Prosegur Cash, S.A. (CASH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Prosegur Cash Full Year 2019 Results Presentation. [Operator Instructions] I must also advise you the call is being recorded today, Friday the 28th of February, 2020. On the call with us today, we have José Antonio Lasanta, CEO; Javier Hergueta, CFO; and Pablo De La Morena, Head of Investor Relations. Please go ahead.

Thank you. Good morning to everyone, and welcome to our 2019 full year results review. This presentation will be led by José Antonio Lasanta, CEO, Prosegur Cash; Javier Hergueta, CFO; and myself. We estimate it will last around 0.5 hour. And during this time, we will try to address the most significant events that took place during the reference period. At the end of the call, we will open the floor for our Q&A session, where we will try to answer any remaining doubts with as much detail as possible. I wish to thank you all for your attendance and remind you that this presentation is also available via webcast on our corporate web page. Now before turning the call over to José Antonio, let me comment some interesting news regarding the use of cash. First, let's analyze how the lack of options in terms of transaction methods might undermine democracy. Alex Gladstein, Chief Strategy Officers at the Human Rights Foundation states that a healthy democracy needs financial privacy and that the current trend of tracking all of our behaviors and all of our movements can damage democracy in a further way. In this sense, if all of our data are collected and used to assign a rating to each human being, this could determine, for example, our financial freedom, the loans we can obtain, the Internet we can get or even the schools where our children can attend. Second, let us mention that the ECB supported the draft law proposed by the Swedish government, which aims to warranty that the largest banks provide a minimum level of cash services throughout the country. The ECB noted that the ability to pay in cash remains particularly important for certain groups in society that, for various reasons, prefer to use cash rather than other means of payment or who are unable to use digital technology. Additionally, cash payments facilitate the inclusion of the entire population in the economy by allowing need to settle any kind of financial transaction in this way. Third, let me make some comments regarding the evolution of the credit card product in the e-commerce, which is growing at the same rate as the number of transactions. According to the most recent studies, this sort of product grew by 30% during the last year in Spain, while the counterfeit of note evolved in the opposite direction and decreased. In this sense, unless the new means of payment significantly improved their security in the future, the use of cash to perform payments will remain much safer. Finally, a follow-up on how the different cities are approaching the cashless debate. After Philadelphia, San Francisco and New Jersey, New York has also decided to apply its business to receive cash payments. And again, this has acknowledged that, as a mean of payment, cash is universal and a very powerful tool to guarantee financial inclusion. Moving forward, today's agenda is as follows: we will start discussing the main highlights of the period; then we will review the performance of our different regions; and finally, we will summarize our financials and make some closing remarks before moving to the Q&A session. I will now turn the call over to José Antonio, who will cover the most relevant topics today.

Thank you, Pablo, and good afternoon to everyone. Today, we are presenting the 2019 full year results, a period marked by the ongoing depreciation of the emerging market currencies and the second year of application of the hyperinflationary accounting in Argentina, the resume of the path of growth of our sales and improvement in our operating margins and the continued execution of both our consolidation and transformation strategies. And finally, our financial discipline, which allow us to keep deleveraging and to get our investment-grade rating reaffirm. Both our sales and our operating margins have continued expanding as we anticipated and are showing a recovery in euro terms on the back of a solid underlying operational performance. Our sales growth in local terms reached close to 17% in 2019, thanks to the steady organic growth, which has accelerated versus last year, and our M&A activity. Moreover, our operating margins improved close to 150 basis points in the case of both our consolidated EBITDA and our consolidated EBIT. This solid recovery is mainly explained by the positive contribution coming from most of our countries, our divestments in nonperforming operations and the synergies coming from our recent acquisitions. This M&A activity has helped our consolidation strategy to keep evolving in line with our expectations. We have closed one more deal during the fourth quarter, reaching a total of 6 transactions during the year and investing EUR 85 million in aggregate. Moving now to our new product strategy. Let me highlight that the progression continued in the last quarter. As a result, our new services represented 16.2% of our sales at the end of the year, showing a remarkable evolution when compared with the 11.8% posted a year ago. New solutions grew slightly above the 40% mark in euro terms on the back of our smart card solutions, AVOS and ATMs. Finally, I would like to point out that our free cash flow generation reached EUR 213 million during the period. Our financial discipline allow us to redeploy funds to keep growing the business organically and through the acquisition of companies; to reduce our leverage ratio down to 1.6x, including IAS 16-related debt and M&A deferred payments; and to maintain our credit rating, which remains at BBB with a stable outlook. Let me now spend some minutes discussing the evolution of our sales and margins and our performance in terms of M&A and new products development. In the next slide, we can see 2 different charts, showing, on accumulative basis, the evolution of our local growth and our operating margins. The chart at the top reveals that our business continues to grow in local currency terms, and that this trend has been accelerating since 2018. This is the result of an accelerated organic growth higher than initially expected in many countries on our M&A investments, despite of our divestment in France in the later part of the year. The chart at the bottom highlights the sequential improvement in our operation margins in euro terms along the year. This margin uplift is the consequence of the positive underlying evolution of our operations, the synergies resulting from our M&A activities and the strategic divestments executed during the previous quarters. During the quarter, we have completed 1 additional acquisition in Europe, reinforcing our presence in the Spanish AVOS ecosystem. This means that during the whole year 2019, we have closed 6 deals for an accumulated M&A investment close to EUR 85 million, which is within the guidance provided to the market. We believe these transactions fit very well in our current footprint, reinforcing our leadership in our existing geographies and laying the foundations to capture future growth in new specific business and regions. Complementary to our M&A activity, we implemented portfolio management initiatives that materialize in our divestments in South Africa and France, as already commented in previous conference calls. To conclude, I would like to stress that M&A remains at the forefront of our growth strategy. We have more opportunities in the pipeline, some of which have already been successfully closed at the beginning of 2020, which led us to think that this year, we will be on the higher range of our target. Additionally, at the beginning of this year, we have completed our portfolio management plan with the divestment of our Mexican operations. To conclude this part of the presentation, let me talk about transformation. As of December 2019, the sales of our new products ended in EUR 292 million, coming from EUR 205 million a year ago. This figure represents an increase of 42% in euro terms over the same period in 2018, variation that is much higher in constant currency. In terms of sales penetration, the new solutions exceeded the 16% mark at the end of the period, a very successful increase versus the figures reported a year ago. And this is the result of the very good performance of our smart cards, AVOS and ATM solutions, which kept growing organically and inorganically quite strongly and above our expectations. As we are excited with the existing opportunities in this area, we continue strengthening our teams and accelerating our investments in platforms to capture the potential growth related to these new businesses. And this is something that we will keep doing as long as the return on the investment remains as attractive as they currently are. Now I will give the word to Pablo, who will walk you through the different dynamics of our regions.

Thank you, José Antonio. In Latin America, our sales reached EUR 1,185 million, 3.2% higher than the figures reported a year ago. Our local growth, close to 23%, more than offset the combined negative effect coming from the strong currency depreciation against the euro and the hyperinflationary accounting. Organic growth continue with its sequential acceleration, reaching 16.3%. This improvement resulted from the general positive contribution of all countries in the region and the higher-than-initially expected volumes in some of our countries that were temporary in nature. Inorganic contribution, resulting from the acquisitions we have made in both traditional business and new products, was somewhat above 6%. Integration of the acquired companies are both in line with our expectations, although we believe there is still room to extract more synergies. Moving to the new products. I would like to stress that our sales increased an impressive 52% up to EUR 192 million. As a percentage of sales, new solutions represented 16.2% of our total Latin American sales, catching up with the average of the group. Smart card solutions, AVOS and ATMs remain the main contributors of this improvement. Operating margins grew more than 11% in absolute terms and expanded in relative terms due to the positive underlying evolution of our operations and the synergies resulting from our M&A. As a result, our consolidated EBITDA and EBIT ended the period in EUR 390 million and EUR 275 million, while in relative terms, improved to 24.5% and 23.2%, respectively. Moving to Europe, our sales grew from EUR 491 million to EUR 509 million, an increase of 3.6%. Our organic growth in the region remains close to the 5% mark. This figure, which is quite robust, is a bit lower than the one shown in the first 9 months of the year as it includes the complete deconsolidation of France, which was growing above the region average up to the divestment. M&A contribution was minus 1.2%, also reflecting the impact of our divestment in France at the end of July. Our new product sales ended in EUR 94 million, representing 18.5% of our European sales, an increase of more than 370 basis points versus a year ago. Our growth in the region continues to be driven by AVOS, smart card solutions and ATMs. Also, our operating margins slightly improved, both in absolute and relative terms, thanks to the divestment of our French business. We expect this positive margin trend will continue in 2020. To continue the regional summary, let me spend some minutes reviewing our performance in AOA region. Our sales ended in EUR 105 million, an increase of 13% versus a year ago. The positive contribution from the Philippines and Indonesia more than offset the negative ForEx impact and the evolution of Australia, where the situation remains in line with previous quarters. New products contribution reached 5.4%, in line with our strategy to promote these kinds of solutions in the region. Finally, our operating margins remain subdued because of Australia and the integration cost in core in Indonesia. This is all regarding the performance of our different regions. I will now hand you over to Javier, who will summarize the financials.

Thank you, Pablo. Starting with the top line. Total sales reached EUR 1,799 million, an increase close to 4% versus 2018. This is the result of a total negative impact of minus 12.8% coming from the combination of currency depreciation and the effect of applying IAS 29 and 21 that was more than offset by the contribution of our local growth of 16.7%. Operating margins also improved in absolute and relative terms, increasing more than 13% and close to 150 basis points. Consequently, our EBITDA margin reached EUR 323 million, representing 18% over sales, while our EBIT margin ended in EUR 305 million, a 16.9% over our reported revenues. This margin recovery versus last year is explained by a combination of factors such as the positive contribution coming from most of our operations that are growing and improving their performance as a result of the operating leverage and various efficiency programs designed to streamline the operations, the synergies captured from our acquisitions and our divestments in South Africa and France. Below the EBIT line, our financial results posted net expenses of EUR 45 million and were affected by some noncash items. Higher interest expenses coming from deferred payments and the applications of IAS 16, together with costs related to FX, explains the difference against last year. Our tax rate for the period close to 35% was pretty much in line with the guidance provided along the year. As a result, our net consolidated profit ended the period in EUR 169 million, which represents margin close to the 9.5 mark. Regarding cash flow, I would like to underline that at the end of December, our free cash flow reached EUR 213 million and that our cash conversion ratio remained at 74%, better than in 2018. Our CapEx amounted to EUR 104 million, fueled by our investments in the smart cash solutions that continue gaining wave within our CapEx mix. Client CapEx grew by 41%, representing the same percent in our mix of the end of 2019. Working capital ended the period consuming EUR 34 million of cash due to the strong organic growth in local currency terms we have experienced in our geographies. Nevertheless, an important effort was done in the last quarter as figure shows. This cash outflow has been offset by the improvement in the provisions in other item's caption that resulted from the sliding of some payments to the first quarter of 2020. Finally, I would like to mention that during the quarter, we paid the first tranche of our newly approved dividend, which amounted to EUR 22 million, taking the total disbursement in the year to EUR 110 million. Let me now make some comments regarding our total net debt, which, on top of our net financial position, includes not only the deferred payments coming from former acquisitions and the treasury stock, but also the IAS 16-related debt. As of December 2019, our historical total net debt, excluding IAS 16-related debt, amounted to EUR 548 million, pretty much in line with the one reported in December 2018. The lower net financial position versus last year was somewhat compensated by the higher amount of deferred payments resulting from the acquisitions executed during 2019. On top of that, this amount was increased by EUR 105 million, reaching EUR 654 million due to IAS 16 implementation. According to our financial discipline and conservative approach and despite our financial covenants do not compute it, we calculate our leverage ratio including the IAS 16-related debt. As a result, our total net debt to our last 12-month EBITDA ratio reached 1.6x, showing a deleverage when you compare against the figures reported in previous quarters and the 2018 performance. Before moving to the balance sheet, let me highlight that the maturity of our main debt facilities is concentrated in 2025 and 2026, as you can see in the chart at the bottom of this slide. As we do not have any major refinancing needs before that time, we can fully concentrate on capturing the existing organic and inorganic opportunities while continue transforming our company. Our main balance sheet parameters have remained stable versus previous quarters. Being the most noticeable topics, the increase of our tangible assets due to the application of IAS 16 and our CapEx investments; the increase in our intangible assets due to our M&A investments; and lastly, the increase in our financial liabilities resulting from the application of IAS 16 and our inorganic growth efforts. I will now turn it back over to José Antonio, who will make some closing remarks.

Thank you, Javier. Prosegur Cash has strong focus on ESG-related topics as these factors are integrated into our company's business model. However, we have decided to refine and strengthen our commitment to all environmental, social and governance-related issues. In this regard, I would like to comment the following. First, our aim to combat climate change by accounting for carbon dioxide emissions and setting control measures to optimize our carbon footprint. In addition, we are introducing electric, hybrid and lighter vehicles in our fleet, which have fewer greenhouse gas emissions with an objective of reducing carbon emissions of our sales. Second, our willingness to decrease our plastic consumption and recycle both plastics and oil from vehicles, targeting our circular economy objective. We are also pursuing to cut down our paper consumption for which we are investing in digital transformation projects to introduce electronic [ handles ] in all our operations. Third, the sponsorship of our new contract in Spain guaranteeing that 100% of our electricity comes from renewable sources. We hope that this is the first of more contracts, not only in Spain but in other geographies. Fourth, we have signed a new equality and inclusion plan to reinforce our commitment to prevent discrimination and to avoid the gender gap. Finally, we have created a committee to improve health and safety with a clear target of achieving 0 recurrences and a budget to deploy measures to reach this target. Before moving to the Q&A, I would like to review our performance in 2019. First, we declared our intention to grow organically at mid-single digit in euro terms. As you have seen during the presentation, in 2019, our sales in euros grew close to 4%, thanks to the 16.7% local growth that more than offset the 12.8% negative impact coming from the currency depreciation. Second, we targeted to maintain or slightly increase the profitability of our operating margins, an objective that has well exceeded in the year. As previously discussed, this margin recovery resulted from the positive underlying performance in most of our countries due to the operating leverage and targeted efficiency plans and the synergetic M&A activity. Third, we also said that we wanted to spend between EUR 50 million and EUR 150 million in acquisitions, something that we did as we deployed EUR 85 million in 6 transactions. We have invested half of these resources in traditional opportunities to complement our current footprint and to place our company in an advantageous position to capture the bright prospects of the industry. And the other half in new products, trying to accelerate the time to market of some of these new solutions. Fourth, we continue increasing the weight of our new products within our revenue mix. In 2019, the sales of our new products represented an impressive 16.2% of our total sales, coming from 11.8% a year ago. This represents a 42% increase in hard currency over our 2018 revenues. Fifth, financial discipline. In 2019, we have been able to reduce our leverage ratio to 1.6x, well below our internal covenant of 2.5x without slowing down our investments in client CapEx and additional M&A. We do have ample room to pursue our growth strategy, something that we will continue doing as long as the return of the investment makes it worth and does not jeopardize our financial soundness. Finally, last December, our Board of Directors approved the distribution of an interim dividend of EUR 87 million. This amount represents a payout of 50% on the net result of the year 2018 and is aligned with the payout ratio established in our dividend policy. All in all, I believe this strong set of results proved one more time the resilience of our business model and allow us to face the future challenges with optimism. This is all on my side. Thank you all for the attention. I will now be pleased to begin with the Q&A session.

[Operator Instructions] The first question today comes from the line of Juan Ros from InterMoney.

A couple of quick ones. First of all, I don't know if you can guys update us on the FX clampdown in Argentina. And how are you coping? Are you still being able to retrieve the cash in any way and get it to the holdco in Spain or maybe you are thinking about investing in real estate or I don't know, whatever? And then, well, the obvious -- I don't know if you guys are feeling any changes in your activity as a result of the coronavirus. And maybe you can provide some insight if you have any. Finally, I don't know if you can provide some more granularity on the EUR 30 million others that you have in your cash flow. Are they earn-outs or maybe there are some other things?

Okay. Thank you, Juan. Regarding the first question, the market is open right now. So we could send any potential dividend or payment of our management fees to the holding company as normally. Nevertheless, as you know, we've been quite proactive, and we believe that we won't need to -- or we will not send any cash to the holding company in the next 6 months because of the profile of our cash flow in the different countries. So that's about the first question. The second one about the coronavirus. We have an updated business continuity plan because of obvious reasons. And we don't see any drop of activity up to this moment. And the third question about the EUR 30 million in the cash flow is advance payment of taxes.

The next question today comes from the line of Matija Gergolet from Goldman Sachs.

Quite a few questions from me, but okay, the most important ones. Firstly, on guidance. So you provided us some guidance for Europe on the margins. Could you give us a little bit of guidance also for what you expect for Latin America from these fairly high levels? Second question is on your strong growth in, let's say, new products. And I would like maybe some commentary there on the margins. No, I would expect like the, for example, outsourcing part to be below the group average margin, for example, but then you keep showing margin improvements. And also like in Latin America, keep growing in value-added services, in new services and showing margin improvement. I mean, frankly, it's quite surprising. If you can comment a little bit what do you expect in terms of say, margins from these new services relative to the rest of the business? Are they now in line, higher, lower to be helpful? Then thirdly on M&A. You did comment on basically that the M&A pipeline is at the high end of the range of EUR 50 million to EUR 150 million. Is that -- perhaps if you could comment, partly linked to now expectations on G4S? Or is this now top end of the M&A range, independent of any developments with G4S? And just -- and two more, if I may, very quick ones on numbers. Is it right that Argentina will have a lower corporate tax rate in 2020, which maybe will impact you positively? And then lastly, financial result, EUR 45 million, interest expense, only EUR 10 million. Could you just help us with the no major items for the difference?

Thank you, Matija. The first one, as you know, we don't normally give any guidance. I think that we can take -- I think we are improving our margins on all countries because of the M&A and because of the important efficiency plans that we are launching in all countries, both in -- in both regions, in Europe and Latin America. I think that the profile of margins that we have this year is -- could be similar to the ones that we're going to get this year. In Latin America and in Europe, we are going to clearly improve it because we will have the drag of different operations that we had for the first half of the year. So a clear improvement of the European operations. And we maintain the profile of the operations in Latin America, very much dependent on the ForEx behavior. On the rest of the world or AOA operations, we also expect a clear improvement compared to this year because we are really getting results on our streaming efficiency plans that we are launching in Australia. Also, we will not have the start-up costs that we had incurred in Indonesia. So clearly, we will improve our margins there as well. New products. I think in new products, we also have maintained from the beginning that the margin of our new products is in line with the average of the group. So while it grows, it's clearly a little bit below the higher-margin countries, but is much higher than the rest of the countries. So as we keep growing it, we will add a little bit of margin expansion to the whole of retail business. The third question was about M&A. The M&A, we are going to be on the top of the range independently of the G4S transaction. I think G4S is already close with -- brings most of their operations, cash operations. And we have many other opportunities in a clear road map that we have been designing for the last few months. So we really believe we are going to be on the top part of the range. If you ask me where we're going to be, I think there's not going to be much more on bolt-on acquisitions during the next few months, although they are the priority for us. I don't think we will open new markets. And I think most of them will be new products. And the fourth question was around the corporate tax in Argentina. There is a lot of discussions right now on what the government could be doing. I think the government is taking tough decisions. In that other governments were -- or have more problems to implement. So there are hard decisions that would be adjusting regarding -- depending on their results that they are getting. One that is being debated is the -- an adjustment in the corporate tax, but we personally -- as a company, we don't see any change during this year. But anything could happen, really. And the fourth question -- the last question, sorry, it was about the financial cost. I think on financial cost, I think the important thing is half of it is noncash items. Half of it, they are ForEx, as we said, noncash item ForEx-related, and there are some repatriation costs that maybe Javier would like to comment on.

Yes. Yes, just to put some more color into that, if you want. When you see the cash outflow of EUR 10 million, that's basically related to the cash outflow for pure bad debt interest. And when comparing it up to the P&L, we're using the $45 million, which is EUR 40 million difference versus last year, as José Antonio was saying. Half of that comes from FX-related topics. Basically, coming from the fact that we had a strong FX gain in 2018, which is much more in 2019. So that makes the bulk of the difference on that front. And the other 50% comes from higher M&A expenses being accrued by the deferred payments, the IFRS 16 financial cost due to the new accounting standard. And then, to a lesser extent, the monetary revaluation of the provisions in our balance sheet. That makes the whole detail of it.

I think here, the important thing is to notice that 50% of it is non-currency items. And you can see it in the cash flow that has been quite solid on that. So there has been some of the accounting tailing from these hyperinflationary accounting that we are using.

The next question today comes from the line of Francisco Ruiz from Exane.