Indra Sistemas SA

MAD:IDR

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to Indra first quarter '21 results presentation. I would like now to hand over to Ezequiel Nieto, Head of Investor Relations. Sir, please go ahead.

[Ezequiel Nieto Baquera, Head of Investor Relations]

Thank you. Good evening, ladies and gentlemen. Thanks, everyone, for joining us today in our first quarter results presentation. I'm Ezequiel Nieto, Head of Investor Relations. And as usual, let me refer you to the 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 intended duration will be around 1 hour.

[Fernando Abril-Martorell Hernandez]

Thank you, Ezequiel. Good evening, and welcome to our conference call on the first quarter 2021 results. Thanks for being with us this evening. Today with me, as usual, I have Ms. Cristina Ruiz, our Chief Operating Officer of Minsait; and Mr. Ignacio Mataix, our Chief Operating Officer of our Transport & Defence business; and also our Corporate General Manager and CFO, Mr. Lázaro. And as usual, after the presentation, we will be answering any questions that you may want to ask. Let's start and let's move to Slide #4 for the review of our main highlights for the first quarter. And let me start by saying that the first quarter in this 2021, it's quite good. And we are very positive because we are recovering the sales volumes that we had in 2019. This is before COVID. And at the same time, we are capturing the margin improvement derived from the cost containment and from the savings of our efficiency plan. And here on Slide #4, you can see the main highlights of this first quarter. Our net profit reached EUR 22 million, well ahead of 2020 and 2019 figures. Revenues are back to growth, both in reported and absolute terms, driven by Defence and by Minsait. Our reported first quarter '21 EBITDA grew by 25%, while our EBIT did it at 104%, 104% compared to the first quarter of 2020. Minsait delivered a really strong performance, with revenues up by 4.2% in constant currency and a clean EBIT margin over 4%. Transport & Defence also performed very well, with sales up 3. -- sorry, 7.3% and the EBIT up 58%. And it's worth mentioning Defence, whose sales grew by 21%. Finally, our backlog delivered double-digit growth and reached a new historic high. In short, a strong set of results, fully in line with our 2021 targets despite the fact that the pandemic is not over yet, and it's still a source of uncertainty for -- at least for the first half of the year. If we move to Slide #5, we see our revenues performance for the first quarter. Our revenues went up 5.5% in local currency, pushed by the growth registered in our both divisions and organically, taking into account the SmartPaper acquisition, we grew 4.3%. FX in the quarter had an impact of EUR 24 million, this is 3.3 percentage points. We believe that as the year progresses, we should have less quarterly impact from the FX. Moving to the right graph, we display the evolution of the first quarter over the last 2 years. And as you can see, we have recovered 2019 levels prior to the pandemic. And the first quarter '21 Minsait sales exceeded those of first quarter '19 while the revenues in Transport & Defence division are at similar levels. I also have to remember you that the first quarter 2020 was a quarter that was almost non-affected in sales by the COVID. So obviously, the numbers are also much bigger than last year. If we move to Slide #6, we see the backlog evolution of both Indra and our 2 divisions as well as the backlog of the last 12 months revenue ratio. Above on the slide, we see the backlog that went up 11% in reported terms and reached again a new historic high. Transport & Defence grew 18%, while Minsait remained almost stable. And at the bottom end of the slide, we see the backlog over the last 12 months revenues ratio that have reached 1.74x at the end of the first quarter of this year comparable to 1.5x at the end of the first quarter of last year. This ratio also improved in both divisions, highlighting the Transport & Defence division one, which is over 3x. If we move to Slide #7, we see the group's operating margin and the EBIT evolution. And on the left graph, we see the operating margin that amounted to EUR 52 million in the first quarter of '21 compared to EUR 31 million same quarter last year, equivalent to 6.9% operating margin compared to 4.2% operating margin in the first quarter of 2020. And if we move to the right graph, we see our reported EBIT of EUR 39 million compared to EUR 19 million in the first quarter of last year. And this has been equivalent to 5.2% margin in the first quarter of 2021 compared to 2.6% margin in the last year same period. As you can see, we doubled the EBIT with an improvement in our 2 divisions, thanks to revenue growth. Thanks to the very tight cost control and also the traceability of the savings plan. Both Cristina and Ignacio will dive deeper into the contribution of Minsait and Transport & Defence to the operating margin and to the EBIT of the group. Moving now to Slide #8. Please find the evolution of our final workforce and the breakdown by division. And on the left, you see that our total final headcount at the end of March '21 increased by 2.1%, this is 1,000 employees more compared to December 2020. But because we incorporated SmartPaper paper, which is 1,047 employees, this means that the workforce remained almost stable, minus 48 employees less on comparable terms. And moving to the right graph, we can see a decrease of 2%, 1,019 employees less of our total final headcount compared to March 2020, even taking into account the headcount contribution from SmartPaper. At the bottom line, we display that this is new. The evolution of the workforce and assigned to projects being right now at a very low level, thanks to the efficiency plans that we put in place at the end of last year. Now let me turn the call to Ignacio, our Chief Operating Officer of our Transport & Defence division.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Thank you, Fernando, and good evening to everyone. Now let's move into Slide #9, where you can see the order intake and the revenue 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 3% in local currency, boosted by a strong order intake registered in Defence & Security, which was up 28% in local currency. This growth was mainly due to the order intake recorded in the Eurofighter project. On the right graph, we display the evolution of our first quarter revenues, which increased by 8% in local currency, boosted by the growth recorded in Defence & Security, which was 21% in local currency, being the vertical of the company that registered the best performance. Mainly boosted by platforms, Eurofighter and the F110 frigates, Integrated Systems with air defense in Azerbaijan and Vietnam, and Simulations with the NH90 Helicopter. On the other hand, Transport & Traffic sales went down by 2% in local currency due to the double-digit decline posted in air traffic management. This drop was explained by delays in the recognition of some milestones in both Europe and AMEA; however, we expect to recover them in the coming quarters. Now please if we turn down to Slide #10, the operating margin and the EBIT for Transport & Defence. On the left side of the graph, the operating margin in Transport & Defence division in the first quarter reached EUR 24 million compared to EUR 15 million in the first quarter of 2020, equivalent to 9.1% margin compared to 6.2% in the last -- in the period of last year. The increase in profitability is explained by revenues growth, efficiency measures from the action plan as well as by higher contribution from Eurofighter. Moving to the right graph, EBIT in the quarter was EUR 19 million compared to EUR 12 million in the same quarter of last year, equivalent to 7.2% margin vis-à-vis 4.9% last year in the same period. Now I turn down to Cristina, our Chief Operating Officer in Minsait.

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

Thank you, Ignacio. Good evening, everyone. Let's move now to Slide 11, where we show the order intake and revenue breakdown of Minsait. On the left-hand side, order intake in the first quarter went down 8% in local currency. This drop is explained by the difficult comparison versus last year, where we signed relevant multiyear contracts, and by the sound delays in the new contracting, which we expect to recover in the coming quarters. Moving to the right graph, we displayed the evolution of our first quarter 2021 revenues. Sales went up 4% in local currency, mainly bolstered by Public Administration and Healthcare. We posted a 21% growth in local currency. Regarding the rest of the vertical, sales have remained similar levels compared to the previous year. Financial Services sales increased by 1% in local currency, thanks to the positive activity in Spain delivered from the project in some Banking Sector [ conciliation. ] Energy & Industry revenues went up 1% in local currency, mainly helped by the inorganic contribution of SmartPaper. On the other hand, sales in the Industry segment, which is more exposed to COVID, was close to double-digit decline; however, we are seeing good dynamics in the manufacturing sector in Brazil and Mexico. Public Administration and Healthcare revenues increased by 21% in lower currency, showing an outstanding performance in Spain and Italy. And Telecom & Media revenues decreased 1% in local currency due to the difficult comparison versus the first quarter 2020, in which sales grew 15%. However, we have a good prospect for the year, in general, as we recently got a go-ahead with relevant contracts in Colombia. If we move -- let's move now to Slide 12 to present Minsait profitability. On the left side, you can see the evolution of Minsait operating margin, which is the first quarter of 2021, it stood at EUR 28 million compared to the EUR 16 million in the same quarter 2020, equivalent to a 5.8% operating margin compared to 3.2% in the first quarter of 2020. This increase is explained by the revenue growth, efficiency measures from the action plan, together with the improvement of margins in Energy & Industry, and Healthcare. Moving to the right graph. Reported EBIT was EUR 20 million compared to EUR 7 million in the first quarter 2020, equivalent to a 4.1% margin in the first quarter 2021 compared to a 1.5% in the first quarter 2020. Now I leave the floor to Javier, our finance -- to see our financial review.

[Javier Lázaro Rodríguez, Head of Corporate & Corporate General Manager]

Thank you, Cristina, and good evening, everyone. Let's start the financial review with the analysis of the evolution of the free cash flow on Slide 13. On the top part of the slide, you can see free cash flow for the quarter that was negative EUR 17 million. And this includes an outflow of EUR 11 million related to the workforce transformation plan. So this is actually a net improvement of more than EUR 40 million if we compare the same period last year, or over EUR 50 million better if we exclude the cash flow from the restructuring plan that I just mentioned. The improvement of the operations and the lower working capital levels in 2021 were the main reasons behind this improvement. Down on the slide, you can see cumulative free cash flow for the last 12 months, standing at EUR 125 million, or actually EUR 173 million, if we were to exclude the EUR 48 million associated to the transformation plan over the last few months, including the fourth quarter and the first -- last year, and first quarter this year. This is the kind of levels that we had on the years, but we're still benefiting from the normalization of working capital in 2017 and 2018. So good performance in terms of cash flow for the quarter. If we now move on to Page 14, let's analyze the net debt position, which stood at EUR 505 million versus EUR 481 million in December. And if we break down the different contributors, we can see that, as usual, operating free cash flow was the largest positive contributor to cash flow generating EUR 58 million. On the opposite direction, net working capital contributed negatively with minus EUR 54 million, reflecting the seasonality of the first quarter of the year, as we will see later on. If we continue moving through the bridge, CapEx was EUR 4 million versus EUR 17 million last year, mostly explained by lower intangible investments derived from the action plan, and also the deconsolidation of the CapEx of Metrocall, the company that we sold in the middle of last year, which had intense CapEx program just before we sold it. We also got higher levels of grant this year than we got in previous years and that net out the actual final CapEx figures. Tax payments, cash tax payments remained stable versus the same period last year at around EUR 2 million and the variation of other financial liabilities that you can see. In Europe, this is basically the reversion of the leases charged under IFRS 16, which are actually not included for some strange tweak of the accounting rules as part of the operating free cash flow and need to be corrected here to compensate for that. Cash payments linked to our financing to a debt amounted to EUR 8 million compared to EUR 5 million last year. And this is explained by basically the higher interest rates and some other financial expenses that were higher this year than in the previous year. And then finally, financial investments and other noncash flow items stood at negative EUR 7 million. This includes the acquisition of shares in the open market to cover payments due and to a medium-term compensation plan. Moving on to Slide 15, let's analyze the evolution of the 3 main building blocks of our working capital, which stands at 0 days of sales compared to plus 15 days of sales a year ago, or minus 9 days of sales in December in 2020. During the first quarter, our working capital increased by 9 days of sales, which is in line with the seasonality of the first quarter. It's the same amount in days of sales that happened a year ago. If we analyze the evolution of the 3 different components separately, we can see that inventories went up by 5 days of trading, which is explained by the increase in work in progress typical of this part of the year after the invoicing of clients at the end of the year and also reflecting to a smaller degree, this time, some delays associated to COVID. If we look at accounts receivable, we see that they increased by 5 days of sales, and this was despite the traditional seasonal decline of the first quarter. And the reason for this was mostly -- has to be found mostly on the mark of a strong sales during the month of March as well as some consumption of some of the advances from clients that, if you remember, were particularly strong during the fourth quarter. For its part, accounts payable remained stable during the first quarter, which is also a bit unusual given the seasonal decline that you normally see in this item. Last year, it went down by 9 days of sales and this is mostly on the back of some large procurement actions that we took during the period. Moving on to Slide 16. Let's look at the evolution of net debt and leverage ratios. As usual, we eliminate IFRS 16 from both the numerator and the denominator. Net debt, as we said, amounted to EUR 505 million translated into 2.4x net debt-to-EBITDA, still reflecting the weak operating performance of 2020 in the context of COVID that's affecting the denominator. And obviously, that makes the figure larger than it would have been -- should we be taking into account normalized months. This ratio compares to 2.2x a year ago or 2.5x in December. Nonrecourse factoring stood again, as usual, at this final figure of EUR 187 million, which we keep constant to facilitate comparison of cash flow generation. And now just to finish the presentation, let's look briefly at our debt structure on Slide 17. On the left-hand side, you see the composition of different financing sources. We've got it all. Corporate and convertible bonds, bank facilities, R&D loans and even a small facility from the European Investment Bank. We have against that a cash position of EUR 1.150 billion, so almost EUR 1.2 billion of cash plus some available short-term facilities of just over EUR 160 million. On the right-hand side, you can see the gross debt, the cost of the debt, which is -- remained stable at 1.9%. And finally, at the bottom of the page, you can -- we show you the maturity profile of our debt which, as we like to highlight, is lacking in any kind of pressure in the shorter term, during the whole of 2021 and 2022. So with that, we finalize our results presentation. Thank you very much for your attention. And now let's move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Manuel Lorente from Mirabaud.

[Manuel Lorente, Analyst]

My first question is regarding the phasing of the EUR 90 million savings that you announced for this year. Which one were already incorporated on the first quarter and what is your expectations for the remaining of the -- for the rest of the year? My second question is on some granularity of the more than EUR 200 million guidance. On the light of the first quarter results, we have seen Minsait with an EBIT of -- roughly 4% of EBIT margin, and T&D roughly an EBIT margin of 7%. Historically, Minsait has been below this level and on contrary, T&D has been well above this level. So a little bit of a breakdown of your of the margin progression of both lines throughout the year will be great. And probably my final question is on, well, do you have any comments regarding the recent news flow on Hensoldt. Obviously, looks like the deal has not been made. But what are your thoughts for -- in terms of M&A going forward?

[Fernando Abril-Martorell Hernandez]

Okay. We are getting organized on who is answering which question. I mean on the efficiency measures, we are doing okay. I mean, we are on track. So that's all. We're going on track. It is true that part of the efficiency measures related to labor are not fully in effect in the first quarter because the Transport & Defence division was on a voluntary basis and we are doing okay. But people leaving, it's more sort of back-ended really. Okay. And on the rest of the measures we are doing on track. So it's not really -- we never said what was awaiting each quarter, but clearly, the first quarter is not -- is less than the 25% to put it into context, just because on the label people on Transport & Defence division, it's back loaded, okay? It's not coming now, it's going more towards the second half. Okay. In terms of the margin progression in the divisions, I mean, Cristina?

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

Okay. For Minsait, we set around the level that we have in 2019 around 3.8%, maybe a little bit better, maybe around 4%, but because the efficiency plans, revenue, if the earning is so well, and we get the operating leverage that we expect, we think that would be around 4% in the year.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Okay. And with regard to Transport & Defence, I think we expect to go back to the double-digit margins, probably with the recovery of the delays of 2020, despite still is not so easy to execute the progress, but we are progressing there in which -- here, we have obviously a high contribution from the Defence & Security. Also the efficiency plan is helping. And also, we have a higher level of Eurofighter sales in 2021 compared to 2020. So that should help on the recovery to the double digit.

[Javier Lázaro Rodríguez, Head of Corporate & Corporate General Manager]

And on the Hensoldt, I mean, we believed it was a very good strategic fit despite, obviously, risks on the execution and complications because it was only 25%. So that was the reason why we looked at it seriously. This is a very good company. It's probably the company that is more similar to our Transport & Defence division really in the Defence space in Europe. So we thought it was a very good strategic move. It's linked to the German budget. We have intense collaboration in many areas already with them, with people with management. And given that there was opportunity to be the Industrial partner, we thought that was a good idea. Obviously, we didn't win the contract. So that's it. Okay.

[Manuel Lorente, Analyst]

Okay. So just maybe a quick follow-up on the margin progressions on T&D. If the first quarter has been 7%, and do you expect a full year going back to this double-digit threshold? This margin improvement should be a combination of top line recovery, more consolidation of savings, especially as Fernando was saying on the workforce planned and a little bit more of Eurofighter? Or am I missing something?

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

No. I think we continue to expect some growth from that side, the improvement of efficiency. We do not expect further growth on Eurofighter, so we have higher growth already, but that's not going to be a differential contribution. So I think it's a little bit of mix of everything and a better execution on the rest of the year.

[Operator]

Your next question comes from Bosco Ojeda from UBS.

[Bosco Ojeda]

I have a question on your contracting trends. I want to ask you if you are seeing any signs of recovery? What are the feelings of your clients? Do you see a pickup in some areas or how is that going? And related with that, the -- whether you see any demand for -- coming from this European funds? If there's anything specific coming there? Is it sizable or it's not? What are your comments on that?

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

In the Minsait side, we have a very good expectation in Latin America where we have a very good position and very quality clients. And our commercial team is moving forward very well, so we have good expectation in Latin America. And in Spain, it depends a little bit on context -- macroeconomic context, but we think that our clients would continue to invest in digitalization process. So there, we will have opportunities. If the European funds arrive to Spain, we think that Public Administration will be -- help us with revenues. In general, our clients, we use these funds to come in -- to continuing digitalizing the process. So for us, everything would be okay. It could be a very good year in this sense.

[Fernando Abril-Martorell Hernandez]

But it's not in the budget. So we have not budgeted anything, not expect anything from European funds. Okay? And also because we believe that in case it has an impact that we believe it will have an impact because what Cristina just said, it will be more 2022 than in 2021, given that the money arrives, it's distributed blah, blah, blah. And then they have to make the plans. So -- but the more they give for the Public Administration and the clients to do things in digitalization; obviously, it will be good for us anyway because it will -- we will get a share of that directly or indirectly. Ignacio?

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Yes. And I think on Transport & Defence, I think we had a very good couple of years on the back of ours. We still have a few contracts in the next months that look good, both in Spain and outside of Spain. And obviously, we are progressing towards finalizing the approvals, which will happen probably before the summer, and we expect to have FCAS in the second half of the year, but which will be around a couple of hundred million contract, which is very relevant for the company.

[Operator]

Your next question comes from Nicolas David from ODDO BHF.

[Nicolas David, Analyst]

And first, congrats for the strong results. My first question is in regards to Minsait. Should we be aware of some exceptional items explaining the strength of Minsait in Q1, I mean, both in terms of growth? There, I'm thinking about the Public Sector and Healthcare, which is growing 20%. Is it sustainable? Or is it kind of a one-off? In terms of profitability, you should enjoy just the impact of the efficiency plan or did you also enjoy some specific one-off item? And still regarding Minsait, given the strong Q1 and given that the comps are getting easier, it seems like for Q2 and Q3, with this embedded growth you could be able to post like high single-digit growth in Q2 and Q3, so is this assumption right? Or am I missing something in terms of seasonality? And my second question is regarding ATM. ATM declined 13% in Q1, which seems fair given the context, but given the fact that you signed some relevant contracts, I'm thinking about China and Poland notably and given that the cost might make it easier going forward, can we expect a significant improvement? Can we even expect that this business could go flattish somewhere during the year?

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Yes. Okay. Regarding ATM, I mean, yes, we had a weak first quarter. I think we see 2 realities. European one, in which we are, I would say, at full speed with the contracts in Europe, and we see very limited issues there. It's true that the execution of contracts internationally. I mean, in any country with still difficulty to travel and so on and so on is dragging the capacity of recovery, full recovery from what we had in 2019. So we still expect a little bit of a few months of non-normality, so it would take some time to get to normality. But we expect single-digit growth for the year.

[Fernando Abril-Martorell Hernandez]

And in respect to Minsait, and in general, I would tell you that, I mean, these numbers for the first quarter are pure, neat, and it's just very strong set of results. I mean, there's nothing really unusual. There's no one-off. It's the usual seasonality. There's nothing -- if something, I will say that we have the Easter against us because we have Easter, last year, it was on the second quarter and this year, it's on the first quarter. And you know that, that affects us a little bit. We had a very strong first quarter because our revenues went very well, okay? And then we did a very good cost control exercise. Having said that, obviously, this is the start of the year. If in the second quarter, we see the numbers continue to be good, we might even have to revise what are the numbers. You also have to take into account that we are comparing now on the revenues with the toughest quarter because revenues last year, first quarter, were not affected by COVID, were marginally affected by COVID. So despite that, we had -- that's why we believe this first quarter is very strong. Now at the same time, we are comparing on the cost side with the first quarter last year, we had 8% more salaries than '19 and so on and so forth. So probably the cost comparison will get worse as we move forward in the year. And the revenue comparison will get easier, on the other hand, okay because we are entering now the month in which we were affected by COVID. So revenue should behave better compared to last year. But at the same time, we have started to reduce our costs, for example, in travel and in many other costs. And while in the first quarter last year, we still had those costs high, and we are now obviously pretty efficient plus the redundancies, plus, so on and so forth. But clearly, we are happy with the first quarter because the numbers are quite neat, and there's nothing really unusual nor extraordinary. And again, if something, Easter is against us.

[Nicolas David, Analyst]

Okay. So it's not foolish to believe that you could post high single-digit growth in Minsait in Q2?

[Fernando Abril-Martorell Hernandez]

I mean, obviously, we have something against us, which is that the first quarter also, we have the worst comparison on the FX because we had just in Minsait, EUR 25 million against. We'll see how it goes. I mean, I think Cristina said before that the [ climate inclines ] is not negative. Lat Am is doing well. It did very well last year. It has done well on the first quarter this year. Our digital is improving compared to the rest of the backlog. And then there's lots of things going on. You know that the IT division, things move quite quickly. You can recover quite quickly. You can also go down quite quickly. But right now, things are okay.

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

Things are okay. And we have good expectation on this rest of the year, but we are cautious because the COVID is still there, and we have some clients that are suffering a lot. So that is...

[Operator]

Your next question comes from Stacy Pollard from JPMorgan.

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

Three from me, one on Minsait. Digital was 27%. So what is your midterm target there? And maybe just what is the bulk of the non-digital? Just so we understand whether that's shiftable or more stable. Secondly, can you just talk us through the seasonality of free cash flow this year as well? And should we expect positive free cash flow in Q2 and then the usual strong Q4, I guess, maybe a little bit of a chat through that? And the third question, how does the M&A pipeline look? Remind us sort of what other areas you'd be looking at for M&A, barring the situation that didn't occur?

[Javier Lázaro Rodríguez, Head of Corporate & Corporate General Manager]

Stacy, on the free cash flow. Let me start with that seasonality, it should be similar to other years. Q2 should be negative. Q3 should be neutral and Q4 should be very strong. Same as usual. We don't anticipate any surprises there. You always have the advances from clients depending on when you sign the contract, they may come at different points in time, but this is the pattern that we normally have and that we would expect to see this year as well. With respect to the M&A pipeline, as you mentioned, we have a number of things. Obviously, none of the size of the one that Fernando mentioned before, the one that we have the usual bolt-on acquisitions in the typical sectors. As we mentioned, we are looking at things in cyber, in digital and some other things in Defence as well, mostly on the technological side.

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

Okay. In Minsait digital side, more or less, the Minsait, we have -- at the moment, we are growing -- start to grow in digital and Proprietary Solutions this quarter. We gained from last quarter where we decreased our sales 5%. And now we are -- we have made a very good first quarter in digital with 3.5% of growth. And in the other side, we have the more legacy offering in the company, the outsourcing in Process and Technology and where we are decreasing a little bit, and we were expected to be flat more or less around the year. In digital, we think that we will have a strong demand from our clients on that, and we have good expectation in the next month, in the next quarter. So we are pushing our [indiscernible] with the organic growth and also with inorganic divisions, as Javier said.

[Fernando Abril-Martorell Hernandez]

And don't forget that, Stacy, in the most traditional, we have more impact from FX as well. So the numbers that Cristina has told you are the reported numbers. So I mean the declines or -- the flattish scenario that she was expecting on the more standard things. Don't forget that it's flattish despite that is where we have the biggest impact in FX. We have more impact in FX there than in digital.

[Operator]

The next question comes from Fernando Lafuente from Alantra Equities.

[Fernando Lafuente Seseña, Equity Research Analyst]

Two -- well, three questions for me, please. Quick ones. A follow-up for Cristina on the margin of Minsait. I understood that you expect the margin by the end of the year close to the 4 percentage. That's what I -- is that right or I misunderstood what you said? The second question is on Transport & Traffic, well, actually, on the margins. I would like to have your view on the potential recovery. With the -- well, what was basically the levers that you get? I know you normally don't say the specific number, but just your impression of where are the margins today? And where do you expect margins going forward? I mean, it's good to see the top line for especially Transport growing just to have the sense of -- in terms of margins. And last one, on the net cash. I mean, if I look compared to last quarter, there's been a big improvement, which is more or less half of your free cash flow generation estimate for the year. You said that the evolution should be more or less similar to previous years, but should we expect similar improvement? I mean, probably not similar, but improvements versus what you made last year in terms of absolute figures?

[Javier Lázaro Rodríguez, Head of Corporate & Corporate General Manager]

Fernando, on the cash flow. And Fernando said, with respect to the rest, I mean, we started the year in a positive tone, let's see what the year brings. I mean, we gave some guidance. And I mean, so far, we stick to it. It's too early in the year. I mean, we had a very good first quarter. In terms of cash, we know there is some volatility there. We don't see any reasons why it should get worse, but it's a tricky, tricky year. But basically, we stick to what we said from that point of view.

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

Okay. Minsait margins, as I said, we expect to be around 4%, more or less, maybe a little bit better, but we are very cautious at this moment. It's only the first quarter. The efficiency plans on revenue [indiscernible] is going well, but we have all the year to get that level. So we expect at least 4%.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Okay. If I understood on Transport & Defence, you were mentioning basically Transport, so ATM and Transport on the margins. So there, first, we are slow in revenues. We don't have an issue on the margins. So I mean, that is basically more or less in line with what we were expecting. The saving plan should help on the recovery there. So I mean, that's it. So we are expecting to recover that. And mainly, we will recover with the sales.

[Fernando Lafuente Seseña, Equity Research Analyst]

Maybe -- just a follow-up Ignacio. Sorry, maybe, I explained wrongly myself. I mean, I was talking about Transport specifically. As you are saying, yes, the top line is improving, which was one of the necessary conditions for margins of this specific business to start to recover. So my -- I was more -- I wanted to have your feeling on this specific margins of Transport. I mean, this has been a loss-making business or even flattish or breakeven business in the last few quarters. Should we expect this year to be really the year of recovery of the division? But at least in terms of top line, it looks good, at least to me.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Okay. I think in Transport, obviously, the margins we have in Transport, as you say, we don't disclose the margins specifically, are lower than the ones we have in Defence and lower than the ones would have in traffic management, that's very clear. Second, I mean, we've had a few contracts, as you know, which I think now are performing well, and you've seen the news on the Mecca-Medina high speed line, which was signed, the agreement, to start operation again. And there, we have a few sales stock with also low-margins because of the issues on the part of the program. And so we will expect recovery there. But I think -- I mean, having said that, the margins are not similar to the ones we have in the other 2 areas. I think we expect some recovery on margins there.

[Operator]

The next question comes from Gregory Ramirez from Bryan Garnier.

[Gregory K. Ramirez, Analyst]

A couple of questions on my side. First of all, going back to the Defence & Security business obviously, you mentioned Eurofighter as a catalyst, that's -- probably there is no big difference with what you said in February regarding the growth you expect. But could you imagine that the rest of the year will stay at growth levels, which are probably not as strong as Q1 in Defence & Security, but still up double digits? My second question is regarding the surprise finally that we had in Q1 in terms of revenue because I remember you mentioned that you were expecting a low single-digit revenue decline. And finally, it's longer digit growth. It looks to be that...

[Fernando Abril-Martorell Hernandez]

Sorry to interrupt. The line is faltered. We cannot hear you well. We lose some of the comments, sorry.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

So maybe we got the first question, but not the second one.

[Gregory K. Ramirez, Analyst]

Yes. So my second question was regarding the Q1 revenues, which were finally well above consensus. And remember that in February, you mentioned that you were expecting Q1 revenue declining, slightly declining at low single digit decline. But now, you delivered low single-digit growth. And the surprise mainly to stem from the Minsait division. But also on T&D, but it looks to be more on Minsait. So what are the specific elements which have created -- generated the surprise, I would say, in Q1, just to clarify? And my third and last question was regarding Q2 and Q3 because you were down like-for-like, I think, it was 6% to 7% last year. Given the strong Q1, solid Q1, can you imagine that Indra, or the group as a whole, could generate revenue growth around 10% or even more in Q2 and Q3?

[Fernando Abril-Martorell Hernandez]

Okay. I think -- I mean, if we don't answer properly, just -- you can reenter -- request for re-question. Okay. Okay. On the first quarter, we had no surprises. We got a better ported than we expected, especially in March. On the Transport & Defence division, don't forget that we have the revenue recognition by the NIIF and, therefore, that might shift recognitions from one quarter to another, and we've been late throughout 2020 because we couldn't -- we had delays and we were not able to recognize revenues. And now in the first quarter, we've been able to recognize revenues, especially we had better revenues in Transport and also in Defence, okay? And that's it. And then on Minsait, we had strong numbers from Public Administration. We had strong numbers also from Latin America on the quarter, and that has basically top it up a bit, okay? Now 10% for the whole year on reported terms, even on local currency, we believe that we -- our objectives are not as high as that, let me tell you like that. So we'll see what happens. What it is true is that the first quarter is stronger, in general, both for the combination of level of revenues and good cost control. If we have a second quarter good as well, then we might revise our targets for the whole of the year when we present our second quarter numbers. But I think it's very early. Don't forget also that what I said before, we are comparing now on the cost side with the highest cost quarter of all of last year. And so we'll see what happens on that. So we will be having tougher comparison on costs as we progress through the year, and we will have easier comparison on revenues as we progress through the year, but there's a lot of uncertainty still. Still we don't have -- we cannot make our people travel and fix some of the things. I mean, it's still very complex and bumpy. It's more bumpy on Transport & Defence, on the revenue recognition. And it's more sort of flow on the IT side, where we are positive. We'll see what it gets. We are positive. It's the first time, I think, in 6 years that I said, we have a very good -- I said in the statement, it's very good results. I think I've never said that ever in the past. So we are positive. The Board was ecstatic when they read the report. So yes.

[Gregory K. Ramirez, Analyst]

Yes. When I was referring to 10%, it was for Q2 and Q3, obviously.

[Fernando Abril-Martorell Hernandez]

I think it's -- I don't think so. The worst -- what was our worst quarter was the first one? Or was it the second one?

[Cristina Ruiz Ortega, Senior VP of IT Business & Executive Director]

No, it was the third one.

[Fernando Abril-Martorell Hernandez]

It was the third one because we expected second quarter last year to be the worst, and then it came out the third quarter, especially September -- sorry, October was really -- September and October were the 2 worst months that we had. And one came in the third and the other one in the second. So second was 7.6% down in sales, and the third was 9.8% down in sales. So I think 10% is a little bit on the top compared to our guidance. We gave you guidance of EUR 3.2 billion revenues on constant currency, okay? So we'll see. We might improve that. We'll see. I think the second quarter will be important because we'll see the run rate compared to the second quarter, what was already affected by COVID, and I guess we can project better what happens. Notwithstanding the fact that, again, it bumpy. The revenue recognition and Transport & Defence division, and it could shift and we could get delays. So I think it's early to say. Okay?

[Operator]

The next question comes from Laurent Daure from Kepler Cheuvreux.

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

Congratulations for the first quarter. I have also 3 questions. My first one is, sorry to strain you again as other analyst on your full year margin from Minsait to 4%. I'm struggling to understand why it's not going to be better than the first quarter? I understand you want to be cautious. It's early stage, but the environment should be better. You probably did not have the full impact of the saving planned in Q1. And generally, the seasonality is quite geared in margin terms from the fourth quarter. So if you could help us to understand what could be a drag to beating the first quarter profitability? My second question is on the Transport & Defence margin in the first quarter, only 7% roughly, while you earn much better Eurofighters, which are set to carry high margins. So does it mean that you had a strong negative impact on one of the units? And my final question is, if I remember well, you had like EUR 100 million of delays due to COVID on the Defence business. Now as lockdowns are going to ease during the summer and, hopefully, everything will be opened in the second half, do you have room to recoup all the revenue that shifted last year? Or do you believe that there is to see some flowing into 2022 only?

[Fernando Abril-Martorell Hernandez]

Okay. I mean, correct me if I'm wrong, Cristina. I mean, we understand that the first quarter looks better, looks pretty good in terms of margin. But bear in mind several things, okay, which I think we should bear in mind. First of all, don't forget about the cost comparison element that I'm telling you. We started 2020 with a much higher labor cost base compared to 2019, and we have done a lot of work throughout 2020. And at the end of 2020, we did also the redundancy plan. So now we have sort of the biggest gap comparison in terms of labor costs underlying. Not only those, but other costs, okay? For example, travel costs, okay? We are not traveling yet. We are even below budget because people are not able to travel and so on and so forth. So clearly, this first quarter, it's going to be, in my view, in our view, it's going to be the easiest comparison on the cost side, and we had a very good level of sales at decent gross margin, okay? Okay. So we had a much better EBIT margin. Now for the rest of the year, the cost comparison will be more difficult. That doesn't mean that on absolute terms, we cannot continue to improve because we will continue to put a lot of tight control on costs and if we have a recovery in sales, that gives us a lot of operational leverage, and we are -- and we manage to control the costs. We might be on the upper part of the range that we internally have as an objective for the margin in Minsait. But I think 4%, which is what Cristina said, is what we believe cautiously we can give as a guidance now. And again, we might change that or not, depending on the second quarter when we present the first half numbers. Okay? And that's it. There are many other elements that have to be taken into account. Don't forget also that last year, on the variable compensation, also, we had to adjust. And this year, obviously, depending how it goes as per the contracts of about 6,000 employees that are entitled to have bonus, we have to see all that. So I think that we are very positive again. And again, we might revise targets, depending on how the second quarter is and, obviously, we'll give you due explanations. But I think for the time being, I think, we believe 4%, maybe slightly higher, but that's where we are so far. Also we have elections this year, which it depends. We have a budget and now we have more elections than we thought we will have, but these are standard elections in Spain and so on and so forth. And maybe we can reap a little bit of revenues from that compared to budget although, we'll see. And on the second question.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Okay. On Transport & Defence, let me see if I can -- first of all, I mean, as we said, we have growth -- or revenue growth in mainly international projects, which we should think that will not have the same margins that we have in other projects. And on top of that, some of that growth is in Transport, in which, I would say, and especially one project and which will have, I would say, extremely low-margin for not -- worse than extremely low margin. So there is a different mix here in the first quarter. Second, you mentioned Eurofighter, it's true we have higher sales in Eurofighter, but slightly higher. It's not dramatically higher. So it helps a little bit, but it's not a substantial help. And also, I mean, you mentioned, we are recovering part of the delays. But unfortunately, we are not going to be able to recover in 2021, the delays we had in '20. Some of them will shift into '22, and it will shift because you cannot recover delays. You have all sorts of issues on supply chain and so that in some occasions generate the delay. In some occasions, our clients, because also they are suffering and mainly the ATM, so traffic management clients, they -- if you are delayed because of the supply chain or because of whatever reasons, and they don't need -- rather or whatever, they prefer that you deliver that on the following year. So we're not going to be able to recover fully the sales, some of that will be shipped to 2022.

[Operator]

[Operator Instructions] And the next question comes from Carlos Treviño from Santander.

[Carlos Javier Treviño Peinador, Equity Analyst]

One question and one clarification. The clarification is for Ignacio. If I had understood well, I think that you had commented that your expected single-digit growth for the year is in air traffic management. Just to clarify that this is for the business as a whole and not only for any specific region? And a question, Fernando, on Hensoldt, you have commented that you have an intense collaboration with Hensoldt. My question is if you think that this collaboration could be impacted moving forward by the fact that one of your competitors now, Leonardo, is taking this industrial stake in the company. So do you think that this could have an impact on this collaboration and especially on your business that you are generating through this collaboration moving forward?

[Operator]

Ladies and gentlemen, the speaker line has dropped. Please hold your lines while we try to reconnect the line. Thank you.

[Fernando Abril-Martorell Hernandez]

Hello? Hello?

[Operator]

Yes, speakers, you're online. Please go ahead.

[Fernando Abril-Martorell Hernandez]

Yes, sorry, Carlos, it's not that we didn't want to answer, it is that we unfortunately pressed the wrong button. I think Ignacio will answer to both of the questions, on the Hensoldt as well. Okay.

[Ignacio Mataix Entero, Senior VP of T&D Business and Executive Director]

Okay. Yes, I think -- I mean, we are expecting for 2021 recovery with single-digit growth in traffic management compared to 2020 as a whole. Okay? So different probably speed on the regions. But as a whole, recovery with a slight growth on the single digit. With regard to Hensoldt, I think we are good partners in a number of programs. I mean, one of them is I would say, the larger one is Eurofighter. And the radar of the Eurofighter, the next radar generation. I mean we do not expect -- and we have other collaborations in other programs. And obviously, FCAS will be also an important collaboration for the future. I mean we do not expect the -- and we are also cooperating with Leonardo on some Eurofighter programs also and Leonardo is supplier to us. We don't expect that nothing is going to change for sure in the current programs and current programs in Defence take long. So we are going to still develop radar for the Eurofighter together for the next 10 years and continue to serve them for the next 20 or 25 years. So we don't expect any change in the cooperation we have with Hensoldt. It's extremely good cooperation. As Fernando was saying, there's a good relation -- management relationship. And I think things will not change in the short to medium term.

[Operator]

There are no further questions.

[Fernando Abril-Martorell Hernandez]

Okay. Thank you very much for your presence in this call. And as usual, any other questions you may have or any difficulty you may have in understanding this set of results; obviously, our Investor Relations department is at your disposal to help you. Thank you very much.