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

Good morning. Welcome to Indra's First Half 2026 Results Presentation. I now hand the conference over to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead.

Good morning, everyone. Welcome to our first half 2026 results presentation. My name is Ezequiel Nieto, o, Head of Investor Relations. Before we begin, let me briefly draw your attention to disclaimer on the current slide, which sets out the legal framework applicable to today's presentation. Joining me today are Josep Recasens, Chief Executive Officer of Indra; and Miguel Garau, Chief Financial Officer of Indra. With that, let me hand over to Recasens to walk you through the key highlights of the quarter. Recasens, the floor is yours.

Thank you very much, Ezequiel. Good morning to everybody, right, and thank you for joining the current presentation of the first group first half results of Indra in 2026. Actually, it's a privilege to address you today in my first results presentation as the Chief Executive Officer, and I fully recognize the responsibility that comes with this role. The results that we are presenting today are a result of the work carried out by our teams during the first half of the year. I want to acknowledge and recognize that work and thank everyone at Indra for the welcome I have received. As you may know, I'm coming from the automotive industry, more than 25 years in the automotive sector, 20 years in the Volkswagen Group and the last 5 based in Paris in the Renault Group, right? So I have had different responsibilities and strategy, product programs partnerships and business development. But despite the role were different, the equation was always the same, turning a strategy into execution by making the right product choices, managing programs efficiently and diligently and delivering on our commitments. That is the approach I bring to Indra. In my first weeks at Indra, I have focused on what I think matters the most, our teams, our customers and our programs. What I have found indeed is a company with exceptional outstanding technological capabilities, a strong backlog, talented people and a real momentum. My role, in fact, is to accelerate that execution. Let me now turn to the environment in which we have to do that. Actually, every time I join a new venture, and this is a very particular one, I'd like to understand in which is the environment and context I have to operate. And in fact, I have identified a total of 8 challenges, right? Actually, our industry is, at the same time, facing both more challenges and opportunities than ever before. First, geopolitical instability and polarization are reshaping the global security environment. Governments are reassessing the capabilities they need to protect their citizens, their infrastructure and their strategic interest. Energy security and resilience have also become part of our national security. The question is no longer only how much energy costs, but whether is it available and secure when it is needed. As a consequence, we are experiencing a sustained increase in defense spending. The 27 EU member states spent more than EUR 400 billion on defense in 2025, 20% more than in 2024. In 2026, that figure is expected to reach EUR 450 billion according to the latest European Defense Agency report. This is not a temporary spending cycle, it is a structural change in priorities. At the same time, shortages of critical raw materials and pressure on global supply chains are forcing Europe to reconsider its dependencies and strengthen its industrial capacity. That is why Suberanity has moved to the center of government agendas. Governments are asking not only what capabilities they need, but also where they are designed, where they are produced and who controls the technologies behind them. In this context, scale and innovation are decisive, decisive competitive advantages. Developing excellent technology is not enough. Companies and this is what Indra aims to be, must be able to industralize it, produce it reliably and deliver it on time at the required quality and a competitive cost. Civil and military technologies are also converging and converting really, really fast. The traditional 5 to 10-year development cycle in defense no longer matches the speed at which threats evolve. Ukraine has shown how commercial drones and satellite communications can be adapted to battlefield needs in months, not years. Disruptive technologies, such as artificial intelligence and quantum are accelerating this transformation even further, reshaping how systems are designed, how decisions are made and how capabilities evolve. Together, these forces are redefining our industry. For a company like India, this environment is not a threat. Actually, it's our moment. Every one of these forces points to greater demand for precisely what we do. But capturing that opportunity and turning it into results will depend on execution. Given this context, we have defined 4 clear principles to guide how we operate. The first is delivery and speed. Our credibility is earned by delivering on our commitments on time and with full control of every program. That means managing milestones by milestones, anticipating bottlenecks and taking decisions faster. In programs such as land vehicles, drones and radars, the challenge is clear, increase our delivery capacity and convert demand into industrial output. The second is quality and reliability. In our businesses, quality is not an auction. We work on systems that must perform in critical environments over very long cycles. Eurofighter is a good example. It is not a program measured in months, that indicates it requires the same level of excellence, mission, after mission and upgrade after upgrade. The speed is again essential, but speed cannot come at the expense of reliability. The third is sovereignty. Technologies like ingrain keep critical capabilities in our hands, in our country's hands and in Europe's hands. The fourth is competitiveness. Being sovereign is not enough. We must also be competitive in cost, in lead time, in quality, in technology and in international ambition. Air traffic management proves that Indra can compete globally and win. That standard must guide us across the group. Underpinning all 4 is our industrial footprint and ecosystem, our plants, engineering centers, suppliers and partners must operate as 1 single system. These are our 4 management principles, deliver faster, deliver with quality, control critical technologies and compete globally. That is how we will turn a strategy into execution and backlog into results. With that, let me turn to our first half performance. Without a strategic context in mind, let me now turn to the key operational and financial highlights of the semester. The results for the first 6 months of the year demonstrate the consistent execution of our strategy and the continued progress we are making to deliver our annual targets. In particular, the second quarter marked a clear step-up in performance with a further acceleration in growth and continued margin expansion across the group underscoring our ability to deliver profitable growth while maintaining strong operational discipline. Before taking a closer look at our financial performance, let me briefly highlight some of the key milestones achieved during the first half of the year. In the United States, we strengthened our industrial footprint with the opening of our Center of Excellence in manufacturing in Kansas while also commissioning the first radar for the FAA, a significant milestone that reinforces our position in the air traffic management market. In Defense execution remained strong. With tests, we have delivered in half year more than the full year 2025, and this is a statement we want to keep going on. We also continue to expand our ecosystem of strategic partnerships through agreements with leading industry players such as BAE systems, in metal nuts, Iveco and Kongsberg. These collaborations further enhance our technological capabilities, broaden our market access and strengthen our long-term growth opportunities. In terms of commercial activity, we secured important contracts awards including radar project in Congo and the Transport of Washington contract in the United States, further supporting our Business Consulting division and reinforcing our focus on corporate businesses. Let me now turn to our financial performance and walk you through the key results for the first half of 2026. Order backlog reached a record high EUR 20.5 billion more than doubling year-on-year with 117% increase. At the same time, order intake grew by 58% to EUR 5 billion, driven primarily by the strong momentum in defense and the contribution of Hispasat and Hisdesat Idesa following their integration into the space business. Revenues increased by 30% year-on-year to EUR 3.2 billion, supported by an outstanding growth in defense, which more than doubled its revenues and by a continued expansion in air traffic management. Importantly, this strong revenue performance was a combined by improved profitability. EBIT margin reached 9.9% up to 1.3 percentage points versus the first half of 2025 and 10.6%, excluding the impact of test consolidation. In absolute terms, EBITDA and EBIT increased by 22% and 51%, respectively. Net income amounted to EUR 219 million, representing a 2% increase versus the first half of last year. Free cash flow reached EUR 1.5 billion compared to the EUR 65 million in the same period of 2025. Fully explained by the prepayments received in January 2026 from the special modernization programs. As a result, we closed the first half of 2026 with a strong balance sheet and a net cash position of EUR 1 billion, implying a net debt EBITDA ratio of minus 1.3x, providing significant financial flexibility to support our future growth ambitions. Looking to the second quarter on a stand-alone basis, we saw a clear acceleration in revenue growth, driven by the strong performance across all our divisions. Defense was particularly notworthy delivering exceptional triple-digit growth of 103%. This solid top line performance was also reflected in profitability. EBIT margin reached 10.7% in the quarter, an improvement of 1.8 percentage points compared with second quarter of 2025. Let me now turn to our first half sales performance. During the period, we achieved revenue growth of 30% in local currency and 16% on an organic basis. This performance was supported by both solid organic growth and the contribution from our recent acquisitions, while FX had a marginal impact on reported revenues. Moving now to the divisional breakdown. I would like to highlight the continued transformation of our business portfolio. Aerospace and defense now represent more than 71% of the group's EBIT as illustrated on the chart on the right-hand side, underscoring the strategic importance of these activities and the growing role in driving value creation across the group. Looking at our workforce metrics, head count decreased by 5% to 58,383 employees, mainly driven by the 12% reduction in insight. More importantly, this evolution has a combined by a substantial improvement in productivity. Revenue per employee increased by [ 30% ] year-on-year and by 21% compared with December 2025, highlighting the benefits of our portfolio transformation and the greater efficiency of our organization. With that overview of the group's results, let us now take a closer look at the performance of each division and the key factors driving growth and profitability across the portfolio. Starting with the Defense business, the first half of 2026 confirms the strength of the business in all key performance indicators. Order intake increased by 120%, further reinforcing long-term visibility. Revenues more than doubled year-on-year, supported by a successful ramp-up of major programs already in execution. Lastly, profitability remained at sector-leading levels with an EBITDA margin of 20.9%, an EBIT margin of 17%, excluding the test impact. Looking specifically at the second quarter, Defense delivered a particularly strong quarter with program execution accelerating significantly. Order intake increased by 195% driven by Eurofighter, Air Defense and PAMS. This was accompanied by a remarkable revenue growth of 156% and supported by the ramp-up of the test PCR 8x8 deliveries and the strong execution of major programs already underway. Profitability remained resilient with EBITDA and EBIT margins of 19% and 16.6%, respectively. Following with space, the first half of 2026 marks a transformational period following the integration of Hispasat and Hisdesat, significantly [Audio Gap] expanding the scale and strategic profile of that division. Order intake increased by 98%, while the backlog reached EUR 2.9 billion, providing a strong long-term visibility. Revenues grew by 398% primarily reflecting the first full half consolidation of Hispasat and Hisdesat. Importantly, this integration has also reshaped the division's profitability profile with EBITDA margin improving to 40.5% and the EBIT margin reaching 10.6%. Looking at the second quarter, the Space division continued to showcase the new operation scale of the integration of Hispasat and Hisdesat. With order intake growing by 110% and the revenues by 403%, driven by the strong contributions across Spain, America and Europe. This effect has -- was also reflected in profitability, EBITDA and EBIT margins improving to 42% and 14.2%, respectively. Turning now to Air Traffic Management. The business delivered another strong set of results in the first half of 2026. Order intake increased by 57%, driven by strong momentum in America AMA and Spain, further and strengthening the division's growth outlook. Revenues increased by 16%, while organic revenue growth reached 15%, highlighting the underlying strength of the business. At the same time, profitability continued to improve, with EBITDA and EBIT margins increasing to 15.2% and 12.6% respectively. Focusing now on the second quarter, Air Traffic Management delivered another solid quarter, with order intake up to 84%, driven by strong bookings across AMEA and Europe, while revenues advanced 15% in the quarter. The division also delivered a further improvement in profitability, with EBITDA and EBIT margins reaching 13.9% and 11.9%, respectively. Looking at Mobility. The key highlight of the first half was the outstanding commercial performance delivered by the division as order intake more than quadrupled year-on-year, increasing by 317%, supported by several landmark awards like the transport of London contract, the Saudi rail maintenance program and the Transport of Washington contract. These awards drove an increase in the book-to-bill ratio to 5.4x compared to the 1.25x in the first half of 2025, providing a strong revenue visibility for the coming years. Moving on the second quarter. Mobility delivered another solid performance with order intake increasing by 92% and revenues growing by 2%, while profitability reflected EBITDA and EBIT margins of 2.7% and 2.6%, respectively. Finally, let me conclude the divisional review with Minsait, which delivered a resilient performance in the first half of 2026, with revenues increasing by 3%, while organic growth accelerated to 5%, driven by the strong performance of public administrations and health care. Order intake rose by 2%, maintaining a healthy book-to-bill ratio of 1.19x. Furthermore, profitability remained stable with an EBIT margin of 5.8% and operating margin standing at 6.9%. Zooming on the second quarter, public administrations and health care remain the main growth driver, supporting a 4% increase in Minsait revenues and an acceleration in organic growth to 8%. Order intake was up to 2%, while EBIT margin was sustained at 5.8%, highlighting the business' ability to preserve profitability while continuing to grow. I will now hand over to our Chief Financial Officer, Miguel Garau.

Thank you, Reca, and good morning, everyone. Starting with the free cash flow. The first point to highlight is that in the first half of 2026, the company achieved an exceptionally strong free cash flow of EUR 1.5 billion compared with EUR 65 million recorded in the first half of 2025. As we explained during our first quarter results presentation, this increase is entirely driven by the prepayments received in January under the 2025 special modernization programs or PEMs. After deducting the amounts already invested in these programs, the net impact of these prepayments at the end of June stands at EUR 1.7 billion. That said, during the second quarter, we unlocked additional PE-related prepayments, which partially offset this expected reduction. Additionally, as a reminder of a point we discussed also in the first quarter presentation. Since the beginning of 2026, we have stopped using factoring at quarter end. Given our current cash position as this instrument no longer provides an efficient source of financing. For reference, factoring historically represented approximately EUR 187 million at the close of each quarter. For this reason and to facilitate a like-for-like comparison with previous periods and with our full year guidance, the chart on the right reconciles reported free cash flow of EUR 1.5 billion to a comparable free cash flow of EUR 15 million accumulated in the first half of 2026. Adjusting for both the net effect of PEMS prepayments and the impact of factoring. While this comparable free cash flow is below the EUR 65 million generated in the first half of 2025. The difference is fully explained by the higher levels of CapEx and working capital required to support the execution of our growing backlog. These investments reflects the strength of our business and the ramp-up of major contracts already awarded. Importantly, this temporary effect does not change our expectations for the full year and we remain fully confident in delivering our guidance of more than EUR 375 million of free cash flow in 2026 excluding the impact of PEM related prepayments. Regarding the working capital, the evolution of days of sales shows an extraordinary year-on-year improvement, mainly explained by the prepayments received under the special modernization programs, minus 118 days of sales, and to a lesser extent, by the positive net effect of days of sales resulting from the consolidation of Hispasat and Hisdesat this minus 26 days of sales. As a result, in the first half of 2026, we reached minus 110 days of sales compared with 6 days recorded in June 2025. We will now analyze the evolution of net financial debt in the first half of 2026. The company closed the first half of the year with a net cash position of EUR 1 billion compared with a net debt of EUR 583 million recorded at the end of 2025. This change is primarily explained by the prepayments received from the PEMS, which amounted to EUR 1.7 billion in the first half of the year. In addition to this impact, it's worth highlighting the strong operating cash flow of EUR 444 million compared to EUR 219 million in the first half of last year, reflecting the solid operational performance of the business. At the same time, CapEx increased significantly to EUR 183 million in comparison with EUR 40 million first half of 2025, in line with the group's commitment to its industrial transformation strategy. Lastly, the sale of the BPO business generated proceeds of EUR 70 million, which is also reflected in the financial investments, FX impact and other items bar shown in the chart. This transaction is fully aligned with our strategy of divesting noncore IT activities and further increasing our focus on our space and defense. As a result of the factors discussed, the net debt to EBITDA leverage ratio improved to minus 1.3x at the end of the first half of the year compared with 0x in the same period last year. And finally, regarding our debt profile, we continue to make progress in reducing the cost of our gross debt, which declined to 3% in the first half of 2026 from 3.1% in the same period last year. At the same time, the average debt maturity extended to 3.8 years compared to 3.1 years in the first half of 2025. Lastly, the consolidated cash position stood at EUR 2.5 billion, primarily reflecting the advanced payments received under the PEMS previously mentioned. In addition, the group has EUR 949 million of available committed credit facilities, including EUR 385 million financial facility from the European Investment Bank for specific uses. With that, we conclude the financial review. And I will hand it back to our CEO for his closing remarks.

Thank you very much, Miguel, and ladies and gentlemen, let me close where I began. We are building on a solid foundation, robust financial performance, a competitive product portfolio with proven demand across all markets, from brothers to electronic warfare and above all, highly qualified people. That foundation gives us the capacity to be ambitious. Now the priorities are clear. We must turn the growing demand for technological and industrial severity into sustainable growth. We may scale artificial intelligence through IndraMind as our sovereign platform and a business in its own to respond to our clients' needs and embedding AI in our products such as command and control, payments or intelligent traffic systems. We must play a leading role in strengthening the Spanish defense ecosystem while deep incorporation with our European partners. And we must capture mobile alongside the several group's business units, corporate functions and geo sharing technologies, capabilities, best practices. We will set out the road map in our new strategic plan ambitious in its objectives, realistic in its assumptions and disciplined in its execution. Until then, the priority is clear, deliver and deliver. Thank you very much.

Thank you. We are now ready for the Q&A session.

Thank you. Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] And our first question comes from the line of Juan Canovas from Bestinver Securities.

Congratulations on your appointment. I was -- I wanted to know about your capital allocation strategy. There has been a lot of speculation in the press for [Technical Difficulty] And what are you doing to develop.

Sorry, Juan, sorry we are having some difficulties here in the line. Could you please start since the beginning? Because we wouldn't hear the question. Could you please start since the beginning, please because we couldn't hear you here. Juan,, could you please repeat since the beginning because we couldn't hear the questions.

Can you hear me now?

Yes. No, it's fine.

Now I wanted to ask about your capital allocation strategy in terms of partnerships, industrial investment plans since there has been a lot of speculation in the press recently about changes of previous management plans. And also whether you will continue looking for bolt-on acquisitions and divesting parts from midsize, that was the first question. And the second, I wanted to ask about your in-demand strategy after the U.S. restricted access to artificial intelligence models for international partners at the beginning of June. What are you doing to the top income and whether these restrictions have increased your business prospects you were targeting, I think, EUR 1 billion revenues in [indiscernible].

Look, thank you very much for the question regarding our capital allocation logical strategy. What I would say is the following, right? So we have a massive challenge in front of us. in terms of technological disruption and acceleration split and scale in all fronts, right? And I'm sure that there is no company on F, especially in Europe that will be capable to manage all that in a stand-alone basis. So it's going to be crucial to set up alliances with partners, suppliers and other peers in the European sector to make that happen, right? So I insist on the fact, I don't believe that nobody alone will make it happen. So alliances will play a fundamental role. And this is where capital allocation plays a role in deed, right? So -- it's going to be organic and inorganic. It's going to be using commercial agreements with suppliers alliances with partners. This is what exactly we are investigating and exploring under the condition that in our strategic plan, we will define our core activities in terms of make and buy strategies. This is about the first question. Regarding IndraMind, what I would like to highlight is the relevant role of a business unit like that, right? So to protect our critical infrastructure, it's key, right? And our value proposition with IndraMind is to cover an end-to-end platform, AI native in order to be a solid instrument to capture superior cognitive properties to be capable to automatize them and to be capable to be cyber resilient, right? So IndraMind is aiming to cover that end-to-end value proposition. And by doing that, we will be in the position to become a leading player, not only in Spain but in Europe in order to offer AI at first solutions for all critical infrastructures in Europe.

If I may, one, just to give you some big numbers around IndraMind this year, just to put that in context, last year, revenues to IndraMind were EUR 323 million first half of the year, revenues attributed to IndraMind EUR 191 million, basically underpinned by cybersecurity, cyber defense, official intelligence and IndraMind platform. Thank you, Juan. Next question, please.

Our next question comes from the line of Michael Briest from UBS.

Good morning, and welcome to the company. We've obviously had a CMD in our thoughts for some time now. Can you give any indication on the timing of that? And I sense that there's still a degree of strategic uncertainty. Are there any parts of the business that you would consider selling perhaps we've heard of Minsait being core, noncore at times over the last 2 to 3 years. Maybe just to frame if any disposals would be considered. And then just in terms of the timing of the 2026 PEMs, have you any insights or expectations there? And in relation to cash flow, how can you firm up the 2026 CapEx guidance?

Regarding the first question about the strategic plan. Of course, there is a lot of attention about that strategic plan, right? I would like just to ask you for a little bit of patience. It's about 15 days that I own duties in the company and trying to catch up very fast in all senses, meeting people, learning about everybody and understanding all the dynamics and strengths of the company. As mentioned during the presentation by Miguel and myself, I think that we have a very strong foundation -- solid, very solid foundation based on a high backlog and contracts. Our priority at short term right now is to make all that happen in terms of delivery and speed to fulfill our customer expectations in that respect, and this is what we are making that happen. Secondly, of course, I'm spending with a team time to explore how do we keep the next strategic way for the company. That, of course, is going to be based on what the company has been reaching so far but probably we will need to strengthen our, I would say, technological differences because I do believe that companies that had on technology that create difference and outstanding performance on them are the ones that are going to succeed. Here, and as mentioned before, IndraMind with artificial intelligence is going to play a crucial role in terms of kind of brain of system of systems and command and control making all that based on our past experience, right? So let me remind you that Indra is a tech company, right, first definition. And with the high skill qualified number of software engineers and developers in the company, we are ultra well prepared to face all those technological challenges because this is in the DNA of our workforce, who can do that better than us. This is the question that we would like to demonstrate. And regarding the PEMS of 2026, I think that it's more the Ministry of Defense that has the responsibility to announce wood when. We have, of course, our willingness to continue participating proactively and responsibly in the assignment of those PEMs and the consequent execution. But I would rather expect a wait to the announcement that the public administration in that case, the Ministry of Defense will do a due course.

Yes. And then, Michael, regarding your question on some guidance on CapEx. Let me give you some granularity on that first half of the year, gross CapEx of EUR 205 million which EUR 136 tangible, EUR 69 intangible, grants, EUR 22 million, so net CapEx of EUR 183 million. So our guidance is around EUR 300 million for this year. That's important to mention not taking into account is the Hisdesat CapEx, which is included in this EUR 183 million I already provided, but including Hispasat CapEx. And just to give you a sense of Hispasat CapEx, which, by the way, you know that is fully prefinanced by the Ministry of Industries is EUR 69 million the first -- in the first half. And we expect around investing CapEx around EUR 100 million in new factories on this industrial footprint that we have been commented. So that's important because we are in comparison with last year, where we invested around 2.5%. We expect to increase our CapEx on revenues at a level of around 4% to 4.3% this year.

Thank you, Michael. Next question, please.

Next question comes from the line of Deepshikha Agarwal from Goldman Science.