Brinks Co (BCO) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to The Brink’s Company fourth 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). Mr. Dudley, you may begin your conference.

Thank you. Good morning, everyone, and welcome to our fourth quarter conference call. With me today are Michael Dan, our Chief Executive Officer, and Bob Ritter, Chief Financial Officer. They will each begin this morning with some brief comments, and then we'll open the call up for your questions.

Before that, let me just mention a couple of quick things related to the call today. First, the press release we issued earlier today is available on our Website at Brink’sCompany.com, or by fax by calling 877-275-7488. Secondly, there will be a replay of today's call starting this afternoon through Friday, February 13. The replay number in North America will be 800-642-1687, and for those outside North America, 706-645-9291. The conference ID for the replay is 1326503. A replay of today's Webcast is also available, or will be later today, on our Website, and that will go through Friday, February 20th.

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 Securities 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 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 express written permission of the Brink’s Company.

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

Thanks, Scott. Let me also extend my welcome to those of you who have joined us today. I want to begin this morning with some comments and observations about both the strengthening of our operating performance in 2003, and the successes we've had in achieving our strategic goals this year.

As you know, our strategy has been to ex the coal business and sell our other non-core natural resource operations, restore BAX Global to profitability, and grow our security business. We have also consistently communicated our commitment to appropriately fund the legacy liabilities from our former coal operations over time using the proceeds from the sales of non-core assets to assist in this funding.

Between August and December of last year, we took major steps to dispose of our three remaining natural resource operations and the last significant coal property, one that was not part of the sale of the coal assets in 2002. Specifically, we closed on the sale of our natural gas business in August for cash proceeds of $81 million. We liquidated our gold interest by selling the shares we held in a publicly traded mining and expiration company in Australia for 19 million in cash. In November, we sold most of our remaining West Virginia coal assets for $14 million. And at year end, we announce the closing on the sale of our timber business for $39 million in cash. We received a little over 5 million of this late in December, and last week we received another 32 million.

In addition to these asset sales, earlier in 2003, we realized 26 million from the monetization of non cash proceeds, namely royalties and notes receivables, obtained in earlier sales of coal assets. In total, these transactions have generated more than 175 million in cash since January of 2003, which we have used to fund the VEBA and strengthen the Company's overall financial position.

As previously announced, we contributed a total of 82 million to the VEBA in the year 2003. The value at year end was 105 million. Last quarter, we also made a $21 million contribution to our U.S. pension plan. This, in combination with improved financial markets, has helped the fund's positioning significantly. And finally, we were able to reduce our net financings by more than $100 million last year. Bob Ritter will give you some more details on this in a few moments.

Turning now to the fourth quarter results. Overall, I am pleased that through the efforts of our people we were able to finish the year strongly and lay a good foundation for 2004. The economy throughout most of 2003 remained weak. It was affected by the Middle East conflict and the SARS. So I am especially proud of the tireless focus of our 50,000 employees worldwide on improving efficiency and cost-effectiveness, while also maintaining strong safety and continued leading service levels for all of our companies.

Brink’s Incorporated posted significantly improved results, led by the international side. Better economic conditions, favorable currency translation, and our own efforts to improve operations were the main drivers. Our Brink’s Home Security business turned in another outstanding quarter. Once again, they achieved strong subscriber growth, excellent margins and cash flow, and further improved in both customer retention and service operations.

BAX Global again posted strong operating in Asia and global supply chain management. However, the real story at BAX in the quarter was the improved performance in North America, driven by higher volumes in the U.S., reflecting the strong economy in the fourth quarter, the continued strong cost control efforts.

Now looking at operating results for Brink’s Inc. For the quarter, worldwide revenue increased 18 percent, driven by international operations. Although about half of the increase resulted from the weak U.S. dollar, we did see higher revenues and earnings in key markets such as France and Venezuela. These two countries are the largest operations we have in Europe and South America.

International revenues rose 29 percent for the quarter, while North American revenue was up modestly about 4 percent. Brink’s operating profit was up more than 50 percent to 45 million, compared to the 29 million we earned in the fourth quarter of 2002, driven by the stronger performance of international operations -- very strong operating margin of 9.7 percent.

South America led the way in profit growth, accounting for more than half of the overall improvement in operating profit at Brink’s. Revenue in South America was up 23 percent over the prior year's fourth quarter. Venezuela and Columbia were strong contributors in the quarter to both revenue and profit growth. Currency effects were minimal.

In Europe, revenues were up 28 percent due to currency effects and growth in France and Belgium. Operating profit in Europe was up sharply over the fourth quarter of 2002, primarily as a result of the significantly better performance in France. The improvement comes in part from actions we took early in 2003 to streamline and reorganize our European operations. However, as a whole, economies in Europe continue to be sluggish, particularly the U.K. and Germany.

Asia-Pacific, while a small part of Brink’s' International business, again showed a nice improvement in results in both revenue and operating profit. Margin growth in Asia-Pacific was largely driven by Hong Kong and global services.

In North America, operating profit was up 18 percent year-over-year on 4 percent higher revenues. This reflects better results from both (indiscernible) logistics and our traditional armored car operations. We saw some volume growth in Canada. We also benefited from stable employee benefit costs in the U.S. in the fourth quarter this year compared to the year ago quarter, in which we experienced some cost increases.

Looking at some of our product lines. Our CompuSafe product again added installations and increased profits. We now have over 4300 units installed and we continue to push this value-added service into additional markets at a growing number of customers. In the U.S., our core armored car services, namely cash in transit and ATM, are up only slightly, reflecting a modest increase in volumes in the midst of very competitive market conditions.

In summary, I am encouraged by the strengthening of our international performance, the growth of cash logistics in the United States. There is room for further improvement and additional growth, and we'll be focused on these areas during the coming year.

Regarding the outlook, based on the operating trends we are seeing, we expect Brink’s to generate increases in revenue and operating profits for the year, but certainly not at the rate of growth seen in the year 2003. We expect Brink’s performance for the first quarter of 2004 to be solid, but not at the robust margin levels we just posted in the fourth quarter.

In North America, we should see continued growth in cash logistics and CompuSafe, while traditional ground operations, including ATM, should achieve some modest growth with the improving U.S. economy. In Europe, we believe that benefits of our cost reductions and organization realignments in 2003 will help us in the first part of 2004, but we have concerns about the pace of recovery in some key economies, particularly France, Germany, and the U.K.

In South America, conditions continue to get better, with Venezuela being a pivotal part of the regional recovery. While we are pleased to see this, Venezuela's political and economic situation is very volatile, and I would say somewhat fragile. So we will be monitoring conditions closely. Asia Pacific should continue to slowly build on its positive momentum, especially with global services. Cash generation will remain strong throughout the business.

Now at Brink’s Home Security. Brink’s Home Security had one of its best quarters ever, with strong growth in subscribers, further improvement in its already high customer retention levels, and excellent financial performance. New installation volume grew 20 percent, with revenue up 11 percent for the quarter. We continue to improve customer retention by remaining focused on the very highest level of service quality. Our disconnect rate was a low 6.4 percent, consistent with the rate in last year's fourth quarter. For the full year, the rate was 6.9, down from 7.1 in the year 2002.

Subscriber growth was 9 percent quarter-over-quarter, and we ended 2003 with more than 833,000 subscribers. The growth in the subscriber base and improved service operations enabled Brink’s Home Security to achieve record operating profit of $18.7 million in the fourth quarter, representing year-over-year growth of 18 percent and am operating margin of 23 percent. Monthly recurring revenues increased to 23.3 million from 22.7 million at the end of the third quarter. Overall, an outstanding quarter for Brink’s Home Security.

As to their outlook, we will maintain our focus on the key areas that drive the strong performance of this company, namely, balancing (indiscernible) installation volume and profit growth while working to further lower our installation investments, enhance our already industry-leading service to maintain high customer retention, profitability, and meet our goal of customers for life. We continue to build a quality subscriber base through effective mass marketing, complemented by opportunities generated through our relationships with those major national home builders through our home technology service. As result, this business and its recurring cash flow should continue to demonstrate very good growth while adding economic value. But as with Brink’s, we expect the rate of growth in 2004 to be below the exceptionally strong pace we just set.

Now moving to BAX Global. I am quite pleased with the much better performance in the quarter. As you know, the fourth quarter is usually a profitable quarter for us, but to be able to report profit growth was very encouraging as we look ahead to 2004. Our domestic freight operations benefited from a 5 percent increase in volume, with some of that growth coming from the wholesale freight (indiscernible) service we launched last summer.

We also are seeing the benefits of our business structure and broad service offerings. What sets BAX apart is the efficiency of its fully integrated domestic transportation system, a system that is designed to be mode neutral at BAX's superior service levels. Customers choose BAX because we have a full range of service offerings, from standard overnight, second day, and deferred delivery, with service quality that is second to none. While there has been a shift on the part of shippers away from overnight to deferred products, we have been able to capture a good portion of that volume on our integrated air and ground transportation and delivery network.

In the fourth quarter, revenue from the standard overnight and second day products continue to trickle down; however, this was more than offset by the solid growth in the BAX saver deferred service incremental revenue from our new wholesale freight forwarder service, and by an increase in the guaranteed overnight volume. This improved performance in the U.S. transportation part of our business reflects more of the solid results from our global supply chain and logistics operations to shine through.

Worldwide revenues were 8 percent in the quarter, driven by an increase in international activity, and some improvements in the Americas. On the international side, Asia-Pacific was again the growth driver, with a revenue increase of 13 percent. Although Europe showed higher revenue, the increase was related to currency exchange rates. Excluding the translation impacts, revenue actually fell due to the sluggish economic conditions there.

In the Americas, revenue was up slightly about 2 percent, reflecting higher volumes and the continued shift from overnight to deferred products. BAX saver grew 15 percent. Guaranteed overnight grew 13 percent. We generated a good level of incremental revenue from the wholesale freight forwarder service. BAX continued to build its supply chain business, seizing opportunities both here and in the United States, and building on our strong base overseas.

BAX posted a worldwide operating profit of 16.3 million in the fourth quarter, up 46 percent compared to the profit of 11.2 million a year ago. This better performance reflects the continued strength in Asia-Pacific, breakeven results in the Americas, partially offset by weak performance in Europe, as the several European zone economies are still recovering slowly.

ATI increased its profit contribution, reflecting hiding charter activity for the U.S. government. ATI's service performance was solid (indiscernible) all our people continued to improve their very high levels over the past year. Asia Pacific operating profits were flat in the quarter. Better results in India, Taiwan and Malaysia, were offset by declines in China, Hong Kong and Singapore, which were boosted last year by the effects of the West Coast dock strike, gross margin pressures, and some new business start-up costs.

As far as the outlook for BAX, Europe still has a way to go in its recovery, and it is not clear that we will see conditions improve much this year, especially due to the strong Euro and Sterling. We are pleased with the growth trend and strong operating in Asia-Pacific, the continued growth in our BAX saver product, and our expanding supply chain management operations. We are also encouraged with the steady growth of volumes from our wholesale freight forwarder service. The U.S. economic recovery benefited BAX's integrated domestic shipping business, and we are optimistic about the positive impact the continuation of the recovery would have on BAX domestically.

Now turning to our long-term retiree medical liabilities. With a review of our businesses, let me turn to another issue that is very important to our overall financial position, and that is our long-term retiree medical liabilities associated with our (indiscernible) former coal operations.

We received a favorable report from our actuaries that we will benefit from the recently enacted Medicare prescription drug bill. The exact amount is being determined now, and will be disclosed in our Form 10-K filing for 2003. Bob Ritter will have some more information on this during his comments.

So in summary, I'll wrap up by saying that in total, we are pleased with the results for the quarter. There is more work to be done, and opportunities exist for further growth and improvement in all three segments. Meanwhile, we are feeling positive about the U.S. economy and the benefits that our business, particularly BAX Global, will derive from higher levels of economic activity. At the same time, Latin America seems to be strengthening, and we're keeping a watchful eye on the signs coming out of Venezuela, where Brink’s has its largest operation in the region.

The economic picture in Europe still appears to be somewhat cloudy, and that will be an issue for both Brink’s and BAX Global to manage through. At Brink’s, we will maintain our focus on aggressively pursuing new business, while maintaining our high security, service, safety standards, and as always, our pricing discipline.

Brink’s Home Security continues to have impressive growth and rock solid financial results. Given their market position and strong management team, focused on execution, we expect this business will continue its excellent track record. For BAX Global, the focus will be growing the successful logistics business to be a larger portion of the total operations, maintaining effective cost controls and excellent service quality levels, while working towards consistent profitability.

Overall, the Brink’s Company continues to generate positive cash flow. In terms of successes and achieving strategic goals, I am very pleased with the timely sale of non-core assets in 2003, the initial funding of the VEBA, and the strengthening of the U.S. pension plan and our overall balance sheet. As a result, I believe that as a company, we are becoming easier for investors to understand, and we have eliminated a significant amount of uncertainty about our future.

Now for some additional comments on our financial side, here's Bob Ritter.

Thanks, Michael. I'll begin with some comments about the accounting for some of our coal related liabilities, then I will cover a couple of issues which should be helpful in looking at earnings for 2004, then the usual balance sheet items and the 2004 outlook for some key cash flow items.

As we noted in the earnings release today, every year during the fourth quarter, with the help of our actuaries and advisers, we reevaluate our employee benefit related and other coal related liabilities, based on data we receive from outside sources as it becomes available. Adjustments to two of these liabilities accounted for most of the fourth quarter charge in discontinued operations.

First, (indiscernible) the value of withdrawal obligations for two multi-employer pension plans was raised by $14 million, due to an increase in the underlying plan's funding status. The funding status was determined at the end of June last year, when market interest rates, discount rates, were pretty low and the financial markets had not rebounded to the extent we saw by year-end. But anything can happen, so our ultimate liability can change for the better or for the worse.

We also adjusted the Health Benefit Act liability, also known as the combined fund, to reflect an increase in our share of the unassigned pool. I want to remind you that this amount is booked as undiscounted dollars over the 70 to 80 years of projected payments, and amount to a nominal increase of $31 million. On a net present value basis, however, it will be worth more like 15 million at a discount rate of 6.25 percent.

It is also worthwhile to point out that until now, almost all of the unassigned pool payments have been covered through government funding sources. We in the industry are hopeful that questions about future funding to cover these costs will be put to rest on a permanent basis. If so, we may have a different and positive view on the likelihood of making significant payments for the unassigned fund, and may reduce that portion of the Health Benefit Act liability in future years.

Earlier, Michael commented on the effects of the recently enacted Medicaid reform bill. We have worked with our actuary to try to determine what the impact will be, and it is their assessment that we will see a significant reduction in the current net present value of our expected future obligation. The APBO, or the accumulated post-retirement benefit obligation, for those of you who enjoy this stuff. This will likely also lower ongoing expense levels for this liability. Arriving at the final number is complicated by taxes and plan document issues, but we're working through the alternatives and accounting for this, and hope to have it finalized shortly.

Now turning to the outlook for 2004. Michael has already commented on his expectations for the services businesses. There are a couple of other issues I would like to point out to you. First, SG&A expenses are expected to go up by 4 to $5 million next year to cover costs of implementing and auditing Sarbanes-Oxley regulations.

Now just a brief comment on the tax valuation allowance we recorded during the fourth quarter. This $22 million charge covered operating loss carryforwards and other deferred taxes associated with a couple of international operations and state tax loss carryforwards and deferred tax assets. This adjustment was purely an accounting one, and has little current cash effect. In fact, only about $2 million of the related tax loss carryforwards are expected to expire during the next five years, and most of the 22 million relates to tax loss carryforwards with unlimited life. So we will have plenty of time to improve operations and take other actions to take advantage of them over time.

Taking everything we know into account, our preliminary look at taxes for next year suggests an effective tax rate of 40 percent or so. One final comment on 2004 performance -- you should also know that discontinued operations in the first quarter will show a sizable gain on the recently concluded transfer in timber.

Finally, I would like to make a few comments about the Company's cash flow and debt position. Depreciation and amortization for the full year 2003 amounted to just over $165 million. We currently expect the full year 2004's depreciation and amortization to be in the range of 170 to $180 million -- divided among Brink’s Home Security at $50 million or so, Brink’s at 70 to 80 million, and BAX Global in the 45 to $50 million range. Corporate and other will have very little impact.

Once again, a reminder for those of you who calculate cash flow indicators. Please note the non-cash Brink’s Home Security related revenues and expenses reflected in the other financial information table on page 13 in today's release.

As for capital expenditures, spending came in at a little over $200 million for the recent year. CapEx on continuing operations should be up slightly for the full year 2004, with our current projections in a range from 210 to $230 million. We expect Brink’s Home Security to take the largest share at 100 to 110 million, as we continue to build the 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 30 to $40 million.

As for financings, we ended the year with outstanding debt of approximately $275 million. Combining this with roughly 130 million in cash, the Company's net debt was approximately $145 million. This compares with a net debt figure of just about 255 million at year end 2002. Receivables sold in the asset securitization facility were $77 million at December 31st, up from the 72 million for December 2002. In summary, financings, net of cash, were roughly $225 million at the end of September, down about 105 million from the year end level last year. This reduction is even more significant when you combine it with the $102 million in contributions we made to the VEBA and pension plan last year. All in all, a pretty good year from a liability reduction standpoint. Just another indicator of the strong cash generation capabilities of the Brink’s Company.

That is all I have for now. We are ready for questions.

(OPERATOR INSTRUCTIONS). Jeff Kessler, Lehman Brothers.

Just a parenthetical statement here -- just as I yelled at you guys for a -- whatever that was -- a 3.5 percent operating margin the first quarter in Brink’s, you have to congratulate you guys on almost getting to 10 percent, which is clearly the bogie for any company in this industry. Just a great, great fourth quarter. The question is -- first, if you could help us get to a real number -- real earnings number for the fourth quarter by pulling out, I suspect, the $22 million of taxes. Is that the way that we are going to, again, a real net income number, by taking $22 million out of -- reversing that $22 million tax deferral charge?

This is Bob Ritter. Yes, to get to a more normalized earnings number for the quarter, I think there are actually 2 adjustments that I would make to the numbers that we reported for continuing operations. That 22 million is a special onetime event. The other thing that you should keep in mind is that there was $10.4 million pre-tax and about 7 to $7.1 million after-tax gain that we posted on the sale of stock in our Australian mining investment. And neither one of those is typical of a normal quarter. So I think if you adjust for those, you are going to be very much in the neighborhood.

Second question is on Brink’s. Mike, you've gone over some of the factors that you are expecting here. I know you don't have any control over Latin America, and particularly Mr. Chavez in South America, but clearly this has been a wild-card for you. What exactly did improve in the quarter? Because it was somewhat surprising that all of a sudden things -- I'm not going to say things just got better; things had been improving, particularly in the other countries -- but it seems that Venezuela really did improve. And since it's such an important factor in South America, if you could just explain what the operating situation there is currently, it would help.

It's probably the most volatile place that we have operations in today for political, social, and criminal elements. I will tell you that it's been a very difficult time for the industry there, and we have been able to benefit due to who we are and how we operate. And some of our competitors have failed in the marketplace, and that has helped benefit us. Secondly, there is quite a bit of economic activity that is being generated down there at the current time, so those volumes going through our fixed cost system there fall to the bottom-line pretty quickly. But I want to emphasize that the political situation down there is very, very fragile, heating up again, and it is a big contributor to our earnings, as it has been in the past. And we are just going to keep an eye on it. Meanwhile, the rest of the economies in Latin America are slowly improving, and we have good solid management in each of those countries down there. And we hope to continue to see improvement, to get back to the type of contribution levels we were able to get out of that part of the world a few years ago.

Question on BAX. Your competition reported some miserable results just a couple of weeks ago. And I'm wondering, is it fair for you to say that you have seen marketshare gain on the part of BAX in this business in the last three to six months, or would that be pushing it?

I think that would be pushing it a little bit. We have a different business combination, we have a different strategy and a different focus. And we've got to find ways -- we're not over the hump here; we have made some good directional improvements, but we've still got a lot of work to do. We got good boost through the fourth quarter economic activity in the United States. We've talked in the past, Jeff, about the velocity impacts of slowing down really hurts (indiscernible) freight companies, speeding up of the economy, velocity benefits us. And I think management has done a reasonable job at cutting and controlling expenses, and we were able to benefit in that fixed cost system. And I think our freight forwarder product, which is starting to have some affect, is helpful. We are benefited a little bit for some charter activity on our ATI operation. The supply chain management business and our freight forwarding product continues to get traction. We are becoming less dependent on the high fixed cost network. And obviously, if the economy comes back, that will have a good affect for us. And it's hard to say. Historically, I wouldn't begin to predict where we are going with the fixed cost system in the first quarter. It's always the worst quarter of the year; I assume it will be the worst quarter again. January's numbers and volumes are encouraging compared to previous levels, but where the economy is going for the rest of the quarter and the rest of the year, I don't have a clue. And that will determine where BAX goes in 2004.

Quickly, on Brink’s Home Security -- 11 percent, 11.5 percent, actually, gain in revenue in the fourth quarter. I realize that wasn't the case for the entire year, but you ended up at about 10 percent. Realizing the nature of what -- how you grow in a home alarm business, is 10 percent sustainable or is that pushing -- is that pushing the accelerator a little too hard, or is that -- do you have a model that can handle that type of growth at this point?

Our goal is to grow all three of those major components, which is subscriber base, revenue, and operating profit, at a double-digit rate growth. You can't do that if you're not growing the topline at a 10 percent growth rate. And as you know, a few years ago we slowed down that operation on purpose. And now as we go through this acceleration phase again -- like I said, pedal to the metal -- we are trying to get back to that stable balance -- 10, 10, and 10 we call it -- of growing that business. And we are almost there. We have to continue to focus on it, but that is our internal goal. This year we had an outstanding performance from all the employees and the management group at Home Security. I think we picked some low hanging fruit on our improvement process. I think we gained from some of the competitive situations that cut across the U.S. business. So it's going to be little bit tougher in 2004, but we're not lowering our sights. It's the greatest economic value that we add into this corporation. They're getting the lion's share of the capital. And as long as we continue to balance the growth, efficiency and profit to the levels we do, it is just a great story. And I think we can do it again in 2004.

One final question. What is the percentage of non-cash in transit business currently in the U.S. at Brink’s Armored these days?

It's probably -- if you put ATM in --

Yes.

-- to the CIT side, then I would tell you it's 70 percent. If you take ATM out, it's probably 40, 45 percent.

Again, congratulations. Real good quarter.

Jeff Saul, Inscilda (ph) Securities.

Just a few questions -- two of your main competitors on the European cash handling side are currently negotiating a merger. What's your view on that possible merger?

We don't have a view. They are really guard companies, is their primary business. And the guard companies is not a focus of our business.

No, but I guess (indiscernible) is a big competitor in many countries, and so is (indiscernible).

Actually, we don't come across Grufor (ph) in hardly any of the countries that we operate in on the CIT side of the business, and Secure Corp. (ph), as you know, is the strongest player in the U.K. market, where we're a relatively small player. And if you take away their CIT revenues out of the U.K., which is the vast majority of their CIT revenues, they are a guard company.

Okay. So you don't really see that as a big event for your operations?

That's correct.

And you were -- when you commented on Europe, you were a bit hesitant on the recovery of the economies in general in France, Germany and the U.K. Is that just because you're not seeing any improvement, or are you actually seeing the market climate deteriorate in those three countries?

First of all, there's two different issues. One is the economies in Europe and where they are, and there is the strength of the Euro, and eventually that all effects the operation and the opportunities we have in our business. So I am a little bit concerned about the overall economic health of Europe as we go forward. The second issue is, in our business in our industry, Germany has been a disastrous market for our industry for a long time because of competitive activity, and that continues to be an issue for us. And I do think that the U.K. market in our business has deteriorated to a degree, but we're actually benefiting from that now, so I am hopeful that we will see some improvements there over time. In France, our market position and our performance there is solid, after a little bit of slippage. But at the end of the day, we're in the safety security business; it's about execution, it's about understanding your markets (indiscernible) about price discipline. And I think the management group in Europe has done a very good job to restructure -- recognizing these problems last fall, restructuring the Company, and starting to get the benefits of those actions. And I would expect that to continue in 2004.

Okay. Just on Germany -- do you both see problems in the financial sector segment and the retail segment? Or is it still mainly the retail segment which is the troublesome one?

I think the German market has been the most competitive market in the industry for the last five years, and there has been some quite dramatic changes in restructuring of that market, as you know. And there's enough companies that somebody always finds a way to fill the void. I think it will be a while before it shakes out. My view is that we have to maintain our discipline, we have to maintain our focus and our service excellence, and we will be in a better position than most to see our way through that particular country.

Have you had any issues on the Euro conversion, as many of your European competitors have had, where basically they've had some big accounting differences -- they can't find the cash?

We have none of those problems whatsoever.

Jerome Landy (ph), Millbrook (ph) Capital.

First of all on the taxes, I understand that we should look past the 22 million adjustment, but even pro forma for that and the tax effect of the gain on sale, it looks like your tax rate in the quarter was still high 50s.

Jerome, that's not unusual for companies in the -- because in the fourth quarter, typically, most of us follow a good practice when we look at our tax accounting. We basically review everything. What we basically have to do is we have to tie down our deferred tax assets and liabilities to the tax returns, that for the most point we have just filed. We also verify our earnings in the current year by country and by the tax rates in there. And in a year when you have a big currency swing, it's also very important for us to go back and re-review allowances and carryforwards. So that's all part of just making sure that the full year number is appropriate.

Okay. So I understand the catch-up, and that is fine. But I'm still not totally clear on why it's all a catch-up in the fourth quarter. Weren't these things you were adjusting for throughout the year?

You adjust for some of it, but typically, under 109 it calls for you to do an annual reevaluation of your assets and liabilities, and make sure you're comfortable with them. And that is a primary reason for the $22 million adjustment in the quarter.

BAX international margins were down in the quarter. I think you starred to say something about this, but could you elaborate a little bit on why?

Asia-Pacific is the most benefit in the international side of the business, or our biggest area and our most profitable area. And obviously, with the resurgent economies there and the growth of Asia, and everybody's focused on it, it's becoming a very, very competitive marketplace. And the gross margins are being squeezed. We also had some had some start-up business expenses go through with some of our recent supply chain management successes there. And what you're seeing is the effect of both of those events, not allowing us to bring the normal percentage from revenue growth to the bottom line.

Okay, but for going forward, you know -- start-up costs obviously flow-through, but thereafter, if you have price competition, you should still see a depressed level of margin on a go forward basis. Is that not right? Or do you think you'll get back to what you have done historically?

It's hard to predict what the competitive landscape is going to do or who is going to get overly aggressive on gross margins and some of those things. But once again, we're the number one supply chain management company in this industry in Asia-Pacific, and that is the side of the business that's growing that hurts us on the start-up costs. And a certain amount of that will flow through the transportation model, but it's management's task to manage that, to control the costs, to stay competitive -- at the same time, deliver the returns that we are used to enjoying in Asia-Pacific.

On the pension, the increase in the underfunded liability in the pension, is that related to the performance of the plant assets? I'm trying to figure out why you should have had such an increase in the underfunded, you know, in a year when the markets did what they did?

Actually, in our pension plan -- and I'm talking about our major U.S. pension plan, because I've actually looked at the results in there -- we've actually had quite a bit of a decrease in the underfunding in that plan. And the decrease would have been -- almost wiped out our underfunding against the ABO there if it had not been for the drop of 50 basis points in the discount rate. So we have picked up not only from the improvement in the market, but also the 20 million we put in.

That's good. Regarding the cash on the balance sheet, what is the level of cash that you really need to operate the business? And it seems like you have an excess there, and I'm wondering what you intend to do with it?

Obviously, there's some sensitivity to cash, particular some of the things that you've read in the paper over the last couple of months. I've actually gone through a very detailed review of that with our people in treasury, who are constantly working on trying to bring the number down. And our guess is that the probable number for us is going to be in the 100 million range, if everything is clicking perfectly. But to do that you have got to have everything working well from a borrowing and lending standpoint, because we do hold cash. And also our tax and dividend considerations. So I think you'll see over the next year we'll start to bring it down, but for us to get it below 100 to 110 million would be very difficult.

Sure. But so I understand you correctly -- so you've got some 30 million excess now, and you just received 30-plus from escrow proceeds from timber. So I'm wondering what you're going to do with that?

Our treasury people have been working on that first 30 million already this year, but that last 30 million is already gone; it initially went right against our debt to bring it down.

Okay. And finally, I am wondering why you don't expect the margin improvement in Q4 to carry over to Q1? What's not permanent in terms of the operational improvements you have made?

First of all, there is a seasonality that takes place in all these businesses -- not Home Security, but in Brink's Inc. and in BAX Global. Always the strongest quarter for BAX Global is going to be the third or fourth quarter. So that's not -- in my judgment that is not going to carry. And Brink's benefits from the strong retail sales season and process also in the fourth quarter every year. So if you go back and look at the history of both those companies over time -- and BAX you have to go a little bit farther because of all the economic noise that's gone through year, and Y2K, etc. -- you'll see that the normalization cycle for first quarter, second quarter, third quarter, fourth quarter, would give you a better view of that.

So I'm just thinking on a seasonal basis, incrementally speaking, you know, margins should still continue to be better than their year-over-year comps, but just not at a sequential growth rate.

Right. In Brink's Inc., there was a weak first quarter last year, so Brink's will be somewhere at more of historical first quarter levels, if you go back and look at the averages for the last couple of years. And BAX is an economic play -- what's the economy going to do? Is it going to continue to strengthen? Is it going to hold its current level? Or is it going to weaken? And unfortunately, I just don't have that crystal ball. I wish I did.

I'm sorry, I forgot I have one last question. On VEBA earnings, if I understand correctly, you assigned the VEBA to the specific liabilities at the end of last year -- or maybe you didn't, I thought you were -- and therefore, should we be expecting to see the VEBA interest earnings flowing through the VEBA income statement now?

Yes, Jerome. We are in the process of working through the last issues associated with that assignment, so we will have that done. So you should start seeing in 2004 the earnings going through income just like a pension plan. That will go through as an offset to the coal-related liability expense side.

Will that make it into Q1?

Yes, it will.

Thanks very much, and congratulations on a good quarter.

Lars Larsen, Nordea Securities.

I just have a question related to Brink’s. I just wondered how important you see your European platform going forward when you are trying to position that part of the business? And how do you actually intend to develop your European platform in the future?

There's two ways to grow the platform in Europe, and one is geographical expansion, and the other is product line expansion. And both of those initiatives are underway for us in Europe.

But I guess that this time of business is rather difficult to sort of grow up from scratch, especially when you are meeting quite well-positioned competitors, I guess. So would your development tend to depend more on the organic growth side, and how do you intend to do that?

We have mature markets in some product lines, and we have wide open markets in other product lines. And we go where customers ask us to be and ask to have our service offering positioned to benefit them. And in Europe especially, with a lot of the merger and acquisition opportunities and action that's taken place the last few years, and I see taking place in the next few years, that will assist us in getting into some of these marketplaces. As the customers want our service offerings to be in those local markets. We will look for sponsors. And we've always grown geographically that way, and we will continue to do that in the future.

Did I understand you right that you could actually see the acquisition road for you in Europe?

We are always in the acquisition deal stream. We look at opportunities as they present themselves, and we are very disciplined in the process. Any time an opportunity presents itself, we'll take a look at it. But I am just as comfortable to have a Greenfield start up with our service offerings that offer differentiation in the market.

But if you have -- in some markets if you don't really have a brand name to begin with, how do you actually intend to develop that and persuade your customers, and tell them how good service is you are able to offer versus competition?

Because most of the customers are also operating Pan-European or an international basis, and I can assure you they all know who Brink’s is.

Gary Steiner, Awad Asset Management.

Nice quarter. A couple of questions. On Home Security, I just want to follow-up on something that was asked before. You had a really good year, and you're basically saying for '04 you'll continue to do well, but just not at the same pace of growth. Is that because some of the competitive factors were just more benign in '03, and maybe it's not going to be as benign in '04? Or are you just saying -- you know what, this was a great year, and it's unreasonable to expect this to continue at that kind of level?

Once again, our goal is 10, 10 and 10. And this year we were up 17 percent for the business. And some of that was because of improved processes and some other efficiencies we were able to wring out to the system with some great management efforts in that group. I don't expect to see those again. So if I can get back to double-digit growth, returning revenue growth, and revenue growth, hold our service qualities where we are, I am very, very pleased with that rate.

Okay. Have you seen any more intensity in terms of the competitive environment, or does that continue the same?

It continues the same. There are so many dealers out there that work for these other (technical difficulty) who compete against themselves, that it's still basically a zero down market in most places. I don't think that will ever go away, just because of the construct of the market. And as you know, we are a little bit higher priced than everybody else, and try to maintain that differential. And then execute, execute, execute.

Okay. At Brink’s, I think the margin that you reported in the fourth quarter was the best, at least in probably the last seven or eight years. You're still fighting some economic issues in Europe and start and such. Is there anything that was unusually beneficial in the fourth quarter? You have attributed some of the issues that have improved there, but were there any onetime factors or anything that is not going to recur in future quarters?

Brink’s is such a diverse company and spread over 50 countries, and there are a couple of major contributors. And we got help -- no question we were helped by the fourth quarter economy and some of the volumes that went through the systems. Individual countries overall benefited us. And we had very, very good safety security performance because of management's focus on those types of things. And all that benefited to a very, very strong finish in the fourth quarter for the year. I think this business is still a 7 to 8 percent return business. We have got to work on it to get it up to the 10 percent, which I think we can do. But I think it's a 7 to 8 percent business on an annual basis; that's where it belongs; that's where it gets a return on its capital employed. And obviously, we are trying to find ways to build upon the asset base and the skills we have to increase that to get into the 10 percent range. But I don't see that happening in 2004.

But I guess just based on what you reported in the fourth quarter that would certainly -- if we adjust for the seasonality of the business -- certainly get you into that 7 to 8 percent territory on sort of an adjusted for seasonality basis?

You've got to remember in the last few years, with the tremendous devaluations that took place in Latin America, some in Asia-Pacific, and then the problems with the Euro coming in and coming out, and expenses -- how it lined up with the reporting -- really confused the subject a lot for Brink’s. Once again, it's a solid business with diverse platforms, and with huge investments in three different continents, and growing a investment in Asia-Pacific. That's part of the stability and strength of the Company, and we are going to continue to have that model as we go forward. And over time, it should be right in that range that we have targeted.

Just my last question on BAX. I guess this quarter you made a little bit of money, which certainly was an improvement from where it's been. By the same token, the economy has been pretty robust for the last two quarters or so. Certainly. Certainly your major competitor in this business has not reported stellar results either. And I guess I am just wondering here -- if the economy continues to be reasonably robust through '04, I'm wondering what kind of margins you can generate in your U.S. business?

Well, the more robust it is, the higher the margins. It's a fixed cost system; volume goes through and it has a way of getting to that bottom line. We are not sitting on our laurels, hoping that the economy stays as strong as it is. We have got all these different initiatives that we've talked about in previous calls. All those initiatives are being worked on, focused on, to continue to diversify our ability to whittle down the impact of that fixed cost system and the overall results of BAX Global.

Are you hopeful that -- not hopeful, but I mean, do you still have a reasonable expectation that if the economy continues to grow at the rates that it has, that that will be a reasonably profitable business in and of itself? I'm talking just the domestic (indiscernible) --

Yes, I do.

Brian Butler, Friedman Billings Ramsey.

It's actually Michael Hoffman. The VEBA payments, or the pay-as-you-go obligations that are in the expenses -- can you give us a sense what the total was for FY '03?

I just want to make sure I understand the question. Could you rephrase that one more time just so I don't --

Actually, I mixed 2 things together. The legacy liabilities that were below the operating line in discontinued ops last year are above the operating line as an expense item in '03, and what was the full year -- approximately the full year number for that? You had given that in a table in your 10-K, I think it was on page 20 (indiscernible). You thought it would be around 60, 68 million.

Actually we have a table in today's earnings release, and I'm just flipping through it just to find it for you. But there actually is one in there for you. If you go to page 14, it is in note 2. And that gives you the detailed breakdown for both the quarter and the year, this year versus last year, for what ran through the above the line -- above operating profit line for our coal-related obligations.

Alright, so it was (indiscernible). So where this is going, then, is -- what's your sense of -- it's going to be less, but how much directionally do you think less is going to be because of Medicare?

That one we are still working through, (indiscernible) there's a complicated analysis we have to go through, whether or not we want to sit back and take the subsidy that the government has already authorized, or if we want to do what is called a wrap with Medicare, meaning we stand behind Medicare as a second payor. We are working through the tax and the legal issues associated with that to make sure we come up with the best possible outcome for the Company. But just in terms of looking at this thing, you have seen the projections we have done, and we will update them again in the 10-K that is going to come out shortly. But if you look at admin (ph) and you look at idle mine (ph), those two things will be going down this next year as we have suggested they should, because we have basically now completed everything we need to do out there in terms of divesting assets. So those two lines will be coming down. We'll also have the impact of the VEBA assignment offsetting this.

Right. Because in that table, I think if I remember correctly it was approximately 60 million for '04 and '05, your target going down to like 58 million '06, '07. And that reflected the admin and the idle mine reduction; doesn't reflect the VEBA (indiscernible) income.

That did not include, if I remember correctly -- and I don't have the annual report right here in front of me -- but there's a footnote to that table that actually told you which parts of these were not included in that expense projection.

Which it clearly didn't include the VEBA income, because that had not been thought of back then. So heading towards the 50 million type expense number is the right way to think about this?

Yes.

Okay. Working capital, thoughts for '04? Are you going to be a user or a generator of working capital?

We're probably -- if you look at the growth that we expect in the business is you would ordinarily expect us to be a user of cash to fund that, but we are also going to be vigorously working on trying to drive down the cash in the Company, and working on a couple of areas of working capital where we think we have some ability to lower it. So I do not expect to see a huge growth in working capital in 2004.

But net net, you would be a slight user?

Probably a slight user, yes.

And taxes -- about 25 million again in '04?

Yes, we have been running in the 20 to 25 million range now for several years.

Alright. And then, you did 6 million in interest expense in the fourth quarter. Is that the right way to think about the next 4 quarters?

That's going to come down some, because there is some VEBA in there. Plus, as we begin to -- we have already moved some cash off of the balance sheet into debt reduction. And as we are successful in doing that, we will begin to bring that number down. The 3 million or so that we had the prior year is probably a more rational number to look at.

Say that again?

The 3 million or so that we had in the prior year is probably a more rational number to look at going forward.

3.25?

Yes.

So that puts us, what, on a cash basis for the year on interest expense? Is that all going to be cash?

There probably are 3 to $400,000 of amortizations that run through there, but almost all of that is cash.

(indiscernible) 12 million (indiscernible). Okay. And then on BAX, have you seen any excess capacity, whether its trucks or planes, come out of the system at all in the fourth quarter?

Overall industry?

Yes. I mean -- within your competitive environment, has anybody indicated -- have your sales guys said -- gee, we are hearing planes parked or we're seeing trucks not moving -- any sense of excess capacity coming out?

Trucks are busy. That's not a problem. Aircraft -- there's been some readjustments in the competitive marketplace, but there's still excess capacity, in my judgment, everywhere. And we have excess capacity on our fleet.

Okay. And then on the wholesale side, the program you started last summer -- do you have a feeling for new customers that you added, that they are going to stick around beyond the seasonal uptick that would have occurred in the second half? Do you get a sense that there's some permanence to those new customers, or is it really just seasonal?

I think there's some -- judging the January -- you've got to remember, this is our first cycle with this, right? Judging with January, volumes are down a little bit -- which is seasonally affected -- but they stayed in there, and in my judgment, at a reasonable amount. We are delivering a very good service, we're guaranteeing the space, and the number of people who lived with us through the busy season -- when capacity got a little tight for a while -- were very, very pleased with how they were dealt with and our commitment to servicing that segment.

Great. Keep up the good work, guys.

Dan Carroll (ph), Royal Capital.

Just one tiny little item. Great quarter, and I may have miscalculated this. I'm looking at your sort of monthly recurring costs per sub in BHS, and it looks like it ticked up now. Am I miscalculating that, or did something change? Is there a onetime event there?

No, you should see -- that monthly recurring revenue figure should go up on a quarter by quarter basis as we add to our net subscriber base.

Not the monthly recurring revenue, the monthly recurring costs per sub; i.e., it looks like it's costing you more to service and monitor -- not much more but slightly more. I would expect it to go down, not up. I'm wondering if I miscalculated?

The number did not change so much that we even spent a lot of time looking at that, but that's going to float up and down quarter by quarter throughout the year.

Thanks very much. Congratulations on the quarter.

At this time, there are no further questions. Mr. Dudley, are there any closing remarks?

Thank you all again for joining us, and we look forward to talking to you again in the future. Thank you.

This concludes today's conference call. You may now disconnect.