Good morning, this is the Chorus Call conference operator. Welcome, and thank you for joining the Avio first half 2024 results conference call. As a reminder, all participants are on listen-only mode. After the presentation, there will be a Q&A session. For operator assistance via web call, please press the assist icon on the bottom left side of your screen. For conference call assistance, please press star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Marino Patrono, Investor Relations.
Good morning. Good morning, everyone, and welcome to first half twenty twenty-four results conference call of Avio. I'm here connected from our headquarters in Colleferro, together with Mr. Giulio Ranzo, CEO of the company, and Mr. Alessandro Agosti, CFO of Avio. In a moment, we will go through the presentation we just released on our website. As usual, Giulio will go through the highlights and the events of the semester, a pretty important one, I would say. And then Alessandro will go through the financial results. After that, we will open the Q&A session. Thank you for your attention, and I leave the floor to Giulio.
Thank you, Mario. Good morning to you all. Thank you for joining the call. Starting from this call, I believe we have a new, a new conference calling system. I hope this is convenient for you. You will let us know if everything works well, and we will try to optimize it. I would, in the interest of time, start from page four, which summarizes a bit the highlights of what has happened in the last period, since we last talked. First and foremost, we very recently had the last flight of the Vega launcher, which was successfully completed, delivering Sentinel-2C to orbit. It's very important for us, an emotional flight, the end of a program where we have engaged for 12 years in a row.
Made, you know, lots of successes and some challenges, but it was, for us, extremely important. Nothing is better than a very satisfied customer. The launch went extremely well, so we are very, very happy about that. On the Vega C developments, we are on track to fly Vega C by the end of the year. As we have reported in May, we conducted the Zefiro 40 static firing test successfully, which paves the road for a flight of Vega C before the end of the year. Now, beginning of October, we will conduct another static firing test, a bit of a repetition, let's say, of the test we did in May, for further assurance.
But all is on track in terms of planning for a Vega C flight before the end of the year. And it will be another Sentinel satellite, the Sentinel-1C, again, for the European Commission. Since July, Avio has also been authorized to conduct Vega commercial operations, which have been kicked off very recently. I will come back to that, and to then become launch operator by the end of next week- next year. We will see what these wordings mean and what this is all about, again, in a few minutes. One other very important milestone this semester was the successful maiden flight of Ariane 6, long-awaited. It was performed very successfully, as you already know.
We had a lot of our technology on board, the P120 boosters, the turbo pumps on the liquid propulsion engines. So all these technologies worked perfectly, and therefore, we are very, very proud of that, and this definitely paves the road for a rapid ramp-up of the Ariane 6 flights in the months to come. Then we have reported to you towards the end of July some important news regarding our defense business, where our backlog was significantly increased, and in particular, with the signature of two new contracts for U.S. customers, which represents definitely a novelty in what we're doing and is the result of a strategy we have put in place over the last two years, a significant effort to enter the U.S. defense market.
We reported success with signing a contract with Raytheon, the world's largest missile manufacturer, and with the U.S. Army. So that is a very important development, I believe, in our story. I didn't comment much on the financial results. Alessandro will take you over that. I think they are well within our expectations. Probably, the revenues were a little bit ahead of our expectations, some of the other numbers, but give or take, we are within what we expected and what we had anticipated to you, out of which we essentially confirm the guidance we had provided you for twenty twenty-four, which calls for some growth in the revenues and a bit of growth also in the profits. So if I move to page five, as I said before, VV twenty-four was the last Vega flight.
We will then proceed with Vega C only, so the end of the Vega C, the Vega experience was an important milestone for us. The deployment of Sentinel-2C, as always, was done with an incredible orbital injection accuracy, as reported by the customer, who was extremely satisfied about this result. We are quite proud of that. You know, in twelve years, I remember attending the maiden flight of Vega back in twenty twelve, so we have lived this long life with twenty-two launches. We have launched over one hundred and twenty satellites. On average, with about eight hundred kilograms in mass, so the system was dedicated to small satellites to low Earth orbit. I hope you can still hear us.
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Yes, I confirm. I can hear you and see the presentation and, you're welcome. Yes. Yes.
I just lost the connection, so all right, fine. So, some pages here, some photos of the last flight and the payload and so on. I would say this is an important legacy that we will leverage for the future, because as I said, our history with Vega was of several success, but also challenges, as we know, and I believe this is important because all in all, we learned a lot and consolidated an experience base that will be extremely important for the future of Vega C.
In fact, if you go to page six, the Vega launcher in twelve years was a mix of successes and first times, I would say, because except from launching lots of Earth observation satellites, a bit of a routine work for Vega, we did a number of unique missions, I believe. For example, with VV zero four, we launched our IXV, a suborbital vehicle, which reentered the atmosphere and landed in the middle of the China Sea. Its evolution, Space Rider, will fly in the coming years, will be a launch and reentry reusable system that will land on an airstrip.
Vega enabled to create also new applications that, quite frankly, in Europe, didn't exist, and had we not had Vega, we would have not had this application. I believe this marked a very important landmark in our history. Also, the launch of LISA Pathfinder was important. You know, this was a spacecraft launched to the first Lagrange point, an exploration mission, very important for the European Space Agency and very important for us also from a technical standpoint. In 2020, with VV16, we also launched the first so-called Small Spacecraft Mission Service. The first time in Europe we ever launched 53 satellites in just one launch, deployed to two different orbital planes.
So I think all in all, this demonstrated the flexibility of the system to perform a number of tasks that formerly nobody else had ever performed. And on average, the reliability over the first twenty-two missions was very much comparable to that of the other systems, which we typically compare in the same range of the first flights. So if you take the very first twenty-two missions of each of these systems, pretty much they had the same success rate. So a very important chapter in our history. Now, moving on to page seven, let's look at what will happen in the future.
We reported, as I said, success for the static firing test of the Zefiro 40 in May, where we have replaced in our nozzle assembly the carbon-carbon insert using a European supplier, and the motor worked perfectly, so we were quite satisfied about that. Now we are conducting another identical test. The European Space Agency required us to perform a second identical test to just demonstrate the ability of repetitiveness, so to obtain the same results out of the test article. I think this is an important and cautionary approach to quality assurance, which is justified by the challenges we have faced, and to assure the customers even more on the safety of flight.
So this will be at the beginning of October, the Q4 test, and we will report to you what the results will be. On page eight, a short summary of the success for the Ariane 6 maiden flight, which was performed on the ninth of July. I attended the flight. It was emotional as well, this year to see it. I know it was long awaited. The development took longer than expected, but the systems and the technologies we provide performed perfectly, and not only the P120 motors, which of course, we had already flown on Vega C, and they had worked perfectly, but they also worked perfectly on Ariane 6, and of which we are glad.
But also our turbo pump systems on the main engine systems for the liquid propulsion part of Ariane 6, it worked very well. So that's good to hear and again paves the road for what will happen next. We are preparing now the larger version of the P120 boosters, the so-called P160, which would be more powerful and will help Ariane 6 increase performance, in particular to perform against the Amazon Kuiper contract to launch them to space. So we are quite satisfied with that. So if I go to page 9, this is a page we had presented to you earlier this year, with what we had planned to do in the course of 2024 and in outlook for 2025, and essentially, there's nothing to report here.
We are executing as expected, you know, and then Ariane 6 made the flight done, first flying test of Zefiro 40 done, and also VV24 done. Now we are preparing for the next flying test, as we said, of Zefiro 40 and Vega C flight by the end of the year. There will probably be another Ariane 6 flights. I don't know yet what the plan is. This will be reported by Arianespace, but it's clear that the work we are doing, both on Ariane and Vega this year, is to prepare a higher flight rate next year for both systems to fulfill the expectation of the customers. On page 10, some of the evolution in the responsibilities for the Vega launcher. You know, the Vega launcher was marketed and operated by Arianespace.
Since the beginning of July, the European Space Agency has awarded Avio the commercial rights over the sale of the Vega launcher around the world, and therefore, we have started to build commercial operation. In fact, on this page, I forgot to mention some of the very latest developments. As of this morning, the head of the Vega business unit within Arianespace has joined Avio as Chief Commercial Officer. So it's an interesting comeback. It's a great manager, Marino Fragnito, who has worked on Vega for so many years. He will now continue his work as Avio. And that's important, because we will build our commercial team by leveraging all of his experience, and knowledge, and network, and so on. And this will grant also continuity in the relationship with customers and well.
Arianespace will continue to be the so-called launch operator. The launch operator, in particular, means taking care for the launch safety submission to CNES and to hold the responsibility and the liability during flight. They will continue to do so for the next four flights until the end of twenty twenty-five. In the meantime, it is expected that Avio shall take the responsibility as launch operator, beginning from VV-30, so immediately after the end of twenty twenty-five. We are working on this path. We do have the competency to do this. We are optimizing our teams.
We will run commercial operations from the city of Paris, where we have a representative office, and we are building a dedicated team for this for these activities, which will be led by Marino Frignito, Chief Commercial Officer. We will try together with Arianespace to grant continuity and a smooth transition of roles. This is definitely an important change in what we do in Europe for sure. On page 11, some updates on the projects supported by the European NextGen EU funds. As you know, we are working on four main technology development projects in addition to what we do for the European Space Agency. In particular, on the left side of the slide, we have two important projects to accelerate the maturation of the liquid oxygen methane technology.
One is dedicated to prepare an in-flight demonstrator using our M10 liquid oxygen-methane engine. And the second one is to create a much larger liquid oxygen-methane engine with 60 pounds of thrust, using pretty much a similar technology as the one that we have developed for M10. On this, we are now, of course, at an intermediate stage. We have conducted the first test on some of the subassemblies. We are, you know, at the midpoint in the development of these projects, but they are quite promising. And they are essentially consolidating our knowledge in liquid propulsion, which is definitely less developed than the knowledge on solid propulsion, but paves the road for potential future applications on our rockets for, you know, the next decade or so.
On the right side of the chart instead, we have the other two projects funded by the NextGenEU fund, all of which have to do with applications, so first and foremost, we are developing the so-called Multi-Purpose Green Engine, which is an orbital engine, so it's an engine that we use, for example, today in Vega C on our upper stage, to perform orbital operations, and we are developing our own version of that, to prepare for even more sophisticated orbital operations. On that, I have to report that we have just, in the last few days, assembled the first prototype of such engine, and we have finished the commissioning of the test range for this engine, so we will be able to test it on ground.
And this is extremely important, because in addition to consolidating the liquid oxygen methane technology now, we will also consolidate that of orbital propulsion, which we have had experience on, but not as much, again, as in solid propulsion. So the intent, as you can very well see, of the use of the NextGen EU funds is to consolidate capabilities and competencies across an array of technologies that we need to have available to have new products for the next decade. And then last, the last project, in partnership with Thales Alenia, is to create an in-orbit servicing module to offer customers opportunity to conduct missions such as debris removal from space, or other in-orbit service missions, such as refueling or things like that.
So it will be a demonstration project, not yet a service, but extremely important to expand once again the array of applications that we already provide today. Switching gears, on page twelve, I'd like to shed a bit more light on what we're doing in the U.S., that we have touched upon in the past, but not as much. And the nature of the business we do in the U.S., in particular for defense, unfortunately, does not allow for full disclosure of every detail of every contract. But one important point is, we have put in place our U.S. subsidiary, Avio USA, which is our only owned subsidiary, headquartered in Arlington, Virginia.
We have structured this company in the course of the last two years to operate in compliance with the U.S. Security and Export Control Regulation, which is a very complex and structured environment, as you may imagine, to be able to work with U.S. defense, and is today governed by a U.S.-led board of directors. In particular, I'm very proud to have attracted the interest of two extremely experienced people to lead this effort. Marty Bollinger as chairman of the board. He's a retired senior partner from Booz Allen Hamilton, a well-known defense consulting firm. He has an extensive experience in aerospace and defense and is today a lecturer to Navy officer. And as CEO, we have been able to hire Jim Syring.
Jim Syring is probably one of the most experienced persons in the U.S. in missile defense. He has long been with the U.S. Navy. He's a retired U.S. Navy Vice Admiral and was the former director of the Missile Defense Agency in the U.S. He has also been the former president of USAA, which is an insurance company. So an extremely experienced person in the defense field and with lots, obviously, of credibility. Because the effort we are placing in the U.S. is challenging, we needed top players, and I'm very glad to report we have them. So around these managers, we are building, of course, a team. We now have some already in place who are working on different sides, on the commercial side, contractual, operations, compliance.
There's a lot of compliance to be done in the U.S. And so, they are working at full steam on our new work. In particular, on page 13, as you may recall, in July, we had reported to have signed these two important contracts, one with Raytheon and one with the U.S. Army. These two contracts have nothing to do with each other. We just happened to announce them in parallel, but they are completely disconnected, and they refer to different systems. This is as much as we were allowed to communicate for security reasons, so the restriction in communication is very much governed by the requirements of security. So it's not us not willing to share more, but we actually cannot.
But it's important to know that in particular for Raytheon, we agreed to progress on the development of a solid rocket motor for a defense application, which is intended to transition as rapidly as we can towards production of solid rocket motors to support the U.S. defense missile industry. So, we are very glad about that because Raytheon is the world's largest manufacturer, as I said. And given the current market situation, there is a great surge in demand, which significantly goes beyond what the current supply base can provide.
And so this hopefully provides Raytheon the opportunity to match some of this gap, and us to enter this market, which is extremely attractive for us, given the match between our competencies and the needs they have in the US. It is also an honor for us to work directly for US Army. You know, that is a testimony of the fact that we have had trust from different types of customers, even directly from the US Armed Forces. And believe me, this is not very common. So we have been asked to work on fast prototyping, again, of solid rocket motor, which is a bit of our bread-and-butter application for surface-to-air missile applications. And so the intent is to qualify these propulsion systems on a design-to-manufacturing approach, with the idea to-...
Transition towards production as rapidly as possible. Typically, in this system, the transition from, qualification, I mean, from design, conception, qualification to production, is not very fast. So you are not talking about months, you are talking about years. Just to qualify a system, whether the system is existing or new, it takes years to conduct tests on ground to demonstrate that the system works, and it's perfectly, can be repeated in production and so on. It takes years. So we are trying to compress this time as much as we can, but we need to respect, very stringent, technical requirements. So, but I'm very glad we are engaged with these very relevant customers on this task. And I think this is the beginning of a, of a US opportunity. It's not all we have in partner.
There's a lot more we are working on, both on the side of the commercial opportunities and operational activities in the U.S. But you know, it's a beginning of a very promising story, I believe. So in fact, on page fourteen, I want to come back to a slide we had presented earlier this year, but that we have updated now. On the left side, you see the speed at which the order backlog in defense is growing, and that is, quite frankly, it speaks for itself. The market is demanding a lot more propulsion system for missiles than we had anticipated.
And therefore, if you roll out such backlog in the years to come, you see that the production volumes of missiles we have today will tend to grow quite rapidly, probably at a pace of 20%. Here, we are talking about the volumes of production, which is probably not indicative entirely of the revenues and the profits, this we cannot communicate. But that gives you an idea of, you know, the growth we expect in the next few years, which is already in our backlog. Now, the announcement of this U.S. contracts has the effect of not only expanding the expectation for volume production in the next five years, that's the expectation to extend it significantly by another five or ten years at least.
So the time horizon at which we are now measuring our expectations for the future is definitely a decade from now. Given the fact that in the next few years, we will spend time to qualify the systems, meaning to make them fully compliant for production, and then we will follow up with the production. But this means that the expectation in a decade time is a multiple of the volumes we are currently crunching, for which we are prepared. We in terms of capital expenditure also in agreement with customers, and to make sure we have the right skills to do this.
So I think this adds to the space business, which we continue with the promising prospects that we have highlighted to you, but this adds on top probably a growth path that was not anticipated in earlier years. We will continue to report on that as we have news, but it's important that we frame this correctly. So I will now move to, you know, pass the word to Alessandro to give you more color on the first half financials.
Thank you, Giulio. Good morning, everybody. Let's move to page 16. We are talking about order backlog. We reported order backlog evolution over the last five years, which shows a compound annual growth rate of almost 20%. Backlog of EUR 1.4 billion at the end of this first semester is the highest of the company history. It's about four times the yearly revenue, thus providing a strong visibility in the medium term. In the first half, order intake amounted to approximately EUR 200 million, half of them related to defense propulsion activity, basically for Aster missile. Intakes for P120, P160 production accounted for EUR 80 million, also in view of the production ramp-up following the successful maiden flight of Ariane 6 in July, as commented before by Giulio. The remaining orders acquired in this semester were for Vega E development.
Following the recent growth in defense order intake, I recall that also in 2023, we had 120 million of intake. The defense propulsion has almost reached 25% of the total order backlog at the end of the first quarter. Defense backlog is higher than Ariane backlog, waiting for the ramp-up following the successful maiden flight of Ariane 6 in July, and more than half of the Vega backlog, waiting for the ramp-up following the return to flight for Vega C, confirmed in Q4 2024. 60% of backlog is for production activity, and 40% is for development activities. Shall we move to page 17? We reported the revenues of the half year. Revenue increased by 15% compared to the first half of previous years.
Such increase have been principally driven by defense propulsion activities and technology development projects funded by NextGen EU funds. Defense propulsion revenue were almost double than in first half of 2023, and accounted for 17% of the revenue of the first half of 2024. 50% of revenue comes from production activity and 50% from development activities. Revenue from development activity grew almost 40% compared to previous semester, basically for the incidence of technology development projects. Production revenues increased by almost 20%. On page 718, we reported the main financial. The charts report the main financial results for the first half of 2024, compared to the first half 2023.
Significant increase in revenues of about 15% have been principally driven, as commented before, by the defense propulsion production activity and technology development projects funded by NextGen EU funds. EBITDA adjusted is in line with the first half of 2023, principally as a result of contribution of higher revenue from the defense propulsion and technology development project, compensated by the slowdown in production of P120 and P160 engines, pending in the semester, the successful maiden flight of Ariane 6 at the beginning of July 2024, and the slowdown in production of Vega C launcher, pending the return to flight, now confirmed in the first quarter of 2024.
Non-recurring costs were significantly lower than the first half of 2023, for basically lower activities and costs for Vega C return to flight, as we are now closer to the end of the year, when the return to flight is scheduled, and most of the activity were implemented in the first half of 2023. This result in a positive effect in the EBITDA report, and we see a significant increase compared to the first half of 2023.
EBIT shows a positive trend, driven basically by EBITDA, but also by lower depreciation, following the review of economic useful life of certain production assets in the second half of 2023, in connection with the phase out Ariane 5 and phase-in of Ariane 6, and in parallel with the phase out of Vega and phase-in of Vega C. Shall we move to page 19. We reported the sources and uses of the half year. We basically confirmed a structurally negative working capital for advances from orders intakes. In the first half of 2024, we had a typical seasonal trend, driven by the cyclical flow down of advances from customer to subcontractors and suppliers. In addition, the procurement of some strategic long-lead items of Vega C continued during the half year to support future production, all expected.
Provision decrease in the half year mainly relate to the utilization in the first half of to offset the cost of Vega-C return to flight, which were previously provided for in previous years. Fixed assets are substantially in line with the end of 2023, as a result of CapEx and equivalent depreciation in the first semester. CapEx amounted to EUR 8 million in the half year, and basically included increase in for Vega cadence, technology development project, innovation project, basically artificial intelligence, and other extraordinary maintenance. Net cash position, the decrease in net cash position in the half year, is mainly due to the commented changes track in working capital that we commented before.
We reported on page 20 the bridge of the net financial position between December 2023 and July, and June 2024, where you can see the positive contribution of EBITDA reported of EUR 8 million, the seasonal decrease in working capital, which absorbed more than EUR 40 million, together with the dividend distributed in the first half of EUR 6 million, and the CapEx of about EUR 8 million. On page 21, we reported the quarterly pattern of EBITDA and cash generation, which confirmed the concentration of the contribution towards the last quarter of the year.
Particularly, you can see that the net cash position was higher in half year 2023, and that's the reason why we flow down in the second part of 2024, and the second part of 2023 and the first half of 2024, the flow down to subcontractors and suppliers. Finally, on page 22, we reported the guidance. As Giulio commented before, we confirmed the guidance that we provided in market at the beginning of the year, where the backlog is between EUR 1.5 billion and EUR 1.6 billion, with a growth of between 10% to 15% versus 2023, thanks to new orders intake, basically from defense propulsion, as discussed before. Backlog is expected to start to roll out in the second half of the year.
Revenue is expected between EUR 370 million and EUR 390 million, with a 10% growth versus 2023. Growth is driven basically in the defense propulsion activity and technology development projects. EBITDA reported is expected between 21 and 26, with, again, a growth of 10% versus 2023, with an implied non-recurring cost of about EUR 7 million, which leads to a 28-33 million of EBITDA adjusted. Net income, finally, is expected between 7 and 10 million, with a growth between 10% and 20% versus 2023, to confirm also a distribution of dividends, also, as we made in with approval of 2023 accounts. Well, we have finished the presentation on the financials. I hand back the floor to Nevio.
... Thank you, Giulio. Thank you very much, Alessandro. We are now more than happy to answer any question you may have.
Thank you. This is the Chorus Call Conference operator. We will now begin the question and answer session. To enter the queue for questions, please click on the Q&A icon on the left side of your screen, and then press the Raise Your Hand button. Please do not mute your microphone locally, and when announced, make sure you turn on your webcam in the pop-up window. If you are on the phone instead, please press Star and One on your keypad. The first question is from Martino De Ambroggi of Equita.
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Yes. Yes.
Okay. Hi, everybody. Three questions. I know there are restrictions, maybe you will not disclose on what I'm asking you, but three questions on the U.S. contracts. First of all, you are talking about it takes years before getting the qualification. Just if you help us to figure out if we are talking about three more years, very, very roughly. The second is on the potential upside of the third and fourth client if there is this opportunity going ahead. Maybe you are already negotiating, I don't know. Third, if I remember correctly, EUR 7 million of non-recurring costs this year are mainly related to the development of the U.S. business.
I was wondering if these will continue to be present also next year, or the existing contracts in some way will help you to reduce the amount of the efforts required in building business in the U.S., starting from next year. Thank you.
Okay, Martino, I will try to answer your questions, then if needed, Alessandro will follow up. So first of all, to be clear on the schedule, any new product, and you have seen that, for example, when we developed the CAMM-ER missile goes typically from, you know, engineering review, like critical design review and so on, to qualification. What does it mean, qualification? Qualification is a milestone you achieve with the customer, where you demonstrate that not only you can manufacture a certain product, but you can do it at a certain volume. And then once you have done it, all these parts are look alike, you know, and perform identically. And you do that by conducting a number of firing tests and so on.
Besides our capability, there is a number of things you need to do, and it's the same story for space. You know, before flying something, you need to perform ground tests, and so on. Developing something like CAMM-ER has taken us give or take five years, okay? Developing, I mean, developing and qualifying and so on. Now, these products will likely take less, but I doubt they will take less than three years, you know? In order to enter production, we would be anywhere between three to four years to enter production at full steam, so to speak. Because even to carry out qualification, we will have to manufacture a lot of parts.
The number of tests we have to perform is in the number of tens of tests, not in the units, you know. So we will start, allow me to say, low rate production for the purpose of conducting qualification, and give or take, this may take between three and four years, and then we will go at full steam with production. Of course, the demand from the customer would be that we start production tomorrow morning, but at the same time, we have a requirement we need to fulfill, and this is also in the interest of their end customer, because typically, these systems end up, you know, with the US Armed Forces, and the user wants to be assured that the product is perfectly functioning.
So that's pretty much the time span we have to expect. But anyway, in this period of time, qualification is well paid for and accrues revenues and profits as well. Not as much as full-fledged production, but it will contribute to revenues and profits as well, of course. Now, new customers, new contracts. Yes, of course. There are also other customers than Raytheon and U.S. Army in the US, as you may well understand. And we are working with some of them to potentially do work for them as well. Now, we will see when these things mature. It is typically not a slow process. To reach this success with Raytheon and U.S. Army, it has taken us, give or take, two and a half years' worth of work.
I have to say, at the beginning, the effort was significantly higher, because we did not have yet a U.S. subsidiary, fully equipped, as we said before, and structured to comply with U.S. regulation. Now that we have this, it will probably be faster, okay? But it doesn't mean it will be easy. But we are working hard to get that, and I think there are additional opportunities, and they are sizable. Keep in mind that the market in the U.S. is huge. It's probably 15 times what it is in Europe, but at the same time, it's also very competitive, so we are not alone in this pursuit, okay?
That is also important to properly understand the meaning of these successes, because it means we have been better than others, you know, if we have gained the trust of U.S. Army and U.S. Navy. Regarding the non-recurring costs, you're right. Most of this was, until now, to support the U.S. team, and then we will transition to remove them from non-recurring costs and to actually be an expense within the new U.S. contracts, because, of course, the U.S. team generates costs and so on, and part of this will be paid for by the U.S. customer contracts, and we will transition in that role.
But of course, there's been very strong initial effort to conduct commercial activities and all of the huge work in compliance to structure the company in a way that can be, you know, fully functional to work in the U.S. defense system. So, in fact, we hope by the end of the year to start to reduce this amount of non-recurring costs. As you can see now, in the first half, they were, you know, less than half than what we had expected for the first half. So I'm not anticipating too much saving, but we could have a little bit of tailwind on that as we transition towards normal operations.
Thank you, Giulio. Thank you, Giulio.
The next question is from Andrea Bonfa, from Jefferies. Please go ahead.
Hi, good morning. I hope you can hear me. There is a return of voice in the conference, but I will try to speak slowly, if that helps. I mean, some of my questions have been already answered, but I would like to, Giulio, better understand, looking at the launch schedule for 2024/2025 of both the Ariane and the Vega, can we create a kind of rule of thumb profitability rule, by which for every launch, you will make XYZ incremental EBITDA? Or how does it work? When you've got six launches expected for the Ariane and four for the Vega, so let's cross fingers everything goes according to schedule. For every launch, you make one, two million EBITDA, or how does that work? Thank you very much.
A very difficult question, Andrea, for a number of reasons. First of all, twenty twenty-five for Vega will be a transition year in which part of the work that was formerly done by Arianespace will be done by us. Part of it will remain with Arianespace. We are returning to fly to a Vega C, and then we need to move to a very rapid flight rate, four in twenty-five. We will have a mix of launches, some of which are single payload, some of which are dual payload. We need to prepare by the end of twenty-five to also be operator. So, it will tend to be not yet steady state, allow me to say.
But in the medium term, I guess the target would be that in discussions with you as analysts, we could, you know, somehow point you at a way that you can expect an average profitability from each flight. The reality of things, as always, is that if I take, you know, 10, 10 flights, there would be some flights that are more profitable and some flights that are less profitable. And we typically tend to treat them as one project, you know, maybe that comprises something like 10, 10 launches, and so on. Because this is also the way we contract with our subcontractors.
So, you know, if we have one flight that was a little bit at a loss, and one that was at a significant profit, we try to average things out, considering also that most of our cost incurred externally is not incurred on a per-flight basis, but is incurred on a batch basis. These aspects, we are discussing these very days, because now that the responsibility is transitioning between Arianespace and us, we are trying to see the way we account for it. But that's, you know, what we can openly discuss, maybe offline, with you analysts. Regarding the motors for Ariane 6, this will be much more the case, because it's so much easier. You know, it's all done here. It's a subsystem that we deliver. If we make eight, this is pretty much the profit.
If we make 16, this is pretty much the profit, and so on. On this aspect, we can probably work something out with you. I don't yet have the algorithm with me, but we can work something out pretty much. I mean, as we transition to regular production, this shall be the case, because quite frankly, in particular, from the production of P-120 motors, we do expect an operating leverage, while this is more difficult to materialize for the Vega launches, because, you know, every launch is a fact per se, you know, that there are some customizations to meet customer requirements and so on.
The motors are all identical, so it's a factory-based business, and I mean, I don't have-- Again, I don't have the algorithm with me, and nor does Alessandro have, but I think if we have a follow-up meeting with you analysts, we can work something out.
We certainly expect the leverage, a better leverage coming from the production P120, P160, more complex and bigger due to the propulsion and the system activity, as Julio talked before, each launch has a different model to define the profitability.
If I may,
Please.
Is it possible to have an update on the Polish Narew defense contract? Is that coming to the backlog-
It's good that you're asking that question. Yesterday, I signed yet another intermediate agreement with MBDA, which will lead to the full production contract, hopefully between end of the year, beginning of next year. You know, the contractual chain is extremely long, from the end customer to MBDA to us, because this contract is massive. I mean, for MBDA, as they have publicly announced, it's EUR 4 billion. You understand that this requires the signature of so many intermediate contracts that it's even hard to believe. But yesterday, I signed yet another piece that should lead to, I believe, the full contract between the end of the year and the first quarter. That's pretty much the target. So everything is on track.
It's in the interest of MBDA as well to expedite, of course, the acquisition of the full backlog. So we are all aligned, I think.
Is it possible to have an answer, a very rough idea of what the size of the contract or?
The size of the contract, we have not disclosed. It's definitely above EUR 100 million. We have not discussed the exact amount for a number of reasons related also to the fact that we cannot disclose the volumes and such. It's very material, of course, and long distance. MBDA has agreed to release the full contract amount at missile level, project level, which is in excess of EUR 4 billion. I'm not sure we can disclose the full amount of our contract, but it's material, of course.
It's quite big.
Yeah. As soon as we can do it, we'll share it with you.
Okay, I understand. Thank you very much. Thank you very much.
As a reminder, if you wish to register for a question, please press Q&A on the left bar and raise your hand, or press star one on your telephone. The next question is from Bruno Permutti of Intesa Sanpaolo.
Yes, good morning, everyone. I hope you hear me. I don't hear nothing.
We can hear you. We can hear you, Bruno.
Okay, good. Sorry. The first question is on the backlog. You projected a backlog between 1.5 or 1.6 billion by year-end. This would imply more or less between EUR 300-400 million of new orders in the second half. I would like to understand if you can give us some indications of where you expect the most of the orders to materialize in the coming months. And a second question concerns the... Sorry, I can't hear. Can you hear me?
Oh, we can hear you, Bruno. You can go on.
Okay, and a second question concerns the margins. If you can give us an idea what are the moving parts that you projected by year-end, a slight reduction in the adjusted EBITDA margin, and the first half results are perfectly consistent with this outlook, but if you can remember also, which are the moving parts of this dynamic, and also how the sales mix could change this pattern in the future?
So some of your questions are too difficult for me. I will ask Alessandro to answer. Let me try to answer the last one. How will the mix of the business tend to change the overall profitability, and this is what we are trying to do from a strategic standpoint, knowing that the bottom line is the most important one. The idea of growing as much as we can motor production for defense and space, so namely the motors for the missiles and the motors for Ariane 6, is to increase margin. Why? Because these businesses have a much higher degree of vertical integration than the launcher itself. As you know, a good half of Vega is not manufactured here in Colleferro. So, by nature, that has a lower margin.
There's nothing to do about it, you know? And we cannot possibly get to the point where we manufacture 100% of Vega here for a number of reasons, you know. So in the future, meaning the medium term, our target is to increase the margin by moving the mix more towards P-120, P-160 production and defense solid rocket motor production. This is a business that is affected by scale, so as much as you grow the volume, you should get a better leverage, and that's the plan so far. Launches, you know, every launch is a factor per se. We are scheduled to increase the flight rate next year and the following years. We have been funded by the European Space Agency to grow the flight rate up to six.
But I don't expect to be so easy to dramatically increase the margin on a Vega flight, considering the fact that a chunk of the costs of Vega are outside the domain of what Avio does. So the created value is not within our full control. Therefore, that's pretty much the context in which we are moving. And maybe Alessandro, you can comment-
Yeah.
-more on this and on the story-
Yeah.
of backlogs and orders.
Yeah, thank you, Giulio. Good morning, Bruno. Yeah, going into your first question on backlog, yeah, you're right. We accounted for EUR 200 million of orders intake in the first half. We have, more or less, another EUR 300 million to EUR 350 million expected in the second half. And basically, further order intakes expected related to development of Vega C, that we are now finalizing. Other extension of intakes for Vega C, and additional defense orders, in the second half, which confirm the EUR 1.6 billion of order backlog at the end of the year.
For what margin is concerned, to go to your second question, yeah, in addition, let me complement what Giulio said before, we confirm the trend of the revenues of the first half, also in the second half. So the contribution of the year-end EBITDA will be driven basically by the development, the defense production activity, and the technology development project within the European Next Generation funds. We will reduce, as we said before, in the question of Martino, that going forward and from the next year, the non-recurring costs, basically for this year, are confirmed what we have in guidance, basically for the startup of US business.
So we expense the cost as a non-recurring for the US business, because now we are setting up the company and the activities, so we have cost. Then, as Giulio commented before, we will go into development activities and production activities with revenues, cost, and profit. And so we will not have only non-recurring, but we will consolidate line by line, the contribution of US business. Thank you.
Thank you.
The next question is from Carlo Maritano, Intermonte.
Good morning, everyone. I just have a quick follow-up on the US contract. I was wondering if, in the future, you will be considering the possibility to open a production site also in the US, if volumes will be becoming relevant? And the second one is on the report presented by Draghi recently to the European Commission, where he mentioned the space sector as one of the strategic sector at the European level, and especially speak about eliminate, to eliminate the geo-return approach at European level. If you think this could be, could help you in the future also, to eliminate all the subcontractor you have in all the other geographies, currently are penalizing the profitability. Thank you.
Carlo, first of all, production site in the U.S., yes, we are doing work on this, because at some point, we will need, possibly to have production and operations in the U.S. as well. Which doesn't mean that we will abandon what we are doing in Italy on the matter, but we will put these two production capacities in parallel and in addition, right? Of course, this is a project that will take years to mature. You do not create a production site in months. But we are doing planning work with a competent team.
I have also moved to the U.S., one of my most experienced operations managers in the manufacturing of solid rocket motors, and together with the U.S. team, Jim Syring, we are working to prepare for that, as well. Not only by projecting to have our own production site in the U.S., but also developing partnerships with the U.S. supply chain, and with some of the U.S. institutions that can help us to have, for example, the availability of test facilities and experimental facilities. Because as you know, production is not only about manufacturing parts, and so on, but also the possibility to conduct, for example, static firing tests or propellant tests, and so on, which require a ton of authorizations and permits.
So the way we are dealing with that is not only by developing our own facilities, but also partnering with existing facilities, and partners, and supply chain, to really create a U.S. independent capability to manufacture, as well as, you know, in parallel to the one that we have here. Regarding the Draghi report, you know, this came out just a few days ago. We will see what following this this report will have. I have no idea so far. The story of wanting to eliminate the geographic return in the government investment that was typically done in Europe, it's one topic that has emerged also in the European Space Agency.
You will recall that last year, the European Space Agency announced that they want to prepare a so-called European Launcher Challenge, so they no longer want to provide guaranteed return, but some kind of a race, where everybody presents a certain project, and the winner gets the money, basically. I don't really know how this would work, whether the governments are happy to put the money and not know whether the money will come back to their country. That's a little bit obscure to me, how it will work, but at the same time, you know, we have our supply chain team across Europe, the ones we have worked with, and so we can very much maintain the same franchise.
We can participate to challenges and things together with our own European team. So I don't think this will be black and white, meaning that it used to be a European team to manufacture Vega, and all of a sudden it becomes an all-Italian team, you know? And nothing prevents us from maintaining certain partnerships, even if the concept of geo-return is eliminated. So if I have a supplier in Belgium that develops for us the thrust vector controls, even if there is no geo-return, that doesn't prevent my Belgian partner to pursue government support from their government to do work for me, if we both have the agreement that it's good to work together. So we can do it on a voluntary basis, I'm gonna say. So we will see.
We will see this, how the things unfold in the next few months. But I think there will be room for different approaches. And, you know, we have a very clear roadmap, in particular for Vega, for the future, which was built with a certain team. We also have the support of the projects performed with the use of the European NextGen EU funds, which have largely pointed at moving a lot of the competencies to Italy as well. So if we need to play more Italian, we will be able to. If we can maintain our European partnerships, we can. We have met with all the suppliers back in July, and most of them have demonstrated interest to continue in the as-is condition. We will see.
I don't know what the outcome will be, but we are prepared for any of these scenarios.
Thank you. Thank you.
The next question is a follow-up from Martino De Ambrogi of Equita.
Yeah, thank you. Two follow-ups. No problem if there is no answer, but I was wondering on the tactical propulsion, you provided an indication of the strong volume growth going ahead. I was wondering if we should assume price, maybe price and mix, because of the strong demand, maybe there is a discount, so maybe there is a lower average price. I understand it's just one client, so it's difficult to comment, but this was my point. And the second, also in this case, I don't know if you can elaborate, but currently, Leonardo, Thales, and also Airbus are talking about additional collaborations, agreements, additional perimeter on the existing joint ventures, and so on. So probably you are not involved today, I don't know.
But, if not, do you believe that sooner or later, Avio could be part of the discussions, these discussions, for any reason? I don't know, but just a flavor. Thank you.
First of all, on the defense business, really, the last thing we can talk about is prices, but generally speaking, a little bit of logic here. The U.S. defense is under an extremely severe gap between demand and supply, and this gap has matured over the years, and in particular, over the last few years, when new conflicts arise, in particular in Ukraine, in Israel, and so on. There is a very urgent need to fill this gap in the U.S., and I have never seen someone who has an urgent need asking for a discount in my life. It may as well be the case, but it's unlikely, so I don't expect this to mean that you can earn a premium price. I would be cautious.
We first need to demonstrate that we are capable of doing this, and that we are worth spending money on, but there is great interest to receive the product more than to receive a discount, you know? So the primary requirement that we have sensed from the customers is delivery. It's not pricing, you know? It's delivery, it's schedule. This is the challenge we are facing, is making sure that we help them solve their problems, okay? Regarding the Leonardo, Thales discussion, I honestly have no idea. This is a partner that, to them, it's not a partner to Avio. We do not have relationships to, or joint ventures with Thales. As you know, our partnerships refer broadly to the cooperation with Ariane Group, which is owned by Safran and Airbus. We do not hold corporate relationships with Thales.
I don't know what they are, they are agreeing and so on, and I believe this has very little to do with what we do for a business, to be honest with you. Leonardo does not control Avio, so I do not believe that there is a way to link these aspects in from a corporate standpoint that I do not know of, because this will need to go through our board of directors at a minimum, and I have not discussed any of these topics in our board of directors.
In particular, we are going in the opposite direction, because with the recent transfer of some of the responsibilities of Arianespace, from Arianespace to Avio, we are actually becoming a bit more independent from our partnerships than we used to be, okay? We are maintaining a very strong partnership with Ariane Group for the production of motors, as you know, but as far as we are concerned, now we are at steady state. We maintain these industrial partnerships we have with mutual satisfaction, I would say, with Ariane Group. We have changed our relationship with Arianespace, but we don't anticipate any other partnership of this kind.
Okay, thank you very much.
For any further questions, please click the Q&A on the left bar, and raise your hand or press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
Thank you all, and look forward to meet you again in November, on the occasion of the nine months reporting.
Thank you, everyone.
Thank you. Have a nice day. Bye-bye.
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