Prosegur Compañía de Seguridad, S.A. (GGAL) Q2 FY2025 Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Prosegur Q2 2025 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Juan Ignacio Galleano, Head of IR. Please go ahead.

Good afternoon, and welcome to Prosegur First Half 2025 Results Presentation Webcast. Before we start, I would like to remind you that this presentation has been prerecorded and that it will be available on our corporate website. I will now hand you over to our CFO, Maite Rodríguez.

Good afternoon, and thank you all for your presence. We are pleased to present Prosegur's results for the first half of 2025. As we shall see throughout the presentation, operating results continue to follow a strong path, showing good performance when compared to last year. From a financial standpoint, net income marked an impressive 80% increase year-on-year, evidencing a strong performance not only at an operational level, but also from a treasury and tax perspective. For all the above, we are confident that we continue to be on the right track to comply with our main objective of generating value for our shareholders. All our commercial and financial teams are working side-by-side that goal, and we expect the second half of the year to be marked by cash flow generation and further deleveraging of the company. Now with all this in mind, let's take a deep dive into the most significant aspect of the period. Our top line grew by 5.1% compared to the same period of last year, mainly driven by organic growth. Every region where we operate increased, with a special highlight in the United States and the APAC region. As we shall later see, in the former region, our Security business continued to experience strong growth, while in the later, cash volumes continued to increase at very healthy levels. As for profitability, EBITA stood at EUR 170 million, 15.9% higher year-over-year, mainly explained by the strong performance of our Security business. Indeed, volume growth jointly with an agile commercial strategy to pass through cost to prices explain the results. Our Cash business showed good operating performance in all major geographies. However, results were somehow impacted by the devaluation of the dollar, which tend to trigger devaluation throughout Latin American currencies, and by the implementation of an aggressive cost-saving program. We will explain this in detail later. But for now, keep in mind that it resulted in high severance costs. For our Alarm business, as we will see, operational performance was clearly enhanced, reflected in better and healthier indicators. In this framework, it is remarkable the fact that we have achieved 1 million connections. Thanks to an efficient working capital management and keeping infrastructure CapEx under control, the higher achieved profitability resounded in higher cash generation. Overall, net debt stands at 2.3x relative to EBITDA despite our typical seasonality in the first half of the period. Let me remind you that our debt is not only very well structured in the long run, but also very cheap, with an average cost of 2.4%. A few words on Argentina are worth of mention. While the economy continues to normalize from a macroeconomic perspective, as inflation rate continues to reduce on a monthly basis, FX has recently shown some relative volatility. This has more to do with the upcoming midterm elections rather than to deep fundamentals. On the growth side, the sharp recovery that the economy experienced throughout the first half of the year is already behind us, and now growth rates have normalized to more sustainable levels. Let's now turn to Slide 2, where I would like to deep dive into our sales and EBITA figures. As said, total sales during the first quarter increased by 5.1% over last year, reaching EUR 2.5 billion. Discounting for the FX effect, almost the entire growth was organic, evidencing our strict policy when it comes to passing through inflation to prices. At the same time, volumes continued to grow, both in our most traditional businesses without exception and most importantly, in our transformation product. As for geographic sales diversification, it should be noted that growth continues to be the driver. Both U.S.A. and APAC region continued to grow at higher-than-average rate. We foresee to see the exact same trend for the upcoming years positively affecting the sustainability of the entire company. Moving now to further review profitability. EBITA reached EUR 170 million, marking a healthy 15.9% increase compared to last year. Our Cash business registered an EBITA of EUR 112 million, in line with the previous year. This includes the extraordinary expenses incurred due to the implementation of the cost-saving program coming from reorganizing the distribution of our stocks. If excluded, EBITA amount to EUR 117 million, marking a 3.7% increase year-over-year. Turning now to our Security business. EBITA amounted to EUR 38 million, 12.1% higher compared to the first half of 2024. Healthy volume growth, coupled with a strict discipline on cost, explained the enhanced performance. Technology sales further contributed to the good results. As we always explain, our ability to provide high-end tech solutions is one of our main competitive advantages and constitutes one of our main pillars. Lastly, our Alarm business continues to be on good track and good proof of this is the evolution of main financial indicators such as service margin and churn rate. Let's now turn to our full P&L that, as it can be seen, showed a remarkable increase compared to last year. The better performance on financial results has a lot to do with the normalization of the Argentine economy. As explained, inflation rates are going down quite rapidly, resulting in a minor impact due to the inflation accounting. At the same time, the abrupt narrowing of the FX gaps further contributed as dividend upstreaming became cheaper. Going further down to accrued taxes, the 279-basis point reduction in the effective rate should be highlighted. The rationale behind this reduction is twofold. On the one hand, we had better results in all individual geographies. And on the other, as just explained, negative results stemming from hyperinflation accounting and dividend upstreaming were significantly reduced. All of the above led to a net income of EUR 64 million, achieving an astonishing 80% higher year-over-year. Let's now turn to cash generation during the period. As it can be seen, following the historical seasonality of the business, free cash flow resulted in negative EUR 36 million, EUR 8 million higher compared to the previous year. This is naturally explained by a higher EBITA, but also as a result of a strict discipline on DSO, resulting in less consumption out of working capital requirements and by lower CapEx. Net financial debt reached EUR 1.4 billion, resulting in a total net debt-to-EBITDA ratio of 2.3x. It's worth highlighting that both the terms and the structure of our debt is very healthy with an average cost at 2.4% and over 65% at fixed rate maturing between 2026 and 2029. As already explained in the previous quarter, Prosegur cash bond matures in 2026, which has been recorded as short term on our balance sheet, but we have practically completed this refinancing, while the new loans will mature between the next 3 to 5 years. That's all for me for now. I will now turn the presentation over to our Head of Investor Relations, Juan Ignacio Galleano, who will give you more detailed information on the development of the specific business areas.

Thank you very much, Maite. Let's now have a look at the results of each business line, covering the main performance indicators and the most relevant aspects of the period. Starting with our Cash business, I would like to reinforce the almost 10% organic growth that we achieved during the first half of the year. This is a good testament to not only an effective commercial strategy, but also and perhaps more relevant to healthy volume growth. As we always stress, our diverse geographic footprint, coupled with our commitment to transformation products are cornerstones to cope with a more challenging environment in developed countries. As for the latter, sales already exceed 34%, marking an impressive increase year-over-year. Cash to-date are definitely driving this growth, which leads me to the cost savings program that we implemented. The truth is that not only cash to-date constitutes an additional source of revenue and profit, but it also allows us to enhance the logistics of our traditional business. In particular, we can reorganize the distribution of our stops, enabling us to make a better and more efficient use of our fleet and to reduce workforce. At the same time, we've made several enhancements to the distribution of the routes, which combined with the normalization of the Argentinian economy that we already referred to allow us to further reduce stops. This will naturally result in better margins in the months to come, but it negatively impacted second quarter's results as we had to incur insignificant severance costs. It's worth mentioning that we estimate a 1.5 years payback on this cost savings program. As it is shown in the mid-graph, once these costs are fully excluded, EBITA increased by 3.7% year-on-year, while EBITA margin rose from 11.3% to 11.7%. Let's move now to our Security business, which continues to favorably evolve. Total revenues reached EUR 1.3 billion with the organic share reaching 16%. As usual, this is mainly driven by our volume-based strategy that leads to operating leverage, our capacity to pass through inflation to prices and the outstanding performance of the operation in the main countries. The latter also explains the negative FX impact as the dollar continued to depreciate against the euro during the quarter. All the above, coupled with enhanced efficiencies and operating leverage resulted in total EBITA reaching EUR 38 million, 12% higher compared to the same period last year. Margins for the part continued to increase, reaching 2.94% during the first half of the year. Even though all geographies performed, results were mainly driven by our operations in Spain and the U.S.A. As we have explained in past results, macroeconomic stability in Argentina, evidenced by the significant reduction in inflation rate is very positive for the business. As for the U.S.A., it continues to be a very important driver, and we are confident that it will continue to be so as we plan to further expand operations there. Operating cash flow resulted in EUR 16 million compared to the negative EUR 20 million registered in the first half of last year. This is by every means impressive and marks a new standard for the business. Indeed, we've already reached volumes and margins that imply positive cash flows no matter how aggressive we are in sales growth. In fact, operating cash flow includes an EUR 11 million working capital impact resulting from higher volumes. This is definitely a very important milestone for the company as now all main businesses will contribute to our deleveraging strategy. Let's now turn to the Alarm business, where we reached another important milestone. Indeed, our client base surpassed the 1 million connections, marking a 13.1% increase year-over-year. As we always highlight, growing in BTC is crucial for the business. It needs to be done in a healthy manner in order to be able to translate the growth into long-term value creation. In that end, it's clear from the graph that we achieved that as every relevant KPI moved in the right direction. Churn rate stayed in line in Prosegur Alarms and was reduced by 1% in Movistar Prosegur Alarmas, reaching the sweet spot of 10%. ARPU and consequently, the service margins for the part increased, reaching EUR 20 and EUR 22 for BTC for Prosegur Alarms and MPA, respectively, evidencing a strict discipline of our commercial team when it comes to passing through costs to prices. As for acquisition costs, the increase in both cases has to do with a deliberate strategy of increasing marketing expenses, while at the same time, we continue to invest in product enhancements. Let's now turn to the following slide to see how all these indicators flow into recurring cash flow. The combination of higher service margin coupled with either stable or lower churn rate naturally implies an increase in recurring cash flow. That is, the resulting cash after the clients that churn are fully reacquired. In the charts above, what we are showing is the 12-month rolling recurring cash flow of both Prosegur Alarms and MPA. The one on the right side clearly indicates that the generating cash flow capacity of the 2 businesses combined for Prosegur stands at EUR 76 million, 25% higher year-over-year. This concludes our analysis of the performance of each business line for the first half of the year. Thank you all for your attention. I will now hand the microphone back to our CFO, Maite Rodríguez, for her closing remarks.

Thank you very much, Juan Ignacio. Let me now share with you my closing thoughts on the most relevant conclusions of this results presentation. Overall, as we have seen during the presentation, all businesses reported enhanced operating efficiencies and strong results. On a consolidated basis, total sales increased 5% despite the adverse effect of depreciated currencies. EBITA margin reached 16%, while net income increased by a remarkable 80%, thanks to the good performance of all our business lines. In our Cash business, the organic sales increased by 10%, while we put in place an extraordinary cost saving program, thanks to reorganizing the distribution of our stops that will allow us to increase EBITA margins in the future. Turning to our Security business. Sales volumes increased by 8% compared to the previous year, and we achieved higher margins, thanks not only to scalability, but also to a robust client portfolio and efficient price pass-through. Even more important is the fact that the business will start to structurally contribute with positive cash flows from now on, probably excluding the first quarter due to seasonality. This is definitely, as mentioned before, a very important milestone for the company as now all main businesses will contribute to our deleveraging strategy. Lastly, our Alarm business demonstrated very solid growth, surpassing the 1 million connections. This growth is accompanied by strong result in key management indicators. We have seen improvements in churn, service margin and ARPU. This strong performance translates into a rolling recurring cash flow of EUR 76 million, implying a 26% year-over-year increase and pointing to a robust cash generation. As said at the beginning of the presentation, we reported a strong first half of the year, paving the way for achieving the objectives set for 2025. This was all on my side for this results presentation. I would like to thank you all once again, and we are now open for Q&A.

[Operator Instructions] We will now take the first question from the line of Alvaro Bernal from Alantra.

I have two. The first one is regarding the EBITA from corporates. I'm seeing in your accounts that for the first half, it has yielded EUR 20 million. If you can shed more color there. What is driving this result? I think something similar happened already in Q1, but it's repeated once again in Q2. Maybe you can just refresh me what that was? And the second question is regarding Security stand-alone in Q2. We have seen growth when it comes to sales. But in terms of margin, when we look at it stand-alone Q2 versus last year, it has fallen. If you can again shed some color on the product mix here, it would be amazing.

Thank you, Alvaro, for your questions. In relation to the first one, coming from what's happening with the overhead, why we have EUR 20 million positive overhead, it's mainly because there are like three reasons here. The first one is coming because we are also booking there all the revenues coming from the rent of our buildings. As you know, we have a real estate that amounts more than EUR 300 million. And part of it, around EUR 70 million is allocated in Argentina in some towers that we have in a very prime area. And the rents that we are receiving from there, they have also increased. So we have an increase coming from them from the real estate. The other one, as I also mentioned in the first Q is coming from the trademark, mainly because the Security business is achieving better results. So we are receiving a better income coming from trademark, but also because we have agreed with the Spanish tax authority a new brand royalty and the one that is higher in comparison to previous years, and that's why it also has increased. The rest of the amounts are related to the markup that we charge to the rest of the businesses coming from the support areas. In relation to the second question about the stand-alone margin of Security, you have to consider here, as we mentioned also on the first Q, that we -- there was the pass-through in -- as you know, we are all the year passing through prices during the year. And the first Q really has a very, very good result because we're taking -- because we did it in advance. More or less 5% was done in advance. So that's why you have that difference. But we -- even we mentioned it in our first Q results presentation that it was not going to be -- we were not going to have such a big margin and such a big increase in the rest of the year, but it was mainly because of that because the low inflation helps us also passing through prices quicker, and we are really doing very well this year. And it's one of the keys why we are still continuing having that good margin also in this second half because as you know, seasonality is one of our main impact that we have coming from this passing through inflation to prices.

Perfect. And a follow-up to both questions, if I may, regarding forward-looking statement on how we should view on the one hand, the PGA and unallocated EBITA going forward, if we should expect this to be recurrent? And in terms of Security, the margins when looking at them for the whole year?

Alvaro, in relation to PGA, yes, for the rest of the year, the trend is going to be the same one. It's going to be positive. And even I can tell you that it's going to be like that from now on also for -- even for the budget that we are doing for 2026 is also positive. And the second one in relation to what's going -- what we expect in the Security margins for year-end. We are going to keep this trend. As you know, as I always say, Security business is a volume business. So the improvement happen little by little based on our strict discipline in passing through inflation, in the control in the absenteeism, in the scalability and so on. So we will have a positive trend. We are going to have better margins than last year. And I think that the most significant milestone for this year is going to be that the cash flow is going to be -- at least they are going to generate EUR 33 million, and we expect that even it's going to be more. So that's going to be an important milestone for the year because from now on, all the business units that Prosegur has are going to contribute positively on our deleveraging strategy. So that's a very positive thing, and that's why we are also positive on the deleveraging for year-end.

There are no further questions at this time. I would like to hand back -- one moment, please. We have another question from the line of Joaquin Garcia-Quiros from JB Capital.

Just a very quick one. So the Alarm continues to grow at a very good rate. It continues to add lots of new clients, but at the cost of increasing the acquisition cost, it has increased quite significantly in both regions. Should -- are these levels where you feel comfortable that you can maintain them at least for the next few years? And when can we expect the acquisition cost to go down, if ever?

Thank you, Joaquin, for your question. In relation to the acquisition cost of Alarms, as you know now, we are investing a lot in marketing, in publicity and in the product improvement. So that's why you are observing that increase. During this year, 2025, it's going to keep it like that. I don't expect any decrease in terms of acquisition cost. But for the 2026, for sure that there will be a decrease. But this year, no, because we -- as you know, we are changing our marketing and publicity strategy, and this implies a higher investment in publicity and so that's why it's increasing. But it's not going to be for the long run.

Thank you. There are no further questions at this time. I would now like to turn the conference back to Maite Rodríguez for closing remarks.

Thank you very much for attending this presentation. If you need further information, please contact our Investor Relations department, who is open to help you at any time. Have a nice day.

This concludes today's conference call. Thank you for participating. You may now disconnect.