Aerospace Industry Taxonomy and Market Overview

USTITEM project final version (Upstream Satellites Technology Improvement Towards Enlarging Market, USTITEM) Mauro Aliano Martino Lo Cascio FUET team USTITEM project 1

Contents 1. Market overview and Thales Alenia Spazio 2. USTITEM project and matrix hypotheses 3. Other assumptions 4. Prudential approach and measures 5. State and region aids 6. Additional results 1. Sensitive analysis 2. Impact of state contribution 7. Overview for next operational steps to develop USTITEM project 2

A taxonomy of the aerospace branches Upstream segment: design, manufacture, assembly, launch, functioning, maintenance, monitoring and repair; Downstream segment: data and knowledge derived from the space for Earth-related objectives (products and services that support them). Upstream segment can be seen as the provision of space technology, whereas the downstream segment can be seen as the exploitation of space technology (2018) Growing the Space Economy: The Downstream Segment as a Driver Market overview USTITEM project 3

Upstream vs Downstream in a nutshell At 2016 in the world (2018, Growing the Space Economy: The Downstream Segment as a Driver): Upstream 77 bln of USD Downstream 177 bln of USD (source:2018, Growing the Space Economy: The Downstream Segment as a Driver): Following The space alliance hand book (2017), the branches EO and Meteo manufacturing are excepted almost double over the next 10 years. Market overview USTITEM project 4

Upstream vs downstream: push or pull Innovation Upstream Downstream Market Down-stream: technology pull or Market pull? Market overview USTITEM project

Bryce world overview Market overview USTITEM project

The OECD cycles Cycles Pre-space age -1 Dates 1926-1942 Description First rockets (from Goddard to the V2) Military race for intercontinental ballistic missiles, first satellite on orbit (i.e. Sputnik) Pre-space age 0 1943-1957 Space race (from Sputnik to the end of the Apollo era), beginning of military applications (e.g. spy satellites), first humans in space, robotic space exploration Cycle 1 1958-1972 First space stations (Skylab, Salyut) and shuttles (US space shuttle, Buran), further development of military applications (GPS, Glonass), beginning of civilian and commercial applications (earth observation, telecommunications), emergence of new actors (Europe, Japan, China) Cycle 2 1973-1986 Second generation of space stations (Mir, ISS), stronger role of space applications in militaries, further development of civilian and commercial applications (Landsat, Spot Image, satellite television), with more actors entering markets, and many space technology transfers at the end of cold war Cycle 3 1987-2002 Ubiquitous use of space applications in various fields thanks to digitalisation (strong rise of downstream activities), new generation of space systems (small satellites) prompted by integration of breakthroughs in micro-electronics, computers, and material sciences, globalisation of space activities (large and very small national space programmes coexist, development of global value chains) Cycle 4 2003-2018 Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project 7

The OECD cycles (2) Growing uses of satellite infrastructure outputs (signals, data) in mass-market products and possibly for global monitoring of treaties (land, ocean, climate), third generation of space stations, extensive mapping of solar system and beyond thanks to new telescopes and robotic missions, new space activities coming of age (e.g. new human- rated space launchers, in-orbit servicing) Cycle 5 2018-2033 Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project 8

Space launches in 2018 Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project

Number of successful launches Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project 10

Launch industry: Europe is growing Europe is growing Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project 11

Very small satellites launches Very small satellites launches exponential growth couple with large cycle movement Source: OECD The Space Economy in Figures How Space Contributes to the Global Economy Market overview USTITEM project 12

The evolution of technology Cost of launchesFrom 18.000 USD per KG in 1970 to 2.700 per KG in 2018 2 billions of private investment in 2018 23 unicorn in 2018 Market overview USTITEM project 13

The evolution of technology Cost of launches: from 18.000 USD per KG in 1970 to 2.700 per KG in 2018; 2 billions of private investment in 2018 23 unicorn in 2018. Market overview USTITEM project 14

Thales group key figures Order book: 32.3 mln of euro Order in take: 16 bln of euro Sales: 15 bln of euro EBITDA: 1, 68 bln of euro Market overview USTITEM project 15

Thales Alenia Italia spa Total revenues (2018): 707.31 mln of euro Profit (2018): 32 mln of euro (28 in 2016 and 24 in 2017) Magnitude order by which the USTITEM project must be evaluated: from 9% to 25% of 2016 2018 period profit. Market overview USTITEM project 16

Leonardo key figures Order in take: 9.6 bn of euro Revenues: 12.4 bn of euro EBITDA: 510 mln of euro USTITEM project 17

Summing up Future satellite market expansion doubles world economy and trade; High variability in satellite dimension ; VSS (Very Small Satellites) exponential past trend coupled with large cycle fluctuations; Strategical need: flexibility in satellites dimension supply to cope market growth (for the next 10 year); To do this, we present two alternative assumptions: Building an automated facility for Satellite Assembly, Integration and Test (AIT) activities; Rearranging the current production process in order to automatize the current facility. Market overview USTITEM project 18

USTITEM project and Investment hypotheses 10 mln: only machinery and system investments, in the current production site (first wave); 55 mln: new facility, changing production site in a wider area (second wave): Machinery and system 27 mln Other 28 mln TVT CHAMBER THERMAL CHAMBER VIBRATION TEST SYSTEM MEASUREMENT OF MASS AND MOMENT OF INERTIA SYSTEM COMPACT ANTENNA TEST RANGE (CATR) SOLAR ARRAY DEPLOYMENT SYSTEM (SADR) USTITEM project Land, building and related costs USTITEM project 19

Production hypotheses The lack of above investments cause: overloads production (repercussion on raw materials costs); manufacturing processes are inadequate ( repercussion on CCPII current costs). We can make 4 hypotheses to overcome troubles: In HP 1.1 and HP 1.2, CCPII current costs fall only of 10% (in relation 10 mln investments in machinery and system) ; in HP 2.1 and HP 2.2 (27mln in machinery and system investments) CCPII current costs fall of 20%; In HP 1.2 raw materials costs fall only of 3-4% (in proportion to machinery and system investments) instead of HP 2.2 where raw materials cost fall of 10% . USTITEM project USTITEM project 20

Hypotheses matrix - Scenarios by FUET team and Competence Center No falls of current raw materials Raw materials cost falls of 3-4% Raw materials cost falls of 10% CCPII current cost falls (10%) HP 1.1 HP 1.2 - CCPII current cost falls (20%) HP 2.1 - HP 2.2 Only machinery and system investments (10 mln) New Facility (55 mln) HP 1.1, HP 1.2 HP 2.1, HP 2.2 USTITEM project USTITEM project 21

Other assumptions Financial charge (2.20% per year)*; Duration loans 5 (HP 1.1 and 1.2) and 10 years (HP 2.1 and 2.2) ; Fixed installment repayment ammortamento francese); Obsolescence cost equals 400 k for the first year**(costs not incurred for HP 2.1 and HP 2.2) with an estimated annual growth of 5%. *BTP 10 year yield (1.40% - Italy Generic Govt 10Y Yield)+ spread (80 basis points) ** provided by Competence Center plan (c.d. Other assumptions USTITEM project 22

Prudential approach Cost reduction= change in profit (prudential approach) Measures: Payback period; ROI; IRR. The impact of region and state aids: Innovation process (outright grants); Employment (employment incentives); Tax benefits; Impact of non-repayable contribution on: ROI; Payback period; IRR. How costs reduction can repays the additional investment: Prudential approach USTITEM project 23

Savings and payback period HP 1.2 Cumulative savings (mln di euro) Cumulative savings (mln di euro) 16 16 14 14 12 12 10 financial charge 10 8 saving raw net saving 6 8 saving (personnel costs) investment 4 6 2 4 0 2 2022 2023 2024 2025 2026 -2 0 2022 2023 2024 2025 2026 ROI (annualized) = 5-6% Prudential approach USTITEM project 24

Incremental cumulative Cash Flow HP 1.2 3.00 2.00 1.00 Mln of euro - 1-giu-20 1-dic-20 1-giu-21 1-dic-21 1-giu-22 1-dic-22 1-giu-23 1-dic-23 1-giu-24 1-dic-24 1-giu-25 1-dic-25 1-giu-26 1-dic-26 1-giu-27 1-dic-27 1-giu-28 1-dic-28 1-mar-21 1-mar-22 1-mar-23 1-mar-24 1-mar-25 1-mar-26 1-mar-27 1-mar-28 1-set-20 1-set-21 1-set-22 1-set-23 1-set-24 1-set-25 1-set-26 1-set-27 1-set-28 (1.00) (2.00) (3.00) (4.00) IRR = 3% *first installment of loan 30 Jun 2020. First saving : Q3 2021. Prudential approach USTITEM project 25

Savings and payback period HP 2.2 Cumulative savings Cumulative savings 100 90 80 saving raw 80 70 obsolescence 60 60 local rent cost 40 50 net saving 40 finance charge investment 20 30 saving (personnel costs) 0 20 10 -20 0 2022202320242025202620272028202920302031 ROI (annualized) = 7%* *% of residual value of new facility after 10 years : 80% Prudential approach USTITEM project 26

Impact on Income Statement 2020 2021 2022 1,38 - 2,29 - 0,99 - 8,08 2023 1,38 - 2,29 - 0,87 - 8,76 2024 1,38 - 2,29 - 0,76 - 8,78 2025 1,38 - 2,29 - 0,64 - 9,70 2026 1,38 - 2,29 - 0,52 - 8,17 2027 1,38 - 2,29 - 0,39 - 8,77 2028 1,38 - 2,29 - 0,26 - 8,91 2029 1,38 - 2,29 - 0,13 - 8,94 2030 1,38 - 2,29 - 2031 1,38 - 2,29 - building depreciation plant depreciation positive cost negative cost - 1,21 - 1,10 8,98 8,83 saving (mln of euro) - 1,21 - 1,10 3,42 4,22 4,36 5,40 3,98 4,71 4,98 5,14 5,31 5,17 Hypotheses: Building depreciation: 5% (20 years) Plant depreciation: 12% ( 8-9 years) Positive cost: impact of financial charge Negative cost: saving USTITEM project 27

HP 2.2 with 60 mln of investment Key figure ROI= 6.2% Payback: 7-8 years IRR: 5.4% Income statement 2020 2021 2022 1,50 - 2,50 - 1,08 - 8,08 2023 1,50 - 2,50 - 0,95 - 8,76 2024 1,50 - 2,50 - 0,83 - 8,78 2025 1,50 - 2,50 - 0,70 - 9,70 2026 1,50 - 2,50 - 0,56 - 8,17 2027 1,50 - 2,50 - 0,43 - 8,77 2028 1,50 - 2,50 - 0,29 - 8,91 2029 1,50 - 2,50 - 0,15 - 8,94 2030 1,50 - 2,50 - 2031 1,50 - 2,50 - building depreciation plant depreciation positive cost negative cost - 1,32 - 1,20 8,98 8,83 saving (mln of euro) - 1,32 - 1,20 3,00 3,81 3,95 5,01 3,60 4,34 4,62 4,79 4,98 4,83 USTITEM project 28

HP 2.2 with 55 mln of investment (9.5% of interest rate) Key figure ROI= 4.29 % Payback: over 10 years IRR: 5.26 % Key figure ROI= 6.78 % Payback: 8-9 years IRR: 7.16 % CCPPI saving 25% Raw material 15% USTITEM project 29

HP 2.2 with 60 mln of investment (9.5% of interest rate) Key figure ROI= 6.17% Payback: 8-9 years IRR: 7 % Key figure ROI= 3.78% Payback: over 10 years IRR: 5.2 % CCPPI saving 25% Raw material 15% USTITEM project 30

Incremental Cumulative Cash Flow HP 2.2 30.00 25.00 20.00 Mln of euro 15.00 10.00 5.00 - 1-giu-20 1-dic-23 1-giu-27 1-dic-30 1-ago-21 1-lug-24 1-ago-28 1-lug-31 1-nov-26 1-gen-21 1-mar-22 1-gen-28 1-mar-29 1-mag-23 1-apr-26 1-mag-30 1-ott-22 1-feb-25 1-ott-29 1-set-25 (5.00) (10.00) (15.00) IRR = 7,09 % *first installment of loan 30 Jun 2020. First saving : Q3 2021. Prudential approach USTITEM project 31

Payback period by hypotheses HP 1.1 HP 1.2 HP 2.1 HP 2.2 Payback 5-6 years 3-4 years Over 10 years 7 years Investment period 5 year loan 5 year loan 10 year loan 10 year loan Prudential approach USTITEM project 32

HP 1.2 vs HP 2.2 ROI captures economic aspects, while IRR captures financial aspects; For HP 2.2 ROI and IRR are definitely on a similar level; For HP 1.2 ROI has a high value than IRR (due to the incidence delay of loan payment and savings in production); In case of hard aid (see later) , IRR is advisable; The investment return in the range of 3-7% makes economic and financial sense. Payback periods are less than investment duration. Prudential approach USTITEM project 33

State and regional aid Employment regional support for increase in employment: Programma Operativo Regionale (POR) FSE 2014- 2020 - Bonus assunzionale per le imprese - De Minimis (8 k per worker recruited, subject to availability of funds). State and regional aid USTITEM project 34

Soft state aid Industry 4.0: Iper ammortamento: machinery investment up to 20 mln (tax benefit); .; State and regional aid USTITEM project 35

Hard state and regional financial aid Legge 181 del 1989; Contratto di sviluppo: On demand; for investments starting from 20 mln; capital contributions (grant component); interest subsidy; Etc. Accordo di Sviluppo: On demand; fast lane; With co-partecipation of region; for investments starting from 50 mln; capital contributions (grant component); Etc. with co-partecipation of Lazio region State and regional aid USTITEM project 36

R and D activities Accordi di Innovazione: Research and Development projects Agreement between region and MISE Negotiated procedure From 5 to 40 mln of euro. Competence center, Industry 4.0: Innovation hub; CIM 4.0 (with Alenia Thales), manufacturing industrial pole. USTITEM project 37

Hard aid key figures Overview for next operational steps to develop. Key figures to achieve financial support: Increase in employment; Increase in productivity; Follow on of R&D capability; Co-partecipation with Lazio region. State and regional aid USTITEM project 38

Additional results Conventional sensitive analyses and medium- long patterns; Impact of non-repayble contribution; Additional results USTITEM project 39

Sensitive analyses HP 2.2 Impulse-response analysis x raw material cost CCPPI cost residual value of facility ROI 0.282 0.158 0.047 y Payback -25.915 -10.705 0.739 IRR 0.301 0.154 - Mean of percentual changes of y due to percentual changes x (ceteris paribus, detailed year figures in the report) Additional results USTITEM project 40

Hard aid: the impact on performance The impact on performance of hard state aid in case of non-repayable contributions ; Impact on ROI; Impact on payback period; Ceteris paribus For a later discussion!!! ROI=0.1*(SNR) ?????????????= - 0.6*( SNR) Where: SNR: ratio of non-repayable contribution to total investement Additional results USTITEM project 41

Overview for next operational steps to develop Low probability shocks, like international bad news or something like to a sort of italexit scenario; How to get contribution, interest subsidy, tax benefits, etc. (fill Thales Alenia request for state and region aids) Next steps USTITEM project 42