Prosegur Compania de Seguridad SA

MAD:PSG

Earnings Call Analysis

Prosegur Reports Stellar Growth in H1 2023

In the first half of 2023, Prosegur achieved remarkable results with sales in euros growing by 9.7%, propelled by an extraordinary organic growth of close to 27% and complemented by a 2.1% inorganic growth from the previous year’s acquisition. The outstanding sales performance was consistent across all business lines, barring Cipher, and were inflated by an impressive client demand surge. Notably, this growth trajectory exceeded the figures from the same period in 2022 and surpassed regional GDP and inflation rates. EBITA increased significantly by more than 16%, affirming the company's ability to sustain growth amidst adverse conditions like currency fluctuations that impacted the second quarter. Operating cash flow nearly doubled due to improved working capital management, which supported strong organic growth without inflating debt. Prosegur maintained a moderate leverage with a net debt-to-EBITDA ratio of 2.3x and managed to slightly reduce net financial debt, indicating robust financial health and strategic management of capital expenditures.

Extraordinary Growth Amid Market Challenges

Prosegur Cash has shown remarkable resilience and growth, reporting a massive 33% organic increase that has been consistent across all regions. This surge comfortably outstrips prevailing inflation and GDP growth, illustrating the company's ability to leverage inflation and introduce new products effectively. Acquisitions have further boosted growth by 4.8%, as with the Change Group. Nevertheless, currency effects have taken a toll, reducing the overall growth to a rate of close to 11% with total revenue at EUR 979 million. Despite such currency headwinds, the company's growth, particularly in euro terms, has been impressive.

Strengthening Profit Margins

Prosegur Cash has not only grown in revenue but has also enhanced profitability, with the consolidated EBITA climbing by 7.1%, reaching EUR 129 million, and profits demonstrating a healthy EBITA margin of 13.2%. Seasonal effects have had a slight impact, but overall the company's profitability shows a robust improvement. Similarly, the Security business has resumed its margin recovery post-pandemic with a 23% EBITA jump to EUR 23 million. This is reflective of effective cost management and increased demand for advanced, technology-laden solutions.

Innovative Products Drive Sales

The innovation at Prosegur has yielded tangible results with new products accounting for over 29% of total sales and displaying an impressive 38% growth year-over-year. This innovation crescendo has led to the best quarter to date with EUR 284 million in sales. The Security business, too, has kept pace with its own innovative offerings like Hybrid Security solutions, which now serve more than 30% of clients.

Alarm Business Boasts Strong Performance Indicators

The Alarms business indicates robust health with a 10% year-over-year growth in its client base, now totaling 835,000 connections. This growth is supported by the addition of around 81,000 new clients in the first half of the year and an optimized churn rate. Furthermore, the ability to adjust prices to keep pace with inflation has underlined a strong profitability trend, with EBITDA Pre-SAC margins standing at a remarkable 43.1% to 55.2% across various units.

Global Expansion and Capital Expenditure

With eyes set on global expansion, particularly in North America, Prosegur plans to open 20 new branches to meet escalating customer demand. This expansion, however, hasn't budged the group's debt, thanks to strong cash generation and working capital management. Indeed, the decrease in Day Sales Outstanding (DSO) is a testament to the effective capital management being practiced.

Mergers and Acquisitions: A Strategic Growth Lever

The merger approval with Armaguard, a leading operator in Australia, is likely to enhance profitability in the region. While there's anticipation about the impact on EBITDA and free cash flow, executives have hinted at potential near-term positive developments without specific figures. Moreover, the M&A focus will be on organic growth, especially within the Security sector, with cybersecurity and technology innovations being at the forefront.

Looking Ahead: Stability and Growth

Prosegur's commercial growth and profitability appear to be on an upswing, notwithstanding the adverse currency fluctuations. The business lines show strong organic growth and evolving product portfolios, which bode well for future profitability and margins. CFO Maite Rodriguez expects similar growth dynamics for the second half of the year, suggesting stability and further enhancement in organic profitability.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Prosegur Q2 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 Prosegur 2023 First Half Results Webcast Presentation. The 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. Before we begin, I would like to remind you that this presentation has been prerecorded and that it will also be available to download on our corporate website.

I will now hand 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 cover the first 6 months of 2023 and demonstrate a persistent growth trend in our most relevant business lines.

The quickest way to summarize the performance of Prosegur in this first half of the year is an extraordinary organic growth in sales exceeding those of Q1 and resulting in substantial growth in euro terms of nearly 10% in comparison with last year, coupled with a higher increment in profitability in all P&L lines and an excellent increase in cash flow generation. And this all came with some more positive details that I would like to share with you in this presentation.

So without further ado, let me go through a brief summary of the main highlights of the period.

Starting with the strong organic sales growth, which is close to 27% and comes from an overall improvement in the main business lines. The breakdown of growth in local currency for each business unit has been 37.8% for Cash, 20.7% for Security and an extraordinary 42.2% for Alarms.

An exceptional result on the back of higher volumes of cash in circulation, accelerated penetration of new solutions and increased sales effort in all geographical areas.

In inorganic terms, we are pleased to announce that the Australian Antitrust Authorities have granted their approval for the merged project of Prosegur Cash with the country's main Cash and Transit operator. This decision is based on an understanding of the importance of proper and widespread cash distribution in the country as a guarantee of social inclusion for society as a whole, and it represents an excellent opportunity for improvement and growth for both companies.

In terms of profitability, the EBITA has grown by more than 16% compared to the same period last year despite the negative impact of currency exchange rate, which has also increased during this period. This proves our capability of sustaining growth even in the most challenging situations. This significant improvement in profitability continues to be supported by the positive impact of inflation on our business and an efficient transfer of cost increases to prices, which has once again been executed quickly and without negative effects.

Another notable aspect of the period has been the substantial increase in operating cash flow, close to 100% resulting from improved efficiency in working capital management. This excellent result has allowed us to maintain a moderate and stable leverage level which has been able to support the strong organic growth without increasing debt.

And lastly, regarding innovation, the most significant events include the sharp increase in the sale of new products in Cash, which experienced a record quarter. This has benefited from the introduction of the new ForEx currency exchange service.

The global launch of the new xMDR cybersecurity management platform also took place. This advanced automation solution for detecting and responding to cybersecurity threats is quite exclusive and has been very well received by our clients.

Let us now analyze the financial results for this first quarter in more detail, starting by looking at the evolution of our revenues. Sales in euros have grown by 9.7%. As mentioned earlier, this result stems from extraordinary organic growth of close to 27%, accompanied by an additional 2.1% inorganic growth resulting from last year's acquisition of the Global Currency Exchange Operator from now on ForEx.

Organic growth has been consistent across all business lines, except for Cipher, which is still adjusting its client portfolio to the newly offered services.

I would like to highlight the remarkable organic growth reported by Cash, Security and Alarms, which significantly surpassed the figures from the same period in 2022. This growth is not only due to an excellent process of tariff updates, but also to a noticeable increase in the client demand. This fact becomes evident when analyzing growth by geographical areas. It is clear that all regions report growth well above their corresponding GDP and inflation rate, surpassing the equivalent growth reported in the same period in 2022 and in Q1 2023.

Lastly, it is also worth mentioning the increased currency impact observed during the second quarter of the year, driven by the combined depreciation of several LatAm currencies in correlation with a slight depreciation of the U.S. dollar, to which most of our different currency trades before being converted into euros.

Nevertheless, the excellent organic growth reported was able to overcome this situation. And as we will see on the following slide, profitability has also done the same.

Moving on to profitability. We can observe that the group's EBITDA has totaled EUR 150 million, representing a 16.3% increase compared to the first half of the previous year. This also implies a 5.8% increase in the last quarter compared to Q1 2023 as the seasonal effects seen in the first quarter of the year have been neutralized.

Prosegur Cash still shows a certain negative seasonal effect. However, its profitability for the last quarter was 13.7%, improving by 120 basis points compared to Q1 2023. Security significantly improved its profitability to 2.4%, representing a 3% margin in the second quarter. This good improvement is driven by growth in the U.S.A. and the swift and efficient transfer to market of inflationary cost increases.

Prosegur Alarms and Movistar Prosegur Alarms also increased their EBITDA pre-SAC very notably in NPA due to improved client retention and reduced commercial offers. On the margin level in NPA, the EBITDA pre-SAC margin increased significantly to 55.2%, while Prosegur Alarms maintained a stable level, while still temporarily affected by the ongoing transfer of operational cost to the market.

Lastly, our tax EBITDA was affected by the onetime inclusion of higher earnouts agreed upon for the commercial success of its net solution, which have been incorporated in this quarter.

Now let's move on to analyzing the income statement for the first half of the year, which is as follows: during the first half of 2023, there was an extraordinary organic growth in sales of 26.8%, which was close to 30% in the last quarter. EBIT reached EUR 133 million with a growth of 17.8% and a margin of 6.1% compared to 5.7% in the same period last year. Financial interest amounts to EUR 40 million, primarily due to the refinancing of a EUR 700 million bond at an interest rate of 1%, which matured in March. It has been replaced by a EUR 500 million bond at 2.5%, a very attractive rate when compared to the current rise in interest rates.

Additionally, under the financial interest heading, a purely accounting impact was recorded as a result of the negative FX effect of some intercompany operating loans.

Finally, the tax rate slightly dropped to 53.9%, resulting in a net profit of EUR 43 million, an 8.1% increase compared to the previous year, mainly due to the improvement in the earnings before taxes.

Analyzing the group's cash flow, we observed a remarkable 95.5% increase in operating cash generation. This outstanding outcome is the result of careful working capital management, which effectively offset the significant sales growth and enable the handling of client CapEx increments without impacting the group's debt level.

In this regard, it should be noted that client CapEx has risen to 51% of total investments during this quarter. This is a positive indication of the significant progress made by our new Cash products and Alarms within our product offering, which incorporate advanced technology components.

Furthermore, infrastructure CapEx has reduced its shares in the overall mix, now standing at 2% of total sales. This reduction is attributed to the efficiency policies and global cost adjustments implemented since the pandemic. Overall, these excellent results decisively contributes to the group's gradual deleveraging policy, while maintaining the necessary investments to ensure and support the project growth.

To conclude the financial analysis of these results, let's review the group's balance sheet and debt position. The group's net financial debt has slightly decreased compared to the first quarter, maintaining a moderate leverage ratio of 2.3x net debt-to-EBITDA. This is a very positive outcome considering the significant increase in organic growth and client CapEx, which has been financed without increasing debt. Thanks to the excellent cash generation during the period.

The average cost of the group's debt stands at 2.5%, indicating a very comfortable position, especially considering that 72% of our debt is a fixed interest rate and the main maturities are scheduled for 2026 and 2029. Overall, the company posts a very strong balance sheet that can support both current and future robust growth.

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 for each one.

Starting the analysis with Prosegur Cash, the most relevant facts of the period lie in the extraordinary organic growth of 33% reported. This growth has been consistent across all regions, significantly surpassing inflation rates and GDP growth, the company has capitalized on inflation and strongly supported its growth with new products. This organic growth is complemented by an additional 4.8% inorganic growth resulting from the acquisition of Change Group.

However, it is impacted by a significant translational currency effect of approximately 27% leading to a result of EUR 979 million, thus representing a growth rate of close to 11%. It is important to highlight that despite the strong negative currency effect, the business continues to demonstrate the ability to achieve superior organic growth while maintaining a good double-digit growth in euro terms.

The second important piece of news from the period has been the approval by the Australian competition regulator of the merger between Prosegur Cash and the leading operator in the market. This milestone is crucial and could lead to a significant improvement in the region's profitability profile, while reaffirming the importance of cash in society as this has been the main rationale of the Australian government to support this project.

Regarding the profitability of cash in the first half of the year, the consolidated EBITA has grown by 7.1% totaling EUR 129 million with an EBITA margin of 13.2%. Although slightly affected by seasonal effects, it reflects a significant improvement in the last quarter with the EBITA margin reaching 13.7%.

Lastly, it is worth highlighting the excellent progression of new products, which now account for over 29% of sales and have shown an impressive growth of 38% compared to the same period in 2022. Totaling 284 million users in sales and making it the best quarter reported to date.

Shifting our focus to the Security business. We observed that sales have reached a total figure of EUR 1.072 billion. This represents a growth of 9.3% compared to the first half of 2022. This growth stems from an outstanding 20.7% organic growth, partially offset by a negative currency effect of 11.4%. The sales growth of Security in the first half of 2023 has been remarkable in all countries, particularly due to advancements made in Spain and the U.S.A. The commercial growth is accelerating in these regions, thanks to innovative Hybrid Security proposals, and Prosegur's increasing positioning as a global operator focused on high-demand clients.

Our expansion focus remains on North America, where we have extended the target of opening new branches to a total of 20 this year to cater the growing client demand.

Regarding profitability, Security continues the trend of margin recovery that began after the pandemic. During this period, it shows excellent EBITA growth of over 23%, reaching EUR 23 million in the first half and reporting an EBITA margin of 2.4%. This notable margin improvement arises from an effective process of passing cost increases to prices across all geographical areas, combined with higher demand for advanced solutions incorporating more technology and enabling better scalability of investments in remote monitoring centers.

The strong commercial progress in the United States has also contributed to this improvement. Specifically, the United States now clearly leads in gross margin generation in the security business with its EBITDA results only affected by the substantial investments in commercial expansion being made in the country which are gradually absorbing more clients.

Lastly, concerning innovation, hybrid security solutions continue to gain a good penetration rate, serving more than 30% of the total client portfolio.

The integration of [ Barrios ] Security business continuity and employee and customer protection services consistently enhance the value we deliver to our clients.

Now turning to the Alarms business. We can observe how virtually all business indicators saw positive performance in the first half. The total client base is at 835,000 connections, a 10% increase compared to the same period last year, supported by the addition of around 81,000 new clients in the first half and reinforced by the optimization of the churn rate experience in both units.

The number of new sign-ups for Prosegur Alarms accelerates its growth over 27% while in NPA, the growth has been intentionally reduced to optimize operational indicators, although it still remains significantly high, contributing more than 51,000 new clients in the first half of the year.

The positive outcome of this reduced growth rate is remarkable in terms of both churn rate and profitability. In NPA, the churn rate dropped from 14% to 13% and the ARPU increased by more than 10%, reaching EUR 37 per client per month or EUR 40, if we normalize the commercial discounts after the offering period.

For Prosegur Alarms, the churn rate remains stable at 11%, with barely any variation, and the ARPU continues to improve by 6.7% above the strong improvement since in the previous year. Taking advantage of the Alarms business ability to quickly adjust prices to inflation. In terms of profitability, both units report increases in their EBITDA Pre-SAC, representing an improvement of over 17% for NPA and 5% for Prosegur Alarms. This positions the EBITDA Pre-SAC margins at 43.1% for Prosegur Alarms at an excellent 55.2% for Movistar Prosegur Alarms.

Lastly, Prosegur Alarm sales during the 6 months period have reached EUR 92 million, showing an extraordinary organic growth of over 42% and highlighting the robust pricing capability of this business. However, this growth is affected by a strong negative currency effect as most of the Alarms in this unit are located in Latin America. Overall, the sales growth in euros stands at a positive 2.5%.

To conclude with this product lines results overview, let's briefly examine AVOS TECH and CIPHER. AVOS TECH sales grew by 11.9% during the first half of the year, driven by the strong performance of the SISNET solution. SISNET is a specialized management tool for the insurance companies, experiencing high demand within the insurance sector in Spain and several Latin American countries.

This commercial success of this technology led to a higher payout of the earnouts agreed upon during this acquisition 2 years ago. This increase in earn-outs was settled in the second quarter and is responsible for the temporary reduction in AVOS TECH's EBITA, which totaled EUR 3 million in the first half, representing a 7% margin.

As for CIPHER, sales reached EUR 7 million, showing a slight decrease of 5.2% compared to 2022. The gross profit also totaled EUR 1.8 million, maintaining a margin of 26.6%. Despite being below the growth threshold, the results indicate a clear recovery for CIPHER, if we consider what was reported in Q1. It's worth mentioning the global launch of the new xMDR platform by CIPHER in the early second quarter. xMDR is an innovative automation solution for detecting and responding to cyber threats. It is based on a proprietary artificial intelligence and machine learning system, providing our clients with a comprehensive global protection service against attacks.

It can identify threats before they fully materialize and activate protective systems in advance. This highly advanced and exclusive solution is gaining strong traction in the market and is largely responsible for CIPHER's significant improvement in this year's Q2 over Q1.

This concludes our analysis of the performance of each business line for the first half 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 closing thoughts on the most relevant progressions of this results presentation.

We are very pleased to see how the positive progression observed in the first quarter of the year has continued and even intensified during the second quarter. The extraordinary organic growth reported by our major lines of business has far surpassed the inflation and GDP growth rates of all the regions. Although the adverse effect of exchange rates have increased during this period, they have been offset by excellent sales and volume growth.

Cash has continued to show exceptional performance, especially in LatAm, and Security has also reported a significant increase, primarily in the U.S.A. and Europe. Alarms have also grown significantly in all regions at rates higher than expected. The group's profitability continues to show a positive trend with growth outpacing sales despite the adverse effect of exchange rates.

New products are gaining traction with Cash experiencing a record quarter, thanks to the Cash Today and CORBAN Solutions. Furthermore, the new ForEx service is already generating positive profitability.

In the Security segment, there has also been a notable increase in client adoption by Hybrid Security solutions which has positively impacted margins.

Regarding the balance sheet, the strong cash generation in the first half has allowed us to address the increase in client CapEx without any rise in the group's debt. This is a very significant outcome, the result of meticulous working capital management, which has led to a reduction of DSO.

In summary, we believe that today's good results are an excellent indicator of the group's strong commercial progression across all business lines and they allow us to anticipate a second half of the year with very similar growth dynamics that will continue to enhance organic profitability as observed in recent quarters.

That's all from me. Thank you once again for attending this presentation, and I'm delighted to answer any questions you may have now.

[Operator]

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

[Enrique Yáguez Avilés, analyst]

I have 3 questions. The first one is regarding the margins on Alarms. The EBITDA margin has fallen from roughly 7% in the first half of last year 2%, 3% this first half despite the improvement in the ARPU and in the EBITDA Pre-SAC. So what are the reasons for this margin contractual?

Secondly, a question that I should ask Prosegur Cash Management, is regarding the integration of your Australian business with Armaguard. I don't know if you could give us some impact -- quantitative impacts about what you expect from this acquisition EBITDA, free cash flow synergies expected as well.

And finally, regarding M&A, I know that you said that we shouldn't expect so many acquisitions this year because the objective is to reduce financial leverage. But my question is after the integration with Armaguard will be completed, do you foresee any opportunities to grow in other businesses, mainly in Securities.

[Maite Sedano, executive]

In relation to your first question about the EBIT margin or EBITDA margin the decrease...

[Enrique Yáguez Avilés, analyst]

EBITDA.

[Maite Sedano, executive]

Okay. EBITDA margin, yes, the EBITDA Pre-SAC margin has decreased mainly because we are -- there are still some pending effects coming from the cost pass-through. And it's something temporary. But even though the ARPU of this year has like 10 basis points decrease. So we also have an impact coming from there. And for the -- but we are not worried about it. It's something seasonal. And as you know, we can pass through cost in the Alarm business every month. So it's something that we do it just in 1 point of the year or in 2, 3 points of the year depending on the country. And that makes the decrease of the EBITDA.

The results are very, very small impact coming from the investment in the Smart platform, but it's very, very, very small, even misleading impact.

In relation to your second question, we are very, very happy because of the positive answer coming from the antitrust authorities in Australia. We are -- all the conditions coming from this approval are described on the A BBB web page. So you can see even definition of the -- what's going to happen with the prices and things like that. And we will have positive impact in our EBITDA, EBITA.

We are also going to have a positive impact in our cash flow not in our debt because, as you know, when we are going to deconsolidate this Australia, we will have to also to remove all the operative cutoffs that at around like EUR 30 million more now in September. But the cash flow will be improved. The EBITDA will be improved and we are very, very happy because in the medium, long term, it is an important milestone to not just for Prosegur, but also for the full Cash and Transit sector basically because a developed country government has approved the merger of the main 2 players of the market.

What means that they understand the importance of our business and how it is completely essential for the population and society. So this opens a huge window also in other developed countries like Europe. So we are very, very happy, and I think that it's going to be, as I said, an important milestone not just for Prosegur but also for the sector.

Then coming back also to the type of synergies that we are going to have, the main impacts are going to come because we are going to close several bolts, so an important impact and the main impact is going to come from there.

Moving to the third question in relation to the future M&A for the rest of the businesses. We are very, very focused on the organical growth in Securities.

So we do not expect to increase in M&A terms, it's going to be basically organic growth in cybersecurity and in AVOS, we are also with the new solutions. And we've seen that in AVOS we are trying to implement the solutions that we have in Spain, in Chile and in other countries. But in the countries where we are, are not with M&A, it's going to be also organical and also the same thing will happen with the cyber security business.

And in Cash, we -- just today, we are going to close a deal in Germany. So but from now on, the only M&A acquisition that we expect is the one that we are going to close today and nothing very significant for the rest of the year.

[Enrique Yáguez Avilés, analyst]

What is the acquisition in Germany, is it expected to be closed today? It is, I assume that is a bolt-on acquisition, isn't it?

[Maite Sedano, executive]

No, it will be announced in the -- if it's not -- maybe tomorrow or the next day. So you will know about it.

[Operator]

We will now take the next question, from the line of Juan Ros Padilla from ODDO BHF.

[Juan Ros Padilla, analyst]

Just I have a follow-up question regarding your comments on the Armaguard deal, saying that you were making a positive winning because of the Australian government allowing the merger between #1, #2 in the market. Is there -- you were mentioning after that, you were mentioning Europe. Is there any market in Europe that you think that you could, at some point in the future, think about merging #1 and #2 in that country? And what's your feeling on how the European Commission will be -- deal with that? Do you think the European Commission will go through it or not.

[Maite Sedano, executive]

In terms of Europe, I have no idea what the Antitrust Authorities in Europe would say is we do something similar in Europe. No idea. But I think that it's an important milestone what has happened in Australia, because we have an example. And at least we know what the Antitrust Authorities of Australia know and considered about this type of deals.

But in terms of Europe, I think that we will have to see what happens even in the market in the future. But I have no answer to your question in relation of what could happen with the Antitrust Authorities in Europe.

[Juan Ros Padilla, analyst]

A market even if without talking about a potential approval, is there a market that you think that, it could use of a merger between the #1, #2 in that Cash and Transit market?

[Maite Sedano, executive]

There is -- I think that, for example, in if we speak, for example, in Germany or in other countries where we are, we are just in 3 countries in Portugal, Spain and Germany. And if you -- for example, I remember the first time when we bought the first acquisition in Germany, that the Antitrust Authorities in Germany, they didn't allow us to acquire the full customer portfolio that, that company had at that moment.

And now like years later, we are acquiring a lot of different companies in Germany and the Antitrust Authorities. I think that they are also very aware of the necessity and essential business that we provide to the population and society, and they are allowing us to buy other different small competitors. So if your question is, are you expecting to have a huge merge between you and main competitors in other European countries? The answer is no. We are not expecting that now. But if the Antitrust Authorities, maybe they are more open to hear, I think that the answer could be just, yes.

[Operator]

[Operator Instructions] There are no further questions at this time. I would now like to turn the conference back to Maite 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 help you at any time. Have a nice day and wish you all a happy summer.

[Operator]

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