particular cut, of the budget is they would like the Department of Defense to start budgeting for those eventualities in the main budget. So if that's the case, and they have to do the amount of reset that we're looking at for the next three plus years then they're either going to have to increase the base budget a great deal or they'll continue to use supplemental.

Now just, one last thing. We have supplemental funding in the United States every single year. It's become a big issue because people became conscious of it in the last few years because the numbers have gotten so big. But the supplemental is really a term that's used to fund things that were outside of the budget. And that is an ongoing thing, you're not going to see supplementals go away, they're just going to change in terms of value. But not as... we don't have... they only thing that I am going to say is they bought some equipment faster on the supplementals. But that equipment by the way is going to be necessary in the future, so now we have a much broader base of equipment to build on that's not going to be a part of current base of products.

Unidentified Analyst

[inaudible] I have one question for...

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

[inaudible].

Unidentified Analyst

I have one question each. So to... on the IRS calculation which I found very interesting it's 11.4%, so it's 8.4% of your VAT plus 2%. Can you share with us your long-term assumptions on sales growth rate and EBITDA margin? And on the DRS side, I assume that the Iraq war will finish tomorrow, you have probably a negative effect, but also positive effect on the fact that you will have to reset all the vehicles coming back to U.S. Can you give an indication of the net impact of that or can you anyway give some information on that?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

I will answer to that quickly. First of all Iraq is not going to end tomorrow. So.. I mean it's an interesting question, but I don't think it has any baring on reality. The reset is an ongoing problem that we are faced with. So, I think you're going to see continued spending but as a total standalone is probably a minimum of three years of solid reset pipework is it, right. I can't understand what you're saying. It's at least three years that's going to happen now. But in the worst-case you wont be out of Iraq in less than two years, is my prediction. And I don't think we're ever going to just walkout of it. I think there is going to be a presence. What the American people are looking for now are just reduction in casualties. By the way they are talking about moving all these Brigade Combat teams to Afghanistan, so it will be a lot of troops to start to move into Afghanistan.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

All right. In some of the IRA processes, what I can tell you is the fact that we expect to have a growth rate in term of revenues of U.S., which is supposed to be low double-digit for 2008 and 2009 as well as for the 2010. I've been clear that the fiscal year would be closed as there is a [inaudible] to December 31 and then we have an expectation of growth, which is 7% and 8%. What we expect that EBITDA will grow... we move accountably in the sense that the DRS is going to have an EBITDA between 10.5% to 11.5%, which will remain the same therefore as expected. When I say that we would think that 2013 there would be an increase in revenue of $600 million all over. This implies something, which might be DRS and Finmeccanica as well. So [inaudible] cannot be undertaken on a single company but Mr. Guarguaglini explained, they can take both ways. And therefore the relative higher benefit that's benefits under EBITDA that we expect to be $70 million is something that can definitely come from both Finmeccanica, DRS side. Of course we expect that this is not a place once out of the blue and therefore nothing would take place within 2009 and 2012. And therefore if you can... this is to tell you that we expect that both DRS and Finmeccanica will be able to deliver over the next 3, 4 years, particularly in the last two I mean 2011 and 2012, on top EBIT which would be between $30 million and $50 million per year in that period.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

For us Iraq could represented in the future a very important market, especially in the field of OSFE control system, it was in the past that we provided a lots of them in the energy field, and the security field, in customer field and during the talk that they had with the Prime Minister of Iraq show that this is possible before they could see the... they have to invest a lot in order to rebuild the countries and they need the European support, not only Finmeccanica but here from the government, especially in the training of the people. So they are talking [inaudible] in order to have the training in this Home Land Security. So I'm sure that the next year Iraq will represent a very important market for us.

Unidentified Analyst

The 2008, 2009 we will be consolidating end of 2008 so 2009, 2010 that just…?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

[inaudible] '08.

Unidentified Analyst

That's a couple of years 2009, 2010?

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

Double-digit... low-double digit.

Pier Francesco Guarguaglini - Chairman and Chief Executive Officer

Yes.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

[inaudible] felt that, I mean it's very difficult for you to understand without any performance statement if you see the financials of Finmeccanica in the year 2008 because it had a consolidated balance sheet and not P&L.

Unidentified Analyst

Okay. One question that dilution for Finmeccanica in the next few years, you said in the first presentation that even [inaudible] guarantees of 1.5 billion there was no dilution about the prices going down and so what are your new assumption of dilution for Finmeccanica in the next few years? Thank you.

Alessandro Pansa - Chief Financial Officer and Co-General Manager

Yes. Well yes on May 13, the stock price for Finmeccanica was about... €21, €22 whatever it is per share. We expected not to have any dilution in the case in which you hadn't undertaken a new acquisition of €1.5 billion. Today, I mean unfortunately our stock price is lower than that if any... it has recovered significantly in the last month or so. So we expect at the moment a light dilution of the earnings per share, which was light. I mean, really... not very significant for the percentage points.

And by the way, this is something that should take place only in the very beginning of this DRS and Finmeccanica story. We've talked to you about the long-term investment, we've talked about something that should provide benefits over the longer time. Mr. Guarguaglini, and Newman has explained the fact that the benefit that will be listed is not something would take place overnight. And therefore even 2% or 3% dilution for the first year is something that we could be compensated for this significant increases in values or in earning per share for the net period of time. If I may add something, of course, we are very clear that it might affect that shareholders and investors need to be able to write and not only over the longer time or the shorter time and therefore we try to move accordingly as the aggregates of which has been handled by us into the dividends as [inaudible], in order to avoid as much as we can any worsening in profitability terms or the Finmeccanica shares even over the shorter one.

Unidentified Analyst

Just one short question, your sales... DRS sales abroad, your revenue is coming from about as lower than 4% actually, what do you expect from next few years?

Alessandro Pansa - Chief Financial Officer and Co-General Manager

For us?

Unidentified Company Representative

Yes. You are going to [inaudible].

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

Yes, I would say that we were actually at about 6% to 8%, that's where we've been running and we had a goal of 20% and over the next few years as a standalone company we had a good shot of getting close to 10%. But I think together we're going to have many, many more opportunities. We've already started booking contracts but it hasn't sorted through in the revenues yet because... just there is a lag, we actually have to start delivering. So, I think alone getting to 10% within three years would have been very doable, but I think together we're going to be able to open up the markets a lot faster.

Unidentified Analyst

Thank you.

Unidentified Company Representative

Is there any questions from the conference call?

Operator

[Operator Instructions] Just got one question coming through the line of Joseph Campbell from Lehman Brothers. Please go ahead.

Joseph Campbell - Lehman Brothers

Yes. Good morning. I have a question for Mark. Mark, first let me say congratulations both professionally and personally. I am sure Leon will just be astonished and very proud of what you have done. It is certainly going to be a great opportunity to take DRS and Finmeccanica as well to the next step. What I had wanted to ask about is what's happening with the work you are doing with the DSA, the security folks. And what's your current sense of what you might have to put into proxy boards and what do you think you might be able to work around to maximize the businesses that counter [ph] the French going in the SSAs? Thanks very much.

Mark S. Newman - Chairman of the Board, President and Chief Executive Officer

Well, I think that there is an opportunity that we would have to perhaps put everything in SSA and maybe that we have to put some things in a proxy that's going to depend on DSS and we're going to work closely with them, we are going to do whatever we have to do, but I'm sure no matter how it turns out, the government is going to want us to be able to manage in the most efficient way possible to not lose any value for them as the customer. So I think we're going to have to see over the next couple of months how it turns out but we're pretty optimistic right now that it will be favorable.

Unidentified Company Representative

Well, at this point it looks like there are no more questions. So I would thank you all very much for coming to these two presentations. I thank again Mr. Mark Newman for joining us here in London and to Mr. Rich Schneider and we look forward to fielding your questions in the near future and seeing you all soon.

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Source: Finmeccanica F1Q09 (Qtr End 6/30/08) 2008 Earnings Call Transcript
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