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

Thank you for standing by ladies and gentlemen, and welcome to the Prosegur Cash Second Quarter 2021 Results Presentation Conference Call. [Operator Instructions] And I would now like to hand the conference over to your speaker today, Pablo De la Morena, Head of IR. Please go ahead, Pablo.

Thank you. On behalf of all the Prosegur Cash team, I would like to welcome you to our 2021 second quarter results review that will be led by our CFO, Javier Hergueta and myself. We estimate it would last around 25 minutes. And during this time, we will try to address the main events that took place during the reference period. At the end of the call, we will open the floor for a Q&A session, where we will try to handle all the doubts you might have. In case we don't get to all your questions today, we would be pleased to answer those on individual calls with each of you. I wish to thank you all for your attendance and remind you that this presentation has been prerecorded and is available via webcast on our corporate web page. Now before turning the call over to Javier, let me comment some interesting news regarding the use of cash during the semester. First, I would like to share with you the hidden cost of payment apps, a new report by the U.S. Public Interest Research Group finds that complaints submitted to the consumer financial protection grow about payment apps have shoot during the pandemic. Issues related to problems to manage, open or close accounts, [ follow-through ] scams and problems with transactions, including unauthorized transactions were highlighted. The report recommends that overseas makers strengthen consumer protections on payment apps. Consumers should be protected when they are defrauded into sending money, even when they initiated the payment. Apps providers should be required to investigate errors incurred even when the consumer made a mistake or send the money. This is an existing duty, not being enforced. Second, let's comment our Wal-Mart strategy to enable shoppers to pay bills in cash, starting in August. The U.S. retail giant has partnered with fintechs, PayNearMe and Green Dot to provide its customers with a new way to pay their bills in cash at its 4,000 stores. A new scan, pay and go approach will try to benefit from the fact that a significant part of the population still prefers or needs to pay their bills in cash and the convenience of doing it in the same place where they shop. Third, let me point out the public commitment among retailers, consumers and banks in the U.K. to make sure there is access to cash for those who need it. In particular, the retailers' initiative has also received support from the Bank of England as Sarah John, its chief cashier, has stated that signing up to this pledge businesses are helping to ensure that everyone in the U.K. is able to use the form of payment that best meets their needs. Finally, just a few words in relation to the Fastly fall last June. This new blackout comes after the main social platforms in many countries, fell in a March and a recent fire in one of the main European data storage centers in Strasbourg jeopardized the security and the possibility of continuing to operate on numerous websites, e-commerce and a wide range of digital businesses. After these new incidents, experts point out the importance of maintaining hybrid systems that combine physical and virtual capabilities. The coexistence of digital payments with physical money is essential as technologies continue to show vulnerabilities and cash remains as a very important mean of payment. Moving forward, today's agenda is as follows: We will start reviewing the main terms of the period. Then we will discuss our performance in the different regions. And to conclude, we will summarize our financials and make some closing remarks before responding to questions that might have arisen during the webcast. I will now turn the call over to Javier, who will cover the most relevant topics today.

Thank you, Pablo, and good morning to everyone. Today, we are presenting our 2021 second quarter results, a period marked by the acceleration of our local currency growth, the recovery of our operating margins and the sustained cash flow generation. In this sense, our growth in local terms reached 3.1% at the end of the semester, coming from an almost flattish figure at the end of the first quarter, and our reported EBITDA margin amounted to 13.1%, which implies that our underlying EBITDA margin in 2021 kept progressing and benefiting from the reopening of the economy in some of our countries. In the transformation front, our new solutions represented 21.4% of our total sales by June 2021, an improvement of 320 basis points versus the figures posted a year ago. During the quarter, we have acquired Redpagos and also formalized a strategic alliance with Euronet, a leading global financial technology solutions and payment supplier to provide comprehensive ATM outsourcing services in Latin America. Both transactions, Euronet JV and Redpagos are important milestones to achieve the ambitious new product penetration target that we have disclosed in our Capital Markets Day. I will elaborate on these transactions later in the presentation. Finally, let me remark the positive cash flow generation during the quarter, which enabled us to close the first 6 months of the year with an operating cash flow of EUR 65 million, which means a conversion ratio of 79%. As a result, our financial leverage ratio, based on our total net debt and our last 12-month EBITDA has remained broadly unchanged compared to the previous quarter despite the inorganic activity executed during the period and the continued shareholder remuneration. Let me now spend some minutes discussing the evolution of our sales and operating margins and our performance in terms of new products. In this slide, we have 2 different charts showing on a cumulative basis, the evolution of our local growth and our performance in terms of profitability. The chart at the top reveals that our business growth has speeded up during the second quarter of the year in all our geographies, achieving a remarkable 10% organic growth in the isolated quarter. Local growth in Ibero-America keeps showing resiliency and a rising trend despite selective lockdowns and a tough comparable base versus last year due to the absence of nonrecurring volumes resulting from the distribution of economic aid programs. On the other hand, Europe and Asia Pacific regions are benefiting significantly from easing restrictions in their respective economies during the quarter. The graph at the bottom depicts the evolution of our EBITDA margin, which, excluding the capital gain derived from the AVOS divestment has advanced sequentially since the beginning of the year and is increasing month-by-month during the second quarter, as you can see in the label chart. Going forward, despite limited visibility, minor restrictions in Europe and the progress of the vaccination campaign in LatAm should act as catalysts for the business and support the margin recovery. Regarding transformation, let me point out that we carry on transforming our company and increasing the weight of our new solutions within our revenue mix. As of June 2021, our new product sales rose by 6% in euro terms to EUR 148 million, maintaining healthy growth dynamics in all geographies. In terms of sales penetration, new solutions grew up to 21.4% at the end of the semester despite the AVOS deconsolidation in the quarter. And this is an interesting fact is if the AVOS divestment and the Redpagos acquisitions had been executed at the same time, penetration figures would have been much higher, closer to the 23% mark, showing an even more favorable tendency. We continue investing in the digitalization of our company, in our people, in our processes and systems. As a result, we have increased by 28% our disbursements in this area, and we expect more to come throughout the year. In line with our strategy to expand our presence and become a relevant player in the ATM network management arena, we have entered in a joint venture with Euronet to provide comprehensive ATM outsourcing services to Latin America. This means that the combined entity will leverage on the existing Euronet and Prosegur Cash capabilities to own, deploy and manage independent ATM networks and to provide services to outsourced ATMs of financial institutions. Our ambition is to bring world-class ATM outsourcing services to the financial institutions in Latin America, a market that supports more than 300,000 ATMS. We would also like to maximize access to cash for people in that region, where cash remains the preferred mean of payment and a critical element for the economy. In addition, last June, we have acquired the banking correspondent business in Uruguay. Redpagos, with more than 20 years operating experience in the Uruguayan market through a wide network of almost 500 offices across the country, reported EUR 55 million of sales last year and is a leading company in the payments and collection space. This transaction reinforces our existing operations, enlarges our new products offering and allows us to keep transforming our services in the Ibero-America region. Now I will give the word to Pablo, who will walk you through the different dynamics of our regions.

Thank you, Javier. Latin America, despite the COVID-19 and the currency depreciation are still impacting the comparison versus last year, our 2021 second quarter sales increased by 4% in euro terms versus the prior quarter, thanks to our increase in organic growth, the contribution of Redpagos and a milder currency impact. And that helped the sales in the semester reach EUR 447 million and decreased the accumulated drop to 13% versus the same period in 2020. New product sales, which included 1 month of Redpagos, amounted to EUR 100 million, representing a 22.3% of our total sales in the region. This figure implied a 12% increase and a 510 basis points improvement versus the figures achieved a year ago. On the profitability side, our reported EBITDA margin ended in EUR 83 million in absolute terms and 18.5% in relative terms. Underlying profitability remains penalized by currency depreciation, selective confinements and a different mix of services versus 2020 due to the lack of volumes related to the economic aid programs distribution in the region. In Europe, the second quarter has shown a remarkable 16% organic growth, which is explained by the reopening of some of our countries during the month of June and the comparable base versus 2020. With that, our sales decrease in the first semester was reduced to 9% up to EUR 190 million, still showing the impact of the confinement of different intensity in all our countries since the beginning of the year and the deconsolidation of the AVOS business since April. New services and adding EUR 39 million, representing a 20.5% of our European sales. On a like-for-like basis, that's excluding AVOS for both 2020 and 2021, new product sales increased by 12%, favored by the strong momentum of our new product solutions. Our EBITDA margin reflected the deconsolidation of AVOS and the lower level of activity compared to 2020 in the first part of the year, but should start to benefit from easing restrictions, assuming the sanitary environment continues to improve. Our sales in Asia Pacific kept advancing to EUR 55 million on the back of our commercial efforts in all our business lines and a more winning exchange rate. Our new products maintained a positive trend, reaching 17.4% of the sales of the region, more than doubling the figures posted a year ago. Regardless these encouraging figures, our operating EBITDA margin in the region remained broadly unchanged versus last year as market dynamics in Australia continue to be tough and weighting down our profitability. 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 692 million, 10.3% less than a year ago. This is the combined negative effect of inorganic growth and currency depreciation of minus 0.4% and minus 13.3%, respectively that has been partially mitigated by an organic contribution of 3.5%, which has accelerated up to 10% during the second quarter of the year. On the profitability side, our reported EBITA margin ended in EUR 91 million, representing 13.1% over sales, an improvement of almost 20% and 330 basis points in both absolute and relative terms versus 2020 figures. The underlying EBITDA margin for the first half of the year a figure that excludes the capital gains derived from divestments, resulted in EUR 17 million and slightly above the 10% mark in relative terms. This metric, also still impacted by the comparable base, the different mix of services and the currency headwinds versus the prior year, is sequentially improving since the beginning of the year, reflecting the gradually better environment for our operations. Below the EBITDA line, our financial results posted net expenses of EUR 19 million, somewhat below last year figures. Lower interest expenses resulting from our net debt reduction have offset the lower profits on foreign currency transactions. Our effective tax rate for the period is the result of a worse fiscal mix and higher corporate taxes in several geographies. As a result of all this, our net consolidated profit increased by 41.3% to EUR 31 million, which represents a margin of 4.4% over sales. Regarding cash generation, let me underline that our free cash flow reached EUR 65 million by the end of June and that our implied free cash flow yield remained at an attractive 7% if we consider our LTM free cash flow and our current enterprise value. The benefits from the tax cover deferrals and the provisions related to the restructuring programs faded away and mainly explain the year-on-year variation of the provisions and other items captured. CapEx and working capital figures continue benefiting from the optimization of our investments as well as the thorough management of our working capital. As a result, our CapEx investments have been reduced by 4% versus last year, and the working capital outflow remained stable compared to the previous trimester despite the activity increase reported during the second quarter of 2021. Below the free cash flow line, M&A caption ended in minus EUR 3 million and was the combination of cash outflows from deferred payments, the upfront payment of the new acquired CORBAN business and proceeds received from the AVOS disposal. The remaining part of the Redpagos acquisition price has been deferred as it is common in our M&A activity. Finally, the dividend and the treasury stock line incorporate the payment of the first 2 installments of our dividend in January and April and the share buyback program we have in place. We continue preserving our cash balance, and as a result, our steady cash flow generation and our portfolio management strategy have self-funded our new investments and the remuneration to our shareholders. Let me now make some comments regarding our total net debt, which on top of our net financial position includes the deferred payments coming from former acquisitions, our treasury stock and the IFRS 16 related debt. As of June 2021, our total net debt amounted to EUR 680 million, a EUR 57 million reduction versus the figures reported a year ago. On a sequential basis, and due to the inorganic activity carried out during the second quarter and the continued shareholder remuneration, our total net debt increased in absolute terms compared to the figure posted back in March 2021, while our financial leverage ratio remained stable. Also, let me recall you that our debt maturity profile has not undergone any significant change, and therefore, we do not have any major refinancing needs until 2026. Before moving to the Q&A, let me spend some minutes reviewing our progress in sustainability and make some closing remarks and conclusions. In our previous call, I commented the approval of a new sustainability director plan for the 2021-2023 period that shows our firm commitment towards a sustainable global society, in line with the United Nations Sustainable Development Goals. This director plan, which is available in our corporate web page, establishes specific initiatives encompassing 4 main pillars, which are ethics, transparency and governance, environment, people and safe work. Without the intention of being exhaustive, I would like to highlight the direct link between the compensation of our employees and the achievement of ESG specific goals effective 2021. Our ambition is to become fully carbon neutral in 2040, 10 years ahead of the Paris Agreement objectives. Here, we are participating in a project to compensate all carbon emissions made in Europe through a waste management process put in place in Brazil. Our pledge for social inclusion, not only by fostering a diverse and equitable workplace and increased employability of our workers through continuous training, but also through the promotion of cash among the unbanked or under-banked population. Last but not least, our determination to reduce our severe labor accidents and casualties to 0. Now for my closing remarks, I would like to summarize the second quarter results with the following ideas: First, the proven resilience of our business model with organic growth improving in all regions. Leaving aside the translational impact of the ForEx, our teams have been capturing new services and maintaining strict commercial discipline to offset lower volumes resulting from lockdowns whose impacts appear to abate in some countries. Second, the solid performance of our new solutions that keep gaining share in our revenue mix. As we recently explained in our Capital Markets Day, new products will play a very important role in our future growth strategy. And as such, we will continue monitoring the evolution of our cash ecosystem to develop new opportunities that allow us to grow individually or together with partners, leveraging on our existing network and capabilities. Third, the progressive improvement of our underlying EBITDA margin. Despite the adverse ForEx, the subdued level of activity and the increased investments in digital transformation, the cost realignment exercise we did last year is yielding positive results, allowing our margins to gradually recover, a trend that should accelerate when volumes get completely back. To conclude, our financial discipline, which means that we will continue preserving our cash generation, protecting our balance sheet and maintaining an appropriate level of indebtedness. This is all on my side. Thank you all for the attention, and I will now be pleased to begin with the Q&A session.

[Operator Instructions] Your first question comes from the line of Beatriz Rodriguez of GVC Gaesco.

Just 2 questions. The first one regarding the [ traditional ] businesses and taking into account the improvement in the quarter. What is the outlook for this year? Do you expect to reach breakeven in 2021 or 2022? And the second one is we've seen the growth in new products during this semester. Is organic growth more relevant or inorganic growth due to entering into new business?

Regarding the first question about Australia. As you may have seen in the call, we are making good progress in terms of growth. So our commercial efforts are proving to be successful in several ways. We captured 2 big contracts, as we discussed last year, which are now showing up in our numbers, and we are also capturing a number of smaller and midsized contracts. But despite all that and the cost initiatives also evolving, the environment in the country remains tough for the time being. So we are making progress, although that's not yet fully seen in the EBITDA of the region. But we expect that recovery trend to keep happening at a more noticeable pace in the coming quarters, although the context in the country with the self-isolation and no foreigners allowed to travel into Australia is not really helping. But given the good trends in the cost initiatives and in the new contracts that we are gaining, we expect to improve in the coming quarters. I would say that reaching breakeven in 2021 itself is not really on the table now, but we should be able to improve significantly the figures and next year at some point in time, we should be on a much better situation and achieve on a run rate basis at some point in time that objective that we've been pursuing for a long time now. In relation to the second question on the new products, those have become significantly positive, as you have seen in the presentation, that is, as it typically happens, a mix of organic and inorganic growth. So we've made some acquisitions. Part of what we did last year is showing up now, and we've also made Redpagos, although that is only consolidating for 1 month in the period, but it's a mix of both. I mean so organically, the growth has also been quite significant. That cash today, for instance, is a portion of business, which is purely organic. And in that sense, the number of installed devices in the last 12 months have grown more than 20%, and that's purely organic. So that reflects the strength of the business. And that's also accompanied, as we said, by some inorganic impacts as well.

[Operator Instructions] And your next question comes from the line of Javier Pinedo of Torreal.

I just wanted to check if you can tell us how much have you paid for the Uruguay acquisition in terms of enterprise value, would be appreciated.

We didn't disclose a figure expressly when we announced the transaction, we disclosed the sales figure contribution or the last year sales that were around EUR 55 million. But I think I can tell you that the implied EV to sales multiple is lower than we typically do. So as you may recall from previous calls, the implicit multiple on average on our recent M&A in the last year since the IPO is around 1x sales, and this transaction has been made at a lower multiple than that.

And just to follow-up. In terms of M&A or in terms of inorganic CapEx with the Euronet JV. Could you help us understand how much will you spend in 2021 and maybe 2022 in terms of growth CapEx, please?

Well, that will depend pretty much on the number of projects that we can gain and the timing of those. So I wouldn't say that there's a limit on that. I mean so the more we can spend on that, the better for us because that would mean that we are capturing more projects and at a quicker path. So there's no really a gap to it. So we'll see in the next quarters, how it goes. I mean so up to now, the investments into the ATM business have more been focused into the Australian project that we announced last year, and we are developing now, and we expect that to significantly increase with the JV with Euronet, but there's no limit for that. So the more we can capture the better for us.

And sorry for the last question. But when we look at July, in terms of operating trends, can you give us some color on how you're seeing things with the lift of some restrictions everywhere? And how do you see LatAm, specifically in July, in which you have significantly more visibility than any of us?

In that regard, I would say that, as we've commented also in the intra-quarter for Q2, I mean, month-to-month, that trend remains the same. So July with the mobility restrictions easing, increasing now in most of our geographies is continuing that recovery trend. So volumes keep improving in all of our geographies in Europe. I mean probably something more visible to you because it's closer to us, and that is the case. It is happening. And in Latin America, the organic activity is also improving. You probably may have seen that the vaccination programs are now improving and the sanitary situation in Latin America is somewhat more favorable than it was a couple of months back. Apparently, a significant number of vaccines are arriving in Latin America in the short term. So that should also be helping. And we are also benefiting from more winning FX at the same time. So you've seen that the Argentinian peso has remained quite stable for quite a few months already. And that the Brazilian real has revaluated after several quarters with some imbalance between the inflation and the FX. And that also is a good piece of news for us. So in going back to the specific question, July keeps the same trend as we were seeing before. And there are several factors there that make us think that we can face the next months and the coming future under a better scenario than we were before.

Thank you. That will conclude today's Q&A session. I would now like to turn the call back to Mr. Javier Hergueta for any additional or closing remarks.

Well, just say thank you to all of you for attending the call. Hope to speak again back in Q3 results after the summer break. In the meantime, have a nice summer break all of you, and you know that should you have any further queries, our IR team remains at your disposal. And hope to speak again in the next quarter presentation. Thank you all. Bye.

Thank you, gentlemen. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, and you may now disconnect.