Brinks Co (BCO) 2013 Q1 法說會逐字稿

Welcome to The Brink's Company's first quarter 2013 earnings call. Brink's issued a press release on 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 Brinks.com.

(Operator Instructions)

As a reminder, this conference is being recorded.

Now for the Company'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 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.

As most of you know, we report results on both a GAAP and non-GAAP basis. The non-GAAP results exclude a number of items, including US retirement expenses, acquisitions and dispositions and some currency-related items. The 2013 non-GAAP results also use the expected full-year tax rate of 37.5%. A summary reconciliation of non-GAAP to GAAP EPS is provided on Page 2 of the release. More detailed reconciliations are provided in the release and in the appendix to the slides we're using today. The slides are included in this morning's 8-K filing and are available on our website. 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.

On a non-GAAP basis, first quarter earnings from continuing operations came in at $0.35 per share, versus $0.67 last year. This year's results include a $0.24 charge related to the robbery at the Brussels airport. The segment margin rate was 5.2%. Excluding the theft loss, the margin rate was 7.2%. Organic revenue growth for the quarter was 6%. Currency translation had a negative impact of $24 million on revenue, $3 million on profit and $0.04 at the EPS level.

Tom and Joe will provide more details on these results and our outlook for the rest of the year. For those of you who model our results, please note that Page 7 of the press release provides a summary of selected results and outlook items that should be helpful in forecasting 2013 results in more detail.

I'll now turn the call over to Tom.

Thanks, Ed. Good morning, everyone.

First quarter earnings came in at $0.35 per share, which is far better than we expected at the beginning of the quarter, when you consider that the results included the $0.24 charge for the robbery as well as a profit decline in North America. Profits from our international operations were much stronger than anticipated, especially in Latin America and the Asia-Pacific region.

Looking ahead to the rest of the year, we expect profits from international operations to offset reduced expectations in North America and that we will achieve our full-year segment margin rate range of 6% to 6.5%. Joe will provide details behind our results and our full-year outlook in a few minutes.

As far as the robbery goes, I trust you understand why we do not discuss details regarding our security losses. What I can tell you is this. On February 18, criminals attacked a plane at the Brussels airport that was about to embark on a flight to Switzerland. The diamonds that were stolen belonged to customers of Brink's and several other security companies. Although Brink's was not attacked, we assume custody of our shipments from pickup through delivery. I'm happy that no one was hurt, and all of our customers were fully reimbursed within 48 hours of the robbery.

The pretax charge related to our robbery was $19 million. It's important to note that our practice has always been to allocate this type of expense to our two reporting segments, much as we do with our other global expenses. The result is that North American profits were reduced by about $4 million because of a robbery that took place in Europe. The balance of the charge, or about $15 million, was allocated to international operations. We are working with the authorities in connection with this incident and do not expect to provide any additional details beyond what we've already disclosed.

Now let me move on to an update of our global operations. Our primary goal is to reposition Brink's for long-term growth. An important part of our strategy is to maximize profits in developed markets of North America and Europe as we invest in developing and adjacent markets. To execute this strategy we've invested in productivity, exited unprofitable markets, strengthened our leadership team and are transforming our culture to become more focused on our customers, innovation, new opportunities and leveraging the power of the Brink's brand.

In North America, our goal to return to a 7% segment margin will take longer and cost more than expected. The ongoing pressure on volume and price has exceeded our actions to reduce costs, consolidated brand structure, optimization of routes and enhance productivity. In fact, first quarter results were a step backwards, as margins were unacceptably low even after adding back the $4 million impact of the Belgian robbery. On our February call we said we expected 2013 North American margins to be in the 4% range. We now expect full-year margins of this region to be in the 2% to 3% range.

In addition to the ongoing pressure on volume and price and the impact of the Brussels loss, unexpected internal issues (technical difficulty). For example, first quarter results were hurt by IT-related service outages in our legacy systems that affected our customers and resulted in a $1.5 million profit reduction. Patty Watson, our new Chief Information Officer, is leading the effort to centralize our global IT operations to improve efficiency, service levels and decisionmaking. I'm confident that Patty and her team are expediting the remediation of these systems, but there will be some additional expenses associated with completing this work.

Mel Parker, who joined Brink's in January as the President of North America, has been working through these primarily US-based issues. He has also decided to make more changes to North America's senior management team than we originally anticipated. This will temporarily increase severance and subsequent onboarding costs for the new management, but these changes are critical to the future of the region. Mel will be very proactive in taking the additional actions necessary to turn this business around.

In Europe, our decision to exit certain underperforming markets boosted 2012 margins to about 7%. While first quarter profits were down due primarily to the impact of the robbery at the Belgium airport, we otherwise remain on track in our efforts to sustain profits near the level we achieved in 2012. Moving forward, we will continue to pursue additional productivity improvements and deliver new, higher value solutions. We are working on a number of opportunities, including the expansion of our end-to-end ATM network management capabilities, which our Threshold business is currently providing in Canada.

Now let's move on to Latin America, our largest and fastest growing region. As expected, profits declined versus exceptionally strong year-ago levels but were much stronger than we originally anticipated, despite a moderation in revenue growth, the currency devaluation in Venezuela and lower results in Brazil that Joe will discuss shortly. For the full year we expect strong profit improvement based on growth across most of the region. This profit growth will be at least partially offset by our productivity investments, and we're assuming additional currency devaluation in Venezuela in the third quarter. But overall we remain very optimistic about Latin America's long-term growth prospects and will continue to invest aggressively there.

Finally, our relatively small Asia-Pacific operations have been restructured under the leadership of Amit Zukerman, the President of our Global Services business. First quarter results, profits in the region improved substantially, reflecting the benefits of a streamlined cost structure and higher global shipments of precious metals.

Now, before turning it over to Joe I'll briefly update you on some of our strategic actions to exit underperforming businesses and to redirect our investments into growing our developing markets and adjacent businesses.

As we announced in February, we completed our exit out of the underperforming guarding businesses in France and Morocco, and we're working to complete our exit of the cash-in-transit market in Germany. We recently completed the exit of the CIT market in Poland, and earlier this week we announced our planned exit of the cash-in-transit market in Turkey. Together, these businesses generated more than $100 million in revenue but had about $17 million in annual operating losses.

There was also a fair amount of activity on the acquisition front during the quarter. In Latin America, we acquired the remaining 26% ownership interest in our cash-in-transit business in Chile for $18 million. We also acquired Brazil-based Rede Trel for $26 million. Rede Trel is a distributor of electronic prepaid products, including mobile phone air time, with a network of about 20,000 retail locations. This strong distribution network supplements our ePago walk-in payments business, which has operations in Brazil, Mexico, Colombia and Panama.

We also announced the initial rollout of the Brink's Money payroll card to US employers, which is just getting underway. We do not expect Brink's Money or Rede Trel to have a meaningful near-term impact on our results, but these investments demonstrate our commitment to entering adjacent markets where we can leverage the brand. You can expect to see additional products and services in this segment in the future.

In closing, we are focused on taking decisive action to improve near-term results while positioning Brink's to achieve long-term success. Our new leadership team is in place and highly focused on pursuing new opportunities to reduce cost, improve productivity and deliver new solutions for our customers. Successful execution in 2013 and '14 is critical, as we're not assuming a significant contribution from new, higher value solutions until the end of 2015. By then we expect to have achieved substantial margin expansion in our core business that will be supplemented by higher margin revenue from these new services. I assure you that we have a great sense of urgency, but it's balanced by the discipline and commitment needed to make the investments to drive our long-term success.

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

Thanks, Tom.

I'll start with a summary of first quarter results and then cover the assumptions behind our full-year outlook.

Total revenue for the quarter grew 4% on a reported basis and 6% on an organic basis, due mainly to organic growth in the Latin America region, driven by Venezuela and Argentina. The unfavorable currency impact of 3% was driven by Brazil and Venezuela. Segment operating profits fell $25 million due to the $19 million Belgium theft loss, a $4 million profit decline in North America, which excludes the allocated cost from the Belgium loss, and unfavorable currency of $3 million. The earnings per share declined due to the decline in operating profit.

The earnings per share bridge highlights the $0.31 decline due to segment operating profit, with $0.24 directly attributable to the Belgium robbery. The unfavorable currency impact and decline in North America earnings make up the remaining $0.07.

Let's look a little closer at total segment results. Organic revenue growth of 6% was in line with our annual guidance of 5% to 8%. Most of the growth came from international operations, led by Latin America, but we also had organic growth in Europe and the Asia-Pacific region, which reflects strong growth in our global services business. North America revenue was flat, and profits fell by $8 million, including $4 million from the Belgium theft loss. The additional decline in North America was due to continued price and volume pressures and the IT remediation cost that Tom discussed.

International profits declined by $17 million, which includes a $15 million expense for the theft loss and a negative currency impact of $3 million. Latin America profits were down compared to last year's very strong results but were better than we expected entering the first quarter due to improvement in Venezuela and Mexico and slightly slower investment in productivity initiatives. Excluding the Belgium loss and unfavorable currency, the international segment profit was flat versus last year, as growth in the Global Services business, Venezuela and Netherlands was offset by a decline in Brazil.

Precious metals movement was very strong in the first quarter, particularly in India, China, Switzerland, the US and the UK. Diamond and jewelry activity was mixed during the quarter, as lower volumes early in the quarter were offset by improvement later in the quarter, particularly the Hong Kong Diamond and Jewelry Show.

In Brazil we experienced a decline in profit, primarily from wage inflation and slowing volumes. A portion of the wage increase was caused by the passage of a new law last December that raises the wages of many workers in our industry by about 30%. This wage increase has not been finalized, and the market has not adjusted the pricing to customers to reflect this increase in cost. We anticipate a recovery of much of this increase later in the year.

The total segment margin rate declined by 280 basis points, to 5.2%, due mainly to the Belgium theft loss and the profit decline in North America. Excluding the theft loss, the total segment margin was 7.2%, reflecting an international margin of 8.9% and a North America margin of about 2%.

First quarter cash flow from operating activities excluding changes in customer obligations and discontinued operations declined by $15 million versus last year due to the decline in operating profit.

Capital expenditures and capital leases declined by $5 million versus last year, as we continued to reduce maintenance in capital spending through efficiency projects and reallocated more of our spending to growth and productivity initiatives. The North America region decreased CapEx by $11 million, primarily due to the timing of purchases of armored vehicles and CompuSafe units. The international segment CapEx spend increased by $7 million due to investment in productivity initiatives in Latin America.

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 increased by $104 million, to $336 million, due to the $56 million in acquisitions that Tom described earlier, the Belgium theft loss, the normal annual payments that are made in the first quarter and an increase in working capital.

Our overall guidance for the year has not changed. We still expect the full-year margin rate to come in between 6% and 6.5% as continued improvement in international profits is expected to offset the impact of the robbery and the profit decline in North America. We continue to expect organic revenue growth of 5% to 8%, driven primarily by Latin America at similar growth rates to 2012, with no significant growth in North America or Europe.

We are expecting an unfavorable currency impact of between 2% and 4%, due primarily to currency devaluation in Venezuela. In February, Venezuela devalued its currency by about 16% versus the exchange rate we were using to report our results. Our guidance still assumes a total devaluation of about 40% for the year, the total impact of which is estimated to be a reduction of $130 million in revenue.

In North America, we expect the weak revenue trend of the last few years to continue, and we've reduced our margin outlook from about 4% to 2% to 3%. The steps we've taken to improve results in North America, which include exiting unprofitable markets, consolidating branches, reducing headcount and investing in productivity, have clearly been insufficient in offsetting price and volume pressures. We have included additional cost in our estimate for the rollout of the Brink's Money payroll card later in the year, which will enable us to leverage our brand to accelerate our entry into this new space for Brink's.

The goal to achieve our historical margins of 6% to 7% is still very much in place, but, as Tom said, it will take longer and cost more than we expected. In the meantime, we will continue to focus our commercial efforts to get closer to our customers, to understand their challenges and deliver differentiated solutions. But this, too, will take some time.

In summary, 2013 for North America will be devoted to strengthening senior management, building more robust IT capabilities and developing the commercial capability to stabilize price and volume.

In Europe, we are assuming a slight decline in profits from a contract loss in France and the absence of last year's favorable commercial settlement. We do not believe there is enough growth in these mature markets in 2013 to offset these items.

In Latin America we expect continued profit growth across most countries, driven by strong organic revenue growth. The Venezuela devaluations and an increase in our productivity investments will offset some of this growth. We expect the payback on the productivity investments to be realized in 2015 and beyond, as the implementation costs decline and the benefits accelerate.

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. Our new leadership team is highly focused on delivering solutions to our customers, protecting our employees and generating strong returns to our shareholders.

Denise, let's open it up for questions.

Thank you, sir.

(Operator Instructions)

The first question will come from Ian Zaffino, of Oppenheimer. Please go ahead.

Great. Thank you. Couple questions here. The first one, on the precious metals and diamond jewelry, as you look into this quarter and the outlook, do you still see sort of precious metals remaining strong globally, particularly with the price of gold coming down? And has jewelry and diamonds, has that continued its sort of rise that you saw throughout the last quarter? Is that continuing into this quarter?

So, in terms of precious metals, we're certainly hopeful that it's going to continue to be very strong. It's always difficult to say based on what the price of the precious metals are versus the import versus the storage, Ian, so we're certainly hopeful that it maintains its robust nature.

Diamond and jewelry is pretty much the same. We had a very slow start to the quarter, but we had a good end of it with the Hong Kong Diamond and Jewelry Show. Joe, any other comments on either of those two?

No, I think you covered it.

Okay, so basically the upward trend in diamond and jewelry has continued.

So far.

Okay. And then this is a bigger picture, kind of more of a philosophical question, but as you look at all of the costs and volume pressures in North America, what would it take, and do you have a desire to maybe transition or transform the Company into more of a low-cost provider? It doesn't seem like -- you have a premium product. It doesn't seem like anyone's willing to pay you for it, or fewer people are willing to pay you for it. Can you sort of morph into somewhat of a lower cost provider, and do you have a desire to do so?

Kind of a hard question to answer, Ian. Certainly what we are looking to do is to get our costs in line and to continue to provide differentiated solutions to our customers. So, and we believe that we can do that in North America. We believe we can do that in Europe, which is what we've been successful at. And we believe that we can do it in Latin America. But we have to demonstrate that. So philosophically that's where we're going.

Okay. So you're not of the mind of saying, hey, what we're doing is a commodity business and therefore we have to offer it at the best price possible?

Even on a commodity business, then, you have to have the costs in line.

Right. That's kind of what I'm getting at. Okay. Thank you very much.

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

Thank you for taking my question. Good morning. I wondered what was the segment margin in North America if you excluded the robbery.

It was about 2%. It was about a $4 million impact on the region.

Okay. And I guess while I'm at it, what would it have been -- so, did you allocate it evenly between international and the US, then?

We -- that falls into the bucket of costs that we allocate fundamentally by revenue.

Okay.

So it got about a little over 20% of the total cost for that loss plus the corporate overhead cost that we allocate.

Got it. And so we have a lower outlook for the business in North America in terms of margins. Have there been any significant contract losses since you last reported?

No. No significant contract losses, Clint.

Okay. And so, I mean, is it just -- is the story, I assume, pretty much the same, just continued pricing and volume pressures? No significant change in the competitive dynamic within North America?

That's correct.

Okay. Okay. And I guess switching south, then, here, just any updates on Mexico and that business's contribution to the quarter?

Yes, I mean, I'm going to let Joe get into some of the -- a couple of the details, but, I mean, Mexico continues to be on the positive trend, continues to be doing what we believe they need to do to get to that 10% operating -- segment margin that we talked about by the end of 2015. So they're doing lots of things, and they're doing them correct. Joe?

So, Mexico is very much on track to deliver the 10% or higher margins by 2015. The team has their strategy laid out that they've been executing the past couple years. We've continued to see the kind of margin expansion that we expected. They have, as we commented on the fourth quarter call, seen a slower volume, slower growth rate over the past couple of quarters than what they had over the previous couple of years, and that's really something we've seen kind of post the elections in Mexico more broadly. That continued in the first quarter.

And so we are expecting some volume increase later in the year in Mexico, organic growth rates, and we feel comfortable that they can deliver on that. The cost actions and productivity initiatives, some of the increase in CapEx in Latin America was specifically in Mexico to drive productivity. We bought money processing equipment, continued to invest in the fleet and the facilities, and the team down there is executing on their plans and strategy and we're confident we'll continue to see the margin expansion in '13, '14 and '15 to get to our commitments.

Okay, great. Thank you guys.

The next question will come from Doug Greiner, of Compass Point. Please go ahead.

Yes, just one for Joe. Given the drop in North American profit, will you just address today's free cash flow available domestically as it relates to certain benefits commitments that you have? I know in the past there's been issues with free cash flow and the pension payment requirements.

Sure. That was an issue that we dealt with really at the end of 2011 and the first half of 2012. We did find a few ways to tax-efficiently repatriate cash earnings from offshore entities. We bridged that problem with some short-term measures for 2012, '13 and '14, and then we have some longer term plans that we have begun the implementation of that will solve that problem longer term. So, although the profitability in North America, particularly the US, is lower than we expected for the year, that will not materially affect the cash flow plans that we have in place to deal with the pension needs which I suspect you're referring to for cash flow purposes.

Great. Thanks. That's it.

Thank you. Our next question will come from Jeff Kessler, of Imperial Capital. Please go ahead.

Thank you. I know you've probably talked about this -- we've talked about this already, but can you go through the longer term plan to get North American margins up to a level at which they can be -- what will it take to sustain North American margins at a more competitive level, and what compromises, if any, will you have to make to get those margins to 5%, 6%, 7% and keep them there?

So, Jeff, the plan is to continue with the productivity changes we've made, to continue with the upgrading of the information technology systems, the legacy systems, and new productivity investments. We are looking much closer at improving our sales force to be able to sell and leverage some of those services that we're talking about, the higher value services. We're changing out a lot of the senior management to make sure that we have the right leadership going forward. And we believe that we will be able to start to change the trajectory of the profit margins in North America and get them up to that 6% or 7% that we talked about.

Okay. And this is -- well, and what I'm getting at is so you've just given us about five or six talking points about getting to that 6% or 7%. Is there anything else that you need to maintain that 6% or 7% once you get there?

No, I think continued execution of the plans that we're going to lay out. So this is now about the new North American team executing.

Okay. So this doesn't have to -- this doesn't mean that there has to be a certain percentage of logistics or specialized services as a percentage of total sales. It has to do with getting -- with basically getting the base business there, as well, the cash-in-transit --

That's correct. And this has got nothing to do with -- we're not assuming changes in competition or the economic landscape, anything like that.

Okay. All right. Great. Thank you.

(Operator Instructions)

The next question will come from Maharth Kapur, of Credit Suisse. Please go ahead.

Yes, hi, guys. In terms of just to follow up on the North American business, how far away would you say you are in terms of resizing your cost structure, fixed cost structure there, to bring it more in line in terms of perhaps being able to satisfy some of the lower cost customers you have there, lower price portion of the market?

Well, so we're working very hard through 2013 to change that trajectory. And we've talked about getting back to the 6% or 7% margin in the relatively near term.

Well, I mean, you guys have been taking out cost for the last year, so, I mean, how much farther would you say you are away? I mean, is it a year, two years in terms of resizing perhaps the cost base?

It's in the area of a handful of years. It's not a lot of years, but, I mean, the real issue is how quickly it'll turn, and what I don't want to do is make a commitment that I don't have all the data at the present time for.

So you're not relying on volumes coming back?

We are relying on some volume coming back but not a huge amount of volume to turn us around in terms of our efficiencies and profitability. We're not assuming that we're going to grow at 5% or 6% margin -- I mean, 5% or 6% organic growth.

But you're not assuming that those premium price customers that you saw move away perhaps two, three years ago, you're not assuming that those kind of premium customer business comes back in some period of time.

That's correct.

Thanks.

(Operator Instructions)

Thank you. This will now conclude today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.