Brinks Co (BCO) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Brink's Company second quarter 2009 earnings call. 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 your host, Ed Cunningham, Director of Investor Relations. Thank you, Mr. Cunningham. You may begin.

Thank you, Rob. This is Ed Cunningham. Good morning and thanks for joining today's call. It will proceed as follows: CEO Michael Dan will review our financial results and outlook, then CFO Mike Cazer will make some follow-up comments before we open it up for questions. The earnings release was issued this morning and is available on our website at BrinksCompany.com. Our safe harbor statement is as follows.

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 these 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 Brink's Company assumes no obligation to update any forward-looking statements made during the call. The call is copyrighted and may not be used 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. My comments will focus mainly on operating results. Mike Cazer will follow up on some of my comments and several non-operating items that affected the quarter, including the planned $150 million pension contribution that we announced this morning.

Today we reported second quarter earnings of $16 million or $0.34 per share, down from $31 million or $0.66 per share last year. These results reflect very challenging business and economic conditions throughout our markets, especially in Europe. Given these conditions we expect our full-year organic revenue growth rate to be in the low to mid single-digit percentage range with a segment operating profit margin between 7% and 7.5%. There are many factors to consider in analyzing our earnings this quarter. In addition to the impact of the global slowdown, results were affected by several other items including foreign exchange, pension costs, tax rates, and gains related to asset sales. As I mentioned, Michael will cover these points after my review of the segment results.

Total revenue for the quarter declined 6% to $752 million, although it was up 5% on a constant currency basis. The organic revenue growth rate which excludes the currency impact acquisitions and divestitures was 2% for both the quarter and year-to-date period.

Segment operating profit was $28 million versus $53 million last year. The operating profit margin was 3.8% versus 6.6% in the year-ago quarter. The year-to-date operating margin now stands at 5.5%. We expect second half results to boost the full year margin above 7%.

Comparisons with the year-ago quarter were affected by a variety of factors, but when you sort through it all we can draw four major conclusions. First and most obvious, the global economic economy remains weak, and Europe is particularly weak. Profits there continued to decline during the quarter. Improving Europe's performance is clearly our biggest challenge and primary focus of our efforts.

Second behind Europe, the negative profit comparison was due mainly due to higher foreign currency transaction costs and the absence of high-margin revenue from last year's currency diversion project. Third, results in North America continue to improve under very difficult market conditions. And fourth, a sharp fall-off in the diamond and jewelry business affected our global results.

Now for a little more details. Revenue from international operations were down 6% but were up almost 8% on a constant currency basis. Acquisitions added about $20 million to this year's second quarter revenue.

Operating profit from the international operations was $15 million versus $42 million last year due to the profit decline in Europe and Latin America. The operating margin for international was 2.9% versus 7.4% last year. Some of the profit decline was due to the fact that last year's results included $12 million of high-margin revenues from the currency conversion project in Latin America.

Another major factor was the $6 million increase in the foreign currency transactions costs in Venezuela. While we don't disclose country-specific results, these two items account for a substantial portion of the year-over-year decline. When you take this into account and factor in the improvement in North American, it's even more apparent that Europe remains our biggest challenge.

Europe has been hit hard by the global economic crisis, making turning around efforts there ever more difficult. Throughout the region there is pressure on pricing, customer service frequency and margins. Our global service business was particularly hard hit by a severe downturn in diamond and jewelry business. We also experienced some business losses mainly in man guarding services and the additional costs which were incurred to address this loss of revenue.

Latin American profits also declined versus 2008 levels for the reasons I described earlier. It's important to note that economic conditions are pressuring results in these region, as well. Average selling prices improved, but customers are pushing for price relief and reductions in service frequency. As always, it's important to acknowledge the greater risks in Latin America in terms of safety and security, geopolitical issues, and the threat of currency devaluation. We have been managing these risks for 50 years and will continue to do so.

Revenue and profits also declined in our relatively small Asia Pacific operations primarily due to lower diamond and jewelry volumes.

In North America revenue declined 5% to $222 million and was down 3% on a constant currency basis. Despite this decline, operating profit was $13 million, up 19% percent due mainly to higher selling prices and lower fuel costs, which more than offset generally lower volume levels in cash in transit and global services coupled with a higher pension expense. The operating margin was 5.9%, up from 4.6% last year. North American operations struggled through most of last year, so we are encouraged by the fact of the profit improvement for a second consecutive quarter.

More than ever our customers are looking to cut costs, and that is clearly affecting our results, but it's also an opportunity that plays into our strengths as customers look for outsourcing opportunities. A good example is our proprietary CompuSafe service which is continuing to gain traction precisely because it improves efficiency for both the retail and banking customers.

In 2008 we installed -- our installed base grew 17% to about 7,800 units, thanks in a large measure to the introduction of our daily credit feature. In the second quarter we installed 1,200 units, bringing 2009 installs up to 2,000 units. That's a 26% increase since year-end, and more than we installed during all of 2008. Our installed base now stands at 9,800 units.

Second quarter installs were well ahead of expectations, as many customers accelerated their third-quarter orders into the second quarter. We expect a more moderate pace in the third quarter, but we are clearly on track to meet or exceed our goal of 3,200 installs for the year. In terms of profit contribution, our CompuSafe service is one of our higher margin lines of business, and as our customer base continues to expand, it should drive revenue and margins higher over time.

That concludes my overview of results. In summary, it was clearly a very difficult quarter. Even in these challenging economic times, I want to stress that I feel very good about our people, our business, our competitive position, and our growth prospects.

The economic crisis will continue to test us, but it will test our competitors even more. As a global leader in secured logistics, we expect to emerge as an ever stronger company. We are the world's premier security brand, a global footprint in the industry's broadest array of value-added services and the financial strength to address our challenges and growth opportunities.

I can assure you we will remain highly disciplined and focused on those things that we can control. These include internal cost reductions, safety, security, and of course customer service. We will continue to execute on our core strategy which is aimed at growing cash logistics and other high-margin services in our current markets while penetrating new geographies with high growth potential.

Our recent acquisitions in Brazil and Russia, expansion efforts in Turkey and in Canada demonstrate our commitment to growth. We are exploring additional acquisitions and have new efforts underway to increase our presence in high-growth markets. I am confident that we will execute on these and other opportunities and we will strengthen our position as the world's premier provider of secured transportation and cash management services.

As you all know, Mike Cazer will assume responsibilities for our European operations on August 1st of this year. Joe Dziedzic who is already on board will become CFO upon Mike's departure.

With that I'll turn it over to Mike.

Thank you, Michael, and good morning everyone. As Michael said, second quarter results and comparisons to last year were affected by a variety of factors. I'll add some detail to these items as well as comment on our outlook for 2009, our liquidity position, and the voluntary contribution we intend to make to our US pension plan.

Our operating profit declined $16 million in the second quarter versus last year, driven by several factors. The non-recurrence of last year's currency conversion project in Venezuela was a large driver of the decrease. We haven't disclosed the exact margins from this project but have communicated that in the second quarter of 2008 it yielded $12 million of high-margin revenue.

We had $46 million of this project's high-margin revenue in the first half of last year. The total for the second half of 2008 was only $5 million. Additionally in Venezuela, we incurred about $6 million of higher currency transaction expenses related to buying US dollars on the open market. It's no secret that the government of Venezuela is slowing down the conversion of bolivar fuerte via its official exchange mechanism.

This forced our Venezuelan subsidiary to purchase US dollars on the open market at a less favorable exchange rate than we had done in the past. The volume of US dollar purchases was higher than normal, which also drove up expense. The challenging environment in Europe is impacting our results there. In particular, our guarding business struggled in the second quarter due to the loss of certain contracts and issues regarding pricing and labor costs. We are taking steps to fix these issues.

In the second quarter we made accounting adjustments that reduced after-tax income by $3.3 million or $0.07 per share. These items which were related to prior years were centered primarily in our Belgian operations.

Our US pension and retiree expenses increased $7 million compared to the second quarter of last year. As we've communicated in previous conference calls and filings, this item was expected to increase. On top of these items which drove the decline in our operating profit, we steered through a challenging economic environment across the globe.

We did have several favorable items in the quarter which are worth mentioning. In North America operating profit grew 19% on improved pricing. We also continued to build a foundation for future high-margin growth by boosting CompuSafe installed base by 26% over the last six months. The integration of our first-quarter acquisition in Brazil is on track and is already accretive to our results.

In our two largest business lines, core services and high-value services, our revenues grew 8% and 9% respectively on a constant currency basis without the one-time currency conversion project in the comparison period. We made real progress in our efforts to reduce costs around the globe. This is very visible in our corporate expenses which are down 75% or $7 million versus last year. We are benefiting from lower general and administrative costs and Brink's Home Security royalty income.

The sale of residual coal assets which was announced last year yielded a $5 million pretax gain. This gain, which was expected based on last year's transaction, increased EPS $0.07 a share on the quarter.

Lastly, we announced our intention to make a voluntary contribution to our US pension plan. In a minute I'll describe the key details of the contribution, but I want to highlight that it addresses a significant obligation of the company in a capital-efficient manner and should be accretive to 2009 and 2010 EPS.

Let's look forward to our total year outlook. We expect organic revenues to grow in the low to mid single-digit range for the year. While our year-to-date revenues are down 6% on a reported basis, they were up 2% on an organic basis. This 2% growth includes overcoming $46 million of nonrecurring revenue from last year's currency conversion project.

If you remove the conversion project from last year's numbers, year-to-date organic revenue growth is 5%, which is encouraging given the contraction of the global economy. It also supports our full-year outlook.

We believe full-year segment operating margins will come in between 7% and 7.5%. For the first six months our segment margin was 5.5%. The second quarter was an especially tough period, but it's important to remember that the second quarter is historically our low point for the year.

On the margin front, our biggest challenge as Michael mentioned continues to be Europe. Business conditions there are very tough right now. General economic weakness throughout the region continues to put pressure on pricing and volume across our operations. Weakness in diamond and jewelry shipments and issues with several guarding contracts continue to have a significant negative impact on profits.

On top of all this, we took a $4 million charge related to accounting corrections in the second quarter, and severance and restructuring charges of $7 million in the first half of the year. Improving performance in Europe is our primary focus. We think performance there will improve, but it will take time.

As Michael noted, profit comparisons in Latin America were affected by two core factors, the absence of recurring income from last year's currency conversion project and a $6 million increase in foreign currency transaction losses. Excluding these items, our operating profit in Latin America would have been flat versus the second quarter of last year.

Lastly, we are encouraged by the continued improvement in the performance of our North American business. Where operating profit rose 19% in a very tough environment, we expect these improvements to continue through the year.

Let's turn briefly and look at the outlook for corporate expenses. As I mentioned earlier, our efforts to reduce costs are yielding results. We are lowering our full-year estimate for these items to $27 million. This is down about 50% from last year and $5 million better than our previous outlook.

With regard to taxes, second quarter comparisons were affected by a large increase in our effective tax rate from 10% to 25%. Last year's rate was unusually low due to the release of valuation allowances in non-US jurisdictions. We continue to expect the full-year rate in 2009 to be somewhere between 23% and 26%.

A quick comment on FX rates. Changes in foreign exchange rates had a large impact on reported revenues but a small impact on profits. The dollar strengthened significantly against most currencies compared to the second quarter of 2008 reducing revenues by $83 million or 11%. The impact on our profit was only $2 million.

Now let's turn to liquidity and cash flow items. We ended the quarter with $178 million of cash and $192 million of debt, resulting in a net debt position of $14 million. We have a $400 million committed revolver and access to smaller, uncommitted credit facilities. We have used $101 million of the $400 million revolver, and therefore have available committed capacity of $299 million. Our uncommitted credit facilities also have available capacity of $45 million.

CapEx for the quarter was $45 million, and depreciation and amortization was $33 million. Full year capital spending is expected to be about $185 million. Depreciation and amortization should be approximately $135 million for the year.

Now a few comments regarding this morning's announcement of our intent to make a voluntary contribution to our US pension plan. I'll highlight the key details and explain the rationale behind our decision to make this contribution. The contribution will be $150 million. It will be composed of approximately $90 million of cash, which will be funded by $60 million of borrowing and $30 million of tax refunds that the contribution itself should generate.

In addition to this cash we plan on contributing approximately $60 million of equity. We plan to make the contribution no later than September 15th of this year to take advantage of tax gains that expire at that date. This delivers a $30 million tax refund.

Equity is included in the contribution as a means of increasing the contribution, thereby maximizing the tax benefit while minimizing the use of debt, giving us maximum flexibility to pursue our growth strategy and preserving precious liquidity in these uncertain times.

The contribution along with the July actuarial re-measurement will improve the $308 million under-funding of the plan by nearly $200 million. So in effect $60 million of debt and $60 million of equity yields a $200 million reduction in the under-funding.

The expected contribution and changes in our funding election will also eliminate any required contributions in 2010, and reduce the 2011 minimum funding to $16 million. In total this is a $94 million reduction of required contributions over 2010 and 2011 versus previous projections.

We expect the equity contribution to increase the number of shares outstanding by approximately 4.5%. Despite the slight dilution, overall we expect the contribution to be accretive to 2009 and 2010 EPS by approximately $0.02 per share and $0.04 respectively versus not making a contribution this year.

The accretion comes from lower pension costs impacting the income statement which more than offset the higher interest from the debt and dilution from the additional equity. There is a fair amount of information on this in the press release, including a series of questions and answers. Our 10-Q, which will be filed shortly, will provide even more details.

In closing, there are a lot of variables to consider in assessing our second quarter earnings and our outlook for the year. We expect the challenging global environment to continue. We will be focused on reversing the profit decline in Europe, building on the momentum we have achieved in North America, reducing our costs worldwide as we pursue strategic growth opportunities in key high-growth markets.

Most importantly, we remain highly vigilant in protecting our people and our customers' assets. AS we execute these actions, we will emerge from the current economic conditions stronger than ever.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions) One moment, please, while we poll for questions. Our first question will be coming from the line of Clint Fendley of Davenport. Please go ahead with your question, sir.

Good morning, Michael and Mike.

Good morning.

I noted where you're expanding your efforts in Turkey. I know they're changing their bank notes there. Is this a one-time project similar to the Latin American conversion?

Yeah. But our scale of operations there is much different than it was in Latin America when we went through that conversion, so we'll be a player there but not to any degree like we were in Latin America.

Okay. And then any color on the Canadian expansion, any particular city?

About 20 some odd years ago, we exited the Quebec province and have not operated there. We opened up there back in about five years ago just in Montreal, and customers have been pressing us very, very hard to expand our footprint and presence there. And so now we're opening up in four other or five other cities, and we're in the process of building our facilities to handle that influx of work and customer requests.

Okay. Thank you, that's helpful. And then I wondered if you could comment just generally on your outlook for the diamond and jewelry market. And obviously a notable player in that space commented that they believe the market may have bottomed. What are you expecting for the near term here?

I'm glad you asked the question. I mean, the diamond and jewelry business just fell off the cliff in the first six months of this year, and De Beers released some information yesterday. To give you a flavor for this, their rough sales year-over-year were down 57%, and the value of those rough sales went from $3.7 billion down to $1.4 billion, and that's just the beginning of the pipeline, right, coming off from the mines to the rough sales.

But that has gone throughout the whole diamond and jewelry chain, and it's basically on a global basis. The only place that it's relatively flat is in China. Almost every country is down to those types of degrees. And as you know, that's one of our higher margin lines of business, which contributed to some of the shortfall that we experienced on a year-over-year basis in the second quarter.

As far as the outlook goes, people like De Beers, they shut their mines down for the first five months of this year, just absolutely shut them down. The mines in South Africa. The mines in Canada. The mines in Botswana. And the Russians just stopped selling for the first four months of the year, five months of the year, any diamonds -- rough diamonds into the market.

The supply chain has obviously tightened because of that, and so there is a little bit of an uptick happening as far as the pipeline. Now, whether that's going to translate into the retail sales segment, frankly we won't know until the next three to four months.

Okay. Thank you. That's very helpful. And then a final question, the $4 million accounting charge in Europe, what is that and should we expect any more charges there going forward?

Basically -- Clint, this is Mike. Basically what it is is we identified some errors in our books in Belgium, and we corrected them. They were related to prior periods, and we don't expect to see corrections like this going forward.

Excellent. Thank you, guys.

Thank you. Our next question is from the line of Ian Zaffino with Oppenheimer & Company. Please state your question. Mr. Zaffino, your line is live for a question.

Thank you. Thank you. A couple of questions here. The first one would be in Venezuela, have you or will you need to write down those assets given what's going on? And the way you're now required to use the unofficial rate for your purchases, will the auditors then turn to you and say, look, you've got to start writing down your assets based on that conversion rate, too? And then I have some follow-ups.

Ian, this is Mike. It's a good question, and we look at the operations in Venezuela very closely and make sure that our accounting is correct. We're not required to write down our operations in Venezuela. What happened is for some of our operations we have been able to access the official cadivi is the term, or exchange rate mechanism, as well as -- and sometimes you have to go through the open market.

For certain purchases that we have historically been able to access the cadivi mechanism, we were declined for just those purchases. For the larger transactions that would have -- it would impact our accounting such as repatriation of dividends. That process, while very slow, is still available and we have applied through the normal process for approval of dividends from cadivi. So right now there is no indication that we need to write down our assets, but it's something frankly that we look at very closely on a continual basis to make sure that we've got our accounting right.

Okay. And given that this quarter seemed to be pretty heavily loaded with purchases from the Venezuela unit, does that mean we're not going to see this type of level of transaction costs going forward?

Yeah. As I mentioned in my comments, what we saw this quarter was an abnormally high amount of purchases, and I would say my expectation is that that level will not continue going forward. I mean, we're still going to always have some routine purchases for USD priced items, but going forward the amount should come down.

Okay.

Ian, this is Michael. Just to add some more color to that, if this becomes a problem, then it's just a cost of doing business there. And obviously that's going to be borne by our customer base, and we're not the only company that's been affected by this and the only industry that's been affected by this. All the companies trying to get dollars out of Venezuela have this same issue and this same problem.

Okay. And then the last question would be, Mike, you're -- I guess you're heading over to Europe pretty soon. How do you assess the landscape there? It's been tough for you guys right now. Is there a potential that this business can be turned around to look very similar to the US per se, or is there something structural going on there that won't work itself out?

I'll answer that for Mike because he's still my CFO and that will be his headache next week. Our problems in Europe are centered around a handful of countries. We're doing very well in many countries in Europe, but there is a handful of countries that have been particularly stubborn to deal with. And it's Ireland, it's Belgium, and it's Germany in particular.

And some of those are structural issues and some of those are competitive issues, and we have developed plans to attack each and every one of them and we're just running into the crosswinds of the economic crisis in Europe. So there is some heavy lifting to be done in a handful of those countries, and there might be some critical decisions that we'll have to cross in the next year in one of two of those countries, and we will take those, as we always have in the past, if necessary, if we can't find a way to fix those businesses.

But Mike is headed over there, and I'm confident that a fresh set of eyes along with the incredible support that's already in Europe, and we have a good team to go after those, and I look forward to finalizing any major steps that need to be taken over there to get acquisitions or divestitures.

Okay. And do you define fixed as achieving the same returns as the US? Is it going to always be slightly lower?

No. At the end of the day it will probably be slightly lower just because of the construct of the European business model that we compete in, number one. But what I will have responsibility for is -- what I call success in Europe is having positive economic value on our invested asset base. And the marching orders from a management perspective here is to make sure we achieve that goal within three years.

Okay, great. Thank you very much.

Thank you. Our next question is from the line of Stephen Velgot with SIG. Please state your question.

Yes. I'd like to just follow up on Europe, but first, Mike Cazer, you had mentioned severance and restructuring charges in the first half of $7 million. Could you remind us what that breakout is there quarter by quarter?

Yeah. In Europe we had $5 million Q1 and $2 million in Q2.

Okay. And given that you're a fresh set of eyes in Europe, should we anticipate that by year end there could be a larger restructuring or has much of that already been in place?

It's too early to tell, Steve. I haven't started the job yet. When I get over there, we'll start assessing what we need to do to make Europe effective.

And I take it that that goes back to Michael's comments about potential divestures and/or acquisitions, as well. But I take it from earlier conversations that there isn't necessarily the same kind of issue there was back when you guys exited the UK business, that once that's removed the numbers look much better. I take it this is smaller issues and -- but probably more -- it sounded like more countries in terms of Ireland, Belgium, Germany.

I would say that's accurate. However, there is only so long that certain conditions -- and it's a different country. Different issues in every country, but there is only so long that people can continue to do certain things in the marketplace. And in Belgium which we are struggling, our global services business there is highly concentrated.

But Antwerp as you know is one of the diamond hubs, and they continued to perform quite well during this period of time. It's our local business that we'll be focused on, but the asset base that's employed in Belgium, if you put them all together, it's still a reasonable business opportunity with room for improvement. Every country has a different formula, and we have plans that we're executing now to improve those. And I'm confident with the addition of Mike over there, we'll be able to hopefully speed that process up.

And one last question just concerning your longer-term goals in improving operating margins. Is there any reason to think that because of the difficulties this year that there may be more of a catch-up in that type number next year, or should the longer-term view still be that your goal is to increase the operating margin by 50 basis points or so?

Yeah, the long-term goals are still in place. And even in this quarter, even in this quarter if you break out our call it our base core business, our CIT business, our ATM business, we were hit hard by frequency issues. In other words, people having service three days a week instead of five days a week, and so our volumes were down substantially.

Our higher-margin growth businesses, with the exception of diamond and jewelry, which is a big exception, showed strong growth, double-digit growth in the second quarter. So our strategy is being executed, and I was actually pleased to see those statistics. I was surprised at how much some of the frequency volume fell off around the globe, but our strategy, our high-margin business, and the interest of people outsourcing to us and the growth of CompuSafe, all those things are right where we expected them to be as we reported in the past.

Okay. Thank you.

Our next question is from the line of Jamie Clement with Sidoti & Company. Please state your question.

Good morning, gentlemen.

Good morning.

Mike, just I obviously saw that your corporate expense projection had come down for the year still versus what you had expensed in the first half. You're looking for a pretty significant increase in the second half, and post-spin-off of Brink's Home Security, and I'm just kind of looking for an update on sort of what the -- why the increase in the second half and also kind of what the normalized range is going forward in your opinion.

So the reason that there is an uptick in the second half versus the first half is really I attribute it to two primary factors. In the third quarter is when we have awards, some of our equity-based grants, and the accounting for those and the population that receive them indicates -- or drives us to expense a significant portion of those up front, so the third quarter traditionally is a high-expense quarter for corporate expenses.

On top of that, in the first quarter we had a one-time $3 million gain from the sale of some property which reduced corporate expenses, so once you normalize from those, you get a pretty even run rate. We're going to come in, as I said, we're about $27 million this year is our current look, and a big reduction from last year. Some of it was stuff that we've talked about, the one-time earned benefits such as some of the [spin] expenses going away and some FX costs going away. The other thing is just real structural reductions in our spending. So I think if you take the $27 million and adjust for the $3 million gain in our -- that we took for the property sale in Q1, you get about a $30 million number, which feels like a pretty good number for us to think about going forward.

Okay. All right. Thank you very much.

Thank you. Our next question is from the line of Michael Kim of Imperial Capital. Please state your question.

Hi, good morning. Just a couple of areas. First on the US side of the business, you talked a little bit about the competitive environment and the improvement that you're seeing in your North American business as it relates to your competition, and is it your sense that you're gaining market share? Any commentary would be helpful. Thanks.

Sure. The competitive environment in the United States continues to be difficult, and what happens in tough times like this is the competition is desperate for business and so we're seeing some really lowball pricing going on, and obviously we're not following that. And that's just going to put more pressure on the competition in my judgment.

And we also had the successful price increase program because our customers appreciate the value proposition we bring to the table, and you're starting to see the benefits of the accelerating growth of our CompuSafe business which is one of the higher-margin businesses.

And I think the third factor is very, very good cost control and some structural reductions in our management structure in that business unit. So you put those three together and I feel very, very good about where we are in these tough, difficult economic times. And our sales pipeline looks strong. There is a series of major bids that are out in the marketplace, and I feel if we are properly positioned to retain what share we have and hopefully gain some share as customers have concerns about the viabilities of some of our competitors.

And then just on CompuSafe specifically, has there been any change in that revenue framework that you guys have mentioned in some of your previous comments?

No. The business model, how it works, what we capitalize, it's all the same.

Okay. And then on a global basis, can you speak a little bit about safety and security costs, what the trends are looking like? Are you actually seeing that continue to elevate with some of the macro headwind or moderating from these levels here?

No. The attacks against the industry continue to grow and accelerate, as does the violence as the economic environment dictates, and that's what always happens. We see our losses have increased up on a year-over-year basis, but not to an alarming degree at all. And as you know, we reserve for these and have insurance for them, whether it be self-insurance or purchased insurance. So we're halfway through the year. We've got another half to go. It doesn't take a lot, a major robbery in some location or a series of robberies in some location. There is always a possibility, and it's part of the risk of our business.

Okay. And lastly on the European operations, can you talk a little bit about the timeline to realign some of the costs -- reducing the cost structure and given the -- some of the labor regulations, is that something we can expect to see through the end of the year or is it your sense maybe longer than that?

I don't think there is -- if we make a major decision, if we make a major decision to do an acquisition or a divestiture of one of these units, we'll do that because that's the best economic course for us to take over the long term. But I don't expect to have $7 million of restructuring expense in Europe this year or next year, unless we make some major decision. But once again we'll do that because that's in the best long-term economic interest of the business.

Great. Thank you very much.

Thank you. Our next question is from the line of Chris Marangi with Gabelli & Company. Please state your question.

Hi, good morning. You I think touched on this in the last set of questions, but another nice quarter of margin improvement in North America. And I was curious, is lower employee turnover, is that a benefit for you? Is that important?

As every company I think in America and probably in the world today is seeing lower turnover, we're seeing lower turnover too. And yes, of course it's a benefit. It helps with our training costs and those types of things, but it's not a big cost driver.

So you think mix and fuel and some of the pricing that you mentioned are much bigger drivers.

Absolutely.

And it's been a while, and I can't remember the last time we talked about guarding on this call. I think what you call security service is like a $300 million or $400 million revenue business. How strategic is that to the rest of the logistics operation?

That's a very good strategic question that we're always looking at. We're basically in the guarding business really only in Europe. That's where 95% of that revenue or even more is based. There is two or three countries that it's strategic to us and it does very, very well. There are some other countries that we're not so sure how strategic it is, and that will be one of the questions that we will be addressing that I referenced with Mike going over to Europe.

Great. And then last question, again kind of strategic, you mentioned two of the brick countries, Brazil and Russia. Any update on what's going on in China or India?

We have a large company, and we're 40% owners, in India that continues to perform very well and grows with the market rate over there and expanding. And in Russia that is a high-growth company that we purchased. It's been our subcontractor for many years, and we are expanding as fast as possible. And obviously that's causing us to incur losses, but we see it as a tremendous opportunity and we're getting fantastic support from the banking community there.

Thank you.

Our next question is coming from the line of Beth Lilly of Gabelli & Company. Please state your question.

Hello Michael, Mike and Ed. How are you today?

Hi Beth. Fine.

I wanted to explore your -- the issues in Europe, and just as best as possible in terms of granularity. Michael, I want to understand, you said that within three years you hope to have that business generating positive EBA. Is that what I heard you say?

That's correct.

Okay. So if I look at your margins for the three months internationally, they were 2.9% and for the six months they were 5.3%. And you said I think to a prior -- maybe to Ian's question you said that the margins internationally will be below North America margins. Is that correct?

The European margins historically have been lower than the North American margins.

Okay. So within three years it's your goal to maybe get those European margins to maybe 6%. Is that a fair goal?

That coupled with our global service revenue that runs through our asset base in Europe, right, and making sure that the asset base is appropriately sized for our business. That would be correct.

Okay. And would you say -- I mean, you mentioned Ireland, Belgium and Germany where the real issues are. Is that --?

Three problem children.

That's the problem children. Are there any other countries or they're all based in those three countries?

Oh, no. We can improve performance in every country we operate in, and that's what management's job is to do every day. We are in Poland, and we're struggling in Poland but it's a relatively small company and it's growing. And we're investing there because it's a good future for us. But elsewhere in Europe we're making money, just not at the levels that have been adequate to have a positive economic value.

So it is competitive issues? Is it cost? Is it structural issues for the way that your business is sized?

Beth, it's different by country. Once again, we run our business by the country other than global services. I talked a little bit about Germany I think on a previous call, and there is an operator in Germany who has been losing tens of millions of Euro and writing off more than that, and that's got a 53% or 54% or 55% share and they just publicly announced that they no longer -- they're owned by a private equity and no longer can afford to continue to operate that way.

And that's going to -- we've been waiting for this to happen for a period of time, and they were bought out of bankruptcy and the new owners thought that density was the issue. And they went out and bought up some more companies and they lowered prices, and they continued to lose money because that just doesn't work. And new private equity entered to spread that risk, and they've all suffered from that. Meanwhile, we suffer from that too, but that can't continue. That can't continue.

Meanwhile, we have a profitable global services business running in Germany also, so it's just a matter in that case you have to wade out and it's painful, but we've got a good management team there and that will be a great opportunity as to whether you shrink that company a little bit or do you make an acquisition and grow that business, or just does pricing move? And it's my opinion that the pricing is going to have to move.

Okay. Okay, great. Well, good luck over there, Mike.

Thanks.

Our next question comes from the line of Erin Caddell with Hovde Capital. Please state your question.

Hi. Can you hear me okay?

Yes.

Thank you for taking my question. Just a couple, and I apologize. I am not as familiar as some others on the call with the issue with the Venezuelan currency and the charge or the impact on the quarter. Can you just explain the $6 million? I didn't know whether that was you had to buy $6 million in unfavorable exchange rates or that was the loss, and what that exactly results from again.

You hit it right on the head. You had the right answer. You answered your own question.

Okay. So it's a $6 million loss, but why is it?

So the business in Venezuela is -- it operates using the official exchange rate, and that exchange rate has historically been available to run your business, to buy, say, for an example, parts for aircraft. Because of the economic conditions in Venezuela, I suspect the Venezuelan government has slowed down the approval of buying US dollars to buy things like aircraft parts. So we have had to go to the open market in Venezuela to get US dollars. The exchange rate --

Is worse on the open market?

-- is worse on the open market.

Yeah, okay.

So that's what drove the expense.

Got it. Okay. I understand. Thank you very much.

You're welcome.

Thank you. There are no more questions at this time. I would like to turn the floor back over to management for closing comments.

That's all we have. Thanks for joining the call, and we'll talk to you next quarter.

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