The Brink's Company
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

Welcome to The Brink's Company's Second Quarter 2018 Earnings Call. Brink's issued a press release on 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. [Operator Instructions] As a reminder, this conference is being recorded. Now for the company's safe harbor statement, this call and the Q&A session will contain forward-looking statements. Actual results could differ materially from projected or estimated results. Information regarding factors that could cause such differences is available in today's press release and in the company's most recent SEC filings. Information presented and discussed on this call is representative as of today only. Brink's assumes no obligation to update any forward-looking statements. The call is copyrighted and may not be used without written permission from Brink's. It is now my pleasure to introduce your host, Ed Cunningham, Vice President of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.

[Ed Cunningham:]

Thank you, Drew. Good morning, everyone. Joining me today are CEO, Doug Pertz; and CFO, Ron Domanico. This morning, we reported results on both the GAAP and non-GAAP basis. Non-GAAP results exclude our Venezuela operations, reorganization and restructuring costs and items related to acquisitions and dispositions. We believe the non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly, our comments today, including those referring to our guidance, will focus primarily on non-GAAP results. Reconciliations of non-GAAP to GAAP results are provided in the press release, in the appendix to the slides we're using today and in this morning's 8-K filing, all of which can be found on our website. Finally, Page 3 of the press release provides the details behind our 2018 guidance, including revenue, operating profit, noncontrolling interest, income taxes and adjusted EBITDA. I'll now turn the call over to Doug.

[Doug Pertz:]

Thanks, Ed, and good morning, everyone. This morning, we reported our ninth consecutive quarter of year-over-year profit growth. We're now at the midpoint of our 3-year strategic plan to drive profit growth organically and through accretive acquisitions. And our results reflect great progress on both fronts, with both revenue and operating growth well above our plan targets. Second quarter reported revenue rose 8% and reported operating profit increased 25%. And that includes a significant unfavorable FX impact of 4% on revenue and 26% on earnings. Furthermore, the 25% reported profit increase this quarter after FX is on top of a tough comp of 52% profit increase in last year's second quarter over 2016. On a constant currency basis, which excludes the impact of FX, revenue and operating profit rose 13% and 52%, respectively. The constant currency profit increase was the same as last year's increase of 52% reported. These results clearly demonstrate increased operating leverage of more than 3x from internal improvement initiatives, which have enabled us to extend our profit momentum even with the recent currency headwinds. Similar to the first quarter, acquisitions added 5% in revenue growth and 14% in profit growth. Our operating profit margin was up 120 basis points over last year and up 360 basis points over the last two years. Adjusted EBITDA grew 25%, and similar to the first quarter, earnings per share rose 12%. In both quarters, first and second, the lower growth rate for earnings compared to operating profit is primarily due to higher interest expense and higher tax rate. These factors caused a drag on EPS in both quarters, which otherwise would have been up 21% this last quarter. We expect the Dunbar acquisition to close early this year, and when it does, the cash on our balance sheet will be fully deployed and is expected to generate nice accretive returns. And as we disclosed in May, the Dunbar acquisition also will enable us to reduce our tax rate significantly. As a result, future earnings growth should be more consistent with growth in operating income. Turning to Slide 4. Reported profits in North America were up 55% on revenue growth of 4%. Constant currency profit growth, which excludes negative currency translation was 60% driven by strong improvement in both the U.S. and Mexico. Profit growth in each of these countries was well over 50%. The margin growth rate of 275 basis points to 8.1% is clear evidence that our breakthrough initiatives are working. In the U.S., we continue to target a full year margin rate approaching 6%, as our breakthrough initiatives gain additional traction and our normal second half seasonality takes hold. Continued growth in CompuSafe services are -- which are on track to exceed our 2018 target of 3,500 new orders should also drive improvement in the U.S. marginally and in our recurring revenue. We're certainly pleased with our progress in the U.S., but the biggest driver of second quarter revenue and profit growth in North America was Mexico, which continues to benefit from growing sales to retail customers, improved profitability, and lower labor cost. Similar to the U.S., we expect productivity initiatives and seasonality to have an increasing impact in the second half of this year as well. We're very proud of the Mexico team and in their 3-year strategic plan, they challenge themselves to more than double their margin rate to 15% by the end of 2019, our strategic plan period. They're well ahead of schedule and have a shot at hitting that 15% this year. Turning to Slide 5. In South America, reported revenue grew 14% and operating profit rose 27% reflecting close to a 200 basis points increase in margin rate to almost 20%. Results were affected by negative currency translation in Argentina, where the peso declined by 32% against the U.S. dollar versus last year's quarter. And in Brazil, where the Brazilian real declined 11%. The total translation impact on revenue was $42 million or 21% and 13% -- excuse me, $13 million or 36% on operating profit. Strong organic and acquisition growth continued in Argentina, Brazil and Chile. On a constant currency basis, operating profit in South America was up 62%, again demonstrating demonstrable proof that our underlying operations, including acquisitions are performing well. And speaking of acquisitions, our pending acquisition of Rodoban in Brazil has been delayed due to still pending government approval. We expected to close the transaction this year, but given the uncertainty of timing, we'll take it out of our 2018 guidance, which we'll cover more in a moment. Slide 6. And Rest-of-the-World segment. Revenue was up 9%, primarily due to favorable currency translation and the acquisition of Temis. Operating profit was relatively flat, but down 6% on an organic basis due to continued price and volume pressure, particularly in France, partially offset by profit growth in most other Rest-of-the-World countries. As we said after the first quarter, the competitive market disruptions in France in 2017, which included pricing pressure and an unusually high number of tender rollovers continued through the first half of this year and are now likely to persist for most or all of 2018. We expect to only partially offset these factors in 2018 with internal cost reductions, and we expect more significant improvement in 2018 from additional core business cost savings and the synergies from Temis, hopefully supported by more stable market conditions. This slide, Slide 7, summarizes our revised 2018 guidance, which has been impacted by four key drivers

[Ron Domanico:]

Thanks, Doug, and good day, everyone. Before I cover results, I want to highlight two accounting items

[Doug Pertz:]

Thanks, Ron. In summary, we had another very strong quarter and expect continued strong growth through 2019, the remainder of our strategic plan period and beyond. As mentioned earlier, in the 2 years or 8 quarters that Ron and I have been with the company, our management team has consistently increased year-over-year operating earnings every quarter, with a compound annual growth rate approaching 40%, which is well ahead of our strategic plan targets. The operating income and EBITDA improvements that we've achieved to date are driven by both increased revenue growth and by strong earnings leverage. And I want to emphasize that our global management team is highly focused on continuing to build on this base of consistent strong earnings growth, with increasing free cash flow and a further emphasis on higher recurring margin and recurring revenues. I also want to emphasize that the EPS growth in 2019 and beyond should be much more in line with our operating income growth as well, with no longer having excess cash on the balance sheet after funding the Dunbar acquisition. In addition, with increased U.S.-based income and other tax attributes that are gained by the Dunbar acquisition, our tax rate is expected to be reduced. These realignments of both tax and interest components should substantially improve our EPS growth beginning in the first quarter of 2019. In summary, we're confident that we have a strong base for continued earnings growth through the 2019 plan period, a strong platform and momentum to continue this growth beyond the plan period, and we're developing additional strategic plans to drive shareholder value in 2020 and beyond. We'll share more of these strategies early next year. Drew, now let's open it up for questions.

[Operator:]

[Operation Instructions] The first question comes from Tobey Sommer of SunTrust Robinson Humphrey.

[Kwan Kim:]

This is Kwan Kim on for Tobey. First, how should we think about the long-term risks of continuing volatile FX fluctuations on the core business? I understand the short-term risks are all translational, but could a prolonged period of FX volatility impacts your CapEx and maybe M&A strategy?

[Ron Domanico:]

As we said repeatedly, we are almost exclusively translational. So the only impact we would have with acquisitions in CapEx internationally would, if the dollar continues to appreciate, we would expect that our absolute amount of capital expenditures would go down and we would be able to have the same types of returns in excess of 15% to 20% that we have on our existing capital expenditures. But again, the tariffs that we're seeing in the news would have almost no impact on Brink's. We're able to produce armored vehicles in multiple countries and not have that as an issue. So we see no future prolonged impact from ForEx differentials other than perhaps a reduction in our capital expenditures and maybe a slight reduction in the amount that we have to pay for international acquisitions.

[Kwan Kim:]

Okay. And on the Dunbar acquisition, as of today, what are the most significant factors that could accelerate the transaction and the factors that could slow it down the most?

[Ron Domanico:]

Slow down the acquisition. The first is the closing date. And again, we're subject to HSR review. So the sooner we're able to begin the integration process, the sooner we'll be able to capture those synergy. I will tell you that both teams are cooperating now to try to understand the potential without crossing over any lines. We're very careful to stay within the strict compliance with the laws, but we are looking to move swiftly once we have approval to close the acquisition. I think the teams are identifying versus our preliminary estimates of synergies, opportunities to execute those quicker than we had originally thought. So we're looking forward to that, but again, everything is contingent on the actual closing date.

[Operator:]

The next question comes from Jamie Clement of Buckingham.

[Jamie Clement:]

So North American margins up a lot year-over-year. Could you give us a little bit more color on, how much might have come from Mexico, how much might have come from the U.S.?

[Doug Pertz:]

I think we've made a statement that overall margins in both U.S. and Mexico were up more than 50-plus percent. We tried to give you a little bit color without giving specifics around that. And what's that suggesting is, in the U.S. our margin is more than 50 plus percent up over the prior year. So we continue to see the strong results of our breakthrough initiatives. And as, I think, has been the question in the past, we see this as not just picking up low-hanging fruit in the first 4 quarters of our 12-quarter strategic plan. This is continuing to see the benefits associated with adding additional trucks, the other CapEx expenditures, high-speed money processing equipment, the implementation of one-person vehicles and the other things associated with that. And we're starting to see additional benefits that we'll continue to see ramping up even further on the CompuSafe sales and other sales initiatives as well. So continue to see the build up, the ramp-up of that. And this is right on track to do that.

[Jamie Clement:]

All right. Doug, on the trucks, approximately what percentage of the way are you down the road of hitting your goal on the truck number? I know that late last year and early this year, you were looking potentially to find additional suppliers of those trucks. So has that process accelerated, on track or cannot accelerate? Any specific color you can give?

[Doug Pertz:]

Yes, we're on track. We were behind a little bit at the end of last year too. So we didn't hit our number, I think, if we laid it out in terms of equal ramp-up or even ramp-up in truck additions. We've certainly gotten deliveries in the first half of this year. Obviously that would've delayed some of our benefits if we would've had those at the beginning of this year, but we started to see a ramp-up this year of additional truck deliveries. We are working with alternate suppliers on that, but have not finalized anything beyond that. I would suggest in general, we are on track with our truck ramp-up and we'll see the benefits accruing greater in the second half of this year versus the first half.

[Jamie Clement:]

I appreciate it. And Ron, if I could just ask you one question. It seems like investors sometimes lose sight of this. You just alluded to it, if the dollar is relatively strong sure, that hurts reported results, but if you've got money to spend on acquisitions, that can actually be a potentially big bonus for you. So if -- would you guys be willing to go beyond that approximate $400 million per year spending target that you laid out a year or so ago, if there are more acquisition opportunities out before [indiscernible].

[Doug Pertz:]

Let me answer that one in particular, but Ron can answer the rest of it. That's a target that we've laid out. I think if you know as by now we're going to do what makes the most sense for getting returns on the business and where we could be taking this to maximize value. We have a strong balance sheet. Let me give you an example. The Rodoban acquisition has been delayed. The Brazilian real has decreased in value. Our actual cost of that transaction the cost of buying that has gone down. As a result of that, I'm just using that as an example in terms of suggesting all the transactional -- translational FX impact that we have can also help us in some other places, both in terms of local CapEx spend that was well within country as well as potential acquisitions and our competitiveness related to that. But getting back to the general question, we're going to do what's right for the business. We're going to continue to do aggressively new acquisitions, and I think the purpose of the target we laid out there is to give us any -- The Street some modeling capability as well as some method to judge our performance by, if you will, and hence, that's what we suggested. To date, we announced acquisitions. So far in '18, we're 85% along that 2-year measurement 2 quarters into the 2 years. But we'll continue to do what makes great sense for returning shareholder value and doing the appropriate acquisitions within the constraints of our financial capabilities.

[Operator:]

The next question comes from Jeff Kessler of Imperial Capital.

[Jeff Kessler:]

First, with regard to your estimates with regard to where the Argentine peso is going to go, it fell 8% in the first quarter and then it fell another 30% in the second quarter. And the econometric surveys that most -- it's recovered a little bit, but the econometric surveys are all talking about another somewhere between 10% and 15% for the remainder of the year. You seem to be, let's call it, more conservative in that. You look like you're guiding for a steeper fall in the peso than what is being predicted. I'm assuming that as a safety net you're giving yourself.

[Ron Domanico:]

That's exactly right, Jeff. Number one, we don't consider ourselves experts in forecasting currency movements. So what we choose to do instead is to be conservative on our translation, and if the things are better than that, then great. The other side of that same coin, Jeff, is that our price increases in inflationary and highly inflationary countries are driven in part by devaluation as that translates back into inflation and we have that ability to recover it over time. So that, in essence, the absolute level of devaluation really is not as important to us because we're able to recover that and more over that essentially 3-quarter lag that we showed on the slide in the presentation. So while devaluations have short-term shocks to our consolidated results in U.S. dollars, from an operational standpoint, it's something we know how to function very well in and we already have the price increase process underway in Argentina, and it looks like, again, that we will be able to repeat the past patterns of recovering significant devaluations through higher pricing, ad valorem and additional volume. So the absolute level of the currency is not as important as our ability to manage future prices.

[Doug Pertz:]

Let me just chime in that I can't talk anything more technical on that, but I think the best indication, as Ron suggests, what's going to happen in the future is what we've done in the past. And we don't know, we can't forecast where things are going to go. But I think Slide 15 gives a good indication of what has happened in the past over numerous similar falls like this and this isn't something new and how the structure in Argentina and our team has been able to respond to that. So I think that's what really suggests where we think the future will go.

[Jeff Kessler:]

Okay. Second question, can you parse out a little bit what is helping the operating margin in North America, particularly -- as you split it out between the U.S. and Mexico, is it the addition of CompuSafe as a recurring revenue item as opposed to a sale item that is helping the margin up? Or have there just not been enough of those sales yet? And in Mexico, is it more than just labor -- the labor rates in [indiscernible] -- is there something else that is driving the margin in Mexico? Are there anything that is -- and connected to that question, is there anything that is common between the U.S. and Mexico in driving the North American margin up?

[Doug Pertz:]

Interesting questions. Let me parse it through that in the U.S., I would suggest you that CompuSafe is on track or better than on track. We're very pleased with that year-to-date, but that is not really what's driving the margin improvement in the U.S. That's something that will continue to have more of an impact in the second half of the plan period because it is a strong recurring revenue stream base. These are long-term contracts. These are higher margin than the rest of our other business. These are better solutions for our customers, which overall are great things for both us and the business. So those things will provide more growth and ramping up of both organic sales as well as margin improvements in the second half of this year. In the U.S. it's been heavily driven by the key breakthrough initiatives and other core blocking and tackling in the U.S. operations. So the addition of trucks leading to the reduction in repair and maintenance costs, the addition of trucks leading to one-person vehicles and the labor savings around that. As we get more trucks in place, we'll see the benefits ramp-up of those labor savings. Second half of this year will be higher than the first half of this year because of higher tracks and more utilization on the route. Same thing going forward next year. The money processing equipment and the network optimization will have more benefits going forward this year and next year as well. So those are the things that are continuing to drive the U.S. operations and the continued ramp-up and the improvements there. It'll only be hastened and improved by the additional ramp-up of recurring revenue streams from both the CompuSafe services as well as other customer solutions that we'll be continuing to roll out in more detail in the future, which will be, and I would love to add this, which will be supported by and driven as well by our customer-facing technologies that we're rolling out with our new Brink's app, our track-and-trace applications and other technologies. And I'm pretty excited, frankly, to be talking about those -- I will be talking about those later in the next couple of quarters and next year. And I think that will continue to not only help with recurring revenue and higher margins in the future in the U.S. and on a global basis. So that's the U.S. In Mexico, it's the raft of all the things that were laid out in the strategic plan, obviously the headline of that is the improved relationships -- the improved relationship and relationships across the board with our unions in Mexico that continue to strengthen, to be beneficial for both our company, the unions and we think with our customers. So it's an improved relationship there that has reduced our overall labor cost that has reduced -- or over time, that has increased our ability to optimize routes, optimize the way that we run and drive our business, the implementation of handheld and other technologies that we were not able to implement before that has helped that as well. And on top of that, we've materially increased our top line, so our organic growth in Mexico has materially accelerated heavily through the ramp-up of sales to the retail sector. So a combination of top line growth with significant multiple drivers on the cost side that we have a lot more room to continue to build on that. So they're different, but in many cases, driven by the overall unique drivers but key breakthrough initiatives on -- in both countries. And as I said before, both of them are seeing the continued as planned or more improvements. Mexico has just been a great story of working with the union and getting a team that laid out some fairly significant objectives and targets and are very turned on to achieve those and more.

[Operator:]

[Operator Instructions] The next question comes from Ashish Sinha of Gabelli & Company.

[Ashish Sinha:]

I had a couple of questions. First on France, where you talked about the 2018 improvement delay, could you please remind us in terms of what are the various...

[Operator:]

Excuse me, Mr. Sinha, could you kindly move the voice too closer to your mouth, sir, and repeat your question kindly?

[Ashish Sinha:]

Is this better now?

[Doug Pertz:]

Much better.

[Ashish Sinha:]

Okay. So yes, I had two questions. Firstly, on France. Could you maybe talk about the structure of the market? And in terms of, you said the price pressure is going on -- and you expect it throughout 2018, so I just wanted to understand the improvement you're talking about 2019, how much of that would be internal, i.e. from synergies with Temis and how much do you -- would you need the market to improve? That's my first question. My second question is on South America, where organic growth was 20%, I think, improving from the 18% you said year-on-year in the first quarter. Now within the second quarter, we, obviously, had the truckers' strike in Brazil, which obviously impacted probably the retail environment. So I just wanted to get a sense of this significant disruption in the economy, yet you still had pretty impressive growth. So just wanted to understand where that strength is coming from and how sustainable that is?

[Doug Pertz:]

So Ashish, the first question regarding France, I think we've laid this out in the last 2 quarters at least, the earnings call for the fourth quarter last year as well as the first quarter of this year earnings call. But as a result of pressures from a heightened number of tender rollovers last year and the pricing pressure that we saw on those tenders, and therefore, the potential reduction in volume as well as the prices of those tenders in the marketplace that put pressure on the marketplace and continue to put pressure on the marketplace and that pressure of volume and pricing -- in market pricing, we're seeing continue and will probably continue as we're projecting now potentially for the rest of this year. That doesn't change...

[Ashish Sinha:]

So if I could just stop you there. In terms of the pricing pressure, you're talking about additional pricing pressure in contracts, new contracts coming up for renewal or...

[Doug Pertz:]

No, nothing different than there was before. But pricing -- but it hasn't come back up on new contracts like we would've probably hoped that it would have. So the real answer is, no further down -- downward pricing pressure of consequence like what we saw a year ago. But not the recovery that we are hoping in terms of the general market. So that's one piece of it. The second piece and the third pieces of it, I guess, as important is, we laid out prior to the 2017 moves in the marketplace, in other words, in the early part of '17, a strategic plan, it was a 3-year strategic plan that included significant cost reductions in our core business in France. And we are implementing those cost reductions now and will continue to do that in concert with -- [indiscernible], both the rest of this year and seeing the full year impact and a little bit more next year as well. So those are part of the significant actions that are being taken to offset and were already in place to offset some of the downturn in the marketplace to the changing market conditions in the marketplace. So that's helping this year, and we'll see the benefits of that associated with next year as well. And then synergies related to the Temis acquisition, which we're just starting to be implemented in the latter part of this quarter, last quarter we just reported and we'll see the benefits for the rest part of this year and the first part of next year. So it's those things that are offsetting the market conditions that we have a confidence and we have control over being able to really drive those that will offset the pricing. Then on top of it, we do see growth and better margins in selling of solutions. And we're clearly the leader in the French market with our solution selling in France, that, again, has been very positive and is offering a better solution and alternative for our customers and is gaining significant traction. So that will help offset the pure competitive pricing position in the marketplace as well.

[Ron Domanico:]

I can jump into your South American question. The results are up for several reasons

[Doug Pertz:]

And to that point, you're correct. There was some impact, although probably not as significant as maybe other companies saw, as a result of the trucker's strike in the second quarter, which I think actually bodes well for where we see things going forward in the future in Brazil.

[Operator:]

And we have a follow-up from Jamie Clement of Buckingham.

[Jamie Clement:]

Doug, Dunbar, I think it's always had a very good reputation among retailers. What have the conversations been like? I'm particularly curious about maybe some retail customers that you share with them? After you've announced the deal, what -- have those conversations been particularly encouraging?

[Doug Pertz:]

I think, Jamie, it's a very astute question. I'm a little bit concerned where you get your information from, but in general, what we've seen is that it's a very strong position, reputation with retail space in particular, but also with the advisers they deal with. But heavily on the retail side where we think it's very complementary with our business, Dunbar has a very strong reputation of being closer to customer, being customer-focused and well liked, and we think that will be something that we can learn from as well as, hopefully, be able to assure that we maintain that stickiness, that customer focus both with their customers as well as get some more of that into our business. So yes, we've heard that. That's been very positive, and we certainly want to build on that, both in terms of the people from the Dunbar organization that we think will help picking the best of the best and assuring that we continue to provide that to their customers, but also other customers as well in the future.

[Operator:]

The question-and-answer session and the conference have now concluded. Thank you for attending today's presentation. You may now disconnect.