Good evening. This is the Chorus Call conference operator. Welcome and thank you for joining the Leonardo First Half twenty twenty 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.
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, and welcome to our first half twenty twenty results conference call. I'm Valerie Risotti, Head of Investor Relations and Credit Trading Agencies. Today, our CEO, Alessandro Profumo and our CFO, Alessandra Zenko, will take you through our progress during the first half of this year, the first half financial results and the outlook for 2020. And we will then welcome your questions. I will now hand you over to our CEO.
Thanks, Valeria, and 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, and we know it has continued to be an extraordinary set of circumstances for everyone around the world. Before we get into the results of presentation, I want to express my thanks to all our people at Neonardo for their commitment and support during these prime times, especially for the successful efforts made by everyone to keep Leonardo operational and productive despite the lockdowns across our core markets and in the last few months. There are some important points to make today.
We have responded at Leonardo robustly as an organization to the challenges presented by COVID-nineteen. We moved quickly to address and face these challenges. We made a clear action plan, and it has been working. As an organization, we have shown we are both robust and resilient and able to adapt very well in faster fiscal challenges. We have proved that Leonardo has strong foundation to leverage on.
In a moment, Alessandra will take you through the first half results and performance in more detail, and 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. But we have not been immune clearly, as we have seen the impact of COVID, particularly and unsurprisingly on the CV side of our business.
And 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 country client's country, and the travel ban has been an immediate 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. However, 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, and you can see it in the new order recently signed in Italy for the Italian Army's new helicopter and in The UK with the Iscan Radar development, and we are grateful for their support. We have proven that we can be successfully 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, and we have moved quickly to remote working that is now more efficient.
So our business has been responding well. Looking further forward, we expect certain challenges facing the civil side of our business to extend beyond 2020. Civil aeronautics business are facing current structural challenges, and we will continue 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. And while in helicopters, we can leverage on the military governmental side of the business, 86% of backlog. In Aerostructure, we believe highly prevalent exposure to commercial aircraft. We expect a decline in production rates well beyond 2020. In our in Aerostructure, we have four separate factories and fixed costs attached to the site, machine and tooling.
These costs are hard to take in a structural way, while 55% of production costs are referred to vehicle. We are mitigating actions in place and we are considering further action this year and the next. And so we will also be discussing with unions on potential furlough. And of course, it means a delay in our target of breakeven profitability and cash flow in Aerostructure. Despite of 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 NAFJ and AW169, the so called light utility helicopter in Italy and also IMOs, integrated marine operational support and this kind of radar development in The U.
K, a book to bill still at once, 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, and all of this underpins our confidence. Second, operationally. We have been considered strategically relevant for our domestic markets. We moved quickly to keep our people safe and ensure business continuity. And our rapid response ensured production facilities have remained operational for all but two days or through running slower.
This is a remarkable achievement considering Northern Italy that Northern Italy was the epicenter of the COVID 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 ninety nine of our employees test positive for COVID, of which sixty six in Italy, but none inside our production facilities. No one of them, we are sure of that, took the contagion inside our facilities since there were only a single case in each of the sites.
We are seeing month and 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 six different to 100 were absent. Third, financially.
And we are on track with the 2020 cost reduction, Alexander will be more precise than that, and 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 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. And we expect the net investment of €700 €750,000,000 to be down 40% to 50%, thanks to prioritization of investments. And in the first half, we have already achieved two thirds 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-nineteen resurgence, we expect to achieve substantially flat revenues in full year and to reduce the impact on our profitability due to the delays in CVD deliveries, slowdown in program execution and lower profitability because of the cost of actions we have taken. We have worked hard to progress key programs. In the case of AFAB-eight, 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. This all means we are on track for EBITA in the range of $9.90 to €50,000,000 and broadly, new track cash flow despite extreme market conditions.
And we have circa €4,300,000,000 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 the European leader in defense electronics with top capabilities in air, sea and land, and we are also building and upgrading our portfolio, for example, TENPET.
And the reference partner for The U. S. EUV and U. S. Brands.
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 GSF. We are going to remain a key partner in the Space Alliance with growth in service activities and 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 front order backlog of €36,000,000,000 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. And importantly, the strong support we received from our key stakeholders. So I hope that gives you a sense of what we have seen 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. And on that, I would like to hand over to Alessandro. Many thanks.
Thanks, Alessandro, and 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 and how, looking forward, what we can currently see in terms of outlook and the direction of the group and the businesses. So starting with our half year results. In summary, you'll 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.
And 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 €6,100,000,000 at a similar level to last year. Solid group revenue performance at 5,900,000,000.0 again in line with last year. And 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 €269,000,000 while free operating cash flow was negative almost €1,900,000,000 in the first half, things 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 €2,000,000,000 And recently, at the July, we issued a €500,000,000 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 our metrics have moved year on 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. But significantly, we have increased our domestic order intake across all our business lines, driven by domestic mini day governmental and in particular helicopter orders. And this has made a big difference. Then 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 EFA Kuwait, which added to our top line but with diluting margins and Leonardo DRx confirming its growth path. So you can see in EBITA and profitability a number of factors: a reduced contribution from our ACR 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 stability to the cost recovery, while this has been partially offset 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.
Now let's look into more detail at the key group metrics across the operating businesses. Starting with new order intake. Orders were €6,100,000,000 This is a strong performance. We have continued to win important contracts. While travel restrictions led to slowdown 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. And this shows the strength and resilience of our military and governmental business with affirmation from customers in our important domestic markets. And we saw good performances across the group. Helicopters performed strongly with important order wins. Order intake was up almost 50% to €2,500,000,000 in the first half.
And here, we won more domestic military governmental orders in Italy, in The U. K. And also in The U. S. This more than offset the much lower CV side.
Among the major order that we won, I'll mention the customer support for The UK AW101 Merlin preset, orders from the Italian Army NES and 15 AW169LUH and the first order for 32 Navy trainers, the eight, which is our 119 AW119 platform. In Defense Electronics, overall, we saw solid order intake of 2,900,000,000.0 with DRS increasing its order intake to €1,400,000,000 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 effect affecting our ability to finalize export campaigns, enable traffic control systems and automation. Remember that last year, we booked a large contract in the UK Airborne Systems log.
In Aeronautics, order intake was just under €1,000,000,000 The Aircraft division performed well and accounted for about 65% of this total, with orders on the F-thirty five program from Lockheed Martin and logistics support on IFA and C-27J. While Aerostructures won orders for almost €350,000,000 So overall, we can be pleased with the level of commercial activity surrounding order intake. Next, revenues. Revenues were €5,900,000,000 for the half year at the same level as last year, a solid top line performance benefiting from our strong backlog. Helicopters achieved €1,700,000,000 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.
But 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 €13,000,000,000 of which approximately 85% is military and governmental. Defense Electronics as a whole achieved revenues of €2,900,000,000 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 €1,100,000,000 up 11%. Aeronautics achieved revenues of €1,500,000,000 up 9% from last year, with eFAQA revenues and customer support affecting slowdown in other programs and aerostructures, where we have seen COVID factors impact demand and production rates, mainly on the B787 and ATR programs. So overall, a solid and resilient revenue performance across the group. And the key driver of our medium term revenue growth is our backlog. At some €37,000,000,000 €36,000,000,000 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 92,000,000 down from $4.87 causing lower profitability in the first half with ROS at five percent. We saw the fuller impact of COVID-nineteen for the entire second quarter, impacting and slowing down program execution, productivity and deliveries.
But 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 200,000,000 to €139,000,000 mainly due to COVID causing lower deliveries and slowdown in programs as well as lower productivity. And 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 €228,000,000 to €166,000,000 The European Electronics 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 M346 fighter attack aircraft successfully completing its maiden flight equipped with an optimized variant of GRIFO radar. On top of this, we also faced 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 €129,000,000 to €76,000,000 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 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 offset by the settlement with Airbus for the A380 program termination. Lastly, Space contribution also fell to negative €10,000,000 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-nineteen 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% to 15% out of a baseline of €1,400,000,000 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 $2,900,000,000 and approximately 50% of this target has been achieved in the first half.
We are still targeting a 40% to 50% reduction in 2020 of net investments budgeted for 700,000,000 to €750,000,000 and two third of the total has already been achieved by June 30. Now moving to the below the line items. Can see that the first half EBIT fell to €227,000,000 reflecting the fall in EBITA as well as nonrecurring costs related to COVID-nineteen, which amounted to some €40,000,000 And our net result was affected by EBITA performance and higher financial charges associated with FX hedging activities as our volume of hedge revenues has increased. Meanwhile, our free operating cash flow was negative almost 1,900,000,000.0 We were already in large part expecting this higher negative cash flow earlier this year because of anticipated higher seasonality. And we're seeing the second half weighing the second half weighing 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 replaced 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 this month earlier this month, a €500,000,000 bond in the euro market. We will use the bond proceeds to refinance some of our debt maturing in early twenty twenty one, and this will reduce our average cost of borrowing to around 3%. The bond issue was very well received by the market, four times oversubscribed, and this is a testament to the creditworthiness of our group. And we have a strong liquidity position. As you know, in May, we have strengthened it further, signing €2,000,000,000 of additional credit lines.
And at the June, we have available liquidity of 4,300,000,000.0 So 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 are currently seeing, which will have an impact on the coming quarters. Our business is being affected by the measures taken to combat the COVID-nineteen pandemic globally. We currently are facing unusually high level of economic and business uncertainty. But please let me highlight that Leonardo has been considered strategically relevant for all our domestic markets in Italy, The UK and The U.
S. Q1 performance reflected the initial impact of COVID-nineteen. 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 and in the civil side. We have started seeing signs of stabilization in Q2. And excluding any COVID resurgence and further lockdowns, expect a reacceleration of our activities in the second half of the year.
Taking into account all these elements, currently expect a resilient full year 2020 with full year 2020 orders showing a level of 12,500,000,000.0 to €13,500,000,000 reflecting the support we have gained from domestic and military governmental customers whose orders should help offset the slowdown of international order intake and the lower civil market demand in Aerostructures and civil helicopters. Revenues at EUR 13,200,000,000.0 to 14,000,000,000, 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 900,000,000 to $950,000,000 due to the short term impact of COVID 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.
And 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. Expect a net financial position as a consequence of circa €3,300,000,000 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 expect it 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. Then in Defense Electronics, we are seeing the benefits in 2020 of the European side of the business being more weighted towards a more resilient non civil market and again a strong backlog to leverage off.
On the other hand, we're experiencing a slowdown in order intake due to COVID effects. We're seeing slowdowns in program execution in Europe and lower productivity since March, which is gradually and steadily improving. And 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. But 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 IFA, Eurofighter and TENFES. Talking about DRS in S, the the business has also strong fundamentals. The military base business has a strong backlog and is performing well commercially. It has been enjoying good growth momentum over the last couple of years and little COVID 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 ERS to continue to perform well driven by its positioning on key DoD priority programs and projects under development moving into the production phase. And 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 EFAQ wage ramp up even at a lower pace compared to expectations and customer support activities and 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 and its financial performance has been solid and resilient. IFAC weight remains a key program and activities continued this quarter even if travel restrictions and the increase of COVID cases in Kuwait generate some obstacles causing delays. But 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. And we expect the Aircraft division to perform well in 2021, supported by a strong portfolio and key opportunities already in the pipeline, in particular in international programs such as Eurofighter, JSF and our trainer platform. Then Aerostructures has the most exposure to civil markets.
Already since March, we have been seeing the impact of production slowdowns. So far, our employees have made great efforts in adapting to limit this impact on productivity. But 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. And this may mean we may need to take actions in terms of furlough. Then 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 is planning much lower production levels in the near term 2020 and 2021. We expect ATR will continue to be affected by lower demand in CV aviation market. 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. With production levels reduced by 50%, the reorganization would imply a reduction in headcount by two zero four 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.
So 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-nineteen, but we have responded quickly and have been actively managing the situation. And despite these years of uncertainty and challenges, we remain very confident in our longer term strong business fundamentals, our large backlog, our position in our key domestic markets, our products and technologies and the opportunities all of this give us.
And with that, we are ready to take your questions. Thank you.
Excuse me. This is the Chorus Call conference operator. We will now begin the question and answer session. 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 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. And then 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? And how are you thinking about deliveries on civil for the rest of the year? Thank you.
Hi, David. So the A380 term settlement the A380 termination and the associated settlement is recorded in June for approximately €30,000,000 On Helicopters. On Helicopters, we 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. Now 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. Well, you for that.
The next question is from Nicolas Cunningham with Agency Partners. Please go ahead.
Thank you very much and good evening. Yes, 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. But a couple of things that strikes on particularly is that ATR made a €34,000,000 loss in the first half. And obviously, are going to carry on being very difficult through the second half.
But that looks sounds like an exceptional situation with only a single delivery. So 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 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 to that?
And then finally, on the cost reductions, you're at about 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. On I'll start with the last one. On cost reduction, we will be 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. Some of these targets have been achieved at a faster pace on controllable costs, for example, just because there's been no travel whatsoever in the last four months.
However, there is going to be a normalization of the trend in the past going to year end. On ATR, ATR has as we mentioned done one delivery in the first half and that generated a loss the loss that we are recording for the first six months of the year. There will be what we are expecting is clearly that the pace will accelerate the pace of delivery will accelerate over the second half. Nonetheless, we don't think that this will make the sign of the performance change because the number of deliveries will not be will be as you are seeing in the whole Commercial Aviation market will be affected approximately by 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 use for to continue to use for special missions the ATR because, as you well know, it connects countries that are on island different islands whose geography is scattered across islands. So there is a service in 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 touristic 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.
It was about recovering milestones and any milestones that got missed in the first half in Defender contracts.
Well, what you see is that we are flat on revenue. So I think you have an appreciation for the fact that we have set 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 CV side of the business. So 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. And 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. And can I just clarify one point on the cost reduction? The 10% to 15% cost reduction plan, is that a 10% to 15% reduction in the run rate of costs or 10% to 15% achieved lower cost in 2020?
So it's 10% to 15% on the costs that we had forecasted to have in the budget 2020.
So that would imply actually for fixed costs, might be at a better run rate than that, I. With bigger cuts as of the end of the year and looking into 2021?
No. No, because clearly, 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 2020, we really need, for instance, more person in the office or in the factories. So it's something which is mainly related to the cost base of 2020.
Right. I understand. And will do you expect any of it to stick as you go into 2021?
In the Aerostructure, we will continue to have action in 2021 as well in the other division that today we consider in a recovery phase. We won't have a cap of employees. We are also adding some, I should say, efficient base. For instance, we assume that we will continue to utilize partially the smart porting that will require less space, less operating cost and so on and so forth. So we will have a different setup.
We are not yet capable to say the benefit of them because, for instance, we will have less space, but we'll have maybe more telecom costs. So 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. I mean, 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 last year, they have yet to catch up. It is still a bit below what they were last year. I was wondering whether that could be a reason or whether is the weakness mainly in the single market is driving down a little bit of margins in the second half compared to last year? That's my first question.
Alessandro, operational efficiencies are improving. As you have heard Alessandro 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. And we're seeing every week a steady progress and improvement. So clearly going into the second half, this will represent a plus. Nonetheless, we have to recognize that at 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.
However, 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. And 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 that you used to get there?
And whether the IFA contract has passed in generating a neutral free cash flow for this year, whether you're assuming deliveries this side of year end or whether deliveries are likely to be delayed in 2021?
Okay. So in the free operating cash flow assumptions that we have relate to you earlier, we assume that the IFAP way 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. So 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, cash in will be even more than ordinarily concentrated in the last couple of months of the year. So 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 guidance. Alessandra, if I look at the decline in sales mid single digit compared to the decline in EBITA minus 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 is other there are other issues that justifies such a high operating leverage?
Yes, yes, Massimo. Well, you have mentioned the key one, which is the joint venture contribution. So both ATR as well as Space manufacturing are unfortunately impacting us in the first half as well as in the full year. So 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 €14,000,000,000 of volumes clearly makes a delta.
Okay. One off costs for COVID is something relevant?
One off costs for COVID have been booked under the EBITA line between EBITA and EBIT.
Okay. And R and D capitalized, the net effect is always 100,000,000 €150,000,000
Yes, yes. I mean fundamentally, we don't see reasons to change that figure now.
Okay. And the second question is on the other structure. We are not accustomed to see quarterly results for this business as stand alone. Is it possible to have an idea where it is landing in 2020 in terms of EBITA? And 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.
So 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 because 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 also utilizing our know how and capabilities in other areas. So it's something which, clearly, we are continuously working. The breakeven is delayed for a 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, so which means that the operational capability of the division is pretty good. We are working on that in a continuous way. The fact that the division will report to Varejo Chopfi, the new Director General of Granardo is also relevant because I want that Giancarlo Scissano is doing, as I said, quite well. We'll be focused on the operational activities of the division, while Barelia will have more senior management time to work on the other the mitigation factors, shall we say in this way. So 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. So many thanks to all of you. And clearly, we are always available, Valeria mainly, but Alexander and myself as well to answer to all of your question and specific topics. So thanks a lot.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.