Jul 26, 2012
Operator
Welcome to The Brink’s Company Second Quarter 2012 Earnings Call. Brink’s issued a press release on its second-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.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded.
Operator
Now for the company’s Safe Harbor statement. This call and the Q&A session contain forward-looking statements.
Actual results that 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 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.
Operator
It is now my pleasure to introduce your host, Ed Cunningham, Director of Investor Relations and Corporate Communications. Mr.
Cunningham, you may begin.
Ed Cunningham
Thank you, Denise. Good morning, everyone.
Joining me today are CEO, Tom Schievelbein and CFO Joe Dziedzic. Most of you are aware, we report results on both the GAAP and non-GAAP basis.
Non-GAAP results exclude certain items related to U.S. retirement expenses, income taxes, asset acquisitions and dispositions.
Non-GAAP results also adjust the tax rate to the midpoint of our full-year non-GAAP estimated range of 37% to 40%. Summary reconciliation of non-GAAP to GAAP EPS is provided on page 3 of the press release.
More detailed reconciliations are provided on page 11 of the release and in the appendix to the slides we’re using today. The slides included in this morning’s 8-K filing and they’re also available on our website.
Ed Cunningham
There is one reconciling items that we’d like to call to your attention. During the quarter, we changed our funding strategy for certain retiree health care obligations.
As a result, we no longer expect to be affected by an income tax deduction limitation that was inactive with the passage of the 2010 health care legislation.
Ed Cunningham
On a GAAP basis, this change in funding strategy resulted in a non-cash tax benefit of $21 million or $0.43 per share. This benefit is excluded from our non-GAAP results.
From this point on our comments will focus on the non-GAAP results, which we believe, make it easier for investors to assess operating performance between periods.
Ed Cunningham
Non-GAAP earnings were $0.40 per share versus $0.35 last year. Improvement reflects a slight increase in segment profit and lower earnings for minority interest, partially offset by higher non-segment expense.
Revenue was down 1% due to the stronger U.S. dollars impact on currency translation.
Organic revenue growth, which excludes the currency impact was 7%. The segment margin was up slightly at 5.2%.
Ed Cunningham
Both Tom and Joe will discuss regional performance and our outlook for the full year. Please note that on page 7 of the release, we provide a summary of selected results and outlook guidance that should help those of you who wish to forecast 2012 results in more detail.
It includes our guidance on revenue and segment margin, non-segment expense, interest expense, tax rate, non-controlling interests, capital expenditures, capital leases and depreciation and amortization.
Ed Cunningham
I’ll now turn the call over to Tom.
Thomas Schievelbein
Thanks, Ed. Good morning, everyone.
Going to start with some brief comments about the quarter and our strategy to create value for shareholders. Joe will provide a more detailed review of our results and the outlook for the year and then we’ll open it up for questions.
As Ed said quarter came in at $0.40. Organic revenue growth was in line with our annual guidance, but it was more than offset by currency exchange.
Likewise our segment margins were affected by currency, which cost us $0.06 per share in earnings. They also includes that we also incur a charge of $0.04 related to my transition to permanent CEO in June.
Thomas Schievelbein
From an operating perspective, the segment margin rate improved as profit growth in North America and Europe are offset lower results in Latin America. The decline in Latin America was driven by wage increases due to labor contract negotiations, as well as costs related to some new government regulations.
Second quarter is historically our weakest in terms of earnings and wage increases in Latin America are one of the reasons for this seasonality. The good news is that it is temporary and will be offset in the second half.
Thomas Schievelbein
We’re confident that we will meet the guidance that we gave in April, which calls for organic revenue growth in the 5% to 8% range with a segment margin of about 7%. The cost reduction actions that we’ve taken are driving near-term improvements in North America, we’ve also taken actions on several other fronts.
For example, after a thorough review, we have reduced capital expenditures and now expect full year spending to come in below last year’s level. We’ve also taken several steps that enabled us to fund our July pension contributions with cash instead of stock, and we expect to use cash for all future payments as well.
Joe will provide more color on those 2 actions in a moment.
Thomas Schievelbein
Our portfolio review is active and ongoing and we’ll keep you posted on the results, I can assure you that our demonstrated bias towards taking decisive action will continue. Our strategy for the company has not changed, we will work to maximize profits in North America and Europe, pursue continued strong growth in Latin America and expand the high value services worldwide.
Thomas Schievelbein
We are committed to accelerating the execution of this strategy and to developing a highly focused customer centric organization. Our progress will be measured in part by near term results, but our longer-term goal is to deliver a 10% segment margin by the end of 2015.
You may have noticed that the one word, I’ve been using is acceleration. We will accelerate the execution of our strategy to improve near term profits; longer term we want to accelerate the evolution of Brink's into a company that’s recognized globally for high value solutions by our customers and for value creation by our shareholders.
Thomas Schievelbein
I’ve been asked a good number of times if I thought that the pricing pressure in matured markets would be alleviated with return of economic growth. Since the timing of an economic turnaround is uncertain, it’s really the wrong question, the question I’m asking our operational managers is, what are you doing today with the levers under your control to improve the operating performance of the business.
The answer is that we must reduce costs and improve efficiency without compromising safety and customer service and we must generate an acceptable return on the investment while doing so.
Thomas Schievelbein
Now, in contrast to our matured markets, Latin American countries are more cash intensive than our customers clearly understand and value the security service that we provide. As a result the price and volume dynamics are more attractive than in our developed markets, but America is a key component of our growth strategy and we will continue to invest there.
Thomas Schievelbein
The most recent example is Mexico, which is well positioned to deliver consistent revenue and profit growth. We must also accelerate efforts to shift our revenue mix into services that generate higher margins.
These include money processing, full service ATM support and other back-office services that help our customers operate more efficiently.
Thomas Schievelbein
Expanding our global services businesses in the new areas is another priority. I’ll close by saying that I’m excited about my new role as CEO.
We have many opportunities to create value for our customers who are under tremendous pressure to reduce costs. It’s a difficult environment for our industry.
But it’s also a great opportunity to demonstrate the value of Brink’s. We made good progress in a short time.
Our focus is on execution and we expect to demonstrate additional progress this year. Joe is up next and then we will put it out for questions.
Joe?
Joseph Dziedzic
Thanks, Tom and good morning everyone. I’ll start with a brief summary of second-quarter results.
Revenue fell 1% in total but was up 7% on an organic basis as solid organic growth in Latin America and Europe was negated by an unfavorable currency impact of 8%. Segment operating profit increased 4% reflecting improvement in North America and Europe, which was partially offset by unfavorable currency and a profit decline in Latin America.
Earnings rose 14% to $0.40 per share. The increase in segment profit accounted just for about $0.02 cents of the EPS growth even after an unfavorable currency impact of $0.06.
Non-segment expense increased by $0.02 per share due to the $0.04 per share of compensation charges related to the CEO transition.
Joseph Dziedzic
Excluding the CEO transition cost, non-segment expenses were actually down $0.02 per share. Lower interest expense added a penny and a reduction in non-controlling interest expense added $0.04 this was related primarily to the lower profits in Venezuela which is approximately 60% owned by Brink’s.
Joseph Dziedzic
Venezuela was impacted by higher wages and other employee benefits. We will work to recover these higher costs in the second half of the year.
The tax rate was 39% in both periods. As we look forward to the rest of the year, we expect segment profit growth to drive earnings per share improvement with no significant change interest costs or the tax rate.
We’ve provided a full-year outlook for these and other items in the earnings release. It shows both non-segment expense and interest expense coming in about flat for the year.
Joseph Dziedzic
We expect non-controlling interest expense to come in between $24 million and $28 million after factoring in a resumption of profit growth in Latin America and the tax rate should be between 37% and 40%. Looking at the total segment results, our organic revenue growth was 7% which is in line with our annual guidance.
The segment margin rate improved by 20 basis points to 5.2% reflecting profit growth in North America and Europe that was largely offset by currency and lower profits in Latin America.
Joseph Dziedzic
Although margin improved only $1 million versus last year, it is important to note that currency was a negative impact of $5 million in the quarter. The organic growth in margin during the second quarter was 14%.
During the first half, the organic margin growth was 25%, a very strong performance.
Joseph Dziedzic
We continue to expect full-year margin rate to come in around 7% with organic revenue growth in the 5% to 8% range. We also anticipate 3% to 5% of downward pressure on revenue from currency due to a stronger US dollar.
Through the first half of the year, currency translation reduced segment operating profit by $7 million versus last year, and we expect the full-year impact to be at the high end of the range of $10 million to $15 million.
Joseph Dziedzic
Our segment margin rate at mid-year was 6.2%. The assumptions behind our 7% annual rate guidance include a resumption of profit growth in Latin America and modestly better results in Europe and North America.
Joseph Dziedzic
The North America revenue trend is expected to remain flat to down slightly as it has for the past 3 years, with no growth expected in the foreseeable future in the US. Last year, we took action to reduce our branch cost structure and streamline operations to address the decline in volume and improve productivity.
This year, we took additional action at the regional and headquarters level. These actions should deliver a full year margin rate in North America, between 4.5% and 5.5%.
The rate at mid-year is already at 4.6%. So we’re on track to achieve the low end of the range with the actions we are taking.
Hitting the high-end would require some tailwind from the economy, or increased productivity in our processes, which we are working on.
Joseph Dziedzic
International segment revenues increased 10% organically on strong growth throughout Latin America, which was totally offset by negative currency translation.
Joseph Dziedzic
Operating profit was flat as organic growth of 12% was offset by unfavorable currency rates. Segment margin fell slightly to 5% as profit growth in EMEA was offset by the decline in Latin America, which was due primarily to Venezuela.
Our Mexico operations continue to improve operationally through the second quarter and we expect them to continue to deliver improved results in the second half as they position for increased margin expansion in 2013 and beyond.
Joseph Dziedzic
Looking ahead, we expect international operations to deliver another year of strong organic revenue growth driven by Latin America. However, we expect negative pressure on revenue of 4% to 6% from currency.
We expect the full-year margin rate 7% to 8% as profit growth in Latin America resumes and EMEA achieves modest growth in a very difficult environment. Year-to-date cash flow from operating activities excluding changes in customer obligations and discontinued operations was $51 million compared to $78 million last year.
Joseph Dziedzic
Decline versus last year was driven by an $11 million pension payment to our former CEO. Higher tax payments of $9 million driven by the timing of tax refunds and an increase in working capital from organic growth and receivables collection timing, partially offset by increased operating profit.
First half capital expenditures and capital leases declined by $20 million versus last year as we continue the efforts to reduce maintenance capital spending through efficiency projects and reallocated more of our spending on growth and productivity initiatives.
Joseph Dziedzic
The North America region decreased CapEx by $9 million as we reduced U.S. spending on maintenance CapEx and CompuSafe and increased the spend on productivity initiatives.
International segment CapEx spend decreased by $10 million year-to-date due to the timing of a number of growth investments and the delivery of armored vehicles particularly in Mexico. Total capital expenditures for the year are expected to be about $235 million versus $239 million in 2011.
The net debt increased from $232 million at the end of 2011 to $285 million at the end of mid-year due to the spend on capital expenditures and an acquisition in France exceeding the cash flow generated from operations.
Joseph Dziedzic
As Tom noted we recently contributed $7 million in cash to our pension fund and our plan is to continue using cash to meet future funding requirements. Earlier this year, we made a $9 million contribution to the plan using stock.
As we said on our last call in April, we have been exploring alternative methods of funding. In addition to reducing capital expenditures and improving U.S.
profitability, we have identified and implemented some tax efficient methods to repatriate international cash flow to the U.S. As a result, we are now in a position to continue using cash instead of stock to fund our pension contributions.
Joseph Dziedzic
In addition, our near-term pension contributions will be reduced by recent legislation that alters the method by which companies calculate required contributions. Without the benefit of this legislation, we would have been required to make additional contributions in 2012, totaling $15 million and estimated payments in 2013 and ‘14 totaling $93 million.
The discount rates to be used in the new calculations will be high and well, therefore reduce these amounts. We’re still awaiting regulatory clarification on the legislation, but we expect to make lower payments for the remainder of 2012 by approximately $5 to $10 million and in 2013 by approximately $10 to $20 million.
Joseph Dziedzic
So to summarize our required payments in the near-term will be lower and we plan to fund them with cash instead of stock. We will continue to focus on efficiently deploying capital investments to maintain the level of safety and security that Brink's is known for, while reallocating capital to focus on growth and productivity efforts.
As Tom noted we’re confident that we can deliver on our full year guidance, we’re not counting on any improvement in the macroeconomic environment poor market conditions. Our plan is to execute on cost structure and productivity improvements in North America, Europe and Mexico.
We expect Latin America and our Global Services business to continue to grow both revenue and profits.
Joseph Dziedzic
In summary, we expect organic revenue growth of 5% to 8% and a segment margin rate of approximately 7%. We believe North America will expand margins to 4.5% to 5.5%, Europe profits should also improve slightly as we address underperforming countries in that region and Latin America should continue its strong growth as we position Mexico for accelerated margin expansion 2013 and beyond.
We will continue to take the steps necessary to create value for our customers, employees and shareholders.
Joseph Dziedzic
Denise, let’s open it up for questions.
Operator
[Operator Instructions] Our first question will come from Jamie Clement of Sidoti and Company.
James Clement
The first question of 2, if I may. Just a little bit more of an update, if I could, on the status of Mexico.
Obviously that you have about 12,000 employees down there and it’s quite an undertaking and you had a better than expected year last year. I was just curious where you were at in terms of that process?
Thomas Schievelbein
Well, let me start Jamie. I mean, Mexico is working hard to look at productivity improvements to work on their branch structure and working with employees.
So in general, they were consistent with the -- where we said that they’d be which is in the low single digits and growing. Joe, you want to talk about any more specifics?
Joseph Dziedzic
Certainly. In Mexico a little bit on the numbers in the first half of last year, their profit was negligible.
The first half of this year, they’ve had a very strong performance, I’d characterize them as ahead of last year, both first half and the margin rates are actually ahead of last year’s full year rate, last year the full year was about 2.5%. They continue to focus on the operational improvements Tom referenced.
You noticed in our international CapEx spend we are down year-over-year and a portion of that is in Mexico as we’ve been able to implement some of our operational efficiencies with less CapEx in the first half and there’ll be more CapEx spend in Mexico in the second half.
James Clement
Okay. So it sounds like things are at or better than planned?
Thomas Schievelbein
They are at or better than planned.
James Clement
Okay, great. Last question, there’s so many moving parts in Europe because of the actions that you’re taking on what was included in your comments or in the release?
The bidding situation on demand if you will, did that deteriorate in France and Germany during the second quarter in your opinion? I mean obviously, we read a lot of articles about Europe.
It’s hard to know exactly how that impacts your business?
Thomas Schievelbein
Actually France improved results, good operations in this quarter as did the Netherlands. Germany was consistent with where they’ve been in the past, so I mean there’s obviously a lot of macroeconomic issues in Europe.
We wouldn't want to underestimate those. However, on the micro and in terms of Brink's in particular countries they are working hard on productivity improvements.
And so we saw an improvement come through in this quarter.
James Clement
Yes, absolutely, we absolutely saw in the numbers, it was just - I was just curious whether just from your feeling and just talking with your operators there whether there was another sort of step-down that the economy had seen in the cash transit business?
Thomas Schievelbein
As I said, France was up. You talk to operators and they are always nervous about all sorts of things.
But France was up as was Netherlands and Germany was consistent with the - where we were trying to drive them to from an operational perspective.
Operator
Our next question will come from Clint Fendley of Davenport.
Clint Fendley
Very nice improvement here in North America. It sounds like most of this is from the cost reductions that you guys took earlier in the year.
I’m wondering how we should be thinking about some of the technology investments that you’ve made in your back office and the efficiencies that that we should perhaps expect from those in the second half of the year?
Thomas Schievelbein
Yes, I mean a lot of this has come from the cost reductions we’ve taken, but we’re also getting very close to implementing a lot of the productivity improvements in terms of improvements in IT systems, to add to that productivity. So I would expect those to start to kick in the second half and that’s what really gets us hopefully to be the, the higher end of our expectations in terms of margins for them.
Most of the productivity gains do however have a bigger impact in 2013, but they are getting ready to start to kick in where you’ve got some pilots on some of these productivity gains that start in September.
Clint Fendley
Okay thank you, that’s helpful. Last question here in shifting gears, I wondered if you could update us on CompuSafe and that we know you’ve made some changes to the product.
I am wondering what level of unit growth, we should expect this year from that and also wondering how the belt tightening on some of the capital spending might affect the growth rate here for that product?
Thomas Schievelbein
All right, I would let Joe talk about the details, but obviously, as we constrain capital that has an impact on the growth rate, but we are seeing improved profit levels on CompuSafe in the US. So Joe you want to take any specific details on CompuSafe.
Joseph Dziedzic
Sure the CapEx, reduction in CompuSafe is more driven by only taking deals that that we’re certain to have the returns that we want, the product had explosive growth with the past 3 or 4 years. And with that, there was proliferation of models and complexity that crept into our processes there that impacted our profitability.
And so now we’ve streamlined, we’ve modified the pricing and the growth in the U.S. has been slower as we expected.
It’s still growing. We’re actually realizing some good growth outside the U.S.
as we roll out the product and in the number of other countries we have. We have now our presence in almost 20 different countries, where we have CompuSafe either rolling out or piloting.
So, I would say, our growth is going to be in CompuSafe in aggregate greater outside the US and inside the US and the focus in the US is getting the profitability up and that’s happening and you’re seeing it in the results for the first half.
Operator
[Operator instructions] Our next question will come from Michael Kim of Imperial Capital.
Michael Kim
Could you first talked about some of the contributions from higher value services that you, you talked about earlier in your prepared comments for money processing, ATM services and so forth. And what the mix was in the quarter and then how that’s progressing.
Thomas Schievelbein
In terms of from our overall perspective, what we really are pushing forward is on some of the ATM services that we’re offering with our CompuSafe -- excuse me, with our Threshold capabilities. And so that’s the focus for the future.
Now, the reality is that the mix of those services in this quarter is not materially changed. So you have CompuSafe which is a service.
We have some of our money processing, which are services. But we’re trying to drive the future into more of these higher value services that will improve the margins.
Joe, any other comments.
Joseph Dziedzic
I think you summed up well.
Michael Kim
And then switching to North America cash in transit. Can you talk a little about the pricing and volume environment.
Obviously as you made some nice improvements on the cost structure. But how are picking about re-gaining market share gaining market share.
And then what do you think Brink's needs to do to recover great organic growth in North America.
Thomas Schievelbein
I mean you pretty much, saw the trajectory of the revenue, which is flat just down slightly. The way that we are driving the business was the first year the profitability back to the respectable position.
But after that we’re going to focus very highly on customers. And we need to move to those value added solutions to drive both the revenue and the profitability higher.
So we are looking at how we improve on those services. Because the economics haven’t changed the banks continue to be in a tough situation.
So I don’t see a whole lot of movement coming just from working to regain market share.
Michael Kim
And are you seeing any change in volume in terms of stops in retail or other verticals any significant movement one way or another.
Thomas Schievelbein
No, nothing that trend or nothing worth even commenting on.
Michael Kim
Okay. And then, Joe, one quick question for you with the improvement in CapEx do you think Brink's will continue to be able to reduce that or is that sustainable at the current levels or will CapEx have to rise as the company expands?
Joseph Dziedzic
Well, we’ve talked about our focus on CapEx in the 3 categories that we analyze. We look at the maintenance CapEx and we’re looking for efficiency on a year-over-year basis.
We look at the growth CapEx and we’re still spending on growth CapEx, even with the reduced year-over-year spend in total. And then we look at how much are we spending on productivity and efficiency and that the reality is we’ve been able this year to reduce the maintenance CapEx in a number of areas, we’ve reallocated to more productivity and quite frankly the growth focus is still in Latin America and we’re going to continue doing that.
I think long-term, you have to look at the variables that drive CapEx. We’re going to be more efficient in our maintenance CapEx, that’s for sure.
We have a number of opportunities to continue investing in productivity and we’re continuing to do that and the growth is really coming in places like Latin America and a few other spots around the world, but mostly Latin America and in addition to that you have inflation pressures in Latin America. So that when you think about the inflation rates in places like Venezuela and Argentina in the 20s and low 30s and then you consider the mid-single digit to high single-digit inflation rate, some of the other countries in Latin America, you naturally get an increase in your CapEx spend, in addition to the increased volume investments.
So the long story short is that we’re going to be very judicious in how we spend and where we spend CapEx. Our goal is to get more efficient and maintenance CapEx every year and to keep finding places to invest in growth and productivity.
So I would love to spend even more on productivity and growth because that has a much faster payback. So we will keep that focus.
Operator
[Operator Instructions] Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time.
And thank you for your participation.