Brinks Co (BCO) 2005 Q3 法說會逐字稿

Good day and welcome, everyone, to the Brink's Company third quarter 2005 earnings results and conference call. This call is being recorded. With us today from the Company is Chief Executive Officer, Mr. Michael Dan; and the Chief Financial Officer, Mr. Robert Ritter. At this time, I'd like to turn the call over to Mr. Ritter, please go ahead, sir.

Thank you, good morning. Welcome to our third quarter 2005 conference call. With me today is Michael Dan, our Chief Executive Officer. And as usual, each of us will make a few comments and then we will open the call for questions. Before that, let me mention a couple of details related to the call. First, today's press release is available on the Company's website at Brinkscompany.com or via fax by calling, (877)275-7488. Secondly a, replay of today's call will be available starting this afternoon through Friday, November 18, 2005. The replay number in North America will be (888)203-1112 or outside of North America, (719)457-0820. The conference I.D. for the replay is 6405430. A replay of today's webcast will also be available on our website.

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 form, 10-K. The information discussed in 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 is a copyrighted work of the Brink's Company and may not be rebroadcast, sold, or distributed without the express written permission of the Brink's Company. With that, I will turn the call over to Michael Dan.

Thanks, Bob. Good morning everyone. Let me also extend my welcome to those of you who have joined us today. Operationally we posted a solid third quarter results with a 16% increase in revenues. Operating profits were up $7.5 million, 13% over the last year's third quarter. Brink's Incorporated, Brink's Home Security, and BAX Global all posted double-digit revenue increases. The Company generated strong cash flow as reflected by the $45 million decrease in net financings during the quarter despite our increasing investments in all of our business units. Brink's Home Security continued to grow its subscriber base, although at a higher cost than I'd like to see. And BAX Global posted a strong increase in operating profit. Operating performance for Brink's Incorporated declined in Europe in comparison to very strong results in the prior year period, due to negative effects of lost business in certain countries. Net income from continuing operations for the Brink's Company in the third quarter was approximately $39 million or $0.67 per share. 1% lower than the $0.06 to $0.08 per share a year ago. A lower tax rate in last year's third quarter offset the effects of the operating profit improvement this year.

Now, I will comment on each of the business units, starting with Brink's Incorporated. Brink's revenue increased 12%, driven by international operations. This top line growth reflects a balance between organic growth and the effects of the acquisitions we made earlier this year. Benefits from foreign currency exchange effects were pretty small as the dollar strengthened against the euro. International revenues rose 14% for the quarter while North America revenue was up 7%. Brink's operating profit came in at 41.3 million, down from the 44.7 in last year's very strong third quarter. As we told you last year, achieving a 9% plus margin was exceptional. Although we didn't hit that mark this year it was good to see us get back over the 7% for this quarter. But we can do better, particularly in Europe and somewhat in the United States.

Now, looking at the international operations. In South America, operating profit was generally strong, reflecting good volumes and revenues. The benefit of continuing favorable market conditions in Venezuela, our largest operation, was partially offset by a weaker performance in Brazil. In Europe, revenues were up 2% after excluding the effects of acquisitions. This revenue increase primarily reflects continued strong volumes in France, offsetting the year-over-year volume declines in the Netherlands and Belgium, which we have covered with you in earlier quarters. Europe's operating profit was about half of last year's very strong levels and was impacted by the volume. In Asia-Pacific, revenues in operating profit matched the levels of a year ago.

In North America, operating profit was up almost 20% despite higher pension costs. Revenue was up 7% and strong cost controls helped push margins back up over 8% for the quarter and almost 7% for the year-to-date figure. Regarding the outlook, although we expect a solid fourth quarter, we expect the margin for the full year 2005 will be slightly below 7%, but we will expect to return it to the more normal profitability in 2006.

In North America, our value-added Cash Logistics and CompuSafe services should maintain their solid growth while traditional cash in transit and ATM services which make up the bulk of our business should improve with our better market conditions. Fourth quarter operating profit will continue to be impacted by higher pension costs in the U.S. Internationally, we plan to continue to enhance and grow our European operations. We expect to do this through effective integration of our recent acquisitions and by completing the adjustments of the scope of our operations in various countries, depending on market conditions and profit potential. South America, with the exception of Brazil, conditions remain favorable at the current time and while there is always risk, we don't see anything in the near-term that would change conditions. Asia-Pacific should continue to grow and produce solid margins, driven by the strength in Global Services.

Now turning to Brink's Home Security, new installation volume grew 15% but our customer retention record was affected by Hurricane Katrina. The hurricane cost us 4,200 subscribers during the quarter. This could grow by an additional 2,800 subscribers for a total of 7,000 by the time we are through assessing the damage. The 4,200 additional disconnects recorded in the quarter drove the disconnect rate up to 7.7%. However, without Katrina, it would have been approximately 6% as compared to 7.1% last year. It's important to note that even though the disconnect rate went up, our strong insurance coverage insulated the Company from any material negative financial impacts during the quarter. Subscriber growth was 11% year-over-year and we ended the quarter with 998,000 valued customers.

During October, Brink's Home Security achieved an important milestone with the addition of its 1 millionth customer. We can continue to achieve double-digit growth from all three key subscriber acquisition channels. In the third quarter, our branches accounted for 70% of our new subscribers. Our dedicated dealer network contributed 16% and our home technologies division, which provides prewiring for new home builders, accounted for 8%. However, the costs and timing of the new subscribers for our new home side was not coordinated as well as we would like. So costs are higher than we wanted and expected to see. Thanks to strong subscriber additions, revenues grew 15% while operating profit increased about 5. Monthly recurring revenue also grew double digits at 13% to $28.4 million at the end of September and cash flow was once again strong.

The outlook for Brink's Home Security remains bright. As Brink's Home Security continues its industry leading performance in the residential security market, it remains focused on building its technical and sales capabilities on the commercial side. The strong brand, highly effective marketing and excellent service performance Brink's Home Security as poised to continue to post good growth in subscribers, revenues, earnings, and cash flow.

The construction of our new customer care center in Knoxville, Tennessee is proceeding on schedule. The new facility, which will support our growing customer base is on track to be operational in the first quarter of 2006. Now, this will lead to some higher costs and lower overall margins in the current quarter and probably the first two next year, similar to what we have witnessed in the third quarter this year. But I expect 2006, like this year, will be another strong one for Brink's Home Security, achieving the triple-double. That is double-digit growth in revenue, customers and profit.

Now, moving to BAX Global. BAX posted another quarter of improved year-over-year performance despite continued high fuel prices. In the quarter, revenues were up 20% with about a percentage point coming from currency effects. The improved top line performance reflects continued growth in Asia-Pacific and higher U.S. freight volumes as well as fuel surcharges. BAX posted operating profit of $22.2 million in the quarter, up from $14.6 million a year ago. This positive performance reflects strong results in Asia-Pacific, especially China, Hong Kong and Singapore and the steady Americas. BAX's supply chain management activities posted growth in revenues and profits. We remain focused on increasing the size of this part of our business, where profit potential is higher.

Now looking first at the Americas. Revenue increased 11% on 4% growth in domestic freight and a 16% growth in U.S. export volume. Our U.S. domestic freight operations posted a solid increase in revenue, led by the wholesale freight forwarder service, which saw volumes in revenues nearly double compared to the third quarter of 2004. As was the case in the second quarter, the performance of our expedited services was mixed. While revenues from our guaranteed overnight products increased 17%, our standard overnight service declined by the same amount. Customers continued to shift towards lower-priced deferred products as evidenced by the 16% increase in our BackSaver product.

The Americas posted an operating profit of 10.3 million, about flat with last year's performance after eliminating special charges from each year. Results this quarter also include a reserve of 1.6 million to cover the bankruptcy of a customer. Results for the third quarter 2004 included a $4.7 million impairment charge for IT systems.

On the international side of BAX, revenues grew nearly 27%. The Asia-Pacific region was the growth driver with a revenue increase of 37% due to the strong increase in air exports and the robust supply chain management activity. European revenue grew about 7%. Growth in Europe reflected both better market conditions and successful sales and marketing efforts that produced customer wins. International operating profit grew to about $18 million from about $11 million in the prior year, due to strong profit performance in our Asia-Pacific region.

Now, the outlook for BAX, we believe that the Asia-Pacific will remain a strong market for exports and supply management services, a market which BAX is well-positioned in growing rapidly. We also believe that Europe and the U.K., in particular, can improve further. We are in the midst of the busiest part of the shipping season and we are encouraged by the strong volume trends at the start of the fourth quarter. The negative impact of high fuel prices on the volume mix remains a concern in the U.S. However, based on the improving trends, we believe BAX is in position to achieve growth headed into 2006. Full year 2005 margins will be testing the 3% mark. Overall, BAX continues to improve its performance quarter by quarter.

In summary, Brink's Incorporated will pursue market opportunities in its traditional armored car operations while expanding further in our cash processing where growth and margin potential are higher. For BAX Global, the focus remains on further improving the utilization of our integrated domestic freight transportation network, building on our strong presence and success in Asia and increasing the relative size and scope of our supply chain management business around the globe. We expect Brink's Home Security to continue to build on its excellent operational and financial success with growth for revenues, profits and new subscribers sustained at 10% or better. Overall, the Brink's Company's growth, performance, and financial position continue to improve. Now for some additional comments on our results and financial position, here's Bob Ritter.

Thanks, Michael. As usual, I will make a few comments about the businesses and our costs and expenses to help you with forecasting for the fourth quarter and beginning to look towards 2006. Then I will finish up with information on our financial position and cash flow considerations.

At Brink's, we may see a relatively small amount of restructuring costs in the fourth quarter and Europe has already recorded about $8 million more in restructuring costs this year in comparison to last. In addition, as we have previously told you, we expect about 6 to $7 million in cost savings next year from the actions taken to date. At Brink's Home Security, as Michael noted, we expect to see continuing effects this quarter of the rapid growth in our new homebuilding channel and the gradual ramping up over the next three quarters of costs related to the start-up of our Knoxville facility. All in all, though, 2006, should once again, be a good year for Brink's Home Security.

One final note, and just to remind you, the disconnect rate, if you exclude the effects of Katrina was pretty special during this normal move quarter. We would have achieved a 6% annualized rate. BAX Global should continue to show improvement in margins as Asia continues its strong growth and North America and Europe gain. Each of these businesses should also improve some in 2006 from the recent changes we've made in the benefit plans. But I want to remind you that we will be conducting our annual review of all the key assumptions for our benefit plans in the next couple of months. We'll let you know what the effects of that will be in February.

Also, our third quarter tax rate on continuing operations came in at about 35.5%. A little below the normalized annual rate before valuation allowances, changes from tax exams, et cetera. Our full-year overall rate should be between 41 and 42%. You can back into a fourth quarter tax rate based on your pretax expectations. Looking ahead, 2006 will probably in the 37 to 39% range.

Finally, I'd like to make a few comments about the Company's cash flow and debt position. I will start with depreciation and amortization. The third quarter's depreciation and amortization was about $48 million in total, divided among Brink's at $23 million, Brink's Home Security at 15 million and BAX Global at 10 million. Looking ahead for the full year 2005, we're still expecting Brink's to be around $90 million, Brink's Home Security should be in the 55 to $60 million range and BAX should come in at about $40 million. In total, the Company should see about 185 to $190 million of depreciation and amortization for the full year 2005.

As for capital expenditures, third quarter spending came in at about $73 million. You will note in today's press release that as we told you to expect, CapEx increased in each business in the third quarter this year from the prior year period. In total, spending for Brink's Home Security for all of 2005 should be in the 160 to $165 million range. At Brink's, we expect spending to hit 90 to $95 million for the current year and BAX Global should run from 45 to $50 million. All in all, spending in 2005 for the Brink's Company is currently expected to run about 295 to $305 million.

As for financing, we ended the quarter with outstanding debt of about $270 million. Combining this with roughly $185 million in cash, the Company's net debt was about $85 million at the end of September, up about $10 million from year-end 2004. Receivables sold in the asset securitization facility were up to $64 million at September 30, from $25 million at last year-end.

In summary, financings net of cash were about $150 million at the end of September. Up from the $100 million at year-end but down about $45 million from June's level. The increase in net financing since year-end reflects the Company's investments to support growth, including acquisitions by Brink's Inc. during the first half of the year and the purchase by Brink's Home Security of its headquarters building in Dallas. In addition, construction on a second monitoring site continues in Knoxville, Tennessee. Even with the investments made to date, we expect to once again generate solid cash flow in 2005. The $45 million reduction in net financing this quarter demonstrates the Company's cash generation capabilities. We will continue to put this to work growing our businesses and positioning them for the future. That's all I have for now. We are ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go to Steven Fisher with UBS.

The margin improvement at Brink's, Inc. in North America, is the business getting better in terms of mix or competitive forces? Or was it just expense reduction that you mentioned in the press release? And what was the expense reduction?

First of all, as I mentioned it last quarterly conference call, I believe that the competitive situation in the U.S. is beginning to turn for the first time and so there's some of that effect starting to come through. But other of it is just strong expense control across the whole business line. Once again, our major cost components are labor and fringe benefit costs and probably followed by administration costs. Offset by, of course, our pension increases. It's really across the board cost control, a good job by the management group in the United States.

So in terms of security costs, I would think in the previous quarter, you'd incurred some higher security -- I guess, suggested crime was up and maybe some attack rates higher. Is it more just the administrative side? I would think to control the security costs, it sounds like it was maybe with a quieter quarter, you may have had to increase spending on the security side of things?

We do -- it was really more of a global comment, especially in Europe and especially in Latin America. Although there were increased attacks in the U.S., also. That was more of a global comment, that wasn't specifically limited to the United States.

Okay. Shifting over to Home Security. Can you give us a sense of how much the -- I know you talked about the disconnect rates specifically, X-hurricanes, but can you give us a sense of how how much the lower margins were due to the hurricanes versus the home techology installs versus the spending on commercial build-out?

It's kind of a good news/bad news story and there's actually good news inside the bad news. So listen carefully, I'll give you a lot of information on it. The good news is, is everything's on track at Brink's Home Security, our goal of triple-double in customers, revenues, and profits will be achieved this year as it has been the last two years and I -- I believe we're headed that way for next year. What looks like bad news is the disconnect rate, which is totally having to do with Hurricane Katrina. It would have been a 6% disconnect quarter for the third quarter, which is one of the big move quarters of the year. That was just a fantastic performance. So it's all hurricane-driven. But there is no financial impact of -- material financial impact in the quarter because of the impact of the hurricane because of our insurance coverage is very, very good. I mean it's probably a couple hundred thousand dollars with the actual cash -- or P&L impact because of the hurricane is absolutely minor.

The bad news is coming from Brink's home technologies, our new home builder business. Once again, I'm not sure it's all bad news, it might be good news. As you know, we lose money every time we sign up a new customer. And we try to keep a good balance to keep this triple-double goal of ours going. Well, the good news is, is our home technology business is growing much, much faster than we planned because we're doing such a great job. There's three components of that business. Remember in our traditional business, we go to a home, we install a system and we leave, then we turn it on and we're monitoring it. In our home technology business, we go to the home three times, one to do prewires, one to do the trimouts, and then one to do the activation. Similar to our traditional business. Well, during the quarter, our home technologies business grew 44%. So we, quote, were a little bit out of balance. And the time between doing your prewires and your trimouts to getting to your activations when you have that growth rate is what you're seeing in affecting the Brink's home security margins this quarter. I think you will see it in the next couple of quarters. This is all because of the success of growing that business and so we're behind the curve in getting the activations started on those.

I believe that we will catch up on that curve and we have a plan in place to do it. There are two issues that are on my mind there, one, we lost efficiency because we grew so fast. A lot of that growth took place in the southeast, which has been affected by the hurricanes. And we had some higher than normal turnover in our technicians and installer base just because of the demand for those types of skills as a result of the hurricanes. So we've lost some efficiency down there. We're focused on making sure we get that back into demand. And the second issue on my mind, which isn't as clear yet, is the number of homes in certain areas, that might be purchased by I would call investors or speculators who don't tend to then occupy the home and turn the alarm system on at the same historical rates we have. That's a little harder for us to get our hands around, our mind around, but we're working on that in a variety of ways.

We've come up with a very, very strong action plan to address that, to make sure it doesn't become a downside for the business. One, we're increasing prices. And when you have that type of demand coming through the door, it's an opportunity for us to increase prices that build our segment and we're doing that. The second thing is, is we're eliminating any builders who have substandard economics or activation rates. That's where we see this effect of investors or speculators in the marketplace. And we're watching that.

The second thing that I think has affected the operating margin a little bit is we have higher service costs as a result of all these hurricanes coming through. We had to have more of our people out servicing our customers in the hurricane-affected areas than normal. That's why you see the operating profit improvement year-over-year be a little bit short this quarter, I would expect that to happen next quarter. But overall, Brink's Home Security in my judgement will finish this year at the triple-double and will finish next year at the triple-double, but we're dealing with those effects.

Great, thanks for that. In terms of just the home technologies, I think you said it was 8% of installs this quarter. Do you have a target as to where you'd like that to be? And essentially weaker housing markets, would that be a help?

We love the business. Because that's the other piece of good news I probably should have mentioned in my retort to you last time. Is it's the best positive economic value-added business we have. People who buy a new home tend to stay in there for a longer period of time. So there's less churn and turnover so it's our best EBA business that we have. We're continuing to try to grow that. But once again, we have got to keep this in balance. This business grew faster than we wanted it to grow and it grew faster in an area where we had this effective turnover. And we've got to get back in balance. Because this business is all about maintaining balance and we kind of are a little bit out of balance in home technologies. So we might slow it down a little bit with the effect of raising prices and eliminating some dealers in the future, but we're absolutely committed to this business because we believe it's the best business. We just have to stay in balance.

Okay. On the commercial revenues, when would you expect them to start to impact results? And what would the margin impact be from the commercial side?

That business will start to grow -- and it is growing very rapidly. It's a relatively small base still, but it's growing in the 30% range, I recall this last quarter. The economics are not as strong yet as our traditional business, but they're approaching that. And we're going through a learning curve with this, but we're very happy with our growth rate, we continue to add business security sales consultants to that, and we will be accelerating that growth rate in 2006. I think it will start to become more meaningful and we will start reporting on the commercial activations probably some time next year.

Okay. And lastly on BAX, margins are about 2.5% for the year and I think you said they would test a 3% level for the year by the end of the fourth quarter. Any thoughts for 2006? I think you've said in the past that you're hoping to get to your cost of capital sometime in 2006?

That's correct. I think BAX's performance this year -- this quarter was up to 3%, a good performance from the BAX organization, really across the board. Especially with the fuel price increases and the issues we had to deal with. BAX has been improving quarter after quarter, continues to do so. The volumes in the first month of this quarter continue to trend as expected and they're just on a winning streak. All the programs that BAX management was working on the last three or four years are bearing fruit. It comes out of the numbers. I expect that to continue in 2006. And I do believe we're on track to do that. Remember, our global business, our international business, our supply chain management business, continues to become a larger and larger portion of that, which is also helping us reach our cost to capital goal during hopefully the latter part of 2006.

Thanks very much.

Thank you.

And next you will hear from Jeffrey Kessler from Lehman Brothers.

Thank you. Good quarter, guys.

Thank you.

With regard to Brink's, first, you had mentioned earlier, in earlier conference calls, that you were expecting a 2 to $3 million charge, a restructuring hit sometime in the second half. Was this buried in the third quarter? Are we going to see it in the fourth quarter?

Jeff, we had about half of that came through in the third quarter and we're still evaluating whether or not we're really going to have all of the rest of that during the fourth. There are some things that are happening in Europe that may give us a little bit of additional volume and allow us to ease up a little bit on that.

And that came through in the Brink's operating income?

Yes.

Okay. What is the competitive or otherwise operating problem that you're facing in Brazil which has made you a little bit more negative on that country than the other countries in Latin America?

For about the last two or three years, there's been a very serious price war, price reduction going on in the marketplace. And we followed our usual program of shrinking this as much as we can. There's only so much you can shrink to where you have to maintain a network down there. We sort of hit that point. I will tell you that the competition is in total disarray. That approach never works in this business, Jeff, as you and I have talked about for 10 years and the major competitor down there has changed the CEO of the Company five times in the last six years and--.

Are you talking about Pro Segore?

The major competitor.

Okay.

I will predict the current one will also be changed within the next couple of months because it's just ridiculous-type activity. But they're not the only one.

Okay.

But it's been a very difficult time. And we are -- it's the one country we're really struggling with at the current time in Latin America and it's hurting us, but I believe, that once again, that will also improve and, of course, the Brazilian economy has been coming back pretty strong, which is helping us. And we have some new products and services that we're trying to go to market with down there. But it will probably be another year before I feel satisfied that I can tell you that the Brazilian market is back on the track it should be.

Okay. A couple of questions on Brink's Home Security. First, the possibility of 2,800 more disconnects or incremental disconnects because of Katrina. Is that a possibility that we might be facing in Q4?

That would all be in the fourth quarter. No question about it. What it is, is we're contacting customers who are either turning back on, can't turn back on, will never turn back on, or we can't find them. We have an estimate -- the difference between what we accrued and what the maximum affected people could be, so we accrued per accounting rules the lower of that estimate in the known, all right? So the most it could be would be that additional number I quoted with 2,800 is the maximum additional people that could be affected by that, and we will know that during the fourth quarter.

Okay.

There's no financial effect to that, Jeff?

All right.

It just affects our disconnect rate?

No, I understand that. But people look at statistics like disconnect rates, things like that. Can you give me -- I'm sure, Bob, you have off the top of your head your -- your creation multiple? For the third quarter, given that it probably did go up?

The cost per subscriber?

The cost -- yes, your revenue -- your MRR multiple and creation cost?

Oh, the MRR was $28.4 million at the end of the quarter.

I know that but do you have a creation multiple.

You mean how much it costs us to--?

Yes. To create a new customer?

That's typically down in the -- maximum, in the very low 20s.

Okay. Are you maintaining -- you've talked about kind of mid-to high 6% margins for the Company in 2005. Are you maintaining this mid to high 6% margin guidance?

Are you talking about--?

I'm talking about the Company -- I'm talking about -- I'm talking about Brink's -- I'm sorry, I'm shifting back to Brink's, Inc., I apologize. You've already said so, that you're hoping to get toward 7. Or just short of 7.

We will be in the 6% range somewhere, Jeff.

Okay. Final -- final question and that is -- and this is just, I guess, for some other investors edification because I've asked this question already, but it's popped up in your release that you did put in some legal language with regard to your -- with regard to your discussions over the VAT and the customs duties. Is this -- have you put this in here because you have -- as you say, commenced discussions with the appropriate government authorities? Because it doesn't seem like you've changed any numbers or any estimates on your liability here?

Jeff, you have it exactly right. The only issue there is that we have gone another step. We've been talking to the government now for some time and we have now provided them the documentation and the calculations of the customs duties that we believe we owe. We're waiting for their response.

Okay. And do you -- you hopefully will have this done by the end of the year so we don't have to have this in footnotes anymore?

We -- we're moving as quickly as is reasonable and part of it is we have to work with the government at the pace that they want to work. So, we don't really control the timing.

Okay. Great. Okay, thank you very much.

Thank you.

And next we'll move to Michael Hoffman with Friedman Billings Ramsey.

Hi, again, nice job, folks. With regards to this unnamed competitor in Brazil, they also fancy taking share in Mexico, which is another country you enjoy some presence. Have you seen them showing any irrational behavior in any other countries outside of Brazil?

Actually, that competitor is a nonfactor in Mexico so.

They've actually talked about wanting to go and grow there at a faster rate so.

That's true, but they're not a factor in Mexico at the current time.

Have you seen them in other parts of South America where they're starting to show behavior that is irrational as Brazil and attempts to try and get a foothold.

No, that's the only place. And once again, Brazil has more competitors, there's probably 50 or 60 armored car companies operating in Brazil because it's the largest country in Latin America, which is different from the other countries which are smaller populations and there's less competition.

Okay. On the Home Security side, I mean I get the home technologies piece in your description of what happened. Is -- if you do this adjustment on the attrition for Katrina, what's some of the follow-through on your margin that is related to the GAAP accounting on attrition that impacts margin, as well? What's the delta there that would be adjusted for -- pull out the Katrina numbers?

Okay, Michael, on that piece, the -- although it did affect our disconnect rate by basically 170 basis points on an annualized basis for the quarter, we did run the expense through our financial statements. In addition, because we have such good insurance coverage, which has been tested in the past, we set up a receivable which offset the vast majority of the costs that we had associated with this. So from an operating profit performance standpoint, even though the disconnect rate was higher it didn't hit us.

Okay. So 100% of this for all intents and purposes, margin declines are all resting on the shoulders of home technologies?

Higher service costs as a result of the multitude of hurricanes that went through, where we were dispatching people to people's homes to repair or fix systems.

Got it. Okay. Can we get a sense of -- I mean it's 200 basis points year-over-year, so, is -- what's -- what -- how do I think about what comes back instantaneously because I'm through that service repair issue but I'm still dealing with the timing--?

Right. Well, then the third issue, Michael, is Knoxville. You have the start-up costs of Knoxville which is going to be expensive in the sense that we're flying people back and forth between Dallas and Knoxville, doing setup and doing training for the next couple of quarters. Those are the three components that come through. So what I expect to see, is I expect to see a similarly growing operating profit line this quarter for the next couple quarters, two to three quarters in Brink's Home Security and then back to our normal triple-double. In my judgment, we will end 2006 with everything that's on the board today, just like we ended 2005, 2004 with those double-digit growth rates in both revenue, customers, and operating profit.

Okay. So, if I can parce it a little bit more, for modeling purposes, we all should be shifting towards a 21 to 22% operating margin versus the 22 to 23 that we've been enjoying.

For the next couple of quarters I would say that that's probably an intelligent summary.

Okay. And then on BAX. If you look at competitors in the similar business and you take out North America, which is an asset-intensive business, just focus on the nonasset intensive, they have much better margins. What's the major difference for you at this point in comparison to those companies? And probably the most relevant one would be Expediters.

Expediters has a different -- it looks like they're normal competitors, but Expediters has a used ocean business. BAX has a very, very small ocean business. Expediters has a much, much larger customs service business than BAX. It's a different construct business model. I think they do an excellent job. My hats off to them. One of the major initiatives we have at BAX is to grow our ocean business and to grow our customs business and to have a better balance of these other higher value-added, less asset-intensive services. That's part of our strategy that we're pursuing and they're getting traction and we're growing in those businesses, too, but they have a huge head start on us in some of those areas.

And with smart guys in your operation as they look and try and disaggregate an Expediter's model, when you look at the like to like, do you feel comfortable that your margins are competitive to the like to like margins?

Well, it wasn't -- there's not a lot of like to like margins with a fixed asset cost base in the United States. The fact of the matter is one competitor just came out of bankruptcy. The other competitor probably should have been in bankruptcy and it was sold for pennies on the dollar, which all, I think, is going to be a strong benefit for BAX as we go forward in 2006, 2007. So -- but I'm not happy with BAX to make our cost to capital. That's what a fix is. Our goal is to get there. You can't get there without making -- having a good strategy and executing that strategy and doing it quarter after quarter after quarter, I think the BAX Management Group is demonstrating that the last six or eight quarters.

The announcement by UPS to shutter the Menlo hub, has that benefited you all yet, or at all? Or do you see a benefit coming in '06?

We definitely see a benefit from that and as you know, they delayed that. They're a little bit behind. We were disappointed that it was delayed. We think that it will definitely be a benefit. We will end up and we are already starting to see getting a little bigger share of customers who split the business between the former Emery/Menlo and ourselves. They were getting a bigger portion of the pie, as an example, 60/40. We're starting to see that we're getting 60 and they're getting 40. So those types of benefits that are starting to flow through and we expect those to accelerate as a full integration takes place because of the more flexible and customized services that we can bring to the marketplace.

Okay. And then are there any intentions to own more planes going forward, like the strategy you laid out for us in the second quarter?

Only if it makes financial sense. We're not increasing the size of the fleet. We're just making decisions on whether it's better, more economical, and more flexible for us to lease versus finance -- versus buy, I mean.

And is there -- when you think about capital spending in '06, is there any of that sort of on the horizon? Or can I think about capital spending as being--?

I think the capital spending on the airplane side of BAX will be probably the same as it is this year. I do expect IT spending and other CapEx spending at BAX to be a little bit higher next year as the business continues to grow and expand and be successful.

Okay. And then pension savings. I mean you announced this back, oh, I guess almost a month ago. If I've done the math correctly, this is a -- it should be a pretty healthy improvement in profitability in '06 just like to like. I mean if I just take that number, it ought to add $0.40 in savings. Have I done that math correctly?

Based on the best of our knowledge, if we had rerun 2005 with the benefit plans, changes in place that we had this year, or, yes, that we've just announced, it should have taken close to $35 million out of our expense line.

And if I -- and that's pretax and tax of that, you're -- I'll use 40%, divided by your share count, that's $0.40.

Yes.

Okay. So that's the math. Okay.

Yes.

All right, last question, I have to ask it. Have you hired a banker to look at strategic options, including possible sale of BAX?

We don't answer those types of questions, as you know and I was waiting for someone to ask it, Michael, so, thank you for getting it out of the way. Our policy is not to comment on any market rumors, regardless of how they arise and where they appear.

Okay. Had to do it.

Thank you, Michael.

Michael, I understand.

You're welcome.

And next we go to Shy Tanbor of Al Creek Asset Management.

Hi, can you hear me?

Yes, sir.

Hi, I also wanted to talk about BAX and with operations doing so well, does that help you in terms of considerations for selling that business? And we've been hearing that that process is still going forward. We wanted to get your thoughts on that.

First of all, we're very happy with the continuing quarter by quarter improvement demonstrated by the BAX organization, but they're still not fixed. They're still not where they're supposed to be. They haven't earned their cost of capital which is what we talked about.. But we're very, very pleased with that. And our strategy has been in place, it's been announced what we are going to do, and we will continue to work towards the goal of meeting our cost to capital.

Okay, thank you.

Thank you.

And we'll move on to Beth Willie of Woodland Partners.

Good morning.

Good morning, Beth.

I wanted to ask, there wasn't any talk about the VEBA, and I was wondering if you could discuss what level -- how much is in the VEBA? And I don't think you funded it at all during the quarter.

No, Beth. The -- to the best of my recollection, I think we're probably up into probably the 180 million range, somewhere in that vicinity. That's through investment growth this year.

Yes.

We have not contributed any -- we have not made a contribution to it yet. Part of our thought process on that is we are still working through the amount and timing of bringing back dividends this year because of the one-year shot that we have at doing that and that will all play into it. So hopefully within the next month or so we will be able to figure out where we're going with that and take care of it.

So do you expect to fund it all in the fourth quarter?

To fund at all or to--?

No, to make additional contributions?

That's something that we have to review with the Board and I don't want to predispose them or ourselves to which way we want to go on that. But it's obviously something we will look at. We will either do it this year, depending on our tax situation, or we will put money in next year.

Okay. Great. Now the -- let's see, let's talk about Brink's Home Security and the commercial business. It grew a lot, I think Mike, you said, 30% in the quarter, is that correct?

Yes. But it's still on a relatively small basis, Beth.

Okay. As you go forward Brink's Home Security enjoys wonderful margins and I'm curious about will we see margins -- now granted commercial's a very small portion of the overall revenues, but as it continues to grow fast it will start to become a bigger and bigger part of the Home Security revenues and I'm curious about what kind of impact margins that will have?

Beth, we certainly have a hybrid here in how we're going after the commercial market. Which is a little bit different just as it was when we started the Home Security market we did it different. Our goal is not to impact that. If I think it's going to impact it, as long as it's an EBA positive business that's attractive to invest in, I won't separate it as a separate line of business so everybody can see it clearly to make sure that we're not impacting the shareholder value or the perceived impact of that. Which is how we separated Home Security from Brink's Incorporated years ago for the very same reason.

Is there a particular part of the commercial market you're going after?

We're really down at the -- still the relatively simple, smaller or mass, easier installations. And over time, we will move up in sophistication to the mid range and I'd call it larger, more complex operations. And of course, we always are on the lookout for an acquisition that might allow us to accelerate that process. We haven't been able to find one that's attractive enough to us in our economics to do so. Or has the right management group that we'd be comfortable in doing that. So right now we're going to do it just like we've been doing Home Security, we're learning and we're growing in a very methodical method.

Okay. Do you have a goal of -- as you look out, Mike, at the Home Security -- I know it's hard because commercial is now in the Home Security -- Brink's Home Security business unit, but do you have a goal of what you want the mix to be between Home Security and commercial security four or five years out?

No, because I'm not sure how fast -- it's my judgment that at some point an acquisition will be appropriate here.

Yes. To get to the critical mass?

To get to the real critical mass and the geographic footprint that we need. And the skills, frankly. They're different skillsets. And we are building those slowly in the file play within Brink's Home Security. But I think at some point in time, with the right opportunity, if the right economics came along, we'd look that way.

Okay. And my last question is just so we can -- we go around and around about BAX, you'd talked about getting to your cost of capital. That's when you will be happy. Can you remind us again what your cost of capital is and where you think you can drive BAX margins to?

Our internal hurdle rate for cost of capital has remained unchanged at 12%, that's what BAX's management and all our management groups are focused on, is a minimum return on invested capital. Obviously our real cost to capital, because of today's interest rates, is substantially lower than that. BAX right now is probably approaching the 8% return. They're still short but once again, they're making strong progress towards that goal, they continue the progress, the economies continue to do what they do in the world today. There is a very good chance, we will have the opportunity by the end of 2006 for BAX to finally hit their cost to capital. That's our goal.

And that cost to capital, the 12% cost to capital then translates into something like 4 or 4.5% operating margins. Is that right?

That's -- somewhere between 4 and 5%. Unfortunately, some of that is getting distorted now by the size of the fuel surcharges running through. Because that's basically adding to the top and not adding anything to the bottom line.

Yes.

So it's actually making the -- their margins look a little lower than they would in a normal environment.

So how do you adjust for that, then?

Well, the bottom line from an EBA standpoint is we still have to get to the point where we earn enough that we're going to hit the 12% hurdle rate that we have. If fuel costs stay where they are it's probably in the upper end of the 4 to 5% range. If they were to come down, it's probably closer to the lower end.

Okay, so you don't normalize it and say, okay, fuel costs are exorbitantly high and we don't think they're going to stay this high. You actually take that into your capital charge?

Yes, because basically it washes through. We work off of the operating profit before tax, then we make our adjustments from there to come up with what our EBA should look like.

Okay. Great. All right. That's all I have. Thanks so much.

All right, thank you.

[OPERATOR INSTRUCTIONS] We'll move next to Craig Rosenbloom with Millbrook Capital.

Hey, guys, congratulations on another good quarter.

Thank you.

Just a couple quick questions. On the home technology business, are the other large home security players, ADT, or Protection One, or anyone else competing in that space right now? And secondly, just from a capital allocation perspective, what was the reasoning from earlier in the year when you bought the HS headquarters and some of the planes, what were the economics there?

If I forget the other two, remind me, okay.

Sure.

I already forgot the first one.

It was about the home technology business, whether, I was curious of whether the other large Home Security players--.

Oh, okay. The biggest player in the home technology, of course, is ADT. And they do it basically through their dealer -- through a dealer network and they've relied on one dealer and that dealer has pulled back and shrunk in certain markets, which has dramatically helped us. And part of that has to do with capital intensity and their ability to finance it, et cetera. And that's one of the reasons our growth rate is so high. The rest of the competition comes from other people, small, local operators and/or people who do other low tech wiring in new home builders. So it's pretty fragmented. So I would tell you we are probably now the largest installer, the number one market share installer in new home technologies divisions and that could change as we pull back a little bit here to get our growth rate back in balance.

As far as the airplanes go, we only buy the airplanes because it makes good economic sense for us. I think we talked about the last conference call that there are return conditions on these leased planes and sometimes returns conditions on onerous, they're worth more than the asset. You end up in a negotiation to buy your way out. Sometimes it's cheaper just to take these airplanes, own them, and have the flexibility that we want to do. But most of those decisions are strictly what's lowest impact and we look at every one. If it was cheaper to lease, we'd lease. But in this case -- the recent cases, it's been cheaper for to us acquire.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] I'm showing we have no further questions. Gentlemen, I will turn it back over to you.

All right, thank you. Thank you, everyone, for listening in. We will talk to you at the next conference call. Thank you.