Brinks Co (BCO) 2002 Q4 法說會逐字稿

Good day, everyone and welcome to the Pittston Company fourth quarter 2002 earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to [Burt Tropp] (ph). Please go ahead sir.

Thank you, Lisa. Good morning, everyone. Welcome to our fourth quarter 2002 conference call. With us today are Michael Dan, CEO, and Bob Ritter, CFO. Before turning to our senior executives, a cull of housekeeping items. First our press release is available on the company's Website 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 one hour, will be available this afternoon through Friday, February 21st. The replay telephone number in North America will be 888-203, 1112, or outside of north America, 719-457-0820. The identification number for the replay will be 744055. A replay of this call will also be available on the Pittston Company Website through Friday, February 28th.

And now for 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 S.E.C. form 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 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. Following Michael's remarks, CFO Bob Ritter will address various financial topics related to 2002 and 2003. After these prepared remarks mike am will chair the Q&A session. Now let's get started with comments by CEO Michael Dan.

Thank you Burt. And let me also extend my welcome to those of you who have joined us today.

As you recall, the strategy of the Pittston Company weighs to sell coal fix backs an grow the Brinks Companies. And we've made steps in that direction in 2002 and particularly in the fourth quarter.

I'll startle with an overview of the sale of coal assets. We completed the process of exiting the coal business in December by selling our Virginia and closing down our west Virginia operation. You may recall we exited the Kentucky market earlier in the year 2002. We have achieved about 85% of our value goal. And we're confident that the ultimate value of $100m plus will be achieved through the sale of the remaining properties and assets.

The Pittston Company still shoulders cost related to our heritage as a major producer of coal. But we are now well positioned to start the process of significantly reducing our exposure to those liabilities. Bob Ritter will be discussing some of the financial aspects of the coal sale and legacy liability shortly. More importantly, the disposal of our coal operations will allow us to focus on the growth opportunities at BAX Global, Brinks and Brinks Home Security. We are grateful to the management and employees of the coal group operations who continue to perform at the highest levels of the process of exiting the coal business took place. The process to dispose of the other non-strategic assets is well under way. And we will advise as soon as we can during the course of 2003 on their process.

Turning now to Brinks’ operating results. For the quarter, worldwide revenue declined as expected approximately 5% reflecting the strong fourth quarter of 2001 with the euro distribution. And the economic political and social pressures being experienced in South America. North American revenues were up modestly at 3%. Total international revenue was down 11% for the fourth quarter. Revenue performance in Europe was off only a modest 3% in the quarter, given the strong period one year early. Remember, the euro distribution. For the year revenue in Europe was up more than 15% as the operations in France, Holland and global services registered strong increases and benefited again in the first quarter of 2002, with the euro returns.

North America had strong profit growth compared to a weak performance of a year ago, as margins reached 8 ½% for the quarter, 7 ½% for the year. There was good growth in U.S. global services and strong security performance in the quarter and the full year. Although economic conditions in the United States continue to be challenging, and tend to dampen demand for services in our domestic business, new business wins during the last six months of 2002 will help our business going forward.

In Europe, we were still winding down the cost associated with the euro distribution work. The operating profit margin in the quarter was respectable 8 ½% but still weak at less than 6% for the full year. France is struggling with right-sizing after the euro. Security performance however was also strong in the quarter and the year.

South America remains a very difficult environment, with no signs of improvement in the near term. Revenue was down 28% for the quarter. However, in spite of the very difficult economic, political and security pressures on the business, particularly in Argentina, Venezuela and Brazil, management throughout the region was able to successfully contain the negative financial impact. And report a small profit for the fourth quarter, as well as improved results compared to the third quarter of 2002. But it's still difficult to predict when conditions will improve in that part of the world.

Asia Pacific again showed marked improvement over the prior year. As was the case for much of 2002, that improvement was largely driven by Australia, where pricing improved to reasonable levels. And the business is growing. Other parts of the region on such as Hong Kong are experiencing attractive growth, primarily driven by increases in global services. Overall an improved year, very strong free cash flow. Revenue up 3%, operating profit up 4%, in spite of Latin America's revenue being down 18% for the year and severely impacting operating profits.

Regarding the outlook at Brinks. While some good progress was made last year, there is still room for improvements and we have plans in place to make that happen. We expect the usual seasonal pattern and a stronger half 2003. And we will have to contend with a very strong comparative first quarter because of the euro distribution and return activity. North American needs to grow the top line across all geographical areas and product lines while contending with the effects of strong economic conditions.

Profitable growth of any kind will be difficult in South America until the social economic landscape improves in Brazil, Argentina, Venezuela and, to some degree, Columbia. At this point it is not apparent the current pressures will subside any time soon.

We expect European managers to make progress in their ongoing business as they now have the special Europe project behind them. I do have some concerns with the French manning levels which is receiving management attention at the current type. Asia Pacific, though relatively small, should continue to show respectable progress and growth. Brinks global services, Brinks [fast] (ph) logistics, and CompuSafe are trending positively.

The wild cards in 2003 are most likely to be, number one, security. It is a major concern throughout the world today. But there is also the competitive opportunity for the company that best manages risk. Insurance pressures and costs are high, but tougher on competitors than on us. And second, of course, is Latin America which hopefully bottomed in the third quarter of 2002 and will start to show some signs of improvement going forward. But it's too early to know. We will continue to focus on the safety and security of our people.

Brinks’ balance revenue mix -- 56% international, 44% north America -- continues to service well in difficult economic and political environments on a global basis. Expect strong execution to drive improvements next year.

Now, at Brinks Home Security. Another great quarter of expanding the economic value and cash flow of the business. New installation volume was up nearly 19% for the quarter, 16 ½% for the year. Revenue growth was 9% for the quarter, 10% for the year. Operating profit grew better than expected at 24% in the fourth quarter, and for the year was again solid at nearly 22% of revenue. As we've always said, a key to this business is service levels which continue to be very strong.

The disconnect rate was 6.4% for the quarter, the lowest rate in more than six years. Our award-winning monitoring center, industry leading customer service continues to pay dividends. There are now over 766,000 subscribers that generate over $21m of monthly recurring revenue. All in all, another solid quarter for the customers, employees and management of Brinks Home Security.

As to the outlook at Home Security, we will continue to manage the balancing act between installation volume and profit growth. We'll focus on managing the installation investment while maintaining the highest level of quality service. As a result, the business and recurring cash flow in economic value will continue to grow nicely, and generate substantial free cash flow.

Moving to BAX Global. Worldwide revenue growth was strong in the quarter with an increase of 16% year over year. For the full year, revenues increased 4 ½%. The Asia-Pacific region was a growth driver benefiting from a West Coast port closure, and aided with an increase in air demand. With an increase of 45% year-over-year for the quarter, 26% for the full year. Revenue in the Americas was up 4% in the fourth quarter, still down slightly for the year. But trending in the right direction. Europe also showed signs of growth late in the year with an increase of 5% for the quarter but down 4% for the year.

Worldwide operating performance improved substantially in the fourth quarter and the year. Much improved performance in the both the Americas region and the Asia-Pacific offset weaker Performance in the Atlantic. The continuing focus on strong cost control in the Americas was successful in the fourth quarter as evidenced by a $5.5m improvement in the year-over-year operating results on a revenue increase of approximately $10m.

For the year, the evidence is even more dramatic. Operating profits up $31m on a decrease of revenue of $18m. BAX continues to be well positioned as freight has been shifted to our ground transportation network. The BAX saver product continues to grow nicely. Second day and deferred products drew at double digit rates in the quarter. Good progress on supply chain management in the U.S. continue to focus on our value-added services.

Asia Pacific profitability increased in the quarter and year as operating profits grew 60%. The benefits of the previous investments in our new vendor hubs, increased business activity, and the impact of the air freight on the west coast port strike were realized in 2002. European markets remain weak and may in fact be softening. Strong international volume growth in the quarter was partially offset by flat volumes in the Americas. We will continue to focus on strong service levels which helped drive business to BAX as volumes improve. Pricing pressure continues to be evident. However we understand our cost and its service value as do our valued customers. Our ATI operations again provided solid service to BAX and its other customers while generating increased revenues and approved reliability throughout the year.

As to the outlook for BAX. While Asia Pacific clearly had a very strong performance in the fourth quarter, we'd still like to see some improvements in the Atlantic region and more volume in the U.S. domestic system. Cost control will continue to be a key focus as we work to maintain and elevate our already strong service levels. BAX management will continue to pursue new business priced right while striving to increase profitability. Focus on supply chain management and the ocean line of business will continue. The U.S. and European economies are of course a major concern for our business. And I'm hopeful that most major markets will start to show some signs of improvements over the next two to three quarters. As we saw with BAX's results in the second half of last year further increases in volume should have a very favorable impact on our bottom line.

In summary, I'll wrap it up now by reminding you that our primary strategic goal in 2002 of exiting the coal business was accomplished. Our focus now turns to growing our three core businesses. BAX Global made further progress in the past 12 months. Although performance is highly dependent on economic conditions. We expect further progress in expense control, productivity and capacity utilization going forward.

Brinks Home Security turned in a very solid performance in 2002 and the organization continues to be focused on our customers for life, and anticipate that business will continue to generate strong economic returns in cash flow. Brinks had a reasonable performance, given the very difficult situation in South America. In the near term, South American performance will likely continue to offset improvements in other parts of the world at least for the next couple of quarters. However Brinks’ good balance -- North American, Europe and Asia Pacific -- will help mitigate.

Overall, it was a good quarter for the company's core businesses, I am pleased with the continued progress at BAX Global and the record performance at Brinks Home Security. Looking ahead, we are still operating in a difficult economic environment. While we expect progress for the year, it would not be surprising to see substantial performance variances in any one quarter, particularly during the first half of 2003. Recall the euro comparison at Brinks.

Now, for some additional information on our financial position, here's Bob Ritter.

Thanks Michael. And welcome to those of you who are listening in either today or to a replay of this call. We have a lot of ground to cover so let me get started. I'll begin with a few comments on discontinued operations. Over the last year, we have received approximately $86m in proceeds from coal transactions, roughly broken down as follows: Cash, $42m. Notes, $8m. The net present value of minimum royalties, $16m. And transfer liabilities, $20m.

As Michael noted, we still own a few properties and intend to sell them as conditions permit to realize value. We do not feel pressure to sell them quickly at distressed valuations. Also since they aren't particularly significant any longer to our overall capital position, we only intend to comment on them after sales are completed.

Now as to the accounting for the conclusion of the disposal process which is reflected in the fourth quarter. In preparing our final accounting for discontinued operations, we unbundled the properties which we still own but that we had planned to sell in a package. And compared expected fair values to carrying amounts for all related assets and liabilities, essentially minimum royalty obligations. As a result of this review, we recorded a $19m pretax charge. This charge was recorded within continuing operations in accordance with SFAS No. 144 since the related assets are held by the company.

In addition, we compared actual operating performance during 2002, including any final true-up adjustments to our original accruals for discontinued operations. And found that in total the pluses and mines minuses essentially balanced each other out. Finally we undertook our annual revaluations of liabilities associated with the combined fund premiums we pay also known as the health benefit act obligations. And the expected future multiemployer pension plan liability. As a result of these obligations we recorded a charge of $31.9m after tax to reflect increases in these obligations during 2002.

This seems like an appropriate point to remind you once again that certain costs we've previously identified as legacy costs or retained expenses will be reflected within continuing operations beginning in 2003. I'll give you more detailed information on this in a minute.

Now I'd like to spend a couple of moments on the so-called legacy liabilities and residual expenses. Fluctuations in market interest rates and medical inflation assumptions will push up the net present value of our legacy liabilities by about $100m from the roughly $650m estimated last year. There will also be miscellaneous minimum royalty liabilities and other residual liabilities. But these will be more than offset by retained assets such as tax incentive refunds, additional federal black lung excise tax refunds, and asset sales.

Further, the actual payment of the residual Liabilities themselves and or the funding of the Viba will result in $250m in tax benefits over time. These are currently recognized as deferred tax assets. And of course we will begin to add to the $17m we have in the Viba. Since the liabilities net out to about $500m or less after tax and extend for decades, we'll have amp opportunity to both fund the Viba and grow the good businesses that we have.

Based on our reviews of actuarial reports and estimates of other residual expenses, we expect total legacy expenses to run in the vicinity of $63m in 2003, including $5m to $6m of higher pension costs. Which I'll discuss in a moment. And additional charges for administration. As I mentioned earlier, these costs will appear beginning in the first quarter as a separate line item within continuing operations. Related cash flow for the year, which isn't affected by actuarial assumptions, should only be about $70 million or so. Not changed too much from the level of cash demands we've been covering for the last couple of years. Now I'd like to comment on some other important financial considerations for the company for 2003. I would like to start first with pensions. All of us with defined benefit plans have had to deal with the dual effects of the declining global financial markets on planned assets combined with declining interest rates on the valuations of liabilities. As we discussed in today's earnings release, these two forces resulted in a shortfall in the year end asset values of a few of the company's pension plans in comparison to the calculated value of earned benefits.

As a result we recorded a non-cash charge to equity of approximately $130 million. However, as we have previously mentioned, we have already run the numbers on our debt covenants taking this adjustment into consideration. And there will be no impact on any agreements we have in place.

The decline in global financial markets asset values and interest rates will also have an effect on earnings in 2003. We expect our annual expenses related to the U.S. pension plan to increase by about $22m, with $5m to $6m to be included within expenses from our former coal operations. Now, don't double up on these because they are already in the $63m projection I gave you for residual costs. And the rest being charged to our three service businesses.

The good news to report to you on this front is that the projections developed by our actuaries show that we will not be required to make a cash contribution to our U.S. plan until the 2005 plan year. And that's payable up to September of 2006. As a result, we have some time to see the timing and extent of my market recovery. Or to put in interim contributions should it make sense. We finished 2002 with a tax rate on continuing operations at 37.4% of pretax income. Looking ahead to 2003, I would expect to see the effective tax rate in the same general area.

Now, before I go on to discuss some balance sheet information, I'd like to remind you of the impact of a few of the things which Michael and I have discussed today. As you develop your expectations for the Pittston Company, we expect that 2003 will be another good year for the company as we build on the solid accomplishments of 2002. Our three service businesses should continue to grow earnings and cash flow over the year.

As I noted Earlier, our U.S. services operations will also be incurring about $17m in additional costs related to the company's pension plan. And also keep in mind that including pension costs administration expenses -- roughly $63m or so of pretax expenses from the former coal operations -- will be returning to the income statement. However, the cash flow effects haven't changed much from current levels.

A lot of factors can affect performance of any large global company including global and local economies, political and social instability, capital market performance, interest rates, inflation and foreign exchange. But subject to these factors and of course any extraordinary or unusual items, we expect that we will be able to achieve EPS somewhere in the $1.10 to $1.30 range for 2003.

For those of you who develop quarterly projections, there are a couple of other things to keep in mind as you look at the first quarter. 2002's first quarter performance for Brinks included the favorable effects of euro distribution and predecessor currency recovery work. Further, performance in certain South American countries was better than the run rate we are currently experiencing. Finally you've got to keep the cost increases in mind that I've just discussed.

Now I'd like to make a few comments about the company's debt position and cash flow. You'll see a reclassification from other liabilities to our reported debt this year end associated with a guarantee of debt of $43.2m connected with one of the operations of our former coal businesses. We have already been covering the annual interest payments for it. And expect to be called upon to make the balloon payment when it comes due in 2020. This guarantee was previously included in other liabilities, because it was connected with one of the coal business operations. And we thought that we might transfer it to a potential purchaser of coal assets in lieu of cash. We ended up taking cash and short term notes instead. And frankly I am happy to have kept the debt, because it is a nice piece of long term capital with decent interest rate of 7 3/8%. Further, we may have the opportunity to refinance it to lower the rate even further.

Including this reclassified debt, we ended the year with outstanding debt of approximately $360m. Combining this with roughly $100m in cash, the company's net debt was approximately $260m. This compares with a net debt figure of just above $210m at year end 2001, but about $255m if you include the debt guarantee. Receivables sold in the asset securitization facility was $72m at year end up slightly from the $69m from December 2001. In summary, financings net of cash was roughly $330m, up about $10m from last year's level despite the $35m pension contribution and the repurchase of our remaining preferred stock for $11m.

Depreciation and amortization on our continuing operation for the fourth quarter amounted to just under $50m. And for the full year it was just under $190m. We currently expect 2003 depreciation and amortization to be in the range of $180m to $190m, divided amongst Brinks Home Security at $70m to $80m, Brinks at $60m to $65m, BAX Global in the $40m to $45m range, and other operations at about $5m.

With that, EBITDA for the year from continuing operations -- for simplicity defined as operating profit plus depreciation and amortization -- was once again over $300m. We expect to be up in that range again in 2003, even with coal-related expenses restored. This cash generation capability is a real strength of the company.

As for capital expenditures, spending on continuing operations came in at a little over $60m for the recent quarter, and approximately $205m for the year. Cap ex should be up slightly in 2003, as our current projections range from $200m to $230m. Brinks home security will take the largest share at $90m to $100m as we continue to build the subscriber base and value of the business. Brinks investments should run in the $75m to $85m range, BAX should run at 30 to $40m, and there should be roughly $5m in other areas.

To conclude my remarks, the company had another good year for cash generation in 2002. And as Michael mentioned earlier, we expect a good year again in 2003. We've been easily handling the cash effects of the residual coal liabilities for some time now. And with the disposal process behind us, we can direct the consistent cash generation of our three companies into growing the company as a whole and attacking the liabilities.

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

The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing star and 1. If you are using a speaker phone please allow your mute to be turned off. We will proceed in the order you signal us and we will take as many questions as time permits. Once again it is star 1 if you do have a question. We will pause for just a moment to assemble our roster.

First question is from Jeff Kessler from Lehman Brothers.

Thank you. I do want to congratulate you guys in doing a great job in the fourth quarter from the operations. The frustration that people are feeling is embodied in -- I was just at a security conference where BHS was mentioned several times as the leading light in the whole industry right now. And it's just too bad that the leading light in the whole industry is inside a stock that is trading at the level that it is. I think one of the frustrations that we have here is that for the -- to get a better hold of what will be sold in discontinued and other types of operations, that can go into the Viva so that the $650m go to $750m obligation can be reduced over time.

And I guess the first question related to that is, amongst the other assets that you still have, whether it's gold or timber or gas, can you just elaborate a little bit on what the size of that asset is right now? In other words, how much do you have, so we can try to put some -- we can do our own homework and try to put some valuation on that?

Hi, Jeff, it's Bob Ritter. I'll respond to that question. If you look at our assets that we still have remaining, obviously gas is the premier one involved there. If you look at it over the last few years it's consistently generated a large amount of both operating profit and EBITDA. And we've continued to grow that. And clearly we're very happy with where natural gas prices are today.

We're not in a position right now to come out with any estimated values on the natural gas and timber and land that we own. But obviously, we believe that it will be a substantial figure.

Do you in any of your filings show how much MCF is in the ground or how much you've been generating?

I believe we do. But we'll check on that and -- clearly that will be in the K that comes up --

I assume the same thing for timber, how many acres there are on the timber?

I'm certain we've disclosed how many acres we have.

Okay. Finally the next question is related to Some of the obligations that you just went through, particularly the $17m in pension costs. The $63m is pretty clear. The $17m, does that have to do with a relationship between the actual benefits and the projected benefits?

It's primarily the projected benefits. And the reason that that number has grown so much over the last year is -- there are a couple of factors there. The primary one being the change in the discount rate over time. We have gone down in terms of our projected discount rate by 50 basis points year over year. And clearly that has a substantial impact on the numbers that you would anticipate seeing in an ABO. So that actually pushed up the ABO quite a bit on us, and it was a leading factor in the charge that we took against equity at year end.

Okay. So we should just assume that that -- that $17m, is that going to be a separate line item or is that going to be borne by the various divisions split up?

That will be split up among the three service businesses.

Okay. With regard to Brinks, the company did substantially better in the fourth quarter than we had estimated. And it's a good job considering what was going on in Latin America and the tough comp that you had. I was just wondering, were there factors that helped that -- did the global services business do better than expected? Did the CompuSafe or any of the ancillary businesses come through better than in the fourth quarter?

It was pretty evenly spread throughout the world. And Latin America wasn't as bad as some people expected it to be. I think reading about Venezuela in the paper everyday for the last 60, 70 or 90 days -- whatever it's been -- upset some investors and the potential ramifications of that. I would tell you it was better performance in Latin America, because it's too hard to predict what's going on down there. And strong performance in the North American movement, global services unit, and Brinks overall safety and security performance for the year, recall that we had in my judgment a pretty poor fourth quarter 2001 also.

A final question that is on BAX. The margin in BAX usually increases substantially in the fourth quarter. And while your revenues did increase substantially in the fourth quarter, which is seasonal, your margin did not go up with that. The extra cost that obviously was being borne by something, was it fuel in the U.S. or whatever? Because obviously, while the revenues are fine, you can't be happy with that fourth quarter margin.

Jeff, most of that revenue growth from my previous remarks was from the Asia-Pacific region. And obviously all the lift that was available out there was at premium price. And so our expenses rose at the same time that our revenue rose. Which is why you don't see that strong margin improvement. I can assure you that if that happened on top of our fixed cost system it would have been dramatic. But because it is basically Asian driven you don't see it.

Okay. I have no further questions. Thank you.

Jeff, before you disappear I do have one other comment for you. We've grabbed a copy of last year's 8 K, the property section. And on page 8, under timber, I've disclosed in there that the company owns approximately 225,000 surface acres of land including approximately 125,000 acres of saw timber grade hard wood forest. In addition, in natural gas -- I will caution you this is of last year end -- at that point we said we had 52 billion cubic feet including royalty interests.

Okay. And your position is that you're under no stress to get rid of this -- as soon as possible, but clearly, you understand where the pressures on your stock are coming from. And it has to do with the relationship of these liabilities to not only your P&L but to people waiting to get rid of these liabilities who have been waiting around for several years.

Jeff, as I said in my prepared remarks, the process to exit the non-strategic assets is well under way.

Okay. Thank you.

We'll take our next question from Rob Kirkpatrick from Cardinal Capital.

Let me add my congratulations on your operating revenue. That's really wonderful.

Could you take a moment and review for us your thinking on funding this EBIT trust? And why perhaps you have not begun to fund that with the coal sale proceeds which I think may have been one of the expectations of the investment community?

Rob, that is something that clearly is very much in the forefront of our thinking of what we want to do as we go forward. What we are in the process of doing right now is making sure we understand all the ins and outs that we are looking at this year. What we want to do in terms of business growth and how we want to than funding of our Viba so that we get the most tax-efficient utilization of our cash. We actually had an opportunity where we could have put some money in late last year but that would have been very tax inefficient for us. And so we're holding off until we have a clearer view of that. I wouldn't anticipate that that will take forever. But certainly in the next few months we have a clearer view of where we want to go.

And is the most tax-efficient use of cash your overall driving factor in doing this? So you're not considering obviously the effect on the investment community and what we think of this liability?

Rob, it's a very important factor for us obviously. But it is not the only factor we consider. We obviously understand both the psychological and the legal ramifications of starting to fund the Viba. So we are balancing those to make sure we come out with what we believe is the best package of value for our shareholders.

Okay. And could you take a few minutes and walk me through the free cash flow that you think you've generated by business unit, No. 1? And then No. 2, with particular attention to the capital expenditures that you're expecting for the Brinks side in '03? What's your spending all of that money on?

Okay. I'm not going to get into some of the fine points of how one would define free cash flow. But if you just take a minute to look at the EBITDA by business, versus the capital expenditures that we have. Brinks in 2002 generated over $150m of EBITDA. And spent against that roughly $80m of capital expenditures. BHS was well over $100m and had capital expenditures of somewhere between $85m and $90m. And BAX was over $60m and had capital expenditures last year of slightly under $30m. And that's BAX just having come from a loss to a profit of about $17.5m last year.

So you can see in terms of the ability of these businesses to generate cash over and above the investment needs. We have that we feel we have some pretty substantial and very strong properties in terms of generating cash flow as we go forward.

And then the Brinks capital spending, the Brinks -- the regular Brinks business, I mean -- I understand that BHS requires more capital as you grow it and it becomes the larger. But what about Brinks business?

Brinks is part replacement capital and part growth of the business. The business is continuing to grow and we want to continue it to grow. So we want to put capital expenditures in wherever we can get the kind of rush that Michael expects from it.

What kind of hurdle rate do you have on a business like that?

We have typically used for our EVA calculations a 12% rate after tax.

Okay. And then to follow up to Jeff Kessler's question about BAX. Can you walk me through what the comparison was between the fourth quarter and the third quarter on the domestic side of the business? And why with higher revenues you swung from a profit of roughly $5m to a loss of roughly $5m?

Aircraft repairs, mostly. We do heavy flying. That would be one factor.

In addition, Rob, there were surcharges that were starting to come into play during the quarter. And those typically lag behind the price increases you see in cost of fuel. Plus, the fact that with the West Coast dock situation, much more significant factor in the fourth quarter than it was even in the third quarter. There were additional costs associated with making sure that our customers were well served. That you don't necessarily recoup within the quarter but you recoup over time.

Okay. So you had up front costs on serving them?

Right.

Remember, the advantage of Asia-Pacific volumes was offset -- which we talked about at the last call, Rob -- by the West Coast port being plucked. The ability of getting freight onto their fixed cost system.

Okay. Then a final question, are you seeing much in the way of benefit from the federal government as they move military efforts through to the middle East?

Most of that's being done with wide body aircraft. And we fly long range narrow body aircraft.

Great, thanks so much guys.

As a reminder press star 1. If you have a question. We’ll take our next question from Ed [Brief] (ph) with Sterling Capital.

What is the current NOL position at the company?

Currently, Ed, my guess is it's around $50m. We are still in the process of wrapping up what we think we're going to be including in this year's tax filing, which is actually not technically due until the end of September. But we're obviously accelerating that so we understand the ramifications of whatever we might do. But in addition to the $50m or so that we have from tax benefits that we could touch immediately, remember that we have Viba financing. As we put money in there, that's going to help us shelter income that we generate here in the United States.

Okay. I thought I had the book value, at $267m at the end of last year.

You're looking at the deferred tax asset and the long term asset side of our balance sheet. And a large chunk of that relates to the recording of the legacy liabilities. And as you know, those type of expenses we're not going to be able to get tax deductibility for them until we actually pay the medical benefits etc. or put money into the VIBA.

More cleanly, if we were to look at the deferred tax cash inflows, the statement of tax that will materialize over the next couple of years. What should we expect on an annual basis, should we assume you're not paying much in cash taxes in the next three or four years --

I'll turn that around to make sure I'm clear. And if I'm not, stop me and I'll do it again. We do not expect to pay federal taxes for the next several years because of the tax loss carry-forwards that we have. In addition the ability to fund the VIBA and take care of certain other liabilities that we have which are tax effective. From that standpoint we don't expect to pay taxes here in the U.S. But we will have some state taxes and we will have foreign taxes. And if you look over the last couple of years they've probably been running somewhere between $20m to $30m a year. But that's what I would anticipate going forward for the next few.

Okay. The next question is, if we -- maybe this has already been answered. But you have $17m in the Viba today. Is there any expectation of over the next year, is it really dependent on the timing of asset sales to determine what the level of funding will be? I mean, there is no goal you have for the next year or anything like that?

Not a direct goal. And it's going to be a factor of obviously what kind of cash generation we have from our regular businesses, asset sales that we have, the tax situation that we find ourselves in, and any potential opportunities that may come our way to help expand the businesses. And to generate an even greater cash flow in the future.

Okay. And my curiosity there is, if you were to look at selling other more major assets of the company. I guess I'm curious what level of funding would you be able to confidently say you could, in essence, ring-fence the liability within the remaining division. And then if a buyer were to look at one of your major divisions they effectively wouldn't have to look at the continuing obligation. I mean, there's a $750m obligation and some of it's non-health. But what level of assets in essence justifies a free and clear asset of say BAX or something? Have you ever done that? I'm sure you've done the work internally. But is there some ring-fencing threshold that we ought to think about?

We obviously keep that in mind and did some modeling of our own. Any negotiation of that type, in that type of a situation -- again this is speculative -- will come down to the type of asset being sold and the size and comfort level of the acquirer. So for me to be able to pick out a number would be extremely difficult. And all I can assure you is I wouldn't be right.

I imagine Brinks holding company would have to offer an indemnification for any transaction that indemnify them for any obligations for this VIBA? I suppose that would be part and parcel of any asset sales?

I can't answer that because it sounds like you would be negotiating for a buyer we wouldn't know about.

Okay. On the Brinks home service. What level of customers do you have to get to before you have to think about a new monitoring center?

We still have capacity for over a million customers at that particular center. And it seems with technology marching forward that continues to push itself farther and farther out. Three years ago when this was asked it was like 500,000. I would tell you probably in two years we'll need a new center. And right now the capital cost of a new center is about $20m.

And so the capital spending is primarily I suppose on I.T. and trucks?

90% of the capital spending is new accounts.

Is new accounts, but that's -- oh, okay. Never mind, I've got it. Thanks so much.

You're welcome. Thank you.

That does conclude today's question and answer session. Mr. Tropp I'd like to turn the conference over to you for closing concluding remarks.

We would like to thank you for your interest in the Pittston Company and we look forward to communicating with you again.

That does conclude today's conference call and on behalf of Premier Conferencing we thank you for your participation.