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Edited Transcript of PSG.MC earnings conference call or presentation 30-Jul-19 11:00am GMT

Half Year 2019 Prosegur Compania de Seguridad SA Earnings Call

Madrid Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Prosegur Compania de Seguridad SA earnings conference call or presentation Tuesday, July 30, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio de Cárcer

Prosegur Compañía de Seguridad, S.A. - Head of IR

* Antonio Rubio Merino

Prosegur Compañía de Seguridad, S.A. - CFO

* Christoph Schoofs

Prosegur Compañía de Seguridad, S.A. - Capital Markets Director

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Conference Call Participants

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* Alvaro Lenze Julia

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Chirag Vadhia

HSBC, Research Division - Research Analyst

* Flora Mericia Trindade

CaixaBank, S.A., Research Division - Analyst

* Miguel Medina-Sivilotti

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director

* Steven James Goulden

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Prosegur First Half 2019 Results Presentation. (Operator Instructions) I must also advise you the call is being recorded today, Tuesday, the 30th of July, 2019. I would now like to hand the conference over to your first speaker today, Antonio de Cárcer. Please go ahead.

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Antonio de Cárcer, Prosegur Compañía de Seguridad, S.A. - Head of IR [2]

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Good afternoon, everybody. On behalf of Prosegur, I'd like to thank you for taking time to attend this conference call setting out the company's first half 2019 results. This presentation will be hosted by Antonio Rubio, Prosegur's CFO; Christoph Schoofs, Capital's Market Director; and myself.

Over the next 30 minutes, we will give you a detailed summary of the key financial indicators and most significant events of the period. At the end of this conference call, we will open the line for questions, where we will be happy to answer any remaining doubts or inquiries.

Prior to starting, I would like to remind you that this presentation has been prerecorded, and that it will also be available via webcast on our corporate web page.

I will now hand over the presentation to our CFO, Antonio Rubio.

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [3]

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Thank you, Antonio. Good afternoon, and thank you, everyone, for attending this conference call. The results we are presenting today related to the first half of 2019 are still reflecting the strong adverse currency impacts and the corresponding translational effects in our consolidated figures reported in euros.

As previously explained, the application of the hyperinflationary accounting rules in Argentina has also had an additional negative effect in our reported P&L. The application of IAS 21 and 29 will remain present in our reported financials and the Argentina fees to be above the hyperinflation threshold. Therefore, it will remain a common thing in our reported financials. Nevertheless, even despite this adverse situation, there are clear indicators that keep demonstrating the solidness of our business model and improved performance, even in low-seasonality periods such as this second quarter.

First of all, I would like to point out the excellent 14% growth in local currency terms, which has been achieved through a balanced combination of organic and inorganic growth. As in previous quarters, it has been quite steady across all geographies and business lines. Organic growth remains at the high single-digit rate, in line with the first quarter and consistent with the last year's figure, even taking into consideration the more adverse macro environment we have been facing since summer 2018.

The good performance in terms of operating cash flow generation is also worth mentioning. As you know, cash flow is not affected by hyperinflationary accounting. Hence, together with growth in local currency, it can be considered the least distorted indicator of underlying business performance.

Additionally, as a result of our continued financial discipline, we have managed to further optimize our cost of debt. The long-term nature of our obligations as well as our overall strong balance sheet allow us to face future investments irrespective of prevailing market conditions.

In summary, high sustained organic growth, improved cash flow generation and a strong financial headroom evidence the good performance and solid fundamentals of our business model.

On top of that, I would also like to draw your attention to the fact that during the period, we had performed some strategic divestments, in line with our objective to focus on increased profitability by prioritizing our resources and capital allocation to those markets that can generate the most value for our shareholders and clients. In this regard, during this past quarter, we sold our New Delhi Alarms business to the partner company we initiated activity with. And likewise, we have also sold our participation in the South African Cash in Transit business we have been holding since 2016. Additionally, last week, we successfully closed the previously announced sale of our French cash activities to one of our global peers.

As you will see in our next slide, these operations had trigger a positive effect that increase our profitability over consensus, improves our value creation commitment with the market.

Looking at the consolidated P&L of this first half of the year, we see total consolidated revenues of EUR 2,055 million, that represents a 2.2% increase over the same period in 2018. As previously mentioned, revenue growth can be broken down into a very satisfactory 7.3% organic growth, enhanced by an additional 6.7% of inorganic nature and lower by an adverse 11.8% currency effect. However, this negative FX impact has softened when compared to previous quarters, thanks to a more favorable comparable base and the stability that both the Argentinian peso and the Brazilian real has shown during the period.

In profitability terms, EBITDA and EBIT amounted to EUR 247 million and EUR 145 million, respectively, which still reflects the impact of the hyperinflationary accounting rules applied in Argentina and the overall adverse currency contest. The improvement compared to consensus derives mainly from the positive one-off items related to the already explained divestment in Cash and Alarms.

Our tax rate has also improved in relation to Q1. It is also affected by the application of IAS 21 and 29 accounting rules. As mentioned during our last quarter results, we expect this negative effect to normalize as the year burns.

Finally, net profit totaled EUR 71 million, reduced to EUR 48 million at consolidated level when deducting the minority interest related to the 27.5% of our cash business that was listed back in 2017.

Let's now move to the revenue analysis by business line and geographies. Starting by geographies, we see positive local currency growth in all of them. Europe grows at 1%. It did not see the negative effects of our voluntary withdrawal from some large contracts in Spain 1 year ago. The rest of the countries in this region still maintains the same positive growth pattern shown in previous quarters. This flattish profile will be normalized as the years progresses, given that several old contracts were awarded towards the end of last year compensating for previous losses. Besides this temporary effect, the region still presents solid growth opportunities, and we remain confident regarding its future evolution.

The Ibero-America region represents an extraordinary local currency growth close to 18%. This is mainly driven by the good performance of the Cash business in almost all countries of the region. This strong reported growth demonstrates the capabilities of our commercial teams to transfer cost increase to market in a context where inflation is beginning to catch up with the currency depreciation that occurred last year.

The acquisitions made in Central America 1 year ago as well as some other bolt-on deals made in Peru, Paraguay and Colombia had also, to some extent, contributed to this growth.

In consolidated euro terms, the Ibero-America region suffers from the negative FX evolution, reducing the outcome to 4.3% when compared to the same period 2018.

Lastly, the rest of the world region also grows by more than 100%, without any major currency impact. The significant volume increase comes mainly from the recently initiated operations in North America as well as from the acquisition made by Cash in Philippines.

Looking now at the revenues by business line, we see a similar behavior as seen by regions, where all activities had not only been deliver double-digit growth in local currency, but are also showing positive evolution in euro terms. Antonio de Cárcer will give you more color on this later when analyzing business performance individually, but I would like to stress, once again, the solid evolution of our revenue growth that, in the case of Cash, has continued improving in local currency terms for the fifth consecutive quarter, and even in Q2, which is the weakest period within our seasonality profile.

We consider this a major achievement that proves the extraordinary resilience of our business model, and what can instantly deliver result as soon as market conditions improve.

Now let's look at overall profitability and cash flow generation. EBIT reached EUR 145 million versus EUR 181 million last year. This decrease is mainly driven by the change in mix as a result of both the negative currency translation and the hyperinflationary accounting that is being applied in Argentina. Other factors such as integration cost of recently acquired companies and the loss-making operation in France, that now has been sold, had also have a negative impact on margins. On the contrary, the divestments made in India in the Alarms division, and in South Africa in Cash has been accretive marginwise, and our final EBIT margin reached 7% of sales.

Regarding our cash flow generation, as stated in my introduction, we are very satisfied with the consistent improvement of our operating cash delivery. As you know, our overall business has a strong seasonal profile, which becomes even more evident in terms of cash generation. The first half of the year is usually weaker due to several calendar effects, whilst the price increase negotiations in some Latin countries are delayed and only tend to take place during the second half of the year. Taking this into consideration, we are quite satisfied with a nearly 20% increase of our operating cash flow generated in this first half of the year, a figure that also implies an improvement in the EBITDA to cash conversion ratio, which almost reached 40%.

As previously mentioned during the highlights of the period, cash flow generation is not affected by hyperinflationary accounting rules. Consequently, it is a very sound indicator of the real performance of the business. And in addition, our strict cash protection policies will continue being upgraded as digital and transformation projects are being deployed globally, enhancing collections and working capital requirements.

This is all on my side for now. I will now hand the presentation over to Antonio de Cárcer, who will provide you with further information on the performance of each business line. I will join you, again, at the end of the presentation for my closing remarks and Q&A.

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Antonio de Cárcer, Prosegur Compañía de Seguridad, S.A. - Head of IR [4]

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Thank you, Antonio. We will now cover some more detailed information on the breakdown of sales by nature in each business line as well as some additional insights on the main drivers of the profitability and other key performance indicators.

Starting with Prosegur Cash, the most relevant fact we would like to highlight is the excellent 9.6% organic growth achieved during the period, overperforming the same result in Q2 2018 under harder market conditions and positively supplemented by a 7.2% inorganic growth coming from recent M&A transactions. This, altogether, delivers an excellent 17% local currency growth in the period.

Volume growth has been driven by the increased logistic operations in Ibero-America as well as the higher penetration of the new added value outsourcing services in all geographies that, in this period, has again increased the presence in clients to become almost 16% of total sales, showing an outstanding near 50% growth in sales in euro terms compared to the same period last year. However, being [past] the business line with the highest exposure to the most depreciated currencies, this excellent 17% of local currency growth suffers an adverse translational effect of more than 16%, limiting its top line growth to EUR 888 million when consolidating in euros, and leaving the sales figure almost identical to the one obtained in the first half of 2018.

As far as profitability is concerned, although the business continues improving its margins in local currency terms, the adverse FX reduced the wave of most profitable markets. This, combined with the additional integration cost of recently acquired operations and the still weak situation in Australia and France in this period, minus margins in euro terms to 15.4%, a transitory situation that will revert in the incoming months as the final sale of the French operations and the steady margin recovery in the rest of geographies begins to be more visible in our business P&L.

Moving on to the Security business, we see a positive revenue growth of more than 3%, totaling EUR 1,027 million in consolidated euro terms. Sales growth breakdown shows a 3.9% organic growth, slightly lower than the one achieved in the same period in 2018 due to, as Antonio Rubio already mentioned, the negative effect on the voluntary rejection of some large contracts that took place in Spain by the middle of 2018, whose volume decrease was partially compensated by the end of the year, and therefore, it does not still show up in this first half year results.

Other than this one-off in Spain, the rest of the countries have performed according to our specific targets for each of them, with some positive outcome from Brazil that, despite being still under a general economy slowdown, has delivered better performance than the same quarter last year and will probably continue doing so as the economy of the country seems to be gaining traction supported by the government recently announced reforms.

Organic growth has been also supplemented by strong 7% growth coming from the recently initiated operations in North America that are now fully consolidated in the figures since the end of first quarter.

Coming to negative FX impact, the Security business suffers less of this headwind due to its higher mix of hard denomination currencies. Nevertheless, it's still affected by a 7.7% negative currency translation.

EBIT and EBIT margin are also impacted by the same factors as Cash business, whereas, it also has the same negative effect of the hyperinflationary accounting in Argentina, today our third biggest market in Security, and the additional dilutive effect of the integration of the 4 companies acquired in the U.S. EBIT in the period totals EUR 20 million, and EBIT margin drops to 1.9% coming from 2.6% in the same period in 2018, still under pressure because of the previously mentioned reasons, but with a positive recovery outlook in the incoming months.

Finally, it's also worth mentioning the good performance of our Integrated and Advanced Security Solutions, or Integra, as this is a commercial name under which they are introducing to the market, that now represent more than 26% of total sales and are becoming a common place in our service offering to clients.

Finally, let's look now at the Alarms division. This business line is under a strong sales model transformation following our strategy initiated in the other 2 businesses to focus growth on healthy client portfolios, which can sustain adverse cycle conditions and keep on growing not compromising future value creation. After several years of high double-digit growth of the install base, we are now concentrating on lowering churn rates and obtaining higher operating margins. Using advanced Net Promoter scoring indicators and prioritizing investment in countries where the potential clients are more prone to automatize payment through a bank account is the cornerstone of this sales model and is already bearing fruit. As you can see in the graphic, our client bancarization ratio is ramping up with more than 83% of the new additions to the base being done through these methods in a position to the average 75% of previous year.

ARPU also stays stable despite the fact that a large fraction of our Alarms installed base is in Argentina, and therefore, it also shows the inherent structural capability of this activity to adapt prices to inflation with no major concerns. And there is also an increase in the sales of new types of services around the Alarm connection, such as vehicle tracking, elderly assistance or large condominiums alarm systems that are also growing at a very fast speed.

Total contract base has expanded by 5.1% compared to same period in 2018, totaling 555,000 installed alarms. This figure reflects some slowdown in client addition, deriving from the combination of the deducted client base in India that has been sold to our former partner in the region and the reduced sales effort in the period resulting from the intense training program applied to the sales force to instruct them on the new sales model. Nevertheless, despite this growth lessening, we have continued growing at industry averages. And the excellent 18%-plus organic revenue development, with no margin dilution, is a solid demonstration of the capability of this business to generate value and a very good outlook of its strong potential to continue expanding.

FX, similar to Security, also represents a negative effect on this business line, deducting 12% of the local currency revenues and delivering a final figure of EUR 140 million in consolidated euro terms, a very good 6.1% overall growth that evidences the strong revenue generation capability of this business even in low sales cycles.

That was all on my side regarding the evolution and performance of our different business lines. I will now hand over the presentation to our Capital Markets Director, Christoph Schoofs, who will cover the main financial parameters of our first half 2019 results.

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Christoph Schoofs, Prosegur Compañía de Seguridad, S.A. - Capital Markets Director [5]

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Thank you very much, Antonio. Let's now have a closer look at our cash flow statement, debt structure and balance sheet. Starting with the cash flow statement, you can appreciate that operating cash flow has improved by EUR 16 million when compared to June 2018, representing an increase of close to 20%. As EBITDA in absolute terms is slightly lower, our EBITDA to cash conversion ratio has also increased, almost reaching 40% versus 32.7% last year.

Despite this positive outcome, I would like to emphasize that due to seasonality, Prosegur traditionally shows weaker performance in the first half of the year, followed by stronger recovery in the second half, especially during the last 4 months of the year.

I would now like to comment on the main variations of the operating cash flow during the second quarter. Provisions and other noncash items show deterioration versus March 2019 that can be explained almost entirely by the application of IAS 16. In terms of tax and profit, there is a noticeable decrease when compared to the second quarter of 2018. This derives from a reduction of the Argentinian tax rate, it was lowered from 35% to 30%, as well as the impact the devaluation of the Argentinian peso has had on local withholding tax payments when consolidated in euros.

Regarding changes in working capital, the evolution during the second quarter was below last year's figures. This is due to the strong Q2 performance in 2018 following the delay in collections in Brazil as well as a calendar effect around the Easter holiday, combined with a comparatively worse calendar effect this year as the last 2 days in June fell on a weekend, which led to collections slipping to the beginning of July. Usually, we expect these cut-off effects to be normalized throughout the calendar year.

As far as interest payments are concerned, continued debt optimization, coupled with an increased focus on management of surplus cash, keep driving improved results.

Moving on to cash flow from investing and financing activities, CapEx in absolute terms remains broadly in line with the previous quarter and with last year's figure. What we consider client CapEx still represents more than 50% of the total amount, and our intention to control maintenance CapEx remains intact.

In terms of M&A, as you are aware, during the first quarter of the year, the U.S. security market entry represented a significant investment. Therefore, any minor variations you can appreciate during the second quarter can be explained by the release of some pending deferred payments, most of them from Cash division.

Dividendwise, if we exclude the portion of the withholding tax paid in January 2018 that was related to the extraordinary dividend paid back in December 2017, payout as of June 2019 is slightly higher than previous year, driven by the dividend increase approved by both Prosegur's and Prosegur Cash Board of Directors in December last year.

Finally, the continued currency devaluation still impacts our consolidated net debt position, although to a lesser extent, as a result of not only more benign currency evolution, but also our increased efforts to reduce cash balances in non-euro currencies.

Please bear in mind that, just like in Q1, the debt figure shown does not reflect the impact in financial net debt triggered by IAS 16. Some further details are to follow on the next slide.

As far as the current structure of our debt is concerned, at the end of the first half of the year, total net debt amounted to EUR 686 million, including both deferred payments of EUR 95 million and treasury stock valued at EUR 3 million. Furthermore, if we include additional IAS 16-related debt of EUR 133 million, total net debt figure increases to EUR 819 million. Please bear in mind that following the authorization obtained at the General Shareholders Meeting held at the beginning of June, Prosegur canceled its existing treasury stock of 18.4 million shares and launched a new shares buyback program with a maximum limit of 10% of outstanding shares during a maximum period of 3 years. As a result, current treasury stock of the group only stood at EUR 3 million at the end of June.

The increase of deferred payments is mainly related to the larger U.S. acquisitions performed earlier this year.

Overall, in terms of leverage, our net financial debt-to-EBITDA ratio of 1.6x remains in line with the first quarter. We still calculate this ratio including the full IAS 16 impact in the debt figure, but only factoring in 2 quarters of improved LTM EBITDA.

Lastly, our group's average cost of debt keeps evolving positively, with a reduction of almost 40 basis points when compared to the same period last year.

Finally, in terms of our consolidated balance sheet, in general, there haven't been any significant changes during the second quarter of 2019. The only exception worth mentioning are assets and liabilities related to Prosegur Cash operations in France, shown as available for sale ahead of the imminent divestment to Loomis. As already mentioned by Antonio Rubio, the transaction was fully closed last week, and the results will be reflected accordingly in our third quarter results.

Apart from that one-off item, tangible fixed assets and financial liabilities are still affected by IAS 16, whilst M&A still drives the increase in intangible assets, although much less than in Q1.

It is also still worth highlighting that our debt maturity profile remains very solid since more than 80% of our financial liabilities are considered of long-term nature.

This is all on my side. I would now like to hand the presentation back to our CFO, Antonio Rubio, who will share with you his final conclusions and remarks.

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [6]

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Thank you very much, Christoph. To close this first half results presentation, I would like to highlight, once again, the following key points.

Growth in local currency continues to be double-digit in all business lines despite the tough macro environment. In the case of both Cash and Alarms, it reached increments close to 17% and even above, respectively. This proves our capability to update price according to inflation and the excellent acceptance that our new products and solutions are seeing in all markets.

We have been able to sustain our profitability at effective levels and even improved it in certain markets, despite the negative impact that FX imposed to our consolidated accounts. Furthermore, we have taken strategic decisions to divest in some countries that will help us to continue creating value for our investors. And we are focusing our resources on markets and businesses that would deliver faster growth and weaker results in the midterm.

The positive trend of our cash flow generation remains intact, both in absolute and relative terms. Moreover, all working capital enhancement policies put in place over the past years will continue being one of our main focus points in order to maintain this strong delivery during the months to come. We are very satisfied with the price implementation of the new commercial policies in our Alarms division that, despite the initial slowdown on growth during the adaptation phase, will allow us to achieve a healthier client base in the medium term with lower churn rates and higher margins. This will certainly increase the value of our current operating platform to higher market standards.

Finally, I would also like to dedicate some remarks to give you an update about our digital transformation project. We continue to invest funds in order to improve all our administrative and operational processes, and we are now initiating the global deployment of the main backbones of each one of them. We expect to obtain long-term efficiency deriving from this project, efficiencies that will also have a very positive impact on the way we deliver new products and services to our clients.

This is all on my side for this first half 2019 results presentation. Hopefully, next time we present results in Q3 reporting will be normalized on a comparable basis in terms of accounting standard regarding previous year's figures. This will allow us to present more consistent and comprehensive information.

For now I would like to thank you all for your participation in this call. And now we'll be very pleased to reply any questions you may have. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have today comes from the line of Flora Trindade from CaixaBank.

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Flora Mericia Trindade, CaixaBank, S.A., Research Division - Analyst [2]

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The first one is on -- a follow-up on a comment you made. You were mentioning that you have been reducing the cash balance in non-euro countries. I was wondering if you could share with us what is your cash position in Argentina right now.

The second one is on the underlying operating performance. In terms of EBIT margin, I know you don't report it, but can you give us a sense of what is the level of the EBIT margin in local currency?

And then, finally, just if you could comment on the level of margins you expect for the Security business in the second half? And whether you maintain the commitment to reach the 5% next year?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [3]

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On your first question about our cash position in Argentina, you know that since -- -- fortunately, since [7] years ago, we don't had any problem to repatriate funds from Argentina. We maintained, in the country, the minimum level, essentially, for the working capital needs.

About the margins, we are quite satisfied about the performance of our margins in local currency. You know that we suffer important seasonality in the first half of the year. We are, in some countries, in some important countries with important inflation rates, in the middle of the process of passing through this inflation to the margins. And we remain positive about the performance we weighed in our margins in the second half of the year and consequently, in the full year results.

About Security, I don't remember exactly what's the commitment of our aspiration to achieve the 5% EBIT margin in Security. In any case, we remain improving locally. And now we are suffering a little bit in Argentina due to the local situation. And we are also in the middle of the process of integration of the new acquisition in USA and all the ramp-up investments we need for establishing our platform there. I'm beginning with the cross-selling and all the -- and developing all the expectation we have for this market. But in any case, we remain positive about the long-term performance of the margins in the Security activity.

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Operator [4]

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The next question comes from Chirag Vadhia from HSBC.

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Chirag Vadhia, HSBC, Research Division - Research Analyst [5]

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The first one is on Security in Brazil. Given that you are talking to -- targeting to return to breakeven at the end of the year, do you still feel that you're on track for this? And then are there -- is there any color that you can share from the underground operations?

And secondly, on the Alarms division, could you tell us then what the percentage churn as it is? And when do you expect to the training of the sales force to translate into higher growth?

And finally, on the divestment of Alarms in India, could you just give us a flavor of what the strategy is behind this? And how many alarms it contributed to the installed base?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [6]

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About our performance in Brazil in Security, although the situation in the economy in the country remains weak, and we are waiting some -- an important change in important laws in the country, and that the government we have that -- a majority in the parliament for developing the economic policy they want to develop and consequently, the economy in the country remain very weak. With some quarters, we are decreasing the GDP growth. We remain very positive. Our performance in the country will remain with our expectation about the trend of profitability and improvement in the country and actually in the breakeven level in the time we had forecasted.

About the Alarms, I'm putting together both your questions about India about the acceleration of the process. I wouldn't say that we had changed our strategy, but we had incorporated, in this strategy of growth, some tactical elements that we consider are key considering our investment policy. So we want growth, and we will had growth by being a healthier way. And in the adjustment process, incorporating to our basic customers of high quality, we are recovering a tradition in our business model that is not to offer an alarm in the mass market, but only to the portion of the market that want to invest really in their security. As a consequence, you can see in this moment, a temporary deceleration in the growth rhythm. And in the case of India, India is a continent. We were in New Delhi, and we are developing a joint venture, local partner, I would want, but we consider that it was better for us to concentrate in this moment in those market where we can achieve a better base of quality and profitability in the midterm. And this is (inaudible) because strategically we consider that was not our moment for developing a new business in India.

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Chirag Vadhia, HSBC, Research Division - Research Analyst [7]

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And then how many alarms did it contribute to the installed base?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [8]

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Roundly 1,000 connections.

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Operator [9]

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The next question today comes from the line of [Juan Ros from Intermoney].

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Unidentified Analyst, [10]

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I have a few quick ones. Firstly, regarding Alarms, I don't know if you guys can explain maybe if the higher operating losses booked in Q2 in comparison with Q1, they all respond to the investment in the new revenue model, the training, et cetera, you mentioned before. Or is there anything else? Or we can just assume that the higher operating losses was sort of the investment?

Then you were mentioning also NPS in Alarms. I don't know if you can share, or want to share the NPS, but maybe give us a sense on how NPS, it's been improving in the last few quarters, if possible?

And finally, regarding Turkey, are you planning to divest the Turkey Alarms or not?

Then going into the digital theme you were mentioning also. Do you have a figure of CapEx, I don't know, for this year or maybe midterm CapEx commitment you want to dedicate to the digital investment in the company?

And finally, regarding the EBIT for the whole year, how comfortable do you feel with the EUR 344 million the consensus is forecasting for this year?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [11]

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About the Alarms business, you know that any small change in the strategy, in the tactics can have an impact in the short-term in some KPI. But in any case, now we are performing better, and we're improving the churn rate and maintaining the R&R even in the situation in Argentina. So about the long-term performance of the P&L in Alarms, we are quite optimistic. Obviously, this tactical improvements in the acquisition process had this meeting about better scoring about the customer, the bancarization, this kind of things. We have, today, better tools with the AI for better scoring of our customers. And in the medium and long term, we will have sure an impact in the churn rate, and you know perfectly well that this is a key metric for calculating the value of the portfolio.

About Turkey, obviously, in this scenario, any investment is under consideration and under analysis. We will see, in the long-term strategy of the company, the role of this country can develop.

And about the digital transformation, we are not in something dramatic. We have that ERP, for example, 13 years old, so we are updating our systems. We consider that in the medium and long term, we will be able for offering a better service to our customer, but probably, we'll see some impact in CapEx. We would like to combine a reduction in the traditional CapEx for infrastructure in some of our business with this increase in CapEx, looking for, in the medium and long term, to maintain, more or less, the same figure. But in any case, you shouldn't expect an increase in CapEx coming from this digital transformation program higher than EUR 10 million.

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Operator [12]

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The next question today comes from the line of Steven Goulden from Deutsche Bank.

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Steven James Goulden, Deutsche Bank AG, Research Division - Research Analyst [13]

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Just on the Security business, can you give us a bit of a feel for how you see the underlying market in terms of the demand environment, and particularly, in terms of price competitiveness? And maybe if you can sort of dig in to that by region, i.e., in Europe, North America or in LatAm?

And just the second question on the Alarms. Obviously, the growth has somewhat slowed. I mean, can you give us any understanding, any feel for what that will translate into in terms of churn reduction and margin improvement as a trade-off?

And going forward, over the medium term, what should we assume that the new sensible medium term subscriber growth number should be?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [14]

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Security industry is under transformation today. If we consider what guarding, manned guarding industry was 10 years ago, something completely different. We are speaking about manpower and location of people in the customer premises. And if you were a player paying properly, social security, taxes and the collective bargaining agreement, offering a good service, a customer able to pay in addition to this a gross margin of 12% to 15%. The world today is completely different. First, because the transformation for negative in many countries, it's clear even in markets that, historically, have the bigger portion of the market was fulfilling all the fair market conditions, we have seen a deterioration in last years. And you can imagine, in some complicated LatAm market, for example, Brazil, only 2% of the market is paying properly social security, taxes and the collective bargaining agreement, probably Prosegur is almost a single company doing this.

In this environment, for avoiding the race of commoditization, the only thing you can do is to transform your business, offering something different and a combination of high-quality manpower, but technology with all the wide range of devices and products you can offer, but at the same time, with a integrated solution from the point of view of the risk management, the global risk management of the company customers.

We are working in this line. We are not obsessed about the top line. We prefer to increase the profitability, and we are measuring as a key performing indicator of our activity, the degree of transformation we are increasing. I can say, for example, in Spain today, the bulk of all the new offers to the customer are offering some kind of transformation toward technology. This is a different business almost, with different margins. The maturity in the transformation depends on the cost of manpower in comparison with the cost of technology. In Europe, it's clear that the cost of technology is decreasing exponentially, the cost of manpower increasing. So the business case is very clear for most of customers. In LatAm, a less developed market, the situation is different. But in these markets, we are being the first company offering this kind of new combination of solution, of global integrated solution. And something that have been a surprise for us and was a big key drivers of our decision were going to a theoretically so mature market as the U.S. market is, is that in the U.S., we have big buster with a big revenue in traditional security, but with no companies offering, at the end of the day, a global solution combining everything, manpower, devices, a risk management solution.

So we consider that we will remain suffering. The same pressure, again, margins that we have suffered, historically, in the last 10 years in traditional security, but with a good opportunity for improving the global margin of the business with this new integrated solution. And this is the main driver and the main pillar of our conviction that in the next years, we will achieve this figure of high percent of EBIT margin, or we then improve it.

And about Alarms, clearly, now we are seeing a temporarily slowdown in the growth readings. For us, Alarms is a growth activity and growth industry. And although, in the last months, we have seen our main competitors a decrease even in the total base install, we remain growing. And we are very positive about the future of the profitability of the business. If you are concentrated in less markets, and you're obsessed about the profitability of every customer, consequently, the level of profitability of the business will improve. And a growth industry is something above 10% at minimum. So we would like to consider that in the future a 10% average growth should be normal in our Alarms activity.

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Operator [15]

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(Operator Instructions) The next question today comes from the line of Miguel Medina from JB Capital.

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Miguel Medina-Sivilotti, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director [16]

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Two questions. The first one is on the Alarms division, just to make sure that I understood. The portfolio that was sold in India was 1,000 alarm connections? Was that the answer?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [17]

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Yes, you are right, 1,000 connections.

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Miguel Medina-Sivilotti, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Director [18]

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1,000. Okay, perfect. Second question, if I look at the EBIT, the amount of operating expenses that are not allocating -- that are not allocated to the 3 business units, Security, Cash in Transit and Alarms, has increased significantly in the first half of 2019. Is this part of this push into digitalization? And should we expect a similar amount for the second half? And then that's the end of it, or there is more to come in 2020?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [19]

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Miguel, we have been in this overhead. Last year, we had some one-off that we don't have this year. And you're right that we invested this amount, I have said before, in CapEx in this digital transformation, and now we are investing also an amount in OpEx. And our intention is to maintain the same standard level in some point in time. This is dependent in OpEx and CapEx in digital transformation. We should have with it the reduction in the traditional overheads. But probably, in the next half, you will see a similar amount.

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Operator [20]

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(Operator Instructions) The next question comes from Álvaro Lenze from Alantra.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [21]

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I just wanted to know if you could provide some detail on how is the churn doing outside of Argentina. I guess in Argentina, I understand that maybe this -- on the horizon, maybe you're trying to compensate this with increasing bancarization. But just to get the sense of how the trends are doing in Europe and in other geographies, and how much of the slowdown in the growth in subscriber base is due to a slowdown in gross connection additions? And how much changes in churn rate?

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [22]

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You had both effects. In some cases -- we have change this tactical approach because we have proof that in some markets, when you accelerate too much the growth, you have the risk of some bulk of bad connections and you need to write it off in some point in time. And we have had kind of this small effects in some LatAm countries.

But despite this effect, despite the effect in Argentina, where the situation in the country for this kind of product is very complicated, the churn rate globally in our Alarms business remain close to 10%. And we don't see any reason in the future for not improve it and to have even a better churn rate.

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Operator [23]

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Thank you very much. There are no further questions over the phone today. I'd now like to hand the call back to Antonio Rubio for closing remarks.

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Antonio Rubio Merino, Prosegur Compañía de Seguridad, S.A. - CFO [24]

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Okay, friends. Thank you very much for attending this presentation, and only from our part to wish you the best summer holidays. Thank you very much.

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Operator [25]

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Thank you very much. That does conclude the conference for today. Thanks for participating. You may all disconnect.