Brinks Co (BCO) 2011 Q1 法說會逐字稿

Greetings, and welcome to The Brink's Company first quarter 2011 earnings conference call. (Operator instructions). It is now my pleasure to introduce your host, Mr. Ed Cunningham, Director of Investor Relations for The Brink's Company. Thank you. You may begin.

Thank you, Diego. Good morning, everyone. Today's call will proceed as follows. CEO, Michael Dan, will summarize first quarter results and segment operating performance. He'll also comment on our strategy and outlook for 2011. CFO, Joe Dziedzic, will follow with some additional comments and then will open it up for questions.

The earnings release was issued this morning and is available on our website at brinks.com. Earnings were reported on both a GAAP and non-GAAP basis. On a GAAP basis, first quarter earnings were $0.39 cents per share versus a loss of $0.10 in the year ago quarter. Organic revenue growth which excludes acquisitions, dispositions and currency items was 7% for the quarter. Non-GAAP earnings were $0.31 cents per share up from $0.23 cents in 2010. Non-GAAP organic revenue growth was 7%. The non-GAAP results exclude certain items related to income taxes, acquisitions and dispositions, Venezuelan currency items and royalty income. The non-GAAP results also adjust the tax rate to our estimated full year non-GAAP rate of 37.5%. We believe the non-GAAP results make it easier for investors to compare operating performance between periods.

Accordingly, our comments from this point on will focus primarily on the non-GAAP results. Summary reconciliation of non-GAAP to GAAP results is provided on page two of the earnings release and a detailed reconciliation is on page 12. In addition, a summary of selected results and outlook items is provided on page 8. It includes our latest forecast for organic revenue growth, segment margin rate, corporate G&A, retirement plan expense, royalty income, interest expense, tax rate, non-controlling interests, capital expenditures and D&A.

Now for our Safe Harbor statement. This call and the ensuing Q&A session contain forward-looking statements. 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 most recent SEC filings. 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'll now turn it over to Michael Dan. Michael?

Thanks, Ed. Good morning, everyone. Thank you for joining our call. Brink's followed up a strong finish in 2010 with a solid first quarter performance. Our non-GAAP earnings came in at $0.31 cents per share on a 24% revenue increase. The revenue increase was driven by our acquisition in Mexico. Organic revenue growth was 7%. Segment profit rose 31%, driven by organic growth of 23%. The segment margin rate was 5.7% up from 5.4% last year. This margin increase was achieved despite the inclusion of about $100 million of break even revenue from the Mexican acquisition. If you exclude Mexico, the margin rate goes to 6.5%, an improvement of more than a 100 basis points over the 2010 rate.

Our outlook for 2011 is unchanged. We expect organic revenue growth in the mid to high single-digit range and the segment margin rate at the high end of the range of between 6.5% and 7%. As in the past years, we expect a seasonally stronger second half. It's also important to note that our margin rate outlook is diluted by the Mexican acquisition which is expected to generate about $400 million of break even revenue as we position it for growth in the future.

Now for performance by region. The improvement in the first quarter results was driven by another strong performance from international operationswhich had organic revenue growth of 10%,organic profit growth of 51% and a segment margin of 6.7%, up 100 basis points over last year. Excluding Mexico, the margin rate for international operations was 8%.

Profit growth from international operations was primarily driven by Latin America and Europe. Profits that are relatively small Asia Pacific operations were up slightly. Our global services business which operates at all regions was a contributor to the profit increase. We continue to benefit from a strong uptick in the global movement of bank notes and precious metals. The recovery of our diamond and jewelry business continued through the quarter, but at a fairly modest pace. We have benefited from strong safety and security performance which sets Brink's apart as the premier secure logistic companies.

The profit improvement in Europe was mainly due to a $6 million reduction in restructuring expenses. It's a good start of the year for Europe, but I wanted to be clear by saying that most of the profit growth was not driven by fundamental improvement in our core CIT business which continues to struggle in a challenging, competitive and economic environment. The annual margin rate in Europe in recent years has been and remains in the low digit range. Our goal is to increase it by 75 basis points per year with a long term target of 7%. I'm confident the results in Europe will continue to improve. Our strategy is to maximize profits by accelerating productivity and cost control efforts in our operations as we go revenue from a high value solutions and emerging markets. Examples of this strategy, continued initiation of CompuSafe projects in several European countries and the ongoing investments we're making in the BRIC countries and Mexico.

In Latin America, our non-GAAP operating profit rose 6% on an organic basis. Organic revenue growth was 17%. Most of the improvement was driven by Venezuela, Columbia and Argentina. The integration of Mexico will be a major focus in 2011. We expect to invest up to $100 million there over the next three years with a goal to achieve the double-digit margins that we have come to expect from our other Latin American operations. We're just getting started and we're very excited about the opportunity.

In North America, profits declined due to continued volume and pricing pressure in our CIT operations. The second margin fell 4.6% to 2.8% on flat revenue. Near-term profit improvement in North America is critical to achieving our short and long-term margin targets, but I'm confident we're taking the right steps to improve our profits, and by that I mean we're highly focused on maintaining price and service quality as we increase productivity and reduce costs. We expect improved results as the year progresses.

Longer term, margins should improve as we shift our revenue mix towards our high value solutions. For example, the sales pipeline for CompuSafe remains strong and we expect net installs to grow by over 20% this year. We are expanding our CompuSafe product line, we are reducing our support costs and we are increasing the number of pilot projects outside of the United States.

Another example of our strategy to leverage our CIT assets is to deliver high value solutions is the Threshold acquisition in Canada. Threshold will enable Brink's to offer full service payment processing and network management solution for customers who currently manage their in-house ATM platforms. Longer term we expect Threshold to enable us to drive newer higher margin revenue from our existing customer base throughout the world. That covers my review for the quarter.

We're off to a good start in 2011, but it's no secret that we continue to face challenges in North America and Europe. Our internal productivity efforts should lead to improved results in these regions as we move through 2011. We expect continued growth in Latin America and in the Asia Pacific region and we're very optimistic about the longer term prospects of our recent acquisitions. Our strategy is to maximize profits in Europe, North America as we invest in the higher margin solutions and emerging markets, extend our brand by investing in adjacencies such as commercial security and payment processing.

We're making progress on all fronts and remain disciplined, but aggressive, in pursuing additional progress. We're confident what we're doing is right and we'll further strengthen our position as the global leader in secured logistics, and lead to substantial growth in revenue, profits and shareholder values over the next few years. I'll now turn the call over to Joe.

Thank you, Michael, and good morning, everyone. Michael covered the main issues from an operating and strategic perspective, so I'm going to provide details behind the financial results. As Michael noted, first quarter results provided a good start to 2011 despite the profit decline in North America. Profitability in Europe improved. Latin America had another solid quarter and our global services business continued its rebound by delivering revenue and profit growth in every region. These operating improvements were partially offset by higher interest expense which I'll cover in a moment. We remain focused on executing our strategic growth initiatives and are well-positioned to achieve our short and long-term goals.

In the first quarter, on a non-GAAP basis, we delivered organic revenue growth of 7%, expanded the segment margin rate from 5.4% to 5.7% and increased earnings per share by more than 30%. Segment profit rose 23% on an organic basis, an increase of $9 million that reflects profit growth of $13 million from our international operations and a profit decline of $4 million in North America. Profits in Europe were up due primarily to a $6 million decline in restructuring expenses, most of which were incurred in France last year, and by lower losses resulting from our exit of the Belgium CIT market. As Michael said, we're making some progress in Europe but it continues to be very challenging.

Latin America profits were up due mainly to improvement in Venezuela, Colombia and Argentina. This profit growth was partially offset by some expenses related to new business taxes in Colombia that lowered operating profit and labor settlements in the region. We anticipate these may recur every two or three years.

Results in North America were disappointing but we expect improvement as cost reductions and process improvements take hold. We remain on track to achieve organic revenue growth in the mid to high single-digit range and our 2010 acquisitions should add about $400 million of revenue growth on top of the organic growth.

Before factoring in the impact of acquisitions, we expected that 2011 segment margin rate to increase by about 50 basis points over the 2010 rate of 7.2%. Adding $400 million of acquisition revenue at roughly break-even margins dilutes our guidance to the high end of a range between 6.5% and 7%. The margin rate estimate applies to total 2011 revenue, including the Mexico and Canada acquisitions at year end last year. That covers the highlights. Now for some of the details behind the results.

We provided both GAAP and non-GAAP results in the press release to make it easier for investors to assess our operating performance by excluding certain items that make it difficult to compare results with prior periods. The first quarter GAAP results include a $0.05 gain related to the sale of investment securities and a $0.01 gain on a very small acquisition where we had a prior minority ownership. These items have been removed from the non-GAAP results to provide clarity on our operating performance. The non-GAAP results also adjust the tax rate to 37.5%.

The middle of our full year non-GAAP tax rate estimate of 36% to 39%. We make this adjustment for the first three quarters and then recast all the quarters to the actual rate at year end. We do this to provide comparability investors as our quarter to quarter tax rates can be volatile for a variety of reasons. We expect the full year 2011 non-GAAP rate to be in a range from 36% to 39%. Last year's non-GAAP rate was 36%.

There were no unusual foreign exchange related charges in Venezuela in this year's first quarter. The business continues to perform well operationally generating positive net cash flows in a difficult economy. We continue to report at the 5.3 exchange rate and continue to obtain government approval at this rate for the US dollar operating cash needs. A detailed reconciliation of the GAAP and non-GAAP results is provided in our press release on page 12.

First quarter severance and restructuring costs were about $4 million versus $9 million last year. We expect severance and restructuring for the remainder of 2011 to be in the historical range of $2 million to $5 million per quarter. Last year's total was $19 million.

On a non-GAAP basis, non-segment expense for the quarter was up $2 million due primarily to higher retirement costs. For the full year, we expect total non-segment expenses to come in at about $63 million on a non-GAAP basis.

Capital expenditures for the quarter were $29 million up from $27 million last year. During the quarter, we entered into capital lease agreements totaling $14 million versus $1 million last year reflecting a change in the financing ofour vehicles and CompuSafe units in North America. The capital restructure allows us to reduce our borrowing costs slightly versus an outright purchase.

For the full year, we estimate combined capital expenditures and capital leases of $220 million to $240 million. This includes about $30 million of spending in Mexico, consistent with our plan to upgrade the fleet and overall infrastructure in order to improve profitability. We will continue to manage spending carefully as we execute our strategy of investing in safety and security and pursuing growth in key markets throughout all economic cycles.

Cash flow from operating activities was negative $6 million versus positive cash flow of $5 million last year due mainly to slightly higher tax payments of $3 million and of $10 million reduction in customer held cash that transfers briefly to us in some of our money processing operations. This cash is generally credited to our customers within a few days and we don't consider it available for general use. So cash flow from operating activities, before the change in customer obligations and income tax payments, was up slightly versus last year. First quarter cash flows are typically our lowest of the year due to beginning of the year payments for several annual items and a generally slower economic activity.

Looking at liquidity, net debt increased from $245 million at year end in 2010 to $276 million at the end of the first quarter. The increase was driven by the typically lower first quarter cash flows and include continued investments in the business to support growth and maintain the safety and security of our employees around the world.

Our legacy liabilities have not changed materially from our last update. The key focus, in my opinion, is on the cash flow impact. The US pension plan does not require contribution in 2011, and at this time only requires about $25 million to $35 million per year from 2012 to 2015. The medical liabilities relating to our former coal business are still funded by the VEBA trust until around 2029. So no cash flow impact on the Company is expected for nearly 20 years.

Looking at our 2011 guidance. On page 8 of our press release we provide guidance on key financial metrics for 2011. Last quarter we added forecast for interest expense, non-controlling interest and capital leases. As we noted on our last call, our interest expense will increase in 2011 due to the 2010 acquisitions, the refinancing of our syndicated credit facility to 2010 market rates and the private placement in January 2011 of $100 million of unsecured notes.

First quarter interest expense was up about $3 million over last year. We expect full year interest expense to be in a range of $20 million to $24 million, up from $15 million in 2010. The forecast includes capital leases due to their increased use.

I'll close by summarizing the assumptions behind our guidance of mid to high single-digit percentage organic revenue growth and a segment margin rate at the high end of 6.5% to 7%. Our assumptions which have not changed since we reported in early February, include modest global economic improvement with North America and Europe lagging growth and Latin America and Asia-Pacific, organic revenue growth and profit improvement in all regions, continued focus on fixing our underperforming businesses and continued strength in our global service business across all regions.

We are confident in our business and our growth strategy. We've clearly demonstrated our commitment to achieving growth through acquisitions and driving margin expansion. We invested in the business throughout the economic downturn and will continue to do so. Our balance sheet remains strong to pursue up in opportunities as they arise. As Michael said, we will remain highly disciplined in our focus on growth in what is still a challenging business environment. We will continue to take the necessary steps to create value for our customers, employees and shareholders.

Diego, let's open it up for questions.

Thank you. (Operator Instructions). Our first question comes from Clint Fendley with Davenport. Please state your question.

Thank you. Good morning, guys. First question on North America here. I wonder if you could talk a bit just about the cost reductions and process improvements that you're working on, how long should these take and what are you doing exactly?

Well, North America is a little disappointing for the quarter, but showed strong improvement. We had a very poor January and February, and March looked much better, so I'm confident you'll see improvement in North America as we go throughout the year. But It's the combination that we talked about before, we're holding our price discipline, we're focused on looking at all our cost base, but at the same time we continue to invest in our high value solution businesses.

We're bolstering our sales and marketing forces to be able to seize those and follow our strategy on our, we call it our path of 2015, which includes upgrading our IT systems and those types of things which are putting pressure on margins. We're here for the long-term, not for the quarter, and I think you'll see the improvement speak for itself as years goes on.

How do you expect the Loomis acquisition of Pendum to affect the pricing dynamic in North America?

Well, Pendum was a low-cost provider, so I think it would be a positive overall.

And Michael, are you seeing any pricing pressure on your higher solutions offering in North America?

No.

Okay. And then I guess just roughly speaking, I mean could you help us understand how much of your total revenue is attributable to just the cash logistics work at ATMs in North America?

It's probably around 50% would be the cash side of the business.

50% of North America?

Right.

Okay. And then I guess lastly here on switching gears to Mexico, the acquisition. You guys have owned it for a while now. You had an original estimate of about $100 million of the investment that you would need to make in the business. I mean how are you feeling about that now?

Well, it's been about four months that we've had ownership of the business, and we've got an integration team hard at work down there and making improvements dealing with some of the historic legacy issues that the companies had. And everything seems to be coming together nicely. We don't expect to make any money there this year. As you know we've talked in the past, we have some challenges there on the labor relations side and we're working very diligently at this moment. Very great cooperation with our union partners down there. And if that continues, we'll see improved results in Mexico faster than we anticipated. But there's always a risk that the labor situation there could deteriorate, but I don't expect that to happen at this time. So we're going on and investing in the business, we'll invest in the $30 million some odd that we planned, and as long as progress continues and good cooperation with our unions down there, and we'll continue to invest in the next two years.

Great. Thank you.

Our next question comes from Michael Kim with Imperial capital. Please state your question. Michael Kim?

Hi, good morning, guys. Can you hear me?

Yes.

Could you comment a little bit on the pricing environment and the competitive environment in Europe and particularly as you exit the Belgium market how that starts to reshape the overall operating margin improvement plan that you've laid out.

Unfortunately we exited the Belgium market is the first issue. Obviously, we were losing money there and when they went on strike, it put us in an untenable position and we exited. Obviously, it will be a plus because we're losing money there. But one country doesn't affect another.

We still have some operations that are underperforming. But we've got a team of people over there that are working very hard to improve those operations. I think we've made some progress.

We're obviously helped by lower severance costs, but it's still a difficult environment economically. Their financial institutions are still mostly owned by the governments, as you know, and so it's very difficult to get some changes made at the current time. But we're doing everything we can to incrementally improve operations. We have made progress in many countries over there, and we're going to stay at it in a very difficult environment.

And are you seeing some moderation in terms of the pricing activity that you've seen in the past in Europe? Is that starting to stabilize at this point?

I would say we were modestly successful with some price increases for the first time in a couple years in Europe which was helpful. But it's just a challenging environment. And we'll make incremental improvements, and as I said in my prepared remarks, it will probably take us a couple years to get up to about the 7% margin which is our goal. But, we're going to stay at it and our solutions business there. We put CompuSafe, so we've got CompuSafe projects going into Europe. We're actually making good progress in France with CompuSafe which is one of our major operations there as you know, and there's some good opportunities to expand that business there in the next couple years. So I think that will all contribute to our goal of improving European operations results.

With CompuSafe specifically, are you finding any key differences with operations in France versus operations in North America? Are there any kind of dynamics --

No. There's no difference at all. It's the same. It's the solution for the customer. It provides a higher margin opportunity for us. It's a differentiated product in the marketplace. So it's just a matter of getting our people up to speed on the selling and marketing of the device, and we've got a lot of experience now in the United States with it, so we have people in the US over there helping them and the outlook for CompuSafe, especially in France, is very strong.

And lastly, can you talk a little about -- in the past you've talked about your investments in Russia and Turkey. Some of your developments there. Any update that you can share at this point?

Both operations are not making any money, but they're growth opportunities for us, emerging markets. Turkey's growing and Russia's growing and it's just the place to be and it will add to our long-term goal in our path of 2015 of achieving our strategy.

Great. Thank you very much.

Our next question comes from Brad Safalow with PAA Research. Please state your question.

Hi, good morning. Thanks for taking my question.

Good morning.

Just the first question. Can you provide us with install base CompuSafe now both in North America and Europe?

We disclosed it. In North America it's just under13,000 and we anticipate this year to have growth at about 20%on a year-over-year basis and the rest of the world is still a comparatively small amount. A thousand plus or minus units across the globe, but spread over many different countries as we're rolling out that product in different locations.

Okay. And I guess for 2011 will CompuSafe -- will it contribute positively to profitability in Europe, or will it be a drag as you roll it out across a variety of countries?

It's definitely a positive higher margin solution, and obviously with any rollout there will be some ramp-up cost. But the business itself is profitable when we sign new contracts and roll it out.

Okay. And then --

It will not be a material item in any country outside of North America until we build up an installed base that has some significance.

That's fair enough. And then just -- first thing about Epago. Can you talk a little bit more about the expansion of -- you entered a number of new countries at the end of last year -- where you stand with that? Whether you're going to deploy that in Mexico this year and what kind of profitability (inaudible) [if your seeding ] outside of Brazil.

Well Brazil is the most profitable of all and continues to grow very rapidly. We're very satisfied with the pace of the Epago growth and Mexico will be our start-up operation for us. But this is a low asset, high value solution business, so it's right on our strategy for achieving our path to 2015, and I think the Mexican market which is a cash market is probably the most exciting one for us. And of course we have in our acquisition pipeline other opportunities that we're reviewing.

Just to be clear, you're planning 2011 you will launch in Mexico with Epago or no?

Absolutely.

Okay.

We've formed a company already and we'll be in the business in Mexico.

Great. In terms of your revenue growth and on an organic basis in Latin America, the difference between volume and price?

Both. There's a lot of indexation of wages and revenue that goes on down there in Latin America which makes it a little bit lumpy sometimes quarter-to-quarter but both of those are effects.

So not one more than the other?

No. In Latin America, as you know, economically is doing very well and we're rising with the tide and also bringing our solutions business. I would say in Brazil we have probably the largest installed base of CompuSafe in Brazil. Most of that number that Joe talked about, and that's also growing. We're excited about where we're positioned in Latin America and continued growth prospects of the region.

Okay. I'll turn it over. Thank you.

Thank you. (Operator Instructions). Our next question comes from Christopher Marangi with Gabelli. Please state your question.

Hi, good morning. I wonder if you could give us more color on the diamond and jewelry market. You mentioned there was some moderate improvement. My opinion was that actually diamond prices are very strong. Is that because price leads volume or there's some other issues going on there?

Well, diamond prices are very strong, especially in the rough, and I attribute most of that to the same reason you're seeing commodity prices like gold and silver. It's store value that people feel safe being in.

As far as the retail side, Europe and the Middle East are doing well. China, Asia is doing well with the exception of Japan. And as you know America's the No. 1 market for retail diamonds. Japan is No. 2, and with the horrific events that have occurred in Japan that business came to a screeching halt in one of the major markets.

The volume is not yet back to what I would call the 2008 level. But it's improved quite a bit from the 2009 level and as you saw through 2010 that business started to improve. Just the pace of that improvement slowed down a little bit. I blame that on the Japanese market because of the unfortunate events there.

May I ask, when do retailers typically order, when do you ship jewelry?

Well, jewelry is different than diamonds.

Right.

Okay. So jewelry you normally see their big show business goes on in the second quarter and the third quarter and then the movement starts around the world for the holiday shopping seasons. That's for jewelry. Diamonds, it's always slow around the first part of the year, and it's always slow during the Jewish holidays. But otherwise it's pretty steady with a strong pickup in the third and fourth quarter, and sometimes there's opportunities in January to have a strong January for good reasons and bad. For instance returns because sales were down. Or there's just a lag of movements. But I expect the diamond market to recover in Japan and our share of the business continue to grow. And as hundreds of millions of people enter the middle class in the next couple years, we're well-positioned to see that product line contribute to our strategy.

Okay. Thanks, Michael.

Ladies and gentlemen, there are no further questions at this time. This concludes today's teleconference. All parties may now disconnect. Thank you and have a great day.