Brinks Company (The)

Welcome to the Brinks Company's third quarter 2019 earnings call. Brinks issued a press release on third quarter results this morning. The company also filed an 8K 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. As a reminder, this conference is being recorded. If you require operator assistance, please press star, then zero. Now for the company safe harbor statement. This call and the Q&A session will contain forward-looking statements. Actual results could differ materially from projected or estimated results. Information regarding factors that could cause such differences is available in today's press release and in the company's most recent SEC filings. Information presented and discussed on this call is representative as of today only. Brinks assumes no obligation to update any forward-looking statements. The call is copyrighted and may not be used without written permission from Brinks. It is now my pleasure to introduce your host, Ed Cunningham. Vice President of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.

Thanks, Drew. Good morning, everyone. Joining me today are CEO Doug Perch and CFO Rhonda Monaco. This morning, we reported third 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, costs related to an internal loss, and costs related to certain accounting compliance matters. We're also providing an analysis of our results on a constant currency basis, which eliminates changes in foreign currency exchange rates from the prior year. We believe non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly, our comments today, including those referring to our guidance, focused primarily on non-GAAP results. Reconciliations of the non-GAAP to GAAP results are provided in the press release, in the appendix to the slides we're using today, and in this morning's 8K filing, all of which can be found on our website. Finally, page three of the press release provides the details behind our 2019 guidance, including revenue, operating profit, non-controlling interest, income taxes, and adjusted EBITDA. I'll now turn the call over to Doug Pertz.

Thanks, Ed, and good morning, everyone. Today, we reported solid growth in revenue, operating profit, adjusted EBITDA, and EPS, despite currency headwinds that were much stronger than expected. FX translation reduced operating profit by $17 million, more than $6 million higher than we anticipated in our prior guidance. Thanks to stronger organic and acquisition-related growth in North and South America segments, operating segment operating profit or operating profit before corporate expenses increased 18% and was up 28% on an organic basis and 33% on a constant currency basis. Total operating profit, which included higher quarterly corporate expenses, was up 7% on a reported basis and 25% in constant currency. These higher third quarter corporate expenses included $5 million of expenses related to share-based comp and higher insurance premiums, together reducing profit growth by about 5%. These costs were in addition to our planned spending of about $5 million for strategy 2.0 development and approximately $2 million of IT upgrades, also in corporate expense. Corporate expenses can vary from quarter to quarter compared to last year and sequential quarters, as demonstrated by this quarter. However, our full-year corporate expenses are projected to be in line with our forecast, supporting our guidance of earnings growth in the mid-teens that we'll talk about today. On the strategic front, we're continuing to execute on our Strategy 1.0 organic growth initiatives, taking them wider and deeper throughout our global footprint. These initiatives have already driven substantial profit growth, and with some new improvement initiatives, will be critical drivers to the expanded margins we are targeting over our next year three-year plan period. Supporting our Strategy 1.5, in the quarter we completed the acquisition of TVS, a small cash management business in Colombia. Our largest acquisition to date, Dunbar, is making significant contributions to our U.S. results. The integration of this acquisition is progressing well, and we expect to exceed our targeted cost synergies of $45 million by the end of 2020. Our new three-year plan will include a third-tier, Strategy 2.0, which is aimed at expanding our presence in the global cash ecosystems. We're developing 2.0 this year for initial rollout in early 2020. Finally, we've adjusted our full year 2019 guidance to reflect the higher than expected impact of FX in the third and fourth quarter of this year. The full year negative translational FX impact is now expected to be $80 million, an increase of $20 million over prior guidance. On an operational basis, our guidance has not changed. Turning to the next slide, reported revenue for the quarter was up 8% and operating profit rose 7%. As stated in the last slide, translational FX rates reduced reported earnings by 17 million, of which 6 million was greater than what we had originally assumed in our guidance. At previous guidance FX rates, operating profit would have been 14% over the prior year, even with the higher corporate expenses we mentioned earlier. We also achieved solid growth in adjusted EBITDA and earnings per share, both in constant currency and on a reported basis. Ron will provide more details on these and other financial metrics in a few minutes. Turning to slide five, led by Mexico and the U.S., our North American operations achieved double-digit growth in revenue and operating profit, both on a reported and on a constant currency basis. U.S. reported revenue of profit growth of 22% and 17% respectively, due primarily to the Dunbar acquisition. It's important to note that U.S. non-GAAP results include approximately $5 million related to the settlement of a class action lawsuit and integration expenses that reduced its margin rate to 6.4% in the quarter. Excluding these items, the U.S. margin rate was approximately 8%. Clearly, the U.S. quarterly results were not as clean as I would have liked them to have been. However, we're confident that even with these added costs, our U.S. business will exit the fourth quarter and its targeted 10% margin rate and achieve a full-year margin rate of at least 8%. It's important to remember that we started our three-year plan in 2017. When we started it, our U.S. margin was less than 1%. As I just mentioned, we continue to expect the integration of Dunbar into our U.S. operations to deliver synergies in excess of 45 million by the end of next year. We recently completed the rebranding of all Dunbar operations, closed or consolidated 21 branches to date, and are in the process of migrating to a new common CIT operating system for both businesses. And as we stated, we expect continued strong profit growth in the U.S., next year, and we're targeting 13 percent margin in 2021. Mexico continues to deliver strong revenue and profit growth. In fact, I want to again congratulate the Mexico team for exceeding their three-year margin target. That's three years through 2018, which was 15 percent in just two years through last year, and they're continuing their path to improve margins this year and will into the future. In South America, reported revenue was up 6% and margins grew 28%, despite FX translation that reduced revenue by $39 million and profit by $15 million. Organic profit rose 54% on 18% organic revenue growth. In constant currency, revenue was up 24% and profit rose 60-plus percent. Argentina and Brazil were the primary drivers of the improved results. Brazil's results included positive contribution of the successful integration of RotaBan acquisition. These results demonstrate that our underlying operations continue to perform very well despite our strong currency headwinds. Our inflation-based price increases in Argentina, combined with recent volume growth, are beginning to offset the pesos' dramatic devaluations since mid-2018, including August of this year. For 2019, we're now assuming an average of 50 pesos versus the U.S. dollars with an average for the fourth quarter of 67 pesos to the U.S. dollar. We'll be keeping an eye on next week's elections in Argentina, which could cause further volatility in the pesos' values. Before turning over to Ra, and I should mention that revenue in the rest of the world segment was relatively flat, with reported operating profit up 5% and 6% up on an organic basis. France is by far the largest country in this segment, and it has achieved solid profit growth in the quarter, thanks to improved efficiencies and to the positive impact of TEMIS integration. We look forward to continuing this improvement both now this year and into next year. And now for review of financials by Ron.

Thanks, Doug, and good day, everyone. I understand we may be having a little technical issue with the slides. We're trying to get that addressed right away. The slides are posted to the website, but I will go on with the script, and we will get that technical issue resolved as soon as possible. Turning to slide seven, constant currency revenue growth was 14%, split equally between organic results and acquisitions. Revenue was reduced by $49 million, or 6%, from negative Forex. Reported revenue was $925 million, up 8% versus the third quarter last year. Third quarter constant currency operating profit grew 25%. Organic results included $31 million increase in segment operating profit That was partly offset by $12 million in higher corporate charges. The corporate increase included $7 million in Strategy 2.0 and IT investment, $3 million in higher non-cash share-based compensation, and $2 million of increased insurance costs. Acquisitions added $5 million in operating profit, the majority coming from Rotobon that closed in January this year and Dunbar that closed last August. Negative Forex translation reduced operating profits by 18 percent, or $17 million, which Doug has said was $6 million worse than prior guidance. Reported operating profit was $102 million, and the operating margin was 11.1 percent. Nine-month amounts are included at the bottom of the slide. The year-to-date revenue percent changes are similar to the third quarter. Year-to-date operating profit was up 38% in constant currency and up 14% after Forex. Versus prior guidance, the $6 million in incremental negative Forex translation reduced year-to-date operating profit growth by 2%. Moving to slide 8. This slide bridges third quarter operating profit to income from continuing operations and then to adjusted EBITDA. The variance from the prior year is at the bottom of the slide. Third quarter 2019 operating profit of $102 million was reduced by $22 million of net interest, which was up $6 million versus the same period last year, attributed to higher net debt associated with the acquisitions. Tax expense of $25 million was $2 million favorable versus prior year, as higher income was offset by a 270 BIP reduction in the non-GAAP effective tax rate. The non-GAAP ETR was 34.2% in 2018, and for the first half of 2019, we estimated the ETR at 33%. Based on improved expectations to utilize tax credits and other attributes, in the third quarter, we reduced the expected 2019 ETR to 31.5%. Last year's buyout of our minority partner in Columbia cut non-controlling interest in half. Third quarter 2019 income from continuing operations of $54 million divided by 51.1 million weighted average diluted shares outstanding generated $1.05 in earnings per share, an 11% increase from last year. Depreciation and amortization added $36 million, relatively flat with last year, DNA is growing slower than we expected, primarily due to the timing of capital investments. Interest in taxes added $47 million, and non-cash share-based compensation added $10 million. In total, 2019 third quarter adjusted EBITDA was $145 million. Moving to slide nine. This slide illustrates the expected impact of translation forex from our full-year guidance to our new guidance. The impact of the devaluation of the Argentine peso is shown in the bottom of each bar. The devaluation impact of all other currencies is shown in the top of each bar. Our prior 2019 guidance anticipated that Forex would reduce full-year operating profit by $60 million. Devaluation through the third quarter 2019 was already $58 million, driven not only by the Argentine peso, but also the Brazilian RIAI and the Euro, which each hit a two-year low in the third quarter. We expect $22 million in additional negative Forex impact in the fourth quarter 2019, bringing the full-year impact operating profit to approximately $80 million. Our guidance is being reduced by the $20 million expected change in devaluation. There is no change in our operating guidance in constant currency. As a reminder, Forex for Brinks is translational, not transactional. The vast majority of our revenue and expenses are in local currency. Concerning Argentina, we successfully operated there for more than 20 years. Throughout continual devaluation, including many significant shocks, we've historically been able to offset the translation impact via inflation-based price increases. Through nine months in 2019, we've realized a 37% price increase, which has more than offset wage increases. Moving to slide 10, we bridge 2018 actual results to our prior guidance and then to our current guidance. 2018 adjusted EBITDA was $512 million operating profit was $347 million with a 10.1% margin, and EPS was $3.46. We continue to expect organic operating profit to grow $113 million, up 33%, and acquisitions to contribute an additional $35 million to drive total constant currency operating profit growth of 43%. We're investing at least $20 million in Strategy 2.0 initiatives and IT platforms and security. Negative 4X was estimated to be $60 million, and we guided 2019 full-year adjusted EBITDA to a range of $590 to $610 million, and operating profit to $405 to $425 million. As we just reviewed, negative 4X is expected to be about $20 million worse than originally forecasted, and we have reduced our full-year guidance accordingly. That is the only change in our guidance, and we expect our results on a constant currency basis to meet or exceed our original expectations. From an operational perspective, we're focused on those items within our control. Excluding Forex and the Strategy 2.0 and IT investment, you can see that the constant currency operating profit would increase about 43%, including the planned investment in Strategy 2.0 initiatives and IT platforms and security, were up 37%. Turning to slide 11. Forecasted 2019 full-year free cash flow of $200 million is $20 million lower than we projected last quarter. The reduction is due entirely to the Forex impact described previously. Adjusted EBITDA at the midpoint of the revised guidance is $570 million. Working capital and cash restructuring is estimated at approximately $70 million. which includes new acquisitions and accelerating restructuring at existing and acquired businesses. Cash taxes are projected around $40 million, favorable due to the timing of refunds. Expected cash interest of $80 million remained the same, while the $180 million projection for cash capital expenditures was reduced due to timing and the capacity for additional lease financing. It's important to note that while operating profit and earnings are historically skewed to the second half, cash flow is even more so. Free cash flow in the third quarter of 2019 was $90 million. Slide 12 illustrates our net debt and financial leverage, both historically and assuming synergies from completed acquisitions through 2020. Our net debt at the end of 2019 is projected to be approximately $1.35 billion. That's up about $150 million over year-end 2018, as investment and acquisitions is reduced by cash flow after dividends. At the end of 2019, our pro forma leverage, based on fully synergized adjusted EBITDA, should be approximately 2.2 turns. Since 2017, we've completed approximately $1.1 billion in acquisitions, which have been accretive to earnings. The acquisition pipeline today is more robust than when we started, both in the potential number of transactions and in total enterprise value. The gray bars on each half of this slide illustrate the impact of another billion dollars in potential acquisitions and an average post-integration multiple of 6.5. The gray bar on the left shows that the potential incremental investment could be funded entirely by debt. The gray bar on the right illustrates that pro forma adjusted EBITDA, including 12 months of estimated synergy, should increase by approximately $155 million, and leverage would be about 3.0 turns. We expect that cash flow from our existing business, combined with the additional acquisitions, could reduce leverage back to two turns within three years. We continue to get questions about how the company could perform across economic cycles. Our revenue is highly recurring, with most business under multi-year contracts. Many contracts include fuel surcharges and or CPI escalators, which protect margins. Cash grows through all cycles, but especially when credit tightens. And should unemployment increase, we would expect workforce benefits through greater retention and moderated wage inflation. But ultimately, the strength of our balance sheet should facilitate success through economic cycles. With that, I'll now hand it back over to Doug. Thanks, Ron.

Turning to slide 13, it summarizes our first strategic plan, which we rolled out at our investor day back in early 2017. Strategy 1.0 is focused on executing internal improvement initiatives to drive organic growth and close the margin gap with our competitors. By the end of this year, These initiatives are expected to help us achieve close to $300 million of operating profit. On top of this, our Strategy 1.5 is expected to add another $100 million in profits from the 13 acquisitions we've already completed so far for a total consideration of about $1.1 billion. Together, Strategy 1.0 and 1.5 are expected to yield close to $400 million of operating profit and $570 million of adjusted EBITDA. representing an operating profit compound annual growth rate of 22% and an EBITDA compound annual growth rate of 19% over the three-year period ending 2019. And both strategies will be key components of our next three-year strategy beginning this next year. Our next strategic plan will expand the number of Strategy 1.0 organic growth and margin improvement initiatives, drive these initiatives deeper into our operations, and leverage them into more of our global operations. We call this next stage of Strategy 1.0 lighter and deeper. Even though margins have increased by over 300 basis points in the last three years, there is plenty of runway for additional margin expansion from already launched initiatives such as route optimization and reduced labor costs. Our 1.5 strategy of acquisitions will remain an important part of our future growth plans. We'll continue the disciplined approach that we've shown thus far, targeting deals that are accretive with post-integration multiples in the six to seven range. Slide 14. Slide 14 combines our organic improvement with our accretive acquisitions. Over the last three years, our total margin rate has increased markedly from 7.4% in our 2016 jumping off point to an expected 10.7% at the end of 2019, supporting our 22% compound annual organic profit growth rate that we talked about in the last slide. Despite significant FX headwinds throughout the planned period, we expect to easily exceed the initial operating targets that we laid out of only $325 million that we set back in 2017. We're highly confident that we'll continue to drive revenue growth and margin improvement in our organic and acquired businesses during the next three-year strategic plan period. For example, we've already stated that the U.S. business should continue its margin improvement drive to 13% in 2021. This equates to nearly 500 basis points of additional margin improvement over the next two years. This will be led by Dunbar cost synergies that are expected to add another $20 million in up income alone after this year, after 2019, and by continuing core organic growth in the core business and operational improvements associated with that. Slide 15. We're currently developing and investing in our next layer of strategy, as we've spoken before, Strategy 2.0, which will focus on expanding our presence in the total cash ecosystem by offering additional high-value services beyond our core offerings today. These services are designed to offer customers a complete solution to their cash handling needs, similar to the full-service offerings that retailers receive from credit card payments today. These include complete handling and processing of cash, reduced labor needed to manage the cash, and optimization of working capital. All of this in a hassle-free offering to customers. Our 2.0 offerings will target expanding our services and revenues with existing underserved customers, increasing our market share in existing cash management markets that we serve today, and increasing services and revenues to currently unvended customers in retail markets today. In the second quarter, we announced an acquisition that will support a portion of our 2.0 strategy with large enterprise customers called Balanced Innovations. In addition, a large French bank agreed to outsource all of their 11,600 ATMs to Brinks as part of our 2.0 strategy. And we're on track this year with our investments to develop additional core 2.0 services with targeted rollout of pilots and services next year. By combining continued revenue and profit growth from 1.0 and 1.5 with what we believe will be accelerated growth from 2.0, we're confident that our next three-year plan period will even be more successful. We look forward to providing a comprehensive strategic review at our investor day in New York City in the first half of 2020, on a date that we'll announce soon. Slide 16. As Ron laid out, the reduction in our full-year 2019 guidance is due solely to the impact of currency. Our operational targets remain unchanged. Despite $80 million of expected operating profit reduction from negative currency translation, including a $58 million of impact that we've seen in the first nine months, we still expect reported operating profit growth of 14% and a 16% growth in earnings per share. Slide 17. In summary, over the last three years of our strategic plan period, and despite the strong FX headwinds, We have significantly exceeded all of our original targets, which are shown on the right side of this slide, and grown operating profit by more than 20% on a compound annual growth rate. We believe it's just the beginning, and we look forward to creating more value for all of our shareholders over the next three years. With that, Drew, let's open up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Toby Summer of SunTrust. Please go ahead.

Thank you. I thought I'd kick off with... M&A. Now, you asked me to elaborate a little bit. It's been a couple of quarters now where you've described a wider array of opportunities as well as larger opportunities. Any color you could provide us there and maybe stratify them versus the traditional cash and transit versus expanding into the cash ecosystem? Thank you.

Well, I'll start and then I'll pass it as well. As I mentioned, as we announced actually in the second quarter release, and as I just mentioned again, we did do a small acquisition called Balance Innovations in the second quarter that we think is a good supporter for one of our core strategies as part of our 2.0 overall strategy, and that will help us provide software, complete analytics and systems that we think will provide better services to enterprise-based customers in particular, and I'm talking about enterprise-sized retailers. So that's an example of an acquisition, one of the ones that we've done to date, that does help us for our next generation, our next strategies. So that's an example of that. TVS was an example of a core-to-core, helping improve our core business in Columbia, which we're very pleased to have done, and similar to other acquisitions we've done in three or four other key major markets, Argentina, Brazil, the U.S., et cetera. Most of what we've done to date has been core-to-core. We still have a number of core-to-core and core-adjacents that we're looking at that are in our backlog, and there are various sizes. I don't think we're going to comment necessarily on what sizes we have done or what we know we've done, but what's on the books. So I think we'll continue to look at acquisitions that fit our core-core, core-adjacent, that support our platform growth, as well as then support some of our strategies going forward.

The only thing I would add, Toby, is that a lot of these companies are family-owned. That process takes time, and every family has different dynamics. And then a lot of these acquisitions are in countries that have long regulatory approval processes. You know, Brazil, as we know with Rotobon, was more than a year. Colombia took us about a year. So even though the pipeline is robust, the timing on these deals is very lumpy, and we'll continue to move forward. Thank you.

And then in terms of pricing, could you comment generally on what the pricing environment looks like for your services? And you can do it in an aggregate basis or site out geographies if that's easier for you.

Perhaps you noticed the third quarter margin in the U.S., both in 2018 and 2019, was lower than it had been in the other quarters. That's typically because the price increase cycle in the U.S. is in the fourth quarter. And up until then, we bared the cost of wage increases and other inflation rates. in the U.S. So, you know, we do see margin pickup and pricing in the U.S. in the fourth quarter based on the continued tight labor environment. We expect to have another round of successful price increases in 2019, similar to what we had last year. Other countries also have a lot of price increases skewed towards the back half of the year. Brazil, Argentina is negotiated, we've talked about previously. So we do see the pricing environment this year similar to last year, and also in France. I mean, we have an opportunity for price increases as well. That market has been consolidated, but also the market is tightening up, which has enabled price increases. But I would say pretty much In line with last year, we do expect to have price increases on the order, I think, globally for Brinks, you know, plus or minus 3%. Thanks.

And if I could speak one last one in. If we were to look at your business, not from a geographic perspective, but from a line of business, such as the high-value services versus cash and transit, et cetera, what would the growth rates look like? And if you don't have specific numbers there, even ballpark color would be helpful.

Thanks. I would say that the retail business, which is a big focus for us, has higher growth rates and will continue to have higher growth rates because it's primarily unvended. On the financial institution side, which is traditional CIT and ATM, that entire market is vended. Every bank has an armored truck service. And so, you know, the growth there is... is trickier, takes longer. We're having more success in the lower tier, smaller banks than we are in the larger ones. But the focus for real growth volume and pricing is going to be on the retail side. And so you're going to see that proportion of the pie that we show in our investor presentations continually move to a greater proportion of retail.

Yeah, and maybe just you asked specifically about the high value. High value, our BGS business varies. It varies up and down based on where commodity prices are, disruption in world trade, dislocation with governments, things like that. So it varies up and down more in line with that than... than necessarily GDP and other things, which can be good and bad, obviously. The other businesses vary so much, growth by country and what's going on specifically by country.

Thank you very much. Thanks, Toby.

The next question comes from Jamie Clements of Buckingham. Please go ahead.

Good morning, Jamie. Good morning, guys. Ron, if I can actually start with you, just a quick one. The midpoint of your EBITDA guidance is down $30 million versus $20 million in OP. Why is there a difference there?

Yeah, Jamie, getting into the weeds a bit, depreciation is lower by approximately $5 million due to timing of CapEx. We've had slower replacement of armored trucks. because of a desire to have more of a global coordination between chassis vendors and the design. So that's taken a little bit slower. Also, we have permitting delays for real estate, especially overseas. These are not uncommon, but we expected to get through the permitting process quicker for some of that CapEx. $3 million of the difference is to lower non-cash shared base compensation. The estimates for the share-based comp are done at the beginning of the year before the actuaries actually figure out the value of the equity grants and then before the board actually grants the number of units. And so $3 million is from that, and $2 million is actually from foreign exchange, which has been a pattern of discussion in this call. Okay.

Okay. And then, you know, on the kind of the one-time, it seems, expenses issue, in the U.S., which I think you sized at about $5 million during the quarter. Why not non-gap that out? Well, yes.

Yes. Okay.

You and Doug are all... That's like seven cents, you know?

Yeah, we know. But to say that we're not going to have another lawsuit in California that gets settled is wishful thinking. You know, it was from 2015 lawsuit that, you know, was just dragging on. So, yes, it was something that happened a long time ago, but it was settled in this quarter. We made an argument that, yeah, that lawsuit won't recur, but we don't have a good argument that California won't pursue additional labor litigations. So let me jump in there.

Obviously, I feel a little bit like you do as well, but I'm not an accountant. So that lawsuit was about a $3.5 million total settlement. that was actually, I think, is good to get settled. It wasn't nice to have it in the quarter. It wasn't nice to have to pay it. But it was one of those that was hanging out there that every other company has had out there. It's called the Rest and Meals lawsuit in California. So it was good to get settled and taken off the plate. Meals plate, yeah. And then there was another component of it that was restructuring expenses that we weren't able to non-gap based on the accounting rules associated with that. But we feel that over the course of finalizing the restructuring, Dunbar, those should not continue on down the road, and that's why we wanted to point those out. So we appreciate that. And as I said in here, I think it's important that from quarter to quarter we see – the difference between our segment op income reporting and then the corporate expenses down to our reported op income, the difference between that is our corporate expenses from quarter to quarter. And they vary based on what goes in the quarter. These expenses like these that we pointed out and others around that, such as stock-based comp and so forth, from quarter to quarter. And that variation then pushes... you know, up or down by quarter. So we really have to take a look at this, I think, fortunately or unfortunately, on a full-year basis. And therefore, looking at the numbers that we have now taken into consideration, the additional $20 million hit to our FX still puts us with this for a full year, puts us at the 14% of up-income growth for the year and 16% for the EPS. taking that consideration on all the quarter variations for the year. I think that's a better way to look at it.

Okay. That's very fair. But, you know, you still think you're going to be at or close to 10% in the fourth quarter, right?

10% what? What's that? 10% what? 10% operating margin. No, I think we're going to be higher than that in the fourth quarter. Oh, okay. Okay. You're talking about 10% operating margins in the U.S.? Correct. Yeah. Overall, we're going to be higher than that. In the U.S., we're going to be higher than 10%. Okay. As well, but yes. And remember, you know, that hit our number that the legal and obviously these non-gappable or the ones that are in the non-gap numbers for the restructuring, you know, are in the third quarter. They'll be in for the full year, and that'll impact our full year margins for the full year for the U.S. That doesn't mean next year we'll necessarily see those, but we'll see. Okay.

And then, Doug, just on organic revenue growth in North America, around I think it was 4% in the slides, are you happy with that number? Do you think you can kind of get back to a range that's better than that? Damn right we can. I'm not happy with it. Okay. Okay. I mean, do you think we can see a better number in the fourth quarter? Is there anything unusual going on in the third?

No, I think it's consistent with what we've seen over the last year to date since we acquired Dunbar. and we'll see, and there are some things that have happened already, like we announced in the second quarter, that should help continue to improve those things going forward. So it's a combination of the Don Breuer integration, some of the things that we have going, that over the, whether it be the fourth quarter or next year, we expect and we will see higher numbers.

Okay, great. Thank you very much for your time. Thanks, Jamie.

The next question comes from Jeffrey Kessler of Imperial Capital. Please go ahead.

Thank you. First question, With the continued devaluation of the Argentine peso, two questions around that. Number one, at what point does Argentina become 8% of your revenues a year ago? At what point does it become small enough so that devaluation of the peso does not have this outsized effect on your reported numbers?

Fortunately, the price increases that we mentioned, year-to-date 37%, are offsetting that devaluation. And right now, we don't see Argentina diminishing from where it is today as a percent of the portfolio.

Well, but to that point, Jeffrey, I think over the course of the last several years, you are correct in that Argentina has become a significantly smaller percentage than it was. But we're balancing two things, and I think your approach is probably reasonably accurate in that it has become and will continue to be probably a smaller portion of our overall portfolio, which is good because that means what we've done through both 1.0 initiatives of improving our margins and growing the business and then doing acquisitions has continued to do that and will continue to drive that. As I stated in my comments, over the next two years, we expect the U.S. to gain another 50 basis points in margin. Excuse me, 500. Let me say that again, 500 basis points in margin over the next two years. Obviously, that margin improvement, which is partially driven by the additional carryover synergies into next strat plan period of time, that will continue to make the Argentinian portion of the contribution overall continue to get smaller. That's good. It doesn't mean that Argentina is going down. The local performance in the country in Argentina is very, very good. The contributions are very nice. So, you know, we don't want to diminish that, but unfortunately, as you see here, the impact of that plus a few other currencies, you know, make a difference in the quarter. We still, even with all that reported 7 plus percent, as I said before, if we would have adjusted just to have it similar to what we initially laid out in our prior guidance, as we call it now, prior guidance, it would have been 14 plus percent, which is consistent with what we're saying for the full-year guidance with all of the impact of FX in there. So eventually, it will get to a point where it becomes a smaller component than it is today. It is much smaller today than it was because of us growing, but it's still a very good business We expect it to continue to be, and we are well down the path of offsetting with inflation-driven pricing, offsetting what we would consider to be the FX shocks from August of last year and August of this year. Well down the path, and we'll talk more about that on Investor Day and in the fourth quarter earnings release coming up.

Quickly, before I get to my real question, I just want one more quick question on our... The real question... There's an election coming up in Argentina. Do you have any feeling as to who wins? Will that have any impact on fiscal policy in that country?

The election Sunday, we're all watching the polls, which everybody knows are extremely accurate, not only in Argentina but in the U.S., have the Socialists winning. They won the primary.

So the question then is, is the impact already baked into both the devaluation and the other economic... You know, the shock we got in the end of August was a result of the primaries, which should be baked into, we hope, much of it now. So hopefully it's baked in. The question then that you're asking is, what happens, what do they do after that? Wait a minute. But, you know, the key piece is that we've got nice internally driven inflation-driven price increases that are help offsetting that. And that's what we anticipate we'll continue to see. Okay.

My other question is on technology. As you move into 2.0, we haven't talked a lot about it. We haven't talked a lot about some of the internal technology improvements that you're using to – to promote services, you know, services to branch, bank branch improvement, is one of the, is one of the fair legs that you are, you know, I think that your next, that your next iteration is going to be based on. Can you talk a little bit about where you are in that process? What seems to be more viable over the next couple of years? And then what is, what is more probable that's going to take more than two or three years?

You know, I hate to not answer that, but I think it's going to be much better served if what we do is answer that in a whole cloth way in our investor day, because I think much of that will be answered in much more detail and much more better understanding about both the strategy, the target growth areas that we're looking at, the impact that we think we'll have, the differentiation we think we'll have, the broader services that we'll offer. I think that'll be much clearer and much more concise, and the technology that helps drive that in our investor day coming up.

If I could rephrase the question just quickly, what about the investment that you've been making this year, and you've talked about them as part of your corporate expenses, what should be showing up over the very, very near term, over the course of the next six to nine months?

Very little, frankly, other than some additional expenses over the next six months.

Okay.

But what should be showing up as we go into 2020 is we should start selling product. It will ramp up as we go throughout 2020. So we should start seeing revenues. Conceptually, we should start seeing revenues associated with the development of the products that we see that we're developing today. So the investments in the OPEX in 2019 should translate into revenue. pilots in early 2020, which should translate then into revenue as we go through 2020, and then through a ramp-up that's hopefully much more significant as we go through the rest of the new strategic plan period, 2020 through 2022. And as we do that, the intent is to continue to invest both in terms of the technology, the product development, as well as marketing and sales expenses through 2020, but to have that offset by, over the course of the year, offset by revenue and higher margins associated with that revenue as we go throughout the year in the planned period. So next year, the intent overall of the year is to not have the negative impact of the investment of 2.0. In other words, the greater than $20 million that we will be spending next year on 2.0 investment, op-ed income investment, that is, will be offset over the course of the year. And again, I stress that because the first quarter won't be as good as the third and fourth quarters, will be offset by the revenues and profits and higher margins that we get from that. That's the intent. That's the strategy. That's what we're laying out. That's the path that we're on. And as I tried to point out, you're getting glimpses of the pieces of this and the various components. We're developing that core strategy of 2.0 that we hope to roll out with pilots and therefore, and then product and revenue achievement in the early part of next year. We did the acquisition of a company called Balance Innovation that gives us software and linkage with 11,000 retail locations and linkage with enterprise retail customers that is another portion of that core strategy. And then, obviously, the award that we received in France is of the outsourcing of a major tier one bank in France of all of their managed services for their ATM, what they call the ATM estate there, is a major, major accomplishment in providing us a foothold of yet another key portion of the core strategy for 2.0. So, you know, the pieces are kind of being shown there. And the other core piece that you're asking about is the integration of our technology that we think will be unique will be really in these pilots and product that we start rolling out in the early part of 2020. And that will be discussed on Investor Day? All of that will be discussed, and hopefully it will come together, and then I'll start whipping out numbers like 2.1, 2.2, and 2.3. I'll start. Okay. Which is integral portions of our strategy and how we are looking at it and how we're developing it. Great. Thank you very much.

Okay. Again, if you have a question, please press star, then 1. The next question comes from Sam England of Barenburg. Please go ahead.

Hi, guys. Just a couple for me. The first one, could you talk a little bit about how the discussions you've been having with other banks on ATM outsourcing are progressing? I know at the time you announced the French deal, you said there were some other banks you were talking to, so I just wondered how that was progressing.

Well, it's progressing faster than we want. And the reason is they are coming to us because with the public announcements, of the deal with BPCE. Every other bank in France knew about it and actually knew about it before the announcement and wants to be next. We need to make sure we have the capabilities fine-tuned, up and running, and then we believe we will also have solicitation from banks in other countries. We think this is a game changer. We believe the banks must continue to provide cash ATMs for their customers, but they're all looking for a way to do it more effectively and more efficiently, and we have a solution that is state-of-the-art with a long lead time and barriers to entry. So it's going faster than we can imagine. deal with all of the inbound requests we have, but we want to make sure we get it right before we expand the offering to other clients.

I might put a little bit of tempering on that. I think that that's absolutely the case because this was a unique win, I think, in that it's hard for a major bank, especially a Tier 1 bank, to outsource their ATM estate. It's risky. It's something different. It's something new. So this was pretty significant for this to happen. And so it is going to take some time. It took a lot of time for that to happen. This is the first major one that I really know of in the industry. And so it's going to take some time for the other banks to continue to move. The response has been because it's now known out there, as Ron is suggesting, that has been significant interest in inquiries around that. In fact, the spinoff to that as well is in France, I think, is what Ron is also alluding to, is that many municipalities who are looking to continue to more rural than in Paris or in the cities are looking to assure that they have access to cash in those areas, and therefore they want ATMs. They're now looking to work with us to put ATMs in those cities. So that's one of the spin-offs as well. But I don't look for this to be something that all of a sudden we're going to see five or six more major banks doing this. This is, I think, a major win. It's going to take some time. As we have told you before, this doesn't really start up until the end of 2021, but it is a 10-plus year deal. And these are longer-term deals to make this both gain them as well as gain the deals, that is, as well as the duration to implementation.

Great, thanks. And then the next one was just around Argentina. I just wondered if there's anything you're doing or that you can do to position the business for a further derating in the peso or potential capital controls after the election on Sunday? Or is it really, you know, you wait and see and just see what happens after the elections?

Well, we could hedge it at about a 25% cost. No, no. The latest quotes I've got for hedging the peso are between 90% and 100%.

You know, I think what we can do is, Sam, is we can remember that we operate a damn good business down there. It continues to be extremely good. Volumes continue to increase as a result of inflation that is created there, which is positive for us as well. And the difference that we're talking about here is when we get the cash. And I think that's really the issue. We aren't importing oil. We're not importing steel. We're not seeing any impact to our margins. In fact, frankly, they're going up. None of that is negative like other things that are happening with trade wars and so forth. This is a darn good business in Argentina that we think is a great part of our business. The difference that we're seeing is this $20 million or the bulk of this $20 million is going to be delayed in the time frames that we get them. Our our debt is going to be going up this year by the amount that we would have paid it down if we would have received it. So it's translational. It's not lost. It's a matter of time frame is the way that we look at it. And I think that's an important piece that the investors should look at this that's much different than what they're worried about operational FX issues. And this is not that.

Great. Thanks, guys. I'll leave it there. Thanks, Sam.

The next question comes from Wayne Archambault of Monarch Partners. Please go ahead.

Hi, good morning. I'm sorry I missed it. I'm sorry I missed it. The investor day, have you specified a day on that? No, we've not. Thanks for asking. We're all very curious. Will it be in the first quarter? Any sense of the general timing?

General timing, we're thinking about late first quarter. Okay. Our class yesterday was in early March of 2017. Yeah. Right, right.

And, you know, what we've done is we've done a great job of getting everybody so excited about it that we need to probably do something. So we will do that.

The turnout a couple years ago was great. So hopefully this turnout will be even better. So that was a very productive day. It was a great – you guys did a great job that day. It was well worthwhile. So thank you.

Well, thanks for that, too. Yeah, we appreciate it. Absolutely. This is going to be even better.

Perfect. Thank you. That translated into 22% compound energy growth rate, and over the whole time, even with an FX, it was a huge negative impact on it. So just think what we're going to get this next time.

Perfect. Wonderful. Thanks, guys. Thank you. Thank you. Thank you.

And ladies and gentlemen, this will conclude our question and answer session, and it will also conclude our conference call for today. We thank you for attending the Brinks Company's third quarter 2019 conference call. And at this time, you may disconnect your lines.