Prosegur Cash SA

MAD:CASH

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 9 months 2020 Prosegur Cash Results Presentation. [Operator Instructions] I must advise you the call is being recorded today, on Thursday, the 5th of November 2020. And I would now like to hand the presentation over to your speaker today, Javier Hergueta. Please go ahead.

[Pablo De La Morena Arranz, Investor Relations Director]

Thank you. On behalf of all the Prosegur Cash team, we would like to welcome you to our 2020 third quarter results review. We also want to extend our best wishes to all the people, who during these months, have been directly or indirectly affected by the pandemic. As customary, this presentation will be led by Javier Hergueta, our Chief Financial Officer, and myself. We estimate it will last around 20 minutes. And during this time, we will try to address the main events that took play 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. In case we don't get to all your questions today, we would be pleased to answer those on individual calls for each of you. I wish to 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. Now before turning the call over to Javier, let me comment some relevant news regarding the use of cash.First, I would like to point out that a coalition of 51 consumer privacy and civil right groups in the U.S. has sent a letter to Senators Kevin Cramer, Bob Menendez, and representative Donald Payne, Jr. expressing support for the Payment Choice Act. Let me recall you that this will make it unlawful for a retailer to refuse to accept cash for the good of services, post signs or notice stating that cash payment isn't accepted or charge a higher price to a customer who pays by cash. According to these organizations, paying in cash should be everyone's right, and businesses that refuse to accept this method of payment could face well deserved accusation of discrimination. And this is not an isolated event as European consumer associations also calls for access to cash one year ago. Second, let's analyze Mordechai Fein conclusions regarding the resiliency of cash despite the rapid development of the electronic payments. In his latest comprehensive study, former Bank of Israel, Cash Department Head explores and reveals the drivers behind the continuing various use of cash despite the global context of rapidly developing electronic payments. The report concludes that despite substantial efforts to limit or even to eliminate cash in some countries, its use continues to increase, although it retarded by the acceleration growth of various means of electronic payments. And this is, according to Mr. Fein, because cash plays an important role for various societal groups, depending on the level of development in each country. Third, just to highlight one of the latest statements from the Riksbank Governor. Last October, Mr. Ingves call for stronger legal protection for cash, as he acknowledged that this mean of payment still fulfills important functions today. He mentioned that cash offer a safe alternative to commercial bank money, that cash works well when the electrical or digital infrastructure is down, that it also works for those who are digitally excluded.Finally, just a brief comment on Mrs. Lagarde's vision on payments in a digital world. ECB President gave a speech at the Deutsche Bank conference on online banking where she recognized that cash remains the most common way to pay, with cash payments accounting for 73% of all physical retail payments in 2019. She also remarked that like many central banks, the ECB is investigating the benefits and risk of a central bank digital currency, and that no decision has been made so far. In this regard, she emphasized that digital euro would not replace cash as the euro system will continue to ensure that all citizens always have access to bank notes. A digital euro, in any event, would be a complement to, not a substitute for cash. 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 our different regions. And finally, before moving to the Q&A session, we will summarize our financials and make some closing remarks explaining the way we are adapting to the new reality. I will now turn the call over to Javier, who will cover the most meaningful topics today.

[Javier Hergueta Vázquez, Chief Financial Officer]

Thank you, Pablo, and good morning to everyone. Today, we are presenting our third quarter results, a period marked by the progress in the execution of the different measures implemented to counter the pandemic and to adapt our organization to the new macroeconomic environment. We continued prioritizing the safety of our employees and the quality service to our customers, while we remain adjusting our cost structure to protect our margins and working to preserve our financial strength. As a result, our profitability kept progressing during the period, and our free cash flow generation reached an impressive amount of EUR 129 million, exceeding by 15% the figures posted a year ago. Let me comment now on our sales and margin evolution in more detail. Our sales growth in local terms reached 1.3%, while our recurrent EBITDA margin improved to 13.8% in the first 9 months of the year. Despite the tough environment, organic growth remained slightly positive and our inorganic growth accelerated to 1.2% due to the M&A activity during the year and the lower wave of the French divestment. Our recurrent EBITDA margin, a metric that excludes the restructuring costs incurred during the second quarter of the year, benefited from a higher operating leverage in some countries and our cost management, and continued its recovery, reaching 13.8%. Moving now to our consolidation strategy. I would like to highlight our efforts to speed up the integration processes of the acquired companies, which have almost been completed. We have also made some deferred payments during the quarter, thus reducing the amount of our future financial commitments. And this is something that you will appreciate in our cash flow generation and net debt position of the period. Regarding transformation, I would like to remark that our new solutions, which represented 18.2% of our total sales, continued to outperform the traditional business. Although the lockdowns have limited the retailer's activity, which has temporarily slowed down the sale of these sort of solutions, the reported figure at the end of September represents a meritorious increase of 220 basis points compared to the previous year. Our main solutions, focused in the retail automation and the outsourcing services, continued to gain wave within our sales mix. Finally, let me stress one more time our financial soundness. The business resiliency and the cash protection initiatives implemented at the onset of the pandemic keep yielding positive results and allowed us to post a strong free cash flow figure of EUR 129 million and to reduce our total net debt versus the previous quarter. In addition, last October, we completed our annual revision with S&P with no changes in our credit rating profile, which remained at BBB, with a stable outlook, and therefore, investment grade. 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, where the COVID-19 and the currency depreciation continued to negatively impact the comparison versus last year, our sales reached EUR 746 million, a 15% drop versus the same period in 2019. However, the organic growth for the period remained positive at 6.3% despite the selective lockdowns in certain countries and the tough comparison versus 2019 due to the nonrecurring volumes captured in Argentina a year ago. The positive organic contribution was also complemented by our M&A activity that add another 3.5%. This inorganic effort was partially offset by the divestment of our Mexican operations. Finally, and in relation to the new products, I would like to highlight that our sales keep growing at double-digit rates in local currency and amounted to EUR 128 million. This figure represented a 17.1% of our total Latin American sales, 100 basis point improvement versus the 16.1% posted a year ago. Moving to Europe. Our sales ended in EUR 322 million, a decrease of 16% versus the last year, which is fully explained by the lockdowns and the deconsolidation of France. Having said this, we have observed that the impact of the pandemic during the quarter has been less severe than in previous months due to the higher degree of mobility. As a result, our volumes have improved and partially recovered in the seeing the true reach during April and May. New product sales ended in EUR 71 million, represented 22.1% of our European sales, an increase of 4% versus last year's figures. Our Smart Cash and AVOS solutions have been the major contributors to this improvement. Let's read now our performance in Asia Pacific. Our sales amounted EUR 71 million, a decrease of 9% versus a year ago, a figure negatively affected by the lockdowns implemented to counter the pandemic. During the quarter, we transitioned the volumes under the new contracts into our existing network. This process is well advanced and is evolving according to our expectations. To conclude the regional summary, let me comment on the new products, that increased by 96% in absolute terms as a result of the new ATM business in Australia. New solutions reached EUR 8 million and represent 11.4% of the sales of the region, almost doubling the figures posted a year ago. 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 1,140 million, a 14.8% less than the previous year. This is the result of a total negative impact of minus 16%, coming from the combination of currency depreciation and the effect of applying IFRS 29 and 21, partially offset by the positive contribution of our local growth of 1.3%. Organic growth remain slightly positive, which was remarkable if we considered that selective lockdowns remain in place in certain countries and that the comparable base versus the previous year was challenging, as Pablo has already explained. Inorganic growth, partially diluted by the deconsolidation on France and Mexico, accelerated to 1.2% due to the M&A activity accomplished earlier in the year. On the profitability side, our reported EBITDA margin ended in EUR 133 million, representing 11.6% over sales. Despite the fact that our accumulated profitability continued affected by: first, the sharp devaluation of emerging currencies; second, the lower volumes resulting from the COVID-19 lockdowns; and third, the EUR 25 million incurred to restructure operations, the gradual recovery of our operational leverage, together with our cost adjustments, have helped us offsetting a very significant part of the overall effect. But let me explain in greater detail our underlying operating performance by focusing on the charts placed at the right-hand side of the slide. Our recurrent EBITDA margin, metric that excludes the capital gains derived from our divestments in 2019 and the restructuring costs in 2020, reached EUR 158 million, and 13.8% over sales, narrowing the gap versus last year to a decrease of 24.5% in absolute figures and 180 basis points in relative terms. These results implied another margin sequential improvement during the third quarter of the year, which has narrowed the gap versus the first quarter of the year by more than 50%. And this is another proof of our solid execution under a tough environment. Below the EBITDA line, our financial results posted net expenses of EUR 28 million, a touch below last year figures. Higher interest expenses resulting from the increase of our net debt position in subsidiaries, deferred payments and FX-related costs were more than offset by the profits on foreign currency transactions. Our tax rate for the period reached 53.1%, being the temporary increase, the result of the geographic mix, nondeductible losses and the hyperinflation accounting in Argentina. As a result, our net consolidated profit ended the period in EUR 42 million, which represents a margin of 3.7%. Regarding cash generation, let me underline that our free cash flow reached EUR 129 million by the end of September, which means a 15% increase versus last year and an implied free cash flow yield of 14% if we considered our last 12 months free cash flow and our current enterprise value. Our cash conversion ratio also improved to 77%, up from the 76% reported in 2019. Provisions and other items have been benefited from tax payment deferrals in some countries due to the COVID-19, although to a lesser extent than in the previous quarter. CapEx and working capital figures reflected the rationalization of our investments as well as the thorough management of our working capital. As a result, our CapEx investments have been reduced by 35% versus last year and the working capital outflow reported earlier in the year has been completely recovered. And this is a significant milestone compared to last year figures.M&A payments reached EUR 100 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. As explained earlier in the call, we have made some deferred payments during the quarter that allowed us to reduce the total amount of our future financial commitments. Finally, the dividend, and the treasury's top lines incorporated the results of the dividend reinvestment program and share buyback program, both implemented in early June. As to the reinvestment program for the fourth tranche of the dividend payment, just to note that 80% of the shareholders have chosen shares instead of cash. Let me now make some comments regarding our total net debt, which, on top of our net financial position, includes the deferred payments coming from former acquisitions, our treasury stock and the IFRS 16 related debt. As of September 2020, our total net debt amounted to EUR 714 million, a EUR 23 million sequential reduction versus the figures reported in June and a EUR 43 million decrease since the beginning of the pandemic in March. Our financial discipline is allowing us to continue deleveraging in absolute terms despite the harsh environment and the restructuring costs incurred in the first half of the year. To conclude, let me highlight that during the month of October, we have completed our annual revision with the Standard & Poor's without any changes in our credit rating, which remains at BBB, with a stable outlook. Before moving to the Q&A, let me share with you some final remarks as my conclusions. Since the outbreak of the pandemic, we have been taking several steps to guarantee the rapid transition and adaptation of our company to the new macroeconomic reality. First, and from a commercial point of view, our teams have captured additional services in all our regions that have partially mitigated the lower volumes resulting from the COVID-19. Second, and from a cost perspective, we have also frozen most of our discretionary expenses and restructured our operations to achieve further efficiencies and adapt our structure to the current activity levels. As a result of these initiatives, as shown in the graphs on the right side of the slide, our recurrent EBITDA dropped 18% during the first 9 months of the year, a decrease quite in line with the one reported in our sales, meaning that we have been very successful in reducing and making more variable our cost base. And all these without giving up our commitment with the innovation and the digital transformation. We continue allocating resources and accelerating our investments in these areas, not only to be better prepared to address future challenges, but also to capture new growth opportunities. Finally, we have implemented some initiatives to preserve our cash generation and to protect our balance sheet. In this sense, we have been very proactive in managing efficiently our working capital. We have optimized our maintenance CapEx, and we have launched a dividend reinvestment program. And as we can also see in the slide, these actions allowed us to improve our free cash flow generation by 15% despite the lower results and to reduce our total net debt in more than EUR 40 million since the beginning of the pandemic. I firmly believe that these measures will allow us to navigate the crisis and strengthen the agility of the company in order to emerge stronger and ready to capture future growth opportunities. To conclude, let me recognize once again the enormous effort from all our employees and emphasize how thankful we are to all of them for their very deep commitment and sacrifice during this difficult time. 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] Your first question today comes from the line of Miguel Gonzalez, JB Capital Markets.

[Miguel González Toquero, Analyst]

A few questions, if I may. The first one, I wonder if you could give us an indication of what is currently your level of activity in Argentina and Brazil compared to 2019? Then on full year outlook, I don't know if you could us an indication of how you see the last quarter. Will you see an improvement compared to the third quarter, or again, the deterioration of the -- due to the new confinements? And last, on dividend, I don't know if you could give us an indication on the dividend for next year, if you could lower the payout, going directly for an scrip dividend or applying the new reinvestment program.? I don't know. Any indication on the dividend will be helpful.

[Javier Hergueta Vázquez, Chief Financial Officer]

Starting with your first question, on the current levels of activity in Argentina and Brazil. I would say that as you've seen in the figures, I mean, we've been posting accumulated positive organic growth for the 9 months period. Having said that, I mean in last quarter, in the third quarter, there have been impacts coming from the comparable base. So what I would say is that if you exclude the impacts from the comparable base. And you also take into consideration the fact that the lockdowns in Argentina especially have been lasting for almost 7 months already and remains still in place. And that has also brought, as a consequence, some transitory delay in the price review mechanics. If you take all that into consideration, the underlying normalized behavior of the activity remains positive in both countries, in Brazil and Argentina. And we would be expecting that to remain the same in the fourth quarter on the back of -- in Argentina, I mean, there's some release of the lockdowns starting to take place right now, together with higher inflation and increase in the monetary base. So that macroeconomic scenario should be backing us on this assumption. And in the case of Brazil as well, summertime should be helping on the fight against the pandemic. And then on top of that, the actual macro situation in the country where you have FX devaluated, but without any inflation, should rebalance one way or another, I mean -- or in terms of the FX appreciation or higher inflation, or should be acting as an engine for the macro in the country, which most analysts now forecast as recovering in the short-term and being stronger. So we expect in both countries that this trend remains and reinforces in the short term.On the second question, on the outlook, it's hard to say on Q4 right now given the uncertainty. Assuming that there were no further major impacts from lockdowns or the FX, I would say that we should be continuing on the trend of improving our EBITDA quarter-by-quarter. But we have to monitor very closely the evolution of the pandemic. In Europe, it looks like the second wave is rising, but we need to see what measures are taken by the different governments, while in LatAm, probably the summertime will be helping to offset partially the impacts of the pandemic. So we will keep a close eye on all those. But as I said, I mean assuming that everything is under the usual course of business, we should be keeping the trend of gradual improvement. And in relation to the dividend, it's too early to say. I mean it's a decision that the Board of Directors has to take in December. They have all the options in the table. And we will see how it goes. I mean, in December, I think we need to look at that based on the actual situation and environment by that time. And we'll see how the Board decides that when taking on consideration all the different elements by that moment.

[Operator]

[Operator Instructions] And the next question comes from the line of Manuel Lorente from Mirabaud.

[Manuel Lorente, Analyst]

My first question is regarding the sales sequential improvement quarter-on-quarter. Can you give us the split between organic, inorganic and FX of the trends of the Q3 stand-alone, please?

[Javier Hergueta Vázquez, Chief Financial Officer]

I think -- I guess you're referring to the overall impacts in Q3. So on that basis, I mean, I think you can probably get the math on your side. But just to try to facilitate that, when we said that the local currency terms, I mean positive component was around close to 0% to 1%. Then on the quarter, on the isolated quarter perspective, you should be assuming that the inorganic part of it is contributing between 1.5% to 2%, more or less. And then the rest is the organic portion. And the FX has reduced its impact in Q3, is now more around 10%, roughly speaking. So I hope that helps.

[Manuel Lorente, Analyst]

Okay. Because doing those maths will imply roughly a negative organic evolution on the quarter, which I believe it might be due to the stricter lockdowns in Latin America as European conditions, more or less, and hopefully, are easy. Is that the way of seeing?

[Javier Hergueta Vázquez, Chief Financial Officer]

Well, I think it has a lot to do with my answer to the earlier question. If you look at it by regions, I mean in Europe, there's an improvement in the sense of a deceleration of the sales decrease coming from the COVID. While in Latin America, you have to consider the comparable base impact from last year, together with the longer lockdowns and certain delay in the price reviews. So if you exclude all those 3 elements, the underlying normalized behavior of the business remains positive.

[Manuel Lorente, Analyst]

Okay. And maybe just one final question. On the free cash flow, it has been consumption of roughly EUR 10 million on the provision and other items line. Is that the consumption from the work for adjustment plan announced last quarter, or is there any other issue?

[Javier Hergueta Vázquez, Chief Financial Officer]

Yes. I think there are different elements playing into that picture. But if you're comparing that versus figures posted in the first half, I would say that, basically, you have less deferred payments than in the first half, and also, the normal course of business according to IFRS 16 and that kind of items that are also reflected under that caption. But it has to do basically with those 2 elements, most of it.

[Operator]

Your next question comes from the line of Francisco Ruiz from Exane.

[Francisco Ruiz, Research Analyst]

I have some questions. The first one is probably a follow-up on the margin improvement that you commented before. So you said that the margin will continue with this trend of improvement. Can you give us an idea of how much of this improvement is due to the restructuring plan and how much is just pre-organic? And do you think that for 20 -- or probably for Q4 and for 2021, we could see an EBITDA margin above 2019? The second question is on the tax. So you said that the higher tax rate is temporary. Could you give us an idea of what is the normalized tax rate for -- I don't know if it's coming quarter or coming year? And the third question is on the buyback. Ultimately, you are halfway to reach the target, but the stock continues to be at very low levels. Are you considering increasing the scope of this buyback program?

[Javier Hergueta Vázquez, Chief Financial Officer]

I will try to address the different questions. On the first one, on margin improvements, I would say that there's a mix of both things. I mean, of course, the restructuring programs are starting to play its role and starting to yield some impact, but still are on the execution curve. And on Q3, we're not yet fully deployed and not at run rate in terms of impact, so we can say that still the organic component of that plays a deeper role into Q3. Going forward, as we said, I mean, there's a lot of uncertainty right now on the evolution of the pandemic in different geographies. So I think that, as we said before, I mean we feel that -- if you look at the EBITDA, in absolute terms, so far, Q3 has represented an improvement versus Q1, Q2. And on a normalized scenario, we would expect that to be the same for Q4. So in terms of margins, should be more or less the same taking into consideration -- I mean, the same -- I mean, improvement trend, taking into consideration the deeper execution of their restructuring programs. So on the short term, I think that's our view right now on that scenario. In terms of the tax, I think that under a normalized scenario, again, I mean, when we have -- when we are over the pandemic effect, and therefore, these different elements that we mentioned before are not in the picture anymore, then I think we should think of it to something converging more to what we had before. So historically, we've been around 35%, 36%, and on a longer-term basis and normalized view should drive us back to that reference, if you want. And then on the buyback, we are executing the program in line with what we anticipated at the beginning of it. So roughly, I mean, I think we've been doing that already for around 4 months, more or less, 4 or 5 months. I would say around 1/3 of the program is already executed up to now. And for the time being, we feel that we are comfortable and fine with the way this is going. And we will analyze any potential renewals or increases when it comes, but not right now. I mean, I think that up to now, we have still room ahead of us, I mean, to keep executing the plan as it is. So that's what we will be focusing on for the shortest term.

[Operator]

[Operator Instructions] We have no more questions at this time. Sir, if you wish to continue.

[Javier Hergueta Vázquez, Chief Financial Officer]

Great. So thank you all for sharing your time with us. As you know, our Investor Relations team remains available for any further questions you may have. Hope to speak back to you on the full year results presentation. And in the meantime, just take care and stay safe. Thanks. Thanks again.

[Operator]

We do have one late question. Do you wish to take that, sir, or you wish to take that offline?

[Javier Hergueta Vázquez, Chief Financial Officer]

Yes. Don't worry. I think we can take it offline since we're already...

[Operator]

That does conclude your call for today. Thank you all for participating, and you may now disconnect.