Indra Sistemas Sa Ord

Good morning and welcome to Indira's first quarter 2024 results presentation. I now hand the conference over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead.

Good morning and welcome to our first quarter results 2024 presentation. I'm Ezequiel Nieto, Head of Investor Relations, and as usual, let me refer you to disclaimer on slide number three that shows the legal framework under which this presentation must be considered. First, let me introduce the participants of this call. José Vicente de los Mosos, CEO of Indra, Antonio Mora, Chief Control Officer, and Luis Abril, Managing Director of MINSIGHT. José Vicente, the floor is yours.

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 result has been very strong and positive. I try never go back and are a great starting point for our strategy plan leading the future and the right first step to achieve this target. Let's start with slide number five, where we display our main business achievement 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 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 companies. With this operation, Indra now covers the entire value chain of the business, from the manufacture of leading edge 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 players of the fence industry, such as the Next Generation Radar in Canada, Emirates with Edge Group, the new industrial collaboration agreement signed with Lockheed Martin, or the collaboration agreement signed with Thales to boost the joint development and commercialization of Vanguard's defense system. And finally, we have achieved two new relevant milestones in ESG, which are the best scores in the technology sector in the SNMP yearbook. the renewal of our top employer certification for the sixth 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 digital growth achieved in the order and take 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 divisions, among which it stands out the growth resistor by defense, plus 56%, and ATM plus 63%. Besides this, 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 0.2 times. On the slide number 7, just let me remark the strength of our organic growth. 90%, one removes the forest impact and inorganic contribution. In terms of EBITDA distribution, defense, IT management and mobility represent 53% of the total for the first quarter of the year. On page number 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 only increased by 2% compared to March 23. The productivity becomes also a key element in our performance. Once the big picture has been presented, let's dive into the performance of each of our four divisions, starting in page 10 with Defence. In slide 10, this has been a very strong quarter for Defence, as you can see in the key figure on the slide. Ordering intake grew by 4%, mainly due to the Eurofighter project, and despite the worse FCAS project comparable. More important are the very strong figures of sales, which grew 56% in Q1 2024, mostly driven by the contribution of the FCAS project. Excluding this contribution, sales would 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 of same quarter. Improvement explained by the increasing contribution of the FCAS project. In high traffic management, also delivered very strong performance as you can see on slide number 11. The positive performance showed by order intake plus 83% growth was mainly due to the contrast sign in Canada and Colombia as well as some other in Europe and AMEA. It is worth noting, as we mentioned before, that NAF Canada joined the ITEC alliance. Sales in first quarter 24 grew by plus 63%, driving mainly by contracts carried out in Belgium and Spain, as well as the inorganic growth from the acquisition of Parker in the UK and the Celex business in the US. And finally, EBIT margin was in the double-digit range of 13.8%. If we move to the mobility division, backlog and order intake fell shortly before minus 3% and minus 1%, respectively, alfalo cells grow, plus 19%, driving by double-digit growth in all geographies except for Spain. The average margin in first quarter 24 was 3.2%, certainly higher than 10, 2.7% recorded in first quarter 23. But frankly, a big job done deeply in mobility session to prepare for the future. About Minsay. Now in past 13, Minsay also printed a very positive quarter. The good commercial momentum goes on with a plus 7% increase in organ intake in Q1 2024. For its part, revenue in Q1 2024 grew by plus 12%, driven by the strong performance shown in public administration and health care, which grew plus 35% thanks to the positive activity with the public administration in Spain while energy and industry posted plus 8% growth and financial services registered a plus 3% increase. Finally, EBIT margin in first quarter 2024 improved to 5.5% versus 5.1% in first quarter 2023 thanks to higher operating leverage from steady sales growth as well as improved revenue mix and therefore done with efficiency initiative. When we compare the concurrence of MinSci, you can see the good job done in first quarter for the team. On page 14, the breakdown of MinSci revenue by horizontal, where you can see that we have improved our mix with digital and solution 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 mid-size. First quarter 24, order intake was up 7%, with double-digit growth in three of the vertical, except for energy and industry, with decline by minus 8%. On the right-hand side, revenue in first quarter 24 grew by plus 3%, driven by public administration and health care for plus 35%, energy and industry plus 8%, and financial services plus 3%. On the contrary, revenue in telecom and media decreased by 4%. Now I leave the floor to Antonio Mora for the financial review.

Good morning everyone. Let's start the financial review with the evolution of the free cash flow on slide 17. That amounted to 68 million euros, an excellent 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 patch 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 two days and accounts payable minus five days. Page 19 shows the net debt devolution of the quarter. The first step is strong operation cash flow of 108 million euros due to the excellent performance of the business. As mentioned, net working capital stood at minus 15 million euros, well below the minus 34 million euros posted in first quarter 23. Other financial liabilities stood at 9 million euros, similar figure as the previous year, and net interest at 4 million euros, slightly higher than third quarter 23. With all this, we have closed this third quarter with net debt at 89 million euros 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 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 697 million euros. Average maturity below two years and cost of debt at 4.2%. The cash position at the end of March was 608 million euros, and we also have 750 and 48 million euros of unrun credit facilities so that we maintain liquidity while cancelling gross debt with cash. Now, let me turn the call to José Vicente for the final slides.

Well, as you can see, that's the beginning of our strategic plan leading to the future. First, I want to congratulate the team. I think this... Transformation of Indra, we start to see the result. I am very proud of my team. We are working very in a solid way, and as you can see, the speed of the transformation. Since March, we'll launch Capital Market Day. But we don't sleep. Now I want to show you the eighth world stream to implement leader the future. As we advance our vision 2024-2026 Strategic Plan Leader of the Future, I am eager to present to you how we have structured the implementation around eight critical workstations. The first work stream or control tower and operating model is designed to oversee the overall status 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 our growth and efficiency. The focus of the Strategic Corporate Operations Workstream is to oversee the creation of the SPICE NUCO, including the carve-out of current capabilities and leading the search for global long-term partners and new companies to be incorporated. Additionally, this workstream will guide us in the portfolio rotation process, which includes the divestiture of non-core assets and the acquisition of defence and aerospace targets. It will also lead the search for new key strategy partnerships and alliances. Our geographic expansion worksheet aims to position Indra as a stronger multinational company, enhancing local positioning and customer proximity by deploying three new clusters of home markets as announced in our Capital Market Day. The growth-wide digital capabilities worksheet is focused on expanding mid-sized digital capabilities across the organization. The technological R&D world stream will prioritize investment in digital and cutting-edge technologies as part of our commitment to invest plus the 3 billion euros in technology development up to 2030. Our corporate-enabled wash clean is taken with supervising the implementation of our new talent plan, which includes the deployment of the new IndiraWay culture and initiative in all the key areas such as ESG, branding, and digitalization of corporate systems. Lastly, the booster wash clean is where we will explore additional opportunities to further accelerate Indira's growth. If we go to the next slide, turning on the implementation phase of our strategic plan, we are currently in the activation period. Our focus is on making critical organizational adjustments and allowing a robust foundation for all subsequent options. Since the Capital Market Day, we have been structuring and planning meticulously All the subjects. New committees have been established and we are implementing advanced monitoring tools to ensure transparency and control. We have also started priority action with dedicated sponsors. It's for that we have defined the first 100 days that we have the action, that we have the responsible for each committee direction 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 approach ensures that we are not only adequately prepared for the strategic plan launch, but also proceed in a manner that guarantees success. As you can see, first, we have defined the check transformation officer, that he will be responsible to monitoring, monitoring, following, supporting the team in each action. Also, we have defined the SEO to leading strategy corporate transaction work team, end-to-end. Control tower, I explained before, and the quick start team, with a plus 15 priority Wall Street to first 100 day with assigned sponsor. And the immediate priority... Activity to define is new top management meeting incentive scheme linked to guidance release on capital market data that needs to be approved in the next shareholder and space new co-created as part of IndiraCorp priority. I remind why we go to develop the space because communication is part of the business. It's a country needs to be Autonomous, they need to control the communication. If for that makes sense, we develop this new space. That's all for the first quarters. We continue to work. Thank you all for being here today and for your time. And thank you to those 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.

Thank you. Ladies and gentlemen, the Q&A session starts now. If you wish to ask the question, please press star followed by five on your telephone keypad. Our first question comes from the line of Nicholas David from Odo. Please go ahead.

Yes, good morning. Thank you for taking my question, and congrats for this very impressive set of Q1 earnings. Just maybe talking about the outlook in the press release, you just retained the 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 make you... push you not to upgrade it while you see a better outlook than what is in your 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 items which push the growth in Q1 and we shouldn't see in the rest of the quarters? 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've signed in Canada and Colombia are going to ramp up. And I have a second question. Could you please update us on the process to dispose of the stake in Minsight, where it is done 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? Thank you.

Thank you, Nicolas. About your three questions. First one, about the guidance. It's just one quarter, and we prefer to be conservative. Bear also in mind, we have the positive delta of F-cash, 56 million in the quarter. This delta disappears to the remaining quarter. But I explained before, I don't want to never go back. I think the key point is the spread, the thinning, This year is the first year to implement the plan. I think for the moment I prefer to be conservative. About air traffic management, frankly, to put air traffic management that clear division has been very good input for all the customer and shareholder. Because before air traffic management, I remember we are the second company in the world, and maybe we are the most advanced solution for the airports worldwide. To put in relevance air traffic, I can tell you, for example, when I visited Ginebra in the aerospace exposition, that Indra today is a reference in this domain worldwide. That I'm very confident about air traffic management. Now, as 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 Marda 40 small airport for anti-shock plane in US that's the beginning that we are confident about me inside frankly after one year if I listen all the rumors I never can work Okay? We have to take commitment. I think step by step. I explained to you we have more than 15 answers in the 100 days. We are looking for a partner from inside. We are studying non-core business. Step to be a little patient. We don't stop, but I think we have clear direction where we want to finish.

Understood. And on the 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?

Give us time. Please, give us time. Okay, it's under control. Also, this project is led by Luis Sabril, as you know. is the head of the missile division, and we have the schedule and we know how to do in the following months.

All right. Given the very strong performance, we are happy to let you start.

Thank you. Next question, please.

The next question comes from the line of Laurent Dore from Crepe. Please go ahead.

Yes, thank you. Good morning, gentlemen. A couple of questions for me as well, starting with MINSIGHT. Could you give us an update on what you see on the market, on your key regions, Spain and LATAM, as you probably saw most of your competitors are not growing anymore. You're still delivering 10% organic growth. So I know Spain has been more resilient, but do you see the first sign of weakness there? 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. The 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 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 production. In other words, the receivables. I think there's quite a difference between IT and and defence. So if you could clarify a little bit on that topic, that would be useful as well.

Thank you. election, we expect lower contribution around 55, 60 million versus 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 it will be higher, because you know more and more we are invited to more RFQ to prepare election worldwide. Now, Luis will answer you about my side.

Thank you, José Vicente. Yes, I mean, just to complement on election, elections shouldn't be, you know, this year shouldn't be very different from 2023. You know, 2022 was quite good for elections. 23 and 24 should be similar. And on my side, you know, effectively, as you see in the numbers, we still see no significant signs of a slowdown. You know, it is true that in this quarter, the fastest growing vertical has been public administrations. In public administrations, you know, not only we do have the Spanish public administration, we have many other things. We have health. We have actual elections and some other things. But as you can see, you know, with the exception of telco and media, there is growth. There is what we consider solid growth in all the verticals. So, you know, 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... You know, we are seeing, you know, 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, you know, which give us some baseline, which is interesting from a growth perspective. You know, we are... Typically, in very core activities of our customers, you know, we are relatively confident with the fact that we can keep on growing. You know, it is true that public administration in this quarter has been relevant from a growth perspective. You know, we keep on relying not only on public administration, but, you know, in all the sectors involved. that compose MinSight, and as I was saying, we are cautiously optimistic. You know, still, given that we are cautious, what we see for this year, for the end of the year in MinSight, is still, you know, growth figures of mid-single digit and no more. But, you know, we feel that we can comfortably fulfill that, that kind of figures.

Thank you. And the last point was on the working capital.

Yes, regarding your question about the working capital, we'll be better in defense and ATN thanks to the prepayments and a very good collection during first quarter 24.

Thank you. Next question, please.

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

Hey guys, good morning. I actually have three questions. The first one on free cash flow, very strong quarter, your reiterated guidance. I just wonder how should we think about free cash flow generation in the next three 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 I 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 Parker, please? Thank you.

First, before to give the floor to Antonio to answer you about the free cash flow and the contribution for Celes and Parker. In defense, I request to monitoring defense without Eurofighter and without FCAS. Okay? Defense... We have increased 10% without 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. For example, I can explain to you, for example, cost reduction in manufacturing costs. has been important. We are improving efficiency and now we are forecast to establish the second shift in September. That this operational point also supporting us to improve our EBIT margin. Antonio?

Okay. We reiterated our guidance in 250 million euros for a total year in free cash flow. And we'll hope the fourth quarter will be the stronger generation of free cash flow.

Your questions are already answered?

And an ATM and an inorganic contribution? Okay, Carlos.

Celes and Parker.

Yes, and again.

The contribution Celes and Parker has been 9 million euros. Thank you. Thank you. Celes, 7 million Celes and two for Parker. Next question.

Thank you. Ladies and gentlemen, please be reminded that in order to ask the question, you may press the star key followed by 500 telephone keypad. And our next question comes from the line of Michael Brist from UBS. Please go ahead.

Yes, good morning. Congratulations as well from me on the strong start. On space, what's the significance of creating the standalone company? And can you make any comments on the press speculation regarding Hispasat? And secondly, on Minsight, the revenues are obviously strong, but headcount was flat year on year. Does that suggest a lot of the growth was, you know, products, subcontracting, maybe the election businesses? because normally we'd see a stronger margin drop through if headcount was flat on that sort of growth rate. Thank you.

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

I take the one on the inside. Michael, thank you for the question. You mentioned the head count, which is constant. Effectively, it 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 than 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.

But wouldn't that create a bigger margin benefit? I know margins were up, but 10% growth without any headcount should have a bigger effect, I'd have thought.

Well, actually, if you take a look at operating margin and EBIT, the margin is better than in the first quarter of 2023. It is actually significantly better. It's like four, five or six percentage points better.