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

Good afternoon. Welcome to Indra's 2022 Full-Year Results Presentation. I'll now hand the conference over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead.

Thank you. Good evening, ladies and gentlemen. Thank you, everyone for joining us today on our 2022 full-year results presentation. I'm Ezequiel Nieto, Head, Investor Relations, and as usual, let me refer you to 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 CEO, Ignacio Mataix; our Minsait Managing Director, Luis Abril; and our CFO, Borja Altamirano, and the expected duration will be around 1 hour. Now let me turn the call to Ignacio Mataix, CEO of Indra. Ignacio, the floor is yours.

Thank you, Ezequiel. Good evening, everybody. Welcome to our conference and thanks for being with us this evening. We will proceed through the agenda now on our screen and look forward to addressing your questions following that. Let's move to Slide #6 where I will review today's presentation with the main 2022 results highlights. As you will note and have seen already, 2022 has been a year of very good performance for our group. We will discuss that more in detail. It has not been achieved easily in an environment which is challenging from many perspectives, macroeconomic, operational, supply-chain; you know them all very well. So I would like to thank you -- the people of Indra for their hard work and application as a team to deliver for our customers so that the outcome for our shareholders can be the right one. I and my colleagues remained very focused on that. So 2022 has been outstanding and can recall historic reports. Firstly, we have achieved all-time high levels of annual backlog, order intake, revenue and EBIT, well above our already upgraded 2022 guidance. Secondly, we have posted double-digit growth in revenues, EBIT and earnings per share. And finally, our strong free cash flow generation has reduced our debt net to almost 0. All of this has led us to propose a dividend of EUR 0.25 per share, which is an increase of 57% vis-a-vis last year. The 2022 performance sets a strong foundation, of course, for the future, no doubt where you are now focused. We will discuss the outlook and our guidance in some detail. But the overriding message I would like to share is that, we look forward with high confidence to 2023, expecting positive pro forma trends, further growth from our record base and attractive returns from our investors. Let me turn first to the highlights of our 2022 financial results on Slide #7. Backlog and order intake, the drivers of future pipeline and revenues, increased 16% and 19% -- and 29%, respectively, with backlog reaching EUR 6.3 billion at the end of the year. In 2022, this translated into revenue growth of 14% and an EBIT of EUR 300 million, further supported by a 30 basis point margin improvement compared to 2021 and resulting in a final growth of 20% in our earnings per share. Moreover, strong cash flow of EUR 253 million helped us to reduce our net debt and leverage profitably to 0 at year-end. The Slide #8 today, we focus on 2022. We need to review this outstanding year in some recent context, because there is a risk. You can see the trends we are driving. Our group is steadily becoming stronger, more efficient, generating more cash flow and deleveraging. Our proposition for our people, our customers and our investors is about growth and quality. I show you the progress here and we are not yet finished. Backlog, which we have been consistently growing at double-digit rates over the past few years from absolute levels of EUR 4.5 billion in 2019 to our current market well above EUR 6 billion with both Transport & Defence and Minsait contributing to this achievement. This is translated into a very strong P&L performance with EBIT and net profit growing at annual compound rates of 11% and 12%, respectively, on average over the past 3 years, and goes hand in hand with formidable cash flow generation, reducing our debt by more than EUR 500 million since then. In summary, 2022 has been an outstanding year for Indra despite the significant macroeconomic uncertainty and the market volatility, where we have built a high-quality backlog that gives us substantial visibility and confidence for the period ahead. We have increased our capacity to reach bigger contracts where FX stands out. Also, we have intensified and improved our focus and control on efficiency, cost base and capital allocation. With all this, we have optimized the results we generate for our shareholders, which is a key focus for Indra leadership team. Please move to Slide 10 in which we'll see why 2022 was indeed an outstanding year even in the context of our recent path. These results give us a very solid base for medium-term growth, as you will see at the end of the presentation when we discuss guidance for 2023. I will come back to this slide then. Now let's get under the key numbers of the business with respect to the key drivers of 2022, a strong financial performance. Let me start with commercial progress on Slide 11. As you see, our backlog has increased from EUR 4.5 billion in 2019 to all-in time high to EUR 6.3 billion at the end of this year. Both divisions have contributed to this growth with Transport & Defense standing out and rising to 3.44x long-term revenues at the end of 2022 vis-a-vis 2.54x 2 years ago. On Slide #12, we show a strong revenue growth and margin performance for the year. On the left side of this slide, reported revenues amounted to EUR 3,851 million in the year '22, up 40% compared to 2021, while revenues in local currency grew by 12% and 10% organically. On the right-hand side, year '22 operating margin was up 80 basis points year-on-year -- to 9.2% and reported EBIT reached EUR 300 million, up 60 basis points, up to 7.8%. On Slide 13, we highlight the same information for the fourth quarter, very strong as well. Fourth quarter '22 revenues increased by 13% in reported terms, while the fourth quarter EBIT margin was 8.3%, up 110 basis points compared to the same quarter of 2021. On Slide 14, we highlight how Indra's Group workforce has evolved over the previous year and supported our strong 2022 growth. Annual revenue growth, 14%, has been above total group workforce rise 9%, with most of the headcount growth taking place in Latin America. We have improved our revenue per employee by 4% and we have also seen a slowdown of workforce increase in the last quarter versus the rest of the year. Finally, let me highlight that we keep the workforce at the bench at a very low levels, only 126 employees out of a total of more than 56,000. And we managed to maintain an attrition rate of 16%, similar levels to 2021 despite the furious market competition for tech talent. Moving to the Slide #15. As you know, ESG is at the center of our group strategy, influencing and regarding how we engage with our shareholders is not merely our compliance exercise. I would like to highlight our strong ESG performance for another year. Indra was ranked for the second consecutive year as the most sustainable company in the sector and among 1% more sustainable in the world according to the sustainability year book 2023 elaborated by the S&P Global agency. It has also been rated as best practice by the prestigious CDP Exchange Index that recognizes Indra as one of the companies which -- with the best environmental practices. Let me move now into the Transport & Defence division. The Slide 17 shows the outstanding results in this division, which has achieved all-time highs in terms of backlog, order intake and revenues. This has translated into an EBIT margin at double-digit levels, placing us as the best in class amongst Aerospace and Defence universe in Defense & Security and in Air Traffic Management profitability. For this part, Transport & Defence backlog is now over 3x long-term revenues, ensuring a strong growth prospects. Finally, let me highlight the agreement to acquire Leonardo Air Traffic Management business in the U.S., which we have access to -- this very relevant markets. On the Slide #18, we display the main highlights of Defence & Security businesses. As you can see, our medium-term prospects remain very, very solid. The sales global expenditures are at all-time high in 2022. As we already have mentioned our backlog and order intake at a historical high with very sizable and multiyear programs in place, we [indiscernible] the most relevant one with more than EUR 600 million already signed for the next few years. Now, regarding air traffic management business on Page 19. In 2022, we have exceeded above the pre-COVID levels and there are very positive tailwinds for the coming years. Global air traffic is expected to bounce back to pre-COVID levels by 2024. Secondly, we signed relevant contracts during this year, both in Europe and EMEA. Thirdly, we expect to close the Leonardo Air Traffic Management acquisition in the U.S. by March. And last, new opportunities at Canada are arising for the medium term. If we move to Slide #20 to show the main highlights of the transport business, really, it is noteworthy that Transport has returned to profitability in 2022 after a year, -- after a period or at breakeven or loss making. We thought the achievement has been possible after several years of notable derisking of several problematic projects, making 180 between towards value-added products and service quality as well as gaining interest in leading countries in the business. For its part, the order intake carried out in recent quarters [indiscernible] that enjoy better margins, providing more visibility for its profitability improvement. On Slide 21, as mentioned before, Transport & Defence backlog at all-time highs. For its part, order intake in the Transport & Defence division in 2022 was up 43% in local currencies, with a strong growth reported both in defence and security, which was 52% increase in local currency, mainly due to the signing of the Phase 1b of the FCAS project and in Transport and Traffic 30% increase in local currencies, particularly in the air traffic segment. On the Slide 22, you can see that 2022 revenues in Transport & Defence division increased by 5% in local currencies with transport and traffic growing by 7% and defence & security by 4%. Regarding EBIT, it improved to 12.2% versus 11.7% in 2021, mainly backed by the increase in profitability of Transport & Defence. Finally, on Slide 23, fourth quarter 2022 revenue growth was very robust, up 9% and accelerating its growth in the quarter compared to the full year. Thanks to the certification of milestones in certain relevant contracts before year-end in the defense and security and air traffic business. Fourth quarter of 2022 EBIT margin was also improved to 13.8% versus 12% in last year's same period. Now, I'm going to hand to Luis to cover Minsait performance, very much speaking with the broader trends of the group. And we are here -- generated strong growth, increasing with a mix shift towards higher value engagement with a shared focus on continuing to improve efficiency. All of which, as you will see from Luis, is generating very encouraging operational and financial trends for the group.

Thank you, Ignacio. Good evening, everyone. Let's go to Slide 25, if you want, where we displayed the solid year delivered by Minsait also, driven by the double-digit growth posted in order intake and sales, which also achieved all-time highs with most concepts growing 18% year-on-year. In terms of profitability, we have reached our highest historical level of EBIT margin at 5.5%. And at the same time, we have increased our revenue mix with digital and solutions growing 32% in the year and now representing 57% of our total sales. And also, we have continued with our bolt-on acquisition strategy focused on high-growth businesses as payments, cybersecurity and digital. On Slide #26, you can see the main operational highlights of Minsait, which are the following: for first 2022, has seen the consolidation of our core value proposition to our customers, highlighting 2 things basically; one, the high level of specialization by industry for all our end-to-end technology solutions. And then second, a very strong focus on our growth sectors, which are digital, cloud data, payments and cybersecurity. And as such, all of them or all these acceleration vectors have delivered a solid growth, as you see on this slide. Then we have also increased our share of wallet in our top 10 clients with sizable wins in large contracts, reinforcing our relationship with all of them with successful deliveries of their critical system implementations. And lastly, in the fight for tech talent, we have hired more than 15,000 new professionals in 2022 despite high competition while maintaining attrition rate in similar levels as of 2021. On Page 27, we see that the sound 2022 delivery sets us in a very solid position to site multiple growth opportunities looking forward. And here, basically, we highlight, first, the next wave digital domains with things like IoT or the IT/OT convergence and others. Second, new in-roads in our core markets and geographies, such as -- to give an example, financial services in Italy, being Italy already our second geography in revenues; and third, the build-out of new accounts with potential to become top-tier accounts, which will definitely be around in the future. Now let's move on to Slide 28, where we display the backlog and order intake evolution of the Minsait division. Here, the massage is a strong performance on the backlog growing 8%. And on the right-hand side of the chart, you see order intake that increased 16% in local currency backed by the solid growth saw in all verticals, Minsait stood out the growth posted by public administration and health care, which was 35% in local currency, mainly backed by the order intake of the elections project in Angola. And also, we highlight here the growth of Telecom & Media, which grew 19% in local currency. Moving now to Slide #29, where we see revenues and margins. Here, we have to say that revenues increased by 15% in local currency in 2022. Again, with all verticals registering strong growth as well, standing out the increase sold in public administration and health care, plus 28% in local currency, driven again by the higher contribution from the Election business. And also in Energy and Industry, that shows a growth of 14% in local currency. And then, regarding margins, 2022 EBIT margin improved to 5.5% compared to 5.1% of 2021, mainly thanks to the contribution of the Election business and also to the profitability improvement in some verticals such as financial services. Then on Slide #30, you can check the improvement in the mix change in more detail, which we already talked about a few slides back, with Digital & Solutions growing 32% in the year and now representing 57% of our total sales. And last, finally, moving on to Slide 31. Here, we saw the revenues breakdown and EBIT of Minsait only for the fourth quarter of 2022. And here, we have to say that sales in the fourth quarter of '22 were up 13% in local currency. In a market environment where client demand remains nimble and with all verticals grew at double-digit rate. And on margins, the fourth quarter of '22 EBIT margin also improved to 4.6% versus the 2.6% that we saw in the fourth quarter of '21. And that's it for me. And now I leave the floor, I think to Ignacio again and then to Borja for a financial review.

Thank you, Luis. Now we turn to Borja for the financials. For the financials, I think many of you have been waiting for, and in particular, having summarized the high level of the group and the divisions' strength. Let's now tie it altogether in detail for the group before I come back to discuss guidance.

Thank you, Ignacio. Good evening to everyone. On Page 33, we present the free cash flow generated in 2022 that amounted to EUR 253 million with a very strong performance in the fourth quarter, in line with the seasonality of the business. As in 2022, these figures include around EUR 60 million of collection from the projects from transport and traffic. As you may recall, this figure was in 2021, EUR 100 million. If we exclude cash inflows from delayed collections, our free cash flow will have stood at EUR 180 million for the year, above our guidance and the 60% conversion ratio. On Page 34, as a consequence of the capital management policies with a strong focus on the free cash flow generation, together with the growing EBIT of the group, our return on capital employee is growing, closing 2022 at 20%. This achievement has been the result of both the increase in operational profitability and the result of running a very tight ship when it comes to capital deployment. Moving to Page 35. We see material working capital improvement in the fourth quarter, as is always the case in our business. Combined year-on-year figures, day of sales remained negative with a slight increase of 2 days. This increase is due to an increase in inventories, a couple of problems with the supply chain and to the incremental demand from our clients. This increase is naturally offset by the account's level. Slide 36 shows how we have closed 2022 at almost 0 net debt compared to EUR 240 million in 2021. Going a step by step, the most important is the first one as it comes from the excellent performance of the business in 2022 that has generated EUR 432 million of operating cash flow. Working capital slightly negative due to the increase in inventories as we have just seen, CapEx at EUR 39 million and taxes slightly above 2021 due to the higher return and the additional payment of EUR 4 million in Spain, because of the tax inspection, as we have commented in previous conference calls. Other financial liabilities are EUR 52 million, in line with the EUR 34 million at the end of 2021. Net interest reduced to EUR 26 million, below the EUR 33 million registered in 2021, mainly due to the reduction in gross debt, together with higher cash remuneration. And finally, dividend payment was EUR 26 million. FX impact amounted to EUR 29 million, of which M&A represents the vast majority, EUR 27 million. In Page 37, we set out the evolution of our leverage since 2016. We closed 2022 with leverage rate of just 0.1% net debt-to-EBITDA and with a material improvement compared to 2021. As in previous years, factoring stands at EUR 187 million to make figures comparable and excludes the impact of IFRS 16. And now just to finish my part, a quick look to the debt structure on Page 38. In 2022, we have reduced gross debt in around EUR 500 million. At the end of the year, we had EUR 966 million of gross debt, well diversified around 50% and 50% floating, average maturity of 2 years and cost of debt at 1.9%. The cash position at the end of 2022 was EUR 953 million and we also have more than EUR 180 million of undrawn credit facilities, figures that compares well with our gross debt maturity profile that you can see includes EUR 250 million for the convertible bonds that mature in 2023. Overall, our strong financial position, together with a strong operating performance of the business offer opportunities to fund future growth going forward. Now, I leave the floor to Ignacio for the outlook and guidance.

Thank you, Borja. So last, but very important, let's turn to our outlook and update our guidance on Page 40. As we started, I see by indicating you -- to you that following an outstanding 2022, the overall theme is for a moderation of the growth rate in 2023 -- by being on that base, for Indra Group to grow at a very attractive rate. The picture I summarized for you here is formulated early in the year, of course and our tendency is to take a careful approach to our assumptions. But the early signs we have seen in the first months give us confidence at this stage of the achievability. So as you can see on the slide, we over-achieved the revised 2022 guidance we gave back in July in all metrics, revenues, EBIT and free cash flow. As you can see in the middle left part of the table, thanks to outstanding performance of both divisions during the year. Regarding 2023, we expect it to be a growth year both in revenues and EBIT, while generating again a very strong free cash flow. In more detail, we expect revenues in constant currencies to be above EUR 4 billion. Reported EBIT in absolute terms above EUR 315 million, free cash flow of more than EUR 200 million, implying a free cash flow to EBIT comparison rating above 60%. Now on the Slide 41, we come back to the slide that we display at the beginning of the presentation, but now including our 2023 outlook. As you can see, it results in a very positive trend for the 2021-2023 period. Our 2023 guidance implies that we are delivering growth and profitability compared to outstanding 2022 figures with our revenues and EBIT growing 3.9% and 4.8%, respectively, and with a very strong cash flow generation. Moreover, with this 2023 guidance, we expect a trend for the 2021-'23 period improve significantly versus the 2019-'21 period, surpassing in all metrics, revenue and EBIT growth and average free cash flow generation and ensuring that we are very well positioned for the medium-term outlook. Finally, let me finish the presentation by saying how this excellent 2022 has provided a very solid starting point for our future growth and a strategy looking forward for 2023 and beyond. First, because we now have a very high-quality backlog at all times highs and increased mix towards digital, a constant focus on improving our operational delivery, together with a very solid financial process. Second, we now enjoy a very strong balance sheet to support our strategic options, built on our robust cash flow generation and the careful stewardship of our shareholders' capital that we have delivered in the last years, and third, because we will remain sharply focused on delivering first-class customer satisfaction, together with improving our operational performance and efficiency. Thank you very much for your attention. And now we are ready for the questions.

[Operator Instructions] Our first question comes from the line of Laurent Daure from Kepler.

The first is, if you could give us a little bit of granularity on the outlook in defence for 2023-2024? And especially on top of FCAS, maybe the main programs that could contribute to your growth rate over the next 2 years? And my second question is on the profitability, relatively flat, you expect for 2023. I'm wondering with a growth rate north of 4% and net income was of 9% plus the others inflation how to reconsolidate the more modest growth rate and the cost of staff that is likely to go up?

Well, I think -- that how we see 2023, I think we will have it depends on security, I mean, double-digit growth, obviously, with the strong support of FCAS contribution. I think with similar contribution of new factors. If we exclude these 2 programs, I think Defence will pose a strong growth. I think we have a strong backlog, multiyear programs in Spain, I mean, programs like 8x8, NH90 to look our areas, I think, will have a strong contribution in 2023 already. And I think we have also in the pipeline and in order intake. Looking forward in the basket of the year also good prospects to continue increasing our backlog. Regarding the second question, I don't know if it's so clear for me, to be honest, because your line was difficult. We understood the 36% increase.

It's basically the workforce that has moved up. The headcount has grown a lot last year, is when inflation -- It's a bit more than half of the sales the staff cost. So I was just worried about the potential margin squeeze basically?

I think we'll have a 6% inflation. All in all, we think, everything we need to do in the company that we will to the exercise that the revenue on a yearly basis compensate with several measures, pyramid, passing cost to our clients and so on and so on, more -- remote working. I think so we've been doing this around for 4 years. We have maybe a little bit more of a headwind in terms of the real inflation. But we have plenty of measures going forward and already in process that will offset that.

So basically, your target is to have the IT part more or less stable in profitability then?

Yes. Sorry, Luis, go ahead.

Yes, in the IT part, the idea is to be stable in terms of profitability in terms of EBIT. Basically, also because apart from the things that Ignacio was commenting on, we'll have to compensate for the effect of the lower contribution from the Elections in Angola, which as you know, in this year '22 has been relevant. And in '23, basically it will have a minor impact. So basically, what we are expecting here -- the expectations in terms of profitability of Minsait for 2023 to have an EBIT of around -- I mean actually more than 5%. With this flat -- this is apparently flat. If you take out the impact of Angola, it implies a slight improvement.

Next question please.

Comes from the line of Ben Castillo-Bernaus from BNP.

One, just on the FCAS project. You highlighted the EUR 600 million of order intake. Just wondering on the -- how we should think about the phasing of the costs associated on delivering that? And indeed how we should think about revenue being recognized through 2023 and beyond for that initial phase? And then secondly, looking at your hiring in Minsait like hiring sequentially slowed to just 1% in both Q3 and Q4, sequentially down from sort of 3% to 4% before that. How should we think about the expected growth in Minsait in 2023? Are you planning for a positive growth year or a flat year-over-year?

I think in terms of FCAS, now, we have a EUR 600 million contract, roughly EUR 100 million average step-up -- stepping up in 2023. From a cost point of view, this is, at least in the first year, a technology contract -- the technology contract. So basically is having a simple -- in place to develop technology. And we will be able to invoice depending on the number of resources and deliveries we need to do on those resources. So I mean, that's -- it's a pass-through, let's say, contract from a subcontracting point of view to our suppliers. And I would say, very straightforward. I don't know, if that's your question -- answers your question, Luis?

And then on Minsait -- on the growth of Minsait and the evolution of the employee base. Here, we expect low single-digit growth in 2023, which implicitly is actually mid-single digit growth if we take into account the negative delta from the Angola elections project, which is going to be minus EUR 90 million vis-a-vis '22 and taking into account also, I mean, some minor effects of inorganic operations. And so this would be like, as I would say, mid-single-digit increase mid-single digit growth. And then the employee base will have to grow accordingly.

And just one quick follow-up, if I may. Just in terms of FX assumptions. Obviously, we've seen early sharp moves towards the end of Q4 last year. Your guide revenue growth is in constant currency. What's your base case assumption on FX? I think it was a 1 to 2-point tailwind in last year? Where do you -- modeling for 2023, the impact?

Okay. I mean, it's a difficult assumption. But we understand something like EUR 30 million to EUR 40 million positive in 2022 revenues.

[Operator Instructions] The next question comes from Nicolas David from ODDO.

Also congrats from my part for this very stronger Q4. I have a few questions from my side. The first is coming back on Minsait growth guidance. So it's clear that excluding the ongoing contract is mid-single digit. But could you discuss a bit about the phasing of this growth? Is it -- do you expect a stronger beginning of the year? And are you factoring then a slowdown cautious -- more cautious based on the macro assumptions, which are probably macro, is providing some uncertainty? So -- or is it really from the beginning of the year, 5% and your assumption is that you will keep the base all over the year? My second question is what was the impact of the FCAS signing your Q4 book-to-bill? And could you give us a figure and trend for Q4, excluding this contract? And my last question is, could you provide us with an update regarding any potential strategic review be it for midterm -- new midterm ambitions and also potential evolution of the portfolio of activities?

I'll start with Minsait and the growth quarter-by-quarter. Here, I would say that there are a few effects to be taking into account. One is that typically quarters will be relatively stable, okay? Then if we have to say something about the evolution quarter-by-quarter, probably the first one could be slightly weaker because we have to compensate for the salary increase, which takes effect in January. And then if you compare quarter-to-quarter vis-a-vis 2022, here, there may be some effects in the comparison that have to do with the patterns of recognition of revenues of the Angola Elections project in 2022. But overall, I would say that we should expect relative stability in the different quarters. Maybe the first one will be quicker. What I would say is stability.

Thank you, Luis. And then coming back to FCAS, if I understand your question, I mean the order of FCAS is EUR 600 million. If we look into what is the order intake of 2022, FCAS is EUR 1.3 billion, almost EUR 1.4 billion compared to EUR 1.25 million to EUR 1,250 million in 2021. So there is growth of our backlog due to the order intake, including FCAS, okay? And I'm afraid you need to repeat the question 3, because audio was not clear.

Yes. The question 3 was about providing an update regarding any strategic review regarding asset disposal or midterm ambitions? When do you plan to come back to the market about that? Or could you already now give us a flavor of what you could announce? And maybe a follow-up to Luis' answer. I mean my question was rather on the growth. I mean when you mentioned that a weaker Q1 from Minsait, which means, in terms of margin, right? My question was whether about the growth -- phasing of the growth for Minsait, excluding Angolan contract, really underlying growth from Minsait quarter-after-quarter for '23?

Yes, Nicolas, I take this one first. Yes, you are right. I mean it will be slightly weaker in terms of margin. In terms of revenue growth, it shouldn't be weaker. Actually, we see no slowdown so far. We tend to be conservative here because you know that this sector is very cyclical. But in terms of growth of revenues, we see no slowdown, and we see 4 quarters it should be stable in terms of growth.

Okay. On your question on strategy, we are very much working with the Board on strategy. I would say, with a lot of meetings and so on and so on. And once we are prepared, we will come back to the market. And obviously, we will give details on that. But let us work on that and come back to you.

[Operator Instructions] There are no further questions.

So thank you. Thank you very much for your attendance. Thank you very much for the support, and looking forward to the next conference of the first quarter of 2023. And thank you so much to all of you.

Thank you.