Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo first quarter 2020 results 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, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Miss Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies. Please go ahead, madam.
Good afternoon, ladies and gentlemen, and welcome to our first quarter 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 quarter of this year, the Q1 financial results, and what we are seeing so far. We will then welcome your questions. I will now hand you over to our CEO, Alessandro Profumo.
Thanks, Valeria, good afternoon, everybody. First of all, I hope that everyone on the call is well. Thank you for all taking the time to join us today. We know these are unprecedented times for everyone around the world. Today, we want to cover the following, our first quarter results, and secondly, how we are actively managing the current short-term challenges thrown at by COVID-19 over the last two months. What we are seeing, what we are doing, how our organization has been responding, in our opinion, quite well. Just before we get into the results presentation, I want to say how proud I've been of all our people at Leonardo.
Proud of their commitment and support, proud of the role we are playing in the current crisis, supporting the Protezione Civile and many other activities, where we are doing everything we can from our side to help the fight against the pandemic and support institutions. Our helicopter fleet, in an emergency medical service role, is moving patients between hospitals. Both our C-27J and ATR aircraft are moving medical equipment. We thank our customers for allowing us to utilize them. Our satellite services have never stopped guaranteeing connectivity. Our cybersecurity activities are supporting all the cybersecurity risk and mainly the risk related to remote working. In a moment, Alessandra will take you through the first quarter results and performances in more detail. I just want to emphasize some key points. We began the year well and on track.
In the first quarter, we achieved a strong commercial performance, carrying the strong momentum from last year into the first quarter in ordering stage. We started to see the impact of COVID-19 measures on our operations in March, and it began to cause production slowdowns and to affect revenues and profitability. We took quick actions, and as an organization, we have responded well. The safety of our people has been a paramount priority. We have followed all government measures aimed at battling the virus. We have successfully adapted our working practices in Italy and other countries, which means we can keep running our operations safely. We have been the first company signing an agreement with the current trade unions, and we have contributed wherever we can to help fight the pandemic. We've been making a difference, and we are proud of that. We have a solid business mix.
We benefit from our more resilient military and governmental activities. The larger management of our group are accounting for more than 80% of the revenues. Our facilities are deemed strategic and all remain open and operating, although in places, running slower with lower productivity. We enjoy a substantial total backlog now at EUR 37 billion. We are seeing the serious side of our business. Only 18% of the revenues in 2019 is going to be impacted to a greater degree. Clearly, ATR and civil helicopters will be impacted as well as Aerostructure, as Alessandra will explain later on. We are actively managing all these short-term challenges. We are implementing mitigation actions and recovery plans. As Alessandra will explain shortly, we have strengthened our liquidity position, so we have a solid balance sheet and other liquidity to further strengthen it. We have a strong support of our key stakeholders.
We cannot yet quantify the full economic and financial impact of the pandemic on our full 2020 year guidance. We don't know, sorry, yet how much we can make up later in the year. It is clear that the impact will be felt more fully over the second quarter, but we are starting to see some signs of stabilization, which is very important, so that from the visibility we have to date, clearly excluding any further lockdown, we expect to re-accelerate our activities in the second half of the year. This is very important.
The second derivatives, in our opinion, has already changed the sign. We can have confidence because of the way we are responding well in the short term, and because of our key long-term fundamentals, the backlog we have, the market and customer we serve, the products we have and that we are developing, and the longer-term strategic path. What we are seeing, and how has the COVID-19 outbreak impacted Leonardo so far? In our key domestic markets, such as Italy, U.K., and U.S., our operations are seen as strategic, and therefore, we have been allowed to continue operations. Italy has been the first European country affected, and we took the decision to close our facilities for two days for the sanitization of all our premises, setting up protective measures for all our employees. We have successfully managed business continuity by keeping plants open and running.
This has had some impact on productivity and profitability, as we have seen from our EBITDA. The key point is that the organization has adapted, and all our people have shown an incredible support and commitment. We have more than 40% people working from home in Italy and U.K., and people working in our facilities at the end of April comprised an additional 40%, while they were only 14% at the beginning of the crisis on the 20th of March. This is a sign of the confidence in our safe working practices. As we said in mid-March, we expected to see our business being impacted in some areas, and we have actually seen that. First sign of slowdown in demand relating to the civil side of our business, while military governmental is clearly more resilient.
We have seen impact in operations across the group in terms of inability to finalize deliveries, program executions, slowdown, and lower productivity. While we have not actually seen any major impact on our supply chain, also it remains one of our alert areas, which we continue to monitor very closely. Let me cover each of these. First, demand. It's no surprise that we expect to be more impacted on the civil side, while we remain fully engaged on the military and governmental side. On the civil side, the main impact is going to be in Aerostructure. All of us, we have seen the decrease in civil flights everywhere in the world. ATR, which is exactly as the other OEM, and the civil side of helicopter. Sorry, on ATR, there is a key difference, that we are being in the turboprop market. This is a market that will restart before others.
Alessandro will cover later that what we can say at the present time about the expected demand impact in these areas of our group. Moving from the demand side to operations, we have largely been able to continue all of our operations inside, but we have also seen some areas of impact. The main consequence operationally has been a shortfall in productivity and program execution slowdown, which are direct drivers of our profitability. On some military program, activity and progress has been lower, as some of our key functions have moved to home smart working, plus some other business disruption, for example, distancing on production lines. On our major Kuwait program, the travel ban has inhibited our progress to some degree. This could delay some of the milestones, but we are working hard to recover later in the year.
While we expect Aerostructure to be impacted annually in 2020 and 2021, those affecting the ability to reach breakeven in 2021. On deliveries, the travel ban is affecting the acceptance and delivery process mainly in the civil areas of business. In first quarter, we have delivered 11 helicopters compared to the 19 last year, and no ATR. We expect deliveries to be down this year, but we are working to increase the so-called smarter deliveries, leveraging on our digital capabilities already applied to customer support and service activities. Finally, on our supply chain, so far, as I said, we have not seen any major disruption, but we have a general concern, and we continue to monitor closely the supply chain, especially to keep the key suppliers included in the LEAP2020 program. That's the impact we are seeing across our business.
How we have responded, we have been quick to take actions all across our business to protect them, from a health perspective and operational and financial. We move fast to quickly establish protective measures at our plants to make employees safe. We have successfully adapted working practices. To date, we have not seen any sign of the contagion coming from within our plants. We have not had the full load of our key operations or production sites. Our organization and system is working and holding up. That's a really important point. We are actively managing the areas where we see COVID-19 impacting our performance. We have put in place a task force using all available levers to protect our business. We are actively working with our domestic customers.
We are making great efforts through our commercial teams in gaining new governmental orders, especially in our key domestic markets, also through remote working. We are leveraging institutional support, and we are analyzing how to leverage technologies to catch up opportunities arising. For example, in electronics, in command and control, in EMS, in cybersecurity, in autonomous system for defense medicine. Our technologies can be used in segments that are now emerging, which previously we haven't considered. Second, we are working on the recovery of operating and industrial performance to go back to normality while respecting rules in place, maximizing the efficiency of remote working. We put in place rules focused on security and the way we manage the process to guarantee the same level of security of information, even working from home.
We invest in digital equipment to give all our people the necessary tools and make the smart working more efficient. We are reassessing our production and delivery plans and aligning purchase plans. Third, we are working on the supply chain management. As I said, we are actively monitoring the situation and assessing all the potential issues. Fourth, we are prioritizing investment. We are going ahead with investment that are mandatory to meet customer needs or to restart quickly after the COVID-19 break. For instance, digitalization. While we are reducing or delaying those that are less important at this moment, and we expect to reduce gross investment by circa 20%-25%. Fifth, we are working on cost reduction, and Alessandra will explain. We are reviewing costs on all programs and all expenses, and we expect to lower controllable costs by 10%-15%.
There's also some natural cost reduction like travel expenses that are due to travel ban. Finally, we expect around 10% savings coming from labor cost. Sixth, we are focused on strengthening our liquidity and increasing our financial flexibility, as Alessandra will talk in a moment. I hope that gives you a picture of what we are seeing and what we are doing. Just before I hand over to Alessandra, let me emphasize some key points. In the first months, we started the year well from the commercial perspective. Yes, we have been affected by the pandemic in Italy first, and we slowed down production, but we are responding well. We are being affected in civil, but we are a large exposure to the more resilient governmental and military markets. Our system is holding up, that's really important. We are actively managing everywhere we can.
Yes, there is high uncertainty at present, we do have reason to be confident in our longer-term fundamentals. They are intact. Our key markets and customers, the strength of our products, the backlog we have, which is about EUR 37 billion. We have adequate liquidity and financial strength, importantly, strong support from our key stakeholders. Now I really thank you, and I hand over to Alessandra.
Thanks, Alessandro. Good afternoon, everybody. I also hope you are all safe and well. I want to cover the Q1 results and the performance across the businesses, where you can see that we have had a good start to the year, especially commercially, but we began to see the COVID-19 impact on our numbers in March. As you know, Q1 is the smallest contributor to the year. Even in more normal circumstances, it is not a basis for predicting the full year. We expect the level of COVID-19 impact will be greater in our Q2 numbers. We have responded quickly as an organization to adapt and mitigate while keeping fully engaged with customers. In the second half, we expect to see the benefits of these actions. I also want to update you on how we have strengthened our liquidity positions and financial flexibility.
Lastly, I want to set out what we can say and what we cannot say yet about the outlook for the rest of the year. Starting with Q1, in overall terms, we started the year well on the back of good results in 2019 and continued focus on delivering against our industrial plan. You can see this is a strong order intake. We began to see in March the COVID outbreak having some material impact on our industrial performance, first in Italy and then in other countries. We began to start seeing that travel ban led to the delay in some deliveries on the civil side, namely ATR and helicopters. The implementation of measures to protect our workers' health while keeping production plants open led to slowdowns in program execution and productivity.
Looking at the key metrics for the group in Q1, order intake was very good at EUR 3.4 billion, up 36% on last year. Continuing the strong momentum we were building in 2019 and giving us a total backlog of EUR 37 billion. Group revenues were EUR 2.6 billion. Here we did see impact from COVID-19. EBITDA of EUR 41 million in the quarter, down from EUR 163 million the previous year, both because of lower revenues from delivery delays and slowdown on programs, which impacted our fixed cost base, but also because of lower productivity. Meanwhile, our free operating cash flow was negative, almost EUR 1.6 billion. We were already in large part expecting this higher negative cash flow absorption because of anticipated higher seasonality. We also saw the impact of some COVID-related delivery slippages in March.
Let's now quickly go through the key Q1 metrics. First, looking at new orders.
Overall, we saw a strong level of order intake of EUR 3.4 billion, with an especially strong performance in helicopters on the military side. Helicopters won almost EUR 1.5 billion of orders. Really strong performance with major contracts, namely the customer support contract win for the UK MOD's AW101 Merlin fleet. The first order of 32 TH-73A helicopters for the US Navy. In defense electronics, we also saw a continued good commercial performance in both electronics and DRS, together achieving new orders of EUR 1.5 billion. Again, almost all on the military and governmental side. Aeronautics achieved order intake of EUR 644 million, up from EUR 454 the previous year, mainly related to aircraft winning orders from the EFA consortium for support services and from Lockheed Martin for the F-35 program, plus other support orders. A strong Q1 commercial performance with very good order intake.
As I said earlier, in current circumstances, it cannot be a prediction of the full-year performance. Next, revenues. Also in revenues, we began the year well, but we started seeing some of the impacts of COVID-19 in March. Group revenues in Q1 were EUR 2.6 billion, nearly 1% lower than last year, with the COVID-19 affecting the civil side of helicopters, it's impacting the level of deliveries. 11 helicopters delivered versus 19 from last year, mainly down in the AW139 line. Overall, helicopter revenues were down around EUR 100 million to EUR 704 million in Q1. Defense electronic revenues were actually up 2.2% to EUR 1.4 billion, where DRS continued its strong growth with revenues up 13%.
Lastly, aeronautics revenues were flat at EUR 644 million, and we also saw aeronautics business volumes affected in March by the effect of COVID-19 and the ramp-up of EFA waves affecting lower volumes elsewhere.
Moving to EBITDA and profitability. Here we saw a greater impact from COVID-19. First quarter, EBITDA fell to EUR 41 million versus EUR 163 million from last year, caused by the reduction in revenues against our fixed cost structure. It meant our return on sales for Q1 was 1.6% versus 6% last year. Helicopters' EBITDA fell from EUR 56 million to EUR 80 million due to COVID effects causing both lower productivity and lower civil deliveries.
Defense electronics EBITDA fell to EUR 80 million from EUR 100 million, with electronics being affected while DRS actually grew EBITDA in Q1. In aeronautics, EBITDA fell from EUR 37 million to - EUR 17 million in Q1 because of COVID-19 effects, with delivery postponements affecting ATR. Space contribution also fell to - EUR 2 million because of lower activities in manufacturing and lower profitability, partially due to COVID outbreak. Moving to the below the line items.
You can see that Q1 EBIT fell to EUR 30 million, reflecting the fall in EBITDA and slightly higher restructuring costs. Our net result was affected by EBITA performance and higher financial charges associated with FX fair value and hedging activity. I just want to touch on our financial position and liquidity. We started having a strong liquidity position, and we have made it stronger with signing yesterday EUR 2 billion of additional credit lines. We have done this to have additional financial flexibility and to bolster liquidity, also in case we have to absorb larger working capital fees. The facilities have a maturity up to 24 months and have no financial covenants. In liquidity terms, we are in a strong position. As of March 31st, pro forma for the addition of the new facilities, our total liquidity position was over EUR 5 billion.
On that, we are in a safe position. As I said, we do not have any maturities in 2020, and we have a balanced debt maturity profile. Let me now summarize what we have seen in our main businesses in Q1. Travel bans and rules to reduce virus spread resulted in inability to finalize deliveries, program execution slowdown, and lower productivity. Starting with helicopters, remember that we enjoy a favorable business mix in helicopters, with a high proportion of military and governmental and customer support activities. We have a very strong order backlog. All resilience traits. As you heard, we did see Q1 COVID impact in helicopters, specifically on revenues. The impact was driven by deliveries, as customers didn't want to come to Northern Italy to pick up their machines, their helicopters, since February, and to a minor part, by program execution slowdown.
Profitability impacted by lower revenues as well as lower productivity as we switched to safe manufacturing. In Defense Electronics, which as you know well, is our largest business, there was a heavy weighting towards the more resilient military and governmental markets, which clearly represents a key trait for the business and very resilient. In Q1, however, we did see in Europe the impact of COVID-19. Revenues slowed down because of project execution delays, while DRS in U.S. was not yet affected. On EBITA, the impact was driven by revenue decrease and lower productivity. In Aeronautics, the businesses are affected to different degrees. Aircraft is a predominantly military business and in a resilient position. Revenues here were affected by program execution slowdown, while EBITA reflected both the decline in revenues as well as the operational disruption.
In the aerostructures, on the other hand, we are seeing the impact of production slowdown, which affected both revenues and EBITA. Clearly, this is a business which has high exposure to civil markets. Finally, our ATR joint venture, again, pure civil exposure. Here we see the effect of clients' inability to do final testing and take delivery of aircraft. 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 being taken to combat COVID-19 pandemic globally. We currently are facing unusually high levels of economic and business uncertainty. Leonardo has been considered strategically relevant for its customers in all domestic markets, Italy, U.S., and U.K.
Q1 performance reflects the initial impact of COVID-19, while we expect Q2 to be affected the most because travel restrictions will limit our ability to finalize orders and clients' ability to take deliveries of our products and systems. Lockdowns will curb presence on sites, with a negative impact on productive hours and productivity, as well as on program execution. Our cash inflows will be shifted to the second half of the year, while cash outflows will reflect procurement plans only partially adjusted to the downward revised production plans. We are starting to see signs of stabilization in Q2. As Alessandro said, excluding any further lockdowns, we expect a re-acceleration in the second half of the year. Taking into account all these elements, we cannot say at this moment in time what the full financial impact on our group for this year will be.
This will depend on the severity and the duration of the global pandemic, and on how much we can recover in the second half of the year, when the mitigation and recovery plans we have enacted will take full effect. For this reason, it is prudent to suspend the guidance that we set out in March. We will provide you with a new outlook later in the year when we will present results for the first half. We can also say that we are actively managing everywhere we can, and we promptly put in place mitigating actions to face short-term challenges. We pursued and we are pursuing alternative business opportunities. We are addressing the cost base and targeting a reduction of 10%-15% of controllable costs and approximately 10% of labor costs.
We're prioritizing investment initiatives, reducing 2020 investment level by circa 20%-25%. We've strengthened our liquidity position with EUR 2 billion of additional credit lines. Yes, there is high uncertainty at present, but as Alessandro said earlier, we do have good reasons to be confident in our long-term fundamentals. They are fully intact. The solid market we are in, the customers we serve around the world, the strength of our products, our EUR 37 billion backlog, which covers two and a half years of equivalent revenues, are all testament of what I've just said. Thank you. Now I'll hand it over to Q&A.
Excuse me. This is the Chorus 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 [locker] with Bank of America. Please go ahead.
Good evening, Alessandro and Alessandra. Hope you're well. Three questions from me. Firstly, on the labor bill, you mentioned that no employees had been furloughed in Q1, which seems to be different to what a lot of your peers have been doing. What is the reason-
Sorry. Can you repeat? Maybe that you are too close to the micro, but it's incredibly difficult for us to hear. We are five people in the room.
Okay.
No one is capable to follow your question. Sorry for that.
That's okay. Can you hear me okay now?
Yeah.
Okay. I'll slow down. In Q1, you said that there were no employee furloughs. I just wanted to ask, why was that, and how do you plan to get to the 10% cost savings on employee costs? Is that something more permanent in terms of cuts? That's my first question. My second question was on the Aero Structures negative year-on-year EBIT contribution. Can you break down the split between ATR 787 and A220 or give us any flavor there? My final question, on free cash flow, given the prepayment we were expected to get this year, do you have any visibility today on whether you can generate positive free operating cash flow for the year at group level? Let me know if that was unclear. Thank you.
Okay, David. Following the order of your questions, we did not furlough any employee in Q1. The target that we have set for cost savings on labor is driven by reducing the variable component of the compensation as well as a lower number of headcounts in general. We had contemplated to have a number of new entries in the workforce, which we are not anymore planning. It's a volume effect as well as a price effect. On Aero Structures, as much as we would like to be helpful, that level of detail by program is not something that we would discuss. On free operating cash flow for the full year, as Alessandro said earlier, we will adjourn and update all of you in the second half result discussion on all the metrics on which we are defining a guidance for the year.
Okay. Thank you very much for the answers.
Thank you.
The next question is from Nicholas Cunningham with Agency Partners. Please go ahead.
Hi. Good evening. Thanks for taking the call. A few questions. On liquidity, the additional headroom you've given yourself. In a normal year, say last year or the year before, how much headroom would you have at the worst part of the year, so that we can see, if you like, what your normal surplus headroom is and then add the EUR 2 billion to it? It gives us comfort, if you like. Secondly, sort of connected to that, how much is the either net additional debt that you're adding or the facilities that you've added, how much will that cost in terms of incremental interest or fees? Final question, the restructuring plans. I can see there's a lot about hiring freeze and so on, that doesn't really cost anything. If there's a headcount reduction, is there likely to be any meaningful cost attached to that?
Thank you very much.
On liquidity, Nick, last year, we ended the year with a cash balance of EUR 1.1 billion, we had a fully undrawn revolving credit facility for EUR 1.8 billion and additional undrawn, uncommitted credit lines for another EUR 700 approximately. The new facility will have a margin of 110 basis points. On your last question, we're not talking about any restructuring plans, unless I've missed what you said. The restructuring plan is not on the table as of now.
Alessandra said basically that the cost reduction is coming, for HR, it's coming from different areas. We are utilizing all the holidays not utilized. We are utilizing some day of holidays we can plan centrally. With the reduction, with the budget, we were planning hirings that won't happen. We foresee a different salary system. There is one was expected to be implemented in a normal year. There are contribution that we pay when we achieve the target. Contribution, sorry, salary bonus. There are different areas. There are no layoff, so we don't have a restructuring cost related to this reduction.
Thank you for that. Just one brief follow-up. The liquidity headroom, the solvency headroom you had at the end of the year, is that indicative of what you have all the way through the year? Because normally there's some seasonality and, in particular, one tends to expect cash to come in at the end of Q4.
Sorry. You know that we always had a cash utilization in the first, to be honest, three quarters of the year, and then there is a positive cash in the fourth quarter. We have never communicated the budget, but our free cash flow in the first quarter has been better than the budget. Just to give you an idea. Is in line with the usual trend. Also, internally, we are seeing that it's better than the budget we had.
I suppose what I'm driving at, and I'm pretty comfortable about your liquidity, but just to reassure others, if you like, how much of the normal facilities would you draw at the worst point of the year? How much headroom do you have at the worst point of the year, before what you've already added now in terms of your additional facilities? I'm just sort of trying to get a feel for how far we can stress test Leonardo before you run out of headroom.
Yeah. last year, the RCF was really almost every quarter, and there was no utilization of the line. As of 31st of March, also, the revolving credit facility, EUR 1.8 billion, was not utilized. I hope this helps, Nick.
That helps a lot. Thank you very much.
The next question is from Alessandro Pozzi with Mediobanca. Please go ahead, sir.
Hi there. I have a question on the productivity of your plans. Appreciate we are in sort of unprecedented time, and the visibility remains very low. I was wondering where we are at the moment compared to where we were pre-COVID-19 levels, in terms of operating capacity, and whether do you expect that to improve soon given that Italy has just entered the phase II of the lockdown. Thank you.
I can give you some indicator, just to have some number. Talking of people not present for a different reason, so it could be that they are what we say in Italian, on ill. [Non-English content] malati, in malattia, not sick. Sorry, or other reason.
That's okay. Yeah.
The 10th of March, we have to remember that the 10th of March, we were already with the red zone in the north of Italy. We had people not present by 19%. On the total, we have in Italy 31,000 people. The 20th of March, we were 44%. The 30th of April, we were 17%. Yesterday night, we were down at 14%. We have a continuous improvement. These are people absent. When people are present on-site, which is important because, for instance, for engineers to be on site is relevant in terms of coordination for the cost to cost program. In the 10th of March, we had 60% present on site. The 20th of March, we were 14%.
We are at 40%. In the meanwhile, the smart workers were 29% the 10th of March, were 42% the 20th of March, and are 43% at the end of April. Which means that people present on site and smart workers are 83% at the end of April. The people not present were 17%. As I said, yesterday night were 14%. I don't remember the split between people present on site or smart workers. At the 20th of March, as I said, we had 44% of people not present, 14% on site, and 42% in smart work. Which means that we reacted very rapidly. The people are coming back to be on site, which is incredibly relevant. The smart workers are a huge amount of people. Today, we have to be transparent that the people in smart working don't have 100% of efficiency.
This is very important. Our estimation from a list of indicators we are utilizing is that today the level of efficiency is around 75%. Clearly, one of the projects we are ongoing is how to improve efficiency of people in smart working. I hope that I answered your question.
Yeah. That's helpful. I have a second one on your comment about the softness in demand in the civil markets. I believe you mentioned, you started to see that in March, the second end of March. I was wondering what kind of softness, in what area do you see that? Thank you.
Sorry. On Aerostructure, I think that the best is that you will look to the OEM numbers. I think that all the major OEM have already presented their production plan and the numbers they have in terms of market. Clearly, it's not exactly one to one, our activity vis-a-vis the OEM one because, for instance, today, we are still at rate 10 on the 787, while we know that we go down to seven in 2021, if I remember correctly. No, to the 2022, sorry. Not '2021. In 2022. Clearly, the Aerostructure area is an area which is significantly impacted. We have the Helicopters. Helicopters, as you know, the civil helicopters. I say immediately that today we don't have major impacts from oil and gas because there is a reduction.
You remember that we had the order by Saudi Aramco for 21-AW139, so we are in the process of delivering them. It's not impacting oil and gas, but we are seeing an impact in the other areas of civil helicopters, utility, transportation, and such kind of things.
Given the weakness in aerostructure, do you still expect to break even in 2022 in the aerostructure business?
I said before, we don't have visibility. The other day, I heard that Airbus said that they think that the civil market will go back to normality in 2025. Today it is impossible to say anything. What I can say, stress, confirm, push on, and I don't know whatever else, is the fact that in Aerostructure, before COVID, we were better than the plan. This is, in my opinion, incredibly important, because it means that we are doing pretty well. The Aerostructure, we have an impact which will be higher in 2021 than in 2020. This is the actual expectation with the visibility we have, because as I said before, the 787 will reduce the rate in 2021 and 2022. 787, we always remember, is one half of the revenues of the Aerostructure. This is the situation.
Maybe the Aerostructure will be the area that, in terms of HR, will require some reasoning in terms of utilization of tools that can reduce the cost.
Okay. That was very helpful. Thank you.
The next question is from Martino De Ambroggi with EQUITA. Please go ahead, sir.
Thank you. Good afternoon, good evening, good morning, everybody. The first question is on the cost-cutting measures that you are presenting in slide five. I can figure out the 10% on labor cost, but could you provide an order of magnitude for the overall amount, including the controllable costs, which I'm unable to understand.
The total controllable cost and labor cost is more or less EUR 4.2 billion.
Okay.
No, sorry. It's not EUR 2.9.
Two and a half plus three and a half, so five.
It's close to five.
Okay, perfect. We have an order of magnitude. The second question is on the bottleneck in deliveries. If you can provide just a size of what was the impact in Q1, and just to know if the situation is still totally frozen today, or because of the phase II in Italy, you are starting to at least discuss with your customers to fix a potential timetable to restart the deliveries, or is still totally frozen?
Can you repeat the beginning? Because we lost the beginning.
Yeah. The bottlenecks on deliveries, what was the impact in Q1? What was not delivered because of the impossibility for your customers to get the products. The second part of the question was referring to the current situation. Are you still totally frozen in deliveries, or you are starting to discuss with your customers some potential date?
Martino, on deliveries for the Q1, we have had, for example, in helicopters, we lost seven deliveries on mainly AW139 machines. We did have an impact material both on revenues and EBITA. Clearly also, ATR had a shutdown in travels that prevented customers from leaving their own homes to reach Toulouse. I would say the situation is gradually improving. Having said that, as of April, there have not been major updates. May, the situation seems to be moving in the right direction, but honestly, I don't think that there will be any ability to really travel across countries in a material way.
What we can count on and what we are doing, also in helicopters, for example, is we are getting ready to do smart deliveries, meaning using the digital setup to transfer to the customers all the data related to the final testing that we do on the machine, and that makes them comfortable that the machine is in good shape as if their own pilots had tested personally. Therefore, on that basis, take delivery of the aircraft. This is something that we are working on since things are proceeding well. Nonetheless, we don't expect any significant speed up in the month of May, possibly more in June, and that's one of the reasons why also we're saying that Q2 is going to be the toughest one.
Just a follow-up on this issue. If you are continuing the production, but you do not deliver part of your product, there will be a quite significant absorption of net working capital in the second quarter. I clearly understand it's impossible to predict for the full year, but in second quarter, do you have an idea what could be the, or prepare us to what could be the impact on the free cash flow, which typically is not as bad as it used to be the first quarter?
On the second quarter, the free cash flow will have the double dynamics of having a push to the right of the cash-ins and a production plan, which is not perfectly aligned. The purchase plan that is not perfectly aligned to the production plan. We will continue to have some cash expenses or goods purchased, which are not adequately reduced versus what the market can absorb in terms of final products. This is going to be, you're right, a driver of higher than normal cash absorption in Q2.
Yeah. Okay. Thank you.
The next question is from Monica Bosio with Banca Intesa Sanpaolo. Please go ahead, madam.
Good evening. Thanks for taking my questions. As for the civil segment, I understood that the civil segment, as for the order intake, had a very low weight in the first quarter. Can you just remind me the weight of the civil segment on your total backlog and as for the backlog of helicopters and if you see some risks in terms of cancellation on this side? My second quarter is referring to the slide number 10. I know that the first quarter is the smallest contributor in terms of EBITDA, maybe if you can give us an indication of the trend just for March of the aerostructure, ATR, and helicopters, just to give a sense of what happened in March and for April and May, it could be worse. The very last question is.
I'm sorry to interrupt you. We have never seen the number month by month.
I'm sorry. Can I hear you well?
No, we have never seen the number of EBITDA month-by-month.
Okay. Just,
There are many discussions if it is valuable. As you know, the regulation now is changed, also on the quarterly result.
Okay.
We should go month by month. As we said, the second quarter will be worse than the first one, because the lockdown in the first quarter has been mainly March, but we have to remember that in reality some problems started in February, because some travel ban was already there in February, at the end of February. The main impact on the factories started in the north from the 8th of March, when there has been the red zone, and mainly afterwards, the 13th of March, when there has been the lockdown. In the second quarter, we have April of lockdown, May of partial lockdown. We gave you the numbers that there is an improvement in terms of presence and so on, but many activities are still blocked. It's clear that the second quarter will be worse than the first one.
Yeah. I was trying to figure out the magnitude of.
I'm sorry. If I can be a little bit impolite, it's useless.
No, okay. It's fine. Can you just give me an update on the civil weight of the backlog? Maybe if you just can give us an update on the financial charges for the fourth quarter, if you can give us an idea for the full year, because I've seen that they have increased in the first quarter, year-on-year.
The financial charges are exactly the same. There is a fair value change of EUR 30 million that we assume during the year will be absorbed.
Okay.
The first quarter is exactly the same as the previous quarter. The chart, I think, is pretty clear.
Okay. Thank you.
Yeah. On split between civil and military governmental, Monica, we can refer to page 18 of the presentation, where we do have the split for the revenue base. That is basically the way we have always, as you know, represented the business, and we had approximately 30% of revenues associated with the civil portion of the market.
Okay. Thank you very much. Thank you.
Sure.
The next question is from Christophe Menard with Kepler Cheuvreux. Please go ahead, sir.
Yes. Good evening, everyone. I hope you're well. I have three questions. The first one is, I may have missed it, but could you remind us what is the proportion of fixed cost versus variable cost in your cost structure at the moment? The second question is on the Aeronautics division. Trying to understand the drop in EBITDA. While I understand it's obviously fixed cost, ATR, you mentioned. If I remember well, ATR last year had a difficult Q1. Is it bearing most of the impact, or is it already Aerostructure as well? I'm asking the question because I looked at the volumes of delivery. Indeed, there's been a drop, yes, on 787 fuselage, but it's 36 versus 40 last year. You actually delivered more stabilizer than last year for the 787. It could be ATR fuselage.
Just trying to understand where is that coming from in terms of the EBITDA drop? The last question is more on defense, actually. Have you seen any impact from the drop in oil price from your Middle Eastern clients for defense related programs? I understand Kuwait is proceeding well, but have you seen less appetite for your defense products in terms of potential order intake?
Christophe, I'll take the first two. Alessandro will take the third. The fixed variable cost structure, what we can say is that we do have approximately EUR 400 million per month of costs associated with labor as well as costs that are part of the operational machine of the group. Rents that you pay, electricity to run the factories, clean up, and all the rest. Clearly, there is a big portion that is connected to the amount we produce. As you know, being a project company, the fixed variable subdivision is not fully applicable because the portion that is variable in reality is the one linked to how much we produce for today or for our stock. I hope the first part of my answer will give you a hint of where we are. On second question on aeronautics.
Aeronautics, we have laid out the breakdown of aeronautics as a sector performance by division. What was the driver of this delta year-over-year was mainly, in Aerostructure, the fact that we had lower productivity. As Alessandro described to you, there were fewer people in the factories for a number of days/weeks, and that determined an increase in cost, basically. As well as on aircraft, we have the two drivers. One, we had a slowdown in program execution that impacted both revenues as well as, consequently, margins. We had an issue both with the lower presence and lower productivity in the sites. For example, the engineering smart workers that Alessandro referenced before, a large portion of them was in aeronautics, in aircraft, and those, at the beginning, didn't have, for example, full IT equipment to operate from home, therefore their productivity was improvable.
Going back to Aerostructure. Out of the EUR 26 million, EUR 15 million is what we call the inefficiency of under-recovery of the activity. Which means people are present but are not fully utilized for activities, such as inefficiency due to COVID-19. Which is a major portion of the EUR 26 million reduction we are seeing. Talking of the reduction we are seeing. Talking of the demand from customers. Today, we are not seeing changes, for sure, on the program ongoing, but as well on the negotiation, were on the table at the beginning of the guidance. We have not opened a new negotiation in these countries for the time being, because for us now is really key to close the negotiation we are ongoing. We do not expect, at least at the beginning, an impact on pricing. Could be a delay of programs. This is what could happen.
That something which was expected to happen as a new order this year will be postponed at the following year. We have seen Korea already did some change in terms of allocation. For the time being, for sure, we don't have anything on the existing program.
Okay. Thank you very much.
The next question is from Gabriele Gambarova with Banca Akros. Please go ahead, sir.
Yes, thank you for taking my questions. On slide 10, you were so kind to detail the EBITA between Aerostructures, ATR, and Aircraft. I was wondering if you could provide me the numbers for Q1 2019 in order to understand what was the dynamic of these three sub-businesses, if possible.
Sure, Gabriele. In 2019, aircraft was EUR 59, while Aerostructure was - EUR 8, and ATR was -EUR 14.
Okay, fantastic. I wanted to ask you about the B787. You said that the rate of deliveries is going to come down in 2021 and 2022. Do you have already in mind a number of ship sets by month for 2020, 2021, 2022? Because we have read many statements from Boeing, and sincerely speaking, I don't know what kind of number I should put in my spreadsheets.
Sorry. For the time being, you have to utilize the official numbers for Boeing. Clearly, we have a slightly different perspective. I think that we have seen the official statement of Boeing. In reality, we deliver something more, and this is what you have to consider. They want to have some "spare capacity." Boeing gave to the market the rate for per the per year. You have to consider that we will deliver something more than what we are seeing there.
If I may, the price for any ship set is going to be revised, considering that the volumes will come down, or they are set in stone?
No. Sorry. We have been always very transparent.
Yeah.
Let's say that we have a price up to the 1,400, 06. It's correct, or 06 or 07, I don't remember, ship set. There will be a different price. If there is a slowdown in terms of production, we have a lower price set for a longer period of time.
Okay. Last question, very quick, on IFQ8 is a very important program for you. You mentioned some slowdown, but you also said that you will be able to pick up and recover this slowdown. The delivery, the milestones, you don't think are at risk, I guess?
Sorry. The point is that we are working, and we will achieve the milestones. The issue is this will be delivered there or not.
Okay.
Because we had a period in which we had some spare parts which were ready to be dispatched to Kuwait, but no one was entering Kuwait, so we cannot send the spare parts. In reality, we are not achieving the milestones because you can't go there. I'm not capable. We think that we will recover some of this delay, but it's not only up to us, it's also up to them.
Yeah. It's a problem of delivery more than Okay.
No, delivery, there is some area in which we have to work together. There could be some delay. For the time being, the milestones are respected.
Okay, perfect. Very kind. Thanks.
Gentlemen, there are no more questions.
Okay, I would like to thank all of you. Many thanks for your attention. Clearly, it is a tough time, but we are very positive because, as I said, the reaction of all the team has been really good. We continue to have a strong franchise with customers. We continue to have a very strong product portfolio. Last but not least, a very high backlog, which is not bad. The commercial capability of the company, I think, has been shown by last year, where we beat the guidance in terms of orders and the first quarter of this year. We are fully sure that the medium-term perspective of the company are not affected by these events. Thanks a lot.
Thank you.