Brinks Co (BCO) 2012 Q4 法說會逐字稿

Good morning, and welcome to the Brink's Company's fourth-quarter 2012 earnings call. Brink's issued a press release on fourth-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 Brinks.com.

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.

Now, for today's Safe Harbor statement. 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 presented and discussed on this call is representative as of today only. 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.

It is now my pleasure to introduce your host, Ed Cunningham, Director of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.

Thank you, Denise. Good morning, everyone. Joining me today are CEO Tom Schievelbein and CFO Joe Dziedzic. In addition to reporting earnings this morning, we also announced the divestitures of selected operations in Germany, France, Morocco and Poland. The sales in France and Morocco have been closed, and we expect to complete the dispositions in Germany and Poland in the near future. Results from these businesses are now reported as discontinued operations, and are provided on page 1 of today's press release.

As most of you know, we report results on both a GAAP and non-GAAP basis. Non-GAAP results exclude certain items, such as US retirement expenses, and acquisitions and dispositions. The non-GAAP results use a full-year tax rate of 37%. A summary reconciliation of non-GAAP to GAAP EPS is provided on page 3 of the release. More detailed reconciliations are provided in the release and in the Appendix of the slides we are using today. The slides are included in this morning's 8-K filing, and are available on our website.

Please note that page 12 of the release provides quarterly and full-year results from continuing operations as they are now reported. As such, they exclude results from discontinued operations. In 2012, these discontinued European operations generated $104 million of revenue and an operating loss of $16 million, or $0.31 per share, on a non-GAAP basis. From this point on, our comments will focus on non-GAAP results from continuing operations, which we believe make it easier for investors to assess operating performance between periods.

Fourth-quarter earnings from continuing operations came in at $0.60 per share versus $0.67 in 2011. The segment margin rate was 7.4%, down from 8.1% in 2011. Organic revenue growth was 6%, and currency translation had a negative impact of $17 million on revenue, $2 million on profit and $0.02 at the EPS level.

Full-year earnings were about flat at $2.31 per share. The full-year margin rate was 7% versus 7.1% last year. Organic revenue growth was about 7%. Currency translation had a negative impact of $194 million on revenue, $15 million on profit, and $0.20 at the EPS level for the full year.

Tom and Joe will discuss our revised outlook for 2013. For those of you who model results, please note that page 9 of the release provides a summary of selected results and outlook items that should be helpful in forecasting 2013 results in more detail. In addition to guidance on revenue and segment margin, it includes our outlook for 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, and good morning, everyone. We have several topics to cover today -- strategy execution, the 2012 results, and the outlook for 2013. On one hand, we took several positive, strategic actions that should drive long-term improvement. On the other, fourth-quarter earnings from continuing operations declined, as profit improvements in both Europe and North America were not enough to offset the lower results in Latin America. Full-year earnings were relatively flat at $2.31, again, reflecting improvement in North America and Europe, and the decline in Latin American profits.

We now expect our 2013 segment margin rate to be between 6% and 6.5%, down from 7%, on organic revenue growth of 5% to 8%. The biggest drivers of this expected margin decline include a substantial increase in productivity investments, primarily in Latin America, followed by our assumption of a 40% currency devaluation in Venezuela, and the general uncertainty there. These factors are likely to at least partially offset the overall profit growth we expect in Latin America. We do not expect profit growth in North America this year, and profits in Europe are likely to decline. We expect first-quarter results will be down significantly compared to last year's very strong results from Latin America.

As I said in our call in October, my primary goal is to reposition Brink's for accelerated growth in 2014 and beyond. Our strategy is to maximize profits in our mature CIT markets, as we continue to invest in developing and adjacent markets. To execute this strategy, we said we needed to invest in productivity, take a hard look at the markets that we are in, strengthen our leadership team, transform our culture to become more focused on customers, and pursue new opportunities to leverage the power of the Brink's brand. We made good progress in each of these areas in a very short period, but there is more work to do.

Realizing the positive results of these actions will take time, and investing for the future will affect near-term results, particularly in a challenging global marketplace. I am confident that what we are doing is what we need to do to position Brink's for long-term success. So, my comments today will address primarily near-term results and our profit outlook, but I will try and frame them in the context of our overall strategy.

I will start with our goal to maximize profits in our mature cash-in-transit markets in Europe and North America. With the recent actions we've taken in Europe, the portfolio review we've discussed on past calls is largely complete. The elimination of these operating losses from continuing operations is a major step forward that enables us to achieve our margin goal of about 7% for this region. At a higher level, it also increased annual earnings by $0.31 a share. We do not expect near-term margin expansion in Europe, and 2013 will be particularly challenging due to the loss of a significant customer in France, and the non-recurrence of a favorable commercial settlement that boosted our 2012 results.

So, in the near term, our job in Europe is to sustain current margin levels in 2013 as we pursue new growth by getting closer to our customers and delivering new, higher-value solutions. We are working on a number of opportunities to provide the end-to-end ATM network management capabilities, which our threshold business is currently providing in Canada.

In North America, we have a similar goal to return to a 7% segment operating margin. The 2012 margin improved to 4.4%, up from 3.6% in 2011. In 2012, we made good progress in reducing costs, consolidating our branch structure, optimizing our routes, and our IT-based productivity investments began to pay off.

But the gains we made in these areas were largely offset by continued pressure on volume and pricing. We've been able to replace much of the volume we've lost in recent years, but at lower margin levels. To achieve the margin growth in North America, we must first stabilize that pricing and volume. Volume in 2013 is likely to be flat. We fully expect to realize continued productivity gains in 2013, but if price and volume pressures persist at the current levels, these gains will be offset, again.

Earlier this month, we announced that Mel Parker has joined Brink's as our new President of North American Operations. Mel comes to us from Dell, where he was the General Manager of the North American Consumer business. He also held leadership positions at Newell Rubbermaid, Staples, and PepsiCo. Mel is a change agent who brings a wealth of experience in sales, branding, and building customer relationships. We are excited to have him on board, and he clearly has a full plate of challenges in front of him. From [a net] operations perspective, the business is well-positioned to continue delivering productivity gains. It will take some time to improve the commercial side of the business, but I have great confidence that Mel will impact and expedite a turnaround in North America.

Now, let's move on to Latin America, our largest and fastest-growing region, and obviously a key component in our strategy to invest in developing markets. Fourth-quarter and full-year results were down in this region, due primarily to a profit decline in Venezuela, and an increase in productivity investments throughout the region. The national and regional elections in Venezuela affected volume and margin much more than we expected. Full-year results were also affected negatively by $6 million related to the government terminating an industry subsidy in Argentina, and slower than expected second-half economic growth in both Brazil and Mexico.

In 2013, we expect strong profit improvement based on continued growth across most of the region, including Mexico, which delivered a higher profit margin in 2012, and is on track to continued improvement in 2013. We expect this profit improvement will be at least temporarily offset by substantial increases in productivity investments and currency devaluation in Venezuela. In summary, we remain very optimistic about Latin America's long-term growth prospects, and will continue to invest aggressively there.

The third leg of our strategy is to invest in adjacent markets. We recently announced the first-quarter rollout of the Brink's Money Card in the US, and yesterday we acquired Redetrel, a Brazilian-based distributor of electric prepaid products and mobile phone top-up services. Redetrel's distribution network includes over 20,000 retail locations throughout Brazil, and when combined with our ePago business, it further strengthens our existing networks in Brazil, Colombia, Mexico and Panama.

In terms of revenue and profits, neither Brink's Money nor Redetrel is expected to move the needle much in the near term. Indeed, we will likely increase our investment in the growth of these businesses. But once again, they demonstrate our commitment to executing our strategy to enter adjacent markets where we can leverage the Brink's brand.

Before turning it over to Joe, I do want to review one of the most critical aspects of our investments, and that is the additional changes we have made to our leadership team. In addition to Mel Parker, we recently added Patty Watson as Chief Information Officer, and Darren McCue as Chief Commercial Strategy Officer. Patty comes to us from Bank of America, where she served as the Senior Technology Executive for the Treasury, Credit and Payments division. At Brink's, Patty will help set the vision for information technology and process improvements throughout the Company, and will work with the regional leaders to drive productivity improvements, operational efficiencies and product differentiation for our customers.

Earlier this week, we announced that Darren McCue will join Brink's in February -- actually, February 19, as our Chief Commercial Strategy Officer. Darren most recently served as Executive Vice President of Strategy and Business Development for Consumer Financial Solutions at Aetna. At Brink's, he will be responsible for leading the development of new products and services, facilitating the growth of existing products and solutions, identifying new growth opportunities, and other critical marketing responsibilities. Finally, Amit Zukerman, our President of Brink's Global Services, has added responsibility for the Asia-Pacific region. Amit brings a customer-focused, disciplined view to this area; this decision allowed us to rationalize the overhead spend in the region.

So, to summarize, since I became the permanent CEO in June, we've strengthened our team by adding new leaders in North America, Asia-Pacific, Human Resources, Information Technology, and Commercial Strategy.

In closing, we are focused on taking the decisive actions necessary to achieve long-term success. Eliminating the operating losses in Europe is an important step towards that goal. We are very optimistic that Latin America will continue to grow. We will also continue to seek opportunities to invest in the adjacent markets. In 2013, with our new leadership team in place and focused on delivering results, we will continue to pursue cost reductions, productivity gains, stronger customer relationships, and new solutions.

We've also instilled greater discipline in our capital allocation process. Our 2012 capital expenditures were reduced by $32 million, and, given recent results, we are planning to hold capital spending flat in 2013. Successful execution in the near term is critical, as we are not assuming a significant contribution from new higher-value solutions until the end of 2015 or so. By then, we expect to have achieved substantial margin expansion in our core businesses that will be supplemented by an infusion of higher-margin revenue from new services. I assure you that we have a great sense of urgency, but it's balanced by patience, discipline, and a commitment to make the investments needed to drive long-term success.

I will now turn it over to Joe, who will provide the details regarding our results and outlook.

Thanks, Tom. I will start with a summary of fourth-quarter results, and then cover full-year performance and our revised outlook for 2013. Revenue for the quarter grew 4% in total, and was up 6% on an organic basis, as organic growth in Latin America and Europe was partially offset by lower revenue in North America, and includes an unfavorable currency impact of 2%. Segment operating profit fell 6%, as the profit decline in Latin America and unfavorable currency more than offset improved results in Europe and North America. The primary driver of the decline in Latin America was Venezuela, where we experienced significantly slower sales growth versus an extraordinarily strong fourth quarter last year. Additionally, the presidential and regional elections negatively impacted volumes. Profits in Mexico also declined in the fourth quarter, against a very strong prior-year performance.

Total earnings for the quarter were $0.60 per share versus $0.67 in 2011. Full-year earnings per share was essentially flat versus last year at $2.31. Although the segment operating profit change generated only $0.01 of EPS improvement, we had to overcome three significant headwinds to achieve this. The unfavorable currency impact of the euro, the Brazilian real, and the Mexican peso accounted for a $0.20 decline in segment operating profit versus last year. The difficult environment in Venezuela, including numerous new government regulations and taxes, negatively impacted segment operating profit, and reduced earnings by another $0.21. The government in Argentina terminated an industry subsidy, which negatively impacted earnings per share by $0.08. These three issues total $0.49 of earnings per share decline.

The total business impact in Venezuela was an unfavorable $0.13 when including the non-controlling interest benefit. The rest of the business generated $0.50 of earnings per share improvement. The improvement was driven by many countries including Brazil, Mexico, Argentina, Netherlands, Russia, France, and the US. Overall, we had a strong year for safety and security, and that improved our profitability in 2012 versus an average year in 2011. In most years, a $0.50 earnings per share improvement would be outstanding, but it was not enough to overcome the headwinds we experienced in 2012. These are the risks of being a global Company operating in developing markets, and we continue to believe that the benefits of operating in these markets outweigh the risk overall.

Now, let's look at segment results. Organic revenue growth of 7% was in line with our annual guidance of 5% to 8%. The first half of the year saw much stronger growth than the second half, as growth slowed in Latin America in the third and fourth quarters, particularly in Venezuela and Mexico. The full-year organic growth rate in Latin America was still a very strong 15%, followed by Asia-Pacific at 7%, and Europe at 6%. North America declined 2%, driven by continued price and volume pressures in the US. The total segment margin rate declined 10 basis points to 7%, reflecting profit growth in Europe and North America that was more than offset by negative currency impact and lower profits in Latin America.

North America increased margins to 4.4% versus 3.6% last year, from various cost actions, but price and volume pressures persist. Latin America profit declined from the previously mentioned headwinds in Venezuela, Argentina, and the impact of foreign currency, in addition to increased productivity spend and restructuring actions. Mexico continued to improve on a year-over-year basis, as their margin rate expanded to 4% versus 2.6% last year. We will continue to make the necessary investments in Mexico, which may include restructuring charges as they position to grow margins to 10% by 2015. Europe delivered a strong improvement in profitability, led by the Netherlands, Russia, and France. On a continuing-operations basis, Europe's margins are now at our 7% target.

Full-year cash flow from operating activities, excluding changes in customer obligations and discontinued operations, was down $24 million, due to $14 million in pension payments to our former CEO and former Chief Administrative Officer, a $13 million cash contribution to our US pension plan, and the timing of an $11 million insurance recovery. Full-year capital expenditures and capital leases declined by $32 million versus last year, as we continued efforts to reduce maintenance capital spending through efficiency projects, and reallocated more of our spending to growth and productivity initiatives.

The North America region decreased CapEx by $17 million, as we continued to reduce US spending on maintenance CapEx while focusing the spend on productivity projects. The international segment CapEx spend decreased by $15 million, primarily due to tightened spending in Europe and the timing of the delivery of armored vehicles, particularly in Mexico and Brazil.

Our plan in 2013 is to hold the capital spend near the 2012 level of $203 million. We will continue to focus on efficiently deploying capital to maintain the level of safety and security that Brink's is known for, while reallocating capital to focus on growth and productivity efforts. Net debt remained flat at $232 million.

Now, let me recap our 2012 results versus the guidance we provided at the beginning of the year on our fourth-quarter 2011 earnings call. As I mentioned, we experienced challenges associated with operating and developing markets that went beyond what we had expected. Within this environment, we were able to achieve organic revenue growth at the high end of the range at 7%, and currency landed at the high end of the range at 5%. North America missed the low end of the range on margin rate by 10 basis points, and the international segment was at the low end of the range, including discontinued operations. Unfortunately, this led to the total segment margin rate being just under the low end of the guidance at 6.3%, including discontinued operations. Other metrics were in line with guidance, except for non-controlling interest, which was driven lower by the Venezuela challenges, and capital expenditures and leases, which were managed to a significantly lower level.

Looking at our revised guidance for 2013. With 2012 results now in, and better visibility into 2013, we now expect organic revenue growth of 5% to 8%, driven primarily by Latin America at similar growth rates to 2012. We are not counting on any significant growth in North America or Europe to achieve this growth. We're expecting an unfavorable currency impact of between 1% and 3%, primarily from an expected devaluation in Venezuela in 2013, which we believe may come as early as the second quarter.

In North America, we expect the weak revenue trend of the last few years to continue. The steps we've taken to generate productivity in North America include exiting unprofitable markets, consolidating branches, reducing headcount, and investing in productivity. The gains from these efforts continue to be offset by pricing and volume pressure. We cannot cut our way to sustainable profit growth, but we believe we can deliver our historical margins of 6% to 7% through productivity improvements, and a stabilization of the price and volume pressure. 2013, we expect price and volume pressures to continue to offset the productivity gains of the Business. We will continue to focus on our commercial efforts to get closer to our customers, to understand their challenges, and deliver differentiated solutions. But it will take some time, and 2013 will be a year of building the commercial capability to stabilize the price and volume pressures.

In Europe, we are assuming a slight decline in profits from a contract loss in France, and last year's results included a favorable commercial settlement. We don't believe there's enough growth in these mature markets to offset these items in 2013. In Latin America, we expect continued strong profit growth across most countries, driven by strong organic revenue growth. The projected Venezuela devaluation, and an increase in our productivity investments, are expected to offset much of this growth. We expect a payback on the productivity investments to be realized in 2014 and beyond, as the implementation costs decline and the benefits accelerate.

An additional factor behind our lowered guidance is security loss performance. At the beginning of each year, we forecast security losses at our historical average, which means the forecast losses for 2013 will be higher than 2012 actual losses, which were better than our historical average. As the year progresses, we update this estimate based upon experience. Based on this regional summary, the total segment margin rate is expected to decline to a range of 6% to 6.5%.

As with any forecast, there may be unpredictable events. For example, the impact of the projected Venezuela devaluation could differ materially from our estimates. We anticipate our first-quarter 2013 results to be significantly below our first-quarter 2012 results, given the very strong performance last year in Latin America.

In summary, we remain very focused on continuing to take the necessary steps to maximize margins in the mature US and Europe cash-in-transit markets, invest in developing markets, and build strong growth businesses in adjacent markets. Tom covered examples of our recent actions in each of these areas of our strategy, including the strengthening of our senior leadership team. Together, we are focused on delivering solutions to our customers, protecting our employees, and delivering strong returns to our shareholders.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

At this time, we will pause momentarily to assemble our roster. The first question will come from Jamie Clement of Sidoti. Please go ahead.

Tom, Joe, Ed, good morning.

Good morning, Jamie.

As you compare your outlook today for 2013, compared to where it was three months ago, and you factor in, basically, taking out losses from Germany and some other regions. Can you talk about the baskets, where specifically, that are leading to that reduction in margin guidance? I mean, you referenced a loss of a customer in France; I don't know how big a driver that was. Obviously, your security costs and that sort of thing, that's probably not something that changed a whole heck of a lot, neither is really your assumption on the bolivar devaluation. So, can you break down that margin narrowing or the margin reduction a little bit more clearly for us?

Yes, let me take a shot at it first and I will ask Joe to add -- to chime in, Jamie. So the biggest issue is from the fall until now, as we saw, much lower volume in Venezuela, we saw additional taxes in Venezuela. So, Venezuela came in at much lower than they did last year and we are anticipating that's not turning around. If it does, that would change the guidance, but as of right now, that's one of the big buckets. The other bucket is, obviously, the devaluation of that currency; that's a big bucket. The security performance is actually a bigger bucket then you would think, so that has an impact.

Quite honestly, the -- we are going to reduce the margin expectations on North America, and so that we have time to impact on the commercial aspects of pricing and volume with the new leadership team. France is not a big driver of the margin, because France is performing well. It's just down slightly year-over-year, just based on the comparison from '12 to '13. So, Joe, we expect the Far East to start to move up. But, that was also because of the organizational changes we made there that had an impact on that guidance.

Okay. Now Tom, just a follow-up question here. Just my interpretation of your comments over the last couple of calls, as well as your comments today, I mean, should investors' expectation over the next couple of years be that Brink's will likely be a smaller company, globally? In terms of infrastructure and platform, and that shrinking the size, perhaps improves productivity and profits and that sort of thing? Is that the big take away from this year? I mean, what --

Yes, I think, there's part of that, Jamie though, I would say if you looked at our footprint, to the number of countries we are in, all of those countries weren't equal. So, you've seen in Europe, where we were not returning acceptable results in particular areas where there was some other guarding businesses or in particular countries, we have trimmed that footprint. We kept the BGS business, which is important for our future, but we have trimmed the future on cash-in-transit. There may be a few other smaller areas where we will look at doing that. I think in terms of the Company getting smaller, we certainly plan on continuing to drive revenue growth. And we do believe, certainly, that with the markets that we have in Latin America and with the rebound in North America, we will continue to drive the top line of the Company up, as well is working on the bottom line.

I think the big take away is that Brink's has historically been a very decentralized Company and that served Brink's well for a number of years. As we work to drive the profitability for the future, we are looking at centralizing a lot of -- which are these productivity improvements I have talked about, centralizing a lot of the transactional expenditures that we make, whether they are in information technology, in finance, in human resources a la payroll. So, we are going to get more efficient in how we perform those services.

The countries will continue to be forward-looking in terms of the customers, because that's the right spot for that to be. I mean, you know, in the end, what we have to do is -- every year, we are going to be surprised, so to speak, by things that are outside controls of Management. In the end, you all don't care about that; that's up to us to manage. We have to get more efficient so that we have more levers to pull, so that we can manage those surprises that will always come.

Okay. All right. Thank you all very much for your time.

Thank you. Our next question will come from Clint Fendley of Davenport. Please go ahead.

Thank you. Good morning, gentlemen. First question just on the Venezuelan write-down. My understanding was that was already in your numbers when you gave the guidance last fall, so has the expectation changed for a larger write-down there? Just -- I am wondering if the eventual write-down is something that will be dictated by your accounting firm?

No, it's not really a write-down. If you're talking about the expectations going forward, Clint? The -- what we had in the fall, basically, at the end of the third quarter, as we talked about the 40% devaluation, that's still in the numbers. The other thing that was different was that we expected similar performance from Venezuela as we had been getting in previous years, and because of the elections and a number of other things, that was down substantially.

Okay, but just to be clear, the devaluation will be a write-down though, correct?

There will be a net monetary asset write-down that when it occurred two years ago, we removed that from non-GAAP and that's our intention, as well. On our guidance outlook page, I think its page 9 of the press release, we included the net monetary asset write-down in the GAAP results, but it's not in the non-GAAP results. The impact of translating the local results at a higher exchange rate, a more unfavorable exchange rate, will reduce revenues in the order of magnitude of $130 million. Which is an assumption starting with the deval in the beginning of second quarter, and that will also have a margin effect on that revenue decline.

Okay. I wondered if you guys perhaps could include any more details just on the shared service center investment that you are doing down in Latin America that might perhaps maybe the level of spend and the timing on any benefits. It sounds like that's something that probably shouldn't be expected until 2014 or later. Is that correct?

That's correct. I mean, we have a couple shared service centers. We have both an information technology center and then we are standing up a large financial center. So, obviously, with any investment like that, you have to stand that up before you can start to get -- take the advantage of the reduction in headcount and productivity in the various countries. But the finance center is the biggest one. So Joe, you want -- that's your area, you want to talk about that?

Sure, it's the startup cost, implementation costs will really negatively impact the results for the next couple of years. In the long-term -- or the plan is to get all of the finance back office activity being operated out of a shared service center in a centralized, standardized manner, which gives us a platform that we can then put other back-office processes through. But considering the number of countries and the complexity of the countries today, and the effort that goes into standardizing those processes, it will take two or three years to define the processes and implement them and get all of the countries moved in before we start to realize the benefits. So, it's really implementation cost over the next two to three years.

Okay. Two last quick questions. Wondering as far -- you guys obviously have hired a number of individuals in the last few weeks. Wondering about executive compensation. I believe that, that was aligned with some margin improvement through part or most of last year. Has that changed, and how is that based as we look forward to 2013 and beyond?

Okay. I mean, certainly, from the annual perspective, and you can see that in the proxies from last year, we have -- it's a direct comparison to how we did financially. In terms of the long-term incentive compensation, obviously, that's the purview of the compensation committee. But from that perspective, we will have very heavily performance-weighted vehicles that are going to be tied to improving our performance. So when that is finally determined by the comp committee, it will be in the proxy and the cDNA, and you will be able to see the direct correlation to improvement if the executives are going to get paid.

Okay, and last question here. I know Germany has been in the news for the last couple of weeks for a plan to move 674 tons of gold back to the country. Is that work that you guys are not positioned for now that you are exiting the region from a CIT perspective? Or could you still be in play, given the global services business that I am assuming will still be in operation there?

I mean, so we are not exiting the Global Services businesses in any of the places that we are at, so we are going to maintain that. Any movement, by the Brundesbank, of gold, whether it be from New York, or whatever country back to Germany, we would anticipate that we would play a large part in. That's really unclear because of all the press releases, it goes all over the place in terms of when that transfer could actually happen. It could be many years from now so -- But we remain well-positioned to that and that's the business that we absolutely are maintaining in -- around the world and in Germany, in particular.

Okay. Thank you, guys.

Thank you. Our next question will come from Ian Zaffino of Oppenheimer. Please go ahead.

Great, thank you. Joe, you said the 6% or 7% for North America, that includes the stabilization inflation volume, or that doesn't include a stabilization?

I'm sorry, the 6% to 7%?

It's for North American margins. (multiple speakers).

Yes, so getting to our historical margins in North America, it includes -- we have to stabilize the price and volume picture. When you look at our 2013 outlook and why we came up short in the fourth quarter, a key element of that was more volume pressure in the second half of 2012 in North America than what we were anticipating. If you look at North America's organic growth, we had 1% decline in the first half 2012, we had 4% decline in the second half. So the price and volume pressure persists. We don't see that changing significantly in the near term.

The new Management team in North America is very focused on that. Last year, in the fall, we hired a very experienced, capable sales leader that's going to bring a new level of energy and focus to the organization, combined with Mel's leadership, and the commercial side of the business has to improve. When we stabilize price and volume, we will be able to expand margins by letting some of the productivity that we are generating drop through. Our assumption for 2013 is that price and volume continue to offset the productivity gains so we will be flat.

Okay. So, what if price and volume trends don't stabilize? What do margins look like in that scenario?

I think we are flat. We are flat. We are flat until price and volume stabilizes. When price and volume stabilizes, the productivity falls through and margins expand.

All right. And then, the last time, I think you were mentioning that North America had stabilized. What changed? Can you be specific?

Well, there were just a number of deals and contracts last year, particularly in the middle of the year and later in the year, that ended up causing us to have price reductions, as well as volume pressures. Each deal is unique. It wasn't any one huge deal; it was a lot of different deals.

I guess I am trying to get a sense of what the drivers are here. Is it there's too much competition? Is it because your customers just aren't financially secure? What's going on?

You know, I think -- this is Tom. What's happening is that our primary customers, which are the banks, continue to be under a lot of pressure. They continue to be putting all of their suppliers under that same amount of pressure. So as we have new opportunities to renew contracts come up, we were getting a lot of pressure to reduce prices. So what has to happen for the future is we have to start moving into higher value solutions, so that our customers value what we are providing them and we get out of just a peer-cost shoot out, because that's what has happened to us in North America.

So that's where we're working hard on solutions, that's why we focused on the hiring of a new leader that has a big background in sales, marketing and the customer. So we have got to get the products that we provide from a straightforward cost shoot out to a more value-added solution basis.

Okay, and then, I know that a significant portion, if not your entire cash bonus compensation was linked to this 2015 margin goal. Now that, that's delayed, what happens with your compensation package? That means you're not getting any cash bonus from now on? Has that been reworked? What's happening on that front?

I mean, they never get reworked. Because, once they are in place, they are in place. The -- what you referred to was the cash bonus, which is the annual bonus, and so, what you will see when we report in the cDNA, you will see how that was impacted negatively by some of the performance. In terms of the long term, like I said, the comp committee is in the process of working on that as we speak. Obviously, to the extent that there were options and the stock price has to go up, that has a direct impact on that. In the future, we are looking at other vehicles that are more performance linked, and I have to leave it at that because the comp committee hasn't approved that yet.

All right. Thank you very much.

Thank you.

(Operator Instructions)

The next question will come from Michael Kim of Imperial Capital. Please go ahead.

Hello, good morning, guys. First, can you talk a little bit more about the integration of Mexico, how -- first on the revenue, on the top line side. Then with the improvement in margins and the productivity investments planned for this year, would you expect to be similar, year-on-year, and '14 being more halfway towards your 10% goal?

Okay. Michael, I mean, Joe is in the process of looking up the exact details. We obviously went from 2.6% to 4% in '12. We expect continued improvement in '13, and then obviously, '14 and '15 to get to the 10%; we may have restructuring things there. The Mexico team has been working very hard on integration and cost take-outs and productivity gains. Joe, you want to add anything, in terms of any of the detail?

Sure. Mexico had 8% organic growth for the year. Unfortunately, two-thirds of that was offset by foreign exchange, and the volumes did slow down in the second half of the year, which is also part of our lowered 2013 guidance. As we exited the year, the volumes were lighter in Latin America, driven partially by Mexico. The margin rate improvements that we saw this year, we expect to continue on that trajectory towards our 10% by 2015. There are continued restructuring plans; as they hit, they may be lumpy. So in any given quarter we might have charges, but that's part of our broader plan to get the 10% by 2015, so we are on track in Mexico.

Yes, I mean we are pretty bullish in terms of what we've told you about Mexico.

And what happened in the second half in Mexico? Was it just a macro slowdown that you were experiencing, or was there specific contracts that came up for renewal -- (multiple speakers).

Yes, it's a good question. It was fundamentally a macro slowdown that we saw in the economy in Mexico.

Post the elections in Mexico, we saw a broader slowdown.

On the broader Latin America front, would the planned productivity investments -- How much of that is allocated to Mexico versus the rest of Latin America?

Well, it's a region-wide program, and so the -- all of the countries are sharing in the cost. Mexico, itself, will begin to incur the cost and reap the benefits of that as we started up in transition Mexico into the shared service center. That's really something that happens late 2013, beginning in 2014.

I don't know if you mentioned -- can you quantify what the total amount of the productivity investments are planned for this year?

We haven't disclosed the total impact, but broadly speaking, there's a number of different productivity investments that we are making across the business. They are all under the centralization and standardization theme that Tom referenced and migrating us from a totally decentralized country -- company, to a company that's more integrated. Whether it's global, regional, and what key processes should be centralized or standardized to reap the benefits of being a global company.

There's three big categories I would point to for the various investments to be made around the world. The first big category would be the finance shared services that we've been talking about for Latin America, but we are also doing the same in US, which has already implemented a number of those changes, and Europe is looking at their shared services, as well. When you look at IT, Tom referenced the global and regional data centers that we are looking at, but it's even more broad than that when you think about IT. There's a number of opportunities there to streamline our infrastructure, develop common integrated systems across the network, and that really is about removing independent legacy systems that -- and applications that we can get some benefits from having standardization.

Along those lines, we have identified two key global applications to support our transportation management. I think the routing productivity that we have talked about, particularly in North America, as well as money processing, we have identified the global standard. And that is each country needs to replace their existing system, whether there's a productivity benefit, they will be rolling that out and implementing it. The thing is, there is a cost to set that up, and there is a cost to establish that standard and implement the first few countries. That cost is really what's driving -- it's also a portion of what's driving the productivity spend in 2013 and '14.

Michael, so then the obvious issue there is that we will have to look at each country as they become ready to begin to invest in those particular software programs to make sure we are getting the return on the investment.

Great, and then just turning to North America. Can you maybe provide a little more color on the end customers, the pressure you are seeing from financial versus the non-financial? Is it of similar magnitude or are you seeing any difference?

No, I mean, I think it's -- we are seeing the same pressure that has been in place since the financial crisis. And the people that are under the most scrutiny and under the most pressure are the large financial institutions, and they are the ones that are putting the most pressure on the supply base.

And how about -- (multiple speakers)

That hasn't changed.

How about with non-financial customers?

I mean, it varies by each one. Whether it's a large retailer or some of the smaller retailers, they did go down in the number of stops. As the economy comes back, we would anticipate that they would begin to revert to more stops, more pickups, but that one tends to be very location specific and retailer specific.

Great, and then just lastly, is the pace of contract renewals coming up over the next couple of quarters, similar to where we were last year? Or do you see any acceleration in renewals coming up?

Well, on the plus side, we don't see any significant renewals coming up in 2013. So we are going to be working hard on new business and how we improve the pricing and volume of the new business.

Great, thank you very much.

Thank you. And we have a follow-up question from Jamie Clement of Sidoti.

Hello, gentlemen, quick question. Looking at the chart via the discounted cash flows at plan discount rates for the retirement liabilities, I know the K is not out yet, but do you have the current funded status at December 31 of the UMWA in the pension?

If you are looking at slide 19, which is the first slide in the Appendix, it shows the that the US pension is $275 million under funded.

Okay.

That puts it at 73% in the UMWA is to 57% under funded; that is 51% funded. With the difference being, the UMWA, no cash out of the Company's pocket until 2022 because the asset will fund that for the next nine years.

Okay, sorry about that. I was flipping back and forth between the press release and that kind of thing. Joe, just your -- the discount rate decline was how many basis points year-over-year?

It went from 4.6% to 4.2%. So it's on slide 20 in the Appendix, you see what the current rates are.

Okay, thank you. I will take a look at that. Thanks very much. Sorry about asking the question.

That's okay.

And that will conclude today's conference call. You may now disconnect your lines and thank you for your participation.