Indra Sistemas SA

MAD:IDR

Earnings Call Transcript 2018-Q1

[Ezequiel Nieto Baquera]

Good afternoon, ladies and gentlemen. I'm Ezequiel Nieto, Head of Investor Relations. Today we are hosting this call to present our 2018 first quarter results.Before starting, let me refer you to disclaimer on Slide #3 that sets up the legal framework under which this presentation must be considered.The conference call will be led by our Chairman and CEO, Mr. Fernando Abril-Martorell, and the intended duration will be around 1 hour. Now let me turn the call to Indra's Chairman and CEO, Fernando Abril-Martorell.

[Fernando Abril-Martorell Hernández]

Thank you, Ezequiel. Good afternoon or good morning, and welcome to our conference call for the 2018 first quarter results. Today with me I have Mrs. Cristina Ruiz, Chief Operating Officer of our IT division; and Mr. Ignacio Mataix, Chief Operating Officer of our Transport & Defence division; also Mr. Javier Lázaro, Chief Financial Officer of Indra.We'll move Slide #4. Let me start by saying that our first quarter results are affected by a number of effects mainly due to the consolidation of 2017 acquisitions: these are Tecnocom, which has as you know restructuring costs and to a much smaller extent Paradigma. And some external factors that have a considerable impact in the comparison with 2017 figures. These factors are the FX impact, which will likely –– if current conditions prevail, I think it might increase in absolute terms during the year; and also the impact of Easter and also the impact of introduction of the IFRS 15, which both are 2 season negative impacts that we expect that they will disappear in the coming quarters. So at least they will diminish in impact at least. As you will see, we'll quantify on these effects in the presentation. All in all, we are performing until now in line with our expectations and our view and therefore our view for the year remains the same. So we reiterate our 2018 guidance in all the metrics.Let's move to our main headlines for 2018 first quarter results. First of all, order intake grew 26% in local currency, which means that our 2 divisions, Transport & Defence and IT, were contributing positively. Revenues in the quarter went up by 15% in local figures, thanks to the contribution of IT, Defence & Security, and Air Traffic Management. On the other hand, we had some headwinds, as I expected as explained to you before, because of the combined effect of FX, Easter, and the IFRS 15.The first quarter EBITDA amounted to EUR 48 million. This is plus 1% versus the first quarter last year. If we were to exclude the Tecnocom integration costs, EBITDA would have grown by 15% versus the first quarter last year. EBIT number reached EUR 26 million versus EUR 33 in the first quarter of '17, equivalent to an EBIT margin of 3.6% in the first quarter versus 5.2% in the first quarter of last year. Again, excluding the Tecnocom restructuring costs and also the Easter seasonality and the IFRS 15 effects, EBIT would have reached EUR 46 million equivalent to a margin of 6.3%.Free cash flow generation was minus EUR 6 million compared to minus EUR 5 million in the first quarter last year counteracting the increasing CapEx, which we had in the first quarter this year compared to last year. We had EUR 14 million this year versus EUR 5 million only on last year and also neutralizing the anticipated collections we had in the first quarter of last year. The net debt to EBITDA last 12 months number is stable at 2.3x in the first quarter. Excluding the cash flows from acquisitions that we did in 2017, the net debt to EBITDA would have fallen to 1.3x. And finally, net income totaled EUR 11 million compared to EUR 21 million last year due to the lower operating income and higher financial expenses.If we move to Slide #5, we see the revenues performance during the first quarter and the impacts that I have already mentioned. Revenues increased by 12% in reported terms reaching EUR 740 million of sales in the first quarter of this year boosted by the IT divisions, especially helped also by the consolidation of the [indiscernible] we have, and also boosted by Defense, Security and Air Traffic Management. Revenues in local currency grew by 15%. So Forex is dragging down around EUR 23 million, mainly because of the Brazilian currency depreciation. The seasonality of Easter and the IFRS 15 amounted to an additional EUR 16 million negative impact. If we were to exclude these 3 negative impacts, sales will have increased by 18% in local terms. As I have already said, both Easter and IFRS 15 impacts are seasonal and they will be neutralized in the next quarters.Now on Slide #6, we can see in depth the order intake and the sales breakdown by region. Order intake at the left of the slide was up 26% in local currency, 22% in reported terms. And this, again, as I said before, has been thanks to both Transport & Defence but also thanks to IT. Order intake in Spain grew by 25% pushed by the contribution of Tecnocom, while America was up by 28% driven by IT and Transport & Defence. Well, it is worth mentioning the increase posted by Energy & Industry, Telecom & Media, and also Transport & Traffic. Europe order intake fell 5% in local currency, affected by the lower activity in Defence & Security. And finally, EMEA went up by 118% backed by both Transport & Defence, especially in Air Traffic Management and also backed by IT. The revenues in Spain went up by 2% in the period compared to the first quarter 2017 with all verticals posting growth, except for Transport & Traffic.The IT division was boosted by Financial Services, Energy & Industry, and Telecom & Media, which registered double-digit growth, and also by the positive performance of Public Administrations & Healthcare. Defence & Security posted once again growth backed by the execution of certain multiannual projects with the Spanish Ministry of Defense, projects that we have already mentioned in several quarters. However, the negative performance of transport dragged the revenues of Transport & Defence in Spain and the whole division posted decline in sales.Sales in America grew by 9% in local currency, thanks to the contribution of Tecnocom with all the verticals posting growth except for Transport & Traffic. Within IT, it is worth highlighting the double-digit growth posted in Energy & Industry, while within Transport & Defence, the defense part of it has offset the decreases registered in Transport. The revenues in Europe increased by 9%, both in local and reported terms, with the IT division showing double-digit growth while the Transport & Defence division positive growth as well, supported by Defence and Air Traffic Management. Finally, Asia-Pacific increased by 11% in the first quarter, mainly driven by the contribution of the electoral business, which showed double-digit growth. On the other hand, Transport & Defence sales decreased due to Transport and despite the positive performance of the Defence & Security.If we move to Slide #7, we see the EBIT and margins for the group. On the top left of graph, you can see the evolution of our EBIT in the first quarter. EBIT amounted to EUR 26 million or EUR 32 million if we were to exclude the restructuring costs of Tecnocom we registered in this quarter. This EUR 26 million are versus the EUR 33 million that we reported in the first quarter 2017. On the bottom left graph, you can see that EBIT would have reached EUR 46 million excluding those restructuring costs, Easter seasonality, and the IFRS 15 impact. On the top right graph, the EBIT margin stood at 3.6% in the first quarter, which would have been 4.5%, excluding Tecnocom's total restructuring costs. And this 3.6% is versus the 5.2% in the first quarter 2017 and has been affected by Easter seasonality and IFRS 15 impact. Excluding these 3 effects, the EBIT margin would have reached 6.3% as you seen in the bottom right graph. So all in all, if we exclude those temporary and seasonal impacts, we are improving our margin versus last year.Well, I just finished the headlines and operating review of the group. I would like to pass the call to Ignacio Mataix, our Transport & Defence Chief Operating Officer, who will present in detail the first quarter results of his division.

[Ignacio Mataix Entero, Executive Director]

Thank you, Fernando, and good morning to everyone. If we move to Slide #8, you will see both the order intake of the revenues and the revenues breakdown of the 2 vertical markets of our Transport & Defence division. On [indiscernible] we displayed the evolution of our first quarter order intake, which increases by 9% in local currency backed by a 37% growth posted in Transport & Traffic due to the sign of our relevant Air Traffic Management contract in Algeria, which offset the decline of 19% posted by the Defence & Security, negatively impacted by the Eurofighter program.On the right-hand side of the chart, we show the evolution of our revenues for the first quarter 2018. Sales in Defence & Security went up by 6%, both on a reported terms backed by the positive dynamics in simulation, radars, and electronics and defense logistics. Region wise, it is worth mentioning Spain benefited once again from the underway multiannual projects signed with the Spanish Ministry of Defence. Transport & Traffic revenues dropped by 11% in local currency affected negatively by some delays in the implementation of new contracts within Transport. On the contrary, Air Traffic Management, which represents approximately 50% of the vertical, registered almost mid-single digit growth, backed by both European and International programs, especially in Asia Pacific. By geographies, Europe was the leading performer.Now on the Slide #9, we display the EBIT and EBIT margin of the Transport & Defence segment. On the top left-hand side of the graph, you can see the evolution of Transport & Defence EBIT reaching EUR 33 million in the first quarter, almost the same figure than in first quarter 2017. On the bottom left graph, you can see that our Transport & Defence EBIT, excluding the impact of IFRS and Easter, would have reached EUR 35 million. As you can see, profitability on this quarter of the year increased very slightly from 12.3% to 12.5%. If we exclude the already mentioned impacts bottom right graph, Transport & Defence EBIT margin would have reached 13.5%, which is an improvement of 1.2% versus the previous period in 2017.I've just did a review of Transport & Defence, and I would like to pass the call over to Cristina Ruiz, our IT Chief Operating Officer, for the review of the IT division.

[Cristina Ruiz Ortega]

Thank you, Ignacio. If we move to the Slide 10, we will see the order intake and the revenue breakdown of IT division. On the left-hand side, you can see the order intake performance in 2018 first quarter. We've grown 34%, mainly backed by the contribution of Tecnocom with all verticals posting double-digit growth, except Public Administrations & Healthcare, which reached high-single-digit growth. By vertical, Energy & Industry went up by 31%. While it is worth mentioning the good performance of hotel and oil and gas sectors.Financial Services 44% in local currency, chiefly thanks to the contribution on Tecnocom and due to the renewal of an important contract with a Spanish banking entity. Telecom & Media posted 56% growth due to the contribution of Tecnocom and the pluriannual outsourcing contract signing with a relevant client in Spain and America. And finally, Public Administration & Healthcare, which reached an increase of 8% supported by election business.On the right-hand side, you can see that our first quarter '18 revenues performance. In the first quarter, IT sales grew 28% in local currency, 23% in reported terms. All verticals registered double-digit growth mainly as a consequence of an inorganic contribution of Tecnocom with activities fully concentrated in IT, as well as by election business in AMEA and positive dynamics of hotel sector. It is worth mentioning that the company continues with the repositioning towards private versus public clients in LATAM, mainly in Brazil regarding Financial Services where some reference has been achieved.Now, I will explain in detail the performance of each vertical. Energy and industry sales grew by 38% in local currency, 32% in reporting terms, mainly due to Tecnocom, both energy segments 15% of total sales in the vertical and industry segments has registered solid performance. Tecnocom's contribution, as well as a positive dynamics in hotel sector, has increased the relative weight of industry segments within the vertical. All geographies posted growth, except AMEA, which has the lower rate within the vertical. Europe is the leading performer with Italy standing out.Financial Services sales increased by 29% in local currency, 25% in reported terms, mainly as a consequence of Tecnocom. Banking segment which concentrate highest activities in the vertical posted better relative performance than Insurance segment. Region wise, Spain and America, though Europe it was vertically partially concentrate registered growth.Public Administrations & Healthcare sales increased by 19% in local figures, 15% in reporting terms, mainly as a consequence of contribution of Tecnocom and election business in AMEA. By segment, healthcare posted better relative performance than Public Administration, excluding the elections. Telecom & Media revenues went up by 23% in local currency, 15% in reporting terms, mainly due to the integration of Tecnocom. The telecom segment, which concentrates most of the vertical activities, showed better relative performance versus Media segment. Efficiency measures and cost controlling dynamics in Telco & Media space remain for this quarter.If we move on to Slide 11, we will discuss the performance of IT division profitability. On the top left graph, you can see the evolution of IT EBIT reaching minus EUR 6 million in the first quarter of '18. On the bottom left graph, you can see that our IT EBIT is clearing the impact of Tecnocom structuring cost, IFRS and Easter will have reached EUR 12 million. As you can see, profitability for the full year decreased from 0.2% to -1.3% which excludes the already mentioned impact, [indiscernible] IT EBIT margin would have reached 2.4%, which implies an improvement of 2.2 percentage points in the profitability of the division versus the previous period indexing.Finally, on the Slide 12, we saw the operating performance of Brazil in this period as we are doing every quarterly. As you can see on the table displayed on the left, our subsidiary in Brazil has progressed well in the first quarter. Order intake continues with positive strength, which is already [indiscernible] years with an growth of 32% compared to first quarter of '17. More important, revenues are starting to get stabilized. Our margins is turning around, while we keep on with our repositioning our business client, reduce our exposure to private versus public sector. All in all, revenues are up by 4% versus the first quarter of '17, while EBIT amounted to EUR 9.8 million versus EUR 1 million in the first quarter of '17 equivalent to an EBIT margin of 5.1%. This is an improvement of 4.5 percentile point versus the first quarter of '17.On the right hand, we disclose for the first time the IT division operating margins as some of the European peers do. This operating margin mainly exclude other costs like staff reorganization, integration and acquisition cost, amortization of intangible assets from acquisition, and equity-based compensation. This impact amount to EUR 12.8 million versus EUR 4.7 million in the first quarter of '17 and our operating margins in the first quarter of '18 was 1.5% versus a reported EBIT of 0.2%.So with this, I finish the review of the IT results. I will like to pass the call over to Javier Lázaro, our Chief Financial Officer, who will review the financial performance of the company.

[Javier Lázaro Rodríguez]

Thank you, Cristina. Let's start the financial part of the presentation with a free cash flow evolution on Slide 13. First of all, you can see at the top of the slide what we show the quarterly evolution of the free cash flow since 2015. As you can see, free cash flow in the first quarter of '18 was negative EUR 6 million, which was actually a positive performance when you take into account the free cash flow that we raised in the fourth quarter 2017, a positive impact as we commented in the previous conference call by the advance collections from clients and some changes in the payment dates of certain items due to the Public Administration, mostly related to Social Security and VATs, a positive result taking all of that into account. Also at the bottom of the slide, you see cumulative free cash flow for the last 12 months, which reached a figure pretty much in line with what we reported in the last quarter, EUR 185 million.If we now move to Slide 14 and you can see that our net debt increased slightly to just over EUR 600 million compared to EUR 588 million in December 2017. Let's look in turn into the different items that made up for this evolution. If we start with the operating cash flow that contributed positively in EUR 35 million, which was slightly below the EUR 48 million that we raised in 2015 and affected mostly by the costs of the acquisition of –– the restructuring associated to the acquisition of Tecnocom as well as some of the impacts of Easter and IFRS that we explained before in the presentation. Net working capital added EUR 37 million becoming one of the largest generators of cash flow for the period, mostly due to the positive performance in terms of collections from our customers.Other operating changes had a big swing, negative EUR 72 million, which is explained by 2 main things: the first item is the variation in the payments with the Public Administrations which is a quite volatile item and had a negative contribution this year but tends to compensate over the course of the year. And then we also paid in the first quarter the variable compensation for our employees corresponding to the previous year. This is something that happens in the first quarter of the year every year.CapEx grew to EUR 14 million versus EUR 5 million raised in Q1 '17, in line with the policy of higher investment commitments that we announced in our strategic plan for 2020. Taxes implied an inflow of EUR 9 million versus negative EUR 3 million in the first quarter last year, and this is due to some refunds from the Spanish tax authorities that we mentioned back in 2016. So this is –– how long it takes to get those payments that got delayed back then. This is how long it takes to get them back. Finally, net interest was slightly below what we paid in 2015 and that was influenced by the difference in balance of cash in Brazil mostly.If we move on to Page 15, let's spend a second talking about the evolution of the net working capital. At the end of March this year, our net working capital position was negative EUR 92 million, which equates to 11 days of sales versus 6 days of sales in – sorry, versus negative 1 day of sales in 2017. So that implies an improvement of 10 days of sales. And this is mostly explained by the better payments of clients. You will also notice that there is a big reclassification there amongst items; that is the impact of the new rules, the IFRS 15, that changes between receivables and inventories.So if we turn the page and move on to Page #16, you can see the leverage ratio and the evolution over the last few quarters, not many changes there. At the end of the quarter, debt stood at EUR 602 million, a slight increase versus just short of EUR 590 million of the previous year with a ratio of net debt to EBITDA up to 2.3x from 2.2x that we disclosed in December, so no major changes there. You will also notice that we maintain, as we always do, factoring stable at EUR 187 million just for the sake for making comparisons easier.On Page 17, we finish with the review of our debt position. You can see that we have added a bit more detail in this quarter. We actually disclose the makeup of our gross debt structure by constituency, by type of debt. We have also managed to reduce the cost of gross debt slightly to 2% versus 2.2% on average for last year, thanks to the optimization of the credit facilities. We also continue to have solid financial position with well-spread maturities, a well-diversified debt structure. Gross debt includes corporate and convertible bonds, and loans and the facilities and also a small loan from the European Investment Bank. We continue to tap on different financial markets to take advantage of interest and price maturity propositions. And during the first quarter, we signed a few small long-term bilateral facilities with some financial institutions. We also issued privately held bonds and more recently in April, and this is not in these numbers, we issued a EUR 300 million [indiscernible] bonds which you will see in the numbers for the second quarter. In addition, we have a solid cash position on our balance sheet and a number of available credit facilities.So with that, we finalize our results presentation. Thank you very much, and now let's move on to the Q&A session.

[Operator]

Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] Your first question comes from Stacy Pollard from JP Morgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

I have a few questions. First of all, can you say what the Q1 growth was on a like-for-like basis, so excluding Tecnocom for the group and then also for IT services business? And then also could you give us a sense of the growth within the Tecnocom business itself? Was that growing -- I know it might be hard to say on a standalone basis, but maybe your sense of that. Second question, maybe can you explain the contract delays in Transport, where was that, and will that recover in Q2? Plus, of course, you had a strong order intake. Would you say that you're pretty confident in a quick recovery of this business? And then third and last question, you reiterated your guidance for 2018 for revenues, EBIT, and cash generation before working capital. Could you please maybe quantify those guidance lines again for us?

[Fernando Abril-Martorell Hernández]

Okay. I will start off asking the overall growth, the like-for-like growth which is flattish taking into account the contribution of Tecnocom, Paradigma, taking into account as well the Easter effect, the FX effect, and the IFRS effect. So all in all, it's a flat revenue growth with slight a growth in IT, about 1.8%, something like that and sort of a 2% decline in Transport and Defence divisions. Okay, so that's on the EBIT side it's a small positive, the like-for-like growth comparison. Okay? It's positive under EBIT, flattish on the revenue side. On the guidance, we guided you for low-single-digit growth in constant currency versus 2017, so we keep that. Obviously, this is the first quarter –– our quarters are not even nor any quarter is pretty representative of the full year. Normally we have stronger first quarter. So this is not going to be a year which changes that. So the guidance for growth was low-single-digit growth, which we keep. For EBIT, despite it's a transition year, as we said because of the comparisons, we also targeted and we keep a slight increase in the EBITDA absolute number in 2018 versus the one we had in 2017. And in terms of cash flow, we guided you at around EUR 100 million before net working capital changes, which is very similar to the guidance we gave for 2017. Bear in mind that this year we also have significant bigger CapEx needs. In respect for the Transport, I don't know whether -- in terms of whether we'd recover or not on the Transport division. I don't know whether Ignacio wants to answer because we are having this call from different sites. I don't know –– I'm not sure you want to answer that one.

[Ignacio Mataix Entero, Executive Director]

Well, I think we remain confident on Transport with the visibility we have today. It's through that we have had some lower start in some projects. As you know, we don't mention specifically any [indiscernible] in concrete, but we've had a little bit of slower start, and also some revenue recognitions due to application of IFRS has shown a slightly negative impact on the Transport business. But I think all in all, as we said, we remain confident. It's a little bit back-ended towards the end of the year, but we say with positive [indiscernible] of transfer going forward throughout the year.

[Operator]

The next question comes from Juan Cánovas from Fidentiis.

[Juan Cánovas]

I'm wondering whether you could give us some idea of the margins on the new order intake and in particular I was wondering the big increase in local currency obviously in Brazil. How is that coming after your experience in that country? I also wanted to ask how much more restructuring charges should we expect for Tecnocom for the rest of the year and whether we should expect any from Paradigma?

[Javier Lázaro Rodríguez]

Okay. On the Tecnocom, we should expect something similar in the second quarter, and then that's it.

[Fernando Abril-Martorell Hernández]

Okay, in terms of restructuring taxes for Tecnocom, well, it is also true, and I would like to mention is that because of the new organization that we have implemented in December and most notably the impact that that had in IT, which we are very happy with it and we see more and more efficiencies –– potential for more efficiencies come in. So we are working on several efficiency plans across different topics. So we think that at the time of the second quarter release -- numbers release, we will be able to tell you exactly those numbers where are and so on, but the Tecnocom part of it, the brand that we presented to you that [indiscernible] basically tracking that's only 1 quarter left. Remember that those numbers were taking into account efficiencies mainly on the corporate headquarters and the administration part. Those were not taking into account other operating efficiencies or sceneries. So don't forget that Tecnocom right now is part of it, and so we don't distinguish anymore what is Tecnocom or what is Indra IT because that's really working [indiscernible] they are working together, okay. So that's no more difference okay. In terms of the order intake, you were asking the margin. The margins are improving slightly, depending where you look at it. On the first quarter we had a big order in ATM, big 1 in Algeria, okay. Obviously that in principle has good margin, but then sometime there are execution issues. In Brazil, we are improving. Slowly we are shifting from public contracts to more private contracts. So there's over 10%, 20% more focus on new contracts right now and the mix in private sector than in public sector, we are having also impacts on margins because there are some financial institutions projects that we had last year that have finished, and we are replacing those from all those years. In general, our EBIT numbers in Brazil are improving slowly and slightly. So this year, our plans are to have an EBIT margin of sort of 3, 4 points above last year, definitively a positive 1. So that's the way it's going. So we're improving. It's not that I'm overly optimistic with Brazil contributions, but clearly it's showing decent progress and things are in order and it's showing much better phase. Okay.

[Operator]

[Operator Instructions] The next question comes from Steven Goulden from Deutsche Bank.

[Steven James Goulden, Research Analyst]

Please, can you just sort of give us a bit more color on the full-year guidance, especially around EBIT. So I think you have Eurofighter and the elections. Both of those are negative EUR 160 million on revenues and both quite high contribution margin. And I know that Tecnocom and Paradigma somewhat offset this on the revenue side of around EUR 130 million, but they obviously don’t –– the margin drop-through is significantly lower. So obviously overall net that's quite negative. And then on top of that you have an incremental EUR 20 million of D&A and then as we've seen in these results, FX is impacting as are restructuring costs as is the IFRS impact, and most of the synergies obviously from the 2015 program are largely done. So kind of factoring all that in together, I'm just struggling to get that much confidence on EBIT growing year-on-year. Can you give us a bit more color on how you see that? And secondly, for me, I just wanted to clarify on Transport. It looks like revenues were down about 25% in Transport. Is that correct? That's it for me.

[Fernando Abril-Martorell Hernández]

Okay. If we look at EBIT for the first quarter of '18 and we exclude the FX impact and we add the inorganic part of Tecnocom and Paradigma and so on and so forth, we basically are above our guidance on the first quarter, if we just compare. So the guidance we gave for the full year was a slight increase in the absolute EBIT number. And that takes into account everything. And we don't have reasons to believe that we will not meet those numbers. It is true that the EBIT impact of the EUR 160 million more or less revenues impact that we will have due to the gap in the electoral business compared to 2017 and the gap in the Eurofighter compared to 2017 are obviously that's creating an EBIT impact, which we think we will overcome it and [indiscernible]. And the first quarter so far in fact in terms of EBIT, we are okay with the guidance. Maybe on the first quarter could be more challenging on the sales side because it's flattish compared to last year, while on the EBIT it's slightly positive. It is true that it's back-ended and it is true that on the first quarter this year, the impact on the electoral business is not negative. On the contrary, it's slightly positive. So clearly that means on the sales side gap, it's a still more back-ended in the second half, but it's not really –– we [ rotated ] the guidance. We can guide you through the specific numbers with our Investor Relations group. But basically, we are okay when you take into account the EBIT that we reported in '17, the delta with the synergies of Tecnocom, the delta of the restructuring costs of Tecnocom, the bigger depreciation, the inorganic contribution and so on, and the other effects that having quantified. In respect to the IFRS, we are tracking this very closely because it's a complete change of the way we bill to our clients, and clearly, we have a billing plan. As long as we can meet the billing plan, the effect for the full year of the IFRS should be neutral. So far we're monitoring it. We had a big gap on January. We closed it down in February. In March we opened it a little bit. In April we have kept it constant in absolute terms. So we are very much focused on fulfilling the billing plans that we have for the clients. As long as we fulfill those for the year, there will be no impact of the IFRS 15. So we will recover on that. But obviously we monitor on a year -- on a monthly basis, and we have all these plans. So, so far in April, for example, basically the numbers are similar, but obviously on a bigger number of sales and the impact on percentage terms are smaller, but we are working hard to eliminate the effect totally within the year. On the question on Transport, I think that Ignacio will answer that one.

[Ignacio Mataix Entero, Executive Director]

I think the question was the drop in revenues on Transport & Traffic. Yes, it is true. If you look at the charts I presented, we see a drop in transport think of a little bit more than 10%. If we take into account that Air Traffic Management represents 50% of that market and we have grown slightly there, you can see that we have reduced transport by 20% in the first quarter.

[Operator]

The next question comes from John King from Merrill Lynch.

[John Peter King, Research Analyst]

I've got 3, please. So first of all, Javier, I think you mentioned during the Q4 call there was a potential with you to maybe upgrade some of your systems and potentially real estate. Could you update us there with any thinking around that? Second question was on the plan for working capital this year, again coming out of the Capital Markets Day I think there was a plan to potentially reinvest a little bit in working capital. So maybe just to understand what your thoughts are for 2018 on that front. And then lastly, with the movement in currencies in LATAM, does that cause you any problems from margin standpoint if that continues to go this way or is it purely a translation effect?

[Javier Lázaro Rodríguez]

On the working capital investments, you have already seen a bit of an investment there when you look at the figure for inventories, you can see they have gone up. Most of increase is due to the reclassification of items in the context of IFRS 15, but there is a small number that corresponds to an increase in inventories relative to the business itself. I think we'll have maybe, say, EUR 20 million to EUR 30 million throughout the year in those items. And that is mostly related to some Defence and some ATM contracts in which we intend to accumulate kind of our building blocks for final products. That should allow us to speed up the time to market of our offering going forward. And I think that is probably the major –– the most relevant investment from that point of view. With respect to the movement of currencies, you've seen the impact at the sales level, which is quite material. Things get much more muted at the EBIT level given that the margins in Latin America as a whole are a fraction of total sales. So to the extent that this volatility of these rates continue to being there, we will probably continue to have an impact, but I think it will be much more noticeable at the working level than at the margin level.

[Fernando Abril-Martorell Hernández]

In terms of the systems, real estate and other investments, in reality on this first quarter numbers on the CapEx side, out of the EUR 13.6 million CapEx, EUR 14 million, which is up from EUR 5.1 million, in reality Transport & Defence has been EUR 6.6 million versus EUR 3.7 million last year. IT is EUR 3.2 million versus EUR 2.7 million, and then we have material CapEx of EUR 2.2 million versus EUR 1.00 million. A little bit of that is what Javier just described in terms of stocking some material to be more effective on time to market. The rest is already some investment in systems. So we are really working hard to define some of the investments. As soon as we have them, we will disclose them I think at the time of the second quarter number conference call, we will be able to disclose those. Again, at the same time, we have some efficiency plans, as I mentioned before, due to the reorganization that we are having in IT and more efficiencies that we are finding just because of the organizations and the layering and some of the factors. So we have advanced a lot on the system side and we will end up doing high investments and also we have some higher OpEx. We will disclose to you all that. With the aim of being able to do teleworking, which until now in the company it's only few hundreds of employees that could do that, and obviously, we want to increase to multi-thousand employees being able to work from home or from different sites, obviously with the security needed for that. So we will come back basically at the end of the second quarter, I think we will be in a position to have the numbers and exact numbers and tell you those.

[Operator]

The next question comes from Georgios Kertsos from Berenberg.

[Georgios Kertsos, Analyst]

Two quick ones for me. Given with the free cash flow progression, do you have an update on potential reinstatement of dividends and when that might possibly coming? And second one, a bit of a housekeeping one for me. In terms of what effective tax rates should we assume for modeling?

[Javier Lázaro Rodríguez]

Taxes, as you know, are a bit tricky because they are affected by the fact that we used to have some losses in countries where we cannot activate tax income. But in general, you should assume that we are going to be in Spain which means we'll pay more taxes is slightly below 25%. That is where we should –– that's where we are and that's where we should end up being over time with the fluctuation and the noise that these countries, mostly Mexico and Brazil, may add to the equation

[Fernando Abril-Martorell Hernández]

And in terms of the dividend, I mean what we said at the time of the investors conference in November when we presented a strategic plan is that within the cash flows that we think we want to generate over the next 3 years, obviously, we will reinstate the dividend. I think it's a little bit early to talk about timings, but within the scope of the plan, obviously, we are planning to reinstate the dividend.Okay, I think there is no more questions. So thank you very much to all of you for connecting to our call. Again our Investors Relations department is happy to help you with any other detail that you might need to fill your models or whatever. So thank you very much. Bye.