Good day, and thank you for standing by. Welcome to the Prosegur Q2 2024 results presentation. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Juan Ignacio Galeano. Please go ahead.
Good afternoon. Welcome to Prosegur second quarter 2024 results presentation webcast. Before we start, I would like to remind you that this presentation has been pre-recorded and that it will be available on our corporate website. I will now hand you over to our CFO, Maite Rodríguez.
Good afternoon, and thank you all for your presence. We are thrilled to present Prosegur results for the first half of 2024. As we shall see throughout the presentation, operating and financial performance in most of our businesses registered significant enhancements year-over-year. We are confident that we continue to be in the right track to comply with our main objective of generating value to our shareholders. All our commercial and financial teams are working side by side towards that goal. We expect the second half of the year to be marked by cash flow generation and further deleveraging of the company. Let's now deep dive into the most significant milestones of the period. During the first half of the year, our main businesses continued to perform, resulting in EUR 2.3 billion in total annual sales. This represents a 6.9% 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 figures increases to 8.1% when correcting for both sales for the Australian operation during the first half of 2023, and sales from the Indian operation during the second quarter of 2024. As for the former one, you know that it is outside our consolidation perimeter since the merger with Armaguard. Regarding the latter, we started to consolidate the operation effective April 1st. Moving to profitability, our Cash Business was mainly impacted by the depreciation of Argentine peso. Indeed, year-over-year, the currency depreciated in real terms around 10%. On top of this, two other factors explain the decrease. On the one hand, our Forex business continued to expand, resulting in additional setup costs and operating expenditures.
On the other, we are still impacted by restructuring costs in our Australian operations. We are confident that over time, this will no longer exist, allowing us to reap the benefit of the synergies and efficiencies of the combined operation. In this line, it's worth mentioning the recent commitment made by the main players in the industry to contribute with AUD 50 million during the upcoming year, and to reach an agreement on a sustainable fee structure going forward. Our Security Business, for its part, continues its upward trend with a 30% increase in EBITDA compared to the same period of last year. EBITDA margin totaled 2.8% in the first half, and 3.6% during the second quarter. 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 continued to increase on a yearly basis, coupled with the fact that the share of technology sales was higher year-over-year. As we will later see in our Alarm Business, we continue with our strategic growth while keeping all main operating and financial indicators in line. This is the case for both Prosegur Alarms and our Spanish operation, MPA. Our cash flow generation has been temporarily impacted by fewer operating days compared to last year. Indeed, the month of June this year had one additional weekend. At the same time, as was just mentioned, technology sales growth in our Security Business further deteriorating our DSO. Although it may seem obvious, it is important to highlight the temporality of all the above mentioned impacts.
As it has been the case for many years now, innovation is at the top of our priorities, as we know for a fact that it paves the way for a more diversified and hence sustainable growth. In this line, transformation products in our Cash Business continue to gain more relevance, and exceeding 32% of total sales. Let's now turn to slide two, where I would like to deep dive into our sales figure. As said, total sales during the first six months of the year reached EUR 2.3 billion, 7% higher year-over-year. Discounting for the FX effect, almost the entire growth was organic. Clear evidence on how efficient we were in both passing through inflation to prices, and most importantly, growing volumes. It has been the case for all our main business units where organic growth ranked from high 30s to as high as 107%.
When it comes to sales breakdown by geography, it's evident that diversification continues to improve as Europe's share increases against LATAM. The 3.1% reduction in RoW sales is fully driven by removal of the Australian operation from the consolidation perimeter. Moving now to profitability, total EBITDA reached EUR 147 million, marking a 3% decrease 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 stated, our Cash Business performed well, but was impacted by the investments deployed in our Forex business. It's evident that the new branches that we opened this year yield, so far, negative EBITDA. Every time, total sales are just not enough to dilute all the fixed costs necessary to operate, mainly salaries and rent.
We certainly expect to reverse this in the upcoming months with the tailwinds of high seasonality. At the same time, FX dynamics played their part as currencies in some of the geographies where we operate suffered a real depreciation against the euro. This impact, however, should not overshadow the positive results that we attained in most of the geographies where the combination of higher volumes and enhanced efficiencies combined to generate strong results. Such is the case, for instance, in Germany and Brazil. EBITDA growth in our Security Business was quite impressive, proving us right with the strategy followed over the past years, including the restructuring of our client base in some of the countries where we operate. Our commercial teams did a great job in passing through prices, contributing to high margins.
At the same time, we continued with the micromanagement of our cost structure while implementing cost savings initiatives. Our alarm businesses presented solid results, with service margins increasing 10% and 12% in Prosegur Alarms and MPA, respectively. As we shall later see, the performance of almost every relevant indicator in alarms moved in the right direction, pointing to an increase in value per customer. Indeed, the cash generation capacity of this business is particularly high and paradoxically overlooked, as we will later see. Turning now to our P&L, it can be seen that all the way down to EBIT, results were slightly impacted by the reasons I already explained. Net income, however, resulted in EUR 28 million, marking a 22% decrease compared to the previous year.
The reason is the sharp increase in financial results, which were, in turn, driven by the hyperinflation effect that went EUR +3 million last year EUR -26 million. The explanation for such a shift is found in the Security Business in Argentina, which last year had a negative net monetary position since it held debt balances in its financial statement. This year, and thanks to the enhanced financial and operating performance, the net monetary position became positive, and it started generating cash balances, and debts were paid off. This is certainly very good news as it speaks for a complete turnaround of the business. The flip side of the capitalization is a negative accounting hyperinflation result. There's one point that I would like to further stress regarding this topic, and it's the non-cash nature of the loss.
However, out of the EUR 40 million lost last year, EUR 35 million were cash outflows compared to EUR 30 million this year. The lower cost associated with dividends upstreaming has a lot to do with the decrease. This is very important as it ultimately implies an improvement in operating results. When it comes to income tax, the effective tax rate for the year dropped to 48.3%, marking a 560 basis point reduction year-over-year. This reduction is even more impressive excluding the hyperinflation effect. Net results increased 50% if we isolate the hyperinflation effect, which reflects the good performance of the period. Let's now turn to cash generation. The only line that has a significant difference compared to last year is the investment in working capital.
As a matter of fact, and as it can be seen in the top right graph, DSO in June increased in three days, out of which two has to do with the calendar effect, while the other, with the higher technology sales in our Security Business. These additional days are fully responsible of the EUR 34 million of additional working capital during 2024. As per CapEx, total investment reached EUR 89 million, in line with the same period of last year. Following our business strategy, the deployment of expansion CapEx was more skewed towards transformation products and our Forex business. Infrastructure CapEx continues to be stable at 1.9% of total sales. To wrap up the consolidated financial overview, let's now discuss the company's financial position. Net financial debt reached EUR 1.3 billion, resulting in a total net debt to EBITDA ratio of 2.8x .
We feel confident that throughout the second half of the year, we will generate enough cash to reduce leverage ratio to a level around the 2.5x . This will be the case even considering the aggressive growth forecasted in our Security Business. We are determined to capture as many profitable opportunities as we can, even when this implies postponing cash generation for the next year. It's worth highlighting that both 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, maturing in 2026 and 2029. That's all from me for now. I will now turn the presentation over to our Head of Investor Relations, Juan Ignacio Galeano, who will give you more detailed information on the development of the specific business areas.
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 48% organic growth that we achieved during the first half of the year. This is a good testament that volume growth remains high at very healthy levels. At the same time, as it was already pointed out, different geographic dynamics of sales growth resulted in more sustainable diversification. Both EBITDA and EBITDA margin were negatively impacted by structuring costs in our Australian operation, the FX impact in some of the geographies in which we operate, and by the seasonal deferment in price reviews.
It should be noted that the temporary gap in the pass-through of inflation to prices in a very high inflationary environment, as the one in Argentina, further deteriorated profitability. At the same time, investments in our Forex Business further explain the fall in EBITDA, as we've incurred in set-up costs and additional operating expenses without still benefiting from higher sales. As per product diversification, it must be said that it continues its upward trend. Indeed, transformation products are gaining more relevance, exceeding 32% of total sales. We are certainly benefiting from all CapEx deployed in both Cash Today and the Forex Business. Operating cash flow was primarily impacted by the calendar effect, which explained the increase in DSOs. The impact was temporary in nature, and as of today, has been already fully reversed. Let's move now to our Security Business, which continued to be the major highlight.
Total revenues reached EUR 1.2 billion, with the organic share reaching a remarkable 37%. 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 34 million, 30% higher compared to the same period last year. Margins, for their part, reached 2.8%, marking a 17% increase when compared to the same period of last year. Again, operating cash flow was negatively impacted by the calendar effect in June and by the increased share of technology sales. As already mentioned, this was a key driver to explain the higher achieved margins. However, these kind of sales require a higher investment in working capital, as DSOs are structurally higher compared with traditional guarding services.
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 sheds light on how agile we were in passing through inflation to prices. This has been particularly so in the case of Argentina, where, given current macroeconomic circumstances, we continue with our strategy of reviewing prices on a regular basis. This is mainly the reason why churn slightly increased compared to the previous year, something that we expect to normalize as we enter into the second half of the year. Volume growth is the other missing part that explains the 107% organic growth. As can be seen, our client base totals 395,000, marking a 7% increase year-over-year.
Service margin went up from EUR 16 to EUR 17, despite the negative impact of the depreciation of the Argentine peso. Unitary acquisition cost went down almost 7%. 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 Argentine currency. Moving now to MPA, all metrics behave as expected. ARPU, without including discounts, went up 3.6%, from EUR 41 to EUR 42 per connection, while churn plummeted from 13%-11%. Acquisition cost increased year-over-year, primarily explained by enhancements made at product level. Service margin resulted in an outstanding 12% increase moving to EUR 22.
Finally, to wrap up our analysis on the Alarm Business, we would like to stress a fact that we think anyone would agree that it should be the fundamental mainstay on which intrinsic value rely on, yet it appears to be completely overlooked. The actual cash-generating capacity of the Alarm Business. In this line, we would like to focus on recurring cash flow. This is the cash that the business generates after acquiring the exact number of clients that churn during the period. To the service cash flow, which equals to unitary service margin times the average BTC, you should then subtract the reposition cost, which is calculated by multiplying the acquisition cost to the number of clients that churned. If we then add up the recurring cash flow of Prosegur Alarms and 50% of the recurring cash flow of MPA, we get a total amount of EUR 59 million.
This implies that on a run rate basis, the Alarm Business has the capacity to generate that amount of cash, considering that all relevant metrics would stay the same. It's evident that this cash generating capacity is by no means reflected in the business EBITDA every time the growth investment coupled with the hyperinflation effect drive it down to very low figures, as of June 2024 to almost zero. The natural conclusion then is that this business should not be valued by an EBITDA multiple. This concludes our analysis of the performance of each business line for the full year. Thank you for your attention. I will now hand the microphone back to our CFO, Maite Rodríguez, for her closing remarks.
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 in all geographies despite fewer business days. On top of this, we reported an enhancement in geographic diversification as the share of ex -LATAM increased year-over-year. The same is true for product diversification. In our Cash Business, total EBITDA has been negatively impacted by temporary effects such as the restructuring cost in Australia and the additional setup cost in Forex. At the same time, the natural temporary gap of the pass-through of inflation to prices in geographies with very high inflation temporarily deteriorate margins. It's worth highlighting the ongoing increase in the transformation product share of total sales, which are now over 32%.
Moving to our Security Business, we have presented a strong result with EBITDA and EBITDA margins increasing 30% and 17% respectively, compared to the same period of last year. This is clearly a good testament on the efficiencies we are achieving as we continue to consolidate in certain geographies, capturing operating leverage. In addition, there has also been an improvement in the profitability per customer of our portfolio. The Alarm Business continues its positive trend with all relevant indicators going in the right direction, while at the same time, BTC keep growing, both in MPA and Prosegur Alarms. Furthermore, recurring cash flow amount to EUR 60 million, pointing to a strong cash generation. All this growth was achieved without putting in jeopardy our solid leverage position. We are confident that our leverage ratio will continue to fall as we generate cash flow during the second half of the year.
At the same time, the good structure and low cost of our financial debt should not be overlooked to properly assess our financial position. This was all on my side for this result presentation. I would like to thank you all once again, and we are now open for Q&A.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take the first question. From the line of Francisco Ruiz from BNP Paribas. Please go ahead.
Hello, good afternoon. I have three questions. The first one is on security, given the strong growth that you show in this semester, could you give us a breakdown by geography, where are the geographies that are pushing this growth and if this growth is expected to be maintained in the second half of the year? A follow-up on this is on free cash flow. It looks like every time that you accelerate the growth in security, you have a headwind on free cash flow. My question is, how sustainable is to grow in security, increasing the return on capital employed that you put in the business? Because it looks like your cash flow is heavily affected every time you grow above expectations. The third thing is on leverage.
The current leverage at 2.8x looks high, even more when you have put the effort on controlling the leverage, not doing big acquisitions, et cetera. How do you see the evolution of the leverage in the coming quarters? Thank you.
Thank you, Paco, for your questions. In relation to the first question about the growth in Security. Almost all the growth is coming from the big countries. As you know, USA, Argentina, and Spain, the three of them are really doing very well. It is important that the rest of them, as Brazil, that is also reviewing prices very well. They are at least having positive results and positive cash flow. That's also important for us, if we exclude the effect of the pass-through in prices. In terms of what do we expect for year-end, the accumulate margin for year-end should be at least the margin that we achieved last year. These three countries, for example, in the case of Argentina, they are dealing with the fifth pass-through or price review of the year.
We are happy of how they are evolving, and we think that everything will continue as it has been evolving during this first half. The growth, as you know, this business is a volume business, so the growth is always slow. The good thing here is the positive trend that we are having quarter by quarter, and we will achieve, and I think that we will increase the EBITDA margin for year-end in comparison to last year-over-year. Moving to the second question, in relation to the free cash flow. As you know, when you grow, in the case of security, you need cash flow. Your working capital is going to be affected. The technology business, when you grow, really needs more cash flow.
What we are analyzing very deeply is the quality of the customers that we are winning, and they have a very good margin. What we are going to do is this year, we are going to, let's say, sacrifice a little bit of cash flow just for achieving that very good margin growth. That doesn't mean that we are going to have a negative cash flow as we did in previous year. If you remember, last year was the first time that Security Business achieved positive cash flow. This year we will repeat again, and we will have a positive cash flow coming from Security Business. It is true that when you see the photo of this first half of the year, the Security Business cash flow is negative, but it's mainly because of the seasonality that we have with the price review.
In terms of leverage, that was your third question. That's why we have such a high leverage, that now we are in 2.8x. It's high, but it's also because of the seasonality. For year-end, we should be around 2.5x. Even I think that we are going to be better than that. We should be better. Even the cash flow that we are going to generate at consolidated levels is going to be better than last year one.
Thank you.
Thank you. We will now take the next question from the line of Álvaro Lenze from Alantra Equities. Please go ahead.
Hi. Thanks for taking my questions. Coming back to the cash flow generation in Security Business. You've mentioned that there is a dependent impact from the repricing, but I just struggle to understand how that affects negatively on your cash flow and not on your earnings. If you're not repricing, you're not recognizing the revenues either. I struggle to reconcile EUR 34 million of EBITDA to EUR -20 million of operating cash flow, especially considering that the operating cash flow does not include CapEx. That's my first question. The second question is a technicality on alarms. I really appreciate the increased disclosure for the business, but I'm struggling to understand the acquisition cost KPI that you are providing. It appears too high to me, and I cannot reconcile that with the numbers that you report in terms of profits.
I don't know if this could represent the gross acquisition cost and that there is some acquisition revenue when you first sign a contract with a client, and whether that should be included into this KPI or if this KPI is already net of any upfront revenues that you recognize when you sign a new client. I am also surprised by the fact that MPA has a higher acquisition cost than Prosegur. If you could please clarify on that. Thank you.
Álvaro, thank you very much for your questions. In relation to the first question about the cash flow and the differences between P&L and cash flow, you have to take into consideration that the technology, when the invoices and the cash flow of the technology that we sell will come with a higher DSO than the traditional guarding. We have been growing a lot in technology, and that's why you have that gap between the P&L and the cash flow. That's a temporary effect because you will collect that invoice amount in the next months or weeks. In relation to the alarms, to the acquisition cost, here you have to take into consideration that what we call acquisition cost is the cash out that we have for acquiring an alarm.
It's the cash that we have to pay for, I don't know, publicity, marketing, the equipment, and all those things together. Maybe you are not considering that a lot of those costs, we activate them. We put them as an asset, so maybe that's why you have the difference.
Okay. Thank you.
Thank you. We will now take the next question from the line of José Antonio Suárez from CaixaBank. Please go ahead.
Hi. Hi, Maite. Hi, Juan. Thank you for taking my questions. I have two, if I may. One of them is more related to 2024 figures. Looking at Bloomberg consensus, it looks like from the figures in terms of sales, it reflects a 3% decline second half 2024 versus second half 2023. This is a little bit shocking, considering the increase we've seen in the first half. How do you see the second half of 2024 evolving versus the second half of 2023? Are you comfortable with the EUR 570 million EBITDA figure for the full year? Do you think it's feasible to reach it? Do you feel comfortable to reach and even surpass this figure? This would be my first question. The second one, it's related to the division of AVOS Tech. In the presentation, you didn't even put mention on that.
It seems like the priorities, both on AVOS Tech and on Cipher, are going a little bit back. I was wondering, what's your strategic approach about this division, if you're planning to sell it, or how are you seeing things going forward for the AVOS Tech division?
Thank you, José Antonio, for your question. In relation to the first one, for 2024, the second half, we think that thanks to the seasonality, we will have a very good second half of the year. We are happy how our Alarm Business is evolving, how our Security Business is growing, and how we are reviewing pricing in the Cash Business also. In relation to the consensus, I expect that we are going to have a higher figure than what the consensus of Bloomberg or any other consensus are saying. I am quite sure of that. In relation of the second question about AVOS Tech, we didn't put it on the presentation, mainly because we think that it's not our main focus now.
We have three big business lines, I think that if we speak about AVOS Tech, I will give you the numbers, if not later, Juan Ignacio can provide you more detailed information on that. We have the total sales for this first half of the year for AVOS Tech are around EUR 50 million. The total Prosegur is EUR 2.3 billion. It's like speaking about two business lines that just amount those EUR 50 million, we think that it just lose focus between analysts and investors. That's why we remove it. We will keep like that, because I think that it's more important to speak about the big business lines. However, I think that you also asked if we are thinking about selling it or something like that. No, the answer is no.
We are not thinking about selling any of our two business lines that we have under AVOS Tech.
Maite, if I can, a quick follow-up on what you were mentioning of a higher figure than consensus in sales. Do you feel comfortable with a low to mid-single- digit year-on-year growth in the second half of 2024 versus second half of 2023? Do you think this could be something feasible, a low to mid-single -digit?
Yes, we will be in single -digit. Yes.
Perfect.
Thank you. As a reminder, if you wish to ask a question, please press star one and one on your telephone. We will now take the next question from the line of Enrique Yáguez from Bestinver Securities. Please go ahead.
Hi, Maite . Juan. I have two questions. The first one is a follow-up on the cash flow profile of security, and it's linked to your target of further reducing leverage in the second half to levels of 2.5. How much of this financial leverage reduction in the second half of this year comes from the working capital reversal of security? How much of it depends on that? I don't know if you could provide us, how should we think in the future about the working capital investments needed in the company as the technology makes progress in security? The second question is just regarding the financials impact from the very inflationary accounting in Argentina. The impact taking this quarter is some kind of one-off due to the change in the net monetary base of Argentina or should be a recurrent impact. Thank you very much.
Thank you, Quique, for your questions. In relation to the cash flow of Security Business, I don't know. If I say it true, I don't know exactly the figure that will come from working capital, I can tell you that minimum, and maybe this will help you doing your numbers, minimum the Security Business this year has to achieve EUR 7 million in positive cash flow including CapEx. I don't know if that helps you, yes, there is going to be a big reversal coming from working capital. As you know, it also will depend on all the growth that we will have on the last month of the year, that if the margin is good, we will go ahead for it.
In relation to the second question, about the hyperinflationary adjustment that we have and that we have passed from EUR +3 million to EUR -26 million, that net monetary position will depend on if we have cash flow or if we have leverage on Argentina. It's a one-off. It also depends on the macroeconomics and how the inflation and the devaluation will evolve in Argentina. What I think is that in Argentina, we are having very positive results. We are having good cash flows, and in the past, we used to have leverage. Yes, because of that, I expect that this impact will continue in December. That's what I expect, because big things should happen.
I think that for sure that we will still have a big impact coming from hyperinflation, mainly because of the net monetary position performance that is going to come because of the positive cash flow of Argentina.
Thank you very much, Maite. Very helpful.
Thank you. We will now take the next question from the line of Miguel Medina from Mirabaud. Please go ahead.
Can you hear me okay?
Yes, more or less.
Okay. If it doesn't work, let me know. I have just two questions. The first one's on Australia. You mentioned it, and Cash also mentioned it in the conference call last week. This one-off payment of AUD 50 million, I think that today, Maite, you also added that there is a permanent tariff agreement. Should we assume that the positive impact of this AUD 50 million is not just limited to one year, that this is a permanent future in Australia? The second question, going back to the leverage issue. I think S&P on, I don't know, it was yesterday or on Friday, they downgraded the outlook to negative. They also mentioned that you were falling short on some of the metrics. My question is, how confident are that you will be able to hit those metrics and therefore there will be no rating downgrade?
Linked to it, whether S&P, when they come up with the debt figure in Prosegur, I am curious to know how they treat the holding in Telefónica, whether that is treated as cash or they exclude the investment in Telefónica from their debt calculation. Thank you.
Thank you, Miguel. I didn't understand you some of the questions, I will try to answer what I understood. In relation to Australia, no, it's just one-off. What I said is that we have those AUD 50 million of one-off, in parallel, we are trying to arrange the new tariffs. That's why maybe you get confused because of that. In relation to the S&P rating, what we have received, S&P has released is that they reaffirm in our BBB. It is true that the outlook is not stable, it's going to be negative, mainly is related with the debt. The ratios that we were discussing with them is the FFO to debt, we have some discrepancies with this change in the outlook since we have a very particular and temporary situation because of transferring prices, of the growth of technology.
I'm sure that this ratio for year-end will again be close to 30%. That is what they are asking us. It's something temporary. Also, S&P told us that if it's just temporary, in February, they will again increase the outlook to stable. I am not worried about that. In terms of Telefónica, S&P consider Telefónica shares as cash flow.
As cash. Okay. Thank you very much, Maite. Thanks.
Thank you. There are no further questions at this time. I would like to hand back over to the speakers for closing remarks.
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, and see you all the 27th of September on our Alarms Analyst Day.
This concludes today's conference call. Thank you for participating. You may now disconnect.