Brinks Co (BCO) 2011 Q3 法說會逐字稿

Greetings and welcome to The Brink's Company third quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference please press * 0 on your telephone keypad. 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.

Thank you Claudia and good morning everyone. Today's call will proceed as follows -- CEO Michael Dan will summarize third quarter results and segment operating performance. He will also comment on our outlook for the fourth quarter, full year and 2012. CFO Joe Dziedzic will follow with some additional comments and then we'll open it up for questions.

Our earnings release was issued this morning and is available on our website at Brinks.com. Earnings are reported both on a GAAP and non-GAAP basis.

On a GAAP basis, third quarter earnings were $0.66 per share versus $0.45 last year. Non-GAAP earnings were $0.52 versus $0.46 last year. Organic revenue growth which excludes acquisitions, dispositions, and currency items was up 9% for the quarter. Total revenue growth which includes the benefit of our late 2010 acquisitions in Canada and Mexico was 28%.

The non-GAAP results for the quarter exclude certain items related to income taxes, asset sales, acquisitions, and dispositions. The non-GAAP results also adjust the tax rate to our estimated full year rate of 37.5%.

We believe the non-GAAP results make it easier for investors to compare operating performance between periods. Therefore, our comments from this point forward will focus primarily on non-GAAP results.

A summary reconciliation of non-GAAP to GAAP earnings is provided on page two of today's release and a detailed reconciliation is provided on pages 14 and 15. In addition, the summary of selected results and outlook items is provided on page ten of the release. 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, CapEx, 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 Brinks assumes no obligation to update any forward-looking statements. The call is copyrighted and may not be used without permission from Brinks.

I'll now turn it over to Michael Dan. Michael?

Thanks Ed. Good morning everyone and thank you for joining our call today. As Ed mentioned, my comments will focus primarily on non-GAAP results.

Earnings came in at $0.52 per share, up from $0.46 per share last year, on organic revenue growth of 9%. Segment profit improved over last year's results but we were not satisfied with the level of improvement especially in North America.

Profit growth in Latin America was solid but below internal expectations. Results in Europe improved but further near term progress will be difficult to achieve in the current environment.

Fourth quarter results should improve from current levels and we are on track to meet our annual revenue target but our full year segment margin is likely to finish in the 6% to 6.3% range, down from our initial target range of 6.5% to 7%.

The lowering of our full year margin outlook is a temporary setback. A preliminary outlook for 2012 calls for continued strong organic revenue growth in the mid to high single digit range with a targeted segment margin rate in the 6.5% to 7% range and our long term goal to achieve 10% margins by the end of 2015 is still in place.

Joe will provide additional details on our results and outlook in a few minutes. I'll now comment in more detail on operating results for the quarter.

Segment profits were up 22% driven primarily by 9% organic growth and the favorable impact of acquisitions, divestitures, and currency. Segment margin rate declined from 7.5% to 7.1% due mainly to the inclusion of more than $100 million of near breakeven revenue from the Mexico acquisition. Excluding Mexico, the margin improved to 7.7%.

In North America, profits improved over last year's weak results though less than we anticipated. Revenue was flat on an organic basis. The segment margin rate in North America was 3.6%, up from last year's 2.4%. At midyear we expected to improve over the second quarter margin of 4.2% so the third quarter results for North America were one of the primary reasons for lowering our full year margin outlook.

These results reflect the severe pressure on pricing and service frequency that continues to plague the U.S. market. The effects of the recession, the banking crisis, enhanced ATM technology reduces the number of services ops and persistence of low interest rates and aggressive pricing by competitors have all played a role in part of the slowdown of our CIT business in the United States.

As always, maintaining the highest safety and service quality standards is our first priority. This requires great discipline in an environment that encourages aggressive pricing and shortcuts on safety, quality, and reinvestment. We will maintain our pricing discipline that is required for long term success of our organization.

We believe the profits in North America bottomed out in the first quarter but they are obviously recovering slower than expected. To achieve our long term goals we must accelerate the profit growth in North America. We will continue to reduce labor and fleet costs and increase our investment in IT to improve productivity, customer services, and internal processes. I am confident we are taking the right steps and the results will improve in 2012 and beyond.

I'll now move on to international operations which account for about 75% of our revenue. In Latin America revenue grew 74% due to the Mexican acquisition, favorable currency and 21% organic growth. Operating profit was up 19% reflecting organic growth in Argentina, Chile, and Columbia. Profits in Venezuela declined due to a higher labor cost in a highly inflationary environment. Even with price increases lagging inflation driven wage increases, Venezuela continues to deliver solid returns but below past expectations.

As expected, the inclusion of revenue from the Mexican acquisition is pressuring our margin rate but we're still ahead of schedule in our turnaround efforts. This business was slightly profitable for the quarter and continued improvement is expected in the fourth quarter. We're very encouraged by our progress in Mexico and we expect revenue and margin growth there to continue in 2012 and beyond.

In Europe, revenue growth was 12% on currency and organic growth of 6% despite the $9 million of revenue loss from our exit of the Belgian CIT business. The organic growth reflected higher volume in Greece, Netherlands, and Germany along with growth in emerging markets and our Global Services division.

Operating profit was up $7 million due to the improved results in Greece, Netherlands, Global Services, and the benefits of exiting the Belgian CIT business which lost $2 million in last year's third quarter.

Third quarter results in Europe improved despite very challenging economic conditions but near term profit growth will be difficult in the macro environment that appears to be getting worse.

In our relatively small Asia Pacific operations, both revenue and operating profit were up due to increased demand for shipments of banknotes and precious metals. Our Global Services business is the primary driver of results in the Asia Pacific region and is also a key part of our strategy to grow profits worldwide through high value services. This unit continues to perform at or above expectations. Global Service operates at all our regions, leveraging our infrastructure to move high value shipments over long distances. We expected continued growth in this business in 2012.

That concludes my review of operations. To summarize, we are resetting our near term profit expectations but remain confident about our strategy in our improvement in 2012 and beyond. During 2012 we will be more aggressive in pursuing higher margin business opportunities. We continue to invest in our IT and we expect continued profit growth in Mexico and the rest of Latin America.

Our turnaround efforts in North America will begin also to pay off and the upward momentum of our Global Services business should continue across all regions.

In addition, our long term goal to achieve 10% margins by the end of 2015 is still in place.

I'll now turn the call over to Joe for additional comments before opening the Q&A. Joe?

Thank you Michael and good morning everyone. Michael covered the operational and strategic matters. I'm going to provide some details behind the financial results.

As Michael noted, third quarter earnings did not meet our expectations. We remain on course to meet our annual revenue goals but our full year margin rate outlook has been reduced to the 6% to 6.3% range.

The strong organic revenue growth we expected remains on track and we should get a boost from our normal seasonality though it will not be as robust as we had projected on our call in July.

As we look ahead to 2012 we expect the solid organic revenue growth to continue and our segment margin rate should expand to the 6.5% to 7% range. We expect continued profit growth in Latin America and Asia Pacific. Improving profits in North America and Europe continues to be our greatest challenge.

Organic revenue growth in the third quarter was 9%, driven mainly by Latin America. Total revenue growth was 28% including our Mexico and Canada acquisitions.

On a non-GAAP basis earnings came in at $0.52 versus $0.46 last year reflecting an increase in segment profit that was largely offset by higher expenses below the segment line which I'll cover in a moment.

The segment profit increased about $13 million which includes organic growth of $5 million, a benefit of about $2 million from profits in Mexico, and $2 million from the elimination of losses resulting from our exit of the CIT business in Belgium. The remaining profit improvement was related to favorable currency translation.

The segment profit increase was offset by $2 million in higher borrowing cost from our private debt placement earlier this year and higher debt levels in support of acquisitions. Another $2 million offset was related primarily to an increase in non-segment G&A expense.

North America's profit was up versus last year but we were disappointed by the slight sequential decline from second quarter results. Results in Europe improved in a difficult environment with profit growth in Greece, Netherlands, and Global Services. The profit growth in Latin America was driven by Argentina, Chile, and Columbia. The Asia Pacific region continues to deliver solid growth led by the Global Services line of business.

Through the first three quarters we have grown revenues by 29% and total operating profit by 25%. A significant portion of this growth came from acquisitions and dispositions which we are glad we did but I don't want to understate the 8% organic revenue growth or the 9% organic segment profit growth in an extremely difficult environment particularly in North America and Europe but also increasingly in some markets in Latin America.

Our segment operating profit through the first three quarters has grown from $140 million last year to $171 million this year, a $31 million increase. However, we do not expect to have as strong a fourth quarter performance this year as we did last year due to several factors.

Our safety and security performance this year has been solid but it doesn't match the exceptional results of last year. The impact of our recent acquisitions and dispositions had a more significant impact in the first three quarters of 2011 than they will have in the fourth quarter largely because we stopped consolidating the loss making Belgian operations early in the fourth quarter of last year.

Additionally, in several places we are taking the necessary actions to invest in the business that will have longer term returns but short term negative profit impacts. These investments include ongoing restructuring and severance and investments in IT to drive operational improvements.

In Venezuela we expect at least one more quarter of cost inflation outpacing the price recovery. Also, the recent strengthening of the U.S. dollar relative to the first part of 2011 is likely to have a negative impact on our international earnings.

So now to cover some of the specific financial metrics. 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 third quarter GAAP results include gains totaling $0.14 per share related to asset sales, acquisitions, and dispositions and a $0.09 gain caused by the reversal of a U.S. tax valuation allowance. These items were removed from the non-GAAP results to provide clarity on our operating performance. The non-GAAP results also adjust our quarterly tax rate to 37.5%, the middle of our full year rate estimate of 36% to 39%. Last year's non-GAAP tax rate was 36%.

We make this adjustment for the first three quarters and then recast all the quarters to the actual rate at yearend. This improves comparability for investors as our quarter to quarter tax rates can fluctuate for a variety of reasons.

There are no unusual foreign exchange related items or charges in Venezuela in this year's results. We continue to report Venezuela's results at the 5.3 exchange rate and continue to obtain government approval at this rate for the U.S. dollar operating cash needs. A detailed reconciliation of the GAAP and non-GAAP results is provided in our press release on pages 14 and 15.

Third quarter severance and restructuring costs were about $4 million versus $5 million last year on a non-GAAP basis. Year to date severance and restructuring costs total $14 million, roughly flat versus the first nine months of 2010. In the fourth quarter we expect these costs to be at the high end of our 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 to higher G&A expense and slightly higher retirement costs. For the full year we continue to expect total non-segment expenses to come in at about $63 million on a non-GAAP basis.

Third quarter interest expense increased by about $2 million due to higher rates on the private placement of $100 million of debt in January and an increase in borrowings related to acquisitions.

Capital expenditures for the quarter were $47 million compared to $41 million last year. During the quarter we entered into capital lease agreements for new assets totaling $9 million versus $6 million last year. Year to date capital expenditures and capital leases were $158 million versus $123 million in 2010 which is an increase of $35 million. Approximately half of this increase was driven by our investments in Mexico as part of our turnaround program and the other half were IT investments to drive operational efficiencies in the business.

For the full year 2011 we estimate combined capital expenditures and capital leases to be between $220 million and $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 our spending carefully as we execute our strategy of investing in safety and security while pursuing growth in key markets throughout all economic cycles.

Year to date cash flow from operating activities was $170 million, up from $143 million at this point last year. The $27 million increase was driven by improved operating performance in the first nine months of the year.

Looking at liquidity, net debt increase from $245 million at yearend 2010 decreased from $245 million at yearend 2010 to $230 million at the end of the third quarter. The decrease was driven by cash flow generation from operations exceeding the amount spent on capital expenditures through the nine month period. We anticipate higher than normal cash repatriation in the fourth quarter which will be used to reduce bank debt.

Our legacy liabilities and related expenses are likely to increase in 2012 and later years. This ultimately depends on the yearend interest rate levels and equity market performance which has been volatile so far this year.

Based on recent trends we expect a significant increase in our 2012 expense related to U.S. retirement plans due to this year's decline in interest rates which will drive the liability higher.

In addition, if planned asset performance is lower than expected, costs will increase further. These costs are reported partially in our U.S. business and partially in non-segment expense.

In terms of cash flow, the U.S. pension plan does not require contribution in 2011 and currently requires a $36 million contribution in 2012. Estimated contributions beyond 2012 are likely to increase based on interest rate trends and year to date equity market performance. If the recent pickup in equity markets continues, the cost increase would be mitigated.

The medical liabilities and cash payments relating to our former coal business are funded by the Viva Trust until around 2029 based on the yearend 2010 measurement. All of our legacy liabilities will be re-measured at yearend 2011 and we will provide an update when we release fourth quarter results.

On page ten of our press release we provide guidance on key financial metrics for 2011. We have already covered our revenue and segment margin guidance. As a reminder, we also include forecasts for interest expense, non-controlling interest, and capital leases to help investors better understand these items.

As we noted, interest expense is higher 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.

Third quarter interest expense was up about $2 million over last year. We expect full year interest expense to be $22 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 initial 2012 guidance of mid to high single digit percentage organic revenue growth and a segment margin rate between 6.5% and 7%. Our assumptions include modest global economic improvement with North America and Europe lagging growth in Latin America and Asia Pacific, continued focus on fixing our underperforming businesses including IT investments to drive operational efficiencies, continued strength in our Global Services business line across all regions, and acceleration of the turnaround in Mexico.

We are not satisfied with our third quarter results and our full year outlook but we remain confident in our strategy and our 2012 growth plans. We have clearly demonstrated our commitment to achieving growth through acquisitions. We invested in the business throughout the economic downturn and will continue to do so. Our balance sheet remains strong to pursue new 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.

Claudia, let's open it up for questions now.

Thank you, sir. Ladies and gentlemen we will now be conducting the question and answer session. (Operator Instructions)

Our first question is coming from the line of Clint Fendley with Davenport and Company. Please state your question.

First question is on the guidance here. Typically, the fourth quarter is a very strong seasonal quarter from you. I'm just wondering did you lose any contracts in North America? Based upon that, your guidance seems to imply a fourth quarter segment margin that is potentially lower here than even what we saw in 2009.

I think the best way to address that, Clint, is to say that the difficulties in Europe in some of our safety and security performances weren't as strong this year as they were last year although they were still very, very good. We had one large incident that took place in the Netherlands that affected our security performance and the way we account for that, when we have an extraordinarily good year, more of that shows up in the fourth quarter than it does in the other quarters because we retain a certain amount of our insurance risk and we're not going to have the benefit of the fourth quarter as a result of that incident.

How should we think about Europe and how it will impact your business? Is your exposure there and your potential weakness coming from exposure to any of the troubled countries there or if you could just provide more color for the impact that we should expect from the debt crisis there.

We've actually, year over year we have had some improvements in Europe especially the Netherlands, in Global Services and Greece in particular. We're still struggling in Poland, Hungary, and Germany and not making the progress that we need or we want. And then there is the European, the macroeconomic situation in Europe which is, day to day we're all reading about it and how it is affecting things and the banking industry is our major customer base over there and so we're affected by that.

It's a tough environment. It's an unknown environment. Everybody is working very hard as you know at the government level and the international level and the IMS level trying to stabilize things there. That level of uncertainty which we all feel and which is affecting the markets bleeds through our customers and affects us as a vendor to them and I don't expect that to clarify itself in the next three months.

And I guess it's impossible for you guys to know as you develop your guidance but as of last time we supposedly have some type of agreement. Is it possible here that maybe you've been too conservative with regard to your guidance assuming that maybe some of the concerns out of Europe begin to dissipate as we continue through the fourth quarter?

That could help but I don't think the consumers in Europe are going to be any different than the consumers in the United States. They're going to be sitting on their wallets for a little longer than the next quarter so once again, quarter to quarter to quarter we have an obligation here to give you our best judgment and our best view but we don't want our business on a quarter to quarter basis. We're looking for the long term and we're making the right investments and making the moves we think are necessary to improve our profitability there and there are some good upsides. Barclay put out a public press release recently that they are building the largest gold vault in the world in London due to the demand for gold storage and that's a contract that we won so we're actually building, managing that vault for a ten year period with a five year option.

There are things that are happening, positive things that are happening in Europe. We'll be building the vault for the next 12 months. It's the largest gold vault in the world and that won't come out until probably, revenue-wise, until the end of next year or the beginning of 2013.

So there are positive things happening for us but how fast is the diamond jewelry business going to pickup in Europe? How fast is it going to pickup in the United States? Those are the types of things that are still an unknown for us.

Last question here, on your comments on the reduced labor and fleet cost in North America, I wondered if you could just provide a little bit more detail on what you're planning to do. I know we've heard from you about the technology improvements that you've made on some of your trucks. Is that something that you're going to push forward on now in a more meaningful way? Would you consider exiting certain cities within the U.S. or maybe the competitive pressures have become too great? What is the potential impact over the longer term that you think you can have on your margins through some of these reductions both in the labor and the fleet?

The best way to summarize all those questions would be yes, we are continuing our investments in technology, in our fleet, and our labor, and our management group in the United States in particular has done an incredible job along with our frontline labor force in understanding the tough conditions that we face, the competitive conditions that we face.

Our main problem has been with the tier one banks who are under severe economic pressure as you know, being sued by the government, federal government, state governments, everybody else, laying off tens of thousands of people, the tier one banks. Those are the people that have affected us most in the United States.

We have held our pricing discipline which has caused us to walk away from large sections of business over the last two years. We know that is not sustainable. We recently had a nice return of business at our rates by a tier one bank in three different states. In fact, they wanted to come back to us in one state and we told them no. We wanted more. We demanded more so we ended up getting business back in three states at our rates.

As far as closing branches, the fact of the matter is Brinks is not going to be a safety net for any institution especially a tier one institution. If we lose a substantial amount of work in the market which causes us to close a branch we are fully prepared to do that as we have done in the past and we won't be there. We won't be a safety net and we have made that clear to these financial institutions so it's my judgment that the major pain in dealing with this institutions is behind us. We've had some comebacks, some give back now about coming back at Brinks' level of rates so I'm glad we held our pricing discipline. If we would have done the typical thing that our competitors have done which is drop the prices 20%, you just can't recover from that and you end up filling up all your capacity.

So we've done the right thing. There are a couple markets that are up for bid currently with tier one banks and we're holding our pricing discipline. If they're going to reduce our share of net market, they're going to pay us more to be retained and if they want to remove that work from us because that's our stance, they can remove it. That's their choice but if it causes us to close a branch or a series of branches we'll do so.

Thank you.

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

Just touching on the high value solutions, can you expand on the progress for CompuSafe, how that's tracking and if you're still confident in the 20% growth that you've outlined in the past and then secondarily, can you talk about Threshold and the extension beyond Canada and how that integration is progressing? Thanks.

The CompuSafe product is still growing I think, Joe, at about a 20% rate, and we're taking a very hard, deep look to make sure that all the pricing components are appropriate at CompuSafe, that we're getting the right returns. There is a lot of back office work and a lot of specialty things we do to make that happen, a lot of technology investments and we're doing a really deep dive now to make sure that the CompuSafe profit level margins are appropriate for our business. We think that in some cases it's fine. In some cases, it isn't and we're making those adjustments which could affect the growth rate in 2012 but it will still be double digit at a minimum if not more because it's a solution for our customers.

As far as Threshold Technology goes, that integration has gone very, very well. We just did our planning review this week for 2012 and the main focus is how do we take that acquisition out of Canada and what are the next markets that we take that technology to and how do we staff and how do we go to market in an organized fashion? We'll finalize those plans by the end of this year. I would say it would probably be the middle of next year before we have firm plans on what countries we're entering, how we're entering, and how we're going to globalize that institution.

Great, and then just turning back to the guidance, with some of the challenges in Europe, are you still looking at the 50 to 75-basis point improvement towards your long term target of 7% as a 2012 range to think about or just given the environment, do you think that might be a little aggressive to forecast at this point?

I'm pretty comfortable that we'll be able to do that.

And then just on the U.S. side, with the pricing environment, do you see any visibility on that starting to turn given that some of these tier one banks are starting to come back to you and the pricing sustainability of your competitors are starting to sort of become moderate at this point?

Once again, their capacity is full so they would have to go out and create capacity and at the price levels that they have taken on this business or taken this business away from us -- usually it's at least 20% below our rates -- it's just not sustainable and I don't know how you can continue to invest capital in facilities at that level of pricing. It just doesn't make sense.

And for service frequency, have you started to see that, the seasonal improvement in service frequency, similar to what you were seeing last year excluding some I guess, you mentioned some moderation quarter to quarter?

Actually we haven't and I think of all the statistics that I look at, Michael, that disturb me the most about the fourth quarter is that where the container shipping rates from Asia to North America are at 20 year lows which gives me an indication about what retailers think the normally busy fourth quarter holiday season period is going to be and that's not a pretty sign in my view, in my mind. I don't expect to see the American consumer all of the sudden decide that things are wonderful and get out their wallet and have as a good a year as we did last year in the fourth quarter on the retail side.

Great, thank you very much.

Our next question is coming from the line of Jeff Kessler with Imperial Capital. Please state your question.

I'd like to just keep on the theme of North America for a second. Typically, that margin obviously has been higher. The question is is from where you are now you've outlined some general framework and you've outlined and you've just given Michael an answer on some of the specific things you may start doing. Over the longer term, we're talking about the next two or three years, what is a reasonable expectation for a North American margin assuming, and what is it going to take to get to a 5% or 4% to 5% margin in North America since that seems to be -- if Europe remains where it is and Latin America remains growth-y but you begin to pen the Mexican margin, a real linchpin in your margin improvement will be coming from North America where the margins are unnervingly low. Question is what are the things that are going to get you to that higher margin in the next two or three years in general, above and beyond the specifics that you're trying to talk about for next year?

Jeff, that's a good question. First of all, I'm very confident we're going to get it back to our historic margins in North America over the next two or three years. If you look what's happening in the banking industry, the three monster banks, those are the ones we call tier one banks, they're the ones that have caused us the most difficulty over the last two or three years. By the way, the people who are benefiting from that are the regional banks and the results of the regional banks like Huntington Trust, Huntington Bank Shares, SunTrust Bank, Fifth Third Bank, KeyBank, those banks are benefiting from the tier one banks' current troubles and that is becoming more and more our core focus. By the way, we do a substantial amount of work for those customers and we're well positioned with them. They understand the value proposition. We can usually run the cash vault for those people. We don't run the cash vaults with tier one banks. They continue to do it themselves in most major markets.

I'm confident that we stood our ground with the tier one banks. We've done it correctly. It's been painful. It has affected our margins and we've refocused ourselves on those customers who value what Brinks brings to the market. As the tier one banks suffer like they have recently in one particular state and we wanted more than one state to take any work back, that's part of what I call the long term educational process and it has served this Company well through its history so I think it will be a combination of the strengthening of the regional banks, the continued growth in our CompuSafe, the continued growth in our cash logistics business, and the tier one banks giving us our fair share at our pricing levels will get us back to the levels that we've enjoyed in the past.

Are the regional banks, your operating margin with them is higher than with the tier one banks?

The tier one banks, where we service them the margins are the same. We just have less share with the tier one banks because they've been chasing price with the pressures they feel that they're under.

Okay so then the final question would be do you expect that the percentage of business that you're doing with the regional banks to continue to increase or is this totally dependent on what we see going on with the tier one banks' macro situation over the course of the next year or so?

The tier two banks and even the tier three banks, they're growing. They're benefiting from the current economic situation. Whether it's public dissatisfaction, whether it's the Wall Street movement, whether smaller banks are more willing to lend than the larger banks, those banks are growing. Go look at their results. They're growing quarter to quarter to quarter their revenue line. They're gaining business from the tier one banks. That has become our new sweet spot and we're already properly positioned to seize that. That makes me feel good about the next two or three years.

So effectively, this becomes a major part of your strategy for getting that North American margin up to what you would deem to be acceptable over the next two or three years?

And hold our pricing discipline with the tier one banks, absolutely.

Okay, thank you.

(Operator Instructions) Our next question is coming from the line of Brad Safalow with PAA Research. Please state your question.

First question on the pension side, if we finish the year around the current rates I think we're looking at a 100-basis point decrease, roughly. Can you give us a sense of what that would mean in annual expense, could follow cash flow backwards, annual expense for you guys?

In our 10-K we actually did provide a Sensitivity to this so in our 2011 U.S. retirement cost we had projected about $8 million and if that rate is one percentage point lower it's about a $10 million impact. You can find that in the 10-K on page 58.

Perfect and just going -- I don't want to belabor this North America issue but maybe I can ask the question a different way. Looking at your margin objectives, what can you actually obtain just from what you're doing with headcount, with being more efficient from a field perspective, managing your own internal operations in terms of rationalizing capacity if need be, all the things you've mentioned, what can you do from a margin perspective there in North America versus what you're talking about, separate dynamics, whether it be market share gains from regional banks, changes in behavior from tier one banks, other dynamics that can occur in the marketplace so just specifically about what Brink's Company can do. What is a realistic margin expansion target from where we are or where we will finish 2011?

I think the best way to answer that question is there is nothing that is not on the table. There is no thing that is not being looked at from headcount to SG&A to how we go to market. Every manager, every employee understands where the Company is, the pressure that North America, the U.S. in particular is having on the effect of the Brink's Company. It's all hands on deck.

I mentioned that we had business planning review meetings here the last two weeks and we were looking at multiple levers, ways to move that needle faster than possible and the Management group which is based in Dallas, Texas is fully aware of the effect, that they're making the right decisions, the smart decisions, controlling costs, investing money and capital in a smart way and at the same time maintaining that price discipline. As difficult as it is they are fully aware of what we need to do and are focused on doing it. I'm confident we have the right people, we have the right strategy, and we have the right attitude that are going to take the tough steps that are necessary to improve that margin hopefully much, much faster than we expect.

Okay, and then just shifting gears on the diamond market, seeing a pretty big move in rough diamond prices, polished diamonds not nearly as much. It does sound like the marketplace is seeing very good demand from Asia, to a lesser extent, Latin America. Does your exposure to the shipment of diamonds, is it roughly equal to what global shipments look like, that is to say I think it's about 35%, 40% of diamonds, polished diamonds, go into the U.S. and maybe 20%, 25% into emerging markets. Is that your exposure or do you have a greater exposure to the U.S. market at this point?

That is truly, truly a global business for us and again as I've said on past calls, the rough price has gone up as you know, substantially and I give most of that to similar reasons as the price of gold. People want to store value and they're doing it in roughs rather than polished stones. We're doing well. High end retail customers we have, we're doing very, very well with them. Their sales are doing well. Where we're suffering is in Middle America and to somewhat lesser degree, into Europe where the middle, polished diamond jewelry sales have picked up a little bit better but the U.S. is absolutely flat. The retail sales for the middle market for smaller stones is absolutely flat but the global movement of diamonds and the global movement of rough, we're absolutely aligned with them globally. As that market moves, we move. Where they are, we move. When the world is doing well, we're doing well and when the world is struggling -- the U.S. is the biggest diamond market. I don't see the retail sales being particularly strong as it normally would be in the fourth quarter.

Inventory build is an issue. Last year there was a great expectation it was going to be a good holiday season and it turned out to be okay, not great. Well, guess what? We benefit from that because we ship the diamonds in and if the diamonds aren't sold, we ship them back. This year, I just foresee a little more caution on how much polished diamonds are going to be moving into the U.S. market due to the economic uncertainty, the American consumer's behavior, the unsettled economic environment that we're all aware of.

Okay, thanks for the detail. I'll turn it over.

Our next question is coming from Chris Marangi with Gobelli and Company. Please state your question.

I'll focus on Latin America since that's where more than half your profits come from. Mexico, you mentioned SBC was ahead of expectations. I think one of the gating factors there was the labor agreement. Could you just update us on the status of that and any other color?

Yes, first of all recall that we took a little higher severance expense in the second quarter of this year which is moving ahead faster in our integration plan which is what is going to help us in the third quarter and the fourth quarter. The labor negotiations in Mexico, the labor contract expires the first week in November so we are in negotiations with our labor partners in Mexico at the current time and I will tell you that you never know what is going to happen when you are in labor negotiations but to date, we have made I think solid progress on building relationships. They know changes need to be made, that we're not a service business as this business was run when it was controlled by the banking community in Mexico and we hope to make strong progress in Mexico during this labor agreement to have more management rights, more management flexibility, more cooperation from the union for the benefit, for us to be able to grow our Company and add more jobs in our Company and for the union in Mexico. This is the first test. This is the first test, the first labor agreement since we've controlled this operation and I am hopeful that we will be successful in reaching an equitable agreement to the satisfaction of all parties involved.

Great, thanks and you signaled some general disappointment in the improvement in Latin America, or growth in Latin America. I presume that's directed at the situation in Venezuela. That situation changes everyday. Any update on what is happening on the ground there?

Our problem has been trying to recover in the highly inflationary environment. The full wage increases that get mandated down there have been more and more difficult. The percent of banks that have been nationalized from a year over year basis has increased to some degree and therefore, trying to get price increases from these government owned banks, or stay up with that inflation, is much more difficult than it is with the private banks. In my judgment, that situation is not going to change. It has potential to get worse if more banks get nationalized. It has the potential to get better if the November elections next year changes the government but it's just a very unsettled situation but we continue to perform strongly.

We've got a great management team down there that has been steering our course through there for the last 12 years that Mr. Chavez has been President and we'll continue to do the very, very best we can and the returns continue above average in Latin America.

Terrific, thanks a lot.

There are no further questions at this time. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.