The Brink's Company (BCO) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining the Leveraged Finance Conference. My name is Marlane Pereiro, and I am the services analyst for Bank of America covering Brink's. I'm excited to have Ron Domanico, Executive Vice President and Chief Financial Officer of Brink's with us. Our format today will be a fireside chat. We encourage investors to type in questions, and we will try to include those in our presentation today. So with that, I'll get started with the questions.

Ron, again, thank you for being with us. And obviously, it's been a great, last quarter went very well for Brink's. For anyone listening that is new to the story, could you start with an overview of Brink's, where you sit in the cash ecosystem and how you are positioned in the industry?

Sure, Marlane. And thank you, and thank Bank of America. We've got a great partnership with the bank. We're one of the few businesses where the bank is a vendor and a customer, and so it really is a partnership. So thank you and the team. Brink's is almost 162 years old. We started delivering trunks from the railway station in Chicago to the World Exposition in that year. So it's been a long run. We had a home security business that was spun off years ago. That is not part of Brink's today, although a lot of people still confuse it because we share the same brand name. Brink's today is a global provider of cash management services. We are the largest, by far, more than twice as large as our nearest global competitor. We operate on the ground in 53 countries. We serve about 117 total with international logistics of high-value goods, including banknotes, precious metals, diamonds and jewelry, things like that. So we compete in the cash ecosystem. We're best known for our armored trucks and our armed messengers that move cash and valuables around the world. We also do it at airports. It's typically the last thing on the plane and the first thing off. And most of the time, the passengers have no idea that they're sitting on top of millions, in some cases, hundreds of millions of dollars of valuables. So we have been doing the same thing the same way for a very long time. And in the last couple of years, Doug and I joined in the middle of 2016, we've been looking at ways to really penetrate the cash ecosystem with services that are more valuable to our customers, that are more comprehensive and have higher margins and use less capital to increase our return on invested capital. So that's just a brief overview.

Great. And can you walk through the strategic rationale for the G4S transaction? And remind us what the company did from a balance sheet perspective this year and what your liquidity profile looks like right now?

Sure. Well, we've actually, since joining Brink's, have had conversations with the world's leading cash management companies. All of us belong to the International Security Ligue. It's based out of Europe. And it involves ways that we can work together to improve the security and the transportation of valuables and in guarding services. And during those meetings, we had the opportunity to meet the CEO of G4S. And we basically asked him about the reason, the rationale for combining a guarding business with a cash management business. It seemed like they could create value by splitting the business. The margins on the guarding side were higher than the margins on the cash side, and that should be something he would consider. And then about a year later, he said he had this brilliant idea to split the businesses and would we be interested in talking. And so that began a year-long process to see if we could come to agreement. And on February 26, we announced the intention to acquire 18 cash management businesses from G4S, 17 country-specific businesses and a global transportation business for valuables. And it was days later that we found ourselves in a global pandemic. It was a fantastic acquisition at a horrible time. So we did the best we could with the situation. We contacted our bank groups even before the deal was announced, saying there was a potential that we would want to exercise the accordion of our credit agreement and expand our term loan A. We did that. We originally thought we would raise $400 million. But due to the unknown of the pandemic, with the help of Bank of America as the lead, we raised $590 million. And then the second part of the plan was to go to the public debt markets. They had shut. We were going to go originally to Europe to get euro financing. A lot of the cash flow stream from the G4S acquisition was going to be in euros. It seemed like a natural thing. But we were not prepared to wait until that market opened. So again, we used Bank of America as a lead to go to the high-yield markets in the U.S. We raised $400 million of senior unsecured debt. The execution was great. Hindsight is 20/20. If we waited another month, we could have got lower rates. But we were very happy to have the funds necessary to complete the transaction, even though it was going to be phased in, in 18 separate deals. At the same time, we went to our credit facility and worked with Bank of America to amend the covenant. We had 2 covenants, one of them is a leverage ratio and the other one was interest coverage. We were never even close to the interest coverage covenant. But the Board was concerned that some of the pressure on the stock price maybe with the uncertainty of the pandemic and the leverage of the largest acquisition in Brink's history that perhaps we should seek some covenant relief. We did that. We went from a total leverage ratio to a secured leverage ratio. And we got plenty of headroom and we also got the amendment for the full term of the agreement through February of 2024. We had a $1 billion revolver. We used the term loan A accordion, plus the senior unsecured notes to finance the acquisition. At the end of the third quarter, we had $1.5 billion of liquidity, almost nothing drawn on the revolver and almost $600 million of cash on the balance sheet. And Brink's is seasonal. A lot of people don't know that, but we generate about 150% of our annual cash flow in the second half of each year and quite a bit in the fourth quarter. So the fourth quarter will be free cash flow positive, even with the completion of another $106 million to finalize the G4S acquisition, which we're working hard to finalize, but we're really at the mercy of some regulators and licenses in countries that are being impacted by a second wave of lockdowns.

Got it. And Ron, I mean, just a quick question. How long do you think it could possibly push out the deal being finalized, if at all?

Well, we've completed 90% of the enterprise value. So we've done 15 of the 18 deals. So I hate to say it really doesn't matter, but it really doesn't matter. Every single deal in this transaction has been at the mercy, if you will, of the pandemic. 14 of the geographies are new to Brink's. So imagine trying to do inventory vault counts at 23 different vaults in Malaysia at the same time when you have no organization on the ground. And you're asking third-party consultants to do inventory, where the inventory is money, gold bars, silver, diamonds, jewelry. You really can't afford a mistake. And so we had to train everybody remotely using WebEx and Zoom and Microsoft Teams and anything that would work. And then if just one of those branches was closed due to travel restrictions or a COVID shutdown, we had to put the whole closing of the entire transaction in that country on hold. And so it's been a very trying experience. The Brink's team has been amazing. The G4S team stepped up as well. And I'll tell you that we're very happy with the transaction. You may not know this, but because Brink's and G4S were global competitors, we were not allowed to meet the country management or even see country financial information until we were the owners of that business. So it was a unique situation now being owners of 15 of the 18. We're very pleased with the team. They're a great team. During the pandemic with our legacy businesses, we did something that we called a restructuring of our operations. We weren't sure how severe, how long the pandemic would be. And so we asked each of our businesses around the world to reduce their variable cost at least the same percent or more that their revenue declined in the worst month of the pandemic, which for us was April. We also asked them to reduce 10% to 15% of their SG&A and their indirect costs. And the G4S businesses were no exception. Welcome to Brink's. You're going to have to realign your cost to deal with a global pandemic. I tell you, they really stepped up. The actions they took were really spot on. And really combined, the Brink's team, the legacy team and the G4S team were really responsible for delivering the overperformance in both the second quarter and the third quarter versus the Street's expectations.

Great. And actually, that's a good transition to my next question. What are the biggest organic growth opportunities for Brink's, especially as it applies to the new markets acquired with G4S?

Well, there's a couple of things. So first of all, in the new geographies, when we joined Brink's in 2016, the U.S. business, the largest business was losing money. And Doug and I, together with the team, really decided to focus on just a few things. We had 4 things that we called our breakthrough initiatives. We implemented them in the U.S. to dramatically change the fleet. We developed a new armored truck that you could separate the chassis from the body so that whenever the cost of ownership exceeded the replacement, you can replace just the bottom of the truck, not the entire truck. Almost 2/3 of the value of an armored truck is obviously in the body, the armoring, the security versus the chassis. So this new design enables much cheaper fleet upgrades and replenishment. We increased the security of the vehicle so it could be operated safely with one fewer person in the truck. And in the U.S., we went from 2 people to 1; Canada, we went from 3 to 2; for Mexico, we went from 4 to 3. We also then worked on our network optimization. We figured out that in many large cities, we could go to a hub-and-spoke system. So instead of every location having a money processing room and a vault, we can convert the spokes, if you will, to a secured garage and do all the money processing at a central hub. So very successful in those 3. And the fourth thing we did was really focus on sales. How do we sell Brink's products and services. It was a very successful implementation. The profitability of Brink's U.S. now is 10% operating profit margin, approaching 15% on EBITDA. And we're going to take those initiatives throughout the world, not only legacy Brink's operations, but also the new G4S operations. And they're very excited to have not only the ideas and the management focus, but also the investment to help implement these initiatives. So that's the first part of the organic growth strategy. The second part has to do with looking at the cash ecosystem. As I said, for over 160 years, we've basically been doing the same thing the same way. And we've come up with our Strategy 2.0. We're not very clever when it comes to numbering things. But this is leveraging our existing infrastructure to come up with new services that are comprehensive, create value for our customers, have higher margins for Brink's and require very minimal capital investment. So a big win for the ROIC.

Got it. And part of the opportunity you see going forward with Strategy 2.0 is focused on higher-value services associated with retail. Does pressure on brick-and-mortar in the near term from the pandemic limit or change that opportunity?

It's a great question, Marlane. And we're dealing with a misperception. So let me just go to some facts. Pre-pandemic in the United States, of total retail, 11% was online and 89% was brick-and-mortar. Of that 11%, half was Amazon. During the peak of the pandemic, so the summer, early summer, we saw online retail go up to 21%. Now whatever we are now, the end of the first wave, the beginning of the second wave, the advent of the vaccine, whatever you want to call where we are now, it's about 15% online retail. Which means today, of retail, 85% is still brick-and-mortar. I bet if we polled our listeners, I think they would think it would be much, much higher. So the reality is, where you've seen some retail closures, you've seen some bankruptcies, the vast majority of retail is brick-and-mortar and is with traditional payment methods. Now over time, cash has become a smaller percent of payments, but cash payments have grown 5% to 6% annually. So in the U.S., approximately 30% of retail transactions are paid for by cash, second only to debit. And then we've seen around the world the same trend. Cash use is growing. Cash use as a percent of payments is slightly declining. So there's a misperception out there. And unfortunately, in our circle, which don't take it derogatory or anything, we're 1 percenters. Very few of us use cash. Our friends don't use cash. Our kids don't use cash. So we really believe cash not only was dying, but that maybe even COVID had killed it. The reality is, is that during recessions, whether they're caused by financial crisis or a pandemic, the use of cash actually increases. In many of our branches today, Brink's is processing more cash now than we did before the pandemic. So it's a unique situation. It's really caused by people on the margin in society lose access to their credit during a recession. And unfortunately, we're seeing that, and that's causing these people who can't use a debit card, who can't use a credit card to use cash. And that's what's accounting for the increase in cash, not only in the United States, but globally right now.

Got it, Ron. And kind of with a resurgence of COVID or with the numbers going up, can you provide any commentary if you're seeing any changes in cash usage trends with the numbers going up?

So you're right. There is a second wave going around the world. Asia, where this all started, was the best prepared for it. They're doing well. Singapore, for example, we have a thriving business there, is doing very well with very few incremental cases, low hospitalization. We have other countries that have been devastated. Mexico, for example. The government took very little action for lockdowns. As a result, their economy did really well, but the human toll was probably among the greatest around the globe as far as percent hospitalization and percent fatalities. Not a trade-off that I would have made, but I'm not going to judge governments or even states on how they approach this. There's so much that's unknown about the virus. What is surprising to us is, generally speaking, around the world in the second wave, we see very few establishments that had opened or reopened actually closing. What's happening in stage 2 is that occupancy is being reduced. So if they were at 50% max before, the government is reducing them to 25% max. If they were allowed to stay open until 10:00, restaurants in France, for example, they've been now reduced to like 8:00, which is a problem for the French because they typically don't eat that early, but they can order takeout. So where we feared that a second wave would result in similar levels of shutdowns and loss of revenue for Brink's, what we've seen is really the opposite. Places have remained open at lower levels of activity. Well, our business model, we get paid each time we go to a location regardless if we pick up $2,000, $10,000 or $20,000. So our revenue has been pretty steady at the beginning of the second wave globally. Now we don't know how that's going to continue to morph. We are seeing tomorrow a slight easing of the restrictions in France. In the second week of November, they tightened things up. Tomorrow, they're going to loosen them up because the results are there. The U.K., every country is different. And as I said earlier, every state is different. But we have been pleasantly surprised that the recovery of our revenue stream has continued at the beginning of the fourth quarter at a much lower rate, but we actually were expecting a decrease because of the second wave.

Got it. So is it fair to say then that customer demand for your services, like, for example, in terms of the number of pickups or drop-off, has that been impacted? Or because you had mentioned how you get paid whether you pick up or not, but has the number of pickups or drop-offs been impacted with this kind of second wave going on?

Very slightly. Customers pre-COVID who had 3 pickups a week. If they were shut, they reopened. They basically they'll want 3 pickups a week. And even if you have a reduction in the cash on hand, you really don't want it sitting around an extra day or 2 building up for the risk profile. I will tell you that during the pandemic, we actually picked up new customers as bank branches were forced to close due to the virus. Some of these establishments that were open didn't know how to get their money processed. They couldn't get it to the bank. And we actually stepped in and provided at our cost or in sometimes even less services for community service just to make sure that we could keep the cash ecosystem functioning. We've been rewarded. That's not why we did it, but we've been rewarded by getting new customers and getting some of our competitors' customers to switch just because of the service levels that we've been able to maintain throughout the pandemic.

So is it fair to say more broadly because the pandemic has in some ways accelerated the outsourcing trend, especially among financial institutions?

We hope so. So Brink's is the first company that is able to provide a total outsourced solution for bank ATMs. We're doing this in France right now with BPCE, who's the second largest bank group. But we've heard from other banks in France and other banks around the world, including in the U.S., that when this is proved successful and viable, that you can totally outsource your ATM suite. The machines themselves, first line. Second line maintenance, reconciliation, replenishment and cash in transit, money processing, vaulting all by an outsourced provider like Brink's at a much lower cost than the banks can do with themselves. It's something that's attracted a lot of attention. The pandemic has slowed down the implementation in France a bit, but not too much. We've already rolled it out in about 10% of the BPCE Group, and we'll have it fully implemented, we believe, if there's not a third wave, by the middle of 2021.

Great. And what is the company's ideal leverage range or target? And ultimately, what are your goals with the balance sheet?

We don't know. Doug and my belief is that we optimize stakeholder value, both for our shareholders and our bondholders and our banks at around 3.0x levered. We actually had trouble getting to that level before the G4S acquisition. We're going to have trouble maintaining that level. After the G4S is integrated and COVID is behind us. The ability for Brink's to generate cash is material and should delever the business. In fact, we've said publicly that we believe, at the current projections, at the midpoint in the models that we put out, we believe we could get down to 2x levered within 2.5 years from the current situation. So an improvement in the world with a vaccine or global economy recovering as we move out of this pandemic would prove positive and accelerate that further. However, I should, at the same time, say, we have been very disciplined investors in both organic strategies, whether it's our breakthrough initiatives in the U.S. that we're taking globally with what we call wider and deeper, whether it's our 2.0 initiatives, or inorganically with our acquisitions, we have very strict guidelines. We need at least a 20% return from internal investment, at least a 15% after tax IRR for external acquisitions. And if we see opportunities to continue to invest internally or externally that deliver those types of returns, we'll pursue those. But we really would prefer leverage below where it is today, 3.7x at the end of Q3; 3.6, projected at the end of Q4 but declining after that. And then the secured ratio was 2.0 versus a max of 4.25.

Got it. And can you talk about how impactful the distribution of a vaccine will be on each of your retail, financial institution and other customers?

Wow, my first pandemic. What's that? I am praying for -- praying for a return to normal with the understanding that it's probably going to be a new normal. I mean, part of me as the CFO is grateful that we're saving $6 million a quarter on lower travel expenses. Part of me is impressed that we're able to operate as efficiently and as effectively remotely as we've been able to do. There's no way I'm going to authorize travel budgets what they were pre-pandemic with the understanding now that we can function, at least, very well remotely. So there's been some silver linings in the pandemic. I mean, we saw customers who, pre-pandemic, were demanding that we only show up between this hour and this hour on this day. Otherwise, it would disrupt their business now saying, hey, please just show up. And we have a photograph where if you look down the main street in France, the only vehicle you see is a Brink's truck. We are there to keep the world's cash ecosystem functioning and we've learned that we can improve route scheduling and route density by asking our customers to be more flexible with no negative impact to their business. I think I would love to get back together with my colleagues face-to-face. I don't know what we're losing by not being together. I just know that there's something falling between the cracks. It's not -- do you compare the water cooler value versus $6 million a quarter in travel savings. We always believe that the interactions that happen between the meetings are extremely valuable. I'm really looking forward to getting back to those. At the same time, this pandemic is not over. The threat is very real. We need to make sure as our first priority at Brink's that we are safe. We keep our colleagues safe. It's the only company I ever worked for where people routinely shoot at your employees. So we have that as our #1 value before the pandemic. It's been emphasized since then. We were one of the first companies to provide PPE for all of our employees around the world to keep them safe. We still want to keep them safe. This isn't over. The vaccines aren't out yet. They haven't been tested. And until that time, I mean, we're going to be at the forefront of safety, but we're also at the forefront of making sure we serve our customers and keep the global economy functioning. It's a very fine line to balance, but we take great pride in what we've been able to achieve so far. And we're really looking forward to the vaccines coming in and to the new normal.

Got it. And Ron, my first thought is that with the distribution of vaccines, your retail customers would probably be the most impacted. Is that an oversimplification? Or is that an obvious observation that, in fact, they would benefit the most? Or is there something I'm missing in terms of your financial institution customers or something to that effect?

Well, Marlane, I'm very surprised how many people are shopping in malls right now. I live in Georgia. It's a red state with lax lockdown. And that's not a political comment. It's more of just a reality. So even without a vaccine, I'm surprised that retail is doing well. Side effect of this pandemic is that a lot of people have saved money on commuting that they're planning to spend on the holidays coming up. They're expecting a very big retail season. The vaccine is really going to help one of our customers that is under the radar, schools. We provide services to public schools, to universities, to private schools. And when they're shut, we're missing not only a little bit of business. It's not a big part of our business. I think we're missing a big part of our society. So I really think the vaccine is going to have the biggest impact on the younger generation, those that are in schools. The ability for them to get back in schools is important. And I think that will free up the parents who've had to stay home, especially with the younger children, so that they can get back in the workplace. And that everybody can get back to a more normal situation. So it's hard to pinpoint the best part of a vaccine, but I'm really ready for it.

Got it. Ron, that's all I have. I really appreciate your time today. It was great speaking with you.

Marlane, the pleasure was all mine, and thank you. Thanks for the questions. They're very spot on. And thanks again for Bank of America for our partnership, and we look forward to getting through this pandemic and growing together on the other side of it. Thank you so much.

Great. Thank you so much.