Brink's Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Hello, and welcome to The Brink's Company's Second Quarter 2023 Earnings Call. This morning, Brink's issued a press release detailing its Q2 2023 results. The company also filed an 8 ks that includes the release and the slides that will be used in today's call. Release and slides are available in the Investor Relations section of the company's website at investors. Brinks.

Operator

Com. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Call. This call and the Q and A session will contain forward looking statements.

Operator

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. Brink's assumes no obligation to update any forward looking statements. The call is copyrighted and may not be used without written permission from Brink's.

Operator

I will now turn the call over to your host, Jesse Jenkins, Vice President of Investor Relations. Mr. Jenkins, you may begin.

Speaker 1

Thanks and good morning. Joining me today are Brink's CEO, Mark Eubanks and CFO, Kirk McMacken. This morning, we reported Q2 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 most comparable GAAP results are provided in the press release, the appendix of the presentation and in this morning's 8 ks filing.

Speaker 1

I'll now turn the call over to Brink's CEO, Mark Eubanks.

Speaker 2

Thanks, Jesse, and good morning, everyone. Thanks for joining us. Starting on Slide 3, We delivered record revenue and operating profit in the Q2. Total revenue was up 7%, including organic growth of 8%. Cash and valuables management business grew organically by 5% and the ATM Managed Services and Digital Retail Solutions customer offerings earnings call.

Speaker 2

Operating profit was up 6% in total and 13% organically for a margin of 10.8%. Adjusted EBITDA of $194,000,000 was up 4% with a margin of 16%. Cash generation remains a key focal point of the business We remain 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, 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.

Speaker 2

As a reminder, 2023 was the 1st year we've added free cash flow targets to our annual management incentive plan, which applies quarterly top 200 global leaders across Brink's. Working capital improvements, EBITDA growth has generated $115,000,000 more cash than this time last year, well on our way to delivering the approximate $150,000,000 year on year improvement that we laid out with our full year guidance. Financial results. On the operating margin side, we continue to drive cost out of our business with the rigorous implementation of lean through the Brink's business system, execution of our 2022 global restructuring plans and the revenue mix benefits of AMS and DRS growth. Earnings release.

Speaker 2

These gains were offset by a $12,000,000 year on year increase in security losses, primarily from a single event in our Global Services line of business. Current quarter. 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 affirm the guidance that we increased last quarter operating profit, adjusted EBITDA and earnings per share. Turning to Slide 4, I'd like to provide a few more details on the customer offerings that are driving our performance.

Speaker 2

The cash and valuables management line of our business growth in the 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 lap 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 Brink's business system is our framework for business excellence and operational improvements across all areas of the business.

Speaker 2

Commercially, we're focused on improving our customer experience 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 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 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 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 Brink's business system.

Speaker 2

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 Brink's 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.

Speaker 2

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, earnings call 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 and customers are responding to our solutions based sales approach. In the U.

Speaker 2

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 Q3. 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. And's. 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.

Speaker 2

Customers were represented by a large arts and craft retailer, a publicly traded entertainment company and a large multinational fashion retailer in Mexico. Views. In AMS, we completed the rollout of the BPCE network in France at the end of 2022. Recently we signed 2 additional banks that will leverage the same infrastructure. We're currently in the project planning phases and expect to have these 2 networks online and integrated by the end of 2024.

Speaker 2

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 help our customers reduce their cost of ATM ownership. We're engaging with many financial institutions and independent ATM operators around the world we were interested in the AMS offering as well as our expertise in the area. We recently added 2 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.

Speaker 2

Turning to Slide 5 and starting on the left, total revenue was up 7%. The organic growth of 8 earnings release that 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. Currency translation was a 4% headwind in the period. Looking at the segments, we drove continued AMSDRS 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.

Speaker 2

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. Reported operating profit was $132,000,000 with a margin of 10.8% and adjusted EBITDA was $194,000,000 with a margin of 16%. Excluding the timing related impact of the security losses from the reported numbers, We would have generated a $20,000,000 increase in both operating profit and EBITDA year on year with operating margin expansion of 90 basis points strong productivity, the execution of our restructuring actions and the revenue mix benefits as we shift to higher margin AMS and DRS revenue. The Brink's 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 $0.02 versus 20.22 The growth in profits as well as the working capital lifts are driving improved cash conversion 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 120 basis points of profit margin expansion versus last year.

Speaker 2

I remain encouraged by our progress and excited about the future as we shape the business around these 2 accretive services. I'll now hand it over to Kurt, who will 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. Kurt?

Speaker 3

Thanks, Mark. Beginning on Slide 6, revenue was up $122,000,000 or 11% on a constant currency basis, primarily from 8% organic growth, We achieved record revenues in the quarter, highlighted by 21% organic growth in Latin America and strong AMSDRS growth in Europe. As Mark mentioned, North America revenue was down 1% organically, which was in line with our expectations. The decline was driven by the impact of one time items in the period, primarily from equipment sales in the prior period related to onboarding a large DRS enterprise customer. The decline also included the continued rationalization of our customer portfolio to optimize profitability.

Speaker 3

We remain confident in our progress in North America, supported by the strong DRS sales pipeline Mark mentioned earlier and the 90 basis points of margin expansion we delivered in the quarter. Acquisitions added 3% to total company revenue and FX translation was a headwind of $40,000,000 or 4% versus the prior year, primarily due to Argentine Peso. Reported revenue was $1,200,000,000 up 7% versus last year. 2nd quarter operating profit in constant currency was up $22,000,000 or 18% versus last year, primarily from organic growth of 13%. Organic profit growth across each of our segments was driven by profitable growth and higher margin lines of business, disciplined pricing that offset inflation, cost productivity, leveraging the Brink's business system and the execution of our 2022 global restructuring plans.

Speaker 3

Segment profit growth was partly offset by $6,000,000 in higher unallocated corporate expenses, including a $12,000,000 increase and security losses, primarily stemming from a large loss event in our Global Services line of business. As part of our normal budgeting process, We analyze years of historical information to create an estimate for the upcoming year that we budget to occur evenly over the course of the year. As we saw in the Q2, occasionally large losses occur that extend beyond our budget in discrete quarters. Due to the way that we manage risk, we We see the 2nd quarter increase as a timing matter and is not expected to have an impact on our full year profit guidance. Excluding the impact of security losses, unallocated corporate expenses were down by $7,000,000 and our organic incremental margins were approximately 33%.

Speaker 3

Acquisitions added another 5% to operating profit and foreign exchange was a 12% headwind, resulting in reported total operating profit of 132,000,000 operating profit and walking left to right. 2nd quarter interest expense was $51,000,000 earnings release of $19,000,000 versus last year, primarily due to increased rates year over year as well as increased debt from the Note Machine acquisition. Tax expense was $25,000,000 $4,000,000 lower than last year from lower profit before taxes in the quarter. As a result of tax planning actions, we were able to lower our forecasted 2023 effective tax rate by 100 basis points to 30%, 30 basis points lower than last year's rate. In total, dollars 132,000,000 of operating profit less interest expense, taxes and non controlling interest and other generated $56,000,000 of income from continuing operations, earnings, which generated $1.18 of earnings per share.

Speaker 3

Excluding the impact of the $12,000,000 increase in security losses, EPS would have been $1.36 per share. Depreciation and amortization were $60,000,000 versus the prior year due primarily to the Note Machine acquisition. As discussed, interest and taxes were $51,000,000 $25,000,000 respectively. Non cash stock based compensation expense and other were $9,000,000 down $5,000,000 versus last year. The reduction was in line with expectations and the $9,000,000 run rate is roughly the expectation for the remaining quarters of the year.

Speaker 3

2nd quarter adjusted EBITDA of $194,000,000 was up $8,000,000 versus last year, primarily due to the flow through of higher operating profit. Now turning to Slide 8, I'd like to spend a few minutes on capital allocation. I'll start with a few highlights on free cash flow on the left hand side of the slide. Year to date, we have generated $66,000,000 of free cash flow, representing $115,000,000 increase over last year and a significant portion of the $147,000,000 increase we're targeting for the full year at the midpoint of our guidance. Year to date increase was primarily from adjusted EBITDA growth and sustainable working capital improvements.

Speaker 3

The working capital result was driven by DSO improvements across the business, including continued accounts receivable recovery in Mexico, where our teams continue to make solid progress following last year's regulatory change invoicing requirements. We are also starting to see working capital benefits from our shift to subscription based DRS AMS offerings. Adjusted EBITDA and working capital improvements were partly offset by higher cash interest, primarily due to higher variable interest on our floating rate debt as well as a one time payment for the previously discussed security loss. Investments in our business. We continue to make investments in the business that will drive growth.

Speaker 3

And as Mark discussed in detail, We're driving productivity gains through investments in the Brink's Business System. These investments will largely be OpEx related and managed within our operating profit and EBITDA guidance. Turning to leverage. Our 2nd quarter leverage ratio remained at 3.2 times. We are firmly on track to achieve our targeted leverage of between 2 and 3 times share repurchase by year end.

Speaker 3

In capital returns, we have $180,000,000 of remaining capacity on our existing share repurchase plan after purchasing approximately $18,000,000 of shares year to date through June 30. Coming off the strong free cash flow performance we saw year to date and with better visibility into performance in the back half of the year, we expect to accelerate share repurchases in the Q3 and beyond. We remain focused on the capital allocation priorities in our business that drive profitable growth and compound cash generation and ultimately return excess cash to our shareholders. I'm encouraged by our start to the year and look forward to continued growth, margin expansion and cash generation in the back half of the year. Financial results.

Speaker 3

Now, I'll hand it back over to Mark to discuss guidance.

Speaker 2

Thanks, Curt. The table on the left provides a summary of our affirmed full year guidance. We're off to a strong start so far in 2023 and on track to achieve revenue growth of 6% to 9%, driven by organic growth of 7% to 11%. We expect AMS DRS revenue to make up approximately 20% of our base by year end. We also expect operating profit and adjusted EBITDA to grow by approximately $100,000,000 each with margin expansion of approximately 120 basis points 90 basis points respectively.

Speaker 2

Free cash flow is expected to improve by approximately $150,000,000 year on year to $350,000,000 at the midpoint. Year to date improvement of $115,000,000 in the 1st 6 months, we're well on our way to achieving this step change in cash conversion for the business. Earnings per share is still expected between $6.45 $7.15 per share with 14% growth, approximately double the rate of our revenue growth. Given our strong performance in the first half and with line of sight to our leverage targets and accelerating free cash flow conversion, We plan to increase share repurchase activity starting in the Q3, as Kirk mentioned. I'm pleased with our performance at this point and we remain on track with our full year expectations.

Speaker 2

Our AMS and DRS growth strategy underpinned by improving operating productivity through the Brink's business system and continue to gain momentum for the future. I'm confident these sustainable improvements in the business will drive meaningful shareholder value as we move forward call in the year and beyond. Now, let's open up for questions. Operator?

Speaker 4

Passion and Valuables grew 5% organically this quarter. What's a reasonable and sustainable rate of growth in this business? And how does that growth break down into pricing and volumes?

Speaker 2

Yes, George, as we talked about before, we can look back and sort of demonstrate this over the last 10, 12 years of continued mid single digit growth and we expect that to continue in both the same framework of sort of a fifty-fifty price to volume as we think about that over time. As we talked about last year during this COVID recovery cycle and high inflation, we were closer to sixty-forty more price volume, but see that continuing to moderate. And I think you saw it in the quarter. We talked about it last quarter that looking forward, we thought pricing would moderate coming out of that unusual inflation period.

Speaker 4

Got it. That's helpful. And then Secondly, your DRS and AMS business combined grew a strong 19% organically. In terms of mix, it was 19% of total trailing 12 month revenue. Can you elaborate on how DRF and AMS individually are performing?

Speaker 4

Basically trying to see if both are approximately equally contributing to the growth mix or one has more of an impact than the other.

Speaker 2

Sure. George, we don't explicitly disclosed those separately, but they're largely in line with each other. They're both contributing. They're both similar of similar scale. So we continue to see the organic piece of that continuing.

Speaker 2

Obviously, a little bit of extra inorganic growth from the note machine acquisition we closed last year in Q4. We also though as we think about customer's acquisition and the sales. A lot of times these AMS contracts could be larger, so they could be lumpier just like we would see with the BPCE contract we brought on at the end of last year fully, where AMS might be a smoother ramp, let's say. But both are continuing to grow and both are not only contributing to with new customers, but also converting customers that we already have from a traditional CIT solution to a DRS solution or a traditional ATM replenishment to ATM managed services agreement.

Speaker 4

Got it. Very helpful. Thank you.

Speaker 2

Great. Thanks, George.

Speaker 3

And our next question will come from Tobey Sommer with Truist Securities. Please go ahead.

Speaker 5

Thanks. I was wondering if you could give us a little bit more color on the win in progress in the French market in AMS and how your existing customer In the new customers, how that's going to function?

Speaker 2

Sure. Good morning, Tobey. This is Mark. So the way that responsibility for operating their ATM network. And that's everything from monitoring to dispatch and dispatch of both first and second line maintenance as well as cash replenishment.

Speaker 2

And so as we bring on new customers and their networks, we are able to leverage all of the workflow tech stack that we've developed and invested in to build out the infrastructure to maintain. That also includes the ability to optimize our logistics network in a more optimized way around these new locations. And so that's really there's not a whole lot of interaction between the customers themselves. It's more leveraging the investments in both technology and infrastructure that we've built.

Speaker 5

Okay. Thank you. I had a question about your incremental margin comment. I think you said it was in the 30s if you exclude security loss. Is that a good framework?

Speaker 5

Or is there is the quarterly performance ex the security loss sort of Higher or lower than you would expect over time.

Speaker 2

Yes, I'd say it's about right, Tobey, and that's it's largely in line with what we had expected and where we're seeing the improvements in the business that we're driving, not only from the restructuring that we've talked about explicitly, but also the ongoing performance both commercially and operationally. First on price, not just on inflationary pricing, but price optimization and strategic pricing we're doing across the portfolio To make sure that we've talked about this in the past, where we've got some large disparity with common customers that we're making sure that we're driving a consistent pricing and equivalent to our value proposition. On the operational side, this is really the Brink's business system continuing to drive productivity and putting a wrapper and a name around a program doesn't do that. It's people, its process and it's continuing to have discipline around standard work and being able to deploy that standard work from branch to branch, from country to country and region to region.

Speaker 3

Yes. Hey, Tobey, it's Kurt. I was going to add on to Mark's comment. I mean, traditionally, I think you'd see the business somewhere between 25% 28% incremental basis, if you want to look at it that way. And to Mark's point.

Speaker 3

We're really working to try to march that upward. Obviously, it can shift a little bit depending on mix of business, both geography, but in line of business. But that's exactly right. We think that what we're trying to do between pricing and Brink's business system operational improvements Continue to march that incremental rate up towards 30% and lower 30%.

Speaker 2

Yes. And I'd say that the Maybe it ties back to the question a little bit, Toby, on the AMS side. Once we have a network deployed and we've made the initial investments around workflow integrations, technology deployment and software. Then the incremental adds of additional onto the network density matters, and it matters again across the technology stack as well. And we would expect frankly that to continue to progress certainly with volume as we leverage the seasonality as we think about volume into from first half to second half.

Speaker 5

Thanks. And I wanted to get your perspective. You came out with your cash flow guidance and focused on that improving spread out, some incentive compensation within the organization. But you've now been in the throes of working that direction for a while. So I'm wondering if you've had new ideas and processes that can kind of further your goals that have percolated up From the 200 people who now have skin in the game and are working towards that goal.

Speaker 3

Yes, Tobey, it's Kurt. Let me just try to address that. I mean, we are seeing a lot of good traction with what's coming up through the organization in terms of additional ideas around driving cash flow. So number 1, we've talked about in the past is also just their understanding the importance of the DRS AMS mix and how that actually improves the cash flow profile of the business. And because they tend to be recurring revenue contracts and because those contracts tend to have much shorter payment terms on them.

Speaker 3

That's really resonated. And so that is an additional driver to the growth of those and improves cash flow. But I would say there's also more ideas just coming out throughout the balance sheet. So we mentioned accounts receivable, But we're also seeing it on the payable side. We're seeing it in other areas of the balance sheet coming up from the business.

Speaker 3

Look, the awareness and the focus on is just getting people more aware of what really drives it. And then the final thing I'd say is, The reality is that a lot of what gets into success around accounts receivable is just being rigorous around it and the discipline around it and just working it day in and day out and staying on top of it. And we've definitely seen that in the business increase.

Speaker 5

Thank you very much.

Speaker 3

And that concludes our question and answer session.

Speaker 2

Great. Thanks for joining us today, everyone. We appreciate your support and look forward to speaking to all of you on our next earnings call in early November. Have a great day.

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Key Takeaways

  • We delivered record Q2 revenue of $1.2B (up 7% yr/yr; 8% organic) and operating profit rose 6% (13% organically) with margins at 10.8% and adjusted EBITDA of $194M (16% margin).
  • Our high-growth services, ATM Managed Services (AMS) and Digital Retail Solutions (DRS), grew 25% organically in Q2 (44% YTD) and now represent 19% of total revenue, with a strong pipeline into Q3 following major retail wins.
  • Free cash flow increased by $115M year-to-date versus last year and is on track for a full-year improvement of ~$150M to $350M, underpinning incentive plans and planned share repurchases.
  • Through the Brink’s Business System, cost productivity and restructuring, we expanded YTD operating margins by 190 bps in North America, 90 bps in Europe, and 110 bps in Rest of World despite a discrete $12 M security loss.
  • We have affirmed full-year guidance of 6–9% revenue growth (7–11% organic), ~$100M increases in operating profit and EBITDA with +120/90 bps margin expansion, and EPS of $6.45–$7.15, while targeting 2–3x leverage and accelerating buybacks.
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Earnings Conference Call
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