Brinks Co (BCO) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for holding. Welcome to the Brinks Company 1st quarter results 2007 conference call. A replay of today's call will be available starting this afternoon through may 16th, 2007. The replay number in North American is 1-877-660-6853. Outside of North America, the number is 1201-612-7415. The passcode for the replay is 286. And the conference i.d. is 239927 A replay of today's web cast will also be available on our website. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. Ed Cunningham, Director of Investor Relations. Thank you, Mr.Cunningham. You may begin.

Thank you, Joe. Good morning, this is Ed Cunningham, Director of Investor Relations and Corporate Communications for The Brink's Company, thanks for joining today's call. Joining me today are Michael Dan, our CEO and Bob Ritter, our CFO, today's call will proceed as follows -- Michael will cover quarterly results and Bob follow-up comments then we'll open it up for questions. A press release on first quarter earnings was issued this morning and 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 such differences is available in today's press release and in our SEC filings which include our most recent form 10Q and 10K documents. Information discussed on this call is representative as of today only and the Brink's company assumes no obligation to update any forward-looking statements made.

This call is a copyrighted work of the Brink's company and may not be used by a third party without the expressed written permission of the company. I will now turn the call over to Michael Dan.

Thanks, Ed. Good morning and thanks for joining our call today. The Brink's Company is off to a good start in 2007. The first quarter earnings reflecting solid improvement at both Brink's Incorporated and Brink's Home Security. Our full year outlook for each business is unchanged. At Brink's we continue to expect annual percentage revenue growth to be in the high single digit range with margins above 7%.

Our goal for BHS is to achieve another triple double which means 10% or better growth, revenue, operating profits and subscribers. Before getting into details of the quarter, I'd like to remind you of our approach to dealing with strategic options that are proposed by our shareholders. I am sure everyone listening in today is aware of a proposal made by one of our shareholders in a recent 13d filing. Just as we have done in the past, our board of directors and management team consider all such proposals carefully and incorporate them into our regular evaluation process for overall corporate strategy. I assure you, that are ongoing process is a rigorous one, where we routinely enlist the assistance of highly regarded investment bankers and other advisers when needed.

The strength of our process gives me confidence that the board is well supported whenever it makes decisions as to what strategy and actions are in the best interest of the company and all of its shareholders. Over the years, we have kept our shareholders informed about these decisions and will, of course, continue to do so as appropriate. I'll now move on to our first quarter results. Income from continuing operations was 28.4 million or $0.61 per share, up from 24.2 million or $0.42 in last year's first quarter. Total revenues rose 13.2% to $751.5 million. Excluding the impact of a weaker dollar, revenue was up 10%. Operating profit was 62.1 million, up 40.8% from the 44.1 million in 2006. Profit growth at both Brink's and Brink's Home Security exceeded 20% year-over-year. I'll provide more detail with each business in a moment.

Earnings were affected negatively by an increase in our tax rate due to recording of a valuation allowance on tax benefits in one of our European subsidiaries. In a few moments, Bob Ritter will provide some more details on these and other items. I'll now comment in more detail on our two security businesses. I'll start with Brink's, first quarter profits increased 23.2%, to 48.8 million, up from the 39.6 million last year. Total revenue at Brink's increased 13.9%, to 636.8 million, up 558.9 million in the year-ago quarter. When you consider the impact of a weaker dollar, total revenue at Brink's rose 10%. The overall operating margin for the quarter was 7.7%, up from 7.1% in the year-ago quarter.

In North America, revenue was 211.2 million, up 4.9% from the 201.3 million in the first quarter of 2006. Operating profit was 18.3 million, down slightly from a very strong 18.4 million last year. The operating margin for the quarter of 8.7%, down from 9.1, was due primarily to higher sales and marketing costs. Revenue from our international operations was 425.6 million up 19% from 357.6 million in 2006, reflecting increases in all regions except Asia-Pacific. The constant currency basis, revenue was up 12%.

Operating profit was 30.5 million, up 43.9% and then 21.2 million made last year, due primarily to continued strength in Latin America and a slight improvement in Europe. The operating profit margin for international operations was 7.2%, up from 5.9% in last year's first quarter. First quarter revenue for the European region was 281.4 million, up 18% from the 238.5 million in 2006. Operating profit improved but certainly not enough, as we continue to see poor performance in a few countries including Germany, the U.K., and Ireland. The operating environment in Europe continues to be our greatest challenge. I can assure you that we're highly focused on turnaround efforts there and will take actions as needed to achieve further operating efficiencies.

As stated in the press release, we are evaluating the loss of a few customers in one European country. These measures may require us to record significant charges. When we complete our review, we may need to take additional actions to reduce cost. The biggest driver of the approved results as Brink's was Latin America. Where revenue increased 28.6% to 129.5 million, up from 100.7 million in 2006.

Operating performance showed significant year-over-year growth due to higher revenues combined with a continued strength in Venezuela and improved results in Brazil and Colombia. Our people are doing an excellent job of servicing our customers and we're being rewarded for that. First quarter revenue in Asia-Pacific was 14.7 million, down 20.1% from the 18.4 million in prior year. Revenue and operating profit declined due to loss of a customer in Australia which we disclosed in 2006.

In summary, it was a good quarter for Brink's. Our cash logistics business continued to grow with first quarter revenue reaching $163 million, up more than 15% over last year's first quarter. We expect a strong performance in Latin America to continue but remember, there's always more risk and volatility to be considered there.

In North America, we will be challenged to improve dramatically upon 2006 results because it will take some time to see the benefit of our more focused selling and marketing investment efforts. In our February conference call, I said we were encouraged by the positive momentum of our turnaround efforts in Europe. I also said that if momentum stalls, we'll be pro-active in taking additional steps to improve performance. First quarter profits in Europe were up but not as much as we had hoped. We are considering a variety of measures to sustain and hopefully accelerate momentum we have already achieved. In any case, our goal of achieving an annual operating profit margin above 7% at Brink's remains unchanged.

Now turning to Brink's Home Security. First quarter revenue increased 9.6% to 114.7 million, due to continued growth in our subscriber base and higher average monitoring rates. Operating profits hit 28.2 million, up 21% over previous year. The strong profit growth was driven by several factors, including continued growth in our customer base, sound cost control efforts and reduced activity in our home technology segments which held down our up-front cost. We also had a small gain from insurance proceeds relating to Katrina, worth about $400,000. That would have had about a 19% uplift in year-over-year operating profit. The lower cost helped push the quarterly operating margins up to 24.6% compared to 22.3% in last year's first quarter. The annualized disconnect rate for the quarter was 6.1% versus 5.5% in the first quarter of 2006. Monthly recurring revenue rose 13.6% to $34.2 million, so future cash flow continues to grow. Brink's Home Security ended the quarter with more than 1.1 million active customers, an increase of 10.1% over the year-ago quarter. Installation growth was 6.3% and continues to be lower than we'd like to see due to the ongoing weakness in the housing market. But thanks to our low disconnect rate, we are still able to grow our customer base by a little over 10%. For the full year, we expect annual subscriber growth to again be close to 10%. Obviously, sustaining longer-term growth at current levels depends on our ability to improve the pace of installations. Hopefully, a gradual recovery in housing markets during 2007 will provide a tail wind for our internal marketing efforts. Our steady growth into small commercial accounts continues on course, accounting for over 7% of the quarter's installations. We continue to view expansion into commercial accounts as an attractive growth opportunity. As such, we'll continue to support those growth efforts and seek potential acquisitions.

In summary, it was a good quarter for The Brink's Company. Brink's incorporated will continue to pursue market opportunities in its traditional armored car operations, while expanding further into cash logistics where potential for revenue and margin growth is greatest. There are always concerns as we look ahead. For example, there's no guarantee that the economic activity in Latin America will continue at its current pace. We also have to continue to improve our performance Europe, despite the competitive pressures we face.

At Brink's Home Security, our optimism is tempered by the reality that the pace of installations needs to increase in order to deliver double digit growth over the long term. And we certainly won't retain the margins we saw in the first quarter. But we have a very strong brand, effective marketing and excellent customer service. We will use these strengths to enhance our industry leading performance in the residential security market, as we continue to build our technical and sales capabilities on the commercial side.

I'll close by saying that The Brink's Company is financially strong, sharply focused on growing two world-class security businesses. We are well positioned for the future.

I am confident that the overall performance, financial position, and growth prospects of the Brink's company will continue to improve and build value for all of us. Now, for some additional comments in our results in our financial position, here's Bob Ritter.

Thank you, Michael. Good morning and welcome to everyone listening in on this call. As Michael noted, we've gotten off to a good start but there's still a lot to be done this year. We appear to be on track achieve our previously stated goals for the year. However, as usual, you can expect some variability by quarter.

Looking at the second quarter for Brink's, please remember that the second quarter is often the weakest quarter from a margin standpoint. In fact, in each of the last two years, margins decline sequentially from the first to the second quarter. This is true even if you factor out the effects of severance and restructuring costs recorded in the second quarter of both years. I would also remind you that we have recently been notified that we will lose a significant amount of business in one of our European units, although we won't actually see significant revenue reductions for a while, management is evaluating the available alternatives but unfortunately we may be required to take actions to reduce costs. As for Brink's Home Security, moving season is getting underway with its normal pressure on general and up front costs and disconnect expenses.

The outstanding margin weigh achieved during the first quarter looks even more impressive in comparison on the the soft comp of last year's first quarter. We certainly do not expect to continue to run at 20-plus percent over last year's operating profit levels. We should settle down some on the way to the triple-double.

Before I move further down the line on earnings, just a quick reminder that we expect to record one-time earnings from Hurricane Katrina-related insurance settlements. The settlement gains will probably fall between second quarter and should run from $1 million to $1.5 million for Brink's and roughly $1.5 to $2.5 million for Brink's Home Security. Now a brief comment on corporate expenses. We reported total corporate expenses of $11.6 million in the first quarter. This was below the $12 million expensed in the same quarter last year despite normal inflation. Our efforts to reduce professional and consulting fees are gaining traction and I expect we'll see continued improvement this year.

Now a couple of comments on below the line expenses. As we mentioned last time, as a result of the paydown of debt and the temporary investing of proceeds from the sale of BAX Global, during 2006, we found ourselves in the unusual position of generating more interest and other income than interest expense. Net net for the full year, we reported income below the operating profit line of $3.7 million in 2006 versus a more normal $9.3 million net expense for aggregate of those line items in 2005. Without the benefit of the temporary investment income and dividends on a real estate investment and with an expected increase in borrowing levels, 2007 should return to a more normal net expense position for us. In fact, in the quarter just ended, we reported a net expense of $1.2 million. We expect this situation to continue and probably expand as the year progresses.

Now for taxes. You probably noted that our effective tax rate for the first quarter was on the high side at about 42%. The major factor in this was a recording of evaluation allowance covering previously recorded tax benefits in one of our European entities. About $2.4 million of this allowance covered the value of related tax benefits on January 1st. We've taken the above into account along with our projections for performance for the year and currently expect the full year effective tax rate to be between 39 and 41%.

Now let me turn to CapEx and depreciation and amortization figures. In the quarter just ended Brinks invested about $26 million in branches, trucks and IT systems. Remember, spending in the first quarter traditionally runs a little light and activity picks up as the year progresses. We are still looking at a full year spend in the range of $135 to $145 million. Brink's Home Security spending for the first quarter is 43 million plus was right on track for our full-year projection of $175 to $185 million.

I'd like to at call your attention to the fact that without the spending on our two monitoring and service centers that we incurred during the last two years, the ratio of installation spending to total CapEx was back at the normal 95%-plus ratio we expect. As always, the bulk of spending at Brink's Home Security goes to secure future recurring revenue. As for depreciation and amortization, Brink's, with $23 million in the first quarter, is on track for the projected $105 million or so we expect for the full year 2007.

Likewise, Brink's Home Security with $18.5 million in depreciation and amortization is tracking toward the $75-plus million that we previously forecast. The solid operating performance, low level of capital expenditures and some temporary changes in cash versus borrowing in a few units resulted in a very low net debt figure at the end of the quarter. We were down to $5 million in net debt from the $33 million position we had at year-end 2006. We had already seen borrowing levels begin to move back up during April. Having said that, we obviously have sufficient capacity to continue to grow and consider other actions to build further value for our shareholders. That's all I have for now. Joe, we're ready for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from Jeff Kessler with Lehman Brothers. Please state your question.

This is Jeff, firstly, great quarter. I just had one follow-up on the European situation. Firstly-- is the forecast 7% operating margins excluding these charges that you're talking about in Europe that you might have to take and if you could please give us a little more color on the timing and, you know, size of the potential charges here?

It's still very early in the game for us to know exactly how sizable any charge that is we might be required to take will be. But as it stands right now, our forecast for the year includes anything that we might have to do.

Okay. And I guess with corporate expenses, obviously with inflation still showed a reduction year-over-year, how much further do you expect that level to go down, given that you are now back to, probably totally out of your corporate expense, stuff that you need take into account for?

We're pushing and shoving. And one thing I will point out to you that the first quarter is typically the quarter where we have the largest amount of professional and consulting fees because that's when you're doing the audits and you are finishing up on 404 and doing a lot of other things that are required. I'm hopeful we've seen the high point for the year with the exception of anything that we might have to do related with stock-based compensation, which typically hits in the third quarter.

Okay. And on minority interest, do you expect, I guess the 7 million that you reported in the last two quarters, do you expect that to, at least based on whatever you're seeing in predominantly Latin America, now to continue along that run rate for the rest of the year?

It will probably vary up and down from there. But seeing that, it's obviously a good thing for us because that means that we and our partners are making money.

Okay. And finally, on Brink's Home Security, with obviously the higher than expected margin because of the slower growth in installs, do you expect -- I mean you know the 22% to 23% margin for the full year, to remain the same as you accelerate growth through rest of the year or should we see some upside to the margins overall?

We're holding fast on the 10% plus growth. That obviously should translate into moderated margins over the balance of this year in comparison to the very strong first quarter we saw.

All right. Thanks, guys, I'll get back in the queue.

Thank you.

Thank you. The next question from Steven Fisher with UBS, please proceed with your question.

Hi, good morning. You had higher sales and marketing costs for Brink's, Inc., in North America. Could we talk about your initiatives are that you're undertaking there and what was your motivation for that?

Most of that has to do with our efforts to expand more rapidly in our cash logistics and solutions business which really differentiates ourselves in the competitive environment and we're really ramping up in that area. And it's expensive to do so but it's the right thing to do. And it's an investment in our future to ensure we continue to perform at the levels we're at and even increase the margins as we go into 2008 and 2009.

That I guess leads me to my next question. Could you put the 15% growth in cash logistics in the context of what the growth was in 2006?

Cash logistics is lumpy as it comes in, because you sell an account and sometimes it takes four, five, six months to implement the account. We had some good sales activity in 2006 which we're benefiting from in 2007. Our goal is to keep that pipeline as full as possible so we can bring on these account in the future.

What types of accounts are you seeing growth in? Has something fundamentally changed to kind of a create acceptance for this service in the market? It seems like it's been a few years since this has been in process and now it really seems like it's starting to take hold.

We call it our virtual vault. And our capabilities allow banks who are geographically constrained to actually market their services over wider geographical basis by using our technology, our software and our physical footprint. And I think that's getting a lot of excitement in the marketplace. And so that's why we're investing the money on that point.

Okay. Then on home security, can you just remind us what the profile is of the commercial customers that you are adding?

Typically now, we're trying to move up the sophistication level. We're still basically at the small and medium-size customers although we're starting to have more CCTV sales, those types of things as we develop our internal capability. But we're spreading this out throughout our organization, coast to coast. We continue to pick up momentum. Also our dealer network is showing some strong contributions on the small commercial side. I think it will be another 16 or 18 to 24 months before we start doing what I would call the larger type of projects. We have plenty of opportunities, we're growing as fast as we can and we don't want to get ahead of ourselves to make sure we maintain our efficient operations.

What would a larger type project entail?

Just bigger projects, rather than office buildings or strip mall, possibly a factory, those types of things.

Okay, got you. Thanks a lot.

Yes, sir.

The next question is from Brian Butler with FBR. Please state your question.

Good morning.

Good morning.

Just a question on the home security margins. They're not sustainable as the growth gets back above 10% or at 10%. But if growth was going to stay at just below 10%, are these margins then sustainable? Is there something, or is there something else that's causing the pullback?

There's a variety of components in play here. One is sustain and balance to make sure our sales and technical installation staff is in balance, that balance of course is affected throughout every location we have. And so we had strong cost of control in the first quarter, better than we had last year. I remember we were dealing with Katrina and everything else. I think the management group at home security has done a wonderful job on the cost side. That helped the margins. Do not forget there are $400,000 in insurance proceeds that came through. Then slowdown in particular, at the home technology business, which we initiated, because we could see that coming, has helped the profit margin to be a little bit higher. Hopefully the home technology slowdown, which has been quite dramatic, by the way, will moderate a little bit as we go forward. But it's pretty hard to predict what's going to happen in the new home market in particular. It doesn't look real promising now. Those margins could maintain themselves in the 23% range, 24%, but that's a stretch. I think our marketing efforts and our growth pattern will increase as we go into the second and third quarter.

Okay. And then looking in that same segment on the disconnects, they were up from first quarter 2006. Is there anything in that or is that really the seasonality playing through?

It's a, we're really great last year at 5.1 %, that was an outstanding performance. I like the see it get below 6%. It's a real struggle. As you know, that's about half the rate of what most of our competitors post. But every effort we have is to keep our customers for life. And we want to keep that rate at 6% or below. We were a tick over, 5% is a pretty big stretch for us, I'm afraid. But I would sure like to get it down to 6% level for the year.

And, Brian, just to add on the that, if you go back to look at 2005, we're back up above 6%. So if I look at the three years, the anomaly was last year.

Okay. And then just on the Brink's, Inc. business, the European operations, from a timing perspective, do you have any more color on, you suggested that you might not see the revenues decline from these customers this year. Can you just give us more color on what drives that?

It's too early. We're in negotiations over contractual issues and timing issues at the current time. So we're not able to get more color at the current time.

Any sense, is this, this is similar to the Australian customer leaving? Are they leaving because pricing from competitors are lower or just you need to raise prices because increased security environment? Yes. But both, yes to both. Okay. Thank you very much.

Thank you, Brian.

The next question is from [Clint Friendly] with Davenport, please state your question.

Thank you. Good morning, gentlemen. Bob, I wondered if you could comment as to your appetite for share repurchases at these levels and also will acquisitions remain a part of your strategy at this stage.

Clearly, acquisitions remain a very important part of what we would like to do. We will maintain our traditional patience and discipline, though, in seeking them out. And one of the things that we will obviously consider with the board and the board considers on a regular basis what we should do with any excess cash or borrowing capacity it would have. So I can't comment as to whether or not anything is being talked about on that right now but you can be assured that we talk about those type of things on a very regular basis.

How has the acquisition pipeline in the commercial side been impacted by private equity as far as valuations?

It's been impacted, there's no question about it. But there's small operators out there, regional operators out there that are of interest and we are continuing to review. But we need management as part of the acquisition process and it's got to be the right fit with the Brink's culture.

Okay. Thank you. That's helpful. And, Michael, obviously the merits and value of operating as two separate entities have been articulated for some time now. I wondered if you could speak to the synergies you see by having two or even more security service offerings?

I think the Brink's brand name is the central issue here. If you went and talked to the people at Brink's Home Security and asked them where they would be today if they didn't have the Brink's brand name, home security is about brand. People buy brand. They type in our name or type in home security, and people are going to feel a comfort with the Brink's brand name that's been built up over 150 years versus somebody else. We think we can leverage that into other areas that make sense. We demonstrated it with Brink's Home Security and we're going to continue to look for those opportunities. Meanwhile, we're concentrating making sure we're executing at the highest levels of efficiency on the two units we have today.

Thank you.

The next question is from Jerome Landy with Millbrook Capital Management. Please state your question.

Good morning, I've got a question, this is John for Jerome. I have a question related to the Barkley's ABN merger. Specifically, if there's any business with ABN or Barkleys or an opportunity to gain business based on the merger. What the impact might be based on some previous mergers of of that scale.

It all depends. It's a mixed bag by countries. I would tell you that it depends on who the successful winner is, it could be a positive force or a negative force. As an example, if B of A is successful with the LaSalle acquisition, that would probably be a benefit to us as one of our largest customers and we currently don't have that business in Chicagoland area. On the other hand, we have a lot of business in Brazil with ABM (inaudible) and if the other suitor was successful, that business could be at risk. But these are things we have dealt with for 20 years as banks have been consolidating at country level, regional level and now at a global level. Just our size and breadth neutralizes those effects.

Thank you.

(OPERATOR INSTRUCTIONS) The next question is from Jeff Allen with Silvercrest Asset Management. Please proceed with your question.

Hi, good morning. I was hoping you guys might be able to shed a little bit of light what's happening in Venezuela. Obviously, we read about some fairly alarming things in the newspaper happening there recently. And it almost seems like your profits are positively correlated with unrest. Could you help us sort of put that in the right perspective?

Well, the Latin American region tends to have more difficulties and therefore more appreciation for the security risks that are involved and customers tend to be more willing to pay appropriately for those risks. In the Venezuela situation, obviously it is a large operation for us, it is a very dangerous environment. We have got a great operating team. We also have minority interest there which are some of the largest financial institutions. As you know, these tend to be cash societies so it's a very critical component that there be an efficient distribution of logistics process in that country. We are an integral part of that. That said, the political risks there are high, always have been, always will be. And our job is to execute and maintain the best relationships we can with our partners and the government entities there.

Okay. Is it just, is it within the realm of possibility that your assets there could be,

Ex-appropriated? There's always that risk. It happened to us in the '70s in that country and in other countries in Latin America. That's always a political risk and it's factored in all our investment decisions that we make.

Okay.

(OPERATOR INSTRUCTIONS) I'm showing no further questions in queue. I'd like to turn the call back over to management.

This is Ed Cunningham again. Thanks for joining today's call. We look forward to our next update.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.