Brinks Co (BCO) 2003 Q1 法說會逐字稿

Please standby, we are about to begin. Good day everyone and welcome to Pittson Company first quarter 2003 earnings result 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 Traub. Please go ahead sir.

Thank you Amber. As some of you know, my long-planned retirement date is today. Over the years, I've communicated with many of you and I have appreciated that opportunity. At this time, I'm pleased to introduce Pittston's new Director of Investor Relations, Scott Dudley. Scott?

Thank you Burt. Good morning everyone, and welcome to our first quarter 2003 conference call. With us today are Michael Dan, Chief Executive Officer, and Bob Ritter, Chief Financial Officer. 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, 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 an hour, will be available this afternoon through Friday, May 9th. 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 701334. A replay of this call will also be available on Pittson Company Web site through Friday, May 16th. And 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 Security and 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 Pittson Company assumes no obligation to update any forward-looking statements made. This call is the copyrighted work of Pittson Company and may not be rebroadcast, sold or otherwise distributed without the express written permission of Pittson Company. Now turning to today's agenda. Michael Dan will begin with a general overview and summary operational comments for each of the major businesses. Following Michael's remarks, Chief Financial Officer Bob Ritter will address the various financial topics related to the first quarter results and outlook for the remainder of the year. After these prepared remarks, Michael will chair the Q&A session. Now lets get started with comments from Michael Dan.

Thanks Scott, I appreciate it very much and also Burt, thank you very much for your great service here, at Pittston will (ph) go on retirement. Let me also extend my welcome to those of you who have joined us today. I will start with some general comments. First, let me say that we are disappointed with the results of the first quarter, which were impacted by continuing difficult economic conditions in several parts of the world, primarily Europe, Middle East and South America. These conditions more than offset the positive steps we have taken to improve our performance. Brink's Home Security continues to post solid results in growth rates. We are very pleased with their performance. Our overall cash flow remains strong. We are very confident for the full year and as a result has announced that a $32m contribution to our VEBA in April. The total fund now approximates $50m. We continue to make progress on the disposal of our other non-strategic assets. In fact, we are currently evaluating an initial round of bids for our natural gas and timber assets, which we received just this week. We have a team working on it full time, and we will keep you appraised as appropriate in the future.

Now turning to Brink's operating results. For the quarter, worldwide revenue declined 4% due mainly to the one-time benefit of the Euro distribution in first quarter a year ago. There is also quite a bit of exchange revenues (ph) running through with a very strong Euro and continuing weakening Latin American currencies year over year. Overall, that was approximately a wash. Similar to our experience last quarter, North American revenues were up only modestly about 4% in the first quarter. Our total international revenues were down 10%. North America's operating profit was flat from a year ago, while margins decreased slightly to 6.1%, mainly pension and healthcare costs to the tune of about $2.5m were recorded in the quarter, which were mostly offset with productivity improvements and rate increases, which are ongoing and will continue. There was good solid growth in cash logistics and US Global services. Our economic conditions in the US continue to be very challenging and tend to dampen the demand for services in our domestic business, particularly ATM and coin. The previous business wins will continue to help our business later in the year, as always happens. Market conditions, however, remained difficult in Canada. However, some bank tenders are in the marketplace now and it bodes well for our future there. Revenue performance in Europe was down slightly in the quarter, about 1% given the strong period of the Euro and the return of the retired currency. However, operating profit was down sharply in France, Germany, and the UK where our major concerns lie. Our European operations have further work to do to right size following distribution work of the Euro. The economy was very weak in the first quarter and the Middle East conflict virtually stopped currency reparation throughout the Middle East and Europe. Security performance in Europe was very good in turn in the quarter. Turning to South America, it remains a very difficult environment with no signs of improvement in the near term. Revenue was down 29% in the quarter. Year-over-year at four million dollar drop in operating profit. As you recall, Latin America tailed off throughout last years. This quarter is particularly difficult comparison. The economic, political and security pressures remain on the business particularly in Argentina, Venezuela and Brazil. Management throughout the region was able to successfully contain these negative financial impacts and report a small operating profit in this first quarter. It was just slightly better than the fourth quarter of last year. It continues to be very difficult to predict when conditions will improve in that part of the world. Asia Pacific again showed solid improvement over the prior period. Revenues up solid 15% and operating profit improved inline. Improvement continued to be largely driven by Australia where the business is growing and we are having success translating higher revenues into improved operating performance. Others parts of the regions such as Hong Kong are experiencing attractive growth primarily driven by increases in our global services division. At the same time, the spread of SARS has impacted the regional economy. For example, trade shows and other events are being canceled or postponed and shipments schedules are feeling some of these negative effects. Regarding the outlook it brings we ended last year knowing that we needed improve and we still have work to do despite some notable progress made in the first part of this year. We expect the usual season pattern of stronger second half in 2003. North America appears to be holding its own. Europe and Latin America will be challenged, more confidence in Europe. In Europe we have taken the steps designed to reduce cost going forward. Improvement will begin to be seen in the second quarter in the second half of the year. Management changes at country levels have taken effect and are proving to be the right moves. We see continued revenue and profit growth opportunities domestically in our value-added products, CAS (ph) logistics, copy safe (ph) and ATM. Profitable growth of any kind will be difficult in South America until the social economic landscape improves in Brazil, Argentina, and Venezuela. And again we don't expect any immediate change. Asia Pacific were relatively small should continue to build on a solid momentum. We have also announced the very difficult decision to close the [Inaudible] headquarters relocating our people either to the Richmond office here or to Dallas, Texas. This will take place during the second and third quarter of this year. Now turning to Brink's Home Security. Brink's Home Security was the bright spot this quarter, turning into another good quarter of expanding the economic value in the cash flow of this business. New installation volume growth was nearly double-digit. Revenue growth was 10% for the quarter, but this net rate improved again and is not at 6.5%. A low rate is best in class for our industry. The growth in subscriber base in the lower disconnect rate enabled Brink's Home Security to achieve a record operating profit of nearly $17m in the first quarter, representing growth of 10%, as we had stressed before, materials business in service levels, I'm pleased to say, they remained very strong. At the quarter end, we had more than 780,000 subscribers representing an 8% increase over the year-ago quarter. Monthly recurring revenue increased to $21.6m from $21.2m at the end of last year. All in all, another very solid quarter for the employees and management of Brink's Home Security. As to their future outlook, we will continue to manage the balancing act between installation, volume, and profit growth. We will continue to focus on managing the installation investment while maintaining the highest level of quality service. As a result, the business and recurring cash flows will grow nicely. It should continue to add economic value and substantial cash flow.

And moving to BAX Global, worldwide revenue growth was strong in the quarter with an increase of nearly 12%, over 90% of that was reflected in the international business, also was impacted by few home security surcharges. Australia, China, Hong Kong, and Japan had strong increases. The Asia Pacific region was the worst driver with an increase of more than 30%, year-over-year. Europe also showed a good growth with revenues increasing 11% in the quarter. However, much of this growth was related to currency exchange and surcharges. Revenue in the Americas was up a modest 2%. A good progress of logistics in the United States, BAX [Inaudible] and deferred products were up 21% year-over-year, now, 40% of revenue in the US. We continue; however, to see declines in the overnight in MRR volumes. The worldwide operating loss was reduced to $5.5m in the quarter. The continued strong performance in Asia Pacific region and some improvement in the Americas was offset by significantly weaker performance in Europe. European operations suffered from both volume and margin erosion, high transportation cost, including carrier surcharges and operating expenses were principal factors, and of course, there was some mix issues. Europe markets and economic conditions remain weak. Asia Pacific operating profits grew more than 50% in the quarter, reflecting their strong performance in China, Australia, and Japan, offset somewhat by declines in Malaysia and Singapore as manufacturing activity continues to shift. We continue to focus on a strong service levels, which helped our business to BAX, when volumes improved. Pricing pressures continue to be evident. However, we understand our cost in our service value as to our customers. Good discipline in a very difficult environment. Asia operations again provide a solid service to BAX and its other customers to continue to focus on increasing reliability. Now, for the outlook for BAX. Asia Pacific fairly had a very strong performance in the quarter. We need improvements in the Atlantic region and more volume in US domestic overnight system. Cost control will continue to be a key focus as we work to maintain and elevate service levels. BAX management will continue to aggressively pursue our business striving to increased profitability and control cost. The US and European economies are the major concerns for this business as we look forward. We continue to look for early indications that major markets will improve for the next two to three quarters. Figures for April in the overnight system are not encouraging, reflecting the economy in the United States. As we saw BAX's results in the second half of last year, steady increases in volume should have a very favorable impact on the bottom line.

In summary, I will wrap it up by saying, having now accomplished the goal of actually in the business, our focus is turned to even greater degree and growing our three core businesses. As you know, we will be changing and able to fix in company to the Brink's company on May 5th subject to shareholder approval. However, it was a not a good quarter for the company's core businesses, primarily due to microeconomic factors and geopolitical events. I'm pleased with the record performance of Brink's Home Security. We expect this business to continue to generate strong economic returns in cash flow. At BAX Global, performance is highly dependent on economic conditions and higher volumes. We are looking for further progress and expense control, productivity, and capacity utilization as the year progresses, also, normal [Inaudible] increases will occur. Brink's had a mixed performance given the very difficult situations in South America and Europe. They continue to focus on improving the performance in Europe, plants are being executed and are completed by the end of the second quarter. I'm pleased that we are in a position to begin funding of VEBA in April. Overall, our company's cash flow is positive.

Looking ahead, we are still operating in a number of difficult economic environments and while we expect further progress in a year, it's most likely to occur later. Now, for some additional information on our finance position, here is Bob Ritter.

Thanks Michael, and welcome to those of you who are listening in either today or to a replay of this call. Before I start, Burt, let me also express our appreciation for [Inaudible] you've given us over the time here. I'm very proud to tell people, I had worked with you. Now, let me begin with the few comments about the first quarter's performance and some thoughts about the second quarter. At Brink's, the US turned in a solid performance despite increased pension and medical expenses, which we discussed a couple of months ago. Asia Pacific's results also were good. We cautiously optimistic that results in Latin America may have bottomed out as operating performance was positive for the second consecutive quarter. Europe has continued to struggle with high costs, but that's being addressed as Michael mentioned earlier. We'll likely see the effects of those actions during the second quarter. The 2002 second quarter had some, but certainly nowhere near the level seen in the first quarter of revenue and operating profit from completing the euro work, which will not be repeated this year. The first quarter this year included a couple million dollars in cost to realign resources to business needs. We'll probably see some more in the second quarter. Brink's Home Security had another good quarter as it continued to build its subscriber base, operating profits, and cash flow generation capabilities. Remember though that the second quarter is the beginning of moving season in the US. So, you should expect to see the disconnect rate and the resulting expense go up somewhat in comparison to the first quarter. BAX Global's performance in the first quarter was constrained by the US and European economies, the specter of war in Iraq, and a multitude of surcharges and rate increases. We'll have to see what the second quarter's global environment brings to BAX. To finish on my comments about the upcoming quarter, I'd like to briefly call your attention to the $2.6m pre-tax gain we expect to record on the recently concluded monitorization of the bulk of the royalty and inventory obligations we received as part of the proceeds from the disposal of our coal business. The roughly $20m we received, replaced the cash stream which would have extended over five years. More importantly than the gain, the monitorization further demonstrates our commitment to convert non-strategic assets to cash when we can obtain fair values for them. Now briefly looking to the full year. As Michael commented in the earnings release, we anticipate EPS on continuing operations to be near the low-end of the one dollar ten plus range we previously announced. With the uncertainty of the war, illness, and other factors hanging over the global economy, we're eagerly awaiting further clarity. I would also like to remind you that along with reporting a gain, should we complete the sale of the bulk of the natural resource businesses, GAAP will require us to reclassify out of continuing operations, all historical revenue and earnings performance for the sold businesses. We hope to have greater visibility on all of these issues within the next few months. Now, before I provide you with debt and cash flow information, I'd like to briefly comment on the VEBA. We were pleased to be able to make another contribution to the trust within the last few days, which raised its value to about $50m. This will show up on the company's balance sheet when we report the second quarter. We remain resolved to fund the VEBA on a prudent basis after taking into account taxes, capital and growth needs and changes in liability amounts. Now just a brief related note on our US take position. Although we are still in the initial phase of preparing our 2002 tax returns, early indications are that we will be able to carry back the losses incurred in 2002. This will free us up to benefit from the tax deductibility of the VEBA to offset US taxable income on a go-forward basis beginning this year. Finally, I'd like to make a few comments about the company's cash flow and debt position. Depreciation and amortization for the first quarter amounted to just over $40m. We currently expect 2003's depreciation and amortization in the range of $160m to $170m, divided among Brink's Home Security at $50m or so, Brink's at $60m to $65m, BAX Global in the $40m to $45m range, and other operations at about $5m.

For those of you who calculate cash flow indicators such as EBITDA, I suggest you combine this depreciation and amortization information with the non-cash BHS-related revenues and expenses reflected in the other financial information table in today's release. We plan to present this information every quarter to help you update your models.

As for capital expenditures, spending came in at a little over $45m for the recent quarter. CAPEX should be up slightly in 2003 over 2002, as our current projections range from $200m to $220m. Brink's Home Security will take the largest share at $90m to $100m as we continue to build the subscriber base and value of the business. Brink's Investments should run in the $75m to $85m range; BAX should run at $30m to $40m; and there should be roughly $5m in other areas.

As for financings, we ended the quarter with outstanding debt of approximately $380m. Combining this with roughly $150m in cash, the company's net debt was approximately $265m. This compares with a net debt figure of just above $255m at year-end 2002. Receivables sold in the asset securitization facility were $65m at March 31, down from the $72m for December 2002. In summary, financings net of cash were roughly $330m, down slightly from the year-end level.

That's all I have for now. Amber (ph) , we're ready for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star and one if you would like to ask a question. And we will pause just a moment to give everyone a chance to signal. We will go first to Jeff Kessler, Lehman Brothers.

Thank you. Can we go through a couple of the operating difficulties here you've gone through in the first quarter in Brink's? I realize there is a lot of cost occurrence with some of these micro economies. But, when you take a look at and go back to 2001 the first quarter and then 2000. And in fact, if I take my spreadsheet and I go back to 1992 and 1991, I can't find a quarter in which we're hitting this low a margin in Brink's. I'm just wondering, was this just a combination of factors or can we get back to a typical 6-6.5%. And I know that you guys would like to get it to 7-7.5% type of margin at Brink's, realizing the first quarter is usually the low end, I know that. But the 3.5% on the margin in Brink's is pretty low for you guys.

Hi Jeff. Good morning

Hi.

First of all, recall that Brink's has basically three major geographical operating units, Latin America, Europe and North America. And as you know, last year, the deterioration of Latin America and the sociopolitical problems down there and the devaluations has affected one of those arms dramatically. In South America, Latin America in particular, has always been our strongest margin earner. Coupled that now towards this first quarter with Europe, the economy screeching to a halt and France and Germany and the UK issues that we have and you pile them on top of each other, and you end up with the results that you see. Actually, they're not unexpected. We knew, going into this year, with this first half for Brink's would be a difficult environment as we adjust the, some of the operating and management issues that we had to face in Europe. We made management changes in France in the fourth quarter. We made management changes in Germany in the first quarter to be able to make sure that we're getting back on track in those areas. I expect to see improvement in Europe in the second quarter and much more so in the third and fourth quarter. There were a couple of million dollars as Bob mentioned, in cost in Europe as we took some right sizing during this quarter. We'll probably see the same amount in the second quarter, all of which makes great business sense that our results improve back to more normalized levels as we go forward. I can't say the same for Latin America. I just don't know. Things in Venezuela show no signs of improvement, no signs of improvement. Things in Argentina show very little signs of improvement. And Brazil continues to be under pressure. And so, the international results of Brink's will continue to be under pressure as we go forward this year. Of course, we still have the North American business unit, which is, I think that really had a pretty good first quarter, considering the additional expenses that they had to bear and made that up with some good productivity improvements during the quarter. I think there is some more to come. But, the industry itself is under tremendous pressure, not only in Latin America and Europe, but in the United States. And we're going to lower this storm well, brings us vast diversed company and companies that are performing very, very well in Europe in spite of the difficult economic conditions. You'll see things improve. Getting back to this 6 and 7% operating margins with Latin America struggling. It'll be a little bit difficult until probably later part of this year. And we can help in Latin America each other.

Okay. Going over to BAX, last year one of the positive surprises you guys pulled out was in the second quarter on $440m revenue you were able to get BAX back into the black. I'm looking at the first quarter here and you're $20m above that -- 19m above that, still showing a loss realizing if it is the first quarter, you're seasonally weak in the first quarter. I understand that, I' m just wondering what are the moving parts in terms of margin versus revenue that gets you $20m more of revenue and yet you're still showing an operating loss where, you know, again in the second quarter of last year you actually be able to make a profit of $20m less?

Unfortunately all of it came from International operations in Asia, the vast majority came from Asia. And as you know surcharges on fuel and security and tightening up the amount of space affected some of that, but we actually book to the bottom line, the strong increase, not putting profit. But the problem is in the North American system. You know, we've made further cost savings and changes during the first quarter and we've obviously had the additional pension and health cost that are also running through the BAX organization, which is a US issue. And so, overall, you know, BAX's first quarter isn't as disappointing if you factoring those three items. The question is what where [Inaudible] volumes in the United States business for the balance of this year and I will tell you that the April month results are not encouraging, but like everything else in this business, you know, the last 40 days of the quarter that make the difference, some of the things move. And I don't have any better crystal ball than anybody else where this economy is going to go. Management's focused on continuing to take out cost to continue to improve service qualities and grow those other businesses and we are doing each and every one of those strategic steps.

Have your Asia volumes been affected over the last month or so by SARS?

We haven't seen as yet. We're starting to feel it, people just stop travailing. I mean, you know, business shows are being cancelled both in the BAX side and Brink side. Conventions aren't happening. You know, people are canceling meeting and so, sometime if you are out there trying to generate new business and deal with customers, nobody wants to meet with you. It's going to have a knockdown effect of that. So, we might have some effect of that in this quarter, yet Jeff, it is too early to tell.

One final question on the coal business or at least the legacy liabilities. I am noticing that there are some administrative costs that are appearing on top of the minors' benefits of about $3.5m a quarter. Are those going to be ongoing costs?

They will for the second quarter and then will start to dribble down in the third and fourth quarter a little bit. First of all, we're still operating, the natural resource (ph) businesses, the timber businesses, and servicing the legacy liabilities. We're also providing services to some of the buyers all those services at the end of the second quarter and those costs will start to come down somewhat.

All right. One final note. Given what you know that I know about the alarm (ph) industry what we're doing and who else (ph) has been making announcements right left. I will congratulate you guys on bringing some security. They are shining right in that part of the industry right now.

To do a great job for us. Thanks Jeff.

We'll take our next question from Michael Hoffman, FBR Bank.

Hi Mike, how are doing?

Hi Mike.

Help us a little bit about the Brinks, [Inaudible] closure. Is there a charge showing in the second quarter with the cash implications of the move, and what's the long-term cost save?

All right. Well, first of all, you know, we have announced it that last month and we are in the process of having our valued people there to make a decision on whether they are going to relocate or not based on their personal circumstances. It's expensive to relocate people. It's relatively inexpensive to pay out the severance package to these people. They are making those decisions now. Our best estimates at the current time is, that it will be $5m or $6m severance cost that will play out over the next couple of quarters, and the benefit from this move will be in the similar range on an annualized basis.

Okay.

Coming of that is getting a little bit more difficult. I think Bob should make a comment on that.

Yes, Michael. Under the new accounting pronouncements associated with this, the cost of that would be spread out most heavily over the second and the third quarters and a little bit will dribble off into the fourth quarter, but we'll see the effects coming up very quickly.

And is five to six all cash too or is some of that non-cash?

It was all cash, maybe all cash.

Alright. And will that, they keep changing on these accounting rules, just trying to make the life more transparent, seems like it's more opaque. Where would that show up? Is that going to be an extraordinary item or is that going to be in operations?

It will be in operations, but will disclose the amount for you so that at least we can shed a little like that way.

And then, to get my point, out of beating your dead horse on Brinks [Inaudible] International, I guess the why question is this, why can't we do it faster in right sizing? If it's ugly it's been ugly Europe, it's not going to get any prettier. Why don't we go faster and fix this, the cost structure faster?

First of all, addressing cost structures in many European countries is very, very different than any place else in the world, and close consultations have to take place with a variety of parties. At the same time, we have got some management issues, local management issues that are not being satisfactory addressed, which is why we made some changes. But you know, all those decisions that have been made, the steps have been taken, the plans are in place, and we will start to the benefits of, some of that already in the second quarter and much more to follow on the second half of the year.

Okay. So, if I wanted to figure out what the potential sort of corrected margin is, I take out $2m of cost in this quarter for the international business or set in a different way, international instead of doing $2.5m of profits would have been more like 4-5m in profits, ex the cost of rightsizing?

During the quarter yes.

And therefore, that's what it should look like in the second half because I won't have those costs?

In second half, we wouldn't have any of those costs, that's correct. The restructuring effects taking place in Europe will be completed by the end of the first half.

Okay, and then, what's going to make that number get bigger assuming that Latin America doesn't help you?

Because Europe will returned to, I'd call historic levels of profitability that particular time. We have also made an acquisition, relatively small acquisition in Belgium which is going to improve that operation quite a bit which is closed during the first quarter. The wildcard in the International operations is going to be Latin America. It's not going to be Europe. Europe's got a good solid plan in place, and it's executing that plan and it is on course. Just different plan in a couple of different countries. Latin America is to be issued on the International side.

But Latin America can be looked at as it isn't going to get any better, it's not going to get any worse?

I'd tell you that's probably a pretty good assumption.

So, that's sort of quantifiable. So the real leverage here is this, can you materially improve international profits by rightsizing Europe?

Yeah, well, it's more than just Europe. You have to understand that, Europe came to a screeching halt during the Middle East conflict. Nothing happened. No international travel. No money. You know, we have a big reputation business that runs throughout the Europe and the Middle East. It just ceased to exist. All that is starting to come back, and that hurt us during the first quarter also Michael. You know, already those volumes are coming back into April. People are traveling again. And so you know, the effects of the conflict in Europe were much more damaging than at people here in the United States realize. People just didn't try to fly.

Okay, and then on to BAX global, I would have thought the volume improvement year-over-year that was happening on the heavy airfreight world would have suggested the margin and difference between a year-ago's loss, and this year loss would have been far greater. You would have lost less money. You still would have lost money because you do in the first quarter. I am struggling a little bit why you didn't get more help there from that significant volume improvement?

Michael. This is Bob Ritter. Let me just take you through a couple of issues that I think might be helpful to you in that regard. The first one on the international side, which also affected the US to a certain extent, you know, that the carriers have been cutting back a lot on a number of planes they've been flying. So, the amount of belly space available was severely constricted both from Asia to the US and within the United States. What is there is it certainly firm the market up and drove rates up there, so the prices we're able to recoup that by charging after customers, but we -- in essence what we're doing is increasing revenue without increasing margin. In fact, if any of the margins withdraw, it's because of that. We had a same situation with surcharges both domestically and internationally and those surcharges came about for a whole host of reasons, some of which are starting to peel back. A further issue in the United States, as Michael had mentioned before, are EMR which is our - the guaranteed overnight and our overnight packages have dropped dramatically -- not dramatically, but they've been dropping in US. That's being replaced with ever increasing ground transportation where we have very good margins, but the yields on those are very different. So, we have a whole bunch of different factors that have been playing against the margins during the first quarter and it's the - those are the reasons why revenue was up, but the margins are down.

But then, I mean, if I follow up that line of thinking, you know, local guidance in the ground are watching pricing rise to capacity constraints and you're going to have to raise your prices too. Who's making the decision to adjust the price correctly, so the margins stay intact? I mean, it sounds like bad pricing decisions are made locally.

Michael, the overnight product, VMR product, is on our fixed cost system in the United States. Those costs don't go away. And if the freight is down to plane, the revenue goes away. That is on the truck. It's as simple as that.

Okay. And so, are you putting the root of this huge difference on just North America more than Latin American surcharges and tight capacity. I mean other than Asian tight capacity?

Asia is also a very big factor in this. So that, as Michael had mentioned before we've had a big increase in Asia and a lot of that work is coming here as freight-forwarding work. So, we have to remain competitive with other freight-forwarders and all of us are capable of passing through increases we receive. But, you don't necessarily maintain your margin when you pass that increase.

I mean, the last of point of, sort of, ask about it, I mean, other freight-forwarders have been reporting and it doesn't look quite as bad.

They don't have - they're freight-forwarders, they don't have a fixed cost system in the United States.

That was the time you got rid of the fixed cost system?

No, we continue to tweak it and do everything else and we're looking for other ways to put additional freight down in the system and we got some action plans do those types of things. But you know we need overnight system as part of our worldwide global system. We have got it right-sized now. We should got to get a little break from the economy. We are not hoping for it, that's why we are working on the cost side and once again we have couple of million dollar of cost increases run through the Americas business based on the health and pension cost which we have worked and so it just offsets some of the cost cutting that they were very successful in the first quarter. I just [Inaudible] for the rest of this quarter. I just don't have it. Our overnight volumes continue to deteriorate, that has put some more pressure. That the overnight volume has come back. The leverage there once again is very attractive and April doesn't make a quarter. I am not encouraged with April's numbers.

Okay one of its added points you gave, as a corporate number under the operating profit, year-ago is $5.5m as a cost through a negative issue at $7.2m. What's the big step up in that number, why do that go up?

Primarily, we have had some people increases here, so salaries were up somewhat but also the benefits that were paid are up and I think you are going to see the number over the next couple of quarters will come down somewhat. Certainly, I do not expect to run at the same high level we saw in the first quarter.

All right lastly you did give guidance of the 1.10 or 1.30 go to the low in, how do you get there as you sort of lay it out over the next three quarters. We are not getting into obviously precise guidance. I mean, how would you talk to the street of that the way to think about where that shows up in the next three quarters?

Michael, we decided last year because of the realistic disposition of the core assets and international resource assets and some of the challenge we have that we are going to give an annual guidance figure and stick to that and not get into this quarter-to-quarter game which we don't think is productive for anybody and we are very clear that we were concerned about the first half of 2003. We think the events in Europe and some of the, you know, this war happening and the economic affects that we felt. We are going to be lower-end of that range that's why we got it that range. We are going to stick to the annual guidance. We did that for the best interest of our investors and shareholders.

Okay, I'll try one other way at this time. Do you lose money in the first half and make money in the second half or are your breakeven in the first half and but make the rest of it in the second half?

Michael, I think the easiest way to approach that is that we expect to be doing better going forward throughout the rest of the year. We do have some seasonality in both brinks (ph) and back (ph) which has quite a good deal of seasonality so our expectations incorporate that.

Okay thanks a lot.

Thank you Michael.

Just a reminder, that's star one, if one of you like to ask a question. If you find that your question has been answered, you can press star two to remove yourself from the queue. Just a remainder that star one to ask a question. We will take our next question from David Kimball with Thomson Davis & Company (ph) .

Hi, I just want to ask about [Inaudible] , is that -- do you have those installations available.

I don't have the precise number on my fingertips, but as you know, we signed a pretty good contract with Exxon Mobil and we are in the process of rolling out and installing that. This would be one of our better years on installations, but that goes on throughout the year.

So, it's for the area, if you would suggest the 20% increase in installations.

Yeah -- It will be in that range. It is going very well. We are very pleased with where we are with our [Inaudible] product.

Is there a really good situation for the domestic company and there is no -- you can't do it overseas or is there any thought of doing it international?

Yeah, we have actually a pilot started in Canada, which is going relatively well, and got it pilot started in Brazil that started. But, too early to tell how that actually go. Canada of course is a much smaller market, although Brazil isn't, there is a mist in Brazil that we are cautious about David. We are not sure what the inflation rate is going to be, which will effect how many bills going to these machines. And so, we are changing the model a little bit how we sell it. But, we don't see any application forward at the current time in Europe.

Right. On SARS, I came in the conference call a little late and SARS had, beginning you said that it was having some impact and then you seem to say that primarily on passenger travel so far. Is that the way --

The question I was answering David, was what are the serious effects of SARS and what we are seeing is, we are seeing lot of business meeting cancelled or conventions cancelled or people will not travel in to that region to discuss, you know, logistics, opportunities or things like that, that are being cancelled. So, that the business pipeline has been effected more than anything else. But, it is too early to tell whether there is going to be a material impact in the second or third quarter yet. As you know, there is lot of very, very frightened people, especially in Asia Pacific at the current time and we are dealing with those issues on an employee basis, not our customer's basis.

All right. And as far as BAX is considered, I had figured that last year's first quarter was around a 29% gross margin on International business. And I think if that has lessen this year from what your comments were?

Yeah. Because of some of these surcharges and the timing of [Inaudible] charges and passing it through to certain customers, those margins get high pressure put on them. That is correct.

And what about the possibility of recovering some of that in the second quarter?

There is always a tale to these surcharges that you pick some up on the end but rest (ph) of all volume is going to be, is there going to be an affect on the hitech industry and what's been shipped, how much capacity is coming over the Pacific Ocean as we go forward with the SARS and what the airline industry is doing, those are all pieces that are moving on the board David and it's pretty tough to call that.

And there has also been a pick up in some old cargo aircraft recently, so, I thought maybe that would be some offset to the downturn and belly capacity?

There is some but it all depends on what the airlines do, because that's probably the most attractive rates.

Okay. Thank you.

Thank you.

Thank you.

We will take our next question from Robert Kirkpatrick Cardinal Capital.

Good morning. Can you explain to me whether it is all seasonality the decline in Brink's International earnings between the fourth quarter of last year and the first quarter of this year or incrementally what was so much worse?

Obviously there is some seasonality, but the economy in Europe particularly has been severely affected by the Middle East conflict.

Okay. And a couple of number questions for Bob, aircraft maintenance and aircraft amortization?

If I remember correctly the expense this year in the first quarter was, and this I'm going from memory, so it will clearly be in the Q, which we will file in the next two weeks. But I recall it being about $5-5.5m and I believe the cash implications are about the same but that number we will definitely have out within a couple of weeks.

Okay, and Michael a question about the remaining coal assets?

We had some small transactions that took place that are really immaterial as far as publicly reporting them. We still have other coal assets to sell. We have people who are taking a look at them and we are in the process of having discussions and we hope to be able to once again sell those remaining assets as soon as possible.

Okay.

We don't have to deal with them.

Just a legacy cost. And then finally with a number of owners of a lot of companies and a decent amount of turmoil these days and possibly playing some of those properties on the market, what is the PHS (ph) appetite for acquisitions, material acquisitions as opposed to little things here and there?

We look at everything that comes on the marketplace to see if it makes economic for ourselves or our company. But, as you know, a lot of the properties that are rumored to be on the market or projected to be on the market. The reasons they have had difficulties in their performance is that they were basically built through acquisitions and it is almost impossible in my opinion to provide tough quality customer service under those circumstances and so it would have to be the right acquisition with the right kind of customer base we could provide the Brink's level of service or frankly we would be interested in doing it.

Okay, great. And is it possible that you would have some sort of conclusion on the gas and timber assets by the end of the calendar year with possibly that cash being put in the VEBA depending on Mr. Ritters calculations?

If I said when I thought those assets would go Mr. Ritter would strangle me. [Laughter]

We are not going to be declaring discontinued operations, Rob. [Laughter]

Well, Rob we just received [Inaudible] that opened last 50 days and we had good people come through their good interest in their initial bids literally arrived yesterday, and we are in the process of trying to understand them, what they mean, line them all up and we understand that there was a non-strategic asset and we are going to take their best effort to maximize the value and accept those but this is not a fire sale and I think we've got some good interest. This is a good time to be selling gas properties and may be a better time to be selling timber than we originally thought. So we will take a look and see where we are and as soon as we have an announcement we will make one.

Is there anything about gas and timber assets that makes them more or less complex to sell in the case of Pittson Company then was the coal assets?

Much less, much less. Nothing is as complicated as selling those coal assets.

Okay.

That's behind us except for a few pieces that are immaterial but no there's no way near that complexion.

Okay. Great. Thank you so much.

Rob, I did have one comment that I make for you, my memory on the expense on heavy maintenance was pretty good. The cash that we laid out, it looks like it's going to be about a million and a half less than the expense during the quarter.

So, it would be around three and a half, four.

Four.

Okay. Great. Thank you so much.

We will take our next question from David Horowitz with David J Green & Co.

Hi, guys.

Hi, David.

Needless to say, we were quite disappointed on the, particularly the 1.1% operating margin at Brinks International. It has become apparent as we listen that that number is a nonsense number because it has the three geographies were (ph) the three primary geographies. Can you give us some help in understanding the breakdown of the revenue in the operating profit line there in terms of Europe, Asia, and Latin America, so we can get a better handle on exactly, sort of how impacted you were by revenue shortfall and that screeching hole that Michael mentioned a couple of times in Europe versus just a lack of control?

David, we have not disclosed that recently the breakouts in there and obviously we will take a look at what we think is the appropriate way to handle that, but let me try to help you a little bit in understanding the impact of Europe versus Latin America, Asia/Pacific is not a real big factor for us, it is certainly the smallest of the three areas outside the West, as Michael had mentioned in his prepared comments, we were about $4m below last year in Latin America in operating profit in the quarter, we had positive results for the second quarter in a row as you look ahead in the second quarter, we, last year we were somewhere north of a million dollars in operating profit in Latin America which I think you are finding helpful assuming that we stay at that the, that we have bought them down to Latin America and we stay around where we are, that's certainly going to begin to lessen the drag that we have seen from Latin America and than going forward into the third quarter, if you recall last year we had a slight loss in Latin America in the quarter and then a slight gain in the fourth quarter, so as we go through, I think that should somewhat helpful to you in trying to understand international piece a little better.

Okay. It is, I am just, I am really trying to see what I really want to get to is how bad the revenue shortfall was versus expectations in Europe because when you look at and I am more interested in fourth quarter versus first quarter than I am in first versus first because the fourth quarter was more comparable in terms of Latin America and as you said Asia/Pacific relatively small and I have a, you know an operating margin drop EUR 6.3% to 1.1%. So that's obviously, it's got to be virtually Europe, so how big was the revenue shortfall or more importantly was there aside (ph) from the $2m that you have discussed in terms of this operating expense that you incurred were the closure expense you incurred. How bad was the management of this business?

Firstly are you talking year-over-year or fourth quarter, first quarter?

Fourth quarter, first quarter?

Fourth quarter, obviously has a seasonal impact and there is this exchange rate differentiation, how much it was between the first quarter and the fourth quarter. I know year-over-year it's 20% factor. But the fact of the matter is that the economy in Europe came to a screeching halt in the first quarter. Nothing is going on in Germany, nothing is going on in France and with the Middle East conflict, I mean just everything stopped. And then obviously you can read the press yourself to what's going on in both of those countries in particular and as you know the largest company we have after the US business is the French company and when it's affected by the economic situation that is in France, the volumes come down, you know, it affected us dramatically. we changed the management in France in the fourth quarter of last year. And everyone is happy with how things were being handled and the pace that it was being done. We have a new action plan that's being implemented. It's on course and on track. We'll continue through the first half of this year to complete that and have all the appropriate benefits for the second half of the year.

Okay. Let me, you know, not much discussion on the US business so that when they call it solid in the release. I guess it's 10.8 versus 15.1 at the end of the fourth quarter of last year.

That's normal, David, that's normal.

It is?

Yes, more or less normal. Remember we took on about $2.5m of additional health intention costs in the first quarter, which we were able to offset up to almost 100%. So actually the US business is doing pretty well.

Okay, and this has some side with US?

Yes.

So what's your patience level on Latin America. I mean if you would had to over lay your comments on Latin America over the past several, may be even four quarters, I think we can conclude that you were perhaps running out of patience because --

Not at all. We got Latin America for forty years. We make a lot of money in Latin America in normalized times. The reason we make a lot of money in Latin America in normalized times that's because it's a tough security environment and people are willing to pay for security. Every few years, about every six or seven or eight years, Latin America goes through one of these situations that it is in now and they are very difficult to do. I mean, years ago we used to lose a lot of money when the economy went like this. Now we are breaking even, so I am actually pretty pleased with our performance down there. Things will get better in Latin America, I don't know when, but they will get better and when they get better, we are positioned to grow and to bear the fruits of that as we have in the past for it's the most profitable in the world to the operators.

With respect to the VEBA, Bob can you do a little bit of a dog and pony show here and tell us a little bit about the VEBA funding, what factors are there in terms of your determining how much cash to put in there and how much ultimately do you need to fund the VEBA in order to consider having the full coal oriented liability funded?

Let me deal with the back half of that question first, Dave. That is a very difficult question which is not going to be resolved for a couple of years because that one really gets into what is going to happen in Congress and the states as they try to deal with the increases that we see in pharmaceuticals and other healthcare costs over the last couple of years. Right now there is no assistance on the pharmaceutical side for Medicare recipients and almost all of our participants now are Medicare eligible. So anything that happens there will have a significant impact on the companies liability and we certainly would not want to jump the gun and over fund the VEBA because one the money goes in, you can get it out but you get it out very difficultly and over a long period of time. So we are going to be -- if anything [Inaudible] on the side of being a little cautious as we try to approach what we believe is an appropriate level of funding for the VEBA. The key factors that we look at or focus on year-over-year basis is what is our current tax position. What is the capital and cash needs of the company and what do you want to do to make sure that we are properly positioned to grow and handle all of these needs simultaneously. What we have done is we have found ourselves in a position where we cannot -- we believe we will be able to adjust our taxes so that we can now start to fund the VEBA going forward to knock out any US tax liability and that would obviously be a big factor.

Okay. Any -- what is the income statement impact of funding the VEBA?

There is no immediate [Inaudible] purely the cash flow implications. The expense side of that is recorded in the post retirement medical and the combined fund liabilities and expenses that we show. But what it does do is we will now be able to take these funds and invest them and now that the number has gotten to a significant level, we are going to begin to examine changing the accounting under FAS 106 which, obviously, could help us going forward. But that is something that we will be looking at in the next quarter or so.

What would that do for you, Bob?

If we do put position it so that it comes under all of the restrictions that you have in FAS 106, we will be able to take the earnings in the VEBA and move that up actually, we believe, into the operating profit line as opposed to reflecting those earnings down in other interest right now.

Well that obviously makes sense to us because it is obviously the offset to the operating expense of the coal liability.

Yes. It makes sense to us but we want to make sure that we meet all the stipulations of 106 but I also have my eye on what is probably going to happen to pension accounting because pension accounting and accounting for the VEBA will be very similar and you know that there are going to be changes in pension accounting going forward.

Sure. Okay. And you know with respect to -- if you had your eyes set eventually on funding this for $250-300m which some had argued would be basically a satisfactory funding level to cover the whole 750 (ph) and you were only able to get, let's say a 100 into the VEBA tax efficiently. Could you set aside some more money in some sort of a fund or something that is apparent to investors so that we can be confident that you have these funds set aside to cover the liability?

The difficulty we would have there is other than using the VEBA, any other fund that we might set up, it is highly unlikely, we would be able to get a tax deductible status for that. So, we would be tying up the company's capital on to handle this thing. We would be using our borrowing capacity, which clearly is something that we have to be careful about because we are very proud of the fact that we are an investment grade company and we want to retain that. So, the money will go into the VEBA as appropriate and one other thing I will point out to you is that the number is going to go up and down in terms of liability. Over the last couple of years, its interest rates have declined, the discount rate has obviously been pushing the total number up fairly sizably. So, unless you believe that interest rates are going to stay down at this low level forever, part of that will come back.

Okay, and last but not least, can you talk a little bit, Michael, without any strategic alternatives that you maybe examining, I mean, it is obviously disheartening to you as it is to us to see, either to see the stock selling at a price that might reflect the value of BHS but there are things that you can do to help in light of the investment [Inaudible] underlying values here. We are very focused doing the next stage of fixed backs (ph) which we think is absolutely crucial and obviously, making sure that brings European operations complete their plan, which I am very satisfied with and very happy with this year and that gets the cash generation capability of this company up because just as important is servicing these legacy liabilities is a cash generation capability of this company and less the balance [Inaudible] we have here. How do we balance all that to make sure that we build the most economic value for our investors?

One last specific question. Could you recomment on the sales or the royalty stream. I missed that as you were discussing it.

Okay. As part of the proceeds from the sale of part of our coal business late last year, we had advanced royalties that were paid on an annual basis, advanced minimum royalties, but they get earned out against production. So, we expected to receive a stream of about $20m over a period of five years and in addition as part of the sale, we wanted to make sure we had a cleaner break as possible. We had inventory that we sold along with the rest of the assets that we had and we took a note on that and what we did basically is we took the royalty stream and the note and monetized it with the purchaser so that they would have the flexibility to do some things that they wanted to do and we would obviously get the cash and be able to use it in a more productive fashion.

Okay, is the cash [Inaudible] ?

Yes it is.

How much was it?

$20m.

Great. It would eliminate any credit risk, going forward.

And that generated a 2. something million dollar gain, which is in 2Q?

Yes.

Okay, got it.

We will take our next question from Bill [Inaudible] Capital.

Hi gentlemen, you have spend sometime on the call describing the economic impact, the kind of macro impact on several of your businesses. I was wondering if you could help us in getting from this starting point to your guidance, what you have assumed in terms of macro-economic changes, if any thing?

It is very, very difficult with what we said today to have this crystal ball on where this macro-economy is going, as it affects our businesses. I can outline what the potential risks are, right. And, it's continued economic stagnation in Europe and here in this country, and there is the effect that SARS possibly have on the Asian business, as it affects not only the Brinks (ph) company but more, probably, just as importantly the bags company. And I can't quantify those. I just quite frankly don't know what they are going to be.

And I can appreciate the difficulty associated with doing that. I guess what I am trying to get out is, in getting from this starting point to the guidance you have offered on this call, are you assuming an unchanged macro-economic environment from Q1?

We expect the overall economy probably to grow about 2% in this country for this year and I expect a worse performance in Europe and I expect Asia-Pacific, subject to what happened with SARS and those reactions continue to be very, very strong as it has been for this past period of time.

Great, that's helpful and the last question. When you talk about the low end of the previous guidance range, I imagine, this assumes the 37% kind of tax rate?

Yes the effective tax rate was 37.5% for the quarter and that's our anticipated rate for this year.

Wonderful, thank you.

Thank you.

Due to time constraint, we will take our last question from Rob Norfleet with Davenport and Company.

Hi, how are you all this morning?

Hi Rob, fine.

Just a couple of quick questions for all the answers I missed for the other questions I had. Can you just quantify the impact of higher fuel costs during the quarter back in terms of the impact it had on the operating profits? And in addition can you talk about some of the hedges that you do have in place for higher fuel cost?

Hi Rob. Fuel was not a major issue for us because we had a substantial amount of hedge as we went into the New Year. The hedge position that we had stated in the 10-K might have not changed dramatically from that point forward, and obviously you've seen pricing has come back down. So, looking forward we're not at all concerned about fuel prices. And in the first quarter we have adjustments, surcharges that we pass through to our customers as well associated with the effects of jet fuel increases as well as cost increases that come out of the tracking side.

Thanks great. Mike you've alluded a few times when you were talking about the next stage takes it back. So you know this is a kind of recurring scene but can you quantify to some degree of what additional steps need to be taken in North America to further reduce the overhead or just the general high capital structure. We've already grounded a number of planes. In issues like head count reduction we're done a lot of things. What else can we do to light size this operation?

I think the BAX operation is sized what needs to be. I don't think shrinking it any further would have any beneficial impact if that will be harmful to the BAX organization in the business base and the customer base. Secondly, we have the most efficient heavy weight hub and lowest cost hub in the business. What we're trying to do is look at ways that we can leverage those advantages to put more line through that system. And as we explore each one of those opportunities and we have some interest, these opportunities to go that works for me (ph) . We think we can make a pretty good impact at BAX if we can pull it off and we've got a team of people working out in two or three different approaches to do that, we think it is necessary to do that, to meaningfully change BAX's earning capacity and reach it's required goals and return on assets and we're prepared to do that. You know two years ago we had the wrong system. We're just putting the truck (ph) system up, the air system is too big, we had to right size that air system. We've got 40% of our revenue now, you know going the way that customers want it, that the customers choose and our service levels were of the highest they had been (ph) in history of the company. Certainly we've accomplished those three steps. So, this next step now is how do we leverage that and to take some [Inaudible] out of fixed cost system, especially into this very, very difficult economic times and we're not prepare to wait for the economy get better. And so, we're looking at some putting innovative ways and if we have some announcements' talk about there in the next quarter, we're going to do, I would be very happy.

Okay. I mean will there be a point where you will be able to discuss `some of the innovative things` that you are talking about?

Absolutely, probably next quarter.

Lastly, just gets back to Brink, at what point in the first quarter did it become apparent that results at Brink especially in Europe were going to be as poor as obviously what was reported this quarter? I mean is this something that--?

I think, none of this is a surprise to us at all and I think if you go back and look at our press release and listened to our conference call at the end of the fourth quarter, we were last year about, our concerns about the first half of this year. If you look at our 10-K that we filed, the outline what the cost impacts and the risk for, I think we are right [Inaudible] we were. If you factor out some of the severance costs that will answer the whole your PN (ph) operation for the quarter. It's not as biggest shock to us at all. And you know, we made the very distinct decision to go to this annual guidance not to a quarter-to-quarter guidance because of the situation, which we faced here, this time with these different businesses and exiting the non-strategic businesses. And there is, you know, little bit of a impact on the severance cost, little bit of impact on the economy, this Middle East conflict that happened in Europe, which made things a little tougher in the first quarter and that's why we're going down to the lower end of the scale (ph) .

Okay. Mike, I understand that you don't control, nor do you endorse what numbers are out on the Street, but obviously there with the range of numbers on the Street anywhere from $0.10 upward to $0.17 a share for the first quarter. And again, as I said, I know you did not endorse that, but obviously as it [Inaudible] going to become close to meeting those expectations. Was there a thought involved that potentially looked at pre-releasing that obviously was (ph) going to come below the expectations? What's kind of the company stats regarding?

Well, we made the decision to go to this annual guidance for all the reasons we discussed at the fourth quarter call and we've touched on at this call today. The Street comes out and puts out those quarterly numbers, for us to go back and [Inaudible] those quarterly numbers, alright, would have just been counterproductive to the whole process. And so, it was very concerning to us where we're going, but quite frankly, there was no way other than to slip back into this quarterly game again because I don't think it's productive at all, especially where we find ourselves to do so.

And Rob, it's Bob Ritter. Since we saw the differential, one of the things that we could do under FD and we took extreme care to make sure as we went through the preparation of the MD&A and the 10-K, to go through and list out the factors that we saw that were concerning us at the time we were preparing that. So, we did everything that we believe was appropriate within regulation FD area to signal The Street as to where we were going.

Okay. I understand and appreciate, I think most people including myself just had a difficult time with the seasonality of the businesses in really trying to get, as you often mention it's difficult to project quarterly, unfortunately that's what The Street dictates, but it obviously just, I think, everyone is trying to kind of grab with the idea of getting a better sense of where each separate segment is performing at what level and then working at sequential trends and obviously the sequential trends don't point to a very favorable quarter, but nevertheless I understand and I appreciate your time.

Thank you. Great, we will thank everyone for joining us on today's call, look forward to communicating with you again in the future.

Once again that does conclude today's conference. We thank you for your participation. You may disconnect at this time.