Brinks Company (The)

Good morning and welcome to the Brinks Company's second quarter 2020 earnings call. Brinks issued a press release on second 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 in the investor relations section of the company's website, Brinks.com. At this time, all participants are in a listening mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now for the company's safe harbor statement. This call and the Q&A session will contain forward-looking statements. Actual results could differ materially from projected or estimated results. Information regarding factors that could cause such differences is available in today's press release and in the company's most recent SEC filings. Information presented and discussed on this call is representative as of today only. 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, Chad. Good morning, everyone, and welcome to our call. Joining me today is our CEO, Doug Pertz, and CFO, Ron DeMonaco. This morning, we reported second quarter results in both a GAAP and on both a GAAP and non-GAAP basis. 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 also provided an analysis of 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 to the slides we're using today, and in this morning's 8-K filing, all of which can be found on our website. Finally, while we have not provided any specific guidance for 2020 or 2021, page three of the press release does provide sensitivity models that include a range of potential revenue and adjusted EBITDA levels for both years based on recent trends and customer data. I'll now turn the call over to Doug.

Thanks, Ed. Good morning, and thank you for joining us. Given the challenges and uncertainties of the ongoing COVID-19 pandemic, Our second quarter results were much better than expected when we reported our first quarter results on May 5th. On a sequential basis, compared to the first quarter, we delivered strong growth in operating profit, adjusted EBITDA, and EPS. We reported operating profit of $73 million with a margin rate of 8.9%, despite negative currency translation that impacted revenue by $86 million and operating profit by $18 million. This negative FX impact on operating profit was more than offset by aggressive variable cost reductions in the quarter and the initial contribution from the G4S acquisition. Compared to 2019, our reported revenue, which includes the acquired GA4S business operations in the quarter, was down 10% and was flat versus last year on a constant currency basis. Like most companies, our sequential and year-over-year results were heavily affected by the global pandemic, both in terms of reduced revenue and profit and added cost of operations. When we reflect on where we were in April, we're very encouraged by the progressively positive impact of our cost reduction actions and what they have had on implementation during the quarter. were also encouraged by the strong revenue recovery we saw in June as economies began to reopen. For example, total company revenue, including acquired G4S businesses, were down 20% on a reported basis versus last year's prior April, and revenue recovered to be up 3% in June. Excluding G4S businesses, which may be a better comparison for the market recovery, the April decline at the bottom was 29% compared to a 14% decline versus prior year in the month of June, a 50% recovery. Looking at the U.S. alone, there was a similar 50-plus percent improvement during the quarter, from a 24% decline in April in revenue to an 11% decline in June. Both Ron and I will provide more detail in a quarter, but first I want to address some investor concerns that we heard after releasing first quarter results. On February 26, we announced the acquisition of the majority of the G4S cash business. We believe this is a great acquisition, and early results clearly support this. But with the subsequent onset of the pandemic, the timing was less than ideal. Despite the attractive valuation for the acquisition, Our increased borrowings in the face of the pandemic raised investor concerns about our debt covenants. We addressed these concerns by amending our debt covenants through the first quarter of 2024, and we expanded our liquidity to over $1.3 billion. The G4S acquisition is now 80% closed, with the acquired businesses performing well, and $20 million of annualized synergies expected to fully be realized in 2021. The G4S operations made a strong contribution to our second quarter results, and with additional ongoing cost realignment, we expect further profit growth going forward. In March and April, the impact of the pandemic, the sudden downturn of economies globally, and the resultant impact of our short-term earnings and cash flows were all unknowns and therefore potentially significant investor concerns. In response, and as part of our Priority 2 initiatives, during the quarter we made substantial and timely progress in reducing costs on a global basis. Ron will provide more details. The results of these cost reductions were targeted at reducing variable costs in line with expected near-term revenue reductions and are evident in our comparatively strong second quarter results. These cost reductions had increasing impact as they were implemented through the quarter. And together with additional longer-term cost reductions, they should be key drivers for margin growth in the second half of this year and even more in 2021, when we also expect additional revenue recovery. Investor concerns about our exposure to retail customers, which comprise about 45 percent of our total revenue, is certainly understandable as well. However, it's important to understand that we have a very stable base of large retail and financial institution customers. Furthermore, the overwhelming majority of retailers do not do business with Brinks or other cash management services. In fact, we estimate only approximately 10% of U.S. retail locations are vended, which gives us a great opportunity to serve these locations by offering a better cash management solution for these customers, which we're in the process of doing with our Strategy 2.0 initiatives. We believe the stability of our FI customers, the revenue recovery we're seeing, and the new 2.0 service offerings for a very large, unvented retail market will limit our downside exposure during these types of times. About 45 percent of our retail customers in the U.S. never closed because they were considered essential businesses. just as we are. Of those that have closed, many have reopened, and the customer locations that have reopened are generating revenue for us at or near pre-crisis levels. And contrary to what many of you have been hearing, every one of our US customers that has reopened is accepting cash from its customers. Furthermore, cash in circulation has grown and shown a sharp increase since the onset of the pandemic. We'll provide more details in a few minutes. With the recent July data indicating continued revenue recovery above the June revenue levels, which was at 86 percent of last year's revenue level on a comparable basis, we believe revenue for full year 2021 could recover to a range around 100 percent of 2019 revenue levels or potentially higher. It's too early to provide guidance for 2021, but with our cost reductions, adjusted EBITDA in 2021 could be in the $700 million range, and even higher if 2021 revenue is greater than comparable 2019 levels. For 2020, we expect continued improvement, especially as our cost reductions further take hold and drive adjusted EBITDA margin improvement, with our sensitivity model showing a range of between 14% and 14.5% EBITDA margins for the full year of 2020. Before going further, I want to briefly remind everyone about our top three priorities as we manage through the COVID-19 crisis. The first and most important is to assure the safety of our employees, their families, and to assure a safe working environment. In addition, to assure we provide the essential services to our customers and communities we serve. During the pandemic, we did just that, maintained our essential services to our customers, thanks to all of our 70,000-plus employees globally. The second priority is to act decisively to protect our business by preserving cash and reducing variable and fixed expenses to align our near-term cost structure with the reduced volumes and revenue caused by the mandated shutdowns globally. Unfortunately, doing so has required us to make many tough decisions, including employee layoffs, furloughs, and salary reductions throughout the company. However, the aggressive and decisive actions taken, supported by our dedicated employee teams globally, produced the better than expected second quarter financial results. Our third priority is to position Brinks to be a stronger company on the other side of the crisis. This priority is focused on right-sizing the business and capturing significant additional fixed cost reductions through restructurings that include headcount reductions and other structural cost takeouts. These sustainable fixed cost reductions are expected to drive higher margins at lower revenue levels and create greater earnings leverage that results in even higher margins as revenue continue to grow. We're also sharply focused on completing the acquisition and integration of the G4S operations, including synergies, as well as rollout of our Strategy 2.0 initiatives. We're acting with a great sense of urgency and making solid progress on each of these priorities, as proven by our results and our future margin targets that we're sharing with you today. Now for a quick summary of quarterly results. As I mentioned earlier, our reported revenue declined 10% in the quarter including the significant negative impact of transitional FX, partially offset by the G4S acquisitions completed in the quarter. On a constant currency basis, without the negative FX impact, our revenue was flat versus last year. Organic revenue was down 17% versus last year. This excludes the addition of the G4S businesses that were added in the quarter and is probably a good indicator, again, of the pandemic's impact in the quarter. Operating profit, as reported, of $73 million declined 18%, with the entire decline due to $18 million of negative currency translation. In constant currency, profits were actually up 3% versus last year's second quarter on flat constant currency revenue growth. The strong operating margin of 8.9% in the quarter compares well with last year's 9.7% margin, and on a constant currency basis was actually higher than last year. These results show that our aggressive cost reductions had a very favorable impact in the quarter and position us, again, well for the future. Adjusted EBITDA fell 6% to $125 million, but reflecting a 15.2 margin rate, an increase of 60 basis points over last year's same quarter. Earnings declined 22% to 67 cents per share, reflecting a negative currency translation and higher tax rate. In constant currency, earnings were up 3%. Ron will cover more of this in a few moments. Turning to slide six. Predicting the future impact of the pandemic on our business, or most any similar service business, is very difficult, and we acknowledge these uncertainties. Just as government mandated closings of our customers negatively affected our revenue and therefore our profits, the reopenings provide a path to recovery with the question and the key question being the timing and slope of the revenue recovery. This slide shows year-over-year revenue changes for April and June for a variety of markets and the overall company. As you can see, most of these countries are recovering from their lowest level of revenue in April to June, the most recent month after reopening started in many countries. In aggregate, our consolidated recovery, including the acquired G4S businesses with their respective pre-COVID-19 levels, shows a recovery from down 29% versus 2019 levels in April to a 14% decline in June, or an approximate 50-plus percent revenue recovery. These June numbers represent only partial reopenings, and in general, additional openings continue beyond the middle of June and into July, further pushing the overall revenue recovery levels higher than the 86 percent of last year. Without knowing the timing of future economy openings or the impact of possible resurgence of the virus in the U.S. and other countries, The June revenue of 86% of 2019 revenue seems to be a reasonable starting point for modeling future 2020 results. The consolidated bar on the far right of the graph shows reported revenue, including the acquired G4S businesses as compared to only the Brinks businesses in 2019. This comparison shows revenue down 20% in April and actually up 3% in June. This illustrates that future earnings will not only be driven by core business revenue recovery from the pandemic, but also by the added G4S acquisition revenue, both in the second half of this year and in 2021. Here's a closer look at U.S. CIT volumes measured by stops as well as by actual revenue. At the low point in April, stops were at 68% of pre-COVID levels or down 32%. they have already recovered to an encouraging 83% of pre-COVID levels. More importantly, the corresponding revenue recovery has also been rapid and equally encouraging. At the April low point, U.S. revenue was down 24% and has climbed back to 89% of pre-COVID levels in June, and with additional retail openings since the middle of June, is currently higher than that level. The data gives us confidence, yet again, that more customers are With more customer reopenings, we're on track to approach and hopefully exceed 2019 revenue levels. Most of the reopenings are for non-essential services, such as clothing, general merchandise, retailers, as most of the essential service providers remained open during the pandemic. Dine-in restaurants and entertainment locations, such as sports venues, theaters, and casinos, have been particularly hard hit by the pandemic. and may continue to be delayed in reopenings as and if the virus continues. These customers in total represent only about 3% of our pre-COVID revenue. Since the pandemic hit, I often hear that our retail customers will not be accepting cash in the future, and consumers, in fact, will not use cash in the post-pandemic world. Contrary to popular belief and what is often heard in media, Every one of our customers that has reopened since being closed by the pandemic is continuing to accept cash from their customers as they reopen. This includes a large, well-known department store chain that media indicated would not accept cash when they reopened. Our revenue with this customer is back close to pre-COVID levels. In our U.S. retail business, we bill our customers several ways, based on the number of stops, on a monthly flat rate basis, or on a subscription basis, such as we do with CompuSafe, we do not bill based on volume of cash handled. Typically, our customers average two to four stops per week, or as needed in the case of CompuSafe. In the second quarter, due to the state-mandated closings, many of our customers that are on flat rate service or CompuSafe subscription agreements temporarily closed. even though our agreement stipulated that they would continue to pay. Invoices sent to these customers were equal to approximately 11% of overall second quarter U.S. revenue. However, these invoices were not included in our second quarter reported revenue, but are included in our accounts receivable ledger. As customers pay these invoices over the next quarters, those invoices will be booked as revenue without additional cost. If these invoices were recognized as revenue in the second quarter, US reported revenue would have been down about 10% versus the reported 20% decline in the quarter. And the estimated operating income would have been about over 12%. As disclosed in our last earnings release, significant cost reductions were planned and implemented in the US in April and May. These cost reductions have resulted in a U.S. operating margin of approximately 10% in June, even with the revenue down 11% in June versus the prior year. Before I talk directly about slide 8, I'll remind you that the charts we've shared in the past regarding cash and circulation are included in the appendix and in other recent investor presentations. Those charts show that cash and circulation, both in value and number of notes, continues to grow in the US and in Europe at annual rates of between 5% and 7%, well ahead of GDP rates. This growth has been consistent for the last 20-plus years, providing a strong underpinning for our business. They also show that cash in circulation and percent of payments in cash historically has increased during a recession, which we're in. While this pandemic is unprecedented, This new slide for 2020 clearly demonstrates that U.S. cash in circulation has increased sharply from pre-COVID levels and at a rate much higher than the historical 5% to 7% annual rate. It also shows a corresponding increase in the volume of notes that Brinks processed before and after COVID-19, supporting the stability of our financial institution customers and demonstrating the increased use of cash as a method of payment. It is our strong belief that cash is and will remain a very popular form of payment in the U.S. and in the rest of the world. In fact, in emerging markets like those in Latin America, Eastern Europe, and Asia Pacific, growth rates in cash and circulation and cash as a percent of all payments are even higher than in the U.S. and Europe. I'll now turn it over to Ron for a financial review. Ron?