Brinks Co (BCO) 2009 Q4 法說會逐字稿

Greetings and welcome to The Brinks Company fourth 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 Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ed Cunningham, Director of Investor Relations for The Brink's Company. Thank you, Mr. Cunningham, you may begin.

Thanks, Rob. This is Ed Cunningham. Good morning and thanks for joining today's call. It will proceed as follows. CEO Mike 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 Web site at BrinksCompany.com.

Before turning the call over to Michael I want to point out a few things about the release and today's call. First of all, our comments today will focus primarily on adjusted results which are non-GAAP financial measures. Adjusted results exclude the following items. A $118 million tax evaluation allowance release, a $23 million charge on the repatriation of Venezuela dividends, and a third quarter gain of $14 million on an acquisition in India. The adjusted figures also reflect the impact of reporting results from Venezuela at the less favorable parallel market rate. Details regarding adjusted results and a reconciliation to the most direct and comparable GAAP results are provided by quarter for both 2009 and 2008 at the end of the release.

There's also a summary of selected results and outlook items on page 13. It provides our current forecast for 2010 revenue growth, segment operating margin and several other items including non segment G&A costs and US retirement plan expenses. In regard to the retirement plan expenses, we have included estimates for the next five years on funded status, costs and payments. These details are on pages 17 and 18 of the release.

Finally, we combined our corporate and former operations expenses into a single category called nonsegment results. The intent is to clarify the distinction between segment and nonsegment. We hope this information is helpful especially for those of you who model our results and make projections.

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 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. Michael?

Thanks Ed. Good morning and thank you for joining our call today. This morning we reported fourth quarter income from continuing operations of $2.53 per share versus $0.83 in 2008. These results include a variety of items that, when combined, pushed earnings up but make it difficult to assess our operating performance. Joe will cover these items in more detail. As Ed mentioned, the focus of my comments will be on adjusted results.

Fourth quarter adjusted results were $20 million or $0.41 per share, down from the $31 million or $0.67 per share in 2008. Organic revenue which excludes acquisitions and currency impact was flat. The full year adjusted earnings were $66 million or $1.39 per share, versus $107 million, or $2.29 per share in 2008. Organic revenue for the year was flat. For 2010, we expect low to middle single digit percentage organic revenue growth with an operating segment margin and 7% to 7.5%. This revenue growth outlook is based on 2009 adjusted revenue of $2.9 billion.

Our 2010 outlook assumes improved results in all regions especially Europe where restructuring costs could be significantly lower than the $14 million we spent in 2009. Joe will cover the assumptions behind our forecast in a few moments. Total adjusted revenue for the quarter was $788 million, up 12% but flat on an organic basis. Segment operating profit declined 7% to $52 million, yielding an adjusted operating margin of 6.6% for the quarter. Profit declines in Europe and North America offset another strong performance in Latin America where organic rose 16% and profits were up 41% due to volume growth in several countries including Venezuela, where the ongoing economic and political turmoil increased cash movement throughout the quarter. The Brazilian acquisition added $2 million to the profit increase in Latin America.

In Europe, organic revenue was down 5% due mainly to the loss of certain guarding contracts in France which accounted for $12 million of the revenue in a year ago quarter. Profits in Europe fell 36%, due mainly to a $6 million increase in severance costs related to the lost guarding contracts in France and turnaround efforts in Belgium. Pricing and volume pressure persists in our CIT operations throughout Europe and the diamond and jewelry markets there remained weak compared to historic levels. Improving Europe's performance continues to be our biggest challenge. We are pursuing cost reductions on several fronts, and assuming a moderate pickup in the European economy 2010 results should improve.

Revenue in the relatively small Asia Pacific operations was up 48% while profits declined, mainly due to lower diamond and jewelry demand. The revenue increase was due to acquisitions in India and China. In North America, organic revenue was down 3%, lower volume in CIT and Global Services were partially offset by higher selling prices. Profits in North America fell 10%. In addition to the decline in volume, profits and frequency in North America were hurt by the weak diamond and jewelry market, and a $3 million increase in legal expenses. The fact that customers are looking to cut costs is having an impact on our business but it's also an opportunity and plays into our strengths as these same customers are looking to outsource more of their cash processing activities. Brink's North America has the broadest vaulting and money processing infrastructure in the industry, and is strongly positioned to increase its share of these higher margin cash logistics services. Our banking customers are increasingly looking to Brinks for solutions to their outsourcing needs.

Our proprietary CompuSave service is another example of how Brinks is improving efficiency for both our retail and banking customer. In the fourth quarter we had about 500 net installs which increased our install base to about 10,300 units. The pipeline looks good, and in 2010 we expect to grow our installed base by 30% to 40%. In 2009, our CompuSave service generated approximately $60 million in revenue. In terms of the profit contribution, it is one of our higher margin lines of business. And as our customer base expands, it should drive our revenue margins higher over time.

That concludes my review of operations, but before turning it over to Joe I want to offer some perspective on 2009 results and our expectations going forward. As you just heard, in almost every region, results in our CIT operations are being affected by pressures on both price and service frequency as customers react to the continued economic weakness in their markets. But when I step back and reflect on the past year, I realize what an admirable job our employees have done. Organic revenue growth was flat in 2009 and our segment operating margin, while not satisfactory by any means, held up reasonably well in an environment that was extremely difficult for our customers in the banking, retail and especially diamond and jewelry sectors. Given the obstacles faced by our employees and our customers, 2009 operating results demonstrate the ability of Brinks to withstand the adversity of a severe global economic crisis.

Despite these challenges, we did not stray from our disciplined approach to positioning the Company for growth. Our core strategy is to grow cash logistics and other high margin services in our current market while penetrating new geographies with high growth potential. Acquisitions made in 2009 in Brazil, Russia, India, and China demonstrate execution of this strategy. The Brazilian acquisition is delivering solid results in one of the world's fastest growing economies. The Russian acquisition is small but an important step in our effort to getting on the ground floor of a large and growing market.

Our acquisitions in India, already an important market for Global Services, expands our presence in one of the largest cash service markets in Asia. And the acquisition of ICD in China, is a good example of our strategy to expand in new security related markets. In this case, the commercial security market in Asia. This acquisition provides a platform to pursue additional commercial security opportunities in other regions. And, as I just mentioned, we continue to grow our CompuSave service in North America.

We also took several other significant steps to position Brinks for the future. Our decision to repatriate cash from Venezuela and report its operating results at the parallel market rate reduces the uncertainties associated with operating there. We also addressed the under-funded status of our US pension obligations, thereby enhancing our financial flexibility by reducing the likelihood we'll need to make cash infusions for the next several years. In Europe, a complete new leadership team is sharply focused on restructuring and other turnaround efforts. The economic conditions will continue to test Brinks, our customers and our competitors, but I feel very good about our people, our business and our competitive position and our growth prospects. Remember, we are the world's premier security brand, a global footprint, and the industry's broadest array of value added services, and the financial strength to address our challenges as we pursue new growth opportunities. Our people have weathered the storm and as economies around the world stabilize and improve, Brinks will emerge as an ever stronger leader in the markets we serve.

With that I will turn it over to Joe Dziezic. Joe?

Thank you, Michael. Good morning, everyone. Michael covered the main issues from an operating perspective. So I will provide some details behind the results. First I want to explain the format and content of the earnings release. As Ed mentioned, we made several changes, many of which respond directly to suggestions from investors. Because the changes were extensive, we decided to issue the release a little earlier this time. The most obvious change is the inclusion of adjusted results, a non-GAAP financial measure to enable easier comparison of segment operations and EPS. Another important change is the manner in which we present segment results. We provided summary segment tables, followed by brief explanations of the variances versus prior year. This information is on pages three through eight. We believe this format is easier to read and more user friendly.

We also formed a new category of expense and income items called nonsegment results. This category combines the former categories of corporate expense and former operations. It also contains significant items that are not allocated to segment operating profit based on how management assesses operating segment performance and allocates resources. There are two significant items in 2009 reported in nonsegment. The India acquisition related gain in third quarter and the Venezuelan repatriation charge in fourth quarter. These two items were corporate actions and therefore not included in segment results. Analysis of nonsegment results are provided on pages five and eight, as well as a more detailed table on page 15. We think this change clarifies the distinction between segment and nonsegment items, and therefore supports efforts to analyze our operating performance.

There is a new one-page summary of selected results and outlook items on page 13. It provides our current forecast for items we traditionally provide, as well as a few new items. We also added information on our US retirement obligations which is on pages 17 and 18. We included projections and other details on the funded status, expenses, and payments associated with the various plans in a format we think is easier to understand and more user friendly.

Lastly we added profit and loss trend data in our GAAP reconciliations that facilitates both sequential and year-over-year comparisons. It includes GAAP and adjusted results going back eight quarters. This information is particularly relevant given the recent transition to reporting results from Venezuela at the less favorable parallel market rate. We hope these changes will provide even greater clarity and understanding of our results.

Moving on to the fourth quarter and full-year results, I will start by reinforcing Michael's perspective on our performance in 2009. While there is clearly room for improvement, I too believe our 2009 results demonstrate the underlying resilience of our business, especially when you consider the challenging external environment over the past year and its impact on our customer base. I'll start by summarizing our GAAP results for the quarter and versus the guidance we provided in October at our last earnings call.

Fourth quarter revenue was up 12%, almost entirely due to currency and acquisitions. On an organic basis, revenue and segment operating profit were essentially flat, which I think is a strong result in an environment that continues to be extremely difficult for our customers. Late in the quarter we faced several headwinds. We incurred necessary restructuring costs in Europe, up $6 million. In North America, legal expenses were up $3 million. The decision in December to repatriate cash from Venezuela and begin reporting it the parallel rate reduced operating profit by $4 million excluding the cash repatriation charge. These are not excuses. We made these decisions to better position the Company for the future. The takeaway is, even with a combined headwind of $13 million and in an economic downturn, Brinks managed to deliver segment profits that were up 2% over year-ago levels.

Now for our results against our prior guidance, again on a GAAP basis. We expected to deliver low single digit organic revenue growth. It wasn't exactly a home run but we did achieve 1% growth. We also expected our segment operating margin for 2009 to come in at the low end of the range between 7% and 7.5%. We came in at 6.8%. We missed it. But again, the headwinds I just covered are a big part of the reason for the miss, especially when you consider most of the $13 million I just cited was incurred late in the fourth quarter. No excuses. These were necessary steps to position the business for the future.

Finally, we said our tax rate for the year would come in between 26% and 29%. Our tax rate was 30% on a comparable basis, which excludes the US tax valuation allowance release and the Venezuela repatriation charge. We expected a favorable tax settlement in the fourth quarter that, had it occurred, would have put us at the low end of our range. We expect this tax settlement in 2010 and have included it in our guidance.

In summary, we were in line with our revenue guidance but below our margin rate and above the tax rate. I provided some perspective and context around GAAP results versus this guidance. The fourth quarter results on a GAAP basis contained several items that make it difficult to assess our operating performance which is why we provided adjusted results. The fourth quarter adjusted results exclude the following items. $2.40 per share related to a US tax valuation allowance release. $0.46 per share Venezuela cash repatriation charge. Venezuela results reported at the less favorable parallel rate resulting in an $0.18 earnings per share reduction versus GAAP results. When you take these items into consideration, adjusted earnings were $0.41 per share, down from $0.67 last year.

The US tax valuation allowance release is largely the result of the equity market improvement in 2009, coupled with the contribution we made to the pension plan during the year, and improved credit markets, resulting in the reduction of the deferred tax assets related to the Company's retirement and post retirement benefit plans. Overall these factors together led us to the conclusion that we would realize these deferred tax assets. And as a result, the previously established valuation allowance was released.

The Venezuela cash repatriation charge of $0.46 per share was the result of our December 21st, 2009 decision to repatriate 76 million bolivares fuertes at the parallel market rate. We intend to repatriate future dividends generated by our Venezuelan operations at the parallel rate. As a result of this decision, we immediately began reporting our Venezuelan operations at the parallel market rate.

The full year 2009 results have one additional change from the GAAP results to the adjusted results. The India acquisition related gain has been removed.

When I review our full year 2009 results on an adjusted basis, page six of the press release, what stands out to me is the $40 million organic operating profit decline. That's a big decline. The obvious question is what drove it. There are a few key drivers. The 2008 Venezuelan monetary conversion project. A $12 million increase in restructuring and severance costs, primarily in Europe. And $6 million in accounting corrections. These items account for more than the $40 million decline in organic operating profit. I said it on my first earnings call in October and I feel more strongly about it today. This team and business have weathered a difficult period very well. We are well positioned for growth in 2010.

Which leads me to our 2010 outlook. We are forecasting low to mid single digit organic revenue growth in 2010 from the 2009 adjusted revenues of $2.9 billion. This growth is driven by all regions, particularly Latin America and Global Services. We expect the competitive environment and pricing pressures to remain challenging with modest global economic growth. Segment margin rates are projected to be between 7% and 7.5%, up from 6% on an adjusted basis through improved operational performance across all regions.

Our tax rate is projected to be between 36% and 39% including reporting Venezuela as highly inflationary, and the reclassification of a business tax from an operating expense to an income tax in France. This French tax law change is the cause of the increased tax rate estimate from the previous guidance of 36%. We are projecting capital expenditures of $180 million to $200 million in 2010. This compares to expected depreciation and amortization of $145 million to $155 million. Another important highlight on cash flow is that based on current projections, we are not required to make any cash contributions to fund our coworker medical liability until 2026. And our US pension plans do not require contribution until 2012.

Our projections for 2010 royalty income is about $5 million, down from $9 million in 2009. The reduction is related to the anticipated purchase of Brinks Home Security by Tyco, which Tyco has stated is expected to close in the second half of Tyco's fiscal 2010 which is April to September 2010. Tyco indicated on their recent investor call that they expect to eliminate the royalty upon closing, or very shortly thereafter.

I will give a brief overview of our liquidity position, and then wrap up. We ended the quarter with $143 million of cash, and $196 million of debt. Resulting in a net debt position of $53 million. This is an increase in net debt of $150 million. Despite over $180 million spent in 2009 on acquisitions, pension contributions and Venezuela repatriation and translation at the less favorable parallel market rate. We have a $400 million committed revolver, and access to smaller uncommitted credit facilities. We have used $98 million of the $400 million revolver and therefore have available committed capacity of $302 million. Our uncommitted credit facilities also have available capacity of $40 million.

I will close by saying that 2009 was a difficult year in an extremely difficult environment. The team at Brinks has faced the challenges and made the tough decisions necessary to deliver today and in the future for our customers, employees, and shareholders. I look forward to an exciting 2010.

Rob, let's open it up for questions.

We will now conduct a question-and-answer session. (Operator Instructions). The first question is from Clint Findley with Davenport. Please proceed with your question, sir.

Good morning, Michael, Joe and Ed. Question on the CapEx guidance of $180 million to $200 million, obviously the top end of that is about a 17% increase over '09. Should we assume that most of that is attributable to the growth in CompuSave?

I would say about half of it is CompuSave and the other half is the lumpiness of having to provide facilities which is our other big capital expense. We have a couple facilities that are up for replacement, renewal or expansion in 2010.

A rough idea then of the breakout between the maintenance and the growth CapEx, are you saying it is roughly 50/50 or no?

I would say it is roughly 50/50.

Okay. And on the CompuSave growth, obviously that has been primarily in North America, to date. Will you be expanding in EMEA or Latin America?

And in Asian. We have pilot programs going in about 12 countries.

Shifting a bit, I was wondering about some color on the profitability and EBIT contribution of the lost guarding contracts in France.

They are money losers which is why we got out of one contract. I believe it was at the end of March, or during March. And then we sold the rest of the business, I believe, during the fourth quarter of 2009. They were loss making contracts so we were happy to exit.

So no guarding exposure as of today in France.

We're still in the guarding business in France but we're in the areas we want to be in and we don't have loss making contracts.

Great. And then finally on the diamond and jewelry market, obviously your commentary that things continue to be weak there. Any expectations for the next six months and any particular geography where we might expect to see some improvement first?

Hopefully, in the Asia Pacific region. If you look at all the statistics that come out from the industry, the only place that had any growth at all was in Asia and a little bit in China, just where they're growing economic prowess. So I would hope to first see it in Asia Pacific followed by Europe, and maybe a little bit slower here in the United States. But it's going to be a developing story. The fourth quarter had a little bit of an uptick, then it flattened itself back off. It was better than the fourth quarter of 2008, but the outlook from people like DeBeers and the major diamond dealers is that it's going to be tough sledding ino 2010 in the diamond jewelry market.

Thank you, guys.

One clarifying point. So as you look forward into 2010, the sale of the guarding operation in France, which we referenced was a $5 million impact, that's really only about a month. So as you think about 2010, you'll see that impact for a full year, 2010 versus 2009. We will always put that in the inorganic. So when we quote organic revenue growth we're ignoring that change because it's an acquisition or disposition.

Thanks, Joe.

Our next question is coming from the line of Jeff Kessler with Imperial Capital. Please go ahead with your question, sir.

I want to congratulate you guys on the amount of detail that you've put into these new releases. It really helps and it's a huge change from before. It is very good for the analysts. The first question is am I right to assume that if your net debt went up this year, but it was off of $115 million, but it was against about $180 million of what we'll call one-time expenses although some of them are partly operating, that you actually generated somewhere about $50 million to $60 million of cash from operations when you net all that, assuming you define Venezuela and pension as non operating?

We had a couple of items moving around in cash flow but we did have positive cash flow from operations. We also had some additional US tax refunds as part of some of the accelerated depreciation options that the US Government provided in 2009. We also had an excise tax refund during the year, and obviously we had foreign tax payments. So, we did have strong positive cash flow from operations for the year.

Okay. So effectively it wasn't that all that $65 million positive was from operations but a portion of it was?

The vast majority of it was.

Okay. With regard to growing your Global Services business, and perhaps increasing the size of your Global Services business into a more integrated operation, you were talking about a fairly significant expansion, both in terms of CapEx and the number of places you are setting up in CompuSave. You are talking about improving and increasing your Global Services business into other areas that you've not been in. Are you about to, or can you get to a point at which you start putting together an integrated services business that combines guarding, Global Services for high value items, CompuSave to offer a package to customers that they might be able to pay a little higher margin on?

Jeff, that question was more confusing than our published results.

What I am trying to get to is with the amount of services that you have now in place, and the amount of services you can provide to a customer, that you're not now just with CompuSave in the United States, you can offer a whole list, a laundry list of services to clients, not just in the United States, but abroad. Can you take a model like this, both cash logistics and other Global Services, combine them and begin to offer a more integrated platform, so that you can get higher margins?

That is, of course, our base strategy as a company. We use Global Services to spread our existence, our placement around the world and then we move in and set up ground operations and use that integrated platform. So that's exactly what we're doing, Jeff. We are expanding both Global Service offerings. Of course, CompuSave is what it is. We have the next generation of CompuSave we're working on, it will come out this year with more functionality for our customers and have more of a global platform for it. So we are really focused on the higher margin businesses and anything we can do to integrate our cash logistics services to move up the scale on our operating margins is what we are spending our management time and our CapEx and our IT investments.

One little tiny question. You have been fighting regulation, and what we'll call regionalization in the low countries, particularly Belgium, the last few years. Holland, where you lost a contract several years ago. You did pull out of an entire region in, obviously, the UK when things were not profitable. Are you going to continue to downsize that business in areas where it just doesn't make sense any more in Europe?

Absolutely. We're either going to fix or we're going to exit, which is what we've always said. We are making some good progress in some areas in Europe. I just returned from there a week before last. And we have made some difficult decisions on how we're going forward, and that heavy lifting is going on, as we speak. But we're either going to fix these businesses or we're going to exit the markets that don't make sense for Brink's.

Is there a real structural problem there, meaning is there a permanent competitive problem with several large companies and several companies that don't care that much about large, and relative to volumes? Is this going to bug you for the next five or six or seven years, or is there a way that you can deal with this?

The way you deal with it, Jeff, is you fix it or you exit. You just make the tough decisions. We demonstrated that discipline in the past and we'll continue to demonstrate that in the future, and you'll hear more as we go forward this year on the steps we're taking and the progress we're making in Europe. And then, of course, later this year we're going to have our investor day and we'll bring over our senior management from around the world and you can ask them first hand on some of the detailed questions.

Great, thank you, and hopefully have a great 2010.

Our next question is from the line of [Alex Yahey] with Morgan Stanley. Please go ahead with your question.

Hi, good morning, everyone. I wanted to also thank you for all the additional disclosures. I think they're very helpful in understanding what's going on in Brink's. Two questions, and I'll just ask them both at once. First, the Global Services business, you've talked about being weak because of jewelry and diamond demand. Just in terms of quantification or getting a better feel as to how that's changed, can you equate that to Global Services 2008 was equivalent to 2006 levels or 2000 levels? Just understanding how much that declined and if it went back to some kind of normal level what difference that would make. And then second, you've made some acquisitions. Can you just talk about what you're looking for in the M&A world right now.

First of all, in the Global Services division, the major impact we've had has been diamond and jewelry. And as I mentioned before, the key in that business is consolidation. We're meeting airplanes all over the world every night, and if there's 50 packages on the airplane or there's 150 packages on the airplane it makes a big difference as far as our profitability of our business. Overall diamond jewelry sales are down 30%, 40% year-over-year 2009 over 2008. And remember that the tail end of 2008, the last couple months, diamond jewelry fell off the cliff, and we have not seen it climb back yet. So there's a lot of upside potential if that business comes back to some reasonable level of expectations.

As far as the M&A activity, our pipeline is full. We've got opportunities. We made a small tuck-in acquisition in the month of January, I think. We closed in France, the western part of France, filled in a hole. We have other acquisitions that we'll be announcing if they're material enough, that we're working on around the world. So we're excited about our growth opportunities.

When you think about the free cash flow that you are generating, are you more likely to be focused on M&A at this point versus share buyback, which you've done in years past?

At the current time, the M&A opportunities are more exciting than a share buyback program.

Thank you very much.

Thank you. Our next question will be coming from the line of Yvonne Varano with Jefferies & Co. Please go ahead with your question.

Thanks. I'm wondering if you could give us a little bit of your outlook in regard to pricing and how we should think about that in the disparate regions and what you have factored into your 2010 outlook.

It's a challenging, competitive environment in both Europe and in North America. But we are using our normal disciplined approach to that, and we walk away from business if it's appropriate. Obviously it's easy to drop price and it's almost impossible to get it back. And the margins in this industry and this business really don't allow a lot of room to be dropping prices. There are isolated instances of competitors taking pricing actions that make no sense to us. We try to be very disciplined in that process. I think things should be more or less stable in the year 2010. We were relatively good at getling price increases last year. This year we're passing on those increases, we are finding ways to take out costs in our operation around the world.

If we look at it regionally, I would think EMEA is still going to be challenging. But in Latin America and Asia Pacific, is there a potential to see any price increases there?

Latin America is always very, very difficult because a lot of those increases are government mandated increases. And they tend to occur at specific times when the government decides to impose them. That's just a matter of passing on those increases to our customers as fast as we can. And so, what happens down there with inflation and government action are the keys, but we have a long history of being able to recoup those types of cost in a reasonable amount of time. Asia Pacific, it is all about the economy. We don't have large ground operations in Asia Pacific region. We are basically a global services business there. Its profitability and improvement will hinge upon basically how global services, in particular diamond jewelry, goes. I'm starting to think it could have some upside there because of the economic expansion going on there.

And then, just in EMEA, is there something that can happen from a market perspective? Is there more consolidation that needs to occur there? How do you view that market in terms of the potential for it to improve?

There is great potential for it to improve. There's no question about that. A lot of the severance costs and charges that we took this year, especially late in the fourth quarter were for actions of downsizing or right-sizing these businesses. And those actions are being taken, and they're the appropriate thing to do for the long term health of EMEA. We are down to about three countries that need intensive help. We have cleaned a couple up. We have three we are working on, the heavy lifting is going on now, and we will see how those things play out. But we will find a way to be positive in Europe as we are everywhere else we operate in the world. Europe isn't and overall as a Company we are positive. If we can get Europe carrying its own weight we will have a very compelling return on capital storey for our shareholders.

When you look at it, those are your efforts and I understand that, but is there something from a market perspective that may prevent you from getting there?

No. I really don't think so. I think it is a matter of our execution and our disciplined approach that we are taking, and the resources that we put over in Europe, and they're all working very, very hard. Like I said, I just returned two weeks ago. I was in Europe and we went through every single country and what action plans were. I will be back every quarter to make sure we are staying on track. I will tell you our people are working very very hard to achieve success there.

Okay, great. And just last thing. You said North American legal expenses were up. Was there a specific reason for that?

We have legal expenses, more or less, at a certain level all the time. We have some particular higher expenses this quarter which is why we highlighted it. We don't expect those to be recurring.

On balance, legal expenses were comparable year over year, and they tend to be lumpy by nature.

Great. Thanks.

Thank you. (Operator Instructions). Our next question is from Jamie Clement with Sidoti & Company. Please proceed with your question.

Good morning, gentlemen. Most of my questions have been asked and answered. But the one question I do is in your press release, the areas where you lay out the charts regarding the pension plans and legacy liabilities, are you including the VEBA in the UMWA balance as a net or are you not?

It is in the calculation of the funded balance, yes.

In other words, when I see 2009 I see a starting balance of $207.5 million. That is net of the VEBA, right?

That is correct. So the gain in there, the benefit plan experience gain, is the asset improvement because of the equity market rebound. And just to reinforce the point here, we don't project any cash flow from the Company for this particular item, UMWA plan, until 2026. VEBA funds all of the expenses for the next 16 years.

And then just an additional question just for people that look at the book value of these balances and that kind of thing. Deferred tax assets associated with some of these plans you guys have disclosed in the 10-K, do you know what those balances are approximately?

At the end of last year, end of '08, they were roughly $150 million, and those have been largely released based upon the improvement in the equity markets, the contribution we made, as well as the improvement in the credit markets.

Thank you very much.

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