Brinks Co (BCO) 2006 Q2 法說會逐字稿

Welcome to The Brink's Company's second quarter results 2006 conference call. [OPERATOR INSTRUCTIONS] Is it now my pleasure to introduce Mr. Ed Cunningham Director of Investor Relations. Thank you. Mr. Cunningham, you may begin.

Thanks, Ross. This is Ed Cunningham and thanks for joining today's call. With me are Michael Dan and Bob Ritter. As in the past, Michael and Bob will each make a few comments and then we'll open it for questions. Before turning it over to Michael, I'll cover a few details related to the call. Second quarter results were released this morning the press release is available on our website at brinkscompany.com. If you wish to have the release faxed to you please call 877-275-7488. 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 projected results is readily available in today's press release, and our fillings with the SEC, including our most recent forms 10-Q and 10-K. The information discussed on this call is representative as of today only as 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's and nay not be rebroadcast, sold or otherwise distributed, without the express written permission of The Brink's Company. I'll now turn the call over to Michael Dan.

Thank, Ed. Good morning and thank you for joining us today. Second quarter income from continuing operations was 21.2 million or $0.42 per share, up from a very weak 2.2 million or $0.04 per share in last year's second quarter. Quarterly revenue rose10% to $698 million. Operating profit from continuing operations was 41.9 million, more than doubling last year's weak second quarter operating profit of 18.3 million. This profit swing of almost 24 million includes a net benefit of about $7 million from lower restructuring expenses in Brink's Incorporated international operations . This improvement is driven by several factors: results improved at both operating units most significantly at Brink's Inc. where profits more than doubled to $33.8 million, thanks to solid performance in North and South America and Global Services division. Brink's also benefits from $3 million in savings resulting from last year's decision to freeze the U.S. pension obligations and the lower level of restructuring cost I mentioned earlier.

Profits at Brink's Home Security rose 5% to 24.5 million. Ongoing expenses related to formal operations declined by 4.5 million. This relates primarily to lower post-retirement medical benefit obligation expenses covering employees of our former coal operations. As you know these expenses are offset to a large extent by earnings of our VEBA which had assets of 418 million at the end of the quarter. We also reported net interest and other income of 2.2 million versus a net expense of 2.2 million last year. This +4 million swing was made possible by lower debt levels and the short-term investment of remaining proceeds from the sales of BAX Global. In a few minutes Bob Ritter will provide more details on some of these items. In summary, it was good quarter.

In summary, it was a good quarter. We were on track toward achieving or financial goals for the year despite the performance of our European operations which while improving continue to struggle and the restructuring charges in Australia. We expect results to continue to improve in Europe this year, in fact I'm confident we'll see tangible evidence to support this optimism in our third quarter results. Our full year outlook for Brink's is basically unchanged. We continue to expect an annual operating profit margin approaching 7% with percentage revenue growth in the high single digits. our full year outlook for BHS is slightly tempered by a slow down in the housing market but we continue to expect annual revenue and profit growth in the business to be about 10%.

I'll comment in more detail now on both Brink's and Brink's Home Security. I'll start with Brink's where our second quarter profits were more than doubled to 33.8 million and revenue growth at 10%. Revenue and profits were up in both North America and international operations. As I mentioned earlier the profit growth was driven primarily by continued strength in North and South American operations and Global Services. Results were also helped by a reduction in restructuring cost of about 7 million. The operating profit margin for the second quarter was 5.8% versus 2.8% in last year's second quarter. If you exclude restructuring costs in both periods there was significant margin improvement.

North American revenue was 205.5 million, up 7%, operating profit rose 77% to 16.6 million. The strong results were driven by improves in U.S. cash and transit, ATM and global service operations. Profits in North America were also helped by the net reduction in $3 million in pension expenses and lower safety and security costs. Revenue from Brink's international operations rose 11% to 382.3 million, reflecting increases in all regions. Operating profit was 17.2 million up strongly from the 5.7 million of last year. South American revenue rose 29% to 107.3 million, while profits more than doubled due to strong results throughout most of the region. Third quarter results in this region are expected to be moderated by some recent labor cost increases. Brazil remains the key focus.

Profits in our relatively small Asia-Pacific operations were down due to a restructuring charge of 3.4 million related to the loss of our largest customer in Australia. Europe continues to be our biggest challenge. Revenue was up 5% to 255 million. Operating profit was positive versus a loss of the year ago quarter but the improvement was mainly due to the absence of any significant restructuring expenses. Last year's second quarter results included approximately 10 million in restructuring expenses primarily associated with European operations. The operating environment in Europe continues to be difficult due to a number of factors including changing regulatory and labor issues, competitive pricing pressures, and higher security threats. While improvement in Europe is occuring at a slower pace than I would like to see, our restructuring actions are taking hold. Second quarter operating performance improved sequentially over the first and is accelerating. We continue to be highly focused on improving the performance in Europe and I expect to see meaningful profit growth in the third quarter and continued improvement in 2007.

Our full-year outlook for Brink's remains intact. In North America, our traditional cash and transit and ATM services which make up the bulk of our business should be able to maintain or improve current levels of performance as our value-added Cash Logistics and Compusave business continue to grow. In international operations we expect continued year-over-year improvement especially in South America, but we obviously have some challenges to overcome in Europe. In Asia-Pacific, which is our smallest region, our global services business should help us deliver long-term growth however this year's results for the region will be dampened with the loss of a customer in Australia, which accounted for approximately $20 million in annual revenue. Europe continues to be a major focus of our efforts. I'm optimistic that we'll demonstrate clear improvement in the second half starting with the third quarter results. Before moving to Brink's Home Security I'm pleased that we were able to expand Brink's geographic footprint further in the quarter with the acquisition of a cash and transit and guarding business in the Republic of Mauritius. I welcome our new employees there at the Brink's family. This is approximately $18 million in revenue.

Now turning to Brink's Home Security. Second quarter revenues were up 13% from the year ago to 109.7 million, due to continued growth in our subscriber base and higher average monitoring rates. Operating profit was 24.5 million, up 5% over last year's second quarter. As expected, the higher profits from recurring services, were partially offset by increased investment in new installations and our cost related to our new monitoring facility in Knoxville, Tennessee. As a result the operating margin was 22.3% down from a strong 24.1% earned in last year's second quarter. The annualized disconnect rate for the quarter was 6.9 up slightly over last year's rate.

Brink's Home Security ended the quarter with 1.73 million active customers generating monthly recurring revenue of 31.2 million so future cash flow continues to grow. Brink's Home Security installed 43,200 systems,and had 18,700 disconnects resulting in a net addition of 2.4% or 24,500 customers to its subscriber base during the quarter. We believe the second quarter subscriber growth was hurt by softness in home sales and some unsuccessful changes to our marketing programs which has since been corrected. We're beginning to see signs of improvement and we expect growth in subscribers during 2006 to be close to 10%.

We continue to achieve solid growth from all three key subscriber acquisition channels. In the second quarter our branches accounted for 73% of our subscribers. Our dedicated dealer network contributed 19% and our Home Technology division accounted for 8%. The outlook for Brink's Home Security remains bright. We have a very strong brand, highly effective marketing and excellent customer service. We use these strengths to focus on enhancing our industry-leading performance in the residential security market as we continue to build our technical and sales capabilities on the commercial side. Our new customer care facility in Knoxville is fully operational and should help us demonstrate greater efficiency as start-up costs diminish during the second half of the year. The slow down in housing certainly bears watching. Brink's Home Security should be able to deliver close to 10% or better growth of revenue, subscribers, and profit for the full year.

In summary, we have had a pretty good first half of the year, while we are addressing some challenges we are tracking well toward hitting our targets for the year and positioning the Company for continued improvement in 2007. Brink's Inc. will continue to pursue market opportunities in its traditional armored car operations, while expanding further into cash processing, with potentials of revenue and margin growth is greatest. As I said earlier annual percentage sales growth in 2006 at Brink's should be in the high single-digit range and our annual operating margin should approach 7% even after Australia restructuring costs. Brink's Home Security will continue to build on its excellent financial and operational success. Our goal is still to deliver a triple double which means a 10% or better growth in sales, operating profit and subscriber. If we don't get there on all three counts I'm confident we'll be very close. As a result the overall performance, financial position and growth prospects at Brink's Company should continue to improve and build value for all of us. Now for some additional comments on our results and our financial position, here is Bob Ritter.

Thanks, Michael. I'll begin with some comments on the quarter, point out some things to keep in mind for forecasting performance in 2006, and then cover the usual information on cash flow and the balance sheet. First, as Michael said it was a pretty good first half. Brink's Inc. once again saw solid performance in North America and South America during the quarter. North America's performance combined both the effects of revenue growth with cost reductions particularly due to actions taken on pension costs. Internationally, strength across the board in South America more than overcame the weaker than expected performance in our European operations. Improved safety and security costs also contributed worldwide.

I would like to take a minute to highlight the impact on the quarter of the actions we took in Australia to address the loss of a large customer there. Now, all of the figures I'm about to mention are in U.S. dollars, not local currency. We expect to incur about $5 million this year in costs to restructure our operations, about 1.5 million of that should hit the third quarter. About $3.4 million of the cost have been recorded in the second quarter. And although these charges have or will negatively impact profits and margins we have considered them in our comments on Brink's margin for the full year. Further, as you assess income from continuing operations for the quarter, you need to keep the after tax impact of the $3.4 million in charges in mind. You should also consider that we recorded a $2.2 million tax valuation allowance related to our Australian operations during the quarter. To keep things on an apples-to-apples basis, you should do the same for last year using the $10 million or so in restructuring charges and $6.5 million in tax valuation allowances.

Moving on to Brink's Home Security. At Brink's Home Security we had a reasonably good quarter. Revenues were up solidly and revenue profit margin held up despite higher costs associated with bringing our new Knoxville facility up to speed. We should see improvement over the balance of the year. The one factor that concerned us was the pace of growth in new subscribers. It was lower than we have become accustomed to during the quarter, however as Michael noted we are adjusted our marketing programs and began to see a rebound with improvement in June and further improvement in July. Costs of former operations came in a little lower than in the first quarter. You should expect these costs in total to be in a similar range to the third and fourth quarters.

Looking ahead, corporate expenses should begin to decline some. The real test will be tightening down on costs in the second half and particularly in the fourth quarter when SOX 404 costs usually accelerate. However, because of the new accounting rules regarding the treatment of stock options, and the way our options works, we expect to record about $4 million of the full year's $7 million cost in the third quarter in corporate expenses. Our current expectation for the full year effective tax rate on continuing operations continues in the 41% to 42% range about the same as is reflected in this quarter's results before adding the $2.2 million valuation allowance charge for Australia.

Now I'll cover the usual comments about cash flow measures. Depreciation and amortization was about $41 million for the quarter, with Brink's at about $24 million and Brink's Home Security at just under $17 million. We expect these figures will run a little higher in the second half of the year so we are projecting full-year estimates of $100 million to $105 million for Brink's and $65 million to $68 million for Brink's Home Security. Capital spending in the first half was a little lower than expected for Brink's at $47 million while Brink's Home Security came in as expected at 82 million. We believe that the relatively low level of spending will hold for Brink's, although we expect these numbers will climb a little over the balance of the year so our full year estimate for CapEx at Brink's is lowered to $100 million. Brink's Home Security should be about as originally estimated at $160 million to $165 million.

Now I'm sure you noticed our net debt schedule on today's release and the significant changes from last quarter. At March 31st, combined cash and marketable securities balances were up over $700 million from year end 2005. By June 30, the amount in excess of the year-end level was down to about $125 million. We paid out about 30 million in June to cover the first installment on our tax bill this year. The rest of the drop was simply the result of following through on our commitment to enhance shareholder value. First, 530 million was used in the self tender offer which concluded in April and from late May through the end of the quarter the Company repurchased approximately $35 million worth of shares in the open market. And since the end of June the Company has continued share repurchases. Another $20 million has been returned to shareholders through Monday.

We have also used $20 million to make the final payments on the withdraw liabilities related to two multi-employer pension plans. We expect to continue to drive down the balance of cash we have left through share repurchases, tax payments, and to meet growth needs. So income from investments should fall sharply in the second half. On the other hand, the number of shares outstanding also be down significantly, and to help you out here, as of today we have slightly fewer than 47 million outstanding shares for EPS calculation purposes. Plus about 500,000 equivalent shares from outstanding options. That's all I have for now. For us, we are ready for questions.

Thank you sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Jeff Kessler will with Lehman Brothers. Please proceed with your question. Hello? Mr. Kessler will your line is live.

Hello.

Yes, Jeff.

Okay. First question-- two questions on Brink's Home Security. The first is, you know, up-- you know, the housing slow down is, you know, probably having some effect on you folks, and it is also having an effect, also, though, on the number of movers that are running-- that are sloshing around in the system as well. So your attrition rate ticked up 1/10 of a percent in the quarter, and I'm just wondering if there was a delayed reaction, lag effect in having the attrition rate perhaps decline a little bit as less people move in a slower housing market.

Yes, we-- we-- we assumed that that's what we would see, but we think-- we think that is being offset by the very, very high energy costs that are going through our economy today, which is putting some pressure on some of our customers, which is driving up some possible thoughts of discretionary spending on home security. But that's just our best guess at the current time.

Okay. So essentially if we're model attrition rates for you going forward, the high sixes is basically an area that we should be comfortable with?

I would-- I would hope that we can improve on that a little bit right now, but that's sort of what we're modeling.

Okay. Second question on BHS is can you talk about some of the changes to the marketing programs that you are making in light of the changes you seeing in the housing market? You know-- you noted that there-- you know there was six-- there was some originally unsuccessful and now you're hopefully saying some successful changes to the way you are marketing your-- your systems.

Yeah, Jeff, I wish I could tell you we were making a change that improved the process. We made a change that made it worst. We did the wrong thing. Basically we measure-- we call it grips which are gross rating points, and we had turned down the amount of frequencies we had in prime time and we went up in daytime thinking we could increase the number of sales opportunities. Unfortunately it had the opposite effect, and so we have gone back to more prime time, less daytime and more frequency on prime time, cost wise it's all basically neutral, and that sort of fixed the problem that we stumbled across.

I think the second issue that we think has had some impact on our sales opportunities via our marketing programs is that the overall spending in the industry seems to be substantially down by our competitors, and I think we benefit in a high advertising environment where-- where people are seeing these market ads on TV and then they shop with us and our competitor and usually we do a pretty good job getting in front of the customer and getting the account. So we think those are the two factors that affected our installation rate in the second quarter.

Okay. A question on Brink's, and the Australian loss there. There is one major-- there is one major competitor who has been out there in Australia for a long time, and I'm wondering No. 1 did you lose to them, but most importantly the question is why did you lose it? Was this a pricing issue that you refused to budge on? And I shouldn't put it in those terms, but you know what I'm getting at. And it is an issue that the type of thing that you believe that price per service may eventually come back to you at some point?

We talked about it last quarter a little bit, Jeff we did lose it to the largest operator in Australia and it was our largest customer. It was a price issue. There was about a 30% price differential. We were given the opportunity to match, which would have made it uneconomical. We chose to downsize and walk away from the business. That occurred throughout the quarter. I think we ended the last service in the first or second week in July.

I can assure you it has been a very, very painful hand over for the customer unfortunately, which has affected their customers, and it's been very devastating to our people in Australia, we laid off about 450 employees and paid severance cost, which is the majority of the charge we took in the second quarter. The remaining charges we'll see in the third quarter will be for lease costs and lease write-offs just accounting rules. But we're doing the right thing. The service quality of our competitor is suffering across the board which has given us sales opportunities with other customers and we're still going to be profitable in Australia as less restructuring changes for the balance of the year, and we'll build our business over time, because those costs aren't sustainable.

And Bob, as a corollary to this, can you just describe how you calculate the tax valuation allowance based on this and beyond the next quarter, how much of a tail is this going to have?

I'll answer the last question first. The charges that we expect almost all of them will come through the third quarter there might be a little dribble, maybe 100,000 or so that hits the fourth quarter but that's the timing of when we actually vacate various premises. So you should not see a long tail associated with the activities in Australia and as Michael said the actions with the people, as painful as they were, have already been taken care of.

In terms of the tax valuation allowance, the $2.2 million charges that we took in the quarter in taxes was relates to the tax benefit that we had previously booked for losses in Australia that we had assumed that Brink's would be able to use for its profitable operations. With the lower level of profitability we have right now, it was prudent for us to reduce the valuation that we had there.

Okay. I don't have anything else. Keep up the good work. Good quarter, guys.

Thank you, Jeff.

Our next question comes from the line of Michael Hoffman with Friedman, Billings, Ramsey. Please proceed with your question.

Good morning. Just to follow through on the tax allowance, if we make that adjustment, that's about $0.05, is that correct?

I guess if I were going to sit down and noodle about how to evaluate Australia you have to take two pieces. You have to take the 2.2 million which is obviously an after-tax number for the valuation allowance and you would also take the 3.4 million, and I think the easiest way to handle that is to take it using our basic effective tax rate. And that will give you an after-tax value for that. I would add the two pieces together.

Okay. So it's greater than $0.05. All right. That's solves that. In Brink's Home Security subscriber growth ends up in the sort of higher single digits, as opposed to the 10%, you clearly end up spending less in capital spending, would you do more share repurchase for that? Do you pile that up for next year? What happens with the extra cash?

Whatever we might do with extra cash and looking ahead will obviously involve our plans for growth and other needs that we have, but I don't want to prejudge or predispose the Board to go one way or another. We'll present the ideas to them and let them make decisions at the appropriate time.

That would be one of the options, though.

Yes.

Talk about commercial and sort of the progress being made with regards to growth there, have you seen any impacts, vis-a-vis the economy theoretically slowing if you look at some data on your commercial expansion or is it independent of that?

I would say, Michael, that it is independent of that we continue to invest and grow your commercial sales force. We believe it is a strategic point for us to grow that business and build our learning curve and we're getting better and better at it. We continue to invest in it and we have not seen the types of effects we have on the residential side.

Okay. What is the threshold of size that you would start to separate that out so that it's got a different level of margins and profitability than the home security business so that we see the-- those differences?

Michael, we're actually looking at trying to get our accounting nailed down so that we can do that for you. But clearly before we get there, we want to make sure that every bit of accounting is easily separable so when we show you numbers we have the same degree of confidence in those as all of the numbers we present right now.

Okay.

We hope to get that done some time by the end of this year.

So by fourth quarter?

Yes.

Okay. And then you mentioned that you thought your corporate overhead numbers would come down. Do you have a target for which you think annual corporate overhead ought to be based on how much comes off in the second half?

Well, one of the things we need to work through this year is just how much we can carve out from 404. We did incur a very sizable amount of consultants fees in the second half last year. We have added heads and we have taken some other steps to make sure that we do not have a repeat of that, and I think we'll be able to answer that question much more clearly for you probably in another three months.

So at the end of the third quarter, we get the guidance about that in the third quarter earnings call?

Yes.

Okay. All right. And then with with with regards to Europe and one of the issues had been prior to Heros' bankruptcy is that Heros was being a price spoiler. When they went bankrupt it appeared the market stabilized. Now they have had this white knight come up. What has their behavior been since Mateland Patterson [ph] showed up in the scene?

Mateland Patterson showed up about May 1st changed the name of the company to Secure Log [ph]. And in July, you might have saw an announcement, they sold half of the business to Goldman Sachs, which I think was an indication that things are difficult for them, and then recently one of our major competitors in Germany made an announcement they lost their largest customer to them at prices 30% below what they were selling them for, which were low prices to start with, because there's somebody else who thinks they can grow their way to success in the risk business, which doesn't work. As you might recall Group Four tried that and suffered. And Secure Task tried it for 10 years and sold out. Heroes tried it and went bankrupt. Now the new guy thinks that's the way to success in Germany. My judgment is that's not going to work.

But one less competitor in the market one day is the way I look at it. We're going to steer the course the way we know how to run this business. Our branches are full. We were a little sloppy in over hiring, and-- but you have to understand that there was a financial crisis in the country with the bankruptcy of this company, and we were under a lot of pressure from the major banks in Germany to make sure the liquidity of the market continued. And we were probably a little rambunctious on gearing up on our labor cost. Fortunately we did that with temporary labor. We're in the process of adjusting for that but I'm confident that the new pricing level in the marketplace will improve our operations in Germany as we go through the second half of this year, and the reality of the actions of the new major competitor in the marketplace will start to be painfully evident to them sometime in 2007.

And is that major new competitor branched out towards France or Benelux and tried to use price in those markets too?

No, in fact in Holland they liquidated or sold it off to somebody else. And in Benelux they have retreated. We don't expect there to be any activity there. But you never know.

Okay. And then on the securities' side, you know, with regards to risk, one of your challenges is to be able to get the customer to absorb some of the cost. Have you had better success with that?

We have been doing okay with that. The security situation in Europe is particularly difficult. I will tell you that it's getting worse and worse and worse in certain countries in Latin America, which we're very concerned about. Our job is to recognize that and raise our security standards and barriers and with proper investments to protect our people as we do that as necessary.

So in order to approach that 7% goal, Europe clearly has to do better than adjusted-- or international has to do better than the adjusted 5.4, if you add back the Asia charge. If North America sort of stays at a constant, the international business has to do better, right?

Yeah. It will and you'll see the improvements mostly come from Europe. Actually I expect a little slowing in Latin America. You'll see improvement in the third quarter and come mostly from Europe. You got to remember it's the holiday season and every year July and August are the strongest months. Everybody in France goes south and the rest of Europe goes to northern France. France is one of our strongest countries. And we always have a good, good third quarter in Europe, and you'll see that again this year.

And then last year in your fourth quarter, unfortunately you didn't sustain the seasonal volume increases. Are there any sort of indications, early signs that worry you about that surge in volume that you end to get in the fourth quarter?

Some of it depends on the economy, some of it depends on the security risk profiles that we face at that time so it is pretty hard to predict.

Okay. One of the things Secure Test said they were going to spin out all of these businesses and break the Company up. There was chatter that Loomis Fargo was de facto putting it up for sale. Anything you're hearing about that?

The rumor in the marketplace is that is not going to be part of the spin off. Some of the private equity firms are in there. It's my understanding there were seven or eight and they are down to one. So the question will be do they spin off or do they sell it to equity. I think that will become evident come September.

Okay. And then on the homeland security business, as you look at the patterns that are occurring, it's interesting, if you look back over the +20 years you have been in operation, the peaks and valleys in housing starts and home sales have not historically been a factor you would have attributed to your performance. Is that a sign that this is a maturing market that this is becoming more of an impact?

I'm not sure, because you got to remember last time there was a housing slow down in the market, Michael was one of the times we were slowing down the growth of Brink's Home Security on purpose, putting the brakes on the pedal a little bit to make sure we were organized correctly and as efficiently as possible. And our Home Technology division really wasn't a factor back then.

And recall that last year we started noticing the slow down with investor housing flipping in Florida in particular, and taking some strong actions on either increasing prices or canceling some of our customers who just weren't turning these houses on. I will tell you that the indications we have from our people in the field is investors were putting down as little as $5,000 for these houses especially in the Orlando market area. When the turn comes they are just walking away from those, so the build up of inventory which you can read about in the new market in that area is quite shocking, as you know, which is reflected in the equities of those public home builders.

Okay. And then with regards to Home Technologies, one of the issues last year is a little bit of over exuberance. you got a lot of installs, more expenses and it wasn't keeping pace with the conversion rate what is happening this year with regard to all of the installs? What are you seeing on the conversions?

The actions we have taken, which is raising prices or canceling customers and sharpening our focus are having a beneficial effect. We are very happy with where we are on Home Technologies. We're glad we took the steps we did early in the process. So are a lot of those installs from last year getting converted to subs? As the housing market permits, but more importantly we're not installing a lot but we saw the rate when you turn them on, Michael, continue to decline. We have been able to balance that out again.

Okay. All right. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Jerome Landy [ph] with Melbrook Capital. Please proceed with your question.

Good morning. In Europe could we go back to that for second, especially with regard to Belgium where last quarter I think there was talk about increased regulation and changes on the environment there can you comment onto the Belgium environment unto itself, not with regard to Heroes and things like that?

Actually Belgium is improving a little faster than some of the other ones, and those-- those changes are still-- regulatory changes are always a problem in Belgium. We're working closely with the government regulatory agencies to make sure those are addressed appropriately. There was some confusion about approved devices in the marketplace that is being to be cleaned up, and that's actually going to benefit us in the third quarter. and I'm actually pleased with the steps that are taking place to Belgium to date. The bigger concerns in Europe are still UK, Ireland and we already addressed Germany on the call, so I won't do it.

You brought up UK and Ireland. That was my next question What is the status there and can you give us more clarity on what is delaying the structuring benefits?

Some of it has to do with very, very competitive pricing in the marketplace where people think that density is the answer. In other cases it's the security environment, which continues to be very, very dangerous especially in Ireland and the UK. We have to keep the defenses up to protect our people and to protect our assets. We are pressing very strongly for the appropriate price increases in those marketplaces with our major customers, and we're involved in those critical negotiation as we speak.

And can I assume-- let's-- you know, take those two possibilities you get the price increases through and we should see the improved profitability second half of this year. If you are not successful in getting those price increases through, can we expect to see you shrink in UK and Ireland?

That's always an option that we have used in the past that if a customer base will not properly compensate us we'll take necessary steps to shrink our operation and wait for the market to have some sense.

When do you think you will know more about which direction that is?

Probably closer to fourth quarter.

And the CapEx decrease for Brink's Inc. is that along the same lines of your over staffing in Germany? Your expectations of what was needed to spend there?

No it's simply the under performance of Europe and our discipline of holding back capital spending until it performed appropriately.

Okay. The Australian charge, I think last quarter you said it was going to be 10 million, now it's 5 million. What changed that?

Couple of things. We have been able to offload some of the leased property we thought we were going to have to write off and some of the attrition rate where people were leaving our employ little faster than we assumed lowered our redundancy cost we had to pay by law, but fortunately the management group and the employee base there did a wonderful job in maintaining service levels right up to the end for a major customer down there. I'll really proud of them.

Got it and you were asked already about commercial and what is going on there so I understand that you feel you have solid prospects there, but I would like to understand a little better -- speaking more broadly and more long term -- what your time frame is for that and-- and particularly within the spectrum of what is going to get Brink's to the next level? You know, commercial is obviously an opportunity you have talked extensively about wanting to add a third leg without giving a great detail of what that might be. Even in the release today there's a rather vague comment from you, Michael, about new opportunity for increasing value. Can you-- can you give little bit more clarity on what time frame we should expect to see something like commercial ramp-up, if not commercial, what kind of other things, and when should we expect to see you take advantage of what is now a pristine balance sheet and opportunities for growth?

It's hard to quantify Jerome and today with the amount of money slushing around in private equity and hedge funds that we're in the deal stream, and we have looked at numerous opportunities that quite frankly just aren't economical for us. I'm not going to do something just for the sake of doing it. It's got to fit our strategy. It's not to fit our strategic model. It's got to be in line with who we want to be as we go forward, and if those opportunities don't crystallize or clarify well enough we can discuss with Board of directors how else do we leverage the very strong balance sheet that we have and what other opportunities we can do to increase shareholder value.

And timeframe on commercial and other opportunities you are exploring maybe for example?

In the deal stream we're looking for things all the time, Jerome. We are hard at it. We have a whole group dedicated towards it, but we are not going to overpay for an opportunity that doesn't make sense.

I understand. Let's put aside acquisitions for a second what about organic growth for commercial can you get there growing it yourself?

Obviously not as fast some type of acquisition but we did it with Brink's Home Security over time, and I think we'll see probably in the next six to 12 months, when we continue the rate of growth on the commercial side at 30% to 40% a year, which should be relatively easy given the small size that it is, but we can continue to grow it at that rate, and maintain the quality standards and fits the mold we have for the rate of growth on the complexity of the commercial side I'm satisfied to do that until the right opportunity comes up to jump start that business.

Got it. Thanks and congratulations on a great quarter.

Thank you.

Thank you.

Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Good morning. In North America, Brink's Inc., the business definitely looked better year-over-year, but sequentially the revenues and growth and margins were down. What was driving that? Is that just a reflection of slower GDP growth?

I'm not exactly sure. We have actually had very good revenue growth in about three years most of that co,ing from the U.S. business. And we had a very strong security and safety results for the first quarter. Solid in the second quarter but not as good so that might be the effect that you are seeing there, some of the safety and security costs in the second quarter.

Okay.

I'm very pleased with where we find ourselves in North America in the actions we're taking. I mentioned last quarter that service quality is starting to become an issue, customers are starting to appreciate that a little bit more, and as I said the worm was starting to turn and I am very hopeful that the level of growth on revenue in North American will maintain itself in the high single digits as we go forward.

Okay. On the international margins on Brink's Inc., can you summarize what it is that give you the confidence of the tangible benefits in Q3 relative to what you are seeing in Q2? I know you mentioned France vacations and Germany destaffing, but can you summarize what all of the components are that give you that confidence.

The first quarter in Europe was weak the second quarter is still weak by our standards, but much, much stronger than the first quarter. So it's picking up momentum and that momentum increased at the end of the second quarter, and we know, that seasonally we're going to be better in the third quarter in Europe so that gives me the confidence.

Okay. So it's primarily a top line as opposed to--

and accelerating improvements on the restructuring costs we took last year and the expected benefits. They are a little slower, but they are coming, and I hoped to be about two months ahead of the schedule we are today so I'm a little disappointed about the two-month lag. We're basically receiving the benefits of the restructuring charges last year in Europe.

Okay. Great and lastly can you just give a little more color or details on what is going on with the Cash Logistics business? You know, what kind of contract you are working with there? How that's progressing, revenue growth rate?

You know we call it Cash Logistics. The reality is the whole marketing campaign of the Company is going through a change to solution selling. The highest single component of cost that we provide to our customers is transportation. So anytime we can take transportation out of the product mix, it's a win for our customers and a win for ourselves and we do that by expanding our Cash Logistics business where we don't have to haul the cash anywhere but back to our terminals. And so our whole sales marketing thrust for us to build up our capabilities on that side very similar to what we are dong on the commercial alarm side with Brink's Security. We're going to continue to invest in that. We're continuing to have success continuing to grow in this higher margins business. There is organizational resistance sometimes to these types of changes but the management group is working through those, and I'm confident that that's going to be the growth platform for the Company for the next five years.

Great. Thank you very much.

Thank you, Steven.

Our next question comes from Elaine Hahn with Hahn Capital Management.

Thank you. Michael, I wonder if you could give us a sense of what your fuel cost situation is, and whether-- are you hedging your costs on the fuel for the armored cars?

No, we do not hedge fuel on the armored cars. We pass on the vast majority, especially the medium and small customers into a vast majority of our larger customers. There's usually a delay with some of our larger customers,and we do have some resistance from some there in the negotiation. But we have been over time successful in offsetting the vast majority of those costs 70% to 80%. We do take some it on the chin. And it's always a concern on how high fuel prices go, and we may have to reengage some of our larger customers either on a base price increase or a fuel surcharge where they haven't accepted one to date, but that is a constant battle we have with our customers and they are usually pretty cooperative.

What is the lag time associated with passing those costs through?

It would be different. It could be a couple months. It could be three months, and of course they want it to drop the minute the price of gas falls, but it has affected our results to some degree but it's not an overriding factor at the current time.

Okay. I have another question regarding Brink's Home Security can you give us any additional color on the opportunities you see in the commercial market?

I just think there's a tremendous opportunity. There's one or two dominant players and hundreds of smaller regional or local players, and I just think we have to find the right one that fits in with our business model of how we work. We have very, very high standards with the margins we have in the Home Security business, and we're growing that business as rapidly as we can. We had little slow down in this quarter, which we already talked about. We don't want to grow a business at a lower margin, so we have to have a very tight fit on the Commercial side and what makes economical sense for us to make sure we maintain the strong EBITs that we have in that business. So our model relatively narrow with size of businesses we're willing to go into. We want to increase those capabilities which is some of the things we're looking at. That would probably be a different business model and a different leg to the stool. But once again we have to find the right opportunity that meets our strategic criteria, and will be meaningful enough for us to expend shareholders funds.

Okay. Thanks a lot. I appreciate that.

Our next question comes from the line of David DeGraff with MFS Investment Management. Please proceed with your question.

Hi, guys.

Hello.

I wanted to talk about Brink's Home Security a little bit. On the gross adds front, were the marketing changes that you did in response to slowing growth adds?

No, we actually were trying to speed it up. That's why I said it was our mistake. I wish it was the change in the marketplace, but we actually thought that in consultation with our outside marketing experts that going more to daytime would increase the amount of responses we would get with your direct marketing, and that turns out to be a miscalculation, and it took us about 45 days, 50 days to realize that we had to reverse course which we did and basically went back to the same formulary that we had before. It was a misstep on our part coupled with a slow down in Home Technologies and some of the housing slow down, those three factors contributed to what you are seeing.

What are the gross adds they are about 2% for the quarter. What did they run through for the quarter and what did they bounce back to in July? You said you see an improving trend?

They are accelerating back to normal levels. It's still early but it's accelerating back to normal levels. We're pleased with where we find ourselves.

So normal is like almost 10% in the first quarter?

Right. Correct. Double digit.

Okay. Great. And you said no more increase in marketing dollars spent just reallocation?

Right. No more margin. Exactly we didn't cut back and we didn't increase it was just how we did it, how we went to market, and frankly it was a good idea that didn't work.

So it was a bad idea, I guess.

Which ended up being a bad idea, I agree.

Okay. Switching over to Brink's Inc., can you give me a sense for how much South America makes up of the operating profit on the international side?

I don't know if we break that out separately, but I will tell you that Latin America by the nature of the environment down there is more dangerous. We tend to have in good economic times higher margins in Latin America than poor economic times, just by the nature of the environment that we operate in. People appreciate security more. It's a most volatile market we operate in, though. It's gone through some bumps and traumas through the years. There's been some devaluations down there, but it is a very, very good market for us. Right now the economy is doing well in Latin America and we're riding the crest of that with reasonable margins.

Okay. So margins are higher than the overall segment?

Yes.

Okay.

In good times.

Right. Okay. And then back -- back to Europe, it-- it seems like-- I guess I'm having a hard time understanding why the severance wouldn't just flow through as fast as you thought. I mean, the people are gone, so is the pricing pressure--

It's different--

holding back the savings?

It's different every quarter for instance in Belgium we knew what we had to book, but we didn't let the people go because you had to negotiate. We identified the people, we were able to take the accounting charge last year, but the people bleed off as you go forward after you get the local unions, the national unions and everybody else to agreement and that's when we announced this last year, that there would be a time lag, that has to do with Belgium. In most of the other countries the expenses take place the same time you take them but Belgium drags that out a bit. But once again I think we're on track with Belgium.

Okay. So to take the charge all of the severance goes into the charge right? So why it is still impacting this year's results? Because you're just hitting the reserve.

We still have of the expenses, depending on the timing when the unions finally agree to let us let the individuals go.

Okay. And that's-- Belgium was enough, though to push the margins down to 5.4 there from 5.9 in the first quarter?

That's part of the effect.

Okay. So is just overall market pricing the rest of that effect?

More security levels we need in the UK and Ireland which are very, very dangerous areas to market and operate in business currently.

Okay. And I guess you said over there that margins were-- or operating profit was positive, but just because of the-- the swing in the $10 million charge so doesn't that sort of imply, I guess operating profit of, you know, zero to $7 million there.

Operating profit in Europe it was within that range but it increased substantially over the first quarter and it will accelerate even more so into the third quarter, which is why we're confident with the reaffirmation of approaching the 7% margins for the year for Brink's Inc..

Margins over there are in like the 2% to 3% range.

We don't give out specific margins by area. The advantage of Brink's is we're all over the world. All different regions. We have some regions that go through good times and bad times. Overall we want to get to 7%, 8% margin rate to have a positive economic value which is where we are today, and we want to make sure we can work on improving that as we go forward.

Okay. It seems like they were in the 2% to 3% range for this quarter in Europe, what do you need to do outside of the restructuring to get back to that sort of 7% EBITDA positive range in Europe?

I think the benefits of the restructuring programs coming into full fruition and our normal volume increases in the second half of the year will more than take care of that.

Okay. Great. Thanks.

Thank you.

Our next question comes from the line of Steven Tan with Avenue Capital. Please proceed with your questions.

Good morning, guys. I would like to ask you a couple questions about Brink's Home Security. You are forecasting an '06 EBIT growth of about 10%. When I look at Q1, Q2, it's 4% to 5%. So I guess you expect to accelerate in Q3 as you mentioned before you are seeing some of that in June and July of Q4. I'm just trying to understand if that's achievable considering that you have quite a big shortfall in the first half?

We call it the triple double and I mentioned it's a little bit at risk on the subscriber side. I think we're going to get very close just because of the volume increases that we're seeing now in the third quarter. We'll be okay on operating profit because the Knoxville start-up cost are behind us, which we predicted at the first half of the year would affect us, it would keep margins down at the 5% and revenue, of course, is already at double digit. So the issue is going to be subscriber, how close to we get to the double digit on subscriber, and obviously we'll have more clarity at the end of the third quarter. I think we'll be close but whether we'll achieve triple double I'm not sure, it might be a double, double.

Okay. Can you remind me again how much Knoxville start up costs cost you in the first quarter?

The extra cost in the quarter was probably in the $1 million range.

Okay.

It was a little less in the first quarter, because we really didn't start it up fully until February 28th.

Okay. Great. Thanks so much.

Gentlemen there are no further questions at this time. Do you have any closing comments?

No.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.