Indra Sistemas SA

MAD:IDR

Earnings Call Analysis

Indra's Strong First Quarter Boosted by Key Initiatives

Indra's first quarter of 2024 showed significant growth with a 22% rise in revenue, driven by defense and air traffic management sectors, which saw increases of 56% and 63%, respectively. Their new Space subsidiary aims to position Indra as a leading European player. The acquisition of Global Training Aviation strengthens their simulation business. Financials were strong, with a doubled free cash flow of €68 million and a minimal financial leverage of 0.2x. Additionally, significant ESG achievements and strategic partnerships further highlight Indra's solid footing and promising outlook .

Strong Start to 2024

Indra has kicked off 2024 with impressive first-quarter results, exhibiting double-digit growth in various key financial metrics. The company reported an order intake growth of 7%, as well as a notable increase in revenue by 22% overall, driven largely by major verticals including defense, which surged 56%, and air traffic management (ATM), which rose 63%. These metrics suggest a robust demand for Indra's services, establishing a solid starting point for the company's strategic growth plan.

Acquisitions and Strategic Moves

The quarter was not just about numbers; strategic moves have also positioned Indra for future success. Notably, the creation of a new Space subsidiary aims to guide Indra towards becoming a Tier 1 European player in the space sector. Furthermore, the acquisition of Global Training Aviation enhances its simulator offerings, completing the value chain from manufacturing to pilot training services. These initiatives reflect Indra's commitment to enhancing its capabilities and market standing.

Strong Financial Health

Indra maintains a strong financial position, characterized by low financial leverage of 0.2x net debt to EBITDA. The company's cash generation improved significantly, with free cash flow amounting to €68 million, doubling from the same quarter last year. The net debt at the end of the quarter stood at €89 million, coupled with a healthy cash position of €608 million and available credit facilities of up to €748 million, providing ample liquidity to navigate future opportunities.

Sustainable Growth Outlook

Looking ahead, Indra has opted to be conservative with its annual revenue guidance, preferring to maintain its current estimates amidst a strong first quarter. While the growth may not continue at the same pace, the company remains optimistic about its strategic initiatives that are set to roll out by the third quarter of this year. This includes the implementation of eight critical work streams under its ‘Leading the Future’ plan, aimed at fostering operational efficiency and enhancing market positioning.

Commitment to ESG and Market Leadership

In terms of sustainability, Indra has garnered recognition for its ESG performance, achieving the best score in the technology sector for the S&P yearbook. This commitment to environmental, social, and governance principles positions Indra as not only an industry leader but also as a responsible corporate citizen, which may enhance its attractiveness to investors focused on long-term impact.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to Indra's First Quarter 2024 Results Presentation. I now hand the conference over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead. .

[Ezequiel Baquera, executive]

Good morning, and welcome to our first quarter results 2024 presentation. I'm Ezequiel Nieto, Investor Relations. And as usual, let me refer you to disclaimer on Slide #3 that shows the legal framework under which this presentation must be considered. First, let me introduce the participants of this call, Jose Vicente Los Mozos, CEO of Indra; Antonio Mora, Chief Control Officer; and Luis Abril, Managing Director of Minsait. Jose Vicente, the floor is yours.

[Jose vicente Los mozos, executive]

Thank you, Ezequiel. Ladies and gentlemen, good morning, and welcome to our conference and thanks for being with us this morning. I think it's fair to say that our first quarter results have been very strong and positive. I try never go back and are a great starting point for our strategic plan leading the future and the right first step to achieve this target.

Let's start with Slide #5, where we display our main business achievements for the quarter. First of all, we have taken our first step to deliver on our strategy presented in the Capital Market Day by creating our Space subsidiary with the aim of making it the cornerstone of our business activity in the coming years.

As we said, we have the commitment of becoming a Tier 1 European player in the space. We have also carried out the acquisition of the whole capital of Global Training Aviation to reinforce our position as one of the world's leading simulation company. With this operation, Indra now covers the entire value chain of the business for the manufacturers leading simulator to the provision of training services for pilots.

Another very important milestone has been the joining of NAV Canada into the iTEC Alliance, where Indra is a major player in the global air traffic ecosystem. With this important partnership, iTEC has reached beyond the European border for the first time. We have also signed several agreements with top player of the first industry such as the net generation rather in Emirate with EDGE Group. The new industrial collaboration agreement signed with Lockheed Martin all the collaboration agreement signed with Thales to boost the joint development and commercialization of Vanguard defense system.

And finally, we have achieved 2 new relevant milestones in ESG which are the best score in the technology sector in the S&P year book. The renewal of our top employer certification for the fifth consecutive year as one of the best companies to work for.

In Page 6, we can see the headline of our financial results for the first quarter of 2024. Just let me highlight the following. First, the double digit growth achieved in the order intake, revenue, EBIT and EPS. Second, the size and quality of our backlog, which grew 6.3%, providing good visibility for our near future growth. Third, the commercial momentum that the company is going through with revenues growing at 22% rate, strongly backed by all our division, among which it stands out the grower resister by defense plus 56% and ATM plus 63%.

Besides that, this growth, combined with our cost measure and driving -- are driving our improvement in profitability as our EBITDA and EBIT margin show and cash generation, allowing us to maintain financial leverage at a very low level of just 0.2x.

On the Slide #7, just let me remark the strength of our organic growth, 90%, one removed the ForEx impact and inorganic contribution. Intent -- in terms of EBITDA distribution, defense, high traffic management and mobility represents 53% of the total for the first quarter of the year.

On Page #8, we display the evolution of our headcount. Let me highlight here that we have improved our revenue per employee by 14% while our workforce has always increased by 2% compared to March '23. The productivity become also a key element in our performance.

Now once the big picture has been present, let's dive into the performance of each of our 4 divisions, starting in Page 10 with defense. In Slide 10, this has been a very strong quarter for defense, as you can see in the key figure on the slide. Order intake grew by 4%, mainly due to the Eurofighter project and despite the worst FCAS project comparable.

More important are the very strong figure upsell, which grew 56% in first quarter '24 mostly driven by the contribution of the FCAS project. Excluding this contribution, sales will have increased by 10%. On top of this solid revenue growth, EBIT margin grew from 15.7% in first quarter '24 to 16.4% last year same quarter, improvement explained by the increasing contribution of the FCAS project.

In air traffic management, also delivered very strong performance, as you can see on Slide 11. The positive performance showed by order intake, plus 83% growth was mainly due to the contract signed in Canada and Colombia as well as some other in Europe and EMEA. It is worth noting, as we mentioned before that NAV Canada joined the iTEC Alliance.

Sales in third quarter '24 grew by plus 63% driven mainly by contracts carry out in Belgium and Spain as well as the inorganic growth from the acquisition of Park Air in the U.K. and the Select business in the U.S. And finally, EBIT margin was in the double digits rent of 13.8%.

If we move to the mobility division, backlog and order intake fell slightly minus 3% -- minus 1%, respectively, after sales grew plus 19%, driven by double-digit growth in all geographies except for Spain. The EBIT margin in first quarter '24 was 3.2%, slightly higher than 2.7% recorded in first quarter '23. But frankly, a big job done deeply in mobility set to prepare for the future.

About Minsait. Now in past 13 Minsait also printed a very positive quarter. The good commercial momentum goes on with a plus 7% increase in order intake in first quarter '24. For spar revenue in third quarter '24 grew by plus 12%, driven by the strong performance of improved administration and health care, which grew plus 35% thanks to the positive activity with the public administration in Spain, while Energy & Industry reported plus 8% growth and financial services registered a plus 3% increase.

Finally, EBIT margin in first quarter '24 improved to 5.5% versus 5.1% in first quarter '23 thanks to higher operating leverage from a steady sales growth as well as improved revenue mix and therefore then with efficiency initiatives. When we compare the concurrence of Minsait, you can see the good job done in first quarter for the team.

On Page 14, the split down of Minsait revenue by horizontal, where you can see that we have improved our mix with digital and solutions growing by 15% compared to first quarter '23 and now representing 50% of our sales. And finally, on Page 15, we saw our order intake and revenue breakdown of Minsait. First quarter '24 order intake was up 7% with double-digit growth in 3 of the verticals, except for Energy & Industry with decline by minus 8%.

On the right-hand side, revenue in first quarter '24 grew by plus 12%, driven by public administration and health care plus 35% energy and industry plus 8% and financial services plus 3%. On the contracted revenue in Telecom & Media decreased 4%.

Now I leave the floor to Antonio Mora for the financial review.

[Antonio Mora Morando, executive]

Thank you, Jose Vicente, and good morning, everyone. Let's start the financial review with the evolution of the free cash flow on Slide 17. That amounted to EUR 68 million, figure taking into account business seasonality and considering that we are more than doubling the already good figure for the same quarter last year. This level of cash generation, as we will see below, has allowed us to maintain our financial leverage in a very low level.

Now in Page 18, we see how days of sale improved compared to both March '23 and the end of last year. The good performance versus March '23 can be explained by the improvement of accounts receivable, minus 2 days and accounts payable minus 5 days.

Page 19 shows the net debt evolution of the quarter. The first step is strong operational cash flow of EUR 108 million due to the excellent performance of the business. As mentioned, the net working capital stood at minus EUR 15 million well below the minus EUR 34 million posted in first quarter '23.

Other financial liabilities stood at EUR 9 million, similar figure of the previous year, net interest at EUR 4 million, slightly higher than third quarter '23. With all this, we have closed this third quarter with net debt at EUR 89 million and a leverage ratio of 0.2 net debt to EBITDA, as you can see in Page 20, slightly above, the figure we presented in March 2023, but still at a very low debt levels.

And now to finish my speech, a quick look to the debt structure in Page 21. In first quarter '24, gross debt remains stable in EUR 697 million. Average maturity below 2 years and cost of debt at 4.2%. The cash position at the end of March was EUR 608 million, and we also have EUR 748 million of undrawn credit facilities so that we maintain liquidity while considering gross debt with cash.

Now let me turn the call to Jose Vicente for the final slides.

[Jose vicente Los mozos, executive]

Well, as you can see, that's the beginning the our strategic plan "Leading the Future" will restore. First, I want to congratulate the team. I think this transformation of Indra will start to see the result. I'm very proud of my team. We are working very in solid way -- and as you can see the speed of the transformation. Math will launch Capital Market Day, but we don't sleep.

Now I want to show you the 8 work stream to implement Leading the Future. As we advance all of Vision 2024, 2026 strategic plan Leading the Future, and aiming to present to you how we have structured the implementation around 8 critical work streams. The first work stream or control tower and operating model is designed to oversee the overall structure of the plan's implementation and to deploy key organizational and operating model changes, and it will share by the Chairman and myself.

Second, the transformation work stream is set to drive improvement across several fronts, accelerating our business top line, boosting industrial and software development productivities and laying the groundwork for the newly announced Indra technology hub expected in 2026, these initiatives are crucial for growth and efficiency. The focus of the strategic corporate operation work stream is to oversee the creation of the spice NewCo.

Including the carve-out of current capability are leading the shares for global long-term partners and new companies to be incorporated. Additionally, this work stream will guide us in the portfolio rotation process, which includes the divestiture of noncore assets and the acquisition of defense and aerospace target, it will also lead the shares for new key strategic partnerships and alliance.

Our geographic expansion work stream aims to position Indra as a stronger multinational company, enhancing local positioning and customer proximity by deploying 3 new cluster or home market as announced in our Capital Market Day. The group-wide digital capabilities work stream is focused on expanding midsize digital capabilities across the organization. The technological R&D work stream will prioritize investment in digital and cutting edge technologies as part of our commitment to invest plus the EUR 3 billion in technology development up to 2030.

Our corporate enabler work stream is taken with supervising the implementation of our new talent plan which include the deployment of the new Indra work culture, an initiative in order key areas such as ESG, branding and digitalization or corporate system. Lastly, the booster work stream is where we will explore additional opportunities to further accelerate Indra's growth.

If we go to the next slide, determined on the implementation phase of our strategic plan, we are currently in the activation period. Our focus is on making critical organizational adjustment and lying a robust foundation for all subsequent. Since the Capital Market Day, we have been structuring and planning meticulously all the subjects. New committees have been established, and we are implementing advances monitoring tool to ensure transparency and control. We have also keep started petition with dedicated sponsor is for that, we have defined the first 100 days that we have the action that we have the responsible for is committed deration or inside the team with related data to be implemented.

Looking ahead, we anticipate the rollout and execution phase of our strategic plan to commence by the third quarter of this year. This phase of course ensure that we are not only adequate prepare for the strategic plus launch, but also proceed in a manner that guarantees success. As you can see first, we have defined the Check Transformation Officer that he was responsible to monitoring following supported the team in its assume.

Also, we had defined ACO to leading strategic corporate transaction wording end-to-end. Control Tower, I explained before, and the quick start with a plus 15 priority work stream to first 100-day with assigned sponsor. And the immediate priority activity to define as new cost management mid-term initiative scheme linked to guide and release on Capital Market Day that need to be approved in the next shareholder and Space NewCo as part of Indra core priority.

I remind why we go to develop the space because communication is part of those business is country need to be autonomous, they need to control the communication is for that make sense we developed this new space co.

That's all for the first quarter, we continue to work. Thank you all for being here today and for your time, and thank you that are making this plan a reality. I see you at the end of July. Thank you very much. And now we are open to the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Nicolas David from ODDO.

[Nicolas David, analyst]

Yes. Congrats for this very impressive set of Q1 earnings. Just maybe talking about the outlook in the press release you just reiterated annual guidance for this year. How should we read that? Should we read that as a way you expect a way softer growth in the coming quarter? Or it's just your internal processes, which makes you push you not to upgrade it while you see a better -- actually a better outlook than what you guidance?

And we understand that Q1 was probably the strongest quarter of the year, but notably because FCAS comps are going to be tougher going forward. But could you please highlight some other potential exceptional item, which pushed the growth in Q1 and we shouldn't see in the rest of the quarter, notably air traffic management. How sustainable is the growth -- the organic growth you have now notably in those countries you mentioned.

And when the big contracts you signed in Canada and Columbia are going to ramp up? And I have a second question is, could you please update us on the process to dispose a stake in Minsait? Where do you stand now? There were some rumors in the press that you were more open to sell a majority stake? And when should we expect an update on that official.

[Jose vicente Los mozos, executive]

Thank you, Nicolas. About your 3 questions. First one about the guidance, it's just 1 quarter and we prefer to be conservative. We are also in mind, we have the positive delta of Indra EUR 56 million in the quarter. This delta disappear to the remainder quarter. But I explained before, I don't want never go back, okay? I think the key point is the split that in to improve. This year is the first year to implement the plan.

I think for the moment, I prefer to be conservative. About our traffic management, frankly, to put traffic management that clear division has been very good input for all the customer and shareholder because before air traffic management as I remember, we are the second company in the world and maybe we are the most advanced solution for the airports worldwide. They put in relevance, air traffic I can tell you, for example, when I visit Geneva in the air space position that Indra today is a reference in this domain worldwide that I am very confident about air traffic management. Now -- and that we explained in the Capital Market Day, for us, the key point is to entry in the U.S. market that in the following years, the airport will be renewed.

But also, I can tell you in the last month, we have won a small project for 40 small airport for anti-truck plane in the U.S. That's the beginning that we are confident. About Minsait, frankly, after 1 year, if I listen all the rumors, I never can work, okay? We have the commitment. I think step by step I explained you, we have more than 50 as in the 100 days. We are looking for a partner for Minsait. We are studying noncore business step to be a little patient. We don't stop, but I think we have clear direction where we want to finish.

[Nicolas David, analyst]

Understood. And on inside beyond the rumors, I mean, is it true that you are in the phase of receiving offers yet? Or it's really too early in the process and yes?

[Jose vicente Los mozos, executive]

Give us time. Okay. It's under control. Also, this project is led by Luis Abril, that you know is the head of Minsait division. And we have the schedule and we know how to do in the following months.

[Operator]

The next question comes from the line of Laurent Daure from Kepler.

[Laurent Daure, analyst]

Yes. A couple of questions from me as well. Starting with Minsait. Could you give us an update on what you see on the market on your key region in Spain and LatAm as you probably saw most of your competitors are not growing anymore, and you are still delivering a 10% organic growth. So I know Spain is more resilient. But do you see the first sign of weakness? And more particularly, you were boosted by the public sector. Do you expect the same inflows of revenue from a large government contract for the rest of the year? So that's the first point.

Second question is on the election business, it's always very hard for us to forecast. So if you could give us your best guess for 2024 versus 2023 on this business? And my final question is back to your -- the good working cap control in the first quarter. I was wondering if the shift towards more defense business can have an impact going forward, not only this quarter but for the next years.

On the speed of cash collection in other words, the receivables, I feel there's quite a difference between IT and defense. So if you could clarify a little bit on the topic that would be useful as well.

[Jose vicente Los mozos, executive]

Before to give the floor to Luis Abril about the election. Election, we expect lower contribution around EUR 55 million, EUR 60 million versus EUR 69 million in 2023. But we are in May. We don't know political overview in the following months, maybe it will be lower, maybe will be higher because you know more and more we are invited to more RFQ to preparation worldwide. Now Luis will answer you about Minsait.

[Luis Abril Mazuelas, executive]

Yes. I mean, just to complement on election, election shouldn't be -- this year shouldn't be very different from 2023. 2022 was quite good for elections. '23 and '24 would be similar. And on midsize, effectively, as you've seen in the numbers, we still see no significant signs of a slowdown. It is true that in this quarter, the fastest-growing vertical has been public administrations.

In public administrations, not only we do have the Spanish public administration, we have many other things, we have held. We have actually elections and some other things. But as you can see, with the exception of telco and media, there is growth, there is what we consider solid growth in all the verticals. So overall, we see -- as I was saying, no signs of a slowdown. It is true that some of our peers have been more pessimistic in the last months, and actually, some of them have been having some problems. It's not our case.

And for the future, we are still cautiously optimistic. We have a good pipeline. We have -- we are seeing solid demand from our customers. It is true that we probably do have some advantages versus our most relevant peers such as the fact that most of our customers are large customers who are suffering the crisis less or the fact that many of our contracts are multi-annual contracts which give us some baseline which is interesting from a growth perspective.

We are typically in very core activities of our customers. We are relatively confident with the fact that we can keep on growing. It is true that public administration in this quarter has been relevant from a growth perspective. We keep underlying not only in public administration, but in all the sectors that compose Minsait. And as I was saying, we are cautiously optimistic. Still, given that we are cautious, what we see for this year, for the end of the year in Minsait, is still growth figures of mid-single digit and no more. But we feel that we can comfortable to fulfill that kind of figures.

[Laurent Daure, analyst]

Okay. And the last point was on the working cap. .

[Antonio Mora Morando, executive]

Yes. Regarding your question about the working capital will be better in Defence and ATM, thanks to the prepayments and very good collection during first quarter '24.

[Operator]

The next question comes from the line of Carlos Iranzo from Bank of America.

[Carlos Peris, analyst]

I actually have 3 questions. The first one on free cash flow, very strong quarter, your regulated guidance. So I just wonder how should we think about free cash flow generation in the next 3 quarters is 2024 a year in which you are not going to generate most of your free cash flow in the last quarter of the year?

Then second question on defense, 70 bps of margin expansion at the EBIT level despite the strong contribution from FCAS. So just wonder if you can give a bit of color on the revenue mix and how have you been able to increase margins despite the strong contribution from FCAS? And then last one, if you can help me in terms of modeling on high traffic management. Could you please give us the inorganic contribution from SELEX and Park Air, please?

[Jose vicente Los mozos, executive]

First, before to give the floor to the -- to Antonio answer you about the the free cash flow and the contribution for SELEX and Parker. In defense, I request to monitoring defense with our Eurofighter and with our FCAS, okay? Defense, we have increased 10% with our FCAS revenue, okay? About the EBIT, our margin EBIT in defense has been 16.4% versus 15.7% improvement thanks to operating leverage and FCAS contribution. I can explain to you, for example, cost reduction in manufacturing has been important. We are improving efficiency. And now we are forecast to establish the second in September, that this operation are a point also supporting us to improve our EBIT margin. Antonio?

[Carlos Javier Treviño Peinador, analyst]

Okay. We retired our guidance in EUR 250 million for the total year in free cash flow and will hope the fourth quarter will be the stronger origination of free cash flow.

[Carlos Peris, analyst]

Clear. And ATM and the inorganic contribution?

[Antonio Mora Morando, executive]

Yes. Yes, SELEX and Park Air has been EUR 9 million. For this first quarter. SELEX, EUR 7 million and EUR 2 million for Park Air.

[Operator]

[Operator Instructions] And our next question comes from the line of Michael Briest from UBS.

[Ben Castillo-Bernaus, analyst]

Congratulations as well from me on the strong start. On Space, what's the significance of creating the stand-alone company? And can you make any comments on the press speculation regarding Hispasat? And secondly, on Minsait, the revenues are obviously strong, but headcount was flat year-on-year. does that suggest a lot of the growth was products, subcontracting, maybe the election business because normally, we'd see a stronger margin drop-through is head count was flat on that sort of growth rate.

[Jose vicente Los mozos, executive]

Space. When we have explained our concept in new space to the shareholder consultant. There has been very open interesting because we have in mind a very agile space NewCo that each company will have his autonomy. In some case, we can buy also but also for maximum the synergy and the same potential sale strategy that today, for example, we have a -- we are in the process to affiliate our communication growth. We are in the discussion of different companies around the value chain that for a moment, I can now give you the name. And it's past that I explained, it's an option. But it's not the only option, okay? Because we want to become a European partners that Space can be in the operator part of the NewCo? Yes. Can be other non-Spanish company? Yes. It depends in the following months that the discussion we have with a different company in Europe and also in some case in -- with U.S. companies.

[Luis Abril Mazuelas, executive]

And I take that one on Minsait. Michael, thank you for the question. You mentioned the headcount, which is constant, effectively is constant despite the growth -- and this has to do not that much with extraordinary effects or picks of things like the election business. It has to do basically with the fact that sales are more high-quality sales done before. We are selling more digital. We are selling more projects and services, which are less intensive in people. We are selling less BPO and things like that. And this allows us to grow without significantly increasing headcount.

[Michael Briest, analyst]

But wouldn't that create a bigger margin benefit? I know margins were up, but 10% growth without a head count should have a bigger effect on the port.

[Luis Abril Mazuelas, executive]

Well, actually, if you take a look at the operating margin and EBIT, the margin is better than in the first quarter of 2023. It is significant -- actually significantly better. It's like 4, 5, 6 percentage points better. .

[Jose vicente Los mozos, executive]

Any other questions?

[Operator]

There are no further questions at this time. .

[Jose vicente Los mozos, executive]

Okay. Thank you, ladies and gentlemen. And I hope to see you at the end of first -- at the end of the second quarter. Thank you. Have a nice day, nice week.