Prosegur Compania de Seguridad SA

MAD:PSG

Earnings Call Analysis

Prosegur reports strong organic growth and optimistic future guidance

In Q3 2024, Prosegur achieved EUR 3.6 billion in sales, reflecting a 6.4% year-over-year organic growth. The security business surged 20%, with an EBITDA margin of 3.2% in Q3. Operating cash flow reached EUR 143 million, driven by efficient working capital management, while net debt fell to EUR 1.5 billion, reducing the debt-to-EBITDA ratio to 2.6x, nearing the targeted 2.5x by year-end. For 2025, Prosegur anticipates further EBITDA and cash flow growth, particularly in security, with expected cash flow generation doubling from EUR 7 million. This positions the company for sustained profitability despite challenges in its cash business due to restructuring costs.

Strong Organic Growth Amid Challenges

Prosegur reported solid total sales of EUR 3.6 billion a 6.4% rise year-over-year for the first nine months of 2024, showcasing that the company is effectively navigating through the challenges of fluctuating currencies and varying geographic dynamics. The underlying organic growth, after adjusting for specific markets like Australia and India, stands even higher at 7%. This performance underlines Prosegur's robust operational strategies to maintain volumes and contend with inflation effects.

Impact of Restructuring Costs and Currency Fluctuations

While the cash business experienced overall growth, it was notably impacted by restructuring costs in Australia and setup expenses associated with foreign exchange (ForEx) businesses. Specifically, the Brazilian real and Argentinian peso depreciated, somewhat impacting EBIT margins. However, Prosegur remains optimistic about offsetting these challenges through expected synergies from its Australian operations moving forward.

Security Business Flourishes

The Security business remained a bright spot, with revenues of EUR 1.8 billion reflecting an impressive 20% year-over-year growth. The organic growth for this segment reached a remarkable 33%, attributable to a strategy focused on volume-based offerings and operational efficiencies. Moreover, EBITDA surged 30% to EUR 54 million, pushing margins up by 21% compared to the previous year. The continuous enhancement in efficiencies has been evident, as every geographic segment recorded positive EBITDA margins.

Alarm Business Yields Sustained Cash Flow

In the Alarm business, Prosegur reported commendable metrics with a recurring cash flow of EUR 66 million, representing a significant 14% increase year-over-year. Service margins increased due to Prosegur's strategic pricing discipline, reflecting a strong ability to pass through inflationary costs. From the previous quarter, the total business-to-consumer (B2C) participants rose by 10%, from 377,000 to 404,000.

Financial Position and Debt Management

Prosegur's financial health remains conservative with net financial debt at EUR 1.5 billion, and an improved net debt-to-EBITDA ratio at 2.6x compared to 2.8x last year. The company targets lowering this ratio to 2.5x by year-end 2024, indicative of strong cash generation capabilities. Additionally, the average cost of debt remains low, now down to 2.6%, further supporting Prosegur's strategic focus on managing leverage.

Future Outlook with Promising Projections

Looking ahead to 2025, Prosegur aims to decrease its net debt while simultaneously enhancing cash generation from security operations, which is projected to more than double from around EUR 7 million this year. This trajectory bolsters confidence that upcoming growth initiatives will provide viable pathways for increased profitability and sustainable growth in the coming years.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, and welcome to Prosegur's Third Quarter 2024 Results Presentation Webcast. Before we start, I would like to remind you that this presentation has been prerecorded and that it will be available on our corporate website.

I will now hand you over to our CFO, Maite Rodríguez.

[Maite Sedano, executive]

Good afternoon, and thank you all for your presence. We are excited to present Prosegur Results for the 9 months of 2024. As we shall see throughout the presentation, we continue to outperform in our main businesses, validating our growth strategy. We are thus optimistic to fully comply with the financial targets set for the fiscal year when it comes to EBITDA and cash flow generation.

Let's now deep dive into the most significant milestones of the period. During the first 9 months of the year, our main businesses continued to perform, resulting in EUR 3.6 billion in total annual sales. This represents a 6.4% increase year-over-year. The growth, which was purely organic and across all geographies, not only highlights the solid operating performance but also reaffirms our growth strategy going forward.

It's worth stressing that the figure increases to 7% when correcting for both sales from the Australian operating during the first 9 months of 2023 and sales from the Indian operation during the second and third quarter of 2024. Moving to profitability. Our cash business continued to be impacted by the real depreciation of the Argentine peso and the Brazilian real. We continue growing, albeit at a slower pace in our ForEx business, resulting in additional setup costs and operating expenditures. Just to get an idea, we opened over 50 new branches in the first 9 months.

We are pleased with the footprint that we have, and we are confident that we are now in a solid position that should translate into both increased EBITDA margins and cash flow generation in the year to come. Finally, we are still impacted by restructuring costs in our Australian operation. Our security business is once again in the spotlight as it continues to grow. This time, marking a 20% increase year-over-year. EBITDA margin totaled 2.9% in the first 9 months and reached an astonishing 3.2% during the third quarter.

Every single country is EBITDA positive year-to-date with an outstanding performance of Spain and U.S.A. As it has been the case in past quarters, positive results were mainly driven by enhanced operating efficiencies as we continue to grow in a very sustainable fashion. At the same time, our technology sales continue to increase on a yearly basis further contributing to EBITDA generation. As we will later see in our Alarm business, we continue with our systematic growth while keeping all main operating and financial indicators in line. This is very well captured in the recurring cash flow metric as we reached EUR 59 million and EUR 36 million in MPA and Prosegur Alarms, respectively.

We generated EUR 143 million in operating cash flow, mainly driven by a very efficient management of working capital as we managed to reduce DSO by 1 day. September proved to be a very strong month as we generated EUR 83 million, confirming once again the seasonal nature of our cash flows. We continue our investment in innovation award that is the only way to achieve product diversification and that's a more sustainable growth path. In this line, transformation products in our cash business already exceeds 32% of total sales.

Let's now turn to Slide 2, where I would like to deep dive into our sales figure. As said, total sales during the first 6 months of the year reached EUR 3.6 billion, 6.4% higher year-over-year. It's clear that almost the entire growth was organic as a result of our efficiency in both, passing through inflation to prices and most importantly, growing volumes. This has been the case for all our main business units where organic growth ranged from low 30s to as high as 92%. As for sales breakdown by geographies, we continue to depend our geographic diversification as Europe share increases against that of LatAm.

Moving now to profitability. Total EBITDA reached EUR 237 million, marking a 1.2% increase compared to the same period of last year. As seen in the right-hand chart, except for our cash business, all of our most significant businesses registered double-digit growth. As previously started, our cash business performed well, but was impacted by the restructuring costs associated with the merger of the Australian operation, coupled with the investments deployed in our ForEx business.

Regarding the latter, and as it was already mentioned, we slowed down the growing pace during the third quarter as it's time now to consolidate the growth, reason why we are very optimistic for the upcoming future. As for the former one, we are confident that in the upcoming months, the implementation of the expected synergies will more than offset the restructuring cost, resulting in enhanced margins. At the same time, the real depreciation that currencies in LatAm suffered, specifically the Argentine peso and the Brazilian real further contributed negatively in EBITDA.

It's worth highlighting, though, that Argentinian operation is being favored by a systematic increase in monetary aggregates, which naturally translate into higher volumes. EBITDA growth in our security business was quite impressive, proving us right with the strategy followed over the past years that can be easily summarized as follows: First, a strict discipline in passing through inflation to prices; second, a thorough control of absentism; third, operational leverage, thanks to higher sales volumes; fourth, a controlled customer portfolio turnover; and finally, a lean operational structure. On the other hand, our Alarm business presented solid results with service margins increasing 9% and 10% in Prosegur Alarms and MPA, respectively. As we shall later see this translates into a significant increase in the cash generation capacity of the business, reaching highly attractive levels.

Turning now to our P&L. It can be seen that every single line increased compared to the same period of last year, the only exception in financial results. This only reaffirms what we have been explaining all the way through this presentation, enhance economic performance of our businesses. As the financial results, the main reason behind the increase has to do with the hyperinflation effect that went from negative EUR 10.1 million to negative EUR 23.9 million. As previously explained in our last earnings results, this is explained by the security business in Argentina as its net monetary position went from negative to positive as many of the financial debt were either paid off or capitalized.

However, it must be remembered that the nature of this impact is noncash. Indeed, financial results that has a direct impact in cash generation went down 30% year-over-year. The lower cost associated with dividend upstream has a lot to do with the decrease. Further down the P&L, it can be seen that our tax rate went down 517 basis points, reaching 47.4%, which, together with higher EBIT generation, explains the 2.2% increase in net income.

Let's now turn to cash generation. All the way down to operating cash flow, there's 3 lines that present significant differences compared to last year. Provisions and other noncash items, investment in working capital and others. As per the former one, there's EUR 51 million negative difference mainly attributed to the fact that last year, the VAT in Spain was paid in October, while the lease liability related to IFRS 16 increased resulting in higher lease payments coming from ForEx business.

Regarding the investment in working capital, not only the negative calendar effect of June was fully reverted, but we also managed to decrease DSO by 1 day year-over-year. Finally, the share reduction in others is mainly attributed to the consolidation of the Australian operation during the month of September of last year. As per CapEx total investments reached EUR 133 million, in line with the same period of last year. Infrastructure CapEx continues to be stable at 1.9% of total sales, while the reduction in expansion CapEx is explained by our strategy to lease cash [ to pay machines ] in some of the geographies where we operate in order to lessen our asset base and increase profitability.

To wrap up the consolidated financial overview, let's now discuss the company's financial position. Net financial debt reached EUR 1.5 billion, resulting in a total net debt-to-EBITDA ratio of 2.6x. Indeed, despite the increase in net debt in absolute terms, the leverage went down from 2.8x to 2.6x, driven by higher EBITDA generation. This results put us in the right track to get to the 2.5x that we targeted at the beginning of the year. It's worth highlighting that not only our leverage position is quite conservative, but also that both the terms and the structure of our debt is very healthy with an average cost at 2.8% and over 70% at fixed rate and long term in nature.

That's all for me for now. I will now turn the presentation over to our Head of Investor Relations, Juan Ignacio Galleano, who will give you more detailed information on the development of the specific business areas.

[Juan Ignacio Galleano, executive]

Thank you very much, Maite. Let's now have a look at the results of each business line, covering the main performance indicators and the most relevant aspects of the period. Starting with our cash business, I would like to reinforce the 39% organic growth that we achieved during the first 9 months of the year. This is a good testiment that volume growth remains high at very healthy levels. At the same time, and as it was already pointed out, different geographic dynamics of sales growth resulted in a more sustainable diversification. Both EBITDA and EBITDA margin were negatively impacted by structuring costs in our Australian operation, the investments deployed in our ForEx business, the FX impact in some of the geographies in which we operate and by the seasonal deferment in price reviews.

As previously stated, the remonetization process that is taking place in Argentina evidenced by the systematic increase in monetary aggregates is already translating into higher volumes and should be the case for the months to come. Transformation products continue to gain share, exceeding 32% of total sales. As we always stress, this is of paramount important every time it evidences product diversification. Operating cash flow reached EUR 142 million, as was mainly affected by lower EBITDA generation as the management and working capital continues to be highly efficient.

Let's move now to our security business, which continued to be the major highlight. Total revenues reached EUR 1.8 billion with the organic share reaching a remarkable 33%. This is mainly driven by our volume-based strategy that leads to operating leverage and our capacity to pass through inflation to prices. All the above, coupled with enhanced efficiencies and operating leverage resulted in total EBITDA reaching EUR 54 million, 30% higher compared to the same period of last year. Margins for the part reached 2.9%, marking a 21% increase when compared to the same period of last year.

Even more important is the fact that every geography registered positive EBITDA margins. Operating cash flow reached EUR 2 million, marking a remarkable 150% increase year-over-year. The enhanced financial performance, coupled with a strong discipline when it comes to working capital management explain the increase. Indeed, DSO were reduced by 1 day compared to the same period of last year.

Let's now turn to the Alarm business, where, once again, we delivered outstanding results. As it can be seen, all relevant KPIs continue to move in the right direction as we continue to grow. Starting with Prosegur Alarms, I would like to stress the outstanding organic growth, which speaks for our commitment and discipline in passing through inflation to prices. As said, our volume continues to increase as reflected in total B2C that went from 377,000 to 404,000, marking a 10% increase. Regarding the churn rate, RoW post a minor increase, mainly explained by Argentina in light of the significant pass-through of inflation to prices. Service margin went up from EUR 16 to EUR 18 despite the negative impact of the depreciation of the Argentinian currency.

Unitary acquisition costs went slightly down, reaching EUR 1,447 per BTC. This is mainly due to enhanced efficiencies and volume growth contributing to cost dilution, a higher share of what we call new channels, dealers and commercial alliances and the depreciation of the Argentina currency.

Moving now to MPA. All metrics behaved as expected. ARPU, without including discount, went up 4.5% from EUR 41 to EUR 42 per connection, while churn went down from 12% to 11%. Acquisition costs increased year-over-year, primarily explained by enhancements made at product level. Service margin resulted in a 10% increase moving to EUR 22.

Finally, to wrap up our analysis on the Alarms business, we would like to comment on the recurring cash flow generated by the business. Our Star metric that is built as already explained in past calls and during our Analyst Day, by the different pieces that we just explained in the previous slide. In the case of MPA, recurring cash flow more than doubled, reaching EUR 59 million as of September 2024. The operations of Prosegur Alarms for their part generated EUR 36 million, making up the EUR 66 million in cash flow that Prosegur as a company generated out of the Alarms business.

This implies a 14% increase compared to the same period of last year. It is indeed a remarkable figure that brings to light the promising years ahead of us. This concludes our analysis of the performance of each business lines for the first 9 months of the year. Thank you all for your attention. I will now hand the microphone back to our CFO, Maite Rodríguez, for her closing remarks.

[Maite Sedano, executive]

Thank you very much, Juan Ignacio. Let me now share with you my closing thoughts on the most relevant conclusions of this results presentation. On a consolidated basis, total sales increased 7% without considering neither the sales in the Australian operation nor the Indian one for the cash business. Even more important is the fact that this increase was widespread across all geographies and further enhancing both geographic and product diversification, that's making the entire operation more sustainable. In our cash business, total EBITDA has been negatively impacted by temporary effects such as the restructuring cost in Australia and the additional setup costs in ForEx. It's worth noting that this effect should be fully offset next year once projected synergies get fully materialized in the case of Australia and once the growth in ForEx is fully consolidated.

The share of transformation products continued to increase, reaching 32% of sales. Moving to our Security business. We have presented strong results with EBITDA and EBITDA margins increasing 21% and 20%, respectively, compared to the same period of last year. More impressive is the 3.2% EBITDA margin that we reached during the third quarter. Our Alarm business presented solid results with increased service margins and cash generation. This is clearly captured by our recurring cash flow, which amount to EUR 66 million, implying a 14% increase year-over-year, pointing to a strong cash generation. All this growth was achieved as we continue to be mindful on our leverage position. We are confident that our leverage ratio will continue to fall as we generate cash flow during the last quarter of the year. At the same time, a good structure and low cost of our financial debt should not be overlooked to properly assess our financial position. Indeed, the average cost of our debt went down from 2.8% to 2.6% during the third quarter. This was all on my side for this results presentation.

I would like to thank you all once again, and we are now open for Q&A.

[Operator]

[Operator Instructions] This is from the line of Enrique Yáguez from Bestinver Securities.

[Enrique Yáguez Avilés, analyst]

I have 3 questions. The first two are related with the security business. In security, we have seen a slight deterioration in the EBITDA margin in the quarter stand-alone, just to ask what is the vision? It's a question of the mix of sales or some temporary effect? And second, also in the security business, the stronger cash flow generation this quarter, very high compared with traditional standards. So is related with some potential impact of working capital.

And finally, if we -- the impact of profitable cash and securities in your operating profit in EBITDA, it seems that there is a positive impact of EUR 4 million in the quarter. The question is what is the reason behind that is a reduction in corporate expenses of improvement in the EBITDA of Alarms?

[Maite Sedano, executive]

Regarding the first question about security business, we have achieved 2.9% margin. What means that is for the 3Q isolated 3.2% of margin, which is quite high. And as you know, here, we always have the seasonality coming from the passing through inflation to prices. So for -- we are happy with 3Q margin because this is a higher than previous quarters, but it's mainly because of the seasonality. And you were asking that it was lower, but I don't know if you were saying that it was lower comparing with -- because comparing with the previous quarters, it's higher...

[Enrique Yáguez Avilés, analyst]

Yes, it was lower compared year-on-year basis. In the third quarter of last year, it was [ 3.3 ] the trend was quite positive throughout the year. And in this quarter, we have seen a slight deterioration. So just -- the question is why it doesn't follow the same trend than in previous quarter of sequential improvement?

[Maite Sedano, executive]

Yes. Okay. Perfect. Understood. No, it's just mainly because of the passing through inflation to prices. As you will see, for the fourth quarter, this doesn't mean that we are going to have a smaller margin in comparison to last year. Not going to be the opposite. We should be more or less with -- at least with the margin that we have of 3.2% a full year, I mean, in accumulated terms that we achieved 3.2% so we should be for the fourth quarter around that figure.

And I think that about -- for sure that figure. And in relation to your second question about the strong cash flow generation. Here, we have a better management of the working capital. We have increased 1 day in comparison to last year. And on the other hand, we also have the calendar effect that we, if you remember, first Q and second Q, both of them were impacted by the calendar. So now we do not have those impacts, and that's why the cash flow generation has been improved also because of the good management of the working capital coming from that improvement in the DSO. And we are also still controlling our infrastructure CapEx. So that also helps on this cash flow generation and even improving our leverage. And going back to your third question about those EUR 4 million. They are related with the overhead that we have improved mainly because now we have a leaner structure, and we have been doing plenty of sales in that regard, and it's fully coming from there.

[Operator]

[Operator Instructions] This is from Manuel Lorente Ortega from Santander.

[Manuel Lorente Ortega, analyst]

I mean my first question is about net debt levels by year-end. Maite, I believe you mentioned that you were expecting lower net debt levels by the end of the year, whether you can precise a little bit more in terms of whether the net debt-to-EBITDA levels will remain on this 2.6x or you expect [ further cuts by year-end? ]

[Maite Sedano, executive]

Yes, Prosegur is in the right way to get into the 2.5x net debt-to-EBITDA ratio. That's our target for full year -- for year-end. And I think that is achievable. We are -- I'm sure that we are going to achieve it. But I think that I would like to clarify in absolute terms that even though we are going to improve our ratio in relative terms in this net debt-to-EBITDA ratio. In absolute terms, we are not going to improve it. We will be a little bit above the last year's figure. But in -- for the next year in the absolute figure for the net debt for next year for 2025 will be significantly smaller than the one that we are going to achieve in 2024. But for 2024 -- for full year 2024, in absolute terms, the net debt will not increase in comparison to 2023. Yes, in relative terms, we will achieve that 2.5x.

[Manuel Lorente Ortega, analyst]

I see. And just a quick question regarding whether you can comment regarding 2025 expectations. Probably it's too early to give precise indications that it would be grateful if you can share with us your initial thoughts regarding the different moving parts for next year. You have mentioned that you expect a significant improvement in the Cash business because of a combination of the different issues that has been affected [indiscernible] the business. It's fair to say that you also expect some further additional margin improvement, for example, on the security business or not really. Consolidating the pretty high current levels, it's a good starting point for next year.

[Maite Sedano, executive]

For 2025, we are going to start decreasing even, as you know, we have -- our plan is -- our first 2 year plan, as you know, we have to plus 2 years plan. And this first 2 years plan of the plan, we have to -- we have our main -- one of our main goals is to decrease the debt. And that's why for 2025, we are going to reduce it. But it's mainly Cash business will continue generating, as you know, it's a very good business for cash generation and will continue on the same way. But here, the key is going to come from security business because the margins will continue improving, and we'll continue having the same trend as we have been observing in this -- during this year. And even in not just in margins, but also in cash flow generation, what means that if this year, the security business is going to generate around EUR 7 million of cash flow. For next year, we are really, really going even to more than double that figure. So that is going to be a game changer. Never in the past, we are going to generate so much cash flow, and that's why our debt is going to decrease. As you know, Alarm business is not going to change a lot because all the cash generation from cash we will reinvested on growing and -- but just security business. So that one is going to be the key. And even, I guess, for the analysts, it's going to be something that should be quarterly deeply analyzed because that's going to be the key to reduce our net debt for 2025.

[Manuel Lorente Ortega, analyst]

Okay. And just my final question, just more, let's say, quality type of question. I saw that you announced last week the extension of some agreements with Prosegur Cash regarding internal actions between the two companies. Do you want to comment anything regarding whether this is something that's relevant, irrelevant, nonevent type of agreement or something that we should considering going forward between the relationship of the 2 entities?

[Maite Sedano, executive]

Manuel, it's legal formality business as usual, even it's something that was done just because the legal department recommended to do it, but nothing relevant.

[Operator]

Next question from the line of Miguel González from JB Capital.

[Miguel González Toquero, analyst]

I just have one question. This is related to the acquisition cost and Prosegur Alarms. Could you explain what are the reasons? You only saw a slight evolution of this cost compared to a 7% decline in the first half of the year and why there is such a seasonality between the quarters because I believe acquisition costs were EUR 1,000 last quarter compared to EUR 1,400 in this quarter.

[Maite Sedano, executive]

Miguel, thank you for your question. Here, there are two main reasons. The first one is the FX impact that we have in the acquisition cost. And the other one is a kind of mix of all the different products. As you know, when I mean with products, it's like you have -- there are a lot of things like the cost of equipment and publicity and all those installation costs and those things. So sometimes, we also have different costs because of the different agreements that we have closed with our suppliers. But there isn't nothing significant. It's mainly the mix of different costs and the FX impact.

[Miguel González Toquero, analyst]

Sorry, do you expect this cost lower in the fourth quarter or to remain a similar level?

[Maite Sedano, executive]

Similar to what we have in this quarter.

[Operator]

[Operator Instructions] There are no further questions coming through, so I will just hand back to the speakers if there are any closing remarks.

[Maite Sedano, executive]

Thank you very much for attending this presentation. If you need further information, please contact our Investor Relations department who is open to help you at any time. Have a nice day.