Indra Sistemas SA

MAD:IDR

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to Indra's First Quarter 2022 Results Presentation. I would like now to turn over the call to Mr. Ezequiel Nieto, Head of Investor Relations. Please, sir, go ahead.

[Ezequiel Baquera, executive]

Thank you. Good morning, ladies and gentlemen. Thanks, everyone, for joining us today on our 2022 first quarter results presentation. I'm the Ezequiel Nieto, Head of Investor Relations. And as usual, I will 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 Indra's CEO, in Ignacio Mataix; and our new Minsait Managing Director, Luis Abril; and our CFO, Javier Lazaro, and the intended duration will be around one hour.

Now let me turn the call to Ignacio Mataix, CEO of Indra. Ignacio, floor is yours.

[Ignacio Mataix Entero, executive]

Thank you, Ezequiel. First of all, I'm delighted to introduce Luis Abril to all of you. The Board appointed last week Luis as Executive Director and Minsait Managing Director. Luis has a long and successful track record in Minsait. He joined us at the company 8 years ago and he was Vice President of Minsait and he led the Energy and Industry vertical before last week's appointment. Welcome, Luis.

[Luis Abril Mazuelas, executive]

Thank you, Mataix.

[Ignacio Mataix Entero, executive]

Let's move now to Slide #4 for the review of our main highlights and the results. Our 2022 first quarter results stand out for the strong demand and commercial momentum that both our business are enjoying. The solid commercial activity together with our record backlog and our already delivered efficiency plans have been clearly reflected in our P&L, which has posted double-digit growth in all items. As such, revenues increased by 13.3% in the first quarter of 2022 vis-a-vis the first quarter of 2021, with Minsait delivering 17.3% growth, while T&D posted 6%.

Secondly, EBIT grew 54% year-on-year. The first quarter of 2022 EBIT margin reached 7% versus 5.2% in the first quarter of last year, with both divisions improving their margins at the same time. Net income reached EUR 39 million in the first quarter, which is 76% more than in the first quarter 2021. The first quarter 2022 was also positive in terms of free cash flow generation, in fact, the best first quarter in the last 6 years. In total, EUR 13 million positive in the first quarter versus EUR 17 million negative in the same quarter of 2021.

As a consequence, we decreased again our leverage ratio to 0.7% compared to 2.4x one year ago. In a nutshell, a pretty solid start for the year in line with our guidance and our 2021, 2023 strategic plan. If we turn to Slide #5, we show our revenues performance for the first quarter of 2022. Reported revenues amounted to EUR 851 million in the first quarter and were up by 13% vis-a-vis the first quarter of last year. while revenues in local currency grew 12% with ForEx contributing positively with EUR 7 million because of the appreciation of some Latin American currencies. Revenues organic growth, excluding the impact of last year acquisitions and the FX contribution was up 11% compared to the previous year.

On Slide #6, we expect the revenue breakdown by region where you can see that all regions grew across the board. America printed a 5% increase in LatAm currency, while Spain, Europe and EMEA delivered double-digit growth. If we turn now to Slide #7, we see the group's operating margin and EBIT evolution in the first quarter of 2022.

On the left-hand side, you can see now how operating margin improved to EUR 72 million in the first quarter compared to EUR 52 million in the first quarter of 2021, equivalent to 8.5% operating margin vis-a-vis 6.9% operating margin in the same quarter of last year, thanks to the operating leverage due to the revenue growth and the benefits of our past efficiency plans. As such, both divisions improved their margins, as we will show later. On the right-hand side, EBIT in the first quarter of 2022 was EUR 60 million compared to EUR 39 million of the same quarter of last year, growing 54% in reported terms, equivalent to 7% EBIT margin compared to 5.2% in the same quarter of 2021.

Turning now to Slide #8, please find the evolution of our headcount with the breakdown by division. Our total final headcount at the end of March increased compared to both December '21 and March '21, explained by a very strong levels of demand that we continue to see in our main markets and the integration of the workforces from the bolt-on acquisition we did last year. At the bottom of the page, we display the evolution of the number of employees not assigned to projects, which remain very low for another quarter.

Now let me move into transport and defense results part on Slide #9. Here, we show our order intake and revenues breakdown of the 2 businesses of our Transport & Defense division. In the first quarter of 2022, order intake was up 37% in local currency, backed by the strong performance of Defense & Security, which was 98% up, highlighting the contract of the MK1 radar of the Eurofighter project for Germany and Spain. On the right side of the slide, revenues in the quarter increased by 6%, both in local currency and in reported terms, pushed by growth registered in transport and traffic, which was 11% with double-digit growth for both air traffic and transport.

In Aircraft and management, this is explained by the higher activity with Enaire in Spain and the European programs in Sweden and Belgium, while in transport, was due to the higher activity in the rail projects in Spain, Interurban systems in Riyadh and Control Systems and Ticketing in Egypt. For this part, defence & security sales remained stable for the period.

Now if we go to Slide #10 on operating margin and EBIT for Transfer & Defense, the operating margin in the first quarter of 2022 reached EUR 30 million compared to EUR 24 million in the same quarter of last year, equivalent to 10.7% margin versus 9.1% last year same period. This improvement was explained by the increase in profitability in transport and traffic. On the other side, EBIT in the first quarter of the year was EUR 27 million up -- EUR 27 million compared to EUR 19 million last year same period, which translates into a 9.8% EBIT margin in the first quarter compared to 7.2% for the same quarter of last year.

And now let me turn the call to follow the presentation to Luis.

[Luis Abril Mazuelas, executive]

Thank you, Ignacio, and thank you for your introduction, and Good morning, everyone. I'm actually very happy to begin today my relationship with the financial community with this results call. In fact, I think, I know Minsait well because of my last 8 years leading different areas within it, but this is my first call as responsible for the whole division. So if you want, let me start with the Minsait results presentation with this Slide #11, where we basically saw a strong commercial push, both in our order intake and also in revenues in the first quarter of 2022.

As you see on the left side graph, order intake increased by 44% in local currency in the first quarter of '22 versus the first quarter of '21, basically backed by the all the growth delivered by all our verticals. Here, among the verticals, it stood out the growth showed in Public Administration & Healthcare, which amounted to 110% in local currency, mainly helped by the order intake of the elections project in Angola, while the rest of the verticals basically stayed comfortably in the double-digit territory. And then if we go to the right side, here, we see sales that grew 16% in local currency in an environment of very strong demand according with all verticals posting double-digit growth and here again, standing out public administration and health care with an increase of 28% in local currency.

Let's move now to the Slide #12 to present Minsait profitability. On this page, what we see is a clear improvement in margins compared to the same quarter of 2021. And again, if we go to the left-hand side of the chart, we display our first quarter '22 operating margin, which stood at EUR 42 million compared to EUR 28 million in the first quarter of the last year, which is equivalent to an operating margin of 7.4% in '22 versus the 5.8% in '21. And if we move to the right-hand side of the chart, here, we see EBIT, which in the first quarter of '22, reached EUR 33 million versus EUR 20 million in the first quarter of '21. This is equivalent to an EBIT margin of 5.7% in this quarter versus the 4.1% of the first quarter of '21.

Basically, this margin boost is the result of different things. And here, I would highlight first the revenue growth that definitely helps, but also the steady improvement of our product mix and the ambitious efficiency methods we've been putting in place in the last 2 years, which have been fruitful. And I think that, that's it from Minsait.

So now I leave the floor to Javier for the financial review.

[Javier Rodríguez, executive]

Thank you, Luis, and good morning, everyone. Let's start the financial review with the evolution of free cash flow on Page 13. At the top of the page, you can see the strong cash flow generation for the first quarter this year, which was EUR 13 million, which was not just the strongest for the last 6 years, but also was unusually positive for the quarter, which has allowed us to continue reaching our financial leverage as we will see in a minute.

The bottom of the page, you can see the cumulative free cash flow generation over the last 12 months, which is actually reaching a historical highs of over EUR 300 million. And this is obviously in terms that are consistent with our guidance. I also note that this figure includes a number of positive working capital catch-up impact that we had in 2021. So this is not directly -- you cannot extrapolate this as a way to get a potential cash flow generation for the year. We're still influenced by those positive items that we discussed last year.

If we move on to Page 14, we can see the evolution of net debt, which is basically driven down by the strong impact of the operating cash flow in connection with the presentation, all the elements that both Nieto and Luis mentioned already, slightly compensated by working capital, which is a typical adjustment for this part of the year. I think the rest of the items are the usual ones. If you have any doubts on them, please talk to the IR department, probably not worth spending much time discussing them in the call right now.

If we move on to Page 15, let's look at the evolution of the 3 main building blocks of our short-term and long-term working capital. Remember that now we report those 2 elements together. We can see how there is a significant improvement versus March last year of 11 days of sales. This is mainly explained by the reduction of inventories, which it is 11 days of trading. By the bulk of this reduction, by the way, has already taken place by the end of last year as we described.

Other than that, if we just focus on what's happened in the last few months since December, there is a worsening of disposition of 5 days of sales, which is what you would expect for this part of the year. And if we analyze that in a bit more detail, you see that inventories go up by 5 days. This is the buildup of inventories that happened following the liberation of inventories at the end of the year with the recognition of milestones and normally concentrate around the few weeks of December.

Accounts receivable worsened by 4 days of trading. And this is, again, seasonality and reflects a number of high payments that we received in the fourth quarter. And also last year, we received some advances in the fourth quarter that we should have -- we were expecting for the first quarter this year. So actually, it's a bit of an imbalance between one year and the other when look at a quarterly basis. With respect to accounts payable, you see that the region improves by 4 days. We are managing a payment to our suppliers a bit more aggressively this quarter, but the reality is that this is mostly...

[Operator]

Ladies and gentlemen, please hold your lines while we will connect to our speakers. Ladies and gentlemen, please hold your lines. Please go ahead with the presentation.

[Ezequiel Baquera, executive]

Okay. We're waiting for the Q&A session right now.

[Operator]

Perfect, ladies and gentleman...

[Javier Rodríguez, executive]

Sorry, there's something -- things we got interrupted. Can we check when we got interrupted exactly during the presentation. Do we need to go back to any of the points? Or did we finalize...

[Operator]

I believe you were in Slide 15.

[Ignacio Mataix Entero, executive]

Slide 15?

[Javier Rodríguez, executive]

Slide 15, when we got interrupted, okay. So let's go quickly through that if you don't mind. Basically, on Slide 15, we're looking at the evolution of the working capital. Sorry, just apologies with that. Yes, let me make sure that we are live.

[Operator]

Yes, you're live.

[Javier Rodríguez, executive]

Okay. Very good. So yes, going quickly through that, and I'll go very quickly. If you need any further comments, very happy to explain that later. Our IR team is at your disposal. But very quickly, our working capital position has suffered the typical worsening of this time of the year, less so than the year before. We are -- from December last year, we were selling 9 days of sales. This year, it's only 5 days of sales. We continue to manage this very tightly. Most of reduction versus the same period last year comes from the reduction on inventories. This, we have discussed already happened mostly at year-end. The rest of the positions of the different items just reflects the typical seasonality of this part of the year. And I think we have discussed that online, but you can see the figures are quite attractive and improving year-on-year.

Quickly on Page 16, our net debt position is at a record low, below the one at the year-end, which is the first time that happened, at least in recent history and the ratio stands at 0.7x, which again, as you can see on the page compares very favorably with any other end of first quarter in the last 6, 7, 10 years. And to finalize, on Page 17, our debt structure, you see the typical elements that we've always mentioned with no maturities that we have not covered in cash in the foreseeable future. And the only point I'd say that is worth noting is the reduction on the cash pile that we have that has gone down by almost EUR 300 million. This is saving us a significant amount of cash as well as not getting into any liquidity or financial position. We still have shy of EUR 1 billion.

So that's it, apologies for having to go again through this and sorry about the disconnection. And if you agree, we can now move on to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Bosco Ojeda from UBS.

[Bosco Ojeda, analyst]

I would like to ask couple of questions. The first one on your order intake. The quarter was very strong and the question is whether you see clients as active at the moment. I would guess that with the European funds and the need for more defense spending, it should continue to be very strong. But then your revenue, if I'm not wrong, you have kept your revenue guidance in line despite this very high order intake. So a question on the -- what are the recent trends and whether we should expect more to come.

And the second question is about these management changes and all these changes we're seeing in the company. There's been quite a few over the past 12 months. And I wanted to ask specifically that is going to lead to any sort of strategic changes? Or are you expecting to come to the market and tell us something about these changes? And also specifically on whether you think about any acquisition, in particular, ITP, is that still rejected from you? Or there's a possibility that you could proceed to a stake in ITP?

[Ignacio Mataix Entero, executive]

Thank you, Bosco. Well, first of all, with regard to the order intake, I think it's been a strong quarter. But taking into account also that we have had 2 very important orders, which is the Angola elections and one important contract also in defense, which is as I think I mentioned in the presentation, the radar for the MK1, which is the German -- the Eurofighter and the radar for Spain and Germany.

So we expect -- I think we see a good pipeline. We see good order intake. But also it's true that the first quarter has had 2 very important orders. And we continue to see European funds and possibilities there. So we expect that order intake will remain strong. And on top of that, we also should continue to look to the cash order, which as you know, we did not sign last year, and we still expect to sign in the next months. So order intake remains strong.

With regard to management changes, it's true that we have had some management changes in the last week. I think we have now a stable management team, which -- and I don't see any change on the strategic plan we have for the company, which you know is 2021, 2023. So we are -- the management team is strongly supporting the strategic plan that we approved in the Board late 2020. And with regard to ITP, we are not looking into the file. The file is not in our table. So that remains unchanged.

[Operator]

Next question comes from Manuel Lorente from Mirabaud.

[Manuel Lorente, analyst]

Welcome Luis to this small Indra's community. My first question is again on company changes, especially on the point of the stake of SEPI, do we have any update on that? Because I believe it was last February when they announced their intention to reach roughly 28%. But do you have any update on that situation?

[Ignacio Mataix Entero, executive]

Okay? We don't have any additional comment on that. There is no news that we've seen. So we have no additional comment.

[Manuel Lorente, analyst]

Okay. And I believe Ignacio you have said that the company will stick to the '21, '23 strategic plan that was approved from the Board of the company. I don't know whether that was communicated to the market or do you have any intention of highlight the nature of that strategic plan?

[Ignacio Mataix Entero, executive]

Okay. No, it's true. I mean, remember that the plan was approved by the Board in the middle of COVID. So at that moment, we did not have plans to communicate externally. So we continue to work in the plan to deliver the plan to the Board. And obviously, we will -- next year is 23%. So we will deliver next year the guidance for '23. And I mean, I don't think there will be any news on the plan in the next months. So we continue supporting the plan and executing the plan we have for the company.

[Manuel Lorente, analyst]

Okay. So one question now on defense. It has had a mute revenue performance in the quarter with a flattish evolution versus last year. And seeing your peers reporting and in the current geopolitical context, what do you expect of this division going forward? Because we have seen massive upgrades in terms of defense spends, especially in euro or at least announced of that? And your number doesn't quite much of those potential headwinds that we are seeing across the board?

[Ignacio Mataix Entero, executive]

Yes, Manuel, yes, I think we are very bullish on defense expenditure. It's absolutely right what you say, a big announcement, massive announcement. So good momentum for the defense market going forward. But you need to take into account that, I mean, that cannot be translated into orders immediately. So there is a period of time -- needs time, okay? So we see the momentum. We see the increase in GDP percentage. We will see orders coming in the future, but we need some time, the recent time until we are able to see actual orders. And actually, those orders converted into additional sales. So time is important here.

So in our business, what we are seeing in the first quarter is you are right, flattish growth. We will see a mid-single-digit growth throughout the year and we will see additional growth depending on when we are able to sign the FCAS contract. So that should happen by midyear. And due to that, I think we will see growth -- additional growth to that mid-single digits through the second half of the year on the cash contract. So in the long term, I think very, very good outlook. We'll see, I think, growth in the business. And in the short term, I think the year will deliver growth and depending on FCAS, we deliver this growth.

[Manuel Lorente, analyst]

I see. And my last question maybe on Minsait. If I'm doing the math correct, top line revenue in local currency ex-M&A, ex the positive contribution from the election business has been roughly plus 12%, 13% on the quarter. I was wondering whether you can give us some indication on the mix between price, volumes or any remarkable trends that you are seeing there, especially on the pricing regime that I believe that it might be something refreshingly new for your verticals?

[Luis Abril Mazuelas, executive]

I mean, actually, those calculations are correct. And it is true that we are optimistic in general with the outlook. Looking forward, still we see that sales growth in the year is still going to be above mid-single digit, but the dynamics are different for the business. Here, we have the digital division and everything that has to do with proprietary solutions, which is -- I mean, this is growing at a double-digit pace. And as I was saying, the dynamics are very good. Services and other business lines, these are growing at a slower pace. And then if you want, from a vertical perspective, here, what we can say is that all the verticals are growing very solidly. It is true that we have this election, few millions of elections that also affect the quarter, but all the verticals are growing well. That's on sales.

Then on pricing, there are some dynamics on pricing here, which are important. And here, the main message is that we are relatively happy with these dynamics as well. Pricing trends are being positive. Actually, we are fighting against one of the problems that we are having in this quarter, which is high inflation with things like trying to increase prices. And even though this is something that we cannot do all across the board, the truth is that we are achieving some price increases, which are having a positive impact in the margins.

I mean, this pricing thing, as I was saying, this is something we cannot do all across the board, but in some cases, in projects which are sorted, I mean, in digital projects, in proprietary solutions, in those cases of projects, which are sourcing it is being possible to increase prices. And even in longer projects and services, what we are seeing is that we have more pricing power than before because at the end of the day, when the customers, for example, want to achieve some yearly price reductions, now in the context in which we are, we are able to say no to those pricing actions because, actually, we can easily allocate the resources in other projects and services. So pricing is having a positive impact in the whole thing. There are other elements that are impacting the numbers that you see, both in terms of sales and margins. The efficiency measures in which we are working since some time ago, the mix evolution is also helping. It is actually a mix of all these things.

[Manuel Lorente, analyst]

But you can say that or it is fair to say that the vast majority of the positive trends in revenue in Minsait, is it still coming from volume rather than pricing?

[Luis Abril Mazuelas, executive]

No. Volume has been important, but it's actually a mix of things. And it is not only volume or price. It is also efficiency. We keep on standardizing processes. You keep on doing many things from an efficiency perspective, which are helping and also the mix, what I was saying. We are posting heavily part of the strategic plan that we were talking about before has to do with pushing high value-added solutions in Minsait. Things like payments or things like cybersecurity, things like data cloud, things like digital, which is a new division we launched where we basically aggregate all our activity that has to do with IoT and with the confluence and the physical and the digital world, all those things, which is high-value offering and we are selling more and more, is having an impact as well. So it's a mix of the 4 or 5 things I've been saying.

[Operator]

The next question comes from Laurent Daure from Kepler Cheuvreux.

[Laurent Daure, analyst]

A couple of questions on my side as well. The first one is on Minsait. And I understand most of the drivers of profitability. I was just wondering if you could share with us maybe the difference between average prices and the average increase in cost per head to see if your gross margin is on the way up even excluding the mix. And also I wanted to be sure about the provisioning of the variable compensation because last year, in the fourth quarter, we had a slight negative surprise on that side. So are the bonuses this time well provisioned throughout the year? So that's the first question.

The second question is back to the question on the order entry and the 2 large deals. Is it possible to share with us what would have been the order entry worth without those 2 deals? Third question is on the FCAS. Just checking that if the FCAS is signed? Are we still talking about maybe EUR 30 million or EUR 40 million of sales during the second part of the year? And the final question is for Javier, is now that your balance sheet is strong, does it make any sense to keep the factoring? Is it still a very low interest to way to finance your balance sheet? Or could you consider getting rid of factoring in the future?

[Ignacio Mataix Entero, executive]

Okay, Laurent, let me see if we can answer all the questions. If not, you come back with the ones we have not answered. First of all, regarding the compensation, I think, we are accounting for what we believe is the volumes compensation of the year on a monthly basis. So we believe that's accurate and well learned. With regard to the order intake, as I said, there are 2 big orders. And I think maybe we can give you later some details, but -- because some of them, we don't do exactly -- we don't deliver exactly the numbers of some of the order intake because of confidentiality reasons and then reflected more on the defense order intake, but Angola is, as we have mentioned before, on the north of EUR 130 million, and that one is also large order, okay? But maybe I think I can give you some details thereafter.

On FCAS, we expect to have on the second half of the year, revenue on FCAS. You mentioned, I think, around EUR 40 million on revenue of FCAS. I think depending on when we signed, that is not, let's say, a number which is outside of what we may consider, okay? But we need to see when we sign, how is the ramp up and remember that we are here also coordinator for the program, so it depends also on the ramp-up of our partners in the rest of Europe. Okay? So that will depend very much on that, but that type of number sounds realistic.

[Laurent Daure, analyst]

I think, the 3, pricings for Minsait.

[Ignacio Mataix Entero, executive]

I don't know if there's anything else aside of that before we take the work on Minsait. So compensation order intake discussed. The factoring you asked, Luis will take Minsait as he has sequences on Minsait.

[Luis Abril Mazuelas, executive]

Yes, couple of things on me. You talked about average costs and you know what part of the increase in average costs in salaries is compensated by price increases. This is not a number which is easy to calculate, okay? But here, what we can say is basically that looking forward and thinking about the whole year, we keep on expecting that personnel expenses will grow around 13%. This quarter has been slightly higher, the increase, but on average, we believe that the year is going to see an increase in personnel expenses of around 13%. Around 8% out of those 13% will be linked to workforce increases and the rest will be sudden inflation, okay? And several points of those will be compensated by price increases. But again, here, the positive impact that compensates the headwinds of salary increases is a mix of different things, okay? And then I don't -- if you talk about the order intake of Minsait. Then I think that's it from Minsait and we go to the financial.

[Javier Rodríguez, executive]

And Laurent, your question on the factory, yes, you're right. I mean with this level of leverage, I think at some point, we'll have to stop doing that. I think importantly because this is one tool of financial flexibility that we cannot use at the moment. So what we will probably do at some point, I would say, probably coinciding with year-end is reduce that to zero and then push ourselves to maximum limit on that amount, so that we can use that margin to normalize and make our quarterly cash flow generation less bumpy.

So -- but you're right, I wanted to look at this point of leverage, maintaining that amount of factoring at that fixed level stops making sense for many reasons, including the fact that as I said, we are precluding ourselves for using a very sensible and perfectly acceptable financial tools as -- with a limit. So we'll talk about that probably at the year-end.

[Laurent Daure, analyst]

The cost of this factoring was quite low and interest rates were low. Has it gone up quite a lot?

[Javier Rodríguez, executive]

No. This is negligible, less than a EUR 1 million factoring in the year. Don't forget that we set it up at the end of the quarter just for comparison purposes. And we'll let it die very quickly. So by a few weeks into the quarter, the factoring goes to nearly zero. And then we open up back at the end of the quarter, so that we have at the end of the quarter, exactly the same amount. So it's actually funding the average kind of if you were to weigh that by the average sounding balance over time is a very small balance at a very low cost. So this is not a relevant cost point. This was more something that we decided to do to increase transparency and being able to make it clear -- being easier for people to compare the cash flow generation for June quarter.

The expenses of giving up on a tool, which is one of the reasons why our cash flow is so different from one quarter to another. So eventually, we'd like to retain the tool, but obviously, subjecting ourselves to limit, so that there is no suspicion in the -- on the sides of the market that we are using factoring to get to move favorable terms or anything. So we will do that if and when it's necessary as opposed to making the same amount on a monthly basis. But this is probably something more for year-end, which is when cash flow is at the highest level and leverage more relevant for comparable purposes.

[Ignacio Mataix Entero, executive]

Thank you, Javier. Laurent. Have we gone through all your questions?

[Laurent Daure, analyst]

Yes. Everything was clear.

[Operator]

The next question comes from Nicolas David from Oddo BHF.

[Nicolas David, analyst]

I have 2. Actually, the first one is regarding Minsait profitability. You posted a nice profitability improvement in Q1 already. Well -- I remember well, you were quite cautious regarding the beginning of the year given the timing, phasing of salary increase versus price increase. So and I remember that you were expecting more margin improvement in the back half of the year than the beginning. So what happened there? Should we think differently about the similarity finally? Or is it just because you are outperforming and absolutely will remain also back half, but all the year will be better than what we are expecting initially? And the second question is regarding the defense MK1 Radar contract, in which time frame do you expect it to generate revenue? And could you share also the magnitude of revenue of this contract?

[Luis Abril Mazuelas, executive]

On Minsait, I stood at the numbers, this quarter have been solid. We're actually looking forward to the next of the year. Here, what we can say is that despite the headwinds from salary inflation, we expect to improve and to be between 5% to 6% for the whole year 2022, probably closer to 6%, actually because it's true that the results in this first quarter, they have been good. So probably closer to 6% rather than 5%. Thanks to all the things that we've been discussing: revenue increases, operating leverage, et cetera.

[Ignacio Mataix Entero, executive]

And MK1, okay coming back to the order. That is -- and let me don't say, as I said, I mean, around EUR 100 million order. This will be delivered in the next year, so typically 5 to 6 years contract. So we see that growth in the first couple of years. Traditionally in these contracts, you see more the engineering space. So lower revenues and ramping up to the production phase in that type of period, okay? So that's more or less the time frame of the contract.

[Javier Rodríguez, executive]

That's clear. And all the best, Javier, for your new project out of the company.

[Operator]

The next question comes from Carlos Trevino from Santander.

[Carlos Javier Treviño Peinador, analyst]

2 questions from my side. The first one, I would like to know if you do have seen any impact with the current, generally speaking, supply chain situation and with the problems that we see due to scenario of political and even COVID-related down in China. Have you seen any impact in your supply chain or any component shortages impacting to you this quarter? Or do you think that you could suffer this in next quarters?

And my second question will be for Javier regarding free cash flow, specifically working capital. Well, I would like to ask you for expected seasonality in working capital for next quarters and do you identify any specific topic in whatever of the different metrics or working capital, which should be significant and special over next quarters.

[Ignacio Mataix Entero, executive]

Thank you Carlos. Let me start with the supply chain. Obviously, we have daily issues on supply chain. Things have become much more difficult. But I think we have a very focused team on solving the day-to-day issues. And I must say that, I mean, today, we have impacts in some of our projects, but they are not relevant impacts, which are making today that we need to stop projects. But this will continue to be the case, I think, throughout the year, and we will have to continue focusing on the execution on the supply chain and suffering delays and managing the supply chain and having to expedite suppliers and so on. Is this going to get worse? Well, that's the question mark, which we will need to see how we address. I think we have a strong supply chain management team, which is solving the issues. And as I said, we do not expect throughout the year to have major stocks on the programs. But I mean this is one of the risks that we are looking, all the industry is looking and we need to be close to it. Javier, can you go through impact...

[Javier Rodríguez, executive]

With respect to working capital seasonality, nothing special for this year. I mean, we normally have a second quarter, which is slightly negative, mostly because there are a number of things that happened this month, that particularly the payments of the variable component of remuneration for employees. This year that could be compensated somehow by some payments from some specific projects, like, for example, the elections that we referred to. So it might not be asked about the value for some of the years, but that would be material. The third quarter tends to be kind of neutral. And the fourth quarter is the one where all things happen. We have an unusual concentration of both milestones and payments in that quarter, concentrated mostly in December, as we normally do. So we don't expect that to change in any material way this year.

[Operator]

The next question comes from Fernando Lafuente from Alantra Equities.

[Fernando Lafuente, analyst]

2 questions for me, please. The first one on the balance sheet. Congratulations for the evolution of net debt. Javier, what is your view ahead of the end of the year? Where do you expect net debt to end the year all-in included, especially if you are considering this cancellation of the factoring that you mentioned? And the second one and the second question is it's for Nieto. Sorry to come back, but I didn't understand correctly or actually I didn't hear correctly what you said about ITP. I understood that you said that it's not in the table that you are not looking for it. My question is provided that this is actually the case, if you would consider small acquisitions as you've done in the past in IT, also in defense, if you could make kind of bolt-on small acquisitions that could, I would say, strengthen your product offering in specifically in defense?

[Ezequiel Baquera, executive]

Javier, go on with...

[Javier Rodríguez, executive]

On the leverage, I'm assuming that we keep factoring constant, so that we don't mix things up. I mean, just by applying the much of the cadence, we see them both in EBIT plus cash flow, we should end in 0.3x or thereabout. And I mean that could be moderated by some outperformance of either of the metrics that we have announced as guidance because remember, our overall guidance is higher than or it could be modulated the other way for some small acquisitions that we may make, which, as usual, this year, we have a few on the pipeline. But then we should be around those levels. And then if you take out the factoring then that should at around 0.5x 0.6x of leverage. So it will be -- in any case, it will be a very manageable level as you would expect.

[Ezequiel Baquera, executive]

Thank you, Javier. Regarding -- coming back to your question -- to you third question. But what I said is regarding ITP, the file is not on the table. So that's what it is. Regarding acquisitions, yes, I think we have an active pipeline, both in inside and in transport and defense, and we are looking a number of bolt-on acquisitions, both in -- I mean in -- I would say, a number of geographies. So we will be actively looking into increasing -- with increasing our incoming new acquisitions, which as we've been doing in the past.

[Fernando Lafuente, analyst]

The next question comes from Gregory Ramirez from Bryan, Garnier & Co.

[Gregory Ramirez, analyst]

I will come back on the topic of the margin with the operating margin, and I talk about operating margin and not EBIT margin. But regarding transport and traffic, I think in the past, you were referring to something around 12%, if I remember well, maybe I'm wrong. But given the coupon margin, do you think that the 12% will be achievable? And what would be, I would say, the levers to go there? Does it imply, I would say, the additional product revenues. And just a clarification regarding the margin expected for Minsait. I think that the 5% to 6% was referring to the EBIT margin and you're in the ballpark in Q1. But is there -- I would say, are there reasons to believe that you could be above that ballpark given the fact that it's Q1? I'm not sure that the election project in Angola is a huge boost to profitability, but -- and you have, I would say, the price versus salary inflation topic to manage. So given all these moving parts, could you maybe elaborate a bit more on that? And how to consider eventually that the 5% to 6% margin scenario, EBIT margin scenario could be cautious?

[Ezequiel Baquera, executive]

Yes, Gregory. Coming back to the questions. I mean we always guide on EBIT, not in operating margin. okay? So both the 12%, which is a mid-term is 12% on EBIT, okay, not on operating margin, and that compares with a 5% to 6% on Minsait on operating margin -- on EBIT margin, sorry, not on operating -- on EBIT margin on both numbers, okay? So that's correct. We look into the 12% from defense. And Luis, you can come back on the 5% to 6% on EBIT margin for Minsait.

[Luis Abril Mazuelas, executive]

Yes, it's EBIT. And we believe, given the numbers of the first quarter that we'll be closer to the 6% more than to that 5%, but there's not much that we have to say at this point on one part. I mean there are some effects that we have and the elections in Angola will help so on and so forth. But so far and after one quarter, that's what we can say.

[Gregory Ramirez, analyst]

Okay. And just an additional last question. Regarding the -- your customers in manufacturing, have you ever seen any, I would say, negative signs according to which they have been -- they have started to be affected by the rising price of energy or things like that?

[Ezequiel Baquera, executive]

It doesn't have -- I mean we are seeing a bit of impact in some of the clients, but actually, we do not sell that much to those clients. Those manufacturing plants would be within the energy and industry vertical, an industry at the end is more part of the whole thing and a few of them are slightly affected, but we are noticing it in our figures.

[Operator]

The next question comes from German Garcia from JB Capital.

[Ezequiel Baquera, executive]

We don't listen, maybe the line was cut or there's no question.

[Germán García Bou, analyst]

Can you hear me?

[Ezequiel Baquera, executive]

Yes, we can now.

[Germán García Bou, analyst]

I got a follow-up on the previous answer. You mentioned to make it clear, mid-term targets for transport and defense in terms of EBIT margin around 12%. And in the case of Minsait, I didn't get it. You mentioned 5% to 6% in year '22, but what would be your mid-term expectation?

[Ezequiel Baquera, executive]

Okay. So midterm, yes, 12% on transport and defense. Mid-term in Minsait, Luis, 6% to 7% now?

[Luis Abril Mazuelas, executive]

Yes 6% to 7%, more 7% than 6% if things continue in the direction we are.

[Ezequiel Baquera, executive]

Okay. Is that clear?

[Germán García Bou, analyst]

Very clear.

[Operator]

Ladies and gentlemen, there are no further questions. I will now give back the floor to the speakers.

[Ezequiel Baquera, executive]

So thank you very much to all of you for being present on the conference call and for all the questions you made. So looking forward to seeing you all in the next conference call in the end of July. And so thank you so much for the support and for the follow-up on behalf of Indra team. And you have Investor Relations team at your disposal to any other additional questions you may have and any iterations or whatever. Thank you so much to all of you.