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

Indra's 9-month 2020 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 9-month 2020 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. Conference call will be led by our Chairman and CEO, Fernando Abril-Martorell, and the intended duration will be around 1 hour. Now let me turn the call to Indra's Chairman and CEO of Fernando Abril-Martorell.

Thank you, Ezequiel, and good evening to everybody. Welcome to our conference, and thanks for being with us today. As usual, today with me, I have Mrs. Cristina Ruiz, Chief Operating Officer of Minsait; Mr. Ignacio Mataix, Chief Operating Officer of our Transport & Defence business; and our Chief Financial Officer, Mr. Javier Lazaro. These quarterly results are characterized, at some extent, by a certain worsening of the macro environment after [indiscernible] affecting our plants and a little bit of business. Putting more pressure than we had anticipated on our revenues in Minsait and air traffic management during the quarter. Despite this, the quarter showed, again, a very positive performance of the order intake and backlog, a certain improvement in profitability compared to the first half of this year, together with a solid print in terms of free cash flow generation. If we move to Slide #4. We move to our main highlights for the 9 months '22 (sic) [ '20 ] results. And we see that the backlog reached once again its highest historical level and stood at EUR 5.15 billion in the first 9 months of the year, implying plus 18% growth in reported terms. Backlog over the last 12 months revenues also reached new historic high and stood at 1.68x compared to 1.36x in the first 9 months of 2019. Our order intake went up 11% in local currency, accelerating its growth in the third quarter, pushed by the strong growth delivered in Transport & Defence. For its part, revenues in the accumulated period continued to be impacted by delays and lower activity and decreased 3% in local currency, 6% in reported terms, mainly as a consequence of the decline in Transport & Defence. Sales also decreased in the third quarter, 5% in local currency, 10% in reported terms. If we look at the margin, the operating margin, which is the EBIT before other operating income and expenses, amounted to EUR 87 million compared to EUR 162 million in the same period last year, which implies 3 percentage points less, affected by delays and the lower activity. In the third quarter, the operating margin was 6.6%, improving versus the first half of 2020, thanks to the first positive contribution of the efficiency measures of the plan announced in July. The EBIT in the accumulated period was minus EUR 9 million compared with EUR 127 million positive last year, impacted by the delays in the lower activity, also by the impairments of intangible assets accounted in the second quarter, $95 million, but also helped by the capital gain of the Metrocall disposal that took place in the third quarter, plus $36 million. The cash generation in the third quarter amounted to EUR 51 million, including the disposal of Metrocall. Free cash flow was EUR 14 million versus minus EUR 1 million in the third quarter of '19, implying a net debt over the last 12 months EBITDA, excluding the impact of IFRS 16 and the impairments of intangible assets and the capital gain on metrical of 2.8x compared to 2.4x in the -- at the end of the 9 months of '19. Additionally, we have reinforced once again our liquidity position during the quarter, now owning more than EUR 1.25 billion between cash and credit facilities as of the end of September 2020. To conclude with the [indiscernible], As many of you have asked during the last few weeks for the Investor Relations at [indiscernible] display on Slide 25 on the annex 1, our Indra's share positions as insiders over the last 12 months. If we move now to Slide #5, we show our revenues performance for the accumulative period and also for the third quarter, both in reported and organic terms. Revenues decreased by 2.7% in local currency and by 5.9% in reported terms in the first 9 months of the year, mainly as a consequence of the fall in Transport & Defence. On the opposite, Minsait division remained stable at plus 0.2 percentage growth in local currency. The ForEx have dragged EUR 73 million in the first 9 months of the year, while the inorganic contribution of SIA have added $49 million. Revenues in the third quarter fell 5% in local currency, 9.8% in reported terms, with both divisions decreasing their sales. Organic revenues decreased 7.2%. The ForEx impact in the third quarter remained strongly negative at minus EUR 35 million, mainly because of the Brazilian and the Mexican currency depreciation. If we move to Slide #6. We provide a deeper insight into the order intake and the sales breakdown by region. Above on the slide, the 9 months order intake posted a very strong growth in Spain, 31%, pushed by the order intake belonging to the production of the electronic defense systems and the surveillance product for the F110 frigates of the Spanish Army. America grew 4% in local currency, backed by the growth posted by Minsait, mainly driven by Brazil. Europe increased 3% in local currency, pushed by the rail transport contract signed in Ireland control center and also by the air traffic contract in Poland, while EMEA decreased 34% in local currency due to the tough comparable versus the 9 months of last year when the order intake of the urban and inter-urban ticketing maintenance phase in Riyadh took place. On the middle graph, the revenues of the first 9 months of 2020. We see that America delivered growth in constant currency, plus 4%, with positive contribution of both Minsait and Transport & Defence. For its part, Spain has slightly decreased, minus 1%, showing both Transport & Defence and Minsait divisions declined as well as Europe, minus 2% in local currency. Finally, sales in EMEA decreased by 21%, affected by the decline in Transport & Defence and also by the decline in -- comparable decline of the Election business. Moving to the bottom of the slide. Sales in the third quarter declined in all geographies, Spain minus 3% in local currency registered both Minsait and Transport & Defence sales decreased. America printed minus 1% in local currency as a consequence of the fall registered in Minsait fundamentally in Public Administration and Healthcare. Europe fell 4% in local currency, while EMEA was down 22% in local currency, mainly drive by the decline in transport and traffic and in the election business. If we move now to Slide #7, we display the backlog evolution of both Indra and our 2 divisions as well as the backlog over the last 12 months revenue ratio. Above on the slide, we see that Indra backlog was up from more than 18% in reported terms and reached again a new historic high. For its part, Transport & Defence grew 23%, and Minsait grew 7%. At the bottom of this slide, Indra's backlog over the last 12 months revenues, the ratio stood at 1.68x versus 1.36 in the 9 months of '19. The Transport & Defence ratio increased to 3.12 versus 2.3 last year, and Minsait ratio increased to 0.86 coming from 0.78 last year. If we move now to the Slide #8, it gives us a good perspective over the last 4 years evolution of our backlog, showing the results of the commercial push and the transformation of all our businesses. Since 2016, after deeply restructuring all our businesses, operations and our financial position and also changing the focus of our commercial efforts, we have been constantly growing our backlog from levels of EUR 3 billion to a current mark well above EUR 5 billion, with both Transport & Defence and Minsait divisions contributing to this achievement. Let's move now to Slide #9, where we show the group's operating margin and the EBIT evolution. On the top left graph, operating margin amounted to EUR 87 million this year compared to EUR 162 million in the first 9 months of last year, and this is equivalent to a 4.1% operating margin compared to 7.1% operating margin last year, affected by the delays and the lower activity. Moving to the right graph, the operating margin in the third quarter improved versus the accumulated period and stood at EUR 44 million compared to EUR 60 million last year, equal to 6.6% margin compared to 8.1% margin in the third quarter of '19, Still affected by delays but showing some positive contribution of some of the measures of the efficiency plan that we announced in July and also showing better execution. On the bottom left graph, reported in the first 9 months is minus EUR 9 million compared to plus EUR 127 million in the first 9 months of last year, impacted negatively by the impairments of intangible assets, minus $95 million, as well as by the delays and lower activity and impacted positively by the capital gain of Metrocall, EUR 36 million positive. If we were to exclude the impact of the impairments and the capital gain of Metrocall, the EBIT will have amounted to EUR 50 million positive. Thus, EBIT in the third quarter amounted to EUR 69 million, EUR 34 million excluding the impact of Metrocall capital gains, compared to EUR 48 million in the third quarter of last year. Both Cristina and Ignacio will dive deeper into the contribution of Minsait and Transport & Defence division to the EBITDA at the end. If we move now to Page #10. We see the evolution of a final workforce broken down by division. Our total final headcount at the end of September decreased 2.4%. This is a little bit more than 1,000 employees less compared to September 19, posting for the first time in the year a decrease in the comparative versus the previous year. For its part, our headcount fell by 4.8%, 2,400 employees more or less since the beginning of the year when our workforce was designed for a year of strong growth. Obviously, in Slide #11 is just a reminder of our efficiency plan. As of the end of September, the total negative impact in P&L has been EUR 95 million, that was the hit we took on the provisions [indiscernible] that we did at the end of the second quarter. So it remains the same as of the first half results. The impact coming from the workforce transformation plan will be accounted once the negotiation with the unions are closed. Finally, from my part on Slide #12, you can see our 2020 guidance that we gave at the end of July and the delivery until September. The revenues guidance has become more challenging after the third quarter print, but we still believe it's achievable. Remember that the fourth quarter is always the biggest in size, and we just need a small increase versus fourth quarter last year. Anyway, I have to tell you that visibility remains quite low in this regard. If we look at the EBIT, we continue to keep the numbers in the EUR 120 million to EUR 135 million range. Let me remind you that this figure excludes the impact of the efficiency measures we also described the footnote and also excludes the Metrocall capital gain. Finally, on free cash flow generation, we expect to be in positive territory as the fourth quarter is always the strongest of the year by far. It also excludes the capital gain of Metrocall. And this is it from me, I just finished headlines and operating review of the group. I would like to pass the call to Ignacio Mataix, our Transport & Defence Chief Operating Officer, who will present results of his division. Thank you very much.

Thank you, Fernando, and good everyone -- evening to everyone. Now let me move into Slide #13. When you can see the order intake and the revenues breakdown of the 2 business of our Transport & Defence division. The graph on the left shows the evolution of our first 9 months of the year in order intake, which went up by 31% in local currency, boosted by the strong order intake registered in our Defence & Security business, which was up 51% in local currency. Moving to the middle of the slide, we display the evolution of our first 9 months revenue, which decreased by 8% in local currency. Defence & Security sales decreased by 9% in local currency due to the lower contribution in platforms, integrated systems and simulation and in the Eurofighter program. Sales in Transport & Traffic went down by 6% in local currency, 8% in reported terms, mainly due to the declines as showed in air traffic management. On the right graph, we show the evolution of our third quarter revenues, which decreased 9% in local currency, dragged by the decline in Transport & Traffic, 19% in local currency due to the fall in air traffic management. On the contrary, Defence & Security registered 4% growth in local currency. On the Slide #14, we want to give more insight into our Defence order intake and pipeline, which has been delivering a very strong performance to date, and we expect to continue the good momentum in the coming months with good news coming from both national and international programs. At the top of the slide, the F110 and the 8x8 program where we have already signed EUR 475 million. Please remember that the order intake of the 8x8 is EUR 150 million, will -- which will be accounted in the 4Q of 2020. So it is not yet in our numbers. And on top of the current contract, we should have additional ones in the coming months for the existing Phase 1, which covers deliveries of 348 vehicles up to 2027. We continue to expect to have other contracts for Phase 2 and 3 in the coming years. Moving to the middle of the graph, you can see other national relevant contracts that have good progress, and we expect to sign in the next 12 months for more than EUR 250 million, the NH90 contract, the Chinook Helicopters contract and the air defense radar for the Spanish Air Force. Below, we show 2 examples among the biggest contracts that remain in the national pipeline, such as the tactical radios, which need to be replaced in the coming years for the land soldiers and the vehicles and for which we have already formed a partnership with a large European company, or the future trainer in which Indra will request a position in the traditional systems such as sensors and mission equipment. Finally, in the right side of the graph, we show the existing and long-term high-volume international programs in which we'll form part. Starting with Eurofighter, we have recently signed a very relevant upgrade on the new radar system named Mk1 for an amount of around EUR 140 million for part of the existing fleet and future aircraft. Besides that, we continue to expect new jet orders that might come in the next month from Spain and Germany. On FCAS, the secretary of the states of the nations -- of the 3 nations have signed last week the amendment to the contract to allow Spain to be incorporated into Phase 1a, and we expect to have during the first half of next year, approved the proposal for Phase 1b and 2 that will amount to something like EUR 5 billion, which will not immediately materialize into contracts, but will approve the path to gradually convert into annual contracts, the commitment of the nations up to 2027. In addition, in the bottom of that same graph, we have been awarded with a number of European research programs that will give a lot of technology to the company in the coming years based on the European Defence Fund. And we are also involved in other different contracts like the contract for the Tiger helicopter, and we have also in our pipeline a number of other contracts for naval platform. If now we move to Slide #15. The operating margin and EBIT. On the above of the slide, the operating margin in the Transport & Defence division in the accumulated period reached EUR 57 million compared to EUR 96 million in the first 9 months of 2019, equivalent to 7.7% margin compared to 11.8% last year in the same period. The decline in profitability is explained by delays in the milestones certifications, which, in turn, generate extra cost in some projects and postponement in decision-making of clients and the awards comparison also in this case of Eurofighter. However, moving now to the top right graph, the third quarter operating margin improved and stood at 11.6% margin compared to 7.7% in the first half of 2020. Thanks to the recovery of some of the delays as well as some catch-up in the contribution of the Eurofighter program. As you can see on the bottom of the slide, EBITDA stood at minus EUR 45 million in the first 9 months of the year compared to EUR 81 million positive last year in the same period, and EUR 60 million in the third quarter of 2020, helped by the capital gain of Metrocall compared to EUR 30 million in the third quarter of 2019. That's all for me, and I turn the call to Cristina, Chief Operating Officer of Minsait.

Thank you, Ignacio. Good evening, everyone. Let's turn now to the Slide 16, where we saw the order intake and revenue breakdown of Minsait. On the left-hand side, order intake in Minsait was up 1% in local currency, all vertical registered to growth in local currency, Telecom & Media, 40%; Energy & Industry, 1%; Financial Services, 1%; Public Administration & Healthcare, minus 6%. Moving to the middle of the slide. We display the evolution of our 9-month '20 revenues, we've seen as stable in the local currency. And sales increased in telco and media and financial services, while remaining stable in Energy & Industry and decrease in Public administration & Healthcare. Financial Services sales increased 4% in local currency, posted by the banking sector in America and mainly in payment means. On contrary, in Spain, market is starting to show to a slow incremental pressure. Energy & Industry revenues remained stable in local currency. The energy segment, 15% of the total of the vertical posted slight growth. While the industry segment, 40% of the sales in the vertical recorded decline. Public Administration & Healthcare sales decreased by 9% in local currency. Sowing revenues decreased in all the geographies at Europe, mid single-digit growth. Telco & Media revenues grew by 7% in local currency with almost all the geographies showing growth. On the right-hand side, we display the evolution of our third quarter 2020 revenue. Sales went down 3% in local currency, mainly affected by the fall registered in Public Administration & Healthcare, minus 10% in local currency, due to the tough comparison with Election -- in the Election business. And Energy & Industry, minus 4% in local currencies. Let's move now to the Slide 17 to present Minsait profitability. On the top side, we see -- we can see the evolution of Minsait operating margin. The first 9 month operating margins in Minsait stood at EUR 30 million versus EUR 66 million same period last year, equivalent to 2.2% operating margins versus 4.5% in the 9 months 2020. This decline is explained by the loss of the operating leverage as a consequence of lower sales, together with the higher personnel costs our workforce size at the beginning of the exercise for a sales growth year. On the positive side, moving to the right graph, the third quarter 2020 operating margin reflects an improvement versus the second quarter. 3.9% versus 0.5% and versus 5.3% in the third quarter '19, helped by the new efficiency measures and the better comparison of the cost base. As you can see in the bottom of the slide, EBITDA stood at minus EUR 52 million in the 9 months 2020 versus EUR 45 million last year same period, affected by the impairments of the second quarter. EBIT in the quarter stood at EUR 9 million versus EUR 18 million in the third quarter, so an improvement versus the first half of 2020, but still affected by lower activity. Now let's -- I leave the floor to Javier and see you the financial review.

Thank you, Cristina, and good evening, everybody. Let's start the financial review with the evolution of the free cash flow on Slide #18. At the top of the page, you can see the evolution of the free cash flow by quarter. Free cash flow for third quarter has been good. We have generated EUR 14 million positive. I'm please remember that this figure excludes the amounts -- the proceeds from the disposal of Metrocall. Also this performance in the quarter is consistent with the guidance that we gave for 2020 of achieving positive free cash flow before extraordinary items, i.e., the proceeds that we mentioned from the disposal of Metrocall as well as charges that we may have for the COVID plan that we announced in the second quarter. Accumulated free cash flow for the last 12 months improved again. As you can see in the graph at the bottom of the page, increasing to EUR 170 million, which is basically benefiting from the positive performance throughout the year and also the various strong fourth quarter last year. If we move on to Page 19. We take a look at the evolution of the net debt of the group, which, at the end of the period, stood at EUR 626 million compared to EUR 552 million in December 2019. In this activity, we go through each of the building blocks that get us from one figure to the other. Operating cash flow was positive, that's normal. EUR 134 million of cash flow we generated through our operations. Working capital consumed EUR 88 million, which is EUR 270 million better than the performance in the 9 months of 2019, for the reasons that we will explain in the following pages. If we continue moving through the bridge, CapEx amounted to EUR 47 million versus EUR 54 million in the same period of last year, already reflecting the rationalization of CapEx that we announced after our second quarter numbers. Cash taxes amounted to EUR 21 million, similar figure than same period last year versus 2020. Other financial liabilities with the variation of our financial liabilities, EUR 27 million. This is basically a correction of the IFRS -- releases on the IFRS items that then get reclassified with the new accounting process. Cash payments linked to financing amounted to EUR 25 million versus EUR 19 million in the same period last year, explained by basically the higher interest, the payment of the incremental financing facilities that we've been signing up since the beginning of the pandemic. Finally, financial investments and other noncash flow items remain stable. This includes EUR 19 million related to FX adjustments with no impact in cash or in the P&L, and EUR 22 million of the net of investments and disposals, and this includes some variation of items and the disposal of Metrocall. Moving on to Slide 20. Let's analyze the evolution of the 3 main building blocks of our working capital, which has increased to 13 days of sales from 6 days of sales versus December 2019. However, if you notice, it would have -- it has decreased by 11 days of trade of sales versus the same period in 2019, a better reference given the seasonality of the working capital. The main reason for this evolution is the following, if we look at each of the parks separately. Inventories, you can see that they increased again, and this has been happening throughout the year. It's gone up by 14 days of sales or around EUR 100 million, mostly concentrated on the Transport & Defence division, and is explained, as we have a said repeatedly, by the work in progress attached to projects that have been delayed by the application of IFRS 16, in which we have [indiscernible] at the final, reaching the milestones to certify the impact. And this is in the context of the current health situation. Accounts payable have worsened by 12 days of sales, around EUR 130 million, and this is lower, on one hand, to a reduction -- significant reduction on our procurement costs, which reduces our capacity to manage payments to suppliers, but also to the impact of foreign exchange currencies that reduces this item when you compare one year versus the other. On the positive side, you can see that accounts receivable improved. They go down by 18 days of sales or EUR 165 million. And this is mainly due to the positive performance of cash collections from clients in the T&D division, where we've been recovering parts of the delays that we saw during 2019 in Spain and some projects in the Middle East as well. And also, we've been benefiting on this side by the advancement of a number of large contracts that we have been signing up during the year. If we now move on to Page 21. We show here the evolution of the net debt and leverage ratios. In these figures, as usual, we have eliminated the impact of IFRS 16, both in the numerator and the denominator, to make numbers comparable. And we have also adjusted for the impairment of the intangible assets as well as further capital gain associated to -- or the capital proceeds associated to the Metrocall disposal, basically just to make all numbers comparable. You can see there that net debt amounted to the EUR 626 million that we'll register, which translates into an EBITDA multiple of 2.8x versus 2.4 a year ago. Nonrecourse factoring, once again, stays constant at EUR 187 million, which is the same figure that we have traditionally in this position. If we now move on to Page 22, let's touch briefly on the evolution of our liquidity position. We have discussed since early March, basically since the onset of the pandemic, we have been focused on adding liquidity to our balance sheet. And in the third quarter, we have increased our position by more than EUR 150 million versus June, again, as we highlighted [Audio Gap] below 2%, 1.9% for the total of our gross debt, only slightly up from 1.8% last year. And to conclude, at the bottom of the page, you can see the evolution of the average life and the maturity profile of our debt with -- that we mentioned about no meaningful maturities until the second half of 2022. So now with this, we finalize our results presentation. Thank you very much, and let's move on to the Q&A session.

[Operator Instructions] The first question from Carlos Treviño from Santander.

Yes. Well, I will have 3, if I may. The first one is you are highlights -- in the highlights in the comments of your press release, you are talking about the structural changes in your businesses. I would like if you could elaborate a bit more on that sentence. And well, how do you think that this could impact your businesses moving forward, those changes? Also, my second question will be specifically on air traffic management. It was very weak in Q3. So with demand is reduced, do you see moving into Q4 and specifically, and more important, moving into 2021? And my third question will be on working capital in Q4. Well, I see your guidance in free cash flow for the year as a whole, so I can imagine you feel confidence on working capital evolution in Q4. Specifically, my question is, do you expect to have similar trends that in previous year with collections -- anticipated collection from 2021? Or do you see different dynamics this year versus previous ones?

Okay. We are going to answer on the inverse older. So Javier will answer first on the working capital.

Okay. Carlos, I think -- I mean, Q4 will have the behavior of a typical Q4, if there is such thing for us. I mean you know that every year, the fourth quarter is a quarter in which we have the higher level of collections, normally [indiscernible] from the following year. I mean this year, we are facing it with a bit more uncertainty than other years. But fundamentally, we think that we should be able to meet the guidance that we gave. We have a number of contracts that we sign in. We're expecting some advances. We are really collecting cash at a good rate, and we believe there is room in the management of payments to suppliers that we can work with in the same way that we've been doing lately. So we think, from our point of view, it should be a relatively standard year in terms of working capital with uncertainties that we'd normally have. With respect to the following year, I mean, to the extent that we don't have any surprises from the current situation and the medical emergencies, et cetera, et cetera, it should be a relatively normal year when it comes to working capital, and we should be following whatever the underlying businesses do. We don't expect delays. We have already recovered most of the delays of the money that we were owed by our clients in the Middle East, although we could have a bit of upside coming there from what has not been collected so far. But by and large, it should follow very much what the underlying business does. And for that, unfortunately, you clearly have to wait until we publish full year numbers and give you guidance of the following year to get more precise, but this should be relatively normalized.

Now Ignacio Mataix will answer the air traffic management question.

Okay. Yes. On air traffic management, obviously, is the side of the business that has more difficulty with the current situation. Just a reminder, which is our business is not based exactly on passenger flow, so we don't get revenue from passenger flow. But obviously, ANSPs, which are our clients, which is air traffic control management companies, are in trouble with regard to the revenues they get, and therefore, they are looking in great detail into the investments they do, how they can manage better the new acquisitions, how they can delay some of them. But what we are seeing is some delays on the contracts, decisions take more time. But we are not seeing cancellations on what our clients need to do for the future. We are seeing clearly that it takes longer in the international contracts, so Middle East, Far East, than in Europe. I think our current clients in Europe will represent a big portion of our business, continue to invest to upgrade the systems, and we have not stopped any program. So in that sense, I think that's positive, but we need to remain -- I mean, looking into the business on a daily basis because, obviously, how the business comes back will affect on the longer-term on the business.

And now Cristina Ruiz will answer the -- will explain a little bit what we mean by structural changes in the business.

Yes. As we see the business in digital and IT services is the turns that we have been seeing in the last 2 years, accelerated a lot because of the COVID content and the situation that we have on the clients in general and our clients. The acceleration in digital is enormous. I mean, many of our clients are, in this moment, trying to accelerate their digital products or channels, the migration to cloud platform. So to do that, they have also, at the same time, a lot of pressure in efficiencies to get money to transform their business. All these things in terms of Indra gave us very good opportunities in the digital segment. But at the same time, we have a lot of pressure in the service side. This pressure in all that we call legacy systems has an impact, clear impact in our capabilities. We have many people that are attached as a legacy system, and we need to invest in them to convert these people in digital skills or even thinking about layoff of these people because we cannot convert them in this new content. So the main thing is what we see is accelerating the terms that I will have seen in the 2 years -- last 2 years, that is positive for us in the digital side, but we have a lot of pressure in the service side.

Okay. Just one thing, Carlos, to the 1 trend -- going back to working capital you asked before. The 1 trend that we will see in 2021 should be the reduction of the excess inventories that we've been accumulating this year because of the delays in the recognition of some milestones, okay? So that should improve.

The next question comes from Laurent Daure from Kepler.

Yes. A couple of questions as well on my side. Going back to the ATM business, which is suffering further pressure on revenues. In the saving plan, did you have some action on the ATM, or do you have to do something additional to? Because I remember this business had a pretty solid margins in recent years. So that's the first point. The second point is on the negotiation with unions. Do you still believe it would be dealt before the end of the year? And in the case of no agreement, what can you do? Can you just go through the restructuring without the agreement of unions? So any color on that will be quite useful. And finally, on the IT services market in Spain, to be clear, do you see an additional deterioration? And does it mean that you may have to restructure a little bit more than the plan that you announced a few months ago.

Okay. So Ignacio will answer the ATM follow-up question.

I don't think we see restructuring the ATM. We are taking measures to reduce cost. So we are maintaining the margins on the business. And what we have seen is some delays, as I said. Probably, we are not increasing our backlog in the way we were thinking because people take longer to take their decisions, but we continue to see strong margins and we don't see a further restructuring.

Okay. In the IT services in Spain, we see a lot of pressure in price, but we have managed this pressure during the last year just doing our best. I mean, and at this moment, we don't see many more restructuring that we have at the moment in the table of the union. So for the future, if we do this plan today, the business will be fine and we can manage with us.

Okay. And in respect the negotiations, basically, the formalities of this is that first of all, you call on to the unions and propose them formal negotiations. They have 15 days to decide who's going to represent them. And then we have a month to reach an agreement or not to reach an agreement. So right now, this is the second week of negotiations. So we sent them the notice on October 3. It took them 2 weeks to decide who was to negotiate. And we just started negotiations last Monday. We are having negotiations 4 weeks basically. So we are a little bit close to the middle of the negotiations. And that's for the services area. And then on the 16th of October, we did send formal notice to the trade unions on the Transport & Defence division. So they are now deciding who's going to represent them. So we are about 2 weeks delayed between 1 area or the other. And our aim is to -- because of the deadlines and so on, is to finish negotiations sort of mid-November and sort of end of November, beginning of December, to execute whatever as soon as possible. What we believe is that we have proposed very rational and very measured decisions and proposals. So we believe what we've proposed is pretty accurate and makes a lot of sense. Remember, we tried to anticipate this a little bit in April, but we couldn't. Now we basically move it forward. And obviously, we believe we will reach an agreement. Now if we don't reach an agreement, we don't know, we will have to decide. But it's likely that we will move forward without an agreement, okay, because we believe that what we are proposing is pretty rational, and it's pretty measured and it's what -- that's what we believe. Now obviously, we want to reach an agreement, and we are happy to discuss and we negotiate and listen and explain. But we've been dealing with the trade unions for the last 6 months. They know precisely well the situation of the company, the impact of all the situation, the structural changes and everything. And therefore, we hope that we will reach terms of agreement. If not, we'll need to move forward because our responsibility is really to manage the things, no?

If you have to go forward because you don't reach an agreement, what will be the difference? It would be the same cost? Or would it be faster?

No, no. It will be less cost. Because if you don't reach an agreement, you just do it with a minimum impact. So I mean, you have a legal argument, right, that you've presented to them. The reasons for doing this, whether they are organizational reasons, structural reasons, economic risk, whatever. And this is very formal procedure. You file this need with the Ministry of Labor, okay? And it's a pretty formal thing. And then if you reach an agreement, that's it. If you don't reach an agreement, you execute within the legal possibilities. You do it at the minimum cost because that's the way you do it. If you reach an agreement, normally, the cost is higher because you negotiate within the minimum and whatever you negotiate. So what we announced, what normally we believe, it should be a payback of 2x, something like that, right -- of 2 years, sorry. That's what we normally aim for, which is clearly more than the minimum. The minimum is less. Obviously, if we move forward without an agreement, then they will take us to court. And then the court in due time, 6 months to 1 year, will take a decision of whether we were -- our arguments were within the low and right or not. So I mean, at the end of the day, what makes sense is that we will reach an agreement because objectively, you see the numbers, you see the impact in revenues. We have a very high fixed cost business, especially in the IT area, very intensive in people. We've basically added on a net basis only in Spain, 3,000 new employees over the last 3 years because we've been growing, right? And we need to take some measures now because, obviously, the leverage -- the operational deleverage that we have as soon as we lose sales, it's important, plus some of the agreements that Cristina explained, the structural changes that are happening. So I think we will reach an agreement.

The next question comes from Stacy Pollard from JPMorgan.

I dropped a couple of times on the call, so I hope this isn't repetitive. But I believe there was an earlier question about pipeline and visibility going into 2021. I was hoping to follow-up on that. So how do you see your growth recovery evolving? Do you think you can see positive growth again by Q2, given that the year-on-year comparison eases? And then second question, maybe sort of longer term strategic. Do you still contemplate a potential disposal of Minsait business? Maybe a possible shifting of strategic focus towards the product business in Transport & Defence, including the potential to boost that with M&A? Or has this COVID crisis kind of pushed this thesis to the back burner for a bit longer?

The first question was in respect to the pipeline, no? And how that translates into sales and, I guess, and growth and margin for the next 2 years, that was the question, Stacy?

Well, the more detail, the better, yes.

Okay. I mean -- okay. Normally, basically, every year on our Transport & Defence division, the sales of the next year are more or less 80%, 85%, depending on the year, coming from the backlog, basically. And you are risking between 15% and 20%, depending on the years. In Defence, less. In Transport, more. In ATM international, a bit more. You are risking that. You need to contract in the year and execute and selling the year. Okay. So clearly, the fact that we have a very growth -- a very strong backlog in Transport & Defence, that is pretty good for the future because it gives you, first of all, visibility. Second, more stability, okay, because obviously, it reinforces that. It is true that this backlog because it's 3, 4 years execution, is not translating into sales immediately. It takes a little bit some time. So at the end of next year, we will start having some sales of the programs that we've signed over the last year, 1.5 years. But then that should give a strong growth. And we are right now working on the new strategic plan, '21, '23. And we know that many of these programs will still be translating into sales beyond the plan. Because, for example, the armor vehicle later time safety for [ 8, ] that we call it, it lasts until 2027, for example, okay? So -- but I think it's pretty good, or at least we are extremely happy of the big backlog that we have because it gives us a lot of certainty and so on and so forth. And then we are working on the budget right now. We will be giving you guidance, as we normally do, when we publish full year numbers. But we are positive about it. I was going to say optimistic. Let's say we're positive in general. Then in IT is totally different. Because in IT, although we've increased the backlog, we basically multiply the backlog by 1.6x in the last 3, 4 years. But the reality is that every year, sales of the year are only justified by 60%, 65% of the backlog. The other 35%, you have to contract and selling. It is true that there's a lot of renewals and so on and so forth, so that's completely different. So visibility in the IT business statistically is there. But in these disruptive times, we don't have as much visibility. So we believe it's possible to grow. Of course, we believe it's possible to grow, but it's -- certainty on that, it's difficult. We need to now to accelerate the change of mix, and we need to now we take -- we'll have to take decisions. And we are, right now, as I told you, working on the strategic planning. And all the topics that you mentioned are obviously coming recurrently, and it will come again. We have this coming Friday, the first session with the Board on the strategic planning for the next 2 years. And obviously, one of the main topics is always whether we are considered conglomerate, all these topics, right? But we are -- we believe we can grow. And clearly, we have a very strong backlog. We had a EUR 3 billion backlog 4 years ago. Now we have EUR 5.5 billion. And we still think by the end of the year, and even recovering sales, we will be ending with EUR 5.7 billion backlog. So everything related with the assets, what we do on that, it's something that comes on recurring, and we will discuss that on the strategic sessions with the Board, including the Minsait disposal or not or whatever. And we will, in due time, present it to you and share our views. Okay?

[Operator Instructions] The next question comes from Alastair Nolan from Morgan Stanley.

Just 2 for me, if you don't mind. The first was on the cost saves on the efficiency program. I think you mentioned in the release and on the call that you saw some immediate benefit in the third quarter. Just wondering if you could maybe quantify that, maybe give us a trajectory as to how that looks over the next couple of quarters? And how -- I guess, how much is dependent on the labor negotiations going through? And then just secondly, looking at the full year guide, particularly on revenues. And I know you mentioned that it looks like a relatively big ask. I just wanted to check that I have my numbers right. And with the FX -- consider it's an ex FX range, is the implication that the fourth quarter needs to see positive revenue growth in order to hit the bottom end of the range. And I guess what are you thinking in terms of or what visibility do you have around kind of some of the project milestone issues that may help get you over the line for the fourth quarter?

Okay. The guidance we gave on sales is on constant currency. So the FX is not affecting the guidance, okay? So we gave the guidance on constant currency. And if we go to the low end of the range, that was EUR 3.150 billion, more or less. That will mean we will need to grow a little bit over last year's fourth quarter, just tiny, constant currency terms, okay? Okay. And then in terms of cost efficiency, we started obviously to execute things and part of that is improving a little bit the margins. So in the third quarter, it's about EUR 5 million, more or less. It's mixed because we also have extra cost because of the COVID and some of the health elements, but it's about -- on the growth coming from the cost efficiency, not the net, but the gross, it's about EUR 5 million, EUR 5.5 million. It will have another impact, hopefully, similar in the fourth quarter. And then the big bulk comes, as we said when we presented it in July, next year. And the labor, it's about 1/3. The labor negotiations should deliver about 1/3 of that.

The next question comes from Manuel Lorente from Mirabaud.

My first question is on -- regarding what Cristina said. Looks like at this stage, we are seeing somehow cannibalization on -- between the legacy systems on IT and digital solutions. So to that extent, can you give us an indication of the growth of the digital solution, excluding perimeter for this year to have a more or less an idea whether or not you are capturing part of the losses that you are losing on the legacy territory? My second question is on the Eurofighter. I remember at the beginning of the year, that you stated that this year should be a year of mute evolutions in terms of Eurofighter, both revenues and EBITDA-wise. I have -- if I'm -- if I hear correctly, Ignacio has stated that we have seen some improvement in the orders on Eurofighter throughout the year. So can you give us an idea of an indication of the Eurofighter for this year remains valid what you said previously or is there any new remark? And probably my final question is regarding your statement on free cash flow generation for the full year. You said that you expect free cash flow to behave a little bit better than what you were expecting previously in July, whether you can comment what has changed basically?

If let's start the other way around with the free cash flow question. I mean the -- what we're basically saying is, if you look at our performance of this year, we've burned around EUR 75 million. And if you look at the fourth quarter cash flow over the last few years, you see that it's been ranging around EUR 140 million for pretty much every year, except for 2019, which was a very unusual year. Obviously, it's difficult to compare the fourth quarter of 2020 with anything given the uncertainty. But looking at the previous track record, we think we should be around levels that will probably be around, I mean, not that far, maybe a bit below, but not far from the ones that we did in the previous fourth quarters of the previous -- of those years. It's obviously tricky and volatile, and every year is complicated, and this year is definitely not going to be less complicated than other years, so more unusual. But if you look at the patterns of previous quarters and other years, that's kind of what we see, and this will give a bit more comfort. We're looking at a number of indicators. We're looking at how operations are evolving. Looking at the rate of invoicing and the total impact on sales. And all of those will be factors that will have an influence on the final number, but we do believe that we should be able to do a decent show in terms of cash flow generation in the fourth quarter, and that should give us something to hope to get a better number than what we discussed.

Okay. I mean on the Eurofighter question, what we said is, if you remember, at the beginning of the year, we said that we will be like a touch lower, slightly lower. What we've seen in the first half of the year is double-digit reduction. What we've seen in the third quarter, a single-digit reduction. We expect to recover part of that in the fourth quarter. And with regard to the contracts, yes, I think -- I mean this Mk1 contract, which is very positive, which is $140 million. I think that's good for the backlog to strengthen the backlog in Eurofighter, and it's good to maintain the business longer without the reductions. So that will not increase in the short term, the volume will maintain our volume.

Okay. About the first question, as you have said, it's true, if there is a kind of cannibalization of legacy business versus digital. We have done a very good performance in digital area in all the quarter. In reporting sense, in the first quarter, we grew 90%. The second quarter was 7%. And the last one, the third quarter was 10%, and we expect to be in the middle digit and double-digit growth in the last quarter and in a year or 2. So we have a very good pipeline. And digital is part of our strategy in terms of [ NMEs ] to improve our margins. So for us, as I said, it's a good area, and it's a good news that our clients continue doing digital transformation.

Sorry, Cristina, but I missed the number on the digital sales evolution for the 9 months, sorry.

For the 9 months in accumulated, [indiscernible] 12%.

But that is the reported terms?

Yes, reported terms.

Yes. And excluding perimeter?

Excluding the SIA, both -- the cybersecurity company that we acquired at the end of the last year. If we exclude this part, we are minus 4% because we -- in some line of business, we have some contract that we have lost in the last month. But in reporting terms, we have 12% of growth.

Okay. So it looks like that at least...

Just one thing -- sorry, just one thing, Manuel, is which now the new cyber business is not flowing anymore internally. So it goes into -- so it's a little bit of mix there as well. So it's organic, so it's a little bit of mix there. Okay?

Okay. So it looks like, at least today, you are not recovering what you are losing from the legacy system. So probably the question is when do you expect to start to capture in some of the, let's say, the structural changes that you are seeing in the sector? This is something that is going to take, I don't know, 6 months, 12 months, 3 years?

As Fernando said, today, we don't have a cybersecurity business. Stand-alone SIA and the Minsait business operate in different units. So part of our inorganic growth is also in SIA. So it's a little bit missed. But in any case, we have the impact in the -- of the second quarter that we have -- some of our projects have been stopped because the clients were focusing on the running, not in transforming the business. And the major impact is in that quarter. And we see that in the next ones in the last of the year and at the beginning of the next year, we will return to the growth of [indiscernible] without problem and continuing doing our [indiscernible] that we have started in last year. So the main impact is the second quarter of the year. Because the rest of the year, we have seen very good activity and we'll have a very good pipeline.

But in any case, Manuel, I mean, our digital business is 25% of the total business. Obviously, for that business to recover, what you will lose in the other. Obviously, it takes a little some time, and you need some growth. And as you can see, as per the reported numbers, obviously, the overall net effect so far is flattish in terms of revenues, a little bit negative if you exclude SIA inorganically. So -- because the net is negative means, obviously, that we have not been able to compensate yet. But as Cristina said, we have a strong pipeline. And now there's more focus on transformation, transformation what was companies were cutting weaker because such short-term projects normally, and that's what they did at the beginning of the pandemia in April, May. And now, obviously, we see that coming back.

The next question comes from Toby Ogg from Bank of America.

Two, please. So firstly, just wanted to follow-up actually on the question around the outlook for 2020. So clearly, you've mentioned that the revenue guidance obviously represents a larger challenge at this point. And as discussed, you need to grow a little bit in Q4, which is a pretty steep sequential acceleration just to kind of hit the low end of the range, despite the fact that lockdowns could be showing signs of escalating. If perhaps you could just talk a little bit about of the moving parts, specifically on the growth into Q4? And what gives you the confidence that you can accelerate that growth to the extent that's required? And then secondly, just on the EBIT guidance as well. How should we think about your confidence levels around that, I guess, given the risk around the revenues?

Okay. I will start with the second one. Obviously, the lower the revenues, the more challenging the EBIT as well, okay? But within the third quarter, our margin has been a little bit better within the month of our third quarter. September has been better compared to July and August, and it's embedded both in Transport & Defence, but also in Minsait, our IT division. Also, when you compare the headcount, the average headcount that we were running for the first time, our headcount is lower this month than it was last month of last year. The average is still above. But clearly, the convergence, as we move towards the end of the year, will help us also a little bit. So we are -- it's not that it's done for sure, but we are relatively more confident on the EBIT and on the cash than on the revenues. What we've seen in the revenues is that in September, we've seen a slowdown, notably in Spain, in general. We've seen a bigger slowdown. We've seen less volutive on IT and so on and so forth. And it is true that it's a big ramp and a steep ramp in the fourth quarter. But every year, we have it, our fourth quarter is disproportionately big in general. And when we look to the Transport & Defence division, because part of the possibility to bill and to recognize the milestones, it's because we are continuing to work and execute the mandates. The problem is whether we are able to recognize the revenues or not. That's what Ignacio was referring as to delay. So obviously, sometimes is 1 or 0, whether we can recognize them or not. But in case we do, clearly, we can really meet the revenue guidance. The problem is that it's not sort of a standard and regular stream of revenues, but it has sort of milestones that whether we meet them or not, the moment we have a delay or there's a problem or you cannot travel or whatever or the flight cannot happen, and therefore, you cannot test the radar or the -- whatever, then it's more sort of lumpy. So that's a little bit the issue. So we believe it's more stress, the guidance in revenues, because September, not so much July and August, but September, it's been lower than we thought it would be in Minsait a little bit. And in Transport & Defence, a little bit as well, okay? But despite the steep curve, we believe could still meet it. And in EBITDA, we are starting to see in EBIT the improvement of some of the efficiency measures and also the crossing of the number of employees that -- we had 8% more salaries in January. And now we have basically roughly flat or a little bit slightly over, okay? So that should continue to converse and help us in the fourth quarter.

The next question comes from Bruno Bessa from CaixaBank BPI.

Two questions from my side. And sorry for getting back to the cash flow generation during Q4, but just to be sure that I have understood correctly your message. So when I look to the net debt reduction over the -- during Q4 over the last 2 years, I see that net debt has been cut by close to EUR 200 million on average in Q4 over the last 2 years. I think you've mentioned that you could reach a similar cash flow generation during Q4 this year. So my question is, you will be comfortable with the net debt figure below EUR 500 million by the end of the year. This will be my first question. The second question, if you could provide us a bit of visibility on your commitment to resume shareholder remuneration policy and what kind of policy could we expect? And when could we expect Indra to start paying dividends again?

Bruno, on the -- when you target, I mean, yes, the last couple of years has been -- fourth quarter has been over EUR 200 million. But I think those are 2 key years to compare. We definitely -- yes in which we were coming from a stronger footing. Don't forget that the money that we cash in, in the fourth quarter is mostly the money that we have invoiced up to the end of the third quarter and only a little bit of the fourth quarter. So what I mean is that coming from lower year in terms of sales, obviously, the expectation in terms of cash for the fourth quarter cannot be as good as the EUR 200 million that we did or EUR 250 million that we did in the last couple of years. I think we could probably be closer to the EUR 140 million, EUR 150 million, EUR 100 million, around those levels. But in any case, which means that, to your question of could we be below EUR 500 million, I mean it's not impossible. It's within reach of what we can do in -- but then again, this is a bit of a bit of a tricky year. But yes, but in principle, that is not -- we wouldn't be surprised if we end up there. It should be consistent with history, it should be consistent with what we see. But everything taken with a pinch of salt, given the circumstances in which we are these days and the level of uncertainty.

And in respect of the dividend, our aim clearly is to resume it as soon as possible, okay? But it also needs to be sustainable. So it's not only the debt level which is relevant, which, as Javier said, normally, we should be at a lower absolute debt level, okay? Not the liquidity that we have plenty of liquidity, but also the business prospects for 2021. And we are in the middle of the budget now. Whenever the budget is ready, we will make our mind. We will share with the Board. And obviously, we will inform investors, but you shouldn't expect anything on that, any comment. No comments from us until we present full year in February, okay? But our aim is to resuming as soon as possible.

The next question comes from Gautam Pillai from Goldman Sachs.

Two quick questions. Firstly, on just a follow-up on the revenue guidance for 2020. Can I just clarify if you have considered lockdown restrictions happening in different regions in Europe in Q4 when you basically state that you still think that the guidance is achievable? And secondly, a question on order intake. Can you comment on the time frame required to convert the bookings into revenues? We have seen positive order intake growth in prior quarters, but the revenue growth seems to lag quite a lot. And then you comment on a lack of visibility even into 2021. Can you explain the dynamics here, please?

Okay. When we shared with the investor community our guidance for the end of the year, that was at the end of July, 20-something of July, and obviously, we were not taking into account all these pandemia revival that we started to have in Spain in August and that we are having everywhere. So obviously, we did not take into account at that time, what is happening now. We were cautious in general, but not thinking that this will have such a sharp increase, but rather thinking in how the economic climate will unleash. And we were a little bit cautious, but not clearly. We were not taking these restrictions into account. Having said that, that's what we said. And we'll see what happens. So the more restrictions and the more difficulties and the more problems, the more difficult it will be to meet this. But remember that we communicated this to the market in July when the prospects in general, in Europe and in Spain, in particular, were more positive. Okay? Ignacio?

Yes. With regard to the order intake, I think it's not an easy question, but I'll try. I mean, I think we have to differentiate between projects in which we are currently executed and we have new orders, and those will come through revenues quicker. From programs in which like the F110 or the 8x8 in which it's a new program. And therefore, you start doing the engineering and then you deliver the units in the case of the 348 units of the 8x8. Those programs are more back ended. So we will, as Fernando said, deliver units up to 2027, and we need 2 or 3 years to start delivering the first unit over a couple of years. And during that time, we only booked the engineering work. So some of the new programs are somehow back loaded. And that's why, I mean, it takes some time to convert the backlog into revenues in these type of programs.

Okay. Cristina will talk a little bit about the backlog in -- and translation to revenues in IT.

Obviously, in IT, as quickly as a conversion. The kind of contract that we have are more or less 3, 4 years maximum time. So that's the time to convert the backlog in revenues. The important thing is to reinforce this backlog as soon as possible, but the mean time to convert the backlog in revenues have 3, 4 years maximum.

But linearly, so from day 1.

Yes, from Day 1.

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

Most of my questions have been asked. Just a follow-up on the balance sheet, I guess, maybe for Javier. You've got about EUR 1 billion of cash now, significantly up liquidity wise, at least from June. I mean any more plans to increase liquidity? And any plans for that cash maybe on the M&A front, any other smaller acquisitions like SIA or any potential other non-core divestitures like Metrocall that we could see you execute and add to the cash position over the coming months?

Okay. We -- I mean, yes, we are looking at different things, small things [indiscernible] in different areas, and we might execute some things, but all of them are sort of small. We've been looking also -- that's on the acquisition side. On the disposal side, we don't need more liquidity. It will be more just generating value and reducing debt, but not really looking for liquidity. And we are also looking at 2 small things right now. So nothing really important in the coming months.

The next question comes from German Garcia from JB Capital.

During the second quarter results conference call, you mentioned that a reasonable level for EBIT in 2021 would be nearly EUR 200 million. Do you reiterate that view in the light of the current environment?

Yes. Yes, we believe so. Now again, visibility on some areas of the business is limited. And -- but assuming things don't deteriorate sharper, we believe that we believe that we have the efficiency plan. We have some -- we expect to recover some of the activity that we couldn't really deliver or hit the milestones this year. I mean there's a combination of things. Again, we are still in the middle of the budget. So we still don't have our more specific targets for next year. But we still believe that should be -- that we should be there.

Ladies and gentlemen, there are no further questions in the conference call. I will now give back the floor to the company. Thank you.

Okay. So thank you very much for attending this call. Happy to answer further questions to our Investor Relations department. Thank you very much. Have a nice day.