Indra Sistemas SA

MAD:IDR

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and welcome to Indra's First Quarter 2023 Results Presentation.I now hand the conference over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead.

[Ezequiel Baquera, executive]

Thank you [indiscernible] on our 2023 first quarter results presentation. I'm Ezequiel Nieto, the Investor Relations. And as usual, I refer you to disclaimer on Slide #3 that sets up the legal framework under which this presentation must be considered. Conference call will be led by our CEO, Ignacio Mataix; our Minsait, Managing Director, Luis Abril; and our CFO, Borja Alarcon, [ an internal ] duration will be around 1 hour.Now let me turn the call to Ignacio Mataix, CEO of Indra. The floor is yours.

[Ignacio Mataix Entero, executive]

Thank you, Ezequiel. Good evening, everybody. Welcome to our conference, and thanks for being here with us this evening. We will proceed through the agenda now on our screen and look forward to addressing your questions following that.Let's move now to Slide #6, where I will begin today's presentation with the main first quarter results highlights. As you see, the results for the first quarter of 2023 have been very solid, delivering growth in all items of the income statement among which it excludes our net income, showing double-digit growth. We have achieved all-time high levels of backlog, thanks to the strong market demand, especially in Transport & Defence and the solid commercial performance of our business, which improves our growth expectations for the next few years.Both Indra revenues and EBIT experienced a strong growth that almost reached double-digit rates, showing the fast conversion of these commercial achievements into project execution and keeping up EBIT margin similar than in the first quarter of 2022, despite the context of a strong wage inflation pressure in the main markets where we operate. Cash generation, once again, showed a very positive performance, the best for the past 6 years, more than doubling the favorable execution posted in the first quarter of 2022 and reducing financial leverage to 0.1x over again. This strong first quarter financial performance allows us to reiterate our guidance for the end of the year.Let me turn to the highlights of our first quarter '23 financial results on Slide #7. Backlog and order intake, the drivers of future revenues increased by 13.1% and 4.2%, respectively, with backlog reaching EUR6.8 billion. This translated into revenue growth of 7.7% and EBIT growth of 8.4%, managing to maintain EBIT margin at similar levels than in the first quarter of 2022 and resulted in a financial growth of 11.1% in our earnings per share. Moreover, a strong cash flow of EUR27 million, more than double the positive execution posted in the same quarter last year, reducing financial leverage over again.On Slide #8, we show our strong revenue growth and margin performance for the quarter. On the left-hand side of the slide, reported revenues amounted to EUR917 million in the first quarter, up 8% vis-a-vis the same quarter of 2022, while revenues in local currency grew by 7%, and also revenues organically grew by 5%. On the right-hand side, the first quarter '23 operating margin was up 6% and reported EBIT reached EUR65 million, up 10 basis points to 7.1%, a figure that we have improved despite the context of growth of a strong wage inflation pressure.Now on Slide #9, we highlight how Indra's group workforce has evolved over the previous year, supporting our strong revenue growth in the period. This headcount growth has been achieved, improving our revenue per employee by 6% compared to March 2022 and 2% compared to December 2022. At the same time, we have kept the workforce at the bench at a very low level, only 207 employees out of a total of more than 56,000 employees, which means less than 0.5%.On Slide #10, we reiterate the guidance provided for the end of the year, given the solid results of the first quarter, which represent an unbeatable starting point for these calls.Let me turn now to the Transport & Defence division. And to Slide #12, which shows the strong results in this division, which has achieved all-time high in terms of backlog, allowing us to position backlog to revenues ratio above 3.6x compared to 3.1x last year in the same period. Order intake also posted a strong growth at 31%, while revenue declined by 4%. This has translated into an EBIT margin at double-digit levels, improving from 9.8% to 11.7% of EBIT margin.On Slide #13, as mentioned before, Transport & Defence backlog is all-time high. For this part, order intake in the Transport & Defence division in the first quarter of '23 was up 31% in local currency with a strong growth reported in Transport & Traffic, 60% in local currency, boosted by both the Air Traffic segment with higher activity in Spain and in the projects that Air Traffic Management has in Honduras and Belgium and in Transport with rail projects and ticketing projects in Spain. Furthermore, Defence & Security posted a 16% growth in local currency, backed also by Spain. The remaining amount of the first phase 1B of the FCAS projects and some other projects related to the F-18 and also Air Defence Systems in Rwanda.On Slide #14, you can see that the first quarter '23 revenues in the Transport & Defence division decreased by 4% in local currency with both Transport & Traffic and Defence & Security posted 4% decline for it. Regarding EBIT -- well, sorry, this decline, I would say, is due to one-off effects, which has been a lower contribution of Eurofighter. And the fact that FCAS will not be contributed during the quarter. So FCAS will contribute in the second quarter of the year. We expect a catch-up of Eurofighter in the second quarter of the year, and we expect also a strong contribution of FCAS that will contribute more than EUR100 million during the year. In addition to this, transport had an extraordinary contribution last year with the Riyadh project. [ Whereas in ] EBIT, it improved to 11.7% versus 9.8% in the first quarter of 2022, mainly backed by the increase in profitability of Transport & Traffic.And now I will hand over to Luis to cover Minsait performance.

[Luis Abril Mazuelas, executive]

Okay. Thank you, Ignacio, and good evening, everyone. Okay. First, on Slide 16, we display the key figures of this first quarter delivered by Minsait. I'll start with the order intake, down 6%, as you can see, in a context in which we have offset most of the extraordinary effect in the first quarter of '22 of our Election business, when -- as you know, we have the Angola project. And actually, in fact, if we exclude Elections, order intake would have grown plus 9% in the barter terms in this first quarter of '23.Sales or revenues reported a very strong growth of plus 13%. Thanks to the solid performance in all our verticals. And in terms of profitability, we've been able to maintain the EBIT margin above 5%, despite the context of strong salary inflation, which has been higher than any other year in the recent past. And these profitability levels are in part here due to the fact that we have kept on improving our product mix with Digital and Solutions growing 20% compared to the first quarter of '22 and now representing 56% of our total sales.Now let's move on to Slide #17, where we display the backlog and the order intake evolution of our Minsait division more in detail. As you see, backlog went down minus 2% in the first quarter of '23 versus the same quarter last year and totaled EUR1,970 million. This is only a slight decrease, that has to do with the fact that last year, we had around EUR100 million of the Elections Angola project in backlog that this year is not there and is offset with other non-one-offs contracts.On the right-hand side, order intake decreased 6% in reported terms, mainly affected by the decline again posted in Public Administrations & Healthcare, which is a minus 34% in the barter terms due to the order intake of the Elections project in Angola in the first quarter of last year, as mentioned in the previous slide. On the same graph, it stood out the double-digit growth finally registered in the order intake of Energy & Industry, which was plus 16% due to the positive performance showed by this vertical in Spain, in the Philippines, in Brazil and in Peru.Moving now to Slide #18, more detail in revenues. Revenues increased by 13% in local currency in the first quarter of '23. With all verticals registering very positive performance. And here, it stood out that will be growth posted in Financial Services, which was plus 15% in local currency, mainly due to the increased activity of this vertical with large banks in Spain and Mexico as well as inorganic contribution of the Chilean company Nexus, that we acquired in the second half of last year and is specialized in Payment Systems. Regarding the other verticals, Energy & Industry and Public Administrations & Healthcare also showed double-digit growth. And then Telecom & Media revenues registered solid growth, plus 4% in local currency due to the high activity with the main Telecom operators in Spain and America. These on revenues.And if we go to the right-hand side of the chart, we see at the bottom that the first quarter of '23 EBIT margin stood at 5.2% compared to 5.7% in the first quarter of '22. This is a slightly lower profitability, basically due to the lower contribution of the Elections project, as well as most importantly, the impact of salary inflation that we are working on offsetting through different vessels. I think quite successful actually because our inflation this year has been quite high.And then finally, I will not spend time on the Slide #19, where you can check the improvement in the product mix more in detail. And as I already mentioned at the beginning, with Digital and Solutions growing 20% in the quarter and representing already 56% of our total sales. And that's it on Minsait.So now I leave the floor to Borja for the financial review.

[Borja Altamirano, executive]

Thank you, Luis, and good evening to everyone. As you can see in Page 21, the free cash flow generated in the first quarter of 2023 amounted to EUR27 million. This is an excellent figure taking into account the seasonality of the business and considering that we are more than doubling the figure already posted in the first quarter of 2022.In Page 22, we see how working capital remains at a very good level in the Q1, despite the seasonality of the business. The variation in [ 2 days ] compared to the first quarter of 2022 is explained by different factors. The first one is the improvement of 11 days in the accounts receivables, thanks to a very good level of collection from clients. This improvement compensates the increase in 9 days in inventories due to work in progress and stockpiling that will be naturally absorbed over the next quarters. And finally, a reduction in 4 days in the accounts payable.Page 23 shows the grid in the quarter. Going a step by step, the most relevant one is the first as it comes from the excellent performance of the business in the first quarter of 2023 that has generated EUR81 million of operating cash flow. Working capital were negative as is always the case in the first quarter for the reasons commented in the previous page. CapEx at minus EUR0.3 million lower than previous year, explained by higher subsidies. Although in those terms, the amount is similar to the first quarter of 2022. Taxes slightly above 2022 due to the higher results. Other financial liabilities at EUR8 million, same figure as the previous year. And finally, net interest reduced to EUR0.3 million, below [ EUR4 million ] registered in 2022 due to the higher cash remuneration, together with a reduction in [indiscernible].On Page 24, we set out the evolution of the leverage since 2019. As you can see, we closed March '23 with leverage ratio of just 0.1 net debt to EBITDA and with a material improvement compared to March '22. As in previous year, factoring net debt at EUR187 million to make figures comparable, and we exclude the impact of IFRS 16.And now just to finish my part, as we look to the debt structure in Page 25. In Q1, gross debt was EUR975 million. As you can see, we have a strong cash flow position to afford the maturity profile that includes EUR247 million from the convertible bond with September 2023 and EUR153 million from our corporate bonds in the first half of 2024.Thank you very much for the attention. And now we are ready for your questions.

[Operator]

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

[Bosco Ojeda, analyst]

I wanted to ask you first about the -- where you're planning to publish a strategic plan and also on the timing for the substitution of the CEO, when would you expect that to take place? And also wanted to ask you about the IT activity, whether you're starting to see any sort of pressure from the macro situation or slowdown or also maybe the prospects for pricing where you are passing on the higher inflation to customers constantly or how is the situation over there?

[Luis Abril Mazuelas, executive]

Okay, on IT, I will take the second part, okay, Bosco. On IT, well, the growth of the first Q, you see that it's been -- it's been quite good. We're growing revenues at 13%. And actually, we continue to see demand from our clients. There are actually no signs of a slowdown. It is true that IT companies are typically, as you know, like cyclical. It's true also that some of our peers are pointing out that in the second half of the year, things can be tougher. But actually, so far, we don't see anything, okay? That's on the pressure from the macro.And then you also mentioned something about how difficult it was seen to transfer the salary inflation to clients. And here, what we think is, as you see, the margins that we've achieved in the first quarter, I think that they are quite good, and this is partially because we've been able to transfer part of the impact of the salary increase to customers. Salary increases, salary inflation this year has been quite relevant in the range of 6%. And part of that increase has been transfer to new contracts, even though there are other measures that we -- other levers that we pull for achieving these levels of markets. We keep on working on efficiency. We keep on working on the product needs and these kind of things, okay?

[Ignacio Mataix Entero, executive]

Bosco, this is Ignacio. Well, regarding your 2 first questions, I think the Board is working hard on this topic on the replacement on the succession of the CEO, it will be announced when the process is finished. I don't think we can disclose details at this point of time. So the process is driven by the Remuneration Committee, led by an independent director. And I would say, process is ongoing. And when we have new, we'll come back to the market and deliver the news. So that's regarding your first question.Regarding the strategic plan. Well, as you know, we have our current plan, which ends by the end of the year, so end of 2023. Meanwhile, I mean the Board is working on a strategy. And again, when we have some news will come back to the market. And also -- and that's also related to the incorporation of the CEO and so on and so. I think we'll come back when we have the news.

[Operator]

The next question comes from Nicolas David from ODDO BHF.

[Nicolas David, analyst]

Yes. I have a few questions from my side. The first one is regarding the reduction of headcount at midsize in Q1. What is the logic behind that? Is it something you are controlling? Or is it something that surprised you because of employee attrition or some issues to hire? And is it -- could it be -- I mean, what should we expect in the quarter? And should it be a headwind for your capacity to deliver on the backlog if you fail to increase that headcount. So that's my first question.And my second question is really, again, Minsait. Given the lower margin in Q1, is still comfortable to reach a stable margin for this year compared to last year.

[Luis Abril Mazuelas, executive]

Okay. I will take that two questions, Nicolas. On the reduction on headcount, I think that this is something punctual and basically, it has to with the completion of a data center outsourcing contract with a telecom client in Colombia that has nothing to do with the dynamics of the market. The sales are growing. It is true that the backlog has slightly decreased because last year, we had the Angola project in the backlog. But as I was saying, we see nothing that has to do with the slowdown and we expect that the workforce will keep on growing in parallel with our revenues in the next quarters, okay? That's on your first question.And then on the second question, we think that the margins achieved in this first quarter are quite good because basically we've been able to offset relevant [Technical Difficulty]

[Operator]

The next question comes from Carlos Trevino from Santander.

[Carlos Javier Treviño Peinador, analyst]

Yes. My question is related to the FCAS project. You are expecting a significant contribution in revenues in Q2. Should we expect that this company is going to be at the normal run rate in Q2 or this perhaps is something that we will reach more in Q3. And I want to ask you also on the profitability expected for discount that addressed this year. So we are assuming the normal profitability levels of your typical loss in different projects or profitability, perhaps [ that ] could be a bit lower.

[Ignacio Mataix Entero, executive]

I think we should expect -- I mean, take into account, we've been working during the first quarter, and we will get revenues of the first quarter in the first days of the second quarter because the contract invoices update you closed each quarter, okay? So we should expect -- and we are now in April. So we are there now, we should expect. We have the contribution of tax in April for the first quarter. And I would say, you should expect a very similar, very slight increase from the second quarter to the third quarter to the next quarter. So -- but I would say more, as I said, more than EUR100 million in revenues in net for the year and increasing a little bit, but a good contribution already in the second quarter from the first quarter.And regarding profitability, I think a lower contribution or lower profitability than Eurofighter, but -- and therefore, in average of the good defense contract. Is that clear?

[Operator]

[Operator Instructions] The next question comes from Laurent Daure from Kepler.

[Laurent Daure, analyst]

Yes. I have a couple of questions as well. The first one is on the Transport & Defence margins, which went up despite the lower sales. I understand the improvement in transport margin. But at the same time, you have less Eurofighter that are high-margin business, less defense in the mix. So does it mean that the transport margin and a real surge in the first quarter, what do you stand on that? So that will be the first point.My second question is that on the Angola contract last year, highly profitable. Can you share with us the dilution on your IT margin that will come from the end of the revenue with that contract? And my final question would be on the discussion and the rumors on the spin-off -- potential spinoff of the IT unit. It's hard to understand what is a board position on that. There are some press articles. So if you could share the view of the Board and maybe the view of the management as well on this specific topic.

[Ignacio Mataix Entero, executive]

Okay. In the third question, I think we have no news on that. I think as I said, the Board is working on the strategy and what we have we will deliver that.Regarding the Transport & Defence, I think -- well, I think on Air Traffic Management, I think we had a good first quarter on Air Traffic Management with good margins. I think transport also contributed positively compared to the first quarter of last year. As you say, we had a little bit less defense with a little bit less Eurofighter contribution, which has higher margins. But I mean, [ depending one ] quarter and depending on also how you have your revenues on, for example, things like aftermarket, which has higher margins, well, we [ can't ] vary a little bit. So I think we are on track on Transport & Defence margins for the year, on good track, which, as you know, is 12% as the period for the year. And yes, I mean, we have had a good third quarter, boosted by Traffic & Transport, and we deliver more aftermarket. So I think it's a good start in that sense.And Luis, maybe on the Minsait.

[Luis Abril Mazuelas, executive]

Yes. I take the Angola one, Laurent. But here -- but we cannot give a specific information on margins per contract or per client for obvious reasons. But here, I think that we could say first, as you know, the Angola project has above our gross margins. That's the fact. And then also, if we exclude Angola project, we expect to a slightly improve margins in 2023 vis-a-vis 2022. I don't know if that's enough.

[Laurent Daure, analyst]

Yes, that's enough. But on the transport side, to clarify a little bit, I remember a couple of years back when you were still loss making the long-term ambition was to get the margin maybe to 6% or 7% operating margin. Are you getting already near that level?

[Ignacio Mataix Entero, executive]

Yes, Laurent, I think that, that continues to be our aim. I think we are close, okay? But I would say we are not there yet, but we are very -- we are starting to get closer to that.

[Laurent Daure, analyst]

Okay. Understood.

[Ignacio Mataix Entero, executive]

A little bit more work -- a little more work in some contracts, but we are getting there. I think the performance of transport, I mean in the last couple of years with strong collections, as you know, from a cash point of view and also the recovery of the number of contracts we have mainly international contracts. I think that has been a complete turnaround for the transport business.

[Laurent Daure, analyst]

And does that remain strategy [ work to be here ]?

[Ignacio Mataix Entero, executive]

That is strategy loyal. This is -- I think it's a very relevant business for the company with a lot of interactions. And I think we have strength still improving the business. I think we will continue improving the business. I think we have a good order intake, a good backlog, and we need to continue executing those contracts, which I mean starting to look at good profitability in the business.

[Operator]

The next question comes from Bruno Bessa from CaixaBank BPI.

[Bruno Bessa, analyst]

I have 2 questions, if I might. The first one on cost inflation. You mentioned and around 6% cost inflation for funding side. And just wondering if you could provide us some color also on the wage inflation in the Transport & Defence division, we are expecting for this year. This will be the first one.And the second one, if you could provide us some [indiscernible]? And the third question regarding convertible bonds that you have maturing in the third quarter of this year. The share price is approaching the strike price of the convertible. Just wondering if you could provide us an outlet on what are your intentions about this debt instrument? And what we will be doing in case the share price is above the strike when the bond matures?

[Ezequiel Baquera, executive]

In T&D -- cost inflation [indiscernible] the salary inflation was 6%, and that would sit, then the question was more on T&D, right?

[Ignacio Mataix Entero, executive]

Okay. Yes. We can't hear you at the beginning, so we're not -- we were not listening [indiscernible] clearly. And you know that inflation is relevant, that is not as relevant as in Minsait, because like 30% of the cost is on salaries. I mean salary freeze is around 6%, similar as of the total of the company, okay. But representing less of an issue as we are executing contracts that we've signed in the last couple of years.With regard to [ CLX ], that we are -- I would say, almost there in getting the authorization. So it should be in the next days, okay? It's been a little bit slow process, but we should be, as I said in the next couple of weeks, being able to close down and close the acquisition.Regarding the convertible bonds, I think our intention is that we will pay that in [ cash, when it's 0 ] in September, September and October, we pay that in cash. And on the Board have you want to make any comment regarding, I think we are far from the strike, and we will pay on cash. Is that okay, in terms of what you have other which we didn't get because the line was not that good.

[Bruno Bessa, analyst]

No, it's fine.

[Operator]

Thank you very much. There are further questions.

[Ignacio Mataix Entero, executive]

Okay. So thank you so much to everybody for the questions, and we look forward to seeing you in the next conference call, end of July. Thank you so much.