Prosegur Compania de Seguridad SA

MAD:PSG

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Prosegur Q1 2023 Results Presentation. [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, Mr. Antonio de Carcer, Head of IR. Please go ahead.

[Antonio de Cárcer, executive]

Good afternoon, and welcome to the Prosegur Q1 2023 results presentation webcast. This presentation will last around 30 minutes and will be followed by an open Q&A session. This webcast will be hosted by our group CFO, Maite Rodriguez, and myself. Prior to starting, I would like to remind you that this presentation has been prerecorded and that it will also be available to download on our corporate webpage.I will now hand you over to our CFO, Maite Rodriguez.

[Maite Sedano, executive]

Good afternoon, everyone, and thank you very much for your attention. The good results we are presenting today for the first quarter of 2023 show solid continuity and improvement, persisting with the growth dynamics seen throughout 2022, with a strong organic growth driven by our commercial capabilities, able to benefit quickly from inflation, but also capable of generating higher demand for our new products in all business areas.2023 is somehow presenting bigger challenges in terms of seasonality and adverse macro than 2022. However, we are confident that we can overcome them and deliver good results throughout the year. And this first quarter is a good example of this.Without further ado, let's begin by reviewing the main milestones seen during the period. The most noticeable aspect of the period is our excellent revenue growth of over 13%, coming from organic growth close to 24% and exhibiting double-digit business expansion levels in all geographies, far above the compound nominal GDP of each region.Transferring cost inflation to market is also progressing fast with positive results, although some time it's still needed to fully conclude this process. Our second point to note is the highly efficient performance the group has shown in what usually tends to be one of the weakest quarters of the year due to seasonality.In this regard, profitability at EBITDA level has grown by 22.7% with a remarkable margin increase of nearly 60 basis points versus Q1 '22, demonstrating our capacity to pass prices through and generating new demand.Our cash flow generation has also improved significantly compared to Q1 '22, recovering from the exceptional adverse effects we saw 1 year ago as a result of increasing absenteeism due to COVID, supply chain shortages and increased working capital consumption. The group's balance sheet also remains stable with low cost of debt and moderate leverage ratios despite the current global increase in the cost of money.Finally, I would also like to highlight our continuous commitment to sustainability. We have a very ambitious well-structured ESG policy that has launched several different initiatives to be implemented in 2023. Today, I am proud to share with you our recent announcement of a new emissions compensation project in Brazil. This project, which is a pioneer in the sector, focuses on compensation by generating 100% renewable energy in Rio Grande do Norte in Brazil. By supporting this infrastructure, Prosegur is proud to contribute to local sustainability, thanks to the production of renewable electricity from wind power plants with low environmental impact.Let us now analyze the financial result of this first quarter in more detail, starting by looking at evolution of our revenues. Sales in the first quarter has increased by more than 13%. In organic terms, growth has been over 23%. This excellent sales result is in line with the reported growth in the fourth quarter of last year and significantly higher than equivalent growth in the first quarter of 2022.This increase in organic revenues has gone hand-in-hand with an additional 2.2% for recent M&A operations, only reduced by a negative FX impact of 12.7%. This excellent performance clearly reflects the effectiveness of our business model in leveraging inflation and generating new business opportunities. This growth has been primarily driven by the excellent performance of our Cash business with volumes continuing to increase in both traditional and new products, supplemented by excellent business development in our Security business in Spain and in the U.S. as well as the powerful pricing capabilities of our Alarm business.This is clear evidence of how our business model is gaining traction in each of our markets, sustaining double-digit growth in euros across each region and business line despite the translational effect of exchange rates.Moving on to annualized profitability. We can see how our EBITDA margin growth is approximately 23%. This is a higher increase than sales growth while maintaining the EBITDA margin at levels almost equal to those of the last quarter of 2022. It is an excellent result, especially considering the increased seasonal effect observed this year due to the high inflation rate of 2022.As you are aware, the first few months of the year usually has a negative seasonal effect on our accounts due to the cost increases that have not yet been properly transferred to prices. This seasonal pattern, which is typical of the business, is further exacerbated this year by a greater differential in cost increase compared to the previous year, coming from higher salary negotiations agreed in the collective bargain agreements in almost all geographies, along with the incorporation of some new business units such as ForEx, whose profitability is more skewed to the second half of the year given the strong seasonal nature of their operations.Although the progress in price transfers to the market is satisfactory, the negative effect of the still updated quantities is comparatively higher than last year. As shown in the profitability graphs by business, this effect has had a greater impact on Cash and AVOS in Q1, with relative profitability remaining flat despite the absolute increase in their respective EBITDAs. However, this will be corrected through the year as the negotiations for rate updates, which are retroactive in some markets, are being concluded satisfactorily.Security and Alarms, on the other hand, show a significant improvement in their respective indicators, while Movistar Prosegur Alarms also improved in absolute terms, maintaining its pre-SAC EBITDA above 50% and being only temporarily affected by the cost of updating its technological platforms.As a result of these commercial and profitability dynamics, we have reached the following P&L in this first quarter of 2023. The most significant aspect is the excellent increase in improvement in all lines, all of them going further than the previous one and leading to an improvement in net profit of nearly 20%. This is a strong indication of the resilience of our business model and our ability to maximize market macro circumstances.It is also important to note the increase in the group's financial costs compared to Q1 2022. This comes mainly due to the refinancing of the EUR 700 million bond at 1% interest rate, which matured in March and which has been replaced by a new one worth EUR 500 million at 2.5%, a very attractive rate if compared to the current interest rate rise.There has also been a significant reduction in the tax rate, mainly due to the improved profitability in certain geographies. This is good news as it is expected to be maintained throughout the year and will contribute positively to offsetting the increase in financial expenses.Let us now move on to analysis of the group's cash generation for this first quarter. Cash flow also improved compared to Q1 '23. Our operations continued to gain in scale, and we are optimizing the working capital consumption that underwent a strong increase in Q1 '22. As you may remember, this came about due to the strong volume recovery experienced at the beginning of the year, combined with accelerated stockpiling to offset the supply chain shortage seen in the same period of 2022. Fortunately, all these negative experiences are almost over and our cash flow generation capabilities are returning to normal as evidenced in this quarterly cash flow statement.Total CapEx remains below 3.8% of sales despite its obvious increase in absolute terms, resulting directly from higher sales in new products and more intense operational volumes. We have continued to increase customer CapEx in the first 3 months of the year, and this now represents 46% of CapEx consumption compared to 40% at the close of 2022. This is an excellent indicator directly linked to the increased penetration of new products and the growing demand of technological solutions from Cash and Security clients, respectively.Finally, let's review the debt position and balance sheet to conclude the financial overview of the quarter results. In terms of debt structure, it's worth mentioning the moderate level of leverage, which now sits on a 2.3x net debt-to-EBITDA ratio, in line with the close of last year and 1 notch lower than reported in Q1 '22.Our average cost of debt has increased slightly to 2.5% due to the refinancing of our bond. As for our balance sheet, as usual, there are no significant variations to report other than the inclusion of our Australian cash operations under the heading noncurrent assets held-for-sale. As you are aware, we are still awaiting regulatory approval to conclude our merger with the main Australian cash-in-transit operator.I will now turn the presentation over to our Head of Investor Relations, Antonio de Carcer, who will give you more detailed information on the development of the specific business areas.

[Antonio de Cárcer, executive]

Thank you very much, Maite. Let's now have a look at the results of each activity line, covering the main performance indicators and the most relevant aspects of the period in each one.Starting with Prosegur Cash, the most significant achievements of the period have been the noticeable nearly 30% revenue growth in organic terms, sustaining the excellent local currency revenues growth seen along the past year and coupled to an additional 5.1% in organic growth coming from recent acquisitions. This excellent performance has been consistent in all regions, with increments in excess of 36% in LatAm, 13% in Europe and more than 23% in Asia Pacific. All of them are above of their respective nominal GDP growth. These excellent revenue results have been affected from a negative 18.6% currency translational impact, leading nevertheless to a very solid 16.2% sales growth in euro terms that reflects the good expansion dynamics the business is delivering.EBITDA has also grown by 9%, totaling EUR 60 million. It was temporarily affected by a more intense seasonality due to both the price transfer season and the ForEx business acquired last year, whose operational volumes tend to be stronger in the second half of the year. However, we expect a progressive recovery in Cash profitability as the year progresses.Also worth noting in this quarter has been the strong increment in revenues experienced by our new products that now account for more than 28% of total sales in cash, reinforced by the introduction of the new ForEx services coming from the recent acquisition of ChangeGroup.New products have grown by more than 40% year-on-year, being important contributors in all regions, including Asia Pacific, due to the intense commercial activity and with a significant incremental of sales in the main solutions, Cash Today, CORBAN and ForEx.Turning our attention now to the Security business. We can observe a significant organic growth of 17.8%, amounting to EUR 521 million after adjusting for the negative FX impact of minus 6.7%. Sales performance has been very strong across all regions, with Spain and the U.S. being particularly noteworthy due to the continued success of our Hybrid Security solutions.We have accelerated our expansion plan in the U.S., opening 6 new branches in addition to the 11 created during 2022, which is driven by the demand of new clients. By the end of 2023, we expect to add another 10 operational branches to fulfill our geographical expansion.In terms of profitability, Security has grown by almost 35%, reaching EUR 9 million and delivering an EBITDA margin of 1.8%, which is a remarkable achievement given the strong investments in the U.S. and seasonality, indicating a good structural recovery of the business profitability.Price increases have been well received by the market with proposed increments being fully accepted by clients. But there is still some percentage of the client base pending closure, which is normal at this time of the year. We expect this process to be fully concluded in the incoming months.Finally, our Hybrid Security solutions continued to grow and expand their presence, now serving more than 32% of our total client base, which is 140 basis points increase compared to the figure at the end of 2022. Hybrid Security combines 3 elements: our security professionals, the most advanced security technology that enhances human capabilities and the data captured by the security ecosystems that feeds back into the model, allowing for easy adaptation and flexibility.This new value proposition to clients allows for the implementation of different types of services as opposed to traditional single product contracts and is largely responsible for the profitability improvement that the business is experiencing.Shifting our attention to the Alarms business, we observed that the total number of clients has reached nearly 820,000 connections. This indicates a net growth of 90,000 clients since Q1 2022. New clients acquired in Q1 '23 have increased by 43% in Prosegur Alarms, but have voluntarily decreased in MPA. This is because MPA is now focusing on attracting higher-quality clients to enhance business efficiency indicators.Revenues for Prosegur Alarms have impressively increased by 36.3% in organic terms, which is evidence of this business's exceptional ability to raise prices and pass on inflation to clients. However, this growth has been negatively impacted by FX as more than 2/3 of the total client base is in LatAm. Both units have reported improvements in churn rate as a result of client retention campaigns initiated this year, and they have also seen significant increase in ARPU due to pricing updates.ARPU has grown by almost 10% in Prosegur Alarms and by an excellent more than 13% in MPA. This increase was also due to a reduction in aggressive campaigns that were offered to most clients in 2022 without any upfront connection cost. Furthermore, in line with our previous results presentation, we have included a projection of the actual value of ARPU and EBITDA pre-SAC in MPA once the newly gained clients terminate their discount periods. This provides a better understanding of the excellent value creation of this business.Profitability by client in both units have continued to increase with the obtained EBITDA being EUR 17 per client a month in Prosegur Alarms and EUR 19 in MPA or EUR 23 if discounts are normalized. The EBITDA margin has also increased in Prosegur Alarms to 44.4%. While in MPA, it still reflects the cost of the new video management platform that is being diluted as the number of clients demanding this system increases as well as the client retention campaign initiated this year. Nevertheless, the EBITDA margin in MPA still remains above the comfortable 52% and it will continue to expand as the client base increases.To conclude with this product line results overview, let's now briefly look at AVOS and Cipher. Prosegur AVOS has increased its revenues by almost 14% with no adverse effects to be taken into consideration. Being this is a very good indication of the sustained double-digit growth, this highly signifies the BPO business line is delivering.Profitability-wise, EBITDA has stayed almost flat due to seasonal effect as pricing increment is still in the process to be concluded, given that the increment to be transferred to clients this year, 2023, is higher than the one in 2022. Nevertheless, we expect this situation to normalize as the year progresses and the business begins its habitual EBITDA margins.Cipher, on its side, is reflecting this quarter the cost implicit on the restructuring of the business towards a more agile and recurring service model. We are in the final stages of implementing the new exMDR platform. exMDR, extended management detention and response, is a proprietary robotic technology developed by Cipher to streamline intelligent detection and response activities designed by our engineers and operated by our experts as one theme.It's a major investment that will help boost sales and has also demanded a restructuring of the commercial team, whose cost has been fully incorporated in this first quarter. Client bookings on the last part of the quarter have been very positive, and we expect this situation to revert to profitable numbers along the year.This concludes our analysis of the performance of each business line in this first quarter of the year. Thank you for your attention. I will now hand the microphone back to our CFO, Maite Rodriguez, for her closing remarks.

[Maite Sedano, executive]

Thank you very much, Antonio. Let me now share with you my concluding thoughts on the most relevant conclusions of the Q1 results presentation.We are very pleased to report a satisfactory start to 2023, characterized by robust organic growth across all our geographies and businesses. This achievement is thanks to our consistent focus on innovation, operational excellence and good understanding of the macro conditions.The company's profitability is growing ahead of sales, a remarkable accomplishment in a seasonally adverse first quarter. This strong performance indicates a positive trajectory for the company's results in the upcoming quarters, leaning on the 2 main factors of volume increases and successful price transfer to market. And we expect seasonal effect on profitability to be offset over the next few months.In this regard, we are happy to state that our inflation volumes have continued to grow at similar rates as in Q1 '22 and our price increase process is progressing successfully and in line with expectations.New products have continued to perform exceptionally well with close to 30% penetration across the group, led by Cash, but also with an increasing penetration of the hybrid security concept, which has a direct positive effect on margins. This indicates that the company's focus on innovation and customer centricity is bearing fruit, and we will continue to focus most of our efforts on developing this strategy as it is proving to be the healthiest way to sustain our future growth.The company has also seen an interesting recovery of its cash generation levels in this first quarter, still affected by the seasonality of the business, but with a positive outlook as our main investments are becoming more client-oriented with short-term returns. And finally, taking all of this into consideration, the company has positive expectations for 2023.It is true that we are facing tougher macro challenges than the previous years, but we remain optimistic given the strong start of the year, actual growth momentum and our ability to take advantage of inflationary environment. That's all from me.I will now like to open the floor for any questions. And thank you all for your time with us.

[Operator]

[Operator Instructions] We will now take the first question. It comes from the line of Enrique Yaguez from Bestinver Securities.

[Enrique Yáguez Avilés, analyst]

I have 3 questions. The first one is regarding the evolution of EBITDA. If we exclude the contribution of Cash and Security, there has been a positive impact of EUR 5 million roughly from the remaining businesses and the headquarters shows minus EUR 2 million in the first quarter of last year. So the question is what drives this improvement with lower cost reduction of cost at the headquarters or a larger contribution to Alarms or any other reason?The second question is regarding the tax rate. It increases for as a cars and falls for the parent company. So what is the reason? Is just a question of the higher impact of hyperinflationary accounting in Cash or any other reason? And finally, on the Alarms business, 2 questions.First of all, in the previous quarter you had added signing new strategic alliance as one of the priorities of the company. So any update on this regard will be welcome, and how has been the evolution of the commercial agreement since until now, especially in LatAm. Secondly, if you could give us some also color about the evolution of the KPIs in the second quarter given the strong evolution of Q1.

[Maite Sedano, executive]

Thank you, Yaguez, for your questions. In relation to the first question, here, you have to consider that we have better margins coming from Security. We have better margins coming also for -- from Alarms. And we also have some impact coming from indirect cost efficiencies that were done in last -- the 4Q of last year, and they are very fruit now in this first Q and in the rest of the year. So it's mainly coming from there.In relation to the tax rate, here, you have to consider that in some countries in Security business, we were losing money. And this year, we are not. So as you know, in our accounting policy, we are very conservative, and we just booked as a credit loss is the very -- we as credit losses, the companies that have achieved the breakeven. And we almost have that breakeven in almost all countries, and that's why the tax rate is also improving.In terms of alliances, the -- we are, as you know, is one of our main targets for this 2023. We are really working hard in this point. And we will see if we have new ones or this is like I always say the same thing. This is like an M&A deal that you never know what's going to happen until the day that you are signing the deal. So we will see, but we are very positive.And in terms of how our commercial -- the previous commercial agreement that we have been signing during the last year, how they are evolving. The answer is they are evolving very slowly. But it is true that time is very -- it's not so quickly because you have to train the sales team. You have to know your partner and you have to know how to work together and sometimes that it's not so easy. So we are really working harder so that we expect more positive results for the second half of the year.And in terms of KPIs, we -- for the second Q, we will maintain this same trend, and we are very positive on how it's going to evolve for the second Q.

[Operator]

We will now take the next question. It comes from the line of Pedro Alves from CaixaBank BPI.

[Pedro Alves, analyst]

Two, if I may. The first one on Security. So given the collective bargaining agreements to date, any inflation transfer to clients moving according to our expectations, the good penetration of hybrid solutions and so on. So do you have now an updated view on where margins will stand for the full year in security. Do you think you are on track to reach at least a 3% EBITDA margin figure?And secondly, the Prosegur Cash, I know this is a recurring question of keeping the company listed or not, but following the buyback programs, I think Prosegur now should own close to 80% of the company. Can you just remind us if there is any mandatory takeover rule and that could be triggered at some point by the Spanish regulator?

[Maite Sedano, executive]

In relation to the Security margin for the year-end, the answer is that we are going to maintain the same trend as last year. So we have started this first Q stronger than last year. So we expect to continue like that and with that same positive strength of growing and improving the margin. In terms of the buyback programs that nowadays, we do not have any buyback programs in the parent company. We have them in the Cash business.And there isn't any mandatory I know that now we get -- the remaining percentage for the repurchase of cash is 20%. But the reason is from our regulator, there isn't any regulation that says that we have to buy it. It is if we achieve another 10%. When you have like 10% just listed to have it's like a kind of mandatory to buy it. But if not, there isn't any kind of regulation that applies in this sense.

[Operator]

We will now take the next question. It comes from the line of Francisco Ruiz Martin from BNP Paribas Exane.

[Francisco Ruiz, analyst]

I have 3 questions, too. One is on -- a follow-up on the Security margin because it's true that Security margin improved in this quarter. Mainly we are comparing with the Omicron quarter last year. So some [indiscernible] is a little bit fictitious. So could you give us an idea of what should be the impact of price transfer in coming quarters in the margin security? And how is the situation in Brazil and the United States for the year?The second question is on the consensus. I mean last week, your colleagues on Prosegur Cash commented that they are comfortable with the current consensus of EBITDA for the year. Are you as well comfortable with this? I mean I think the consortium is around EUR 340 million.And last but not least is on Alarms. It's true that results have been quite good. But if we look at net adds, we have seen a slowdown. I mean this is a typical slowdown because of the changes in the policies between you and your competitor. Do you think that the current levels of new adds is feeling for the company and growth in terms of net adds would be more difficult from now on?

[Maite Sedano, executive]

In relation to Security margin, yes, we are very happy of how it's evolving and how during this first Q, even we are improving in comparison to last year. This is thanks to the evolution of all the countries where we are, even Brazil and U.S.A. In the case of Brazil, we have achieved the breakeven, what are very good news.And in the case of U.S.A., as you know, we are investing a lot in new branches. Now we have opened around 10 new branches and we really have a very challenging target for this year because we are really going to open a lot of more new branches, and that's decreasing the margin. But if we exclude those investments, the margins are coming from U.S.A. are one of the highest in -- at group level in Security business.In terms of price, as you know, this part of the year, we have the price weights more than volume and as it happens in the first Q of previous years. However, this year, the price is slightly higher than what is common in this period, but it's mainly because of the inflation that we have.In relation to your second question about the consensus, the answer is the same as Cash answer yesterday. We are also very comfortable and -- our market is quite similar to the consensus.And answering your third question about the Alarm, it's not a group. We are not -- you can grow whatever you need whatever you want in the Alarm business in Spain because the penetration of the market is very low. But here, what now our strategy has changed a little bit. As I mentioned in the fourth Q of last year, this year, we are more focused on retention than on achieving a higher number of subscribers. So that's why our churn rate also has been improved. And even we are also care about the margins in EBITDA per stage.So that's why we are not growing so much because in Alarm business, you have to be sharing all the time, retention because when you grow, you need cash. So you have to control also that the cash that you need for growing. So it's very common to combine both models. We have growing and now we have to be more focused on retention and looking for the cash flow. But that strategy for sure that will be changing in the future.

[Francisco Ruiz, analyst]

Okay. Just a follow-up another question is as you deconsolidate already Australia in your balance sheet, first is how it's possible that you consolidate on the balance sheet and continue to show on the P&L. And second, if you could give us the impact that this has had in net debt?

[Maite Sedano, executive]

That's because of the accounting standards, you have to -- in the P&L, you have to consolidate it fully as normal. But in the balance sheet, you have to split it from the rest of the balance sheet. It's mainly because it's not -- the technical worries because it's not considered a segment. So that's why we are not separating also in P&L. And your second question was?

[Francisco Ruiz, analyst]

Is on the debt, what has been the impact on the debt of the consolidation?

[Maite Sedano, executive]

I don't have exactly the figure. Antonio maybe later, we can give you exactly the figure. But it's going to be related with what we call creditors that are the cutoffs coming from the Australian customers. So -- but excluding that, it's not a very significant amount. But Antonio will tell you later if you want because we do not have here the figure.

[Operator]

There are no further questions at this time. I would like to hand back over to Mike Rodriguez for closing remarks.

[Maite Sedano, executive]

Thank you very much for your attention. And if you need further information, please contact our Investor Relations department who is open to have you at any time. Have a nice day.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.