Prosegur Cash SA

MAD:CASH

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Prosegur Cash Q2 2023 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded.

Now I'd like to hand the conference over to your speaker today, Miguel Bandrés, Head of IR. Please go ahead.

[Miguel Ángel Bandrés Gutiérrez, executive]

Good morning to everyone, and thank you very much for dialing in to today's meeting. I want to welcome you to our 2023 Q2 results review that will be led both by Javier Hergueta, our CFO; and myself. The presentation is planned to take around 30 minutes in which we'll share the main events that have taken place in this first 6 months, including many ESG developments, as well as the drivers that lie behind the performance of our company. We as well will review our main financials and our key results by region. After the presentation, we'll open a Q&A session where we will address the questions you might have. Should we not get to respond all points today, we'll answer those remaining on an individual basis.

I again want to thank you all for your participation and remind you that this presentation has been prerecorded and is available via webcast on our corporate web page at www.prosegurcash.com.

To begin with, and before passing on to Javier, I would like to highlight several recent events and news regarding the world of cash that can give us an idea of some important developments around that. The areas covered go from recent measures proposed by the European Commission to protect cash, the usage of cash by Spaniards, the trust of Swiss citizens on cash or the shutdown of Verse.

So turning to Page 2, we can read that the European Commission has just put forward a proposal to ensure that citizens and businesses can have access to and make payments with the banknotes and coins in the euro area. This is only a further step in line with government policy initiatives around the world to protect cash in society. Being aware of how fundamental this mean of payment is for the correct functioning of modern economies, promoting inclusiveness, avoiding privacy breaches and insuring freedom, all of these as fundamental values of our society.

In the second piece of news, we can read how relevant the use of cash is for the Spanish population. In this study carried out by the Spanish consumer and user organization, OCU, they find out that 99% of the Spanish population uses cash and 60% uses on a daily basis, citing as main reasons that it warranties their privacy, they find it accessible and it's convenient. Once again, study shows the resilience of cash in society and, most importantly, the fact that consumers appreciate its attributes and use it.

We now move further north to Switzerland, where we can read an interesting article citing that Swiss citizens have a high trust in cash. Its unique characteristics of safety and resilience make it a preferred option for them as a protection element. It's estimated that they keep on average $12,000 of cash at home. These being the highest of any other economy in the world. It's important to underline that this happens in what probably is the safest country in the world, and it might make us reflect what are we doing back home.

In the last piece of news, we can read about Verse, a very promising Spanish immediate payment platform supported by Block, the former Square. This app that reached a very significant amount of 2 million users will be discontinuing operations as from September this year. Amongst other problems such as finding consistent and alternative growth patterns, regulatory bodies have fined the company for anti-money laundering reasons. All users have been requested to take their money out of the platform in the coming months. Despite this being warranted, it is one more in a line of shutdowns in alternative payment methods that definitely show -- should raise an eyebrow on the direction this industry is taking.

This overview gives us a flavor of how solid the world of cash is, and this is once more reflected in our results. I'll share with you today's agenda. First, Javier will review the highlights for the period, then he will elaborate on the very important merger approval granted in Australia, before reviewing our P&L and our transformation strategy.

After, I'll share the key drivers by region, and Javier will review our cash flow, our debt evolution on our main ESG highlights. Before leading to conclusions after which, we will open the Q&A session.

This being shared, I would like to pass over to Javier, so he can walk us through the key highlights of the period.

[Javier Hergueta Vázquez, executive]

Thank you, Miguel. I would like now to share with you the key focal points for the period that can be summarized as that of a very significant organic growth with a strong transformation while recovering margins.

The first point to underline is the growth of our top line by 10.9% in euro terms for these first 6 months of the year and really important to note is the fact that organic growth has climbed by 33%. This growth is backed by volume increases that show the health of our industry. We must remark the persistency of underlying inflation across all geographies that continues to help the evolution of our volumes. It is as well important to underline that all geographies have contributed with solid plus double-digit organic growth in the period.

Second, we note that our EBITA margin has reached 13.2% in the period, representing a 7.1% improvement in absolute terms. We can observe a sequential improvement on how EBITA has increased by 15% quarter-on-quarter, leading to a 13.7% margin in the second quarter stand-alone despite still some business seasonality and ForEx exchange headwinds.

Looking at our transformation effort, this continues to advance at a very strong pace. New product sales account for 29.1% of total company revenue, and we can observe a good seasonal ForEx development as well as a strong advancement of the penetration of our new product offering in all geographies. All in all, new products grew by 38% in the period.

Moving on to free cash flow, we can see that it has totaled EUR 35 million in the period, confirming a good acceleration of cash generation quarter-on-quarter, since in this second quarter, we have added EUR 27 million. I would like to highlight the improvement in working capital consumption of EUR 9 million versus the same period 1 year ago despite fueling the continuous accelerated organic growth we have seen earlier in this page.

And the last 2 elements I would like to underline in the period are: first, the renewal with a very good 64 grade of our Standard & Poor's ESG rating, recognizing our relentless commitment to the matter and, most importantly, the approval granted by the Australian authorities to the merge of our business, which I will explain in further detail straight away.

As you know, last month, the Australian Competition Authorities, ACCC, granted the approval of the proposed merger between Armaguard and Prosegur Cash in Australia. First, I would like to thank the authorities for this thorough and well-conducted process that has taken the necessary time to arrive to what we think is the best solution for the Australian market. As expected, remedial measures have been determined to be taken, and I will summarize them in the following 3 key points.

First, for the next 3 years, we have a clear scheme to adjust prices in the market, which is a very important first step towards assuring the viability of the model. Second, we must assure the current complete geographic coverage, so no areas that are currently being served will see the service discontinued. Now very important to note is that we will be able to execute the required synergies to assure that this coverage takes place in the most efficient manner. And to this point, teams are already actively working.

And lastly, we will have to provide a listing of all the assets that will not be further used. Full information about the approval is available in the ACCC web page. Several initiatives are already being worked on the ground by the teams having as a first step to complete conclusion of the deal. When the synergies are implemented, we will see very positive effects in our deteriorated financial statements in the region. Our margins will improve in both absolute and relative terms, our tax rate will be lowered, our earnings per share will be enhanced, and we will significantly strengthen our cash flow.

As you see, this is a very important move for us, and we are confident it is the first step to a new phase in our Australian investment. As well, we think it's very important, not only for us, but as an indicator of where the industry will head towards in markets with overcapacity in order to guarantee a sustainable availability of cash supply in the market while assuring the economic viability of these service providers.

Turning now to Page #5, I will share with you the key evolvements from our profit and loss statement. Looking at our top line, we can see that it has reached EUR 979 million, which implies an increase of 10.9% over the same period 1 year ago and a growth of EUR 96 million. It is very important to underline the 33% growth driven by organic sales. This figure shows how resilient our business continues to be, thriving on the back of consumer confidence and as well in a persistently strong underlying inflationary environment, which helps our industry.

On top of that, we can see that our inorganic strategy has added an additional 4.8% of sales to our top line, fundamentally driven by the changed acquisition we did last year. On the other hand, we have to as well highlight the headwinds we are having to whether when it comes to foreign exchange impact with several currencies from Latin America to Asia Pacific suffering against the euro.

Going down to EBITDA, we see it has improved by EUR 12 million to EUR 182 million from EUR 170 million a year ago, which implies a 6.6% improvement and reaching in relative terms 18.5% of sales. Depreciation has suffered slight EUR 3 million increase to EUR 53 million, and EBITA has seen an improvement of EUR 9 million in the period, totaling EUR 129 million, an increase of 7.1% versus 2022 and representing 13.2% of sales.

If we look at relative profitability versus last year, we observed a slight decrease of 40 basis points, halving the first quarter's gap of 80 basis points, and such a decrease is mainly explained by, on one side, still some seasonality enter into the change of business that had a slow first quarter that still trails in the figure and that has continued to evolve positively as [ months ] into the second quarter progress. I must recall that having the same fixed cost structure still drags the overall profitability until sales reaches higher levels towards the end of Q2 and the beginning of Q3; and as well, the impact of currency effects that affect our profit mix together with the hyperinflationary accounting impact.

The financial result adds to EUR 45 million, up from EUR 27 million in 2022, driven to a significant extent by noncash items. On one side, the continuous increase of interest rates taking place in recent quarters has driven an increase in the accounting value of some of the liabilities in our balance sheet, together with higher IFRS 16 and deferred payment charges related to our inorganic activity; and on the other, FX-related expenses, a significant part of which are noncash and, in some cases, of nonrecurring nature, such as the ones related to hyperinflationary accounting.

Both FX under significant noncash impact explain why when we look at our cash flow statement, interest payments is far lower than the one we observed in our P&L. Tax expenses reached for EUR 34 million, implying a tax rate of 48%. That means that for the stand-alone quarter, it was of 45.6%, this being a very significant improvement on which to continue to build.

All this takes us to a net consolidated profit of EUR 37 million, almost 4% of our sales. Improvement of Q2 and Q1 on all lines is very clear, and we are sure that seasonality will continue to improve and support the enhancement of our results.

If we turn now to Page 6, we can see the main KPIs of our transformational strategy, which continues to deliver at a very strong pace. First, we see that total new product sales have reached EUR 284 million, which is a 38% increase in relative terms and an improvement of EUR 78 million over the EUR 206 million we reported 1 year ago. These figures show how well our transformation strategy continues to be executed. Penetration has climbed by 570 basis points in 1 year, and new product sales now account for 29.1% of total sales.

If we look at the stand-alone performance of the second quarter, we see that total sales have reached an absolute record of EUR 150 million in the period, accounting for 30% of total sales. Once again, it is important to underline that this increase in penetration takes place at the same time as we have seen overall sales continue to grow in a very healthy manner. The growth in transformation has fundamentally been propelled by a continuously strong growth in Cash Today solutions across all geographies, a very solid performance of Corban in Latin America and the mentioned growth of the Change Group fundamentally in Europe and AOA. Once again, customers are backing our new product offering, showing that these solutions have a very promising future to grow on an already strong performance.

I'll now pass over to Miguel, so he shares our main developments on a regional basis.

[Miguel Ángel Bandrés Gutiérrez, executive]

Thank you very much, Javier. We will start with Page 7 where we can see the indicator for Latin America, our biggest region accounting for 63% of total sales and where cash usage is the strongest within our footprint and amongst the highest in the world.

In the region, we can observe a very strong organic sales growth that totals 41.7%. This growth is backed on 2 very significant drivers. On one side, a solid volume evolution that shows again the strength of our industry and the confidence consumers having cash; and on the other, as a result of inflation that makes money being moved faster. This is obviously very important for us as long as we have the discipline to pass on property cost increases into the price equation, which is well ingrained in our business model.

On the other hand, exchange rates have had a very relevant impact of 38.8% with several countries negatively contributing to it, which obviously takes a toll on our euro growth number. This foreign exchange evolution is both affected by inflation, which is positive for us as well as by the negative evolution of the U.S. dollar against the euro in the first, the currency to which Latin American currencies are closely linked to. And inorganic had a minor positive impact of 0.2% in the region sales.

New products continue to thrive in the region, having grown by 14% despite the foreign exchange impact, and bringing EUR 23 million more sales versus 1 year ago to a total of EUR 187 million and reached a penetration of 30.1% of total sales. While EBITDA, which is EUR 119 million in the period, is in line with our figure shown a year ago, despite this line having been affected by the currency impact on the country mix and hyperinflationary accounting.

Turning to Page 8. Europe continues as our second most relevant region with 29% of total sales. In Europe, I'd like to highlight several important elements. On one side, extraordinary overall sales growth of close to 31%, having reached EUR 286 million in the period. Having been this growth fueled on one side by a very consistent organic growth of 12.4%, combined together with an inorganic growth driven fundamentally by the Change Group acquisition of 18.6%.

As well, we can see how transformation continues to increase its space in the region, reaching EUR 81 million in the first 6 months of the year, representing a stunning improvement of 162% versus 1 year ago. Overall penetration on new product sales in the region amount to 28.3% of total sales, more than double the one shown in 2022. This growth is driven fundamentally by the very good performance of the foreign exchange business, but it is well very significant improvement of other new products such as Cash Today.

And lastly, we see an improvement in profitability of 32%, reaching EUR 10 million in the period, while maintaining relative terms, we are still slow first 4 months of the year for the foreign exchange business.

And now turning to Page 9, we find our Asia Pacific region, which continues to improve quarter after quarter. The region accounts for 8% of total group sales. And in here, we can see a very strong organic growth of 20.8% of total sales, showing once again the strength in the performance of the different countries in the region and how important cash is in them. Currency effects affect negatively to our overall sales by 6%.

New product sales have grown by 39% to EUR 17 million and already represent 22.7% of total sales, a 370 basis point improvement over that shown a year ago, driven by the good performance of our foreign exchange business in the region as well as ATM-related services.

Lastly, when we look at profitability, it's very important to underline the great work done by our teams that have been able to keep increasing positive contribution from other countries in the region other than Australia, while unique growing the contribution of their ForEx business and reducing losses in the traditional business, all in all, resulting in a breakeven semester.

With this, I finish our regional overview and turn it over to Javier to continue with our financials.

[Javier Hergueta Vázquez, executive]

Thank you, Miguel. I will first share our cash flow statement. Departing from the EUR 182 million EBITDA for the period, provisions and other items totaled minus EUR 12 million. Income tax outflows summed EUR 44 million in the first half of the year, which is EUR 4 million less than last year.

And when we look at CapEx, we see that it reaches EUR 47 million, up from EUR 28 million 1 year ago. This increase is driven by the fact that last year with Omicron investments were slowed at the beginning of the year, so we have a lower comparable base together with an increasing investment in cash today that is growing strongly as we saw in the transformation part of the presentation.

Changes in working capital totaled EUR 43 million, which is EUR 9 million less than 1 year ago and gives an idea on the extraordinary effort we have done on managing this line while helping business to continue growing. All considered, our free cash flow reaches EUR 35 million, EUR 27 million of them generated only in the second quarter stand-alone.

Despite this being EUR 19 million lower than 1 year ago, taking into account the exceptional regulatory items we carry from Q1, the growth of the business, the investment in cash today and the normalization of CapEx expenditure in an Omicron-free environment, this is a very strong cash performance on which to keep on building.

Below free cash flow, interest payments account only to EUR 2 million, and deferred M&A-related payments from acquisitions reached EUR 13 million. Following the execution of our shareholder retribution scheme accounts adds to EUR 25 million, EUR 19 million of which are dividends distributed that will total EUR 40 million in the year, 1/3 larger than a year before, and EUR 6 million are due to the purchase of treasury stock agreed to be extended until the end of 2023.

The others line, which, amongst others, is driven by customer certifications that tend to net over time, has had a negative impact of EUR 27 million, down from EUR 39 million negative in 2022. So without we reached a total net cash outflow of EUR 33 million.

If we look at the graph on the right-hand side of the page, we see that our total net debt reached EUR 778 million, EUR 1 million more than in Q1. Important to underline that our net financial position at the end of the semester amounted to EUR 565 million, which is EUR 3 million less than 1 quarter ago. Deferred payments due to M&A activity accounted to EUR 125 million. IFRS-related debt at EUR 114 million, while treasury stock totaled EUR 26 million.

In terms of total net debt to EBITDA on a trailing 12 months basis, we are at 2.1x, in line with what we have shown in the last 4 quarters and improving our strict financial discipline.

With this, I would like to turn to Page 11 to review important ESG changes. On the ESG front, I'd like to share that we've joined the Target Gender Equality program, which combats the gender gap and promotes quality. We, as a responsible company, are fully convinced that a gender-rich environment and one in which quality is promoted not only will result in a better society to which we are committed, but as well will result in a better performing and better prepared for the future company.

It is as well a pleasure to share that Standard & Poor's have reviewed our scoring and has confirmed our 64 out of 100 grade. It is always very important that top experts can evaluate us and rate us to the highest standards in the matter, again, showing how central ESG is to our strategy.

And lastly, I'd like on the governance side to share with you that we have as well reviewed and updated very relevant policies to us such as corporate governance, tax strategy, investor communication, cybersecurity as well as the labor conditions and social dialogue ones. This, of course, always at the same time as we have maintained an active engagement with all relevant ESG ratings and indexes.

With this, I would like to conclude underlining some very important elements in our performance to date. The business is very robust as the strong 33% organic growth shows showing double-digit growth across all geographies and that is able to net off a particularly negative currency period. Transformation continues to thrive with having reached 29.1% of total sales and implying a growth over the same period 1 year ago of 38%.

If we take, as said, the second quarter of 2023, new product sales penetration is already at 30%. We have reached an EBITDA margin of 13.2%, up by 7.1% when compared to the one achieved 1 year ago, and we have had a strong second quarter of 13.7% of relative margins.

Cash flow has improved by EUR 27 million in the second quarter, reaching EUR 35 million in total despite growing the business, investing in Cash Today and after extraordinary advance payments already shared in Q1.

We continue to firm on our ESG strategy, both in the gender and equality front as well as in the governance side. And as we have seen, we are very happy to have been granted approval to the Australian merger, which is very important for us and for the cash industry.

With this being said, I would like once again to thank you for your attention, and we will be pleased to open the Q&A session.

[Operator]

[Operator Instructions] First question today is from the line of Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, analyst]

The first one is on Latin America. If you could provide some more detail on how volumes are evolving as we see that in Q2, in particular, sales are down a little bit in euro terms.

And the second question would be, if you could help us understand the performance of Europe. So in H1, you have generated EUR 10 million of EBITDA. And before COVID, you were generating 15, but there have been a couple of changes in the perimeter with the sale of AVOS to Prosegur parent company and with the integration of Change Group. So I would like to know on a like-for-like basis, so to speak, how far are you from recovering pre-pandemic profitability levels? And what's missing for you to get there if you're not there already? Is it a matter of volumes? Is it a matter of inflation on the cost side that is still pending to be passed through to clients?

[Javier Hergueta Vázquez, executive]

Alvaro, in relation to your first question about the volumes in Latin America, I must say that despite what you're seeing of the recent evolution in euro terms for Q2, volumes are significantly improving in the region in the quarter stand-alone. So they are accelerating, and that's a pattern that we are seeing across the whole region. So the business in underlying organic terms remains very strong, and that's a good combination of pricing and volumes. But for volumes, especially, we're seeing an acceleration there. So that's in pretty good shape.

In relation to Europe and the evolution of the EBITDA, I would say that if you take last year's reference, which is already after the AVOS deconsolidation, what you have there is a mix of things underlying. You have Forex now included within the perimeter in Europe, but that's still not at its full-speed contribution. So of course, it's helping, it's contributing, but it's still -- it's not because of the seasonality. It is not yet at its peak.

And there are also some underlying nonrecurring effects there from higher casualties and some additional costs related to our Horizon 3 businesses. But when you exclude all that, the underlying performance of the traditional business in Europe or, say, the ex-Forex business is pretty much in line or slightly better than it was last year. And we expect that trend to keep going on.

I think it's a combination of factors. I mean, volumes keep increasing, and they are increasing very significantly. We see a very well-balanced growth in Europe between pricing and volumes. We see the inflation remains at levels, which are higher than it used to be prior to the last year's increase. That should be helping the business as well and the pricing discipline remains in good shape. So we would expect the margins to keep evolving positively in the coming quarters.

[Alvaro Lenze Julia, analyst]

And a follow-up, if I may, on the evolution of debt. When I look at the total debt figure, we've seen an increase over the past year in the deferred payments, which we understand is mostly related to earn-outs. But during Q2, you have made some additional payments for these earn-outs because I don't believe there are many relevant acquisitions in Q2 specifically. But still, the deferred payments is not going down. Can you please break down what's included within these deferred payments and what's the calendar for you to pay out these earn-outs?

[Javier Hergueta Vázquez, executive]

Yes. On that front, there have been some payments in the period you mentioned, but not very relevant on the overall figure that you see in our first half net debt breakdown. FX is also impacting. So some of those payments, I mean, are due in currencies, which are different than euro. And that is also offsetting those smaller payments made throughout the period. So all in all, we should be expecting a significant part of that to be reducing in the next 12 months, I would say. And then there's another portion which is more of a long-term nature, but we should see a notable decrease of it in the next 12 months.

[Operator]

[Operator Instructions] Next question is from the line of Avinash Mundhra from Citi.

[Avinash Mundhra, analyst]

I have just one question. So in the first quarter earnings call, you were discussing about the seasonal effect from your Forex business in your overall margins. Now -- and you said this will get reversed in the next 2 quarters. I just wanted to understand how much of your impact is -- how much of your positive impact of Forex businesses on this quarter's group margin, please?

[Javier Hergueta Vázquez, executive]

Avinash, in relation to the contribution from the Forex business is, you're right, so at Q1, that was dragging our margins. That is still being the case in Q2, although, of course, the contribution and the performance of Forex is improving as per its natural seasonal pattern.

So I think recalling from what we said in Q1, we said that if we excluded the impact from seasonality of Forex and the hyperinflationary accounting, the margins were improving versus Q1 in 2022. That trend is increasing in Q2. So that contributional performance and that improvement is even higher in Q2. And we would expect that to happen as well in the coming quarter because the seasonality of the business is pretty much concentrated into Q3 and partially in Q2.

So all in all, as we said, for the Forex business, the 12 years -- 12 months, sorry, margins should be quite in line with the group average, but that's something that keeps flowing through throughout the year. So we would be expecting that overall, the margin will be enhancing and will be contributing positively in the coming quarters.

[Operator]

[Operator Instructions] Next question, this is from the line of Iñigo Egusquiza from Kepler Cheuvreux.

[Íñigo Egusquiza, analyst]

First, more clarification from my side, if I may. First, on the cash flow statement, if you could give us some color on the provisions line. If I see your cash flow statement, it was positive EUR 12 million last year; and this year, it's minus EUR 12 million. So this gap, if you can explain the reason for that. This is the first question.

And the second question, on the financials, on the P&L, we see this big jump from EUR 27 million last year to more than EUR 45 million in 2023. If you can give us some explanation for that.

[Javier Hergueta Vázquez, executive]

Iñigo, on your first question on the profit line of provisions into the cash flow, there is a swing there, as you are mentioning, from 12 positive to 12 negative on this first half right now. So more or less 50% of that delta is coming from one-offs already mentioned in our Q1. So there was a change in the timing of some payments related to tax in some of our Latin American countries. So we are dragging that from Q1 already.

And then the remaining 50% has to do with higher provisions and higher accounts payable in 2022 versus 2023. Part of those are related to some COVID late payments that were still in place in 2022, which are not there anymore in 2023, but that's part of that 50%.

And in relation to the financial expenses into our P&L, when we look at the variation of the delta year-on-year, that is roughly around EUR 19 million to EUR 20 million rounded figures. 80% of that is really coming from the delta in the hyperinflationary accounting impact in our financial expense, which is noncash and nonrecurring in nature. So that's roughly explaining the bulk of it. The remaining 20% has to do with the revaluation of our -- some of the liabilities due to higher interest rates. This is also partially noncash and higher M&A-related cost to defer payments, which again is a noncash item, and higher IFRS 16, all those 2 M&A and IFRS 16 related to the Change Group acquisition.

So I think that the best reference to take into consideration is the financial cost into our cash flow statement, where we can see that we are reducing that, and we are benefiting on the back of higher interest rates and earning more cash inflow from the deposits from the excess cash in all our geographies. So the financial expense line into our P&L is a bit distorted because of these noncash nonrecurring items.

[Operator]

[Operator Instructions] There are no further questions at this time. So I will hand the conference back to the speakers.

[Javier Hergueta Vázquez, executive]

Well, thank you all for taking the time and connecting to the conference call. As you know, our Investor Relations team remains available for any further queries you may have. In any case, speak soon, again at our Q3 results conference call. And to all of you who are taking some days off now, enjoy the summer holiday season. So we speak then in some months. Thank you all.

[Operator]

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.