Brinks Co (BCO) 2002 Q3 法說會逐字稿

Please stand by. We are about to begin. Good day. Welcome to the The Pittston Company third quarter 2002 earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to the Director of Investor Relations, Mr. Burt Tropp. Go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to the third quarter 2002conference call. With us today are Michael Dan, CEO and Bob Ritter, CFO. Before turning to our senior executives, a couple of housekeeping items. First a quick reminder that today's press release is available on the company's Web site. That address is www.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 Friday, November 8. The replay telephone number will be (888) 203-1112 or outside of North America (719)457-0820.The identification number for the replay will be 615246.A replay of in call will also be available to The Pittston Company Web site for two weeks until Friday, November 15.

Now our Safe Harbor 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 & Exchange Commission, including our most recent SEC forms 10-K and 10-Q. The information discussed on this call is representative as of today only and The Pittston Company assumes no obligation to update forward-looking statements. This is copyrighted by the Pittston company and may not be sold or redistributed without written permission of The Pittston Company

Turning to today's agenda. Michael Dan will begin with 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. Let's get started with comments by CEO Michael Dan.

Let me extend my welcome to those of you who joined us today. I will start with a brief overview of the company and three out of our four units had a very, very good quarter with mixed results from the Brinks International operations. The solid news from BAX Global was very pleasing. We are continuing to see signs that BAX's cost control efforts and service and quality focus are beginning to be paid off and recognized by our customers. We are seeing some pickup in the U.S. and strong Asia Pacific volumes.

There is plenty of room for improvement on the Brinks side. The worldwide results were not satisfactory because, as pointed out in previous conference calls, the single biggest risk in Latin America continues to be very challenging. The economic and political challenges in those countries are continuing to prove difficult. European results were hindered by poor operating performance in some markets. North America there was stable profit margin but we are continuing to be concerned about lack of top line growth. Brinks Home Security had a strong subscriber growth continues to build economic value and cash flow and positive value. Operating margins were all in line. The dissect (ph) rate was again in line, somewhat higher than last quarter. It is typical for the third quarter in the past years.

BAX Global, of course, is the best story of the quarter. Management team continues to do a solid job in a difficult market. The improvement at BAX was driven by strength? The Asia Pacific region and for the first time in three years improvement in domestic business. Domestic volumes were up nearly double digit and worldwide volumes increased 13 percent.Although overall conditions remain a challenge, BAX posted a very good quarter.

Regarding the sale of coal assets, in accordance with our announcements this week we are now in the process of finalizing the sale of all coal mining operations and most of the rest of our assets in Virginia and West Virginia. We actually exited the Kentucky market this year. Timing and value goals have not changed. We remain confident we will bring about a successful conclusion this year. We are grateful to the managers and the employees of the coal operations who continue to operate at the highest levels under very difficult conditions.

Turning to the Brinks operating risks and uncertainties. Strong revenue growth in Asia Pacific and Europe were offset by a sharp reduction in southern America revenue. North America had a 4 percent profit growth as margins had relatively stable at seven and a half percent. There was good growth in U.S. global services, but the soft economy continues to dampen the demand for services in the domestic business. The U.S. again had attractive wins during the quarter which will help the business in the first half of next year. We continue to experience difficult market conditions in Canada.

In Europe, the line down costs associated with the Euro distribution hampered profitability in some countries. As I noted last quarter, labor costs are difficult to remove in some s countries. Field management understands the importance of rapidly getting back to traditional work flow.

South America remains a difficult environment with no signs of improvement. South American results were below historic norms. Management throughout the region continues to work hard at addressing difficult political and economic conditions and security concerns, particularly in Argentina, Venezuela and Brazil. It is very difficult to predict when these conditions will improve in that part of the world.

Asia Pacific again showed marked improvement over the prior year. That improvement was driven by Australia and Hong Kong, where pricing improved to reasonable levels and the business is growing.

Regarding the outlook at Brinks, there's plenty of room for improvement and we know what needs to be done. The fourth quarter comparison to last year's zero impact will be tough. Last year's third quarter included a boost from the first wave of Euro related work. North American operations need to grow across the top line in all geographic areas and product lines. Normal fourth quarter growth will be evident in our performance. There is room for margin improvement in the fourth quarter. Profitable growth of any kind is difficult in South America until the social economic landscape improves. It is reasonable to expect further pressure on profitability in that region. We expect the European managers to make progress on ongoing business an get they will get themselves out from under the last of the Euro costs. Last quarter we that you thought that would be finished by the end of the third quarter. Unfortunately it will take until the fourth quarter to accomplish that goal. Asia Pacific while relatively small should continue to show progress and seasonal norms.

Overall the fourth quarter profit will be solid, but well below the strong year's fourth quarter results because of Euro distribution work and a much weaker conditions in South America. Strong progress will be evident in North America.

At Brinks Home Security we expanded the cash flow. New installations were up a solid 12 percent, revenue 11 percent for the quarter exceeding the growth rate for Q2. Operating profit grew better than expect at 9 percent and margin was again solid at 20 percent, similar to a year ago. As we have always said, the key to this is service levels which continue to be very, very strong. This rate of 7.9 percent is where we thought it would be. We now have over 750,000 subscribers that generate20 million a month of recurring revenue. Newer distribution channels continue to grow, representing over 30 percent of this year's installations to date. As to the outlook at Home Security, the push for value creating installations will continue. As a result, returning cash flow will continue to grow. As noted before, although the growth doesn't translate well to the P&L statement, we will keep growing the business while managing installation investment as has been successfully done in recent quarters. Home Security will generate strong cash flows and add economic value for our share holders.

Now moving to BAX global. Third quarter results are a good example of the positive operating leverage in this business. Worldwide revenue was up 12 percent, the first year-over-year t double digit increase in nearly three years. Asia Pacific was a very big growth driver, up over 30 percent.Revenue in the Americas was up 6 percent year-over-year and also 6 percent for the second quarter, encouraging sign. It is apparent that the cost control efforts of management are successful as evidenced by the$17 million improvement in year-over-year operating results of the Americas region while revenue increased only $15 million.

Domestic volumes picked up nearly 10 percent in the quarter versus previous year. BAX continues to be well positioned as a lot of freight has been shifted to ground transportation. The BAX product continues to grow nicely. The second day and deferred products grew with double digit rates in the second quarter sequentially. European markets remain weak and may continue to soften, but Asia Pacific has had another strong quarter. We continue to focus on strong service levels which will drive business to BAX as volumes improve. ATI you provided solid service to BAX while increasing charter business during the quarter.

We are seeing some encouraging signs, but obviously we would like to see more volume, particularly in the domestic system. Cost controls continue to be a key focus. We will maintain and elevate the service levels to customers. BAX management will aggressively pursue new business while striving to increase profitability. European economy is our concern for this business. I am hopeful markets will show signs of improvement over the next quarter and, three quarters. Further increase in volume should have a favorable impact on the bottom line.

In summary, I will wrap up by re-mining you obviously our primary strategic focus remains on exiting the coal business. I already commented on our progress there. We continue to take a cautious view of the economy, but also believe that BAX will benefit from any improvement. Brinks Home Security continues to do everything we ask. We expect the business to continue to generate strong cash and economic returns. Brinks had a reasonable first half, but there is plenty of opportunity for improvement. Brinks also must face the unique Euro driven comparison in the fourth quarter. And I would remind you South America will offset improvement likely in other parts of the world for the next few quarters. Overall it was a good quarter for The Pittston Company. I am pleased with solid improvement at BAX, the performance of Brinks Home Security and cash flow remain solid and I expect it to improve even further. For additional information on financial position, here is Bob

Thanks, Michael. And welcome to those of you who are listening in either today or to awry play of this call. As usual, I will begin my comments by covering some accounting and operational information which I hope will be of value to you not only in evaluating the quarter just ended but also 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 and provide every quarter. I will start with a few comments on discontinued operations.

As Michael said earlier, we are working diligently to conclude the disposal of the coal organizations and expect to wrap up in the next couple of months. As we do every quarter we have revisited the assumptions underlying the company's exit of coal, based on the short-term operating performance of our coal units. Based on perform ages of the quarter just ended, through the anticipated conclusion of the plan as well as expected proceeds and assets and liabilities to be disposed of and retained we concluded the previously recorded reserves do not require adjustment at this time.

Along with the actual conclusion of the disposal process we expect to wrap up our accounting for discontinued operations during the fourth quarter. We will revisit our accounting reserve position at that time. We won't know if there will be an upward or downward adjustment until the final deals are closed. I would like to take the opportunity to remind you once again with the conclusion of discontinued operations the charges for those legacy liabilities which we are retaining will be reported in continuing operating performance beginning in the first quarter of 2003.Looking back at the estimates made last year end, we expected an additional expenses to range from $45 million to $55 million. Of course, we revisit these liabilities every year with the assistance of our actuaries.

I would like to call your attention to a few special items affecting overall profit performance during the quarter. First, net income I would like to point not operating profit for the quarter included a $3.7 million benefit from a payment received under the Air Transportation and Safety and System Stabilization Act. As noted in the release we don't expect to see additional payments. We also increased our tax expense during the quarter by $1 million from the run rate of the first half to record the higher expected cost of International taxes. At the same time we fobbing a quick look ahead to next year. Based on that quick look I would expect to see an effective tax rate next year in the range of 36 and a half percent to 37 and a half percent.

Finally, as we announced last quarter we completed the redemption of the remainder of the convertible preferred stock for roughly $11 million during August. The $600,000 premium associated with the redemption reduced net income attributed to common shares. Netting these three incomes, net income was increased by about $2 million for the quarter.

Now for some business specific information. As usual, I'll start with the impact of foreign exchange on Brinks. The Euro has hell on to most of the strengthening against the dollar an on average during the quarter the Euro was a little over 10 percent stronger this year than last. Should the Euro to dollar relationship hold at the98 and a half mark it averaged during the third quarter, or about where it was earlier this week, we would expect to see European revenues for the fourth quarter increase by roughly 10 percent, solely due to foreign exchange. Please remember, last year's fourth quarter included a significant sluggish revenue associated with the Euro distribution program.

Now let's review performance for Brinks in Latin America. As we noted in today's earnings release, the positive impact of the strengthening Euro was offset by the weakening of certain South American currencies, Brazil I will and Argentina notably. Using our basket of currency for our operations, third quarter revenues were cut 20 percent versus a year ago. Over the long run, Latin America is a good region for our operations, but it has been an area of concern over the last year or so. As Michael noted, it continues to be. Year-over-year operating performance during the quarter was off about $4 million, as our operations slipped into the red. Looking ahead, although we normally see a seasonal improvement in operating profits in Latin America in the fourth quarter, South America's political and economic uncertainty is presenting a real challenge. In addition to this, I want to remind you that the positive impact of the Euro distribution that we benefited from last year will not be repeated in this year's fourth quarter. However, we do expect North America to perform better. All in all, though, the fourth quarter comp for Brinks International operations will be a difficult hurdle.

During the quarter, Brinks Home Security continued its efforts to build value by adding high quality customers with solid recurring cash flow. Even though the third quarter is the height of the moving season and we tighten collection policies on customers with poor payment histories, the disconnect rate during the quarter was once again lower than for the same quarter last year. For the first nine no, sir the annualized disconnect rate was 7.4 percent very year versus 7.6 last year. I would like to remind you the third quarter disconnect rate historically is higher than the full year average. To sum it up, Brinks Home Security had another successful quarter.

As for BAX global, I would like to join Michael in complimenting our people fl for a solid quarter in their drive to better performance. Although the strength or weakness of the economy will be a significant factor in BAX's global performance in the fourth quarter we are encouraged by the strong sales and discipline evidenced by our sales people.

I would like to comment on important financial measures to the company. I would like to start first with pensions. We have been following the impact of financial markets on our planned assets and planning an appropriate response, if necessary. Accordingly, during the quarter we made a contribution of$35 million to the U.S. pension plan. Now, one of the questions that is being asked of companies is the funding position of pension plans and the possibility of an equity charge. We have also been following this issue closely and based on our current position an the understanding that financial markets fluctuate over time, we don't see funding levels to be a major long-term concern for the company's financial position. In addition there are various factors that could further improve the situation and we will be watching them. Those include changes in market performance and interest rates. We can also make a further contribution later this year should we feel it prudent to do so. Finally, we have also run the numbers on our debt covenants to ensure that there are no issues there. If the year had already ended there would have been no impact on our debt agreements.

I'll turn next to debt and cash flow data. W e ended the quarter with outstanding debt of approximately $365 million, $25 million lower than a year ago. Combining this with roughly $120 million in cash, the company's net debt was down to approximately$245 million. Receivables sold in the asset securitization facility were $73 million, up slightly from the $67 million for September last year. In summary, financing net of cash were down to roughly $350 million - $315 million, excuse me, about $30 million below last year's level at the end of September. Despite the $35 million pension contribution an the $11 million convertible preferred redemption we did this year.

Depreciation and amortization on our continuing operations for the third quarter amounted to just under $50 million, and year-to-date it's just under $140 million. We currently expect this year's depreciation and amortization to be in the range of $185 to $195 million, divided among Brinks Home Security at 75 to 80 million, Brinks at 60 to 65 million, BAX Global in the 40 to45 million range, and other operations at about $5 million. With that, EBITDA for the quarter for continuing operations for simplicity we have defined it as operating profit plus depreciation and amortization, was roughly $85 million. With where we stand on EBITDA from continuing operations so far this year, roughly $250 million, we should be comfortably above the 305 million attained last year.

As for capital expenditures for the recent quarter, spending on continuing operations came in about $55 million. CAPEX should be up slightly in2002 over last year's 193 million, as our current projections range from 190 to 200 million. Brinks and Brinks Home Security should have roughly $75 to $85 million each. BAX will be in the $20 to $30 million range plus or minus. And other operations will run about $10 million. As I mentioned in earlier calls, the strong cash flow capability of our services business is an important strength as we look to accelerate growth in the future. Capital adjusted EBITDA on continuing operations, defined as EBITDA less CAPEX, was around $30 million and amounted to over 100 million for year-to-date. Lastly, I would like to thank the bankers for the smooth process we encountered in replacing the existing credit facility with a new one which matures in 2005.That's all I have for now. We are ready for questions

Thank you, Mr. Ritter. The 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 touch tone phone. If you are using a speaker phone, make sure the mute function us turned off to allow the signal to reach the equipment. We will take as many questions as time permits. Ladies and gentlemen, that's star one. We will pause for just a moment to give everybody an opportunity to signal for questions. We will take the first question from Jeffrey Kessler with Lehman Brothers.

Thank you. First with regard to the coal sales, you've got three, essentially three partners so far to buy the assets. I'm just wondering, I realize that you have put out an announcement on Horizon, they restructured their agreement with you slightly. Are you monitoring horizon's financial condition slowly that you are comfortable they will be able to make good on those commitments,

Yes, there are three major coal sales we are talking about, not the minor ones. The first one was the Kentucky operations has already closed. It is completed, which was the deal with AT Massey (ph). That's over, closed, gone. The second deal had to do with Horizon. We are very much aware of where Horizon is. In fact, it was the reason we structured the deal. To make sure it met our strategic goals of exiting the coal business this year. We are confident we will be able to do that and close that transaction in a relatively short order. The third deal, which we announced yesterday, is for Virginia operations and that deal we expect to close sometime mid December, by the end of the year. The combination of those three deals will have made us, taken us out of the coal business. We are exiting the coal business.

At what point are you going to give either the dollar, the dollar amount whether it's cash, liabilities or what? Are we going to have to wait until the fourth quarter report on that?

When we conclude the sale of the coal business, all the three pieces - and there's other pieces, Jeff, that are immaterial and haven't been reported, we will present a complete picture to the financial community and our shareholders of exactly what the position is as we go forward. That should happen sometime in the first quarter of 2003.

Second question is, we are looking at, if you are looking at the risk of Latin America which I know has its incremental profitability to you is higher, obviously if you lose that profit ability it's lower, more effective on the margin to you. You are talking about Latin America now being weak for several months, maybe several quarters to come. Inside of Brinks itself, are there areas that you can make up this weakness in earnings? Will we have to depend on the U.S. velocity in cash to get better? To get some of your ancillary revenues better here? I'm trying to think of areas where you can make it up in Brinks so we won't have the fall off, realizing you will have a tough comparison in the fourth quarter. What happens in the first an second quarter next year? How will we get ahead of the game for Brinks in terms of those periods?

Couple questions, Jeff. Let me give you the best perspective I have. First of all it's a volatile situation in Latin America as we talked about in each of the quarterly conference calls this year. As you said it's incrementally higher operating margin in Latin America historically, therefore it has a serious impact when those margins are depleted. Two things are evident. The security situation is deteriorating dramatically in those areas. The first goal in the security business is to step up the security to protect our people and facilities and our customers' assets during this time. We are burying the costs which affect the results more strongly than I think most investors would realize.

Secondly, the cost of doing that will be passed onto our customers as efficiently and rapidly as possible in those very difficult environments. There is s somewhat of a delay to that. We are in the process of doing that very thing in most countries. We are having difficulty in Argentina doing that, some difficulty in Brazil. We are successful in Colombia I can't and experiencing success in Venezuela which has been sickly harmful for us in the last six months, in our International Latin American earnings. We believe the global services arm of the business will offset that deterioration in the earnings and at the same time I'm confident that the fourth quarter performance in the North American business unit will show a substantial improvement year-over-year because last year's was particularly weak as we were affected by some workman's compensation and other liability charges that were not normal. Those will not reoccur this year.

So there's a combination of answers there. The question that's hard to get a handle on is what is happening. I will tell you that every day you read about a strike in Venezuela, it probably costs in the neighborhood of $300 to $400,000 of losses for our company. We have all the expenses there and none of the revenue. I know there have been a couple of those already, three days in the month of October for example that we have experienced. Is there going to be three more or ten more of those in November, December? Of course, I don't know the answer to that.

One final question. That is on BAX. As you know, I'm not asking questions again on BHS. They keep coming through with the numbers. They are like clock work right now. I'll congratulate you on that. On BAX, the number have improved. The question is, are you getting some of this from the truck business? And also are you being affected either positively or negatively by the dock strike? Have you been affected positively, negatively by the dock strike? Maybe some goods moving on to the trucks that way from the quarter?

Jeff, good question. First of all, there has been a positive effect in the Asia Pacific business that I think was registered mostly in the September quarter. I expect to have some stronger improvements as we go forward as a result of that situation. On the other hand, it's a double edged sword. With the docks plugged up, the freight is not coming out to the docks. That freight is some of the freight that feeds the domestic network, including the BAX saver network and obviously the airplanes and the capacity. We had plenty of capacity in the United States to handle additional volume if those ports become unplugged. As you know by reading the newspapers, that's not happening. The productivity is down even though they are operating. I'm not sure what kind of lift we will get there.

As far as the air lift out of Asia Pacific in the fourth quarter, there's only so many airplanes out there to fly. I suspect we will have a little bit of a gain from additional charter business because of our air line, ATI, which will positively impact the BAX performance in the fourth quarter. But the system is plugged up. There's only so much capacity coming across the ocean. All the ships and containers are tied up. I think we will have a six-month play out here, at a minimum, assuming this port situation gets resolved reasonably in the next few months. Overall it will benefit BAX. I don't think it's as strong on up side as people think it is. Frankly, the freight is not moving.

Thank you very much.

Yes, Jeff.

We will go next to David Campbel with Thompson Davidson and Company.

Hi, gentlemen. I wanted to ask about Brinks Home Security. I understand the cash flow is doing well. Certainly it's working versus what I expected to happen. But when I look back on the operating income that you actually report, you reported, if the numbers are right, 53 million in 1997. And this year we are running at around 56, 67 million. Is there some point at which we begin to see revenue growth translate into comparable profit growth?

David, as we mentioned on a few occasions this is a more difficult business to look at from a pure profitability standpoint. This is one where you have to focus very much on the free cash flow that it generates as well as the growth in value which we typically measure by the monthly recurring revenue in the number of subscribers we have. Since the year you quoted,1997, just like every other company we had to change our accounting slightly because of staff accounting bulletin 101 which changed the up front profit ability. What that does, it makes us charge off a substantial amount of money for every new subscriber we bring in. But those new subscribers we are bringing in have positive EVA.s. They are adding to the future cash flow generation capacity of the company. It's the right thing for us to do to continue to build that. We continue to build value. We obviously keep an eye on the profitability, but the key driver here, we want to keep adding high quality customers and service them well so we keep generating cash flow for the shareholders.

So we should continue to look for that rather than any reported significant profit growth?

I think you will see profit growth will continue. But it certainly will not be as rapid a growth as you might see in some other businesses, because of the accounting model that we follow. That is why we focus just as heavily if not more so on the growth in value that we have there.

Also I would like to remind you, we slowed down the growth of Brinks Home Security a couple of years ago to make sure the operating machine was as efficient as possible. We have successfully done that. As I said in past conference calls, we have now accelerated the growth rate of that company on purpose because of the strong economic positive and free cash flow generation we have. The faster we grow, the more impact there is on the profit, reported profit due to the loss of each new subscriber under these accounting rules that we just described. As we continue to accelerate the growth, that puts more pressure on operating profits.

Thank you. On Compusafe (ph), do you have any numbers for the installations?

4,100 or 4,200 in the third quarter. We signed a very, very large contract and we will be rolling that out in the next six to seven months and you will start to see those numbers go up on a quarter to quarter basis.

You can't disclose who that's with.

Exxon Mobile.

That's a lot of gas stations.

I am not getting all the gas stations, but a substantial customer with a large number of installations.

Right, right. Back to BAX Global, you did elaborate well about Asia Pacific. Obviously, there are a lot of cross currents there that, as you say, alter the numbers. I guess one of the big questions, whether you are able to pass on these higher air freight rates to your customers. In the fourth quarter, do you have any comments on that?

Obviously, David, it's a mixed bag. We have some customers that are fixed price contracts. It's more difficult to do that. We added lift. We chartered some aircraft to make sure we can provide the quality level service that we have. We have very, very strong growth in Asia Pacific as you can see year-over-year. I'm confident that the additional charters we are bringing on will be at a profitable rate. The customers rely on us to make sure they get the products and goods to service. There is such a demand for service that additional space on the charters should be relatively easy to fill at a profitable rate. We will be utilizing chartered operations from our airline, but we have our own assets to alleviate any of the negative effects we have with higher freight belly space charges or from the cargo carriers that operate over the Asia Pacific area.

And on the domestic operations, you are not sure there will be a net benefit because, although more air freight is moving on international operations, you are losing some of the sea freight. Is that the way.

Correct, correct. Like you said, a lot of cross currents cutting across here. At the end of the day people have to sit back and say hey, the west coast is plugged up. Capacity is a big issue. I will tell you there's freight - I just came back from say is Asia. There's freight backed up allover the place waiting for ships, but the ships are stuck on the Pacific Rim on the U.S. side. Until that plug gets unplugged, there's a lot of cross currents here. Some people are being a little too enthusiastic about what benefit might come from that, David.

Uh-huh. Do you have any thoughts on the first quarter? Some people have said that this freight is coming in and is going to get in too late to hit the stores and then there will be a big inventory glut in the first quarter.

I'm sure glad I have a back saver network. It won't go on my planes, but I have a way to move it and service my customers and keep the freight.

Uh-huh, up hundred. Thank you very much.

Thank you, David.

We will go next to Collie Yall-ph with Cafe Financial-ph.

Good job with BAX and BHS. I have a few questions. Can you quantify the higher costs associated with the Euro project during the quarter? What do you think it will be -

Most of the cost is, - there's two things driving the Euro related toss to carry into the third quarter. One is, our people work so many hours, particularly in France, and to some degree in Germany and Holland, during that period there was no vacation time taken. A lot of overtime hours. With some of the work rules, regulations over there, those people are now taking a well deserved rest and vacation. We have had to keep what I would call the excess or temporary support help longer than we anticipated. That, of course, is now beginning to bleed off. We are basically finished with any of the Euro related work, backup work that was still being counted through the second and third quarter. It's a matter of making sure we right size those operations.

Do you have a rough estimate of how much that was incrementally on the quarter? The numbers?

If I were going to guess, $2 to$3 million in the European theater.

OK. Then you mentioned in Latin America, I guess, you were not profitable during the quarter. Do you have a rough estimate of what profitability was there?

We are break even in Latin American quarter.

(inaudible) break even?

Yes.

OK, thanks.

Yes.

We will go next to Robert Kirkpatrick with Cardinal Capital.

Good afternoon. Could you tell us what operating capacity you are at in BAX in North America and what your desire or ability is to change that one way or the other? Then I have a follow-up question.

We are operating 21 aircraft in the North American market. That's one airplane in Canada coming down, one in Mexico and the rest are U.S. based network. We still have plenty of capacity on that system. However, that's the number of aircraft we need to service the cities and provide the service net and commitments we have to our customers. But we can take a substantial additional volume on that. Of course, our BAX saver network, our truck network on a national basis is operating very, very efficiently. It's very flexible. We add and subtract trucks based on volume necessary. We have the ability to continue to do that and ramp it up or turn it down on a nightly basis. That is operating very cost efficient and service efficient manner with over 98 and a half percent service capability through this last quarter. We are very pleased with that.

We are happy with where we are with capacity. We have room to take on more. It is a very competitive market out there. There's some very desperate competitors pricing very aggressively. We had strong discipline in making sure we are priced correctly. We know our costs. I think it's reflected in the improvements you see in the Americas region year-over-year.

Great, thank you. Secondly, is the payment that you received from the government of nearly $6 million included in your income for BAX on the domestic side? Is that broken out below?

It is not included in BAX's operations. It's a below the line income item. If you look at the press release, we put a separate line for that income, below the operating line of the whole company.

Great. Finally, could you discuss a little bit more about your timing on the Veba (ph) funding? You created this account several years ago. With you exiting the coal business by the end of the year, what is your final table and magnitude of funding things on that side going forward, please?

That is something that will be dictated first of all by the cash available. Obviously as we start to conclude the coal process, we will generate cash from that. Also our tax situation. We still have quilt a few NOL carry forwards and so we will begin to fund the Veba (ph), but we will not complete the funding of that until we move further along. So my guess is over the next two to three years, that obviously can change, depending on how we perform, but also what our cash an capital position is, we will start to heavily fund that. And you will see us in a much better funded situation.

The initial funding, can you give mean idea as to the magnitude? At least the initial funding up front?

Right now we have about $17 million in there. Clearly over the next, as I mentioned over the next couple of years we will begin to contribute much more heavily to that.

OK, great. Thanks so much.

Thank you.

We will go next to John Discher-ph with Roy's-ph.

Good afternoon, nice quarter. Following up from the prior question, the Veba (ph) contribution, is that part of the legacy liability of 45 to 55 million a year?

Yes, in a way. The Veba (ph) itself is an asset that we have set up which will allow us to pay for the, a good portion of the legacy liabilities. Those legacy liabilities is the expense of $45 to $55 million. You will see an offset based on the amount of funding in the Veba (ph) will help us reduce that number as we go forward.

Most of the legacy liability is the Veba (ph).

That will be used for the legacy.

Think of it, John, as a pension type trust. We can grow the contributions on a tax advantage basis and over time legacy liabilities run 50 years plus. The good news, it's - bad news, it's a lot of money. The good news, it ever over 50 plus years. When it makes sense for us to fund that, to grow those tax advantaged, to pay those liabilities over time.

Got it. Was there a legacy expense this year, or year-to-date, I should say?

I'm glad you're bringing that up. It never hurts to reminds people enough on this. We have accrued that or had accrued that in our discontinued operations reserve. So you are actually not seeing the effect flowing through this year's financial statements. That's why we want to remind people that as we come out of discontinued operations beginning in 2003, that number will start to come back into our financial report, our reported financial results.

To the tune of 45 million to 55 million a year?

Yes.

All right. The BAX operation improvement was notable. I'm just wondering, Michael, what is your goal there in terms of operating margins or EBIT margins when that thing is running how you want it to run.

We are looking to a 5 percent margin an we are close to that on the international side sometimes, particularly in the Asia Pacific operations. North America, which is more asset intensive, we believe we are down to about 4.2 percent operating margin to have a positive economic value, which is our 12 percent hurdle rate. Used to be a 5 percent. We have been lowering that as we lowered the assets intensity of the business. I will be satisfied when we get to about 4.5 percent and then at that point we will raise that target. First we want to get the business fixed and return it cost of capital

You are halfway there based on the recent quarter, 2.2 percent, I think.

That's correct.

Can you get there without growing revenues significantly? Does that four and a half require significant revenue?

Significant, you're talking more than 10 percent? The answer is no. Operating leverage in this business is substantial. And we are controlling our cost in our investments to the point that a little bit of relief we had on the year-over-year revenue growth had quite a dramatic impact on the bottom line. I will tell you another 4 or 5 percent revenue growth in the quarter would have gotten us there.

OK. So you need 10 percent or so?

Remember, it's a seasonal business. We always have a tough first quarter. Usually the second and third quarters are the strongest in a normal economy here, and we haven't been one in the last couple years in my judgment. The key next year will be getting off to a profitable first quarter and having a stronger second and third approaching those levels. That's assuming the economy is relatively flat. You can't bet on the economy. BAX management and I understand that. It's on the cost control, the execution, service, and market share.

Are most of the cost reductions behind you at this point on BAX?

I would say the vast majority are. We can always fine tune and do things smarter, better. We will continue to do that. We are selective on the customer acquisition trail. We know our costs. There are still some customers we elected to walk away from. They are not beneficial to us.

Final question on coal, of course. That is, what is the probability of each of those remaining transactions, West Virginia and Virginia, closing this year? I'm a little bit confused in terms of when it is actually going to close. Not when an announcement is going to be made.

We expect all of them to close this year. The two major transactions that we have announced.

Closed meaning transaction completed, money in the bank, whatever?

Exactly. As already happened with the first one.

I understand, thank you.

Thank you.

We will go next to Rob Norfleet with Davenport and Company.

Hi, I had a couple quick questions. First of all, looking at Brinks Home Security, with Tyco scaling back its ADT operation and dealer network incentive programs, how has that impacted the Brinks business? I guess specifically when you look at the dealer network, typically they go after I guess a lower credit quality type customer. Do you see any future margin compression as it relates to picking up some of that business?

I don't see margin compression. Obviously we have been affected to some degree. As you know, in Tyco, an ADT subsidiary, they are a dealer network. They buy their accounts. They recently announced a substantial pull back in the number of accounts they are going to purchase, which is greatly affecting their dealer network.

I will tell you our phones are ringing off the hook from their former dealers looking to see if Brinks has an interest in expanding our dealer program. Our dealer program is relatively immaterial in our total sales and we choose to only have dealers where we don't have a factory owned store. It is our basic premise that a Brinks controlled factory store gives the best long-term economic value for the customer because the customer for life is the key with our economic model.

I do see some expansion over the next six months of our dealer program in the areas we don't operate which will balance out the portfolio and allow us to grow the company faster than in the past year. But at the same time what may Brinks Home Security such a successful enterprise is a tight disciplined growth pattern. Be are not going to depart from that.

Switching gears a little bit, you have answered a lot of questions regarding Brinks especially on the International side. The more broad question I had, I know in the past you guys have left certain markets because conditions in the outlook over time were bleak. And obviously I'm not saying the case with South America or Latin America right now, that is occurring to date. I know from an incremental standpoint or margin standpoint, typically when things are going well, perform very well.

What kind of financial metrics do you look at or how do you measure your risk relative to staying in a market over an extended period of time? I guess what I'm getting to, you are weathering the storm now. At what point do you say maybe it's not worth staying in this market?

First of all we would not stay in a market where we thought we would consistently lose money. We won do that. Discipline is tight. If we got to that position in one of those countries, I would close, wind down or sell off the operation immediately. I do not think that will be the case anywhere. There might be an exception, but I think it's too early to make those types of judgments at the current time. We have been doing business in Latin America for 40 years. Very strong margins most of the time. We weathered these storms in the past and we will weather them again. We always reserve the option, if it doesn't make sense for us to be there and re-deploy our capital investments, we are willing to do so.

Last question is, on the share repurchases, I know it has been on the radar screen but has been a lower priority in terms of capital redeployment. Bob, given where the stock is today and obviously if it continues to weaken, will that become a higher priority for us?

We always keep in mind the various uses of the capital if he company, Rob. One of the things that first and for most comes to mind is the need for us to make sure that our shareholders and the investing community are as comfortable as we are with our ability to handle the liability situation we have an to put that to bed once and for all. If you are looking at the scales, they are always somewhat tipped towards making sure we have the capital to both deal with the liability situation and to be able to grow this company profitably going forward.

Great. Keep up the good work.

Thank you.

Thank you.

We will go next to David Pettiwith-ph wilts with David J. Green-ph.

Congratulations on doing a good job, with the things you had some modicum of control over.

Thank you.

But secondly, my question was answered with respect to the, you know, the viability of Latin America long-term. Can you also address in terms of, funding that Veba (ph) with sales proceeds from other natural resources or some other approach to other natural resources and what your perspective is on the value of those?

David, over time we have taken the position that we wanted to complete the exit of the coal business. We are approaching that moment now, which puts up the strategic issue of what do we do with the other natural resource assets? We always declared them to be non-strategic in nature and it becomes one of the most opportunistic time to exit those business is.

I will tell you the value of our land, the value of our timber is solid. The value of the gas business is a very attractive asset. As we have told the investment community, that is our position and people who are very interested in those assets have started to indicate a strong interest, one that we are ready to have those discussions I would suspect we can begin to have those discussions sometime early next year.

Thanks. Hey, Michael at this point are you close enough to getting the coal done, getting these other things unwound that you have taken the perspective that it's time to start thinking about other strategic restructuring of Pittston to better recognize values?

Yes, obviously that's a constant discussion we always have, what is in the best interests of our shareholders. We have much more clarified picture here, number one, which is very important with the successful conclusion of exiting the coal business and two, getting appropriate analyst coverage to augment what we already have. We are a much simpler company to cover and to analyze. I think that will put us in a completely different position in analyzing what our future opportunities and probabilities are with all our assets.

Thank you.

We will go next to Ed Bray-ph with Sterling Capital.

Good afternoon. Also congratulations. It looks like there's a light at the end of the tunnel. I know you all are looking forward to it.

The first question, in thinking about 2003, and this additional operating expense related to the Veba (ph), I imagine that the, just the BAX business in a more normalized state would more than overwhelm the additional operating expenses. On a $1.8 to $2 billion business, even a 3 percent margins, it looks like that would over well can the operating expenses associated with Veba (ph). Is that right?

Ed, this is Bob. We expect BAX to continue its performance. If you look at that type of approach and look at a 5 percent number, 2 billion operation, if we are throwing off $100 million a year there on the operating profit line, your analysis is obviously correct.

OK. The next question is, do you know your capital loss carry forward position today?

I don't know it exactly today, but obviously by the end of this year we will have a very good number on that as we close out the sales transactions. Part of the reason why I don't have a specific number is as we move forward we are always tinkering around to make sure that we come up with the most efficient tax result that we can. But we will clearly have a very good number for you for the year end.

And that, to the extent you looked at any natural resource transactions next year, the year after, I imagine most if not all of the capital loss basically offset any tax burden associated with those. Is that right?

I would expect that to be free and clear, yes.

OK. The other question is, with respect to Securitas (ph) on the Brinks business, are you expecting changes under the new owner?

In the United States business?

Yes, sorry.

We haven't noticed any change at all in the ownership.

No pricing really changes in it, anything like that?

Not at all. I say that in the context that, you know, three or four years ago there was a substantial change before Securitas bought the rest of that company and their pricing philosophies. It improved dramatically in my judgment. They have not changed in the last three or four years.

OK. And then finally, a couple other questions for Brinks. If you can, I know a couple of years ago this company was operating north of 8 percent, I think on the operating margin line. I don't know, given Latin America, but do you have any sort of feel or assessment for what a normalized margin for Brinks can be when Latin America becomes, I guess, more material once again?

We have always said that seven and a half to eight and a half percent operating margins the operating margin for Brinks. We have been as high as nine and a half percent and every single area in the company was growing and performing. One of the strengths at Brinks is we have a pretty good balance. Overall, I think you should think about seven and a half to eight and a half percent operating margins.

Corporate overhead, general corporate expenses, is there a fair amount of legal in there associated with coal? Should we expect a run rate north of 20 million, kind of on an ongoing basis?

That's a fairly normal run rate for the company. The legal association, the legal expenses associated with the coal transactions that we are working on are in discontinued ops.

Discontinued ops, okay. The last thing, you haven't put out the credit agreement on the new credit facility, but when you look at, I guess, the cash generation at the business and your net debt capacity today, I imagine your operating expenses associated with Veba (ph), the cash contributions will probably be at or below over the near term what the operating expenses are. Maybe they will be at that level. But irrespective of that, you know, it seems to me that the credit agreement would include some, you know, debt to EBITDA or whatever the metrics might be that would allow you to be more aggressive on share buy back if you wanted to be. Am I rating that wrong?

When you look at the expenses that we have for legacy liabilities, not just the ones that would be covered by the Veba (ph), that also includes black lung, workers' compensation and reclamation. The cash flow implications of that for the next few years are higher than the expense side, probably for the next four or five years, by I'm going to guess in the range of $10 to $15 million a year higher. So we are always mindful of that and we also are very mindful as we use our capital to the growth needs of the very good businesses that we have and what we want to do with them.

OK, fair enough.

Thank you.

Great, thank you again.

We will take the final question from Beth Lily-ph with Woodland Partners-ph.

Good afternoon. I joined the call a little bit late. I want to get some clarification. I apologize because I know you probably talked about this. Can you talk about the problems in the quarter with Brinks, specifically with Latin America?

Well, the social, economic and political instability in Latin America which you read about daily in the newspaper and which we have talked about in the last conference calls caused the problem. Historically we have higher than normal operating margins in that area which is a more dangerous environment to work in. Those conditions have worsened, plus the economic instability led to attacks against our business, our industry, our company.

We have taken steps to protect our customers' assets and our employees, our people. We have yet to pass through the increased security costs to our customers, which we are about to do. We will be successful in doing that in most of the Latin American countries and more difficulty doing that in certain countries. It is a very difficult time in Latin America. It particulars to be a difficult time in Latin America for the foreseeable future. We are going to take a very cautious approach in making sure we are making the best, smartest management moves during this difficult time.

Are there specific countries you can reference where the real problems are?

In particular, Brazil is a very good company operation that we have. They have been going through as you know some terrible difficulties. We know, for instance, every time there is a strike or slow down there, we lose a substantial amount of money. There was three of those already in the month of October. How many are going to happen in November or December with the political, social situation down there, I'm not sure. It is a difficult time. We are in the process of downsizing where appropriate and raising prices to our customers who obviously are understanding of the difficult environment and the conditions that we are facing there

Uh-huh. This is more of maybe a one or two-quarter..

You are asking me to project what is going to happen. I don't think the IMF can do that.

In terms of offsetting your increased costs.

We should be able to, in most of those countries, offset the increased costs over the next two quarters, that's correct.

OK.

Thank you.

Operator?

Yes. That concludes today's question and answer session. Mr. Tropp, I'll turn it back to you for additional or closing comments.

Before we sign off, let me take this opportunity to again thank you for your interest in the Pittston Company. We look forward to communicating with you again.

Thank you. This does conclude today's conference. Thank you for your participation. You may now disconnect.