江森自控 (JCI) 2008 Q3 法說會逐字稿

Good morning and thank you for joining Brink's Home Security Holdings' third-quarter 2008 earnings conference call.

Today's remarks will be made by President and CEO, Bob Allen and CFO, Steve Yevich.

A question-and-answer session will be held following the prepared remarks.

An earnings release was issued this morning and is available on the Company's website at www.investors.Brink'shomesecurity.com under the Investor Information tab.

If you wish to have a copy of the release e-mailed to you, please call 972-871-3511.

This call and the ensuing question-and-answer session may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995.

These forward-looking statements may involve risks and uncertainties.

Such statements may address subscriber growth or growth rates, disconnect rates, customer attrition, the occurrence of expenses in future periods and financial results.

The actual results of which may differ materially from those projected, implied or anticipated by the Company's forward-looking statements.

Please refer to today's press release for additional forward-looking cautionary informational statements included therein.

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 our SEC filings, which includes our Form 10 document.

The information discussed on this call is representative as of today only.

Brink's Home Security Holdings disclaims any obligation to update any forward-looking statements as a result of developments or events occurring after this call.

This call is copyrighted and may not be used by a third party without written permission from the Company.

Today's call will contain references to certain non-GAAP financial measures, which the Company believes provides useful information for investors to enhance the understanding of the Company's performance.

Reconciliations of non-GAAP measures to GAAP can be found in the earnings release.

A copy of the release can be found under the Investor Relations tab at the Company's Investor Relations website, www.investors.Brink'shomesecurity.com.

As a reminder, today's call is being recorded.

A replay of the webcast will be available today at approximately 1:00 p.m.

Eastern standard time and can be found in the Investor Relations section of the Company's website as previously noted.

A replay of the call can be accessed by dialing 888-286-8010 domestic or 617-801-6888 international using the replay passcode of 42028082.

I would now like to turn the call over to Mr.

Bob Allen.

You may proceed, sir.

Thank you.

I would like to welcome you all to the first earnings call of Brink's Home Security Holdings as a standalone company.

Glad you had the opportunity and interest to join us today.

As I am sure all of you are aware, Brink's Home Security was spun off from The Brink's Company via stock distribution to existing shareholders on October 31 of this year.

On November 3, we began regular way trading on the New York Stock Exchange under the ticker CFL, which reflects our mission statement of creating Customers For Life.

The third-quarter results of Brink's Home Security were included in The Brink's Company's third-quarter results on Form 10-Q, which were discussed in their earnings call on October 30, shown, as in the past, as a segment of The Brink's Company.

I participated in that earnings conference call of The Brink's Company on October 30 hosted by Michael Dan and discussed our third-quarter results.

We are back again today for two reasons.

First, we are in the process of filing our own 10-Q for the third quarter as a standalone entity before the close of business on Monday, November 24.

We must update our shareholders and the market on our performance as an independent, publicly-traded company from our last Form 10 registration statement dated October 8, which provided financial and operational performance data covering the first two quarters of this year.

Second, we wanted to make sure we had the chance to discuss with you our third-quarter performance in the context of our standing as an independent, publicly-traded company rather than as a segment of our former parent.

We didn't want to wait until we filed our 2008 10-K sometime near the end of the first quarter of 2009 for a chance to talk with you.

Before I talk about third-quarter results, I would like to cover a couple of other topics.

First, I would like to thank all the terrific people at both The Brink's Company and Brink's Home Security for all their hard work that was required to enact the spin-off.

Second, I would like to thank Carl Sloane, John Brinzo, Larry Mosner and Carroll Wetzel for joining the Board of Brink's Home Security from the Board of The Brink's Company.

I would also like to welcome our newest member of the Board, Sam Gilliland who was elected to the Board on November 13.

Mr.

Gilliland is Chairman and Chief Executive Officer of Sabre Holdings Corporation.

Our five independent directors bring a wealth of experience and perspective to Brink's Home Security.

Now let's move on to our operating performance.

This morning, we reported third-quarter earnings of $14 million, up from $8.1 million last year.

Pro forma diluted earnings per share were $0.30 versus $0.18 last year.

We delivered solid growth in subscriber count, revenues and operating profit in a challenging economic environment.

Revenues increased 9% to $135 million.

Revenue growth was driven by the continuing expansion of our customer base, which has grown by 7% through the third quarter.

We now have approximately 1.3 million valued customers.

Operating profit rose to $22.8 million, up 54% from last year's $14.8 million.

Our profit margin was 16.8%, up from last year's rate of 11.9%.

Last year's results included a $2.5 million charge from litigation.

Installations for new customers were 42,700, 7% fewer than last year, due primarily to the ongoing weakness in the housing market and general economy.

The annualized disconnect rate for the third quarter was 9%, up from 6.9% in the year-ago quarter.

Approximately half of this 2.1 percentage point increase was due to higher residential and commercial subscriber cancellations.

The remainder of the increase was due to non-renewing, multifamily contracts and technical subscriber adjustments, neither of which had a material impact on the income statement.

When analyzing customer disconnects in the third quarter, we have not seen any evidence of any major trends by geography, customer acquisition channel or other characteristic.

The roughly one percentage point increase in annualized residential and commercial customer disconnects has been spread out across our customer base.

As we said in the past, we are no longer actively marketing our services for new customers in the multifamily business.

We currently have about 22,000 multifamily subscribers at the end of the third quarter.

As our contracts come up for renewal, we attempt to keep our customers, but many multifamily complexes are choosing not to renew their contracts.

Our contracts in this segment generally cover 100 or more dwelling units each and are typically written for five, seven or ten-year terms.

Any capitalized costs put up on the balance sheet as installation are fully depreciated over the initial term of the contract.

As such, multifamily disconnect at contract renewal has no immediate impact on the income statement.

We expect that our subscriber base of 22,000 multifamily customers will continue to decline over the next eight to ten years and we will disclose these disconnects as such to give a better understanding of the core disconnect rate.

Even with some weakness in installations and a higher disconnect rate, ending subscribers still grew by 7%.

We continue to add customers in a disciplined, economic manner and are focused, as always, on continuing to grow the net present value of our future cash flows.

Monthly recurring revenue rose almost 10% to $39.8 million.

Future cash flows continue to grow in a difficult economic climate.

Looking ahead, we anticipate continued softness in the housing market and in the general economy.

In the full year 2008, we expect to deliver continued subscriber growth in the mid-single digit range, revenue growth of about 10% and operating profit growth of over 20%.

We continue to believe that the fourth-quarter annualized disconnect rate will be lower than the third quarter.

We expect the full-year disconnect rate for 2008 to range between 7.5% and 7.8%.

Our strategy moving into 2009 remains unchanged.

We are focused on continuing to grow our residential subscriber base, continuing to develop our commercial business and continuing our efforts to retain our customers.

We will maintain our disciplined economic approach to the business, especially in light of the difficult housing market and a tough economic climate.

For 2009, we expect to achieve continued growth in subscribers, revenues and operating profit.

We are holding off on more detailed guidance for 2009 until we get into the new year and get more clarity on the housing market and the economy.

I would like to cover one more topic in my prepared remarks -- our new brand development initiatives.

We have a brand license for the use of the Brink's brand name for a maximum of three years from the spin-off date of October 31.

We have engaged Landor Associates, a well-regarded marketing firm, to help lead the process to develop a new brand identity for our Company.

We estimate that we will incur incremental marketing costs of $100 million to $150 million over a 24 to 36-month timeframe from when the new brand is introduced.

Currently anticipated to be in the third quarter of 2009.

This incremental expense is about 2.5 to 3.5 times our annual marketing expenditures of about $40 million.

Our desire is to build a powerful new brand identity that will allow us to continue our direct response marketing that helps drive our subscriber growth.

We will carefully monitor our spending and the results of our new brand introduction.

You can be sure that we will apply our economic discipline to this endeavor.

We anticipate funding our brand development and subscriber growth initiatives through the use of our $50 million in cash on the balance sheet and the cash generated from our operations.

Now I will turn it over to our Chief Financial Officer, Steve Yevich, for his comments.

Thanks, Bob and good morning, everyone.

There are a couple of items that we believe you should consider as you review our results today, so let me take a few minutes to review these with you.

First, we have presented pro forma earnings per share this morning, taking the reported third-quarter net income, divided by the pro forma basic and diluted common shares outstanding as of the date of our spin-off on October 31.

These EPS numbers are pro forma because, as of September 30, the end of the period we are reporting on today, we were not yet a separate, public company.

Second, as you review the tables attached to this morning's press release, as well as the 10-Q, which we expect to file by the close of business this coming Monday, the 24th, you will note that the operating profit results are different than what was presented for us in The Brink's company's third-quarter results.

Today's release and the subsequent 10-Q will be filed on the basis of Brink's Home Security as a standalone entity.

The main change is that our standalone operating profit results include $9.4 million in royalty expense, as well as an allocation of G&A from The Brink's Company for the third quarter.

Let me be clear on this point.

The results we have reported this morning include royalty expense calculated at approximately 7% of revenues for all periods presented.

There are no pro forma calculations using a lower royalty rate.

The only pro forma numbers in today's release are the EPS calculations.

In the fourth quarter, we will incur royalty expense at a rate of about 7% of revenue for October, dropping to the new lower rate of 1.25% of revenue for the remainder of the quarter.

Obviously, royalty expense is an item that will affect comparability of our reported results for the next several quarters.

Getting back to the third quarter, I am going to provide a little more detail about some of the items that affected earnings and will also touch on some balance sheet and cash flow-related items.

As Bob mentioned, results were driven by solid performance.

Revenue increased $11.1 million, or 9% for the third quarter of 2008 over the comparable 2007 period.

The increase was primarily due to a 7% larger ending subscriber base and a 2% increase in average monitoring rates, partially offset by a decline in Brink's Home Technologies prewired trim-out revenues, which now comprise approximately 2% of total revenue.

The larger subscriber base and higher average monitoring and service rates also contributed to a 10% increase in monthly recurring revenue or MRR, as we call it, as of September 30 this year compared to September 30 last year.

Total operating expenses increased $2.9 million, or less than 3%.

Our cost of revenues increased only slightly in the third quarter, primarily a result of reduced investment in new subscribers.

SG&A spending overall grew less than subscriber-based growth in the quarter, but it did grow a little faster in several functional areas as we continued to invest in developing our capabilities to market, sell and provide customer service across a broader range of products and services for our commercial customers.

In addition, automobile reimbursement costs increased for the salesforce in the quarter.

We also began to directly incur some incremental corporate costs in anticipation of our spin-off.

These increases were partially offset by a decrease in the corporate overhead allocated to us from Brink's for the third quarter, as well as slightly lower marketing and advertising expenses as compared to prior year levels.

Our 10-Q will provide additional details on cost of revenues, SG&A and other operating expense components.

Our tax rate for the third quarter was 38%, down from 43.8% last year.

The rate for 2007 was affected by FIN 48 adjustments recorded in last year's third quarter as a segment of The Brink's Company.

For the full year, we continue to expect our tax rate to be in the 38% to 39% range.

We currently expect that the 2009 effective tax rate will be between 38% and 40%.

There is currently a lot of focus in the corporate world on liquidity and access to capital, so I think it is appropriate to spend a moment to review these areas.

First, let's focus on cash resources and liquidity.

Brink's Home Security ended September with a $4 million cash position with all other cash balances transferred as intercompany remittances to our former parent company.

As a part of the spin and on the spin date of October 31, we received $50 million in cash from The Brink's Company and remaining intercompany receivables and payables balances were forgiven.

As we disclosed several weeks ago, we have a $75 million committed revolving credit facility, which is expandable to $125 million.

We have not drawn on the facility and have no current plans to do so given our current cash balance and our ability to generate cash flow from operations.

We have, however, used about $2.7 million of the availability under the line to issue letters of credit to backstop some of our new insurance policies.

Brink's Home Security post-spin has essentially no debt, a $75 million credit facility and more than $50 million of cash on hand.

We believe we have a strong balance sheet and sufficient liquidity to execute our plans for subscriber growth to finance the expected ramp-up of branding project spend that we anticipate will start in mid 2009 as Bob said.

Let's take a quick look at cash flow items for Brink's Home Security.

CapEx for the third quarter was $45 million and year-to-date was $135 million.

We expect to spend between $40 million and $45 million in the fourth quarter on CapEx.

Depreciation and amortization has run about $21 million per quarter through September and should be about $85 million for the full year.

Impairment charges related to subscriber disconnects totaled approximately $17 million in the third quarter.

While we are talking about cash flow-related items, it might be a good time to talk about the overall cash flow of our business to try to put that into perspective.

You are familiar with our business.

You know that we view our upfront cash investment in new subscribers as a long-term investment with significant future value.

We initially invest in new subscribers with the intention of recouping that investment and earning a solid economic return on that investment as we provide valuable service to our customers over a long period of time.

One of the dynamics associated with our business is that the faster we grow subscribers, the more cash we invest in those subscribers.

Conversely, if subscriber growth slows, we reduce our upfront investment and generate more free cash flow from operations.

As you may be able to ascertain, there is somewhat of a discretionary element to the aggregate amount of this upfront investment.

As we consider our business, one measure we tend to look at to gauge our performance is cash flow from recurring services since we believe it provides a reasonable picture of the Company's ability to generate cash from its existing subscriber base.

I would like to walk you through this exercise.

If you look at the next to last page in the press release, you will see profit from recurring services for the third quarter of $47.4 million.

Adding depreciation and amortization of $21.5 million to that amount, as well as impairment charges from disconnects of $16.7 million and subtracting amortization of deferred revenue of $10.5 million, all of which are also shown on that page, you can calculate a pretty reasonable approximation of pretax operating cash flow captured from the existing subscriber base.

That number for the third quarter was $75 million or about $300 million on an annualized basis.

We go through the same exercise with the full year 2007 numbers that we published in the Form 10.

You can see that that comparable figure was about $263 million.

So we are generating almost $40 million more this year than last year in cash flow from the customer base.

We believe that looking at our business in this fashion is not only worthwhile, but significant because it allows us to see the cash flow from the existing subscriber base without the nuances of counting deferrals on amortizations and provides clarity as to the value of the customer base that we have built through the years.

Once you understand the cash flow from recurring services, you can calculate the cash flow used in acquiring new subscribers.

All the components are shown on that same page in the press release.

And also have the key building blocks to get a feel for what some people call steady-state operating cash flow.

If you like, you can also construct a runoff cash value of our existing subscribers using whatever future disconnect rate assumptions you feel appropriate.

Looking at our business this way, you begin to get a true feel for the power of our business model and the substantial economic value in cash flow generating capacity we have built up in our customer base.

In closing, as a reminder, our 10-Q will be filed on or before this coming Monday, November 24.

It will provide additional details in our third quarter and year-to-date performance as a standalone company.

With that, let me turn the call back over to Bob.

Thanks, Steve.

In summary, it was another solid quarter for Brink's Home Security.

We continued to deliver growth in our customer base, revenues and operating profits even in difficult economic times.

We have a great team, proven strategy, strong balance sheet, zero long-term debt.

We are well-positioned for the future.

Geri, we would like to open it up for questions now.

(Operator Instructions).

Chris Marangi, Gabelli & Co.

Hi, good morning, everyone.

Two questions.

First, it looks like, to parse words here, you have taken in your churn forecast for the year from 7.5 to 7.8 -- 7.5 to 7.8 from 7.5 to 8 and you have also taken down the CapEx guidance a little bit for the fourth quarter versus the release about a month ago from The Brink's Company.

Just wondering if you have any color as to what you have seen in what has been a pretty horrific month over the last four weeks?

Well, one, on the disconnect rate forecast, we did take it down by a couple of percentage points.

As I had said on the call with Michael, we saw the fourth quarter being lower than the third quarter.

It is historically lower and as we got through October and halfway into November, we felt comfortable in pulling down that forward look by 2/10 of a percentage point.

So disconnects are higher than last year, but it is not -- it is not running amuck, let's put it that way.

Chris, on the CapEx range, if I recall correctly, we had a $10 million range on that number for the full year in The Brink's Company call and we are running a little bit to the lower end of that range, so we felt it was appropriate to just tighten it down to a $5 million range.

That is all.

Okay, fair enough.

And then the second question was, now that you are going to introduce the new brand midway through 2009, would it be fair to assume that you're going to pull back a little bit on marketing a brand that you don't own and perhaps as you indicated, in doing that, generating a lot of cash as you perhaps had fewer gross adds?

No, I wouldn't assume that, Chris, in the first half of the year.

We drive our business with -- a large part of our business with direct response marketing.

So even before we introduce the new brand, we will continue to go after our direct response marketing efforts.

Terrific.

Thanks, guys.

Jeff Kessler, Imperial Capital.

Thank you and thank you, Steve, for mentioning the phrase steady-state free cash flow.

First question is, in dealing with customers who are having a hard time paying you or who have indicated that they may be out of work, but they are going to try to get back to work, how do you deal with them in terms of trying to keep them on?

And number two, and how do you deal with them and from an accounting point of view, when do you drop them?

Yes, that's a good one, Jeff.

If somebody calls up to disconnect their service with us for any reason, they go to a specialty desk and our customer service representatives will ask a series of probing questions to the customer.

If somebody just calls up and says I want to disconnect, we probe and see if there is any issues that we can address that could keep them in the family.

If somebody is having financial hard time and they have been a good paying customer in the past and they have some history with us, we will, on occasion, reduce their monitoring rate if required to keep them on as a customer.

All right and if you reduce their monitoring rate, that is just an ARPU decrease.

That is not a drop?

That's correct.

That's correct, Jeff.

Okay.

Number two, as you know, we just ran a big conference, security conference and what was the most striking thing about the conference was the disparity between the private market valuations of deals that are in the market now and are going to go through market, which are in the -- well, I probably shouldn't say it -- but they are -- you know what they are and where the public markets are trading.

I don't need you to comment on your stock price, but what I want you to comment on is perhaps can you give any explanation for why private market valuations at this point in time are at least twice that of the public stock prices in the industry?

Well, that is a tough one, Jeff.

I would say that the public markets right now -- there are a lot of liquidity issues clearly on the part of a lot of investors and there is a lot of cash sitting on the sidelines and there is also a lot of investors needing to generate cash.

People that are looking at valuations in the private market I think right now have a tendency to have cash and/or some access to financing.

So I think that is part of the reason.

The private markets are taking a longer-term view right now than I think the public markets might be given the financial turmoil.

All right.

With regard to also increasing your ARPU and increasing your RMR per customer, there are a whole host of new technologies.

Obviously, web-based marketing -- Protection 1, [Z Secure] -- we can go on and on through all of these new items that are being added just for both marketing and both increasing the RMR once you have got the customer.

What efforts are you making with your existing customers to do the same?

Well, we have a new control panel that is hitting the market that has Internet protocol connectivity, as well as digital wireless capabilities.

So if you get the IP connection, you have a little bit of a gateway into a house.

It also drives more upfront revenue, as well as ongoing revenue per customer.

So that is an opportunity for us.

Are you changing your direct marketing or the way you market in any way to -- I realize that it is a more expensive way of doing, but it also can get you in front of more customers.

Well, I will say that we are looking at all our marketing efforts and we are always looking to improve them and generate more customers.

I would say that you won't see any radical change from us over the next six months in that regard.

Okay, great.

Thank you very much.

Clint Fendley, Davenport.

Hello, Clint.

Geri, I think we lost Clint.

Mr.

Fendley, your line is open.

Are you there?

Hello?

Hello.

You may proceed, sir.

Hello.

Good morning, guys.

Bob, I wondered if you could provide some color given that we are already well into the fourth quarter as to how attrition has fared so far.

Well, we did take down our full-year guidance from 7.5 to 8 to 7.5 to 7.8.

So we took it down a couple of ticks.

Again, there is more people out there than a year ago that are raising their hand for whatever reason saying they would like to disconnect.

Whether it is because they are in financial hard times or they are moving from their house into an apartment or just given the general statement that gee, I don't need security anymore, which is generally a euphemism for hard financial times.

So there is a higher level of customer requests for cancellations than there were a year ago.

So we are feeling some impact from the general economy.

And I know that you previously had indicated that you had not really seen any developing trends by geography.

Have you more recently and here in the last few weeks seen any indication that you have had weaker results say in California or in Florida?

No, again, we keep looking at it because you would expect to have higher levels of activity in places that have more housing market turmoil and more economic turmoil.

But we haven't seen it yet.

Could you maybe speak to the challenges of just sustaining the mid-single digits subscriber growth as we look forward to '09 here?

Yes, the subscriber growth is driven by, obviously, installations, which have been declining slightly over the last few quarters, offset by the disconnect rate.

It's the combination of those two that drive subscriber growth.

So we have had pressure on both sides.

I think the encouraging thing is we are still growing the subscriber base by 7%.

Okay.

And then, finally, Steve, on the rebranding, I am hearing you correctly, should we really be expecting just very minimal rebranding expenses until the third quarter of next year?

Yes, you have got that right, Clint.

Okay, great.

Thank you, guys.

Vance Edelson, Morgan Stanley.

Hi, thanks.

One more question on the rebranding and then a follow-up.

Your latest thinking on the need to spend $100 million to $150 million to rebrand, not based on anything internal, but rather on the weak economy and how that is impacting Madison Avenue.

It seems like these days $150 million would buy an awful lot of newspaper advertising and so forth.

So has that played into your thinking there?

Yes, Vance.

Again, we are planning on introducing the new brand in the third quarter of next year, so we will see how things develop.

A big chunk of our spending is on media, broadcast media and there is a little softness there.

But don't forget, we are a direct response marketer and those rates have always been pretty low.

But we will be taking it into account.

I like the position that $100 million to $150 million at this point is chainsaw work.

We haven't gotten out the scalpel to narrow it down to exactly what we need to do.

We will be able to give more color to that as we move forward.

Okay.

And you had mentioned potentially being flexible on the monthly rate with customers who are experiencing tough times.

On the installation fee, is there flexibility around that as well?

I guess it is traditionally $300.

I know there are some ads out there offering $100 installations from you guys.

Is there much discounting going on?

Can you comment on that?

Sure.

Our initial offer, our initial price point is $99.

We have been generating over $300 per subscriber when we install, so that would be people buying more components of upgraded equipment, so that continues.

One thing we have learned over the years is that zero down is a very high predictor of disconnect rates moving forward and we avoid that at all costs.

We will still be disciplined on our upfront economics.

Okay, that makes sense.

Thanks a lot.

Robert Cathey, Walker Smith Capital.

Yes, Bob and Steve, it's actually Reid Walker.

I have a question.

With you guys trading at right around 500 a sub and you are out in the market buying new subs at 1100 net, obviously, it is early in your life as a public company, but at some point, I assume that it's a very positive EVA getting a sub at $1100.

But just any comments on that you can make.

Yes, I think you are looking at it the right way.

We view adding customers as a long-term investment and we look very carefully at the predictor of future cash flows and we still see the net present value of future cash flows there that meets our discount hurdle and we continue to add new customers.

We think that is in the best interest of creating value for our shareholders long term.

Okay.

Bob, I know you can't answer Jeff's question, but as an outsider and a shareholder, I certainly appreciate the insider buying you have done on your tape, which is about all you can do obviously to comment on that.

But keep up the good work and we look forward to staying in touch.

Thanks, Reid.

Michael Kim, Imperial Capital.

Hi, good morning, guys.

Just to touch on a couple of areas.

First, on the disconnect rate or disconnect, I know you mentioned earlier that you are not seeing any geographic trends.

Are you seeing anything on the new homes side?

I know it is a relatively small portion, but is there perhaps a higher concentration on that side of the spectrum?

We looked at it by acquisition channels, so we look at our home technology group, which is production builder homes and we still haven't seen any differentials.

Okay.

And secondly, just on the subscriber acquisition cost side, are you starting to see any trends or do you see that starting to edge higher here as we go into next year just given the environment?

Does it look like you are having a little bit higher hurdle to acquire your customers?

Michael, this is Steve.

Yes, 2007 was up a little bit from 2006 and as you look at what we have done year-to-date in 2008, the investment is up a little bit over 2007.

We are watching that carefully.

Again, we are always looking at the long-term economics of what we are doing.

So we are keeping that in mind as we invest a little more in subscribers as the economy has slowed down.

I would add on to that as well that our revenue per customer of a newly acquired customer is higher as well.

So we are still EVA positive there.

Okay, great.

And then just touching on the rebranding side, have you guys developed -- I know we are still a year away, but have you guys started to develop a short list of possible new brands?

Have you progressed that or is that still currently a work in progress?

It is still a work in progress.

We have had a series of working sessions with Landor Associates out of San Francisco.

We have been doing a lot of market research and we will be -- we haven't come up with anything yet.

We are open to suggestions, Michael, if you want to send in any of your best.

Sure thing.

And then just lastly on that, is there -- I know you are still taking a scalpel to that number, but what would drive it towards the lower end of the range towards the $100 million versus the higher end of the range?

Are there any big moving parts to think about?

Well, it kind of goes back to I think it was Chris's question on the marketing spend in the first half of the year.

We are a direct response company for the most part.

We rely on people raising their hand, choosing to ask for our products and services, and we don't see that model changing.

One of the great things about that model is it's a quick feedback loop.

So when we introduce a new brand name sometime in the third quarter of '09, most likely we will be doing it piggyback fashion where we will have -- we will be having two brand names.

We will have Brink's Home Security but also be introducing the new company name.

And we will obviously changed the weighting of that as time goes forward.

We will see the receptivity of consumers and how fast we can raise their brand awareness and how quickly we can get them to react to our marketing messages and new brand.

I mean, again, the great news is we measure everything six ways to Sunday here, and we can react very quickly.

And direct response marketing, you can change your spend rate in the market very rapidly.

Great, terrific.

Well, thanks very much, guys.

Steve Velgot, SIG.

Yes, a couple of questions from me.

One is if you took a longer look back and I think what you have disclosed in your public filings, can you talk about what the worst kind of disconnect rate the Company has experienced and whether or not there are things that give you confidence that we are not looking at that kind of situation for 2009?

That would be the first question.

Sure.

We have always been focused on the customer disconnect rate.

But if you look back, the highest annual rate we had in the last decade was in 1999.

We ran a 7.8% for the full year.

So that is the top end of my range that I am giving you for '08 full year.

Right.

Okay.

And I suppose we will have to wait until early '09 to get any sort of look at what you guys are projecting or what type of guidance you might give out.

But in terms of -- I know you have only been a public company now a few weeks here, but have you analyzed whether it makes sense to go to the Board for a share repurchase authorization or do you need some time under your belt as a public company before doing that?

What is your thought on that?

At this point, we don't see share repurchases in our best interest of the shareholders in the short run.

Obviously, if the market stays where it is at and valuations stay where it is, we will revisit that.

Okay.

Thank you.

Ben Shim, CRT Capital.

Good morning, gentlemen.

Steve, I just wonder if I could ask you the breakdown on the $40 million in CapEx, does that include corporate expense as well?

Yes, that does.

Okay.

Can you quantify how much that is?

Corporate expense was a fairly minor part.

I believe it was about $2 million.

$2 million.

Okay.

Also, I have a question about --

Actually.

I'm sorry.

Go ahead, Steve, sorry.

$2.9 million.

$2.9 million.

Thank you.

Looking at ARPU on a go-forward basis, I am kind of wondering, what in your mind gives support to ARPU for next year in light of what could be a deflationary environment overall in the economy?

Is it of a function of mix, industry pricing?

Can you just give a little more color on that and is $35 a good number to use for the high end right now?

When you say $35, are you talking about us or the market?

For Brink's, yes, for a new customer.

That would be the high end at this point.

The market -- when you look at pricing, there is two components to pricing.

The first is the upfront cash that people invest in installation of the system and then there is the ongoing monitoring.

Both are highly competitive and both range from low numbers to high numbers.

We think that we are probably a little premium priced on the upfront and slightly premium priced on the monitoring, but there is still lots of room there.

Not only from the basic monitoring, but also selling in additional features that drive more revenue for us like digital wireless backup for alarm signals and environmental such as smoke and heat.

So we still see some upside on the ARPU per new customer.

Okay.

I guess a lot of attention has been focused on brand awareness and rebranding.

Sort of veering off on a somewhat softer tangent here, what is -- how do you view customer awareness of crime going up in times of economic turmoil?

How are you going to leverage that in marketing efforts going forward?

Well, if you have seen any of our commercials, we are pretty much focused in on crime and it does have a definite fear message there.

Frankly, the newspapers and the media are our best friend.

There is always crime being advertised - not advertised, but reported on.

I am not sure if people respond to rates.

It is really more of a spectacular thing they see and/or something locally happening in their neighborhood or to people they know.

But generally when economic times get tough, crime rates go up and I think people notice that.

Okay thank you very much.

Jerome Lande, Millbrook Capital.

Yes, hi.

This is John Powers for Jerome.

My first question is have you seen any change in your inbound call volume from customers?

Following up on that, has there been any difference in how customers are reacting to the various types of advertising -- television, print?

We are seeing improvement in inbound call volumes.

We are getting more inbound sales calls or inquiries than we were for the same amount of marketing expense.

So the fourth quarter, we are actually seeing an improvement there versus the third quarter.

As far as what media we are getting it from, we are getting it from basically all of our channels.

We are getting it from Yellow Pages and Internet and broadcast media.

Okay, thanks.

Second question, I don't think we have seen a geographic distribution of your customers.

Could you talk specifically about some of you -- regarding your density in the Detroit area?

Detroit would be -- well, let me tell you where our core customers are.

It would really be in the Sun Belt.

What has really driven our business, as well as probably most of the industry, is new home construction, which I think you have really seen on the West Coast, the Gulf Coast and the East Coast regions.

Detroit is a good business for us there.

We are continuing to add customers, but clearly we are watching the economic climate in Detroit carefully.

Okay, thanks.

I guess my last question would be a follow-up on the buyback question from earlier.

Can you just elaborate a little bit further on why a buyback doesn't make sense in the short term?

Well, I think in the short term, we are wanting to conserve cash for one thing.

We know we are going to be going into a rebranding situation and as I said before, we have given a wide range on how much we think we are going to have to spend there.

At this point, we'd like to conserve that cash.

Okay, thank you.

Jamie Clement, Sidoti & Co.

Good morning.

Steve, if I could ask you a question just for comparability purposes going forward, your operating profit as reported for this quarter is about $9.4 million different from the way your profits showed up last month in the BCO release.

I assume that the difference there is the royalty expense that you mentioned.

Is there a -- or is there a corporate cost allocation in your number this quarter and the results that you reported this morning.

And if there is not, are we going to see some of that estimated $8 million to $10 million annual corporate spending kind of going forward?

How should we think about the corporate cost line?

Okay, you are right.

There is a large charge in this morning's results for royalties.

Actually it was about $9.4 million.

On top of that, there was $0.4 million of G&A allocated to us from The Brink's Company for the third quarter.

That is a bit lower allocation than what they had been pushing down in previous quarters.

It had to do with the fact by the time they spent preparing for the spin-off had to be absorbed on their books.

It could not be pushed down to us.

So we did get a slightly lower G&A load in our third quarter.

As we move forward into the fourth, we will get a G&A charge for the month of October from The Brink's Company and then starting November 1, all of our G&A will be whatever we are incurring directly here.

We have said in the Form 10 that we expect, in the first 12 months as a separate public company, we think our G&A will run between $8 million to $10 million.

Given that The Brink's Company has allocated a slightly lesser amount in Q3 now, we are running a little below that $8 million run rate that they charged us in 2007.

So there will be a little bit of pickup we believed in G&A, not necessarily in the fourth quarter, but I think as we go into next year and we continue to flesh out some of our corporate functions.

Okay.

And then a follow-up question perhaps for Bob.

In an environment where we may have Americans' credit scores kind of deteriorating, are there still plenty of customers out there for you guys?

Have you thought about -- if your traditional means of marketing -- are you worried that is going to bring in lower quality credit and as you evaluate those potential customers, do you still think there are plenty of potential new subscribers out there for you?

Has your thinking about any of this changed?

Well, we cast a wide net with direct response marketing.

We don't qualify people ahead of time.

So they inquire and then we will talk with them.

We won't install unless they have a good credit score.

So that hasn't changed.

Okay, okay.

Thanks very much for your time.

Alan Lafer, Neuberger Berman.

Hi, it's Alan Lafer.

Good morning.

Can you tell me the last time you will be able to, in your direct marketing, use the formerly Brink's Home Security?

Yes, it is 36 months after the spin date of October 31 of this year.

Okay, so even in your marketing, it doesn't go past -- it cannot go past that say formerly known as?

Correct.

Okay, thank you very much.

(Operator Instructions).

Jeff Kessler, Imperial Capital.

Thank you.

It's actually just two really quick ones.

First, in studies that we have done previously and I think other industry studies, you guys, as well as ADT, are the only two companies that come out with a very high percentage of unaided brand awareness when it comes to the name being able to pick out an alarm monitoring name without the aid of -- without being aided.

How much is that factoring into the amount of cost that you are putting into the rebranding?

Or do you not believe you have unaided brand awareness?

No, clearly Brink's has a very high unaided brand awareness and it helps drive our marketing efforts.

If you click on the Internet and you are looking for a security company, you're going to come up with a long list of names in your pay-per-click or organic search and you want a consumer to be able to recognize your brand and have a propensity to click on your brand name.

So that is a large piece of our marketing investment going forward, Jeff, is to build a brand that is as powerful as Brink's Home Security and frankly resonates with the consumer.

Okay.

The second quick question is, given that there has been -- there has been increasing pressure over the last several years to get some type of verified response in many communities or increasing fines for increasing amounts of false alarms.

With the current economic climate worsening and with crime rates going up, have you seen any change in the pressures from communities to either increase fines for the third false alarm or to increase pressure on you guys to verify before police will respond?

I haven't seen any pressure there yet, Jeff.

As an industry, we really push the model ordinance, which is that every alarm should have a permit and frankly there should be fines for -- escalating fines for false alarms and people shouldn't be abusing the emergency response units.

But we haven't seen any change in that to date.

So the economic situation really hasn't changed that for better or for worse at this point?

It hasn't had an impact yet.

Okay.

All right, great.

Thank you very much.

Yvonne Varano, Jefferies.

Thanks.

I was wondering if you could just help us quantify a little better the spend that you expect on the marketing and branding.

Is that a couple of million in the first half and then should we take the remaining anticipated spend and kind of equally proportion it out over the next several months up to the three-year period?

We are spending some money right now on an incremental basis versus our base rate for the services of Landor, as well as doing quite a bit of market research.

But it is not of great magnitude, especially when you compare it to that $100 million number.

I would say you should be -- again, we think that we are going to introduce that new brand sometime in the third quarter this year and we will -- not this -- next year, thank you, Steve.

2009.

We will start to spend at a reasonable clip.

We really haven't determined what that introductory program is yet.

But you think that with the introductory program you would probably have a big spend and it might taper off?

We really haven't gotten there yet, Yvonne.

It really has to do with a lot of the research and development work we're doing on what is the new brand going to be, how are we going to portray it in the marketplace.

Again, the nice thing with our business is we can do some things and get really quick feedback.

So it will really depend upon what our experience level is and what we learn going forward.

Okay.

Thank you.

Robert Alpert, Atlas.

Thank you.

Historically, when you have upped your ad spending, what type of bump have you gotten in subscriber ads?

Your historical run rate of $40 million of advertising has probably varied over the course of the years and so you have seen a bump in that for whatever reason, what has been the response to [subgrowth]?

Yes, Robert, I guess let's go back a few years.

When we increased our market spend, we would get an increase in sales opportunities.

One of the things that has happened over the last two years, 2.5 years, especially as the housing market got tighter and the economy started tightening up, we had been spending more marketing to get the same number of sales opportunities.

But I think I know where you're going.

When we get into the third quarter next year and we spend more on marketing, especially in the cobranded situation, we do expect to see more sales opportunities coming in the door than what we would -- given that we are going to have a higher spend rate.

And do you have any sense of what kind of bump you might get or what are you expecting?

Well, not at this point because we haven't determined exactly what our spend rate is going to be, so it's really hard to quantify it at this point.

Okay, thank you.

And that is the last question.

I will now turn it over to Mr.

Bob Allen for his closing remarks.

Sir, you may proceed.

Thank you.

I want to thank everybody very much for joining our third-quarter conference call.

We look forward to speaking with you again in early 2009 when we report on our fourth-quarter and full-year results for 2008.

We appreciate your interest in Brink's Home Security.

Thank you.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.