Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Leonardo Third Quarter and Nine Months 2019 Results Presentation. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] 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.

Valeria Ricciotti: Good evening, ladies and gentlemen and welcome to our Q3 and nine months results conference call. I'm Valeria Ricciotti, Head of Investor Relations and Credit Rating Agencies.

For the presentation today, I'm very pleased to introduce you our CEO, Alessandro Profumo. He will be talking to you about our recent progress across Leonardo and placing that in the context of the execution of our Industrial Plan. Then today our CFO, Alessandra Genco will take you through the detailed financial results for the first nine months and outlook for the full year. At the end of the presentation, we will welcome your questions. I will now hand over to our CEO, Alessandro Profumo.

Alessandro Profumo: Many thanks, Valeria and good evening, everyone and thank you for joining our third quarter and nine months results call. The key messages from our results are that we had another quarter of progress delivering on our Industrial Plan. Overall, we are on track after the first nine months of this year. We have a good order intake across the group at €8.6 billion. Good revenue growth across the group at €9.1 billion up 11% year-on-year and profitability at 7.5% in line with our plan.

Last, but not least that the free operating cash flow is on track reflecting the user seasonality. So we are confirming our 2019 guidance with all

main businesses: Helicopters, Defense Electronics & Security; and Aeronautics performing in line in the time stated ahead of our expectations. While ATR and Space manufacturing joint ventures are experiencing lower contribution. And you'll also see that we are announcing today, a tender offer to repurchase our U.S. listed notes and start reducing interest expenses to be paid over the remaining life of the 2039 and 2040 bonds and this will be NPV materially positive.

Alessandra will cover this later together with the financial performance of the business. Let me now just mention some key things that we have shown during our recent Investor Day in October to be straight to you -- straight our progress how we are delivering to our businesses across the group and where we are in our journey. As you know, we are fully focused on executing our Industrial Plan aimed at long-term sustainable growth. So Helicopters we are on track to meet our targets. We are successfully achieving sustainable growth.

We are a strong well-diversified business. Our successes and our capabilities in military and customer support are offsetting the business of the civil market. And importantly, the plan restore profitability is well on track. We are a great product family and we are investing in new products and new technologies important for building an attractive long-term business. Electronics is growing from trend-to-transfer.

We have key goals to raise performance. We are scaling in the right direction. This is a high-quality business with a positive momentum. We are continuing to leverage best practice in Electronics to challenge and address the underperforming businesses. To give you one example, one year ago we had a problem under-delivering for our customer [indiscernible].

This is fixed and one year later we are delivering earlier than expected. And thanks to that we are now in talks about future partnership with this client. So a successful example of how a new structure discipline and focus in execution can lead to a significant turnaround. Across the business we are also building a long-term sustainable future with new programs. Tempest plays well to our unique strengths.

We are target to work on the project and this gives us a huge opportunity in the long run. Leonardo DRS is growing strongly in the attractive U.S. market with excellent positioning in growth areas that are key priorities for the U.S. DoD. We are seeing very strong top-line increase -- increases and a really good soft backlog and we expect to increase profitability thanks to the conversion of existing programs from lower margin developing type to higher-margin production products.

And in Aeronautics, our aircraft is in very good shape it's building success through important program such as EFA -- the Eurofighter program and those achieving commercial success on programs where we have invested like the M-346 FA. In addition, Aerostructures' performance is improving in line with expectations. And then API in Space manufacturing joint ventures both for different reasons have shown a weaker performance because of short-term headwinds. Alessandra will cover this later, but I want to emphasize that this key message have a good long-term prospect based on good market position. So in summary, we can see our plans being well-delivered through the businesses across the group.

And we can also see long-term growth drivers. We are on track in executing our Industrial Plan. We remain focused on execution, maintaining continued commercial momentum, leading to additional top-line growth, continuing to improve profitability also through strict cost control with a strong commitment to a solid financial strategy reducing gross debt and interest expenses and investing in new products and technologies to compete successfully in the market to build our long-term sustainable future. And on that note, now let me hand you over to Alessandra to take you through the details of the first nine months results.

Alessandra Genco: Thank you, Alessandro, and good evening, everyone.

We have had another quarter of progress in executing and delivering our plan. Overall, we have seen a good nine months and we are on track. We are pleased with the performance and progress in key areas of the group and we are seeing positive good momentum across the main businesses, especially in order intake and top-line. We are growing internationally and we can see long-term growth drivers across the group. So, in summary, good results in Q3 and in the first nine months.

Strong order intake across the group of €8.6 billion. Considering that last year the figure included the €3 billion contribution of the NH90 Qatar contract. This year we had an especially strong performance in the U.S. with our company Leonardo DRS and also in Italy. We can see really positive momentum in export markets.

Good top line revenue growth €9.1 billion up 11% thanks to Defense, Electronics & Security, but also Aeronautics. EBITA at €686 million and group return on sales of 7.5% showing good progress in main businesses more than offsetting the weakness in ATR and Space manufacturing joint ventures. Net income of €465 million benefiting from improved operating results, lower restructuring cost and lower EPA. Cash flow negative at the 9-month stage reflecting the usual seasonality and the cash profile of some contracts namely EFA Kuwait and NH90 Qatar. So overall, we are on track at the 9-month stage and we are confirming full-year guidance in the ranges previously set out.

Notwithstanding some short-term challenges in ATR and Space manufacturing which we flagged earlier in the year. As ever Q4 is the biggest contributor to the full year. Now let's look in more detail how the progress in the business has driven the group performance in the first nine months. Starting with order intake. We have seen strong order intake across the group with €8.6 billion of total new orders and a strong commercial performance reflecting successes across the group in many key markets.

We are very pleased with this. As mentioned, remember that last year's comparable figure included the significant €3billion NH90 Qatar helicopter contract. We are seeing some really positive momentum across the group in export markets, in the U.S and in other domestic markets like Italy. Looking at the businesses. Helicopters achieved €2.2 billion in new orders in the first nine months, adding to a significant backlog of €11.5 billion.

We have been achieving good success in the military market. For example, the important NH90 order for 23 helicopters for the Spanish Ministry of Defense and the AW101 for Poland, all this together with good order intake for customer support and training activity. In Defense Electronics, we also saw a strong commercial performance, with order intake of €4.6 billion, up 30% compared to the same period of 2018. In the electronics division, we saw good export orders for naval combat systems as well as for airborne systems in the U.K. and in the automation business for baggage handling systems.

In the U.S., Leonardo DRS continued its strong performance. Here we are very well-positioned on a number of programs for the U.S. DoD, which underpin future revenue growth. Leonardo DRS has been winning good quality contracts, which we have highlighted to you before. Like for example, the first contract for the supply to the U.S.

Army of active protection systems for tanks and the supply of computers and portable electronic devices again to the U.S. Army. We are investing much time and effort in developmental contracts that position us well for future attractive production phases. On top of all of this and not shown in the number, remember that Leonardo DRS enjoyed a significant soft backlog of potential orders which again underpins visibility and growth for the future. In Aeronautics, order intake of €two billion was achieved with great performance, up from €1.4 billion of last year.

75% of these orders were achieved in the Aircraft Division. And among these major ones include the order for 13 additional M-345 trainer aircraft for the Italian Air Force, plus related logistical support for five years, the first order for six M-346 fighter attack and other important customer order -- customer support orders related to EFA F-35 and other programs. And meanwhile, in the first nine months also Aerostructures won orders to supply 50 more fuselage section for the B787 and 37 ATR sections. So, overall, we are really pleased with this level of commercial activity surrounding order intake. And while there is more to do to achieve our targets, we are comfortable that we remain on track for the full year.

Moving on to revenues, which show the strong increase of approximately 11%, reaching €9.1 billion for the group. We saw topline growth all across our businesses. A key driver was Defense Electronics where revenues grew 12.5% to €4.3 billion. With good performances in areas like Airborne Systems executing its solid backlog and Leonardo DRS particularly strong, showing growth in revenues of 18% to €1.8 billion. A reflection of its winning key contracts and delivering of those wins as we have mentioned before.

Another topline growth driver for us was Aeronautics, where revenues in the first nine months grew 13.8% to €2.3 billion. We saw growth in aircraft activities, driven by EFA Kuwait, while Aerostructures increased volumes, thanks to the B787 program and the A220. At the same time, Helicopters delivered well, showing steady growth of 3% to €2.7 billion. We are pleased with these volumes and the mix containing attractive military and customer support activities. So, in overall group terms, a good top line performance with all businesses delivering.

Talking now about EBITA and profitability in the first nine months. Group EBITA was €686 million, up 8.5% from last year with a return on sales of 7.5%. This shows a good performance on track with our plan. The EBITA reflects improving operating performance across the group, offsetting the lower contribution from the ATR and the Space manufacturing joint venture. Looking at the main businesses in more detail.

Helicopters' nine months EBITA was €270 million, up nearly 25% year-over-year, driven by higher revenues, a robust industrial performance and by the benefit of favorable product mix due to the higher contribution from military and customer support and training activities, as well as from the revised terms of the U.K. pension scheme achieved in the last quarter in Q2. In Defense Electronics, nine months EBITA was €342 million, up 19% from last year on the back of higher volumes and a very good growth at Leonardo DRS, where EBITA grew 38% to $160 million and return on sale continued at an improving path to 6.4%. In Aeronautics, EBITA was at a similar level at €165 million, with strong levels of profitability in the Aircraft Division, progress in Aerostructures, which was offset by weaker results in ATR, where as we expected, the challenges continue to be tough in Q3, with delays in deliveries and sales mix at lower margins than in recent years. The contribution from ATR in the first nine months was €4 million compared to €31 million the previous year.

Then in Space, in the first nine months, we also saw a lower contribution and continuing challenges in the Space manufacturing business as we said at the half year presentation. Elsewhere, our other joint ventures, Telespazio and MBDA performed well and in line with expectations. We have also been continuing to invest in central functions within the corporate with the goal to continue to build the infrastructure and the backbone abroad, especially on the international commercial side. But again, looking at the group overall, we see an EBITA and profitability performance on track with our plan. Looking further down to the bottom line, the net result benefited from our improved operating results, writing to €465 million, compared to €263 million last year.

There are a number of positive factors here. You can see significantly reduced restructuring costs. These fell materially from €186 million -- €187 million to only €80 million in the first nine months of 2019. Last year's figure included the one-off restructuring cost of the early retirement plan agreed with the unions in Italy, which accounted for approximately €170 million. We still expect some restructuring costs for the full year and they will be in line with the guidance already provided that is less than €100 million.

PPA expenses were lower being mainly linked to the original Leonardo DRS acquisition. And we have had a positive effect from the release of the provision set against the guarantees given up on the disposal of AnsaldoBreda. Our net financial expenses in the nine months to September were in line with expectations. You see that we are also announcing today a tender offer to repurchase any in all of our U.S. listed notes outstanding for a total amount of €432 million.

This is in line with the financial strategy to lower financial expenses. The repurchase will have a materially positive NPV for us. The tender offer will close on November 15. And depending on the take-up, we see a charge to this year's P&L of up to €75 million if all the bonds were to be tendered as the notes are trading above par in the market. Then talking about group free operating cash flow.

We have seen the usual seasonal outflow in the period to September together with the different profile of some programs such as EFA Kuwait and NH90 Qatar where in Q3 2018 we had received advanced payments. We are very focused on achieving our cash flow targets. And as ever, Q4 is the key quarter of the year. We are on track for full year and we are seeing good progress across all businesses. Now to sum up and to see how we see the full year.

What stands out is our commercial performance and positive momentum. Our strong top line growth across our businesses and the delivering of our profitability in Helicopters, Defense Electronics & Security as well as Aeronautics. As you have heard, our main businesses has performed well in the first nine months. All-in-all in line with our expectations. At the same time, we have seen some weakness in the contribution from ATR and Space manufacturing.

And these strategic joint ventures will perform below expectations for the full year. For ATR, the weaker performance is mainly due to an unfavorable mix and some shift in deliveries. ATR remains an excellent business is a leader in its market. Customers really like its products and we are investing in new versions for example the short takeoff and landing version the stall, which we have just launched. Management priority has been securing a solid backlog to support a stronger and steadier revenue outlook.

For Space manufacturing as confirmed recently by our partner Thales, the business is underperforming due to market weakness, which is expected to be continuing in 2020. So overall for Space, EBITA in the year will be materially lower than last year. That said, we remain confident in the longer-term strength and prospects of the Space manufacturing business. So for the group as a whole looking at the full year, we are comfortable that we will be within our group guidance ranges previously set out. We can be pleased with our performance in the first nine months of this year in the continued execution of our plans especially our commercial performance in key markets, the good revenue growth and the solid performance of our main businesses.

Overall, we are on track and where we expected to be. We are pushing hard to execute on our plan and meet our targets. And with that, I will hand it back over to Valeria, who will chair the Q&A session. Thank you.

Valeria Ricciotti: Okay.

We are ready for questions.

Operator: Excuse me. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alessandro Pozzi of Mediobanca.

Alessandro Pozzi: Thank you for taking my two questions. The first one is on Electronics. I think we've seen some performance in terms of revenues there. I was wondering…

Alessandra Genco: Sorry. Sorry, could you please restart asking the question? We have been cut out.

Alessandro Profumo: Because we have been cut out for a while.

Alessandro Pozzi: Okay. So on performance in terms of revenues from DRS, I was wondering whether we should see that continuing over the next few quarters? And I was wondering whether the contribution is coming from one main contract or it's spread across different contracts in the U.S. And also my second question is on Aeronautics. I think we've seen an increase in revenues, but the profitability has not followed through.

Especially in Q3, I think it was quite low. I was wondering if you can give us maybe a bit more color on that. Thank you.

Alessandra Genco: Okay. So on DRS the revenue growth is projected to continue.

We have had two years in a row of double-digit growth in the business and we are very pleased with that. And that is the result of a strong order intake that the company has managed to achieve both in 2018 and in 2019 thus far. So we expect that to continue over the coming years and our expectation is that growth is going to be above the peer group in the U.S. With respect to composition of that growth, it will be spread quite evenly across all business segments. Moving on to your second question.

Aeronautics the business -- the Aeronautics business in our segment reportings includes three elements the Aircraft Division, the Aerostructures Division, and ATR. So what you see reflected in the profitability performance in the nine months is also the ATR performance, which year-over-year as we have mentioned has gone down, because of a lower number of deliveries and a less favorable mix. While on the other hand, Aircraft is continuing to perform really strongly with both an increase in top line as well as continued very strong profitability. And Aerostructures is making progress on the turnaround plan whereby production efficiencies are being improved.

Alessandro Pozzi: On ATR, are we seeing a trough for the profitability of ATR, or there's more remedial action to be taken maybe in Q4?

Alessandro Profumo: We do expect some recovery in Q4, the new backlog is pretty good.

So the new order book is good. And so we expect that there would be a significant increase in deliveries. But we want to achieve the level of last year. The backlog is close to €3.7 billion. So it's very relevant.

The feeling we have that the company will continue to perform well as again there has been a reduction in the deliveries in the first nine months due to specific topic, but the portfolio is moving quite positively.

Alessandro Pozzi: Okay. Thank you very much.

Operator: The next question is from Andrew Humphrey of Morgan Stanley. Please go ahead.

Andrew Humphrey: Hi, there. Thank you for taking my questions. The first one I wanted to ask was really around book-to-bill in the quarter. And I can see -- I appreciate you had a tough comp on helicopters last year. But book-to-bill on helicopters this year, but also the European Electronics business and Aeronautics was below 1.

So I wonder for each of those segments, could you give a comment on what is in forming that order weakness? And secondly on the strong growth in Aeronautics in the quarter, could you give us some indication of how much of that is driven by Eurofighter?

Alessandra Genco: Sure Andrew. So with respect to book-to-bill, the book-to-bill is quite lumpy as you know. The group has a backlog of approximately the three years of production €36 billion of backlog. So I would not necessarily focus on a quarter-by-quarter booking parameter. What is relevant is that we are focused on the year-end figure and we are comfortable with the year-end target that we have set for ourselves earlier in the year.

And that is pretty much the value throughout the different areas of the group. On Aeronautics clearly EFA Kuwait is a very good contributor of profitability. Together with the customer support approximately 25% of the Aeronautics business is made of customer support activities. And in general, all the other programs within the businesses are doing well.

Alessandro Profumo: Then if I can add clearly if we have and we always hope to have some jumbo order like the around €3 billion from Qatar, it's a 5000 assets total we have received in the helicopter business.

We have a positive impact. There is some area where we can have significant orders one is the Eurofighter order. We know Kuwait. The other market is helicopter, we are not seeing any other opportunities like that. But because you have to remember that this order has been on the NH90 because of the fact that Qatar decided to have us as prime which is I think very important in order to show the stability of our capabilities because to be the prime is very important.

And the third area where we can have significant orders is the naval business, where usually we receive a significant order on combat management system with the missiles and the weapon component that partially is divested to ourselves for [indiscernible] with Oto Melara and partially is reverted to MBDA which is a company where we have 25%. So back -- what is important is that, I think the largest order we've seen this year is €400 million. And despite of that, we have a book of new orders of €8.5 billion which shows us the solidity of our commercial activity.

Andrew Humphrey: But on that growth scenario and also if I can follow-up, it seems that you've seen significant growth in Aeronautics revenue year-on-year in Q3. But it hasn't at this point dropped through to profit.

So I wanted to try and get to the bottom of are there kind of specific program aspects that are driving that? And how should we think about the evolution of that margin?

Alessandro Profumo: As Alessandra has said before, you have to consider the ATR contribution reduction. Then on aircraft this is mainly work in progress in Kuwait. And not necessarily booked the profitability on a quarterly basis because it depends on what we are dealing. But the aircraft, so talking of our division, which is based on Euro 5 for tornado trainers and C27-J is solidly double-digit. In the nine months slightly better than last year.

Andrew Humphrey: Thank you.

Operator: The next question is from Martino Ambroggi of Equita. Please go ahead.

Martino Ambroggi: Good evening everybody. The first question is on the helicopters because in the first nine months you got 9.9 EBITA margin.

Usually Q4 is stronger than the rest of the year. So you will exceed the 10% target that you had in 2020. So just if you could elaborate on what is your expectation for next year since it seems to be in advanced compared to the original target?

Alessandro Profumo: But we are in line with our claim to be double-digit by 2020. So by 2020 there is also 2019. But by 2020 we will be double digit.

Martino Ambroggi: So but presumably you will be double-digit also this year no?

Alessandro Profumo: I'd say, yes, and we issued the number.

Martino Ambroggi: Okay. And the second is quantitative question on the financial cost. Because you guided for slightly less than €300 million and it seems to be much better. Obviously there is the one-off the €75 million for the bonds buyback.

But I was asking you one what is the updated indication for the financial cost ex the one-off for the bonds buyback? And what is the benefit you expect on this line going forward?

Alessandra Genco: So Martino on the financial cost, yes your recollection is right. The guidance was approximately 3 -- below €300 million. And we are approximately confirming that guidance. And on top there will be a charge for the buyback, which again is going to be max of €75 million so we expect that 100% of the bonds were to be tendered. So that's enough to figure.

Martino Ambroggi: Okay. But the €300 million was not included in the figure or we can sum up also this in the €300 million?

Alessandra Genco: There could be some €3 million from that €300 million full figure that you can do, but not major.

Martino Ambroggi: Okay. And the very last on ATR. Just to figure out what is the real profitability of the remaining business.

Sorry, if I missed the figure. But last year ATR contributed with €12 million. Can we have an idea what is the contribution positive or negative for the current year in absolute value?

Alessandra Genco: Yeah. So for the nine months, we mentioned we have €9 million in 2019 versus €31 million last year. And for the full year, our expectation is that, we will be below last year levels, because again, we will be below in terms of number of deliveries.

Martino Ambroggi: Okay. Okay. Thank you.

Alessandra Genco: Sure.

Operator: The next question is from Gabriele Gambarova of Banca Akros.

Please go ahead.

Gabriele Gambarova: Yes. Thank you for taking my question. Regarding the other and elimination item for DDA, what is your idea for the full year 2019 please?

Alessandra Genco: Gabriel, you were mentioning other and elimination?

Gabriele Gambarova: Yes, yes.

Alessandra Genco: So the other line is as you know composed of various elements, including the corporate cost.

As you may recall Gabriele, when we announced the Industrial Plan one of the elements supporting the target achievement was the strengthening of the central functions, mainly related to commercial exports in order to increase our penetration in key international markets. And we are progressing on that path. And there are a number of initiatives that we are working on. And that's what you see summarized in that line item.

Gabriele Gambarova: Okay.

But I don't know for Q4 we can assume – basically in Q3 they were almost stable. We could assume that they will remain almost stable even in Q4 or there will be an…

Alessandra Genco: In this case, the year-over-year comparison I would say is not particularly meaningful. So I would think more in terms of how we would describe the situation in the second quarter meaning that, there is a progress quarter-by-quarter on our activities. It may not be linear throughout the year, but there will be a higher figure at year-end compared to what you see in the nine-month results which is as per the plan.

Gabriele Gambarova: Okay.

And second question, if I may. On – again on Q4, basically, if I consider your fiscal year 2019 guidance for revenues it implicitly tells me that there will be a revenue fall between 16% and 3% year-over-year. I don't think there is reason to believe that, let's say revenues will come down on a year-over-year basis in Q4. Am I wrong, or the guidance is a little bit cautious on this?

Alessandra Genco: The fourth year is always the most important for us and always the most exciting to dig through. So our guidance as of now we confirm the guidance that we had for the full year which is in the range of €12.5 billion to €13 billion.

And we'll see how things will develop, and we may have some solid continued progress for the nine months. But as of now we feel that confirming that figure range is adequate.

Gabriele Gambarova: Okay. Thank you.

Operator: The next question is from Monica Bosio of Banca IMI.

Please go ahead.

Monica Bosio: Yes. Good evening, and thanks for taking my question. There is just only one remaining from my side. It's, can you elaborate please a little bit more on the soft backlog of DRS? Can you give just an indication like quantitative indication? And second is a housekeeping question.

I've noticed that the tax rate in the third quarter was particularly low. Can you just give us some – elaborate a little bit on this? And can you give us any indication for the full year just an update? Thank you very much.

Alessandro Profumo: Okay. Many thanks. On DRS in the U.S.

you can book an order as order when expanded by the DOD by the government. So what you see in the – our backlog of DRS is exactly what has been already funded. We had a similar situation for the 84 helicopters that have been ordered by the U.S. to our division our Helicopter division. We booked on the already funded helicopters.

But on a statistical base they used say to us that when you are in a program it's usually at a certain level, the program is funded also afterwards, because of this reach in cost for the customer to be the guide. So you can figure out that statistically considering the past what is the amount of the existing orders, so that we'll continue to be funded. And in this perspective and it's a very solid statistic as you can imagine because we have a long Easter behind us. What we are seeing is that you can multiply for quarter by three. So, -- which means, that the total backlog is more or less four times, what you are seeing as a backlog in the groups.

Monica Bosio: Perfect, very clear, thanks.

Alessandro Profumo: Okay, the second piece of the question?

Alessandra Genco: On tax, Monica the tax rate for the year is confirmed between 25%, 27%. What happens on a quarterly basis is the result of very tax-specific adjustments. And adding and subtracting back. So I would not take that as a record point for the full year, where again the rate is around 25%.

Monica Bosio: Okay. Thank you very much.

Alessandro Profumo: Thank you.

Operator: The next question is from Nick Cunningham of Agency Partners. Please go ahead.

Nick Cunningham: Thank you. Good evening, everybody. I know we've talked about the Aeronautics segment revenues already. But it is up 50% in the third quarter itself which is a really big jump. And so I just wanted to try and pin that down a little bit more.

I mean, I'm assuming that most of that is some revenue recognition of Kuwait rather than growth in Aerostructures. So I'd like to check that. And then secondly, because that, profits were flat, there's obviously big moving parts within that with ATR down. But again, does that imply that actually that profit recognition on that initial lump of Kuwait revenue is just going to be low, because you're so early in the program? And is that a quarterly thing like we'll get more of it in Q4? Or is that a year-to-year thing that actually we need to wait until next year or the year after? And then second question. DRS profit margin was much better than I expected good top line growth.

But does that suggest that actually you are seeing some maturity in the programs now. And that we could actually see really quite significant move back towards if you like normal margins over the next year or two? Thank you.

Alessandra Genco: Okay, Nick. So on Aeronautics you are absolutely right. The main driver of the increase in revenues is EFA Kuwait, absolutely.

There is also a certain increase in the JSF revenues. So those are the segments that determine the delta. With respect to profitability there is a mix of phenomenon. There is certainly a component of pass-through activities that we have on the program, because as you know we are prime of an €8 billion contract and the large portion of the activity is also done by our joint -- our partners in the EFA Consortium. Therefore on those activities the margins are lower.

But again, that's very typical for the business. Nonetheless, the higher -- the highest impact on the segment profitability number that you see is associated with the ATR change in profitability year-over-year. On DRS, margin for DRS. The margins in DRS are improving. They're benefiting from a leverage effect, because volumes are really ramping up at double-digit rates for two consecutive years.

So you see a tremendous operating leverage effect. And gradually we are seeing a change in mix with and especially next year we'll see lower contribution from developed new contracts, carrying lower margins and higher contribution from production contracts, which carry higher margins. So this change in mix will certainly move the profitability upwards.

Nick Cunningham: Thank you. Just a brief follow-up on DRS.

If you look at if you like the product mix of the business. And what the DoD kind of allows contractors to make, it depends a lot on that product mix. Is DRS really, if you like an 11% sort of peak of cycle business or potentially a 15% peak of cycle business?

Alessandro Profumo: Nick, I think, there is no mid-tier American company that is 15%. Sorry we cannot be higher than the best-in-class if we talk of mid-tier. If we talk of larger over the first year, clearly the AR and IR with Aerospace thanks to specific programs.

So we do expect to be very well-positioned in the mid-tier segment, as we said. And you remember that we always said, that I think, the figure over time be double digit.

Nick Cunningham: Thank you. That's very clear. Thanks.

Alessandro Profumo: Please sorry if I finished. It is also related to the fact that sooner or later there will be a sort of normalization in the order intake. The peak will continue to grow 15% in terms of new orders. These new orders will dilute the results. But the bottom line will be higher.

So it's a very good way to be diluted.

Nick Cunningham: Thank you.

Valeria Ricciotti: Thank you, all of you. As usual, the Investor Relations team is available for follow-up calls.

Alessandra Genco: Thank you.

Alessandro Profumo: Many thanks.

Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.