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

Welcome to Indra's First Half 2021 Results Presentation. I would like now to hand over to Ezequiel Nieto, Head of Investor Relations. Please go ahead.

Good evening, ladies and gentlemen. Thanks, everyone, for joining us today on our second quarter results presentation. I'm Ezequiel Nieto, Head of Investor Relations. And as usual, 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 Co-CEOs, Cristina Ruiz and Ignacio Mataix; and our Corporate General Manager and CFO, Javier Lázaro. And the intended duration will be around 1 hour. Now let me turn the call to Cristina Ruiz, Co-CEO of Indra. Cristina, the floor is yours.

Thank you, Ezequiel. On behalf of Ignacio and myself, good evening, everybody. Welcome to our conference, and thanks for being with us this evening. Let's move now to Slide 4 for a review of our highlights of the second quarter. I would like to start by saying that the first half of '21, results are very solid, building on the positive terms we start with today -- to see in the first quarter '21. Both our revenues and profitability for the first half of '21 are clearly ahead of the first half '19 before COVID. Our revenues are speeding up in the second quarter '21, while we are capturing the margin improvement derivative of our efficiency plan. Meanwhile, our backlog reached a new historical record. On the Slide #4, you can see the main highlights of the first half results. Our net profit reached EUR 55 million. This is 63% more than in the first half '19. Revenues are growing across the board, both in reported and in absolute terms versus the first half '20 and the first half '19, with a second quarter '21 growth accelerating versus the first quarter performance. Our reported in the first half '21, EBITDA stood at EUR 100 million versus minus EUR 78 million in the first half '20 and EUR 79 million in the first half '19. Both Minsait and T&D showed a very strong performance. Minsait local currency revenues in the first half '21 grew 9% in the -- and 11% versus the first half '20 and the second half -- and the first half '19, respectively, with the first half '21 clean EBIT margins about 5%. Meanwhile, T&D sales increased 50% and 8% versus the first half '20 and the first half '19, fueled by the Defence & Security performance, up 24% in the period. Cash flow generation in the first half '21 was minus EUR 25 million, excluding the cash outflow for the workforce transformation plan versus the minus EUR 88 million in the first half '20. Our leverage decreased again, now at 2.1%, the lowest level in June for the last 6 years. Finally, our backlog delivery gained double-digit growth and reached a new historical high. Now I turn the call to Ignacio to follow with the presentation.

Thank you, Cristina, and thanks for the highlights review, and good afternoon to everyone. If we move to Slide #5, we show our revenues performance both for the first half and the second quarter of 2021. On the left side of the slide, first half '21 revenues went up by 9% in reported terms and almost 12% in local currency, pushed up by the growth registered in both divisions. In organic terms, we grew north of 10%. ForEx dragged down EUR 39 million in the accumulated period. On the right hand, second quarter 2021 revenues grew almost 16% versus second quarter 2020 and 18% in local currency, a spin-up versus the first quarter of '21 reported growth. ForEx subtracted EUR 15 million, a better behavior compared to the first quarter of '21. Now moving to Slide #6. We see the group operating margin and EBIT evolution of both periods. On the left graph, we displayed margins for the first half of the last 3 years. Operating margin is widely above 2020 and 2019, amounting to EUR 125 million in the first half of this year, EUR 43 million in the first half of 2020 and EUR 102 million in the first half of 2019. Same happened to EBIT with EUR 100 million for this year versus minus EUR 78 million in the first half of 2020 and EUR 79 million in the first half of 2019. Moving to the graph on the right. You can see that the margin trends are better for the second quarter on a stand-alone basis. Operating margin for the second quarter of 2021 reached 8.4% versus 6.6% in the second quarter of '19 and just 1.6% in the second quarter of 2020. EBIT for the second quarter of '21 was EUR 16 million -- sorry, EUR 61 million. This is 7.1% EBIT margin versus EUR 40 million in the second quarter '19, which was 5% EBIT margin. As you can see, we improved again our profitability, chiefly thanks to revenue growth, very tight cost control and profitability of the savings. Turning now to Slide #7. Please find the evolution of our head count with a breakdown by division. In the graph of the left, our global financial head count at the end of June '21 increased by 765 employees compared to March this year as a result of the revenue growth acceleration mostly in Minsait. Moving to graph on the right, we have increased our workforce by 3% compared to June 2020. That is 1,516 employees more, of which more than 1,000 are due to the acquisition of SmartPaper. At the bottom of the page, we display the evolution of the number of employees not assigned to projects. We managed to reduce again the figure, and we are now at historical minimum level, thanks to the efficiency plans put in place. Now let's talk about the 2021 guidance on Slide #8. After this solid second quarter print, we have decided to upgrade our 2021 guidance for both reported EBIT and free cash flow before cash for workforce transformation plan. On reported EBIT, we upgrade to more than EUR 220 million versus the initial target for more than EUR 200 million. On free cash flow before workforce cash outflow, we increased our ambition to more than EUR 130 million versus the previous more than EUR 120 million. We maintained our revenue guidance at more than EUR 3,200 million in constant currency. Now if we move to Slide #9, where you can see the backlog and order intake evolution of our Transport & Defence division. On the left-hand slide, backlog in Transport & Defence went up by 7% in reported terms, while backlog over the last 12 months revenues ratio continued its growth and stood at 3x compared to 2.95x in the first half of 2020. On the right-hand side, order intake in the first half of '21 went down by 29% in reported terms, posting both Defence & Security and transfer -- and traffic declines. This trend will improve significantly in the second half of 2021 when we will sign sizable contracts, both in Defence and Air Traffic Management. If we move now to Slide #10, we show our revenues breakdown of the 2 business of our Transport & Defence division. The graph on the left shows the evolution of our first half 2021 revenues, which went up by 16% in local currency, pushed by the growth registered in both divisions, Defence & Security, 22%; and Transport & Traffic, 11%. Compared to the first half of last -- sorry, of 2019, before the pandemic, revenues have grown 8% in local currency in the first half of 2021. On the right graph, we display the evolution of our second quarter revenues, which increased 24% in local currency versus 2020, boosted by the strong growth and recovered in both verticals -- sorry, recorded in both verticals. Compared to the second quarter of 2019, revenues have grown by 14% in local currency in the second quarter of 2021. Now please find on Slide #11 the operating margin and the EBIT for Transport & Defence. On the top-left graph, the operating margin in the Transport & Defence division in the first half of 2021 reached EUR 56 million compared to EUR 30 million in the same half last year and EUR 61 million in the first half of 2019, equivalent to 9.6% margin compared to 5.9% last year same period and 11.1% in the first half of 2019. Moving to the top right graph, the operating margin in the second quarter 2021 stood at EUR 32 million compared to EUR 14 million in the same quarter last year and beating the levels of the second quarter of 2019, which was EUR 26 million, equivalent to 10% margin compared to 5.6% last year same period and 9% in the second quarter of 2019. The increase in profitability is explained by revenue growth, efficiency measures from our action plans as well as the higher contribution from Eurofighter. However, it's still affected by the first half 2021 in the Transport division because of the Haramain project, whose revenues are accounted at 0 gross margin for its last quarter. On the bottom left graph, EBIT in the first half of 2021 was EUR 47 million compared to minus EUR 18 million in the first half of last year and EUR 51 million in the first half of 2019, equivalent to 8% margin versus minus 3.5% last year and 9.3% in the first half of 2019. Moving to the bottom right graph, EBIT in the first -- in second quarter of '21 stood at EUR 28 million compared to minus EUR 29 million last year and EUR 20 million in 2019, equivalent to 8.7% margin versus minus 11.3% last year same period and 7.1% in the second quarter of 2019. I'll now turn the call back to Cristina for the remaining slides.

Thank you, Ignacio. Now let's move on to Slide 12, where we can see the backlog and order intake evolution in our Minsait division. On the left-hand side, backlog in Minsait went up 3% in reported terms, while backlog over the last 12 months, revenues stood at 0.9x compared to 0.86x in the first half '20, which implied 4% increase versus last year same period. The graph on the right shows the evolution of our first half '21 Minsait order intake, which went up by 4% in local currency, mainly driven by Energy & Industry, 15% in local currency; and Public Administration & Healthcare, 8% in local currency. Moving to the Slide #13. We show the revenue breakdown of Minsait. On the left-hand side, we display the evolution of our first half 2021 revenue. Sales went up 9% in local currency, standing out Public Administration & Healthcare, 13% in local currency due to the higher activities in the Spanish administration, the Italian subsidiary and the Elections business, with all the verticals showing growth. Financial Services sales increased by 5% in local currency, both in banking and insurance sector growth. Energy & Industry revenues went up 5% in local currency, boosted by Energy segment, inorganic contribution of SmartPaper and revenues in Industrial segment slightly grow. Telecom & Media revenues went up 1% in local currency, which is very positive performance considering that in the first half '20, sales grew up 10% compared to the first half '19 before the pandemic. First half '21, revenues have grown by 12% in local currency. On the right-hand side, we display the evolution of our second quarter 2021 revenues. Sales went up 14% in local currency, showing all the vertical solid growth. Compared to the second quarter '19, revenues have grown 12% in local currency in the second quarter '21. Let's move now to Slide 14 to present Minsait profitability. On the top of the graph, the operating margin in Minsait in the first half of the year reached EUR 69 million compared to EUR 13 million in the first half '20 and EUR 41 million in the first half '19, equivalent to 6.7% margin compared to 1.4% last year's same period and 4.1% in the first half '19. Moving to the top-side graph. The operating margins in the second quarter '21 stood at EUR 41 million compared to minus EUR 2 million in the second quarter of '20 and EUR 28 million in the second quarter '19, equivalent to 7.5% margin compared to minus 0.5% last year same period and 5.3% in the second quarter of '19. The increase in profitability is explained by the higher level of sales, the efficiency measures and savings derivative from our action plans together with improvement of margins in all verticals. On the bottom left-hand graph, EBIT in the first half of the year was EUR 54 million compared to minus EUR 61 million in the first half of '20 and EUR 78 million (sic) [ EUR 27 million ] in the first half '19, equivalent to 5.2% margin versus minus 6.2% last year same period and 2.8% in the first half of '19. Moving to the bottom right-hand graph. EBIT in the second quarter stood at EUR 33 million compared to minus EUR 68 million in the second quarter of '20 and EUR 20 million in the second quarter '19, equivalent to 6.1% margin versus minus 13.9% last year same period and 3.8% in the second quarter '19. Now I leave the floor to Javier for the financial review.

Dear speaker, can you please unmute your line. We're not able to hear you. Dear speaker, you are online. Please go ahead. Thank you.

Okay. I'm going to restart with Page 15, apologies for the interruption. I don't really know how much of that you got. So let's get started on Page 15. As I was saying, on the top of the slide, you have the evolution of free cash flow for the period, EUR 33 million in the second quarter, EUR 10 million better than the previous year. And this is including EUR 40 million outflow related to the cash -- to the workforce transformation plan. As I was saying before we got so rudely interrupted, the main drivers of this performance were the first, improvement of the profitability of the underlying operations; and second, a lower level of CapEx which were also compensating the higher consumption of working capital linked to the significant increase on sales, which we mentioned earlier. I think it's also worth mentioning that in the first 6 months of 2020, there were a number of positive one-off cash flow items that made actually the comparison with -- for 2021 much harder, so basically meaning that the underlying performance of our cash flow is better still than what the numbers reflect. If we now look at the bottom of the slide, you see how cumulative free cash flow for the last 12 months stood at EUR 122 million, which would have been EUR 185 million if we exclude the EUR 63 million related to the workforce transformation plan. This year, if you look back in time to the left of the page, you will see it's consistent with the previous record periods of cash flow generation at the group, which basically confirm the good underlying performance of our operations. Turning on the page to Slide #16. Let's take a look at the debt. The main contributors of debt are the same ones that we review every year. Operations adding the best in terms of debt reduction, EUR 145 million. Working capital, having a negative note, which is reflecting both the seasonality of the -- of this period of the year as well as the significant increase in sales during the period. If we continue moving down the bridge, CapEx is lower than what it was the year before. This is explained by a number of items, including the divestment of Metrocall, which added roughly EUR 10 million to adjust the year numbers as well as the higher level of grants received. Please note that we report our CapEx net of government and other clients' grants and of other subsidiaries. So hence, this positive influence of subsidiaries. Tax payments stood at EUR 15 million compared to EUR 11 million, no surprise given the higher revenue net profitability of the period. And then the variation of financial liabilities, this is a bit of a tricky item. This is more of an accounting element. This reflects the cash payment associated to IFRS, basically the real estate rents, which is actually excluded from the operating cash flow. And it shouldn't have been included, but this is the way accounting works, and we have to abide by those rules. Cash payments linked to our financial -- to our financing amounted to EUR 25 million versus EUR 19 million last year, explained basically by the higher interest rate and the higher expenses that we have, the higher level of debt that we were carrying in this period versus last year. And finally, our financial investments and other noncash flow items, negative EUR 14 million. This includes a number of minor M&A deals as well as the cash that is needed to buy shares to meet our commitments with our employees under the medium -- the midterm compensation plan. Moving on to Slide 17. Let's analyze the evolution of the 3 main building blocks of our working capital, standing in the period -- at the end of the period at 12 days of sales, which compares to a negative EUR 9 million at the end of December last year and 13 days of sales at the end of June last year. During the first half, our working capital has been increased by 21 days of sales, reflecting both the typical seasonality of this period, also influenced by the very strong closing that we did in 2020 as well as a negative comparison versus June 2020 when we had a number of sizable customer advances, which we have not received in the second half this year. If we break down the main components, the inventories remained largely stable with an increase of just 1 day of trading, explained in part through classification of working progress from the loan to the short term as we expect now that we will turn those inventories into revenues within the next 12 months. Accounts receivable increased by 19 days of trading, mostly due to the seasonality of the first half of the year as well as the acceleration of sales through the last few weeks or couple of months of the period. And finally, accounts payable remained relatively stable, both in absolute as well as in relative terms. On Slide 18, we show the evolution of our net debt and leverage ratios. So these figures, as usual, we have eliminated the impact of IFRS 16, both in the numerator and denominator -- and the denominators in 2019 to make the series comparable. Net debt, as we said, amounted to EUR 546 million. This level of debt translates into 2.1x net debt-to-EBITDA ratio compared to 2.7 a year ago and 2.5 in December 2020. As you can see, leverage in 2020 -- in June 2020 is currently at the lowest level in the last 6 years, both in absolute terms as well as in terms of multiple of EBITDA. As you can see, this ratio is improving at a reasonably fast pace, and we should be ending the year around or probably even potentially below 1.5x level. As always, the nonrecourse factoring remains constant at EUR 187 million. And now just to finish the presentation, let's look briefly at the debt structure on Slide#19. On the left-hand side, we show you the composition of our gross debt, and we have a wide range of financing sources, corporate convertible bonds, private and public bank facilities and the loans and one facility also from the European Investment Bank. In addition, we have over EUR 900 million of cash as well as roughly EUR 100 million of facilities -- available facilities on top of this. You would notice that we have reduced our gross debt by almost EUR 200 million, reverting also to more normalized levels of cash once the main uncertainties on liquidity created by the pandemic start to move into the background. We will continue this trend over the next few quarters with a special focus on the EUR 250 million put window that convertible holders have in October. This put window started on July 7 and will continue until late August, and we will report in next year how this conversion goes or how this -- the exercise of it could also -- goes because this could mean a good reduction of gross debt, which we will welcome if it were to happen. But it would largely depend on the level of the share price. On the right-hand side, you can see the cost of gross debt that remained stable at 1.9%. And finally, at the bottom of the page, you can see the maturity profile with, as usual, no meaningful maturities until 2023. On this front, you will also notice a significant reduction of the maturities due in 2023 in that particular year. We have reduced that number by more than EUR 350 million. This reduction has been achieved in part by some repayment but also by some deferral of our bank facilities contributing also to the improvement of the average life of our debt versus December 2020. So with that, we finalize our results presentation. Thank you very much for your attention. And now let's move on to the Q&A session.

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

I'm going to start with just 3 questions. And congratulations by the way for the strong second quarter. My first point is on your guidance for the year. I'm just struggling to understand why you have not raised your revenue guidance as well. Because if I look back in the last 5 or 6 years, you always had a higher sales in H2 than in H1. So I'm struggling a little bit with this point. Is there anything negative we should be aware about the second half of the year? My second question is now that you are back especially in IT to a full utilization rate, what are your plans in terms of head count addition for the rest of the year? And my final question is on the second quarter orders, especially in IT, they're also flat. They tend to be less lumpy than in Transport & Defence. So I was just wondering if it was kind of a one-off and you will recover as well in IT. Or if there were some turbulences within the sales force because of all the mess that the Spanish government has put during the quarter.

Thank you for the questions. I'll answer number one, and I'll let Cristina answer number second and third. Okay, regarding the guidance and the revenue guidance. First of all, there is nothing strange looking forward in our view. So our guidance is more than EUR 3,200 million. I mean that includes the possibility to increase that clearly. That's why it says more than. I think if we only say that is EUR 50 million, that will be a 2% increase on the second half. I think for the second half, we expect growth, but pandemic is still there. And there is still uncertainty on execution of some businesses, mainly in Transport & Defence, which maybe will have some volatility in the large contracts, still having to have people 15 days going to China and quarantine and so on and so on. So execution is not yet what it should be. So we are conservative. Maybe you can lay on that side, a little bit cautious, but we prefer to maintain at this stage the guidance of higher than EUR 3,200 million.

Okay. The second question about the head count the second half of the year, we expect to grow in the head count because the revenues are growing and we need more people to contribute with a higher level of growth -- of revenues. And we expect the same level of people on the [ bit ]. I mean we have a very good performance there because we have a high level of utilization. And we expect the same level that we have had in the first half of the year. But we have to improve -- to increase our head count because we expect to continue growing in revenues, and we needed to perform this [ growth ], okay? And the third one, it's true that we have catch up in the second quarter of the year in -- regarding to the order intake, okay? And we expect to continue growing and doing the best year than in the year before, and we expect growing in order intake in the second half of the year.

For the 2 businesses in Transport & Defence and IT?

Yes. I think Cristina was referring to IT. I think in Transport & Defence, I think seasonality is -- here is more difficult. And we have, I think, very large contracts in the second half. And taking into account that we have better future combat aircraft. We are -- we've been successful in some options for rather outside of Spain. So I think we have the Spanish -- we have a strong backlog here for the second half of the year. And I think we will be able to come back to numbers which are similar to what we have in the previous year or higher.

The next question comes from Gautam Pillai from Goldman Sachs.

Great. Congratulations from my side as well on a solid set of results. First, maybe can I just check on the order intake? There seems to be a sharp decline in Q2. And you did mention it's a timing issue. But can I check on the revenue impact from a slowdown in order intake? Will there be any impact in the second half? Or is it more a case where it's evenly distributed over the quarters? And also related to the second half, you did mention some of the big projects in the pipeline. Can you just comment on the Eurofighter and FCAS pipeline? And will that be converted into revenues in the second half? And secondly, on Minsait margins, great progress. Can I please check if the workforce restructuring is fully done? And where can the margins get to in Minsait over the midterm? And finally, can you provide any updated thoughts on large-scale M&A? Is there a preference towards the T&D segment? Or would you consider options for Minsait as well in terms of large M&A?

Okay. Thank you for the questions. I'll try to answer the first one, if I understood properly, given that we are going to contract more in the second half, if there is going to be any revenue reduction. I don't think so. I mean take into account that our contracts take some time to start. So we have factored already that the contracts would come in the second half of the year because we have visibility on that. So that will not impact revenues at all in the second half of the year because of that reason, okay? Regarding FCAS, there will be some -- I mean FCAS is in the process of being approved -- reviewed by the German parliament, by the Spanish cabinet. So it's on track, and we have some revenues in the last quarter of the year, but it would be, again, not very large. Because again, it takes time to put in place all the people, the teams and to start all the processes. So it will be a small contribution. Regarding M&A, I think we will continue to involve acquisitions as we can see them both in Minsait and Transport & Defence. And Transport & Defence more difficult to do these type of acquisitions, but we will continue to look into the market. And I will pass back to Cristina to answer the questions on Minsait.

Okay. About Minsait margins, first of all, the restructuring plan, we finished it last year, mostly in the last year. So we captured all the efficiencies during this year and is one of the reasons of the good results in terms of margin in this period. In the meantime, we've seen -- our expectation was more around fees in the medium term. But now after the restructuring plan that we have put in place last year, we think that we can hit 7% EBIT margins in the Minsait in the next 3 -- 2 or 3 years. And to do so, we need to continue on improving our operating leverage, thanks to the revenue growth. We need to continue doing our, in terms mix, more digital, less services, as we explained in the other calls that we had maintained before. And we think that we need to keep doing ongoing efficiencies plan and to managing our parameter. With these 3 action plans, we think that we can get the 7% in the midterm. Okay?

The next question comes from Stacy Pollard from JPMorgan.

Can I just follow up on Minsait, actually? Can you also give us a sense of -- or what do you feel is the sustainable growth rate for your Minsait business as well and just because you hinted out the business mix there? And also, is the strategic disposal or spinout of Minsait still in consideration? Or would you say that's changed under new management? Second question, kind of following on the management. Could someone give us perhaps some insight into what was behind the management and Chairman change? Just some thoughts there. And then finally, last question. Rolls-Royce rumors have surfaced again. Any comments that you have to that?

About the growth in Minsait, we think that we will continue growing the next period. We think that we will continue growing more or less in low single digits. Maybe we will do it better, but at the moment, the view that we have is around low single digits. About the -- what about the monetization of IT business? We didn't -- maybe Javier can explain this.

Stacy, what we probably said is we haven't said explicitly that we will sell Minsait. What we've always said is that we'll monetize Minsait. Selling is a possibility, a tricky one. And there is also the possibility of merging it. There is a possibility of doing an IPO. There are a number of things that we can do once we get to the level of profitability there. That strategic directive has not really changed with the recent changes because the reality is that with the recent changes, we haven't really changed the strategy or anything. So it continues the way it was.

And the thing is we think that we can improve still the value of IT doing our job on getting 7% margins that we have in the target. This possibility is on the table, but there's no decision at the moment, and we will continue doing them -- the things that we are doing at the moment. I mean we will see what happens in the future. But at the moment, there is not a decision in terms of selling this business unit. And the last question?

Regarding the last question, if I understood properly, we believe there is no relation. And as we have said yesterday, we are not in the process of ITP.

The next question comes from Fernando Lafuente from Alantra Equities.

Also a question on margins. But in this case, on T&D. I was wondering, not sure if you could give us kind of a similar answer that -- to Cristina's, but for the T&D division, where do you see margins going back to precrisis or the double-digit levels, if you see them going to that level in the end of this year or should we wait for next year? And also your outlook in terms of growth, revenue top line for the next couple of years. And the second question is on the -- on cash generation, working capital. Javier, maybe you can give us a little bit of info on how you see working capital evolving over the next couple of quarters and also ahead of 2022, if you see -- it seems still growth in top line for the coming year -- for the next year, sorry.

Thank you. Sorry, I couldn't match the bottom to put to speaker. I think -- let me see -- we believe we'll get back to the double-digit margin in the second half of the year for Transport & Defence. Okay? That's our expectation. And I think we have the pipeline, the projects and everything to do that. If we look further down, we have a very strong backlog in Defence, and so we expect growth in Defence. Difficult to say exactly how much, I mean, in that because, as you know, these projects are slow to exit also. But we see growth in Defence clearly and strong growth in Defence. We have a strong backlog. For air traffic management, business is more difficult. I think we have had a good year, but still, you need to think that the NSP, so our clients, traffic management clients have suffered no revenues last year. Continue to suffer half of the revenues, and therefore, investments are a little bit slow. So we need to see how it recovers and depending how clients will recover new investments and therefore, how is our backlog. I think we have a reasonable outlook. Europe is doing fine. And we see some contracts internationally as some [ other ] contracts. So there, we need to see. But I think the portfolio -- the backlog we have is good to have a strong growth in the next couple of years.

With respect, Fernando, to your question on working capital, I mean this year, working capital should really be against us. Because on the one hand, we are growing sales quickly. And that has an impact on working capital. And then on the other hand, we finished last year with a very, very, very strong reading, negative 9 days of sales, which is rather unusual. I don't really know of any other company in that space that has those levels. So it should be really draining cash from our operations. However, having said that, the order intake that we are having, the advances that we expect for the second half and the monetization of specific assets that we had on our balance sheet for a while that are expected for the second half, all of that put together make us quite optimistic towards year-end. So I think despite, in principle, having so many things against us on the working capital side, I think there are a number of elements there that makes us look at year-end in a positive way, which is why we have increased the guidance for free cash flow.

The next question comes from Manuel Lorente from Mirabaud.

My first question is for Cristina, whether you can give us an indication of the Minsait top line growth in the second quarter stand alone ex M&A and ex Elections business, which I believe has had some impact in the quarter. And also regarding margins, whether there has been any special one-off in the quarter to justify this pretty high level. So this is the new normal for Minsait. My second question is for Ignacio. Again, on margins on the T&D division quarter-on-quarter, you have increased revenues more than EUR 100 million and profitability of the EBIT of the T&D division has only increased EUR 11 million, meaning that the original level of the business has been pretty poor. Again, do we have something extraordinary here on the quarter to justify this low profitability? Reading on your note, you referred to Haramain in a number of occasions. I don't know if that's been a significant impact on the quarter. And finally, on the guidance, I remember last year when you gave us the new transformation plan that we were talking of a EUR 90 million delta of savings this year versus last year. How much of that has been already achieved on the first half?

Okay. If I start from the third -- the last question, sorry, on the guidance, I think we are on track. As you know, we don't give specific details on that. But we are on track on the saving plan and the execution as -- on what we announced last year. So I think we are there, and we are meeting the targets. On the question on the margins on Transport & Defence, Manuel, we have had one extraordinary which will, as you pointed out very well, which is the Haramain project, that project finished on the, what we call, the CapEx part, which is the investment part and came into operation. We have had a big sales on the CapEx part in the first half, actually in the last quarter with no margin. So that has deteriorated the average margins of the division, which is a one-off that will not happen in the second half of the year. Is that clear?

Yes. I mean -- and that Haramain impact, is it possible to quantify that a little bit? Or it's just the idea that you already gave us -- for the second half, we should expect a double-digit margin again on the division. So therefore, if we exclude that from the second quarter stand alone, we shall see double digit already. That's the correct way to see it or...

Yes, absolutely. You're absolutely right. We are looking into double-digit margins in the second half of the year. If we exclude that Haramain, we are almost already there, okay? Or we are already there. The amount of the Haramain is something between EUR 40 million to EUR 50 million on the first half, which is 0 margin. So if you take this into account, we are almost there, okay? And I turn to Cristina for your first question.

Okay. The top line growth in the second quarter in local currency without M&A is more or less 12.4%, okay? In the Election in last year in the second quarter was only EUR 1 million because the business of the Election last year was nearly 0. And in this year, we have EUR 14 million in the second quarter. Okay. So more or less, you can do the number, but the growth is organic growth mostly. And in terms of margins, we don't have any one-off in the second half of the year. I mean if they're running in the first half of the year is the running of the business, I mean it's the improvement of margins because of the action plan and improvement of margins because of the change also of the mix in the business or is the underlying, the normal underlying of the business.

Okay. So just one final question on the guidance. It has stated in a number of places throughout the presentation, the comparison of this first half versus the first half of '19, which is probably the correct way to do it. So if we do the same for the second half, EBIT in the second half of '19 was EUR 145 million. So that will lead us at full -- EBIT for the full year, roughly EUR 245 million. I believe Ignacio said that at this stage, you prefer to be prudent because probably related issues are still there. But assuming a similar behavior of COVID on the second half than the one we've seen in the first half, that should be the correct math to do it, assuming a similar EBIT than the one achieved in the second half of '19?

Okay. So good question. It's important to give you more information on the second half of the year in terms of margins in Minsait, okay? It is not going to be a second part of the year as usually because there are several reasons. One is, unlike in other years, we expected this year in 2021 with a full benefit of our largest and unusual call to action plan that we executed last year, okay? The combination of the favorable cost base was plus and a strong revenue growth that we have had in the first half of the year, led us unusually high revenue per employee, okay? We will tend to normalize in the second part of the year because we have, as I explained before, we have to catch up in terms of people to continue growing, okay? In addition, the current hiring environment in corporate, a certain level of salaries inflation due to the positive movement of the underlying business, okay? So we have a little bit -- at the moment, a little bit salary increase, and we're expecting the second high of the year that is going to be a little bit higher. So that is going to be the situation. The other thing is -- another element that contributes to the guidance -- this guidance is that the bonus in the last year has been lower than that is expected this year. So in the fourth quarter of the year, we released part of the bonus that we don't give to the -- our employees. So this year, we have higher bonus because the objectives are going well, and we will pay a higher bonus pool for the employees, okay? And finally, we have a small difference in the number of days that we have in the first half of the year and in the second one. We have more or less 2 days of difference, and that's relevant for the final results in terms of revenue. So we expect to have a second half of the year, more or less around 4.5% or 5% margin for the half -- for the whole year of [ '23 ]. I don't know if -- do you understand more or less, and it's playing well? Or do you have any doubt?

No, no, no. Yes. I see that there are some levers to justify somehow a lower profitability on the second half beyond COVID-related issues.

The next question comes from Ben Castillo-Bernaus from Exane BNP Paribas.

Just had a question on if you could comment on catch up or finishing of some projects. I think Transport division that needed some physical presence to sign them off and therefore, recognize the revenue that was about -- there was a considerable amount of revenue that was going to be concluded this year. Can you just give an update on that? And then secondly, more of a big-picture question. But as your backlog in the Defence business continues to grow and there's some lag in terms of recognizing that backlog in revenue, how do you manage your resources in terms of ramping the necessary R&D or investments to deliver on those contracts? What possible timing risk is there where you may need to invest ahead of revenue being recognized?

Okay. Maybe I need to get, again, the second question because I didn't understand personally. What I understand is how we grow from backlog into revenues and the speed of that happening, if I understood properly well or if we have any problems in terms of R&D to do that. I don't know. I mean it's not straightforward. And we have a strong backlog, as I was saying. I think we expect revenue growth in Defence, which is the majority of that in '22, '23. It's -- some of the projects, as you well know, start from further engineering part of the project until we start the delivery of the hardware in which you fulfill the majority of the milestones, and that is where you get the majority of the revenues because it's milestone driven. So what we have is lower starting projects due to the engineering phase. That doesn't mean that we start late our R&D or so on. So we manage that on a yearly basis. In projects, we move people from one project to the other. And I don't know if I understand -- if I answered your question there. On the execution on the second half of the year, I mean, in the first half of the year, we still have execution problems, as I was saying, and it's not only for us. It's our clients coming down to Spain to look into the test of the equipment, is our people going to install hardware in their countries. And that is although we have according to a situation in which we have managed with our clients to do remote testing and so on and so on is not as a normal year. It's not like we were doing in 2019. So we have some projects which will have some delays on the execution, and we need -- and some volatility and some uncertainty because you have closed out of countries, which you are not expecting from 1 day to the other. So there will have some volatility. Nothing to worry on but some volatility and milestones in some T&D projects at large and, therefore, not [indiscernible] a few millions, and that has impact. Did I answer what you were expecting?

Yes, that was very helpful. I appreciate it.

[Operator Instructions] The next question comes from Carlos Treviño from Santander.

Yes. 2 questions from my side. The first one a follow-up on the guidance in revenues, while I understand explanations provided by Ignacio on T&D. But specifically, I would like to ask Cristina on Minsait. What expectation do you have to growing revenues in the second half? Also, do you think that you [ see ] some impact from the pandemic, which could slow down the growth in revenues in the second half? You have commented before about low [ double ] digit, but I don't know if this is a reference for the second half or more with a midterm view. And my second question, it will be on cash allocation. Javier has commented that you are expecting to finish the year below 1.5x in net debt-to-EBITDA. I was wondering if all this could imply that we could see some shareholder remuneration even in the second half of the year as an interim dividend or even if you could consider the possibility of a share buyback.

Thank you, Carlos. I think my explanation on the guidance was for the whole company. So what I was saying of in excess of EUR 3,200 million for the whole company, but I will let Cristina to comment on the Minsait.

Okay. For Minsait in the second half of the year, we expect low single digits. But in the midterm, we hope and we expect to continue growing maybe more than that. I mean, it depends on the recovery of the economy, the macroeconomic vision, how Spain is going to recover from the COVID and even what is going to happen with the Latin American economy. So we have very good expectation in terms of growth for the future, okay? And in terms of dividends, I think there was another question...

Javier, can you [ go there ]?

Sure. No, no. As we said a number of times already, we -- I think dividends is [ reviewed ]. And we will propose that to the Board before year-end, and we will inform you of the solution, but definitely something that we have to take up and resume sooner rather than later.

I mean, could you consider a share buyback?

Share buyback, yes, is another possibility. We will look into that. I mean it could be a combination of both, could be just the dividend or we will look into that. We will consider both things.

Thank you very much. Ladies and gentlemen, there are no more questions in today's conference call. Dear speakers, the floor is yours.

So on behalf of the investor relations team, Cristina, Javier and myself, thank you very much for attending the first half conference call. Looking forward to the third quarter conference, and you have the investor relations team available for any additional questions you may have. So thank you so much, and good afternoon.