Brinks Co (BCO) 2017 Q2 法說會逐字稿

Welcome to The Brink's Company's Second Quarter 2017 Earnings Call. Brink's issued a press release on second quarter of 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 will contain forward-looking statements. Actual results could differ materially from those 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, Vice President of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.

Thanks, Carrie, and good morning, everyone. Joining me today are CEO, Doug Pertz; and CFO, Ron Domanico. This morning, we reported results on both the GAAP and non-GAAP basis. The non-GAAP results exclude certain retirement expenses, reorganization and restructuring costs, certain items related to acquisitions and dispositions and tax-related adjustments. Our non-GAAP results also exclude Venezuela due to a variety of factors including our inability to repatriate cash, Venezuela's fixed exchange rate policies and continued currency devaluations and the difficulties we face operating in a highly inflationary economy. We believe the non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly, our comments today, including those referring to our guidance will focus primarily on non-GAAP results. Reconciliations of non-GAAP to GAAP results are in the press release, the appendix to the slides we're using in this morning's 8-K filing and our website.

Please note that Page 1 of the press release provides a summary of our 2017 guidance with additional details on Page 2. I'll now turn the call over to Doug.

Thanks, Ed, and good morning, everyone. Thanks for joining us. I'm going to provide a brief review of what we believe was a very good quarter, cover our increased guidance and update you on our strategy to further accelerate profitable growth through accretive acquisitions. Ron will follow with a more detailed financial review and then we'll open it up for questions.

This morning we reported another quarter of strong year-over-year results, including organic revenue growth of 6%, an operating profit increase of 52% and a 64% increase in earnings per share. These results reflect strong margin improvement and operating leverage in our North and South America regions. Profit in North America more than quadrupled versus the prior year's second quarter, and South America's profit was up 68%. This growth was led by significant margin improvement in the U.S., Mexico, Brazil and Argentina.

Our U.S. operations, which represent our single greatest opportunity for organic profit growth, delivered a profit swing of about $7 million versus a year ago loss. Year-to-date, the U.S. is ahead of our last year by about $15 million. We expect U.S. profits to continue to ramp up in the second half of this year as our breakthrough initiatives and investments continue to gain traction and as our normal seasonality uptick occurs. We expect our full year margin rate in the U.S. to be above 4.5%, up from less than 1% in 2016, and our 2019 margin target remains at 10% or better.

In Mexico, our team delivered very strong results, including organic revenue growth of 11% and profits that more than doubled over last year, reflecting an operating margin of 10.4%, up from 4.4% last year. With its midyear margin at 8.2%, Mexico is well on its way of achieving its 10% margin goal for 2017, and we're still targeting a 15% margin in our 2019 strat plan.

It's important to remember that we're only 2 quarters into our 12 quarter strategic plan, but we're off to a great start in terms of executing on our strategy to accelerate profitable growth, both organically and through acquisitions.

So in addition to our organic profit growth, a big part of the story today is about executing on our strategy to make synergistic and accretive acquisitions in our core businesses. Thus far, in 2017, we've completed 4 acquisitions, with the largest and most recent being our purchase of Maco in Argentina, which closed last week. And we're actively pursuing several other acquisition opportunities. In fact, yesterday, we announced that we expect to close on our Temis acquisition in the fourth quarter. Temis is a French CIT and cash management business that will immediately increase our route density and other -- and our customer base in Paris metro area. So it's another example of our commitment to strengthening our position in our core markets.

Given our strong year-to-year -- excuse me, year-to-date results, our expectations for organic growth and the accretive impact we expect of the 4 acquisition we completed to date, we announced significant increases in our 2017 and 2019 guidance.

For 2017, we raised EPS guidance by $0.40 to a range of $2.95 to $3.05 per share, a 34% increase over the prior year with $0.09 coming from acquisitions completed to date. We also correspondingly raised operating profit by $35 million to a range of $270 million to $280 million, a 30% increase over prior year.

And our 2019 targets now include adjusted EBITDA of $560 million, an increase of $85 million over our prior target, which assume no impact from acquisitions, we now expect about $60 million of this increase to come from the 4 acquisitions we completed.

Ron will provide additional information on our increased earnings guidance. Let me review a little bit more on our actual performance so far to date. Second quarter organic revenue growth was 6%, on track with our prior guidance for the year and slightly above the 2019 strategic plan assumptions. Operating profit of $16 million was up 52% over last year's second quarter. The operating margin of 7.9% represents an improvement of 240 basis points and that's on top of a similar year-over-year increase in the first quarter.

Adjusted EBITDA for the quarter increased 31%, and earnings came in at $0.64 a share, which is a 64% increase versus last year. Slide 6 summarizes our expected operating profit growth over the 3-year plan period, similar to the slide that we provided to investors in March.

In fact, we've not changed the profit targets over this 3-year segment -- in each of the 3 segments, which together should add about $210 million of operating profit or about 500 basis points of margin compared to our base 2016 financials. What we have changed is on the right side of the chart, we reduced the contingency by $25 million to reflect the raised organic guidance for 2017 and our performance through the first 2 quarters of our 12-quarter plan period. We also added $45 million of profit we expect from the completed acquisitions, which equates to an additional 80 basis points of margin. The result in our 3 year -- excuse me, the result is our 3-year 2019 operating profit target of $400 million, an increase of about 89% over 2016 and a 21% increase over our prior guidance.

Our original OP margin target was 10%, it now exceeds 11%, with our remaining potential upside of about 170 basis points left in our contingency. And there's even more potential upside to be gained from additional acquisitions on top of those done to date.

Organic growth and operating profit is supported by our key breakthrough initiatives. Here's a quick review of some of the major initiatives we're implementing, not only in the U.S. but in many other countries throughout our network. Our fleet investments are already starting to have an impact on our results in the form of lower repair and maintenance costs. It's important to note that putting hundreds of new trucks into operation is not a linear process.

In fact, in the U.S., it's been a fairly uneven process, yet we believe that by the end of this year we'll hit our target of about 400 new trucks on the road. And I'm very happy to report that starting this month in July, we began taking delivery of our newly designed next-generation Brink's trucks that feature a separable body and chassis. We expect to put about 200 of these next-generation trucks which can accommodate 1- and 2-person crews into operation in the second half of this year. All the new truck additions will support continued reduction in repair maintenance cost and lower one-person labor costs.

Our efforts to reduce crew size are already beginning to pay off in the form of lower labor cost in the U.S., Mexico and Canada. The first phase of our U.S. network optimization initiative is the installation of high-speed money processing equipment, which is just beginning to ramp up in the second quarter. For example, we've seen significantly reduced labor costs in Chicago and we expect similar results in Brooklyn and several other U.S. locations as we put -- new equipment comes in online later this year.

Our approach to sales and marketing, especially, in CompuSafe and Managed Services has been strengthened with the addition of the 18 new hunters in our U.S. sales force. Most of these people came onboard in the first quarter of this year, so the initial investment should start paying off in the second half of this year. The significant change we made in Mexico in cooperation with their unions are also, certainly, beginning to show results as indicated by the markedly improved first half results in that country.

In summary, we're really just starting on these and other initiatives around the world. The biggest single impact, obviously, will be in the U.S., where we continue to expect that these initiatives to have a profit impact of about $75 million in 2019.

The acquisitions we completed to date demonstrate the accelerating profitable growth with synergistic and accretive acquisitions in our core markets is one of our major objectives. The first priority, as we said before, is an acquisition strategy that we call core-core. We seek businesses that align with our existing operations and our existing geographic markets and that offer synergies-related costs, route density and growth in our customer base.

On our first quarter call, we disclosed 2 relatively small acquisitions, 1 in the U.S. and another in Brazil. The initial returns on both are favorable and in line with our expectations.

During the second quarter, we completed another relatively small acquisition of a CIT and cash management business in Chile called LGS. And last week, as we said, we completed our largest acquisition to date when purchased Maco in Argentina. And yesterday, we announced that we expect to close on the acquisition of Temis in France during the fourth quarter.

As I mentioned earlier, the 4 completed acquisitions are expected to have significant positive impact on revenue operating profit and net income. In each case, we expect the significant operating synergies to result in a postintegration enterprise value to EBITDA multiple that is in the 6x range, so they should be nicely accretive. We made considerable progress on our growth through acquisition objectives so far this year. All additive to our 2019 financial targets, and I'm comfortable and confident that there's more to come.

Before I turn it over to Ron, I want to cover Maco in a little more detail because it's a large example of our core businesses in core markets acquisition strategy. As I said before, last week, we completed the Maco acquisition for, approximately, $209 million purchase price. This final purchase price may change based on postsynergy -- postclosing adjustments. Maco's cash-in-transit and money processing operations will be integrated with our existing operations in Argentina, the fastest-growing country in our most profitable segment, South America.

Over the last 12 months, Maco had revenue of about $90 million and adjusted EBITDA of about $24 million, resulting in a purchase multiple of about 8.7x adjusted EBITDA. We'll move quickly to achieve substantial cost synergies over the next 2 years, which should result in a postintegration multiples of about 6x adjusted EBITDA. We're excited about Maco and our future in Argentina. Maco solidifies our already strong #2 position and will immediately strengthen our customer base and route density. We expect it to be slightly accretive to net income this year, and as demonstrated in our increased 2019 guidance, a significant contributor to future earnings and cash flow. While I'm pleased with our accretive -- excuse me, with our accelerated progress on acquisitions, I'm equally pleased with the improved results in our organic business.

On that note, I'll turn it over to Ron.

Thanks, Doug, and good day, everyone. At our Investor Day in March, I discussed Brink's value-creation strategy. The first building block of that strategy is credibility. And our commitment was to reduce complexity, to increase transparency, to set aggressive targets and to deliver consistently. It's only been 2 quarters but our performance demonstrates real progress.

Profitable growth is the second building block.

In the second quarter, organic revenue grew 6% and the 4 acquisitions completed to date, and the one announced yesterday, will accelerate growth further.

The third building block of our value-creation strategy is margin expansion. In the second quarter, operating margin of 7.9%, as Doug said, was up 240 bps versus last year.

The fourth building block is increasing returns. Investment in our breakthrough initiatives and disciplined accretive acquisitions are driving higher ROI and higher shareholder returns. The momentum we've developed has enabled an increase in our 2017 guidance and our 2019 outlook. Our country and segment organic targets remained unchanged, but we were able to reduce the contingency that was built in. We've also added the accretive impact of the completed acquisitions.

Let's take a deeper look at our 2017 performance. Please direct your attention to Slide 12. Adjusting for ForEx, the businesses we exited in 2016 and the acquisitions we completed in 2017, revenue in the second quarter increased $43 million from $717 million in 2016 to $760 million in 2017, an organic increase of 6%. South America delivered 16% organic growth, driven by price increases in Argentina and volume growth in Brazil. North America revenue grew organically 4%, with Mexico up 11% and the U.S. up 2%. Mexico delivered growth from retail customers and price increases. The U.S. growth was lower than the 8% achieved in the first quarter of 2017, which included higher sales of on-site cash recycling services to a national retailer. The rest of the world grew organically by 2%. As a 3% reduction in France due to tenders lost to pricing was more than offset by growth in our other European businesses and a 9% increase in Asia-Pacific.

Revenue ForEx in the second quarter was $3 million unfavorable versus the same period last year. Declines in the Mexico peso, the Argentine peso and the euro were mostly offset by a much stronger real in Brazil.

Our second quarter revenue increased by $6 million from the 2 acquisitions that we told you about last quarter. A small armored tractor-trailer company in the U.S. and a small payments business in Brazil. This increase was partially offset by the businesses we exited last year. While the impact from acquisitions has been relatively insignificant through June 30, we expect the 2017 full year impact of completed acquisitions to be, approximately, $90 million of revenue, $10 million of operating profit, $20 million of adjusted EBITDA and $0.09 of earnings per share.

Turning to Slide 13. Second quarter 2016 non-GAAP operating profit was $39 million. ForEx was $2 million unfavorable and our net acquisition and disposition activity generated $1 million favorable comparison. So the adjusted second quarter 2017 operating profit grew organically by $22 million or 55% to $60 million.

South America grew organic profit $15 million, driven by margin expansion in Argentina and Brazil. North American operating profit was up $13 million organically from the turnaround in the U.S., which continues to benefit from the breakthrough initiatives and productivity improvements in Mexico. The $2 million organic decrease in rest of world was due to lower results in France due to the lost tenders, slightly offset by a $2 million increase in Asia-Pacific.

Segment operating profit growth was partially offset by higher corporate expenses. Cost-reduction actions taken during 2016 had a $2 million positive impact on corporate expenses, including $1 million on salary expense. But the $5 million increase in the second quarter 2017 versus prior year was due primarily to an accrual for higher incentive-based compensation associated with a significantly improved year-to-date performance.

Operating profit as a percent of revenue increased 240 bps from 5.5% in the second quarter of 2016 to 7.9% in the second quarter of 2017. The improvement was driven, primarily, by lower labor cost and lower vehicle expense associated with the breakthrough initiatives.

Moving to Slide 14. This slide bridges operating profit, income from continuing operations and adjusted EBITDA. The variance from the prior year for each part of the bridge is included at the bottom of the slide. Second quarter 2017 non-GAAP operating profit of $60 million was reduced by $7 million of net interest expense and $2 million of minority interest. We continue to expect our 2017 non-GAAP income tax rate to be around 35%, down from 37% in 2016. The decrease is due primarily to the rise of the BCO stock price and the associated deductibility of stock-based compensation. A lower tax rate was more than offset by higher earnings, and second quarter 2017 taxes were $19 million, up $6 million from last year. And that was $33 million of income from continuing operations. This equates to $0.64 per share in the second quarter 2017, which was up $0.25 per share or 64% higher in the second quarter 2016. Second quarter depreciation and amortization was $34 million, up only $1 million from last year, adding back the $25 million of combined interest and taxes, resulted in adjusted EBITDA of $91 million for the second quarter of 2017. This was up $21 million or plus 31% versus the same quarter last year.

On to Slide 15. The strong results in the second quarter continued the momentum from the first quarter. For the first 6 months of 2017 versus the first half of 2016, organic revenue was up 7%, operating profit of $113 million was up 57% while the operating profit margin of 7.5% was up 240 bps. Adjusted EBITDA was $174 million, up 32% and the EBITDA margin was 11.6%. Earnings per share of $1.21 was up 73% versus $0.70 per share in the first 6 months of last year.

Turning to capital expenditures on Slide 16. Excluding CompuSafe and including our completed acquisitions, we are projecting to invest approximately $180 million of CapEx in 2017. Capital expenditures facilitate our breakthrough initiatives and include new-generation armored vehicles, high-speed money processing automation equipment, IT productivity improvement and other investments to drive operating profit growth. Capital expenditures in the first half of 2017, excluding CompuSafe, were $70 million. In addition, there was $23 million in CompuSafe investments. The 2017 CapEx outlook anticipates a rate of investment throughout the rest of the year that is higher than the first half.

Moving to Slide 17. This slide illustrates Brink's debt and leverage position. The borrowers on the left side of the slide represent our debt at June 30, 2016, at the end of 2016 and at the end of June 30, 2017. The height of each bar represents gross debt. The top part of each bar represents our cash position and the bottom part of each bar represents the net debt position. As of June 30, 2017, our net debt was $360 million, up $47 million from a year ago and up $113 million from year-end 2016. This increase is due to normal seasonality, the acquisitions we completed in the first and second quarter and increased capital expenditures. The Maco acquisition in Argentina will add approximately $220 million in net debt during 2017. Around $210 million from the purchase price and $10 million for integration costs, a portion of the payment to the sellers will occur in 2018. To fund these acquisitions, we expect to borrow under our U.S. revolving credit facilities, and the debt will be serviced from the cash flows from the acquired businesses.

Based on our current and anticipated financing costs, we expect additional interest expense of $3 million in 2017 and an additional $6 million to $8 million in 2018. On the right side of the slide, the bars illustrate our trailing 12-month or TTM adjusted EBITDA at the end of 2015, 2016 and at June 30, 2017. Above these bars is the financial leverage ratio of net debt divided by TTM adjusted EBITDA.

Our financial leverage at June 30, 2017, was 1.0, increasing from 0.9 at March 31, 2017. Including the additional $220 million of net debt to be incurred with the Maco acquisition and assuming $30 million of trailing 12-month EBITDA from our completed acquisitions, our financial leverage on a pro forma basis will be 1.4x. Even at the pro forma leverage, our balance sheet enables us to continue making disciplined investments in capital expenditures and accretive acquisitions to accelerate profitable growth, to close the gap and to increase shareholder returns.

Turning to Slide 18. We believe that adjusted EBITDA is the most meaningful non-GAAP metric for stakeholders to assess cash flow. We calculate adjusted EBITDA on a trailing 12-month basis. TTM adjusted EBITDA at June 30, 2017, was $375 million, this was a 32% increase versus 2016 and was driven by the organic growth in operating profit. The adjusted EBITDA margin as a percent of revenue increased 260 bps to 12.5% and brings enterprise value divided by adjusted EBITDA resulted in 3.9 turn expansion in the multiple from 6.1x to 10x. Including the additional $220 million of net debt to be incurred with the Maco acquisition and assuming the trailing 12-month EBITDA plus synergies from our completed acquisitions, our pro forma multiple at the end of 2017 would be, approximately, 8.5x. Perhaps, the greatest relevance in the past year, the BCO stock price has risen about $39 per share, up approximately 135%.

Looking at the right side of the chart, on the top you can see how the Brink's multiple has increased over the last 6 quarters. Below that, you can see that we've eliminated the valuation gap with some of our peers but we have a ways to go to match our most successful peer. We believe, this gap will continue to close as we further implement our strategy and consistently achieve projections.

Turning to Slide 19. Given our strong start, the acquisitions we've completed and the currency rates that are better than we initially assumed, we are raising our 2017 outlook. We now expect revenues to be approximately $3.2 billion, up from around $3 billion from $92 million in favorable ForEx and $52 million from acquisitions. We've raised our operating profit outlook, $35 million, $20 million from organic growth, $5 million from currency rates and $10 million from acquisitions to a range between $270 million and $280 million. EBITDA is now projected to be between $415 million and $425 million, up $45 million. Earnings per share is expected to be in the range of $2.95 to $3.05. More details on our 2017 guidance can be found on the first 2 pages of our press release.

Turning to slide 20. As Doug mentioned, we're also raising our 2019 targets to reflect the 2017 improvement, the acquired businesses and the synergies we expect to achieve through integration. 2019 revenue is now expected to be $3.55 billion, up $275 million from $3.3 billion. The operating profit target has increased to $400 million, up $70 million primarily due to the $45 million expected from the acquisitions and the balance from the 2017 organic momentum. The EBITDA target has been raised by $85 million to $560 million, with $60 million of the increase from acquisitions. And new 2019, EPS target is $4.25, up from -- up around 21% from the original target of $3.50 per share.

The entire Brink's team has embraced the strategy. Their execution has exceeded our expectations in both performance and speed. There's a sense of urgency, teamwork and excitement driving organic growth, and the acquisitions are significant and accretive.

With that, I'll turn it back over to Doug.

Thanks, Ron. And when Ron and I first joined Brink's about a year ago, we said, one of our first objectives is to restore credibility and confidence among our 3 key constituents: our investors, employees and our customers. Doing this begins with delivering on our commitments to our customers and our investors. We still have a long way to go but we're off to a good start, and the opportunity for additional growth and improvement are substantial.

As Ron mentioned, we now expect 2017 full year organic revenue growth of about 6%, with an additional 3% growth coming from acquisitions for a total of about 9% revenue growth. Full year operating income is expected to grow by 30% over last year. And our expected operating margin is expected to increase to between 8.5% and 8.8% versus last year's margin of 7.3%. This is an approximate margin improvement of 130 basis points. And remember, we're up 240 basis points so far in the first half of this year.

We raised our 2017 adjusted EBITDA to a midpoint of $420 million, up about $87 million or 26% over 2016. And we raised our full year EPS to a range of $295 to $3.05. This represents a 34% increase over 2016 EPS. In our first quarter call in April, we said, we expected accretive acquisitions to add materially to our growth over a 3-year strategic plan period. But we intentionally did not include any of the impact of these acquisitions in our 2019 financial targets. In other words, we saw acquisitions as upside to our initial targets. We believe that upside is just starting to become a reality. We now expect to grow 2019 revenue by about 8% annually over the next 3 years to $3.6 billion or an increase of close to $650 million over the 2016 base.

Our 2019 operating profit target is now expected to grow by an annual rate of about 27%, as Ron mentioned the $200 -- to $400 million, with a margin exceeding 11% as an increase of about 130 basis points over our prior guidance. We're now targeting adjusted EBITDA, $560 million, an increase of 68% over the 3-year plan period. With a midpoint of our 2017 EBITDA of $420 million, we're forecasting to deliver $140 million of additional growth over the next 2 years, that's '18 and '19, to hit our updated strategic plan target. And remember, our 1-year guidance for EBITDA growth in 2017 over 2016 is $87 million, obviously, more than half of $140 million.

Finally, we're targeting earnings per share of $4.25, a 90% increase versus 2016. We started to demonstrate significant operational improvement in our U.S. business and throughout our global businesses. With our acquisitions strategy just starting -- just underway, we believe, we're just beginning to deliver sustainable growth in revenue, earnings, cash flow and value creation for our investors. The success we've achieved so far in 2017 is tempered by the fact that we're only 2 quarters into our 12-quarter plan. But I firmly believe, our accomplishments to date are good indication of the opportunities that lie ahead. I also want to take this opportunity to thank our global Brink's employee team for all their hard work so far, and their increased sense of urgency that has helped achieve our results and also with their increased customer focus that is helping improve our responsiveness to our customers as well. It truly is making a difference.

As I've stated in the past, I firmly believe that we have the right leadership, the right strategy and the financial flexibility to drive superior shareholder returns over the next 3 years. Carrie, let's now open it up for questions.

(Operator Instructions) The first question comes from Jamie Clement of Macquarie.

In no particular order, so on Argentina, it is never -- it was never reported separately by Brink's because it wasn't a top-5 revenue country. But I suspect, towards the end, it may have been a top-5 operated profit country. How quickly has that market been growing in the last couple of years? I would imagine that might be, in terms of your significant market -- that might be the fastest growing, either one of the best or if not the best. So can you comment on that?

We haven't commented in the past. It has been double-digit, Jamie. Some of that's been driven by inflation. But a lot of it's been driven by organic growth, real volume growth and something which is also a factor in the pricing there, which is ad valorem, where we get paid a percent of the value of that we're carrying in our vehicles. So the combination of those 2 things. The inflation has been partially offset, as you know, by the devaluation of the peso over time. But net-net, it's been a positive, certainly, for the past couple of years.

We also think, Jamie, it's also worthwhile. When we talked the, in my comments, the profits increases in the key countries that I pointed out, which included Argentina and that was actually done in order. So you're talking about growth and I appreciate that but I'm -- a little side note to that is the profit increases over prior year as laid out there was actually in order. In other words, U.S., Mexico, Brazil and Argentina. So Argentina, obviously, is growing very nicely. On the top line offset by some FX, it also -- profits are growing nicely. But it's not our strongest in terms of profits percent increase.

Great, sure. But although, I mean, although margins in Argentina over the last couple of years have been much stronger since some of the countries that haven't been on the list, I would imagine.

Certainly, in the U.S., yes and yes. So -- no, absolutely the case, Jamie.

Okay, great. Changing gears a little bit, Doug, comment about -- I think you said 200 of the newer independent chassis trucks hitting the fleet in the U.S., I think, you said in the second half in your -- what's the functional difference between those trucks and the newer trucks that you were adding in the U.S.? The wider bodied one towards the end of last year?

Yes, that's a very good question. And this is something, obviously, we always kind of get into, what is our strategy? And how is it really having an impact? Let me first start by saying, both of the types of our new trucks, in other words, they have been -- the ones that we put it in the first half of this year that were really carryovers us from last year as well were not the separable body, not the new design. But they still were the design that reduced the initial cost versus the more expensive diesel trucks as well as they were gas powered and, obviously, they're new. So there are reduced cost associated with the repair, maintenance and operational cost. So they get all of those benefits and most all of those have the ability also to be operated by either a one- or two-person crew. So all of those benefits were there. But what we really wanted to do was go for this new design that had not only the ability to separate the chassis and the body, which gave us -- which gives us the ability to change out the chassis and the timeframe that optimizes, if you will, minimizes, optimizes our cost associated with bare maintenance. So it's pretty obvious, without using specific numbers, it's pretty obvious that if we have diesel chassis, diesel trucks that are 12, 14 years of age, their cost of operation and that, if you will, that repair and maintenance and overall cost is starting to spike and is very, very significant. As we then have the ability in the future to manage the age of our chassis, which is the repair and maintenance cost, down to somewhere in the 6 to 7 year range and then supplement that, in other words, add to that with our new chassis that have extended warranties on our engines, have extended warranties on our drivetrains and on either -- other chassis components that will materially reduce our repair and maintenance cost and it will ensure that we can maintain those lower repair maintenance cost versus the much more expensive costs that we have in place today. And then on top of that, when we then come back, whether it be 6 or 7 years depending on whether we hit our mileage when we start seeing our extended maintenance periods expire, we can now take 40% of that cost and replace it versus the total cost that was higher before on a completed -- on a complete chassis and body. So it's material change in our cost, material change in our CapEx expense, our ability to manage the age of the fleet, have a much lower cost overall and then be able to manage our repair and maintenance and overall truck costs. So the 3 years in our strat plan will allow us to bring down the age of our fleet materially, it'll allow us to change most of these core route trucks to ones that are either capable of one or two person, which will allow us to materially reduce our labor costs with a 1-person vehicle routes and, on top of that, has superior technology associated with it and better ergonomics for our drivers.

Okay. And last question, if I may. You all talked, since you joined Brink's, a decent amount of opportunities among retail customers in the U.S. and you also mentioned Mexico, you haven't really, at least, based on my kind of view, you haven't really talked about it much with respect to Brazil and Argentina. Is that because retailers are not that big a piece of the business there? Are they potentially going forward? Or what kind of -- how should we kind of think about retail in those countries?

Certainly, in Brazil, you should think about retailers being a key piece of our growth and we're moving forward with it. So it's not that we've not tried to -- not talk about it, particularly, in Brazil. It is a key piece and we saw a nice organic growth in Brazil as well driven by retail heavily in Brazil as well. So we're very pleased with that. It is driven by retail and we're very pleased with that. The growth in Brazil was just slightly under on a percent increase basis versus Mexico. So very nice.

And the next question comes from Jeff Kessler of Imperial Capital.

This is a -- sounds like a soft question but it's actually, I think, an important question. The companies that are in the integration area and those larger companies in the lock and access control areas that are doing the best right now relative to their peers are the ones that have aligned the culture of their business with their clients, each client, specifically. Brink's was, pretty much, misaligned with a lot of its customers several years ago either by sales force or by the technology that it was using employing with those guys. What have you folks done to align the company with your largest customers? So that those customers are going to stay with you longer and pay you more for more value-added?

I'm not sure it's a softball question, it's a very, very valid and...

It was soft question, not softball question.

That's what I meant. That's what I really meant. Look, I think we're clearly trying to drive a change in our culture and I think that our team, as Ron mentioned, and I did as well, is excited about that change in the culture and the key piece of that is being more customer focused as we have been in the past. That varies by country. Clearly, the U.S. needs to be more customer focused than we have in the past. We think that, that is not only supported in the desire to service the customer better and be part of that customer driven culture, but it's also comes with a reward for our key managers. As we mentioned before that it's heavily aligned with our shareholders and with the equity that goes along with it. So it's a combination of those things that's helping drive and change that culture. Sense of urgency, customer focus, really making things up, being excited about the direction that we're going. But the focus on the customer's really key. Taking a little bit more dissecting around that, what we did, starting the first of this year, as I mentioned before, is we started aligning our sales force closer in the U.S., anyway, closer to the customer verticals. In other words, the addition of retail focused CompuSafe and, what I call, solutions customers -- salespeople, which really focuses on the customer more than what we did before is really key. That's an example of that. And you'll see more and more of what we're looking to do not only in the U.S. but in other markets, is focused on solution selling to our customers, not just a a pure commodity that is not creative, is not looking for how we can improve our margins, it's not looking for improving the solution for our customers but working in partnership with our customers to not only provide the best solution for their issues and requirements today but also working with them for the future requirements and strategies with them in partnership. So you'll see a change in the way we're operating and hopefully that will lead to an improvement in not only our view by our customers of who we are and where we are going, be more customer driven, but also in terms of an improvement in our margins and in terms of our revenue. So I think you'll see that as we go through this. And I think that's going to be a key piece that's going to help change who we are and how our customers perceive us in the future.

Okay, thank you. And as we go along with the acquisition strategy that you've put out, interesting to note the comments from your Iberian competitor about this being -- you're very interested in the Maco acquisition given that it does seem to be not just an aggressive -- a proactive point to get more revenue out of Argentina but it's also the senses in a way. Are you looking at the strategies in South America, which is very fast growing, to try to make sure that there's 2 major competitors as opposed to 3 or 4 or 5?

We're looking into -- take markets that present opportunities for strong growth as well as profitability and then significant synergies. And all of those things combined are a good example of what we're doing with Maco. It's also an example of LGS in Argentina -- excuse me, in Chile. And we're looking at other opportunities like that as well.

Okay. Final question. It's not -- it's no secret that a lot of the growth that G4S is getting in this business is coming from cash recycling and also, let's call it, some of the other solutions selling that you just talked about in your earlier statement. I'm wondering, how you folks are going to position -- culture aside, how are you folks are going to position that the higher margin cash logistics business as either a way to get into the company or a way to get higher margins out of your clients or just a way to get your brand out there since it is a -- since it seems to be -- appears to be a higher valued service, ultimately. Maybe not in every South American country but in a lot of countries it is.

Again, that goes back to your first question. We're clearly looking at switching a significant piece of our business and, hopefully, the growing portion of our business to the -- what we call, the cash solutions. The full solutions that's not just a single CIT or money processing but everything that's combined with that. And then adding additional services that really provide the solutions that are above and beyond what our customer wants and needs today such as cash forecasting. Again, recyclers is a great example of that. But it goes beyond just recyclers, it goes to -- how do we reduce the amount of cash within the customer's system? How do we reduce the amount of losses? How do we reduce -- I mean, these are all things that are supported by the total solutions selling and process and the different -- the improvements in cash forecasting and other services that we provide. It includes things like recyclers but it's the full systems that go along with it. So it's the [installing] that we'll be presenting.

And as any of what you just said, the thought processes, this gone into your 2019 forecast or is this above and beyond it?

Well, we've been very clear about the improvement in the percent of our total business that will be in things such as CompuSafe, all right? And therefore that component is. And I would consider that more of a basic solution selling versus a pure CIT commodity selling, because it includes the package of the equipment and the CIT, the money processing and the next generation of that will be cash forecasting and so forth that goes along with that. We also think that we have the ability and we think it's good, if not better than the competition, to provide a more sophisticated solutions such as recyclers above and beyond that and even more that we'll be working at as the solutions to meet our customers' needs beyond that. So the answer is, some of that is, but the next generation of our solution selling probably is not.

The next question comes from Tobey Sommer of SunTrust.

I was wondering if you could comment about what you've seen in terms of competitive responses to a reinvigorated Brink's across the globe. You cited I guess some pricing in France. But are there other kind of reactions to a more energized Brink's among your competitors that you could share with us?

I'm not sure that France is necessarily a reenergized Brink's. It's just more of large FIs flexing their muscle in -- as their 3-year contract or 5-year contract terms come up. So I'm not sure it's necessarily having a change one way or the other. I think it does help, particularly, in France, where we provide, similar to the last question that Jeff had, the solution selling that we have in France helps mitigate some of that. Not all of it, obviously, and we've seen some of the ups and downs associated with that. But it helps mitigate that and provides not only above reverses competition in that, especially, the smaller competitors, but also the ability to get a little bit better margin and value out of that. I'm trying to think through other areas like that where we've seen a -- where there are markets where they are more competitive depending on the competitor and specifically, or depending on the -- how we've seen renewals of FI, particularly, bids and so forth. We had a very tough -- we had a very tough bidding situation in Canada that we lost and that was disappointing.

Okay, thank you. In the hiring of various sales teams, could you give us a little more color on where you are in those processes and in terms of being able to go out and stimulate growth across the different offerings?

Yes, so I think we've disclosed before the increase, what I call the operational investment -- operational OpEx investment, that we've made particularly in the U.S., which was the 11 hunters -- sales hunters that we added in the first of this year, really, in the first quarter, primarily, in the U.S., all focused on hunting CompuSafe business. And we're starting to see a good ramp up of that, especially, in the last month or two, it's really started to ramp up to the levels that we'd like to see and we anticipate. And as we go at of this year, it we will be at or above the levels that we'd like to see on an ongoing basis, which is exactly where we wanted to be, so that's very good. So that group is there, the other group that we've hired as well in the U.S., again, were focused hunters in the FI segment, what we call, the sub-tier 1 financial institution segment that have not really been covered as much of in the past and that's starting to ramp up as well. And again, I see both of those as a fairly significant investment that it's cost us some in the first half of this year that will start seeing benefits and returns over the second half of this year going forward. Now on top of that, about 60 days ago now, I'm losing track of specifically of the timing, we also hired a new head of sales for the U.S. And I'm very pleased with Tim Witt joining us from Diebold where he, obviously, knows the industry well and came from the managed services portion of that business, which is consistent with what Jeff and others are asking questions about on our future in the Managed Service piece of the business. So he comes with a very strong background there. So we're beefing up our team to focus on that to move more and increase our position in CompuSafe and managed services as well. We'll continue to see, I think the improvements with CompuSafe. We'll continue to see the lumpiness and the ups and downs in our recycler business as we continue to improve on that. In other areas, other countries, we did add a new salesperson, head of sales in Mexico. As I think maybe we mentioned before, I'd have to go through other countries specifically but those are some examples.

And you've consummated some acquisitions and indicated you have opportunities to continue that process. I'm curious, are there any geographies or countries in which you don't see as many acquisition opportunities in? Therefore, you may think about pruning the company's footprint or is it really kind of a function of, "you like what you have now," geographically and just need to find a way to grow and improve the profit across the board?

I think it's the latter. We're not looking at pruning in our core businesses. That's a different, obviously, mindset and strategies and what the prior management team, I think, had. We're growing the business, particularly, in the core-core side of it. We will be looking as well at places where we have core businesses in noncore geographies today would probably be the next area. And so we may pay a little bit higher postintegration multiples in those areas to get into there, because we don't have as many upfront synergies. But we're not looking at pruning in our core businesses in any geographic locations at all. And we see a well-rounded look at how we might be able to expand and looking at all geographic locations except for those that we may not be able to go into because of regulatory issues.

The next question comes from Ashish Sinha with Gabelli.

So I wanted to start by digging at this bit deeper into your 2019 operating profit guidance range. And if I start by the building block which you put forward in that slide, which includes contingencies. So it's been, like, 5 months since you presented the plan, all of the global breakthrough initiatives you talked about, they're running on track. Your organic growth has been good at 6%. So what I'm trying to understand is, what causes you to release, say, let's say, $25 million out of those contingencies today? And then going forward, there's still $67 million of contingencies on the operating profit. Are there any thresholds in terms of operating margins or organic sales growth which need to be reached before some of those $67 million contingencies could start be released? That's my first question. My second question is on your acquisitions, especially, in a country -- and the reason is -- I'm asking is because of Temis, given the unique situation in that country. So you acquired these small businesses and after a lot of synergies, they generate a pretty healthy multiple. So I'm assuming they started off with very low profitability. What I want to do try understand is, why couldn't to have gone after Temis' business organically, i.e. you know that putting more volume through your system could give you synergies or could give you a profit uplift. So why didn't you go after Temis' customers rather than buying Temis itself? Or similar companies in similar geographies? And then what is the risk that some of those customers decide to walk away? And when you make large acquisitions, for example, Maco, do you speak to customers in advance? Do you get some kind of a feeling that they'll stick with you?

Thanks. Ashish, it's is Ron, let me take the first one on contingencies. So the contingency was created was, we went to our 3 segments and asked them for their commitments by 2019 and those are the numbers that you saw on Slide #6 in Doug's presentation. Then, the separate from that, we determined what we needed to deliver as a company to have a 10% operating margin and regain leadership globally and that's where the target came from. And the difference between that roll up and our corporate objective was the contingency box. And as we've gotten momentum both in the absolute performance and in the acceleration of our own expectations on the breakthrough initiatives, we felt compelled to take the year-to-date performance to, at least, as a reduction to that contingency box. But it's important that everybody understands where the contingency came from. It's not based on any particular risk or uncertainty. It's just the difference between the commitments from the segments and what we needed to get to a 10% margin. So as we see, we're progressing along with the segment performance, we're confident in reducing that contingency.

And Ashish, to kind of emphasize that, we did not put any more on the organic side in than what we have increased guidance for the first 2 quarters that we saw its actual performance. Therefore, we're comfortable that as we've exceeded our targets for -- op income margin and growth and profitability, that's all we put into our improvements on our organic basis. And then the $45 additional million through the -- is only from the 4 acquisitions and not others. In other words, it doesn't include Temis on a projected basis, yet our other acquisitions either. That's your first question. You're second question was why buy versus just fight? Take the business, right?

Yes. I mean, they're marginal players in the economy or in -- within that particular country, so.

Yes, so we're -- we always make that decision based on what the returns will be for shareholders. Speed of getting it, the ability to keep customers, what their margins are, what the synergies are associated with them, et cetera. And we had a conversation in the last call about what business we've lost in some of the tenders in the first half of this year in France or alluded to it, anyway. We also gained some. And in the second half, we're gaining some as well. We're gaining that from other customers -- so that's going on all the time and we'll continue to do that. But I think to suggest that using Temis as an example that we could pick up a substantial piece of that business by just competing in the marketplace would not necessarily give us the same returns that we're looking at getting in this case. And I think that's the judgment call and we think that the investments that we're making, the returns, the IRRs in these investments are very good for our shareholders and improving our value. And the indicative indicators of that are the postsynergy multiples. So we do that evaluation and we still move forward with being aggressive in the marketplace and increasing our revenue and our profitability in a very rational as a strong, good competitor as well.

The next question comes from Wayne Archambo from Monarch Partners.

Just on the leverage ratio, where do you see that going over the next couple of years? Where are you -- how high do you want -- can that go where you're still comfortable?

Yes, it's not a question we've commented on before. We have peers that are as high as 8x levered and that just scares us and there's no way we're getting there. I would say the most successful peers that we have are in the 2x levered. We think, in our type of business, there's an optimal shareholder return between debt and equity somewhere around the 3x plus or minus return. And so while we haven't stated an objective, if I just look at the marketplace where we're able to optimize shareholder value by leveraging the company to a point where we are prudent, conservative and get the returns on incremental investment, I would say, an eventual target sometime that would optimize shareholder returns would be at 3x plus or minus a turn.

And then, secondly, when you get in -- as you make acquisitions in countries like France, do you find it more difficult optimizing the labor element in a country like that where labor, obviously, has a lot of clout and difficulties in laying people off and what not? Is that a different dynamic for you in countries such as that? Or you look at it same way as you do in the U.S.?

We look at every acquisition uniquely. We do involve, heavily, our local management team in the identification, evaluation and in synergy targets for each deal. And in those assumptions, we do factor in the unique labor characteristics and all the unique characteristics of each individual market. And so in the numbers that we've disclosed for Temis and for all our acquisitions in aggregate, they do include the costs required to achieve the synergies based on the local market.

And the timing, the process it'll take to go through that in the approvals. So that's all taken into consideration. And a part of using France as your example, it's not only about acquisitions but it's also sizing the business and our costs associated with the business on an ongoing basis anyway. In other words, we're always looking at improving our cost base in these markets and France is one of those which will continue to do on top of the acquisitions.

And this concludes today's question-and-answer session, and also concludes today's conference call. We want to thank everybody for attending today. You may now disconnect your lines. Have a good day.