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

Good day, and thank you for standing by. Welcome to the Prosegur Full Year 2023 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I will 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 Full Year 2023 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. Today, Prosegur is very pleased to be able to present a very positive set of results to the market, even considering macro impact. As all you know, the Argentine peso suffered a sharp depreciation on December 14, severely distorting our P&L as we build our financials in compliance with IAS 29. Indeed, given the magnitude of the depreciation, most of our financial indicators fall year-over-year, not properly reflecting the reality of the business, as we achieved a solid operating performance during 2023 as we shall see. This is why it is now more relevant than ever to focus on cash generation to assess the business. Let's now deep dive into the more significant milestones of the period. As said, during the fourth quarter, our main businesses continued to perform resulting in EUR 4.3 billion in total annual sales. This represents a 3.3% increase year-over-year, which considering the FX impact, speaks for impressive organic growth. Indeed, volume growth in Security and Cash businesses, coupled with a fast and efficient pass-through from inflation to prices resulted in a 42% organic growth on a consolidated basis. To better assess the relevance of the figure, it must be said that it represents an all-time record. Moving to profitability. The 4% fall in total EBITA does not do justice to the actual operating performance of the businesses, such as the case that once excluding the impact of hyperinflation accounting, both EBITA and EBITA margin increased compared to the previous year. I would like to especially highlight the performance of our security business that registered a 3.2% EBITA margin in full year 2023 and an astonishing 4.8% during the fourth quarter. This is a clear testament that they pursue efforts over the past years to consolidate our position in the U.S.A. are paying off. At the same time, we are enhancing operating and commercial efficiencies in certain countries, especially in LatAm, and we continue to show an agile pass-through from inflation to prices. Thanks to an efficient working capital management, the higher achieved profitability redounded in higher cash generation. Indeed, cash flow from operations reached EUR 313 million, EUR 25 million or 9% higher year-over-year. As always, our main premise is to continue growing, but always being mindful on leverage. Overall, net debt stands at a cautious level relative to EBITDA and very well structured in the long run. As it has been the case for many years now, innovation is at the top of our priorities, as we know for a fact that it paves the way for a more diversified and hence, sustainable growth. In this line, new products in our cash business continued to gain more relevance exceeding 30% of total sales and continuing its [ up guard ] strength. We are proud to announce that the last ESG master plan came to an end with a highly positive balance. We have succeeded in promoting a cultural change within all levels of the organization, and we feel very optimistic towards the upcoming one. Let's now turn to Slide 2 where I would like to deep dive into our sales figure. As said, total sales during 2023 reached EUR 4.3 billion, 3% higher year-over-year. Discounting for the FX effect, almost the entire growth was organic, clear evidence on how efficient we were in both, passing through inflation to prices and most importantly, growing volumes. This has been the case for all our main business units where organic growth ranged from 33% to as high as 73%. Geographic sales diversification continues to improve as Europe's share is increased against LatAm. This is so even when the hyperinflation accounting effect is excluded. This is partially explained by the higher wage of U.S.A. in our security business and is certainly another edge to assess the sustainability of our operations. Let's now move on to review profitability. On a full year basis, total EBITA was EUR 280 million, marking a slight decrease compared to the same period of last year. As said, this decrease is fully attributed to the adverse impact of the hyperinflation accounting and by no means reflect the operating performance of the company. Indeed, EBITA growth in our Security business, where IAS 29 impact lease, reflected the positive combination of higher selling volumes together with the agile pass-through from inflation to prices and enhancement at the cost structure level. Our Cash business performed very well on a full year basis, registering 51% of organic growth. Even more relevant is the fact that volume grew on almost every geography casting out on the gloomy perspective of cash usage. As said, the accounting impact of IAS 29 prevent the operating enhancement to translate into higher EBITA. Indeed, once excluded both EBITA and EBITA margin increased year-over-year. Our Alarm business presented solid results with unitary EBITDA pre-SAC growing 11% in Prosegur Alarms, an extraordinary 22% in MPA. As we shall later see the performance of every relevant indicator in Alarms moved in the right direction, pointing to an increase in value per customer. This is the case for both NPA, our operation in Spain and for Prosegur Alarms in the rest of the world. Still conditioned by anticipated earnout, AVOS TECH continues its progressive recovery throughout the year, while cipher reported a 9% decrease in total sales compared to previous years as we will later explain. I would really like to focus now on our below EBIT performance as it shows that we not only outperformed from an operating perspective, but we also prove an efficient financial and treasury management. As a matter of fact, financial results registered a loss of EUR 85 million compared to EUR 64 million in 2022. The increase is clearly below the spike in interest rates, pointing to a very well structured debt. When it comes to income tax, the effective tax rate for the year dropped to 48.8%, marking a 700 basis point reduction year-over-year. As we shall later see, the reduction in accrued taxes is consistent with lower pay taxes. One of the main reasons for this decrease is the reduction in tax losses. All this led to a 1.3% increase in both net income and EPS, fully offsetting the negative impact of IAS 29 on EBITA. Let's now turn to cash generation. As I already clarified at the beginning, we are convinced that this should be the financial metric by which the performance of the company should be assessed, particularly this year, where IAS 29 fully disrupt our P&L. Free cash flow from operations reached EUR 313 million, 9% higher compared to the same period of last year. This is mainly explained by the combination of higher EBITA once IAS 29 impact is excluded and cash flow management improvements that have resulted in lower working capital requirements as a percentage of sales, deriving in better DSO and the EUR 9 million reduction in paid taxes. At the same time, there has been a significant increase in provisions and other noncash items mainly due to a calendar effect that resulted in the deferral of EUR 15 million in VAT, the reversal of write-offs and the reversal of the hyperinflation effect on EBITA. Further down, we can see that investment in CapEx increased by EUR 34 million, offsetting the higher operating cash flow. Few things are worth mentioning here. On the one hand, 90% of the increase was related to expansion CapEx. This will naturally result in higher future sales and margins. And on the other, infrastructure CapEx as a percentage of sales registered a slight decrease compared to last year. Dividends paid followed a similar trend to taxes paid. Indeed, part of 2023 dividends were advanced during 2022, which explains the big drop this year. It's worth mentioning on committed dividends for 2024. The Board has recently approved an EUR 83 million dividend, marking a 15% increase compared to the normalized 2023 dividend. This is fully explained by our expectation on rising cash generation for the year. Regarding the EUR 34 million increase in treasury, stock and others, this was mainly driven by the deconsolidation effect of the Australian subsidiary on cash balances, which includes the funding of the working capital requirements until December '23. Lastly, the EUR 54 million difference in the exchange rate line is explained by a combination of factors that include, on the one hand, the negative impact of the increased cost to dividend upstreaming in some regions, coupled with the nominal depreciation mainly of the Argentinian peso. To wrap up the consolidated financial overview, let's now discuss the company's financial position. Net financial debt slightly increased year-over-year, reaching EUR 1.2 billion, resulting in a total net debt-to-EBITDA ratio of 2.6x versus 2.3x in December 2022. The increase is fundamentally explained by the accounting EBITDA as a result of the full application of IAS 29. Indeed, excluding this impact, the ratio decreased compared to the previous year. It's worth highlighting that both the terms and the structure of our debt is very healthy, with an average cost of 2.7% and over 73% at fixed rate and long term in nature maturing in 2026 and 2029. That's all from 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 lines covering the main performance indicators and most relevant aspects of the period. Starting with our cash business, I would like to reinforce the 51% organic growth that we achieved during 2023. This not only shows the agile commercial response to inflation but also that volume growth remains high at very healthy levels. Naturally, the sharp depreciation of the peso, coupled with the accounting mechanics of IAS 29, resulted in a slight reduction in total sales. As said already, the same mechanic is responsible for the 15% EBITA reduction since the hyperinflation accounting effect is excluded both EBITA and margins would have been higher year-over-year, in line with the enhanced operating performance throughout the year. This comes to light at operating cash flow level where we reached EUR 226 million, EUR 3 million or 1.3% higher year-over-year. It's worth highlighting that fiscal year 2023 cash flow was negatively impacted by certain regulatory one-offs without which the increase would have been even higher. These positive results are reinforced by the fact that diversification continues its upward trend. Indeed, new products are gaining more relevance, exceeding 30% of total sales. We are certainly benefiting from all CapEx deployed in both Cash Today and Forex business. So let's move now to our security business, which continued to be the major highlight during the fourth quarter. Total revenues reached on a full year basis, EUR 2.2 billion with the organic share reaching a remarkable 33%. 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 U.S. All of the above, coupled with enhanced efficiencies and operating leverage, resulted in total EBITA reaching EUR 70 million, 37% higher compared to the same period of last year. It's worth highlighting that almost every single geography was EBITA positive. Margins for their part, reached 3.2% on a full year basis and an outstanding 4.8% during the fourth quarter. Even more impressive was cash generation during the year, as can be seen in the low-end bar graph, the business has positively contributed to total operating cash flow generating EUR 25 million. It's clear that we are ripping off the benefits of all the investments made during the past years, coupled with the active management at working capital level. We are very optimistic going forward as we are confident that the consolidation of U.S. operations will further contribute to cash generation. Let's now turn to the Alarm business, where once again, we delivered outstanding results. As it can be seen, every relevant KPI did better when compared to the same period of last year. Our client base totaled 871,000, marking an 8% increase year-over-year. While we continue adding new clients, it's evident that we are doing so at a slower pace compared to previous years. This is particularly the case in [ MPA ], where new clients totaled 99,600 compared with the 149,000 we added during 2022. As we have already explained in previous quarters, this was a deliberate commercial strategy aimed at targeting a more sustainable growth. As a result, churn rate went down from 14% to 12%, while ARPU significantly increased as the share of discounts was reduced in line with followed strategy. As for Prosegur Alarms, both metrics continue to be solid with churn standing at an 11% and ARPU increasing 3% to EUR 39. All these effects allow us to generate value on a per client basis. Indeed, for [ MPA ], EBITDA pre-SAC reached EUR 24 per client, while in Prosegur Alarms, we reached EUR 19, marking an 11% increase year-over-year without considering discounts. To conclude with this product line results overview, let's briefly examine AVOS TECH and cipher. AVOS TECH's sales grew by 4.8% during the year, driven by the strong performance of the SISnet solution, a specialized management tool for insurance companies. As we previously explained, the commercial success of this technology led to a higher payout of the earnouts agreed upon during its acquisition 2 years ago. This increase in earn-outs was settled in the second quarter and is responsible for the temporary reduction in AVOS TECH EBITA, which has totaled EUR 6 million, representing a 6.6% EBITA margin. As for cipher, sales reached EUR 15 million, showing a 9% decline compared to the same period of last year. It should be noted that this is mainly explained by the shift in sales scheme moving from reselling to recurring. As per profitability, EBITA totaled EUR 4 million, 28% lower year-over-year on the back of continued marketing and platform investments. This concludes our analysis of the performance of each business line for the full year 2023. Thank you all for your attention. I will now hand the mic 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 a strong result. This was particularly the case in our security business, where we reported an outstanding performance with higher volumes and cost efficiencies that led to high margins. We are very optimistic on the future growth of the business as we consolidate our position in the U.S. and continue to enhance operations in specific geographies. Our cash business reported operating growth supported by growing volumes and enhanced efficiencies. The hyperinflation accounting effect, though, disrupted financial figures. Going forward, we expect to deepen our diversification through Cash Today and Forex. Today, they both represent circa 30% of total sales. The Alarm business continues its positive trend with all relevant indicators going in the right direction, while at the same time, DTC keeps growing, both in MPA and Prosegur Alarms. We are confident that we have already reached a level where new additions can be entirely financed without burning cash. All in all, the better operating performance, coupled with an active and efficient cash management resulted in a 9% increase in cash flow from operations. Total CapEx, on the other hand, increased by EUR 34 million, fully explained by the growth in expansion CapEx in our Cash and Alarm businesses. All this growth was achieved without jeopardizing our solid leverage position. Net debt-to-EBITDA continues to be at sustainable levels and the terms of our financial debt are highly attractive. Lastly, I don't want to overlook our new 2 years business plan, where all our efforts will be diverted to maximizing cash generation. We have positive growth expectations with focus on operating efficiencies that contribute to margin improvement in key markets. From an ESG perspective, during 2024, we will put in place a new set of renewed goals and initiatives within the framework of a new midterm plan. 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] The first question comes from the line of Enrique Yáguez from Bestinver Securities.

I have 3 questions. The first one is regarding the new strategic plan. When should we know something deeper allowed it, if you could share with us any further insights about the different strategic priorities of the different business units. And related with that, also the future capital allocation of the company going forward. And finally, I would also like to ask about your intentions with the stake in Telefonica. Thank you very much.

Thank you, Enrique, for your questions. In relation to the first one, our strategic plan is going to be based on efficiency and cash flow. We have also growth but is mainly focused on trying to achieve higher and better margins and trying to improve our cash flow so that we can decrease our debt. If we -- is that the main priorities that we have in relation to is, of the different business units, in cash, we are going to be more focused in the expansion of the new products we have. Our main target is going to be the diversification of the new product. In Security, we will be more focused on the positive trend that we already have been -- or that you can observe in this last year. So we are going to be very focused in increasing our margins and diversifying also, but in this case, geographically speaking. We are going to be very focused on USA. As you know, U.S.A. is going to be one of our main goals for this new strategic plan. And coming back to the Alarm business, we will be focused on the growing BTC, but without consuming cash so that we continue with the main goal of reducing our debt and increasing our cash flow. And in terms of capital allocation for the[indiscernible] clients, we are not going to be very focused on M&A. We -- our main growth is going to come from organic growth. And of course, the CapEx will be key mainly because of the customer or the expansion CapEx. The infrastructure CapEx will be still contained in the 2-point-something percent of sales. So it will be like the same percentage that we are investing now. And coming to the second question about Telefonica shares. We do not have any obligation to keep them. It will depend on the price of Telefonica share. So we really do not need that cash flow. And in our internal KPIs, we consider it as if it is cash flow. But it will depend on the moment because we really do not want to keep them back. It will depend on on when it's going to be the moment to sell them. And we think that there is still a lot of upside in Telefonica, and it's not the moment now, but we'll see what happens.

[Operator Instructions] We will now take the next question from the line of Manuel Lorente Ortega from Santander.

Just a quick question on the very supportive dynamics on the Security business, especially in Q4. So this very high profitability levels is the good starting point for 2024. We have been -- or the extraordinary margin has been affected by nonrecurrent issues?

Thank you for your question, Manuel. As you know, we -- in the first Q, we are very happy with the 4.8% margin that we have achieved in the 4Q, and as you know, for 2024, we should -- during the different quarters, we are not going to have that margin mainly because of the pass-through costs that we have is something difficult from our sector. But for the full year results for 2024 and in 2025, in our 2 years plan. The trend should be quite similar, and I think that we should be always of course increasing the margin.

So the 4.8% margin in the fourth quarter in standalone. It's a result of, let's say, improvement mix in the U.S., so known the relevant extraordinary nonrecurring impact.

No, no. Okay. So what I am saying is that that 4.8% is -- it hasn't got nothing extraordinary or -- no. It's business as usual. And for the -- and when I mean that we should be having a higher margins, I mean, comparing with the 3.2% that is the full year margin. So -- but we will see the split between the different quarters, we will see how it evolves. But what I mean is that for the full year, if we compare '23 with '24, we should be better and no, and there is nothing extraordinary. It is true that the highest margins that we have are coming from U.S.A. and -- but we are also doing very, very well in the rest of the countries, even now just in a very 2 very small countries, we are having negative margins. But in the rest of them, we are having positive ones and even in the big ones. So -- and as you know, Brazil and other countries that they were -- that we say for a long time, having negative percentage -- negative margins, now we have a positive one. So that's I think the good news of the turnaround in the 2022-2023 and that we will keep going for the next business plan.

And maybe a word on whether you can give us some detail on your free cash flow statement in the provisions and other line, which I believe is roughly EUR 130 million. I believe that it should be a combination of many different factors, including FX, headwinds, accounting standards, technicalities from M&A, but can you give us an idea of what is the different building blocks of that line?

Yes, sure. The increase from -- I think that we passed from EUR 13 million to EUR 130 million in 2023, that increase is coming from the provision and other noncash items. But as you know, we have to correct the EBITDA from the non-cash items. And the mainly -- the main impact that we have are coming from calendar effects that resulted in the deferral of the VAT here in Spain that we have something like EUR 15 million or something like that, an accounting noncash impact, including reversals of one-offs that we have -- and you can see that in our annual report account we have. If you add everything, we have another like EUR 10 million coming from write-offs that we have done and that we have to correct them because it's a noncash item. And the reversal -- don't forget Manuel about the reversal of the hyperinflation effect on our EBITDA. That's why we are alert in saying that our EBITDA is not really reflecting the reality of the business because the IAS 29 is really disrupting the figures and they really do not have sense. But when you analyze the cash flow, you can see there how we have to correct that effect and how we finally achieve a 9% growth in our operative cash flow. So I think that, that's the way how we have to analyze the performance of the business and of course going this year with that 9% increase in our cash flow and not the -- our EBITA or EBITDA replaced because it's not -- it doesn't reflect the reality of the business.

We will now take the next question from the line of Miguel Medina from Mirabaud.

Can you hear me? Perfect. No, just 2 follow-ups and 1 new question. The first follow-up is on the -- what you have just touched upon the Security business. You mentioned that there were 2 small -- small countries in which the margin was negative. So I take then that the U.S., even after overheads is now in positive territory. Because if I recall correctly, in the past, you were making -- you were profitable at the contract level, but the overheads and structural costs were offsetting that. Now in the U.S., you are profitable, full stop. Is that correct?

Thank you, Miguel, for your question. In relation to the 2 negative countries that I told you, 1 is China that I think that the total revenue is, I don't know, even I can't remember EUR 6 million. And the other 1 is another very, very small country. So that's what I mean. And in terms of overheads, here, I don't know if the total figures that we are having now -- but here, maybe what you can see during this 4Q is that there are some internal changes in organic -- in the organizational structure with the business now bears a higher cost of support. So in all these overheads, we always include all the support costs and now we are those costs in some countries, they are passing to the country, mainly, for example, is in U.S.A. where they have their own country manager. They are not leased by the support global area. And it's a new model that is more efficient and that we are trying to check how it goes. So that's why you are analyzing that -- you are looking at a straight movement coming from negative to positive.

Okay. And then the second follow-up question. I think it was a very -- the very first question in the Q&A on the strategic plan. You gave some qualitative data by division, but in the previous plan, the one that run until 2023, you gave fairly specific quantitative targets that were -- I mean, I think, if I recall correctly, you gave some long-term guidance up to 2030. So I was just wondering whether you are planning to do an event or host a presentation in which you will give more specific targets for the '24-'27 plan and how you can frame those targets in light of the 2020 targets that were disclosed in the previous strategic plan?

Miguel, we are thinking about doing something, but it's not decided. So -- but it is sure is that we are not going to do a Capital Markets Day but what I would really like to do is something by business, like maybe an Analyst Day where we can speak about security, the future of the security maybe the analysts, they can visit our [indiscernible]. So we are thinking of doing something related to that, where we can also speak about figures for the new business plan, even we have a [indiscernible] 6 plan. So we have 25%, 27% and 33%. So we are thinking of doing something, but it's not decided. So maybe finally, we don't do it, and it's going to be maybe next year or in September, but we will see .

Okay. And the very final one, and then I'll shut up. It's -- I have gone very quickly through the tender offer document. I assume that's why you cannot comment a lot on that -- on the tender offer situation, but just I think it's a very straight question. If my understanding is correctly from reading the document, basically, there is some sort of like a standstill period of 12 months in which basically -- it's not -- you're not going to see any changes in the whole Prosegur Group structure. Am I right in that?

Miguel, I think that what it means is that -- I know why you are asking that, but I think that -- but -- and it's not on the table now, what we are asking is this is it. But really if it appears in the -- if it was in the public, I guess that even -- we're going to take it, and I will tell you if it's 12 months or how long it is because I'm not sure. But I think that is not something mandatory. But even though the other -- we are not going to -- it's not on the table now in buying cash.

We will now take the next question from the line of Iñigo Egusquiza from Kepler Chevreux.

This is Inigo. Just 2 quick questions from my side. A follow-up on the last question that Miguel asked you. On the partial bit, you were very clear that there is nothing on the table regarding, I would guess, a future acquisition of Prosegur minorities. So my question is, I can understand why the major shareholders is launching a bit at this price, which I think is very, very attractive. But at the end of the day, for the -- from a market perspective, the liquidity issue for the [indiscernible] stock. This is not going to be positive. This is going to be negative. So I don't know, any thoughts on why we just this partial bit and nothing else or nothing else behind. This partial bit, any thoughts would be appreciated. This is the first question. And the second question on Argentina. Obviously, we have seen a big pain on your P&L because of the peso devaluation that we saw in December, the 50% devaluation in just 1 shot. My question is more on the future and the implication for the Argentina economy and for your business in particular of all the measures taken by Milei. I'm not an expert on Argentina economy, but I have the impression that he's taking a lot of decisions very quickly. I don't know what's your expectation for the economy as a result of these measures taken in a very short time. Thank you.

Thank you Iñigo for your questions. In relation to the -- even I'm going to ask because we have already checked that what Miguel was asking about the 12 months is not like that. It's like it's business as usual, so. And in relation to the liquidity that you were asking, I think that it is true that now the liquidity is going to be reduced. It's common sense. But I think that if the delivery of the company improves and even keeps going better and better and better, I think that the liquidity is not going to be the problem because the good performance of the company is going to become presumably more attractive so that I think that we can deal with the liquidity. But it is true that at the beginning, it's going to be a handicap for the investors that wanted to invest in Prosegur, but totally agree in that sense. Coming back to the Argentina economy and the measures, I think that for 2024, I don't know, as you know, Argentina has the ups and downs. But for this 2024, I am very positive. I think that the Argentina economy goes better, it's going to be better for everyone. But as you know, for our cash business, the inflation is very good for our results. And -- in this sense, for example, one of the measures that Milei is going to -- and even they have already said is that they are going to print new notes. So that's going to make us having more movements because we have to move more different amounts of notes and so on. So that at least is going to give us a very good one-off. So I think that we are very positive, and we will see what -- how the inflation continues and even we think that the inflation is going to be higher than the devaluation this year. But in the end, we have to see what happens.

[Operator Instructions] There are no further questions at this time. I would 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 serve you at any time. Have a nice day.

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