Indra Sistemas, S.A. (IDR) Earnings Call Transcript & Summary

Welcome to the Indra Full Year 2019 Results Presentation. I would like now to hand over to Ezequiel Nieto, Head of Investor Relations. Please, sir, go ahead.

Thank you. Good evening, ladies and gentlemen. Thanks, everyone, for joining us today on our 2019 results presentation. I'm Ezequiel Nieto, Head of Investor Relations. And before starting, let me refer you to the disclaimer on Slide #3 that sets up the legal framework under which this presentation must be considered. The conference call will be led by our Chairman and CEO, Mr. Fernando Abril-Martorell, and the intended duration will be around 1 hour. Now let me turn the call to Indra's Chairman and CEO, Fernando Abril-Martorell.

Thank you, Ezequiel. Good evening, and welcome to our conference call for the 2019 results. As usual, today with me, I have Cristina Ruíz, Chief Operating Officer of Minsait; Ignacio Mataix, Chief Operating Officer of our Transport & Defence business; CFO, Javier Lázaro. Cristina Ruiz has lost her voice so I will do her part so we can keep as much as possible of her remaining voice for the Q&A part of the call. If we move to Slide #4. Let me start by saying that 2019 has been challenging, but at the same time, we believe, a very positive year, and we've done a lot of things. We saw a strong backlog, order intake and revenue growth as well as a clear improvement in profitability. Let me try to summarize the most important headlines for 2019. Order intake, plus 7%, continued to grow above revenues, providing some incremental visibility for future growth in both Minsait and Transport & Defence. The backlog grew 11% in reported terms, surpassing the EUR 4.5 billion mark, standing at 1.4x revenues and reaching a new historic high for Indra. This provides not only a better visibility for future growth but also ensures the development of new technological capabilities associated to the defense programs. Revenues went up 4% in local currency driven by Minsait with all the verticals posting solid growth, except for Public Administrations & Healthcare, which is easily explained by the negative delta of the Election business versus 2019. It's worth highlighting the good dynamics in America, plus 12% in local currency, with Brazil and the main countries continuing the pace of growth that we have been seeing throughout 2019. Profitability-wise, the EBIT grew 11%, bolstered by the improvement in Minsait's operational profitability despite the significantly lower contribution of the Election business. Net profit of the group stood at EUR 121 million, which implies 1% improvement versus 2018 explained by a higher tax rate versus last year. With respect to the cash generation, free cash flow amounted to EUR 8 million versus EUR 168 million in 2018, affected by the negative contribution of the working capital in the first 9 months especially in the first half of 2018 -- '19, but clearly more than compensated with the strong cash inflow collected in the fourth quarter, plus EUR 246 million versus EUR 213 million in the fourth quarter of last year, driving our net debt-to-EBITDA ratio to 1.8, 1.6 if we were to exclude the SIA acquisition that we did on the 31st of December of last year. So all in all, we have met our guidance targets for 2019. If we move to Slide #5, we show our revenues performance in 2019 and in the fourth quarter. 2019 revenues posted a 3.6% growth in local currency, driven by the Minsait division, while Transport & Defence sales remained stable. Organic growth, excluding the contribution of ACS and the FX impact, was plus 3.3%. And the FX impact in 2019 amounted to minus EUR 12 million, which represents a lesser negative impact versus 2018. Revenues in the fourth quarter decreased 1% in local currency, impacted by the temporary decline in Transport & Traffic due to delays in milestone certification of a specific project. While Minsait posted a strong growth again, organic revenues in the quarter also declined 1%, and FX impact amounted to minus EUR 4 million. If we move to Slide #6, let me provide a deeper insight into the order intake and sales breakdown by region. On the left graph, 2019 order intake increased all across the board. Spain registered 9% growth, specifically noting the Defence & Security contract signed with Lockheed Martin for the F110 frigate. America grew 7% in local currency, driven by financial services, relevant payment systems contracts signed in Chile and Peru and the BPO businesses in Brazil, and also transport where it is worth noting that tolling systems contract of the I-66 highway in the U.S. Europe grew 6% in local currency, thanks to the positive performance in Public Administrations & Healthcare and Air Traffic Management. And finally, EMEA was up 5% in local currency, especially due to defense systems in Vietnam and Oman. Revenue-wise, it's worth mentioning the growth posted by America, 12% in local currency, driven by Minsait, with all verticals posting double-digit growth except for Public Administrations & Healthcare. Europe grew 9% in local currency with both Transport & Defence and Minsait division showing double-digit growth, while Spain increased by 2% pushed by Minsait. We registered -- which registered close to mid-single-digit growth. However, sales in EMEA decreased by 9% in local currency. But bear in mind that this is a very positive performance in our view considering the difficult comparison versus the last year because of the Election business. If we were to exclude the Election business, sales would have increased slightly. If we move to Slide #9 -- #7, sorry, we displayed the backlog evolution of both Indra and our 2 divisions as well as the backlog to revenue ratio. Above on the slide, Indra backlog went up 11% in reported terms and reached new historic high. For its part, Transport & Defence and Minsait both registered an increase of 11%. Moving now to the bottom of the slide. Indra's backlog over revenue, the last 12 months' ratio also reached a new historic high and stood at 1.41x versus 1.31x at the end of 2018. Transport & Defence ratio increased to 2.54 versus 2.29, and Minsait ratio increased to 0.74 compared to 0.70 last year. All in all, the positive evolution of our backlog and backlog over revenues provide much better visibility for future growth in the coming years and also ensures the development of the technological capabilities associated to the new backlog, especially in Defence & Security. If we move to Slide #8, we see the group's EBITDA, EBIT and margin evolution. On the left side of the slide, you can see the performance of our EBITDA for the accumulated period in the fourth quarter. 2019 EBITDA, which includes the impact of IFRS 16, improved to EUR 346 million versus EUR 293 million in 2018. Excluding the impact of IFRS 16, EBITDA would have amounted to EUR 311 million, which implies a 6% growth. EBITDA margin was 10.8% versus 9.4% in 2018. And the fourth quarter EBITDA stood at EUR 123 million, implying 13.5% margin versus 11.8% margin in the fourth quarter of '18. Moving to the mid graph, we displayed 2019 EBIT by division. Minsait EBIT already represents 34% of Indra's total EBIT versus 21% in 2018, while Transport & Defence division represents 66% versus 79% in 2018. On the right-hand side of the slide, 2019 EBIT reached EUR 221 million versus EUR 199 million in 2018, bolstered by the improvement in Minsait's operational profitability. EBIT margin improved to 6.9% versus 6.4% last year same period. Below, EBIT in the quarter reached EUR 94 million versus EUR 84 million in 2019 (sic) [ 2018 ], improving both divisions compared to the last quarter of last year. We will dive deeper into the contribution of Minsait and Transport & Defence divisions to the EBITDA and EBIT performance later. If we move now to Slide #9, we show the evolution of the total workforce by divisions. At the end of the year, total workforce amounted to 49,607 professionals, implying an increase of 13% versus last year. Most of this workforce increase took place in the first 9 months of the '19 and was related to Minsait -- basically 90% of the total workforce increased due to the beginning of highly labor-intensive BPO projects mainly in America. In the fourth quarter, the head count increased and slowed down significantly, just 1% versus the 9 months of '19. Moving now to Slide #10. We have compressed the main highlights regarding our ESG sustainability performance. Indra is the only company in the software and services sector that has remained listed 14 consecutive years in the Dow Jones Sustainability Index. Since 2015, we're also members of the FTSE4Good index. And in addition, rating agencies like MSCI and ISS also recognized our ESG practices and being well above the sector. This year, we have been one of the 15 Spanish companies included in the Bloomberg Gender-Equality Index, and we have also been awarded top employer company for offering our professionals the best working environment. These 2 distinctions account for best practices in talent management and, in particular, for a commitment to gender equality. Currently, we have 35% women within the company, which is above the average of the sector, and 31% women on the Board of Directors. Ethics and compliance is a top priority for us. And for this reason, we invest a lot of effort to train our professionals on the code of ethics and legal compliance of the company. In 2019, 92% of the company professionals received these type of trainings. Climate change is also one of our priorities. And to this end, we disclosed our emission-related data, taking part in the CDP initiative. In 2019, we achieved 75% of carbon emissions reduction per employee in comparison to the emissions we had 7 years ago. Finally, we also seek to contribute to the development of the local communities where we operate. And for this reason, we have 82% local providers, which enable us to create value in those communities. On Slide #11, you can see our delivery on 2019 guidance targets and our demand in guidance for 2020. As you can see, we met all our 2019 guidance metrics, revenues and EBIT growth, free cash flow generation. And we fulfill the plus 50, minus 50 net debt range committed in our third quarter results communication. Our guidance for 2020 is revenue growth of mid-single-digit in local currency and EBIT growth of more than 15%. This means above EUR 255 million reported EBIT and a free cash flow of more than EUR 150 million. This guidance does not include SIA that we have just acquired. Whenever we are ready to present it, we will also give some guidance or the guidance will come on top of this basically. I just finished the headlines and the operating review of the group. So I would like to pass the call to Ignacio Mataix, our Transport & Defence Chief Operating Officer, who will present the 2019 results of the division.

Thank you, Fernando, and good afternoon, good evening to everyone. Let me move now to Slide #12, where you will see both the order intake and the revenues breakdown of our 2 businesses in our Transport & Defence business. First, the graph on the left shows the evolution of our 2019 order intake, which went up by 12% in reported terms. But as Fernando said before, by the Defence & Security business, in which there is especially important contract with Lockheed Martin in order to manufacture the digital antenna of the Frigate 110 for the Ministry of Defence. But also it's due to the very good performance and order intake of our international business in defense. On the middle graph, we show the evolution of our 2019 revenues which remained stable. Sales in Defence & Security slightly decreased by 1% in both local currency and reported terms, affected by the lower activity registered in security and simulation. Transport & Traffic sales went up slightly, 1% in local and reported terms, where the growth recorded in Air Traffic Management, 4% in local currency, offset by the decline in transport, 2% in local currency. On the right graph, we display the evolution of our fourth quarter 2019 revenues. Sales decreased by 9%, mainly due to the double-digit fall of Transport & Traffic, 14% in local currency, impacted by the delays in milestone certification of some relevant contracts in Transport & Traffic as well as by the difficult comparison with the fourth quarter of the previous year in Air Traffic Management and Transport. This is a temporary impact in the fourth quarter, and we expect solid growth on both Defence & Security and Transport & Traffic in 2020. If we move to Slide #13, we see that EBITDA and EBIT evolution and their respective margins for both 2019 and the fourth quarter of the year. On the top left graph, 2019 EBITDA in the Transport & Defense division, which includes the impact of IFRS 16, reached EUR 184 million vis-à-vis EUR 192 million in 2018, mainly affected by higher restructuring costs. We have a delta of EUR 8 million on the year. And the provisions, which were EUR 9 million that took place in the first half of the year in Defense & Security, as you remember, in both projects, Australia and Kuwait. Moving to the top right graph in the fourth quarter of 2019. EBITDA reached EUR 70 million compared to EUR 66 million in the fourth quarter of 2018. As you can see on bottom left graph, EBIT margin in the Transport & Defence division stood at a 12.2% and compared to 13.2% in 2018, which have also been affected by higher restructuring cost and by the provisions that took place in the first half of the year already mentioned. Excluding this impact, EBIT would have increased by EUR 6 million in the year. Moving to the right graph. In the fourth quarter of 2019 EBIT margin, we see that it has reached 17% versus the 14% in the fourth quarter of 2018, helped by the improvement in Transport and Defence & Security -- Defence & Security profitability, sorry. If we move to Slide #14, we are going to try to explain Indra's role in the future combat aircraft system. As you probably know, on September 2019 last year, the Spanish government appointed Indra as the national industrial coordinator for Spain. This appointment represents a significant opportunity for Indra as it enhances Indra's credibility and competitive capacity, its level of access to major international programs and the potential for future development of technologies. The ambition of the Spanish government is to be an equal partner with France and Germany in the project, sharing with them all the efforts in the design and development phase. It means that Indra as national coordinator will be equal partner with Dassault and Airbus Defence in Spain -- Defence & Space, sorry -- national coordinator for France and Germany in all the transversal activities. Indra's participation in the project is based on these transversal activities and also in the participation on the pillar. But let me give you some color of Indra's role in each of them. First of all, the joint concept study is in the initial phase where the next generation with consistent capabilities, common architectures, technology development road maps and program framework, will be defined. The joint concept study is co-led by the 3 national coordinators. So Indra will be -- will act as co-contractor together with Dassault and Airbus. Second, the joint concept study inter-pillar consistency will ensure that the demonstration projects launch in the different pillars provides sufficient and timely results for the design phase. This -- the essential tool we'll be supporting is the consistency of the [ SIMLAB ] that will allow exchanging the system of system model among these stakeholders and performance analysis along the many dimensions that the systems will have. The aim of the sensor pillar is the development of technical breakthrough in sensor, defensive aids and electromagnetic effectors that will conform the next-generation of smart distributed systems. Indra is a sensor pillar leader in Spain and has been proposed by the Spanish government to be the international leader as well. And finally, in the system of systems, the -- what we call the combat cloud pillar, Indra will have a prominent role as pillar leader and main contractor in Spain. The combat cloud will be the heart of the information and intelligence of the system. Please, if we move to Slide #15, in which we display the estimated planning and investment of the framework agreement signed by the ministers of defense of Spain, Germany and France from 2019 to 2030. Here, we are estimating that the investment of their program for 2019 to 2030 will be more than EUR 8 billion. It is important to mark that Indra will participate since the beginning of the program, and Indra will participate in each phase of the program. During the first 2 years, the national coordinators of each country will start working on the system concept phase, where it will be defined the concept study and the initial research and technology and demonstration activities, and the demonstration activities will be launched. The onboarding of Spain in the concept phase is being done in this phase. After the system concept phase will come the demonstration phase, which will last until 2030. It will cover the continuation of the research and technology activities and the building of individual flight demonstrators and fighter and remote carriers in approximately 5 to 6 years, ending by 2027 with individual flights. Finally, the Phase 3 will demonstrate that the next-generation combat system integrates the capabilities and also will be used to launch an initial phase of the development demonstrators after what we call the PDR, which is the preliminary design review. From 2030 onwards, we'll start the development and production program phase where the prototype will be finished and ready to start deliveries. The initial operation capability for the system will be planned for 2040. I just finished the review of the Transport results, and I will give back the word to Fernando to cover the Minsait activities.

Thank you, Ignacio. Let's turn now to Slide #16, where we show the order intake and revenue breakdown of Minsait. As you can see on the left-hand side, order intake in Minsait went up 5% in local currency, boosted by Public Administrations & Healthcare where the Italian subsidiary stood out and also boosted by telecom and media, thanks to the renewal of relevant contracts in Spain. Revenue-wise, it is worth mentioning the 13% growth recorded by our digital solutions unit in 2019, which now represents 23% of Minsait's sales. We continue to see a strong demand from our clients in these areas and especially related to innovation, digital customer experience, process robotization, big data, advanced analytics and cybersecurity. On the middle graph, we show our revenue performance. 2019 revenues went up by 6% in local currency with all the verticals registering solid growth, except for Public Administration & Healthcare, which remained stable due to the difficult comparison versus last year same period due to the Election business in AMEA. Energy & Industry revenues increased by 10% in local currency and reported figures. The industry segment posted double-digit growth backed by the services and retail sectors and showed better relative performance than the Energy segment. Energy recorded above mid-single-digit growth, thanks to the positive performance in the utilities and the oil and gas sector as well as the inorganic contribution of ACS. 2019 Financial Services sales increased by 5% in local currency, backed by the positive performance in America with key clients as well as midsized banking sector. 2019 Public Administration & Healthcare sales remained stable, which is a very positive performance, taking into consideration the very difficult comparison versus last year due to the Election business in AMEA. Excluding the Election business, sales would have increased by 6% in reported terms. It is worth mentioning the positive performance in public administration in Spain with new contracts with the social security administration, with the post office and with several regional administrations, and also in Europe, especially in Italy. In 2019, Telecom & Media revenues grew by 6% in local currency, mainly due to higher activity registered with the main telcos in Spain and America. On the right graph, we display the evolution of our fourth quarter '19 revenues, where sales increased by 5% in local currency, continuing with the pace of growth that we have seen across the year and with all the verticals recorded mid-single-digit revenue growth. Let's move now to the Slide #17 to present Minsait profitability. On the top of the slide, you can see the evolution of Minsait operating margin for 2019. This operating margin excludes exceptional costs that are mentioned in the footnote below. 2019 operating margin stood at EUR 97 million versus EUR 91 million in 2018, equivalent to 4.8% margin in both periods, showing all the vertical's margin improvement except for Public Administrations & Healthcare due to the very strong contribution of the Election business in profitability in 2018. Moving to the right graph. Fourth quarter of '19 operating margin in absolute terms stood at EUR 31 million versus EUR 27 million on the fourth quarter of last year. On the bottom left side, the EBIT margin in Minsait improved to 3.8% versus 2.2% in 2018 despite the significantly lower contribution of the elections on this year compared to last year. And in the fourth quarter of '19, the EBIT margin improved to 5.6% versus 5.2% in the fourth quarter of '18. And with this, I finish the review of Minsait results. And I would like to pass the call over to Javier Lázaro, our Chief Financial Officer, who will review the financial performance of the company.

Thank you, Fernando. And good evening, everyone. Let's start the financial review with the evolution of the free cash flow on Slide 18. On top of the slide, we show the quarterly evolution of free cash flow over the last few years. And as necessary, you can see that the fourth quarter proved to be very strong with a group netting a cash -- a positive cash inflow of EUR 246 million and turning a positive free cash flow figure for the full year. Once again, working capital was supported by a strong contribution of collections in the last days of December, although advances from 2020 were this year lower than they were the year before. Accumulated free cash flow for the year stood at EUR 8 million versus EUR 168 million in 2018, affected, as we have explained throughout the year, by the negative contribution of the working capital, mostly in the first half of the year. And more about this later in the presentation. Free cash flow before working capital was in line with that of last year, EUR 139 million versus EUR 140 million last year. And this is in spite of the impact of higher [ outlays ] and related to some financial and tax payment. If we now move to Slide 19, let's analyze for a minute, the evolution of the net debt of the group, which stood at EUR 552 million at the end of 2019 compared to EUR 483 million at the end of December last year. Operating cash flow contributed positively with over EUR 300 million to cash flow generation. This figure would be EUR 281 million if we exclude the accompanying impact of the application of IFRS 16, which was EUR 35 million as you can see further on in the graph under the variation of our financial liabilities line. Net working capital was the main track to our cash flow, generating cash flow generation for the year. However, we have seen a significant improvement during the fourth quarter, as we have reduced this figure to EUR 131 million negative versus the EUR 331 million negative that we had only 3 months ago, an improvement of EUR 200 million in the fourth quarter. We will continue to move along the bridge. CapEx was EUR 76 million versus EUR 79 million last year. Cash taxes stood at EUR 36 million versus EUR 17 million in 2018, which was positively impacted by some one-off tax refunds that we received in Spain. The variation of our financial liabilities were EUR 35 million. This is a new item that basically what it does is this reverses the impact to the financial leases affected by IFRS 15, basically, the rents of the buildings were -- from which we operate, which is included for some accounting reason in the -- as part of the operating free cash flow. Cash payments linked to our financial -- to our financing amounted to EUR 31 million versus EUR 17 million the year before. This increase is mainly explained by the fact that the bond that we issued in 2018, in April 2018, has yearly payments and we didn't have to pay anything that year. For that bond we have to pay everything at the beginning of this year. That was also affected by the way, by some reclassification of some FX trades linked to the ongoing operation of some of our projects. Finally, financial investments and other noncash flow items reached EUR 76 million. That is mostly related to the acquisition of SIA EUR 67 million, and also some smaller amount linked to an earnout of Paradigma, the company we acquired 2 years ago. And so if we now move to Slide 20, let's take a look at the 3 main building blocks of our working capital. If we explain first what happen between December '18 and December '19. You can see that working capital has increased by 16 days of trading from minus 10 to plus 6. And this is due to some of the reasons that we've been explaining repeatedly throughout the year. In the first half, inventories increased by 9 days of sale, which is probably EUR 90 million mostly concentrated on the T&D division, and this corresponds to 2 main factors. The first one is the increase in inventories linked to procurement and the stockpiling of components that would allow us to produce some products at a quicker pace and reduce the time to market of some of our strategic products. This accounts to roughly EUR 45 million. And the second element is the application of IFRS 15, which is another similar amount of EUR 45 million, of which EUR 30 million is directly linked to delays in the payment and invoicing of some of our 3 specific projects that we have flagged a number of times in previous conference calls. So that is the major increase that we see year-on-year in the working capital. Amounts -- accounts receivable remained stable in the year, with the higher level associated with the increase of sales being compensated by the advances from customers received during the year, a good part of which we actually received during the quarter. And then accounts payable increased by 7 days of trading, which is actually when you translate that into euros and factor into account the increase in the denominator based by the increase of sales, it is only EUR 37 million in actual money. And this is mostly due to the reduction of the lower level of purchases from outside suppliers of procurement, which was particularly acute during the fourth quarter. There was a difference of over EUR 60 million in the procurement done in the fourth quarter '19 versus fourth quarter '18. If we look specifically at the fourth quarter, you can see an improvement in all items of working capital, significant improvement in collections as it usually happens during the fourth quarter due to the seasonality of our business. Although, as I said, the advances from previous -- from the following year from 2020 into this year were slightly smaller than they were the year before. There was also an improvement in the accounts payable of 6 days of trading, which was mostly due to the larger level of purchases that happened traditionally in the fourth quarter of the year. And we also saw the stabilization of the level of inventories as has already happened in the previous quarter. I mean the increase in inventories was mostly concentrated in the first half of the year. On Slide 21, we show the evolution of our net debt and leverage ratios. In these figures, we have eliminated the impact of IFRS 16 just to make figures consistent with their historical series. Net debt amounted to EUR 552 million as we said before. Important to highlight that this includes EUR 67 million of the payment of SIA, the company we bought on the 31st of December last year. Excluding this acquisition, net debt would have stood at EUR 485 million. Net debt-to-EBITDA ratio was EUR 1.8 million (sic) [ 1.8x ] in December 28 versus 1.6x in the same time last year. Excluding the acquisition of SIA, this ratio would have been 1.6x. You can please notice also that nonrecourse factoring remains at a constant level of EUR 187 million as we normally do in every quarter. Just to finalize this presentation, let's take a look at the debt structure and the maturity profile on Slide #22. As we usually discuss in every call, on the left-hand side of the slide, we have the composition of our gross debt with a wide range of financing sources. We also have more than EUR 850 million of cash on the balance sheet, including the proceeds from manufacturing, which we freshen up at the end of the quarter but let [ die ] during the course of the quarter. And on top of that, we also have EUR 130 million of available credit facilities. On the right-hand side of the slide, you can see how we kept on reducing the cost of debt, first at 1.8% versus 2%, thanks to the [ mostly ] optimization of our credit facility. And finally, if you look at the bottom right-hand side of the page, you can see the maturity profile. You can see that we have a very comfortable maturity profile for the next few years. In 2021, we have reduced -- since our last publication in September, we have reduced almost EUR 200 million of maturities, which we have postponed for 5 years. And we work in to further reduce that number in the next few weeks and months. So a comfortable capital structure to deal with going forward. With this, we finalize the results presentation. Thank you very much, and let's now move on to the Q&A session.

[Operator Instructions] The first question comes from Stacy Pollard from [indiscernible].

A couple quickly for me. So can you give us an idea of what kind of revenue stream you would expect from the next-generation weapon system and FCAS and sort of just broad sense of timing? And to what degree that is a replacement for the Eurofighter? I'm guessing there's a little bit of that. Second question, did you say that SIA is not in the guidance? And if not, is it fair for us to assume around 15% revenue growth for 2020 as well kind of off that EUR 60 million base? And third question since we're on SIA. Obviously, this is in the cybersecurity area. Is that beginning to be a sort of bigger investment area for you? Are you looking at other M&A in that area? And/or what other areas would you consider for M&A?

Okay. Thank you. This is Ignacio. I mean with regard to FCAS, I think this is a very important project for Indra. I'm afraid I am not able to give you figures that we can say we are going to, I mean have revenues or whatever in the next 2 or 3 years. I think there is a very large investment in research and technology and development of EUR 8 billion in the next years. But I don't think we can give you figures in the short term. I think we'll have to wait a little bit for that. We just entered the program. We've been -- started to look into the information that France and Germany have produced for the last years -- year because they've been previously in the program. I don't think -- obviously, FCAS will eventually replace Eurofighter. But we have a lot of years of Eurofighter to come in the next years. I mean we still are expecting more orders from the launching countries. So we are going to see Eurofighter for years. And eventually, obviously, FCAS will replace Eurofighter and will be a more ambitious program than Eurofighter because not only -- it's not only an aircraft. It's a system of systems, and the aircraft will be part of it, which is an important issue for Indra because we are a system company, and that's one of the reasons by which the Spanish government has taken the decision to appoint Indra because we are a system company and not only an aircraft company. So I think very good news. I don't think we'll replace Eurofighter in the short term. And unfortunately, I cannot give you the figures because, I mean I don't think we are in a position to do that in the short term.

Okay. In respect to the guidance, I think your question was, the guidance it's not included. It's not included SIA because we just acquire it. So obviously, we've not include it. SIA for 2019 delivered EUR 64 million in revenues with EUR 6 million in EBIT, which represented a 9.2% EBIT margin. Okay? So we have a budget already, which -- so that take into account that we are not incorporating to the guidance SIA. So you could add that on top [indiscernible] .

Did you just say it grew 15% revenues last year? Do you think it will grow more this year or no, sorry.

No. Well, we have grown in our overall digital area, which includes consulting, digital technologies and cybersecurity. We've been growing between mid-double -- I mean in the 15. This year, we grew 12-point-something percent, and this is on that region, right? So SIA grew above 13% compounded since 2016 into compounded annual rate into 2019. So it has been growing a little bit above our digital business growth, so. And last year, the revenues were EUR 64 million okay? So in respect to -- that is answering your question, sorry, Stacy, on that respect?

No, I think it does. And then just M&A. Yes.

Yes. On the M&A, we are not seeing right now anything in particular in cyber. I presume that if we were to see something interesting that we could really get synergies on, I think we might -- yes, we would look at it, I think, because we see a lot of growth in that area. We see a very fragmented market in Spain and in the areas where we are present in Latin America. We have a lot of demand. And in fact, last year, we couldn't even serve all the demand we have because of lack of skilled people on that. So I think if we were to see opportunities, we will look at them. But right now, we're not looking at anything in particular.

The next question comes from Ivón Leal from BBVA.

Just maybe 2 issues. The first one, just coming back to the position as national coordinator on the [ FSA ]. Do you think that opens up M&A opportunities on the defense side? Or even you feel you need to look for [ starter-specific ] acquisitions within defense, okay, to take benefit of that national coordinator position? And the second one, also on that front, is this going to have an impact on CapEx in the next 5, 10 years? And then about IT, about Minsait. I think in the past, you've basically guided to a 4%, 5% potential EBIT margin on the long term, and you're already around the corner. So I don't know if your perception on midterm profitability has changed, okay? And you're looking now to solid 5% or even beyond that. And even you're just about achieving that, are you considering reactivating the sale of IT?

Okay. I would start with -- those are very interesting questions. I would start with the Minsait question, okay? What we were saying in terms of target is that we have several differences, which some of our competitors, that mean that to get the similar margins is difficult for us because we are selling -- first of all, we have -- we are smaller, obviously, so we cannot basically get -- our fixed costs, obviously, are heavier in respect to our -- compared to our overall volume of sales, and that's the way it is so when we are launching products, so we are -- all those things for us, we start with a little bit higher burden in terms of margin. The second element is that our offshoring or nearshoring as a percentage, especially our offshoring, is lower than some of our competitors. And that means our cost structure, we cannot optimize as much as some of them. And the third element is that the markets where we are present fundamentally, are Spain and Latin America. We are running a lot in Italy. We're doing other things in Continental Europe. But so far, for the time being, we are very strong in Spain and Latin America, and those markets are "cheaper." It's more difficult to get the same pricing from our clients. And that's the point. The performance of Minsait over the last 3, 4 years has been extraordinary because we never disclose the margins on the Election business. So you cannot know how many margin points we've improved so far. So that's been a lot of effort, and that's not been easy because every year, we have, obviously, to recover the cost structure, the salaries increases. And so it's a lot of things to be [ add ]. So for next year, obviously, you are right. We think we can get better still. We'll see. Obviously, we've been enjoying a good economic momentum, so we think we can do better. Still, how much better, we are not disclosing yet. Next year, we'll have to present -- sorry, at the end of this year, we'll need to present in the next 3 years a strategic plan, and we'll see how we think about it and we are looking at how the mix, we believe, it's going to evolve. The mix is helping us as well, and we need to see how quickly we think we can continue to evolve the mix and so on and so forth. So we are positive in general. We think we can improve it. How much, we don't know. So that means we think that they still can struck value from Minsait within the group, okay? So I think we can improve even more. Now in respect to the FCAS, Ignacio will answer.

Yes. I think, let's say, the positive of the defense investment is that -- well, this is an R&D project initially. And the program will pay for the development and the technology development. So I don't foresee CapEx in the short term. It's the research and technology program in which the CapEx will be paid. So we don't foresee that. With regard to the first question on M&A. I think we need to get into the program. And maybe down the road, we'll have to see if there are complementary acquisitions that could be a good option for our current capabilities. But we think we have the capabilities to develop the program today. So we have what we need to have. We have extensively developed those capabilities with the Eurofighter program. This will be new capabilities, but the program will pay to pay those capabilities. So we don't expect that in the short term, and we don't expect to have major needs in that sense.

The next question comes from Charlie Brennan from Credit [indiscernible] .

I've got a few just clarifications around the guidance, if that's possible. Firstly, on the SIA acquisition, I thought you did that at the start of the year. So you've already owned it for the best part of 2 months. What are the ongoing uncertainties around that acquisition, mean you were unwilling to put it into your guidance today? And then secondly, just on the exceptional costs during the year. There's a very nice improvement in EBIT during the year. But if you look at the operating margin before those exceptional costs, profits are largely flat. I think the exceptional charges went from EUR 54 million in '18 down to EUR 36 million. What are you expecting in 2020 for that exceptional line? And then thirdly, just on the free cash flow, what are you expecting for the working capital contribution or headwind this year?

Okay. I will start with SIA. SIA, we bought it on the 31st of December of 2019, so we didn't have it for any day of last year, and we will have it for the full year this year. The problem is that we have been working on guidance before. It's a new acquisition. We are incorporating a business, our existing cybersecurity business into SIA. So we have not updated our guidance. That's why we are warning that our guidance is not including SIA. So our guidance is purely organic from that point of view, okay? Then you will have to add SIA to our guidance to get -- our nonorganic guidance [ split going ] for 2020, okay? So that's the only thing. So when we disclosed the acquisition, we gave the revenues for 2019 and the EBIT margin and the EBIT. And as a minimum, you will have to add that to our guidance today, okay? Although we expect to grow, as somebody asked before, on the average of what we've been growing on the digital services and on the average of what SIA has been growing over the last 3, 4 years. We expect to -- we will work hard to improve that. But as a guidance, you have to take into account that the guidance we gave is not incorporating SIA so you have to add it, okay? Then in respect to -- for the numbers of extraordinary for 2020, on the staff reorganization, okay, which we did EUR 19 million -- close to EUR 20 million last year compared to EUR 35 million the year before, something like that. We are thinking in about EUR 30 million staff reorganization, okay? And then on the PPAs, because we've include SIA, that will be a bigger figure. This year, it's been EUR 11 million. Next year, it will be bigger than that. We paid for SIA a little bit more than EUR 70 million. Obviously, there are some tangible assets or intangibles that will be recognized specifically. The rest will be goodwill. So you should assume that the EUR 11 million that we recorded this year as PPAs will be higher next year. Then we have some -- we might have some reversion of provision, but we are not quantifying that nor incorporating that in the guidance. So that's not included in the guidance. So from a budget point of view, and therefore, from a guidance point of view, you should expect about EUR 30 million on staff and more sort of EUR 15 million, EUR 16 million, EUR 17 million on the PPA number, maybe slightly higher. But you know that we have 1 year to do the PPA, so we will do it along the year, and we will record it towards the end of the year, I presume. No, Javier? Okay.

And so obviously, underlying profit growth has got to be faster than your 15% EBIT growth to compensate for those higher charges you're going to have in 2020. Can you just give us a bridge of where this profit growth is going to come from? I guess there's EUR 9 million from the nonrecurrence of or provisions that you had in H1 of '19. You've obviously got some revenue growth coming through in 2020, but that still feels like a sizable improvement in underlying profitability. Are there any other big gaps that you can fill in for us to help us get our arms around that?

Okay. Sure. Two things. You really -- I mean there's a question that obviously, investors don't know because we don't disclose, which is the real path of EBIT growth if we were to exclude the EBIT from the Election business, okay? So obviously, you don't know that because we've had a lot of EBIT growth -- sorry, EBIT impact on 2017 and 2018, which we don't have this year. So if you were to exclude that, you will see that our path of EBIT improvement [ underlying ], it's been better than what we report, obviously, because of comparison. Some reported it as what they are, and they include the EBIT from the elections. We foresee still good revenue growth for next year, so we will have operating leverage next year. We see ourselves improving the mix of digital versus legacy, and that is important. Don't forget that on our digital division, we expect to continue, as I said before, with double-digit growth. And the margins there are better, okay? We are also on the payment systems, we are improving. We are very positive on that. We have segregated the company. Margins are better, and we have a very good pipeline. We continue with our cost-cutting initiatives, very important. We continue to do lean, automatation. We are continuing to [ delayering ]. We are putting a very strong control on what is not direct head count or everything that is indirect head count. We are controlling it a lot. We continue to do [ parameter ] optimization. We have improved a lot, and we have developed a pricing mechanism, which should improve as well a lot of things and improving the margins. So obviously, there are several levers to really improve the EBIT margin, okay? So we are confident that our margin will continue to grow. I'm talking about Minsait, okay? In Minsait, as I answered the question before, we believe next year, we will be between 4% and 5% margin. And we still think that the year after that, depending on how we end in mix and so on, we can still get to 5% to 6% margin, okay? So those are the levers. And then on the -- on the Defence division, it's tricky. We also expect strong growth next year, okay? We think we will improve on transport. Don't forget that this year, we were unable to recognize revenues and margin because of the delays of some projects in transport, which we think we will be able to recognize. We might have further delays but not of the size of the ones we have. So the ones we have, we think we will recover. Eurofighter, it's important. This year, we have a slightly better Eurofighter than we expected. For next year, we think we will have a slightly worse Eurofighter than we had this year, okay? We are also thinking that we will be able to improve and have less problematic projects compared to this year, okay, as you mentioned, I think, before. And then on Air Traffic Management, we -- that's been a very stable market for us. We've accelerated the growth over the last 2 years in the international air traffic management. And we see for next year on the upper side of what we've seen over the last 4, 5 years, we see a better growth next year than the ones we've seen, which has been good over the last 3, 4 years. So all in all, that's what we believe. So that's why we discussed about what guidance we will be giving to the market. So we thought over EUR 255 million would be something that we should be able to achieve. Obviously, there's uncertainty and there's a lot of things. But that's -- those are the levers that we see. And then?

Perfect. Quickly on -- just quickly on the working capital impact to free cash flow?

Javier will answer that.

Yes. I mean Charles, as you know, this year, we -- working capital was negatively affected by a number of items, mostly inventories and stockpiling and delays on some projects. So we don't expect those inventories to further increase this year. We don't expect them to be reduced either. We will maintain that level of inventories we think strategically makes sense. We have that ability to improve time to market to our products, but we do expect some reversal of the delays that we saw in the year. So all in all, I think we should have an impact in the guidance that we're doing. We are assuming an improvement in working capital year versus year at around EUR 100 million, okay? And then depending on how the year goes and what kind of reversion we see on the delays in the previous years, we will be giving you a bit more guidance.

The next question comes from Gautam Pillai from Goldman Sachs.

I have 2. First is can I check on your exposure to Asia and specifically China, given the ongoing virus situation? Do you see any impact to growth from lower airline volumes in the Air Traffic Management business or any other segments generally? That's the first question. Secondly, on the free cash flow, can you help us contextualize the guidance for 2020 against the midterm targets you provided in the Capital Markets Day of 2018? And assuming, let's say, EUR 150 million for 2020, the cumulative cash flow would be around EUR 50 million lower than the low end of the target of EUR 400 million to EUR 450 million. It would also seem that the CapEx is running ahead of your target of EUR 150 million to EUR 200 million over 2018 to 2020. And in the time period, you're actually tracking ahead on revenues and perhaps EBIT as well. Can you just walk us through the moving parts on the free cash flow? What has -- I think the explanation on working capital is quite clear, but is there anything other than that, which we should be aware of? And also can I please check on the seasonality of the free cash flow in 2020? Is it similar to previous years where most of the collections of Q2 or Q4? Or should we expect a more even kind of cash generation?

Right. So to be quick on the Air Traffic Management, I don't think we expect any impact on air traffic management, taking into account that we are on the systems side. There is a lot of investment to be done in the systems to cope with current traffic. You hear about delays in all the systems in all the airports. So we need to do a lot of investments. So we don't see that we are going to have any impact on that side because we are behind probably in terms of coping with current traffic.

And if I may add, in general, I'm talking about the disease, obviously. This guidance is not including any impact. So far, as of today, we have not seen any impact. Obviously, if our clients end up suffering, we may end up sharing part of the bill, at least partially. It is also true that from a logistics point of view, when we have to deliver the services, we could have a logistic issue because if this spreads, especially in Spain, where we have our factories. But so far, it's not been the case. The commercial activity also could be affected if things get stopped. Example, in Milan, obviously, we cannot do any commercial activity. We have an office there so that's affecting our commercial activity. And then from a procurement point of view, we have a little exposure to suppliers coming from the areas, China or the areas that are having more affected. But again, depending -- if it spread more and where it is spread, we can end up having some impact but not very meaningful impact in any case from a procurement point of view. And obviously, we are implementing all sorts of contingency plans to mitigate, if possible and as much as possible, this potential impact, okay?

And with respect to the -- your question on cash flow. The guidance we've given is fully consistent with the midterm guidance. The delta that you appreciate may be due to the fact that the guidance is excluding CapEx. So if you add back to the guidance that we gave CapEx, then you will see that we are comfortably within the guidance. And with respect to the kind of the dynamics of the cash flow and the [ recent ] elements, to the extent that we are meeting the expectations in terms of revenues and operating cash flow, and once we correct part of the working capital deviation of this year, then all the pieces fall into place and the whole guidance that we've given now is consistent with the midterm guidance that we provided 3 years ago. So from that point of view, we are comfortable. We're still on track. On the seasonality of the free cash flow, yes, this year would be the same as every other year. And fourth quarter will be, by far, the largest quarter, and the other quarters will be neutral to negative depending on other dynamics. But basically, the good quarter in the fourth quarter, and this year will be the same.

The next question comes from Manuel Lorente from Mirabaud

Three questions, if I may. The first one is on fourth quarter profitability, which looks pretty good actually, especially in the context of a relatively soft quarter in terms of revenue, so to speak. I was wondering, I don't know if I have the numbers right, but I remember the fourth quarter last year, you booked a reverse provision amounted to EUR 12 million. So actually, the correct number to compare this EUR 94 million EBIT is EUR 72 million rather than you reported EUR 84 million. That will imply a EUR 30 million -- 30%, sorry, growth in terms of EBIT with lower revenues. So I don't know if you have any extraordinary or any positive impact in terms of contract or any other issue that might explain to that improvement in the operational leverage of the business because, actually, if you make the same math looking rather than the fourth quarter last year, third quarter this year, right? You have, have roughly EUR 46 million of higher profitability with only EUR 117 million revenues. Anyway, my point is whether we have -- you have seen any extraordinary in the solid performance of the fourth quarter's standalone, especially in the context of the revenue evolution? My second question is regarding the levers of the guidance, right? Revenue-wise, there has been some delays on the Transport & Traffic on moving parts of revenue from 2009 (sic) [ 2019 ], 2020. Whether you can give us an indication of the amount of those moving parts from 1 year to the other. And in terms of EBIT, I think that you have said, Fernando, that you expect a lower ESA contribution this year versus last year. And I would like to ask regarding the evolution of FCAS versus Eurofighter. Is this going to be something adding on top of the FCAS? Or the revenue that you should expect from the FCAS is going to be against the evolution of Eurofighter? And my final question is regarding the free cash flow uses of that EUR 150 million. You are going to be using to delever the business, to continue faster repositioning in terms of M&A, or to open the door to the dividend distribution?

Okay. We were talking who answers what and in which order. I think the -- okay, Manuel, on the last one, I will start with the last one. We committed within the strategic plan, we said we will pay a dividend within the 2018-2020 plan. So that continues to be the case. So we will pay a dividend, not necessarily on 2020, but we will pay a dividend with the 2020 accounts. So we might then do an anticipated dividend at the end of this year or maybe in next year but that continues to be the idea, okay? So that's one of the uses. The rest of the uses will be to reduce debt. And obviously, we see some M&A opportunities. We might accomplish them, but nothing dissimilar to what we've been doing over the last years. But the dividend commitment, we continue to think that that will be the case, okay? On the first question, you asked about the fourth quarter profitability, and there are several items that explains that. First of all, in the fourth quarter, we also had less restructuring expenses compared to last year's quarter, okay? So we had less. And then on the -- both on IT and on Minsait and on Transport & Defence division. So that offsets partially the reversion of the provision that we showed last year. On top of that, as I said before, we had this year slightly better Eurofighter than we thought we would have that we anticipated, okay? So the mix of the fourth quarter is better in terms of margin that the mix that we had, okay? So that explains the fourth quarter profitability. We estimate we have an underlying improvement pro forma of the restructurings and the problematic projects and of the reversion of the provisions and also the Elections, by the way, business of EUR 13 million in the fourth quarter of '19 vis-à-vis the fourth quarter of '18 at the group level. That's what we believe is our underlying improvement. So it's even better than the EUR 10 million that we are showing in improvement. We think we've improved net to net basically EUR 13 million, okay? And then Ignacio will answer you the FCAS Eurofighter dilemma.

No. I don't think you can mix FCAS and Eurofighter. So Eurofighter and FCAS have their own life, and FCAS will not eat any Eurofighter business. So we'll see the Eurofighter business, I think this year, slightly lower as Fernando was saying. But we see a growth down the road because there are more aircraft flying, and there will be more revenues from the aftermarket business [indiscernible]. With regard to FCAS and take into account that the amount on research and technology are going to be invested in the first 2 or 3 years are small compared to the back end of the period. It's a lot of research, which is not very large amounts. That's why we are saying we'll see small amounts in the first years.

Okay. So maybe the proper way to analyze Eurofighter this year is, okay, you have -- or you expect a slightly lower contribution from Eurofighter this year versus last year to partially offset what you have seen on 2018 that you will finally end up with a contribution that's slightly higher than 2018. That should be the correct way to look at it in a context of our long-term growth or higher contribution from this business? Or what is the reason why you expect lower contribution from Eurofighter this year?

Well, partially, it could be that. I mean taking to account, we don't exactly control when you book the revenues because it depends on deliveries and so on. So I mean it's very difficult in these very long-term programs. We do deliver complex systems to be sure that if you deliver in the -- in December or January. So that has part of it. So that's part of the reason behind it. So it could be that. But I mean we expect strong growth in '20. Maybe Eurofighter is slightly low but strong growth on defense because of the high -- I mean we have a good order book. We have a good order intake in 2019. It's true that, I mean it takes time until we see that order intake through the revenue. And if we look into the big contract we signed with Lockheed Martin, we are going to see very, very small revenues in this year because we have seen some of it a year early. But we are going to see strong revenue growth in defense throughout the year.

The next question comes from Stefan Slowinski from Exane BNP Paribas.

Most of my questions were answered. But I guess, just quickly on 2021. Just wondering if you have any visibility yet on any Election business in 2021? And also on the defense side, you talked about Lockheed Martin, you talked about the strong order intake. You have some other projects potentially ramping up as well. Could we see a sort of a big step-up in growth going into 2021 on the defense side of the business?

Okay. In respect to Elections, no, we don't have the view of 2021, but there is something that we should also take in mind, which is that we are not thinking in big election projects as we had in the past, okay? So we continue to have a robust Election business, but it's more based on more developed countries, which means more standard margins means also less risk, reputational risk, risk of being able to cash in the business and so on. So we should not expect any extraordinary or very positive sort of Election business going forward. We should expect a good business, growing business, but clearly, with more standard margins and with more sort of normal impacts, okay? If that was the question. So we don't see because in 2021 should come, some of the big impact that we had 4 years before and 8 years before and so on and so forth. But you should not expect those on 2021. We'll do our best, but we should not expect those, okay?

And I mean on defense, we see growth this year, as I explained. I mean 2021, we will also -- we'll see also growth. But take into account -- and I mean you mentioned the Lockheed Martin contract. I mean we will deliver the systems of those -- of that contract by 2023. And very much of these businesses is when you deliver the system. So even though we will see growth, we will not see the full effect of those contracts until the longer term, okay? So we see growth. We see growth in '21, but we are not going to see a huge step-up on 2021 compared to 2020.

On revenues.

On revenues.

But on new orders?

On new orders, yes, but not on revenues because it takes long, and they are linked to the final deliveries.

The next question comes from [ Alex Pinellan ] from Morgan Stanley.

I think my questions have already been answered.

The next question comes from Carlos Treviño from Santander.

My questions has been answered also.

We have no further questions. Sorry, the floor is yours.

Okay. So thank you very much for attending this conference call. As you know, our Investor Relations department is ready to help you for all the details or if some of the answers have not been clear or you have additional questions. We'll be happy to help you work the spreadsheets, okay? So thank you very much.