Brinks Co (BCO) 2019 Q4 法說會逐字稿

Welcome to the Brink's Company's Fourth Quarter 2019 Earnings Call. Brink's issued a press release on Fourth Quarter Results this morning. The company also filed an 8-K that includes the release and the slides that will be used in today's call. For those of you listening by phone, the release and slides are available on the company's website at brinks.com. (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 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, Drew. Good morning, everyone. Joining me today are CEO, Doug Pertz; and CFO, Ron Domanico. This morning, we reported fourth quarter results on both the GAAP and non-GAAP basis. The non-GAAP results exclude a number of items, including 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 an internal loss and certain accounting compliance matters.

We're also providing our results on a constant currency basis, which eliminates changes in foreign currency exchange rates from the prior year. 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 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 3 of the press release provides the details behind our 2019 guidance including revenue, operating profit, noncontrolling interest, income taxes and adjusted EBITDA.

I'll now turn the call over to Doug Pertz.

Thanks, Ed, and good morning, everyone. 2019 was another strong year for Brink's, one in which we successfully completed our first 3-year strategic plan and began developing what we believe will be an even more successful plan for the next 3 years. This morning, we reported fourth quarter earnings of $1.18 per share and full year earnings of $3.89 per share, an increase of 12% in both periods. We achieved this growth despite earnings in both periods being reduced by $0.11 per share due to cash repatriation costs from Argentina, and a mark-to-market charge for an equity investment in MoneyGram International. Neither of these charges were included in our guidance. Excluding these charges, fourth quarter earnings would have been up 23%, and full year earnings would have been up 16%. Organic revenue growth for both the fourth quarter and full year was 6% with reported revenue growth up 7% and despite the unfavorable FX impact of 8%.

Earnings growth for the quarter was driven by a 22% increase in segment operating profit, which finished the year up 17%. On an organic basis, which excludes the impact of FX translation and acquisitions. Segment profit rose 31% in the quarter and were up 27% for the year. The end of 2019 marked the end -- and final year of our first strategic plan, which we call SP1, which we launched at our Investor Day in March of 2017. In that strategic plan, we set up very aggressive revenue and profit goals that we exceeded by a wide margin, with a 3-year organic profit compound annual growth rate of over 20%.

I want to take a moment on the outset of this call to recognize the incredible efforts put forth by everyone at Brink's. Their hard work, strong execution and customer focus drove a share price increase of 200% over the past 3.5 years. And I'm confident that our global team of over 60,000 employees will execute equally as well on SP2, our next 3-year strategic plan, which is aimed squarely at accelerating the ongoing transformation of Brink's and creating even more value to our shareholders.

As part of SP2, we're already -- we've already begun to pilot Strategy 2.0 related retail cash management solutions with customers, and we expect to start to ramp up these sales in the second half of this year. And we're continuing to develop a full range of additional 2.0 related strategies and solutions to serve what we consider to be the total cash ecosystem.

I want to remind everybody, though, that in addition to these new initiatives the core of our next 3-year strategic plan, especially in 2020, is our expanded Strategy 1.0 initiatives, which will drive additional organic growth and margin leverage. The continuation of these 1.0 initiatives alone are expected to drive significant value creation over our next 3-year plan period before being supplemented by a new layer of growth with our 2.0 initiatives, which will take hold in 2021 and '22. We'll disclose more of these details at our June Investor Day.

2020 guidance, we're targeting EPS growth of 13% and operating profit growth of 10%. Our guidance takes into account continued FX-related headwinds, additional cash repatriation charges and continued operating expenses related to developing and commercializing strategy 2.0. Once again, this guidance is driven primarily by a continuation and expansion of our 1.0 organic growth initiatives that we began implementing in 2017. In fact, our guidance suggests the continuation expansion of our proven strategy 1.0 initiatives in 2020 are expected to offset these other significant impacts. I'll cover our 2020 guidance in more detail in our closing remarks.

Today, we also disclosed an equity investment in MoneyGram International. In the fourth quarter, we invested $9 million in MoneyGram through open market purchases of stock, equaling about 4.9% -- 4.95% of its outstanding shares. MoneyGram is one of the largest money transfer companies in the world with 350,000 locations in more than 20 countries globally. We're in discussions with MoneyGram to explore a long-term strategic partnership agreement that we think will offer significant commercial benefits and long-term strategic alternatives for both parties. Developing this partnership is just one component of our near-term Strategy 2.0 and longer-term payments initiatives.

In the fourth quarter, we recorded a noncash charge of $3 million or $0.05 per share related to a decrease in the fair market value of this initial investment based on the value of the shares at the end of the quarter. Today, we also announced that our Board authorized a new $250 million share repurchase program. Under the previous program, which expired on December 31, we acquired 1.3 million shares at an average cost of $69.35 per share. As we have stated in the past and based on our past behavior, our intent is to use the share repurchase authority only if we view our share price to be materially undervalued. While share repurchases are certainly one avenue that we have to return capital to our shareholders, we continue to believe that we will have more attractive opportunities to increase returns and to create shareholder value by investing capital in organic growth initiatives as well as acquisitions.

Now turning to Slide 4. This summarizes our full year results for 2019. As you can see here, our team delivered strong growth by all measures. Revenue growth was 7%. It was up 15% on a constant currency basis. And on an organic basis, it rose by 6%. Operating profit rose 13%, up 36% on a constant currency basis. Adjusted EBITDA rose 10%, up 27% on a constant currency basis. And EPS rose 12%, up 44% on a constant currency basis. Even with a negative translational impact of currency, we converted 7% top line growth to 12% EPS growth. And as I mentioned earlier, these results include the late in the year charges equaled $0.11 per share that were not in our guidance. If these charges were added back and reported, the results would have been $4 adjust -- adjusted EPS or a 16% increase. The cash repatriation charge and our reduced operating profit by $5 million. And despite our 2019 operating margin, despite this, our operating margin in the year increased 60 basis points to 10.6%, capping off a 320 basis point increase in margin, over the SP1 3-year plan period.

Now turning to the next slide. And before I turn it over to Ron, I'd like to quickly recap the results of our Strat Plan 1. When Ron and I joined the company in mid-2016, the Board charged us with affecting change and driving shareholder value. We assessed the challenges as a team, which at that time were many. But we also saw, and we still see great opportunities.

At our Investor Day in 2017, we laid bare how Brink's had significantly underperformed its peers. And we developed strategies with specific breakthrough initiatives to drive organic profit growth over a 3-year time frame, ending in 2019. We also recognize that our balance sheet was severely underutilized. So we launched our strategic plan for acquisition and acquisition strategy. SP1 include a specific 3-year targets of -- for revenue, operating profit, adjusted EBITDA and earnings per share, as shown in the middle of these bars. And all of these aggressive targets were materially exceeded.

In summary, we achieved 27% growth in revenue or on a compound annual growth rate basis, 8% growth per year over the 3-year period with organic revenue growth of 7% per year, an 81% increase in operating profit or 22% on a compound annual growth rate basis, 320 basis points of margin improvement, a 65% increase in adjusted EBITDA or 18% compound annual growth rate, and a 71% increase in EPS, or 19% compound annual growth rate over 3 years. Most importantly, our shareholders benefited from a share price increase of 200% since mid-2016.

With that, I'll turn it over to Ron for his financial review. Ron?

Thanks, Doug, and good day, everyone. Turning to our fourth quarter results on Slide 6. Dunbar was acquired in the third quarter of 2018. It was part of our business for the full fourth quarter in both 2018 and 2019. Consequently, Dunbar is not included in acquisitions on this chart. What is included in acquisitions is Rodoban, balanced innovations, the TBS acquisition in Colombia and a small CIT bolt-on in Brazil.

Fourth quarter 2019 constant currency revenue growth was 8%, with 2/3 driven by organic growth and 1/3 from acquisitions. Revenue was reduced by $48 million or 5% by negative ForEx. Reported revenue was $936 million, up 3% versus the fourth quarter last year. Fourth quarter constant currency operating profit grew 34%. Results included a $29 million increase in segment operating profit, that was partly offset by $17 million in higher corporate charges. The corporate increase included $7 million in planned Strategy 2.0 investment, $5 million in unplanned Argentina cash repatriations and $3 million of increased insurance premiums. Acquisitions added $6 million in operating profit, the majority coming from Rodoban. Negative ForEx translation reduced operating profit by $23 million or 22%, which was in line with our guidance. Reported operating profit was $116 million, and the operating margin was 12.4%, up 100 bps from the fourth quarter 2018.

Moving to Slide 7. Constant currency revenue growth for the full year 2019 was 15%, with over 6%, driven by organic growth and more than 8% from acquisitions. As I mentioned earlier, through mid-August, 2019, the first anniversary of the acquisition, Dunbar trailing 12-month results were included in acquisition. Operating changes and synergies were recorded as organic growth. Trailing 12 months results for Rodoban, Balance Innovations, TVS and the small CIT bolt-on in Brazil were included in acquisition since the time that each deal was closed in 2019. Of the $288 million in revenue from acquisitions, net of dispositions. 7.5 months of Dunbar contributed $244 million. The other acquisitions added $79 million. And the June 2018 sale of our French aviation guarding business decreased revenue by $35 million.

Constant currency revenue was reduced by $268 million or 8% by negative ForEx. Reported revenue was $3.68 billion, up 7% versus 2018. On an organic basis, operating profit rose $91 million and acquisitions added $35 million as full year constant currency operating profit growth was 36%. Negative ForEx reduced operating profit by $81 million or 23% in line with guidance. Including foreign exchange, full year segment operating profit increased $76 million. It was partly offset by $32 million in higher corporate charges. The corporate increase included $21 million in planned Strategy 2.0 investment, $5 million in unplanned Argentina cash repatriation ForEx and $7 million in higher noncash stock compensation. Reported operating profit was $392 million, and the full year operating margin was 10.6%, up 50 bps versus 2018.

Moving to Slide 8. Full year 2019 operating profit of $392 million was reduced by $95 million of net interest, up $31 million versus the same period last year. Interest expense increased by $19 million, primarily associated with higher debt from the acquisitions. The MoneyGram equity investment mark-to-market charge was $3 million and other nonoperating income and expense items comprised of balance. Tax expense of $93 million was $4 million less than prior year, as higher income was more than offset by the 280 bps reduction in the non-GAAP effective tax rate.

The 2018 buyout of our minority partner in Colombia cut full year 2019 noncontrolling interest by $3 million. Full year 2019 income from continuing operations of $199 million divided by 51.1 million weighted average diluted shares outstanding, generated $3.89 in earnings per share, a 12% increase from full year 2018. Depreciation and amortization was $152 million, up $11 million versus last year. Interest expense and taxes were $178 million and noncash share-based compensation was $35 million. In total, 2019 full year adjusted EBITDA was $564 million. Excluding the $5 million charge for the Argentine cash repatriation and the $3 million equity investment mark-to-market, the EBITDA for the year would have been up 12% and EPS would have been up 16%.

Turning now to our segment results in Slide 9. For the year, North America revenue grew 5% organically, was up 22% on a constant currency and a reported basis. Segment operating profit was up 30% organically, 43% in constant currency and up 44% on a reported basis. North America's operating profit margin increased 160 bps from 8.9% to 10.5%. In the U.S., the 29% year-over-year growth in revenue and 52% growth in operating profit was driven by the Dunbar acquisition and realization of $24 million in synergies. When the deal was announced in May 2018, we targeted $45 million of cost synergies, and we're confident that we'll exceed that target. Consolidating Dunbar and Brink's operations resulted in some customer attrition, in line with our expectations. The net 2% organic revenue growth in both the fourth quarter and the full year in the U.S., demonstrated our ability to offset this attrition and grow business with new and existing customers.

We expect higher organic growth in 2020, partially supported by the phase-in of additional business from a large financial institution. When Doug and I joined Brink's in mid-2016, the cash U.S. business operations were losing money. At our 2017 March Investor Day, we targeted that Brink's U.S. would exit the 3-year strategic plan period in 2019 with a 10% operating margin. We did just that, exiting the fourth quarter with over a 10% margin again. For the full year 2019, the U.S. had an 8% operating margin, a 120 bp improvement versus 2018. High U.S. employment levels created wage pressure and made it increasingly difficult to attract and retain employees. System upgrades to improve security ineffectiveness have also added costs.

Nevertheless, we expect to expand margins in 2020 to 10% and exit 2021 with a 13% operating margin. Brink's further penetrated the U.S. retail market in 2019 with 4,100 new CompuSafe orders, ahead of our internal target. CompuSafe is a high-value service with better margins than our core business, which generates recurring monthly revenue and typically with 5-year service contracts.

Mexico continued its strong performance. For the last 3 years, we grew revenue and operating profit organically by double digits. We aggressively pursued retail accounts and had great success selling high-value services. For the 3 years in SP1, Mexico's CompuSafe installed base grew compounded over 50%. Our SP1 target doubled the operating margin in 3 years was exceeded in 2, and there's opportunity for further improvement.

Moving to our South America segment. South America generated $917 million of revenue in 2019. Organic revenue growth was 16% and the Rodoban, TVS and Brazilian CIT bolt-on acquisitions accounted for an additional 8%. In constant currency, revenues were up 23%, but were more than offset by negative ForEx of 24%. Full year operating profit was up 39% organically, up 47% in constant currency, and up 9% on a reported basis. South America operating profit margin increased 230 bps from 21.4% to 23.7%. The Rodoban acquisition in Brazil performed well and synergy realization is on track. TVS was the #4 CIT company in Colombia and is providing a solid complement to Brink's market leadership in that country. Our business in Argentina had a strong year in local currency. Inflation-driven price increases, Ad-valorem and higher volume more than offset cost inflation, increasing margins. For the year, the peso devalued 42% versus the 2018 average and caused U.S. dollar operating profit to be $7 million below 2018.

A new government took power in late October and implemented stringent currency controls. In response, we went to the blue-chip swap market to repatriate excess cash out of Argentina. This resulted, as we said before, in a $5 million charge that was not in our guidance. The charge was recorded at corporate and reduced consolidated operating profit and adjusted EBITDA. Let's look more closely at Argentina by moving to Slide 11. Austerity measures instituted by the conservative government in 2019 were rejected by the people who elected a socialist government in October. International response was immediate. And as I just mentioned, the peso devalued 42% in 2019. We expect the Argentine peso in 2020 to devalue an average of 36% and to ARS 76 to the dollar.

Historically, there have been 2 to 4 nationally negotiated wage increases each year. The wage increases form the basis for negotiating price increases. The business model in Argentina includes an ad valorem component, where the industry gets paid a percent of the value that's transported and/or processed. Historically, price increases plus the ad valorem have exceeded cost inflation and margins have expanded. There are always timing differences between cost inflation, price increases and currency devaluation. That timing affects the reporting of Argentina results in U.S. dollars.

Historically, it took 3 to 6 quarters for U.S. dollar results to recover from a major devaluation. The bars on the left of this slide show Brink's Argentina revenue in U.S. dollars by quarter for the 2019 actual and our 2020 projection. U.S. dollar revenue is expected to recover to 2019 levels, indicated by the green circle by the fourth quarter 2020.

The late recovery would result in Argentina 2020 U.S. dollar operating profit being $10 million lower than 2019. On top of that, we expect to incur at corporate, $10 million in cash repatriation costs in 2020, $5 million more than 2019. In total, we expect a $15 million adjusted EBITDA headwind from Argentina in 2020. On the right of this slide, you can see that in 2020, we expect Argentina to generate 5% of total Brink's revenue and 12% of total Brink's adjusted EBITDA.

Through global organic growth and acquisitions, Argentina's impact on total Brink's results has diminished significantly over the years. And quite frankly, should be less of an issue for all stakeholders. Turning to Slide 12, to review our third segment. Rest of the World full year 2019 revenue was up 1% organically, down 2% in constant currency and negative 6% on a reported basis. The constant currency decline was driven by the June 2018 disposition of our $85 million French aviation guarding business. Organic revenue growth was flat in France, as the impact of the year-end national transportation strike offset modest year-to-date increases. Similarly, the civil unrest in Hong Kong contributed to a revenue decline in that country versus 2018.

Single-digit revenue increases were achieved in the Rest of Asia, Israel, Greece and other EMEA countries. 2019 full year operating profit was up 3% organically, 4% in constant currency and 1% on a reported basis.

Segment operating profit increased 80 bps to 11.8%. Results in France, the largest business in Rest of the World, improved nicely versus prior year, with operating profit up 12%, driven by successful implementation of strategic planned cost reductions, achievement of Temis synergies and price increases. We expect continued improvement in France in 2020. The Strategy 2.0, BPCE, ATM outsourcing implementation is proceeding on schedule and should positively impact results in mid-2021 and beyond. We've already seen indications of negative impact in 2020 from the coronavirus epidemic in our Asian businesses. But it's too early to estimate the financial impact.

Moving to CapEx on Slide 13. The increase in capital spending in 2017 corresponded with the launch of SP1 and our breakthrough initiatives. Investments in next-generation armor trucks and high-speed money processing equipment for our base business and completed acquisitions, drove an increase in CapEx as a percent of revenue from 4.2% in 2016 to 5.4% in 2019. In 2020 and beyond, we expect that Strategy 1.0 wider and deeper initiatives in our organic businesses will continue to enhance our fleet, money processing and network optimization, but at a more moderated pace, targeted at a normalized rate of 4.5% of revenue. And as we previously communicated, we expect to invest $20 million of incremental CapEx at the completed acquisitions to support the full realization of synergies. Strategy 2.0 is expected to have higher margins and be much less capital-intensive than our base business. Going forward, this should improve our return on invested capital.

Turning to Slide 14. 2019's full year free cash flow was $169 million, in line with prior year and $31 million less than our guidance. The $564 million of adjusted EBITDA was $6 million lower than the guidance midpoint. $80 million of cash interest was in line with guidance. And due to timing, cash taxes and cash CapEx for each about $15 million favorable to guidance. Acquisition-related cash restructuring was $7 million higher than estimate, which should accelerate synergy realization in 2020. But the biggest impact was related to missing our DSO targets in a number of operations, including U.S. global services. Our free cash flow target for 2020 is $230 million, up $61 million or 36% from 2019 and quadruple the $58 million generated in 2017.

Moving to Slide 15. This slide illustrates our actual net debt and financial leverage from 2017 through 2019 and our targets for 2020.

Our net debt at the end of 2019 was in line with guidance at $1.35 billion. That was up about $150 million over year-end 2018 as investments in acquisitions were partly offset by cash flow after dividends.

At the end of 2019, our leverage was approximately 2.4 turns. Since 2017, we completed approximately $1.1 billion in acquisitions, which have been accretive to earnings. The acquisition pipeline today is more robust than when we started, both in the potential number of transactions and in total enterprise value. The gray bars on each half of this slide illustrate the impact of another $1 billion in potential acquisitions at an average post-integration multiple of 6.5.

The gray bar on the left shows the potential incremental investment to be funded entirely by debt. The gray bar on the right, illustrates that pro forma adjusted EBITDA including all estimated synergies should increase by about $155 million, and pro forma leverage would be under 3 turns. We expect that cash flow from our existing business, combined with the additional acquisitions could reduce leverage back to 2019 levels, within 3 years.

With that, I'll now hand it back to Doug.

Thanks, Ron. Please turn to Slide 16. As discussed earlier on the call, our strong 2019 results capped off our 3-year strategic plan, SP1. Strategy 1.0, the organic portion of SP1 target accelerating core organic growth and margin improvement. And we did just that. Over the 3-year period of time, our 1.0 breakthrough initiatives, created strong operating leverage that drove $76 million of profit growth in just 3 years from $216 million in 2016 to $292 million in 2019.

This profit growth was supplemented by another $100 million of profit from Strategy 1.5 acquisitions. Most of these were core-core acquisitions. That is core lines of businesses in geographies where we already had operations and can quickly capture cost-based synergies. Together, our 1.0 and 1.5 strategies added $176 million of profit from $216 million to $392 million. In total, these SP1 strategies delivered adjusted EBITDA growth of 65% over the planned period to $564 million for a 3-year compounded annual growth rate or EBITDA of 18%.

Strategy 1.0, 1.5 clearly added lots of value over the last 3 years, and we're confident there is lot more in the next RAP Plan to come. In fact, these strategies form the foundation of SP2, with our next 3 years. We call the continuation of our Strategy 1.0 initiatives and the organic component of this 1.0 WD or wider and deeper. Wider referring to more of our proven initiatives being implemented across our 41 countries, and Deeper, referring to implementation into all branches in every country. So 1.0 WD is a key foundational element of our plan to drive continued growth throughout the next 3-year plan period. The same is true of our 1.5 acquisition strategy. As Ron mentioned, we completed 13 acquisitions and invested about $1.1 billion during SP1 that will result in approximately $160 million in EBITDA contribution after the full synergies are captured.

And this includes, unfortunately, some of the negative impact of FX over this period of time. We have the balance sheet capacity and now the proven track record of growing value through accretive acquisitions. While we don't forecast growth through acquisition before we complete acquisitions. And there are no impact -- and there is no impact, excuse me, from potential acquisitions in our 2020 guidance, we're confident that our aggressive, but disciplined approach to acquisitions will continue to add value during the next 3 years.

Turning to Slide 17. It provides a more detailed look at how we achieved 81% profit growth through this bridge over the 3-year plan period of SP1 even with significant FX headwinds and some investment in the future. The strong growth from our organic and acquisition-related initiatives were partially offset by higher corporate expenses, $65 million in unfavorable FX translation and our OpEx investments in 2.1 -- excuse me, [2.0] and IT initiatives. Despite these offsets, we still exceeded our initial op income target of $325 million by almost $70 million.

And generated 20% compound annual growth in quarter comp income.

Turning to Slide 18. During this SP2 3-year plan, we'll ramp up strategy to 2.0, as our third layer of growth. This multiple layer -- this multi-layered strategy will expand our presence in the cash ecosystem with high margin, cost-effective services for the larger -- for the largely underserved and even the totally unserved retail market and also for our financial institution customers.

We'll share more details and financial targets behind 2.0 at our Investor Conference in June. But we've already begun to execute on our overall SP2 objectives of accelerating organic revenue growth and increasing margins, all with limited -- excuse me with a reduced capital expenditures versus SP1. Most importantly, we believe Strategy 2.0 will help us to fundamentally change and dramatically increase the value proposition that we offer to our customers.

Supporting our 2.0 Strategy, we now have initial pilots underway for promising new tech-enabled retail cash management service, that we plan to roll out in the second half of 2020. Other examples of actions we've taken to lay the base for other parts of our 2.0 Strategy include, our agreement with BPCE in the second -- the second largest Banking Group in France to outsource and fully manage their entire network of approximately 11,600 ATMs.

We expect to begin generating revenue in late 2021 from this agreement, which is a long-term agreement with BPCE. And our 2019 acquisition of balanced innovations, a U.S.-based software company, that provides cash management software for the retail market and other services to a national footprint that includes more than 11,000 retail locations.

And as I mentioned earlier, the development of a long-term partnership with MoneyGram is also part of our 2.0 Strategy. Our goal was to help MoneyGram and its agent partners realize substantial operating efficiencies by improving their cash management processes. Their needs align closely with our next-generation 2.0 retail services offerings. And our collective long-term strategies offer both of us, solutions for -- solutions and strategies for payments in the future.

These are just a few examples of our efforts to date to position Brink's into the adjacent areas in the cash -- total cash ecosystem, driving growth and margin improvement as we do that. We look forward to sharing more of our transformative 2.0 Strategies in our upcoming Investor Day.

Turning to Slide 19. For 2020 guidance, we're targeting organic growth of 5%, and we expect to -- that we expect to be partially offset by negative FX translation, again, mostly in Argentina.

Operating profit growth of 10% with a midpoint of $430 million or growth of 24% on a constant currency basis. Adjusted EBITDA growth of 8% or 18% on a constant currency basis and EPS growth of 13%, which equates to a 32% growth in constant currency. Once again, this guidance is driven primarily by continuation and expansion of our Strategy 1.0 organic growth initiatives that we began in our last strategic plan.

We expect to deliver these results, despite continued FX-related headwinds, as outlined earlier. And despite 2.0 development cost. We expect these 2.0 cost to be offset by both core organic growth and initial 2.0 revenue, which we should start to generate in the second half of this year. This guidance does not include any revenue or earnings benefits from potential 1.5 acquisitions.

Slide 20 provides a little more detail through the bridge format on our 2020 guidance. We expect $90 million organic profit growth, an increase of 23% to be driven by continued synergies from our acquisitions and additional growth from the impact of more broadly executed 1.0 wider and deeper breakthrough initiatives.

And as Ron noted, we expect to exceed 45% -- excuse me, $45 million in synergy, which is our target for the Dunbar acquisition, as we continue to integrate that business. Our guidance includes December 31, 2019, currency rates for all countries, except Argentina. And as Ron mentioned, for Argentina, we're assuming a 36% year-over-year devaluation for the Argentinian peso versus the U.S. dollar, which is roughly in line with a 42% devaluation in 2019.

The impact of this devaluation is expected to partially offset -- be partially offset by stronger local currency, inflation driven pricing -- offset by stronger local currency inflation driven pricing increases that will start to turn Argentina profits as they are reported in U.S. dollars to be profitable and positive versus prior year, starting in the fourth quarter of 2020.

We are also assuming a $10 million impact of $5 million versus last year to repatriate Argentinian pesos to U.S. dollars. Therefore, our guidance assumes a profit reduction versus last year related to Argentina of about $15 million from the combination of both devaluation and repatriation. In total, we expect operating profit to go 10% to around $430 million at the midpoint, with a margin increase of 80 basis points to 11.4%.

Our operating profit without the impact of Argentina FX-related issues would result in approximately a 14% growth. And we expect EPS growth of 13% on a reported basis. And again, without the FX-related impact of Argentina, EPS growth would be about 18%.

In closing, it's worth repeating that our 2020 guidance is based primarily on our 1.0, lighter and deeper organic initiatives with no additional new acquisitions. And initial results from Strategy 2.0 are not expected until later in the year. We expect to accelerate organic growth and margin improvement beginning in 2021 from our 2.0 issues as they begin to take off -- take hold, excuse me, with existing and new customers. SP1 was a great success and our future looks even brighter.

We look forward to providing more details and a new 3-year review of financial targets on Investor Day.

Drew, let's open it up for questions.

(Operator Instructions) The first question comes from George Tong of Goldman Sachs.

This is Blake on for George. Regarding the $5 million cash repatriation expense in Argentina and the $10 million impact expected in 2020. When do you expect these expenses to begin tapering? It sounds like 4Q might be a target, but just curious about timing there.

Well, I think you're correct, that we are looking for the FX translational impact, based on our target of a 36% inflation -- excuse me, a devaluation for the full year to start seeing that turn positive. In other words, in the fourth quarter of 2020, we'll start seeing the inflation driven price increases in domestic pricing will start offsetting the deflation for the year. And we'll start seeing profits on a reported U.S. dollar basis in Argentina to be favorable and positive. But the other 3 quarters will not be. So that's when it'll start coming back, as we saw in 2019, actually. And that's the translational part of this, based on the assumptions that we have in place. Now what we've seen so far since the election, which I think is pretty interesting is that the FX has been much more muted, I guess, is the way to put it than many might have expected. So we'll see where that goes over the course of the year, but a 36% FX translation issue, so to speak is one that will be offset and start turning positive in the fourth quarter based on our projections.

The difference in the repatriation is more of an issue that is not across the board on an FX rate. It's that -- it's only applied, obviously, with the cash that is repatriated.

So a portion of current the operating -- of our operating income for the year is spent internally, in fact, the majority of it is spent internally on taxes, CapEx and other expenses in Argentina. Then it becomes the free cash flow that is generated -- that -- we would then look to repatriate. And at the current, as a result of what happened in the late part of the year. Currently, that's a premium for that repatriation that is included in the assumptions for the year, an additional $5 million versus prior year.

Does that explain it?

Yes, that's very helpful.

I think it's pretty important. I know this gets confusing, but I think it's pretty important that we don't know when and if that will be taken, that repatriation portion will be taken away. But they are 2 totally separate pieces. You can't add that to the FX rate because the FX, we don't repatriate 100%. I wish we could. I wish we had 100% free cash flow on our operating income. But in fact, it's only on the portion that is really true free cash flow that we repatriate.

Great. That's helpful. And then regarding the MoneyGram investment. I know it's pretty early, but just curious how you see this partnership taking shape going forward? And what the potential commercial opportunities are for Brink's longer term?

Well, certainly, what we've suggested is, we're looking for technology-enabled total solutions. That make it much easier, much more effective for any retail customers and which would include specific areas, such as MoneyGram agents to better do business and for MoneyGram to do business with their agents. And we think that our solutions that we're rolling out, and we'll provide more detail around are a great example of that and a great solution for that. It provides a method to make sure the funding is there to give almost instant information about that funding because of tech enablement around that in a fully integrated, easy to use solution that we think provides significant value.

And so there's a near-term and hopefully, a near term, and it turns into a longer-term opportunity for both parties. In other words, for us to sell and provide these services, and for, hopefully, MoneyGram to gain some benefits and their agents to gain benefits related to those services. So that's the first portion of this in the commercial benefits side of this for both sides. And then we think there's a longer-term joint development of strategies around cash payments and cash to digital and digital to cash payments in the long-term that we can work on together. We're both very global businesses. The fit is very nice, and we think there's some great strategies that can be developed together.

The next question comes from Sam England of Berenberg.

Just a couple. The first one, just around the OpEx and the $20 million investment to 2.0. Is that going to be second half weighted this year? And then how do we think about that growing going forward? Is that something you'll guide to on the strategy day?

Yes. So I think what we've said in past conference calls, is consistent with where we have a place today. It will be fairly smooth throughout the year. And this is very similar to the, if you will, OpEx investment. And whether you want to call it investment, it's OpEx spend that we will continue to have to continue to develop, drive and support of the 2.0 initiatives. The difference this year versus last year is, we are starting to roll out pilots. Those pilots will then start, hopefully, to yield additional sales, as we go through the year. And that additional sales will start translating into revenue, as we go forward into the second half of this year. So if you think about it, we're going to be heavier weighted in the first half of this year to seeing the expenses, which what we said in our guidance, those expenses will be absorbed, if you will, and are in the guidance by organic growth and our core business.

And there may be some benefit, but it's only limited in the current plan and the guidance for the second half to start seeing some benefits associated. But most of that is not in the plan. Most of it is not in our guidance, but we'll start seeing it in the second half. And as we do, we'll get both the benefit to offset those expenses and potentially some upside depending on where the -- with the ramp-up and how the ramp-up goes.

Great. And then the second one is around the 1.0 plan. I just wondered what's left to do to bridge the rest of the gap up to 13%. Were there any particularly large parts of the plan, you still need to deliver on this year?

Well, so when you say 13%, that is the number for the U.S. There are very specific targeted plans as we've laid out before, to achieve the 13 and frankly, more beyond the run rate in 2021. And that's a combination of continued breakthrough initiatives that were laid out as part of our 1.0 strategy for the U.S. as well as 1.5 Dunbar synergies and benefits associated with that. So that's really the U.S. look on it. That hasn't changed from what we laid out before, going from the 8% that we talked about that we hit this year to a 10-plus percent full year op income for next year. And then going out of 2021 -- I'm sorry, next year being this year, 2020, I apologize. And then the 2021 exit rate of 13%. So that's the U.S., but what we're talking about is on a global basis, including South America and other countries, France is a key piece of this as well, continue to see improvements in our core business there, by taking initiatives that those countries started out with as part of their 1.0 plan, and expanding and widening those, having more initiatives to implement in each of those countries, more that other countries have implemented new strategies that we've helped put together. And then making and taking those more of that wider initiatives. And then driving them deeper into the operations.

In other words, if we have route optimization that was implemented in the first Strat Plan period of time, those route optimization strategies may have been preliminary, may have been ones that we test marketed, may have been ones that we only put in 10 branches. And now they'll be deeper. They'll go deeper and go into every branch. They will be implemented throughout the organizations. And you can take those and say, whether it be new trucks or other strategies around that money processing room efficiencies. That's putting them deeper into the organization. It's taking the multiple initiatives that we've laid out and are wider and putting more of those in each country. So we don't view that if it -- there's a set amount of initiatives or amount of cost reduction that can be out there, and we're just taking what's left. We're continuing to build and grow and implement and expand on those across all of our operations.

(Operator Instructions) The next question comes from Jeff Kessler of Imperial Capital.

Doug, I know you're going to be talking a lot about this on June 1. But I'm just wondering, you've alluded several times, perhaps many times today to, number one, a declining amount of capital investments in -- towards -- as we move on in 2020 as well as the first inklings of being able to recapture some of the -- some of the inflationary pressure that you've got from Argentina. Can you talk about this in terms of free cash flow?

Free cash flow was slightly below our expectation, but the way you're talking is that free cash flow will begin to actually begin or -- I would say, become a metric that you're going to start talking about and focusing on more, towards the fourth quarter and particularly, into 2021? And can you elaborate on that a bit, given that I think a number of analysts are going to start looking at free cash flow because of what's going that possibly happen in 2021, as a valuation indicator?

Yes. So very good questions. Let me separate those, and then I'll pass the last piece, specifically around the free cash flow projections for '20, and now we're going to impact on at least on a more global basis rather than specifics beyond that for the rest of SP2 period. But let me bifurcate and separate some of those. The Argentinian piece on this is a different issue versus free cash flow. But it clearly is one that is related to continue to improve our free cash flow. It's more of one -- the projections based on the recovery period of time for the local price increases in Argentina, offsetting the already seen and projected FX issues. That's what we're projecting.

I think it's a reasonable projection based on assumptions that we have seen to date for the year. And we laid it out pretty straightforward with great, I think, transparency and suggesting that in Argentina, we will start seeing that turn to be positive in the fourth quarter. And suggesting as well that this is at least a $15 million negative impact going into the year. And hence, that's what we say. If you take a look at our business, without the Argentina piece, the rest of the business and the projections and the guidance we're providing are pretty darn healthy.

So that's one piece of it. And obviously, as that turns the other way, we'll get more free cash flow generation as we go forward. But the 2.0 strategy that I think that we've laid out is suggesting, that a great portion of that strategy is related to OpEx investment versus CapEx investment.

It's related to a combination of a total offering of services that are unique, differentiated, higher value to the customer, but they don't require as much CapEx and investment to do that. What we've talked about in the last -- well, last year and this year is this $20-plus million OpEx investment, which if you consider that, you compare that versus our CapEx investments in the past is relatively low. The fact, though, is if OpEx and it comes into current year earnings versus being long-term CapEx expenditures. And the benefits we think we'll get from the 2.0 initiatives will be higher organic growth. All of BCPE is one example of it. All of what we think will be better total solutions for customers, even in our 2.1 or our solutions, such as talking about for MoneyGram and others. That will be higher organic revenue growth and higher margins that are generated from that with less capital input. So over the course of SP2, we anticipate, and I'd look -- I'd suggest looking at this metric as a new metric as we start looking forward to this.

How does our capital come down, which obviously drives, if everything else growth, such as our organic growth and our margins, that should drive higher margins, higher profitability as well as the higher cash flow, and it should also with lower investments, it should also drive significantly improve return on capital investments. So I would suggest that a good metric and probably the best metric over the course of the 3 years is to see where our return on invested capital goes over this period of time. So you'll see a combination of reduction in Capex, improvement in margins, improvement in organic growth and improvement in invested capital. So with that, I'll turn over more specifics to Ron if he wants to talk or address the free cash flow component.

Yes, Jeff, simple math, then we had CapEx in 2019 at 5.4% of revenue; if our target is 4.9%, that 4.9% times our revenue is about $35 million in improved cash flow just from returning to a normalized spending. But on top of that and echoing what Doug said, we're moving more towards a global lease arrangements on devices associated not only with our 2.0 strategy, but also looking at some of our 1.0, wider and deeper investments. And our object there is to have the cost of any capital included in the monthly service fees. And also increasing the percent of our recurring revenue to make sure that we've got a model, as Doug mentioned, that has higher margins, lower CapEx and is more recurring. It's a trifecta, I think, that got a lot of merit.

Okay. Great. One follow-up question. And that is on CompuSafe. Number one, could you reiterate the domestic CompuSafe number that you said.

4,100 units.

Okay. And as -- and with that, can you talk a little bit about the CompuSafe strategy internationally, given that you're now expanded internationally, where is it taking faster than other places. And number two, will CompuSafe be integrated differently into some of the international strategies as well as, I guess, domestic strategies, will be integrated differently into South America, Rest of World, into Europe, then you're seeing it here.

I'll tell you that we've had tremendous success in Mexico with CompuSafe. I mentioned a 50% compounded annual growth rate of CompuSafe units installed over the last 3 years. But I will...

Brazil, right?

Yes. Brazil. And it's working in other countries. I will tell you, on June 1, you will learn more about a strategy to further penetrate global retail markets with a solution, that is less expensive and more profitable for the retailer and for Brink's. And we're looking forward to that because even though CompuSafe has been a tremendous asset to retailers. Certainly, larger ones, we believe there's an entire segment of the market that's right for penetration with a better solution.

And the last question today will come from Jamie Clement of BRG.

Doug, I don't know why -- I don't know if you can comment on this, but obviously, looking over the Atlantic to Europe, global competitor of yours, lots of stories out there about whether they're going to spin-off a business, or whether they're going to sell it, all that kind of thing. Any comments on kind of how the Brink's company looks at that situation from a competitive perspective and that sort of stuff.

We think Loomis is a great competitor, and they did a great job of improving margins in the U.S. And we think that will translate into new good targets for us to hit going forward.

Okay. For overall M&A, i.e., sort of size of the pipeline versus where it's been a sellers' expectations, all that kind of stuff. Can you kind of give us a sense of where that's at?

Well, as I said in my comments, Jamie, the pipeline has more potential deals at the greater enterprise value. And as I said in the past, all these deals are lumpy. We've also said that we look at everything. But as Doug mentioned in his comments, we're extremely disciplined, which means we won't overpay. In fact, in 2019, we walked away from several deals that got above the point where we believe they would achieve our required rates of return. So we really don't want to say more than that. I think we've been consistent in all, and we continue to exercise discipline in everything we look at.

And James, in all seriousness. Certainly, all we know is the public information that's out there regarding G4s as I think they publicly stated that they're going to be looking at what they do by the middle of this year. And their primary path is a demerger.

Okay. Ron, apologies if I missed this, but I -- in terms of organic growth in the U.S. Obviously, this is the first quarter in Q4 where you fully annualize the Dunbar acquisition. Certainly, you didn't expect to maintain all of that business, how much of an impact in terms of like planned customer attrition impacted maybe the organic growth rate year-over-year.

Yes. Jamie, I would say it was at least 3%. It's very hard to quantify, but Doug is looking at me -- I didn't think it was that big, but -- no, we -- we had several customers that had 2 vendors. One was Dunbar. They had to invite one of our competitors to take a portion of that business. And so it is difficult to quantify. We haven't spent a lot of time on it. We've been looking more towards the future on how we present a compelling opportunity for growth, the penetration of a large financial institution is just beginning of that. We've also had some other wins. And we're really focused on that. But quite frankly, we were pleased with the 2% based on the planned attrition.

Okay. And then, Doug, last thing, as you think about the outsourcing trend, whether it's money processing or whether it's ATMs, globally just -- I'm not asking for a global number because I don't know how you quantify it. But in terms of the U.S., and obviously, some countries are ahead of the U.S. in this sort of things. If you think about your big [FI] customers or potential customers longer-term outsourcing trend. What do you think the market opportunity is there for Brink's?

Well, I think, for us, and the whole industry, we think it's fairly significant. We saw, obviously, banks to start outsourcing vaults, money processing, a number of years ago. There's still a substantial amount of that to continue to be done, whether it be in the U.S. or other countries and other locations, and we're just starting to see with BPCE being the first one, globally, the major financial institutions to look at and move forward with the outsourcing of ATMs, we think that's going to be another major place for outsourcing there as well. And then we take this to the next step, we are looking at as our 2.0 strategy for a significant look of where the market is going to handle, including FIS, the total cash ecosystem management.

And so as you take a harder look at rather than just the components associated with that because everything within the cash ecosystem, we think there's a lot more to do there. It's a combination of outsourcing as well as assuming much more of the total requirements at a lower cost and better value for customers for that. That follows.

This concludes both the question-and-answer session, and the Brink's Company's Fourth Quarter 2019 Earnings Call. Thank you for attending today's presentation. You may now disconnect.