Brinks Co (BCO) 2012 Q1 法說會逐字稿

Greetings and welcome to The Brink's Company's first-quarter 2012 earnings call. Brink's issued a press release on its first-quarter results this morning. The Company also filed an 8-K that includes the release and the slides that will be used in today's call.

For those of you listening by phone, the release and slides are available on the Company's website at Brink's.

At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Cunningham. Please go ahead, sir.

Thank you, Denise. I'll read the Company's Safe Harbor statement now. This call and the 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 press release and in the Company's most recent SEC filings.

Information discussed on this call is representative as of today only and there is no obligation to update any forward-looking statements, the call is copyrighted and may not be used without written permission from Brink's.

Most of you are aware we report results on both a GAAP and non-GAAP basis. Non-GAAP results exclude certain items related to US retirement expenses, income taxes, asset acquisitions and dispositions, non-GAAP results, also adjusted tax rate to the midpoint of our full-year non-GAAP estimated range of 37% to 40%.

Summary reconciliation of non-GAAP to GAAP EPS is provided on page two of the release and more detailed reconciliations are provided on page 10 of the release and as an appendix to the slides that we are using today. Comments today will focus primarily on non-GAAP results which we believe make it easier for investors to assess operating performance between periods.

Non-GAAP earnings were $0.58 per share on revenue growth of 6%. Organic revenue growth, which excludes a negative currency translation impact was 9%. Segment margin was 7.2%. [Group] results were driven by continued strong growth in Latin America. Both Tom and Joe will discuss recent performance and our improved outlook for the full year. Please note that page seven of the press release provides a summary of selected results and outlook guidance that should help those of you who wish to forecast (technical difficulty) results in more detail.

It includes our guidance on revenue and segment margin, non-segment expense, interest expense, tax rate, non-controlling interest, capital expenditures, capital leases and depreciation and amortization.

I will now turn the call over to Tom.

Thanks, Ed. (technical difficulty) Good morning, everyone, and thank you for joining our call this morning. My goal today is to update you on the changes that are taking place at Brink's. These include a renewed focus on business processes, how we plan to drive productivity, and CEO succession. I'll also provide a strategic update and then Joe will spend some time on the details of the quarter.

Speaking of the quarter, results were very encouraging. Latin America delivered broad-based gains across the region including continued improvement in Mexico. Europe and North America are still managing through very difficult market conditions but each achieved a slight improvement in profit margin over the prior year.

We are keenly aware that one quarter does not a year make but we are off to a good start and are more confident about 2012 results. Our outlook for annual organic revenue growth remains in the 5% to 8% range and we now expect our full-year segment margin to be about 7%, which is an increase from our prior range of 6.5% to 7%.

We have a number of opportunities to increase value for our shareholders and that's what I want to talk about this morning. Instead of repeating what's in the press release, I want to look forward and talk about our plans for continued improvement in both short-term and long-term results.

I'll start with an update on the CEO search process which is nearing its conclusion. We've narrowed the search to a strong group of internal and external candidates and as we have stated before, we expect to make an announcement by the end of June.

The only thing I'll add is that I'm confident that our CEO will support the strategy we have in place which is to maximize profits in North America and Europe, continue to invest in emerging markets like Latin America and to grow high-value services.

The earnings growth we reported today was driven by another outstanding performance in Latin America which represents 40% of revenue and is clearly our fastest growing region. Profits were especially strong in Mexico, Venezuela, Argentina and Brazil. These results demonstrate the power of internal productivity and efficiency efforts when combined with positive market conditions.

Latin American markets are cash intensive and our customers value the security services we provide. In other words, the price and volume dynamics are more attractive than in developed markets like Europe and North America. Continuing to invest in Latin America and in other emerging markets with similar attributes is a key component of our growth strategy.

The most recent example is Mexico which we acquired at the end of 2010. Mexico had a slight loss in last year's first quarter and improved steadily throughout 2011 and in this year's first quarter. We do not expect substantial year-over-year profit growth in 2012 as we execute an additional cost out and productivity efforts. But we do expect accelerated profits in 2013 and beyond with margins reaching at least 10% by the end of 2015.

Pushing to North America, first-quarter profit was up slightly on flat revenue. Market conditions have not improved and we expect continued pressure on price and volume. Good news is that the margin rate improvement -- the margin rate improved both sequentially and versus the year ago quarter.

As we said and our call in February, it was critical to halt the downward slide in profits and we believe that we've done so. We've reduce costs and invested in productivity and we will continue to do so. We believe we can increase the North American margin from 3.6% in 2011 to 4.5% to 5.5% range in 2012 with similar growth in 2013.

Our goal is to return to the 6% to 7% margin range in North America over the next two to three years and this assumes no improvement in the competitive or economic environment. It's based instead on continuing cost reductions and productivity improvements. If market and economic conditions improve, we will view it as a welcome tailwind to our internal actions.

Europe profits improved slightly but it will take a while before we see significantly better results. Each country has its own set of issues and opportunities and the restructuring is more difficult to implement.

As said in the previous call, we are looking at our entire portfolio of countries around the world. We are not generating a sufficient return in a given market. It is management's job to address the problems and we will do so. In the meantime, we are being much more aggressive in reducing costs and improving productivity.

In Germany, for example, we are executing a significant business realignment that will consolidate operations and enable us to strengthen service in selective regional markets. While this is not the final answer, it's an example of our acceleration of efforts to improve results in Europe.

We have reviewed our internal processes and have instituted more a financially rigorous review of our capital spending. Joe will provide you with more details on our CapEx but we are definitely raising the bar in terms of how we will determine the appropriate level and expected return for our capital investments.

Finally, there is one additional item that I'd like to discuss before turning it over to Joe. It's an important one for all shareholders. By now I hope that you can see that there are a lot of changes being made here at Brink's and there is more to come.

Among the most important is executive compensation and how incentive compensation is being structured by our compensation and benefits committee. Simply put, if we meet or exceed our preset profit goals, management will be rewarded accordingly. If we do not meet these goals, executive pay will be reduced. Details of our compensation proposal are in our proxy statements which also includes a proposal to reelect four directors for another term on our Board.

Our annual meeting will be held to consider these and other proposals on May 4 and I strongly urge all shareholders to vote in favor of all proposals.

I've now completed my first full quarter as the interim CEO. The last few months have reinforced what I believed when I joined the Board three years ago. Brink's is truly the best operator in the industry, we have the premier brand and executing a strategy we have in place will create value for our shareholders. We will continue to invest in emerging markets and high-value services to accelerate efforts to maximize profits in North America and Europe.

We expect to meet the annual revenue and segment rate outlook that we gave for 2012. Our long-term goal is to achieve a 10% segment margin by the end of 2015. I assure you that our focus is on execution. We expect to demonstrate additional progress this year.

Okay, Joe is up next and then we're going to open it up for questions. Joe?

Thanks, Tom, and good morning, everyone. I'll start with a brief summary of first-quarter results. Revenue grew 6% in total and 9% on an organic basis due primarily to strong organic growth in Latin America that was partially offset by an unfavorable currency impact of 3%.

Segment operating profit improved by $17 million due primarily to Latin America. Earnings rose 49% to $0.58 per share. The increase in earnings per share was driven entirely by the higher segment profit, an improvement of $0.22 per share.

Non-controlling interest expense increased by $0.04 per share from profit growth in Venezuela and Colombia which are approximately 60% owned by Brink's. Non-segment and interest expense were relatively flat year over year and the tax rate was 39% in both periods.

As we look forward to the rest of the year, we do not anticipate any significant headwinds from these items. We provided a full-year outlook for these and other items in the earnings release which shows relatively flat non-segment and interest expense, an increase in non-controlling interest and a tax rate between 37% and 40%.

Now let's look at total segment results. Organic revenue growth was 9% similar to the growth rate we had before the 2008 recession. Segment operating profit increased by $17 million or 32% versus 2011. The margin rate improved from 5.8% to 7.2%. This increase was driven by broad improvement across Latin America and slight margin growth in Europe and in North America.

Before today, our full-year margin rate guidance was in a range between 6.5% and 7%, now expected to come in around 7%. We expect organic revenue growth to remain in the 5% to 8% range. We also anticipate 3% to 5% of downward pressure on revenue from currency.

(inaudible) of currency pressure also was estimated to affect segment operating margin profit in 2012 versus 2011 by somewhere between $10 million and $15 million due to a stronger US dollar.

Our assumptions behind raising the annual margin rate include continued strength in Latin America and modestly better results in Europe. We continue to expect North America profit to be in the 4.5% to 5.5% range.

North America revenue trend is expected to remain flat as it has been for the past three years and we do not expect to see revenue growth for the foreseeable future in the US.

Last year we took action to reduce our branch cost structure and to streamline operations which to address the decline in volume and improved productivity; took additional action earlier this year at the regional and headquarters level. These actions should deliver a North American margin rate of between 4.5% and 5.5%. We are confident that we can achieve the low end of the range with the actions we are taking.

Hitting the high end of the range will likely require some tailwind from the economy and/or the market environment.

International segment revenues grew 12% organically on strong growth throughout Latin America. Operating profit increased 37% from organic growth offset slightly by unfavorable currency rates. Our Mexico operations had a margin rate of 2.6% in 2011 continued to improve.

As we said on our last call, we do expect significant margin growth in Mexico during 2012 given our plans to continue restructuring the business, position it for significant margin expansion in the 2013 to 2015 time period. We said from the start that our goal was at least 10% margin by 2015 and we feel this is very achievable.

In the first quarter, Mexico had a strong improvement in profit as we did not incur as much restructuring cost as expected. We plan to execute more actions in the remainder of the year to improve service and productivity which will largely offset the underlying operational improvement in the business. These actions will position the business for accelerated margin expansion in 2013 and beyond.

In 2012, we expect international operations to deliver another year of strong organic revenue growth. However, we expect negative pressure on revenue of 4% to 6% from currency. We expect 2012 operative profit of 7% to 8% from international operations as Latin America growth more than offsets relatively flat growth in the Europe region.

Cash flow from operating activities excluding customer obligations and discontinued operations noted on slide 13 was $2 million compared to $3 million last year. The first quarter is generally the lowest quarter of the year due to beginning of the year payments for several annual items.

Change in cash flow versus last year was driven by an increase of $16 million in pension payments including a pension payment to our former CEO and contributions to our international plans and an increase in working capital partially offset by increased operating profit.

Capital expenditures and capital leases declined by $4 million versus last year as we increased efforts to reduce maintenance capital spending through efficiency projects and allocated more of our spending to growth and productivity initiatives.

The North American region increased CapEx by $2 million versus last year which was driven entirely by our Canadian cash logistics business and threshold, our ATM managed services business. The US business CapEx was flat compared to last year but we reduced spending on maintenance CapEx and increased the spending on productivity initiatives and CompuSafe. For the full year, we will spend less in North America than we did in 2011.

The international segment CapEx spend decreased by $6 million in the first quarter due to the timing of a number of growth investments and the delivery timing of armored vehicles. The net debt increased from $232 million at the end of 2011 to $285 million at the end of the first quarter from an acquisition in France and higher working capital consistent with our prior years.

In early February, we announced our intention to make stock contributions to our US pension plan during 2012. We made a $9 million stock contribution to the US pension plan in March and have another $22 million to contribute in the remainder of 2012. We made the decision to use stock due to the high cost of repatriating international earnings due to our lack of the US taxable earnings.

We will continue to explore alternative methods of funding the US pension plan including reducing capital expenditures in the US, improving US profitability and identifying tax efficient methods to repatriate international cash flow to the US, to generate US-based cash flow that could be utilized to fund the pension plan.

We still believe incurring significant debt in the US to fund the pension is not an efficient use of capital given our inability to realize a cash tax deduction in the US. As we make progress on the alternatives, we will communicate with shareholders.

We will continue to focus on efficiently deploying capital investments, maintain the level of safety and security that Brink's is known for while reallocating capital to focus on growth and productivity efforts.

As Tom noted, we are off to a good start in 2012 and have raised our margin rate guidance. We are not counting on any improvement in the external environment or market conditions. Our plan is to execute on cost structure and productivity improvements in North America, Europe and Mexico. Latin America and our global services business should continue to be important growth drivers. As we move through the year, we will look for opportunities to reduce capital expenditures.

In summary, we expect organic revenue growth of 5% to 8% and a segment margin rate of approximately 7%. We believe North America will expand margins to 4.5% to 5.5%; profits should also improve slightly as we address underperforming countries in that region; and Latin America should continue its strong growth as we position Mexico for accelerated margin expansion in 2013 and beyond. We will continue to take the necessary steps to create value for our customers, employees and shareholders.

Denise, let's open it up for questions.

(Operator Instructions).

Denise, we're ready for questions.

Clint Fendley.

If you could help me understand how much further benefit we should expect from the restructuring that you guys have done in North America?

Tom Schievelbein. I'm not exactly sure I got the question but what we've talked about is the revenue being flat on the top line and the margin rate being at the 4.5% to 5.5% range.

Right, and you also -- I think as we discussed in the last call, you had made some reductions in headcount there at the Dallas headquarters. I wondered if all of those -- has all of that played out? Have we seen all the actions that you've taken impact the numbers here or should we expect some more benefits in Q2 and beyond?

A lot of the action we're taking were taken during the first quarter so we had some impact from those. We haven't seen it all. It will start to happen in the second quarter but really kick in for the third and the fourth quarters.

Okay, thank you. That's helpful. And, Tom, I also wondered -- your comments on executive compensation, I'm assuming that this means that the alignment will be with the 2015 plan for growth that you guys have had as long-term targets for your business. Is that correct?

The specific thing in terms of the annual bonus is aligned with the year's plan, which is also obviously part of the path of 2015 but that year is planned. The number that is there for that bonus which will be a straight mathematical calculation is in line with what we are providing to the shareholders today.

Okay, thank you. That's good to hear. And then on Mexico, I heard you -- margins of at least 10% by 2015. I guess when I look at -- it looks like you did have some severance charges there in the quarter. I wondered if that changed at all your outlook for the performance for Mexico for this year?

No, I mean, what we've basically said is Mexico had a great quarter but going forward I think in the last call we talked about Mexico being about the level it was last year which was about 2.6, something like that. So they were a little bit above that but we plan on a number of actions so that we can to get it ready and get it in shape for future growth.

With that, I'm going to turn it over to Joe and he can provide some more technicolor on that question of Mexico.

So, Mexico there is a number of actions that we're gearing up to take to improve service and productivity. There's a lot of work to be done there. We've talked a lot about this, we took a number of actions last year. The underlying business continues to improve and in the first quarter that fell through to income because the timing of those actions didn't occur -- we did not incur much expense -- as much expense in the first quarter as we had anticipated.

For the full year, we have every intention to continue executing the service and productivity improvements. There will be more expense in the future quarters so for the full year, we still expect Mexico to be comparable to last year's margin maybe slightly above last year's 2.6%. But in the first quarter, the underlying productivity and improvement fell through to income.

Okay, thank you, that's helpful. And then a last question here, another numbers question. I wonder -- the adjustments related to the US retirement plan is expected to be fairly consistent on a quarterly basis going forward. I guess I'm referring to the $10.6 million expense reconciling item here.

That sounds like a CFO question.

Yes, we've detailed out the expense that we expect to incur by quarter in the US plan so for the year, we're expecting $56 million worth of expense. In the first quarter, it was $17 million so the balance is spread evenly over the second through fourth quarter.

Okay, thank you, guys.

Jamie Clement.

Good morning, gentlemen. Joe, I think you touched on this perhaps briefly. Your CapEx spend for the first quarter was well below the annualized rate that you all expect. I know there's some seasonality in that but can you help bridge us from the amount you spent up to the 240, 260 range?

Well, clearly with the increased scrutiny and focus on the returns, the first quarter was less than last year in spite of our guidance for the year that we could be anywhere from $0 to $20 million higher year over year. And so we're putting it through a much more difficult screen where we spend the money and that caused the first quarter to be lower.

There will probably be a bit of a catch up in the second quarter as we execute some of the higher returning projects that we have approved. I'd expect to see probably second and third quarter be a little higher than normal and then the fourth quarter will probably be lower than normal to get us back within our guidance for the year.

We continue to be very judicious on where we spend money. If we don't see returns in a shorter timeframe, shorter payback than what we have had in the past, we won't spend the money. But we're going to keep investing everywhere that we have growth opportunities. The focus is on growth in productivity and driving efficiency in our maintenance CapEx.

So where we will be declining is maintenance CapEx and ideally I'd love to even spend more in the productivity and the growth because that has a faster and a higher return.

Okay. Update on CompuSafe if you could?

CompuSafe is -- the investment was a little bit higher in the US business on a year-over-year basis as we've got a number of implementations in the second quarter. It grew a little bit in the first quarter. For the full year in the US, it won't grow as much as it has in the past as again we've communicated we've increased the expectations on profitability and returns for CompuSafe.

It's still a great product. We think it is a great solution for our customers and it's really starting to take off in a number of countries outside of the US and there's significant growth prospects there. It's still a small percent of the global install base but it's growing faster outside the US than it is in the US.

Okay, great. Thanks very much as always for your time.

(Operator Instructions). Michael Kim.

Just wanted to get a little more commentary on global services, how is that pace tracking particularly in Asia Pacific and where you see some trends in diamond and jewelry? Thanks.

Yes, this is Tom. It's kind of -- a mixed bag wouldn't be right. We've seen continued growth in global services. We do have some issues in the Far East. I'm going to let Joe detail those a little bit more but kind of looking at it, storage is still very good for global services. Some storage of precious metals is good, the import of gold for instance into China is off. And we've had some dislocations in the volume in India due to some taxes that have been added by the government there.

But, Joe, why don't you take a shot at some of the details.

So, Tom characterized it dead on in that we continue to grow in global services globally. There have been a couple of market factors that have caused the volume in the global movement of diamond and jewelry and gold in particular to slow down. Both as China has tried to diversify their investment holdings, gold imports have decreased. India imposed some taxes on both precious metal imports and diamond imports that's caused a decline in the overall volume of imports into India. And so there was less movement in the first quarter into those markets than in the past, which given our strong position globally in global services that had an impact on us.

And then there were some issues in Israel in the banking industry that caused the diamond and jewelry business to be much slower in the first quarter than the overall market and obviously given our strong position in global services, D&J, that impacted us.

Overall our position continues to be the same and we see great growth prospects in the business particularly in Latin America. And then as the market issues abate, then the growth will rebound in those specific places in the first quarter.

And then, Joe, just turning to the guidance on segment operating margins. If we take the 7% overall and the low end for North America, that does seem to imply that international segment operating margins sort of mid 7s about a point lower than where you guys have been tracking.

What is driving some of that contraction in the operating margins for international or what are you assuming happens to the balance of the year?

Go ahead, Joe.

So the first quarter at 7.2% comparing to our guidance of about 7%, when you look at the international market, the second quarter is traditionally our slowest and weakest quarter. We have wage negotiations that occur in the second quarter. That has an impact because those kick in largely at one time during the year all at once and the price increases with customers happens in a more staggered fashion.

We try to line those up as best we can. So that will have an impact on second-quarter margins as it has historically. The timing and pace of our investments in Mexico, that will impact earnings, could continue to pressure earnings. Recognizing the underlying improvement in Mexico fell through in the first quarter, we do not expect that to happen in the rest of the year because we're making the necessary investments to fix the productivity and service issues in that business.

So when we look at getting into the low end of 4.5% to 5.5% for North America and we look at the strong performance in the first quarter for Latin America and what we're planning for the rest of the year, about 7% is right within the range.

And that seems to imply for the second half, international segment operating margins should be very similar to what we saw in the first quarter then?

I think that math would yield about 7%, yes.

Pretty close, okay. And just on a more of a strategic question, a lot of the major banks now are using other carriers, partly I think due to price. If this recovery continued to remain slow and the banks remain focused on their bottom line, is it your expectation that will push out any market share recoveries or regains that you guys are hoping or planning for with some of these major banks?

I assume you're talking about in the US? Is that right?

Correct, yes.

No, as I think we've said, we are not planning on any recovery in the market so we are making the changes we need to make to get to those profit margins assuming that the banks do not change their operations from what we've seen here in the last two to three years.

So, you know, if indeed that does change, that will provide us a tailwind and let us get to the 6% to 7% earlier than we otherwise would.

And how do you feel about your market share and some of the shifts that we've seen over the last couple of years especially in North America?

Certainly, I wish that we were -- we hadn't seen some of the shifts obviously. But we are working hard to maintain the profitability and to grow that profitability and so we're bullish that we will accomplish that.

Okay, great. Thank you very much.

(Operator Instructions). The Q&A has now concluded. We thank you for your participation. You may now disconnect your lines at this time.