Brinks Company (The)

Hello, and welcome to the Brinks Company's second quarter 2023 earnings call. This morning, Brinks issued a press release detailing its second quarter 2023 results. The company also filed an 8K that includes the release and the slides that will be used in today's call. The release and slides are available in the investor relations section of the company's website at investors.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 and will be available for replay. 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 are available in the footnotes of today's press release and in the company's most recent SEC filings. Information presented and discussed on this call is representative 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. I will now turn the call over to your host, Jesse Jenkins, Vice President of Investor Relations. Mr. Jenkins, you may begin.

Thanks and good morning. Joining me today are Brink CEO Mark Eubanks and CFO Kirk McMacken. This morning we reported second quarter 2023 results on a GAAP, non-GAAP and constant currency basis. Most of our comments today will be focused on our non-GAAP results. because we believe these results make it easier for investors to assess operating performance between periods. Reconciliations of non-GAAP results to their most comparable GAAP results are provided in the press release, the appendix of the presentation, and in this morning's 8K filing. I'll now turn the call over to Brink's CEO, Mark Eubanks.

Thanks, Jesse, and good morning, everyone. Thanks for joining us. Starting on slide three, we delivered record revenue and operating profit in the second quarter. Total revenue was up 7%, including organic growth of 8%. Our cash and valuables management business grew organically by 5%, and the ATM managed services and digital retail solutions customer offerings were up 19% organically. Operating profit was up 6% in total and 13% organically for a margin of 10.8%. Adjusted EBITDA of $194 million was up 4%, with a margin of 16%. Cash generation remains a key focal point of the business and I'm pleased to report an improvement of 233% or $115 million in free cash flow year to date as we made meaningful progress this quarter towards our cash conversion target for the year. Looking at the performance drivers, we remained vigilant in our pricing efforts in our cash and valuables management business and delivered another quarter of strong price realization in excess of inflation across all of our segments. With inflation down from a year ago in most of our markets, pricing growth has moderated from the highs we saw in the previous periods, but remains a key part of our plans going forward as we drill down to a more strategic approach to pricing. The strategic growth engines of AMS and DRS continue to bolster our results with 44% growth year to date and positive momentum in the back half with good customer interest creating actionable pipelines. Our increased focus on free cash flow at the local level has generated strong results as we've ingrained these cash discussions into our normal operations with our country leaders and are starting to make real progress on cash conversion. As a reminder, 2023 was the first year we've added free cash flow targets to our annual management incentive plan, which applies to the roughly top 200 global leaders across Brinks. Working capital improvements, along with the EBITDA growth, has generated $115 million more cash than this time last year, well on our way to delivering the approximate $150 million year-on-year improvement that we laid out with our full-year guidance. On the operating margin side, we continue to drive costs out of our business with the rigorous implementation of lean through the Brinks business system the execution of our 2022 global restructuring plans, and the revenue mixed benefits of AMS and DRS growth. These gains were offset by a $12 million year-on-year increase in security losses, primarily from a single event in our global services line of business. Kurt will have more on the loss and its impact later in the presentation, but these large losses can be lumpy in nature quarter to quarter, but due to the way that we budget and the way that we manage risk, We do not expect this loss to have an impact on our full year guidance. Now, halfway through the year, we remain firmly on our plan and have affirmed the full year guidance for revenue and free cash flow and affirmed the guidance that we increased last quarter for operating profit, adjusted EBITDA, and earnings per share. Turning to slide four, I'd like to provide a few more details on the customer offerings that are driving our performance. The cash and valuables management line of our business grew 5% organically in a quarter. We remain focused on managing inflation in the business and are seeing positive results in our pricing initiatives. As expected, pricing growth is moderating to more historic levels from the peaks that we saw last year in several of our key markets as we lacked historically high inflation coming out of COVID last year. We continue to see pricing opportunities across all services, as we deliver a more consistent customer experience and shift our offerings to provide more additional value added services. The Brinks Business System is our framework for business excellence and operational improvements across all areas of the business. Commercially, we're focused on improving our customer experience with an increasing value proposition related to cash payment efficiency, accurate reconciliations, and working capital transparency. we're developing solutions for a broader set of customers by reducing our cost to serve while driving service and quality improvements. On the cost side of our business, we're driving meaningful productivity. By leveraging best practices, we've been able to drive efficiencies in labor management and fleet utilization in all of our segments. The results of our efforts are translating to the numbers, with year-to-date operating margins in North America improving by 190 basis points, European margins improved by 90 basis points and our rest of world segment improved by 110 basis points. I'm encouraged by the progress, but I'm confident that we're just scratching the surface on the potential we have for efficiency gains as we share best practices from the top performers across the globe within our business. Let's discuss some of the visible improvements specifically in our North American segment resulting from the Brinks business system. Year-to-date service metrics have improved to roughly 98% on-time delivery, and our quality and accuracy metrics, which is measured by our customer SLAs, have improved greater than 30% versus year-end 2022. Both service and quality improvements across the year are being recognized by the market as we complete our mid-year discussions and hear from our top customers. We also continue to make meaningful progress in employee relations as we focus on the health and safety of all Brinks colleagues. In the area of safety, we see a greater than 25% improvement in our recordable incident rate, and we're also seeing a continued reduction in frontline turnover. Our North America Human Resources team has done a great job understanding all of the drivers of employee turnover and have recently improved our training and interviewing procedures for our leaders to ensure that we're onboarding the right employees and training them effectively for their job. With longer-tenured employees, safety, customer service, quality, and efficiency metrics continue to improve. Now turning to digital retail solutions and ATM managed services. We delivered 25% organic growth and 44% total growth year to date. On a trailing 12 month basis, we now have 19% of our total revenue represented by these higher growth, higher margin businesses, up from 18% last quarter and 16% at the end of 2022. The conversion is also helping our impressive cash flow conversion, where we see meaningful DSO improvement, particularly in Europe, driven partially by the DRS AMS revenue growth we've seen across the segment. In DRS, our sales team is gaining momentum and customers are responding to our solutions-based sales approach. In the U.S., June was the best month that we've had this year for DRS contract bookings, And that momentum has carried into the early part of third quarter. As we continue to improve our operating cadence around DRS, we've increased our focus on shortening the period from contract signing to installation and the associated revenue recognition that comes with those agreements. This is a natural extension of our focus on customer loyalty as we work closely through the sales and onboarding process to collaboratively set rollout plans that align with our customer expectations. We continue to see demand for DRS across a wide range of retail verticals. In addition to the success in the quick serve restaurant vertical I mentioned last quarter, in Q2, we closed several significant deals representing hundreds of locations each. These customers were represented by a large arts and craft retailer, a publicly traded entertainment company, and a large multinational fashion retailer in Mexico. We continue to find success with our DRS offerings in these new verticals by targeting individual customers with application-specific value propositions. In AMS, we've completed the rollout of the BPCE network in France at the end of 2022. Recently, we signed two additional banks that will leverage the same infrastructure. We're currently in the project planning phases and expect to have these two networks online and integrated by the end of 2024. The team is working on optimizing routes around the new locations and integrating the new endpoints into our technology stack and workflows. We also continue to make progress integrating the capabilities of Note Machine into the broader business, but particularly in Europe. Having already developed the infrastructure and logistical footprint needed for a holistic AMS experience, we remain uniquely positioned to help our customers reduce their cost of ATM ownership. We're engaging with many financial institutions and independent ATM operators around the world who are interested in the AMS offering, as well as our expertise in the area. We recently added two additional banks to our AMS portfolio in Jordan and have initiated several new customer pilots in Latin America, as well as continue to work a robust global pipeline of AMS deals in all segments. Turning to slide five and starting on the left, Total revenue was up 7%. The organic growth of 8% I mentioned earlier was supplemented by 3% growth from acquisitions, primarily from the note machine acquisition in Europe we completed in Q4 of last year. And currency translation was a 4% headwind in the period. Looking at the segments, we drove continued AMS DRS growth in Europe and delivered 21% organic growth across the Latin America region. In North America, revenue was slightly down due to lapping a prior year equipment sale to a large DRS enterprise customer, as well as the continued optimization of our customer portfolio profitability. These results were in line with our expectations, and with good progress on DRS and another 90 basis points of margin expansion in the segment, we remain confident in our outlook for the year. Report operating profit was $132 million with a margin of 10.8% and adjusted EBITDA was 194 million with a margin of 16%. Excluding the timing related impact of the security losses from the reported numbers, we would have generated a $20 million increase in both operating profit and EBITDA year on year with operating margin expansion of 90 basis points and EBITDA expansion of 60 basis points. As I previously mentioned, The margin expansion was driven by strong productivity, the execution of our restructuring actions, and the revenue mixed benefits as we shift to higher margin AMS and DRS revenue. The Brinks business system continues to deliver results and consistency across our commercial, operations, and technology organizations. Earnings per share results include increased interest expense from higher year-on-year rates of our floating rate debt and would have been up an additional two cents versus 2022 excluding the impact of the one-time security loss. The growth in profits as well as the working capital lifts are driving improved cash conversion with adjusted EBITDA to free cash flow conversion up to 53% in the quarter. Despite the impact of the one-time revenue items in North America and the increased security losses in the period, we remain firmly on our plans for the year and continue to build momentum with DRS and AMS volume and 120 basis points of profit margin expansion versus last year. I remain encouraged by our progress and excited about the future as we shape the business around these two accretive services. I'll now hand it over to Kurt, who'll lead us through the revenue operating profit EBITDA and EPS bridge, in addition to providing some more details on our strong free cash flow performance, as well as our capital allocation plans. I'll return with guidance and a few closing comments.