Good evening. This is the Chorus Call conference operator. Welcome, thank you for joining the Leonardo First Half 2020 Results Presentation conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Ms. Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies of Leonardo. Please go ahead, madam.
Good evening, ladies and gentlemen, welcome to our First Half 2020 Results conference call. I'm Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. Today, our CEO, Alessandro Profumo, and our CFO, Alessandra Genco, will take you through our progress during the first half of this year, the first half financial results, and the outlook for 2020. We will then welcome your questions. I will now hand you over to our CEO.
Thanks, Valeria. Good evening, everybody. First of all, I hope that everyone on the call is well. Thank you all for taking the time to join us today. We know it has continued to be an extraordinary set of circumstances for everyone around the world. Before we get into the results presentation, I want to express my thanks to all our people at Leonardo for the commitment and effort during these trying times, especially for the successful efforts made by everyone to keep Leonardo operational and productive, despite the lockdowns across our core markets in the last few months. There are some important points to make today. We have responded as Leonardo robustly as an organization to the challenges presented by COVID-19. We moved quickly to address and face these challenges. We made a clear action plan. It has been working.
As an organization, we have shown we are both robust and resilient and able to adapt very well in tough circumstances. We have proved that Leonardo has strong foundation to leverage on. In a moment, Alessandra Genco will take you through the first half results and performance in more detail. You will see the numbers. We have remained resilient in the face of extreme market conditions with a strong commercial performance in the first half. We are particularly encouraged by the resilience in our military and governmental business, accounting for more than 82% of our revenues in 2019. We are also particularly encouraged by the support we have seen from institutions. We have not been immune, clearly, as we have seen the impact of COVID, particularly and unsurprisingly, on the civil side of our business.
We have seen some delays in deliveries, slowdown in program execution, and lower productivity. On our major Kuwait Program, the pandemic is now materially affecting our client's country, and the travel ban has inhibited program progress to some degree and in some joint activities. This has delayed and could delay some of the milestones, but we are working out to recover later in the year on several chapters. We flagged this at the time of our first quarter results. Across the group, we continue to actively manage the situation well, with mitigating actions and recovery plan in place. We continue to protect our people, our business, and our customers.
We have successfully been working with domestic customers to accelerate activities. You can see it in the new order recently signed in Italy for the Italian Army's new helicopter and in the U.K. with the ECRS Mk2 delivery. We are grateful for their support. We have proven that we can successfully adapt ourselves. We put in place a so-called Smart deliveries in helicopters, leveraging our digital capabilities already applied to customer support and service activities. Five helicopters have been delivered in this way in the second quarter. We have moved quickly to remote working that is now more efficient. Our business has been responding well. Looking farther forward, we expect certain challenges facing the civil side of our business to extend beyond 2020.
Civil aeronautic business are facing current structural challenges, and we will continue to take the right actions to mitigate any future impact to our business. We do not expect any recovery in our civil aerospace market this year or next year. While in helicopters, we can leverage on the military governmental side of the business, 86% of backlog. In Aerostructures, with its highly prevalent exposure to commercial aircraft, we expect a decline in production rates well beyond 2020. In Aerostructures, we have four separate factories and fixed costs attached to the site, machine, and tooling. These costs are hard to tackle in a structural way, while 55% of production costs are referred to labor. We have mitigating actions in place, and we are considering further action this year and the next.
We will also be discussing with unions on potential furloughs. It means a delay in our target of breakeven profitability and cash flow in Aerostructures. Despite challenges, for the group as a whole, the medium long term fundamentals of our business remain unchanged, and we remain confident in our ability to succeed. Let me talk more about how we are seeing this resilience in our business. We have had to respond to the unprecedented and extreme market conditions created by COVID, but we have been resilient commercially, operationally, financially, and strategically. Alessandra will go into more detail on our business and financial performance shortly, but I would like to highlight a few key things for each of these points. First, from a commercial perspective, stable orders versus 2019 that reflects the group's weighting to military governmental.
Notable wins in material military programs like NEES and AW169, like the so-called Light Utility Helicopter in Italy and also IMOS, Integrated Merlin Operational Support, and the E-Scan development in U.K. A book-to-bill still at one. Strong support from domestic governments in all our core markets. A well-balanced presence across multiple markets, the customer we serve, and the demand of our products, all of this underpins our confidence. Second, operationally, we have been considered strategically relevant for our domestic markets. We move quickly to keep our people safe and ensure business continuity. Our rapid response ensure production facilities have remained operational for all but two days, although running slower. This is a remarkable achievement considering Northern Italy was the epicenter of the COVID-19 crisis for a period of time. We have been able to minimize disruption.
We have kept the contagion outside our facilities, and we monitor this very closely. Globally, we have seen 99 of our employees test positive for COVID-19, of which 66 in Italy, but none inside our production facilities. No one of them, we are sure of that, took the contagion inside our facilities since they were only a single case in each of the site. We have seen month-on-month improvements in productivity and efficiency from the challenges in March and over April, May, and June as we started our recovery journey, and we are seeing increasing number of people on site. We now have 63% of our operational people working in our sites and 37% working from home. While in March, we had 14% people on site and 42 working from home, while the difference, (100), were absent.
Third, financially, we are on track with the 2020 cost reduction. Alessandra will be more precise on that. With the prioritization of investment, we have identified cost savings from labor cost of 10%, and we have achieved approximately 50% of this target in the first half of 2020. We expect controllable costs to be down by 10%-15% by year-end, and we have already achieved approximately 60% of the target in the first half. We expect a net investment of EUR 700 million-EUR 750 million to be down 40%-50%, thanks to prioritization of investment. In the first half, we have already achieved two-third of this target. At the same time, we have not seen any material impact on our supply chain so far, and we are very vigilant here, too.
Excluding any further lockdown or COVID-19 resurgence, we expect to achieve substantially flat revenues in full year and to reduce the impact on our profitability due to delays in civil deliveries, slowdown in program execution, and lower productivity because of the cost of actions we have taken. We have worked hard to progress key programs. In the case of EFA Kuwait, the pandemic is now still materially affecting our client's country, but our progress will still mean we can mainly achieve revenue and cash flow milestones in the second half of this year. Broadly neutral cash flow despite extreme market conditions. We have circa EUR 4.3 billion available liquidity to cope with possible swings in financial needs.
Finally, from a strategic perspective, our strategic path is clear and is based on our long-term fundamentals. This remains strong and unchanged. We have a strong leadership position in helicopters with a cutting-edge technology portfolio and in simulation solutions and training. We are European leader in Defense electronics with top capabilities in air, sea, and land. We are also building and upgrading our portfolio. For example, Team Tempest. The reference partner for the U.S. DOD and U.S. primes. We are increasingly a key player in international cooperation program in aircraft as part of the European Defense Program, but also in programs like the JSF. We are going to remain a key partner in the space alliance with growth in service activities, a reference partner for institutions for safety and cybersecurity.
These ambitions means focusing our efforts and our resources on these key areas of opportunity, underpinned by a strong commitment to innovation for long-term sustainability of the business. Our increasingly international footprint has strengthened our diversification, and it has made us more resilient for the global pandemic. Our strong order backlog of EUR 36 billion, primarily military and governmental, gives us confidence in the future. Our advanced suite of products and technologies that we continue to develop, investing in our future, remains in high demand and value-adding to our customers. Importantly, the strong support we receive from our key stakeholders. I hope that gives you a sense of what we are seeing in the business, what we are doing, and why we remain very confident in the way we are responding well in the short term, but as well in the medium and long term.
On that, I would like to hand over to Alessandra. Many thanks.
Thanks, Alessandro, good afternoon, everybody. I'm going to cover the results for the half year and the performance across the businesses. I will also cover the strength of our liquidity position and financial flexibility, how looking forward, what we can currently see in terms of outlook and the direction of the group and the businesses. Starting with our half year results. In summary, you will see our group has remained resilient in the face of unprecedented market conditions, with commercial performance benefiting greatly from our weighting towards military and governmental, plus the strength of our products and technologies. We are strategically relevant to all our key domestic markets in Italy, U.K. and U.S. We have continued to perform well with good order intake, again, across all our main businesses. First half orders of EUR 6.1 billion, at a similar level to last year.
Solid group revenue performance at EUR 5.9 billion, again in line with last year. Operationally, we have kept our organization up and running with facilities open. We saw signs of stabilization in Q2, but we have not been immune, and as expected, we have seen some impact from travel restrictions and safe working rules affecting deliveries, program execution, and productivity. Notwithstanding that, we achieved group EBITA of EUR 269 million, while Free Operating Cash Flow was negative almost EUR 1.9 billion in the first half, seeing that we were already in large part expecting, and it was further stressed by the seasonality, and the COVID effect.
We have further strengthened our financial position and liquidity by signing, as you may recall, new credit facilities back in May for EUR 2 billion. Recently, at the beginning of July, we issued a EUR 500 million bond, which was really well received by the market.
All of this is giving us a very strong liquidity position and financial flexibility. I want to show you how our credit metrics have moved year-over-year in the first half in these unprecedented external conditions. First, as you can see, order intakes have continued to perform well. In the first half, we have seen lower civil demand affecting order intake, especially in the civil side of helicopters, and we have seen some export order intake delayed by travel restrictions. Significantly, we have increased our domestic order intake across all our business lines, driven by domestic, military, governmental, and in particular, helicopter orders. This has made a big difference. You can see the revenue drivers. A solid performance overall in the first half of the year, given the context that we are all living. Our civil component showed a decrease, mainly in helicopters and civil Aerostructures.
Lower productive hours and slowdowns in program execution led to lower volumes across the group, offset by more activities on large programs associated with prime contractorship, mainly Eurofighter Kuwait, which added to our top line, but with diluting margins. Leonardo DRS confirming its growth path. You can see in EBITA and profitability, a number of factors. A reduced contribution from our ATR and space manufacturing joint ventures. Also, lower activity and profitability on the civil side. Less beneficial mix because of higher activity in developmental phases or low rate initial production, or in contracts where we are prime, and lower efficiency and productivity with reduced working hours and reduced ability to a cost recovery. While this has been partially affected by our cost savings programs.
This has, as a consequence for our Free Operating Cash Flow, with this year shows this impact of lower operating cash flow, higher cash absorbing operations and working capital, with inflows getting more weighted to the second half, with some offset from our savings on investments. Let's look into more detail at the key group metrics across the operating businesses. Starting with new order intake. Orders were EUR 6.1 billion. This is a strong performance. We have continued to win important contracts. While travel restrictions led to slowdowns in export sales activity in the first half, we have been able to successfully replace much of these delays with orders from key domestic customers, mainly in Italy and in the U.K. This shows the strength and resilience of our military and governmental business, with affirmation from customers in our important domestic markets. We saw good performances across the group.
Helicopters performed strongly with important order wins. Order intake was up almost 50% to EUR 2.5 billion in the first half. Here we won more domestic military governmental orders in Italy and the U.K. and also in the U.S. This more than offsets the much lower civil side. Among the major order that we won, I'll mention the customer support for the U.K. Leonardo AW101 Merlin fleet, orders from the Italian Army, NEES and 15 AW169 LUH, and the first order for 32 Navy trainers, the TH-73A, which is our Leonardo AW119 platform.
In Defense electronics, overall, we saw solid order intake of EUR 2.9 billion, with DRS increasing its order intake to EUR 1.4 billion, continuing to benefit from a position in the U.S. and its alignment with the DOD priorities, and the European side showing a lower level, mainly due to COVID-19 effects affecting our ability to finalize export campaigns, enable0 traffic control systems, and automation. Remember that last year, we booked a large contract in the U.K. Airborne Systems LoB. In aeronautics, order intake was just under EUR 1 billion. The aircraft division performed well and accounted for about 65% of this total, with orders on the F-35 program from Lockheed Martin and logistics support on EFA and C-27J. While Aerostructures won orders for almost EUR 350 million. Overall, we can be pleased with the level of commercial activity surrounding order intake. Next, revenues.
Revenues were EUR 5.9 billion for the half year, at the same level as last year. A solid top-line performance, benefiting from our strong backlog. Helicopters achieved EUR 1.7 billion of revenues in the first half, down 10%, with COVID mainly impacting the civil side of the business, leading to lower deliveries as well as some programs on the military side. At a very resilient performance driven by the military governmental business, both in customer support and machines. It is worth noting that helicopters has a backlog of some EUR 13 billion, of which approximately 85% is military and governmental. Defense Electronics as a whole achieved revenues of EUR 2.9 billion, up 2.6% from 2019. The European side is fairly flat, reflecting some impact from COVID, while DRS in the U.S. continued on its positive growth trajectory, with revenues of EUR 1.1 billion, up 11%.
Aeronautics achieved revenues of EUR 1.5 billion, up 9% from last year, with EFA Kuwait revenues and customer support offsetting slowdown in other programs and Aerostructures, where we have seen COVID factors impact demand and production rates, mainly on the Boeing 787 Dreamliner and ATR programs. So overall, a solid and resilient revenue performance across the group. The key driver of our medium-term revenue growth is our backlog. At some EUR 36 billion, it is large in size and includes key large orders. It covers almost three years of equivalent production, and it is well-balanced, as you can see, across our core businesses, geographies, and between military and civil.
Moving to operating profitability, this is where we have seen a greater impact from COVID in the period since March. Group EBITA is at EUR 292 million, down from EUR 487, causing lower profitability in the first half, with ROS at 5%.
We saw the fuller impact of COVID-19 for the entire second quarter, impacting and slowing down program execution, productivity, and deliveries. We have also seen positive effects in terms of our resilience and benefits of measures we have been taking. Looking at the businesses, helicopters EBITA in the first half fell from EUR 200 million- EUR 139 million, mainly due to COVID causing lower deliveries and slowdown in programs, as well as lower productivity. Remember that last year there was a positive one-off element in our EBITA deriving from the U.K. pension scheme. Defense electronics EBITA fell from EUR 228 million- EUR 166 million. The European electronic side was affected by slowdowns on programs and lower productivity because of COVID.
Profitability was also affected by a number of developmental programs, which are key to position us on future opportunities, covering both systems and sensors in naval, airborne, and cyber domains.
For example, last week you saw the Leonardo M-346 fighter attack aircraft successfully completing its maiden flight, equipped with an optimized variant of Grifo radar. On top of this, we also face some extra costs on automation, where we are starting to see effects from the crisis. While DRS EBITA, again, achieved double-digit growth, benefiting from higher volumes. In aeronautics, first half EBITA fell from EUR 129 million- EUR 76 million, affected by a number of factors. First, profitability affected by losses in the ATR joint venture, which has been facing significant challenges due to COVID-19, with just one aircraft delivered in the first half.
Secondly, we saw a less beneficial mix as our Eurofighter Kuwait program revenues were booked as prime, bringing lower margins. Also, we saw lower productive hours driving under recovery of fixed costs. This has been partially affected by the settlement with Airbus for the A380 program termination.
Lastly, space contribution also fell to - EUR 10 million, as we saw a slowdown in demand and lower activities in manufacturing and lower profitability because of COVID, combined with extra costs on commercial telecommunication programs, all in manufacturing. As you can see, the greater impact of COVID-19 on our first half profitability, we have taken actions to offset the effects of the pandemic, and we will see the benefits over the coming months. As Alessandro said, we are on track with our plan to reduce controllable costs by 10%-15% out of a baseline of EUR 1.4 billion, and approximately 60% of this target has already been achieved in the first half. We are also on track on this plan to reduce labor costs by 10% from a baseline of EUR 2.9 billion, and approximately 50% of this target has been achieved in the first half.
We are still targeting a 40%-50% reduction in 2020 of net investments budgeted for EUR 700 million-EUR 750 million, and two-thirds of the total has already been achieved by June 30. Moving to the below the line items, you can see that the first half EBIT fell to EUR 227 million, reflecting the fall in EBITA, as well as non-recurring costs related to COVID-19, which amounted to some EUR 40 million. Our net result was affected by EBITA performance and higher financial charges associated with FX hedging activities, as our volume of hedged revenues has increased. Meanwhile, our Free Operating Cash Flow was negative almost EUR 1.9 billion.
We were already in large part expecting this higher negative cash flow earlier this year because of anticipated higher seasonality. We're seeing the second half weight being increased by the impact of the pandemic and some inflows being shifted to the second half. With lower EBITA, some reduction in customer advances as we replace export orders with domestic customers, some cash milestones delay as deliveries have been performed, and some increase in working capital. All these are the drivers of the results that we have registered in June. Turning now to our balance sheet. We have a very balanced debt maturity profile, and in liquidity terms, we remain in a strong position. We have taken advantage of the financial market to issue earlier this month, a EUR 500 million bond in the Euro market.
We will use the bond proceeds to refinance some of our debt maturing in early 2021. This will reduce our average cost of borrowing to around 3%. The bond issue was very well received by the market, four times oversubscribed. This is a testament to the credit worthiness of our group. We have a strong liquidity position. As you know, in May, we have strengthened it further, signing EUR 2 billion of additional credit lines. At the end of June, we have available liquidity of EUR 4.3 billion. A solid position and a good financial flexibility in these exceptional times to cope with possible swings in financing needs. Now, moving to what we're currently seeing, which will have an impact on the coming quarters. Our business is being affected by the measures taken to combat the COVID-19 pandemic globally.
We currently are facing unusually high level of economic and business uncertainty. Please let me highlight that Leonardo has been considered strategically relevant for all our domestic markets, in Italy, the U.K., and the U.S. Q1 performance reflected the initial impact of COVID-19. Q2 saw a greater impact of the pandemic as we expected, but we are seeing the benefits of our early response and the robust and resilient features of our military governmental business, all helping to mitigate the decline in demand in the civil side. We have started seeing signs of stabilization in Q2 and excluding any COVID resurgence and further lockdowns, we expect a re-acceleration of our activities in the second half of the year.
Taking into account all these elements, we currently expect a resilient full year 2020, with full year 2020 orders showing a level of EUR 12.5 billion-EUR 13.5 billion, reflecting the support we have gained from domestic and military governmental customers, whose orders should help offset the slowdown of international order intake and a lower civil market demand in Aerostructures and civil helicopters. Revenues at EUR 13.2 billion-EUR 14 billion, substantially flat year-over-year, and underpinned by our solid backlog. We expect the military governmental to offset the slowdown of civil activities. EBITA at EUR 900 million-EUR 950 million due to the short-term impact of COVID-19 causing lower deliveries in civil, delays in program execution, and lower productivity. It is important to note again that second half delivery levels will be critical.
Based on current expectations and together with the identified actions on costs, we currently expect to be recovering profitability in the second half. On Free Operating Cash Flow, this year more than usually, we are weighted towards the end of the year. We're trying to accelerate cash milestones and are working really hard to reach neutral or near neutral cash flows at full year. We expect a net financial position as a consequence of circa EUR 3.3 billion, reflecting neutral or near neutral Free Operating Cash Flow. Let me now give you some color on the 2020 outlook and beyond of all our businesses across the group, assuming neither COVID resurgence nor further lockdowns. In helicopters, in 2020, we're seeing the benefits of our favorable business mix with its high proportion of military, governmental, and customer support activities.
We're leveraging a very strong order backlog, and we're also seeing the impact of lower civil demand, down circa 50% versus 2019, and lower productivity as we switch to safe manufacturing. Looking forward into 2021, we are expected to improve productivity, and we are seeing new business opportunities in export markets. We can expect military, governmental, and customer support activities to sustain margins in 2020 and 2021. In Defense electronics, we are seeing the benefits in 2020 in the European side of the business being more weighted towards a more resilient non-civil market. Again, strong backlogs to leverage off. On the other hand, we're experiencing a slowdown in order intake due to COVID-19 effects. We're seeing slowdowns in program execution in Europe and lower productivity since March, which is gradually and steadily improving.
The automation segment is seeing lower demand from airports for its airport baggage handling systems, and similar circumstances are being faced by the air traffic control business. Looking forward into 2021, we are encouraged by demand for our existing products and technologies, including the recovery of some export campaigns from 2020. We're also leveraging the potential of new technologically advanced products across communications, sensors, and cyber. Finally, we're positioned in major product developments such as the AESA radar and the multinational strategic programs such as EFA, Eurofighter, and Tempest. Talking about DRS in the U.S., the business has also strong fundamentals. The military-based business has a strong backlog and has been performing well commercially. It has been enjoying good growth momentum over the last couple of years and little COVID-19 impact so far in the first half.
However, given the recent trend in the pandemic in the U.S., we are monitoring closely any potential impact on its operations or on its supply chain. Going forward beyond 2020, we expect DRS to continue to perform well, driven by its positioning on key DOD priority programs and projects, and the developments moving into the production phase. In aeronautics, you can see the businesses being affected in different ways in 2020. Aircraft is a predominantly military business and in a strong, resilient position with its products and major programs. We have some impact on revenues from program execution slowdown, more than offset by the EFA Kuwait ramp-up, even if it's at a lower pace compared to expectations, and customer support activities. Some limited impact on EBITA from growth in activities as prime contractor, together with slowdown in program execution and lower productivity.
The aircraft business is well-placed, its financial performance has been solid and resilient. EFA Kuwait remains a key program, activities continued this quarter, even if travel restrictions and the increase of COVID-19 cases in Kuwait generate some obstacles, causing delays. We expect a strong second half to support the cash flow profile on the contract, which is based on milestones and program achievements we are working on. We expect the aircraft division to perform well in 2021, supported by its strong portfolio and key opportunities already in the pipeline, in particular in international programs such as Eurofighter Typhoon, JSF, and our trainer platform. Aerostructures has the most exposure to civil markets. Already since March, we have been seeing the impact of production slowdowns. Our employees have made great efforts in adapting to limit this impact on productivity.
It now seems clear that next year, in 2021, we expect to see the impact of significantly reduced demand from customers, mainly Boeing, but also Airbus and ATR, because of falling air traffic. This may mean we may need to take actions in terms of furlough. Our ATR joint venture is facing significant challenges, again, from lower demand in civil aviation. Its order intake is already suffering, with orders being postponed, and it's planning much lower production levels in the near term, 2020 and 2021. We expect ATR will continue to be affected by lower demand in civil aviation markets, and although the short-haul and point-to-point segment will be more resilient than the long haul, we still do not expect any recovery here in 2021. ATR has already announced plan to rightsize its organization in response to COVID-19.
With production levels reduced by 50%, the reorganization will imply a reduction in headcount by 204 positions, including 186 in France. The process for information and consultation with staff and societal partners, and social partners, has already begun with a view to reaching agreement this autumn. Finally, space. As you know, our manufacturing joint venture is facing a tough commercial environment, combined with higher development costs affecting profitability. To address this, a restructuring plan has already been launched. At the same time, the impact of these challenges is being partially offset by the good performance of our Space Service business. To sum up, you have seen that in our first half results, we have remained robust and resilient in very tough conditions. We have continued to perform well commercially. We have worked hard operationally.
We have not been immune to the impact of COVID-19, but we have responded quickly and have been actively managing the situation. Despite this year's uncertainty and challenges, we remain very confident in our longer-term strong business fundamentals, our large backlog, our positions in our key domestic markets, our products and technologies, and the opportunities all of this give us. With that, we're ready to take your questions. Thank you.
Excuse me. This is the conference call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from David Barker with Bank of America Securities. Please go ahead.
Good evening, guys. Thank you for taking my questions. Just a couple of quick ones. Firstly, you highlighted in your Aerostructures EBITA, a one-off gain related to the Airbus A380 program. Can you give us any help in quantifying this and helping us understand what the underlying number should be for Aerostructures in H1? That's my first question. My second question, obviously, you flagged in the last set of results that your civil helicopter deliveries have been impacted quite heavily by the COVID travel restrictions. Have we started to see civil deliveries normalizing now in July? How are you thinking about deliveries on civil for the rest of the year? Thank you.
Hi, David. The Airbus A380 termination and the associated settlement is recorded in June for approximately EUR 30 million. On helicopters, what we see now is that there will be a ramp up in deliveries in the second half compared to the first half, because also a portion of the deliveries that did not occur by June was also due to severe travel restrictions. As these will be partially lifted, customers will be coming to our facilities and premises and do the final test and acceptance of the machines. Nonetheless, the overall market remains one where demand in certain sectors is not going to get back to the 2019 level for some time.
Okay, great. Thank you for that.
The next question is from Nick Cunningham with Agency Partners. Please go ahead.
Thank you very much, and good evening. I wanted to try and get a handle on the significant headwinds and tailwinds between the first half and the second half. We've already touched upon some of that. A couple of things that strikes one particularly is that ATR made a EUR 34 million loss in the first half. Obviously, things are going to carry on being very difficult through the second half, but that sounds like an exceptional situation with only a single delivery. The question there is, do you expect ATR to make a loss in the second half as well? Perhaps much more important, you've missed some military milestones because people can't travel and so on. There's obviously going to be some scope to catch up with that in the second half.
Is there anything you could do to fill us in on some sort of scale for that? Then finally, on the cost reductions, you're at about a sort of half run rate at the end of the first half. Will you be at a full run rate of cost reductions by the end of the second half, just to help us to try and model it out a bit? Thank you.
Okay. Hi, Nick. I'll start with the last one. On cost reduction, the expectation is to reach the full run rate, meaning to achieve the 100% of the target we have set for the full year by year-end. There is going to be a normalization of the trend in the path going to year-end. On ATR has, as we mentioned, done one delivery in the first half, and that generated the loss that we are recording for the first six months of the year. What we are expecting is clearly that the pace of delivery will accelerate over the second half. We don't think that this will make the sign of the performance change.
Because the number of deliveries, as you are seeing in the whole commercial aviation market, will be affected approximately by a 50% cut. Nonetheless, what we're seeing here is that customers continue to be extremely interested in the machine. There is clearly a need also to continue to use, for special missions, the ATR, because as you well know, it connects countries that are on different islands, whose geography is scattered across islands. There is a service and a number of flight hours that is permanently active, and what we're experiencing is that our fleet is actually, in large part, operational. Nonetheless, the touristy component of the flights is, at the moment, in standby and will remain so certainly for the rest of the year, and possibly will be quite weak in 2021 as well. I think I've forgotten your first question.
Oh, it was about recovering milestones, and any milestones that got missed in the first half in defense contracts.
Well, what you see is that we are flat on revenue. I think you have an appreciation for the fact that we have had headwinds, but we have also had tailwinds, and we have managed to recover, because that was what drove us to be flat year-over-year, notwithstanding the limited, but in any case, existing impact we had on the civil side of the business. For the full year, there is definitely going to be a recovery and an acceleration in activities, in a number of activities across the group, in electronics, in aircraft. What we are going to see is how quickly the travel will be allowed back in different countries, and this is something where we'll have a better sense after August, I would say.
The recovery will clearly take place on key programs at a pace that will depend on the ability, essentially, to travel, because the activities done by the group are in good shape and progressing well.
Thanks. Could I just clarify on one point on the cost reduction? The 10%-15% cost reduction plan, is that a 10%-15% reduction in the run rate of costs or a 10%-15% achieved lower cost in 2020?
It's 10%-15% on the cost that we had forecasted to have in the budget 2020.
That would imply, actually, for fixed costs, you might be at a better run rate than that, i.e., with bigger cuts, as of the end of the year and looking into 2021.
No. Because clearly, a piece of the reduction is due to extraordinary action we are taking on, for instance, labor cost for this year. Clearly, having a recovery in terms of revenues in 2021, we will need, for instance, more person in the office or in the factories. Is something which is mainly related to the cost base of 2020.
Right. I understand. Do you expect any of it to stick as you go into 2021?
In the Aerostructures, we will continue to have action in 2021 as well. In the other divisions that today we consider in a recovery phase, we want a cap of employees. We are also analyzing some, I should say, more efficient base. For instance, we assume that we will continue to utilize partially the smart working that will require less space, less operating cost and so on and so forth. We will have a different setup. We are not yet capable to say the benefit of that because, for instance, we will have less space, but we'll have maybe more telecom cost. It's something that we are analyzing and we are putting in place. Clearly, the company will be different from today.
Thank you very much.
The next question is from Alessandro Pozzi with Mediobanca. Please go ahead.
I have two questions. The first one is on the operational efficiency and it looks like it definitely improved towards the end of the quarter. I was wondering as we go into the second half, whether the operational efficiency is still a bit of a drag on the margins. The reason I'm saying that is that, when I look at your guidance, the second half for revenues is still pretty much in line with the revenues of last year, but margins, they have yet to catch up. They're still a bit below what they were last year. I was wondering whether that could be a reason, or whether it's the weakness mainly in the civil market that is dragging down a little bit of margins in the second half compared to last year. That's my first question.
Alessandro, our operational efficiencies are improving. As you have heard Alessandro Profumo say, the number of people operational, both on-site as well as working now is much higher than what it was in the crisis time. We're seeing every week a steady progress and improvement. Clearly going into the second half, this will represent a plus. Nonetheless, we have to recognize at a margin level, there is going to be a continued under-absorption of fixed costs for the entire year, which will be less intense in the second half than in the first half because the number of hours worked will be higher. We can't ignore what happened in the first half, and we also have to remember that we are operating at social distancing in a way from manufacturing facilities that require more, let's say, an embedded inefficiencies, people not being overlapping with each other.
This will continue to have an effect in profitability.
Okay. Thank you. The second question was on the free cash flow. You have a neutral guidance for 2020. Can you give us maybe a bit more the color on the assumptions used to get there and whether the EFA contract has a part in generating a neutral free cash flow for this year? Whether you are assuming deliveries on this side of the year-end, or whether deliveries are likely to be delayed in 2021.
In the Free Operating Cash Flow our assumptions that we have relayed to you earlier, we assume that the EFA Kuwait contract will have milestones of activities as per the plan, fundamentally, with some minor slippages into 2021, but not really changing the cash profile of the contract. That is definitely an element that we'll keep under great observation, under maximum observation. There are also a number of other drivers, as you can imagine, given the amount of activity that will take place in the second half, much more than in the first half. The invoicing process will be concentrated in the latter part of the year, and consequently, cashing will be even more than ordinarily concentrated in the last couple of months of the year.
Those are clearly elements that we have to keep into full control in order to head in the direction of cash neutrality.
Okay. Thank you.
The next question is from Martino De Ambroggi, Equita. Please go ahead.
Thank you. Good evening, everybody. One more question on the guidance. Alessandra, if I look at the decline in sales, mid-single digit, compared to the decline in EBITA, - 30% roughly, there is a huge operating leverage. Could you help us in understanding the weight of the one-off related to COVID? The ATR contribution for sure is part of this because it is consolidated at equity level, and if there are other issues that justifies such a high operating leverage.
Yes, Martino. Well, you have mentioned the key one, which is the joint venture contribution. Both ATR as well as space manufacturing are unfortunately impacting us in the first half as well as in the full year. That is definitely a driver. We are, as we said, also being affected by the under-absorption of the fixed cost as well as by a mix in products in activities. Meaning in 2020, we have more activities on low initial production, some more development activities that carry a slightly lower margin, which applied to EUR 14 billion of volumes, clearly makes a delta.
Okay. One-off cost for COVID is something relevant?
One-off costs for COVID have been booked under the EBITA line between EBITA and EBIT.
Okay. R&D capitalized, the net FX is always EUR 100 million-EUR 150 million?
Yes. Fundamentally, we don't see reasons to change that figure now.
Okay, the second question is on the Aerostructures. We are not accustomed to see quarterly results for this business standalone. Is it possible to have an idea where it is landing in 2020 in terms of EBITA? I suppose it's too early to talk about it, but for sure the crisis in the civil aeronautics is not a short-term issue. I read on some newspapers. Potentially the conversion of the carbon fiber business in something different. I know it's too early, but is there any solution? The crisis probably will last for a while.
Martino, for sure, the crisis will continue for a while. We are actively working on, we cannot say potential solution, but potential mitigation. Utilizing our know-how and capabilities in other areas. It's something which clearly we are continuously working. The breakeven is delayed for obvious reason. There is always one element which is key, if we consider the division without COVID, then we have to consider COVID. In any case, we were performing better than expected, which means that the operational capability of the division is pretty good. We are working on data in a continuous way.
The fact that the division will report to Lucio Valerio Cioffi, the new Direttore Generale of Leonardo, is also relevant because I want that Giancarlo Schisano is doing, as I said, quite well, will be focused on the operational activities of the division, while Valerio will have more senior management time to work on the other mitigation factors, shall we say, in this way. There is really a strong senior management focus on the division.
Okay, thank you.
Ladies and gentlemen, there are no more questions registered at this time.
Good. Many thanks to all of you. Clearly, we are always available, Valeria mainly, but Alessandra and myself as well, to answer to all of your question and specific topics. Thanks a lot.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.