Brinks Co (BCO) 2003 Q3 法說會逐字稿

Good morning. My name is Tina, and I will be your conference facilitator. At this time, I'd like to welcome everyone to Brink's Company third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. Mr. Dudley, you may begin your conference.

Thank you. Good morning, everyone. Welcome to our third-quarter earnings conference call. With us today are Michael Dan, Chief Executive Officer, and Bob Ritter, our Chief Financial Officer. They will have some opening remarks on our operating and financial performance, and then we'll open up for some questions.

Before getting to their comments, let me review a couple of details related to our call today. First, our press release is available on our web site at BrinksCompany.com, and a press release is also available by fax by calling 877-275-7488. We will also have a replay of today's call starting this afternoon running through next Friday, November 7th. That replay number in North America will be 800-642-1687, or outside North America, 706-645-9291. Confirmation number for the replay is 3551344. We will also have a replay of today's webcast, and that will be available on our web site, Brinks.com, and that will run through Friday, November 14th.

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 SEC, including our most recent Forms 10-K and 10-Q.

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

And with that, let me turn the call over to Michael Dan.

Thanks, Scott. And welcome, everyone. Let me also begin by commenting this morning about some comments and observations about our performance underscored by the progress we have made during the last few months in disposing of our remaining natural resource businesses.

As you know, our strategy has been to focus on our core service operations with emphasis on strengthening and growing these businesses. We have viewed our noncore businesses as a valuable source of funding to help address the retained liabilities.

Starting in the third quarter this year, we announced several important developments in the process of divesting our noncore assets. In July, we signed definitive agreements to sell our natural gas and timber business for a total of $119 million. We closed on the gas transaction in August for 81 million. We expect to close on the timber deal by the end of this year.

Earlier this month, we agreed to sell a majority of our remaining West Virginia coal assets which are also expected to close this year. And two weeks ago today, we announced the disposition of most of our gold interest, generating proceeds of about $19 million from the sale of all the shares we held in an Australian gold and nickel mining and exploration company.

Per our strategy, we have sold off noncore assets. We have used the proceeds to fund our liabilities, including building the VEBA and our pension plan. Bob Ritter will comment in more detail on these topics. And as we mentioned in our press release this morning, during the third quarter, we made a $50 million contribution to the VEBA, earmarked at the time we announced the sale of gas and timber. The VEBA balance is now about $100 million, a meaningful level that demonstrates our commitment to build the fund balance to an appropriate level as soon as possible, given our tax position and other potential uses of the company's good, solid cash flow.

With the earlier contributions to the VEBA and the $20 million contribution to the pension plan we made last week, we have put over $100 million to work against liabilities, while reducing net debt by almost $60 million due to our solid cash flow.

Turning to our third-quarter results -- overall I am pleased that our employees and managers who, during this prolonged period of economic weakness, have remained focused on improving efficiency and cost effectiveness while also maintaining strong safety and outstanding service levels. Brink's Incorporated posted significantly improved results led by the international side, which, as we have discussed, has been an area we have been intent on improving from a cost and operations standpoint while waiting for better economic conditions.

Our Brink's Home Security business turned in another outstanding quarter, which continued strong subscriber growth, excellent margins and cash flow, and further improved in both customer retention and service operations.

BAX Global continued to a achieve stronger operating performance in Asia in supply chain. However, the weak U.S. and European economies, and especially lower overnight volumes domestically, continued to hold back BAX's overall performance.

Looking first at Brink's Inc.'s operating results. For the quarter, worldwide revenue increased 10 percent, driven by international operations, with about half the increase being due to the weaker U.S. dollar. International revenues rose 17 percent for the quarter, while North American revenues were up modestly about 2 percent.

Brink's' operating profit doubled to more than $33 million compared to the third quarter of 2002, driven by stronger performance in our international operations. In terms of operating profit, this is one of the best third quarters Brink's has had in many years.

Europe led the way in revenue and profit growth. Revenue in Europe was up more than 20 percent, with about two-thirds of that due to currency effects from the weak dollar. Operating profit in Europe was up sharply over third quarter of 2002, reflecting a significantly better performance in France and Germany. The improvement was driven by the benefits of the management and operational changes we have made in these countries as previously discussed. However, as a whole, the economies in Europe continue to be sluggish, particularly in the U.K. and Germany.

South America was much improved over the slight loss we posted last year. Revenues were up 7 percent, even with the negative currency impacts. Venezuela, which is our largest operation in South America, was the biggest contributor to operating profit growth. This is very encouraging to see the improved performance from last quarter in Venezuela repeated again. Columbia, Argentina and Brazil also improved.

Asia-Pacific, while a small part of Brink's' international business, again showed a nice improvement in its results. Revenues were up 21 percent, with nearly half the increase due to currency effects, while operating profit more than doubled. Margin improvement in Asia-Pacific was largely driven by global services in Australia.

In North America, operating profit was up year-over-year. This reflects better results from cash logistics, partially offset by higher pension and health-care expenses in the U.S. There was also a onetime gain on the sale of some operating assets, and this was largely offset by the cost of the closure of our former U.S. headquarters office in Darien, Connecticut.

Looking at some of our product lines, our CompuSafe continues to add installations and increase profits. In the U.S., our core armored car services, namely cash and transit and ATM, are still being impacted by the economy and high cost, especially in California. U.S. global services posted higher profits on flat revenues. Results from our Canadian operations were flat with a year ago.

In summary, I am encouraged that the actions that have been taken have allowed us to get our margins back up to a more acceptable level. We have more work to do.

Now turning to the Brink's outlook. We expect Brink's' performance for the fourth quarter to continue on track. In North America, we should see continued growth in cash logistics and CompuSafe, but traditional ground operations, including ATM, could be impacted by the still sluggish economy.

Canada finally had a major bank return to Brink's after four years. This bodes well for 2004 improvement.

In Europe, the benefits of the cost reductions and organizational realignments in the first half of this year will be visible again in the fourth quarter.

South America conditions seem to be improving. We hope this is part of a broader regional trend toward greater economic strength and stability. However, a critical factor here in the third quarter was Venezuela's improved performance. There is still a highly volatile environment there, so we'll have to stay alert.

Asia-Pacific should continue to build slowly on its positive momentum. Cash generation remained strong throughout Brink's, Inc.

Now at Home Security -- Brink's Home Security had one of its best quarters ever, with strong growth of subscribers, further improvements in its already high customer retention levels, and excellent financial performance.

New installations grew 22 percent. Revenue was up 9 percent for the quarter. Our disconnect rate improved to 7.4 percent from 7.9 in the last year's third quarter. The rate is higher than we reported in the first two quarters, which is normal for the rate to go up over the summer months, because it's when most moves occur. Residential moves are the largest drivers of disconnect.

We continue to improve customer retention by remaining focused on the very highest levels of service quality. The growth in subscriber base and improved service operations enabled Brink's home security to achieve record operating profit of $18 million in the third quarter, representing year-over-year growth of 27 percent.

At the end of the third quarter, we had more than 813,000 subscribers. Monthly recurring revenue increased to 22.7 million from 22.2 million at the end of the second quarter this year -- overall, an outstanding quarter for Brink's Home Security.

As to the outlook at Brink's Home Security, we will continue to balancing new installation volume and profit growth while working to further lower the installation investment. And as always, we will continue to improve our already industry-leading service through both people and technology because service is what drives retention and profitability.

We also expect to continue to build subscribers through our expanding relationships with major national homebuilders, home inspectors and through our home technology service. As a result, the business and recurring cash flow should grow nicely and continue to add economic value.

Now moving to BAX Global. I'm disappointed with the quarter. Worldwide revenues were up slightly in the quarter about 2 percent, with higher international revenues partially offset by lower revenues in the Americas.

On the international side, the Asia-Pacific region was again the growth driver, with a revenue increase of more than 14 percent. Although Europe also showed higher revenues, this was entirely related to currency exchange rates. Actual revenues were down due to poor economic conditions and very competitive pricing.

In the Americas, revenue was down 7 percent, reflecting lower volumes and the continued shift from overnight shipments to deferred products. On the positive side, our BAXSaver deferred product continues to grow at over 25 percent, and the freight forwarder network we launched this June is steadily building volume as the forwarding community sees the value of our strong service levels and commitment. Supply-chain business continues to present wonderful opportunities. I'm very pleased with their progress, especially the U.S.

Overall, BAX posted a worldwide operating loss of $5.3 million, compared to a profit of 9.9 million a year ago. The continued strong performance in Asia-Pacific was offset by the effects of economic conditions and a loss of performance in the Americas related to the low overnight heavy freight volumes, and the weak performance in Europe.

ATI lost a major lane (ph) for the military, which affected results in the third quarter. Several Eurozone (ph) economies are still challenged by recession. Asia-Pacific profits grew in the quarter, reflecting improved results in China, Hong Kong, Australia, and Malaysia, partially offset by declines in Singapore.

As far as the outlook for BAX, we are pleased with the growth trend and operating performance in Asia-Pacific, and the continued growth in BAXSaver product and our expanding supply chain management operations. And we expect continued growth for our new freight forwarding network, although this is still relatively small portion of our volumes and revenue.

U.S. and European economies continue to be a concern for this business as we look forward, and in particular, the impact on the economy of performance of BAX's domestic overnight business. And as I said before, we're continuing to look for ways to improve this by driving volume increases. Management is working on initiatives to move the needle in the North American fixed cost system. When we finalize one of these, we'll announce as appropriate. I cannot comment further at this time. We are focused to solve this last major performance hurdle at our company.

In summary, I will wrap it up by saying that overall, we are pleased with our results in both the Brink's units for the quarter, as well as the significant progress we have made in reducing our noncore assets and redeploying the proceeds to manage our liabilities. Recent press reports and various economic statistics point to the beginning of an economic rebound here in the U.S., and we are certainly seeing some positive signals in South America.

However, I believe the jury is still out with regard to whether these early signs point to a broad-based -- and a recovery with legs. We haven't really seen enough depth in terms of the good news to be in the position to declare that the economy has turned quarter. Europe still appears to be somewhat up in the air. Our Brink's and BAX Global Businesses have global footprints, industry leadership, and reputations for outstanding service -- needed to take advantage of a broader economic rebound.

Brink's had another good quarter, with much better results in South America and Europe, combined with modestly better results in the U.S. We maintain our focus on aggressively pursuing new business while maintaining our high service and safety standards and our pricing discipline.

The BAX Global performance is highly dependent on economic conditions and higher volumes especially in the North American system. We must fix the volume and complete one or more of our initiatives.

I'm pleased with the record performance of Brink's Home Security, and expect that this business will continue to grow -- excellent service levels and strong financial performance. Overall, our company is cash flow positive.

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

Thanks, Michael. I would like to start with a few comments concerning accounting for discontinued operations and taxes to help you in comparing the performance of the company's continuing operations as we are today with historical performance.

With the sale of natural gas and the impending sale of timber, gains from those sales as well as those businesses' results of operations for all prior periods presented, including this year's quarters, have been moved out of continuing operations. The sales gains and performance results are now included in discontinued.

This reclassification had the effect of reducing reported earnings per share from continuing operations for last year's third quarter by about 3 cents to the 39 cents noted in today's release. That 3 cents of earnings is now in discontinued operations.

Performance for last year's nine months for continuing operations was also reduced by about 8 cents. Further, we reclassified about 11 cents of earnings in this year's first half from continuing operations to discontinued. Looking to the next quarter, the reclassification will reduce last year's fourth-quarter reported income from continuing operations by about $1.5 million, or 3 cents per share, to roughly 14 cents for the quarter.

Now for some brief comments on taxes. If you take out the nonrecurring adjustments recorded this quarter stemming primarily from the completion of the examination of a few more tax years, our normalized effective tax rate for the year looks as though it will be in the 40 to 41 percent range, a little higher than our longer-term rate, because of the effect of permanent differences at this year's level of income. For modeling purposes, as our operating profits increase from current levels, the effective tax rate should go down.

The rule of thumb I'm going to give you now isn't precise because of differences in tax rates in different countries, but generally, as our annual pretax earnings increase by each $10 million, the effective tax rate should go down by roughly 50 basis points.

Now let me turn to the performance of the individual businesses. As Michael said, Brink's Inc. had a good quarter versus a very weak third quarter last year. North American results included a one-time gain from asset sales of $4.7 million, which more than offset the 3.5 million in costs associated with consolidating the Darien operations. We expect there will be another 0.5 million to $1.5 million of consolidation costs recorded in the fourth quarter, as we essentially wrap that process up. International performance for this quarter was well ahead of last year's weak European results and the slight loss recorded in Latin American operations last year.

All-in-all, it was a good quarter, as overall margins recovered to near-normal levels. Looking ahead to the fourth quarter, we expect a good quarter, but not the sequential quarter-to-quarter jump that we saw last year. We've got the extra Darien consolidation costs in the U.S., continuing concerns about South America, and with its return to more normal margins, Europe won't have the room to rebound as it did last year.

Brink's Home Security had an outstanding quarter, with good retention and efficiency performance. Basically, just about everything was in sync. The fourth quarter should look fairly similar.

At BAX Global, improvement in our Pacific operations and supply-chain management was offset by the effects of soft economic conditions in Europe. In addition, in the U.S., the hoped-for pickup in expedited freight hasn't happened yet, as the improvement in the economy appears to be in its early stages. We're looking for the economy to begin assisting us as we go forward, and expect a pickup in third-party air charter business to contribute as well.

One last point out on the outlook for the fourth quarter is that there will be a gain on the sale of the shares we used to own in an Australian mining and exploration company. The pretax gain should be in the range of $10 million, and will be reported within continuing operations in corporate and other.

Finally, I would like to make a few comments about the company's cash flow and debt position. Depreciation and amortization for the third quarter amounted to just under $45 million. We currently expect that full-year 2003's depreciation and amortization and continuing operations to be in the range of $165 to $175 million, divided among Brink's Home Security at $50 million or so, Brink's at 65 to 70 million, and BAX Global in the $45 to $50 million range. Corporate and other will add on another 5 million or so.

And once again, a reminder for those of you who calculate cash flow indicators. Please note the noncash, BHS-related revenues and expenses reflected in the "Other Financial Information" table on page 10 in today's release.

As for capital expenditures, spending came in at a little over $50 million for the recent quarter. Cap-ex on continuing operations should be up slightly for the full year versus the $193 million we spent last year, as our current projections have held in a range from $200 to $210 million. We expect Brink's Home Security to take the largest share at $95 to $100 million as we continue to build a subscriber base and value of the business. Brink's investment should run in the $75 to $85 million range, and BAX should run at roughly 25 to 30 million.

As for financings, we ended the quarter with outstanding debt of approximately $355 million. Combining this with roughly $155 million in cash, the company's net debt was approximately $200 million. This compares with a net debt figure of just above 255 million at year-end 2002.

Receivables sold in the asset securitization facility were 61 million at September 30, down from the $72 million for December 2002.

In summary, financings net of cash were roughly $260 million at the end of September, down about $70 million from the year-end level. If we keep up the momentum, and I think we will, for the full year, the company will have both reduced its debt level significantly and taken a substantial step towards funding its benefit obligations.

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

(OPERATOR INSTRUCTIONS)

We believe we're having technical difficulties out there, so we'll hang on for a second until we can get things worked out here.

Jerome Lawton, MelBrook Capital.

Few questions here -- some are housekeeping, so I apologize if I'm asking something you already responded to. After the pension funding in this quarter, what is your unfunded liability in the pension plan?

Jerome, that's a little difficult to answer right now, because we're actually working off of last year-end's results still. We're in the process of working on this year's valuation, and so we will be able to update that at the end of December.

But if you look back to last year -- if you take all of the pension plans that the company had, we were roughly $120 million below the total of assets below the total of our ABO. But obviously, this year, with the improvement in capital markets, we're expecting to see some improvement in that.

Okay. Will there be additional VEBA funding from the gold or timber sale?

I think for this year, we are done. We have already gotten a pretty good fix on where our tax position is so -- yes, there will be additional funding. But I would not expect it to be during 2003. We'll revisit that during 2004.

Okay. And did you say what the basis is in the timber sale? What your tax base is?

The book basis is actually reported in today's financial report.

Actually I saw, it was 7 million -- but what is the -- is 7 million the correct basis, regardless of keeping the liability?

That's fairly close -- the asset and the book basis are fairly close. The -- this is very old property that we acquired -- much of it around the turn of last century.

Okay. Can you comment on the U.S. freight forwarding launch in BAX? You said it was sequential growth I think -- well, I guess it would have to be sequential growth, since you just started it, but -- how is that going, and what kind of response have you had?

We launched it in the middle of the summer, and we did a test with four or five forwarders, and we have now officially launched the product. And we're servicing about 30 forwarders a night, and the volume is continuing to build, helped by both the economy and some volume increases we're seeing at fair time (ph) -- you know, the interest we have from the forwarding community, where we guarantee there's space on our airplanes. And as they get more and more confidence with our guaranteed space program, we expect that to continue to build. And that will be one of the pieces to help address the volume concerns we have with the North American fleet issues.

Okay. And moving on to Brink's -- the European progress. Is there any additional restructuring left?

There was a little bit of noise going through the third quarter on some restructuring costs. We don't expect any in the fourth quarter, I think, except for maybe a couple hundred thousand euros in Belgium. But it's immaterial in the performance of Europe.

Okay. And then can you bring up the components then of what has driven the margin pickup? Is it purely volume? Is it -- Or what's the order of magnitude of the Brink's Europe improvement versus just overall volume -- things like that.

We have to recognize that we went through this Middle East conflict, which basically shut down a large portion of our global service business in Europe, and especially going into the Middle East during the earlier part of this year. Obviously, that effect has passed by.

Also, the economy in France is a little bit stronger, which has helped us. But it's really been the management restructuring -- change in management that we made at the end of last year, the beginning of this year in a couple of our key countries that is starting to bear fruit. Plus, the pressure on our competitors is probably greater than it is on ourselves. And I think we are benefiting a little bit from some of the problems that they are experiencing.

Okay. And then finally, can you break out the currency impact on the bottom line?

The numbers are not extremely significant, but probably -- in the Brink's camp, probably in the $2 million range in terms of a pickup. And very little effect that I think we saw in BAX.

Scott Schneeberger (ph), Lehman Brothers.

A question relating to freight -- we have seen numbers being published over the past few weeks of a push -- of an increase. Are you guys seeing any evidence of that in the fourth quarter?

It's too early to tell. As a rule, the best month is September, followed by October. We do see a stronger October in relation to September than we normally have through this month. As the economy is getting better -- and it's clearly getting better in the United States -- the velocity effects we should benefit from. And we're starting to see a little bit of that in the United States. I think the retailers have been pretty cautious about inventory levels. So if the economy gets ahead of expectations, we'll benefit from that velocity increase.

And Jeff Kessler has explained to me -- you guys are very EVA-oriented. Just curious -- what kind of operating margins are you looking for out of BAX, you know, for it to earn its cost of capital? Given an apparent upturn in the economy, how long are you willing to wait for it to get that return on cost of capital?

This cost of capital at BAX has probably been driven down to about 4, 4.5 percent, which we would need to return on BAX. And it's obviously been a very difficult time, as we've downsized the business the last three years waiting and working through the tough economy that we have experienced. And we're not pleased with the performance.

We do believe that there has been a shift -- and it is probably a permanent shift, in many cases -- from the air to the ground. And we don't expect some of that to come back. Obviously there will be volume increases overall. But there's still plenty of capacity in these systems.

But we are positioned here that if the economy does have some legs and comes back, that we should be able to benefit from some of the steps we have taken. And obviously, that would be falling to the bottom line in a fixed cost system.

Ed Brey, Sterling Capital Management.

The first question is just -- you mentioned the cash of the balance sheet was roughly 155 million, end of the third quarter. Was that independent from the VEBA funding? In other words, has it already been taken out of the cash?

Yes. In fact, there was a -- we're going to have a separate line item on the balance sheet for the VEBA funding so our investors can track it right along with us.

A separate asset?

Yes.

Okay. Second question -- relating to just this transition between freight going more deferred, at least more recently, versus overnight. How much -- I don't know what experience you all have on that as far as it being a cyclical phenomena -- or really a secular phenomena -- that I guess would might drive more things into trucks. What do you all think?

I think that there's a permanent move to expedite freight on the ground. We're seeing that ourselves in the growth of our BAXSaver product, which continues to grow very, very nicely for us. And until this economy picks up, Ed, I just don't think you're going to see a shift. I expect to see a continued bleed-off of overnight freight. And we are positioned -- it's hurting us. It's pretty expensive for us at the current time. But the fact of the matter is that we have the lowest cost, most efficient heavy-freight hub in the business. And so we are better position than anybody else to go forward with that.

Okay. And the last question is just the accounting treatment for the VEBA. I know there was some talk in the past about looking into accounting similar to pension plans for the VEBA. Is that still being contemplated, or is there any sort of service timeframe on potentially switching that over?

Yes, Ed, we're still working very -- as quickly as we can on that. We're working through couple of accounting and tax and legal issues, and we hope to have our decision reached during this quarter.

Rob Norfleet, Davenport & Company.

Most of my questions have already been answered, but I guess I just wanted -- not to beat a dead horse -- go back to BAX just one more time.

Can you at least allude to -- I know we've talked about the structure change in the market obviously with the deferred volumes. But can you I guess give us some information regarding what the utilization rates are for the North American fleet operation -- and what a breakeven level is? I'm just trying to figure out how far we are off from getting back to that positive breakeven line.

Yes, Rob, we don't disclose that. But I can assure you, there's plenty of capacity on our system. And I'm sure this plenty of capacity on other people's systems just by the steps that have been taken by some other people in cutting back their systems.

And of course, there's a lot of -- I would call -- inappropriate freight on the systems, because the plane's going anyway, so you're putting some of the deferred freight on it because it's still the cheapest way to get from point A to point B.

So we really need to build our forwarder product, which is growing nicely. And we really need to get some help from the economy to move the needle there. And we have worked on some other initiatives that -- I'm just not at liberty at this point to comment on -- to try to make a big difference there. But it is a painful process for us in this economy.

How much lower are the margins at BAXSaver versus the freight -- the margins on the overnight?

They are higher.

They are higher?

Yes, they're higher.

Quickly -- I know, Bob, a question was asked about this, but -- let's assume we do go to somewhat of a pension format for the VEBA. If that were the case next year -- as we looking into '04, what would be the P&L impact from the VEBA? I mean, if we're sitting on $100 million of cash, we assume obviously some rate of return. I would assume we are going to have an other income line as it relates to the money earned from that?

Actually, Rob, the accounting for that will be very similar to the treatment that you have for a normal pension plan. So it would be actually a credit that would go right into the same line as the other -- the coal-related expenses that we have right now, the $17.2 million that we had this quarter.

So it will be an offset?

Yes, it would be an offset to that. And since it would have essentially the same kind of accounting treatment as a pension, what we would do is at the beginning of the year, we would have an assumption of the long-term rate of return, just as you would do with a normal pension plan. And last year, our rate was 8-3/4 -- so let's just say it's in the same range as that, but we'll pick 8 as a number -- if we had an 8 percent expected long-term rate of return, we would essentially have an $8 million credit in that line next year.

(indiscernible) at the hundred million that's in the plan at the current time.

Gary Steiner, Awad Asset Management.

Had a couple of questions. I guess first on the BHS -- this is probably the best quarter you have had in a while. As I recall, the accounting there is pretty punitive when the growth rate picks up, that -- you grew the installations much more rapidly than you have in the recent past, and yet the margins still managed to accelerate.

A couple of questions, I guess -- A, what's driving that? I mean, is there anything that you have done in particular on the cost side? And B, can you just sort of talk about the competitive environment, some of the problems with some of your competitors, whether you think that's had some positive impact, and whether you would expect that to continue?

Well, first of all, I think the credit at Home Security goes to very, very good execution. The management group at Home Security has a propensity for deciding what are the areas of weakness in their business, and to focus on it, and to make improvement on it. And they're doing that basically on a quarter-to-quarter basis. And they're able to sustain those improvements when they bring their focus to the next area. So I'm really, really pleased with the process there.

The second thing is -- you're right, it was a great quarter for Home Security, in spite of the growth rate. A lot of that is driven by the disconnect rate -- continues to come down from changes we made a few years ago on credit scoring and the quality of the customers that we take and the ones that we choose not to take.

But basically, it is just focused execution. And I think that same answer carries over to the competitive environment. Obviously, the competitive environment has been very, very difficult for many, many years. We are focused on who we are, what we are, and how we account, and how we go forward. And we're not distracted by any of that noise. Obviously, it's been a distraction for some of our competitors. I expect that noise to go away as time marches on with some of them. But it really doesn't affect us materially, in my opinion.

But I mean can you attribute some of this specifically to some moderation and some of the aggressive discounting that had gone on for a couple of years? I mean, is it that identifiable, or --?

There's still enough people out there who will sell at zero down. There are enough dealers out there, and there's enough new companies that have sprung up to finance these small installers, small dealers, I think, to fill the void left by some competitors who are buying less accounts in the market.

Okay. And then on BAX -- I guess, just sort of want to see where the thought process is relative to this business. I guess listening to your closest competitor, I hear similar issues -- or pretty much the same issues, right -- we've got too much fixed cost relative to the environment, volume is weak. We're working aggressively on things to address it, but yet each quarter the numbers don't get better. The economy clearly has been improved in the third quarter, yet there has been no improvement in the margins or profitability.

I'm just wondering whether there really is a reasonable solution out there for this business. Some of these alternatives that you're working on -- what sort of optimism you have that it'll actually not just move the needle a little bit, but allow you to achieve the kind of returns that you would hope and expect to keep this business for more than a year or two?

Obviously, it's a very, very difficult time. But I am convinced that the low-cost hub operation that we have and some of the initiatives that we've started and have announced in their progress are all directionally correct.

But this falloff in overnight freight volume is just -- continues to trickle. The economy has picked up -- it didn't really help us on the overnight airfreight product that much, although we're seeing some signs of it in October -- but Lord knows whether that will continue for November or December.

So at the end of the day, we've got to sit back, and we've got to say, what can we do to make this the best situation as possible until we get some help from the economy? If the economy comes back, the whole reverse takes place. The acceleration of freight moving will help us quite a bit.

But at the same time, there's no question -- there's too much capacity in the marketplace. And it's a difficult time for us. But it's an integral part of the BAX organization -- this network. And we're going to find a way to improve the returns on that business.

Our supply-chain business in the United States is performing above expectations. Our freight forwarder product is on expectations. Our BAXSaver is on expectations or exceeding it. And as each of those grows, and our international business continues to perform well, especially in Asia, I expect to see some improvements in BAX.

It's been very disappointing last couple of quarters here with the overnight system. But it's been three years of this economic downturn. And now is not the time to give up to.

And I guess I just wonder if you've got two major competitors out there, both sort of volume-starved -- so both of you guys are out there, I would imagine, trying to move additional volume through your fixed-cost network -- that that can't help the pricing environment. And we have seen the economy come back somewhat to -- people will differ in terms of exactly how much, but -- I'm just wondering how aggressive you're willing to be in terms of resolving this issue.

We're very, very focused on it. It is the remaining issue that needs to be fixed in The Brink's Company. And it just so happens it resides inside of BAX. So we're very, very focused on it.

And secondly, the pricing environment has been very, very difficult, but not for us. I want to know that the yield on our product is unchanged in the last three years. We have held the line on pricing, because -- based on our service quality and the efficiency of our hub. And we've probably lost some volume because of that aggressiveness. But at the end of the day, the low-cost operator and efficient service is going to win this battle. And we are committed to doing that.

Beth Lilly, Woodland Partners.

I don't know if you want to answer this question, but have ever broken out in terms of BAX what percent of the revenue was BAXSaver, what is overnight? Can we get a sense of -- you know, and Michael, I was fascinated to hear that BAXSaver is a higher-margin product for you guys than the overnight. So can you give us a sense of how it lays out in terms of the revenues?

Beth, this is Bob Ritter. We have not broken that out. We put in a couple of pieces of information for you that try to help you understand a little better how the U.S. and the international operations are performing. That's one of the things that we'll look at -- whether or not that is feasible, and the value, versus the cost of pulling that all together. But that's not something we're prepared to give out right now.

Is it because you don't want to give out the information, or is it because -- I mean is it too time-consuming? I'm trying to understand.

It's a bit of both. There is some competitive value to some of the information that we don't want to give out. But some of it, we want to make sure that it's -- if we do put out information, we want to make sure that it's accurate, so that we're not giving you anything that's going to give you problems going down the road.

Just along the lines of BAXSaver, I was wondering if Michael could talk about -- I wanted to explore a little bit more the BAXSaver margins being higher. Can you talk about that?

Well, there's no margins in the overnight business. That's the simplest way to say it, Beth.

Okay, but how about going forward -- when the economy recovers?

There's more margins in the BAXSaver product. The margins -- the gross margins on the ground transportation product as a percent are higher because there are no margins on the overnight products.

Okay, but when the overnight business recovers -- will that still be the case in terms of the margin differential?

In my judgment, yes. In my judgment, there will be more margin on expedited ground freight than there will be in the air.

Beth, this is Bob. Just a little help here, there's a big difference in the yields between the two, but the costs obviously of ground transportation versus the flying is also very significant.

Okay. My last question is -- so it looks to me is as though all of the noncore assets -- you have sold off a portion of the gold assets in the fourth quarter. You've got out of the mining and minerals and everything like that. So are there any considered noncore assets really left

We'll have some, Beth, forever that we didn't sell. But they're immaterial in the scope of the company.

Okay, so for the most part, everything has been sold?

Yes. We have to close the timber sale. And we've got to close the West Virginia asset sale, which we expect to do this year. And then we'll be right where you just declared.

Jeff Saul (ph), Inskatas (ph) Securities.

Just a few questions on your Brink's subsidiary. Have you given the breakdown on the international business -- how that breaks down on the various countries in Europe?

No, we just broke out -- (multiple speakers)

Could you give a flavor of which countries are important to you?

Which countries are what?

Important.

France is, by far, the largest operation that we have in Europe. We do break that out in some of our financial information because (multiple speakers) the organization. But France is the dominant company. Were' very large in Holland, also, and we're very large in Israel and the Middle East, also, inside of the European operations -- then followed by Germany, the U.K., Ireland, etc.

Okay, and then -- of this 20 percent growth that you had in the third quarter, what kind of organic growth did you have? Because I seem to remember that you've taken over Interhugh's (ph) Belgium business.

Yes, but in the scheme of Europe, that's relatively small. We did take that over, and that's reflected in the third quarter, which we talked about the last conference call. We've also taken over the other half of our Swiss operation. And we're always looking at additional acquisitions in Europe all the time. We're in the -- quote, "the deal stream".

There is a lot of pressure on this industry in Europe, as you know. But we understand our business. And we are performing better and better. We're CIT people, and our management group is performing admirably. And we're (multiple speakers) very pleased with the progress.

It's very impressive, given the difficulties your competitors have. One of the problems seems to be the cost of risk in Europe, because of very high attack rates. Have you seen any development in your cost of risk?

The security situation in Europe has deteriorated throughout this year as the criminal element has become more and more active. At the end of the day, we're a security company, and our job is to thwart those attacks and protect our people first, and our customers, people and property second.

And we have been fortunate not to have suffered some of the attacks and the losses that our competitors do. You never know in this business. You never know when that can change. The construct of our insurance program, which is a global insurance program, insulates us from some of the effects that some of our competitors would feel.

What kind of level is it in total -- is it around 4 or 5 percent, or is that less than that?

We don't break out those costs, but -- we look at cost or risk way beyond what we'd call our all-risk insurance. We look at it on our vehicle crashes and our workers who get injured type cost of risks. And they're in that range.

And do you see any potential for margin improvement from these levels? Because I guess with the capital intentiveness (ph) that you have in this business, it's still not attractive margins. But of course, it's a very impressive improvement in this tough environment.

We have a history of being positive economic value-added in this business, which is one of the few companies that has been able to obtain that. It's not as easy as it is in the guarding (ph) business, where there's no capital employed, of course. We are in the home alarm business, or alarm business, where there's more capital.

What differentiates Brink's is our ability to have a positive return on our capital employed in this business. We expect to be able to continue to do that, and to continue to expand on our operating processes that we have developed over 145 years.

Yes. Just finally -- why do you think you're doing a better job in avoiding the problems that your competitors have? Is it your geographical mix in Europe, or are you just doing something better than they are?

There is no way to judge that. I mean, criminal elements decide to target somebody or target a certain country where there's a weakness in a process and the system. When we tend to have a failure or an attack, it tends to be because of an internal weakness that developed.

And so the job of this management group is to make sure that the security levels and the focus of all of our people and all of our systems are not only in place, understood, our people are well-trained, but they're monitored, audited, and checked. If you don't do that -- by the nature of our business, the risk cost can be very, very damaging.

Michael Hoffman, Freedman Billings Ramsey.

You talked a lot about being an EVA-like company, or very focused on return on capital. So the business performance of BAX over the last three years somewhat flies in the face of a debt discipline.

Can you help us understand what are the decision variables at this point that get you to a point that says we can never get a reasonable return, even if the economy starts to show some life; therefore, we need to change this capital allocation? And my understanding is BAX has actually never returned its cost of capital. So it puzzles me that you've shown so much patience.

Michael, it's been very difficult, needless to say, for everyone. And we are very, very much focused on the EVA model, as you know. BAX is a very positive model on its international flexible cost-variable model, and it has never earned its cost of capital on its fleet -- you're correct. That's why we've gone through this transition of putting that -- a trucking network, the forwarder product, and accelerating the supply-chain management growth in the United States as we have been very successful with in Asia -- and to a somewhat lesser extent, is to be able to make sure we hit those hurdles.

Obviously, in the face of that, we have just suffered three of the worst economic years that we have had since you and I have been around, Michael. And so it is frustrating as it has been, I do not want to abandon the ship with downsizing. Three years ago, we probably needed a 6 percent return revenue at BAX to hit that hurdle rate. We've got that down to about 4.5 percent, and we're growing those other lines of business. And I would like to believe that some of the other initiatives that we have started, we will be able to solve that puzzle at BAX. But we do need help from the economy and some additional volume going through that fixed cost system.

The economy -- the data came out today -- 7 point x -- I can't remember the point, but it's over 7 percent GDP growth in the third quarter. So clearly, there are signs of strengthening. At what point with that evidence of strengthening, but you don't see it in your volumes, do you finally say -- it's time, it's enough?

Well, Michael, we are starting to see a little bit of it, as I mentioned earlier in the call. Whether it's sustainable or not or it has legs, of course, I have no idea.

But we are focused now on understanding that it is a very difficult business, there's tremendous overcapacity in the marketplace. And we are going to do what we have to do to make sure that we're properly positioned, we have the lowest cost, the most efficient system in the market, because we believe that's the best way to position ourselves to get that return for our shareholders.

Is there on the drawing board, if you will, a war plan of, okay, the volume has come, but the cost needs to come further? Do you have a plan to do that again?

Yes, we are working on a variety of initiatives that I'm not at liberty to talk about right now to help address that issue if we can't get to where we want to go with our current initiatives.

How dependent are you on -- you know, I'll pick on a competitor -- an Emery finally deciding to shut down its business and make this work versus just the economy?

We don't look to anything like that, Michael. I can't control those types of things.

And what is your G2 (ph) on rationalization and capacity in the marketplace?

I think it's very difficult situation. You have the two DHL fleets flying around the country, as you know. You've got huge cutbacks that Federal Express has taken in their air side of the business on a domestic basis. And we've downsized our fleet to about as small as we can downsize our fleet to. And I think most of the competition has done the same thing. And like you said, the results still aren't there.

So at the end of the day, I believe that the best service and the lowest-cost system will be best positioned to have an adequate return on this capital here. We just need some help from the economy -- it's a fixed cost system.

Operator, we have time for one last question.

Mike Warner (ph), Kennedy Capital.

I had just hopefully a quick question maybe for you, Michael. It's regarding the strategy around the Brink's home security unit. Would there be an opportune time to separate that out or spin that out as awarding the shareholders the value that that business creates at some point in time? Or would it be more strategically advantageous for that business unit to remain as a part of the corporate haul (ph) with Brink's? And I am assuming BAX, at some point, may not fit into your overall model. But I was just kind of curious on what your commentary of that -- not in the near-term, maybe two years, two years plus down the road.

Michael, the issue that The Brink's Company faces it is legacy liabilities. Until we have some time to complete the initiatives we have been in operating our businesses and funding those liabilities, that's going to add the most shareholder value to this company. When we complete that step -- and I think we've made some strong progress here in the last 18 months in that direction -- obviously, that will open up a variety of different opportunities to further shareholder value.

But we can't lose sight of the fact that these joint and several liabilities and the need to attack those is crucial to the shareholders of this company. Absolutely crucial. And the breath and the scope and the earning capacity of the Brink's companies are absolutely essential for us to be able to address that issue.

Okay. Robert, if you could tell me -- how much -- on a per quarter basis, what is the expense that runs through regarding the legacy liabilities again?

We actually break that out. There's a footnote that is in the financial statements we released today which we also repeat in our 10-Qs. (multiple speakers) But it's been running about $17 to $17.5 million per quarter this year.

And again, did the -- the potential way you would set up the VEBA is as -- much like a pension, where there would be a credit towards that amount on a -- I guess, on an annual basis?

Yes, but obviously, that would be reflected quarterly. But that would be netted out against the expenses there.

How much do you think it would -- at this point, would you have to wait until you do another asset evaluation methodology based from last year to this year going forward to determine how much you need to fund the VEBA to wall that off?

That's -- I don't know if that number would change very dramatically from one year to the next, but we have consistently talked about -- we'd be comfortable if we're in the range of 300 to probably 400 max in that.

Well, thank everyone for your time today. Appreciate your joining us, and we'll talk to you again in the future. Thanks.

This concludes Brink's Company's third-quarter earnings conference call. You may now disconnect.