Prosegur Cash SA

MAD:CASH

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Prosegur Cash 6-month 2020 Results Presentation. [Operator Instructions] I'd like to advise you the call is being recorded today, Friday, the 31st of July 2020. On the call with us today, we have Javier Hergueta, CEO; and Pablo De La Morena, Head of Investor Relations.I would now like to turn the conference over to Pablo De La Morena. Please go ahead.

[Pablo De La Morena Arranz, Investor Relations Director]

Thank you. On behalf of the Prosegur Cash team, we would like to welcome you to our 2020 second quarter results review. We also hope that all of you and your families remain safe and healthy in this difficult environment. As customary, this presentation will be led by Javier Hergueta, our Chief Financial Officer; and myself. We estimate it will last around 25 minutes.And during this time, we will try to address the most significant events that took place during the reference period. At the end of the call, we will open the floor for a Q&A session, where we will try to answer any remaining doubts with as much detail as possible. In case we don't get to all your questions today, we will be pleased to answer those on individual calls with each of you.I wish to thank you all for your attendance and remind you that this presentation is also available via webcast on our new corporate web page.Now before turning the call over to Javier, let me comment on relevant news regarding the use of cash. First, I would like to emphasize another public statement by the European Central Bank regarding the potential risk of infection derived from the manipulation of bank notes. According to Luis de Guindos, Vice President of the European Institution, the ECB has been working very closely with top-tier European laboratories to assess the behavior of coronaviruses on different surfaces and concluded that: first, coronaviruses can survive more easily on a stainless steel surface than on our cotton banknotes; second, that it is much more difficult for a virus to be transferred from power surfaces from cotton banknotes than from smooth surfaces like plastic. Therefore, the European institution concluded that banknotes don't represent a particularly significant risk of infection compared with other kinds of surface that people came into contact within daily life.Second, just to mention last month, U.K. Supreme Court rule against Visa and Mastercard. Britain's highest court confirmed that the credit card companies have restricted competition in the way they set fees for retailers and thus, allow them to seek compensation. On the other hand, cash established a cost ceiling to operate and becomes a natural regulator for other means of payment as it limits the fees that can be applied to electronic transactions, and we believe this unique benefit of cash is very important for society.Third, let's analyze the most recent findings of Interpol regarding Africa's mobile money industry. According to mobile money and organized crime in Africa report, the prominent role that mobile money plays in African societies and economies and the rapid pace at which its infrastructure has been developed has enabled criminals to exploit weakness in regulations and identification systems and commit mobile money-enabled crimes. The mobile money system generally sits outside a country's financial reporting system, making it almost impossible for authorities to monitor mobile money transactions. Therefore, the report concluded that unless the vulnerabilities are addressed, these services pose a significant threat to consumers and national security.Finally, just a brief comment on the Starbucks plan to eliminate cash as a mean of payment for its product. In this sense, Mr. Donald Payne Jr, a member of the U.S. Congress, wrote a letter to the CEO of Starbucks, in which he clearly stated that this sort of policy is restricted with the consumer freedom of choice. Thus, the congressman encouraged the executive to continue with the current policy and to allow all customers the freedom to choose the payment options that suits them best.Moving forward, today's agenda is as follows: we will start discussing the main highlights of the period; then we will review the performance of different regions; and finally, before moving to the Q&A session, we will summarize our financials and discuss our latest advances in sustainability.I will now turn the call over to Javier, who will cover the most relevant topics to date.

[Javier Hergueta Vázquez, Chief Financial Officer]

Thank you, Pablo, and good morning to everyone. Today, we are presenting our 2020 second quarter results, a period that continued to be negatively marked by the COVID-19 and the depreciation of the emerging currencies. From an operational point of view, the business has shown its resilience, with sales being within the anticipated range in the quarter. As a result, our sales growth in local terms reached 5.8%, while our reported EBITDA margin ended close to the 10% mark in the semester.Despite being significantly affected by volume reduction resulting from the lockdown measures, organic growth reached a remarkable 4.9% in the context of deepest impact coming from the pandemic. On the other hand, inorganic growth was close to 1%, reflected the deconsolidation of our operations in France and Mexico. Our EBITDA operating margin reflected not only the lower level of activity but also a nonrecurring cost of EUR 25 million devoted to the implementation of efficiency plans that is started during the second quarter of this year. More details regarding our underlying evolution will be discussed later in the presentation.Regarding consolidation. During the quarter, we have started to deploy a project to manage an ATM network in Australia, which not only strengthens the value proposition of our portfolio in the country, but also our view that in the new normal, our customers might accelerate the outsourcing of additional services. We keep exploring new M&A opportunities. And meanwhile, we remain focused on the integration of the companies acquired earlier this year.Now new products. By the end of June, new services represented 18.2% of our sales, which is well above the 15.9% figure posted a year ago. As we discussed in our previous conference call, new solutions have proven to be more resilient to the COVID-19 pandemic, and their more defensive profile allow them to perform better in this tough context.To conclude, let me stress our financial discipline. The cash protection measures we have implemented are starting to show significantly positive results in our cash flow generation, which remains strong and allowed us to reduce our total net debt in absolute terms versus the previous quarter. In addition, we have launched a dividend reinvestment program and share buyback program, as you already know.As a follow-up on the COVID-19 implications for the business, let me spend some minutes reviewing its impacts during the quarter and what are our assumptions for the second half of the year. Our quarterly sales performed in line with our expectations and decreased by 22% versus the same period of last year. In this sense, in the absence of further lockdowns, May was a through, as in June we have seen gradual improvements in our most affected geographies. Also during the quarter, our operations in Latin America were able to partially offset the activity decrease, with additional volumes coming from the distribution of the economic aid programs implemented in some countries. And this, again, reinforces our idea that cash is essential in many places due to its superior attributes, especially in crisis periods and that due to our logistic capabilities, we are in best position to capture all the opportunities that might arise around it.We anticipated that we have deployed several initiatives to preserve our cash flow generation and to adapt our cost structure to the current activity levels. And as a result of this, we have booked a nonrecurring restructuring cost of EUR 25 million in our accounts within the quarter, with the aim of gaining further efficiencies and being better prepared to face any future challenges and capture upcoming growth opportunities.From now on, and regarding the second half of the year, we maintain a prudent stance. We are assuming a slow gradual economic recovery and therefore, an improvement in our volumes and productivity globally as the activity resumes and our efficiency plans unfold. In addition, we are excited with the positive news coming from Australia. As on top of the ATM project mentioned before, we have been awarded a new contract, which means significant new additional volumes that will improve our numbers in the country. Finally, we will keep strengthening our efforts in maximizing our cash flow generation and advancing in the execution of the efficiency plans already underway.Now I will give the word to Pablo, who will walk you through the different dynamics of our regions.

[Pablo De La Morena Arranz, Investor Relations Director]

Thank you, Javier. In Latin America, our sales reached EUR 516 million, being the result of a double-digit local growth, somewhat about 17% that partially mitigates the negative combined effect of the strong currency depreciation against the euro and the higher inflation accounting in Argentina. Organic growth accelerated during the quarter and reached 13.5%.The business resiliency and the distribution of the economic aid programs in some countries have partially mitigated the lower activity, deriving from the lockdowns. Inorganic contribution, resulting from the M&A activity executed during 2019 and the beginning of 2020, was 3.7%.Moving to the new products. I would like to point out that our sales keep growing at double-digit rates in local currency and amounted to EUR 89 million. This figure represented at 17.2% of our total Latin American sales, an increase of 110 basis points versus last year. On the profitability side, the operating margin, excluding the restructuring costs, ended in EUR 106 million in absolute terms and 20.5% in relative terms. The COVID-19 and the currency depreciation are still negatively impacting the comparison versus the same period of the previous year.Moving now to Europe. Our sales ended in EUR 310 million, a decrease close to 17% versus last year, which is fully explained by the lockdowns and the deconsolidation of our French operations. We believe that the toughest moments are behind us. And since the reopening of the economies has started, we have seen gradual improvements in volumes and transported amounts. Our new product sales ended in EUR 48 million, representing 22.7% of our European sales, an increase of 6% versus the figures posted a year ago.The operating margin of the regions, close to 1% and also excluding the restructuring costs, have been severely eroded by the decrease in activity, deriving from the mobility restrictions introduced to reduce the spread of the pandemic.To conclude the regional summary, let's review our performance in Asia Pacific. Our sales amounted to EUR 45 million, a decrease of 11% versus a year ago. Inorganic growth coming from Indonesia and the new ATM business in Australia partially offset the lower activity resulting from the lockdown. New products, as a result of the new business in Australia, increased by 50% in absolute terms, reaching 9.1% of the sales of the region.Last but not least, let me highlight that the profitability of the region, which if we exclude the positive impacts resulting from the sale of South Africa in 2019, has remained pretty much in line with the one reported a year ago despite the negative impact of the pandemic. We expect a progressive margin recovery in the coming quarters, resulting from the new volumes already mentioned in the presentation. This is all regarding the performance of our different regions.I will now hand you over to Javier, who will summarize the financials.

[Javier Hergueta Vázquez, Chief Financial Officer]

Thank you, Pablo. Starting with the top line, total sales reached EUR 772 million, 13.1% less than the previous year. This is the result of a total negative impact of minus 19% coming from the combination of currency depreciation and the effect of applying IAS 29 and 21, partially offset by the positive contribution of our organic and inorganic growth of 5.8%.Organic growth in the period remained positive despite a pandemic and kept accelerating in Latin America while suffered in the rest of the regions due to the volume reduction resulting from the lockdown measures. Inorganic growth, which includes the acquisitions completed at the beginning of the year, has been partially offset of the deconsolidation on France and Mexico.On the profitability side, our reported EBITDA margin ended in EUR 76 million, representing 9.8% over sales. Our profitability has been mainly affected by: first, the sharp devaluation of emerging currencies; second, the lower volumes resulting from the lockdowns; and third, the EUR 25 million incurred to restructure our operations.Let me now explain our underlying operating performance in greater detail by focusing on the chart plays at the right-hand side of the slide. If we look at our normalized operating margin, excluding the gain from the South African divestment in 2019 and the restructuring costs in 2020, our underlying EBITDA reached EUR 101 million and 13.1% over sales, narrowing the gap versus last year to a decrease of 25% on absolute figures and 210 basis points in margin. And that implied a sequential underlying margin improvement in the second quarter against the first quarter of the year, despite the stronger impact from the COVID-19.Below the EBITDA line, our financial results posted net expenses of EUR 23 million, higher interest expenses resulting from the increase of our net debt position in subsidiaries, deferred payments, and FX-related costs explain the difference versus 2019 figures. As a result, our net consolidated profit ended the period in EUR 22 million, which represents a margin close to 3%.Regarding cash generation, let me underline that our free cash flow reached EUR 91 million by the end of June, which means almost a remarkable 25% increase versus last year and an implied free cash flow yield of 13% if we consider our last 12 months free cash flow and our current enterprise value. In addition, our cash conversion ratio remained at 75%, pretty much in line with last year's figure.Provisions and other items have been benefited from tax payment deferrals in some countries resulting from the COVID-19. CapEx and working capital figures started to reflect our productivity in managing efficiently our DSO and DPO and prioritizing and postponing CapEx investments. As a result, we recovered almost all of the working capital outflow reported in the first quarter and reduced by 1/3 our CapEx investments versus last year.M&A payments reached EUR 81 million and were a combination of cash outflows from deferred payments and new M&A and cash inflows related to the disposal of our Mexican operations. Finally, the dividend and the treasury stock lines incorporated the results of the dividend reinvestment program and share buyback program, both implemented in early June. As to the reinvestment program of the third tranche of the dividend, just to note that 78% of the shareholders choose shares instead of cash.Let me now make some comments regarding our total net debt, which on top of our net financial position includes not only the deferred payments coming from former acquisitions and the treasury stock, but also the IFRS 16 related debt. As of June 2020, we our total net debt amounted to EUR 737 million, a EUR 20 million decrease versus the figures reported by the end of March 2020. We consider this as a very relevant achievement as we have been able to deleverage in absolute terms despite the harsh environment and the exceptional restructuring costs incurred within the quarter. All in all, we maintain an average maturity period for our main financing facilities of 4.5 years.Before moving to the Q&A, let me briefly review our sustainability advances. Regarding the first pillar, the environmental aspect, we have started to operate our first eco-hybrid vehicles in Spain that will reduce both our CO2 emissions and our fuel consumption by 23% compared to the current fleet. Regarding the second pillar, the social aspect, let me reaffirm our strong commitment with the health and safety of our employees and customers and the quality of our operations, and this obligation is also extended to the communities where we operate.We continue cooperating with different governments and local authorities and allowing them to leverage on our logistics capabilities to minimize the pandemic effects.Finally, regarding the third pillar, governance, just to inform you that we are updating our internal codes and policies in line with the new recommendations proposed by the Code of Good Corporate Governance recently launched by the Spanish authorities.Also, we have decided to link the long-term incentive scheme of the management team to sustainability targets. This change will become effective in 2021 and will apply to the 2021, 2023 period.This is all on my side. Thank you all for the attention, and I will now be pleased to begin with the Q&A session.

[Operator]

[Operator Instructions] The first question we have today comes from the line of Rahul Chopra from HSBC.

[Rahul Chopra, Research Analyst]

I have 3 questions, if I may. Firstly, can you give us a sense of exit rates for cash volumes and probably maybe if you can give us probably the cash volume growth through the month? That will be really helpful. Secondly, could you give us what has been the main driver for the new contract things in the new products category in the cash business during this environment? And thirdly, if you can just walk us a bit more on political and economic situation in Latin America and its impact on cash.

[Javier Hergueta Vázquez, Chief Financial Officer]

Good morning, Rahul. I'll try to go through the 3 questions, one by one. On the first one, on the exit rate for cash volumes, I think that if you look at Europe, which is like the stronger impacts coming from the pandemic within our footprint, if we look at where we are right now and where we were before in the quarter, I think it's fair to say that the recovery from the bottom volumes that we saw a couple of months back is around the 50% mark.So in June, we had recovered around 50% of the drop in sales in Europe. And that is the, as we would say, the most affected region by the pandemic effects. So other than that, I mean in AOA, Australia could be at more or less similar levels. And then LatAm, as you've seen, is accelerating the organic growth itself. So really, this exit rate is not a concern in LatAm.In relation to the second question on the main drivers for the new products being contracted. I would say that in the actual context, all the outsourcing trend is pretty much in good shape. So on top of the value-added arguments for each of the different new product lines, we feel that all the incentives for outsourcing in both banking and retails all along the value chains are really a trendy situation that we are seeing across all geographies right now. And the smart cash, which is more linked to retail, I mean, we're seeing also the same path of recovery after the COVID or upon lockdowns being softened.So we think that the -- both the lowering of the pandemic effects and the lockdowns and the increase in the outsourcing trends will become a key driver in the coming quarters for new products.And in relation to the political environment and how that affects cash in Latin America, well, you're seeing the performance of our Latin American business. So I think it's fair to say that the decisions being adopted by the different governments in Latin America in the context of the pandemic are really supporting and highlighting the fact that cash is key and even more in crisis times.And going forward, we feel that, that might also be the case, for instance, like the increase in the monetary base that is happening or taking place right now in several countries in the region.

[Rahul Chopra, Research Analyst]

Okay. And just also in terms of -- if you look at the current COVID situation -- I mean if you look at -- in terms of differences, in terms of the way should we think about cost per trip, has any -- is there any change in those kind of dynamics we should be aware of?

[Javier Hergueta Vázquez, Chief Financial Officer]

Could you please repeat the question, Rahul? We didn't get it.

[Rahul Chopra, Research Analyst]

So in the current situation in the COVID is this any -- in terms of the cost per trip, should we be aware of any dynamics in terms of when you are looking through?

[Javier Hergueta Vázquez, Chief Financial Officer]

I don't think that there are any relevant cost items related to the COVID itself. I mean in terms of potential increases, it's more about the cost reductions taking place. I mean we've mentioned the restructuring costs related to increasing our flexibility and adapting ourselves to a change in demand environment.And on top of that, we have some other nonlabor costs also currently at minimum, I would say, and those really both pretty much in line with the activity level at all times. But I don't think that there is anything significant -- specifically due to the COVID other than these cost reduction programs already being implemented.

[Operator]

The next question today comes from the line of Steven Goulden from Deutsche Bank.

[Steven James Goulden, Research Analyst]

I've got a couple, if you don't mind. So just on the LatAm organic growth, you said within that, there's been a benefit from distribution of government cash handouts. Can you give us a bit of a feel for what impact that made because, obviously, 17% organic, very impressive in the current environment, so just to get a bit of a feel for how much that added? And then the -- my other question, could you just give us a bit of a feel on working capital -- sorry, on the free cash flow.Obviously, you pushed accounts receivable, to what extent is that sustainable or maybe it's just a temporary boost that recovers? And can you just give us a bit more color, I think, on the payroll -- on the tax delays that you've done and the impact that, that has had on free cash flow and when you might see a timing reversal of that? Sorry, just last one, if I may. On the Argentina situation, has there been any change in terms of likelihood of capital controls? That would be great.

[Javier Hergueta Vázquez, Chief Financial Officer]

Good morning, Steven. On your question about LatAm organic growth, I would say it's hard to say -- I mean -- or to put a [indiscernible] between the pandemic in the program being in place and the rest of the business because most of it is embedded within the same routes and the same operating performances. But I'll try to think it the other way around, I mean, if there was no pandemic, I think that the short answer would be that we will probably have been better because that would have meant that there was no COVID.I mean, we think that, that is inert into COVID and that also shows the importance and resiliency of cash. In relation to the free cash flow and working capital, accounts receivables, so on and so forth. In Q2, there's always some seasonality, that's one thing that helps, that's not different from any other year. On top of that, we are putting a lot of focus on our collections and payments. So there's some implicit improvement in the DSO figure. And there are also some payment deferrals due to the COVID situation. And so what we feel is that if the second half of the year performs in line with our expectation, which would be significantly better and some more growth then that will mean some higher working capital consumption. But overall, at the end of the year, there should be a normalized picture of working capital, with the focus on DSO being kept at all times.In terms of the Argentina situation, the capital controls, I think it's fair to say that it's not an issue for us in any case -- I mean, because we've already repatriated cash from Argentina in the last quarter, so we are already taking more debt in local currency in order to benefit from natural hedging. And we've repatriated that cash back to headquarters, so the main purpose of our cash flows in Argentina now will be to repay that debt in the coming months.So whatever happens with the capital controls will not be an issue for us. Having said that -- I mean, we don't really expect any dramatic changes in the scenario going forward.

[Operator]

The next question day comes from the line of Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, Research Analyst]

I wanted to know, regarding the organic growth in Latin America, whether you think that the cash hoarding ahead of the highly uncertain environment has had a positive impact maybe in the early months of the quarter? And so if you could give us a sense of how the mix between ATM cash withdrawals and lower use of cash at retail has affected during the quarter? And if the exit growth rate in June has been lower than what we have seen throughout the Q2 in Latin America?And secondly, if you could comment a little bit more or give us some more detail on the restructuring costs, what are the nature of these costs, what are maybe, I don't know severances or what's included here, whether this has already been paid or if this is only a provision? And what are the estimated savings from this? And when will they be realized?

[Javier Hergueta Vázquez, Chief Financial Officer]

Good morning, Alvaro. Related to your first question, I would say that most of the organic growth is coming from underlying real activity, let's say, or cash activity and not that much coming from cash being taken just one-offs to -- for whatever purposes, I mean, of savings or whatever it is or just keep cash in the pocket because what we've seen is an acceleration, sequential acceleration along the quarter, so it tends us to think that it's more about real economic underlying drivers of it.But what I would say on top of that is that all that money that has been taken out of the system for saving purposes, or whatever it is, will finally come back again. So that will mean that whenever that is put into circulation, there will be even more volume and more activity going forward.In relation to the restructuring costs, that is related to a number of initiatives from layoffs to early retirement programs, so on and so forth, depending on different geographies. Around 75% to 80% of all that is already executed, so that means it's been already cash out, and only the remaining 20%, 25% will really be provisions in the quarter that will be consumed in the second half of the year.And in terms of the savings, in order to give you a flavor, you should be expecting the payback of all these programs to be less than 12 months in any case. So that gives you an idea of that.

[Operator]

[Operator Instructions] The next question we have today comes from the line of Beltran Palazuelo from SANTALUCIA AM.

[Beltran Palazuelo Barroso, Equity Analyst & Equity Portfolio Manager]

First of all, I would like to thank all the Prosegur Cash employees for their outstanding hard work. I have a couple of questions. And also, I would like to thank the Board of Directors for approving the share buyback and the management team for proposing it. I think it shows a lot of alignment.Regarding the questions, for example, if you could give us a little bit more color on how Europe looks in June, July? And regarding the one, of course, what would volumes have to look like in order to achieve the same margins in Europe? For example, in Latin America, saying that you feel comfortable margins were very resilient, do you think at certain point, during the second half, we could achieve, let's say, pre-COVID EBIT margins?Then M&A pipeline, of course, with situation -- difficult economic situation, more opportunities arise. So maybe if you could give us a little bit of color what is on the pipeline, what you're looking at and regarding your strong balance sheet there, so maybe you can execute it.Then the last thing is there's a good thing in your presentations, you showed the free cash flow yield to enterprise value. If you saw this enterprise yield against the equity value, it's more than 20%. So my question is, how do you feel about your stock price? Do you feel happy? After this buyback is executed, what measures this management team is looking? New buyback is a tender process for a certain quantity of shares in the cards.And then, yes, of course, with around 30 million shares, you are very happy to buy much -- as much shares as possible in the market because it looks like no one is looking at your free cash flow generation, recurring free cash flow generation.

[Javier Hergueta Vázquez, Chief Financial Officer]

Hi, Beltran. Good morning. We'll try to go through the different questions and not miss any of them, as it's quite a lot. So the first one, I think it was about the June-July performance. So I think -- as we were mentioning before, what we've been seeing is a gradual recovery every month.So in LatAm, there's been an acceleration of the organic growth, and that has been sequential. So we will be on an increasing trend there, and that remains for the time being. And then in Europe, I think we mentioned that before. From the bottom of a couple of months back, we've recovered around 50% of the total sales drop there, so there's also an increasing trend. And what we are seeing is that we are recovering very consistently with the lockdown being less severe, let's say, and we think that we are performing pretty much in line with the economy.So basically, our penetration remains the same. So if the economy performs in the second half of the year, in line with the expectation of a gradual recovery, we would expect to do the same going forward and therefore, the second half should be significantly better than the first half.In terms of the margin, that is also somehow embedded in that outlook that I was mentioning, so we expect things to go better in the second half, and that would also imply margin improvements in all the different regions. But the same way that we've seen Europe being most hit by the pandemic, we also feel that the recovery is taking place at a good path. And I think that 2021 could be a good reference to compare the margins versus what we had pre-COVID. So for sure, there will be a recovery in the second half of the year, and we think that we will fully see the impacts in 2021.In relation to the M&A pipeline, as we've always said, the pipeline remains populated with opportunities of different nature. But as we already anticipated in our last quarterly results presentation, what we see is a higher wave of the outsourcing and transformation opportunities within the M&A pipeline mix, so our priority will be to try to capture the best opportunities possible in the best terms that we can, but most of them are now related to trying to position ourselves and capture all this outsourcing trend and the incoming number of opportunities related to this transformational opportunities going forward.As you've said, I mean our balance sheet is quite comfortable for us in order to undertake any further projects, so that's not a constraint at all. So we will keep analyzing transactions, and you should not rule out more M&A during the year and of course, moving forward.In terms of the free cash flow deal that you mentioned as well, our perception, trying to answer your question is that our stock is highly undervalued, and that's one of the reasons -- or the main reason why we have been keen about implementing the share buyback program.We think that it is quite difficult to find better alternative investment opportunities than our own stock at implicit free cash flow yield levels, which are facts -- I mean, actuals right now, not based on projections. So that is a reality right now, and we also wanted our shareholders to benefit from that potential, and that's one of the main drivers of the buyback program. And in terms of the program, which was your last question, we will try to accomplish the features of the program itself.As you know, we just -- a quick reminder on that is about 3% of shares, so up to EUR 45 million, with a maximum of EUR 40 million, and there are certain procedures that we need to follow in terms of how much we can acquire every day and so on and so forth, but we are following stricter rules and so far, executing that absolutely in line with those maximum amounts allowed for us.

[Beltran Palazuelo Barroso, Equity Analyst & Equity Portfolio Manager]

Okay. My question is, once you finish this program and if the stock price still keeps not reflecting the current reality, any more drastic measures being taken, as I mentioned, a bigger buyback or a possible tender?

[Javier Hergueta Vázquez, Chief Financial Officer]

We're just focusing on executing the buyback program, which is lasting for the next 10 months already because it's a 12-month program. We'll see what the context is and how the evolution of everything is happening during the meantime. And by that time, we'll see what are the options and what we want to do. I mean it's something that we'll need to monitor closely during the next 10 months.

[Operator]

[Operator Instructions] We have a question just come in from the line of Manuel Lorente from Mirabaud. I think he may have put himself on hold. We have a question here from Paco Ruiz from Exane.

[Francisco Ruiz, Research Analyst]

Most of them has been already answered, but I do have a couple of them. First one is related to the CapEx. I mean given the low activity in this quarter, the CapEx has been radically below the standards. So could you give us an idea of what we could expect for the second half?And in relation with this, what is the impact on your retail machine business? And the second question is on provisions. Provision has increased quite strongly. I don't know how much is related to this new restructuring plan that you commented, but do we expect these provisions to go substantially down in the second half as well?

[Javier Hergueta Vázquez, Chief Financial Officer]

Good morning, Paco. In relation to CapEx, I would say that, as you may have seen the reduction in CapEx in the second quarter accelerated to close to 50%, that is the consequence of both lower level of activity, as you said, in the retail industry because of the lockdowns, which is more affecting the client CapEx and also the policies of CapEx contention that we are applying on the infrastructure CapEx. Just to give you flavor, I think we anticipated this the coming quarter. Our aim was to reduce the infrastructure CapEx by around 50% in the year. That's our target, and that is happening from end of Q1 onwards. So therefore, the acceleration that you've seen in Q2, and we expect that, that will remain for the rest of the year.In terms of the client CapEx, which represents around 40% of the total CapEx, that will evolve pretty much in line with the activity. So, of course, there has been a period in Q2 on lower smart cash investment because they're very much linked to their retail, which was affected by lockdowns. But as the lockdowns are eased going forward, we would expect that, that portion of the CapEx will behave in line with the economic development going forward.In terms of the provisions, I guess you're referring to the cash flow line on provision and other items. I would say that the difference versus last year 90% of that is explained by some payment deferrals of different nature and some high provisions coming from these restructuring programs that we've mentioned before, so that will be like 90% of the difference. And how would we see that going forward is that those provisions will be consumed in the second half of the year, and those payment deferrals will also gradually be made, so we should be on a normalized basis in the second half of the year.

[Operator]

We have a final question here from Manuel Lorente from Mirabaud.

[Manuel Lorente, Analyst]

Just a couple of 2 quick ones. The first one, Javier is on -- again, on trading update for Q3. Sorry to come back to this again. You have been telling us that you expect a gradual recovery as long as the economy will recover throughout the end of the year, but -- I agree that visibility is limited, but can you give us some idea of what you are seeing from July trends? That will be my first question. My second question is regarding financial expenses, they have been increasing a lot this quarter. What could be a good guess for the end of the year?

[Javier Hergueta Vázquez, Chief Financial Officer]

Good Manuel. On the first question, I think most has been said already. So we would expect this gradual recovery in line with the economy. What we are seeing so far is that, that is the case, means when we mentioned that in Europe, by June, we had recovered like 50% of the sales drop from the bottom, then you should expect an increase in that recovery, so better volumes in July and going forward. That's our base case.In terms of the financial expenses, the increase in the quarter is explained by different factors. I would say that mainly 3 things explaining that with similar impact, 1/3 each of those: first one will be higher costs coming from M&A deferred payments and monetary reuse of actual value of future payments; second one will be higher cost coming from debt or higher debt taken in local currency plus the disposal of the EUR 300 million revolving credit facility for liquidity proposes; and third, to the other 2 will be the FX and other items impacts altogether, including IFRS 16, hyperinflation, wherever it is. So all those 3 lines together will explain the increase in the quarter itself.In relation to the full year outlook for the financial expenses, we think that the consensus is right now more or less implicitly expecting around EUR 40 million for the year. I would say that should FX remain more or less stable, that could be a good proxy.

[Operator]

There are no further questions. Please continue.

[Javier Hergueta Vázquez, Chief Financial Officer]

Right. So thank you very much to all for attending. I would like to make some closing remarks. First, I would like to recognize once again and convey our gratitude on behalf of the management team for the tremendous effort that all our employees are deploying, especially those ones who are in the forefront, ensuring the continuity of the business.Second, I would like to stress the resiliency of our company that has been able to keep posting positive organic growth even in the toughest period of the pandemic and also at the same time, sequentially improving its underlying EBITDA margin. And we expect that's going to be the case also in the second half of the year, as we mentioned before.Finally, let me also highlight the 25% free cash flow generation increase versus last year, which has allowed us to reduce our net debt in the quarter. We will keep the focus on free cash flow generation in the second half of the year, and this combination of cash generation, capacity and our long-term debt maturity profile make us feel very comfortable on facing future challenges and capturing future opportunities.This is all from my side. I would like to thank you again for attending. Hope to speak back to you in the next quarter results presentation. As you know, the IR team remains at your disposal for any further questions you may have. And would like to wish you all pleasant summer holidays for the one that will take it and stay safe in the meantime.

[Operator]

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.