The Brink's (BCO) Q4 2014 Results - Earnings Call Transcript

Transcripts

The Brink's (NYSE:BCO) Q4 2014 Earnings Call February 5, 2015 11:00 AM ET

Executives

Edward Cunningham -
Thomas C. Schievelbein - Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee
Joseph W. Dziedzic - Chief Financial Officer and Vice President

Analysts

Ashish Sinha - G. Research, Inc.
James Clement - Macquarie Research
Saliq Jamil Khan - Imperial Capital, LLC, Research Division

Operator

Welcome to The Brink's Company's Fourth Quarter 2014 Earnings Call. Brink's issued a press release on the 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. [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. 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.

Edward Cunningham

Thank you, Denise. Good morning. 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 several items, including U.S. retirement expenses, severance and restructuring charges, certain compensation and employee benefit items, acquisitions, dispositions and some currency-related items, including the write-down of net monetary assets in Venezuela. The non-GAAP results use a tax rate of 38.5%, up from 34.2% in 2013. The higher rate is due primarily to lower profits in Venezuela as a result of the currency devaluation in that country in March of 2014.

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 on non-GAAP results. A summary reconciliation of non-GAAP to GAAP results is provided on Page 3 of the release. More detailed reconciliations are provided in the release and the appendix to the slides we're using today and this morning's 8-K filing and on our website. Page 10 of the press release provides a summary of several of outlook items, including guidance on revenue, operating profit and earnings per share.

I'll now turn the call over to Tom.

Thomas C. Schievelbein

Thanks, Ed, and good morning, everyone. We've got a lot of ground to cover today, so I'm going to provide a brief overview of our results, some recent restructuring actions and our outlook for this year and for 2016.

In addition to the normal financial review, Joe is going to spend some extra time on our recent restructuring activities, our new financial reporting format, the impact of currency on our results and the actions we're taking to improve results in the United States of Mexico. Providing this information should help investors track and assess our progress.

Fourth quarter earnings from continuing operations came in at $0.69 per share despite a negative impact of $0.25 related to last year's devaluation in Venezuela and an additional negative impact of $0.14 from other currency declines. Revenue fell 12%. Organic revenue, which excludes the effects of currency translation, was up 19%.

Now on our last call, we projected a full year segment margin rate of 5.5% to 6%, and we came in at 6.1%. So it was a good quarter, and we are particularly encouraged by the strong revenue and profit growth in our U.S. operations.

On an adjusted basis, which uses the devaluated exchange rate in Venezuela for both quarters, fourth quarter earnings were up 25%. After this year's first quarter, the impact of the devaluation on earnings comparisons will be behind us.

Looking at full year earnings, the decline was driven entirely by Venezuela devaluation and currency declines in other countries, which more than offset modest profit growth at the operating level. Regardless, we're not satisfied with the 2014 full year earnings, and we expect significant improvement going forward.

Looking ahead, our margin goals have not changed. Our prior guidance for 2015 called for a segment margin rate of 6.5% to 7% and 8% for 2016. We fully intend to achieve these targets. Of the 80% of our revenue generated outside the U.S., currency is a major impact on our results and is the primary reason for reducing our 2015 revenue guidance from $3.8 billion to $3.4 billion.

We expect 2015 earnings to be in a range between $1.55 and $1.75 per share. This represents an improvement of 30% to 45% after currency impact.

For 2016, our earnings guidance range is now $2 to $2.40 per share. This is the first time we've given current year EPS guidance. We felt it was important to estimate and to communicate the potential impact of currency declines on our earnings. Once again, our margin targets have not changed.

But to help ensure that we achieve these targets, we're taking aggressive actions to reduce cost and to improve operational efficiency. In December, we announced the consolidation of our 4 regional units into 2 operating units. This enables us to eliminate managerial positions and administrative structure. These actions are expected to generate about $15 million in cost savings in 2015.

In addition, most of our country-based support functions such as IT, HR, legal, finance, procurement, security and project management are being centralized. We expect this reorganization and centralization will contribute significantly to our overall speed, decision-making and savings.

This morning, we announced the plan to reduce 2015 cost by an additional $30 million to $35 million by eliminating approximately 1,700 positions throughout the company. The implementation of this plan is underway and should be substantially completed in the first quarter. So with the $15 million of the expected savings that we disclosed in December, we now expect total 2015 savings from these organizational changes to be approximately $45 million to $50 million.

Our goal is to increase profits on a global basis, yet our primary focus, at least in the near term, is in our largest 5 markets: The U.S., France, Mexico, Brazil and Canada. In 2014, these countries accounted for 60% of our total revenue and had a combined operating margin of 5.5%.

By contrast, the combined margin rate for the 36 countries that comprise our global markets group was about 13%. Clearly, our 5 largest countries have the greatest upside profit potential. In particular, executing turnarounds in the U.S. and Mexico are expected to have a substantial impact on our value creation efforts. Joe is going to update you on our progress in both of these countries.

I'll close with some comments on the improvement in our U.S. operations. Fourth quarter profit in the U.S. totaled $12 million, reflecting a 6.3% margin rate and 7% revenue growth. The full year margin was about 3%. And no doubt we'll see some volatility as we execute on a wide variety of improvement initiatives, but these results represent a strong finish to 2014 and a good start to achieving our goals in '15 and '16.

Overall, we ended 2014 on a positive note. And I'm confident that we're entering 2015 as a leaner, more customer-focused company that's well positioned to deliver significant growth in earnings and cash flow.

I'll now turn it over to Joe.

Joseph W. Dziedzic

Thanks, Tom. Good morning, everyone. As in the past, I'll start by covering our quarterly results in the same format as prior quarters. Then I'll review how the recent organizational changes led to a new format for reporting our results at a more granular level. I'll close by reviewing our financial targets for 2015 and '16 and what we're doing to achieve them.

The quarterly revenue decline of $160 million was driven by $108 million decline in Venezuela. Organic growth in other countries was offset by the strengthening U.S. dollar. Segment operating profit fell by $11 million due to a $19 million decline in Venezuela. The rest of the business grew by $9 million, overcoming $12 million of unfavorable currency. The U.S. and Argentina were the primary drivers of the improvement. Brazil profits declined versus last year's results, which included the positive resolution of several operating tax items that did not repeat in 2014.

Non-GAAP EPS fell by $0.03 as unfavorable currency offset operating profit growth. The adjusted non-GAAP EPS, which adjusts Venezuela to the same exchange rate in both periods, shows a 25% increase from $0.52 to $0.65 per share, driven by the growth in the U.S. and Argentina.

The EPS bridge highlights the variances from last year's fourth quarter. The segment operating profit decrease of $0.13 per share was driven mainly by 2 factors: a profit decline in Venezuela due to the bolivar's devaluation; and negative currency translation from other countries, mostly in Argentina, Brazil and France. The positive news on this bridge is the $0.25 profit growth from other countries. The lower noncontrolling interest expense and the increased tax rate were also due to the exchange rate change in Venezuela.

For the full year, reported revenue declined 6%, segment profit was down 20% and EPS fell 30%. Once again, currency declines in Venezuela and other countries had a major impact on the results across all metrics.

Here's a simplified version of the full year earnings per share bridge. It clearly shows that the year-over-year earnings decline of $0.64 per share was driven almost entirely by 2 items: Negative currency outside of Venezuela and the net impact of all Venezuela-related items. The rest of the business improved versus last year by $0.10 per share.

Cash flow from operating activities was about flat versus last year, as improved working capital and the timing of insurance payments was more than offset by the lower earnings.

Total year capital expenditures and capital leases decreased by $30 million due to lower spend on IT, CompuSafe and money-processing equipment. The reduced IT spend was driven primarily by lower spend related to our shared services center for Latin America, reduced spending on U.S. business projects and lower spending across most other countries from centralizing the IT function. The lower spend on CompuSafe is primarily the result of transitioning to operating leases for this device instead of purchasing the safes.

Net debt increased by $107 million from the end of 2013 due to the write-down of $82 million of cash and cash equivalents in Venezuela and increased borrowing to pay $87 million of contributions to the U.S. pension. These items were partially offset by about $60 million of proceeds from the sale of our ownership ventures in Peru and slightly improved working capital.

We continue to manage capital spending prudently, while leveraging procurement to generate additional savings. We spent less than our targeted 1.0 reinvestment ratio in 2014, partially due to the timing of certain purchases that will move in to 2015 as well as the transition of some of our CompuSafes to an operating lease structure. We are targeting about 170 to -- $160 million to $170 million of CapEx and capital leases in 2015, which is consistent with our reinvestment ratio target of 1.0.

The underfunding of our primary U.S. pension plan remained about the same in spite of $87 million of contributions. The discount rate declined by 90 basis points to 4.1%, and the new mortality tables adopted in 2014 completely offset the contributions and investment returns. The funding ratio remains flat at 88%. The UMWA underfunding increased due to a lower discount rate.

In 2014, we made good progress in our efforts to derisk the pension plan, reduce future volatility and reduce our PBGC premiums. We've already disclosed our third quarter prepayment of $61 million, which represented our 2015 and 2016 required contributions to the plan.

We also completed the lump sum buyout offer we initiated last August. Approximately 4,300 pension participants were paid a total of $150 million. As a result of these actions and based on current estimates and assumptions, we do not expect any future cash outflows to the pension. And with regard to the UMWA liability, we do not expect to have any cash outflows until the year 2032. I want to reiterate this point because it is important to our cash flow. We expect no additional payments to the U.S. primary pension plan, and the UMWA liability is funded by existing assets until 2032.

As investors think about our valuation, we believe it's important to look beyond the reported underfunding of these plans and consider that there is currently no expected cash flow impact on the company until 2032.

That completes our review of 2014 results. I'll move on to our new reporting format, which reflects how we're currently managing the business. We also believe it offers investors more granularity and transparency.

This slide uses 2014 results to illustrate how our reporting format has changed. As Tom noted, the 4 regional units that we used to report have been replaced with 2 large operating units. One covers our largest 5 markets and the second covers the rest of the world under the heading of Global Markets. The new format also breaks out the payment services business, which includes operations in Brazil, Columbia, Panama, Mexico and the U.S. The business is focused on serving the unbanked and underbanked population in these markets. The 2014 operating loss is caused by the investment in the prepaid card in the U.S., which is gaining traction and is expected to contribute to earnings in 2016.

Another important distinction is that we will no longer use segment margin as a performance metric. When we transitioned to the new organization structure, we combined the previous regional management cost with the corporate cost related to oversight of our business at the global level. These combined costs are now referred to as corporate items.

As a result of this combination, our 2014 segment margin rate of 6.1%, which was slightly above our 2014 guidance range of 5.5% to 6%, now corresponds to an operating margin of 4.7%.

The combined operating margin rate of the 36 countries that comprise our global markets unit has been consistently strong. Organic growth, particularly in Latin America, has been offset in recent years by unfavorable currency movements. Venezuela has historically driven volatility in both the revenue and operating profit for global markets, but the currency devaluation in the first quarter of 2014 significantly reduced results from Venezuela in U.S. dollar terms. Excluding Venezuela, the profitability of the global markets unit has been steady, and we expect this to continue.

In contrast, the organic growth rate for revenue in the largest 5 markets has been only 2% for the past 2 years. This limited organic growth has been completely offset by currency and the margin rate is far below the rate in our global markets unit. The decline in operating profit in 2014 is driven primarily by Mexico, but also France and Brazil. Improving the margin rates in these countries is our greatest opportunity to create value in the near term. So we are very focused on improving performance in these countries, especially the U.S. and Mexico.

When you look at the 2014 results more closely, it's clear that the 14% organic revenue growth was driven by the global markets unit along with Brazil. These countries also had very good profit margins.

On the other hand, the U.S. and Mexico, which together have $1.1 billion in revenue last year, have the lowest operating margins. We view these 2 countries as the major opportunities to create value. Executing turnarounds in these countries is critical to achieving our financial targets.

I'll close by covering our revenue -- our outlook for revenue, operating margin and earnings per share, including the primary assumptions behind our financial targets and how we expect to achieve them.

While our revenue guidance for 2015 has been reduced from $3.8 billion to $3.4 billion, our margin rate goals have not changed. Last July, we said our goal was to achieve a segment margin rate of 6.5% to 7% in 2015 and 8% in 2016. Expressed in terms of operating margin, our 2015 target is to achieve an operating margin rate of 5.1% to 5.6%. For 2016, our 8% segment margin goal translates to an operating margin target of 6.7%.

Last July, we also said our initial EPS goal for 2016 was to deliver earnings of $2.50 to $3 per share. Based on the steep currency declines in the second half of 2014, our reduced revenue guidance translates to a $0.60 decline in earnings per share. So we're now guiding to a range between $2 and $2.40 per share for 2016.

For 2015, our current estimate for revenue is $3.4 billion, and our estimated range for operating margin rate is 5.1% to 5.6%. We have included an estimate for the tax rate, interest income and other items below operating profit. We expect the actual results to vary from these estimates, but believe the earnings per share range is wide enough to allow for this variability.

We are projecting $200 million of organic revenue growth, which is more than offset by the unfavorable currency impact of $250 million. The EPS bridge highlights the expected currency impact, which is an unfavorable $0.35. The estimated operating profit improvement of $63 million to $80 million is driven by regional consolidation, headcount reductions and operating improvements. This generates $0.74 to $0.94 of earnings per share, which is a significant improvement that would put us on a path to delivering our 2016 targets.

The recent reorganization enabled us to eliminate structure and cost from the 4 former geographic regions. Our initial expectation was that this would reduce 2015 cost by $10 million to $15 million. We now expect to realize the full savings of $15 million.

Today, we announced an additional $30 million to $35 million in expected cost savings related to headcount reductions throughout our global workforce. This difficult process is well underway. The total expected savings is $45 million to $50 million, and the actions we have already taken will deliver about 80% of the savings.

The U.S. business improved its margin rate in 2014 to 3.1%, and we're projecting 4% to 5% rate in 2015 and 6% by 2016. There are a number of key projects the U.S. team has been working on for several years that are in the implementation phase right now. Most of these projects have several phases, which start with an implementation of core functionality and then build with enhancements an additional functionality after the users have optimized the capability of the new process or tool. We have provided an update on the implementation status of several of these projects. This provides some perspective on when the projects should start providing payback on the investments that have been made. The implementation of these projects should coincide with the profit improvements in the business over the next few years, and then provide the foundation for continuous improvement in the business to enable us to deliver margin rates that are more in line with our U.S. competitors.

As expected, 2014 profits in Mexico were driven downward for a variety of reasons, including some customer losses and a onetime insurance premium that we do not expect to repeat.

Similar to the U.S., Mexico has several key projects that are expected to drive profit growth and enable Mexico to meet its 10% operating margin target. The implementation of the standard branch structure was nearly complete at the end of 2014, so we should see almost a full year of the benefits from this project in 2015.

The CIT and ATM efficiencies are being implemented during 2015 and should generate most of the savings in 2016. In addition to these projects, Mexico is very focused on driving top line growth, particularly in the retail sector where we believe there is significant growth potential.

To summarize, we're glad we finished 2014 with a strong fourth quarter. Despite the currency headwinds, fourth quarter earnings per share were up about 25% on an adjusted basis, and the revenue and profit growth in the U.S. is very encouraging. We enter 2015 with a clear plan to deliver significant profit growth even with the currency headwinds. We have a new organization structure in place to accelerate the expansion of our service offerings and drive productivity through continuous improvement. We are highly focused on meeting or exceeding our 2015 targets on our way to our 2016 goals. We remain focused on delivering for our customers, employees and shareholders in these challenging times.

Thanks again for joining us this morning. Denise, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Ashish Sinha of Gabelli.

Ashish Sinha - G. Research, Inc.

I had a few. Firstly, your new company structure. If you could give a bit more details in terms of how the company's setup now versus where it was before. So if you could run us through the org structure, I mean, branch managers in each country, who do they report to and then how does it kind of flow up to the top in terms of reporting relationships and how is it different from before. My second question is on Brazil and LatAm margins, specifically, Brazil. So Q4, we can see a huge drop year-on-year. I do appreciate you talked a little bit about some one-offs, which didn't repeat this year. But last quarter, you were talking about passing on some wage increases in your contracts. If you have any updates on that, and if that impacted your margins at all. And lastly, if you could also talk about some nonfinancial metrics as in terms of your branch performance levels and branch efficiency, that would be great.

Thomas C. Schievelbein

This is Tom Schievelbein, and I'll address the organizational question first, and let Joe address specifics on Brazil and then we'll talk about efficiency improvements. So the first thing, on the organization. We've gone from a regional structure that had the Far East, Europe, North America and Latin America separate reporting in to me. We've gone to a structure where I have heads of 2 now large operating segments. One, being strategy and the focused markets, which are the U.S, France, Mexico, Brazil and Canada under Mike Beech, and I also have the global markets under Amit Zuckerman, which includes the rest of the world. So I think it's 36 countries. I think even more importantly is that we'd changed into a more centralized function. And so the operations and the support functions within each of those countries, and I'm talking specifically here about information technology, human resources, finance, and the rest of the ones I mentioned have been centralized as wages to, again, get advantages of volume, get advantages of synergies. And so Patty Watson, the CIO, has got responsibility for improving cost around the world from our Information Technology. Holly Tyson on HR, Mac Marshall on legal and, of course, Joe with finance. So we have a more direct reporting responsibility, I think it should improve both speed and allowed us to reduce the number of managerial positions that we had that were overseeing the incorporation. Relative to Brazil, Joe?

Joseph W. Dziedzic

So in Brazil, we did have a significant impact, specifically in the fourth quarter from last year, the resolution of some operating taxes that were favorable to us. We also -- we're planning on getting some price recovery. We did not realize as much of that recovery as we were projecting. We also begun to take some of the actions to generate the savings that we announced today. There were some transition costs related to that overall. And the timing of price increases as well as the onetime resolution of the operating tax items in the fourth quarter also affected earlier quarters in the year and that was the primary driver of the year-over-year decline in Brazil. You'd asked a question about branch performing metrics -- performance metrics. I wouldn't characterize those as having changed dramatically due to the organization change. But one of the things we are driving with a much greater focus is a performance on lean -- utilizing lean tools. Let's talk specific to the U.S. Many of the projects that we're implementing in the U.S. gives us of the data to be able to start measuring and managing the business in a very different way, which allows us to provide tools to their branch to manage their routes and their efficiencies in a much more effective way. So that's really related specifically to the U.S. But the organization change in itself didn't really change the branch performance metrics across the company.

Ashish Sinha - G. Research, Inc.

If I could remember, you gave a number of 56% of your U.S. branches, I think, were performing or fell under your performing criteria. And you had a target to take it to 80%, I think. Do those targets change? Or do they still hold?

Joseph W. Dziedzic

The targets don't change. We're really more focused on driving efficiency across the entire business. We look at that as a measure of individual branch performance. But at the end of the day, we need to see the total margins improved and each of the branches have opportunity to improve regardless of where they are today from an efficiency or profitability perspective.

Ashish Sinha - G. Research, Inc.

So it's not going to be a metric you're going to communicate regularly or...

Thomas C. Schievelbein

Ashish, it depends on them communicating regularly. I think we said like on a biyearly or every other month -- or every other earnings release, we'll be reporting on that. It hasn't moved enough or changed enough to where we think it's helpful to report it on a quarterly basis. So you all continue to see those metrics in the future on a regular basis and it's most likely going to be on a every 6-month basis.

Joseph W. Dziedzic

It did improve a few hundred basis points versus the baseline metric you referenced. But that's what you would expect, given the margin rate improvement in the fourth quarter for the U.S.

Operator

And next question will come from Jamie Clement of Macquarie.