Brinks Co (BCO) 2002 Q1 法說會逐字稿

Company's first quarter 2002 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mr. Burt Traub. Please go ahead sir.

Thank you , good morning everyone. Welcome to our first quarter 2002 conference call. With us today are Michael Dan, Chief Executive Officer, Bob Ritter, Chief Financial Officer, and my associate, John Leon.

Before turning to our senior executive, a couple of housekeeping items. First, a quick reminder that today's press release is available on the company's Web site, and that address is: Pittston.com. The press release is also available via fax by calling (877) 275-7488. Secondly, a replay of today's call, which is planned for about 45 minutes, will be available this afternoon through next Thursday, May 2nd. The replay telephone number will be 888-203-1112 or outside the U.S. (719) 457-0820. The identification number for the replay will be: 503780. A replay of this call will also be available on the Pittston company Web site for two weeks through Friday, May 10th.

And now, our Safe Harbour Statement. This call, including the question and answer session may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Actual results could differ materially from projected results. Additional information regarding factors that could cause actual results to differ materially from the projected results is readily available in today's press release and in our filings with the Securities and Exchange Commission, including our most recent SEC Forms 10K and 10Q.

The information discussed on this call is representative as of today only and the Pittston company assumes no obligation to update any forward-looking statements made. This call is a copyrighted work of the Pittston Company and may not be rebroadcast, sold or otherwise distributed without the express written permission of the Pittston Company.

Turning, now, to today's agenda. Michael Dan will begin with the general overview and summary operational comments for each of the major businesses and strategic goals. Following Michael's remarks, Chief Financial Officer, Bob Ritter, will address financial topics related to the latest quarter and full year, 2002.

After these prepared remarks, Michael will chair the Q&A session. Now let's get started with comments by CEO Michael Dan.

Thanks, Burt. And be it my welcome to everyone today, thank you for joining us on this call.

We've had a decent quarter when considering the economic environment that we continue to operate in, not only this country but around the world.

Each of the security units performed well and BAX Global continues to attack their cost while facing the challenge of declining volumes, although at a slower rate than recent quarters. Brinks had strong growth and profitability off a weak performance in the first quarter of 2001. International results were solid and boosted by the euro business in improved pricing. North America was a solid 22 percent profit growth though revenue growth was hindered by our slow economy and a lack of specials.

Brinks Home Security had another solid quarter. We continue to build cash flow and value through strong subscriber growth. The oppressive disconnect rate was the lowest we've seen in many years. And, of course, a solid margin.

BAX Global was again able to effectively manage in a very difficult economic environment. Recall that the first quarter is always the seasonal weakest. Volume ran weak througout the quarter, particularly in the domestic air freight market. We saw very little strength in March. No improvement in business conditions in international markets either. In fact, Europe has weakened. BAX management is continues to hold cost, essentially in-line with last year, in spite of revenue falling $48 million or approximately 10 percent.

Our continuing natural resource businesses had another fine quarter; strong profit and cash flow.

And now my brief comments on the coal sale update. Our goal, in terms of time and in value and committment have not changed. We remain encouraged by the progress and confident we will bring about a successful conclusion this year. Coal markets have been adversely impacted by the mildest winter, temporarily idling may of our facilities in April. We're managing inventories and cash very, very closely. We're making progress on multiple sales. Again, we cannot comment. Sales will be announced as they are finalized. Our safety, our productivity, and the high professionalism of all our employees just continues to be appreciated.

Now, turning to Brinks Inc.'s first quarter. We have significant improvement over the very soft first quarter in 2001. The Euro work provided a strong boost to international revenue and operating profit, good margin business. Remember, that most of the start up expenses associated with the Euro project occurred in the first nine months of 2001. And we have seen the benefits of the revenue and some of the operating profit in the fourth quarter of last year and the first quarter of 2002.

Our North American results improved as management initiatives began to take hold and many of the problems that plagued that operations last year are being addressed, particularly in Global Services where there has been solid improvement.

Insurance cost increases are driving our rate increase program. Canada is still suffering from loss of business during low-price competition on a year-over-year basis. Operations, however, are still profitable but the margins are lower than historic.

In the U.S., all lines of business are performing on our planned margin levels. The productivity aggressively attacking our poor performing areas. We're continuing to strive for margin improvement and better topline growth. The insurance cost increases are being absorbed and passed on through successful price increase programs.

In Europe, the focus was on the Euro distribution. Very proud how well our employees handled this enormous project. France, Ireland, Holland, Belgium and Germany did a wonderful job. Much of the Euro work is now over. There will be some second quarter cash processing. The challenge now for management in Europe is to effectively and quickly handle the winding down of this project and eliminate expenses.

In Latin America, the business and security environments remain very challenging. Management is taking the right steps to deal with these adverse conditions, especially in Argentina, Venezuela, and Columbia. The social, economic and government situations there, however, continue to cause concern. In Chile, a major low-cost competitor went bankrupt last month.

Asia Pacific, as mentioned in our last call, has returned to profitability. We're very pleased in our Australian operation and progress, although it is still not performing at the levels we need. We expect to have further progress there throughout this year. Pricing has improved and the business is growing again.

Overall, Brinks had another strong cash flow quarter, aided by the level of earnings in management of capital expenditures. The outlook for Brinks, is through a good start through this year, but the challenges remain. The Euro work is behind us, the management team has to deal effectively with laying down the process. International results will look more normal beginning the second quarter.

Some pockets of work remain in areas that challenged Brinks last year that are getting attention from management. Pricing is, and should remain, firm. We need to generate better topline growth in all our markets to have the kind of growth rates we target. Second quarter profit growth should be solid compared to the soft second quarter of 2001 but not at the first quarter of 2002 levels. Cash flow is expected to remain strong, and, of course, continuing to earn positive economic value.

At Brinks Home Security, we had a very solid quarter. The standard of the economic value and the cash flow of our business, installations were very strong, up 22 percent from the second quarter. Revenue growth is solid nine percent. The disconnect rate was very good at 6.7 percent, the best we've seen in many years. Installation investment was lower than prior year. Now over 726,000 subscribers generate $19.6 million of monthly returning revenue. We're continuing to develop our new distribution channels and I remind you that the improved economic value of Brinks Home Security service levels continue to be very strong.

The outlook for Home Security, the first quarter will be a tough act to follow. We're continuing to accelerate the number of installations to drive value to growth and recurring cash flow. However, as we've said before, we will not be apparent to reported earnings, due to the conservative accounting we employ, the faster we build value, the more cost we incur.

As we enter the summer months, we expect disconnects to begin seasonal increase but should remain within manageable levels. We will continue to manage the installation investment aggressively as we have done successfully in recent quarters. With the expected acceleration of installation volume in the seasonal rise and disconnects, it's not unreasonable to expect some margin effect in the second quarter. Of course, we're continuing to build strong economic value for our shareholders.

Now, moving to BAX Global. We had been hoping for signs of improvement in the heavyweight freight industry. Sorry to say, we haven't seen it at all. And I am disappointed. It's a tough call in a tough economy.

Our cost control efforts are still successful as evidenced by the ability to absorb a $48 million reduction in our first quarter revenue and had less than a $1 million impact on our operating results. Domestically, we continue to see more of our freight shipped into the ground transportation model. The BAXSaver project has been effective and continues to grow. We saw signs of further weakness in Europe throughout the quarter. In Asia Pacific, the markets are mixed but generally showing signs of life towards the end of the second quarter. China, Hong Kong, and Australia performed nicely. Japan continues very weak.

On a positive note, service levels remain very high which should help BAX as demand picks up. Our airline, ATI, is performed solid throughout the quarter.

The outlook for BAX, is the bottom line is, we need more revenue running through our model, especially in the North American system. Our sales professional and management are on the case. Until then, we'll continue to manage the cost aggressively. But, as you could imagine, that becomes increasingly challenged. But we will not lower our service levels or our commitments to our customers. We continue to manage the infrastructure and aggressively pursue new business.

So, to summary, we still remain focused on the most important issue which is exiting the coal business. We remain hopeful we'll begin to signs of sustainable economic improvement which would make BAX a much more attractive story. Generally pleased with how Brinks and Brinks Home Security began the year. Not reasonable to expect such strong showing every quarter, especially at Brinks, now that the Euro work is over. But both businesses have put themselves in position for solid years.

Our balance sheet remains solid. Overall, I'm pleased with the strength of Pittston and it will continue to improve. And with that, I'd like Bob Ritter to update you on some of our other financial factors.

Thanks Michael, and welcome to those of you who are listening in either today or to a replay of this call.

I will begin my comments by covering some accounting and operational information which I hope will be of value to you in evaluating the quarter just ended and in developing expectations for the balance of the year. Then I'll wrap up my remarks with the usual balance sheet and cash flow information we provide every quarter.

I'll start with a few comments on the impact on Pittston of the required changes and accounting for Goodwill. The first section of the text with today's earnings release, provided a Pro Forma impact of the change on net income and EPS, three cents. The SFAS 142 were in effect for this quarter of last year.

Now we'll go into a little detail on the associated effects on operating profit. For the full year of 2001, $7.4 million was amortized against BAX Global's results and $2.1 million against Brinks. Beginning in 2002, GAP dictates that these regular amortizations be stopped. To help you in keeping track of the quarterly effective Goodwill amortization on last year's operating performance, we once again specifically broke out the amounts amortized in last year's first quarter in the depreciation and amortization tables with today's earnings release. These amounts were pretty steady every quarter last year.

As we mentioned during our last conference call in late January, we were in the process of performing a thorough review of the caring value of the company's Goodwill carried on the balance sheet with a value of roughly $220 million at quarter's end. Our review will be completed during the second quarter and I'll comment then about our results. By the way, the reduction in the value of Goodwill from the $224 million reported at year end was not a one-time charge. It was only a result of fluctuations and exchange rates since much of our Goodwill relates to international acquisitions.

One last item related to Goodwill. The elimination of Goodwill amortization has also caused a reduction in the company's consolidated effective tax rate. As you know, Goodwill recorded on acquisitions prior to the 1993 change in tax law has not been deductible for federal tax purposes. So, in prior years, pretax income was reduced with no corresponding tax benefit, the results being a higher effective tax rate. This effect has gone away and has resulted in a lowering of the effective tax rate for 2002 of 200 basis points from the 37.5 percent rate used last year. In essence, our lower effective tax rate stems from the change in Goodwill accounting, not a different view as to our tax position.

Now for a few comments on discontinued operations. As Michael said earlier, we are pushing to conclude the disposal of our coal business and expect to wrap it up this year. As we do every quarter, we have revisited the assumptions underlining the company's plan to exit coal, based on our current view of the coal market, and the short-term operating performance of our coal units and have added an after-tax reserve of $11 million to cover performance through the expected conclusion of the disposal plans. We will continue to perform this review every quarter until we have completed the disposal process and will, every quarter, assess the impact of completed and perspective sales transactions, shut-down cost, if any, and changes in coal market conditions.

Now, to help you begin to size up prospects for our key businesses, I'd like to remind you of a few of the points that Michael made earlier. Brinks first quarter performance was bolstered by business related to the physical distribution of the Euro and the return of the old currencies. There will be some Euro-distribution related business in the second quarter of 2002, but at a reduced level. In addition, as we manage through the trimming of resources which were added to handle the Euro work, there will be some costs. Obviously, these issues will make direct comparisons of quarterly performance between this year and last, a little difficult. And, on top of this, the performance of our people facing the difficult political and economic challenges in Latin America will also be a critical factor.

On the foreign exchange side, the dollar has shown surprising strength against the Euro. While economic and political problems have knocked down the number of Latin American currencies. All in all, sales were about $17 million lower this quarter than they would have been if last year's first quarter exchange rates were in effect. The impact was about equally split between the Euro and Latin American currencies.

During the quarter, Brinks Home Securities stepped up its efforts to accumulate value by adding high quality customers with solid recurring future cash flow. The rate of new installations was 22 percent higher this quarter than in last year's first quarter. On the disconnect side, first quarter results are usually the best we see every year but this year's performance was exceptional as disconnects were held down to an annualized 6.7 percent rate.

During Michael's comments on BAX, he commented on the ability of the people of BAX to continue to hold the line on costs. As a result, despite the $48 million decline in revenue, as compared to a year ago, operating performance was almost flat. And looking at the upcoming quarter, it's unusual to see a significant sequential decline in revenue from the first to the second quarter as happened last year due to the deepening recession. This year, if second quarter revenues just hold steady with the quarter just ended, the year-over-year drop in revenue would be well below 10 percent and with cost controls in place, should position BAX to improved performance.

Now I'd like to comment on some important financial measures for the company. We ended the quarter with outstanding debt of approximately $330 million. This is almost $100 million lower than a year ago. Combining this with roughly $90 million in cash, the company's net debt was down to approximately $240 million at the end of the quarter. Receivables sold in the asset securitization facility were $53 million. Also down from the $74 million in March last year. In summary, financing's net of cash were down to roughly $290 million, about $110 million below last year's level.

Besides striving to keep that level to a minimum, we are also working to lengthen maturities, diversify our universe of lenders, further increase credit availability, and maintain a prudent balance between fixed and floating rate debt. Earlier this month we placed another $20 million of debt with maturities ranging from four to six years at an average fixed interest rate below 7.2 percent. The proceeds were used to pay down borrowings under our revolving credit facility.

Depreciation and amortization on our continuing operations for the first quarter amounted to approximately $44 million. We currently expect this year's depreciation and amortization to be in the range of $185 million to $195 million. Divided among Brinks Home Security at $80 million or so, Brinks $60 million to $65 million and BAX Global in the $40 million to $45 million range and other operations about $5 million.

With that, EBITDA for the quarter, for continuing operations, for simplicity defined as operating profit plus depreciation and amortization, was roughly $80 million. With the good start we've had on EBITDA for 2002 we should be very comfortably above the $305 million that we achieved last year.

As for capital expenditures for the recent quarter, spending on continuing operations came in at just over $40 million. cap ex should be up in the - up in 2002 over last year and our current projections range from about $200 million to $220 million. Brinks and Brinks Home Security should have roughly $75 million to $85 million each. BAX will be in the $40 million to $50 million range, plus or minus. And other operations, $5 million to $10 million. As I have mentioned in earlier calls, the strong cash flow capability of our services businesses is an important strength as we look to accelerate growth in the future. Capital adjusted EBITDA, defined as EBITDA less cap ex exceeded $40 million for the quarter on continuing operations.

That's all I have for now. And we're ready for questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your telephone. Once again, that's star one for questions. We'll pause a moment to allow everyone the opportunity to signal.

We'll take our first question from Jeff Kessler at Lehman Brothers.

Thanks, and a great quarter. You really did, for the second quarter out, beat the estimates fairly handily.

Regarding the fall and the attrition rate at Brinks Home Security. Clearly, even though you said that our seasonal factors that make the first quarter lower, nevertheless if you take a look at a year-over-year comparison as well as just the operating dynamics that we see with regards to things like adjusted EBITDA, when you add back the expenses that are needs to get new customers, the metrics at Brinks Home Security were simply better this quarter than we've seen in awhile. Is there some blocking and tackling that is going on there? I might just add some blocking and tackling that's going on both in the U.S. and in Europe on the Brinks Armored side that has changed in the last six months. Why have things that were broken been fixed, so to speak, and in the case of Brinks Home Security, why has something that's been pretty good just gotten a little bit better?

Well, Jeff, there's a slew of questions there and I'll try to cover them all. If I miss one let me know.

First of all, we'll address the Brinks Home Security question. As you recall, about 18-20 months ago we made a decision to slow down the growth rate of Brinks Home Security on purpose to make sure that all the blocking and tackling was right. We were concerned about the credit quality of some of our customer bases and we tightened up credit scoring and those types of things.

What you're having now, is it's 18 months later, 20 months later, and as we said last quarter, we were going to step on the accelerator a little bit at Brinks Home Security because we're confident that the blocking and tackling is now an appropriate place and I think we're beginning to see the benefits of not only the better customer service, better installation quality, the better quality customer that we're recruiting. And so we're very pleased. And I will tell you that we were a little surprised at how low that rate was this quarter ourselves and, but we believe the benefit is coming from better blocking, tackling, and credit scoring that we tightened up a couple years ago. You know, earlier disconnects are less and those are very powerful for us on an economic basis because, as you know, when we have a disconnect, we write it off in the quarter.

As far as Brinks Inc. goes, you know, security costs and insurance costs really affected the U.S. operations in particular. There were four or five areas in the United States that, quite frankly, weren't performing to the degree they should which impacted the results. And management in the U.S., and it has been working very diligently in the last year to attack those, and we're just now beginning to see some of the benefits. I think we have a long way to go and I'm pleased with the progress. I was very displeased that we had the fall-off to start with and, but I think management's got their ducks in a row there and are doing a good job.

In Europe, it's both the Euro, you have better blocking and tackling. Both things happening at the same time. And I think the management group in Europe is as strong as we've ever had and will continue to strengthen once we take the Euro effect away.

Mike, have you taken any more of an active roll at Brinks, given the fact that you had run it before? It wasn't doing that well last year and all of a sudden these results are getting a little bit back. I mean, is your hand in there at all?

I would say that we've been more focused on Brinks than in the past 24 months to make sure that management was looking at the right things at the right time and the guidance that I could give them, and, I think, hopefully helped focus them on the areas that they had to attack.

Once again I'd like to remind everyone that it's star one for questions.

We'll take our next question from David Campbell at Branch Cable.

Good morning everybody. Thanks for the good quarter. The relations, do you have any numbers on that for us?

About 4,000, David, and continuing to, you know, add up every quarter. We continue to install more and more machines. It's still not as fast as I'd like but the economics of the program and the acceptance of the program continues to march forward.

OK. Thanks. Now Brinks International, you talked a lot about the first quarter Euro effect. Is there any way you can normalize for us what the revenues and profits would have been in the first quarter without that project?

It's a little hard to do, David, because so much of that project gets, because some of it was special work and additional trucks that we put in the system and some piggybacked on our additional infrastructure. You know, the money was the move whether it was Euros or Francs or Marks before, so it's very, very difficult for us to do that and if you push me to the wall I would probably tell you that the revenue in the quarter was probably somewhere around $20 million. But that's really hard to say, and once again, it runs across our ATM business, our CIT transportation business, and our cash processing business.

And then you mentioned that it would be cost associated in the second quarter with unwinding it.

I'll give you an example of some of those things, David. Nobody took holidays or vacations, you know, for the last four or five months for this project. You know, and all those types of things will start to happen and, you know, what are the costs of temporary labor in these markets that are all different by country based on where their employment rates are and everything else. So, you know, we've always been concerned about the start-up costs going through this bubble and then the wind-down costs. Management's aware of it. They're on top of it. There will be an effect in the second quarter to some degree. We're just very conscious of it and we just want everybody to be aware of it.

It sounds like that could be somewhat offset, at least, by continuing the wind-down of the project too.

Yes. Most of the Euro transportation work is basically finished. I would say it's 100 percent finished. The wind-off in the second quarter is additional cash processing work and, actually, the old currencies came out of the marketplace much faster than anybody said, which kind of overloaded our cash processing capabilities a little bit as it did everyone else. And so we're working those off in the second quarter and this should - hopefully some of that will help offset any wind-down costs.

Thanks. And one last one and then I'll let someone else have it. Then, I think the - you seem concerned about BAX and yet, you know, BAX had a - BAX in this circumference had a substantial - this was about a six percent increase in pounds carried. More than that, excuse me, 12 percent increase in pounds carried year-to-year. That's a pretty big increase.

Yeah, but David, I'm not happy with an operation that doesn't make money and never will be, number one, in spite of the tough economic conditions we have. Number two, remember, our BAXSaver product continues to take share and grow and so a lot of this weight that you see, growth is going on the BAXSaver product which is at lower overall yields. And so we're making good, strong, strategic progress at BAX in a very, very weak economy. But I'm not going to be satisfied until we're making money and then hit our cost of capital, because this economy, obviously, has really impaired that. But we are positioned, and should this economy break at all and to show some much better story at BAX Global.

So, do you, then, expect the pounds carried to even increase to 25 percent or something like that? I mean that's ...

Tell me what the economy's going to do, David? That's a hard one.

Well, it should be better. I mean, so, you ...

I hope. I'm on your side.

So, but you are going to keep chasing? I mean, I don't think - you're not counting on a recovery in next-day air business. I mean, that's - that I wouldn't predict.

Nor would I. Nor would I.

All right. Thank you.

All right, David.

We'll take our next question from at Davenport & Company.

A great quarter. I just have just a couple quick questions. Can you discuss a little bit your outlook in terms of the acquisition environment? What's your seeing especially in the Brinks side?

We don't comment on those types of things at all. I would say that there's a lot of pressure in the marketplace, the insurance cost increases that are affecting the business, have been putting a lot of strain on a lot of people. I mentioned one material bankruptcy that occurred in Latin America. I would suspect there might be some others. But quite frankly, in most cases, our geographical footprint is pretty forward Brinks and I'm not too excited about some of the properties that might be available in that market at the current time.

I guess rewording a little bit. Given that we have derived most of our growth both in Brinks and Home Security organically, is there an effort being made to expand growth rates through external growth initiatives?

We look at every opportunity, both on a geographical expansion basis just for starting-up operations in addition to acquisitions all the time.

OK. And, real quickly another question. In terms of leveraging our asset base, and I'm talking more about Brinks in this , but leveraging our asset base through your offering more services, what are some opportunities in that area in Brinks to, you know, expand our service portfolio above and beyond CompuSafe and some of those things that we've talked about?

Cash processing.

OK.

Quite frankly, all large commercial accounts in the bank want out of the back room cash processing business. And that will drive the growth of this company, in my judgment, for the next three to four years and we're focused on seizing those opportunities, similar to what ATMs did for the previous five years, driving the growth of Brinks. And management is focused on doing that and putting together the infrastructure in a management team to be able to seize those. And I think you'll begin to see that probably in the next 12 months.

Great, thanks a lot.

Thank you.

Thank you Rob.

Once again that's star one for questions and we'll return to Jeff Kessler at Lehman Brothers for a follow up.

Oh, thank you. I had gotten cut off before. I did it unintentionally. And then the question really is on CompuSafe and particularly with regard to ancillary services that you want to add to Brinks. When you come back to CompuSafe, can you just give us an update on what is going on there? How many installations you have out there and if there's been any change in your ability to maybe grow that business?

No, Jeff, we're just around 4,000 installed units and we're continuing to process a pretty full sales channel. It's just a long sale process. That hasn't changed. But we're continuing to make steady progress there and we think it's a good product. We think it adds tremendous value to our customers; saves a lot of money in their back room operations. It's just a long sales cycle and we're just as excited about it today as we were last year.

OK. Thank you.

Thank you, Jeff.

There are no further questions at this time. I'd like to turn the conference back to Mr. Traub for any additional or closing comments.

Thanks . Before we sign off, let me take this opportunity to again thank you for your interest in the Pittston Company and we look forward to communicating with you again. Have a good day.

This concludes today's conference. We appreciate your participation. You may now disconnect.