Brinks Co (BCO) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen and thank you for holding. Welcome to The Brink's Company Incorporated third quarter results 2006 conference call. A replay of today's call will be available starting this afternoon through November 16, 2006. The replay number in North America is 877-660-6853. Outside of North America the number is 201-612-7415. The passcode for the replay is 286 and the conference ID is 216712. A replay of today's webcast will also be available on our website. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce Mr. Ed Cunningham, Director of Investor Relations. Thank you, Mr. Cunningham. You may begin.

Thank you, Dan. Good morning. This is Ed Cunningham, Director of IR for The Brink's Company. Thanks for joining today's call. With me today in Richmond is Bob Ritter, our CFO; Michael Dan, our CEO, is out of the office and joining us from another location. Today's call will proceed as follows. Michael will briefly review the company's strategic direction before discussing quarterly results. Bob will make some follow-up comments and then we'll open it up for questions.

Before turning it over to Michael, I'll cover the usual details related to the call. A press release on third quarter earnings was issued this morning. It's 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 in our filings 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 and The Brink's Company assumes no obligation to update any forward-looking statements. This call is a copyrighted work of The Brink's Company and nay not be rebroadcast, sold or otherwise distributed without the express written permission of The Brink's Company.

I'll now turn it over to Michael Dan.

Thank you, Ed. Good morning or good afternoon, depending on where you are today. Thanks for joining us and as Ed mentioned, I am out of the country. So the question-and-answer period might be a little choppy from our normal process, please bear with us. In today's announcement, we reported the recent completion of a $100 million open market share repurchase program. This share repurchase is the latest in the series of actions that management and the Board of Directors have taken to create value for our shareholders.

As you might expect, we are regularly asked by investors about our plans to build on the proven track record of value creation. Our Board and the management team have actively engaged in the study of a wide range of structural and financial considerations, the value of our businesses, the alternatives for creating additional shareholder value. In this regard, we have sought advice from advisors where appropriate and have received viewpoints from our investors. All these inputs have been taken into account in the consideration of alternative strategies.

Having said that, we are very pleased with the progress we have made so far this year, which includes the completion of the sale of BAX Global, a major step in becoming the highly focused security company that we are today. The delivery of solid growth in earnings and cash flow, the return of $630 million to our shareholders by repurchasing more than 20% of our common stock, the increase in our dividend rate, the significant strengthening of barriers against our legacy liabilities and the build-up of capital in the form of borrowing capacity, which gives us the capability to grow faster than our existing businesses would have been permitted on their own.

As I said earlier, in our announcement, as we approached 2007, our strategic direction is clear. We intend to create additional value by using our available capital to support the growth of our two core businesses and aggressively explore new opportunities to move into other security related businesses that can benefit from the Brink's brand. Of course, we continually review always to continue to create value as demonstrated by this year's dividend rate increase and share repurchases.

Let's move on now to third quarter results. Income from continuing operations was $24.8 million or $0.53 per share, up 6% from the $23.4 million or $0.41 in last year's third quarter. Revenue increased 11% to $721 million. Operating profit from continuing operations was up 18 % to $52.1 million. This improvement was driven by several factors. Results improved in both operating units, most significantly at Brink's Incorporated where profits rose 18% to $48.7 million, thanks to improved performance in Europe and South America.

Profits at Brink's Home Security rose 10% to $23.4 million. Ongoing expenses related to former operations declined by $2.7 million year-over-year. This relates primarily to lower post-retirement medical benefit obligation expenses covering employees of our former coal group.

As you know, these expenses are now offset to a large extent by earnings from the VEBA which had assets of $433 million at the end of the quarter. We also reported a reduction in net interest expense and other non-operating items that totaled $1.3 million. This was made possible by lower debt levels in the short turn investments of the last remaining proceeds from the sale of BAX Global.

The positive impact to these factors were partially offset by higher corporate expenses and the higher effective tax rate that we saw in the third quarter of last year. The increase of $4.1 million in corporate cost was entirely driven by $4.6 million in pre-tax expenses related to stock-based compensation. You will recall that we talked about this in our second quarter conference call. In a few minutes Bob Ritter will provide some more details on those specific items.

Looking ahead, we are on track to achieve our financial goals in each of our two security businesses. Despite the challenges we continue to face in Europe and the restructuring of our operations in Australia, our full year outlook is for Brink's to achieve an annual operating profit margin of about 7% or better, with percentage revenue growth in the high single digits. Our full year outlook for Brink's Home Security is unchanged. Though slightly tempered by a slowdown in the housing market. We continue to fully expect that the full year revenue, profit and subscriber growth will be about 10%, the triple double we talked about.

I'll now comment in more detail on each of the businesses. I'll start with Brink's Incorporated. Third quarter profits increased 18% to $48.7 million on revenue growth of 11%. Revenue profits were up slightly in North America but grew significantly in international operations. Most of the profit growth was driven by continued solid performance in South America and improvement in Europe. The operating profit margin improved to 8% versus 7.5% in last year's third quarter.

North American revenue was up 5% to $207.9 million. Operating profit in North America increased slightly to $17.1 million. The operating margin in North America was 8.2%, down from a strong 8.5% last year, mainly due to higher labor cost and the recording of this year's stock option related expenses.

Revenue from Brink's International operations rose 14% to $401.1 million, reflecting increases in all regions except Asia-Pacific. Operating profit was $31.6 million, up 29% over last year. The overall operating margin for international operations was 7.9%, up from 6.9% in last year's third quarter. Not surprisingly, revenue and profits from the relatively small Asia Pacific operations were down due to the previously announced loss of our largest customer in Australia. Longer term, our global service businesses will help us recover and deliver growth in this region.

Our South American operations were a solid contributor to the improvement in international profits. Revenue in this region was up 29% to $114.7 million, while profits rose due primarily to strong results in Venezuela, Brazil and Argentina.

With regards to Europe, you may recall that during our second quarter call, I expressed some confidence that we would see tangible evidence in the near term to support our optimism that performance there is improving. I'm pleased to report that the third quarter results show substantial improvement, both sequentially and against year-ago quarter.

Revenue was $271 million, an increase of about 10% over the previous year. Operating profit almost doubled over the year-ago quarter and more than doubled over the second quarter of this year. I fully realize that profits for these prior periods were disappointing and unacceptable. The current results are still not where we want them to be. 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. Nevertheless, we are encouraged by the recent improvements in Europe. Our restructuring actions are taking hold and we've established some positive momentum that we hope to sustain through the fourth quarter and into 2007.

Now turning to Brink's Home Security. Third quarter revenue increased 11% to $111.6 million due to continued growth in our subscriber base and higher average monitoring rates. Operating profit was up 10% to $23.4 million. The quarterly operating margin was 21%, down slightly from the 21.2% in the previous second -- last year's second quarter.

The annualized disconnect rate for the quarter was 7.1% lower than last year's disconnect rate of 7.7, which you'll recall was unusually high due to the impact of the Hurricane Katrina.

BHS ended the quarter with a subscriber base that was just short of 1.1 million active customers, up 10% since last year's third quarter. The growing customer base is generating monthly recurring revenue of $31.8 million, so future cash flow continues to grow.

The subscriber base at Brink's Home Security grew by 2.4% or 25,700 customers. This subscriber growth was a little slower than we'd like to see as result of the weakness in the housing markets and some changes we made last spring to our marketing programs. We discussed this on last quarter's call when we told you the changes had been unsuccessful and we are in the process of being corrected.

We are seeing signs of improvement although it has been slower than we had anticipated. Despite this, we still expect growth of subscribers during 2006 to be close to 10%. Commercial growth continues on course, accounting to almost 7% of the quarter's installations.

In summary, it was a pretty good quarter for both of our security businesses. We certainly have some challenges, we are on track to hit our targets for this year and well positioned to continue improving throughout next year. Brink's Incorporated will continue to pursue market opportunities in its traditional armored car operations, while expanding further into cash logistics where the potential for revenue and margin growth are greater.

There are always concerns as we look ahead. For example, there are no guarantees that economic activity in Europe and South America will continue at the pace we saw in the third quarter. As most of you know, I'm always very concerned about the safety and security issues of our organization. Annual percent of sales growth in 2006 at Brink's should be in the high single digit range and our annual operating margin should come in around 7% or better, even after the Australian restructuring cost.

The outlook for BHS, Brink's Home Security, continues to remain bright. We have a very strong brand, highly effective marketing and excellent customer service. We'll use these strengths to focus on enhancing our industry leading performance in the residential security market and continue to build our technical and sales capabilities on the commercial side.

The slowdown in housing certainly bears watching and Brink's Home Security will continue to build on its excellent operational and financial success. Our goal is still to deliver a triple-double in 2006 and that means 10% or better profit growth sales and subscriber growth. If we don't get there we'll be real close.

Finally, as I mentioned at the outset, our strategy is to use our capital to grow our core businesses as we aggressively explore new opportunities in the security-related businesses that can benefit from the Brink's brand. As a result, the overall performance, the financial position and the growth prospects of the Brink's Company should continue to improve and build value for all of us.

Now for some additional comments on our results and financial position, here's Bob Ritter.

Thanks Michael. I'll begin with some comments on the quarter, point out some things to keep in mind for forecasting performance and then cover the usual information on cash flow and the balance sheet.

First, as Michael said, operationally it was a pretty good quarter. Brink's, Inc. once again saw solid performance in South America during the quarter and stronger performance in a few key countries in Europe as well.

North America was essentially flat in comparison to a strong quarter a year ago. Margins there hit 8.2%, 7.9% in international and 8% overall. Year-to-date, margins climbed back to just under 7%.

Looking ahead, financially, we will be satisfied if we can maintain or slightly expand the year-to-date margins during the fourth quarter. There will be a lot to keep in focus and as Michael said, there are always safety and security concerns.

Looking quickly to 2007, with Brink's margins back to more acceptable levels, we will be looking for more normal profit growth next year. Not the significant increase we have seen this year in comparison to last.

Now moving on to Brink's Home Security. At Brink's Home Security, we had a reasonably good quarter. Revenues were up solidly and operating profit margin held up reasonably well. We should see further improvement during the fourth quarter and the full year increase in operating profit should again be at or near 10%.

In 2007, targets will probably be unchanged from the triple-double we normally look for, but we're still working through our planning cycle. Costs of former operations has settled into a new lower rate at about $6 million per quarter. Now this may change, as we go through our annual actuarial reviews in a couple of months and we'll try to update this for you in early February.

Corporate expenses came in about as expected for the quarter, with the $4.6 million of stock-based compensation added in. We expect spending in the fourth quarter to be down from last year, as we have moved a good deal of the consulting work done last year to internal resources.

The tax rate came in high for the quarter as our year-to-date performance and forecasts through year-end have caused a change in our estimated distribution of earnings. We'll have more earnings in certain countries offset by a higher level of losses in other countries or localities where we can generate tax loss carry forwards, but cannot record the accounting benefit for them. An example of this is Australia, where we recorded a pretax restructuring charge of $1.2 million with no corresponding tax benefit. For the fourth quarter, expect a rate in the 46% range. Next year's effective tax rate will likely be lower by a few hundred basis points.

Now, I'll cover the usual comments about cash flow measures. Depreciation and amortization expense was about $42 million for the quarter with Brink's at about $24 million and Brink's Home Security at a little over $17 million. We expect these figures will track only a little higher in the last quarter of the year. So we are projecting full year estimates for deprecation and amortization of $95 million for Brink's and $65 million to $70 million for Brink's Home Security.

Capital spending accelerated in the third quarter with Brink's coming in at $34 million or $81 million year-to-date, while, Brink's Home Security came in as expected at $41 million. We believe that the higher level of spending will hold for Brink's in the fourth quarter, so our full year estimate for CapEx at Brink's is now $110 million to $115 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 in today's release and the significant changes we've seen this year. At March 31, combined cash and marketable security balances were up $700 million from year-end 2005.

By June 30, the amount in excess of the year-end levels was down to about $125 million primarily due to the Dutch tender offer. As we follow through on open market share repurchases and the withdrawal liability payments, this excess declined to just under $60 million by September 30. As Michael noted earlier, we have purposefully built up our borrowing capacity to give us the flexibility and capability to grow.

That's all I have for now. Dan, we are ready for questions.

[OPERATOR INSTRUCTIONS] Our first question is coming from Jeffrey Kessler of Lehman Brothers. Please proceed with your question.

Okay. Thank you. Hi, guys, how are you doing?

Hi, Jeff.

On the tax rate, which clearly was the only, I mean, the quarter came in really nicely. The tax rate was the only real surprise, I think for a lot of us, and dealing with the mix of your taxes obviously is something that, I guess this falls on the shoulder of Mr. Ritter. You've gone through a little bit of talking about how the tax rate looks going in the fourth quarter and into the - into 2007.

Can you elaborate on that a little bit as to where you think the jurisdictions are going to come out, and how you can get that tax rate back down, so that we know that this blip up was, I'm not going to call it a one-time item. The fact is that this was a surprise of 48% where most people were in the low 40s on their estimates?

Yes, Jeff the -- where you look. First of all, I'll talk about the fourth, no the third and fourth quarters and why our projected tax rate has come up. That is primarily because of losses in certain countries, but also in certain states, here in the United States, where we generate losses in those countries and states and are unable to record the benefit for future NOLs -- NOL usage that we have there.

We have a, obviously we've been talking to you about Europe, the results there have been a little bit higher in terms of losses than we've expected. But we also have countries like that that have valuation allowances throughout most of the rest of the world; here and there we have spot issues like that. As we look ahead to 2007, our expectation is that we are going have improved performance in countries and in a few of the states where we do have difficulties right now.

So that should help us bring down the amount of unprotected earnings that we have if you would. And so that will be helpful to us. In addition, we have a couple of countries were it looks as though we are starting to move from a loss position back to gain positions. So we are likely in those where we have previously had valuation allowances to be able to generate a little bit of earnings without a corresponding tax hit of -- during 2007. And that's why we have comfort that we are going to be able to reduce the number next year.

Okay. Your business in Europe, can you go through a little bit more country-by-country, I know that you're hesitant to do that from time-to-time. But, there have been instances, where you have talked about situation in the Netherlands, situation where you lost a customer, but it had been a big customer -- had been a big country for you. The situation in Germany how is that settling out and how are the accounts from the [HIROS] business parsing out to different countries?

Finally, the UK which has been a problem for you consistently and I realize why you're in it. But the fact is, is that we'd love to know, how you're intending to improve the business there?

Jeff, those are all good questions. And once again, we're pleased with the directional improvement that we see in the third quarter and from our European operations. But we still have a long way to go. We still face a lot of challenges. Holland is not a loss making country anymore, but we are not making the type of returns we did before we lost that major customer, and that's probably a two or three year business cycle to wait for the customers -- opportunity to serve a customer like that again.

But we got the business fixed back into the black, so I'm pleased with where we find ourselves. And we'll do everything we can to improve performance there overtime. And the Germany situation is still unsatisfactory. We're still in a loss making situation in spite of the market the upheavals there and the successor company to the one that went into bankruptcy for fraud, but now has new ownership believes that the way to future glory is to increase density.

And they're in a market with very, very low prices, which is making it very, very difficult. So I think Germany is going to be a difficult situation for us, probably for the next year until the reality of that strategy becomes ever more painfully evident to the new owners. In Belgium things have improved, as I mentioned at the last quarter's call, I'm pleased with where we are.

There's continual improvement quarter-to-quarter. In that particular case HIROS abandoned that marketplace, which is one of the benefits that helped Belgium, but the management group in that country has done a good job in getting our cost in line, and starting to grow our market share a little bit. So I'm pleased with the progress in Belgium and that will be a positive for us going into 2007.

Ireland and the UK were the other two, Jeff, that I think we previously mentioned before --

Yes.

-- in Ireland the security situation there was absolutely out of control. We ended up basically having a very difficult situation with our customer base, where we had to demand some large increases. And the customer base has recognized that they had to step up to that. And we have a phased program of substantial price increases in that country, which will put that country into the black during the fourth quarter of this year, which will have a good effect for us going forward into 2007.

And those results will start to be evident in the fourth quarter. UK, however, continues to be a very difficult market for us. It just so happens I'm in Europe, and when I hang up this phone, I'm headed to the UK and I'll be huddling with our management group there trying to come up with -- to make sure we have the right strategy and the right plan in place, or what steps we need to do to make sure we get back on track.

With that, I think we're in pretty good shape for Europe going forward in 2007.

Okay. Michael, the Prosegur situation or the ownership situation in that company is up in the air and since they are a major competitor of yours in South America, and I guess you don't have very much exposure to them, at least competing right now in Spain, although it would obviously make a nice geographic expansion for you. Can you make any comment as to, what your feelings toward Prosegur are at this point?

Well, the Prosegur -- the speculation in the marketplace is that they're for sale and their stock has had a nice run up in the Spanish market. But it's a family controlled company, somebody owns 50.1% of it, the [Goode] family. And until their aspirations are met, I don't think the company will be available. Most of their business outside of -- we do not operate on the ground in the CIT business. We are in global services in Spain and Portugal.

We are interested in looking at that particular marketplace. However, the bulk of their business is in Latin America, where we're number one and they're number one in most of the countries down there. And so it wouldn't be a feasible on antitrust for us to buy the whole company. Would we be interested in looking at the Spanish and the Portuguese business if it was going to be split up, the answer would be absolutely.

Okay. Finally, one last question, and that is on your attrition rates for Brink's Home Security, there -- there should be somewhat of a small silver lining in the downturn in the housing market, which is less people moving.

We really haven't -- we have seen it against last year, but that last year was unusually high because of Katrina. So the question to you is, are you really seeing any benefit yet at all in attrition rates from less people moving because of the slackening housing situation?

The answer to that is no, Jeff. And it's my opinion that the tough economy in the United States, the slowing economy in United States, the high energy prices in United States, has put a real squeeze on a lot of our middle-class customers. And we've had an uptick in the financial disconnects, which should more than offset the slowdown in the move market.

Okay. Great. Thank you very much. And good quarter, guys.

Thanks, Jeff.

Our next question is coming from Steven Fisher of UBS. Please proceed with your question.

Good morning. I wonder if you can start off on Brink's Inc. in North America. What was driving the more moderate growth there? Was it just a function of this slowing GDP in the United States?

It's basically all labor costs, Steven. And I would trace most of that pressure is coming from the Southeast region where labor costs are very, very tight because of the incredible rebuilding effort going on still from Katrina. And we've had to increase our labor rates to maintain our service levels and labor force and turnover.

But we've also had some issues with labor cost in the California marketplace where the markets are pretty tight. The other cost factors at Brink's, however, have been under control, and so we're really focused on making sure that we control, what we call, the overtime costs and get the turnover levels at Brink's back to their normal levels as we did through these two tightening moments I just talked about.

Right, okay. So that's on the cost side. What about on the topline?

Disappointed in the revenue growth in North America, and it's still too low. I think it was 5% for the quarter. We need to get that back into the double-digit range. I'm confident that as I said in pervious calls that the service quality of some of our competitors is really starting to suffer. Some of their price dumping is catching up to them, and the worm's starting the term. And I believe that you will see the revenue growth rate in North America start to improve in the next two to three quarters.

So in the quarter, though, was the more moderate growth a result of sort of macro-environment or were there share issues?

A little share, but mostly the macro-environment.

Okay. Next at Home Security, you mentioned in the press release that you expect improvement in the fourth quarter in margins. What is expected to drive that? And is that something that you're already achieving one month into the quarter or is it still yet to come?

No, we -- the sales opportunity issue and the marketing issue that we talked about, Steven, in last quarter and I briefly mentioned this quarter, what happens at Brink's Home Security is if you get out of balance between the amount of sales opportunities coming through the door, the amount of sales executives being able to seize those and the technicians to install the systems, if you don't have that balance just right, the economics start to suffer right away.

And what happened with our marketing slip in the second quarter, which we started to fix in the third quarter, is a little bit behind the path but I'm confident we've fixed it now based on the results we're seeing. We get some results every week. We're going to be back into balance. And we come back into balance, the efficiency of that operation -- you'll just see the uptick come back and the margins come back into the normal ranges that you've seen before.

Okay. Great. And then lastly, on the comments about aggressively using your available capital, I think last quarter you mentioned that you were seeing pricing on acquisitions kind of being pushed up by private equity. Have you seen that change or are you going to be just more aggressive in what you're willing to pay?

Well, we're not going to -- we're not going to pay for anything, but we are in the deal stream. We have a team of people working aggressively on a variety of opportunities. And if any of those opportunities come to fruition, obviously we have the material and we'll make sure we announce those immediately. But I do believe that we will be able to deploy funds in our capital of our company and not only in our existing businesses, but in some new areas of business. And as soon as we're in a position to share that with the public, we will.

Great. Thanks very much. And good luck to you.

Thank you.

Our next question is coming from Brian Butler of Friedman Billings Ramsey. Please proceed with your question.

Good morning.

Good morning.

Just a quick question to revisit kind of the European business for the Brink's Inc. When you look at the markets that are causing problems, I guess primarily the UK and Germany, when you look at what it could take to fix it, how much of that is in Brink's control and how much is that kind of the market having to really improve?

I believe it's all in Brink's control, 80% of this is management. That's what this is all about. 20% of it is market-based. I think management has made some missteps and miscues in the past couple of years in those marketplaces and we magnified the problem.

The Germany situation, of course, is absolutely unique in the history of this industry what's gone on there in the last five-year period. And that shakeout is continuing, and I'm confident that that will be a good market and we'll find the right solution. And the UK is a much tougher situation. There's a real market share issue there.

We don't buy market share, that's going to be tough sledding for us, but it's a very, very important market for us, especially in global services. It's a place we need to be, and we're just going to have to find the best combination. Let's not lose sight of the fact that the strength of Brink's is that we're in over 55 countries now around the world. There are always going be some countries that are having difficulties and other countries that cover them.

In Europe, in the last couple of years, we just got too many countries that were out of bed. And now we're making the progress of fixing those countries, putting things back into the normal realm of Brink's operations. Of course, you saw evidence of that in our third quarter results.

Okay. Thank you. And last question, just a housekeeping one on the share count. In the written text, you had - the share count at the end of September 30th was 48.6 million shares. But then your diluted share count was 47.2 for the quarter. What's the right share count?

Brian, keep in mind the 48 million figure includes the shares that are in the benefit trust. So you would deduct the 2.3 million that we had at the end of September to get the figure that you would use as a starting point to calculate your EPS.

Great. That's exactly what I was looking for. Thank you.

That gives you the basic number, and then you have to add on --, we've been roughly running in the 400,000, 500,000 share range from the options for dilution.

Okay.

Okay.

Our next question is coming from Linc Werden of HG Wellington. Please proceed with your question.

I was wondering if you could give me a little more background and color on the favorable trends indicated in Venezuela, Brazil and Argentina. Is your favorable trend there due to Chavez and corporate spending for greater security, or is the relationship to business up trends or what down there?

There's a different story for each country. In Venezuela there is no question that the amount of money flowing throughout the economy, and President Chavez's policies in distributing that money is a positive for our company and it helps drive our returns down there.

And we also have a large share of the market in that particular country because it's a very dangerous place to operate, and many of our competitors over the last few years have ceased to exist because of high security losses. In Argentina, we have a great management group, number one, and the economy has been bouncing back after their financial free fall that took place down there and we're rising with the tide with that and seizing some opportunities, and we've had small acquisitions that we've made down there to increase our size and bulk.

In Brazil, it's gone through a very, very difficult pricing war, pricing problem. We have shrunk our company down there dramatically about 40% over the last three years. And the marketplace is now recognizing that the quality of Brink's service is important, and that the pricing levels were ridiculous and there were a couple frauds at competitors -- very similar to what happened in Germany, occurred in Brazil and the value of the Brink's company became more important to the industry -- to the marketplace and we are benefiting from that in Brazil.

Okay. So you're benefiting from pricing improvement in Brazil maybe the economy a little bit, but in Venezuela it's -- well, let's say maybe greater corporate spending or because of political fears and --

Government spending --

-- and dangerous policy.

Yes. Government spending there is a lot of money being pushed into the public sector by the government with the windfall with the oil prices

So it's the government is your main customer in Venezuela?

The banks are, but the government distribution of funds is driving a high liability -- distribution throughout the country and we benefit from that.

Okay.

Okay.

Great.

Our next question is coming -- is a follow-up coming from Jeffrey Kessler of Lehman Brothers. Please proceed.

A quick question, I hate to belabor the Prosegur question, but they are making -- you folks have been part of the number one group in armored cars in Mexico for quite some time even though you are unfortunately a minority partner in that group.

Prosegur is making a very big push into Mexico being very competitive there and they have number one position at least in their sites at least that is what they are talking about. You're part of the - you're a captive audience here -- and you've been grousing about your position in Mexico now for about 10 years.

The question is, is there going to -- are you -- given the size of that marketplace, which is fairly substantial, are you going to make a decision one way or another with regard to Mexico in the next year or so, particularly since now you have a competitor who is trying to make a big push into that country?

Jeff I can't comment directly on that. But keep in mind that we are a 20% holder there and our partners who own the other 80% are the banks. And one of the reasons I grouse about it is it's very difficult having your customers as your partners as they tend to want to run service organization and not a profit organization.

So there is really no easy way to fix the Mexican situation in my opinion. On the other hand, the banks aren't going to shoot themselves in the foot and support -- do entry into the market at their own cost.

Okay. Very good. Thank you very much.

Yes.

Our next question is coming from [Peter Desauld] of Pirate Capital. Please proceed with your question.

My question has been answered. Thank you.

Our next is coming from [Jerome Landy] of Melbrook Capital. Please proceed with your question.

Hi. Congratulations on a good quarter. Can I ask a question about the BHS cost base as we start to look forward to '07, particularly Knoxville obviously has been a drag, but can you quantify it. And is there anything that's going to continue to flow into next year?

Bob, do you want to handle that?

Yes I can. Jerome, the drag in the quarter then -- this is the difference between if we had Knoxville and Dallas both operating optimally it's probably in the $400,000 to $600,000 range and that's something that we have to work down over the next couple of quarters.

So over the next couple of quarters kind of implies that maybe you have nine clean months or nine clean months in '07, but you're going to drag it into the first quarter probably?

Yes. It's only because it's taken us a little bit longer than we had expected to get to this point. So I'm guessing that we'll make substantial progress in the fourth quarter but probably finish it off in the first.

Okay. And what was the first nine months, if you don't mind -- I know you've covered it before -- but what was the total year-to-date drag?

I have to try to remember that. I think we had said in the second quarter that it was around $1 million and it was only a few hundred thousand dollars in the first quarter.

Thanks. I mean the broader question here is really trying to figure out what BHS is going to look like next year and understanding that you're not ready to put out guidance or anything like that, but there are some people on the street who are phasing in a major impact growth for BHS because the housing slow down. And then there's offsets to that, the main one being less expense to install new subscribers.

So you should have improved margins should that happen, not saying it will or it won't, but rather should it happen you would have a significant impact in margin improvement. And what I'm trying to figure out is there anything else headwind-wise, so Knoxville not really but anything else headwind-wise, whether it's increased marketing spend or something like that we should consider when we're modeling various scenarios for BHS next year.

Jerome, we're going to be -- as usual we're going to be shooting for the triple double which in and of itself would tell us that we're shooting for a -- at least a 10% increase in operating profit. The major consideration that we would have there is if we start to spend a lot more in our work to try to penetrate the commercial market, that could be a bit of a drag and that's why I did not give clear guidance on that for 2007 yet, because we're still working through that.

Got it. And on the disconnect rate, for the first, well, the first time I can recall, Michael, you referred to disconnects for actual reasons of moving versus actual financial decisions to disconnect, do you have a perspective on the historical distribution of your disconnect rate between those two factors?

Yes. We look at all the reasons for disconnects and financial is always a major component of that and there's been an uptick of that, which is not unexpected with where we find ourselves in our economy and the very, very high energy prices that have to be paid by our typical middle class customer that we have, which has counted for that uptick and don't forget -- the Katrina effect is gone, except for the comparison to the previous year.

So I think -- and the third quarter tends to have little bit of an uptick historically in the disconnect rates on an annual basis. So I would be looking for some improvements going forward for the fourth quarter and then back to our normal in the high six ranges for 2007.

I understand that's on a blended basis, but I'm wondering can you give a sense of what the historical breakdown, say, if you were to take a best fit line of 700 --

I don't have that information, I don't want to mislead you on it. But I would tell you that financials is the number one reason for [gifts] historically. It's -- really somewhere around 30% to 40%.

Got it, and I appreciate that. Is the stock option expense in the broken-down segment operating profit?

Yes it is. We had $4.6 million in corporate, $1.1 million in Brink's and I think $400,000 in Brink's Home Security, but that -- if I'm wrong that number will be out in the 10-Q which right now we're trying to get filed by tomorrow.

Got it. The subscriber base today you mentioned 7% of the growth was commercial, how much of the total subscriber base today is commercial accounts?

Probably in the 5% range.

Okay. And, can I ask you about the alternatives review process that you described in the beginning Michael. I understand that you said the ongoing strategy is to continue to deploy capital and keep growing the businesses and maybe acquiring business and so on. Was there a formal conclusion to your review process or we're going to review it ongoing and [safe]?

It is an ongoing review process that's front and center at every board meeting on how we're going to continue to create shareholder value and our track record speaks for ourselves. And -- but we will continue to do that at every meeting and review what those opportunities are with our board. Our board members are very focused on taking us to the next level for our shareholders and so that is an ongoing process.

Got it. And last question, I understand this is a difficult topic to forecast, but in the years we've known you, it seems like every little while there is another problem in Europe. So we have a dip of operating margin for a quarter or two or maybe three and Michael, you go over and focus on it and it improves, it always bounces back. So we're always pleased about that.

But is there any reason to consider this anything other than a systematic problem that every few years Brink's will have a blow-up in Europe that will need to be extinguished? I mean is it a function of just general turnover in these economies or lack of overall growth? I mean obviously HIROS is an anomaly, but, separate from that there seems to be a recurring situation.

Yes. The number one issue in this -- running business, Jerome, is good, smart stable management. And if you traced any of our problems to any of the countries we've had where management's caused the mistake, which in my opinion, is the number one issue in all these cases, it was because of management turnover and stability has been the core root issue. Now that's not true for every country, but that's one of the problems and our focus here now is looking at Europe. And by the way Europe is almost half the company, so it is a huge portion of our company today. And we're looking at the structure the company, how we run the company, the quality and level of management depth over here. And those steps have been ongoing to put the stability back in Europe that we see in the North American operations. We should not have as much volatility as we've had the last few years. I'm a little embarrassed by it. But we're going to fix it.

Got it. Thanks again. And again, congratulations on the quarter.

Thank you.

Our next question is coming from Andrew Ripper of Merrill Lynch. Please proceed with your question.

Well couple of questions. First of all on the US, wonder if you could give us a sense of how much of the 5% sales growth was driven by price increases? And what's your growth loss in employment costs please?

Yes. Very little increase on price increases. Most of that is new business coming in and higher margin business starting to come in on our cash logistic side of the business, and - but that business seems to come in a little bit lumpy. And -- because we've been signing some contracts, but price increases have not been a major factor. It's still a very, very competitive market.

There are still people out there who are discounting prices quite aggressively, but once again the service issues are starting to surface there. The pressures on the margins with our competitors are starting to surface. And I see a positive upside for us going forward in the United States operations, and I think we'll see it in both the top line and the bottom line. And I'm sorry, what was your other question?

Well, just on Euro cost base. Obviously, people are the biggest cost, can you give us a sense of what your wage inflation is and what your employment cost are up year-on-year, please?

Probably over 2 percentage points of revenue, which is a substantial increase for us.

Are you planning price increases then to get that back or not?

On a normal basis this contractual -- contracts come up, we look at all our cost bases and management makes the best decision to pass those through. We've had a successful track record at being able to recoup those costs and I'm sure we'll be able to do it, as we have in the past.

Yes. Is that a factor in your guidance; you know earlier on you were talking about accelerating the revenue growth in the US business. Is that incorporating some price growth or is it based on your anticipation of taking share back from --?

It will be more share than price growth.

Yes. And those more aggressive players are you talking about the regional guys or Loomis ?

The major players.

The major players.

Yes.

Just looking at the European business, you mentioned attack losses as being quite a big issue for you in Ireland. What's been your experience in the UK? Has it been an increase in attack losses there and how have you responded to that?

Yes. Fortunately - and knock on wood, as I like to say, we had excellent experience in the UK in the last two years. Unfortunately the industry has had horrible experience the last two years and it is continuing this year and also the numbers of attacks are continuing. So I guess the advantage -- not having market share in the UK benefits us a little bit in that type of an environment. But it is a very dangerous environment and getting worse unfortunately.

Yes. And in terms of trying to improve the profitability of your UK and German businesses, do you have options to acquire to increase your scale in those markets which would help you to become more profitable? I am thinking about the post office in the UK and G4 after selling their German assets?

There is a possibility to do that in those different countries and we're always looking at what available and there's other players in the UK, that we've taken a look at, but once again the value has to be right and it's got to fit our footprint and our strategy.

That's been helpful. Thank you.

Thank you.

Our next question is coming from [Steve Pan] of [Avenue International Advisors]. Please proceed with your question.

Yes, hello. Good quarter guys. I'm just trying to understand, with a number of banks out there are issuing some national RFPs. To the extent that those additional RFPs require someone with a bigger geographic footprint like yourself and maybe the other three or four bigger companies out there. I was wondering if you believe that you can begin to take market share away from some of the more regional guys out there.

The fact of the matter is that doesn't happen. You get these bids that go out, bid instructions are they want to have one national provider. They get bids and they come back and they divide the regions up to the lowest cost in most cases, especially with the big buyers. And that's just a fact of life. And especially, I'm talking specifically the retailers now.

And the banks who tend to use the same type of approach, they're just more service conscious, and the ones that have gone for low price, aren't getting the service and their customers are suffering from it. And that's why I talk about the worm turning and the outlook brightening in the United States particularly, because service is just a demand of the banks and service failures of our competitors are starting to multiply.

And we're talking about raising prices with the last caller, getting market share back is at our price levels not at the market price levels. We don't lose business for service. We lose business because of pricing. So I don't expect to see price increases come in, I just expect the business to come back at the normal levels that we price at.

Okay and with regards to some of your European operations, I know you're often times number three or number four in your sub scale. I mean, up to what point will you say enough is enough, I want to pull out?

We've done that on occasion, but, once again a very important part of our business is Brink's global services and having a wide network is an important component of that. But that doesn't stop us from making tough decisions and closing countries down or shrinking our operations into a reasonable base to where our service offerings, our product offerings, which are differentiated from our competitors in some cases become attractive, and then we can grow the businesses there again.

What's your global services revenue, just trying to understand what it is?

I don't think we break that out separately. I don't think -- Bob, we've never broken that out, have we?

No, we don't.

No, we don't break that out.

I mean I assume it's significant enough for you guys to continue suffering losses in some of these European countries, right?

It is a significant part of our business, yes.

Okay.

It is a very important part of our business.

Okay. Got it. Great, thank you so much.

Thank you.

Our next question is a follow-up coming from Steven Fisher of UBS. Please proceed with your question.

Hi, just two quick follow ups. I'm wondering if you can give me what the year-over-year growth was in your Latin American operation, the [Brink Think] in the third and fourth quarters of last year -- I know Michael you said it's been a great business and tough to know the pace of growth going forward. I'm just wondering what the comps were this quarter and for the fourth quarter?

Bob you have that information in front of you?

I don't have that directly in front of me, but since we disclosed that in our Qs last year, we'll get back to you with that after the phone call.

Okay, great. And then the second question is, what's your current average monthly monitoring rate for new customers at home security, now and what it was last year?

Well I think really you can get to that, but I guess you can't get to that here, we don't disclose that directly --

Not directly.

But you can almost get to that, right Bob?

Yes. It generally runs in the -- right now in the 32 range. The reason we give a range on that is there are different service attachments that could go to it if somebody wants to have a platinum service attached to it that could be like an additional $4, so it varies. So the 32 is a pretty decent average for a new customer today.

And from last year?

That's probably up slightly, but you're -- probably, the average was in the 31 plus range.

Okay. Great. That's very helpful. Thanks a lot.

Okay.

Your next question is a follow-up coming from Jeffrey Kessler of Lehman Brothers.

Thanks. Just a quick follow-up on the option expense. Bob, $4.6 million in the quarter on the corporate basis. Is this a peak or are we going to see this fall off a little bit?

You'll see it fall off dramatically in the fourth quarter. It's just because of the way our options work, we expense a big chunk of it in the third quarter.

You had mentioned this in the second quarter, which is why I'm trying to get it now, are you confident in giving some type of more exact type of number?

I think we're looking at somewhere about $1 million should be the figure that flows through for corporate in the fourth quarter.

All right. And for next year do you have some idea?

No, I don't because the comp committee does not make any decision on that until July.

Okay. All right, thank you.

Okay.

Our next question is a follow-up coming from Jerome Landy of Melbrook Capital. Please proceed with your question.

Hi. I'm pleased that you have completed the buyback but I guess I'm wondering with all the capital available to you, why not just authorize another 100 million or more, I mean particularly with the stock being weak?

Those are the type of discussions that we have at every Board Meeting and what's the best use of available capital based on the things that I outlined earlier in my remarks today. And if that's the conclusion of the Board of Directors that that's the best use of capital for our shareholders or the acquisition opportunities that we're looking at. Those are the types of this issues that the Board takes into consideration and then we make our decisions and as you saw last year with the whole litany of things that we have done and dividend increases and share buyback programs we will continue do what is in the best long term interest of our shareholders, and that's one of the options.

Yes -- no I agree with you and you've done a good job buying back a lot of stock and that's part of why I'm surprised by, it is that, there appear to be clear recognition that it's a good use of capital at low levels which is what we have. And authorizing it doesn't mean spending it day one, authorizing means just so to call together a telephonic Board Meeting to do so if the stock takes a dive.

Yes, it would take us about two days to organize a meeting if those opportunities presented themselves and our board would act in a prudent manner.

Okay. Thanks very much.

Thank you.

And our last question today will be coming from Beth Lilly of Woodland Partners. Please proceed with your question.

Hi, Michael and Bob.

Hi

I just wanted to follow up on Jerome's question which was you spent $630 million buying back stock and I'm just a little bit curious why there hasn't been an additional authorization. I would have assumed, because you've completed that especially where the stock is that you would just re-up.

That's very -- that's one of the options that we'll be discussing at our board meetings, and that's up against the other opportunities that we're also looking at. And you're just going to have to be patient with us and know that -- what our track record is, that we're going to do the right thing for our shareholders in looking for the best long term value creation.

Okay. And then just an add-on question, which is, in terms of the security business, you're starting to move into the commercial markets and I was wondering if you could just talk about -- I think you mentioned what the number was, but as a percentage of revenues, what is the commercial as opposed to the residential?

Bob, do you have that breakdown in front of you?

Yes, it's approximately 5% of our revenues.

Okay. And so in terms of acquisitions, Michael, are you thinking that you would want to grow in the commercial (indiscernible) through acquisition or are you more interested in growing organically?

We would be very interested in a commercial acquisition, we just have to find the right one with the right model. But meanwhile we're not waiting and we're growing it organically within Brink's Home Security and that's growing at a rapid rate and it -- we will see where it goes, but we would love to find the right opportunity on the commercial side.

And the commercial side, does that have lower margins than the residential?

As a rule, yes. No question about it.

Yes.

And we have it broken out separately. In fact at some point when commercial's large enough inside of Home Security we'll start breaking out that also.

Do you have a target of how -- what percentage of the revenues you want the commercial side to be?

Well, I think the commercial can be as big as Home Security and -- but I think to get there the acquisitions are going to be a key component.

Yes. Okay, great. Thanks so much.

All right. Thank you.

We show no further questions in the queue at this time. I'd like to turn the floor over for any further remarks.

That's it. Thank you very much.

Thank you.

This concludes today's teleconference. Thank you for your participation.