The Brink's Company (BCO) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to The Brink's Company's Second Quarter 2021 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 in the Investor Relations section of the company's website www.brinks.com. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Edward Cunningham: Thanks, Kate and good morning, everyone. Joining me today are CEO, Doug Pertz and CFO, Ron Domanico. This morning we reported second quarter results on both a GAAP and non-GAAP basis. The non-GAAP results exclude a number of items including our Venezuela operations, the impact of Argentina's highly inflationary accounting reorganization and restructuring costs, items related to acquisitions and dispositions and costs related to an internal loss and certain accounting compliance matters. We're also providing our results on a constant currency basis which eliminates changes in foreign currency exchange rates from the prior year. We believe the non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly, our comments today will focus primarily on non-GAAP results. Reconciliations are provided in the press release in the appendix of the slides we're using today and in this morning's 8-K filing, all of which can be found on our website. I'll now turn the call over to Doug. Thanks. Doug Pertz: Thanks, Ed and good morning everyone and thanks for joining us. Today we reported strong second quarter results that clearly demonstrate the resiliency of our business and the continued strength of cash usage around the world. Reported revenue was up 27%, including organic growth of 15% on a comparable basis in local currency revenue as recovered to 97% of 2019 pre-COVID levels, supporting a strong recovery from the pandemic lows, even with the unanticipated continued shutdown of many economies, especially in Europe, Latin America and parts of Asia during the first half of this year. Operating profit grew 51% with a margin rate increase of 160 basis points to 10.5%, which is 80 basis points above the pre-pandemic second quarter 2019 rate of 9.7%. This suggests that our focus on sustainable cost reductions is having the desired impact on increased margins even with the revenues not yet back to pre-pandemic levels. Adjusted EBITDA was up 39% with a margin rate increase of 130 basis points to 15.8% which is a 120 basis points above the pre-pandemic second quarter 2019 EBITDA rate. And earnings came in at $1.18 per share, up 62% over 2020 and up 40% over the second quarter of 2019. We achieved these results despite extended shutdowns that affected the second quarter results. Given the year-to-date impact of the pandemic and the uncertainty regarding the future impact we now expect full year 2021 percent revenue growth in the mid to high teens, and we continue to expect earnings to be around the midpoint of the range, reflecting higher margins. Ronald Domanico: Thanks, Doug and good day everyone. Slide 5 is a format that we include each quarter that covers four key metrics, revenue, operating profit, adjusted EBITDA and EPS. For the current quarter, the current quarter In constant currency and the reported results for the same quarter in prior years. I'll go into detail on each of these metrics in the next two slides. On Slide 6, please remember that we disclosed acquisitions separately for the first 12 months of ownership. After 12 months they are mostly integrated and then included inorganic results. Included in acquisitions for this quarter are PAI and most of the former G4S businesses. 2021 second quarter revenue was up 22% in constant currency, with 15% organic growth versus last year and 7% from acquisitions. While the pandemic continues to impact many countries today, the second quarter of 2020 was globally, the most impacted. North America, Latin America and Europe, all grew organically while the rest of the world was relatively flat. Positive ForEx increased revenue by $39 million or 5% as currencies in most of our markets have improved versus last year's pandemic-driven devaluation. Reported revenue was $1.49 billion, up $223 million or 27% versus the second quarter last year. In general, revenue recovery was consistent with the first quarter 2021 despite the impact of lower than expected economic activity caused by new lockdowns imposed by governments in response to COVID variance and increased cases. Second quarter reported operating profit was $111 million, up over 50% versus last year. Organic growth was 42%, acquisitions added 5% and ForEx another 4%. Our operating profit margin of 10.5% was up 160 bps versus 2020 and up 80 bps versus pre-pandemic 2019. This is evidence that our 2020 cost realignment initiatives are holding and that wider and deeper is gaining traction. Segment information is included in today's press release and in the appendix. Recall that in the first quarter the corporate allocation methodology was changed to more accurately reflect segment performance, but distorts the year-to-year comparisons of corporate expenses. Now to Slide 7, second quarter interest expense was $28 million, up $5 million versus the same period last year, primarily due to the higher debt associated with the completed acquisitions. Tax expense in the quarter was $30 million, $12 million higher than last year, driven by higher income. Our full-year non-GAAP effective tax rate is estimated at 32% in line with last year. $111 million of second quarter 2021 operating profit plus interest expense and taxes, plus $6 million in minority interest and other generated $60 million of income from continuing operations. This is a $1.18 of earnings per share up $0.45 or 62% versus $0.73 in the second quarter last year. The gain on marketable securities positively impacted EPS by about $0.16 versus $0.09 last year. Second quarter 2021 Adjusted EBITDA, which excludes $11 million and gains on marketable securities, was $166 million, up $46 million or plus 39% versus prior year. Doug Pertz: Thanks, Ron. Moving to Slide 11. It summarizes our current strategic plan, SP2 which builds on the proven initiatives executed in our first strategic plan built over the three-year period through 2019 resulted in compound annual growth rate of 8% for revenue and for more than 20% for operating income. The bottom layer outlines our 1.0 initiatives supporting core organic growth and cost reductions. Our SP2 target is to achieve annual organic revenue growth of at least 5%, and we've laid out more than $70 million of cost reductions and productivity improvements by 2022. We're driving our cost reductions wider and deeper by expanding cost initiatives into more countries and implementing over 18 different proven operational initiatives including things such as fleet savings, route optimization, money processing center standardization and much more. These initiatives are supported by dedicated lean experts in every country, and by our overall continuous underlying continuous improvement culture. Sustained SG&A cost reductions and other fixed cost expenses reductions have been realized through our recent restructurings and last year's targeted cost takeouts. These cost reductions and structural changes are driving operating leverage as demonstrated this quarter by higher OP margins versus last year and versus 2019. The benefits of operating margins are expected to continue to yield higher margins as revenue recovers from the pandemic lows. The middle layer represents our 1.5 Acquisition Strategy including G4S and PAI which are the first acquisitions in SP2 we've invested approximately $2.2 billion in 15 acquisitions since 2017. Each of these acquisitions, support our overall growth strategy and we expect them to collectively represent a post synergy, post multiple of less than 6 times EBITDA. With the G4S acquisition largely integrated and run rate synergies largely recognized, we're well positioned in 2022 to drive revenue and margin rates above pre-pandemic levels in the 17 markets included in that acquisition. As demonstrated by our recent PAI acquisition, our future acquisition focus is primarily on supporting 2.0 growth initiatives pivoting away from larger core 1.0 acquisitions. However, we'll continue to consider smaller tuck-in core acquisitions that offer compelling returns. Operator: We will now begin the question-and-answer session The first question is from George Tong of Goldman Sachs. Please go ahead. George Tong: Hi thanks good morning. You all expect 2021 revenue performance to come in at the lower end of the full year guide due in part to rising COVID cases. Can you discuss how revenue trends progressed through each of the months moving through the second quarter and into early July? Doug Pertz: Yeah. I think George what we tried to point out that when we've started the year and actually, as we were going through the first quarter we continued to see shutdowns and I'm not sure if the increased COVID cases, but if the shutdowns in the first quarter, coming out of the first quarter going into the second quarter continued in Europe, further and longer than we would have anticipated and several countries in South America as well as actually in Asia as well, kind of the good news and we don't know yet. I'm not sure anybody knows yet, the good news is as we've moved out of the last month, in other words, June of the second quarter, we started to see the European open up, countries open up markedly. We don't know and I think that we are all speculating where the delta, the next wave that we're seeing in various countries in varying degrees depending on the vaccination rates in the countries, we're not sure how that will impact things but we clearly saw an improvement particularly in Europe in June, in the latter part of the second quarter, and I think the key that we try to point out is we saw an improvement even in the second quarter that was not as strong as we would like because of the government mandated shutdowns to a local currency rate of 97% of pre-COVID levels up from the April year-to-date rate of 96% that we've disclosed even as we went through the second quarter. So, hence we were suggesting that we'll continue to see, not a step change, but a gradual increase from that to get to a level of 100% of pre-COVID levels of 2019 levels for the full year of next year. George Tong: Got it. That's helpful. And just to follow up on some of the geographic performance you mentioned, like a little bit about Europe, Asia and Latin America. Can you also include in your discussion how those geographies compare with North America in terms of the recovery and perhaps during quarter where you see the most strength coming out of 2Q? Ronald Domanico: Well coming out of the quarter. George, I would say that the US has the opportunity. We have after Israel, I think the highest level of vaccination, it seems to have stalled for whatever reason around half of the adult population, but nevertheless, we are seeing openings quite strong. So I would say, the biggest opportunity for recovery would be in the US. Every country is different, Israel with their re-openings and vaccination population now approximately 70%, is doing extremely well, and again as Doug mentioned France for example when it started to reopen on June 20th, so we don't have a lot of experience there. People are ready to get out to start spending money in retail, to go to restaurants and the cash is flowing. The question that we all have right now is this going to be continued gradual recovery around the globe or are we going to see a surge in some variant of the virus that causes governments to go into another phase of shutdown. So, it's very hard for us to predict what's going to happen and because of that we didn't change our guidance range. We're just saying that based on what we've seen so far where Q1 and Q2 had continued or new shutdowns due to various strains that we think we'll probably end up on the lower end of the range, and also as Doug mentioned in his comments, the technical adjustment on the revenue for PAI versus the April 6th press release that we put out on expected revenue, instead of recording gross revenue for that business we will according to accounting convention, record net revenue. And so, those two things are causing us to be at the lower end of the revenue range, but as Doug also mentioned the margin expansion, both from a combination of the cost realignment initiatives we took, those initiatives are really hanging on. The team around the globe, the Brink's team is really holding onto those savings. And in addition, the wider and deeper initiatives that we talked about previously, are gaining traction, and those two things are really driving our margin expansion. George Tong: Very helpful, thank you. Operator: The next question is from Tobey Sommer of Truist Securities. Please go ahead. Tobey Sommer: Hello. Thanks. I was wondering if you could give us a sense for just refresh If you would that the principal cost savings in the realignment that you've been able to undertake over the last 18 months, and also on a net basis just describe sort of the costs that would re-insert themselves in the income statement? Ronald Domanico: Yeah, Tobey, and I believe our year-end 2020 Earnings presentation we had a dedicated slide that spoke not only about the costs incurred, but also the recurring savings and then there was a blurred bar that have talked about how much was variable and how much was fixed. I will tell you, that is a part of our global cost realignment. We demanded that each business, take out 10% to 15% of their SG&A, and across the world that happened and those costs have remained down, as you know, those are step change cost and they're only added back deliberately, and we have not added those back. The variable costs,. we required everybody to reduce their variable labor hours by at least as much as the percent revenue decline. They did that. I would love to tell you that the variable labor costs and headcount is coming back with the revenue, but quite frankly, especially in the United States and in other countries, we're actually having trouble attracting and retaining necessary variable labor to meet the recovering revenue. So that's been a challenge, but we took out the least efficient vehicles in the fleet, we shut down facilities in Paris, for example, we closed three of the six branches. I mean, so every country was different, but overall the permanent costs, whether they'd be fleet, whether they'd be facilities or SG&A we're hanging out of those. Doug Pertz: Tobey I laid it out in my script and in that comments in two ways, and we try and lay this out as well as we continue to drive down cost and will continue into the future with our lean continuous improvement methodologies and culture and the $70 million in cost reduction takeouts this year 2021 and 2022 are really based on those lean cost takeouts and we'll continue to do that into the future as well, and we'll give you more guidance on that In December, when we talk about the rest of our strap plan period of time, but that's our continuous improvement wider and deeper cost takeouts that we will continue to see this year we're giving you targets going forward, and as Ron mentioned the L portion of this, the leverage portion of this, was the restructurings and they showed up in our significant restructuring numbers and cash that we spent last year and for part of this year as well. Those restructurings are taking out the fixed cost, the SG&A and other fixed cost and structural cost that gives us the ability to get the strong operating margin leverage as revenues come back. And we continue to have confidence that we'll see that margin leverage on top of our lean WD cost takeouts as we go forward into 2022 and continue to see those takeouts. So, that's kind of the benefits of the underpinning of this positions as well for continued margin improvement in the future as we see revenues come back. We can't tell you precisely when all those revenues will come back, but we have confidence that they will gradually come back this year, and that we don't think it's unrealistic to suggest that the 2022 revenues based on what we can see will be at close to or above 2019, for the full year, next year and that will drive back the leverage as we maintain our fixed cost structure and the levels that we've taken them down to. Ronald Domanico: And Tobey It was actually our October 29, 2020 presentation slide number 10, that has all the detail there. Tobey Sommer: Perfect. And could I just get your kind of brief comments on the pricing trends for your existing lines of business, I'm not asking about the new strategies and maybe as I see the targets for 2022 that the leverage coming down, could you just describe a comment on what the acquisition climate is like? Thank you. Doug Pertz: I'm not sure what you mean by the leverage coming down for next year Tobey Tobey Sommer: The debt leverage coming down. Doug Pertz: Okay now that makes sense, because I think about operating leverage and margin improvement leverage. I think what you're alluding to is a debt leverage coming down because that slide only talks to using free cash flow generated next year, which we anticipate, as Ron suggested on Slide 9 that re-free cash flow will it be improved fairly dramatically next year as we reduce our restructuring expenses and other things like that, we maintain our CapEx level, which will then reduce our CapEx level as a percent of revenue and that will again all contribute to the increase in free cash flow, and then it's a question of what's our best allocation, what's the best use of that free cash flow, as I said in my comments to optimize shareholder return. This page shows that no new acquisitions as an assumption, no new acquisitions and using that free cash flow to pay down debt, and so that's what the leverage, financial leverage, chart shows and the use of that. Increased Free cash flow, paying down debt with our free cash flow and as I've said in my comments about 1.5, our acquisition strategies, I think we're pivoting away from core acquisitions, core business acquisitions, but acquisitions more like the PAI and others to support our 2.0 strategies and growth associated with that, which we think will continue to add to increase above and beyond our target organic growth levels as well as improved margins, that's where our key focus will be going forward in the future and now. Tobey Sommer: Yeah I also asked about pricing. Ronald Domanico: Oh pricing. I'm sorry. The US, it seems to be a bit more of the hot bet, if you will, in terms of pricing, labor issues, etc. that much more so than most other countries around the world. And as we see in many other industries we are continuing to struggle with being able to get labor as we need them across the US and in many cases as we saw in the second quarter, we are raising wages in order to attract and maintain our employees, especially on the front line and as a result of that we pulled ahead our normal October price increase in the US to be implemented in the first part of the third quarter and that is being implemented right now, and that at least so part of what you saw is wage increases, increasing our cost in the second quarter of the US that we will start seeing some of the benefits of pricing come back in the second quarter, but it continues to be an issue with many other as many other businesses, an issue from the standpoint of being able to get labor as well as the continued to pressure on cost. Tobey Sommer: Thank you very much. Operator: The next question is from Sam England of Berenberg. Please go ahead. Ronald Domanico: Good morning, Sam. Samuel England: Hi guys, good morning. Thanks for taking the questions. And the first one, just on the G4S acquisition exceeding the synergy targets, could you talk a bit about which geographies or areas of the business turning out better than the original plan, I mean, do you have any idea of the scale on the extra synergies at this stage and is it something you will talk about at the Investor Day in December? Doug Pertz: Well, we certainly talk about it in Investor Day. And I think Sam, it's more around, not isn't necessarily the synergy targets and exceeding those, I think what we did say that we're close to being on track for the annualized synergy levels, that again weren't overly dramatic, if you want to put it that way because of, there's only overlaps in three of the countries, and on the BGS business. I think what the more important piece of this is, is as we see revenue recovered, we think that we'll see that revenue recovery up next year 2022 in most all of the markets back to or above 2019 levels, but as important as we talked about earlier, we are seeing strong improvement in operating margins as a result of the cost takeouts, the focus on the fixed cost takeouts, which will provide us the leverage on margins and operating margins going forward. So a portion of it clearly is the integration, we feel is almost completely done and the synergies are pretty much there and to gain the run rate on the implementation of those. But more important, I think, is that we've taken additional steps in almost every country for cost takeouts to position as well as with the rest of the Brink's business to get the leverage going forward with improved margins and we're highly confident in that Ronald Domanico: Hey, Sam, I might add that the performance overall, the G4S acquisitions has exceeded our expectations. Which countries are doing better that depends on the shutdowns in those country quite frankly, but the team, the management team is excellent. We are talking about cost synergies, but I will also tell you there are revenue synergies with sharing best practices, the hunger around the world for Strategy 2.0 it's being developed and rolled out in certain countries it is really there. So as we continue to integrate, operate and the world returns to a new normal we're really looking forward to the growth from these new businesses and sharing all of those ideas to really turbocharge the top line, and that will bring leverage, operating leverage, to the bottom line as well. Samuel England: Great, thanks so much. And then the next one was just around cash usage trends. I just wondered how they're looking in markets outside the US, particularly year. I know you've got the data around cash in circulation, but do you have any idea of what's going on with things like ATM transaction, volumes and levels that sort of cash being processed in some of the other markets? Doug Pertz: Yeah so, Sam, that's a good question and I think it's a yes or no answer. We have some data, we have some anecdotal evidence and to support. On page 16. I think it is on the slides in the appendix we did provide, kind of our usual slide, if you will, in the US cash and circulation, which continues to be strong year-over-year versus prior years and pre-pandemic levels. The euro circulation is there as well, and you can see below, there are two bullets on similar sort of currency and circulation in both Brazil and Mexico, which is interesting enough and have similar trends to the US and the Euro in terms of cash that's there. And then on the right hand side, you can see, like the PAI you're asking the question there, unfortunately that is most of the US, if you want to look at it there, but it's continued strong transactions there. I think that part of what's driving PAI though we have to be a little bit careful there, is the continued stimulus piece, and so the bottom line point that we, and I like to say on all this is, it clearly is not going down, it had normally up versus all historical levels. And that's not suggesting there is any trend or anything in sight that suggesting things are different or materially below, in fact they're materially above pre-pandemic levels. The only other thing we have on top of that is going to be anecdotal things like in Ireland with our transaction levels that our ATMs there, they spike back up when we started to see the openings. But that was only the last part of June, and again it's only anecdotal and that's because things were shut down and now they're starting to spike back up again, but I can't give you anything definitive around that. Samuel England: Okay, great. Thanks very much. I'll hand over. Doug Pertz: Thanks, Sam. Operator: This concludes our question-and-answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.BCO Ratings Summary
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What to Expect From The Brink's Q3 Results
Analysts at Berenberg Bank provided their outlook on The Brink's Company (NYSE:BCO) ahead of Q3 results, lowering their price target on the company’s shares to $95 from $100.
The company will report Q3 earnings next week. The analysts don’t expect significantly different numbers compared to the company’s recently reduced 2021 guidance. Therefore, the analysts anticipate the focus to be on the outlook for 2022 and how the company is planning to offset cost inflation. According to Berenberg Bank, key to this will be whether the company is able to pass on inflation in two of its largest costs (wages and fuel) through price increases.
Following the cut to 2021 guidance, any cuts to 2022 expectations would likely be poorly received, as it would suggest the company either cannot pass on cost inflation or that the headwinds to the industry from COVID-19 are more persistent than originally expected.
What to Expect From The Brink's Q3 Results
Analysts at Berenberg Bank provided their outlook on The Brink's Company (NYSE:BCO) ahead of Q3 results, lowering their price target on the company’s shares to $95 from $100.
The company will report Q3 earnings next week. The analysts don’t expect significantly different numbers compared to the company’s recently reduced 2021 guidance. Therefore, the analysts anticipate the focus to be on the outlook for 2022 and how the company is planning to offset cost inflation. According to Berenberg Bank, key to this will be whether the company is able to pass on inflation in two of its largest costs (wages and fuel) through price increases.
Following the cut to 2021 guidance, any cuts to 2022 expectations would likely be poorly received, as it would suggest the company either cannot pass on cost inflation or that the headwinds to the industry from COVID-19 are more persistent than originally expected.
