Brinks Co (BCO) 2018 Q3 法說會逐字稿

Welcome to The Brink's Company's Third Quarter 2018 Earnings Call. Brink's issued a press release on third 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)

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 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.

Thank you, Drew. Good morning, everyone. Joining me today are CEO, Doug Pertz; and CFO, Ron Domanico. This morning, we reported third quarter results on both a GAAP and non-GAAP basis. The non-GAAP results exclude our Venezuela operations, the impact of Argentina's highly inflationary accounting, reorganization and restructuring costs, items related to acquisitions and dispositions and costs related to certain accounting compliance matters.

We also provided our non-GAAP results on a constant currency basis, which eliminates changes in foreign currency exchange rates. We believe these non-GAAP results make it easier for investors to assess operating performance between periods. Our comments today, including those referring to our guidance, will focus primarily on non-GAAP results. Reconciliations are provided in the press release, in the appendix to the slides we're using today and in this morning's 8-K filing, all of which can be found on our website. Finally, Page 4 of the press release provides the details behind our 2018 guidance, including revenue, operating profit, noncontrolling interest, income taxes and adjusted EBITDA.

I'll now turn the call over to Doug.

Thanks, Ed, and good morning, everyone. Today, we reported our 10th consecutive quarter of year-over-year earnings growth. We're now 7 quarters into our 12-quarter strategic plan and our results, excluding the impact of currency, continued to be well above both our original and our upwardly revised planned targets. We expect to extend this strong performance into 2019 and through our next strategic plan period.

Third quarter results include reported revenue growth of 3%, operating profit growth of 25% and a 21% increase in adjusted EBITDA. Our operating margin increased 200 basis points to 11.2%. We achieved these results despite the significant impact of currency devaluations, most notably in Argentina, that reduced our revenue by $82 million in total and operating profit by $24 million. This was more than offset by $106 million of revenue and $42 million of operating profit from organic and acquisition-related growth.

Our reported non-GAAP earnings were $0.91 per share, up 8%. The lower EPS rate compared to the 25% operating profit growth is due mainly to higher interest expense related to the refinancing completed in October of last year, which provided excess cash that has since been used for the Dunbar acquisition as well as due to the higher tax rate. Our results excluding the unfavorable impact of FX provide a better picture of our true operational performance.

On a constant currency basis, revenue grew 13%, operating profit was up 55% to $119 million, adjusted EBITDA was up 44% and earnings grew 42% to $1.19 per share.

Now that the Dunbar acquisition is closed, the cash that was on our balance sheet has been fully deployed and is just beginning to deliver accretive returns.

And as we disclosed when we announced the acquisition, we expect our current tax rate of 37% to be reduced by about -- to about 35% next year in 2019, with additional reductions to the 31% to 33% range over the next several years. As a result, our earnings growth in 2019 and beyond should be more consistent with growth in operating income, which has been over 25% so far in 2018.

Any way you look at it, our third quarter results demonstrate the strong operating leverage we've achieved through our breakthrough initiatives. They also demonstrate the resiliency and future growth potential of our business, especially when currency rates become less of a factor and we recover the Argentine peso devaluation through price increases.

In our view, the real news behind the third quarter results is not about currency. It's about organic profit growth of 50% and the fact that our U.S. operations, along with Mexico and Brazil, were big drivers of this growth.

Turning to Slide 4. Third quarter profits in North America doubled due primarily to very strong organic growth in the U.S. and Mexico. Profits in the U.S. quadrupled and Mexico profits were up more than 50% on an organic basis, driving a segment margin rate increase of 350 basis points to 8.8%.

We're particularly pleased with the accelerated profit growth in our core U.S. operations, which, excluding the Dunbar acquisition, achieved a margin rate in excess of 6%. This strong improvement in our base U.S. operations was driven by continued labor savings from our breakthrough initiatives, including our ongoing conversion to 1-person vehicles, network optimization and higher revenue, with our CompuSafe service on track to exceed our 2018 target of 300 -- excuse me, 3,500 new orders. Dunbar, which we owned for about half of the quarter, added about $50 million in revenue.

We fully expect the profit growth in our U.S. operations to continue to accelerate in line with our strategic plan target. But when we layer in the synergies we expect from the Dunbar acquisition on top of the continued strong performance in the Brink's base business, we believe our U.S. business has reached a very important inflection point in terms of its profit trajectory. Our goal in 2019 is to generate total U.S. revenue of approximately $1.25 billion and exit the year with a combined run rate margin of at least 10%.

We are equally excited about our continued revenue and profit growth in Mexico, which is driven by growing sales to retail customers, improved productivity, lower labor cost and increased use of technology. In 2017, our team in Mexico challenged itself to more than double its margin rate to 15% by the end of the strategic plan period 2019. With a third quarter margin rate of 16%, we're clearly on track to achieve this goal a year ahead of plan, which is very exciting when you factor into this our expectations of continued double-digit revenue growth in Mexico as well.

One last note on North America. On October 17, Canada legalized the use of marijuana for both medicinal and recreational use on a national basis. Brink's is extremely well positioned to service the unique needs of this business with both secure transportation for the product as well as all cash management needs. We've entered into agreements with cannabis suppliers in Canada and expect this business to offer significant growth and profit opportunities in the coming years.

Turning to Slide 5. With the completion of the Dunbar acquisition in mid-August, Brink's became the #1 cash management company in the U.S. We're extremely excited about the joining -- about joining forces with this great company that offers a complementary customer fit and significant cost resynergies -- cost synergies. We are very pleased to receive regulatory approval for the transaction within 60 days and without any requirements for asset divestitures. We expect Dunbar to add at least $60 million of EBITDA in 2019, which includes about $15 million of initial synergies. I've already mentioned the benefits of deploying the excess cash that we had on our balance sheet and the substantial reduction in our tax rate going forward. When fully integrated by the end of the third year, we expect this acquisition to deliver between $40 million and $45 million of cost synergies and about $0.90 of earnings per share in 2020.

We're just getting started with the integration efforts and with an emphasis on the future state of the hub-and-spoke network. The more we learn, the more confident we are regarding the future of the combined operations and the strength of the Dunbar people added to Brink's. In the short 2 months since the acquisition, we're already exploring additional cost reduction and growth opportunities -- revenue growth opportunities that is, that could add substantially to the benefits already cited.

In South America, reported revenue declined 13% and profit fell 3% due entirely to the negative FX translation related to a 45% devaluation of the Argentine peso and a 20% devaluation of the Brazilian real as compared with last year's third quarter. Both currencies have strengthened a bit since the end of the quarter, with the Brazilian real gaining back almost half of its devaluation. But the strengthening is not nearly enough to offset the weakness of the last several months. In U.S. dollar terms, in the quarter, this negative FX translates to a revenue reduction of about $70 million or 28% and a corresponding profit impact of about $22 million or 45%.

Despite these devaluations, our margin rate in South America increased 220 basis points to 21.5%. Our underlying operations in Argentina, Brazil and the rest of South America continued to perform quite well, delivering organic revenue growth of 14% and organic profit growth of 39%. And on a constant currency basis, our results were even stronger, with operating profit of 42%.

And as we stated in our last earnings call, we continue to expect the acquisition of Rodoban to close before the end of the year, probably in December. It's not included in our 2018 guidance, but we've kept it in our preliminary 2019 guidance.

Turning now to the Rest-of-the-World. In our Rest-of-the-World segment, reported revenue fell 4% and operating profit declined 8%, due primarily to continued price and volume pressure in France and the sale of a French airport guarding business that closed in June, which had annual revenue of approximately $80 million. This is the first quarter -- the first full quarter that the guarding business sale impacted revenue and margins. And the overhead costs that were partially absorbed by this guarding business are in the process of now being reduced. Revenue and profit growth in most other Rest-of-the-World countries was positive and these businesses continue to perform well.

As we said in our last call in July, the competitive market disruptions in France in 2017, which included pricing pressure and the unusually high number of tender rollovers, are continuing to affect our 2018 results. We do believe that the weak market conditions in France have finally bottomed out and that both revenue and profits for 2018 will be relatively flat versus 2017 levels. However, we don't expect significant improvement until 2019, next year, when internal cost reductions will be fully implemented, synergies from the Temis acquisition and more stable market additions will combine to drive profit and revenue growth.

I'd now like to summarize our updated non-GAAP guidance for 2018 and our preliminary guidance for 2019. Our original 2018 guidance was provided on February 7 and was primarily based on exchange rate at the end of last year, 2017. The impact of FX on our full year 2000 (sic) [2018] operating profit is now expected to be $74 million. We think that more than half of the additional unfavorable currency impact will be offset by organic growth with contributions from the Dunbar acquisition that we have closed earlier than expected offsetting the delay in the closing of the Rodoban acquisition.

Despite the expected negative FX impact, we still plan to deliver full year revenue growth of 8% to approximately [$3.45 million] (Sic-see press release $3.45b), operating profit growth of 24% and adjusted EBITDA growth of 20% with earnings growth of 9%.

Our preliminary non-GAAP guidance for 2019 assumes October 23, 2018, exchange rates for most currencies. Once again, the exception is the Argentine peso, for which we've assumed an average rate of 45 pesos to the U.S. dollar for 2019. Based on these rates, we're estimating a negative currency impact for 2018 operating profit to be about $120 million versus the prior target.

Despite these negative FX impacts, our guidance for 2019 includes revenue growth of 10% and we expect to deliver our third consecutive year of operating profit growth of approximately 25% to about $440 million. We expect year-over-year margin rate increases of 150 basis points to about 11.6%. Our adjusted EBITDA is expected to grow 22% to about $620 million and earnings are expected to increase 30%, more in line with operating income, to about $4.25 per share.

I want to stress that the preliminary guidance that -- we will update the preliminary guidance after year-end to reflect our business outlook at that point in time as well as year-end currency rates.

I'll now turn it over to Ron for financial review including more of the drivers on the third quarter results and assumptions behind our '18 and '19 guidance. Ron?

Thanks, Doug, and good day, everyone. Let's look a little deeper into our 2018 third quarter results.

Reported third quarter 2018 revenue was $852 million. Versus the third quarter 2017, organic revenue increased 7% or $60 million and acquisitions, net of dispositions, drove an additional $46 million of growth. Translation ForEx impacted revenue negatively by $82 million, due primarily to the strengthening of the U.S. dollar versus the Argentine peso, the Mexican peso, the Brazilian real and the euro. Of the $60 million organic revenue increase, South America grew 14%, North America grew 7% and the Rest-of-the-World grew 1%. Acquisitions added $68 million with approximately $52 million attributed to Dunbar. The second quarter 2018 disposition of our French aviation guarding business reduced third quarter revenue by $22 million.

On the right side of this chart, you can see that third quarter 2018 non-GAAP operating profit was $95 million. Excluding the impact of currency, operating profit in the third quarter 2018 increased 55% or $42 million. The increase was driven by $38 million of organic growth and $4 million from acquisitions net of dispositions, primarily from Dunbar and Temis. In the quarter, there was $24 million in unfavorable translation ForEx, due almost entirely to weakness in the Argentine peso, with some minor negative impact from the Brazilian real and the Mexican peso. Nevertheless, reported third quarter 2018 non-GAAP operating profit was up 25%.

Organic profit more than tripled in the U.S. and combined with the continued revenue and margin expansion in Mexico, drove the 84% organic growth in North America. South America was up 39% organically, led by Argentina, Brazil and Chile. The Rest-of-the-World was down 4% organically, with the continued pricing pressure in France offsetting improvements in other EMEA and Asia Pacific.

Corporate expenses improved $6 million versus 2017, due primarily to favorable bad debt and royalty income from our home security agreement with Monitronics.

Moving to Slide 12. This slide bridges operating profit to income from continuing operations and then to adjusted EBITDA. The variance from the prior year is shown at the bottom of the slide. Third quarter operating profit of $95 million was reduced by $17 million of net interest expense. Net interest was approximately $9 million higher than last year, reflecting the higher net debt used to finance the Dunbar, Temis and Maco acquisitions, combined with higher variable interest rates.

Versus 2017, taxes increased about $6 million to $29 million, primarily due to higher income. We expect our 2018 non-GAAP effective tax rate to be approximately 37%. In 2019, the Dunbar acquisition and other factors are expected to reduce our ETR by approximately 200 bps. We expect our effective tax rate to decline to a range of 31% to 33% once Dunbar is fully integrated.

Noncontrolling interest reduced profits by $2 million. That will be cut in half going forward when we complete the buyout of our Colombian partners scheduled for later this year.

Income from continuing operations was $47 million or $0.91 per share, up from $0.84 per share in the third quarter of 2017. Depreciation and amortization of $37 million was up around 7% versus the year ago quarter. And adjusted EBITDA for the quarter increased $24 million or 21% to $136 million.

Turning to our updated 2018 guidance. On this slide, operating profit is represented by the blue bars; depreciation, amortization and other is represented by the gray bars; and adjusted EBITDA is the sum of the 2. In 2017, we generated $281 million operating profit and $425 million of adjusted EBITDA. At the midpoint of our guidance, organic operating profit will grow approximately $118 million or 42%. And acquisitions, net of divestitures, will add $25 million. Combined, constant currency operating profit is expected to grow 51%.

Based on current rates, unfavorable translation ForEx versus 2017 is estimated at $74 million and our revised guidance to $340 million to $360 million of operating profit and $500 million to $520 million of adjusted EBITDA. Earnings per share was $3.03 in 2017. Higher expected operating profit will be partly offset by higher interest expense and higher taxes and results in a 2018 EPS range of $3.20 to $3.40 per share.

Now let's look at our updated 2018 guidance versus our last guidance. There were 3 notable developments since late July when we issued our previous guidance. Our organic performance continued to improve, we closed the Dunbar acquisition and the Argentine peso continued to devalue from ARS 27.6 per U.S. dollar at July 23 to around ARS 41.3 on September 30. For 2018 operating profits, these factors are expected to offset and our guidance remains at $340 million to $360 million.

While our operating profit guidance has not changed, the Dunbar acquisition revised upward our 2018 depreciation and net interest expense. This resulted in higher EBITDA guidance to $500 million to $520 million and lower 2018 EPS guidance to $3.20 to $3.40 per share. The devaluation of the Argentine peso has had a material impact on our 2018 results. So it's important to review the dynamics of how we operate in this highly inflationary economy.

The blue bars on this slide represent the quarterly revenue in U.S. dollars for Brink's Argentina, excluding Maco. The yellow line represents the devaluation of the Argentine peso versus the U.S. dollar. In Argentina, devaluation historically has offset inflation. While inflation is relatively consistent over time, devaluation is not. Every few years, there has been a 20% to 30% spike in devaluation. The red circles highlight the drop in quarterly U.S. dollar revenue following a significant devaluation. These spikes are followed by systemic price increases and historically, it took about 3 quarters to recover and then exceed the prior U.S. dollar revenue. In the second quarter 2018, there was a 30% devaluation spike. Then in the third quarter 2018, there was another 30% devaluation spike. Based on back-to-back significant devaluations and their timing, instead of a 3-quarter U.S. dollar revenue recovery, we estimate that it could take 6 to 8 quarters. It should be reinforced that Brink's foreign exchange is translational, not transactional. Almost all of our revenue and expenses are in the local currency of the countries where we operate. This is true in Argentina and our margins in local currency are strong and continue to improve.

As I just mentioned, on September 30, at the close of the third quarter, the Argentine peso was ARS 41.3 to the U.S. dollar. The peso has strengthened in October and yesterday, the exchange rate was ARS 36.6. And reporting -- repeating what Doug has said, our guidance assumes an average exchange rate of ARS 40 for the balance of 2018 and an average rate of ARS 45 for 2019.

Now let's move to Slide 16 and our preliminary 2019 guidance. While we had not issued formal guidance for 2019 prior to today, we did discuss 2019 targets as part of our Dunbar release on May 31, 2018. At that time, we expected the decline in the Argentine peso would be fully offset in 2018 by inflation-driven Argentine price increases and improved global organic growth. While we've covered a significant portion of the decline in 2018, further declines of the peso and other currencies since that date were greater than anticipated and will negatively impact 2019. Based on our current assumptions, ForEx will have a negative $120 million impact on our previous operating profit target. This is expected to be partly offset by $40 million to $60 million of additional organic improvement that was previously part of our contingency. As a result, we've lowered our 2019 adjusted EBITDA guidance to a range between $610 million and $630 million.

Now let's look at our preliminary 2019 guidance versus our 2018 guidance. Despite significant currency headwinds, we expect 2019 operating profit to grow by 26% to a range between $430 million and $450 million. This increase reflects constant currency growth of 40%. Our 2019 improvement is expected from continued expansion of our breakthrough initiatives in the U.S., Mexico and Brazil, inflation-based pricing in Argentina and contributions from the Dunbar and Rodoban acquisitions. Currency is estimated to have about a 14% negative impact, primarily from the Argentine peso and Brazilian real. Adjusted EBITDA is expected to grow by about 22% to a range between $610 million and $630 million. 2019 EPS is expected to grow approximately 30% to a range between $4.15 and $4.35 per share, reflecting higher operating profit and an effective tax rate improvement of approximately 200 bps, offset partly by higher interest expense.

Moving to Slide 18. Through the first 9 months of 2018, we've generated around $50 million of non-GAAP free cash flow, which is almost as much as we generated all of last year. The fourth quarter is seasonally our strongest for cash generation and we're looking to triple 2017's full year result.

Working capital improvement, specifically collection of receivables measured in day sales outstanding, is a renewed focus this year and a component of the annual bonus program.

We lowered our 2019 free cash flow target from $300 million to around $215 million, primarily to reflect the expected integration costs, interest expense and capital expenditures related to the Dunbar acquisition. The Dunbar acquisition is not expected to materially contribute to free cash flow until mid-2020.

We expect capital expenditures, excluding those related to CompuSafe, to be around $200 million in 2018 and $230 million in 2019. For Dunbar, we have not estimated any incremental CapEx for 2018, but have included $30 million in 2019.

My last slide illustrates our net debt and leverage position, both historically and assuming additional acquisitions. As of September 30, 2018, our net debt was $1.2 billion, up almost $600 million from year-end 2017. The increase is in line with prior estimates and was driven primarily by acquisitions in CapEx, partly offset by cash flow from operations. If we achieve our 2018 and 2019 cash flow targets and complete another $115 million of acquisitions in 2019, our net debt would decrease to about $1.1 billion at the end of 2019. The bank-defined leverage that includes trailing 12-month partly synergized EBITDA would be around 1.7 turns at the end of 2019.

I'll now turn it back to Doug.

Thanks, Ron. I want to again emphasize that despite significant currency headwinds, we had another strong third quarter, with reported 25% profit growth and with constant currency growth of 55%. For the 3 quarters year-to-date of 2018, reported profit growth is 27% and constant currency growth is 50%. Seven quarters ago, we launched our 3-year strategic plan with aggressive organic and margin improvement targets. We call it our Strategy 1.0. These plans included breakthrough initiatives to materially improve our businesses and margins in the U.S., Mexico, Brazil and other countries. We are on track to meet or exceed these targets as well as subsequent increases in our initial targets, excluding FX.

Many people would have not believed our U.S. results were possible after losing money in the first half of 2016. And doubling our margins in Mexico seemed equally implausible. Only 5 quarters ago, we announced the first of 7 acquisitions as part of our Strategy 1.5. The approximate $1 billion in investment in the 7 acquisitions to date will add close to $130 million of EBITDA in 2019 after partial synergies are gained from route density, infrastructure overlap and efficiency improvements.

We're confident the combined 1.0 and 1.5 strategies will continue to drive revenue and margin growth and continue to significantly outpace the unfavorable impact of currency translations in the future.

As one of our 3 strategic objectives, technology will not only help drive continued achievement of our margin and productivity targets, but will also enable offerings of new and differentiated services. We've already implemented technology to optimize routes and reduce labor and to externally monitor and manage all of our customers' CompuSafes. New customer-facing technologies, now in the pilot stage, include: track-and-trace to provide real time customer data throughout customized portals; the Brink's handheld app for ordering and real time information; plus cash forecasting and other technology-driven services. We are confident that our strategic initiatives and added technology-based initiatives will drive future growth as well.

As we evaluate the value of our strategic initiatives that -- and the value that it offers to our customers, we've observed that Brink's has many characteristics of U.S.-based business services companies, and these include: specialized logistic fleets that are similar to our new 1-person vehicles, as a good example; the ability to optimize routes and achieve significant cost and service density benefits; highly leverageable infrastructures and services as evidenced by our margin improvements to date; and the ability to increase value through accretive high-synergy acquisitions.

And similar to route-based comps, Brink's has demonstrated high organic growth rates at about 6%, supported by high customer retention rates, long-term customer contracts and a high percent of recurring revenue. These factors have and continue to translate into an EBITDA compound annual growth rate of about 20%, significantly higher than route-based peers.

The Dunbar acquisition is a good example of the route-based business value creation that is materially stronger than other industrial services businesses. For the $525 million Dunbar acquisition price, we received LTM EBITDA of about $43 million and have stated that we expect to achieve synergies of approximately 100% on this figure. We further expect the acquisition will offer us the opportunity to achieve even more synergies as we optimize the 2 businesses into our long-term hub-and-spoke network. The value creation from our 1.5 acquisition strategy and the underlying characteristics of our global business closely align to other route-based companies. And we're now layering on more value with technology-driven services.

As I mentioned earlier, in a little over 2 years, our management team has increased quarterly operating profits on average by more than 35%. Our initiatives have driven revenue growth and strong earnings leverage and has easily offset the unfavorable currency impact in 2018 and will achieve an expected 24% operating growth this year.

And while we've reduced our 2019 growth rates and our targets, our plan is to more than offset the $120 million in unfavorable currency and achieve 2019 operating earnings growth of 26% and EPS growth of close to 30% versus 2018.

In summary, we're confident that we have a strong base for continued earnings growth through our current strategy plan period and we're developing additional plans to drive shareholder value into 2020 and beyond. Our acquisitions to date have and will continue to layer on additional value through the next several years as synergies are achieved and growth is accelerated. We look forward to sharing more on these and new strategies in the first half of next year.

Drew, let's open it now for questions.

(Operator Instructions) The first question comes from Tobey Sommer of SunTrust.

I think I'd start out by asking, what are the lessons that you've learned since closing the Dunbar acquisition in terms of opportunities, positive or negative, versus your expectations prior to closing?

Good question. I tried to allude a little bit to that in my words. Some of the, first, I think, lessons, and I'm not sure that's the right way to necessarily put it, is that we got great people. There are great people at Dunbar that have been there for many, many years. They have known the industry very well, and I think will add tremendously to the combined business going forward. We've integrated a number of those senior-level people into our operations and look forward to them being a key piece of where we're going forward in the future. And I think if you take that a step further and we've said this before as well, is that the customer focus that they have is very strong and their customer focus particularly in the small- to medium-size retailer in particular has been very, very good, and we want to maintain that and build on that and that's complementary to what we have in our business on the Brink's side at least historically. I think the third area, and I've alluded to this as well, is that we think there are opportunities above and beyond both in terms of revenue opportunities because of the complementary nature that I just alluded to as well as additional cost synergies, particularly in the area of continuing to look at what that long-term optimized network is -- will be for the combined businesses going forward. And we talked a lot about already into synergies, about the combinations of some of the businesses -- of the branches and so forth that are pretty well understood that we do in these situations and what we can do with some of the investments in the truck fleets, modernizing the truck fleet as well as going to 1-person vehicles and reducing labor cost. So those are in kind of the base synergy numbers, but we think there are huge opportunities on top of that as we look at what our end state is for our hub-and-spoke network of the future. And this gives us the opportunity, this being the combined -- the combination of the 2 business gives us the opportunity to significantly leverage and magnify that.

The next question comes from Jeff Kessler of Imperial Capital.

And first one, I want to thank you guys for putting this amount of detail, particularly on the -- on your outward-looking numbers. It's -- it helps a lot. First, with regard to EBITDA estimates that you've just put out for 2019, the -- let's call it the consensus is sitting around $640 million and you've got it to $610 million to $635 million. At the same time, it appears that you're talking to some extent about $50 million to $70 million of currency -- let's say, currency downturn for next year that you have to work again. If the Argentine peso was to remain in the ARS 35 to ARS 40 region, is there a $30 million or $40 million kick, am I doing the math right, back to EBITDA if that happens?

Jeff, I mean, we believe that highly inflationary economy will continue to experience devaluation by its very nature. And because of that, we feel like we have been conservative with a ARS 40 estimate through the rest of this year and ARS 45 average for next year.

Let's be clear, the peso today is at about ARS 36.5, so that's an increase for the balance of this year. And then it's taking an average of ARS 45, which is if you go into next year, starting at that ARS 40, which is up from, obviously, the ARS 36.5 today, the average of ARS 45 and you can exit the year, next year substantially more than ARS 45 and still get that average, theoretically.

So in answer to your question is if the peso does not devalue further, a large portion of that negative ForEx that we've built into 2019 guidance would not materialize, and we would see that be incremental to both operating profit and EBITDA.

And I guess -- let me just -- one other thing to add to that. Obviously, what we have talked about of the historical, and Ron, I think, went through it in pretty good summary today of how we recapture the FX devaluation that we've seen through the inflationary price increases, which has happened for years and years as part of the structure in the Argentine economy, that will also be something that we catch up on. And so the question is how much will that be and when does that happen. The normal pace is the middle of the year and the question is how much will that be. So that's part of the other upside that we hope there will be as well.

Okay. Again, I want to thank you, again, for talking about the amount -- giving some detail on the capital -- your capital program for the next year, so where you expect to spend it. One of the areas where you did not spend a lot of it lately is your stock is down, let's call it, 28% to 30% from its high. And you've bought back, I see, about $25 million worth of stock in the last quarter. Is there a consideration to upping that if the stock remains at the level that it is now?

We have an authorization that we received in May 2017 for a total of $200 million in share buybacks, Jeff. So obviously, we've used about 1/8 of that. We're not going to disclose our buyback strategy, but you have now seen third quarter that we've actually exercised a portion of that authority. And we will continue to evaluate the share price based on what we believe our cash flow generation and operating income generation capabilities are going forward. We obviously believe it was a good investment last quarter and the price is lower this morning. And so it would continue to be a good investment.

Okay. One quick follow-up question on operations and that is have you -- since -- and this may -- this is with or without Dunbar at this point, I'm assuming Dunbar has helped, but the growth that you're seeing in North America is probably not just due to increasing your business with existing clients. The question is have you recaptured or have you begun to take on new clients that you probably aren't going to give the name of, but can you talk a little bit about your client -- your client biz-dev program and what is going on in getting -- in winning back some of that share that was lost back in 2008, 2009?

I think the best way just to characterize that is we're in the early stages of doing that. I think we have a lot of opportunity to continue to do that. And we anticipate that we'll be able to get to the 5% plus organic growth rates in the U.S. on a sustained basis over the next couple of years, supported by the strong recurring revenue streams of the CompuSafe as a base for that.

The next question comes from Ashish Sinha of Gabelli & Company.

So I wanted to expand a little bit more about the cannabis opportunity you highlighted, both in your presentation and press release. Just wanted to understand your thoughts. I mean, you would have done some work around size of the market, the potential, the addressable market you could have and the opportunity. So if you could talk a little bit about that? And then secondly on the -- within the cannabis market, is pricing traditionally different versus normal CIT and margins? So it's -- is it accretive revenues in terms of margins? And then thirdly, within the same cannabis market, is the competition going to be slightly different maybe probably because you need to be qualified somehow to transport and not everybody can tender or bid for that business? And then secondly, if I could ask the share repurchases question a bit differently. I mean, you bought back shares at $74 and change and now the shares are closer to below $65. So assuming you would have got more aggressive or you would be more aggressive in third quarter or probably going ahead with repurchases. So my question is, have you factored in your EPS guidance any impact from the change in share count?

Let's address the last one first. No. We have not factored anything into our EPS, anything -- any difference of that. And I want to reemphasize this and this kind of goes to the last question about what our guidance was. Remember, our guidance for next year, while we may be a little bit disappointed that we brought down the EPS or our overall targets for next year from where we initially put them up because we only recaptured a portion of the $120 million that we had to recapture. We're still talking about a 30% increase in EPS next year. So I'm not sure, frankly. Maybe this sounds a bit defensive, but I'm not sure if you would have said we were going to be up 40%, it would have made a whole lot of difference in our share price today. So we're still talking about a 30% increase in our EPS next year and a 20-plus percent increase in both our EBITDA and our op income. But no, a difference in our share count is not indicated in that based on a share buyback of any consequence in that number. So that's not -- that would be additional upside if we're looking -- and we clearly think that we're undervalued, if you want to look at it today at the current share price if we thought it was at the average share price that we bought it back out of $74. Cannabis business. I don't know that we necessarily are the ones to talk about the size of the market in Canada, but it's very large. It offers significant opportunity. And I think as we did state in the press release and in my comments is we are uniquely positioned to offer the benefits versus any other competitor in the marketplace for a number of reasons. And Canada is a very interesting market, which is a very good example of where probably things are going to be going in the future in cannabis in that it's a combination of our services that we are so well qualified. That is a combination of the transport of the product, which is what we do best on a global basis with our BGS business, whether these are diamonds or cannabis, whether it's raw material coming -- going from the West Coast of Canada to other portions of Canada to be processed and turned into final product there, or substantially wide array of products to be -- the raw material is turned into and then redistributed from there. We are in the best position to handle that and provide those services and we're uniquely positioned to do that. And then on top of that to then take that product and then be able to transport that internationally as well to other markets that the Canadian manufacturers will be servicing as a result of their position and their really head start in the marketplace. So one side of it is the transportation of the product, which is very unique, and then the other side of it obviously is the full range of cash management services from the CompuSafe services to everything else around that associated with the money processing and so forth associated with. So what we're looking at is a full range of service of providing those full packages. And because we do that, yes, the margins are very attractive and accretive to our existing margins. But still, very competitive with what the expectations are of the marketplace and very nicely supportive of the business for the cannabis producers and distributors in Canada.

You had one follow-up question about competition. Brink's has globally the highest insurance coverage of any of the CIT carriers. And because of that, we know in Canada, we do have an advantage where the other major national competitor does not have the same level of insurance that give us a competitive advantage.

(Operator Instructions) The next question comes from Jamie Clement of Buckingham Research.

We will go next to a follow-up from Tobey Sommer of SunTrust.

I wanted to ask, in the French market, you kind of said things kind of bottomed in '18 and in '19, we will perhaps see some improvement. Have things already started to improve sequentially or is that a prospective comment? And I was just wondering if you could maybe give your perspective on what changes there to drive the improvement other than the expense management that you talked about. Did you expect contracts to kind of be recomputed at better prices in the future?

I don't want to necessarily speak for the market on a future basis, but I guess the answer is yes, we do expect that. We expect that most customers will understand that the major step down that we saw over the last year, the carryforward this year is not something that's sustainable. And while we may not see the step back up again, we are seeing and we will see a prospective improvement. And so I guess the best answer is that we weren't speaking about an improvement in the third quarter necessarily versus what we -- versus last year, but we do expect the fourth quarter to be a bit better. And therefore, that's your -- answering your sequential. And that will take us into a '19 that is better. And the '19 will be better, we think, because of a combination of things. And you, I think, led off with that in that we'll see implementation of our cost improvements and the full implementation of that and the full benefits of that in '19 as well as hopefully some improvements in the customer contracts in prior year comparisons as well as some pricing hopefully going forward. And as I did mention in the comments and Ron did as well that we no longer have the guarding business, so that $20 million or so or $80 million in a full year on a revenue basis is part of the reasons for the revenue drop, and we have to obviously get rid of some of the cost that was absorbed associated with that too. So that's in the process of happening.

That makes sense. With respect to the CompuSafe and recycler business, have you learned anything over the last couple of quarters that causes you to change your view on the addressable market or where you think that can grow over time?

Well, you asked kind of 2 questions there. I think on the CompuSafe side, I think we're right on track to where we thought we were, and we are still highly confident in terms of the size of the market as well as the opportunity to continue to increase that addressable market. And it's not just us. It's the whole market continuing to get more of it. So where we've historically -- like last year, I think we stated that we think that about 18% to 20% of the market is currently being addressed. We think that the market will not only grow, but will also grow in terms of the amount -- the percent of the market that will be addressed. And so we firmly believe that and continue to do that. One of the other thing that's primarily addressing the U.S. market. The other great thing is we're seeing nice successes in other key international markets as well such as Mexico, Brazil and other South American countries in particular. So that's very encouraging. And I think that's in more the infancy in terms of the markets versus competition. That's a little bit different, I think, than the recycler business that is again in the earlier stages of how much of that market of the larger retailers are truly addressed. And therefore, it has a much lower percent of the total market that is addressed today. Again, future opportunity that needs to be further defined and our plans need to be further defined around that, but presents a significant opportunity for the future that is not baked into many of our numbers, and I think what's in the addressable market for the industry today.

One last question for me. With respect to the company's acquisition strategy, what does the pipeline look like today? Are you seeing opportunities that are as exciting as the ones you were able to look at and some of them consummate so far in 2018?

The pipeline is no smaller than it's been when we kicked off our strategic plan in March 2017. Our local teams continue to identify candidates. Those range from as small as $2 million to much, much larger. So yes, we are still excited about the potential for additional accretive M&A.

Jamie, try you?

We have the question from Jamie Clement. Once again, we have a question from Jamie Clement of Buckingham Research.

Doug, so when you all joined, the framework of your presentations, how you all talked to investors was around a 3-year plan. We're obviously about to enter year 3. Would you all anticipate another 3-year plan being introduced next year? How are you thinking about kind of 2020, 2021, 2022 in terms of how you're going to message to the market?

It's a very good question. And you're correct. When we did present our first strategic plan in March '17 to the investor community, it was a 3-year plan that took us through specific and initial targets for '19. And as we had talked about, that was 1.0 organic only as we first rolled it out. We then layered on top of that the 1.5 acquisition plans and then changed and brought out new targets around that. Our intent -- and we are developing the new 3-year strategic plan. And so our intent would be to share at least portions of that plan with the investors sometime early next year. How much we can do and what type of targets, we have yet to be...

Oh, no. Absolutely. I was just more asking kind of bigger picture how you were going to frame it.

And I think as I tried to say in my comments, Jamie, is we're not just resting on the plan and things are going to die at the end of '19; very much is the opposite. And as important of that things such as acquisitions, as I mentioned, you saw the numbers of the contribution and we restated them again that the EBITDA will be contributing just from the acquisitions next year, but that's only partial year synergies. And the synergies, as an example, from Dunbar are 3-year synergies, and you're just going to see the first year of that next year, which we've implemented, we talked about $15 million out of the $45 million, 100% of the LTM EBITDA. And we think there are going to be more beyond that. We'll talk to you about what those more are going to be as we get into -- as we get more definition around that. But those are 2020 and '21 and beyond, and we've shared, I think, what we anticipate our U.S. total business will look like in 2021 and beyond, which is obviously well beyond our '19 targets. And the ability to have done things like the Dunbar acquisition present huge opportunities for additional value creation well beyond 2019.

Doug, can you remind us roughly between Dunbar and Brink's, how many U.S. branches you all have now?

Well, between the 2, we have close to 200 between the 2.

Yes. I mean, I would imagine that's probably not the right number 5 years from now, right?

Well, it's not only not the right number, but it's not the right makeup of what they are. And as the U.S. has done a very good job, I think, in the last year in the initial phases, and I'd almost call it now the test phases of our network optimization, one of our 4 key breakthrough initiatives, the 2 areas of that was, first of all, the high-speed money processing equipment that gave us the ability to improve our efficiency and hopefully improve our error rate and our quality, but then also put the throughput in through key hub locations for money processing, which constitutes the base for our hub future network locations. And then our launch pads, which is our pure, simple, low down, if you will, and dirty secure launch pads for CIT only. Those have been proven and tested this year, helping improve some of our labor costs this year and proving out our point of our ability for the spokes of the future. And those combined will assure that we have equal to or better coverage on the total U.S. basis, but an optimized, very magnified improvement over where we are today of the combined businesses. And it will look much different than what we -- either of our systems look like today, and we think there will be significant benefits associated with that going forward.

That is phenomenal color. Appreciate it. Ron, one last quick one, and then I'll let you guys go. Dunbar slide, Page 5, expect 2019 EBITDA of about $60 million. Then Page 16, which is talking about preliminary 2019 guidance, Dunbar is a $40 million number there. What am I missing?

Yes. You're missing that we include acquisitions, the trailing 12-month at the date of acquisition as the acquisition component. Any growth from that is included as organic because we're taking...

So you're capturing that in the $40 million to $60 million.

Correct.

And we have a follow-up from Jeff Kessler of Imperial Capital.

I have a quick question on CompuSafe. Your traditional market has been money center banks and retailers and obviously -- and the Fed as well. This is all -- these are all large situations, whereas CompuSafe is a -- is generally geared toward small or midsize companies. The Dunbar's main line of business has been those companies where you've been trying to sell and now obviously rent or get out in some type of SaaS service, the CompuSafe business. Do you have a better chance or is there -- are you going through the steps with Dunbar people to integrate them into Brink's to be able to sell or increase your penetration more quickly with CompuSafe?

Look, the best answer is yes. All that process is going on. And I think a key piece of this is the sales leader at Dunbar is integral now to our combined U.S. operations. The sales force that has done such a great job at pursuing and holding onto this small- to medium-size retailer at Dunbar is going to be integral to how we handle and manage things in the future, which we didn't have in the past. And the key piece of this then is integrating our CompuSafe strategies combined going forward with the right product, the right services, monitoring every one of them in a combined system and network, which we'll all be using, integrating our technology that I alluded to in the slides as well, this customer-facing technology, enabling that, we think, will be a great driver for differentiation as well as assuring that we get growth on all sides of this small -- this medium-size player as well as the larger. And part of our future strategy, and I don't want to say too much about it yet, but part of our future strategy, we'll assuring -- we'll be assuring that we integrate our track-and-trace, that we integrate our Brink's app and all of the ability to monitor and use that most effectively and efficiently as well as in a differentiated fashion with real time data to our customers. And we think this will provide a competitive advantage to the smaller customers and open up the addressable market as we talked about earlier with CompuSafe with products around that, that will expand that market more aggressively, accelerate it if you will, and give us a competitive advantage in that marketplace as well, which will continue to support a lot of the things that Dunbar has done in the past and we hope to do in the future. So that's part of our new strategy that I think will be very complementary to what Dunbar has done in the past as well.

And we have a question from Marlane Pereiro of Bank of America Merrill Lynch.

I just have one quick last one. Can you just tell me what roughly like your long-term leverage target is? And if like for the right deal, you might be willing to go above that target?

We've said repeatedly that I think the math shows that an ideal leverage for a company of our characteristic is probably around 3 turns plus or minus. But quite frankly, even with the Dunbar acquisition, we'd lever up and the cash flow from that acquisition levers us back down again. So while we believe theoretically, 3 might be the best for shareholder value, the practical answer is that it depends on our ability to invest capital at returns that are substantially higher not only in our cost of capital but our internal rate of return target of 15% after tax. So it's not an evasive answer. I think from -- on a theoretical basis, we've answered at 3 plus or minus, but the reality is we continue to generate cash that we'll continue to push that leverage back down.

And Marlane, I think that's a key piece out of this is that we not only have shown that we have nice, strong 20-plus percent EBITDA growth and therefore, strong cash flow generation. But as Ron has laid out, we're going to continue to improve that free cash flow generation based on our investments or improvements in margins. And then the investments that we've made that have been high growth, high-return investments will continue to yield -- and will actually reduce our CapEx probably in the future as a percent of revenue, will continue to yield even stronger cash flows in the future. And our business generally is less susceptible to any downturns in the future. So that gives us the great characteristics of not only a typical type of industrial services business but also a great business that would suggest that we can handle those types of multiples as well, assuming that there are great returns that we get from them.

Ladies and gentlemen, that concludes The Brink's third quarter earnings call. Thank you for joining. You many now disconnect.