Brinks Co (BCO) 2009 Q1 法說會逐字稿

Greetings and welcome to The Brinks Company first quarter 2009 earnings conference call. At this time, participants under 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 your host Mr. Ed Cunningham, Director of Investor Relations and Corporate Communications. Thank you. Mr. Cunningham, you may now begin.

Thank you, Jacque. 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. Then CFO Michael Cazer will make some follow-up 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, call 877-275-7488.

And 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 Brinks Company assumes no obligate 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, and thank you all for joining our call this morning or this afternoon. This morning we reported first quarter earnings of $22 million or $0.48 per share. As we go through the details, you will see that these results reflect solid execution by our people in a face of a very challenging economic environment. First quarter results reinforce our belief that we can achieve our 2009 revenue and margin goals. We continue to target full year organic revenue growth in the mid to high single digit percentage range, and with the segment operating profit margin close to 8%.

The year-over-year comparisons were affected by a variety of factors, including the impact of last year's currency conversion project, severance costs, unfavorable foreign exchange rates, and higher retiree expenses. However, we are encouraged by the continued improvement in North America and the results of cost control measures being implemented throughout the world. I will cover some of the details behind our results. Mike Cazer will follow with more information.

Most of you already know we are up against some very tough comparisons in last year's first quarter, which included $34 million of revenue from the currency conversion project in Latin America. We don't disclose country-specific profits, but income from the conversion project was by far the biggest driver of the the year-over-year profit decline. This year's results include $7 million in severance costs, most of which was spent in Europe and the strong US dollar reduced profits by about another $4 million. Beyond this segment operations, first quarter earnings include significant increase in retiree expenses that were more than offset by a large reduction in corporate expenses and a lower effective income tax rate. Mike Cazer will provide the details in his comments.

The total revenue for the quarter declined 8% to $733 million, though it was up 4% on a constant currency basis. Segment operating profit fell 34% to $54 million due mainly to the inclusion in last year's results of the currency conversion income. The overall segment operating margin was a strong 7.4%. Results were also hurt by significantly lower profits in Europe, which included about $5 million in severance charges. Profits in North America improved for the second consecutive quarter.

The largest profit decline was in Latin America. Revenue there declined 5%, but was up 7% on a constant currency basis. To repeat, the currency conversion project contributed $33 million of high margin revenue to year ago results. Exclude the impact of this project, the unfavorable foreign exchange rates and the positive results from the recent acquisition in Brazil, Latin America's revenue and operating profit were up over last year.

As always, it's important to acknowledge there's greater risk in Latin America in terms of safety, security, geopolitical issues, and the threat of currency devaluation. Like the rest of the world, the Latin American economy is struggling and recovery there is likely to lag any recovery of the US. We have been managing these risks for more than 50 years and will continue to do so.

In Europe, revenue decline 12% but was up 4% on a constant currency basis. The profit there declined by lower operating results in several countries, $5 million in restructuring expenses and the negative impact of a strong dollar. Europe has been hard hit by the global economic crisis, making the turn around efforts more difficult. As in Latin America we expect any recovery in Europe to lag the recovery in the US economy.

Operating improvements and cost controls will continue to be the primary focus of our efforts. Revenue of our relatively small Asian Pacific operations were about even with a year ago. Operating profit was down due to foreign exchange rate changes and the slowdown in the diamond and jewelry market, which was partially offset by increase volumes in precious metal and bank note shipments. North America operating profit was $15 million, up 8%, due mainly to higher selling prices and internal cost reductions which more than offset generally lower volume levels. The operating margin was 6.6%, up from 5.8% last year.

Revenue declined 4% to $221 million, though it was flat on a constant currency basis. Continued improvement in our North American operations, which struggled through most of last year is critical to achieving our 2009 revenue and margin goals. We all know that more than ever, businesses are looking to cut costs. I will close with an example of how we are helping customers use our intelligence safe technology to improve their efficiency.

Our proprietary Compu Safe service is gaining real traction in this marketplace. In 2008 the installed base of our Compu Safe service grew 17%, to about 7,800 units. Thanks in large measure to our introduction of high technology and daily credit features. I'm happy to report that that momentum is accelerating in 2009. In fact, during the first quarter, we installed another 800 units, a 10% increase since year end and more than we installed during the entire second half of 2008. Our install base now stands at 8,600 units. And we expect similar growth in each of the next three quarters.

To sustain this momentum, we are highly focused on developing new features and benefits. For example, our goal to add check imaging capabilities into our units by the end of the year is on track. This will further enhance our competitive advantage by positioning Brinks as the only provider of intelligent safes that offers fully integrated check and cash processing for retail customers. Our compu safe service generated approximately $50 million in revenue in 2008. Our commitment to the higher value-added services like daily credit and check imaging is helping us expand our customer base and which should drive revenue and margins higher over time.

In summary, given the challenging environment, Brinks delivered a solid quarter. Even in these difficult economic times, I feel very good about our people, our business, and more importantly, our competitive position. The economic crisis will continue to test us, but it will also test our competitors. As a global leader in secured logistics, we are well positioned to emerge as an ever stronger Company. We have the world's premier brand, a global footprint in industry's broadest array of value-added service and the financial strength to address our challenges as we pursue new growth opportunities. 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.

Finally, I would like to acknowledge a very important milestone. Next week on May 5th, Brinks will celebrate its 150th year anniversary. There are not many companies who were founded in 1850s that have grown to become the global leader today that Brinks is. We're very proud of our history, history based on trust, integrity, and performance. We are also excited about the future because we believe our best years are yet to come. Thank you very much.

I will now turn it over to Mike.

Thank you, Michael. Good morning, everyone. As Michael said, first quarter comparisons were affected by a variety of factors, including the currency conversion project in last year's numbers, higher severance costs, a stronger US dollar and higher retiree expenses. On the other hand, the results were boosted by continued improvement in our North America operations, a substantial reduction in corporate expense, and the lower effective tax rate. I will cover these items, provide an update on cash and liquidity, and provide a few comments on our outlook for the year.

Let's start by looking more closely at revenue, which declined 8% on a reported basis. On an organic basis, it was up 1% which includes overcoming the loss of revenue from last year's currency conversion project. If you remove the currency conversion project from last year's numbers, 2009 organic revenue would be up 6%. That's pretty solid growth, especially when you consider the recent declines in GDP in most of the world's developed and emerging economies. This organic growth rate supports our 2009 growth target of mid to high single digits.

Segment operating profit as reported declined $28 million. As Michael noted, the 2008 currency conversion project was by far the biggest single factor in the profit decline between the two periods. Let's look at several additional items that impacted first quarter results and year-over-year comparisons.

Changes in foreign exchange rates had a large impact on reporting revenues, and a smaller impact on profits. The dollar strengthened significantly against most currencies compared to the first quarter of 2008. This reduced revenues by $89 million or 11%. The impact on our profit was only $4 million because of the natural hedge built into our business model.

We are pleased by the continued improvement in performance of our North America business. The segment's operating profit rose 12% on a constant currency basis, as they achieved higher average selling prices and executed good cost control. Things in Europe are tough right now. In the first quarter we incurred $7 million of severance charges. The bulk of this was incurred in Europe to get that business on a more solid footing. We clearly have more work to do there, but we think the severance actions taken in the first quarter will speed that business' recovery. Our total severance charges increased $5 million versus last year's first quarter.

Overall, Brinks Inc.'s segment operating profit was 7.4%. This is down versus last year, driven by the loss of the high margin revenue on last year's currency conversion project. However, it is a solid rate compared to the previous several years and reinforces our target for 2009 of close to 8% for the total year. As you think about our quarterly margin rates, please remember that the second quarter is historically our lowest and that last year's second quarter included $12 million of high margin revenue from the currency conversion project.

Our corporate costs were $4 million. $11 million lower than last year. As expected, we benefited from reduced proxy and strategic review costs. We also recognized $1.6 million of royalty income from VHS and sold real estate that delivered a $2.7 million pretax gain. Additionally, our headquarters general and administrative costs were down $1.4 million or 14%. On our last call in February, we said that we expected to reduce last year's $55 million in corporate expense by about a third. We now believe full-year expenses should run about $32 million, which is a reduction of more than 40%.

Expenses related to our former core operations were $8 million, versus $1 million last year. This increase, which was expected, was driven by higher costs associated with our retirement plans as a result of the decrease in the market value of the assets during 2008. Our full year outlook for these costs remains unchanged at $28 million. First quarter income was helped by a 3.3 point reduction in our effective tax rate from 27.7%, to 24.4%. The lower rate was due mainly to higher current year tax benefits in certain countries. For 2009, we currently see an effective tax rate ranging between 23% and 26%, which is about seven points better than our prior estimate.

Now let's turn to cash resources and liquidity. We ended the quarter with $223 million in cash and $231 million of debt, resulting in a net debt position of $8 million, versus a net cash position of $62 million at the end of the fourth quarter. The change was driven by the acquisition in Brazil and share repurchases. It's worth noting that the Sebival acquisition in Brazil is a positive contributor to profits, as expected, and its integration is on track.

We have $400 million committed revolver and access to smaller uncommitted credit facilities. We have used $146 million of the $400 million revolver and therefore have available committed capacity of $254 million. The uncommitted credit facilities also have available capacity of $45 million. Looking at cash flow items, CapEx for the quarter was $30 million, and depreciation and amortization was $31 million. We expect to spend about $175 million on CapEx for the full year, and depreciation and amortization should be between $125 million and $135 million in 2009.

Obviously, there are lots of variables to consider in assessing the first quarter results. Given the challenges faced by all companies in this environment, we feel that we are off to a good start in 2009. Building on the momentum we have achieved in North America is critical to achieving the 2009 goals. We are also focused on reversing the profit decline in Europe, continuing to reduce costs across the globe and pursuing strategic acquisitions in key high growth markets. Lastly, and most importantly, we are continuously striving to protect our people and our customers assets.

That's it for now, Jacque, we are ready to open the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. (Operator instructions). One moment, please, while we poll for questions. Thank you. Our first question is coming from Clint Fendley of Davenport & Company.

Good morning, gentleman.

Good morning.

Good morning, Clint.

I wonder if you guys could comment on just the pricing environment that you are seeing in North America right now and when you might be expecting or how you might continue some of the price increases?

We had a very successful price increase program that was conducted in the fourth quarter which became effective mostly in the first part of the first quarter. We are very pleased with that and that's holding well. The pricing environment, I would call it -- I would say it's more normalized than it has been in the past. There's obviously actions by certain competitors who are desperate for revenue that quote low. But at the end of the day, the customers need to service quality and represent the value package that Brinks has to offer. And so I'm not concerned about pricing levels in North America.

How are you seeing -- for those competitors that have been under pressure, their customer base, how willing are they in this environment to look at some of the other higher cost providers in the market?

Our pipeline and sales opportunity list is as full as it's been in a couple of years in the North American environment. And that's why as I was bullish on the call in February, to close out the year. I'm still as bullish today.

Okay. Great. Thank you, guys.

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

Hi, good morning.

Hi, Chris.

Some good information there on Compu Safe. Two questions related to that. One, can you just remind us how the accounting works for those and how much of the CapEx, in particular, in this quarter related to rolling out Compu Safe? And secondly, where are you with regard to Compu Safe in other regions besides North America?

Okay. First of all, these are rough figures but I think Compu Safe now is about a $5,000 CapEx expenditure per unit to give you flavor.

Okay.

And I think we depreciate that over a five-year period of time. And obviously, we have -- we uninstall it, and if we don't reinstall it within a certain part of time we write it off. It's very similar to the home security model, you might recall. So it will be driving -- a strong driver of our CapEx, but it's a higher margin business. It's perfect. Understand that installing 800 units is a major exercise, and an expensive one for us. We bore those expenses in the first quarter. We expect, per my comments, to have the same level of installs throughout the rest of the year. We already have sales to support those. So the full benefit of the Compu Safe installs won't be on the profit side. It will come through to next year. And, of course if we continue to install at this rate, which to me is all great news it will help to build our operating margins in North America in this difficult economic time.

Outside of North America, we have safes installed in seven or eight countries and they are growing. Once again, every market is a little bit different. Obviously Brazil is number two. Canada is probably number three. We have some in Australia. We have some in Hong Kong and we see advantages of continuing to expand offshore with that product as time goes by.

Great. Thank you.

Thank you. Our next question is coming from Steven Fisher of UBS.

Hi. Good morning. The 800 Compu Safe units installed in the quarter was certainly a great result, just to follow up on that topic. And you mentioned that you expect similar growth in each of the next three quarters and you just mentioned that you have sales. I guess are those sales the indicator? Is that sales covering all the unit for the rest of the year, or is it just a book of orders? I'm just wondering how do you get the confidence in that order outlook for the rest of the year?

Those are booked sales. So that number can grow. I wouldn't expect it to decrease at all. It's important to understand why it's such an attractive product. The retail customer can get same-day credit for the money that's locked inside the Brinks controlled Compu Safe. So it's a very value-added equation for the retail community. When they can get same-day credit on their stores without having to pay for the transportation service, it's just -- it's just a great economic. Our big challenge -- the only fear I have there is to make sure that the credit quality of the customers we are choosing to service is appropriate in this very difficult environment. So we are actually turning business away in some cases because I'm concerned about credit quality customers.

No, that's fine. And just again to clarify, the Compu Safe you expect to install in the fourth quarter have already been installed; is that right?

Yes.

Yes, and the ones that are installed in the first quarter are all sold and the ones I mentioned this year are already sold units.

Okay. Great. That's helpful. Sorry if I missed this. But can you just comment on the value-added services outside of Compu Safe, how they're ramping on both the banking and retail side?

I would say there's a general slowdown in the cash logistics side of the business. Many of our customers, their sales are down. Therefore the amount of money that we are processing or counting is down. The number of coin rolls, for instance, because retail sales are down all become affected by that all over the world. So those are high margin businesses, but their volumes are down. More so in Europe than in North America.

But it would typical for a retail customer, we are talking about somebody who is ex-Compu Safe, does not have Compu Safe. If they were getting five-day transportation services, they are under a lot of duress, they have cut down to three days. And obviously, we still have our trucks out there and our crews out there. The management group throughout the country, throughout the world is highly focused on the difficult times we are in and the cost saving measures and programs and are proceeding on track, on schedule. And I think our front-line management group and our employees have cooperated wonderfully in these difficult conditions.

Great. Thanks a lot.

One thing I add to that, we are going to -- in the Q this time, we have a chart that publishes our revenues by line of business as we have talked about in the past. And you see that our total value-added service segment grew 7% on a constantly currency basis if you exclude the one-time impact of the monetary conversion last year in Latin America. So overall, we are seeing good growth in a tough environment.

It and that -- one other point to make, just to be clear, our diamond and jewelry business had the worst first quarter probably in its history. I mean, sales just fell off a cliff from the mines, through the major distributors. It was affected dramatically especially in January and February. We saw a little uptick in the pipeline, which means inventories have been replenished in March, but we are not sure where that will go. Of all our high value-added businesses, I would say the one that most affected was diamond and jewelry.

Great. Thanks for the color.

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

Great. Thank you. I just want to talk a little bit about Europe here for a second. It looks like you put in a bunch of cost savings measures. When did you see those coming through? I know there's probably a lag because of some labor issues over there. I wonder if you could see the effects of that, and if you could actually kind of quantify what you see as far as margins in Europe going forward? Thanks.

That's a good question. I wish I knew the answer to those questions. Europe is a very difficult place to do business, as we have talked about before. And the difference is that we step up and we take our severance costs and move on, rather than try to live with them. And we have demonstrated that again in the first quarter of this year.

And it is our most difficult market place that we are operating in. Retail sales are down dramatically in Europe compared to the United States. We see it in the volumes of the currency that we count over there, the Euros. And it's just -- I don't know how much more difficult Europe is going to become. We're trying to stay ahead of it. We will continue to take ahead of it. But it's a difficult environment.

And all I can tell you is that the two factors for us reaching our goals this year are continued improvement in North America, cost controls. And the big question in my mind is how bad does Europe get and can we stay ahead of it? Once again, though, that's offset by the competitive situation and the rising criminality that's being faced in Europe. So we have our work cut out for us in Europe. We are focused on it, and we have a good management team in place and I'm confident that we will be able to deliver on our goals for 2009.

Okay. And then on the acquisition front, I know you had just announced a deal not too long ago. And you've talked about spending a certain amount of money on acquisitions. Is there -- first, how have the acquisitions been going and what are you seeing as far as your pipeline?

Acquisitions are going well. The integration in Brazil, in particular, is going fine. I just returned about three weeks ago from touring all the locations down there and our management team down there has done a great job. And it was accretive in the first quarter. The full integration will take the balance of the year before all the systems are converted and the company is totally Brink sized. The acquisition pipeline continued to be fall. And the acquisition prices as you know in this market are quite a bit different than they have been in the last few years. And we expect to have additional growth through acquisitions during this year and next.

Okay. Great. Thank you very much.

Thank you. Our next question is coming from Jamie Clement of Sidoti & Company.

Good morning, gentleman.

Morning.

Michael, if I could ask you about risk and the cost of risk and some historical trends. I mean when times get tough, and we're in the midst of a recession I mean -- I think you mentioned Europe, but I would just assume that attempts probably go up. You obviously need to protect your customers and you need to protect your employees. How do you think about a rising risk environment, particularly when volumes are a little lighter? How do you balance costs with revenue there?

Well, first of all, there's no thought process. We just raise our barriers of defense. We have to protect our employees, we have to protect our customers. So there's not even a moment of thought. If criminality picks up, which it has beginning late last year, through this year, we just raise our defenses and we bear those costs. Because over time, that's the only way to operate this business, or your cost of risk will go out of control. Or you lose access to the cost of risk which is fatal to this industry in business.

So far, we have suffered an increase in the number of attacks and attempts, basically on a global basis. But it is a much lower rate than the competition because of our security procedures and rules and 150 years of experience in the business.

And follow-up there, Michael, and correct me if I'm wrong here. But I think there's some evidence historically that when times get dicey out there, you have often left those periods of time actually with increased market share. Can you talk a little bit about that?

Well, I think any Company that is a market leader, as Brinks is, when it enters any difficult time like this, as long as it keeps its eye on the ball, understands that it's all about the efficiency, productivity and execution, any Company in any industry will come out stronger. And I would expect ourselves to come out stronger when this economic crisis chooses to end itself. I wish I knew when it was.

That's very fair. And then just last question, with respect to Latin America and potential currency devaluations, specifically with respect to the Bolivar, do you all have any recourse in terms of how your agreements are priced and if there's ultimately a formal revaluation that you don't take the full hit?

No, we have taken it in US dollars, right.

Right.

Because of the foreign exchange. What happens locally is we have the natural hedge built in because we are doing business in the the Bolivar as an example, or the local currency. We have been through this before with the Bolivar. When there's been a devaluation in other countries in Latin America or even in Asia. We have to go through -- what we call the step down where the US operating profits are reflected. But, what happens after that devaluation, is there's an economic growth spurt.

Right.

You step back and you suffer usually a year, but then you more than recover that in the ensuing two and three years. I mean that been the history that we've witnessed in my career here.

Okay. That's very fair. Thank you for your time.

Thank you. Our next question comes from Michael Kim with Imperial Capital.

Hi, good morning guys. Just a couple of brief questions. One, assuming no change in currency exchange rates here, for the reminder of the year what are your thoughts on the impact of foreign exchange? And then secondly regarding free cash, if you could rank your priorities for what your objectives are for the rest of the year, that would be very helpful? Thanks.

This is Mike. For the foreign exchange impact, we are going to continue to see a big year-over-year impact for foreign exchange in the second quarter, and to some extent in the third quarter. By the time the fourth quarter rolls around, if FX rates stay about where they are today, the effect will be gone. What we have done in the Qs that we published for those prior quarters, we've calculated the benefits in each of those quarters so you could see exactly how much we benefited by in those quarters. much we benefited by in those quarters. So it's relatively easy for you to strip out for your models that benefit assuming that we feel the reverse pressure.

Great. And then on free cash, can you talk a little bit about your priorities for the year?

Well, we are going to continue to increase in growing the business. We have seen a lot of opportunities for growth. We are first going to take care of what Mike mentioned a few minute ago which is making sure that we have the right investments and protecting our people and our customers assets. But as Mike talked about Compu Safe is growing on an accelerated basis that is going to consume some cash flow.

We also are looking at an acquisition environment, which is much more attractive and favorable to us than it has been in the past few years. That will continue too. Those are our priorities. We are going to be a little conservative with regard to protecting our cash balances right now. Because as still is the case, we are in uncertain economic environment and we want to make sure that Brinks has the long-term staying power to win.

Great. Thank you very much.

Thank you. Our next question is coming from Jerome Lande of MMI Investments.

Good morning. I'm not sure I heard this correctly. Can you clarify the expected installations for the rest of 2009 of Compu Safe?. Did you say they are already sold just not installed yet?

Correct.About 800 units a quarter.

I'm sorry, I didn't catch that last part.

800 units for this quarter.

Great. There was an IRS ruling I guess it was the beginning of this month that expanded in pension accounting one's ability to use the spot rate at any point during the fourth quarter through the first quarter -- or through January for calculating your liability. I'm wondering if that affects at all the funding obligations you reported previously?

Right now, we don't see any change in the funding obligations that we've reported. What we will do is at the end of the year, when we go through the reassessment of the liabilities and assets, we will take a look at that. But the -- to date, we don't envision any change.

Okay. So some companies are reporting a decrease of elimination even of some 2010 funding obligations with regard to 2009 under funding, but if you wait to the end of the year and do that test, you wouldn't benefit from that. I'm wondering, what is the rate mechanism you are using? You can use I think the beginning of the quarter or the end of the quarter and now if you can use any point, what are you guys using for the obligations?

Well, Jerome first of all, as we said in the prior quarter call, we will make a decision by September of 2009. What benefit there is of putting any cash into any of these funds, that's in the best interest after tax for the corporation. And otherwise, our policy is on an annual basis, we are going to follow, make a decision on December 31st of where we stand, which will determine the funding basis. And to predict what the asset values are going to be at the end of the year on $700 million, $800 million of invested assets, and put that our publicly, I don't think it will serve any purpose and it would be a guesstimate at best.

Okay. Switching gears. Compu Safe is terrific, and it's really impressive growth. What about virtual vaulting? Has that slowed down with bank spending and growth plans?

Not at all, but the volume, Jerome going through the system has slowed down because retail sales are down but the sales pipeline, as far as rolling that out is as attractive as ever. And we have seen a slowdown on CIT stops. Retailer gets three stops instead of five stops but those type of higher margin products in that pipeline continues to be attractive.

Okay. And do you anticipate breaking down details on that the way you have for Compu Safe here or maybe it needs to get to greater critical mass first and then when do you think that will happen?

I -- it's really hard to do, because Compu Safe, Jerome it is sort of like the ATM product. I think you and I have had the conversation before. It it involves transportation, it involves processing. So I sort of look at it as part of our cash logistics and supply chain business our higher value businesses. At some point in time, it might become appropriate to talk about high value services versus standard transportation. And we will add that clarity when it's appropriate.

Great. Thanks very much.

Thank you.

(Operator instructions). Thank you. This concludes today's Q&A session. I would like to hand the floor back over to management for any closing comments.

This is Ed Cunningham. Thanks for, again, for joining the call. And we look forward to talking to you in the next quarter.

Thank you. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.