Brinks Co (BCO) 2004 Q2 法說會逐字稿

Good morning. My name is Ashley. And I will be your conference facilitator. At this time, I would like to welcome everyone to The Brink's Company second 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. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I'm sorry, press star, then the number 2 on your telephone keypad. I would now like to turn the call over to Mr. Scott Dudley, Director of Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to our second quarter 2004 earnings conference call. I'm joined today by Michael Dan, our Chief Executive Officer and Bob Ritter, our Chief Financial Officer. We will have a replay of our call today starting this afternoon running through Friday the 13. The replay number in North America will be 800-642-1687, or outside North America, 706-645-9291. The conference ID for the replay is 8955779.

We'll also have a replay of the webcast and that will be available on our website at brinkscompany.com running through Friday, August 20. Before we get started, a quick reminder about our Safe Harbor. 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 a 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 out of the way, 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. Regarding our second quarter results this morning, we reported results driven by improved operating performance from each of our business units led by BAX Global. For the quarter, The Brink's Company revenues were up 18%, operating profit grew to 39 million, up from 13 million a year ago. Brink's, Brink's Home Security and BAX all posted double digit revenue increases which resulted in improved operating profit and cash flow.

In addition to better operating results from each of our businesses, The Brink's Company's operating profit also benefited from a decrease in costs for our former cooperations offset somewhat by higher corporate expense. BAX Global had an encouraging quarter, posting a solid profit this year versus a loss a year ago. I'm especially pleased to note that our Americas operations were profitable in the quarter. This was the best quarterly performance we've seen since we restructured the U.S. business.

Brink's Incorporated posted improved results met again by the international side, which benefited from the operational enhancements and better economic conditions. Brink's Home Security turned in another great quarter driven by sustained strong subscriber growth, customer retention, which helped produce strong margins and cash flow. I'll comment on each of these units starting with Brink's Incorporated. For the quarter, revenue increased 13% or 11% excluding currency effects driven by international operations. International revenues rose 21% for the quarter while North America revenue was up about 3% driven by Canada.

Brink's' operating profit grew 24% to 26.6 million with nearly equal contributions from North America and international operations. Operating profit in the current quarter at Brink's had a $2 million less restructuring costs in the U.S. and Europe than the prior year. International results at Brink's in the current quarter were impacted by $2 million of non-income tax contingencies. There is information in our press release today concerning a recently discovered issue at a non-U.S. business unit of Brink's Incorporated relating to duties and value-added taxes including the potential for penalties and interest that could be assessed.

Obviously we are disappointed in this situation. As a Company founded 145 years ago on the principles of integrity and trust, we are treating this as a serious matter that is deserving of a rigorous investigation that is currently being conducted. Because this matter is still being investigated it is inappropriate to comment further. However, let me assure you that we are committed to resolving this matter as quickly as possible and providing additional information as appropriate in a timely way. Looking at the major regions in more detail, South American operating profit was up modestly.

Revenue in South America was up 18%, or 25% excluding negative currency effects. Venezuela was a primary driver, but Brazil, Columbia and Argentina also contributed in the quarter to higher revenue and operating profit. In Europe, revenues were up 22% with about 1/3 of that increase due to currency affects. Operating profit in Europe was slightly ahead of the prior year. We achieved significantly better results in France due to prior restructuring and operation enhancements made a year ago.

We also benefited from a small acquisition in Greece. This improvement was largely offset by decline in performance in Germany and the UK, as economic and marketing conditions remained challenging. Asia-Pacific, again showed a nice improvement in both revenue and operating profits, driven by Global Services. As I mentioned, overall international results were impacted by a total of $2 million of non-income tax issues. In North America operating profit was up 24% year over year on 3% higher revenues.

Cash logistics, point processing, and Canadian ATM operations were positive factors. These were offset somewhat by lower profits of our U.S. armored operations on lower revenues and higher employee benefit expense. Our CompuSafe service added installations increased profits during the quarter. We now have more than 4,500 units installed, up from about 4,300 at the end of 2003 and we are working to keep growing this service. Regarding the outlook for Brink's, in North America, we should see continued growth in our cash logistics at CompuSafe, while traditional cash in transit and ATM services should achieve some modest growth with the improving U.S. economy and better conditions in Canada.

In Europe, we believe the benefits of our cost reductions in reorganizational realignments in 2003 will help us again in the third quarter, but the comparisons in the second half of 2004 will be much, much tougher, giving the improved performance we posted last year. We remain concerned about the pace of improvement in the UK and Germany. South American conditions have been more reasonable now for several quarters and that's certainly encouraging. However, as we have cautioned before, political and economic stability in the region remains fragile. Asia-Pacific should continue to grow, driven by Global Services.

Brink's should continue its strong cash generation. Overall, we expect further improvement in the second half of this year, but not at the pace we saw in the first half. Now at Home Security, Brink's Home Security had another record quarter. Its subscriber growth and its industry leading customer retention levels remains strong. Financial performance was excellent. New installation volume grew 26% and the disconnect rate remained a low 7.2%, the same as in last year's second quarter.

Just a reminder, the second quarter rate is usually higher than the full year rate, as disconnects increase during the summer due to moves. Revenue and operating profits both grew at 12%. Subscriber growth was 10% year over year. And we had about 874,000 valued customers as of the end of June. The growth in the subscriber base in improved service operations enabled Brink's Home Security to achieve record operating profit of 19.8 million in the second quarter. Monthly recurring revenue grew 10% to 24.5 million at the end of June.

Overall, continued strong performance from Brink's Home Security. The outlook remains bright. Solid execution has been the key to Brink's Home Security success and the management team remains focused on the fundamentals, including the effective mass marketing through a variety of proven channels, including our home technology service and a network of well qualified dealers; adhering to good subscriber selection criteria and constant attention to delivering the highest quality service from installation to ongoing monitoring, customer care and of course overall operating efficiency and cost effectiveness.

I expect Brink's Home Security to continue to post good growth. We already are starting to see results aligned with our targeted levels with 10% top line, 10% of bottom line and 10% growth in subscribers. Now moving to BAX Global, I am pleased and encouraged by the much improved performance we saw this quarter. Revenues were up a strong 23% or about 20% excluding currency effects driven by growth in Asia-Pacific and higher U.S. freight volumes. BAX posted a worldwide operating profit 12.4 million in the second quarter compared to a loss of 2.5 million a year ago.

This positive performance reflects the significant improvements in the Americas, and solid performance in Asia-Pacific. Now looking first at the Americas, revenue increased 20% on strong freight volume growth across all product lines. Operating profit in the Americas was 6.1 million, a significant improvement over the loss of 10.6 million in the second quarter of last year. Our domestic freight operations posted a 25% increase in revenue led by the wholesale freight forwarder service we launched last summer and by growth in both standard and guaranteed overnight products.

In fact, the guaranteed product revenues were up more than 60%. Revenue from BAX Saver and our second day products was also up nicely. In addition to higher revenues from intra-America shipping, the Americas region also posted 10% growth in U.S. export revenues. ATI increased its revenues and profit contribution reflecting higher charter activity for the United States Government. Overall, a solid quarter for BAX, especially in the Americas, that brings us closer to where we need to be.

On the international side, revenues grew 24%. The Asia-Pacific region was again the growth driver. With a revenue increase of 37% or about 34% excluding the currency effects due to the strong increase in air exports and increased supply chain management activity. Although Europe also showed higher revenues, the increase was all related to currency exchange rates. Excluding the currency impacts, revenue actually fell. International operating profits were up 35% in the quarter, mainly due to high tech export volumes from China and Hong Kong.

Operating profit in Europe was flat as performance in the UK offset smaller bright spots in other parts of the European area. As far as the outlook for BAX, they are off to a positive start in 2004 with year to date operating profit of 15 million compared to a loss of 8 million for the first half of 2003. The Americas operation was profitable in the quarter and it is certainly pleasing to be able to finally say that. Our people have worked long and hard to achieve this. We're optimistic about the third quarter and the full year for BAX.

In addition to the usual volume growth that comes from the peak shipping season in the second half of the year, we expect overall activity will be stronger this year with the better U.S. economy. As we expect, the growth in Asia-Pacific to continue, driven by strong markets for exports in supply chain management services. Meanwhile, we are encouraged by some modest improvements in certain European economies, but the bigger issue is the UK. We don't expect much improvement through the balance of this year. In summary, we are pleased with the results for the quarter in the first half of the year.

This gives us a positive outlook for the rest of the year. Each of our business units is positioned to achieve further profitable growth through a combination of better economic conditions and focused pursuit of market opportunities and disciplined executions. Brink's, Inc. and BAX Global in particular stand to gain from further improvements in the economies in the U.S. and Europe. Brink's will pursue growth in traditional armored car and our value added services like cash logistics, coin processing and CompuSafe.

Brink's also stands to benefit from a continued stability in South America. At BAX Global, the focus will be on maximizing the benefits of the positive leverage of our integrated domestic freight system, growing a successful logistics business, expanding our ocean activities, and building on our fast growing Asian markets and of course maintaining our excellent service quality standards. Brink's Home Security should continue to build on its excellent operational and financial success, as growth rates for revenues, profits and new subscribers become more balanced toward the rate of 10%. Overall, The Brink's Company's performance, financial position, and growth continue to improve. Now for some additional comments on our results and financial positions, here is Bob Ritter.

Thanks, Michael. I'll begin with a couple of comments on operating performance to help put this last quarter into perspective for the third and fourth quarters. I'll conclude with the usual cash flow and financing information. I'll start with Brink's. As Michael noted, we've had a solid first half, but it's being compared to a weak first half last year. There were 2 factors which added wind to our sails in the second half of last year.

Year over year differentials in foreign currency exchange rates and the sharp rebound in performance of international operations, particularly in the Europe and Latin America. The difference in exchange rates doesn't look to be as significant this year unless of course we see the dollar weaken from where it is today. And on the performance side, we've already seen the normal cooling off in performance of some international units as they have returned to more sustainable levels. As Michael said, we expect to improve from the second quarter run rate, but we won't see the same year over year gains we saw last year in the second half.

Brink's Home Security has had a good first half. They have grown quickly and continued improving efficiencies. We've seen the normal seasonal rise in the disconnect rate during the second quarter. And the third quarter should also see a relatively high, at least for us, disconnect rate before settling down a little in the fourth quarter as moving season ends. All in all, the rate of year over year improvement in operating profit began to moderate also to a more sustainable level this quarter.

BAX Global continued to show improvement with the growing economy. We hope that the world's economies continue strengthening so we can watch the impact on margins of the revised structure of this business. Costs of former coal operations for the quarter were once again significantly below those of a year ago as we had expected. The expected benefits of the Medicare reform legislation lower the the charges associated with the post retirement medical plan by $1.5 million during the quarter.

As we've mentioned before, with the allocation of VIVA to pay only costs associated with the plan the accounting for it mirrors the pension plan. As a result we booked investment income at the expected long term rate of return, or about $2.3 million for the second quarter of 2004. There was no similar income offset here last year. Also as we noted during the first quarter's review, with the sale of almost all of our former coal sites we have substantially reduced the cost of maintaining those idle sites. Those costs ran through much of last year.

There is one more thing to keep in mind as you look at the third and fourth quarters. For the full year we now expect to record over $10 million in gains on the sale of former coal properties as an offset to costs of former coal operations within operating profit. But we don't control the timing on the remainder of the gains. So they could end up in either or both of the remaining quarters. I'm inclined to believe that most will be in the fourth quarter. But, again, as a note of caution, these gains are not something you should expect to occur after 2004. Now for those of you who prepared detailed models of operating performance, I'd like to make a couple of comments about the quarters below the operating profit line results.

I'll start with interest expense. The $5 million of expense for the quarter was pretty low based on strong cash flow and the current level of debt as well as current interest rates and foreign currency values. With the contributions we expect to make and interest rates ticking up, I would expect that we won't go much lower than this and we could see it begin to move up over the last 2 quarters. Now for income taxes, our regular evaluation of the potential realization of tax assets led us to conclude that the tax assets related to loss carry forwards in one of BAX Global's European subsidiaries could no longer meet the required more likely than not criteria. Accordingly we have taken evaluation reserve against these assets.

This didn't cost us any out of pocket cash and the loss carry forwards have an unlimited life. But it was the primary factor in the $5.2 million of tax charges over and above the expected 40% effective tax rate. We still expect the full year's rate to be about 40%, plus this quarter's charge. Finally, I would like to make a few comments about the Company's cash flow and debt positions. After reviewing the first half and considering foreign currency fluctuations, we expect the full year 2004's depreciation and amortization to be a little lower than we last estimated. We currently expect it to be in the range of $165-$185 million.

Divided among Brink's Home Security at 50-55 million, Brink's at $75-85 million and BAX Global in the $40-$45 million range. As for capital expenditures, spending came in at just under $100 million for the first half. And for the full year CapEx on continuing operations still looks as it will be in the range we noted during the last call, $210-$230 million. We expect Brink's Home Security will take the largest share at $115-120 as we continue to build the subscriber and value of this business. Brink's investments should run in the $70-$80 million range and BAX should run at roughly $25-$30 million.

As for financings, we ended June with outstanding debt of just over $235 million. Combining this with roughly $145 million in cash, the Company's net debt was under $95 million at the end of June. This compares with a net debt figure of just above $145 million in December and $125 million in late March. Receivables sold in the asset securitization facility were only $50 million at June 30, down from $77 million in December 2003. And in summary financings net of cash were just over $145 million at the end of June, down almost $80 million from the year end level. Remember we expect to be using some of this financing capacity during the third quarter to cover the $61 million in pension and VIVA contributions we announced today.

$11 million had already gone into the pension plan. And we expect to put another $15 million into the VIVA before the quarter ends. To wrap it up, so far all 3 of our businesses have had a pretty good first half from both an earnings and cash flow standpoint. And as promised we're using this combination of earnings and cash flow to finance growth and address our liability situation. That's all I have for now. Ashley we are ready for questions.

[Caller instructions.] Your first question comes from Jeff Kessler of Lehman Brothers.

Thank you. A couple of questions here. First, obviously everybody on the call who's listening wants to know a little bit more about this potential liability that you have indicated. And while it seems if it's related to somehow, to VAT related issues that obviously means it's over in Europe. Probably means it's related to Brink's over there. But I'm just wondering if you can give us any more detail than you've given us. Realizing that you're in a legal situation we accept that. But we have to get some more because obviously your stock has got rocked this morning. Principally because of the uncertainty surrounding this situation.

Unfortunately, Jeff I can't give any additional information other than what we've disclosed because we're in the middle of this investigation. And obviously it's very disappointing based on the fact of the performance of the unit and the cash flows and the improvement in our Company. On the other hand we feel very very strongly that this timing of this surfacing corresponded with the timing to release this press release. And we feel very strongly about the need for total transparency in trying to put some book ends around it. And it's best we understand it at this early stage of the investigation and to publicly report that. Beyond those comments there's really not much else I can add to it at the current time.

Okay. Can you make any comment about why you believe what is apparently looks like a $3 million discrepancy can result in charges that are as much as $85 million?

Jeff this Bob Ritter. We are still in as obviously as Michael said we're in the preliminary stages of the investigation. And these are always very complicated matters. And - - but basically it's the best information we have today based on our interpretation of the facts and circumstances that we're currently aware of.

Okay. Well, obviously I'm not going to be the only person asking about this issue. But let me move on to an operational issue. This is - - in Brink's, clearly getting Brink's down on a past basis or on a yearly basis has been always for me a lot easier than quarter by quarter. And clearly in the first quarter Brink's you had a quarter which was your best quarter in history. 7.2% margin. That margin is now 5.7% in the second quarter. Which is a quarter which is usually as good or better than the first quarter. And I realize 1 quarter does not a trend make. And I'm assuming that we're going to see some improvement quarter by quarter in the second half of this year. I'm just wondering if you could give us some reason why the first quarter was so abnormally strong and the second quarter turned out to be, we'll call it a more normal quarter for Brink's?

I'd be happy to Jeff. First of all, I think you have to divide it up. In North American in operating performance was basically the same. There was no improvement on flat revenues. As far as operating margin goes on the whole North American business. So, the change was all in international. And the vast majority of that was in Latin America. Where you'll recall in the first quarter I talked about the incredibly strong results that we experienced. I didn't think that was going to continue. And unfortunately we had a $2 million charge in the income tax contingencies which got that operating margin down to 5.7. Or it would have been on an operating basis about 6.1%. Which is more or less in line with where I thought the second quarter would be. I do expect to see improved performance in the third quarter based on just seasonal volumes like we normally see. And once again I always think is a 7%-8% business is where it belongs. And I think you'll see those results by the time we get to the end of year be right in that range.

Okay. So, if I can interpret this again. During your original comments you did mention that there was $2 million in this quarter. There was $2 million of income tax contingency that was taken out of the operating income for Brink's in the second quarter?

Yes Jeff.

Oaky. The next question is the housekeeping item. You did not give an exact amount of shares outstanding in the table. And I'm wondering if you can give that to us?

Let me figure that out as we forward. And I'll be sure to make a comment if you're still on or not. I'll make a comment within another minute or 2. Let me just --

Okay.

I can get the right numbers.

Okay. And finally, with regard to Brink's again, if you could just give a little more detail on where you feel kind of feel growth will be in the second half of this year? Second half of last year you had a big bump up, partially because of European costs going away. This year you've got an improving Europe except for maybe for the UK where things seem to be still a problem. And yet, but you also think that the cash in transit business which had been flat to slightly down in the U.S. is going to be a little bit better in the second half. So you put this all together it sounds like there's still going to be some reasonable growth in your operating income in Brink's in the second half of this year.

Jeff, once again our target is getting to that 7%-8% range. And I think that we'll be successful doing that this year. I think a lot of that help will come from Europe. I told you we made a small acquisition in Greece and I think we'll have some good results from the third quarter there, especially because of the Olympics, which will affect that. And at the same time, I expect Latin America to if this political stability situations down there stay the same, to improve a little bit, help drive our performance. And in North America it would be strictly seasonal volumes picking up. I don't expect any large new business pieces to come aboard at all, just normal seasonal increase we see in the United States.

Okay. Finally one last item and that is the $5.2 million of tax, excess tax charge, that is primarily related to BAX in Europe and primarily 1 time in nature?

Yes, sir. It's- - these relate to net operating loss carry forwards that we have accrued in the past, the benefits from that. Based on the performance of this particular subsidiary to date and the outlook that we we just did not feel it was prudent to- - we did not feel it continued to meet the more likely than not realization test. So it's a 1 time deal associated with that particular subsidiary. It is non-cash and I just want to remind you these are very long term useabilities for these items. So to the extent that we're able to improve performance down the line, we'll be able to relook at this issue.

All right. So let me just get this straight. There was 5.2 million here and there is another $2 million related to Brink's in the quarter?

Right. That $2 million was a non-income tax item, so that is actually up above the line that's in operating earnings.

Okay.

Jeff, to answer your other question, let me give you the quarterly information and also the first half on the per share data. This is fully diluted.

Mm-hmm.

For the quarter, it was 55.1 million shares this year versus 53 million even last year.

Yep.

For the half, it was 54.8 million versus 52.9 million last year.

Okay. Great. Okay. Thank you very much.

Thank you, Jeff.

Your next question comes from Jerome Land of Millbrook Capital.

Hi. First of all, not to beat a dead horse here, but the 2 million that appeared above the line in Brink's operating income, what was it exactly?

These are non-income tax related items and basically, it's issues that we had open that we had anticipated coming out on the right side of court rulings and unfortunately, court rulings which we had really thought we were going to end up on the right side of came out against us during the quarter.

So it was 2 judgements entered against you for $2 million?

Well 1 was actually a judgment entered against us for less than the full amount, but the other 1 was some similar companies or similarly situated companies to ours in another country had court cases go against them, which had actually reversed prior court cases in those countries, or that country. So those are not things that we would expect to recur.

Okay. And I have to come back to this issue of the $3 million in unpaid duties and so on that you discovered because I frankly am disappointed. I feel like you have more disclosure in the press release than you're willing to say here on the call. And to arrive at what you've told us, you have to know at least some basic details on where this was, the mechanism of how 3 turns into 85, you know, how this was discovered? Was it you, was it somebody else, who is involved in the investigation? I mean I think you owe us a little bit more about that.

Jerome, this is Bob Ritter. Let me just talk about that briefly. These issues are always very complicated issues, and unfortunately as Michael had said, we've run into a situation where we have-- it is time for us to report our earnings and unfortunately we are still very actively involved in the investigation of this and for us to disclose additional information at this time could limit our choices as we go forward.

All right. I appreciate that. It just seems a strange decision to release something like 85 million without explaining how you got there. Who discovered this?

Jerome, again, it's Bob. Because of the fact that we are still actively involved in the investigation, that's not something that we're prepared to discuss yet.

Do you have any sense of when the investigation will conclude?

We are going wrap it up as quickly as we can, but the- - we have to make sure we follow down every lead possible.

All right. Thanks.

Thank you.

Your next question comes from Bill [Greerson] of Paradigm.

Hi. I don't know whether or not it's worth trying. Obviously there is widespread dissatisfaction on the amount of disclosure here. If you won't tell us more about what happened or how we get from A to B, can you tell us, can you draw some more bounds around what you believe based on the leads that you're aware of today represents a reasonable time for concluding your investigation?

Bill, it's Bob again. Based on the - - so far where we are in the investigation, we would anticipate that within the next few months we will wrap this thing up completely. But that is a- - that is something that will- - is open to change based on what we find out as we continue the process.

Okay. Fine. Thanks.

Thank you.

Your next question comes from Michael Hoffman of FBR.

Well, let me get my whip out and start beating on this horse as well. Clearly, someone either internally or externally has sat down with the tax code and the penalty guidelines that exist somewhere to be able to ascertain that 85 million could be a number. Is that a reasonable conclusion on how an 85 arrived?

Michael, you have to understand, it was a very, very preliminary stages of doing this. And in the process of doing that, we're working on very, very limited information and we're trying to give the book ends that we understood at the time we had to release this press release, the best we could to be totally transparent and that's what we've done.

Okay, but then you haven't been transparent in the end. Clearly the market's telling you that because you're down $6 on 1.5 million shares. By definition, you failed at that objective. And I'm sorry to be harsh about it, but that - - but I respect the context of that's what you're trying to do and there is evidence to the contrary. So with evidence to the contrary, if you have defined a book end, you would seem then to have had a series of assumptions you use to apply, to reach a definition of what a book end is.

I think we have an obligation, Michael, when we have whatever information we have to be, as transparent as possible. I understand the confusion and obviously the market reaction this morning. You know at end of the day our obligations are to improve the operating performs of this Company and its cash flow and to ensure that the highest standards of ethics and transparency exist. And we're doing that within the context of where we find ourselves and the timing of this investigation.

Okay. The - - to arrive at an $85 million number, is there existing statute or, you know, sentencing - - penalty guidelines that exist in the jurisdiction in which you're doing this investigation that you were relying on and trying to reach this conclusion, this is one end of the book end?

Michael, unfortunately, you know, that figure we gave is the best transparency we can give at the current time. And it could be nothing or it could be materially different from that and we just don't know at this time.

Okay. Well this, is a little bit like sentencing guidelines. You know, the question is was Martha going to jail for 20 years or none and she got 5 months. So, are we in the same kind of bandwidth here, that there are principals out there that you were trying to use as mile markers to come up with this?

I can assure you if that we had more information we would have disclosed it in today's press release. And we will disclose it as soon as possible.

Is it really just $3 million?

The best information we have at the current time, the answer to that is yes.

And is there any reason to believe that will be any different?

No. At the current time, there is not any reason to believe that would be any different.

And given the nature of this investigation, have you been able to eliminate that this doesn't- - this situation doesn't exist in any other foreign operations?

Michael, this is Bob Ritter. We are very comfortable with our controls throughout our organization. And although obviously those possibilities always exist, it's not something that we're concerned about at the current time.

And was this discovered through an internal audit process that you all conduct periodically through operations?

Michael, because this is still obviously an investigation - - I realize this is somewhat frustrating for you as it is for us, we're still in the investigatory phase on this thing and we are not in a position to disclose that yet.

I think you got to get another set of lawyers to talk about fair disclosure because I think they are giving you bad advice. Thank you.

Your next question comes from Michael Herber of HighBridge.

My question was just recently asked, but I don't think they got an answer. In terms of if you have had the opportunity to investigate and ensure that this tariff issue is only problematic 1 country, I know that you said that you are comfortable with the controls that you have in other countries, but have had you the opportunity to actually look at the numbers and make sure these controls have been adhered to?

Well, we're - - if you look at all the rest of the countries that we operate in, we are also going through our regular internal controls review that we typically have ongoing this Company and we're also going through a Sarbanes-Oxley review. So that's, that's an issue that obviously is addressed on a country by country basis as we work through things .

Your next question comes from James Clement of Sidoti.

Good morning. Was it - - did not want to continue on this same line of questions that others had had. But one of the things that I was curious you guys are planning on filing a 10-Q next week, that's correct?

Yes.

And I think that in the press release you allude to potentially having to make some revisions in the numbers that you reported today. I guess the question that I had about that was, you know, if the ongoing investigation and fact finding that you guys are involved in right now could theoretically take a couple of months, what could one expect, I mean not necessarily specific dollar values, but I mean would you be looking at potentially taking a reserve that would show up in the 10-Q numbers and wouldn't show up today? What can investors - - what is your thinking on those terms?

That's- - the possibility of a reserve is one that we are evaluating.

Okay. Okay.

But I would point out that this is- - obviously this is still at the very preliminary phase. We, we are investigating what's going on. As we noted in our release today, we have not been notified by any governmental authority about anything related to this issue and we are going to work through all of the alternatives over the next, you know, as fast as we can so we can come out with the best resolution for the Company.

Okay. You know, given what you just said there and the fact that obviously this could take some time, you know, I mean is- - the numbers that you report in your 10-Q, I mean is that going to be, you know, based on "current information at the time"? Or do you actually think that when you report the 10-Q that investors are actually going to have some increased disclosure compared what you are saying today?

It will be reported based on the best information that we have at that time, but hopefully we will be able to report more information.

Okay. Thanks very much, guys.

You're welcome.

your next question comes from Michael Novak of Frontier Capital.

Hi. In the scenario that you had to pay the entire $85, which is $1.50 per share in your valuation, what would the implications be for the overall business on a go forward basis?

That's - - also, because of the ongoing investigation, and, again Michael and I are very cognizant that this is certainly as frustrating for you as it is for all of us here at The Brink's Company, that is not something we're in a position to discuss yet.

What about from a financial standpoint and a balance sheet standpoint?

We will- - well clearly from a balance sheet standpoint, if you look at our Company, we are a relatively good size Company with a relatively strong balance sheet. We have very solid banking relationships, so in terms of its impact on the balance sheet, that's not something I'm focusing a lot of attention on yet.

So you don't see any financial risk to, other than $1.50 a share in value from the Company from this, arising from this?

Well, it's- - you know, we have to figure out what to do with the issue and then how to resolve it after we finish our investigations and determine what our best course of action is. And then we'll figure out what that answer is.

And can you give us a little more clarity on why your confidence level is high that controls are in place, that these issues are not more pervasive in other countries and other divisions of the Company?

Well, we believe that, again, as I said, that we're comfortable with our controls and we believe that the situation we have found ourselves in is a fairly unusual circumstance for this Company. And that has given us some confidence. But obviously we will continue our checking process to make sure that our confidence is as well founded as we believe it is.

And how far are you, along are you in that process currently?

That's something that we are constantly checking.

Okay. Is the $3 million that you found, could you give us the time frame that it's related to? So is it something that's been occurring for 10 years, 1 year?

Again, that's an issue that's, that's a subject of the investigation that we're in. And any information I might give you, you know, could end up being inappropriate or wrong. So it's not something that we're willing to talk about yet. As soon as we can, we will.

Okay. Is it reasonable to conclude that if you were going to put out a number of 85 million that your attorneys would advise you to put out the absolute worst case scenario given precedence for fines within that particular country of operation?

It's a number that right now, as best we know today based on the investigation to date, it is the, probably the- - right now it looks like the maximum amount of fines that would be associated with this thing. But, again, that is something that is subject to change as we go forward.

Understandable.

And we will make sure that we come out with an appropriate number as we move forward in the investigation in terms of what our risk is.

So you're not suggesting that's a point estimate. You're suggesting that's as far as you know today, would be a worst case scenario?

Yes, as far as we know today, that is the outer, the outer end. But, again, it's subject to change as we go forward.

Okay. Given that the stock seems to have taken a severe adverse reaction to non-operating type issues, would the Company consider share repurchase in that type of situation?

We are- - we always evaluate the issues like that in terms of whether a share repurchase is appropriate for the Company. And one of the things that we consistently find is that, and this comes from most of the investors that I speak with, that the biggest situation that they are concerned about in terms of how we can add value to this Company right now is continuing to deal with the liability situation and continue to fund VIVA. As I mentioned earlier in my comments and Michael mentioned as well, we have already committed - - or we're in the process of working through to get to the $50 million figure during this quarter. So we would continue to probably put our money in that area.

Okay, and you have $145 million of cash on the balance sheet, is that correct?

Yes.

What are your expectations for free cash flow generation this year?

Well, we've had a very good first half and typically you see the Company perform better in the second half. So that's hopefully we're going to see things continuing to move up from where they are.

Okay, and you made a comment during your prepared remarks that you're looking forward to seeing where BAX's operating margins can go if shipping volumes continue to stay strong, given what you have done with the cost structure of the business. I know that in the past you have committed to having BAX earn its cost of capital over an entire business cycle to include the downside, so it averages out earning over its cost of capital. What operating margin would that imply and also, what operating margin do you think the division is capable of peaking at?

Well, we continue to, of course, reduce the asset intensity of BAX, which is helping us on one side. And obviously the economy and the volumes are helping us tremendously on the other side. And our non-asset-based unit becomes larger and and larger in the growth, which is all headed in the same direction. Right now we are probably in the vicinity of 4.25% to 4.5% operating margin to cover the cost of capital. And once again that's got to be the average over the good times and the bad.

So given that the bad times, you know, in 2000 were, you know, negative 5%--

Yes.

-- it means you have to average 4 over a business cycle?

In a good time we have to go higher than that, but, you know--

Right. But that would imply high single digit, maybe 10% operating margins, is that something you think is reasonable?

We'll never get 10% operating margins out of the BAX organization, but probably in the 6.5-7 and, you know, we have a good strategy. We're executing the strategy. We're making it less asset intensive and we're growing the supply chain side of the business and the freight forwarding side of the business. And we're having some strong success now in doing that. And we're going to continue to do that. But we're still going to be very, very sensitive to the economic flows that are going on in the United States on the asset side of this business. And I will tell you that the, we're very pleased with where we are in the first quarter there, the first half of the year there and we're encouraged by what we saw in July.

Okay, and what is the cost of capital for the BAX division, as you measure it?

We just put a cost of capital, after tax 12% for all our units. We adjust it in some cases for overseas units, but on a business unit basis, it's 12% after tax.

And do you think that, you know, if 6.5%-7% is a goal for the division, is the business currently structured to be able to achieve that margin over the next 2 to 3 years?

I think with the strategy we have in place and that I just went through before and the construct of the business, in decreasing the asset intensity, in growing the non-asset base, the answer is yes.

Okay. We appreciate the good operating performance and look forward to a speedy resolution on the tax issue.

Thank you.

Your next question comes from Richard Rosen of Selleckman.

Richard?

Hello?

His line has been removed from the queue. The next question comes from Gary Steiner of Allen Asset Management.

[inaudible] things at the Brink's, when you talk about the second half of the year being up, are you talking on a sequential basis or are you talking year over year?

We were talking about sequential basis. We were - - we expect improvement off the run rate that we had in the second quarter of this year, but we wanted to remind people that the third quarter we had, third and fourth quarters we had last year had a lot supporting them. We had exchange rates were clearly going in the favor of U.S. reporting last year and they have come pretty close to coming, to matching one another this year. In addition, last year we had- - a lot of times when you see a rebound in our international operations, it takes off very rapidly at the start. And we saw a lot of that in the third and fourth quarter last year. The most of those operations have settled into the more normal operating performance that we would expect, so we certainly do not expect to see the same type of growth year over year that we saw last year.

Okay. Let me see if I understand that. So on a year over year basis, do you expect any growth or do you expect the operating profits out of Brink's to be down?

On, certainly on a year over year basis we expect to see solid growth this year.

For the year or for the second half?

For the year.

How about for the second half?

That remains to be seen. We had a very- - obviously we had a very tough comp with the fourth quarter last year. So we're just going have to see how our performance goes in the third quarter.

Okay. I just want to follow up on a question that was asked earlier and I apologize if I missed this. Just in looking at Brink's in the second quarter versus the first quarter in international, you know, you were down maybe, maybe 6 million or so of EBIT on a sequential basis second quarter versus first quarter. And I guess 2 million was the issue that you spoke about earlier. So the other 4 million, was that primarily out of Europe or out of Latin America on a- -?

Latin America.

Out of Latin America. And you were saying that the second half you expect some better improvement there?

That's correct.

And could you just, if I missed it, just explain again what caused that issue in the second quarter?

We had an extraordinary first quarter which we mentioned in the last conference call in Latin America. We expected Latin America to be down somewhat. But we didn't understand that we were going have these 2 court cases to cause the adjustment of $2 million, which added to the problem. But the, the third quarter is always stronger in Latin America and subject to any major social or political upheaval down there.

Okay. I guess could you just explain what causes a particular quarter to be extraordinary or a little bit light in the Brink's business? You know, sort of how much visibility you have in that business?

Some of it can have to do with the general economic conditions in a country. Some of it can have to do with how much international movements are going on with precious metals, diamonds or jewelry or things like that. There is also the timing issue in some countries of price increases and cost increases, of course at Brink's the major cost is labor. And the timing of those, when they come in and come out, which can cause some variation quarter to quarter.

Okay. I mean was there anything that you can speak about in terms of what was so particularly strong about the first quarter that weakened in the second quarter in Latin America?

Some of the labor costs, timing and labor cost increases was probably the predominant one.

Okay. And then just on the investigation, are you able to say when, when you were notified of this issue?

Very recently.

Days? Yes?

Very recently and that's why we're in the process of investigating this thing as fast as we can, but we certainly don't have all the facts and it's unfortunate that we're at this juncture without being able to give you more information.

Understood. And just the last question I have, can you just remind me on BAX what the normal seasonality of that business is with the- - is the third quarter normally a better quarter than the second quarter?

Yeah, third is usually the strongest. The second or fourth can be the next strongest, depending on the cycles. We haven't had too many normal cycles over the last 3 or 4 years with the world economy. But as a rule, third quarter is the strongest followed by the fourth.

Okay. And I apologize, this will really be my last question. Where are you guys in terms of Sarbanes-Oxley in terms of working through the various issues?

We're still rolling along. It's a long, involved process, but we have- - we're putting every necessary resource that we have and in some some cases probably a little bit more than we need towards it to make sure that we continue moving the process along and on as fast a basis as we can.

Thanks a lot.

You're welcome.

Thank you.

Your next question comes from Chris [Annerhan] of Sigma.

Chris?

His line has been removed. Your next question comes from Michael Hoffman of FBR.

Hi. Following up on operating questions, you made a comment that one of your objectives on BAX is to be less asset intensive and that will drive margins. If I read between the lines, your asset intensive business is the U.S. operations, so is that a downsizing, a sale, how do we get less intensive in BAX?

Michael, we do everything we can to maintain as much flexibility on our lease commitments for aircraft and to continue to diversify away from the asset intensive business. As you know, we're putting more and more of our customers expedited freight where possible on the ground. Where we're not using our own assets. We're using other people's assets as an example. So I think the plane asset intensity of the Company where we downsized it 2 years ago and is relatively the same size. We have no plans to increase it other than the normal third and fourth quarter adjustments we make in scheduling to service our customers' flows. But we don't have any intention of increasing the amount of asset intensity and we're growing the rest of the Company around it.

Okay. So bottom line is that the U.S. operations aren't for sale at this point?

BAX?

Yes.

There is no way, Michael, as we have discussed in the past to separate the BAX organization. Customer base is a global customer base. And we serve them everywhere. There is no way you can separate the U.S. from the rest of the organization.

Okay and then we don't really have a pattern for North America in BAX because of the challenges. But we've had a pattern in the past for BAX International. Should we apply- - this is a seasonal pattern. Should we apply that seasonal pattern, having reported a positive pattern, all things being equal, the economy stays on the course that it's on, the trend ought take to be 6 million gets better than the third quarter and then might be equal or a little bit less than the fourth quarter?

If the- - on the conditions you described, I would say that's a pretty good judgment.

That's the way to think about it, okay.

Michael, just to give you a little background behind that, if you look back over the last few years and we've had a lot of bizarre years. Tou know, back in '99 that was a weird year as we were going into Y2K. 2000 we started to see the effects of the slumping economy, and we've had all kinds of effects on the economy. So you really have to go back a few years to be able to see something think that we would think even resembles normality.

Yeah, I would agree with that. All right. Brink's, Inc. then, similar question about seasonality. Given the strong second half you had last year and your guidance of being, trying to make sure we're being cautious, but typically fourth quarter in the North America is one of your strongest if you go look at patterns. So you would expect the North American fourth quarter to actually be better than fourth quarter a year ago in North America?

Michael, the problem was we had a very, very weak first half at Brink's last year. And we had a more normalized or strong second half last year. And so all we're trying to point out was that the comparisons in the first half of this year versus last year were relatively easy. They are going to be tougher in the second half of the year.

Right. So would you expect to be flat or positive in the second half of each quarter?

We would expect normal seasonality at Brink's, as you go back and look, our stronger second half than first half historically at Brink's, that's correct.

Right, okay. And then on the SOX issue, if you think about, you know, the pattern, you build all your documentation to what you need to do, you run tests in the second quarter, you sort of do your remediation on what you learned and it didn't work in the third quarter and then do you the outside auditor comes in the fourth quarter and, you know, blesses it. Are you on that path still?

Yes. We're in a phase that you would expect a Company of our size and sophistication to be on. We still have a few remediation issues we're working but we are moving through testing into the secondary testing phase. So it's- - we see ourselves as being on track with the schedule we have set for ourselves.

And are you using your current tax auditor to do the SOX audit for you as well?

No, we are not. We are actually using one of the other big 4 to help us out and we think they are helping us quite a bit.

What's their feedback for you? Do they feel you're on track?

Yes.

Well, keep up the good operating work and get new lawyers so you can disclose more about this tax issue.

Thank you, Michael.

your next question comes from Richard Rosen of Selleckman.

Yes, hi. Thanks a lot. I have a couple of questions. First of all, your corporate expenditures in the quarter increased, you mentioned Sarbanes-Oxley. Should we begin to use a $.5 million a quarter higher because of that?

It's probably going to be in this range, maybe edge up some. But what we're trying to do is to, what we're seeing is a fair amount of spending in this first part of the year with the external, the extra accounting firm that we are using to help us in the implementation phase. You're going to start to see the actual auditing phase kick in, which will also continue to allow that number to creep up. It's just part of the cost of doing business for us.

Okay, and then just getting back to this whole tax issue, so $3 million, if I understand it correctly, represents however long this VAT issue has been going for as long as it's been going on, right? Whether it's 1 quarter or 5 years? Is that correct?

That is, to the best of our knowledge, yes.

Okay. So if I were to assume that the penalties aside for what has already transgressed, if they throw the book at you, that on an ongoing basis that $3 million, if it's $3 million a quarter, then it's $12 million a year or, I don't know, 15 cents or something like that. Or if it's $3 million over the past 12 months or forever, then the number is significantly less than that on an ongoing basis. Is, is that basically the correct way to think of it?

No, and we can't comment on it further, but I will tell you that it is an immaterial amount on an ongoing operating basis.

it's an immaterial amount on an ongoing--

On an ongoing operating basis, that's correct. Wholly immaterial.

So the VAT thing- - so what- - so the stock is down, you know, however much it's down, partially due to Brink's disappointing a little bit. But also, but due to this really insignificant ongoing thing unless there is something that you have completely missed and we've completely missed, is that correct?

I'm not sure why the market reacted the market - - if I was going speculate it's because there is some uncertainty in the amount of transparency that people believe we're showing. But I can assure you we're showing all the transparency and reporting all of the information that we have accurately at the current time.

So if there's not--

I believe strongly that as the market understands this better, understands the performance of our operating units, the cash flow generation capabilities of this Company that the market will appropriately value our equity.

Okay. Look, I'm one of your biggest critics normally, now, historically. But so just to make sure that I understand it, that regardless of how - - if you have to write a check for $85 million, unless there is something that you have no idea the ongoing incremental VAT costs or whatever is significantly less than $3 million?

Totally, totally immaterial to the operations.

It's totally immaterial, so we're talking about the stock being down 17% because operating margins in my opinion disappointed a little bit on the Brink's side. Okay. That's, that's all- - well, and that's all well and good. And I guess that's really all I have. So thank you.

Thank you.

Thank you, Richard.

Bye.

Your next question comes from Stephen Fisher of UBS.

Good morning a few questions. Starting on BAX, you had mentioned last quarter that you had about 70 customers that were using the freight forwarder product. Can you just tell us how that's progressed? Has that increased? If so, by how much?

There's about 100 customers that are regularly using our service. It continues to grow at double digit rates and we're very, very pleased and our customers are very pleased with it.

Okay. And then on a Brink's, Inc. on your last call you had also indicated that you were going to be aggressively pursuing new business both on the armored car and cash logistics side. Can you just comment what you are planning to do in the quarter with regard to and that how that played out for both sides, seeing that the armored car was weak again in the quarter? Are you still seeing the serious price competition?

It depends on the market. In the United States, the price competition is still very difficult. There is actually no revenue growth in the U.S. side of the business. North American revenue growth was really attributed to Canada. But we've had decent revenue growth in the rest of the Company everywhere else. There have been some competitive problems if in 2 or 3 different countries which we've benefited from where people have underbid the business. And they're paying the ultimate price. And we expect to continue to benefit from those situations. And we expect those situations to eventually occur here in the U.S. market.

Okay. And lastly, on Home Security, your disconnect rate was still pretty low at 7.2%. But picked up from the first quarter, which you indicated. Was that normal seasonal increase? I know you track your customers pretty closely and given that you've been ramping up growth recently, did you see any of that higher disconnect from some of the more recent growth.

No, totally has to do with the seasonality of the people moving. And we also have a pick up in the second quarter and usually a little more in the third. Just because that many people move. And then there is a question of how many of those people can we can sign up in their new homes, how many can we sign up in the new home owners. So it's very typical, very seasonal if you can go back and track. I don't see any reason that the growth rate is effecting that at all.

Okay. Thank you.

Thank you, Steve.

Your last question comes from Dan [Kentor] of Columbia Management.

Good afternoon, gentlemen. I'm wondering if you can say on the investigation how many employees today are on administrative leave or have been terminated at this point and are any of them in sort of the top 20 of the senior level managers of the Company?

It's too early in the investigation for us to make any comments like that at all.

Okay. Is- - but can you say if anyone in Richmond is not coming to work today because of the investigation?

Dan, we can definitively tell you that is not a problem in Richmond.

Okay, and then can you describe a little bit, the goods and services that are associated with the 3 million, maybe 1 million of it is one type of product related importation, can you just talk what those goods and services are?

Due to the nature of the investigation and what's going on, it's just inappropriate for us to have any of those comments. I'm sorry.

Okay. All right. Thank you.

Thank you, Dan.

I will now turn the call over to Mr. Dudley for any closing remarks.

Well, thank you, everyone, for joining us. We appreciate your time and attention and we'll talk to you soon. Thanks much.