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

Good morning, ladies and gentlemen, and thank you, everyone, for joining us today on our 2023 First Half 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. First of all, let me introduce the participants of this call. Marc Murtra, Chairman of Indra; Jose vicente Los mozos, CEO of Indra; Borja Altamirano, our CFO; and Luis Abril, Managing Director of Minsait, available for the Q&A session.Meeting duration will be around 1 hour. A presentation will start with an introduction of Marc and then Jose vicente will present his coming perspectives and the 2023 first half results highlights. Following Borja, who will explain the quarterly results in detail, and then we will move to the Q&A session. Now let me turn the call to Marc Murtra, Chairman of Indra. Marc, the floor is yours.

Thank you, Ezequiel. Good morning, everyone. As we sit, we are at a time of transformation and opportunities in our key markets. The world continues to change. The war has dramatically accelerated the concern and focused on defense and security in the European Union and its allies. We expect defense spending to grow by nearly double digits in the coming years. Air traffic recovery has been surprisingly swift after COVID, and we are now in 2019 traffic levels. Growth for 2024 is expected to be above 4%. Mobility's new paradigms are reaching maturity like pay-as-you-go or mobility as a service, opening up a new world of opportunities. Technology has changed the playing field significantly with a growing demand for cybersecurity and generative artificial intelligence. In this context, our company is well positioned to succeed. We have a strong track record of innovation and agility, and we are focused on high-value segments that are growing rapidly, such as defense, Internet of Things, cloud, digital payments and combat cloud. We want to become the Spanish defense and tech leader and a relevant international player. How are we going to achieve this? We will prioritize, working closely with our clients to develop the necessary capabilities that will demand in the future, collaborating with the defense industry and value chains in Spain to build an ecosystem with the right scale to compete globally, achieving operational improvements in order to successfully implement larger and more numerous European defense programs, increasing our capabilities, investing in R&D and selecting carefully our opportunity to become a technological leader. Our client priorities and strategic needs will provide us with the framework to evolve and transform our offering. We have already commenced the transformation of our company. Over the past few months, the Board has engaged in continuous strategic reflection, providing us with a solid starting point for a new strategic plan. Additionally, we welcome new Board members who share our common vision and strategic focus for our company. The appointment of our new CEO, Jose vicente Los mozos, a strong leader with a proven track record will drive the necessary changes and technological evolution to propel our company forward. Finally, we have reorganized our key management team by incorporating new members with a renewed motivation drive and in line with our objectives. We believe that these changes will allow Indra to achieve its full potential of growth and value. Now Jose vicente will explain this in more detail.

Thanks, Marc. Good morning, everyone. It's my pleasure to present to analysts and investors on my first quarter as Indra CEO. I want to start to thank the Chairman, Marc Murtra, and all the members of the Board of Directors for their support in my appointment at Indra's General Shareholders Meeting. I will turn my presentation on Slide 9, sharing with you my initial observation so far. I arrived to Indra the 18th May. From this day, I have immersed myself in all aspects of the company. I met the first and second line company management. I have reliant with Indra main customer. I have visited our factory and technology center. My high-level view is that looking forward, there is a significant opportunity for Indra to deliver and create value for all the stakeholders. I will now summarize how I have come up with this view. Number one, Indra is exposed to market with significant cultural long-term positive economic growth driver, example, defense, air traffic management and mobility. Second, Indra is strongly positioned to serve, support and develop Spain industrial and technology capabilities, while acting as an enabler for many value chains. Third, I see the group possesses the required capability, talent and capacity necessary to deliver on all of our existing and future opportunities. And last one, Indra is a group that owns unique assets driven by a lean capital management strategy and increasing profitability. Indra also has a strong balance sheet with almost zero net financial debt which unveiled multiple future to strategy grow also. In conclusion, I see Indra is strongly positioned for future growth and future leadership. I will now move to Slide 10, where I set out Indra in guiding principle. As we head into the next step of Indra journey, I have identified 3 key strategic challenge to sustain our leadership positioning and ensure operational excellence across the company. Number one, we need to grow. We need to grow to compete in a more complex and sophisticated arena with players with higher scale. Therefore, we must control a higher stake of our value chain going forward. For example, in systems, we control only 10% of our value chain. We need to become contractor. A good example is FCAS. For this purpose we need to be more ambitious in M&A strategy as well as the strategic alliance and partnership. Third principle, we need to simplify. In order compete more effectively in all our core division, which should evolve our core Indra legacy product portfolio in a simple and more streamlined one based on digital and other disruptive technology. In fact, Indra must seek ground in segments with higher added value shifting its revenue mix in this direction over the next few years. Additionally, we shall focus on driving more agile and efficient operation to support our growth expectation and respond to all customer expectations. I will give you an example. When I check radar manufacturing, with my background, I think we have a big opportunity to standardize the back office of the parts, and we can reduce the lead time 50% and reduce the cost 30% with more agile and more organized manufacturing. Another thing, we need to invest. I see a major opportunity for Indra to enhance the company's performance by investing further in technology and operations to ensure that our programs are delivered at the right quality, cost and time. Likewise, we have the balance sheet strength to support our future strategic growth also, but we will remain financially disciplined and focus on delivering attractive record for all shareholders. For this, we have 4 priorities to lead this journey. Number one, traction. We must leverage our unique assets to become the prime national defense and technology contractor in Spain. Spain needs to lead the ecosystem technological with all the industrial capability because today, defense industry is fragmented and subscale compared to the reigning European countries and Indra needs to lead this Spanish integration through both acquisition and strategic partnership. In the future, we will also explore international expansion opportunities, but we need to become first the leader in domestic market. Second pillar, transformation. Indra must transform the company operating model to meet new industry challenges while maintaining the financial discipline. Transformation will come through 2 levers. Adaptation of the company to be able to develop its [indiscernible] and simplification of our internal operations to be able to respond to our customers in a more agile way. Third, talent. We find ourselves in a situation of fierce competition among all players in the industry for their equipment and highly qualified and specialized professionals. To carry out our transformation, we need to attract and retain the best national and international talent in an industry whose main asset is its people. We must create a differentiated work environment that makes our employees feel proud of the company they work for. And fourth pillar, technology. We need to invest more in technology in a sustainable focus and customer-oriented way. Most of our portfolio are a reference product for the industry. However, technology is progressing at an ever faster rate, and hence, we need to define and secure a long-term road map, investing and developing the technological capability that adequately addresses the need of our customers. If we go to the next slide to reinforce our role as prime contractor we have already signed 2 memorandum of understanding with the Spanish players, Navantia and Tecnobit. Nonetheless, we want to double down our effort in that set, and therefore, we expect to sign new MoUs in the coming months with national and international players. As a consequence, this will enhance our international positioning in the European market to pursue more sophisticated opportunities. It's very simple. Navantia manufactures chips that we can integrate our system with Navantia systems, and we can go international to take new offers that today we already made. When we discuss with [indiscernible], they can become a photonic supplier our electronic war system. That is an example that we can reduce our R&D, and we can accelerate the development of new products. To implement all of this, we need a new organization. Ensuring that for the 1st of July, we have announced a new organization. Visualization relied in 4 business divisions, all reporting directly to me with end-to-end P&L responsibility, which will drive the day-to-day operation and still the company as a whole. The divisions are Defense and Security, Air Traffic management, Mobility and Technology and Minsait, which will remain a high degree of management with autonomy under the leadership of Luis Abril. And we are working on this afternoon we'll announce the new defense organization and will be organized by business unit. It's very important is accountability in all the levels of the company. Additionally, the technology, the operation and the other business support, [indiscernible] legal or finance, will sustain the 4 business divisions. The function will manage the mid to long-term vision of the company and ensure that the day-to-day operation have the necessary capability to achieve the business world. If I remember my last story in the current industry in the front wheels is the business, the rear wheel, the function to support the movement of the car. This illustration will allow us to ensure greater collaboration with business and business support function and to engage agility flexibility, which is extremely relevant to ensure operational excellence. And of course, we will continue our focus on ESG leadership. We are a true leader in ESG, as shown by our continuous strong ESG performance over 2022. Indra was ranked for the second consecutive year as the most sustainable company in the sector and among the 1% more sustainable in the world according to the sustainability, the year of 2023 elaborated by the S&P Global Agency. It has also been rated as best practice by the prestigious CDP climate changes index, who recognize Indra as one of the companies with the best environmental practices. And the very strong 2023 second quarter results we have posted are a very solid starting point of our strategic plan going forward. Now we go to the results, the highlight of H1 '23 before to give the floor to Borja, I want to move -- if we move to Slide 16 that you can see the results for the first half of 2023 have been very positive with improved commercial momentum reflected in growth in order intake and the rapid conversion of the backlog into revenue growth leading to a spectacular growth in earnings per share, which grew 35% compared to the first half 2022. We have achieved all-time high level of backlog once again, thanks to the strong commercial performance of our business. Both Indra's revenue and EBIT has experienced an acceleration in growth which has enabled them to post double-digit rate increase. This increase in the level of revenue led by Defense, mainly FCAS and air traffic together with our ability to grow while maintaining our operating profitability result in the spectacular rating growth discussed above. Cash generation in H1 saw a historical performance being the best H1 figure ever reducing financial leverage to 0.1% over again. This strong first half financial performance and the start of the transformation journey are all up to upgrade our guidance for the end of the year, as I will elaborate later. And now for all the details, I'll give the floor to Borja.

Thank you, Jose vicente. I'm on Page 17, where you can see the headlines of the first half results. Let me start with the backlog that grew 12.8% in the first half of the year, reaching EUR 6.8 billion and order intake that grew 8% in the same period. These 2 figures are very relevant as they give us visibility and comfort about the future of the business. Double-digit growth in revenues and EBIT. And what is more important, as you can see on Page 18 and 19, growth rates in both cases improved in the second quarter compared to the first one. Margin-wise, EBIT margin was 6.9%, slightly above the EBIT margin of the first half of 2022. We believe these are good news as it means that we have been able to offset some of the headwinds we had as inflation and with the impact such as the election in Angola in the second quarter of 2022. Notice that we have recognized in the second quarter the impact of the contract resolution of the previous CEO. Growth rate accelerates when we dive into the bottom of the P&L as net income grew in the first half of 2023, 35%. This is explained by the deceleration of the level of revenues and EBIT, together with an excellent financial result due to the higher remuneration of deposits, reduction of gross debt and the cost of the liability management done in the first half of 2022. Regarding workforce evolution, as you can see on Page 20, we have managed to improved our revenue per employee by 10% compared to June 2022, keeping the headcount almost stable compared to December 2022. Let me now move to Transport & Defense results present in Page 22 to 25. On top of the backlog more than EUR 4.8 billion, order intake grew by 7% in the first half of the year and remember that order intake grew by 32% in the first half of 2022. So again, very solid and high figures that we have visibility for the future. By division, a strong growth in air traffic management, plus 49%, supported by the tailwinds in the sector that keeps growing on the back of the recovery of the investment after COVID. After a order intake and transport grew 20% and as commented order intake declined by 7% in Defense in the first half of 2023. But remember that it grew 64% in the first half of 2022 when we included, among others, the modernization of the helicopter, Tiger. Now going to revenues of T&D. As you can see on Page 24 and 25, Defense posted a strong growth on the back of the contribution of close to EUR 50 million FCAS in the second quarter. And Eurofighter also had more revenues than in 2022. That said, even taking out the contribution of these 2 programs, Defense will have shown growth compared to 2022 as it has a good mix of different products. Same thing applies for ATM that grew 18% in the first half, heavily distributed among the 2 quarters and with Selex contributing for the first time with EUR 3.5 million. In contrast, Mobility didn't go well due to the lower contribution from contracts such as the train Mecca-Medina, T-Mobilitat and the [indiscernible] project in Riyadh. Nevertheless, we expect to catch up in the second half with a view to grow at mid single digits in transport in 2023. All in all, very strong revenue growth in the division of 12%, with heavy growing even faster, and therefore, improving the margin compared to the first half of 2022. As you can see on Page 25, EBIT margin in the second quarter is impacted by the contract resolution of the previous CEO. If we take out this impact, EBIT margin in the second quarter would have been 10.8% above the 10.6% registered in the second quarter of '22. Moving now to Minsait. On Page 27, let me start highlighting the excellent evolution of order intake that once more is a good signal for the future. As you can see in Page 28, order intake grew at 10% in local currency with excellent behavior in all sectors, with public administration growing at 12% despite the fact that it included EUR 150 million from Angola in 2022. And Telecom & Media decreased by 8% due to the strong activity registered in Colombia and Spain in the first half of 2022 when order intake grew by 24%. In terms of revenues, Minsait has reported double-digit growth, 12% in local currency with all vertical, registering very positive performance, in line also with a healthy evolution of the order intake. It's important to mention this growth rate is well distributed among the different sectors with financial services and energy industry growing more than 15% in local currency. Public administration at 7%. But if we exclude the Election business due to election in Angola in 2022, it will have around 19% and Telecom & Media growing 1% due to the strong growth posted in 2022. EBIT also grew at 11% in the first half, growing faster in the second quarter and maintain the margin about 5% the context of strong wage inflation. In the recent half, we have improved our mix with digital solution growing more than 13% compared to the first half of 2022 and now registering 56% of total sales as you can see in Slide 37. Luis Abril can give you more color about all this in the Q&A session. We move now to Page 33 with a review of the financial section. As in the past, let me start with the free cash flow generated in the first half that amounted to EUR 54 million, which is, as you know, an excellent figure given the seasonality of our cash flow. Moving to Page 34. We see how working capital needs increased by 10 days compared to June 2022 due to the increase in inventories [indiscernible] and despite the improvement in account payable. Like-for-like, excluding the collection of the Angola project in the second quarter of 2022, net working capital would have improved 3 days of sales. The increase in 6 days of trades receivable is related milestone pending to be approved by our customer that it will be naturally absorbed in the coming months together with the increase in inventories due to a higher level of work in progress and stockpiling in order to avoid problems in the supply chain. We expect this figure to decline by year-end and the worsening in accounts receivable is related to the extraordinary effect of the collection from the election in Angola in the second quarter, like-for-like. Excluding this effect, days of accounts receivable, we have improved in 7 days. And finally, all these impacts are partially offset by the improvement in accounts payable as we increase the level of purchase due to the increase of activity. Page 35 shows the net debt evolution in the first half of the year. The first step is a strong operating cash flow of EUR 183 million due to the excellent performance of the business. Net working capital needs of EUR 69 million, above the EUR 52 million posted in the first half of 2022. And as I have commented previous page, we expect this figure to be absorbed in the second half of the year. We have view to closed 2023 with a slightly negative working capital needs. Net interest at EUR 7 million, posting a very relevant improvement compared EUR 22 million registered in the first half of 2022. Remember that we register in the cost of the repurchase of the bond that materials in 2024 and that we have less growth debt and better remuneration of the deposit. Finally, we paid EUR 45 million related to the acquisition of Selex. In Page 36, I mean, as you can see, we have closed the first half of 2023 with net debt at EUR 47 million and a leverage ratio of 0.1 net debt to EBITDA representing a material improvement compared to June 2022. And now to finish my speech, a quick look to the debt structure in Page 37, where I will highlight 2 things. First, we have a very strong liquidity position of more than EUR 1 billion. If we add cash and undrawn credit facilities and [indiscernible] reduce our gross net leverage in the coming months as the convertible bond matures in October, and we plan to cancel it with cash. And the same thing applies for the bond that matures in early 2024, together with some bank loans. Now I hand over to Jose vicente, who will address the financial guidance and the closing remarks.

Thank you, Borja. As that you can see on sort our portfolio increase, our results are solid. So that I decided to increase our guidance by 4%. That revenue from EUR 4 billion to EUR 4.150 billion, EBIT from EUR 315 million to EUR 335 million and cash flow from EUR 200 million to EUR 210 million. This company has the capability, but we need to be more ambitious. And now it's the right time to accelerate all performance because, frankly, I have confidence that the company can become the leadership in Spain in technology and defense. Now next question is, okay, the strategic plan. So today, I can announce thinking our ambition to become the leading Spanish multinational independent technology. Today, I will announce a new plan, focus on growth in 3 phases. Focus from 2024, 2026 scale up. From 2027, 2030 that will give our vision and lead, then we'll see our purpose from 2031 to 2035 focus where the mission will be defined and addressed. The scale up vision for the new ambition and lead the purpose at Spanish multinational in the defense and technology center. The new strategic plan will address the main challenge that the company is currently facing to achieve the full potential, identifying midterm KPIs and clear accountabilities to ensure proper implementation and to achieve the objective that will be defined. The main areas that will be discussed in the preparation of the plan are: Portfolio rotation and development based on clear M&A rule; product simplification and creation from a value based perspective, development of growth better across the different divisions of the company; geographic footprint optimization considering also impact in the go-to-market and operational models; creation as a technology consistent leveraging start-up universities and reserve centers; and evolution to the new Indra 4.0, both in terms of commercial and operational processes. However, as cross-cutting capability and best practice have not been tackled up to the moment, in this strategic plan, we will address development and implementation of digital cross-cutting capability, talents initiative intended to become top of mining project for digital and engineering and ESG commitment. The end-to-end process to prepare the strategic plan will last from September to December 2023 and will ensure the participation and commitment on the entire organization. I honestly believe that power came from the inside. And therefore, first talent will be involved to secure the new ideas and bottom-up initiatives are properly captured in the plan. Our objective is that we communicate a strategic plan in our first Investor Day in the first quarter of 2024. But previously, the preparation will have 3 phases. First one, definition of ambition and the strategic guideline from a top-down perspective will be aligned with the top management of the company. Second, identification of the plan by division and cross-cutting initiative and fair approval of the strategic plan by the Board of Directors and elaboration of the equity story to the market. Hence, Slide #42, our new strategic plan for Indra will be leading the future. And that's in summary, I arrived 18 May. We have observed, I have been reporting by the shareholder. In every moment, thanks to the support of the Chairman, we create a new organization. We start to develop the Spanish ecosystem. Now we'll increase our guidance, and we are now all strategic plan that -- our story is robust, it's ambition. And you will see our strategic plan will be top level. Thank you, and now we are ready for the Q&A session.

[Operator Instructions] Our first question comes from Bosco Ojeda from UBS.

I have a couple of questions. The first one is on the strategy. You mentioned quite a few times about M&A, which seems to be a priority. If you could let us know a little bit about which is the criteria for those sort of [indiscernible]. You have done like maybe EUR 500 million of deals over the past 5 years. It's always difficult to track the profitability of those deals. So maybe you want that's going to change in the future? Or where are you going to be looking for opportunities or maybe you already have something in mind. And if I'm correct, from your comments, it looks like that money might be prioritized over dividends if that is the case or is not the case? And the second question for Borja, I wanted to ask about the outlook for working capital and CapEx. It's been doing quite well in the first half and the outlook for the second half.

Well, starting M&A. I think, first, we need to focus our product. We need to simplify and will focus on more high-value products. That is the priority. When we'll be ready, we need to study also our value chain ownership. And for this, our priorities first is create in Spain the ecosystem because we have a resource limited. We can for a technology company or defense are limited for the government or in some cases are very expensive. That first, in domestic, we are going to create the ecosystem where we take a lead. And second, it depends after optimization of the footprint and the products we'll start to think which company can be interesting to improve our portfolio, increase sales and/or reduce our R&D. That's really with the 2 metrics is how we can improve our turnover or how we can reduce our CapEx or already. About working capital and CapEx, please Borja.

Thank you, Jose vicente. With regard to working capital, as I explained during the presentation, we are expecting to be absorbing the increase in the working capital days in the second half due to the natural evolution of the business, With a view of answering your question to close '23 with a slight negative working capital in line with the one that we had in the past. And with regard to CapEx, remember that we had EUR 53 million in 2022 and the plan for 2023 is EUR 60 million.

The next question comes from Carlos Trevino from Santander.

I have several from my side. The first one will be, you have highlighted the impact will a strong focus on high-value segments going for like cybersecurity, cloud. Well, I would like to ask you if you're seeing that these businesses could wait more in the business in inside moving forward, and what are your plans to reach perhaps a higher weight to their businesses. Also related to us for profitability in Transport and Defense. We have seen a very strong quarter in the terms that is a very profitable business. But however, this has not gone down so directly to the EBIT line, I would like to ask you specifically of the drivers in the EBIT margin or in adjusted operating margin in Transport and Defense this quarter. And also, I would like to ask about the total expectations over the next quarters. I think you have highlighted that the EBIT hit EUR 50 million if I am not wrong from the FCAS projects. Also, there is not in the Eurofighter. So any reference on which kind of expected growth we could expect will be helpful.

Okay. About the high-value business. I will start and maybe Luis can support me. First and the leaders -- leadership from Luis, we are mapping all the resources we have in the company in the technology. And we see in all the divisions, we have operation. Second to do is what will be the disruptive technology will lead in 10 years. You talk about your security, we can discuss [indiscernible] artificial intelligence. And when we started in the strategic plan, the disruptive technologies will take the current technology we have, how do we come from the current to predict the future. And that's the idea I explained before. We are ready to push with the university. We want to put -- work with a start-up, why no M&A. And also it's a collaboration between divisions and that technology, maybe Luis, you can explain how you have mapping this technology growth map that we have today.

Yes. Thank you, Jose vicente. Carlos, let me elaborate a little bit more on that, okay? Because it is true that we have to keep in mind that long term vision on what technologies are going to be top-notch in the future, I mean in 10 years, also in the short to midterm, there's also work to do. And here, as you've seen in the results that we are presenting, what we are doing basically is to push the accelerated intake in Minsait to push the accelerated vectors that you've mentioned some of them, that gives data cloud and this is cybersecurity. This is digital. This is also a payments. There are a few technologies that we have identified and that we keep on pushing. And that they are actually being quite relevant in terms of helping us improving the margins. These areas of business are currently the ones that grow more. They are growing everything that has to do with digital and proprietary solutions and so on and so forth. These kind of things are growing at double digit very solidly. And the idea is to take that starting point, make this reflection thinking on the long term and how these technologies are going to be evolving. And this is going to be the strategy in technology. In Minsait, there are high value-added technologies and also services. The idea is to push the first ones. This is the way of increasing margins, and you know that that's going to be part of the strategy.

Thank you, Luis. About profitability, maybe Borja, you can explain all the details.

Thank you, Jose vicente. Carlos, well, you referred to the EBIT of Transport & Defense, remember that we closed the first half of 2022 with 10.2%, first half of 2023 10.5%. If we take out the remuneration to the CEO, to the agreement with the CEO, it would have been instead of 10.5%, 11.1%. So you see here the profitability and then your question about the FCAS for 2023, we are expecting more than EUR 130 million in revenues.

[Operator Instructions]

We are very happy, not too many questions. Thus, thank you. Thank you, all of you for this conference call. I wish all of you a very good summer. And we will see again in late October in our 9 months results. Thank you. Have a nice day.