Prosegur Compañía de Seguridad, S.A. (PSG) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to the Prosegur First Half of 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to hand the conference over to our speaker today, Mr. Antonio de Carcer, Head of IR. Please go ahead.

Good afternoon and welcome to the presentation of Prosegur results for the first 6 months of 2022. This presentation will last around 30 minutes, followed by an open Q&A session. This webcast will be hosted by our group CFO, Maite Rodriguez and myself. Before starting I would like to remind you that this presentation has been prerecorded and that it will be also available to download from our corporate website. I will now hand you over to our CFO, Maite Rodriguez.

Good afternoon, everyone, and thank you for attending this presentation. The results we are presenting today for the first half of 2022 reflect a remarkable increase in both revenue and profitability. They follow the improvement trends initiated in the second half of 2021 and show how our business model has taken advantage not only of the post-pandemic general recovery, but also of the current macro conditions. Allow me please to guide you through the main highlights of the period, both in qualitative and quantitative terms. Firstly, I would like to point out the excellent overall growth both in terms of revenue and profitability that the company has delivered during this period. Revenue growth has been higher than 22% and profitability has increased by more than 40%. Not only accelerating the margin recovery trend strongly in the cash business, but also in security whose profitability is gradually improving quarter-on-quarter. Remarkable organic growth has been delivered in all business lines and regions. The only exception has been the cybersecurity business, which has remained flat due to their restructuring of the product offering in which we are currently involved. Organic growth in regional terms has consistently outperformed the nominal GDP of each region. This shows the excellent capability of our business models to take advantage of inflationary environment. Our ability to transfer costs to market quickly and the capacity to continue capturing market share in all countries, thanks to our clients recognition of our services. Consequently business performance has exceeded budget estimates, even outperforming the previous quarter, despite the adverse seasonal effects that our industry normally suffers during the second quarter of the year. For M&A, we recently announced the agreement between Prosegur Cash and Armaguard, Australian's main cash-in-transit operator, to create a joint venture for all services related to the cash-in-transit business in the country. This agreement is still pending approval by the Australian Antitrust Authority. Should this clearance to be obtained, we will update you on further details of this deal once it has been finalized. Finally, I would like to point out how as business accelerates growth, our leverage ratio begins to decrease, now being below its position in Q1 and with a positive outlook as the year progresses. Prior to the full review of our financial statements, I would like to share with you a more detailed view of what we consider the main achievements in the period. In the cash business, we continue to experience a strong increase in volumes in all regions, mostly in emerging ones, but also in mature markets such as Spain or Germany, where cash volumes have grown far above the nominal GDP increase. This recovery in volumes is also driving a strong improvement in margins, as operating volumes return to pre-pandemic levels and operational efficiencies derived from scalability become effective. We are also proud to state that our yearly price increase transfer process is progressing ahead of schedule, both in the percentage of the number of clients being reviewed, and in the price increase to be agreed upon, which is slightly higher than our current labor cost increase. This is excellent proof of the commercial capability that our business, mainly in security, has traditionally been able to deliver. And although there are still some pending costs to be transferred in the second half of the year, according to our estimates, we will continue with this excellent trend during the remaining part of the year. Finally, I will also like to point out the exceptional value creation that our Alarms joint venture with Telefonica, Movistar Prosegur Alarmas has delivered in nearly 2 years. In that period it has almost doubled its client base, increasing now more than 400,000 clients from 210,000 when it started operating back in March 2020. This is an extraordinary performance if we consider that sales almost drowned to a halt for 6 months due to the pandemic lockdown. In absolute terms, this achievement has created nearly EUR 600 million in value if we apply the same multiples of the initial transaction. We expect to continue creating more value in the coming quarters. Thanks to the anticipated client base increase. Let's have a look now at the consolidated P&L for the first 6 months of the year, which breaks down as follows. The most remarkable fact to share looking at both the accumulated 6 months P&L and the isolated Q2 is a consistent high double digit improvement in all lines. The strong 22.3% revenue growth arises from 18% organic growth, 2% inorganic growth and a 2.3% positive FX impact. EBITDA grows by 27% to EUR 218 million. This figure does not include the additional EUR 8.7 million in income resulting from the reversal of provision due to a favorable ruling in relation to a regulatory sanction imposed back in 2016 by the antitrust authorities in Spain. We have opted not to reflect this item in our results presentation as we prefer to present the most accurate image of what our business is able to deliver in pure operational terms, avoiding the inclusion of external one-offs, even if they are of a positive nature. Nevertheless you will find this item properly reflected in our published official accounts. In terms of EBITDA, we can see a 40.7% growth in comparison to same period of the previous year in absolute terms and 39.9% when comparing to isolated quarters to Q2 in 2021. This is very remarkable given the fact, as you know, Q2 is normally for seasonal reasons the weakest quarter of the year, as the cost increase is usually fully implemented while the transfer of price increase to market is still pending and will materialize in the second half of the year. This is a good delivery to prove how inflation benefits our business combined with a strong ability to transfer prices to market. Moving down the P&L statement, we can see an increase in financial expenses that corresponds mainly to the accounting effect derived from FX differences on intercompany loans. These therefore does not have any impact on the cash flow. Finally, we are also gradually reducing our tax rate as a consequence of improving our results in all regions and individual entities leading to a final net result of EUR 40 million, also with a close to 40% increase on the previous year. In the following graphic, we can see the full breakdown of revenues by nature and also the excellent improvement they have shown both in terms of regions and the main business lines. On a geographical basis, all regions have delivered substantial growth not only in local currency, but also in euro terms. It is worth noting that the real organic growth in Europe has been around nearly 10%, far above the current inflation rate, but it still shows some negative inorganic impact resulting from the sale of Prosegur Soluciones to Movistar Prosegur Alarmas last year. LATAM grows by more than 32% due to the combination of an excellent 29.5% local currency growth plus some additional positive 3.2% FX. The rest of the world has achieved 25.6% local currency growth, boosted by a 9% positive FX resulting from the appreciation in the dollar combined with our extraordinary 53% sales increase in the U.S. On the left side of the slide, we can observe a detailed evolution of our pure organic growth on a quarterly basis for both the company as a whole and the 2 main business lines. As you can see, once the worst effects of the pandemic had passed in the first quarter of 2021, all entities started to show a strong growth acceleration, which is now more than twice the growth of the pre-pandemic quarters. Let's now have a similar look at profitability. We observe excellent results in profitability driven mainly by the cash business, which continue to improve each quarter, thanks to the operational efficiencies resulting from the restructurings implemented during the pandemic and which are now apparent as volumes are recovering. Security has also made a sizable contribution. EBITDA has doubled in comparison to the previous quarter, showing a very significant recovery that has been driven mainly by higher volumes in technology solutions, good price, increased transfers and a very good reduction in all the [indiscernible] activities generated by the Omicron variant during the first quarter of the year. Please bear in mind that the security business received job-keeping aid from the U.S. government during 2021 for the aviation industry, which today has still not fully recovered. However, the business has been able to almost offset the impact of this aid, resuming the positive trends by its own means. For its part, Prosegur Alarmas continues to increase its profitability at EBITDA Pre SAC levels, benefiting from its ability to quickly reflect inflation in prices. And lastly, Movistar Prosegur Alarmas has slightly reduced its quarterly indicators due to the strong commercial effort it is currently making to capture market share in Spain. Moving on now to the consolidated cash flow statement. The most significant variation we can observe comes from the changes in working capital. This is obviously tightly linked to the strong sales growth we are delivering and the increased inventory stockpiling to ensure the supply chain. The operating cash flow for Q2 is around EUR 60 million, almost the same figure as that generated in the same quarter in 2021, excluding U.S. aid. We believe these positive trends will continue to improve during the year as our DSO remain within our normal operating parameters. And cash inflows from this route are currently being received during this third quarter. CapEx cash out increase is linked to the very positive current CapEx growth that we are experiencing. At the same time we continue to control our maintenance CapEx below 2% of sales. And finally, variations in treasury stock and others are related to own share acquisitions, the customers cutoffs and the recent investments made in inorganic growth in companies which are consolidated by the equity method. Looking now at the group's financial position. The most remarkable point is the reduction of our net debt to EBITDA ratio which has decreased to 2.3x. This is still comfortably below banking covenants and our own internal limits and a good initial indicator of our deleveraging commitment. In absolute terms, our net financial debt has experienced an increase of EUR 127 million compared to December 2021. This is explained by the increase in working capital mainly derived from the growth in volume. The average cost of debt of the group is 14 basis points higher than in Q1, as it now fully reflects the inclusion of our 500 million bond issue in April this year and whose coupon is 2.5%. This bond has reinforced even more our strong firepower and leverage expiration. As for the balance sheet, I'd like to highlight the reclassification to held for sale of their cash-in-transit balance sheet as a result of their agreement with our main Australian operator, subject to the antitrust authority's approval as previously mentioned. That's all from me. I will now hand over the presentation to our Head of Investor Relations, Antonio de Carcer, who will give you more detailed information on the development of the specific business areas as well as some additional information on our ESG progress and achievement.

Thank you very much, Maite. Let's now take a look at the results of each activity line covering the main pro forma indicators. The cash business has delivered very strong revenue growth, close to 28% driven by the noticeable recovery of cash in circulation in all regions, now that the negative effects of the pandemic in terms of lockdowns and restrictions are behind us. A phenomenal result supported by the beneficial effect on inflation on the business with organic growth higher than the compound with nominal GDP of each region and thus proving the excellent capability of our commercial teams to adapt and succeed in complex macro environments. As a consequence of this strong volume growth, the business has experienced an operational leverage optimization that has boosted profitability increasing EBITDA by 71%, resulting not only from the increased volumes, but also from the strong structural optimization measures taken during the pandemic. In terms of efficiencies, cash also delivered a very good cash flow generation in the second quarter. It outperformed Q1, even considering the fact that this exceptional growth recovers higher working capital consumption. Additionally, the recent announcement of an agreement to create a joint venture in Australia could mean the capture of further efficiencies during the coming years. It is important to note that this agreement is still pending authorization from the relevant antitrust regulatory bodies in the country. So no further details can be shared by us for now. New products have also increased its market penetration and now account for 23.4% of total sales. New product growth has been widespread in all regions led by Latin America, supported by the recent M&A of carbon activities in Uruguay and Ecuador, but also with a notable impact in Europe and rest of the world. Taking a closer look, we can see in the chart how the 27.6% in total revenue growth in the period is an excellent 22% pure organic in nature and additional 3.6 that comes from the acquisitions made in Q1 in Ecuador and Germany. And there is a 1.4% positive currency effect. Organic growth has been consistent in all regions and product lines. As mentioned earlier, new products now represent 23.4% of total sales. So when an extraordinary growth over 56% year-on-year, faster than the traditional services and clear proof of the acceptance of these new solutions in all regions. And finally, there is the already mentioned extraordinary 71% EBITDA increase of EUR 120 million in the first few months of 2022, an outstanding result continuing the margin acceleration initiated in 2021 and sowing the benefits of the operational restructuring put in place during the initial stages of the pandemic. Looking now at the security business, we can also observe a significant nearly 19% growth in revenue. This is driven mainly by Spain, U.S., Brazil and Argentina, but especially the U.S. as it continues to increase volumes by more than 50% year-on-year. On the profitability side, this business has continued accelerating improvement and is clearly recovering from the negative impact of the termination of the job keeping subsidies in the U.S. and the increase in employee activities generated by the Omicron variant in the past 2 quarters. In fact, these technology sales mainly in Spain and the U.S. lowered absenteeism and a strong focus on transferring cost increase to the market quickly are the 3 main drivers of the recovering margins that the business is experiencing. As indicated by Maite Rodriguez at the beginning of the presentation, transfer to price increases to market is ahead of target in both percentage of client base already reviewed and the price increase to be transferred. This has resulted in an improvement in margins that is also supported by the reduced absenteeism whose current outcome is also ahead of target. On the innovation side, the penetration of technology leading solutions continues to increase at a much higher rate than the traditional guarding volumes, having a fully blended structure in which there is no distinction between manned or unmanned services. An interesting example of this principle is the recent introduction of robotic monitoring services, mainly at larger sports and associated events where a certain physical security services are supplied by the teamwork of human guards and robots. We call this new model hybrid security, a new wider concept of security based on people, technology and data to provide a wiser, faster and more comfortable level of security to our clients. The breakdown of revenues by type in security looks very much like the one in cash. Strong almost 50% organic growth mainly driven by the U.S. and Spain, a mere 0.4% in organic increase from the acquisition made in the Midwest back in 2021, and a supportive 3.6% currency effect. As mentioned, new products continue to grow much faster than the traditional guarding services. Although traditional guarding has experienced a remarkable recovery versus the same period in 2021. Nevertheless both services that combine mobile guarding with remote monitoring and just plain technology sales by themselves have grown at a much higher rate. And this precedence is now being perceived as improvement in our margins. As for profitability, security is still under the negative comparable effect versus last year when we were receiving subsidies mostly from the U.S. government to maintain jobs. This came to an end at the beginning of Q4 last year when clients have not yet recovered the fully business operations. Now the situation is clearly reverting. As you can see in the figures, if we exclude the effect of those subsidies in 2021, the comparable reported EBITDA and security has almost doubled to 2.1% in the first 6 months of the year. We believe this excellent acceleration trend will continue during the second half of 2022, as there is still some more price increase to be transferred to the market, but mainly as higher-quality clients are being added to the portfolio in the most relevant regions. Let's shift now to the Alarm business that has also reported excellent performance during the first half of the year. The total contract base has grown by about 19% compared to 6 months '21 and exceeds 758,000 connections. Both units Movistar Prosegur Alarmas in Spain and Prosegur Alarms in the rest of the countries have reported 59% and 26% new additions, respectively, on a year-on-year basis, also improving on a quarterly basis. Growth continues to accelerate in both units despite the obvious seasonal effect that Q1 always have on this type of subscription-based business. There has also been an improvement in both churn rate and ARPU in both companies. And while it's very evident in Prosegur Alarmas where price updating is progressing very fast and with no issues, it is more gradual in Movistar Prosegur Alarmas, where both indicators have also improved versus Q1, but are still affected by the extraordinary growth of a client base that has doubled in size in almost 2 years through an aggressive pricing campaign. This situation is now being reverted and we expect ARPU and churn improvement to continue progressing during the year. In terms of efficiency over the past few months, both units have been working thoroughly on the optimization and acceleration of both the installation and consumer rotation processes. This, together with the automation of the arrangement of client visits and Alarm management through robotics is having a beneficial effect in terms of speed of growth, subscriber acquisition cost and operating margin. Although it's too early to see real tangible effects, we expect these factors to help reduce churn and increase margins in the midterm. On the innovation side, both companies continue jointly adding new features and products to the existing range. A good example of this is the new car finder service to track, locate and monitor several indicators on your vehicle that can be self-installed by the client and a new pet ready enhancement to the existing client base that allows the alarm to avoid false alerts triggered by the movements of pets inside of the house using a combination of sensors and intelligent video recognition. Analyzing the key performance business indicators of both units, the most remarkable facts we observed are 8.1% growth versus fiscal year 2022 on the combined installed base of both MPA and Prosegur that now have 406,000 and 352,000 active clients, respectively. Churn rate improvement of 110 basis points in Prosegur compared to the end of 2021 and also a 20 basis points reduction in MPA that indicates a positive correction trend for the following quarters. It is a similar case with ARPU values that increased by 17% in Prosegur and have also improved in NPA, now being EUR 33 per customer instead of the 32 reported in Q1. Cash flow generation in Prosegur has also grown as subscriber acquisition cost has continued to fall slightly versus Q2 '21, and the generated EBITDA Pre SAC has increased by nearly 26%. Looking at the revenues for Prosegur Alarms only, we can see a very solid 17% organic growth, affected by the still negative inorganic growth resulting from the sale to MPA of the commercial unit Prosegur Soluciones and also some negative effects impact a 2/3 of the alarms belonging to Prosegur Alarms are located in LATAM. And finally, in terms of profitability, we can see how both units have increased its relevant EBITDA Pre SAC results, both in absolute and relative terms by approximately 25 percentage. An excellent overall performance of the Alarm business lines, in that we consider and continue to deliver similar or even better growth rates in the second half of the year. Shifting now to AVOS, our technology business versus outsourcing unit, we can see that revenues have grown by more than 34%, maintaining a similar, even better evolution to the growth trend seen in past quarters. Gross profit has also grown by 21%, thus generating a slight reduction in margin that is explained mainly by the remaining effects of COVID absenteeism and the integration cost of the recently acquired Solunegocios in Chile. Regarding this operation, we are pleased to communicate that it has already been successfully integrated and hence, capture synergies will begin to show up in upcoming quarters. Additionally, AVOS has fully consolidated all its technology service lines into a vertical offering for clients called AVOS Tech, specializing technological solutions for banking and insurance sectors, which is widely responsible for the excellent organic growth delivered. In summary, AVOS continues to make progress in line with established budget for the year. Finally, let's have a very quick look at our cybersecurity business line, Cipher. Cipher is still in the process of restructuring of its offering model, shifting from a one-off consultancy oriented services to a managed detection and response services model that generates higher recurrency and stability in clients and has larger scalability advantages. This transformation requires a certain degree of investment in infrastructures and client portfolio optimization. And this is the main explanation for the temporary flattish evolution of both revenues and profitability. What's more results on the transformation are quickly taking shape. A good example of this is the recent awarding to Cipher by the Spanish National Airport Authority, of the cybersecurity protection contract for the entire technology infrastructure of all airports, a major contract with high visibility and recurrency. Also important is the recent launching of the global managed detection and response service, a service intended to provide cybersecurity monitoring and integration services for large multinational clients, providing homogeneously spoke cyber protection services regardless the geographical location of business activity. As of today, the GMDR service already provides services for more than 60 large multinational clients and is expected to continue growing to double size in 2023. This concludes our analysis of the performance of each business line for the first half of the year. Now I would like to briefly comment on our ESG performance. Prosegur continues to improve its commitment to sustainability and good government practices. Therefore, we are also expanding our communication policies to be included in the most reliable and market recognized ESG rating agencies. Today, we are proud to share with you that Prosegur and Prosegur Cash are the first private security companies in the world to obtain and publish its environmental social and government assessment from Standard & Poor's global ratings. The rating agency has positively valued the actions in environmental matters implemented by both Prosegur and Prosegur Cash and in particular, has highlighted those related to the management of greenhouse emissions, waste and pollution. Regarding the social of both companies, the report highlights its commitment to the client as well as its corporate governance activity in aspects such as the definition and compliance with codes and values and its information and transparency policy. This is a major milestone in our ESG valuation, and I would like to point out that the Standard & Poor's rating itself has also been recognized as the ESG assessment tool of the Year at the prestigious Environmental Finance Sustainable and Investment Awards 2022. Besides this excellent recognition, we are also proud to share with you our current ratings with other highly recognized rating agencies. As you can see on the right side of the slide, our good scores with the most reputable ESG agencies are above average in all of them, and we are fully committed to continuing on this path in the incoming years. Thank you for your attention. I will now hand the microphone back to our CFO, Maite Rodriguez, for her closing remarks.

Thank you very much, Antonio. To wrap up this first half results presentation, I would like to summarize the following key takeaways. First, I would like to emphasize once again the excellent growth in volume deliveries in the first half of the year by all businesses and regions. Cash has boosted its profitability by an outstanding 71%, proving that the cash in transit industry is well alive and also showing how all the efficiency measures we took during the worst of the pandemic were the right thing to do and are bearing fruit in line with expectations. For its part, security has also shown an exceptional performance. It has expanded in the U.S. by more than 50% and grown with new technological solutions in all markets and accelerated the margin recovery trend despite being the worst seasonal part of the year. We have been able to take advantage of all the macro environment variables that can help our business, proving the statement that inflation is an accelerator for the cash business and that it does not represent a major threat to the rest of the activities as they are very capable of transferring price increases to the market quickly and with no losses. In Alarms, we continue to create a sizable amount of value in Movistar Prosegur Alarmas, we plan to continue growing at similar excellent rates to the ones seen during the past 2 years. We remain active in M&A, announcing our intention to create a joint venture in Australia between the 2 main operators. In summary, an excellent first half of the year with solid indicators that make us very confident that the positive trends presented today can continue during the rest of the year. That is all from me. Thank you very much for your attendance, and I will now gladly take any questions you may have.

[Operator Instructions] There are no questions from the phones. Please continue. We've got one question, sorry. Would you like to take it?

Yes.

And the question comes from the line of Enrique Yaguez from Bestinver Securities.

Just 2 quick questions. I don't know if you could provide some visibility about the trend of sales in the different business units in July. Do you continue seeing acceleration as it was gain in the second quarter results? And the second question is if you could provide some about the margin improvement in security. I thought that the second quarter is the margins in security were going to be more or less in line with Q1 and the improved. And the question will be what kind of improvement do you foresee in the second half or it will be like in the second quarter?

In relation to the acceleration of sales, the trend is positive. Yes, we are improving every month, and we expect for the rest of the month to continue the same trend, positive trends. And in relation to the margin of security for year-end, we should be in a figure higher than 3-point-something percent. So we should be between 3% and 4% for year-end, more close to 3%.

We will now take the next question. And the next question comes from the line of Francisco Ruiz from BNP Paribas Exane.

I have one question on the Alarms. If we look at -- I mean it has been a greater growth on new connections. However, we've seen that Movistar Prosegur Alarmas continues to deteriorate in both ARPUs and churn. So how long will it take to maintain these levels? And if it's worth for these guys to continue growing with the deterioration of these other KPIs?

In the case of MPA, even ARPU and the churn, they have increased in relation to the first Q. You -- in ARPU I think that we were in around 32% and now we are in 33%. And in churn, you can't appreciate the improvement mainly because of the decimals of the number, but there is an improvement. Even though during the month of June, we have started new commercial airports and new commercial campaigns. So we -- not in the churn because we have permanent -- 1 year ago we didn't have permanent or long-term contracts. But in ARPU, we are still going to suffer a little bit, but just mainly because of these commercial airports that we have just started in the month of June.

Thank you. There are no more questions at this time. Please continue.

So thank you very much for attending this presentation. If you need further information, please contact our Investor Relations department who will openly help you to answer any questions at any time. And yes, have a nice day, and happy holidays.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.