Prosegur Cash SA

MAD:CASH

Earnings Call Analysis

Strong Sales & Profitability Growth Expected in H2

The company experienced a robust 5.1% sales growth in the quarter, despite a 1.5% inorganic drag, totaling EUR 998 million. EBITDA reached EUR 177 million (17.8% margin), with expectations of significant profitability improvement in the second half. EPS grew by 5.2% to $2.58. A key focus is on the integration of the Indian business starting April 2024 and restructuring costs in Australia, with expectations of enhanced cash flow and leverage reduction. Transformation products, especially Cash Today and Forex, showed promising double-digit growth while maintaining strong shareholder commitment by paying EUR 15 million of an expected EUR 60 million dividend for the year.

Sales Recovery and Growth

In the latest earnings call, the company reported a solid recovery in sales, with a 1.9% increase for the first half of the year. This marks an improvement from the previous quarter where the company experienced negative growth. A significant organic growth of 48.4% contributed to this revitalization, although it faced a notable foreign exchange (FX) negative impact of 45%. Total sales for the period reached EUR 998 million, signaling a more stable foundation as the adverse FX effects have diminished compared to the previous quarter.

Profitability Trends and Expectations

The company reached an EBITDA of EUR 177 million, translating to a margin of 17.8%, which represents a substantial quarter-on-quarter improvement of 110 basis points. However, comparing year-over-year, there was a decline in profitability, with the margin sitting at 11.3%, down 190 basis points versus last year. Looking ahead, the management is optimistic about a significant catch-up in profitability during the second half, expecting to meet or exceed the consensus EBITDA target of around EUR 270 million.

Earnings Per Share and Cash Flow Performance

Earnings per share (EPS) increased by 5.2%, highlighting the overall health of the company despite some challenges. The free cash flow generation was notably strong, with EUR 28 million reported in the second quarter, leading to an overall cash flow of EUR 29 million for the period. This is a positive indicator of the company's cash generation capability going forward.

Impact of Geographical Operations

Performance varied significantly across regions. Latin America, making up 62% of overall sales, achieved a revenue of EUR 619 million, maintaining stability despite the FX hit. Europe, accounting for 32% of sales, demonstrated robust growth with a 12% increase in revenues, driven by an organic growth of 9.4%. The emphasis on transformational products like Cash Today and a burgeoning Forex business, which grew by over 25% year-on-year, indicates strategic growth areas.

Future Outlook and Guidance

The company expressed confidence in strong revenue growth in the second half due to favorable comparables in Argentina and completion of restructurings in Australia. Additionally, leverage is expected to reduce toward the end of the year, with aims to fall below a 2.5x ratio. A recent agreement to receive AUD 50 million from main clients over the next 12 months is set to bolster liquidity and operational support in Australia.

Cash Flow and Dividend Commitment

As part of its commitment to shareholders, the company has already distributed EUR 50 million in dividends from a total of EUR 60 million planned for the year, underscoring its dedication to return value despite operational costs and investments. The management noted that cash flow generation is anticipated to significantly enhance in the latter half of the year.

Transformation Strategy and Product Penetration

The management reported that transformational sales now account for 31.8% of total sales, which marks an increase of 270 basis points compared to the prior year. Transformational products such as Forex have been particularly resilient, showing double-digit growth. The company's strategy continues to focus on increasing this penetration as they expand existing solutions and introduce new ones.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Prosegur Cash Q2 2024 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]. Please be advised that today's conference is being recorded. I would now 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 for joining today's call. I would like to welcome you to our 2024 Q2 results review that will be led by our CFO, Javier Hergueta, and myself. The presentation will last around 30 minutes in which we will show the main events that have taken place in the period and how they've driven our performance. We'll review our key financials, our geographical performance and our transformation effort, drilling down into our foreign exchange business. As well, we will update you on your latest ESG developments.

After we will open a Q&A session, should we not get to respond to everything today. We'll get back our remaining topics on an individual basis. Once again thank you all for your attendance and remind you that this presentation has been prerecorded and is available via webcast on our corporate web page that you can find at www.prosegurcash.com.

And now before letting the floor to Javier, I'd like to share some news regarding cash that have lately appeared in the media. They range from the view Germans have on cash payments, the choice of Europeans for payment methods, Spain's onwards an view on financial inclusion or the major AT outage that occurred only 1 week ago. These are an example of many on how for different recent cash is so important for society.

In the first news, we can read from German newspaper, Der Spiegel about the growing concern more and more Germans are having as a result of the limits some stores are placing on cash payments. Germans are regarding such limitations as an attack on the right to choose and on their financial freedom. This is getting to a point by which political parties are getting involved and working on how this loss could affect consumers.

Second, bringing from our Deutsche Bank report, you can see that cash remains a payment method of choice for Europeans. Over 70% of them have used it throughout 2024 and they emphasize some of the many characteristics that are unique to cash being its convenience, its ability to control domestic budgeting or the security it provides with.

In the third piece of news, we can read from a Spanish Newspaper El Pais that the Spanish onwards man is worried for and clearly calls for ATMs and bank branches to be an economic service of general interest in Spain. These would warrant competition between operators and again underscores the essential role cash plays in ensuring a proper financial inclusion.

And in the last piece of news, with [indiscernible] said BBC. As we are sure you're aware of, last Friday, a major outage took place that collapsed infrastructure in many industries amongst them banking and payments. This reflected in serious breakdowns affecting multiple businesses across the world. This again shows that a received mean of payment such as cash is essential for the proper functioning of our economies. This is only a sample of relevant news and events on the world of cash that underscore its relevance for the proper functioning of society and its economy in different regions of the world.

After this brief news update, I'll share today's agenda. Javier will start reviewing the period's highlights followed by updating us on key financials for the quarter and bringing us up to speed on our transformation strategy, giving some more detail on our change business. After which, I'll share key information provision and Javier will update us on our ESG initiatives as well as sharing the key takeaways before opening the Q&A session.

So that being said, Javier, please share with us these previous highlights.

[Javier Hergueta Vázquez, executive]

Thank you, Miguel. Good morning to everyone, and thank you for attending. Let me get to share these period highlights. In the quarter stand-alone, sales have grown by a robust 5.1%, and all geographies continue to show very healthy organic growth. This reflects how we are constantly recovering growth in a very steady manner, as sales have increased by 1.9% in the first semester versus negative 1.4% 3 months ago. I would like to as well highlight that this 1.9% figure increases to 3.4% when excluding the inorganic impact, which is very relevant, especially if we take into account there's still a significant negative currency effect.

Moving into profitability. EBITDA margin has improved in the quarter by 120 basis points and is now standing at 11.3% on a year-to-date basis. This shows a relevant improvement versus 1 quarter ago despite the fact that we are still bearing with Australia's restructuring costs as well as with the continuous expansion of our Forex business. I would like here to signal that in the coming quarters, Australia should stop dragging our results as current restructuring efforts and other measures start to bear fruit. All in all, we expect a significant catch-up in profitability during the second half of the year.

EPS has grown by over 5%, thanks to, amongst others, lower financial expenses and improved tax rate. In terms of transformation, we continue to progress reaching now 31.8% of total sales and increasing the penetration in the second quarter by 20 basis points. Once again, we are experiencing strong double-digit growth in both cash today and the above-mentioned Forex business.

Looking into cash flow. We've generated EUR 29 million with a very strong second quarter where stand-alone, we've been able to reach EUR 28 million at free cash flow level, slightly better than the same quarter 1 year ago. With this, our net financial position would increase due partially to the impact of the beginning of the consolidation of our Indian business. In this sense, we expect that cash flow generation will significantly enhance in the second half of the year, therefore, deleveraging the company both in absolute and relative terms.

Lastly, we've launched a commercial paper notes program of up to EUR 400 million, which is enabling us to diversify and optimize our financing lines. With this, we are reducing our financing costs, and at the same time, it allows us to keep our existing facilities as a backup to be used under exceptional situations. And last but not least, we continue to show a strong commitment to our shareholders. We have paid EUR 15 million in the first 6 months of this year, and there are EUR 45 million remaining to be paid in the second half.

I will now turn to the key financials for the quarter. Turning first to our P&L. I would like to take a look at the sales evolution we can observe on the right-hand top chart. Overall sales have improved by 1.9% on the back of a strong organic growth of 48.4%, of course, helped by inflation in some regions and with a penalty on the FX ground of 45%. In terms of inorganic, we can see a negative impact of 1.5%, more than halving the minus 3.9% we saw 1 quarter ago. This is due to the fact that despite not consolidating Australia since September 1, 2023, we have started including India in our scope from April 1, 2024. Total sales now account to EUR 998 million, and we can observe that the negative FX impact has substantially lowered when compared to the one we saw 3 months ago.

Turning to EBITDA. We have reached EUR 177 million, representing 17.8% of total sales and an improvement of 110 basis points in the quarter-on-quarter evolution. Depreciation reaches EUR 64 million, taking us to an EBITDA of EUR 113 million. As we can see in the bottom right-hand chart, it reaches 11.3% of sales, a 190 basis points decrease versus that experienced 1 year ago, but representing an enhancement of 60 basis points when compared to that of last quarter with 120 basis points increase in the stand-alone quarter-on-quarter figure. As said, we expect a significant catch-up in profitability during the second half of the year.

Amortization of intangibles stays at EUR 13 million, taking EBIT to EUR 100 million and 10% of sales. The financial result totals EUR 31 million, a substantial decrease versus that experienced 1 year ago on the back of much lower exchange rate impacts and allows us to reach an earnings before taxes of EUR 70 million, which is EUR 2 million less than a year ago and represents 7% of sales. Taxes totaled EUR 31 million, that represents a 44.2% tax rate, which is 3.10 percentage points less than 1 year ago and give us a net profit of EUR 39 million, 3.9% of total sales and an improvement of 4.5% versus last year.

Lastly, our EPS has improved by 5.2% versus last year to $2.58. If we turn to Page 5, we can see our cash flow and debt position for the period. Regarding our cash flow, we have started an EBITDA of EUR 177 million. Provisions and other items account for EUR 19 million and income tax payments totaled EUR 42 million in the period. CapEx outflow totaled EUR 48 million, including both infrastructure and customer CapEx that generates direct revenues to the strong organic growth shown. This all results in a free cash flow of EUR 29 million and a conversion rate of 73%. Particularly noteworthy is the EUR 28 million free cash flow that has been generated in the second quarter, reducing the year-on-year gap.

Interest payments accounted for EUR 13 million with lower income from local currency deposits as cash has been repatriated on a constant and efficient manner. M&A payments totaled EUR 32 million in the period and EUR 50 million have been paid in the form of dividends. Others represent EUR 25 million being a significant portion of them the debt we are consolidating from our Indian operation. With this, our total net cash flow results in an investment of EUR 56 million.

Net financial position at the end of the period totaled EUR 687 million, resulting from deducting the total net cash flow to an additional foreign exchange impact of EUR 6 million, which posted a significant reduction of exchange rate impacting the above-mentioned net financial position when compared to a year ago. IFRS 16 debt has been reduced by EUR 2 million in the last 3 months, while deferred payments remain equal at EUR 125 million as well as treasury stock that has stayed constant at EUR 6 million. All of this said, our leverage stands at 2.9x, which despite being well within our covenants, will significantly reduce in the second half of the year. It is true that this slight increase from last quarter is affected by the consolidation of our Indian operation for which we only account for the EBITDA of the second quarter, whilst all its debt is considered.

I would now like to share where we are regarding transformation. Our transformation products continue to grow in a very healthy manner, and we are very proud to say that the penetration over total sales only continues to expand. Total sales for the period have reached EUR 318 million, which is an 11.7% increase over a year ago. If we were to look at the second quarter stand-alone, we can see that we have experienced an 11.9% improvement. The 2 transformational products that continue to mainly drive our growth, our Cash Today and Forex.

Transformational sales represent a 31.8% of total sales, implying a 270-basis points improvement over the figure we saw at the end of the second quarter in 2023. In like-for-like terms, transformation has continued to improve its penetration in all geographies, showing the strength of such initiatives for the future of our company. It is as well interesting to highlight that if we look at our transformational sales in the last 12 months, they have reached a very significant amount of EUR 600 million. Their success only ratifies how our customers endorse to our strategy. We're confident that this will continue into the future as our existing solutions continue to grow, and we as well incorporate new ones.

Turning now to Page 7. I would like to share with you some insights about our foreign exchange business. As you know, this is the last initiative we have incorporated to our transformation family. It is as well as we have earlier said, and together with Cash Today, our fastest-growing new product showing that customers appreciate the value it brings on. It operates in 4 main spaces, this being outbound pre-trip gateways at airports, both outbound and inbound and fourthly, inbound destination. For each of them, the puts factors for our customers do vary.

Whilst, for instance, in the outbound pre-trip customers may be looking for FX optimization or budgeting discipline at gateways, they're normally looking for a convenient location, trying to satisfy as many needs or because they have limited alternative exchange options. In the last category inbound destination, users are normally looking for an immediate response for their need to shop or a need for additional currency. In terms of customer type, normally, the outbound retreat and the inbound destination cutted to the laser travel, while the gateways cater equally to leisure and work travel.

Key services and channels offering them, do vary as well and for instance, in outbound pre-trip both the online channel and premises in high traffic locations are predominant. In gateways, you'll normally find stores at airports, local currency ATMs or VAT refunds offices and in the latter category inbound destination, you can find as well premises in high-traffic location transits, local currency ATMs, VAT refunds or international transfers.

In terms of KPIs for this business, its annual revenue is in the region of EUR 150 million, experiencing strong double-digit growth, while run rate margins are in line with group average despite now as earlier said, they are temporarily below as we are investing in creating further capacity to capture value into the future and the openings have a ramp-up period that can range in between 1 to 2 years to get up to speed. We are processing more than 250,000 transactions per month on around 200 stores and under 1,000 ATMs. And we are opening on average 1 store per week. Just to give you an idea of the growth rate we are driving this business at.

Lastly, we are operating in 15 countries and in the lower right-hand side of the page, you can see where we were operating before the Change Group Acquisition, which geographies we added with such acquisition in which countries we have grown organically ever since. As an example, we have just recently opened Singapore and New Zealand to help growth in the AAA region. We are very confident that this business line will bring us very good news in the near future.

With this, I will now turn to Miguel so he can update us on our regional dynamics.

[Miguel Ángel Bandrés Gutiérrez, executive]

Thank you, Javier. We first turned to Latin America that represents 62% of total group sales as they have reached EUR 619 million in the period. This is flat as compared to the same period 1 year ago, and it's on the back of a strong organic growth of almost 71%. However, offset by an equally large adverse currency effect. If we look at the second quarter on a stand-alone basis, there has been a sales recovery of over 2%, primarily driven by the Argentina area as well as Central America. So we can clearly see a positive evolution as the year progresses that will only continue in the coming months.

If we turn to the transformation products picture, we can see they've grown by 10%, reaching EUR 206 million, and that represents 33.2% of total sales. This implies an increasing penetration of 310 basis points versus 2023 and levers fundamentally on in and CORBAN. Both of these solutions continue to receive the strongest trust from our Latin American customers. EBIT of EUR 98 million shows a clear recovery trend after the strong currency devaluations that took place in the region in late 2023.

Turning now to Europe that represents 32% of total group sales, we can see that we've reached the total revenue for the period of EUR 321 million. This implies a 12% growth over the same period a year ago, and it is split in a very healthy 9.4% organic growth, which shows how our customers endorse our business, a 2.7% inorganic contribution due to the acquisition of [indiscernible] last summer, with which we gained completely strategic geographical national coverage and a minor 0.3% positive impact from foreign currencies.

Transformation products can be observed to grow by 25% in the year, reaching EUR 101 million that represents a 31.5% of total sales. This implies an increasing penetration of 320 basis points, thanks to primarily Cash Today and the Forex business that Javier has previously explained to us. Lastly, I would like to highlight that the EBITDA for the period has reached EUR 50 million, which represents a 4.7% of sales margin and an improvement of over 50% when compared to last year, which is a very relevant step from which to continue building into the future.

And last but not least, I'll share our Asia Pacific region, which currently accounts for 6% of total group sales. The revenue for the region has reached EUR 58 million in the period, which impacts a 21% decrease over the same figure 1 year ago. To properly understand this decrease, we have to take into account that Australia was deconsolidated for both quarters, whilst India has been only consolidated since April this year.

I would like to highlight the continued strong double-digit organic growth the region continues to enjoy and has reached 11% in these first 6 months of the year. If we look at our growth initiatives in terms of transformation products, they decreased to EUR 11 million after Australia's deconsolidation. However, we consider it in a like-for-like basis, we've experienced a very positive improvement of 26.4%.

Regarding margins, the region's EBITDA continues to be affected by Australia's restructuring costs. However, this negative impact should have finished by now. And in the coming quarters, we should see a clear turnaround in the region's profitability propelled by a healthy Australian business as well as by the growing Indian, Philippines and Indonesia operations. In the case of Australia, we had the synergies underway, the recovery should be fueled also by the recent agreements reached with our main clients to financially support the operations from July onwards.

With this, I hand over to Javier so he can share with us all our progress in terms of ESG.

[Javier Hergueta Vázquez, executive]

Thank you, Miguel. I will start with a review of our ESG initiatives that you know are so important for us. Regarding the environment, we continue to push forward our determined emissions reduction policy for which we are increasing the use of alternative fuels for the carbonization. And as well, we continue to raise the consumption of recyclable materials, such as plastics and paper by over 40%.

I would like to stress on this front that all the initiatives we carry on make full financial sense and imply no additional cost for us. When we talk about social, for us, it's critical to train our large employee base properly. Along these lines, we have increased our efforts in competency-based training, implementing specific courses, especially on compliance and road safety behaviors.

As well, we have continued to conduct our employee satisfaction survey, and we are very proud to share that these have shown the best score to date. This shows that our multiple initiatives to engage our team members are being fruitful and encourage us to continue along the same lines. This is reflected in our voluntary rotation tracking that is at historic lows.

And regarding the last pillar, governance, we are glad to share some important progress. First, the deployment and implementation of a new compliance to module, the review and proposed improvement of current compliance policies as well as the recognition by INR ratifying their AENOR G++ highest rating. On the lower left-hand side of the page, we can see the proxies that have issued ratings in our company in the last 12 months to add to the above-mentioned INR recognition.

And to conclude, I'd like to summarize what I believe are the key elements in this first half of 2024. We continue to see a strong recovery in sales. Second, regarding EBITDA margin that has reached 11.3%, it's very relevant to see how quarter-on-quarter, it has improved by 120 basis points, showing a very positive trend as the year progresses. And I would like to remind that the most negative phase of our Australian restructuring is over now and in the coming quarters, we should see how this region starts to contribute positively. With this in mind, we can be very confident that the profitability improvement in Q2 over Q1 will definitely be enhanced as we advance in the year as we expect a much better year-on-year performance in the second half.

Earnings per share have grown in the period by 5.2%, which is always good news and reflects the health of our company. While in terms of transformation, we continue to deliver their sales reached almost 32% of total sales and continue to be very positively driven by both cash today and Forex. Regarding cash flow, I'm very proud to share a very strong second quarter where we've been able to generate EUR 28 million of free cash flow. Our net financial position has been impacted by the consolidation of our Indian business.

That being said, we are confident that leverage will reduce both in absolute and relative terms towards the end of the year. And we, of course, continue to have our shareholders as our top priority being the retribution key to us. We have paid in May the first EUR 50 million out of the total EUR 60 million that will be paid in the year. As we have shared, many relevant events are taking place in the period, and the positive trend of our figures make us be very confident in the future of the company.

Now I would like to open the floor to any questions you might have. Thank you.

[Operator]

Thank you. [Operator Instructions]. We will now take the first question from the line of Miguel González from JB Capital.

[Miguel González Toquero, analyst]

I got 2. First, I would like to know about your thoughts around the second half of the year. You mentioned in the presentation, you expect an improvement in margins in the second half. But EBITDA fell 12% in the first half, and I see consensus for cash for the year is around EUR 250 million. So this is a 15% increase. So this will imply a very strong second half.

So do you think you could reach consensus for the full year. Obviously, you have a better comparable base in Argentina, at the end of restructuring in Australia or India. But do you think it's enough? Or what could be the additional drivers that it might help for such an improvement?

And secondly, very quick on Forex activity. I will appreciate whether you could elaborate a bit on what's the growth strategy here. What the expected growth for next year, for instance? And how this could affect your CapEx or leasing in the coming quarters?

[Javier Hergueta Vázquez, executive]

On your first question about the second half year, let me stress here that we are fairly convinced that we can achieve consensus or be on a normalized scenario. So EBIDTA is now on consensus of around EUR 270 million. So as you were pointing out, that implies a second half with margins well within the guidance we gave at the Capital Markets Day, some time back. And we are firmly convinced that, that will be the case. We expect it to be strong for several reasons and across the different regions.

In the case of Latin America, as you pointed out, the comparison base will help, but we have an ongoing increasing gradual catch-up between [indiscernible] devaluation in the case of Argentina while the rest of Latin America is at the same time, performing strongly. In the case of Europe, we should also be seeing a strong performance, especially in the Forex area, due to seasonality, Q3 is typically the strongest quarter for the Forex business. So that should also be helping the improvement the performance.

But in the case of AOA, as we mentioned during the presentation, the driving results should have been over during the second half, and we should start seeing an increasing impact from the synergies generated through the [indiscernible] the contribution from our main clients in terms of additional funding. So all in all, the second half went strongly and as a consequence, the whole company to post a strong second half.

With regards to your second question about the Forex business. As we mentioned, we are growing now at double digit. We've earned some significant contracts there. By the way, we have just started operations in [ Cantieri ] in Singapore, which is a landmark for us. And we expect some more growth to come. But I would say that at least for full year '22, the bulk that the growth has taken place and most of CapEx is already over. So we should be seeing the benefits of all that in the second half of the year. Nevertheless, I mean, we will keep, of course, participating in the different tenders of county market. But as of today, I think that we should see the fruits of that in the second half.

[Operator]

Thank you. We will now take the next question from the line of Francisco with from BNP Paribas Exane.

[Francisco Ruiz, analyst]

I have 3 questions. The first one, although Javier you have commented on the different situation on first half versus second half in Latin America versus FX. If you could give us an idea what would be the delta in terms of FX, taking into account that all things will remain equal. I mean this depreciation of the Argentinian peso of around 2% per month in the fourth quarter of this year.

The second question is on Australia. If we look at the balance sheet, the financial assets, has declined 25% since the beginning of the year and mainly correspond to Australia. So what's the reason for that? And last, you talked about the leverage in the second half. So mainly this leverage will come on H1 numbers or also versus last year?

[Miguel Ángel Bandrés Gutiérrez, executive]

I'll take your first question on the FX. What we are seeing now is sure you also have the figures with you, inflation is lower in Argentina, but it still is at a much higher rate than the valuation of the currency as of today. So if you compare year-to-date figures versus last year, there's a very significant increase in the inflation versus evaluation gap when compared to last year.

But looking forward, I mean, if you look at the full year estimates, depending on the side you take, but more or less average there, forecasting inflation for the full year to be in the range of over 130% to 140%, while the expected valuation is much lower than that. So the gap will be increasing also in the second half of the year. So that's the trend we are seeing right now where we are proceeding and what we will be expecting going forward.

I'll take down your third question because I didn't catch very well the second one. So I will ask you to repeat that one. But before that, let me take the third one. In terms of deleveraging will definitely that to happen in the second half, as we said, both in absolute and relative terms. If it will be versus last year, for sure, we will be deleveraging in terms of rate versus last year. So we would expect the year to be much closer to the 2x that we've been regularly seeing in the past once the impact from the valuation of hyperinflation, in Q4 last year in super. And in absolute terms, I mean we'll see how we end up, but we will be much more in that region than where we are today.

And could you repeat the second question, please? I would appreciate.

[Francisco Ruiz, analyst]

Yes. My second question was on Australia. I mean now you consolidate Australian as an associate and by associate, and in the financial assets. So if you look at the financial assets in your assets and your balance sheet, has declined from EUR 58 million to EUR 44 million since December last year. I don't know why is this? I mean if there is something substantial in the value of the assets you hold.

[Miguel Ángel Bandrés Gutiérrez, executive]

Okay. Now it's just value adjustments of the different assets we have as one assets of different [indiscernible], but it has nothing to do with Australia so it's just part of the ongoing process and value the different asset times, but it's not Australia.

[Operator]

Thank you. We will now take the next question from the line of Avinash Mundhra from Citi.

[Avinash Mundhra, analyst]

So a couple of questions from my end. First one is on the transformation products. So what is your target penetration rate for transformation products as a percentage of sales in the short and near term? Do you have set some targets for your transformation products?

And I'm sorry if this was asked earlier, I just got disconnected for a while. Could you please help me with your net bridge for the remainder of the year. The leverage ratio is nearing 3x? And how do you plan to place this within the stress or level of 2.5x that you have set as internal targets?

And one more, please. Could you also remind me with the India impact on sales and margin in the second half. So second half, if I'm right, it is EUR 40 million additional sales from our consolidation of India.

[Miguel Ángel Bandrés Gutiérrez, executive]

Let me go one by one on this. In terms of transformation, we don't face targeting sales other than what we mentioned at the Capital Markets Day some time back. What we're seeing is that we are increasingly moving closer to that. But whether we will end up on that or not it really depends not only on the performance of the transformational business but also on the core business as we are measuring as penetration over double sales. We keep improving on that. And as you may have seen, we are now closer if we look at on a run-rate basis, we are more in 1/3 as of today and increasing. So we are on that trend, as I said, and we expect that to keep coming in the coming quarters.

Secondly, with regards to the leverage thing, yes, we think that, as I said, the second half of the year will be significantly strong both in terms of P&L and therefore, in cash flow terms. So that should be driving part of the deleverage to ratios below the 2.5x that we were mentioning. But also bear in mind that when looking at the ratios today, we are temporarily affected by the figures in Q4 last year due to the impact of the hyperinflationary campaign that we have, which should not be the case any longer this year. So that itself is on comparison base will be much milder and that should also help drive the ratios down.

And in terms of the contribution from India, you're right the run-rate basis, sales will be around EUR 80 million, double EBITDA margin. So if you look at the second half, the EUR 40 million figure that you have in mind will be a valid reference and you should be expecting double-digit margins.

[Avinash Mundhra, analyst]

Just a follow-up, Miguel, please, sorry. So a double-digit margin, you mean mid-teens, low double digit? Any ballpark number that you can provide, please?

[Miguel Ángel Bandrés Gutiérrez, executive]

If you look at EBITDA, which is the main KPI that you look at, it will be between 10% to 15%, somewhere in between.

[Operator]

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

[Unknown Analyst]

I have just 2 questions. The first one is a follow-up on the question on India. One is on the timing of this transaction. You have been present in the Indian market for a very long time. So why now you have changed the terms of the relationship, I guess you are more in control and therefore, you can consolidate the operations, the timing right now? Second, whether the fact that you have more management control. Can we expect an improvement in the profitability of the operation in India? That was the first set of questions on India.

And then the second question is on the P&L related. I understand that because of the Indian transaction, there is a positive one-off, which I guess is the gap between the accounting value and the fair market value of this transaction. I believe there is also another positive extremely from the sale of a business in Luxembourg. And at the same time, there is a negative externally from some write-offs that you have done. So can you tell us what the net effect of these one-offs is and what the impact has been on EBITDA or EBITDA or EBIT in the second quarter? Just to get an idea of what the underlying EBIT performance has been adjusting for these one-offs.

[Javier Hergueta Vázquez, executive]

With regards to the first question on India. I think we explained this last quarter, we just reached some agreements with our partners in India that allow us to change the consolidation method. And right now, things that happen over time. So nothing specifically, no specific reason for that just the ongoing relationship that we have with our partners in India.

With regards to the profitability that you were mentioning, I feel that India has been improving on a constant basis since the very beginning, we entered in a business that was almost greenfield by that time, a long time ago, and we have improved significantly the performance of the business as we've been an active part of the management of the business, and we expect that to be the case going forward. So it's not that we are changing the dynamics here, the dynamics has always been good, and we expect that to be a case going forward.

In terms of the one of the impacts that you were mentioning, we have some positive impacts, as you said, from the change in the accounting methodology in India and the sale of our Luxembourg business, the Luxembourg business will be pretty minor to all that. It will be mainly related to the India transactions and that, together with some other value adjustments in the different assets. So for different nature, we leave the net impact of again less than EUR 2 million overall, so that is included in the EBITDA or EBIT…

[Unknown Analyst]

Sorry, you said less than EUR 10 million?

[Javier Hergueta Vázquez, executive]

Less than EUR 2 million.

[Unknown Analyst]

Less than EUR 2 million? Okay?

[Javier Hergueta Vázquez, executive]

Net impact of all that.

[Operator]

Thank you. [Operator Instructions]. We will now take the next question from the line of Enrique Yáguez from Bestinver Securities.

[Enrique Yáguez Avilés, analyst]

We have 3 questions to a related with margins, the other for Australia. In terms of margins, I would like to know the reasons for the margin decline offered in Latin is due to the lower relative weight of Argentina due to the devaluation of the Argentinian peso is because of the pass-throughs taking a little bit longer than expected. If you could elaborate a little bit more, it will be good.

Second, on Europe. Europe evolution has been very, very strong in the first half, with EBITDA growing plus 51%. So how sustainable is the evolution of the first half going forward in H2 and next year? And finally, in Australia, if you go further elaborate about the nature of the agreement reached with the Australian Banking Association, the AUD 50 million to be received. So when this money will be received, how you will be able to invest, I mean, any additional details to the ones that has been published will be welcome.

[Javier Hergueta Vázquez, executive]

I'll take the questions one by one. In terms of margins for Latin America, the driver for the performance is basically on the mix impact. Pass-through from prices are ongoing at a normal pace. So 100% pass through '23. It is true that it is now becoming a more frequent at the ideation dynamics, but as a whole, the overall impact remains in that one. So we use 100% of it. And it has more mainly related to this impact from the mix on how the different countries look like in euro terms when you convert that.

With regards to Europe, we believe that the EBITDA performance in first half should be a good reference going forward. So we consider that as a sustainable level. If you also bear in mind that the FX business has been a bit affected still by the additional costs from the openings, and we should be now entering the strongest quarter in terms of seasonality. We think that we should be seeing good performances for Europe in the next quarters.

In the case of Australia, let me elaborate a bit on this. This is a contribution from our main clients, banks and retailers, which is a significant milestone for the Australian business, lease AUD 50 million that will be contributing within the next 12 months. So from July '24 to June '25. This is a very significant milestone because it will allow us to see a stronger Australia from the second half of '24 onwards, where we state in Australia, they start driving. It will, on the one hand, reinforce our P&L but also our liquidity, and that will allow us to accelerate the integration process and the extraction of synergies in Australia. And on a longer-term basis, it reinforces the viability of the system on the industry. So it's a very important step in the process that we are in verging Australia right now.

[Enrique Yáguez Avilés, analyst]

But those EUR 50 million is a mix of further revenues and some liquidity available in order to preserve the service? How is the structure?

[Javier Hergueta Vázquez, executive]

It will all be in the form of additional revenues in our P&L.

[Operator]

There are no further questions at this time. I would like to turn the conference back to Javier Hergueta for closing remarks.

[Javier Hergueta Vázquez, executive]

Thank you all for taking the time. As always, we know that our Investor Relations team remains available for any further queries you may have. And if we don't speak before for those of you who are taking some day-off enjoy and speak again in our Q3 presentations. Thank you very much.

[Operator]

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