The Brink's Company (BCO) Q1 2016 Earnings Report, Transcript and Summary

Welcome to The Brink's Company's First Quarter 2016 Earnings Call. Brink's issued a press release on first 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 Brink's.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. Now for the Company's Safe Harbor statement. This call and the Q&A session 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. This call is copyrighted and may not be used without permission, written permission, from Brink’s. It is now my pleasure to introduce your host, Ed Cunningham, Vice President of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.

Thank you, Denise. Good morning everyone. Joining me today are CEO, Tom Schievelbein; and CFO, Joe Dziedzic. This morning, we reported results on both the GAAP and non-GAAP basis. The non-GAAP results excludes certain retirement expenses, reorganization, restructuring cost, acquisitions, dispositions, and tax rate adjustments. In addition to these items, the non-GAAP results exclude Venezuela, due to a variety of factors, including our inability to repatriate cash; Venezuela's fixed exchange rate policies and continued currency devaluations, and the difficulties we face raising prices and controlling costs in a highly inflationary economy. We believe the non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly our comments today including those referring to our guidance focus primarily on non-GAAP results. A reconciliation of non-GAAP to GAAP results is provided on Page 2 of the release. More detailed reconciliations are provided in the release and the appendix to the slides we’re using today, in this morning’s 8-K, and on our website. Page 7 of the press release provides a summary of several outlook items including guidance on revenue, operating profit, and earnings per share. I’ll now turn the call over to Tom.

Thanks, Ed, good morning everyone. First quarter earnings from continuing operations came in at $0.30 a share versus a strong $0.44 in the first quarter of 2015. Revenue declined 9% due to negative currency, which also reduced earnings per share by $0.06. Strong organic results in Latin America were offset by lower profits in the U.S. and Mexico. Our 2016 EPS outlook has not changed. We expect improved results as the year progresses and another year of strong earnings growth, $1.69 in 2015 to a range of between $2 and $2.20 per share on revenue of about $2.9 billion. We expect organic earnings growth to be driven by continued strength in Argentina, improvements in Mexico, and our payments business, which will turn profitable or should turn profitable in 2016. Compared to prior guidance, this outlook reflects a profit reduction of about $15 million in the U.S. that we expect will be offset by additional cost reductions at the corporate level and the currency impact that we now believe will be more favorable than we previously expected. My comments today are short. I will close with a reminder that my retirement becomes effective this Friday, May 6. The search for a new CEO is being overseen by the Board's Governance and Nominating Committee and both internal and external candidates are being considered. The selection will be announced when the final decision has been made. With that I’ll turn it over to Joe and then we’ll open it up for questions. Joe.

Thanks, Tom, good morning everyone. I’ll start with a summary of our quarterly results then I'll review each segment's results and finish with some additional comments on our outlook for the year. On an organic basis, our revenue grew 3% as continued growth in Argentina and a strong quarter from Brazil were partially offset by a decline in the U.S. and in our global services business, where we experienced market driven volume declines across most categories. The unfavorable currency was related mainly to the Brazilian real, the Argentine peso, and the Mexican peso. Although exchange rates are significantly unfavorable year-over-year, they have improved since the beginning of the year. On a constant currency basis, operating profit declined from $41 million to $36 million. As the year-over-year decline in the U.S. and Mexico, more than offset the organic improvement in Argentina, Chile, Brazil, and lower corporate expenses. The negative impact of currency lowered profit another $5 million. When you net it all out, EPS came in at $0.30. The next few slides provide an overview of our five largest countries and global markets, starting with the U.S. and Mexico. The U.S. had an operating loss of $2 million for the quarter, due mainly to higher fleet costs, volume pressure, security – safety and security costs, and higher employee-related costs. On our last call in February, we said first quarter results were not expected to improve significantly over the loss we reported in the fourth quarter of last year and I didn’t. Although the first quarter was a loss, we believe we're taking the necessary steps to deliver improvement in the second quarter, and even greater improvement in the second half of 2016. The new U.S. organizational structure is enabling us to make changes faster than in the prior structure. We've added more supply chain and continuous process improvement expertise, through new hires and intensified focus on helping our branches and branch managers serve customers more efficiently. Part of the delay in the profit improvement is the need to add back resources into the branches to focus on core processes, improved revenue capture, and manage change. We continue to execute the roll out of the one person vehicles, and are on track to introduce at least 325 by the end of the second quarter and 460 by the end of the year. Our route logistics optimization project is on track to reach 40% of all routes by the middle of this year, and 60% by the end of the year. We're taking aggressive actions to reduce our fleet cost, through improved fleet management, and increased investment in new vehicles instead of retrofitting existing vehicles. We're taking steps to reduce employee turnover, and reduce safety and security costs. The expected results of these actions gives us confidence in our revised forecast, which is for profitability in the second quarter and significantly higher profits in the second half of the year, resulting in full-year profit between $15 million and $25 million. Profits in Mexico declined due mainly to a difficult comparison with year ago results, which included a gain related to a change in employee benefits. Excluding the impact of this change, Mexico profits were roughly flat versus last year as higher volumes were offset by timing of fleet expenses and wage increases that took effect late in 2015. Organic revenue growth in Mexico was 5%. Thanks to the volume growth in retail markets. We continue be encouraged by growth in the retail sector, and given the positive impact of cost actions taken in 2015, and the strong pipeline of productivity projects, Mexico remains on track to achieve its targeted margin rate of 10% in 2016. France, Brazil, and Canada, round out our largest five markets. Our team in France continues to perform well under challenging conditions. Converting 1% organic revenue growth into 10% organic profit growth, despite operating in a highly competitive slow growth macro environment. For the year, we expect solid profit growth on flat revenue, as we control cost and execute our service offering transformation in France. Our team in Brazil continues to perform extremely well in a difficult environment, delivering 34% organic profit growth on 12% organic revenue growth. The strong fourth quarter of last year provided momentum entering 2016 and the successful pricing execution, helps Brazil deliver a strong first quarter result. The team continues to execute productivity actions and cost controls that positions them well for the difficult environment they’re competing in. We have cautious optimism about the rest of the year in Brazil. Despite facing many macroeconomic headwinds, we are confident our team is up to the challenge. It also helps that the Brazilian real has strengthened by about 12% thus far during 2016. Especially considering our Brazilian profits have been historically strong in the second half of the year. In Canada, organic revenue and profits improved in the first quarter. We expect significant improvement in second half profits from volume gains and productivity actions already taken. Even with the negative impact of the strong dollar, along with volume pressure in our global services unit, the steady performance of our global markets unit continued into the first quarter. The combined operating margin rate of the 35 countries that comprised this unit exceeded 14%, up 170 basis points over the year ago quarter. Most of the improvement was driven by strong results in Argentina and Chile. Revenue and profits in the EMEA region declined versus last year due to results in global services and Ireland, which we are in the process of exiting, and have been removed from our non-GAAP results effective March 1st. The impact of reduced shipments for gold, bank notes and diamond and jewelry is reflected in our European results. Despite operating in a difficult macro environment, this region maintained solid margins at 7.2%. The Latin America region delivered strong organic revenue growth and substantially higher margins. Most of the organic revenue growth, and more than half of the first quarter profits in Latin America, were driven by Argentina. Results in Chile also improved, as we are realizing the benefits of restructuring actions taken in the past few years. Finally, while profits in Asia were flat due to slower volumes in global services, this region continues to deliver strong profits on a consistent basis. We have not changed our 2016 EPS outlook of $2 to $2.20, but we have changed how we get there. On the revenue side, we increased our guidance to $2.9 billion, which reflects our expectation of a slightly lower currency impact versus our assumptions in February. The improvement is primarily the Brazilian real and the Euro. Our guidance of 5% organic growth has not changed. As Tom noted, we have reduced our U.S. profit outlook by $15 million, which puts 2016 year-over-year improvement in the U.S. in a range of between $0 million and $10 million. We expect to offset the forecast in the U.S., with savings in corporate expenses and the improvements in the real and Euro. We still expect strong year-over-year organic improvements in Argentina, Mexico, and our payments business to help drive our full-year margins to about 7%. The EPS guidance of $2 to$2.20 has not changed. Year-to-date cash flow from operating activities on a non-GAAP basis decreased by $8 million due primarily to the decline in U.S. non-GAAP earnings. First quarter cash flow is usually the weakest of the year, due to normal beginning of year payments, such as annual bonuses and insurance premiums. Capital expenditures and capital leases were up $10 million versus last year because last year was an unusually low spend of only $15 million, as we were redesigning our vehicle in the U.S. and executing global tenders. Our full-year estimate of $120 million to $130 million has not changed. Net debt increased by $58 million from the end of 2015, due primarily to the negative cash flow from operating activities and CapEx spend consistent with prior years. That concludes my comments this morning. Denise, let's open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] and our first question will come from Jamie Clement of Macquarie. Please go ahead.

Hi Tom, Joe and Ed, good morning.

Good morning.

Good morning.

Good morning.

Tom, if I could ask you a question, I think it's on a lot of people's minds at this point in time. The Annual Meeting is almost upon us…

Yes.

And I think the way the press release read a couple of months ago, was that would mark your retirement day. If we don't have an announcement of a new full-time CEO in the next couple of days, will you be sticking around? Or are you going to start enjoying your retirement?

Well, the Governance Committee, the Nominating Committee of the Board has been interviewing candidates and they are both from internal and external. And as soon as they have something to announce, we will be announcing it. My retirement becomes effective as of the Annual Meeting.

Okay, okay. And then just sort of different part of the leadership question, and obviously, this also relates to the U.S. full year guidance reduction assumption. I believe Christian left in January. Who exactly is running the U.S. right now?

So Mike Beech has taken that responsibility. He had the five markets. He also now has taken the additional responsibility until we find who we think is the right permanent manager, but Mike has that responsibility.

Okay.

And Mike has indeed moved to Dallas to do that.

Okay. Well that’s encouraging. I appreciate that.

I think it’s going to make a big difference. Obviously time will tell, but I do believe that will make a big difference in the performance of the U.S.

Sure, okay. Thank you for that. And Joe, if I could move on to you. I know you all don’t make a habit of guiding quarterly formally, but I know heading from historically heading from 1Q to 2Q, sometimes you’ve helped us out a little bit, because there’s always that phenomenon of wage increases, particularly down in Latin America, sometimes preceding what you can get on the revenue line. So with all of the puts and takes here, would you expect earnings and margin in the second quarter maybe be slightly down compared to the first quarter, before the positives in the back half of Latin America kick in, and before the real good numbers in the U.S. start to kick in?

You’re absolutely right. Our historical pattern is second quarter is typically down from first quarter. The one mitigating factor on that would be we do expect profitability in the U.S. in the second quarter, after losing too in the first quarter. So that will help to mitigate some of that historical trend. But I don’t see any reason that broad trend will change.

Okay. I appreciate it. And obviously I mean we have got to look at year-over-year, and the second quarter is still not the easiest comp in the world in the U.S., right?

Correct. On the year-over-year basis, that is absolutely true. The second half of the year, the U.S. comps become much easier for sure. But looking at first quarter to second quarter, we should see improvement in the U.S. to profitability, which will help us quarter-to-quarter.

Okay. Thank you all. I’ll jump back in the queue. Thank you.

The next question will come from Ashish Sinha of Gabelli. Please go ahead.

Hi. Thank you for taking my questions. I just wanted to trail a little bit on the U.S. Starting with the market, could you please talk about the market growth dynamics, volumes, and the pricing environment, and specifically your pipeline. This morning, one of your competitors talked about 5% to 10% organic growth for the U.S., and they have been building market share according to them. Now we know that they have won one large contract, and if we X out that one large contract, how different is your organic growth versus then? And then on U.S. margins, a couple of quarters ago you talked about having to higher temps to meet service quality levels, which had impacted margins, and then we were told to expect margins to come back, as you maintained those service levels whilst right-sizing the operations. Clearly, first where the margins have taken a step back. So, my question is, are those service quality levels still suffering, and beyond 2016, how should we be thinking about the long-term margin potential for the U.S. And lastly on corporate costs, so $5 million to $10 million, you’re talking about your guidance being better by $5 million to $10 million versus earlier. Is the savings entirely due to currency? And going forward how should we be thinking about corporate costs, either as an absolute number, or as a percentage of sales? Thank you.

Joe?

Our view of the market in the U.S. from a volume perspective has not changed. We reported in the first quarter negative 3%. Year-over-year there’s about 1% unfavorable impact due to fuel surcharges. The competitor reported very strong organic growth that referenced taking market share. Other than the one contract that we talked about in the middle of 2014 that transitioned to that customer, or that competitor largely by the middle of 2015 it had fully transitioned, we have not lost market share to that competitor. So if they’re gaining share, it’s not coming out of our portfolio of business, and our view is that the U.S. market is not growing at that rate. When we look at the other competitors, published results, we do see a dramatic decline in their organic revenues. So I think we can deduce where the market share growth for that other competitor that discussed their results yesterday and today came from. We feel we’ve got a very good pipeline of growth opportunities in the U.S. from differentiated service offerings that we’re working on, and we hope to see the impact of that in our results very soon. Addressing your question about service levels in the U.S., we did make change, significant changes in the second half of last year. We made more changes in the first quarter of this year, and we continue to add back some resources in the branches in the U.S., to continue to improve our service levels. We have made dramatic improvement, and feel that we are performing at a very competitive level relative to our competitors, from a service level perspective. What we have to do now is become far more efficient in what we’re doing. The resources that we’ve added back into the branches is going to help us better manage our core processes, help us manage the change that we’re working on with the various projects that we’ve talked about, whether it’s the route optimization project, or the 1-person vehicle, or some of the other continuous process improvement projects that we’ve talked about, AM and PM time are examples of them. These resources are going to help us better execute those changes in the branches. They’re also going to help us better realize the benefits of the billing system implementation, where we had hoped to reduce revenue leakage as one of the key paybacks for that project. So the resources we’re putting in place, we expect to help us to realize improvement in revenue leakage. So as we look at the first quarter results in the U.S., clearly it was in line with what we expected in terms of not much improvement, it got a little worse than last year. We have confidence in the changes we’re making. We think it’s going to be another quarter or two before we see meaningful improvement. But we believe the actions we are taking are the right actions in the U.S. With respect to corporate expenses, the savings that we are generating this year, they’re real tangible savings that we would expect to continue. We have said all along that we expect to continue focusing on corporate expenses, and nominally reducing the amount of corporate expenses in the business. The corporate expenses is made up of several different things. There is some global management oversight. There is some SG&A. There are the public company costs. But there are also corporate specific, corporate funded projects that we’re implementing to try to help the countries. As those projects start to wind down, we’ll see reduction in those costs, and we will continue to focus on reducing the SG&A, the global oversight and public company costs in corporate expenses. We have not provided specific guidance on the amount of reduction to expect, but it’s very much in our sights to continue to reduce corporate expenses. Did I miss any of your questions, Ashish?

No, thank you.

The next question will come from Brian Ruttenbur of BB&T. please go ahead.

Thank you very much. A couple of questions. Let me first start off with Mexico, switch countries on you. X the one-time employee benefit, what would the profit margin have been in the quarter?

The one-time benefit was last year. So it’s really a year-over-year comp. First quarter margins that you have already exclude that benefit, last year if you look at our quarter splits, and we talked about last year in the first quarter, we changed the benefit plans for our employees. We gave them the option of selecting to change or stick with the prior plan, and everyone chose to switch, and that created a gain for us within the quarter that did not repeat on a year-over-year basis. So the margin rates you see are the current first quarter rates.

Okay, I’m sorry. Let me restate. What was the margins last year X that one-time benefit? I am trying to get a year-over-year comparison, I misstated.

We didn’t disclose the exact value of that, but the margin rates are pretty consistent year-over-year excluding that one item.

Okay. And then in the U.S., one-man fleet, you mentioned what you’re going to be at the end of the third quarter, and your goals for the year. Where are you now?

We’re on track with hitting our mid-year targets that we provided, and we’re very comfortable with our trajectory to hit our year end targets.

Okay. And I’m still not clear on the stumbling block in the U.S. It sounds like and I’ll summarize that the changes that you’re making haven’t really taken hold yet, but you anticipate them to take hold in the second half of the year. Is that the summary?

We are getting traction with the actions we’re taking. We’re not seeing that in the output measures yet. We expect it to be about a quarter later than we had anticipated.

Great. Thank you very much.

The next question will come from Jeff Kessler of Imperial Capital. Please go ahead.

Thank you. Hi Tom, hi Joe, hi Ed. Question on inflation impact on your revenues down in South America, particularly in Argentina, a little less so Brazil. To what extent are your revenues helped by the Argentine peso, and the then the real inflating, or the economy inflating I should say, and you are not economists but how sustainable do you think that is?

I believe as long as inflation rates remain where they are, we will be able to recover the inflation through price increases. It’s been a very consistent historical pattern in Latin America, and the industry has been able to do that, and I believe we will be able to continue to do that. There’s no question particularly in Argentina that a substantial piece of our revenue growth was inflation. Last year we did have physical volume growth in Argentina. We expect to see continued physical volume growth in Argentina, as well as recovering the inflation. Brazil, Brazil did an excellent job of completing their price increases late last year. That gave them a good start entering into 2016. They actually surprisingly saw better volume than we were anticipating. That gives us cautious optimism in Brazil, but the Brazilian team has also taken the necessary cost actions, and they have a strong pipeline of productivity that’s helping them and gives us cautious optimism for the year. The wild card in Brazil is simply the geopolitical environment, and what happens to their economy if there is a change in the President’s role.

I just wanted to follow up on Brazil because it is, you see it’s an interesting comparison that you actually doing, you’re doing well in Brazil whereas your competition that I can from what I can discern in looking at both private and public companies down there are not doing well. So it’s kind of, well, I know we’re all focused on the U.S. here. Trying to find out what are you doing down in Latin America that is taking share from your competition. Can any of that be translated in terms of operational efficiencies what you are doing, learning curve up to the United States?

Fair question. We have a strong management team in Brazil that continues to take the necessary actions to deliver the profit improvement. They’ve managed through the difficult environment very effectively. I think philosophically there are clearly some learnings that can be transferred across lots of countries, and Brazil is an example of dealing with a very difficult environment very effectively, and capitalizing on a difficult environment.

And from a strategic, this is Tom, strategic perspective, Brazil is one of the countries that reports to Mike Beech, and so the top five, do and that’s the whole reason for that alignment, is so that we can take the best from each of those countries, and transition it, move it to the other place where is it can be helpful.

Okay, one final question. With regard to corporate costs, one of the things that this Company has been in the process, or has attempted to do is take a look at, is take a look at what types of corporate costs can be centralized, and what costs have to remain out at the international branches. At what stage are you in getting to that point at which you can take, you can actually begin to get let’s say what you call the outputs from reducing international corporate costs, for what you can centralize, and rationalizing what you have to out in the field?

We’re working to find the happy equilibrium of that point.

Okay. That’s my last question, Joe.

Thank you, Jeff.

[Operator Instructions] And with no additional questions, we will conclude the question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.