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The Brink’s Company (NYSE:BCO)

Q4 2012 Earnings Conference Call

February 1, 2013 11:00 ET

Executives

Ed Cunningham - Director, Investor Relations and Corporate Communications

Tom Schievelbein - Chief Executive Officer

Joe Dziedzic - Chief Financial Officer

Analysts

Jamie Clement - Sidoti

Clint Fendley - Davenport

Ian Zaffino - Oppenheimer

Michael Kim - Imperial Capital

Operator

Good morning and welcome to The Brink’s Company’s Fourth Quarter 2012 Earnings Call. Brink’s issued a press release on fourth quarter results this morning. The company also filed an 8-K that includes the release and the slides that will be used in today’s call. For those of you listening by phone, the release and slides are available on the company’s website at brinks.com. 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 today’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 written permission from Brink’s.

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 and good morning everyone. Joining me today are CEO, Tom Schievelbein and CFO, Joe Dziedzic. In addition to reporting earnings this morning, we also announced the divestitures of selected operations in Germany, France, Morocco, and Poland. The sales in France and Morocco have been closed and we expect to complete the dispositions in Germany and Poland in the near future.

Results from these businesses are now reported as discontinued operations and are provided on page 1 of today’s press release. As most of you know, we report results on both the GAAP and non-GAAP basis. Non-GAAP results exclude certain items such as U.S. retirement expenses and acquisitions and dispositions. The non-GAAP results use the full year tax rate of 37%.

In summary, reconciliation of non-GAAP to GAAP EPS is provided on page three of the release. More detailed reconciliations are provided in the release and in the appendix of the slides we are using today. The slides are included in this morning’s 8-K filing and are available on our website. Please note that page 12 of the release provides quarterly and full year results from continuing operations as they are now reported. As such, they exclude results from discontinued operations. In 2012, these discontinued European operations generated $104 million of revenue in an operating loss of $16 million or $0.31 per share on a non-GAAP basis. From this point on, our comments will focus on non-GAAP results from continuing operations, which we believe make it easier for investors to assess operating performance between periods.

Fourth quarter earnings from continuing operations came in at $0.60 per share versus $0.67 in 2011. The segment margin rate was 7.4%, down from 8.1% in 2011. Organic revenue growth was 6% and currency translation had a negative impact of $17 million on revenue, $2 million on profit, and $0.02 at the EPS level. Full year earnings were about flat at $2.31 per share. The full year margin rate was 7% versus 7.1% last year. Organic revenue growth was about 7%. Currency translation had a negative impact of $194 million on revenue, $15 million on profit, and $0.20 at the EPS level for the full year.

Tom and Joe will discuss our revised outlook for 2013. For those of you who model results, please note that page nine of the release provides a summary of selected results and outlook items that should be helpful in forecasting 2013 results in more detail. In addition to guidance on revenue and segment margin it includes our outlook for non-segment expense – interest expense, tax rate, non-controlling interest, capital expenditures, capital leases and depreciation and amortization.

I will now turn the call over to Tom

Tom Schievelbein

Thanks Ed and good morning everyone. We have several topics to cover today strategy execution, the 2012 results and the outlook for 2013. On one hand we took several positive strategic actions that should drive long-term improvement, on the other fourth quarter earnings from continuing operations declined as profit improvements in both Europe and North America were not enough to offset the lower results in Latin America. Full year earnings were relatively flat at $2.31 again reflecting improvement in North America and Europe and the decline in Latin American profits.

We now expect our 2013 segment margin rate to be between 6% and 6.5%, down from 7%., our organic revenue growth of 5% to 8%. The biggest drivers of this expected margin decline include a substantial increase in productivity investments, primarily in Latin America followed by our assumption of a 40% currency devaluation in Venezuela and the general uncertainty there. These factors are likely to at least partially offset the overall profit growth we expect in Latin America.

We do not expect profit growth in North America this year and profits in Europe are likely to decline. We expect first quarter results will be down significantly compared to last year’s very strong results from Latin America. I said in our call in October, my primary goal is to reposition Brink’s for accelerated growth in 2014 and beyond. Our strategy is to maximize profits in our mature CIT markets as we continued to invest in developing and adjacent markets. To execute this strategy we said we needed to invest in productivity, take a hard look at the markets that we are in, strengthen our leadership team, transform our culture to become more focused on customers and pursue new opportunities to leverage the power of the Brink’s brand.

We made good progress in each of these areas in a very short period, but there is more work to do. Realizing the positive results of these actions will take time and investing for the future will affect near-term results particularly in a challenging global marketplace. I am confident that what we are doing is what we need to do to position Brink’s for long-term success. So, my comments today will address primarily near-term results and our profit outlook, but I will try and frame them in the context of our overall strategy.

I will start with our goal to maximize profits in mature cash in transit markets in Europe and North America. With the recent actions we have taken in Europe the portfolio review we’ve discussed on past calls is largely complete. The elimination of these operating losses from continuing operations is a major step forward that enables us to achieve our margin goal of about 7% for this region. At a higher level it also increased annual earnings by $0.31 a share. We do not expect near-term margin expansion in Europe and 2013 will be particularly challenging due to loss of a significant customer in France and the non-recurrence of a favorable commercial settlement that boosted our 2012 results. So, in the near term, our job in Europe is sustain current margin levels in 2013 as we pursue new growth by getting closer to our customers and delivering new higher value solutions.

We are working on a number of opportunities to provide the end-to-end ATM network management capabilities which our threshold business in currently providing in Canada. In North America we have a similar goal to return to a 7% segment operating margin. In 2012 margin improved to 4.4%, up from 3.6% in 2011. In 2012 we make good progress in reducing costs, consolidating our branch structure, optimizing our routes and our IT-based productivity investments began to pay off. But the gains remained in these areas were largely offset by continued pressure on volume and pricing.

We have been able to replace much of the volume we have lost in the recent years but at lower margin levels. To achieve the margin growth in North America we must first stabilize that pricing and volume. Volume in 2013 is likely to be flat. We fully expect to realize continued productivity gains in 2013, but if price and volume pressures persist at the current levels these gains will be offset again. Earlier this month, we announced that Mel Parker has joined Brink’s as our new President of North American Operations. Mel comes to us from Dell, where he was the General Manager of the North American Consumer business. He also held leadership positions at Newell Rubbermaid, Staples, and PepsiCo. Mel is a change agent who brings a wealth of experience in sales, branding, and building customer relationships. We are excited to have him on board and he clearly has a full plate of challenges in front of him. From a net operations perspective, the business is well-positioned to continue delivering productivity gains. We’ll take some time to improve the commercial side of the business, but I have great confidence that Mel will impact and expedite a turnaround in North America.

Now, let’s move on to Latin America, our largest and fastest growing region and obviously the key component in our strategy to invest in developing markets. Fourth quarter and full year results were down in this region due primarily to a profit decline in Venezuela and an increase in productivity investments throughout the region. The national and regional elections in Venezuela affected volume and margin much more than we expected. Full year results were also affected negatively by $6 million related to the government terminating an industry subsidy in Argentina and slower than expected second half economic growth in both Brazil and Mexico.

In 2013, we expect strong profit improvement based on continued growth across most of the region, including Mexico, which delivered a higher profit margin in 2012 and is on track to continued improvement in 2013. We expect this profit improvement will be at least temporarily offset by substantial increases in productivity investments and currency devaluation in Venezuela. In summary, we remain very optimistic about Latin America’s long-term growth prospects and will continue to invest aggressively there.

The third leg of our strategy is to invest in adjacent markets. We have recently announced the first quarter rollout of the Brink’s Money card in the U.S. And yesterday, we acquired Redetrel, a Brazilian based distributor of electric prepaid products and mobile phone top-up services. Redetrel’s distribution network includes over 20,000 retail locations throughout Brazil. And when combined with our ePago business, it further strengthens our existing networks in Brazil, Columbia, Mexico, and Panama. In terms of revenue and profits either Brink’s Money nor Redetrel is expected to move the needle much in the near-term. Indeed, we will likely increase our investment in the growth of these businesses. Well, once again they demonstrate our commitment to executing our strategy to enter adjacent markets, where we can leverage the Brink’s brand.

Before turning it over to Joe, I do want to review one of the most critical aspects of our investments and that is the additional changes we made to our leadership team. In addition to Mel Parker, we recently added Patty Watson as Chief Information Officer and Darren McCue as Chief Commercial Strategy Officer. Patty comes to us from Bank of America, where she served as a senior technology executive for the treasury, credit, and payments division. At Brink’s, Patty will help set the vision for information technology and process improvements throughout the company and we’ll work with the regional leaders to drive productivity improvements, operational efficiencies, and product differentiation for our customers.

Earlier this week, we announced that Darren McCue will join Brink’s in February, actually February 19th as our Chief Commercial Strategy Officer. Darren most recently served as Executive Vice President of Strategy and Business Development for consumer financial solutions at Aetna. At Brink’s, he will be responsible for leading the development of new products and services, facilitating the growth of existing products and solutions, identifying new growth opportunities, and other critical marketing responsibilities.

Finally, Amit Zuckerman, our President of Brink’s Global Services has added responsibility for the Asia-Pacific region. Amit brings a customer focus discipline view to this area. This decision allowed us to rationalize the overhead spend in the region. So, to summarize, since I became the permanent CEO in June, we have strengthened our team by adding new leaders in North America, Asia-Pacific, Human Resources, Information Technology, and Commercial Strategy.

In closing, we are focused on taking the decisive actions necessary to achieve long-term success. Eliminating the operating losses in Europe is an important step towards that goal. And we are very optimistic that Latin America will continue to grow. We will also continue to seek opportunities to invest in the adjacent markets. In 2013 with our new leadership team in place and focused on delivering results, we will continue to pursue costs reductions, productivity gains, stronger customer relationships, and new solutions. We have also instilled greater discipline in our capital allocation process. Our 2012 capital expenditures were reduced by $32 million and given recent results we are planning to hold capital spending flat in 2013.

Successful execution in the near-term is critical, as we are not assuming a significant contribution from new higher value solutions until the end of 2015 or so. By then, we expect to achieve substantial margin expansion in our core businesses that will be supplemented by an infusion of higher margin revenue from new services. I assure you that we have a great sense of urgency, but it’s balanced by patience, discipline and a commitment to make the investments needed to drive long-term success.

I’ll now turn it over to Joe who will provide the details regarding our results and outlook. Joe?

Joe Dziedzic

Thanks Tom. I’ll start with the summary of fourth quarter results, and then cover full year performance and our revised outlook for 2013. Revenue for the quarter grew 4% in total and was up 6% on an organic basis as organic growth in Latin America and Europe was partially offset by lower revenue in North America and includes an unfavorable currency impact of 2%. Segment operating profits fell 6% as the profit decline in Latin America and unfavorable currency more than offset improved results in Europe and North America.

The primary driver of the decline in Latin America was Venezuela, where we experienced significantly slower sales growth versus an extraordinarily strong fourth quarter last year. Additionally, the presidential and regional elections negatively impacted volumes. Profits in Mexico also declined in the fourth quarter against a very strong prior year performance. Total earnings for the quarter were $0.60 per share versus $0.67 in 2011. Full year earnings per share was essentially flat versus last year at $2.31. Although the segment operating profit change generated only $0.01 of EPS improvement, we had to overcome three significant headwinds to achieve this.

The unfavorable currency impact of the euro, the Brazilian real, and the Mexican peso accounted for a $0.20 decline in segment operating profit versus last year. The difficult environment in Venezuela, including numerous new government regulations and taxes negatively impacted segment operating profit and reduced earnings by another $0.21. The government in Argentina terminated an industry subsidy, which negatively impacted earnings per share by $0.08. These three issues totaled $0.49 of earnings per share decline.

The total business impact in Venezuela was an unfavorable $0.13 when including the non-controlling interest benefit. The rest of the business generated $0.50 of earnings per share improvement. The improvement was driven by many countries, including Brazil, Mexico, Argentina, Netherlands, Russia, France, and the U.S. Overall, we had a strong year for safety and security and that improved our profitability in 2012 versus an average year in 2011. In most years of $0.50 earnings per share improvement would be outstanding, but it was not enough to overcome the headwinds we experienced in 2012. These are the risks of being a global company operating in developing markets and we continue to believe that the benefits of operating in these markets outweigh the risk overall.

Let’s look at segment results. Organic revenue growth of 7% was in line with our annual guidance of 5% to 8%. The first half of the year saw much stronger growth than the second half as growth slowed in Latin America in the third and fourth quarters, particularly in Venezuela and Mexico. The full year organic growth rate in Latin America was still a very strong 15% followed by Asia-Pacific at 7% and Europe at 6%. North America declined 2% driven by continued price and volume pressures in the U.S. The total segment margin declined 10 basis points to 7% reflecting profit growth in Europe and North America that was more than offset by negative currency impact and lower profits in Latin America. North America increased margins to 4.4% versus 3.6% last year from various cost actions, but price and volume pressures persist. Latin America profit declined from the previously mentioned headwinds in Venezuela, Argentina and the impact of foreign currency in addition to increased productivity spend and restructuring actions.

Mexico continued to improve on a year-over-year basis as their margin rate expanded to 4% versus 2.6% last year. We will continue to make the necessary investments in Mexico which may include restructuring charges as they position to grow margins to 10% by 2015. Europe delivered a strong improvement in profitability led by the Netherlands, Russia and France. On a continuing operations basis Europe’s margins are now at our 7% target.

Full year cash flow from operating activities excluding changes in customer obligations and discontinued operations was down $24 million due to $40 million in pension payments to our former CEO and former Chief Administrative Officer. A $30 million cash contribution to our U.S. pension plan and the timing of $11 million insurance recovery.

Full year capital expenditures and capital leases declined by $32 million versus last year as we continued efforts to reduce maintenance capital spending through efficiency projects and reallocated more of our spending to growth and productivity initiatives. The North America region decreased CapEx by $17 million as we continued to reduce U.S. spending on maintenance CapEx by focusing the spend on productivity projects. The international segment CapEx spend decreased by $50 million primarily due to tightened spending in Europe and the timing of the armored vehicles particularly in Mexico and Brazil.

Our plan in 2013 is to hold the capital spend in near the 2012 level of $203 million. We will continue to focus on efficiently deploying capital to maintain the level of safety and security that Brink’s is known for, while reallocating capital to focus on growth and productivity efforts. Net debt remained flat at $232 million.

Now let me recap our 2012 results versus the guidance we provided at the beginning of the year on our fourth quarter 2011 earnings call. As I mentioned we experienced challenges associated with operating and developing markets that went beyond what we had expected. Within this environment we were able to achieve organic revenue growth at the high end of the range at 7% and currency landed at the high end of the range at 5%. North America missed the low end of the range on margin rate by 10 basis points and the international segment was at the low end of the range including discontinued operations.

Unfortunately this led to the total segment margin rate being just under the low end of the guidance at 6.3% including discontinued operations. Other metrics were in line with guidance except for non-controlling interest, which was driven by lower – which was driven lower by the Venezuela challenges and capital expenditures and leases which were managed to a significantly lower level.

Looking at our revised guidance for 2013, with 2012 results now in and better visibility into 2013 we now expect organic revenue growth of 5% to 8% driven primarily by Latin America at similar growth rates to 2012. We are not counting on any significant growth in North America or Europe to achieve this growth. We are expecting an unfavorable currency impact of between 1% and 3% primarily from an expected devaluation in Venezuela in 2013, which we believe may come as early as the second quarter.

In North America we expect a weak revenue trend of the last few years to continue. The steps we have taken to generate productivity in North America include exiting unprofitable markets, consolidating branches, reducing headcount and investing in productivity. The gains from these efforts continued to be offset by pricing and volume pressure. We cannot cut our way to sustainable profit growth, but we believe we can deliver our historical margins of 6% to 7% through productivity improvements and stabilization of the price and volume pressure. 2013, we expect price and volume pressures to continue to offset the productivity gains of the business. We will continue to focus on our commercial efforts to get closer to our customers, to understand their challenges and deliver differentiated solutions, but it will take some time and 2013 will a year of building the commercial capability to stabilize the price and volume pressures.

In Europe, we are assuming a slight decline in profits from a contract loss in France and last year’s results included a favorable commercial settlement. We don’t believe there is enough growth in these mature markets to offset these items in 2013. In Latin America, we expect continued strong profit growth across most countries driven by strong organic revenue growth. The projected Venezuela devaluation and an increase in our productivity investments are expected to offset much of this growth. We expect the payback on the productivity investments to be realized in 2014 and beyond as the implementation cost decline and the benefits accelerate.

An additional factor behind our lowered guidance is security loss performance. At the beginning of each year, we forecast security losses at our historical average, which means the forecast losses for 2013, will be higher than 2012 actual losses, which were better than our historical average. As the year progresses, we update this estimate based upon experience. Based on this regional summary, the total segment margin rate is expected to decline to a range of 6% to 6.5%. As with any forecast, there may be unpredictable events. For example, the impact of the projected Venezuela devaluation could differ materially from our estimates. We anticipate our first quarter 2013 results to be significantly below our first quarter 2012 results given the very strong performance last year in Latin America.

In summary, we remain very focused on continuing to take the necessary steps to maximize margins in the mature U.S. and Europe cash-in-transit markets, invest in developing markets, and build strong growth businesses in adjacent markets. Tom covered examples of our recent actions in each of these areas of our strategy, including the strengthening of our senior leadership team. Together, we are focused on delivering solutions to our customers, protecting our employees, and delivering strong returns to our shareholders.

Denise, let’s open it up for questions now.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions) The first question will come from Jamie Clement of Sidoti. Please go ahead.

Jamie Clement - Sidoti

Tom, Joe, Ed, good morning.

Tom Schievelbein

Good morning Jamie.

Jamie Clement - Sidoti

As you compare your outlook today for 2013 compared to where it was three months ago, and you factor in basically taking out some losses from Germany and some other regions. Can you talk about the baskets where specifically that are leading to that reduction in margin guidance? I mean, you referenced loss of a customer in France, I don’t know how bigger driver that was. Obviously, your security cost and that sort of thing that’s probably not something that changed a whole heck of a lot, neither it is really your assumption on the Bolivar devaluation. So, can you breakdown that margin narrowing or is the margin reduction little bit more clearly for us?

Tom Schievelbein

Yeah, let me take a shot at it first and the last Joe to add to chime in Jamie. So, the biggest issue is from the fall till now as we saw much lower volume in Venezuela, you saw additional taxes in Venezuela. So, Venezuela came in at much lower than they did last year and we are anticipating that, that’s not turning around. If it does, that would change the guidance, but as right now that’s one of the big buckets. The other bucket is obviously the devaluation of that currency. That’s a big bucket. The security performance is actually a bigger bucket than you think. So, that has an impact. And quite honestly, we are going to – we have reduced the margin expectations on North America, and so that we have time to impact on the commercial aspects of pricing and volume with the new leadership team. France is not a big driver of the margin, because France is performing well. It’s just down slightly year-over-year just based on the comparison from ‘12 to ‘13. So Joe, we expect the Far East to start to move up, but that it was also because of the organizational changes we made there that had an impact on that guidance.

Jamie Clement - Sidoti

Okay. And Tom just a follow-up question here and just my interpretation of your comments over the last couple of calls as well as your comments today. I mean should investors’ expectation over the next couple of years be that Brink’s will likely be a smaller company globally in terms of infrastructure and platform and that shrinking the size perhaps improves productivity and profits and that sort of thing. I mean is that the big takeaway from this year, I mean what?

Tom Schievelbein

Yeah, I think, I mean there is part of that Jamie though I would say if you looked at our footprint to the number of countries we are in. All of those countries weren’t equal. And so you have seen in Europe, where we are not returning acceptable results in particular areas whether it was some of the guarding businesses or in particular countries. We have trimmed that footprint. We have kept the BGS business, which is important for our future but we have trimmed the footprint on cash-in-transit. There maybe a few other smaller areas, where we will look at doing that. I think in terms of the company getting smaller we certainly plan on continuing to drive revenue growth and we do believe certainly that with the markets that we have in Latin America and with the rebound in North America we will continue to drive the top line of the company up as well as working on the bottom line.

I think the big takeaway is that Brink’s has historically been a very decentralized company and that served Brink’s well for a number of years. As we work to drive the profitability for the future, we are looking at centralizing a lot of from which of these productivity improvements I have talked about, centralizing a lot of the transactional expenditures that we make whether they are in information technology, in finance, in human resources, a lot payroll. So, we are going to get more efficient in how we perform those services. The countries will continue to be forward-looking in terms of the customers, because that’s the right spot for that to be. I mean in the end what we have to do is every year we are going to be surprised so to speak by things that are outside controls of management. In the end, you all don’t care about that, that’s up to us to manage. We have to get more efficient, so that we have more levers to pull, so that we can manage those surprises that will always come.

Jamie Clement - Sidoti

Okay, alright. Thank you all very much for your time.

Operator

Thank you. Our next question will come from Clint Fendley of Davenport. Please go ahead.

Clint Fendley - Davenport

Thank you. Good morning gentlemen. First question just on the Venezuelan write-down, my understanding was that, that was already in your numbers when you gave the guidance last fall. So, has the expectation changed for a larger write-down there? And just I am wondering if the eventual write-down is something that will be dictated by your accounting firm?

Tom Schievelbein

No, it’s not a really write-down if you are talking about the expectations going forward Clint. What we had in the fall basically at the end of the third quarter as we talked about the 40% devaluation that’s still in the numbers. The other thing that was different was that we expected similar performance from Venezuela as we have been getting in previous years and because of the elections and a number of other things that was down substantially.

Clint Fendley - Davenport

Okay. But just to be clear, I mean the devaluation will be a write-down though correct?

Joe Dziedzic

There will be a net monetary asset write-down that when it occurred two years ago, we removed that from non-GAAP and that’s our intention as well. On our guidance outlook page, I think its page nine of the press release, we included the net monetary asset write-down in the GAAP results, but it’s not in the non-GAAP results. The impact of translating the local results at a higher exchange rate, a more on favorable exchange rate will reduce revenues in the order of magnitude of $130 million, which is an assumption starting with a deval in the beginning of second quarter and that will also have a margin effect on that revenue, right, revenue decline.

Clint Fendley - Davenport

Okay. I wondered if you guys perhaps could include anymore details just on the shared service center investments that you are doing down in Latin America that perhaps maybe the level of spend, and I mean the timing on any benefit is it sounds like that’s something that probably shouldn’t be expected until 2014 or later. Is that correct?

Tom Schievelbein

That’s correct. I mean, we have a couple of shared service centers. We have both information technology center and then we are standing up a large financial center. And so obviously with any investment like that, do you have to stand that up before you can start to take the advantage of the reduction in headcount and productivity in the various countries, but the finance center is the biggest one. So, Joe, you want – that’s kind of your area, you want to talk about that?

Joe Dziedzic

Sure. It’s the start-up cost implementation cost will really negatively impact the results for the next couple of years. And in the long-term or the plan is to get all of the finance back office activity being operated out of a shared service center in a centralized, standardized manner, which gives us the platform that weakened in for other back office processes through, but considering the number of countries and the complexity of the countries today and the effort that goes into standardizing those processes, it will take two to three years to define the processes and implement them and get all of the countries moved in before we start to realize the benefits. So, it’s really implementation cost over the next two to three years.

Clint Fendley - Davenport

Okay. Two last quick questions, just wondering as far you guys obviously have hired a number of individuals in the last few weeks, wondering about executive compensation, I believe that, that was aligned with some margin improvement through a part or most of last year. I mean, has that changed and how is that based as we look forward to 2013 and beyond?

Tom Schievelbein

Okay. I mean, certainly from the annual perspective and you can see that in the proxies from last year we have it’s in our direct comparison to how we did financially in terms of the long-term incentive compensation. Obviously, that’s the purview of the compensation committee, but from that perspective, we will have very heavily performance weighted vehicles that are going to be tied to improving our performance. And so when that is finally determined by the comp committee, it will be in the proxy and the CD&A and you will be able to see the direct correlation to improvement if the executives are going to get paid.

Clint Fendley - Davenport

Okay. And then last question here, I know Germany has been in the news for the last couple of weeks for a plan to move 674 tons of gold back to the country. Is that work that you guys are not positioned for now that you are exiting the region from a CIT perspective or could you still be in play given the global services business that I am assuming will still be in operation there?

Tom Schievelbein

I mean, so we are not exiting the global services business in any of the places that we are at. So, we are going to maintain that. And any movement by the Bundesbank of gold, whether it be from New York or whatever country back to Germany, we would anticipate that we would play a large part yet. That’s really unclear, because of all the press releases that goes all over the place in terms of when that transfer could actually happen. It could be many years from now, but we remain well-positioned to that and that’s the business that we absolutely are maintaining in around the world and then Germany in particular.

Clint Fendley - Davenport

Okay, thank you guys.

Operator

Thank you. Our next question will come from Ian Zaffino of Oppenheimer. Please go ahead.

Ian Zaffino - Oppenheimer

Great, thank you. Joe, you said the 6%, 7% for North America, that includes a stabilization in pricing volume or that doesn’t include a stabilization?

Joe Dziedzic

I am sorry the 6% to 7%?

Ian Zaffino - Oppenheimer

It’s for North American margins you are getting?

Joe Dziedzic

Yeah. So, getting to our historical margins in North America, it includes we have to stabilize the pricing volume picture. When you look at our 2013 outlook and why we came up short in the fourth quarter, a key element of that was more volume pressure in the second half of 2012 in North America than what we were anticipating. If you look at North America’s organic growth, we had 1% decline in the first half 2012, we had 4% decline in the second half. So, the price and volume pressure persist. We don’t see that changing significantly in the near-term. The new management team in North America is very focused on that. Last year in the fall, we hired a very experienced capable sales leader, that’s going to bring a new level of energy and focus to the organization combined with Mel’s leadership. And the commercial side of the business has to improve. And when we stabilize pricing volume, we will be able to expand margins by letting some of their productivity that we are generating drop through. Our assumption for 2013 is that pricing volume continue to offset the productivity gains, so will be flat.

Ian Zaffino - Oppenheimer

Okay. So, what if price and volume trends don’t stabilize, what do margins look like in that scenario?

Tom Schievelbein

I think we are flat. We are flat until price and volume stabilizes. When price and volume stabilizes the productivity falls through and margins expand.

Ian Zaffino - Oppenheimer

Alright and then last time I think you were mentioning that North America had stabilized what changed, can you be specific?

Tom Schievelbein

Well, there were just a number of deals and contracts last year and particularly in the middle of the year and later in the year that ended up causing us to have price reductions as well as volume pressures. And each deal is unique, it wasn’t anyone huge deal there was a lot of different deals.

Ian Zaffino - Oppenheimer

I guess I am trying to get a sense of what the drivers are here, is it – there is too much competition, is it because your customers are financially secured what’s going on?

Tom Schievelbein

I think this is Tom, what’s happening is that our primary customers which are the banks continued to be under a lot of pressure and they continue to be putting all of their suppliers under that same amount of pressure. And so as we have new opportunities to renew contracts come up, where we are getting a lot of pressure to reduce prices. So, what has to happen for the future is we have to start moving into higher value solutions, so that our customers value what we’re providing them and we get out of just a peer cost shootout, because that’s what’s happened to us in North America. So, that’s what we’re working hard on solutions. That’s why we focused on the hiring of a new leader that has a big background in sales, marketing and the customer. So, we’ve got to get the products that we provide from a straightforward cost shootout to a more value-added solution basis.

Ian Zaffino - Oppenheimer

Okay. And then I know that a significant portion if not your entire cash bonus compensation was linked to this 2015 margin goal. Now attached to rate what happens with your compensation package that means you’re not getting any cash bonus for now and has that been reworked what’s happening on that front?

Tom Schievelbein

I mean they never get reworked because once they are in place, they are in place. The – you referred to was the cash bonus, which is the annual bonus and so what you will see when we report in the CD&A, you will see how that was impacted negatively by some of the performance. In terms of the long-term like I said the comp committee is in the process are working on that as we speak. Obviously, to the extent that there were options and the stock price doesn’t grow up that has direct impact on that. In the future we’re looking at other vehicles that are more performance-linked and I got to leave it with that because the comp committee hasn’t approved that yet.

Ian Zaffino - Oppenheimer

Okay, alright. Thank you very much.

Operator

Thank you. (Operator Instructions) The next question will come from Michael Kim of Imperial Capital. Please go ahead.

Michael Kim - Imperial Capital

Hi, good morning guys. First can you talk a little bit more about the integration of Mexico how – first on the revenue on the top line side and with the improvement in margins and the productivity investments planned for this year, would you expect to be sort similar year-on-year and ’14 being more halfway towards your 10% goal?

Tom Schievelbein

Okay, Michael I mean Joe is in the process of looking up the exact details. I mean we obviously went from 2.6 to 4 in ‘12 we expect continued improvement in ‘13 and then obviously ‘14 and ‘15 to get to the 10%. We may have some restructuring things there the Mexico team has been working very hard on integration and cost take outs and productivity gains. Joe, you want to add anything in terms of any other details?

Joe Dziedzic

Sure, Mexico had 8% organic growth for the year unfortunately two-thirds of that was offset by foreign exchange. And the volumes did slow down in the second half of the year which is also part of our lowered 2013 guidance. As we exited the year the volumes were lighter in Latin America, driven partially by Mexico. The margin rate improvements that we saw this year we expect to continue on that trajectory towards our 10% by 2015. There are continued restructuring plans as they hit they may be lumpy, so in any given quarter we might have some charges, but that’s part of our broader plan to get the 10% by 2015. So, we are on track in Mexico.

Tom Schievelbein

Yeah I mean we are pretty bullish in terms of what we have told you about Mexico.

Michael Kim - Imperial Capital

And what happened in the second half in Mexico was it just a macro slowdown that you are experiencing for this specific contract that came up for renewal?

Joe Dziedzic

It’s a good question, it was fundamentally a macro slowdown that we saw on the economy in Mexico post the elections in Mexico we saw a broader slowdown.

Michael Kim - Imperial Capital

Okay and on the broader Latin America front with the plant productivity investments how much of that is allocated to Mexico versus the rest of Latin America?

Joe Dziedzic

It’s a region wide program and so all of the countries are sharing in the cost. And Mexico itself will begin to incur the costs and reap the benefits of that as we started up in transition Mexico into the shared service center. That’s really something that happens late in 2013 beginning in 2014.

Michael Kim - Imperial Capital

I don’t know if you’ve mentioned, can you quantify what the total amount of the productivity investments are planned for this year?

Joe Dziedzic

We haven’t disclosed the total impact, but broadly speaking there is a number of different productivity investments that we are making across the business and they are all under the centralization and standardization theme that Tom referenced and migrating is from a totally decentralized country to company – to a company that’s more integrated whether it’s global, regional. And what key processes should be centralized or standardized to reap the benefits of being a global company. There is three big categories I would point to for the various investments that we made around the world. The first big category would be the finance shared services that we have been talking for Latin America. But we are also doing the same in the U.S., which has already implemented a number of those changes and Europe is looking at their shared services as well.

When you look at IT, Tom referenced global and regional data centers that we are looking at, but it’s even more broader than that when you think about IT. There is a number of opportunities there to streamline our infrastructure, develop common integrated systems across the network and that really is about removing independent legacy systems and applications that we can get some benefits from having standardization.

Along those lines we have identified two key global applications to support our transportation management, I think the routing productivity that we’ve talked about particularly in North America as well money processing. We have identified the global standard and that as each country needs to replace their existing system where there is productivity benefit. They will be rolling that out and implementing it. The thing is there is a cost to step that up and there is a cost to establish that standard and implement in the first few countries and that cost is really what’s driving and it’s also a portion that was driving the productivity standard in 2013 and ’14.

Tom Schievelbein

And Michael so then the obvious issues there is that we will have to look at each country as they become ready to begin to invest in those particular software programs to make sure we are getting the return on the investment.

Michael Kim - Imperial Capital

Okay, great. And then just turning to North America, can you maybe provide a little more color on the end customers the pressure you are seeing from financial versus non-financial is it similar magnitude or are you seeing any difference?

Tom Schievelbein

No I mean I think it’s we are seeing the same pressure that has been in place since the financial crisis. And people that are under the most scrutiny and under the most pressure are large financial institutions and they are ones that are putting the most pressure on the supply base.

Michael Kim - Imperial Capital

How about with non-financial customers?

Tom Schievelbein

I mean it varies by each one whether it’s a large retailer or some of the smaller retailers, they did go down in the number of stops. As the economy comes back we would anticipate that they will begin to revert to more stops, more pick ups, that one tends to be very location specific and retailer specific.

Michael Kim - Imperial Capital

Okay and then just lastly is the pace of contract renewals coming up over the next couple of quarter similar to where we were last year or do you see any acceleration in renewals coming up?

Tom Schievelbein

I mean on the plus side we don’t see any significant renewals coming up in 2013, so we are going to be working hard on new business and how we improve the pricing and volume of the new business.

Michael Kim - Imperial Capital

Great. Thank you very much.

Operator

Thank you. And we have a follow-up question from Jamie Clement of Sidoti.

Jamie Clement - Sidoti

Hi gentlemen. Quick question, looking at the chart the discounted cash flows at planned discount rates for the retirement liabilities or I know the case is not out yet but do you have the current funded status at December 31st of the UMWA in the pension?

Joe Dziedzic

If you are looking at slide 19, which is the first slide in the appendix, it shows you that the U.S. pension is $275 million under-funded.

Jamie Clement - Sidoti

Okay.

Joe Dziedzic

That’s puts it at 73% and the UMWA is 257 under-funded that is 51% funded with the difference being the UMWA no cash out of the company’s pocket until 2022 because the asset will fund that for the next nine years.

Jamie Clement - Sidoti

Okay, sorry about that. I was flipping back and forth between the press release and that kind of thing.

Joe Dziedzic

Okay

Jamie Clement - Sidoti

And Joe just your – the discount rate decline was how many basis points year-over-year?

Joe Dziedzic

It went from 4.6% to 4.2%.

Jamie Clement - Sidoti

Okay.

Joe Dziedzic

So, it’s on slide 20 in the appendix, you see what the current rates are.

Jamie Clement - Sidoti

Okay, alright. Thank you. I’ll take a look at that. Thanks very much. Sorry about asking the question.

Joe Dziedzic

That’s okay.

Jamie Clement - Sidoti

Okay

Operator

And that will conclude today’s conference call. You may now disconnect your lines and thank you for your participation.

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