Indra Sistemas SA

MAD:IDR

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Indra's First Quarter 2020 Results Presentation. I would like now to hand over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead.

[Ezequiel Nieto Baquera, Head of Investor Relations]

Thank you. Good evening, ladies and gentlemen. Thanks, everyone, for joining us today on our first quarter 2020 results presentation. I'm the Ezequiel Nieto, Head of Investor Relations. And before starting, let me refer you to the disclaimer on Slide #3 that sets up the real 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, Mr. Fernando Abril-Martorell.

[Fernando Abril-Martorell Hernandez]

Thank you, Ezequiel, and good evening to everybody. Welcome to our conference call and we hope that you and your family are safe. As usual, today with me, I have Mrs. Cristina Ruiz, Chief Operating Officer of Minsait; Mr. Ignacio Mataix, Chief Operating Officer of our Transport & Defence Division; and our Chief Financial Officer, Mr. Javier Lazaro. If we move to Slide #4 of the presentation. I would like to summarize Indra's priorities in face of the COVID-19. And I would like to say that in this unprecedented environment, our first priority has been to protect our employees both in our premises as well as at their homes. In the second week of March, more than 90% of Indra workforce has been working from home. Working from home is not new for our employees as we implemented almost 2 years ago what we call easy working. So we have been able to rapidly adapt all our teams to this situation. Furthermore, we immediately increased strict personal hygiene measures and deployment of protective equipment, liquid sanitizer, masks, COVID test, et cetera, in all of our factories and premises in operation and we stopped most of our travels. In addition, we have also provided emotional and mental support for employees who are isolated at home. While taking care of our employees, we have used our technological capabilities to guarantee the continuity of our clients' operations from day 1 of this new situation as some of our clients operate in critical activities to face the pandemic: public administration, health care, utilities, telecommunications, banking, defense and cybersecurity. We were fast in rapidly adapting to our client needs and giving them an immediate response in this difficult environment. At the same time, we are moving decisively to respond to the potential adverse financial consequences of the current situation and strengthening our financial position by securing additional liquidity and refinancing maturities over the next 2 years. In addition, we are starting to take cost savings and CapEx contention plan to mitigate potential impact on financial metrics. COVID-19 is just starting to have a major impact in the global economy, and thus, we expect an impact in our business, which is still unclear for the coming quarters. In consequence, we have decided to withdraw Indra's 2020 guidance and the decision to resume dividend payment in 2020 has also been postponed. If we move now to Slide #5, let me start with our main highlights by saying that the impact of COVID-19 in our first quarter results have been still limited and mainly concentrated in the Transport & Defence division. Our commercial inertia goes on and our backlog reached another new record, standing at EUR 4.8 billion, implying a 12% growth with positive performance in our 2 divisions. Order intake was up 8%, showing both Minsait and Transport & Defence strong performance, even though we are starting to see some order intake delays due to COVID-19. Revenues remained stable in reported terms, backed by the Minsait division, which grew 4%. Profitability-wise, our EBIT in the first quarter amounted to EUR 19 million versus EUR 39 million last year, dragged by the decline in the transport and defense profitability, mainly due to the timing and delays in Eurofighter and to a lesser extent, delays in some other significant transport and defense projects due to COVID-19. The EBIT at Minsait was similar to the first quarter '19 figure. With respect to cash generation, free cash flow improved EUR 49 million compared to the first quarter of '19. Our free cash flow has been affected by the working capital seasonality as well as specific delays in some Transport & Defence projects. Our net debt-to-EBITDA of the last 12 months ratio, excluding the impact of IFRS 16 stood at 2.2x versus 1.9x in the first quarter of '19. If we move to Slide #6, we see our revenue performance in the first quarter. Revenues in the first quarter increased by 1.7% in local currency, stable in reported terms. And this was backed by the Minsait division, which posted a 6.4% growth in local currency. On the opposite, Transport & Defence revenues decreased 6.5% in local currency, affected by the fall in Defence & Security. Organic revenues, excluding the combination of SIA, the cybersecurity company that we acquired at the end of last year, and excluding also the FX impact, showed a slight decline, minus 0.5%. It is worth noting the organic revenue growth posted by the Minsait division, which was by 2 point -- plus 2.9%. The FX impact in the quarter amounted to minus EUR 13 million, which represents a higher negative impact versus the first quarter '19 that was only minus EUR 5 million. Something that might get worse in the coming quarters, considering the recent evolution of the main currencies we are exposed to. If we move to Slide #7, let me provide you with a deeper insight into the order intake and sales breakdown by region. Above on the slide, order intake increased considerably in America, plus 36% in local currency driven by Telecom & Media, Spain went up 9%, boosted by Transport & Traffic. And Asia and Middle East and Africa increased 10% in local currency, pushed by both Transport & Defence and Minsait. However, order intake decreased in Europe, minus 15% in local currency due to the difficult comparison versus last year in the same period when some relevant contracts in simulation and defense in the U.K. were signed. Moving to the bottom of the slide. Revenue-wise, it is worth mentioning the growth registered in America, 6% in local currency, pushed by Minsait. Spain went up by 3%, posting growth both divisions. Europe grew 1% in local currency, showing the Transport & Defence division better relative performance than Minsait. However, the sales in Asia, Middle East and Africa decreased by 14%, largely affected by the decline in Transport & Defence. If we move to Slide #8, we display the backlog evolution of both Indra and our 2 divisions as well as the backlog over revenues ratio. Above on the slide, Indra backlog went up by 12% in reported terms, and reached again a new historic high. For its part, Transport & Defence grew 14% and Minsait, 9%. At the bottom of the slide, Indra's backlog over revenues of the last 12 months ratio also reached a new historic high at 1.5x versus 1.37x at the end of the first quarter '19. The Transport & Defence ratio increased to 2.61x versus 2.25x in the first quarter '19, and mean site ratio increased to 0.86x from 0.82x at the end of the first quarter '19. If we move to Slide #9, we show the group's EBITDA, EBIT and margin evolution. On the left-hand side of the slide, you can see the performance of our EBITDA for the first quarter. EBITDA stood at EUR 51 million versus EUR 70 million in the first quarter '19, implying a decline of 28%. The EBITDA margin in the first quarter was 6.9% versus 9.5% last year in the same period. On the graph, at the center of the slide, we display the EBIT by division. Transport & Defence accounts for 62% of interest total EBIT and Minsait accounts for the remaining 38%. On the right-hand side of the slide, EBIT amounted to EUR 19 million versus EUR 39 million in the first quarter '19, equivalent to 2.6% margin compared to 5.2% margin last year in the same period, mainly dragged by the decline in the Transport & Defence profitability and also a little bit affected by higher restructuring costs in the period versus last year. Both Cristina and Ignacio will dive deeper into the contribution of Minsait and Transport & Defence to the EBITDA and EBIT performance. And if we move to Slide #10, and finally, from my side, we show the evolution of the total workforce by division. Our total headcount decreased by 1% during the first quarter and amounted to 9 -- 49,998 professionals. As you might guess, we froze all our hiring processes in February to early mitigate the potential impact of the COVID and at the same time, we are steadily replacing subcontractors with our own staff. Now let me turn the call to Ignacio, Chief Operating Officer of our Transport & Defence business.

[Ignacio Mataix Entero, Director]

Thank you, Fernando. Good evening to everyone. Now let's move into Slide #11, where you can see the order intake and the revenues breakdown of the 2 business of our Transport & Defence division. The graph on the left shows the evolution of our first quarter order intake, which went up by 9% in reported terms, backed by both air traffic management with contracts, with an either Spanish operator and our European partners and transport mainly due to urban projects, both in Spain and Kuwait. On the right graph, we displayed evolution of our first quarter revenues, which decreased by 7% in local currency and in reported terms. Defence & Security sales decreased by 18%, mainly impacted by lower execution and delays in Eurofighter and also by some international projects. On the positive side, sales in Transport & Traffic went up by 4% in local currency. The growth posted in Transport, mainly again in urban transport projects in Spain and in air traffic management in our European programs was offset by a decline in our air traffic management international programs, which are suffering delays because of COVID-19. I would like to remind you that the revenue and margin recognition of our projects is based on milestones, and therefore, despite we are progressing in project execution, we are not able to meet the contractual milestones due to the fact that our clients and our teams cannot -- are not able to fly. We are partially offsetting that situation with virtual milestones and we will continue to do so. But in a number of important projects, this is not a possibility. Now please find on Slide #12, EBITDA and EBIT margins. And if you go into the left-hand side of the graph, EBITDA reached EUR 24 million in the first quarter 2020 compared to EUR 41 million in the first quarter 2019, with both verticals, Defence & Security and Transport & Traffic showing profitability declines as a consequence of worst quarterly comparison due to lower execution and delays in the Eurofighter program and some other delays in international projects. As you can see on the right graph, EBIT stood at EUR 12 million compared to EUR 31 million in the same period last year, implying a 6.9% lower margin or margin decline. I would like to turn now the call to Cristina, Chief Operating Officer of Minsait.

[Cristina Ruiz Ortega, Director]

Thank you, Ignacio. Good evening, everyone. Let's turn now to the Slide #13 where we show the order intake and revenue breakdown of Minsait. On the left-hand side, order intake in Minsait went up 11% in local currency with all the verticals [ registering ] growth. Earning wise, our digital solutions sales amounted to EUR 125 million, which represents 26% of Minsait's revenues, implying an increase of 19% versus first quarter '19, mainly posted by the inorganic contribution of SIA. On the right side, we display the evolution of our first quarter 2020 revenues. Sales went up 6% in local currency, with 3 of the 4 verticals showing growth. It stand out the double-digit growth in local currency in Telecom & Media and Financial Services. Energy & Industry revenues increased by 5% in local currency. On the other hand, the Industrial segment posted double-digit growth, although it showed a strong [ down trend ] in March due to the COVID-19 and we think it will be one of the most affected segments. On the other hand, Energy recorded mid single-digit decline. Financial Services sales increased by 10% in local currency, impacted by the positive performance in America with key clients in both payment systems and medium-size banks. Likewise, insurance sector in expense showed positive evolution. Public Administration & Healthcare sales decreased by 3% in local currency due to fall in the main geography, Spain and America. It is good to highlight the positive performance saw in Europe as a result of the positive commercial activity in Belgium, with some projects in the European Union and in our Italian subsidiaries. Therefore Media revenues grew by 15% in local currency, mainly due to the higher activities registered in the main operators in Spain and America with all the geographies showing growth. Let's now move to the Slide #14 to present Minsait's profitability. On the left-hand side, we can see the evolution of Minsait operating margins for the first quarter. This operating margin excludes exceptional costs that are mentioned in the footnote below. Operating margin in Minsait improved to EUR 16 million versus EUR 13 million in the first quarter '19, equivalent to 3.2% operating margin versus 2.7% last year same period, mainly driven by the improvement of Financial Services and Energy industry. On the right-hand side, EBIT margin in Minsait remained stable, 1.5% in the first quarter '19 -- 2020 versus 1.6% in the first quarter '19. With this, I finish the review of Minsait results. I would like to pass the call over Javier Lázaro, our Chief Financial Officer, who will review the financial performance of the company.

[Javier Lázaro Rodríguez, Chief Financial Officer]

Thank you, Cristina, and good evening, everyone. Let's start the financial review with the evolution of free cash flow on Slide 15, please. At the top right-hand side of the page, you can see free cash flow for the year at negative 90 -- sorry, EUR 59 million, which is actually a net improvement of almost EUR 50 million versus the same quarter last year. This obviously reflects a more positive performance, mainly due to the working capital line in the quarter, as we will see in the following pages. I think it's also worth mentioning that this is happening despite the delays in Transport & Defence mentioned earlier in the presentation, which have a very material impact in the evolution of working capital, particularly inventories. We'll talk about this in a couple of pages. With these numbers, cumulative cash flow generation for the last 12 months moves firmly into positive territory, as we can see in the graph at the bottom of the page. Let's now please move on to Page 16, where we can analyze the evolution of the net debt figure. You can see that net debt at the end of this period stood at 100 -- EUR 633 million compared to EUR 552 million in December 2019. In this exhibit, we basically break down this delta into different components. You see that operating cash flow contributed positively to EUR 43 million, which would have been EUR 34 million if we exclude the accounting impact of the application of IFRS 16, which amounts to EUR 9 million. You can see further on the right what it says under the label other financial liabilities variation. Net working capital was negative EUR 68 million in the quarter, which was EUR 72 million better than in the same quarter last year for the reasons that we will explain in the next pages. If we continue moving to the bridge, CapEx amounted to EUR 17 million, slightly below EUR 18 million of the same period last year. Cash taxes were again, slightly below last year, EUR 3 million versus EUR 4 million, mostly due to the lower level of results this year. Other financial liabilities, the variation that amounted to the EUR 9 million. And as I just mentioned, this is a new item that we have to incorporate last year to reflect the cash impact of the financial leases due under IFRS 16. Finally, on the free cash flow part of the bridge, cash payments linked to our financing added up to EUR 5 million negative. And just to finalize this section, we have financial investments and other noncash flow items that reached a total of EUR 22 million, which is mostly related to FX adjustments, which don't have a cash impact or don't have an impact on the P&L. Moving on to Slide 17, let's analyze the evolution of the 3 main building blocks of our working capital, which has increased to 15 days of sales from 6 days in -- at the end of 2019 and 5 days at the same time last year. So let's explain this evolution in the quarter. If we look first at inventories, you see that it has increased 7 days of sales since December, mostly concentrated in the T&D division, Transport & Defence, which explains around 70% of the increment. In euros, this is a total of EUR 64 million versus the end of last year and is mainly explained by delays in the certification of milestones due to COVID-19. An example would be the surveillance systems in defense, some transportation projects in some middle eastern countries, some radars in the Middle East and some specific projects with some regional administrations in Spain. As we hinted earlier in the presentation, delays in the certification or deliveries for that matter of our products have a material impact on our working capital and are mostly reflected in a margin level of inventories. As you know, IFRS 15 prevents companies from recognizing revenues in some projects unless certain customer milestones are met, keeping basically expenses related to those projects as a work in progress item on the balance sheet under the level of inventories. At the same time, companies are prevented from recognizing the revenues and obviously, the margins associated to these projects on their balance sheet, hence, creating the impact that we have discussed earlier in the presentation. I mean even if actually meeting these milestones is a relatively quick and inexpensive part of the overall production process, particularly in multiyear projects, the actual financial impact that I have just described, will affect it to 100% of the amounts involved in that particular milestone. So that's important to keep into account, as Ignacio mentioned earlier. I mean if we now move to accounts payable, you see that it goes up by 11 days of sales. This is mostly reflecting the seasonality of the purchases between the first quarter and the fourth quarter. The fourth quarter, as you know, is the busiest quarter for procurement, for sales as well. And if you check the numbers, you will see that there is a decline in around EUR 130 million in costs from third-party purchases between these 2 quarters. If we compare the level versus the year before, we can also see a reduction in the cumulative parts of Indra, which explains the delta in days of sales with the first quarter 2019. If we were to analyze accounts payable in terms of purchases, in terms of days of purchases, in terms of days of sales, you will see that the 2 figures will converge. On the positive side, accounts receivable improved by 7 days of trading, which is backed by the positive performance of cash collections in, to large extent, everywhere, but in particular, from Transport & Defence, which is in part due to the seasonality of the first quarter, where we're basically cashing in payments from the larger fourth quarter in terms of sales. But there's also here an element or some meaningful payments associated to some new projects like, for example, the advances from the frigate contract that we signed in the fourth quarter 2019, which we received in January this year and also some significant catch up from some projects that -- of the ones that got delayed from last year, which we've been discussing at length, like specific trades in Northern Spain. If we now move on to Slide 32 -- sorry, 18. We showed that the evolution of our net debt and leverage ratio. These figures, we have eliminated, as we normally do, the impact of IFRS 16 just to make them consistent with the historical figures. You can see net debt amounting to the EUR 633 million that we described, which translates into 2.2x EBITDA versus 1.9x, 1 year ago. If we were to exclude the acquisition of SIA, which happened the last day of last year, this ratio will stand at 2x. As always, non-reconstructuring remains constant at EUR 187 million, which is the same figure that we have in every quarter for the last few years. So we now move on to Page 19. Let us touch briefly on the different actions that we have taken to improve the financial position of the group. Since the beginning of the pandemic, we have been focused on 2 things, basically. One, reducing the maturities in the short term; and two, adding to a liquidity position to our liquidity line. First of all, I would like to stress that as of today, we only have EUR 31 million maturing between today through the end of 2021. And as of last Friday, we only had an additional EUR 39 million maturing in the first quarter of 2022. So in total, since the pandemic stated, we have pushed forward into 2022, '23 and '24, a total of around EUR 175 million worth of maturities. At the same time, we have also built decisively into our liquidity facilities. In the beginning of the pandemic, we have approached them and have been approached for that matter, a number of domestic and international financial institutions to negotiate the number of bilateral liquidity facilities ranging from EUR 10 million to EUR 50 million. As of 10th of May, we have a total of EUR 321 million of short-term committed liquidity facilities. And we are currently in discussions to sign additional lines, which could add to an additional EUR 200 million more. Please note that we have drawn on a small amount of these facilities for some practical and technical reasons, as you can see on the page. The other one relevant characteristic of our debt, which I think is relevant in this context is that it is not subject to any leverage or coverage ratio or indeed, any other financial covenant for that matter. With the exception of an EUR 80 million, 8-0, facility with the European Investment Bank, which has not really a coverage ratio but a total capital covenant ratio, which today has ample room and it's not really a matter of concern. So we finished the presentation with the structure of our debt on Slide #20. I think we have already covered the more relevant elements of this page on the previous slides. So we just leave this here for your reference. It contains the data that you are used to seeing. So with this, we finalize our results presentation. Thank you very much. And now, let's move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Stacy Pollard from JPMorgan.

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

How should we think about growth into Q2? I know you've removed your guidance for the full year, but I know that we're also halfway through Q2. So perhaps you could just give us a sense of how it's been the last 6 weeks, kind of run rate? And my second question is our client -- are basically looking at cost management plans actually. The restructuring cost of EUR 8 million in Q1, should we expect more for the rest of the year? What benefits? And over what period of time would you be considering? And then I noticed that you had considered furlough of Spanish workers. This didn't go through. Is there more on that, that we might see coming through?

[Fernando Abril-Martorell Hernandez]

Okay. Second quarter, we think it will be worse, okay? April so far, revenue-wise, it's been okay in Minsait, okay? Okay. And it continues to be with a lot of difficulties in being able to certificate and therefore, recognize revenues in Transport & Defence division. That's a little bit the tone, okay? So we believe second quarter will be worse, revenue-wise. How much worse? So far not much dissimilar, so it's a touch weaker, but not much weaker so far in Minsait and similar in Transport & Defence division, okay? But that's only April. We continue to see delays in -- which are, unfortunately, are impeding that we can recognize revenues and margin in -- especially in Transport & Defence division. Okay, that's what we see. Some of these delays, we are trying hard that they don't create extra costs. Some of them will create some extra costs. We'll see who bears them at the end. But so far, we're trying not to get more extra costs. In respect to restructuring and cost plans, we normally think that for the year, before COVID, we were going to have a similar figure than last year, roughly EUR 30 million of restructuring for the full of 2020. This might be a touch higher so far but this is not incorporating any big structural things on workforce or anything. We withdraw the plan for temporary put out of work, some employees because the conditions under which we could negotiate those with trade unions were not dealing the amounts of savings that we thought were needed. So we are looking very carefully at how the business is evolving together with trade unions. And depending on what's going on, we might have to propose new measures in the coming weeks, okay? Is that okay, Stacy?

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

Yes. Can I just follow-up quickly? Just a question about [indiscernible] in revenue recognition. Is there a chance that you are able to go out and travel again, would suddenly have a big bulk of revenue in [indiscernible]? Or I shouldn't think about it that way. I think about it as a much smoother [indiscernible]

[Fernando Abril-Martorell Hernandez]

Yes. I think Ignacio will answer you to that. You are right. But Ignacio will get deeper into that.

[Ignacio Mataix Entero, Director]

I think, Stacy, if we are back into normal execution by, let's say, second half of the year, I think we will be able to recover probably not 100% of the delays but a substantial part of them, at least, I think -- well, I think a substantial part of them. But we need to go back to a more normal situation in the second half of the year.

[Fernando Abril-Martorell Hernandez]

Probably.

[Ignacio Mataix Entero, Director]

Probably.

[Operator]

The next question comes from Laurent Daure from Kepler Cheuvreux.

[Laurent Daure, Head of IT Software and Services Research]

So a couple of questions. The first is on Transport & Defence drop in profit. I'm just making sure that it's all about the certification delay? The COVID? Or if there is anything else on the drop in profit? My second question is on the Eurofighter. I thought you were mostly doing some maintenance. So what happened? And why do you have a shelf drop in the first quarter? And my final question is on the cash inflow you were expecting, especially in the Middle East, probably I think it was by the middle of this year. So how do you feel about this? And even the oil price, any risk of having an impact on the P&L from that?

[Javier Lázaro Rodríguez, Chief Financial Officer]

Laurent, if -- let me explain with -- we'll start with the question on the oil price. I think it will have an impact. I mean, we still don't know what kind of impact, but it's likely to have an impact. We've had it in the past and is likely to have it again. We don't know what kind of an impact. It's early to say. And the input we get from clients right now is constructive, and they seem to be positive and willing to continue with operations. And they are starting to make some specific payments. So, so far, it looks as if they are committed to keep on paying, but we have to be cautious because in the past, they have -- I mean when the oil has been in low prices, they have had some issues with payments. So it's not happening today, but we want to -- we'd rather be cautious.

[Ignacio Mataix Entero, Director]

Okay. Javier, sorry, if I go to -- if I understood properly your question on margin on Transport & Defence. Let's say that roughly 2/3 of the lower margin is due to Eurofighter and 1/3 is due to the rest of the projects that is -- maybe I will elaborate later on that. Coming back to Eurofighter. It's not only maintenance. Maintenance is like 1/3 of the Eurofighter volume. The rest is still, I mean, new product or new deliveries of aircraft. So it's 1/3 only maintenance.

[Laurent Daure, Head of IT Software and Services Research]

Yes. Then sorry to come back on the question is all what you described, if there had been no COVID -- no shutdown, would you have made more or less the same profit as last year in the Transport & Defence?

[Fernando Abril-Martorell Hernandez]

I think, let me say, I think that we are -- in execution of Eurofighter, we are behind. We expect to recover substantial part of that. Eurofighter is slightly below volumes of what we had last year, so lower Eurofighter compared to last year. And obviously, I mean, if you compare quarter-to-quarter, you always have projects that delay or come before, and that's normal in the first quarter.

[Laurent Daure, Head of IT Software and Services Research]

So basically for the year, you -- if there is no lockdown anymore in the second half, you expect more or less a similar profit than last year on a full year basis?

[Ignacio Mataix Entero, Director]

Well, first of all, after second quarter, as Fernando said, we are showing already a decline in the second quarter, similar to what has been the last 15 -- or to 1-month of the first quarter. Second, we need to assume for that to have the second half of the year, which is full in operation and that we are able to recover 100% of what we were going to do in the full year. So I think there is a lot of volatility and uncertainty to be able to say that.

[Fernando Abril-Martorell Hernandez]

But in terms of the percentage that you were saying, about 1/3 of the shortfall in EBIT for Transport & Defence division, it's been COVID-19. Okay, 1/3. The other 2/3 being Eurofighter. And in Eurofighter, you have different sets of things, okay? The average Eurofighter that we expected budgeted wise for 2020 was slightly lower than last year, okay? We'll see. And the execution of that, it's a little bit delayed so far. And that's not for COVID, it's because it's a bit delayed. Sometimes it's seasonality. And it is true that we had some supply chain issues, specifically on some things that maybe have been related to COVID. But in reality, that's been small, okay? So in case we have no COVID, we will still have posted a shortfall in EBIT for Transport & Defence division, but definitely not as big as we would have posted. I think maybe that was the question you were asking, no?

[Laurent Daure, Head of IT Software and Services Research]

Yes, exactly, that's perfect. That's why...

[Fernando Abril-Martorell Hernandez]

We would have posted a deficit because the Eurofighter is very meaningful margin-wise because 2/3 of the margin gap between Eurofighter. And that's a little bit between COVID. I don't know. There's been the radar scan or whatever that we couldn't deliver because we have a piece that we were not getting from suppliers. Okay, fine. Things like that. And that has not helped in terms of execution. But nevertheless, it was delayed, execution wise, anyway, okay? And that's what Ignacio said, we hope to recover along the year, taking into account that in our budget for this year, we had lower Eurofighter than last year, but we'll see because for the last 2 years, we had lower Eurofighter and then we had bigger Eurofighter. So it's not 100% accurate, the assessment, okay? But we would have had lower EBIT in respect of COVID, but not as big, obviously.

[Operator]

The next question comes from Ivon Leal from BBVA.

[Ivón Leal, Research Analyst]

Maybe 3 questions for me. The first one, coming back to these COVID delays. I mean in Spain, basically, there was full lockdown in April. So what is the stage at this moment? I mean, now production is ongoing, so do you have visibility as if May is going to be a normal month and now significantly impacted by COVID? The second one is on the Transport & Defence, maybe also on Minsait, what does the order intake looks like in the second quarter, okay? And maybe on the longer term, do you have inputs which should worry us about the current situation is going to make defense margin shrink in the coming years, and therefore, is going to significantly impact the revenues 2, 3 years down the road? And the third one for Cristina on Minsait. Again, I mean, on that business, we've always have some pressure on margins -- or on pricing that you've been able to offset through new contracts. I guess have a constant speech with your clients here. What is happening now? Because, I mean, where the people are working from home, does that have an impact on margins? And are your customers reviewing the pricing in the contracts? That's all for me.

[Cristina Ruiz Ortega, Director]

Okay, I give you some more color about Minsait and the situation. We have had a very good first quarter. In the second one, we have no -- we saw some revenue difficulties to get the growth that we were planning in the budget but we think that the second quarter would be more or less good, okay, in terms of revenues. In terms of margins, we have some pressures for our clients in pricing because they have pressure on budget and they need to get some savings in their business. So we have a lot of pressure in pricing and we see that we have some pressure also in growing because of the pressure in budget. So that's the situation. But we are working to improve our margins as we do the last years with the same project in Lean, things like that. We hope to maintain more or less the percent of margins in Minsait.

[Fernando Abril-Martorell Hernandez]

Okay. If I go back, I think to your question on COVID delays, and you were saying regarding Spain, I don't think we have significant delays on our projects in Spain, maybe some of them. We have a project in Barcelona in transport that obviously we've had to stop during a few weeks. But we don't see significant delays in Spain. You need to take into account that -- I mean, the delays are mainly in the international arena. I mean, we have 70% of our business in international. And there is where we are having the delays. Some of them mainly due to COVID. We also need to take into account that we have some projects in oil independent countries and that have their own issues also. But 70% of our business is export. Regarding Defence business, I think we are -- I mean, I think our order intake is good. So we have a good backlog. I think we are seeing that defense auctions and projects that we have in the pipeline that should come up in the next months are not being canceled. Maybe we see some slippage in the auctions, but we don't see cancels. So I think we have a good visibility in our backlog plus the projects we have in the pipeline in the mid, long term. So we have, I think, very good visibility. And we don't see margin deterioration in those projects that we are looking at. So Spain looks good, I say. I mean projects international in order intake look good. Execution is the one that in the short-term is difficult.

[Operator]

The next question comes from Gautam Pillai from Goldman Sachs.

[Gautam Pillai, Equity Analyst]

I have 3 questions. The first one is on the Air Traffic Control business. And given an unprecedented decline in airline volumes and some of the airports considering terminal shutdowns for an extended period of time, how should we think about the -- your ATC business over the medium term as we come out of this crisis? And then secondly, a follow-up on the revenue recognition of the delayed projects. As the project milestones are met and certified, should we expect a significant amount of revenues to be recognized from these delayed projects at presumably very high margins as most of the costs are currently expensed? And lastly, a question on operating margins. Can you comment on your mix between fixed and variable costs in the cost base?

[Ignacio Mataix Entero, Director]

Okay. Let me start with the margins. I mean we will execute the projects if we are able to execute them in the second half of the year at the margins of the projects. So it's not that we are incurring all the costs now. And we will, therefore, have higher revenues in the future, okay? We are incurring the cost. Maybe, as Fernando said, we might have a slight cost overruns in projects because of a longer period of execution. But -- and we are trying -- that will not happen, but we will not -- so we will recognize the project at the margin we have of projects, okay? Regarding ATM, I mean, I think we have to, let's say, separate completely what is happening, I would say, in our European projects in which we are seeing that our clients are using these, let's say, months of lower traffic or very limited traffic to upgrade the systems taking into account that we were all trying to cope with growth of air traffic of 5% and their systems were lagging behind because, I mean, you can recall airlines saying that delays in airports and so and so on. So I think our European clients have taken the decision to continue with the projects, and will continue with the projects in the short to medium term. On the international side of our ATM business, there is where we might see lower execution in our side and maybe some of the clients delaying some of the projects in various countries. But we don't see a substantial reduction of the business in the midterm. Maybe there are some airports in some specific products like ILS and others, which are hardware, which don't need the [ hover ] for the second half of the year, and we'll have to delay to the first half of the following year. But that is not a significant part of our business.

[Fernando Abril-Martorell Hernandez]

And in terms of the breakdown between fixed and variable costs, I can give you a proxy of that. Basically, 60% of our cost base, it's personnel expenses, 60%; and 40% of our cost base is operating expenses, suppliers and things like that, okay? And out of the -- if we assume that the personnel expenses are a fixed cost because, obviously, in Spain, you cannot just lay off people, you need to negotiate with trade unions. It's expensive. It's difficult. It's not the same for all the countries. So in some countries, you can really move employees quicker if need to do so. But assuming 100% of it is fixed cost, that's 60%. And then basically, we consider that about 70% to 80% of the operating expenses that are not personnel could be considered variable. So that translates into basically 70% to 75% of our cost base fixed and 25% to 30% of our cost base variable.

[Operator]

The next question comes from Carlos Trevino from Santander.

[Carlos Javier Treviño Peinador, Equity Analyst]

Most of my questions has been answered before. Perhaps a couple of quick ones on Minsait, especially at the vertical grid, worse performance in revenues this quarter was Public Administration & Healthcare. So I would like to -- if you could elaborate a bit on that, if you have seen any kind of impact there from the crisis that on the other hand, '19 should have been positive. And also, I would like to know on my side how many of your workforce is currently not assigned to any project. And how this has evolved rationally.

[Cristina Ruiz Ortega, Director]

Okay. In terms of revenues in Public Administrations & Healthcare, we have a decline of 3% in local currency because of the [ follies ] in Spain and Latin America in some little projects that are not anything significant. I mean, it's nothing important on that. I mean little things that we have -- that we thought that it will be happening in the first quarter, that maybe it will be happening in the second one. So it's nothing significant there to be worried about. About employees that we have today on the beat, more or less, we have normally, in a normal situation, we have more or less 250 person more or less on the bids because of the demand and the offer in the project, and more or less, that's our Media. Today, we have more employees on the bids. We have more or less 700 employees on the bids. We are working on decline -- reduced subcontracting that we have today. And we have some new projects that we are allowing to keep projects to these people. So it's more or less today, we have a delta of 300 person more than we have in the Media.

[Operator]

The next question comes from Charlie Brennan from Credit Suisse.

[Charles Brennan, Research Analyst]

Two, please, if I could. Firstly, just operationally, if I back out the acquisition, it looks like growth in your digital business is relatively low. Most other IT services companies are continuing to report strong digital growth. What do you think the characteristics are of your business that means you're underperforming that digital momentum that we're seeing elsewhere? And then secondly, you're talking about doing things to protect the financial health of Indra. Just when we look about -- look at the financial modeling for the rest of the year. Can you see a scenario where on a quarterly basis, you actually drop into losses? It doesn't sound like that's going to be the case for the second quarter, but maybe in Q3, which is a seasonally small quarter anyway?

[Javier Lázaro Rodríguez, Chief Financial Officer]

Sorry, Charles, it's been difficult to understand the question because the line was -- but could you repeat the question so we accurately receive them?

[Charles Brennan, Research Analyst]

Sorry about it. Yes, sure. I hope you can hear me. Firstly, operationally, it looks like your digital growth is relatively low if you back out the acquisition. Most of the IT services industry still reporting strong digital growth. Why do you think you're underperforming digital momentum? And then secondly, you're talking about protecting the financial strength of Indra. Do you think there's a scenario where on a quarterly basis, you actually dip into losses? It doesn't sound like that's the case for the second quarter, but Q3 seasonally small for you anyway, do you think you could drop into losses as we go through the course of the year?

[Fernando Abril-Martorell Hernandez]

Okay. Charles, I will start with the last one. Sorry, because before we couldn't understand properly. It could be that we enter in losses in 1 of the quarters. Obviously, don't expect that to happen in the first quarter because we have a lot of normal, I say, is the strongest quarter. And in case we can't recover some of the delays. Obviously, later in the year, the more possibilities we'll recover the delays on some of the certifications in Transport & Defence. So yes, we could have losses in the second or in the third quarter, maybe. Okay? It's early to say, okay? But we have -- we don't expect anything on the lower part of the account because I think tax rate, we can -- you can see to have it at 30%. So no special issues on taxes. In case we had a special issue, we'll be positive because 30% is already quite a high tax rate on average. That's the one we are assuming. So it will be operating in case we have it will be because of the lower operating profits, okay? But it could be, okay? Okay, Cristina?

[Cristina Ruiz Ortega, Director]

Okay. In terms of the growth of our digital business, it is true that in the first quarter, the growth is coming from the acquisition of SIA, plus 19%, but we have a growth of 3% of our digital business, with very good performance in cybersecurity. And the only thing that we have had a little bit delay in some projects because in this business, we -- usually, we do transformational project. We have some more delays in closing some of them because our clients are being focused on COVID. So we have more demand on services to maintain the activity of the -- of our clients but we have had some difficulties in close, some of the projects that we have in the budget for the digital ones because of COVID.

[Fernando Abril-Martorell Hernandez]

Cyber is doing very well now.

[Operator]

The next question comes from Alastair Nolan from Morgan Stanley.

[Alastair P. Nolan, Research Associate]

I think all my questions have been answered, so I'll pass it on.

[Operator]

The next question comes from Manuel Lorente from Mirabaud.

[Manuel Lorente, Analyst]

My first question is regarding the revenue phasing throughout Q1 and trying to figure out what might be the trends on the coming quarters, especially on Security & Defence that has dropped 18%. This has been something back-end loaded on March. So this has been a normal trend -- an underlying trend throughout the entire quarter. My second question will be regarding the Eurofighter contribution. It has been perfectly clear that 2/3 of the shortfall in profitability has come from Eurofighter at the CMD level. That figure more or less is applied also at the top line level. And my third question is on the different moving parts throughout the year. Obviously, you have dropped the guidance because the visibility nowadays is very limited. But what is -- you can give us some indication on the different moving parts of the profitability throughout the rest of the year. And my final question is I think it was Fernando talking that you might have some -- for the news regarding the temporary layoffs in coming weeks. Can you give us some more indication of what should trigger to reopen again that from?

[Fernando Abril-Martorell Hernandez]

Okay. I will start, Manuel with the last 2 questions, and then my colleagues will answer the other ones. Okay. The -- I mean, we throw the guidance because it's very difficult to estimate what could be and we assume that most investors would think that the guidance will be a different one. So we prefer to make it outright and to make a public notice that we draw the guidance. We hope we can give a new guidance or at least indications as soon as we have a little bit more visibility once the circulation of people have been reestablished and in case the travels and things like that have been established. So maybe at the end of the second quarter, we can give you a better guess of what we think it's going to be the full year for us. And especially what we are trying to establish hard is what's going to be the finish point for 2020 and therefore, the starting point for 2021 because that's what we are now trying to understand. The driver for it, obviously, are the revenues -- revenue recognition and margin recognition on the one hand, okay? But also the revenue short fault in case some of our clients are really not just delaying but canceling programs or are putting pressure on evolutions and things like that. So far, in Minsait, we've seen that it's been okay. We've lost some businesses, but we won all the businesses. And as I said before, April has been okay as well, but we will see and we are starting to see pressure from clients on costs and on CapEx as well on new things. So we'll see. The second element that weighs a lot is that we have a lot of operational leverage. And as soon as our revenues come down, obviously, we suffer in the lower parts of the -- on the account. So we are putting in place cost containment measures, trying not to damage the skill set of people that we have and the prospects that we have. We reduced a little bit CapEx. We are taking some steps to our containment of costs, and that's what we are doing so far. And we'll see, okay? Depending on how business goes, we'll need to do more or less, whatever. And then in terms of the people management, the reality is that, although we do not need to reach an agreement with trade unions to implement some of the restructuring measures, we, so far, we always try to have an agreement with the unions because without an agreement, it gets litigation and in a year time, you might have a surprise. So we tried to get an agreement with them. What we are doing right now, which I tried to explain is having a very permanent dialogue with some of the trade unions, anticipating to them the facts that we are seeing in the business and what are the risks that we are seeing, and the opportunities. So in case we need to propose all the measures in weeks or in months, they are up to speed as much as possible, and we have a closer sort of closer approach to what could be the measures to be taken. And we will be taking the measures depending on how quick the situation recovers and what are the impacts we are seeing. As Cristina told you, we have an average of 250 people unassigned in IT and now we have about 650, something like that, which is obviously 400 people more. But this is out of total workforce in IT of close to 42,000, 43,000 people, okay? Now having said that, those people goes directly to the bottom line of our business, okay? At the same time, we are lowering a lot our subcontracting base so we can reaccommodate some of these people that are on the bench into projects, and we continue to work so far. It is true that we had the jump from 250 into 650 immediately the third and fourth week of March, that was very quickly. And for the remaining of April and May, it's been hovering around because we've been able to compensate the extra people that are out of job with reducing subcontracting and changing people from one projects to another. So far, situation is stable. In case this grows a lot, we will need to take steps or do something. Same as in Transport & Defence division, where we cannot recognize revenue, but we continue to have people working. So in Transport & Defence division, we have about 50 people on the bench right now, which is not a lot. Now having said that, there's a point in time that if we are not able to continue to execute, then we might have some people more on the bench. So that will depend also how quickly could things be restored. And that would be -- those will be the drivers for us to propose to trade unions some restructuring plans or not. We will see. But it's important for us to reach an agreement because without an agreement, we can force it, but then it might fight back. Okay?

[Manuel Lorente, Analyst]

Can you reach an agreement only for Minsait or only for T&D? Or it has to be at the group level?

[Fernando Abril-Martorell Hernandez]

Yes. No. Yes. No, no. We can reach an agreement for one or for the other.

[Javier Lázaro Rodríguez, Chief Financial Officer]

Yes. Okay. Coming back to your first and second question, if I understood, I mean, you were asking about revenue phasing of the first quarter, which was like 18% lower. And the Eurofighter revenues and margin. To come back to the second question, revenues and margin, obviously, in Eurofighter are not the same. We have healthy margins in Eurofighter, but that's it. Regarding revenue phasing, I think -- what I tried to explain before is that part of that shortage of revenues in the first quarter was due to lower execution in Eurofighter. We're talking in terms of margin almost 2/3 while the rest was effect on other projects. So we are positive on the Eurofighter recovery throughout the year. It will depend on how we are able to execute mainly the international projects, and some of them are pretty large. So I mean, a milestone, which is not covered, might have a significant impact. So depending on how we are able to execute those in the second and third quarter, we are able to recover in the second half of the year, the capacities to execute, then we will be able to recognize the revenue and recover part of that delay. I don't know if that answers your question.

[Manuel Lorente, Analyst]

Yes. But for example, in terms of security and defense, the drop was 18% in Q1. Let's say that -- what has been the trend? January and February has been flattish and March has been down 40%, but it has been roughly 18% down across the board, the entire quarter.

[Javier Lázaro Rodríguez, Chief Financial Officer]

Well, Eurofighter has been slow throughout the first quarter since the very beginning. The rest is mainly in the last month of the quarter, okay?

[Manuel Lorente, Analyst]

So in that sense, it is reasonable to assume that the T&D in Q2, the situation will be deteriorate further? My point here is basically that your previous statement saying that Q2 trends was similar than in Q1, which makes difficult to reconciliate by the fact that the vast majority of the drop has been at the end of the quarter.

[Javier Lázaro Rodríguez, Chief Financial Officer]

Maybe -- yes. I mean, what will happen in Q2 is that the COVID impact will accelerate. Okay. We'll see that as we've seen in the second half and during March, but we will start to recover the slower start in Eurofighter in Q2. So it will be similar, slightly lower, but maybe different composition or different composition, okay? So we will recover Eurofighter. We will reduce probably or increase sorry, the COVID impact.

[Operator]

[Operator Instructions] There are no further questions. Dear speakers, back to you for the conclusion.

[Ezequiel Nieto Baquera, Head of Investor Relations]

Okay, then. Thank you very much for the -- your assistance to this first quarter results conference call. If you have any other questions, please don't hesitate in contacting our Investors Relations department, which will be all of them, from their homes, very happy to answer you. Thank you very much.