Brinks Co (BCO) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Brink's Company third quarter 2010 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. You may begin.

Thanks, Joe, and good morning. Today's call will proceed as follows -- CEO Michael Dan will provide an overview of financial results, segment operating performance and outlook for this year and 2011, CFO Joe Dziedzic will make some follow-up comments and then we'll open it up for questions.

Our earnings release was issued this morning and is available on our website 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. This morning we announced third-quarter GAAP earnings of $0.45 per share versus $0.70 last year. Non-GAAP earnings were $0.44 versus $0.41.

We believe providing non-GAAP results makes it easier for investors to compare operating performance between periods. Accordingly, our comments today will focus primarily on the non-GAAP results. A reconciliation of non-GAAP to GAAP results was provided in the earnings release, and Joe will provide additional details in his comments.

The release also provides information on organic growth which excludes acquisitions and divestitures, foreign currency translation, and a remeasurement of net monetary assets in Venezuela under highly inflationary accounting. On a non-GAAP basis, organic revenue was up 6% and organic segment profit growth was 3%.

A summary of selected results and outlook items is on Page 7 of the release. It provides our current forecast for 2010 and 2011, organic revenue growth, segment operating margin, and several other items including non-segment G&A costs, US retirement plan expenses, royalty income, tax rate, capital expenditures and depreciation and amortization.

And now for our Safe Harbor statement. This call and the ensuing Q&A session contains 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 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 and Brink's assumes no obligation to update any forward-looking statements. The call is copyrighted and may not be used without written permission from Brink's.

I will now turn the call over to Michael Dan.

Thanks, Ed. Good morning, and thank you for joining our call. As Ed mentioned, my comments will focus on the non-GAAP results which adjust for a variety of items, most of which affected last year's earnings. It's important to note that we do not adjust for severance, restructuring, and certain other items that we consider to be part of normal operations.

So on a non-GAAP basis, earnings were $0.44 versus $0.41 last year, with organic revenue growth of 6% reflecting improvement in all regions. Segment profit for the quarter rose 8%. The segment margin increased 7.5%, up from 7.3% last year, as strong profit growth in Latin America more than offset profit declines in North America and Europe. Organic profit growth was 3%.

Our year-to-date segment margin stands at 6.3%, up from 5.8% in the same period last year. We expect fourth quarter results to push the full-year margin up to a range of between 6.5% and 7% with annual organic revenue growth in the low to mid single-digit percentage range. Our initial outlook for 2011 includes similar revenue growth with a 50 basis point improvement in the segment margin.

The improved earnings were driven by Latin America where profits rose 42% on a 26% increase in revenue. This growth was due in part to favorable currency rates and inflation-based price increases in Venezuela as well as revenue and profit growth in Brazil and Colombia which was due to a combination of currency, higher prices and volume growth. In Europe revenue declined 8% due to currency and last year's sale of the Guardian operations.

On an organic basis, revenue was up 4%. Profits came in about $3 million behind last year due to a combination of currency, higher expenses to support growth in our emerging markets, and lower volume in Belgium and the Netherlands. In Belgium, which is one of our smaller markets in Europe, we have a labor situation that makes it very difficult for us to compete. We are actively engaged with the union to try and resolve this issue. We are ready to continue our investments in the growth of our operations in Belgium, but we need to bring our labor arrangements in line with market, and we aim to do so.

Profits were up in global services and we had reduced losses in Germany, so despite a very challenging environment we continue to expect fourth-quarter and full-year results to improve over last year, and we expect further improvement in 2011 in Europe.

In North America, continued price and volume pressure, especially in the US cash in transit business, led to a $5 million profit decline. It's a very difficult operating environment, and we will continue to pursue cost reductions and efficiency gains. We also remain disciplined in our efforts to obtain pricing in exchange for the value Brink's brings to the table. We will not cut corners on safety, security or price to maintain or win business.

We continue to be highly focused on our CompuSafe service in North America. During the quarter we added more than 600 net installs. Our install base is now over 11,000 units and should exceed 12,000 units by year-end.

Revenue in our Asia Pacific region grew about $12 million. About half of this growth was organic, the other half coming from last year's acquisitions in India and China. Profits also improved due to a pickup in demand for gold and other precious metals in Hong Kong and India.

Revenue and profits improved in our global services business which spans all regions. Brink's global services continues to benefit from higher demand for transport and storage of gold and other commodities. The diamond and jewelry markets appear to have stabilized and are beginning to recover, especially in the emerging markets. Demand for US retailers, historically the largest driver of global diamond and jewelry demand, however, remains inconsistent. A pickup in US demand would lead to further improvement in global services, not only in North America but across the globe.

That concludes my review of operations. We continue to face challenges on all fronts, but I'm encouraged by the organic revenue growth and steady improvement in segment margin versus year-ago levels. Our competitive position has improved and will continue to do so. Our core strategy remains intact. We are focused on growing cash logistics and other higher-margin services in our current markets while entering new geographies with strong growth potential.

Over the past 18 months, a very difficult period for the global economy, we demonstrated our commitment to executing this strategy by completing acquisitions in Brazil, Russia, India, China and France, and we are aggressively pursuing other opportunities to expand our global footprint and offer higher-value solutions to a growing base of customers.

Despite challenging economic and market conditions, I feel optimistic about our growth prospects. We have the world's premier 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 this growth. As economies around the world stabilize and improve, our position as the global leader in secured logistics will only get stronger.

I will now turn it over to Joe Dziedzic and then we'll take questions.

Thank you, Michael. Good morning everyone. Michael covered the main points from an operating perspective so I'll provide some details behind the results. I'll start by reinforcing Michael's perspective on our performance and outlook. On a non-GAAP basis, we delivered organic revenue growth of 6%, expanded our segment margin rate by 20 basis points to 7.5%, and grew earnings per share by 7%.

Latin America continued to perform very well. The Europe, Middle East and Africa regional profits declined slightly due to currency and investments in emerging markets, primarily Russia, and North America struggled under difficult pricing and volume conditions in the US. We are maintaining our full-year segment margin rate estimate in the 6.5% to 7% range, which represents a 50 to 100 basis point improvement over the 6% non-GAAP segment margin rate in 2009. Our year-to-date margin of 6.3% is up versus 5.8% last year, and we plan to add to this year-over-year improvement in the fourth quarter.

Now for some details behind third-quarter results. We provided both GAAP and non-GAAP results in our press release to make it easier for investors to assess our operating performance on a trend basis by excluding certain items that made comparability with prior periods difficult. Most of the adjustments this quarter were in the third quarter 2009 results. For example, last year's third-quarter GAAP results included substantial acquisition-related gain as well as the impact of reporting Venezuela results at the more favorable official government rate, and results from both periods include royalties from our former home security unit. The royalty payments ended in August of this year.

In addition, the non-GAAP results for both periods include tax rate adjustments. As we've stated previously, our quarterly tax rates are often quite volatile due to settlements and other items. To help investors address this volatility, we use the midpoint of the full-year forecasted range as the tax rate in our quarterly non-GAAP results.

Excluding the first-quarter charge related to the new US healthcare legislation, the tax rate for the year is still estimated to be in the 36% to 39% range. Based on where we generate profits and losses around the world and our tax planning activities, we continue to expect our tax rate to be in the 36% to 39% range going forward.

In Venezuela, the business continues to perform very well operationally, generating positive net cash flows even in a declining economy. We continue to report at the 5.3 exchange rate, and continue to obtain government approval at this rate for our US dollar operating cash needs which have been relatively light in recent quarters. Since the exchange rate did not change this quarter, there is no impact from the net monetary asset remeasurement.

Total restructuring and severance expense for the quarter was $5 million versus $4 million in last year's third quarter. We consider these costs to be a normal part of operations that are likely to continue. In the fourth quarter we expect severance and restructuring to be below the $9 million spent in the fourth quarter of 2009 and closer to our historical levels of $2 million to $5 million per quarter. We continue to focus on fixing our under performing businesses in Europe which could lead to higher than planned severance and restructuring.

Capital expenditures through the first nine months were $103 million, down from $113 million last year primarily due to currency and higher capital lease acquisitions of armored vehicles in North America. We have reduced our full-year outlook for capital expenditures to a range between $145 million and $155 million, down from our prior range of $160 million to $175 million. This reduction reflects lower spending across all regions and higher capital leases in North America.

Depreciation and amortization is estimated to be between $130 million and $140 million. Total year capital expenditures and capital leases are estimated to be approximately the same as last year. We will continue to manage spending carefully as we execute our strategy of investing in safety and security and pursuing growth in selected markets throughout all economic cycles.

Through nine months our GAAP cash flow from operating activities was $142 million, an increase of $12 million, as last year included a significant cash contribution to the US pension, $60 million net of taxes that was partially offset by an unfavorable change in cash flows from our discontinued operations of $34 million and lower net operating profit.

During the third quarter we repurchased 1.5 million shares at an average price of $20.07 per share for total expenditures of $30 million. This exhausts the $100 million share repurchase authorization approved by the board of directors in late 2007. Management views these repurchases as very opportunistic and an indication of our view regarding valuation at the time of the repurchase. On an annualized basis we expect the 2010 repurchases to be accretive after borrowing costs by about $0.04 per share.

Our non-segment expense which includes our corporate G&A and legacy pension and medical cost was slightly lower than planned for the quarter. We have reduced our total year estimate for G&A by $2 million to $38 million and slightly increased our royalty income estimate. As a result, total non-segment expense is now expected to be $59 million, $3 million lower than the $62 million guidance we provided last quarter as we continue to focus on cost control and overhead.

Now for a brief review of our liquidity position. We ended the quarter with $149 million of cash and $284 million of debt, resulting in a net debt position of $135 million. This is an increase of $16 million from the second quarter as the share repurchase was partially offset by cash generation.

I'll close by providing additional color on our guidance of low to mid single-digit percentage organic revenue growth and segment margin rate between 6.5% and 7% on a non-GAAP basis. The fourth quarter has historically been the strongest for us, and we expect improved results across all regions. We expect lower severance and restructuring versus fourth quarter last year but continue to be focused on fixing our under performing businesses which could require additional restructuring costs.

The recovery in our global service business continues across most regions, and our year-to-date margin rate is up 0.5% versus last year, already within our estimated range of one half to a full percentage point improvement.

We are excited about our businesses and strategy, and as we communicated during our recent investor day presentation, we're pursuing additional growth opportunities and driving margin expansion in the business. As Michael said, we will remain highly disciplined in our focus on growth in an extremely challenging environment. We have the right strategy in place and are taking the necessary steps to enable Brink's to deliver for our customers, employees and shareholders.

Joe, let's open it up for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question is from Clint Fendley with Davenport. Please go ahead with your question.

Good morning, gentlemen. Thanks for taking my question. Michael, first I wondered if you could just comment on what type of cost reductions that you intend to pursue within the North American market.

We're looking at everything to make sure the business -- the overhead is right-sized to the market and to the conditions that we are encountering. We've taken actions in September already which is part of the severance expense for the quarter, and we will continue to operate as efficiently as possible across our footprint.

Okay. So it's mostly -- is it mostly on the personnel side then that you are pursuing the cost reductions?

That and pedal to the metal on efficiency improvements throughout the organization.

And how was the customer retention in North America during the quarter?

Other than what we chatted about on investor day, there's been no change since then.

Okay. And then just any maybe color by geographic region within the US? I mean, are you seeing the pricing pressure consistently throughout the entire market or are there certain regions where you have a higher amount of the pressure?

The pressure is coming from the largest financial institutions which operate nationally.

Okay. And I think one thing that you stressed at the analyst day is that some of your largest financial customers often have several -- many different contracts, so you're seeing that fairly consistently across the board then with all the regions?

That's accurate, and we've had some losses and we've had some wins so it's -- but there's more losses than wins as we maintain our pricing discipline.

Okay. Thank you.

Thank you.

The next question is from Brad Safalow with PAA Research. Please go ahead with your question.

Hi, thanks for taking my questions.

Yes, Brad.

First question on CompuSafe, you gave us the numbers and I think you said you're going to target them to be at 12,000 by year-end. That's slightly below I think what you were talking about earlier in the year. Any specific comments related to adoption rates and any reason for the deviation?

The pipeline looks good. We had lower installs in the third quarter just because there were some delays with some of the customers, but the order pipeline looks strong so we think we'll hit the 12,000 number by year-end 2010. And 2011 looks strong again, too. The pipeline looks good.

And as far as overseas, what are you seeing there in terms of interest?

Well, as you know, we have five or six other areas that we're trying out CompuSafe. It's getting some strong traction finally in Brazil. We're also looking in Australia, and we've got two or three demonstration projects going in Europe. And there is quite a bit of excitement from the customer base, but I don't think those numbers will be meaningful until 2011 or '12.

Okay. But that's part of -- they'll start to show up in the numbers in 2011?

That's correct.

Okay. And then can you give us any more, if you could, region by region give us a sense of your actual volume growth versus what you're seeing on price? It might help us understand how the economic environment is affecting your business.

We're actually growing across all regions. There is so much noise with currency, and of course there's the sale of the Guardian business and EMEA last year. So you take that out, we're growing across -- but I am particularly pleased -- I mean, Asia is doing great. Latin America is doing wonderful. BGS is picking up on a global basis. And of course the fourth quarter is always the strongest quarter for that business also. So I'm optimistic about the numbers we gave in the fourth quarter and the full year and how we're based going forward.

Can you give any qualitative -- are you growing high single digits on volumes in Latin America, for example, or --?

We're much higher in Latin America. Much, much higher.

Okay. And as far as in, going back to North America for a second, outside of -- or is economic improvement really the only elixir to the issues on the competitive pricing or is there something else that can be done? I know you've talked about demonstrating your value proposition across kind of the enterprise, but what else can you do in the short term?

Maintain our pricing discipline and go after the efficiency improvements. In North American and in Europe we're focused on productivity at the front line, and we're measuring improvement weekly across the operations. Management has got their nose to the pedal, and North America, this is really the first time we've had this contraction in an extended period of time, and I think the management group is doing everything possible both on the overhead side and on the front line efficiency that's appropriate. And as we talked at investor day, some of these pricing decisions that are being made in the marketplace just simply aren't sustainable.

Right. I guess you're -- the last question on North America, your guidance I guess overall seems to imply improvement in margins there. Do you -- what kind of economic environment do you need and does it -- walk me through between what you're doing on efficiency improvements and whatever restructuring you're doing, the economic environment and maybe some return to more rational pricing. Those three factors, how do they weigh in your outlook?

I think pricing is number one. The economy is probably the second factor that would concern me, but the economy is picking up. It's slower than anybody wants in this country. It's slower than anybody wants in Europe. Everywhere else is doing just fine, the emerging markets. And don't forget that we have two large emerging market startups underway where we're investing heavily which are Russia and Turkey, which is affecting results somewhat. But those are right on our strategic target to get into those higher growth markets, and that's affecting results this year and it will affect some results next year. But those are just wonderful opportunities that we're going to pursue.

Okay, understood. So basically I guess what you're saying is you're not necessarily making a meaningful improvement in the economy in North America in your guidance. You think between again some restoration to a more normal pricing environment plus what you're doing restructuring and from an efficiency perspective you can restore margins to kind of that mid single-digit level?

The guidance for next year that we gave, we feel comfortable with. And with any help from the economy or continued improvement, especially in North America, or continued improvement in the diamond and jewelry business, it's all positive upsides for us.

Understood, and I'll turn it over.

The next question is from Michael Kim with Imperial Capital. Please go ahead with your question.

Hi. Good morning, gentlemen. Joe, I think you mentioned an increase in capital leasing, particularly in North America. Should that continue to moderate CapEx? And looking ahead to 2011, do you expect to continue to expand your use of capital leasing versus -- any commentary would be helpful.

Sure. The reason -- we had about roughly a $10 million increase in capital leases third quarter year-to-date 2010 versus last year, third quarter year-to-date. And the reason is after the financial crisis our lessor was unable to fulfill, so for the early part of the year last year we were unable to utilize capital leases. So it's really just a shift back to doing capital leases for armored vehicles in North America as we had been doing in previous years.

The one thing that is slightly different, and it was immaterial in the third quarter of this year but it will start to pick up is we're going to start financing the CompuSaves through capital leases because it's a more tax-efficient structure for us and allows us to lower our all-in borrowing cost. So you'll see that ramp up a little bit in the fourth quarter and next year. Otherwise we would not expect capital leasing to change significantly year over year.

And just for reference, what was the CompuSafe related CapEx year-to-date, or can you give a rough framework?

Year-to-date it only impacted capital leasing by a couple of million dollars.

Okay. And just on a more global perspective, is it your sense that you will be continuing the same pace of acquisitions in emerging markets to give the Company some stronger growth opportunities there in the near term than in North America and perhaps in Europe? But any thoughts on your acquisition activity?

The pipeline is full. We're looking at a number of opportunities in emerging markets and we're looking at some Greenfield startups. And it goes through a careful filter here before we make those decisions. And that pipeline is full, and if something happens that's material we will publicly announce it.

And that pipeline, is in the BRIC countries or are you casting a wider net? There are kind of a lot of geographies in Asia that you're not presently involved in.

It's a global net.

Great. Thank you very much.

(Operator instructions) Our next question is from Chris Marangi with Gabelli & Company. Please go ahead with your questions.

Hi, good morning. Just one question. What are your thoughts on reloading the buyback authorization?

The board of directors will look at our acquisition pipeline and our cash flow, and we'll make a decision as appropriate in the best interest of our shareholders.

And just one other follow-up on your cash available for buying stock back. There is a note in your release that says -- that seems to imply that there is $10 million of cash in Venezuela.

Correct.

Is there -- do you --?

That's net-net of debt.

So you now have debt in Venezuela. Is that --?

Yes. We do have a little bit of debt in Venezuela.

Okay, great. Thank you.

Thank you.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Thanks again for joining our call. We look forward to talking to you next quarter. Thank you.

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