Brinks Co (BCO) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Brink's Company Third Quarter 2009 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator's 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 for The Brink's Company. Thank you Mr. Cunningham, you may now begin.

Thank you, Chris. This is Ed Cunningham, good morning, thanks for joining us for this mornings call. It will proceed as follows, CEO Michael Dan will review our financial results and outlook, then CFO, Joe Dziedzic, 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 website at www.brinkscompany.com.

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 as well as non-GAAP reconciliations are 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 statement 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, thank you for joining our call this morning. I'm going to start by summarizing our third quarter results and our outlook for the full year. I will also provide some initial comments and our outlook for 2010. Then, Joe will follow up on my comments and cover several non-operating items that affected the quarter.

Today, we reported third quarter earnings of $33 million or $0.70 per share, up from $30 million or $0.64 last year. This quarters results, however, included an after-tax gain of $0.29 relating to the acquisition of majority position in Brink's Arya, our subsidiary in India. Excluding this gain, earnings came in at $0.41 due to lower segment operating results, increases in our tax rate and higher retirement plan expenses.

Joe will cover the details regarding the acquisition gain, taxes, retirement plan expenses, and other corporate level expenses. I'm going to focus on our segment operating results which continue to be affected by the weak global economy.

Total revenue declined 1% to $802 million, although it was up 2% after adjusting for currency rate changes. Organic revenue which excludes the impacted currency, acquisitions, and divestitures, declined 2%. Higher average selling prices in Latin America and North America were not enough to offset broad volume declines in our CIT and Global Services divisions.

Excluding the acquisition gain, segment-operating profit declined 9% to $62 million, yielding an operating margin of 7.7% versus 8.4% last year. The 11% profit decline in Europe, a 12% decline in North America, and slightly lower profits in Latin America reflect the widespread pressure on pricing and more importantly service frequency in CIT and Global Service operations.

Before getting into details by regions, I want to offer some perspective on our 2009 performance and initial outlook for 2010. In almost every region, results in our CIT operations are being affected by pressures in price and more importantly service frequency as customers react to the continuing weakness in their markets. In Global Services, profits remain well below 2008 levels due to the severe contraction in the diamond jewelry market that began in last year's fourth quarter.

When I step back and reflect on the business conditions we faced over this past year, I realize what an admirable job our employees have done. On a year-to-date basis, organic revenue is up 1% and it is up 3% if you factor out last year's monetary conversion project. Excluding the acquisition gain, the year-to-date segment margin is now 6.3%, not satisfactory by any means. We can and will do better. But considering the obstacles faced by Brink's and our banking and retail customers, we are holding up well and poised for improvement ahead.

For the full year, we expect organic revenue growth to be in the low single-digit range. Our full year segment operating margin, excluding the acquisition gain, is expected to be in the lower end of the range between 7% and 7.5%. It is important to remember that the fourth quarter is typically our strongest and we are beginning to see some additional signs of recovery in certain market segments. As we move closer to 2010, the holiday season will give us some insight into the strength of a potential rebound in the US economy and to a large extent the world economy.

Our initial target for next year is to grow organic revenue in the lower to single middle-digit range and improve the year-over-year segment operating margin by at least 50 basis points. This outlook assumes that a gradual improvement in the global economy as 2010 unfolds. An accelerated recovery would drive revenue and margins higher, but we're not counting on that at this point. We'll update you on our outlook when we report our fourth quarter results.

I will now cover third quarter results in a little more detail, starting with international operations. Revenue for international operations was up 1% to $579 million with higher selling prices in Latin America and about $27 million of acquisition related revenue were largely offset by lower sales in Europe and the impact of unfavorable exchange rates. On a constant currency basis, international revenue was up 5% or $27 million. Operating profit for international operations, excluding the acquisition gain, declined 9% to $51 million, yielding an operating margin of 8.89% versus 9.8% the previous year.

Most of this unfavorable comparison was driven by poor results in Europe where revenue and profit declined 9% and 11% respectively. Europe has been hit hard by the global economic crisis, making our turn around efforts there ever more difficult. Throughout the region, there is pressure on pricing, service frequency and margins. Our Global Service business continue to be hurt by the downturn in diamond and jewelry markets. Improving year performance continues to be our biggest challenge and a major focus of our efforts.

Operating profit in Latin America declined slightly despite a 17% increase in revenue as economic conditions are forcing customers to reduce frequency. The revenue growth was due mainly to our acquisition in Brazil and inflation driven price increase, which did not fully offset our cost increases.

As always, it's important to acknowledge the greater risk in Venezuela, relating to safety security, geo-political issues, inflation and the threat of currency devaluation. We have been managing these risks for 50 years and will continue to do so. It appears likely that Venezuela will soon be designated as highly inflationary for accounting purposes. The impact of this designation is related mainly to taxes and has no cash impact. Our recent filings contained disclosures regarding this issue and Joe will cover this in more detail.

Excluding impact of acquisitions, revenue and profits declined in a relatively small Asian Pacific operation, mainly due to the weak diamond jewelry market. During the quarter we completed two acquisitions in this region that are integral to our long-term growth strategy. I'll cover both of them in details in a few minutes.

In North America, revenue declined 6% to $223 million and was down 5% on a constant currency basis. Operating profit was $10 million versus $12 million last year and the operating margin was 4.7% down from 5% last year. As in other regions, our customers have reduced their service frequency in both CIT and Global Services.

As most of you know, in prior calls we have expressed confidence that North America would deliver steady improvement over a difficult 2008. First quarter profits were up, second quarter results improved over the first, we expected this sequential improvement to continue into the third quarter. It didn't happen as third quarter profits and margins declined from the second quarter profits levels on flat revenue.

We are disappointed in North American results because they represent a step backwards in our improvement efforts. Whether you look at results from a sequential or year-over-year perspective, the story is the same. CIT profits continue to be pressured by reductions in the stops requested by our customers and our Global Services unit continues to be hurt by a large drop off in the diamond and jewelry business.

The fact that our customers are looking to cut costs has clearly had an impact on our business. But it is also an opportunity that plays into our strengths as these same customers are looking to outsource. Despite third quarter results, I'm confident that Brink's North America is well positioned to help our customers to outsource their cash related needs and the results going forward will improve. The pipeline looks good.

Our proprietary CompuSafe Service is an excellent example of how Brink's is improving efficiency for both our retail and banking customers. As we noted in our last call, we expect the pace of third quarter installs to decline as certain customers accelerated third quarter orders into the second. This quarter, we added 338 net installs which increased our installed bases to about 9,800 units. This was a little bit lower than expected, so we'll take a strong fourth quarter to reach our initial target goal of 11,000 units. In any case, we are on a track to deliver full year growth in the installed base of roughly 35% to 40%.

Last year, our CompuSafe Service generated about $50 million in revenue and we expect 2009 revenue from the service to grow by at least 20%. In terms of profit contribution, it is one of our higher margin lines of business. So, as our customer base expands, it should drive revenue and margins higher over time.

That concludes my overview of results. To be sure, it was a tough quarter under difficult market conditions but we remain optimistic. I feel good about our people, our business, our competitive position and our growth prospects. Economic conditions will continue to test us, our customers, and our competitors.

As the global leader in secure logistics, we will emerge as an ever-stronger company. We have the world's premier brand, global footprint and the broadest array of value added services and the financial strength to adjust our challenges as we pursue new growth opportunities. We remain highly disciplined and focused on those things that we can control, they include cost reductions, safety security, and of course, customer service.

We will also continue to accelerate and 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 new growth potential. Acquisitions made earlier this year in Brazil and Russia demonstrate our commitment to growth. Our acquisition in Brazil continues to deliver solid results in one of the worlds fastest growing economies. The Russian acquisition, while small, is an important step in our efforts to get in on the ground floor of a very large and growing market.

During the third quarter, we closed on two more acquisitions, one in India and another in China. The acquisition or majority interest in Brink's Arya, based in Mumbai, is exciting because it expands our presence to one the largest cash service markets in Asia. India is already an important hub for the transporting precious metals, diamonds and jewelry through our Global Services unit. We will use our growing position there to explore additional high growth opportunities.

The acquisition of ICD China demonstrates our commitment to using the powerful Brink's brand to expand into new security related markets which is a critical element of our long-term growth strategy. ICD designs, installs, maintains, and manages high quality commercial security systems for a variety of large, well known global companies that are expanding rapidly throughout Asia. In addition to providing an entry point into this fast growing commercial security market in Asia, ICD supplements our existing presence in brand awareness in the region.

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'll strengthen our position as the world's premier provider of secure transportation from cash management services.

I'll now turn it over to Joe.

Thank you, Michael, and good morning, everyone. Michael covered the main issues from an operating perspective, so I'm going to provide some details behind the results. I'll also touch on some issues related to Venezuela, taxes, retirement plan expenses, corporate expense and our liquidity position.

I want to start by reinforcing Michael's perspective on our performance thus far in 2009. While there is certainly room for improvement, our year-to-date organic revenue growth and segment margin rate have held up reasonably well, especially, when you consider the external environment and its impact on our customer base.

For example, Michael cited the severe drop off in our diamond and jewelry volume as the key driver of the year-over-year profit decline. The global market for diamond jewelry is expected to fall 16% this year. In the US, it's estimated that 900 specialty jewelry stores will close this year on top of the 1,500 store closings last year and based on reports from publicly traded jewelry retailers, inventories remain high while prices have declined.

DeBeers recently reported that its diamond production declined 40% in the third quarter and is down more than 60% year-to-date. Full year production is expected to be down 50%. The good news is that they have restarted production at several locations and their third quarter production was 43% higher than in the second quarter. So, demand appears to be stabilizing albeit at significantly lower levels. We too are seeing some initial signs of stabilization in the D&J industry, but it is still two early to call it a recovery.

On the banking side, it's hard to miss the headlines about this year's US bank closures which now exceed 100, more than four times the number of closings last year. As far as Brink's goes, the key thing to watch is not bank closings but branch closings, which have been relatively few in number.

Most of the closed banks were small and the vast majority of their branches have been absorbed by surviving banks. However, the sheer number of bank closings is news and it certainly supports the notion that banks are doing whatever they can to cut costs. In many cases, that means reducing their CIT Service frequency and pushing for price concessions.

Despite these market conditions, our organic revenue is up slightly on a year-to-date basis and our 7% to 7.5% target for the full year segment operating margin rate is attainable. In fact, most of the 22% year-to-date decline in segment profit is due to last year's profits from the currency conversion project in Venezuela. If you adjust for this, the profit decline is significantly smaller. Excluding the $50 million of high margin revenue from the project, organic revenue is up 3% so far this year.

The economic outlook is uncertain, but we remain confident that whenever the economy recovers, Brink's will emerge as an even stronger competitor in the markets we serve as well as in some new markets. The fact that we are aggressively pursuing the growth strategy that Michael covered is an indication of our confidence.

Let's review some of the non-operating items in the quarter. I'll start with the $14 million acquisition related gain. In September, we had announced that we had acquired a controlling interest in Brink's Arya, a cash handling and logistic company based in Mumbai, India. Prior to the close, we owned 40% and we now own 78%. The $14 million gain is the result of the revaluation of the pre-acquisition investment in accordance with FAS 141R. It represents the difference between the fair-value and the book value of our original 40% position prior to the acquisition. Excluding this gain yields of $0.41 EPS versus $0.64 EPS last year.

The primary driver of this EPS decline is an increase in our effective tax rate to 34.7% up from 27.9% last year. The increase is due primarily to a reduction in estimated tax benefits from inflation adjustments in Venezuela. The negative impact of these inflation adjustments were partially offset by the benefit of the non-taxable gain related to the acquisition in India. The effective tax rate for the full year is now expected to be between 26% and 29%, an increase over our previous estimate of 23% to 26%.

While we are on the subject of inflation, taxes, and Venezuela, I want to cover a topic from our recent SEC filing. It appears that Venezuela is likely to be designated as highly inflationary for accounting purposes, perhaps as soon as January 1st of next year. Our recent disclosures explain the impact this will have on Brink's in a fair amount of detail, which I will summarize now.

The effect of the designation is non-cash in nature and is related mainly to taxes. Our tax rate will increase because US GAAP prohibits the recognition of deferred tax benefits that result from the inflation based indexing of assets and liabilities when a company begins reporting under the highly inflationary tax rules. In other words, when we begin using the US dollar as the functional currency.

Using year-to-date 2009 results, as an example, we estimate that the tax increase would have been $8.9 million. The net income impact on Brink's, considering our 61% ownership, would have been a reduction of $5.4 million. Our consolidated, effective, corporate income tax rate for this period would have increased from 29% to 36%. Once again, this change in US GAAP reporting has no effect on cash taxes.

Additionally, our net monetary assets held in Venezuela, which were about $112 million at the end of September, would be re-measured monthly at the prevailing official rate with any adjustments in transactions -- transaction gains or losses recognized in earnings. Non-monetary net assets, such as fixed assets would be frozen at the official rate at the time of the designation. So, as long as the official rate does not change there is no impact on the remeasurement of monetary assets. You can find more details in our third quarter 10-Q which we will file very soon.

Third quarter earnings were also affected by a $5 million increase in retirement planning costs due to the decline in plan assets caused by the equity market collapse in 2008. This is slightly better than the first half of 2009 cost due to the voluntary contribution in the third quarter. For reference, most of these costs are included in a former operations expense. We have taken a proactive and tax efficient approach to addressing our pension obligations.

On August 20th, we made a voluntary $150 million contribution to our US retirement plan to improve its funded status. The contribution included $92 million of cash with a balance of $58 million comprised of new issued shares of Brink's common stock. We have already received $30 million in cash from tax benefits related to the contribution, effectively reducing the cash portion of the contribution to $62 million, which we funded with debt. The $58 million equity infusion enabled us to increase the contribution, thereby increasing the tax benefit while decreasing the use of debt.

Based on a re-measurement of assets, as of July 1st of this year, the contribution reduced the under funding of the plan from $308 million at the end of 2008 to $104 million at the end of the third quarter. So, in effect, after getting the $30 million tax benefit, we used $62 million of debt and $58 million of equity to generate a $200 million plus reduction in the under funding.

At year-end, we will re-measure the pension plans as required by US GAAP. In addition, this year's pretax earnings are expected to improve by approximately $4 million as a result of the contribution as we now forecast pension income of $6 million versus a prior estimate of $2 million.

The $4 million of pension credit will be partially offset by increased borrowing cost. For the net effect of the contribution, including borrowing costs and the impact of issuing new shares is expected to be accretive to earnings of approximately $0.02 per share this year and $0.04 in 2010. The contribution is also expected to reduce required minimum funding of the plan in 2010 and 2011 by $94 million, from $110 million to about $16 million.

I'll finish up with a few brief comments on corporate expense, currency impact, liquidity, and cash flow items. Third quarter corporate expense declined by $9 million. The biggest single factor in the decline was a $5 million reduction in foreign exchange transaction losses. We also received $2 million royalty income from the former home security business. General and administrative costs declined $3 million and are down $8 million year-to-date. We expect corporate expense to be about $27 million for the year.

Regarding the impact of currency changes, the US dollar has weakened over the course of 2009, but it's still stronger compared to year ago levels. As a result, third quarter revenue was reduced by 3% or $26 million. The negative impact on operating profit was $2 million. On a year-to-date basis unfavorable foreign exchange rates due to the stronger dollar reduce revenue by 8% or $197 million and operating profit by $8 million.

Looking at our liquidity position we ended the quarter with $234 million of cash and $269 million of debt, resulting in a net debt position of only $35 million, an increase of only $20 million, even after two acquisitions and the pension contribution within the quarter. We have a $400 million committed revolver and access to smaller uncommitted credit facilities. We've used $178 million of the $400 million revolver and therefore have available committed capacity of $222 million. Our uncommitted credit facilities also have available capacity of $40 million.

Capital expenditures for the quarter totaled $38 million and appreciation and amortization was $34 million. Full year capital spending is expected to be $185 million with depreciation and amortization to be approximately $135 million.

I'll close by saying that we feel our employees have performed well under very difficult circumstances. The current weakness in our in-markets, especially the diamond and jewelry market is clear and well documented. The pressures on the banking industry are obvious as well. The customers have been struggling through an economic crisis that has affected every country in which we operate. Although we are seeing some signs of economic stability, I wouldn't call it a recovery.

I joined Brink's at the second quarter in its 150th year of operation, so it was clear to me that this was a very resilient company. Regardless of the timing of the recovery, we're confident that the resilience of our people will lead us to emerge from this difficult period stronger than ever.

That completes my commentary. Chris, let's open it up for question.

Thank you. We will now be conducting a question-and-answer session. (Operator's instructions).

Our first question comes from the Clint Fendley with Davenport. Please proceed with your question, your mic is now live.

Good morning, gentlemen.

Hi, Clint.

Obviously, a minimal segment margin improvement is expected for 2010. I wondered if you could speak briefly to the assumptions that went into that guidance as it pertains to your global services business. Is this something that should come back slowly over time given some of the retail closures we have had here?

Most of the decline in Global Services is strictly limited to the diamond and jewelry business and the holiday season will determine where we are next year with that. It's very difficult for us to see. Obviously, in the third quarter, August is always a dead month in that industry and business. September actually showed a little bit of strength as inventories came back into line and some of these mines have come back into production, all of which were in that whole chain.

But we really don't have a clue of what is going to happen next year in this segment. There are some people in the diamond jewelry business, there have been some recent articles in the trade press in that industry that it is going to be a slow recovery in 2010, and I would tend to buy into that.

Okay. Thank you, that's helpful. With regard to North America, your pricing and volume thoughts as we think about 2010?

Yes, I am still pretty confident on North America. I am disappointed on the quarter results. But I am pretty confident. Banks basically reduce service frequency on their ATM business and our cash in transit. There is record low interest rates so they are willing to have more cash on hand then in a normal environment. And they are under tremendous strain.

So, we are working as best we can with them. But it is very, very difficult to overcome the volume declines on our routes. Our trucks and our crews, our business partners are still out there servicing our customers but it is just less revenue volume on those same asset base.

I think the other point that I would like to make for everybody's benefit is, when you go through a tough economic environment, like we are in today and our customers are under pressure, which obviously, puts us under pressure. It is time to make choices of what you are going to do. I am consciously making a choice and I am going to continue to invest in our solutions business, I am going to continue to invest in our IT and our Solutions business because this period is going to end, whether it is 2010 or 2011. And I am positioning this company for long-term future value growth. I am not worried about this particular quarter.

Thank you, that is very helpful, Michael. Switching gears for one moment. Joe, I wondered if you could update us on what you were thinking of the accounting treatment for the Venezuelan results, realizing that it is extremely difficult to know what the government may do with regard to their currency. Is it possible that you could revalue your results on a market basis even if the government didn't do so?

I tell you that possibility clearly exists. The accounting community has been discussing and evaluating what the appropriate exchange rate is to use for US listed companies operating in Venezuela. To date, they have said that if your assumption on dividend repatriation is the official rate, which is what most companies are using, then you have to use the official rate. That is the guidance. We continue to file for dividend repatriation, it has significantly slowed as it has for most companies operating in Venezuela. So, it is clearly a possibility and it is something that we look at on an ongoing basis.

So, does that mean if you were to repatriate your dividend at the market rate then that would open the door to you revaluing the results here on market rates, as well?

That is clearly a possibility from an accounting standpoint, yes.

Okay, then final question, on the tax rate for the fourth quarter. I wonder if you could explain what went on, here, why it was higher for the third quarter?

The increase in the third quarter is driven, primarily, by a change in the estimated inflation rate in Venezuela, which sounds confusing, on the surface. In Venezuela the tax law requires to, each quarter, to write up your assets, your monetary assets and your equity at the government official inflation rate. We had been using an estimate that the IMF published earlier this year, of 36% inflation in Venezuela to calculate the tax impact of this change. The IMF, recently, came out about two weeks ago with a revised forecast reducing that inflation estimate down to 29%.

So, the tax benefits that we have been recording, throughout the year, based on 36% have to be reduced down because of the lower inflation estimate. That is the primary driver of the higher tax rate in the third quarter, which is, really, a year-to-date adjustment because the first two quarters were we using the 36% inflation. And that will also have an impact on the total year. So, we have revised the total year tax estimate, tax rate to 29% based, primarily, on this Venezuela change.

Great, thank you.

Our next question comes from the line of Ian Zaffino, of Oppenheimer & Co. Please proceed with your question, your mic is now live.

Great, thank you. As far as what is going on in Europe now, can you give us an idea of what you put in place, already, what you intend to put in place and how is that going, as far as the turn around there? And I have a follow up, thanks.

As you know, we replaced the head of Europe with Mike Cazer, our former Chief Financial Officer, who has started duty over there on September 1st. He is getting his feet on the ground and working very, very hard with his team trying to deal with the situation which is being effected by the severe volume declines that we are experiencing Europe. Which are even more so than they are in North American or Latin America, needless to say.

We have made a couple of changes in country management, over there, during the quarter and we have some heavy lifting to do, but I am confident that we will get it done. We have this headwind of the economy over there that we have to deal with and add to that the effective of diamond jewelry, that we talked about previously in the call, also affects Europe. At the end of the day, the European community and the US are vast consumers of finished and polished jewelry and so they are most affected by that decline.

Do you have a target of margin expansion or anything you want to see over in Europe?

The over all goal is to be EVA-positive everywhere we operate and at the end of the day we are, except in Europe. Our goal is, over a three year period, is to become EVA-positive in Europe. Everybody understands that throughout the organization. That is how we are going to measure our success over there. We will improve operations in Europe and the economy is what is holding us back over time.

We also suffered a lost of a pretty substantial guarding contract in France, which hurt revenues, during the quarter, and that will affect our revenue growth on an ongoing basis. But we are not going to do guarding contracts at a loss and if someone wants to price the business below that we think it is worth we are just going to walk away from it.

Okay, and just the final question would be how you think about this business and how should we be thinking about it? Is this not going to recover until GDP starts growing again? Is it, kind of, a late cycle recovery? How should we be thinking about that? And just give us insight into the tax bracket for next year. Thanks.

Okay, I think on our base CIT business, historically, when we have gone into recessionary times we always lag the general economy, going in, and we lag, coming out, a little bit. So we have to sit back and say what is being affected? The bank business is going to be tough sledding, in my judgment. But, the banks are under so much pressure we have more opportunities today in the pipeline for banks looking to outsource their non-essential services such as their backroom cash processing and transaction business. So, that is where our pipeline is looking good. I think, over time, that plays to our benefit.

On the retail side, I am not sure how fast that recovery is going to come. A lot of retailers have disappeared and the ones that are still out there are getting frequency of service at three times a week or four times a week instead of six or seven times a week. When is the pressure, on them, relieved enough that they go back to the service volume? That all has to do with the overall economy, the overall confidence of the consumer and that pace of recovery, your guess is as good as mine.

Okay, and then the tax bracket?

You know on taxes, our best estimate for 2009 is year to date tax rate of 29%. For 2010 our best estimate would, again, be 29% with one exception I'll highlight. If Venezuela is designated highly inflationary, based on their inflation rates in the fourth quarter, which everyone seems to believe they will be by January 1. The tax rate would go up to about 36%. Again, it is non-cash, but it is a change in how we would be reporting the tax rate with respect to Venezuela.

Okay, great, thank you very much.

Thank you, our next question comes from the line of Jamie Clement with Sidoti & Company. Good morning, gentlemen.

Good morning, Jamie.

Mike, you used the word volume, a fair amount, when it comes to talking about the CIT business and I was trying to be a better understanding of what you are saying. When you talk about reduced volume are you talking about banks changing the way they are authorizing you or they way they are wanting their CIT services done? In other words, is it a decline money through the system or are then actually changing how they want the routes managed and that kind of thing? And if it is partially the latter are they, effectively, shifting the cost of risk onto you?

Good question, Jamie, and I will try to give you some perspective and some colors to understand it. On the bank side there are basically two factors that are running through. One is more permanent and one is, I think, driven by the economic conditions. The permanent one is our major bank customers, the largest financial institutions in the country, have accelerated installation in the last 24 months of the ATM machines that don't require daily service to pick up the checks, so that the checks clear and people get credit on time which is very, very important because there are laws that you have to give credit.

They have put in check imaging capturing ATM machines. So the need to service that equipment has sequentially declined permanently. So we only go to that machine to put cash in. We don't have to go to that machine to pick up checks. We used to do that every day and we might have to go to that machine twice a week or three times a week for cash purposes. That is not going to change and as more check imaging ATMs are installed the service frequency of ATMs will be affected.

On the variable side is the economy where the banks will be will to have a larger portion of cash in their facility because of the low interest cost rate. So, instead of having five day a week service we might have three day a week service or two day a week service, because they are under incredible pressures. You translate that over to the retail side, it is just a simple matter of retailers trying to survive, instead of having five day a week service or seven day a week service they want five time a week service or three times. That will come back over time.

Now, that said, operating margins, forget the acquisition gain, our operating margins for the quarter were 7.7% with all this negativity. Let's not lose sight that that is not a bad result. It is not as strong as our normal third quarter, but that is nothing to walk away from. 7.7% return on margins on a global basis in this economy shows that we have had incredible expense control managing our routes and cooperation from our front line employees all over the world, to detail with this tough economic situation. And I am real proud of them.

Okay, Michael thanks for that color. Last question, it seems as if the Chinese are setting the stage to, potentially, open up a CIT business for some minority international investment. Can you give us your sense of what is really going on there? And also your strategy with respect to the region?

Yes, obviously, we are very, very interested in China. We have been operating in China for over 20 years. We are in twelve cities at the current time and the Global Services business which has to do with moving valuables in and out of the country and within the country, we subcontract right now to the police who operate the security services, over there. The pending legislation change is going to open up to some degree with is going to allow minority ownership of CIT type companies in China. We will look at different opportunities which will be opportunistic to do that.

On the other hand, you know the market is so large and so big, that we are doing very, very well subcontracting the most capital intensive part of that business. So, there might be a opportunity if these police agencies are spun off into separate entities, which is a real possibility, over there, for us just to have subcontracting arrangements in many parts of China. We might decline to enter into the capital-intensive nature of the business. Now, we already have vaults there for our Global Services business and we can play it as it comes and be wide open and flexible.

Don't forget, we just had this acquisition of ICD which is a large player in commercial security integration over there and helping to spread our brand name and we believe there are great opportunities on that side as a new line of business, in that particular market. We are wide open and will be opportunistic as we go and if we have an opportunity to buy 49% of one of these policed agencies, that makes sense to us, we will do so.

Thank you very much.

Our next question comes from the line of Chris Marangi of Gabelli & Company. Please proceed with your question, your mic is now live.

Good morning, first question on CapEx, which was relatively low this quarter as percentage of sales and versus last year. You maintained your guidance for $185 million for the year. I think you are at $113 million year-to-date. Some of that is clearly due to CompuSafe. Are you stretching your assets or what is the discrepancy in the fourth quarter?

We have a number of investments lined up in the fourth quarter, globally and it is just, historically, our spend tends to be higher in the second half of the year. So, our current estimate is a typical fourth quarter spend for us, which gets us to the $185 million. But we continue to see the higher CapEx from the CompuSafe growth.

There is also the impact, this year from purchasing some armored vehicles versus leasing as our leaser was unable to fulfill for us, which we are working on addressing. Then, we continue to make investments in facilities and armored vehicles to protect our people throughout the world. As the global economic environment we are operating in continues to increase the danger and the threat of attacks and violence.

So, primarily it is a timing issue?

Yes.

Second question on Venezuela. You just celebrated 50 years there, maybe you could put it into historical context for us. The country has been through previous periods of hyperinflation. Maybe how you think about putting capital in. I know you haven't put capital in, in many years. But more importantly taking capital out. How you think about that, would you just wait for the authorities to approve the dividend or when would you take the cash out?

Obviously, we are in line to apply to take the cash out. That would be our preferred course. But that does take government approval and we are looking at a variety of ways to mitigate if we don't get that approvals. Including investing that cash and other hard real estate type assets in Venezuela to protect our shareholders money. But we have been through tough times, over 50 years.

We were nationalized, went from 100% to 15% in the 1970s and then bought back up to our current position about 61% today. So, that is what comes with Latin America, it is a high-risk environment, it is a high reward environment. One of our goals is to continue to grow the business so that Venezuela isn't as large an operation part of Brink's, but at the same time it is a key one. It has been a great subsidiary for us for many years.

Great and my last question. How important is the precious metals business to you?

The offsetting thing to diamond and jewelry has been precious metals. It is an important segment of our business. I will tell you in the global economic climate we are in, there is a huge demand for gold storage outside the banking system and banking industry which we are capitalizing on and that is offsetting some of the decline in the diamond and jewelry business.

Thank you.

Thank you, our next question comes from the line of Steve Velgot, with SIG. Please proceed with your question your mic is now on.

Michael, I was hoping you could address what market share looks like in the US, particularly the CIT business. I was under the impression there might an opportunity to pick up some market share in the US. I was wondering if you could update us on your progress there?

Our market share is holding strong and our pipeline shows that we will be gaining share in the coming year. It has been a volume issue, it is not a share issue. Our investments in IT Solutions and Solution Selling, our I-Vault, I-Cash, our CompuSafe, all those point in the right direction. Once again, I said earlier in the call this is about choices and my choice now is to be opportunistic to continue the investments in the IT Solution selling to take advantage in the difficult times we are in. We are fortunate here at Brink's to have the management skill, the talent, the balance sheet to be able to do that.

Then just a strategic question. The things you have done buying in the Indian JV and the Brazil acquisition. Other than China are there areas that you are focused on or is China the next bit are that you think you could concentrate your efforts in terms of potential M&A.

I would tell you anywhere in Latin America or in Asia is very attractive to us. There are some possible opportunities in Europe which would strengthen our competitive position in a couple of countries and we are also have a few greenfield startups that will take place in Africa that we are excited about. Remember, we operate in most of these places through our Global Services position. Some of these are just expanding our footprint and our lines of business and to further strengthen our company.

I suppose the one follow-up would be should be look for some sort of update maybe by the next conference all in terms of what Mike Cazer has been able to find as he has taken over the European operations.

Michael doesn't have a magic wand. What Michael has is a great management team and he is a great leader. I think he will have a strong effect in Europe over time but he doesn't have a magic wand. I think the next flavor you will get from where we are with Europe will probably do with investor day that we will have in the next six months. And probably in that point in time we will bring Mike over and other regional leaders and make a presentation for our investor base.

Great, thank you.

Our last and final question comes from the line of Michael Kim with Imperial Capital. Please proceed with your question, your mic is now live.

Hi, good morning. A couple of questions. Michael, you mentioned a strong focus on expense control and managing your routes. Can you talk a little bit more about further opportunities to take costs out of your business? Provide a framework of what your objectives are for cost savings in the next year?

Obviously, we have had a tremendous focus on trying to take costs out and trying to stay ahead of this curve. But I am not going to cut into the muscle or the bone. Which is why I said this is about choices. I could try to take out another $15 million or $20 million of expense but I think that would damage the long term potential of this company, especially with the outsourcing and solution selling, and our IT investments. So that is about choices. That is the choice, I think, is in the best interest of our shareholders over time and I am going to stick with it.

With that said our people are managing our route, our structure, every single day. Employee relations is key to that, as you know. Our employees have responded well. We are not planning on a big economic recovery, here, so we are going to be laser focused on expenses which we think are not critical. We are not going to let up on that, but at the same time we are making that conscious decision to continue to make sure that our competitors position our solution selling capability is unmatched going forward.

Would you anticipate, then, minimal, if any, restructuring costs into next year given that strategic decision?

We always plans for restructuring costs. Especially, in Europe, that is all baked into our plan. It is preliminary guidance that we gave earlier in the call today. But I don't expect any major restructuring expense to take place that is any higher than any normal year.

Then we have talked a little bit about service frequency, particularly in North America and other areas for CIT, but with the competitive environment, can you talk a little bit about pricing? Has any competitors become significantly more aggressive or can you talk a little about what you are seeing out there?

Always pricing gets difficult. The more desperate the competitors become the only way they can gain share or try to replace frequency is to lower cost. I can tell you that never works in this business or industry. All it does is increase risk and put more pressure on margins and more pressure on the routes and our pricing discipline is legendary, we are maintaining it the best we can.

You have to know when to give up a little bit on price and we do it but it is the exception to the rule. I expect the competitors to cut expenses and to lower price and our people know how to deal with that. It is done on a city by city basis and our managers know who to manage that risk and we will steer our way through this and our people who choose that route will end up paying that price over time.

Typically are the contracts adjustable throughout the year or are they one-year contracts. On average an annual contract or how does that normally play out?

In the base business which I almost call the commodity business, if it is a retailer it is a year contract if it is a bank it is usually a three to five year contract. That is our base business. But in our solution selling business our CompuSafe business our Cash Logistics businesses they always tend to be three, five, six year contracts and become very, very sticky over time. As you know we are all focused on the higher margin stickier business with the longer terms on it.

Lastly, on service frequency. Are there any segments of the market you are starting to see stabilization and maybe an opportunity of improvement into next year?

There was a little hope in the diamond and jewelry, but not a lot. Obviously, the holiday retail season there is more velocity. How that plays out, we always have more volume in the fourth quarter, so I expect to see a pick up here. The question is what is the rate of that pick up in the fourth quarter as far as volume goes and then, of course, what happens come January. How is the holiday season sales?

Great, well thank you very much.

Thank you.

Thank you, ladies and gentlemen this does conclude today's teleconference. You may all disconnect your lines at this time and we thank you all for your participation. Have a wonderful day.