Brinks Co (BCO) 2008 Q4 法說會逐字稿

Greetings and welcome to The Brinks Company fourth quarter earnings call. At this time all participants are in a listen-only mode. And 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 your host, Mr. Ed Cunningham, Director of Investor Relations and Corporate Communications. Thank you, Mr. Cunningham, you may now begin.

Thank you, Jackie. This is Ed Cunningham. Good morning, and thanks for joining today's call, which will proceed as follows.

CEO, Michael Dan, will review our financial results and outlook. CFO, Mike Cazer, will make some comments before we open it up for questions. An earnings release was issued this morning and is available on our Web site at BrinksCompany.com. If you wish to have it faxed to you, call 877-275-7488.

Now, for our Safe Harbor statement. This call and the ensuing 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 or estimated results. 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 10-Q and 10-K documents.

The information discussed on this call is representative as of today only. The The Brinks Company assumes no obligation to update any forward-looking statements made during the call. The call is copyrighted and may not be used by a third party without written permission from the Company.

I will now turn the call over to Michael Dan.

Thanks, Ed. Good morning, good afternoon, everyone. This morning we reported strong earnings growth for both the fourth quarter and the full year. This was accomplished in a very difficult business environment that worsened as the year progressed.

Earnings for the year rose 68% to $132 million, or $2.82 per share, and were led by strong results in Latin America and in Global Services, which more than offset a difficult year in North America. Full-year revenue increased 16%, or 12% on a constant currency basis. The annual segment operating profit for Brinks Inc was 8.6%.

Fourth quarter earnings rose 8% to $39 million, or $0.83 per share. The $0.83 for the quarter includes a gain of $0.16 related to an asset sale, and a charge of $0.10 related to a writedown of investment assets. Mike Cazer will provide more details on these and several other items that affected earnings.

I will now cover the fourth quarter operating results in more detail. Revenue was relatively flat at $760 million, though it was up 10% on a constant currency basis. Segment profit at Brinks Inc fell 9% to $69 million, versus $76 million in the 2007 quarter.

The operating margin was 9.1%, versus 10.1% in 2007. Total operating profit rose 15% to $69 million due mainly to coal asset sales and another solid performance in Latin America.

Most of the revenue and profit variance was due to the strengthening of the US dollar against global currencies. Once again, results in Latin America were strong. But they were more than offset by a profit decline in Europe.

North America showed improvement, which is encouraging given our efforts to turn this business around in a very difficult business environment. European revenue declined 3%, but was up 9% on a constant currency basis. Profits declined in Europe due to the currency impact and lower operating results in several countries. Turn-around efforts and cost controls in these countries continue to be a primary focus.

Latin America delivered another strong quarter with revenue up 9%, or 20% on a constant currency basis. Continued profit growth in Venezuela was supplemented by continued improvement in surrounding countries. None of the profit improvement was attributable to the currency conversion project in Venezuela, which is essentially complete. The project was a great success and had a significant impact on our 2008 financial results. This completion will make for a difficult comparison in 2009, especially in the first half of the year.

As always, it is important to acknowledge that there is greater risk in Latin America in terms of safety, security, geo-political issues, and the threat of currency devaluation. We've been managing these risks for over 50 years, and will continue to do so.

Before moving on to Asia-Pacific and North America, I want to mention our recent acquisition of Sebival, a leading provider of cash in transit services in Brazil for around $50 million US dollars.

Brazil is one of the fastest and largest-growing cash service markets in the world. There is a growing need for security companies that are large, stable, and offer value-added services. The company brings a strong management team, a reputation for quality, and about $60 million in additional revenue. It is an excellent fit for us, and we welcome our new employees in Brazil to the Brinks family.

Revenue in our relatively small Asia-Pacific operations was about even with the year-ago quarter. Operating profit was down due to foreign exchange rate changes, and the slowdown in the diamond and jewelry market. Volume and currency in precious metals was relatively strong.

Our North American operations, which struggled throughout much of 2008, ended the year on an encouraging note. Operating profit was up 6% on relatively flat revenue, despite substantially lower activity in the diamond and jewelry segment of our global services unit. On a constant currency basis, operating profit in North America was up 10%. The operating margin improved to 9.1% in a very difficult market, thanks in part to solid progress in our cost reduction efforts.

We all know that many banks and retailers are struggling. And most of our customers are looking to cut costs. Our cash logistics business is a great opportunity for what we call solution selling in this weak economy. For example, in 2008, the installed base of our CompuSave service grew 17% to almost 8,000 units, and is poised for even stronger growth in 2009.

Our commitment to value-added services like CompuSave and Same Day Credit should drive revenue and higher margin growth over time.

In the meantime, I can also assure you we will continue to focus on improving near term efficiency, productivity and profitability through targeted cost reductions throughout the entire Company.

In summary, while it was another solid quarter for Brinks, the outlook for 2009 remains somewhat unclear. One thing we can count on is that it will be a challenging time. In addition to the economic headwinds, our 2009 results will be affected by changing foreign exchange rates, and a substantial increase in expenses related to post-retirement plans.

Earning comparisons in 2009 will also be more difficult due to the successful completion of the 2008 monetary conversion project in Venezuela, which was a significant contributor to last year's profits, especially in the first half of the year. But despite these obstacles, we currently see 2009 organic revenue growth in the mid to high single digit percentage range, with a Brinks Inc operating profit margin close to 8%. As we move through the first half of the year, which is typically slower for Brinks than the second half, our visibility should improve, and we will provide an updated outlook.

Our longer term goals, which assume an eventual turn-around in the global economy, have not changed. We target revenue growth in the high single digit percentage range, and margin improvement of about 50 basis points per year. Our goal to eventually achieve a 10% margin is still realistic when the economic conditions improve.

I will close by saying that even in these difficult economic times, I feel good about our people, our business, and our competitive position around the world. The economic crisis will continue to test us, but it will also test our competitors.

As a global leader in secured logistics, Brinks is well positioned to weather the storm. Our competitive advantages are compelling. We have the world's premiere security brand, a global footprint, the industry's broadest array of value-added services and the financial strength to address our challenges, even as we pursue growth opportunities.

We are the best at what we do. We are also a very disciplined Company with cost reduction efforts in place throughout the world. I'm confident that we will navigate successfully through our current challenges, and emerge in an even stronger competitive position than we have today.

I will now turn it over to Mike Cazer. Mike?

Thank you, Michael. And good morning, everyone. As Michael said, it was another strong quarter, especially given the current business climate. Let me recap a couple of items for the full year.

Brinks grew revenue 16%, Brinks Inc increased its operating profit margin rate 40 basis points to 8.6% and the Company grew earnings per share 69%. We completed the spinoff of our home security business, and repurchased $57 million worth of our stock.

Our Latin America and global services business teams delivered solid performances, and North America started turning around its performance in the fourth quarter.

Turning toward 2009, we are taking actions to lead the Company through a difficult environment, but are doing so from a strong position. We are focused on continuing the turn-around in North America, improving operations in Europe, reducing SG&A costs, and executing smart acquisitions in key high-growth markets.

Lastly, and most importantly, we are increasing our efforts to protect our people and our customers' assets.

I'm going to provide more detail about several items that affected earnings for the quarter and may impact future results. These include foreign exchange, non-recurring items, corporate expenses, taxes, debt and borrowing capacity, and some key details regarding pension and post-retirement obligations.

Let's start with foreign exchange since international operations account for more than 70% of our annual revenue and profit. During the quarter, the US dollar continued to strengthen against most currencies. This fluctuation in exchange rates reduced revenues by $70 million, and operating profit by $6 million, compared to the fourth quarter of 2007. For all of 2008, the impact on revenues and operating profit were increases of $98 million and $4 million, respectively.

For the most part, both our revenues and expenses are in the currency of the country in which they are generated. So in effect, our operations are naturally hedged to a large degree. Also, we have significant presence in the US and in countries whose currencies are currently pegged to the US dollar. This should help to at least partially offset the FX impact if the US dollar continues to strengthen.

Fourth quarter results were impacted by two partially offsetting one-time items. The first was a $12 million gain from the sale of coal assets. The sale, which was announced in November, also generated $10 million of cash for us.

The $12 million gain is reflected in the other operating income line of our income statement, and increased earnings per share by $0.16 in the quarter. Approximately $4 million of additional gains are expected to be recognized during 2009, as liabilities are formally transferred to the buyer.

The second item is a $7 million charge for a writedown of assets related to future pension obligations. These plans don't qualify for FAS87 accounting treatment, so asset declines that are deemed to be other than temporary are immediately reflected in the income statement. This charge, which is shown in the other income and expense line of our income statement, reduced earnings per share by $0.10 in the fourth quarter.

Corporate expenses for the quarter were $12 million, down about $500,000 versus last year. This quarter's expense includes nearly $3 million of foreign exchange transaction losses related to the strengthening US dollar. In the quarter, corporate expenses included about $1 million of revenue income from Brinks Home Security. We expect to receive between $6 million and $7 million in royalty income from BHS in 2009.

Full-year corporate expense in 2008 was $55 million, and includes a variety of recurring and non-recurring items. There is a table on page 14 of the press release that provides the details and demonstrates that basic G&A expenses are trending down.

We are taking actions to continue to lower our corporate expense. We are eliminating discretionary expenditures, reducing fees paid to vendors, and have eliminated more than 15% of the positions in our headquarters and frozen the salaries of our top executives.

Looking ahead, based on cost reduction actions already under way, the non-recurrence of certain 2008 expenses, and factoring in a full year of BHS royalties, we expect corporate expense to decline by more than one-third in 2009.

Fourth quarter income was also helped by a 3.3 point reduction in our effective tax rate, from 28.3% to 25%. The lower rate was due mainly to the reduction of valuation allowances as a result of improved performance in several countries. The effective tax rate for the year declined 13.4 points from 37% to 23.6%. Both of these rates exclude BHS results, which are now classified as discontinued operations.

For 2009, we currently see an effective tax rate of between 30% and 33%. As the year unfolds, we will update this estimate.

Let's look at cash resources and liquidity. We ended the year with $62 million net cash position. Our net cash position is comprised of $251 million of cash, less $89 million of debt. Net cash declined $32 million during the quarter, driven by our $50 million cash injection into BHS during its spinoff.

At year end, we had a $400 million committed revolver and access to smaller uncommitted credit facilities. We have used $106 million of the $140 million revolver, and therefore have available committed capacity of $294 million. The uncommitted credit facilities also have available capacity of $45 million.

Let's take a quick look at cash flow items. CapEx for the fourth quarter was $46 million, and $165 million for the year. We expect to spend between $165 million and $175 million on CapEx in 2009. Depreciation and amortization for 2008 was $122 million, and should be about $135 million in 2009.

Now, let's turn to post-retirement benefit and pension plans. As we all know, pension obligations and their underlying assets have been a source of much discussion lately, as asset values have declined. I want to update you on the status of our pension and retiree obligations, and their expected impact in 2009 and beyond.

The market value of the assets that support our US pension plans, as well as our post-retirement medical obligations, have declined along with the equity markets in recent months. As a result, the funded status of these US plans declined during 2008 by $456 million. This increase in liability for these obligations resulted in a decrease in equity of approximately $450 million during the year.

Based on current assumptions, 2009 expenses related to the US plans are estimated to be $29 million, an increase of $36 million over a credit of $7 million in 2008. About $32 million of this increase will be incurred in our former operations. The remaining cost increase of $4 million will be absorbed by North American operations.

Based on these year-end 2008 assumptions, the expenses for US retirement obligations would be $40 million in 2010, $46 million in 2011, $51 million in 2012.

Regarding the US plan funding requirements, we are not required to contribute to the US pension plan in 2009. However, based on the 12/31/08 actuarial assumptions, we would expect to be required to contribute $42 million in 2010, and approximately $70 million annually from 2011 through 2014. Please note that the $42 million estimate for 2010 is $33 million lower than the $75 million estimate disclosed in our third quarter 10-Q. Also, it is important to note that these required contributions are subject to change based on fluctuating asset values, discount rates, assumed rates of return, and potential legislative actions.

Finally, though not required to do so, we may elect to make a discretionary contribution in 2009 to our US pension plan that would reduce future expected contributions. While the potential contributions in 2010 and beyond are large, we believe that we have the financial capacity to fund them if required, and continue to grow our business.

Additional details on asset values, expense estimates and other relevant assumptions, will be disclosed in our 10-K filing, which is scheduled for later this month. That's it for now. Jackie, we are ready to open the call for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question is coming from Steve Velgot of SIG.

Yes, just a couple clarifications. The foreign exchange transaction gains and losses that shows up in corporate expense, how is that or what is that as compared to the normal translation impact that you get that shows up in the international segment?

Sure. Steve, this is Mike. What that represents, those are transactions where there are currency movements between our operating and our businesses and corporate that have to get revalued as the currency changes.

And so in the fourth quarter, as the dollar strengthens, we had say, for example, dividend receivables from various operating entities to corporate, as the dollar strengthens those were worth less in US dollars. And the impact of those, over the course of the quarter, was a little bit less than $3 million.

Okay. And then the guidance that you gave on corporate expense, that was a third less than the as reported corporate expense, meaning that included a little over $8 million of FX losses and included almost $5 million of strategic review, but only $1 million of royalty income from BHS. So I know you talked about getting $6 million to $7 million of royalty income.

Right.

But I take it that guidance that you gave about one-third less really just talked about corporate expenses as a gross measure, and then we could make our assumption, I take it it's not assuming any further foreign exchange gains or losses, et cetera.

Steve, that's right. The guidance of more than a third less reflects a reduction from the total number, which was about $55 million in 2008, and all of the items that you mentioned would be factors in impacting that number in 2009. On top of the cost reductions that we're doing, kind of the base SG&A.

Okay, and just one quick follow-up. Are we expecting further granularity in the reporting when you come out with your 10-K in terms of business segments, or are you keeping things just North America and keeping things geographic?

What we're going to do, Steve, is we're going to continue to display the international and North America operations for revenue and op profit. For further clarity, we're working on splitting out some of the product lines, such as CIT, high value segments, and security services, and we would do that at a revenue line basis, not down-top profit.

Okay. Thank you.

Thank you. Our next question is coming from Clint Fendley of Davenport and Company.

Good morning, gentlemen.

Good morning.

I wondered if you could comment on the relative weakness that you are seeing within Europe, and what the competitive environment is like there currently, and also a comment on pricing would be appreciated.

Europe is slowing down even faster than what you see going on here in the United States. And it started about six months ago. And of course, you're reading about it in the paper all the time. They're not the big consumers that we are, so we're feeling it across the board in Europe, which is not unexpected.

The pricing environment is always tougher in Europe than it is here because it is very difficult to shed labor and shed people in Europe, so people in our business, any labor intensive business, tend to put pressure on pricing rather than have to face redundancy costs in Europe, and we're feeling all of that. We've been through it before. We will deal with it. And if we have to step up and do reductions in force, we will take those in due course.

Are there any particular geographies that have been weaker than others there?

No, it is pretty much across the board. I would say there was a little bit of a delay in the UK but it is catching up there pretty quick. Things are really slowing down. France is tough. Germany is tough. Belgium is very difficult. Holland maybe is doing a little bit better than the others.

Thanks. And then final question, are you able to give any kind of thoughts on the impact that you've seen from store closures within your retail segment?

So far, it hasn't been a real big issue for us. Our next year plans obviously have taken in a lot of factors, including increased bad debts as we grow our value-added services, our retail business, but we tend to be the high cost provider, so most of the retailers that are in serious financial difficulty have moved away from us in the last year or two. And so we haven't had any real bad debt issues of any magnitude at all.

And of course, the basis of our business is still the financial institutions, and to date, around the globe, the governments have come to the rescue of the financial institutions, so I don't see an issue there for us.

Thank you, Michael.

Thank you. Our next question is coming from Ian Zaffino of Oppenheimer and Company.

Great, thank you. Two questions. The first one would be, can you just -- I don't know if you can break this out for us, but maybe help us understand this -- the breakdown between pricing and volume in North America, and kind of walk us through each piece.

And then on the acquisition front, anything you're looking at now, how much do you intend to deploy, et cetera. Thanks.

All right. First of all, North America, most of what you've seen in the fourth quarter were volume increases. Not price increases. Although we had an aggressive price increase program that we've introduced in the fourth quarter, effective for 2009. Which by the way is going very well. And the competitive situation in the United States is allowing for that. And quite frankly we need to raise prices because our offering results are below par.

And as far as the acquisition pipeline goes, it is full. Asset prices are more reasonable. And we have announced recently a small acquisition in Russia. We announced the Brazilian acquisition. And we have a couple of startups going on. So we're pleased about the opportunities we have to grow the business organically around the world.

Okay. And then as far as, you mentioned aggressive pricing, is that like double digit pricing. Is that -- .

It is all over the map. It depends on the customer. But I would be thrilled to death to get price increases in the United States, which has been very difficult the last couple of years, but the competitive environment is allowing that today because of service failures and people who are carrying incredible debt loads which we don't have to face.

Okay. Great. Thank you very much.

Thank you. Our next question is coming from Chris Marangi of Gabelli and Company.

Hi, good morning. Two questions, first, has the economic dislocation in the US accelerated or decelerated banks moved to outsourcing of cash logistics? And secondly, do you have any outlook for the cost of risk in '09, and how that came out in '08?

The cost of risk in '08 was deteriorating as the year went on, which is to be expected with a deteriorating economic situation all over the world. Simply said, external attacks and internal problems increased. We expect that to further increase in 2009, with difficult economic environments. And one of the things we have to do is raise our defenses during these times to protect our people, all of which we're doing.

And what was the first question?

Whether the economic dislocation has caused banks and other customers to outsource more.

Yes, the whole solution selling process we have, and same day credit is becoming more and more attractive, especially to the retail segment. Because obviously they want to move funds and get one or two days faster credit for their money. So our CompuSave product, which we commented on, which grew the strongest it has in many years last year, is going to grow even strong in 2009, and we're excited about that because those are some of our higher-valued services.

What I don't know is how bad is the retail environment going to get and how that is going to affect us. We have stepped up a little bit our bad debt reserves in our 2009 planning. But as you know, it is pretty difficult to see what the next six months looks like with all of the cross-winds we're experiencing.

Thanks.

Thank you. Our next question is coming from Michael Kim of Imperial Capital.

Hi, good morning, guys.

Good morning.

So for fiscal '09, North America, are you essentially assuming cash in transit sort of holds the line here, maybe turns a little bit better, and then most of the growth being driven by the solution side, the cash logistics side, with CompuSave and other solutions?

I am actually more bullish on the North American side than I am anywhere else. We do have a threat of further foreign currency exchange issues in Latin America.

Europe is slow, but North America has been through a tough couple of years, and we have made some strong investments in the sales, marketing solution side the last couple of years. And they bear the brunt of those expenses. And we're starting to see the benefit from those investments come through.

And once again, we have some competitive advantages in the United States that I think we will benefit from in 2009. So I feel a little more confident about North America than I do other parts of our business.

Okay. And then taking a step back, for fiscal '09, do you have an estimate of what the foreign exchange impact number could look like at current rates?

If I do, I would be working at a foreign exchange desk somewhere.

Sure, I guess do you have a plug number we can work with, just to frame what that currency impact could look like?

No. We all see probably the same headlines and trends, and so we have in our internal planning, we have some things factored in but it is not something that is probably appropriate to share externally.

Okay. And then how about restructuring charges in '09, just an aggregate.

It all depends. The biggest risk would be in Europe, depending on how the economy goes there. But we've always been very, very disciplined about stepping up and taking actions as required. And we will continue to do so as we go forward. As you witnessed us in the past.

Great, thank you very much.

Thank you. (Operator Instructions). Our next question is coming from Michael Isenberg of Gluskin Sheff and Associates.

Good morning, gentlemen.

Good morning.

Congratulations on a good quarter. I just wanted to ask you, with respect to your guidance for organic revenue growth, and your comment specifically with respect to the US. Obviously there has been severe financial dislocation in the financial markets and your end markets, and one would assume that as part of the process that the government is going to initiate, there's going to be consolidation in the industry and rationalization of credit such that we will see fewer banks coming out of this, and then over the next two to three years, and fewer -- especially fewer smaller regional banks.

And as such, growth in branches will probably flow, and ATMs as well. I understand that you have an international business as well and it remains to be seen what happens in Europe. But can you just explain to me how that is going to play out for your business because I just have a hard time believing that it will not impact your end market significantly.

Well, we've been going through bank consolidation in the United States for 20 years. I do think there will be an acceleration due to the factors that you outlined. But at the end of the day, end points are end points. And if it is a Chase taking over Washington Mutual, whether there is overlap in some of their markets, there were some end point dislocations, but most of that was new territories, so sort of depends on how that plays out.

If people are taking overlapping area, there could be an impact. If they're taking adjacent areas, there will be no impact. We will lose a head office here or head office there but we don't service revenue at head offices. We do branch locations and ATMs.

So what is going to offset that also is the competitive situation in the United States. Where we have some competitors who are in financial difficulty. Starting with high debt loads. And the customers are very, very nervous about viability of some of those companies. So I think all of that plays out to a relatively even hand at the current time.

Thank you.

Thank you. Our next question is coming from David [Kislet] of Robotti and Company.

Good morning, guys.

Good morning.

Two questions. One is, how much flexibility do you have on CapEx? How much is maintenance, how much is trying to expand the business?

I always think of CapEx as basically three major pools. The biggest pool being vehicle expenditures. The second being our facility expenditures. And the third being our IT expenditures. The facilities, there's not much you can do about, you need a new facility, you need a new facility, either through growth or because of a lease expiring and we have to vacate. And IT expenditures is the differentiator that Brinks has so we're not going to touch either of those.

The lever we have to pull is on vehicles in some parts of the world where we can delay truck replacement costs, and I would say that probably you can think about 70% of CapEx being maintenance and 30% being growth related, depending on what our growth rate is, as we go forward. The steps that we've taken internally is to basically say that the first half is already done. We've already ordered the trucks, they're being built around the world.

We're not sure how this economic crisis is going to continue to pay out, so we're being very, very cautious on our second half capital expenditure approvals around the world, and our management is all over this. And we will see how things are going through the first three to four months of this year before we make a decision on where our CapEx will be. But we do it have that lever on the truck side and that's the biggest lever we pull.

Thank you. And the second question is, you mentioned several times that some of your competitors have higher debt loads and customers are concerned. Are you seeing customers migrate to you? Or is that something you're anticipating?

Yes, it is happening, and that's why you saw the revenue growth in North America for the first time, and we're seeing more of that as things go forward because customers are very nervous.

Thank you very much.

Thank you. And our last question is coming from Garo Norian of Black Rock Incorporated.

Hi. Wanted to see if you could just touch on the competitive situation in some of the various countries in Europe, particularly the ones that have been more problematic in the past.

Well, the competition in Europe, as I said earlier in my comments is always difficult, because of the inability to shed labor in a timely or in a less expensive fashion than elsewhere around the world. You know, in France, it is a difficult situation. Belgium is difficult. Germany is starting to ease for the first time. Belgium is looking pretty stable.

So at the end of the day, Europe is always going to be difficult. There is so much regulation in Europe that people would rather cut costs and maintain share and not shed employment, and that is just part of doing business there, and we're good at it, and it puts pressure on our margins, but we got a good management team on top of it, and I think we will steer our way through it as best we can.

And secondly, can you just help remind me on Venezuela, to the extent that you can, size, the significance of it for you guys, and I'm curious to also better understand I guess the improved results that you showed now that you're through the currency conversion project down there.

Venezuela is our major operation in Latin America. And we had a fantastic year in 2008 because of the currency conversion, which was very profitable for us. Mostly in the first half of 2008. Of course, that's going away, as we mentioned in our previous comments.

But the economy down there is under some pressure because oil prices are down. But we're doing well. And we're worried about devaluation taking place down there. But we've been through it before. We've been operating in those types of environments for over 50 years. We've been successful in passing through price increases. But there is a substantial devaluation. Its effect on our US reported dollar earnings will be felt. We expect probably sometime in the second quarter to see a devaluation, but you never know with Venezuela.

All right. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. We would like to thank you for your participation. You may disconnect your lines at this time.