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

Good day, and thank you for standing by. Welcome to the Prosegur Q2 2020 Results Presentation. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Juan Ignacio Galleano. Please go ahead.

Good afternoon, and welcome to Prosegur Second Quarter 2021 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 Sedano.

Good afternoon, and thank you all for your presence. We are thrilled to present a good result for the first half of 2024. As we shall see throughout the presentation, operating and financial performance in most of our businesses registered significant enhancements year-over-year. We are confident that we continue to be in the right track to comply with our main objective of generating value to our shareholders. All our commercial and financial teams are working side-by-side towards that goal, and we expect the second half of the year to be marked by cash flow generation and further deleveraging of the company. Let's now deep dive into the most significant milestones of the period. During the first half of the year, our main businesses continued to perform, resulting in EUR 2.3 billion in total annual sales. This represents a 6.9% increase year-over-year. The growth which was purely organic and across all geographies, not only highlights the solid operating performance but also reaffirms our growth strategy going forward. It's worth stressing that the figures increases to 8.1% when correcting for both sales for the Australian operation during the first half of 2023 and sales from the Indian operation during the second quarter of 2024. As for the former one, you know that it is outside our consolidation perimeter since the merger with Armguard. And regarding the later, we started to consolidate the operation effective April 1. Moving to profitability our cash business was mainly impacted by the depreciation of Argentine peso. Indeed, year-over-year, the currency depreciated in real terms around 10%. On top of this, 2 other factors explain the decrease. On the one hand, our ForEx business continued to expand, resulting in additional setup costs and operating expenditures. On the other, we are still impacted by restructuring costs in our Australian operation. We are confident that over time, this will no longer exist, allowing us to reap off the benefit of the synergies and efficiencies of the combined operation. In this line, it's worth mentioning the recent commitment made by the main players in the industry to contribute with AUD 50 million during the upcoming year and to reach an agreement on a sustainable fee structure going forward. Our security business for its part, continues its upward trend with a 30% increase in EBITDA compared to the same period of last year. EBITDA margin totaled 2.8% in the first half and 3.6% during the second quarter. As it has been the case in past quarters, positive results were mainly driven by enhanced operating efficiencies as we continue to grow in a very sustainable fashion. At the same time, our technology sales continue to increase on a yearly basis, coupled with the fact that the share of technology sales was higher year-over-year. As we will later see in our Alarms business, we continue with our strategic growth while keeping our main operating and financial indicators in line. This is the case for both Prosegur Alarms and our Spanish operation MPA. Our cash flow generation has been temporarily impacted by fewer operating days compared to last year. Indeed, the month of June this year had 1 additional weekend. At the same time, as was just mentioned, technology sales growth in our security business further deteriorating our DSO. Although it may seem obvious, it's important to highlight the temporality of all the above-mentioned impact. 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 slide, transformation products in our cash business continue to gain more relevance and exceeding 32% of total sales. Let's now turn to Slide 2 where I would like to deep dive into our sales figure. As said, total sales during the first 6 months of the year reached EUR 2.3 billion, 7% 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 range from high 30s to as high as 107%. When it comes to sales breakdown by geography, it's evident that diversification continues to improve as Europe share increases against LatAm. The 3.1% reduction in row sales is fully driven by removal of the Australian operation from the consolidation perimeter. Moving now to profitability. Total EBITDA reached EUR 147 million, marking a 3% decrease compared to the same period of last year. As seen in the right-hand chart, except for our cash business, all of our most significant businesses registered double-digit growth. As previously started, our cash business performed well but was impacted by the investments deployed in our ForEx business. It's evident that the new branches that we opened this year yield so far negative EBITDA. Every time, total sales are yet not enough to dilute all the fixed costs necessary to operate, mainly salaries and read. We certainly expect to reverse this in the upcoming months with the tailwinds of high seasonality. At the same time, FX dynamics played their part as currencies in some of the geographies where we operate, suffered a real depreciation against the euro. This impact, however, should not overshadow the positive results that we attained in most of the geographies where the combination of higher volumes and enhanced efficiencies combined to generate strong results. Such is the case, for instance, in Germany and Brazil. EBITDA growth in our security business was quite impressive, proving us right with the strategy followed over the past years, including the restructuring of our client base in some of the countries where we operate. Our commercial teams did a great job in passing through prices contributing to high margins. At the same time, we continued with the micro management of our cost structure while implementing cost savings initiatives. Our Alarm businesses presented solid results with service margins increasing 10% and 12% in Prosegur Alarms and NPA, respectively. As we shall later see the performance of almost every relevant indicator in Alarms moved in the right direction, pointing to an increase in value per customer. Indeed, the cash generation capacity of this business is particularly high and paradoxically overlooked as we will later see. Turning now to our P&L. It can be seen that all the way down to EBIT results were slightly impacted by the reasons I already explained. Net income, however, resulted in EUR 28 million, marking a 22% decrease compared to the previous year. The reason is the sharp increase in financial results, which were, in turn, driven by the hyperinflation effect that went from positive EUR 3 million last year to negative EUR 26 million. The explanation for such a shift is found in the security business in Argentina, which last year had a negative net monetary position since it held debt balances in its financial statement. This year and thanks to the cans financial and operating performance, the net monetary position became positive, and it started generating cash balances and debt were paid off. This is certainly very good news as it speaks for a complete turnaround of the business. However, the flip side of the capitalization is a negative accounting hyperinflation result. There's one point that I would like to further stress regarding this topic, and it's the noncash nature of the loss. However, out of the EUR 40 million loss last year, EUR 35 million were cash outflows compared to EUR 30 million this year. The lower cost associated with dividends upstreaming has a lot to do with the decrease. This is very important as it ultimately implies an improvement in operating results. When it comes to income tax, the effective tax rate for the year dropped to 48.3%, marking a 560-basis point reduction year-over-year. This reduction is even more impressive, excluding the hyperinflation effect. Net results increased 50% if we isolate the hyperinflation effect, which reflects the good performance of the period. Let's now turn to cash generation. The only line that has a significant difference compared to last year is the investment in working capital. As a matter of fact, and as it can be seen in the top right graph, DSO in June increased in 3 days, out of which 2 has to do with the calendar effect, while the other with the higher technology sales in our security business. These additional days are fully responsible of the EUR 34 million of additional working capital during 2024. As per CapEx, total investment reached EUR 89 million, in line with the same period of last year. Following our business strategy, the deployment of expansion CapEx was more skewed towards transformation products and our ForEx business. Infrastructure CapEx continues to be stable at 1.9% of total sales. To wrap up the consolidated financial overview, let's now discuss the company's financial position. Net financial debt reached EUR 1.3 billion, resulting in a total net debt-to-EBITDA ratio of 2.8x. We feel confident that throughout the second half of the year, we will generate enough cash to reduce leverage ratio to a level around the 2.5x. This will be the case even considering the aggressive growth forecasted in our security business. We are determined to capture as many profitable opportunities as we can, even when this implies postponing cash generation for the next year. It's worth highlighting that both terms and the structure of our debt is very healthy with an average cost of at 2.8% and over 70% 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 its 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 48% organic growth that we achieved during the first half of the year. This is a good estimate that volume growth remains high at very healthy levels. At the same time, and as it was already pointed out, different geographic dynamics of sales growth resulted in a more sustainable diversification. Both EBITDA and EBITDA margin were negatively impacted by structuring costs in our Australian operation, the FX impact in some of the geographies in which we operate and by the seasonal deferment in price reviews. It should be noted that the temporary gap in the pass-through of inflation to prices in a very high inflationary environment as the one in Argentina further deteriorates profitability. At the same time, investments in our ForEx business further explains the fall in EBITDA as we've incurred instead of costs and additional operating expenses without still benefiting from higher sales. As per product diversification, it must be said that it continues its upward trend. Indeed, transformation products are gaining more relevance, exceeding 32% of total sales. We are certainly benefiting from all CapEx deployed in both cash today and the ForEx business. Operating cash flow was primarily impacted by the calendar effect, which explains the increase in DSOs. The impact was temporary in nature and as of today, has been already fully reversed. Let's move now to our security business, which continues to be the major highlight. Total revenues reached EUR 1.2 billion, with the organic share reaching a remarkable 37%. This is mainly driven by our volume-based strategy that leads to operating leverage and our capacity to pass through inflation to prices. All the above, coupled with enhanced efficiencies and operating leverage resulted in total EBITDA reaching EUR 34 million, 30% higher compared to the same period of last year. Margins for the part reached 2.8%, marking a 17% increase when compared to the same period of last year. Again, operating cash flow was negatively impacted by the calendar effect in June and by the increased share of technology sales. As already mentioned, this was a key driver to explain the higher achieved margins. However, these kind of sales require a higher investment in working capital as DSOs are structurally higher compared with traditional guarding services. Let's now turn to the Alarm business, where once again, we delivered outstanding results. As it can be seen, all relevant KPIs continue to move in the right direction as we continue to grow. Starting with Prosegur Alarms, I would like to stress the outstanding organic growth, which sheds light on how agile we were in passing to inflation to prices. This has been particularly so in the case of Argentina, where given current macroeconomic circumstances, we continue with our strategy of reviewing prices on a regularly basis. This is mainly the reason why churn slightly increased compared to the previous year, something that we expect to normalize as we enter into the second half of the year. Volume growth is the other missing part that explains the 107% organic growth. As can be seen, our client base totaled $395,000, marking a 7% increase year-over-year. Service margin went up from EUR 16 to EUR 17, despite the negative impact of the depreciation of the Argentinian peso. Unitary acquisition costs went down almost 7%. This is mainly due to enhanced efficiencies and volume growth contributing to cost dilution, a higher share of what we call new channels, dealers and commercial alliances and the depreciation of the Argentinian currency. Moving now to MPA. All metrics behave as expected. ARPU without including discounts went up 3.6% from EUR 41 to 42 per connection, while churn limited from 13% to 11%. Acquisition costs increased year-over-year, primarily explained by enhancements made at a product level. Service margin resulted in an outstanding 12% increase moving to EUR 22. Finally, to wrap up our analysis on the Alarm business, we would like to stress the fact that we think anyone would agree that it should be the fundamental main state on which intrinsic value rely on, and yet it appears to be completely overlooked. The actual cash generating capacity of the Alarm business. In this line, we would like to focus on recurring cash flow. This is the cash that the business generates after acquiring the exact number of clients that churn during the period. So the service cash flow, which equals to unitary service margin times the average BTC, you should then subtract the reposition cost, which is calculated by multiplying the acquisition cost to the number of clients that churn. If we then add up the recurring cash flow of Prosegur Alarms and 50% of the recurring cash flow of MPA, we get a total amount of EUR 59 million. This implies that on a run rate basis, the Alarm business has the capacity to generate that amount of cash considering that all relevant metrics would stay the same. It's evident that this cash generating capacity is by no means reflected in the business EBITDA every time the growth investment coupled with the hyperinflation effect drive it down to very low figures as of June 24 to almost 0. The natural conclusion then is that this business should not be valued by an EBITDA multiple. This concludes our analysis of the performance of each business line for the full year. Thank you for your attention. I will now hand the microphone back to our CFO, Maite Rodriguez, for his closing remarks.

Thank you very much, Juan Ignacio. Let me now share with you my closing thoughts on the most relevant conclusions of this result presentation. On a consolidated basis, total sales increased in all geographies despite fewer business days. On top of this, we reported an enhancement in geographic diversification as the share of X LatAm increased year-over-year. The same is true for product diversification. In our cash business, total EBITDA has been negatively impacted by temporary effects such as the restructuring cost in Australia and the additional setup costs in ForEx. At the same time, the natural temporary gap of the pass-through of inflation to prices in geographies with very high inflation, temporarily deteriorate margins. It's worth highlighting the ongoing increase in the transformation product share of total sales, which are now over 32%. Moving to our Security business. We have presented a strong result with EBITDA and EBITDA margins increasing 30% and 17%, respectively, compared to the same period of last year. This is clearly a good testament on the efficiencies we are achieving as we continue to consolidate in certain geographies, capturing operating leverage. In addition, there has also been an improvement in the profitability per customer of our portfolio. The Alarm business continues its positive trend with all relevant indicators going in the right direction, while at the same time, DTC is growing, both in NPA and Prosegur Alarms. Furthermore, recurring cash flow amount to EUR 60 million, pointing to a strong cash generation. All this growth was achieved without putting in jeopardy our solid leverage position. We are confident that our leverage ratio will continue to fall as we generate cash flow during the second half of the year. At the same time, the good structure and low cost of our financial debt should not be overlooked to properly assess our financial position. 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 Francisco Ruiz from BNP Paribas.

I have 3 questions. The first one is on security. And given the strong growth that you saw in this Sonesta, could you give us a breakdown by geography which -- where are the geographies that are pushing this growth? And if this growth is expected to be maintained in the second half of the year. A follow-up on this is on free cash flow. It looks like every time that you assert the growth in security, you have a headwind on [indiscernible] so my question is how sustainable is to grow in security, increasing the return on capital employed that you put in the business because it looks like your cash flow is heavily affected every time the growth of expectations. And the third thing is on leverage. The current leverage of 2.8x looks high, even more when you have put the effort on controlling the leverage, not doing big acquisitions, et cetera. How do you see the evolution of the leverage in the coming quarters?

Thank you, Paco, for your questions. In relation to the first question about the growth in security, if the breakdown, mainly all the growth is -- or almost the big growth is coming from the big countries. As you know, U.S.A., Argentina and Spain, the COM are really doing very well. But it is important that the rest of them as a race that is also reviewing prices very well. They are at least having positive results and positive cash flow that's also important for us if we exclude the effect of the pass-through in prices. In terms of what do we expect for year-end, the accumulated margin for year-end should be at least the margin that we achieved last year. And these 3 countries, they are now, like, for example, in the case of Argentina, they are dealing with the fifth pass-through on a price review of the year. So we are happy of how they are evolving. And we think that everything will continue as it has been evolving during this first half. But the growth, as you know, this business is a volume business. So the growth is always low. And the good thing here is the positive trend that we are having quarter-by-quarter, and we will achieve and I think that we will increase the EBITDA margin for year-end in comparison to last year, year-over-year. In moving to the second question in relation to the free cash flow, as you know, when you grow in the case of security, you need cash flow, your working capital is going to be effective. In the technology business, when you grow, we'll need more cash flow. But because we are analyzing very deeply is the quality of the customers that we are winning. And they have a very, very good margin. So -- what we are going to do is this year, we are going to, let's say, sacrifice a little bit of cash flow just for achieving that very good margin growth. But that doesn't mean that we are going to have a negative cash flow as we did in previous year. If you remember, last year was the first time that security business achieved positive cash flow. And this year, we will repeat again, and we will have a positive cash flow coming from security business. So it is true that when you see the quarter of this first half of the year, the security business cash flow is negative, but it's mainly because of the seasonality that we have with the price review. So -- and in terms of leverage, that's why we are -- that was your third question. That's why we have such a high leverage that now we are in 2.8x, and is high, but it's also because of the seasonality. For year-end, we should at least or be around 2.5x, even I think that we are going to be better than that. But we should be better -- even the cash flow that we are going to generate at consolidated level is going to be better than last year one.

Thank you. We will now take the next question. From the line of Alvaro Lenze from Alantra Equities.

Just going back to the cash flow generation in security. You've mentioned that there is the pending impact from the repricing, but I just struggle to understand how that affects negatively on your cash flow and not on your earnings because if you are not repricing, you're not recognizing the revenues either. So I struggle to reconcile EUR 34 million of EBITDA to minus EUR 20 million of operating cash flow, especially considering that the operating cash flow does not exclude to does not include CapEx. That's my first question. The second question is the technicality on Alarms. I really appreciate the increased disclosure for the business that I'm struggling to understand the acquisition cost KPI that you are providing. It appears too high to me, and I cannot reconcile that with the numbers that you report in terms of profits. I don't know if this could represent the gross acquisition cost and that there is some acquisition revenue when you first sign a contract with a client and whether that should be included into this KPI or if this KPI is already net of any upfront revenues that you recognize when you sign a new client. And I'm also surprised by the fact that MPA has a higher acquisition cost than Brazil. If you could please clarify on that.

Alvaro, thank you very much for your questions. In relation to the first question about the cash flow and the differences between P&L and cash flow. You have to take in consideration that the technology when the invoices and the cash flow of the technology that we sell will come in with a higher DSO than the traditional guarding. And we have been growing a lot in technology, and that's why you have that gap between the P&L and the cash flow, but that's a temporary effect because you will collect that invoiced amounts in the next months or weeks. In relation to the alarms -- to the acquisition cost, hence, you have to take in consideration that what we call acquisition cost is the cash out that we have for acquiring an alarm. The cash that we have to pay for, I don't know, like publicity marketing, the equipment and all those things together. And in -- and maybe you are not considering that a lot of those costs, we activate them. We put them as an asset. So maybe that's why you have the difference.

We will now take the next question -- from the line of Jose Antonio Suarez from CaixaBank.

My questions, I have... if I may. One of them is more related to 2024 figures. Looking at Bloomberg consensus, it looks like from the figures in terms of sales, it reflects a 3% decline second half '24 versus second half '23, but this is considering the increase in the first half. So do you think there's -- how much -- how do you see the second half of 2024 evolving versus the second half of 2023? And also, are you comfortable with the EUR 170 million EBITDA figure for the full year? Do you think it's feasible to read you feel comfortable to reach and even surpass this figure? This would be my first question. And the second one, it's related to the division of AVOS Tech in the presentation, you didn't even put mention on that. So it seems like the priorities on both on AVOS [indiscernible] going a little bit back. So I was wondering what's your strategic approach about this division if you're planning to sell it? Or how are you seeing things going forward for the AVOS Tech division.