Q2 2022 Brinks Co Earnings Call
Welcome to the Brink's company's second quarter 2022 earnings call.
Brink's issued a press release on second quarter results. This morning.
The company also filed an 8-K that includes the release and the slides that will be used in today's call.
So it doesn't mean you're listening by phone.
At least in the slides are available in the Investor Relations section of the company's website right Dot 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.
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 those 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 S E SEC filings.
Information presented and discussed on this call is representative as of today only.
Brink's assumes no obligation to update any forward looking statements.
This call is copyrighted and may not be used without written permission from brakes.
It is now my pleasure to introduce your host Ed Cunningham, Vice President of Investor Relations. Mr. Cunningham you may begin.
Thanks, and good morning, everyone. Joining me today are CEO , Mark Eubanks, and CFO Ronda moniker.
This morning, we reported second quarter results on both a GAAP and non-GAAP basis.
The non-GAAP results exclude a number of items, including the impact of Argentina's highly inflationary accounting re.
Reorganization and restructuring costs.
Items related to acquisitions and dispositions.
Valuation allowance on tax credits and changes in certain allowance estimates.
We're also providing 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 the non-GAAP results reconciliations are provided in the press release and 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 I will now turn the call over to Mark.
Thanks, Ed and good morning, everyone and thanks for joining us today.
This morning, we reported record second quarter results, including double digit organic growth in revenue operating profit adjusted EBITDA and earnings per share. We achieved these results in a macro environment that continues to be challenging demonstrating the resiliency of our business.
We also affirmed our full year guidance, which includes revenue growth of 8% to 11% and operating profit growth of 16% to 23%, reflecting approximately 100 basis points of margin expansion driven by our lean cost initiatives and leverage from our lower fixed cost base.
Our full year guidance is supported by our year to date results, which are included in our appendix.
Through the first half we've achieved 9% revenue growth, 18% profit growth, a 16% increase in EBITDA and earnings per share growth of 26%.
We delivered these results despite a slower than expected start to the year due to omicron related shutdowns in many of our markets.
We expect this momentum to continue through the second half, which is historically much stronger than the first.
Before moving onto the details behind our results I want to touch on our sustainability efforts in July we issued our first corporate sustainability report, which shared more about our priorities and the United Nations sustainable development goals that are aligned with our operations.
We're in the early stages, but sustainability is an important focus for us and we look forward to sharing more about our commitment the targets, we tend to achieve and the progress in future quarters.
Slide four summarizes the strong revenue and profit growth we achieved in the second quarter revenue was up 8% with organic growth of 13% driven by double digit organic growth in all four of our segments.
Second quarter U S dollar revenue recovered to 99% of pro forma pre pandemic levels up from a 95% recovery. We saw in the first quarter, reflecting steady sequential improvement from April to June and.
In fact June revenue recovery reached 100%.
On a local currency basis, excluding Argentina revenue has now been at or above the pre pandemic levels for two consecutive quarters, while our pro forma revenue is now fully recovered from the impact of COVID-19, many of our markets, particularly in Asia are not back to pre pandemic revenue levels, but we expect these markets to.
Continue to recover.
Operating profit was up 12% with organic profit growth of 17% and acquisition related growth of 1%, partially offset by a 6% negative impact from FX.
This profit growth was driven by strong year over year margin expansion in three of our four geographic segments. The exception was North America, where profits declined versus last years, very strong second quarter, which benefited from several one time adjustments related to various insurance credits bad debt reversals and Covid related government subsidies that on a combined.
[laughter] basis more than offset the second quarter margin improvement this year.
On a sequential basis in 2022 the north American margin rate increased by 190 basis points over the first quarter rate and we expect further improvement in the second half.
In North America, our price increases continue to outpace our labor and other cost increases and labor availability continues to improve.
Adjusted EBITDA was up 13% companywide and up 17% in constant currency with a margin of 16, 4% up 60 basis points over prior year.
I'll now turn the call over to Ron who will cover these results in more detail.
Ron.
Thanks, Mark and good day, everyone turning to slide five as.
As Mark just mentioned 2022 second quarter revenue versus prior year was up 13% in constant currency almost entirely from organic growth foreign.
Foreign exchange had some significant swings throughout the quarter, while the euro devalued, 12% other currencies such as the Mexican peso and Brazilian real high we're not as negative Indian aggregate FX was a 5% headwind ripped.
Reported revenue was $1 billion $134 million up $85 million or 8% versus the second quarter last year.
Second quarter operating profit in constant currency was up 18% versus last year organic growth was 17% and acquisitions added another 1%.
Negative Forex was $6 million.
Reported operating profit was $124 million and the operating profit margin of 10, 9% was up 40 bps versus the second quarter 2021.
Moving to slide six.
Second quarter interest expense was $32 million up $4 million versus the same period last year due to higher debt associated with the $200 million in share repurchases completed in the last 12 months and higher variable interest rates.
<unk> expense in the quarter was $31 million in line with last year as higher income was mostly offset by 110 bip reduction in the effective tax rate.
$124 million of second quarter, 2022, operating profit less interest expense taxes, and $1 million and Noncontrolling interest in other generated $62 million of income from continuing operations.
This equates to a dollar and 29 of earnings per share up 12% on a reported basis and up 30%, excluding the mark to market gain on the Moneygram shares we held last year.
Share repurchases reduced our weighted average diluted shares outstanding by 2.9 million shares versus prior year or about 6% and accounted for about six cents increase any P. S.
Second quarter 2022, adjusted EBITDA was $187 million up $21 million or plus 13% versus a strong quarter last year and as Mark mentioned EBITDA as a percent of revenue was 16.4% up 60 bps versus the second.
Order 2021.
Turning to free cash flow on slide seven.
Our 2022 free cash flow range is unchanged from last quarter and is estimated between 280 and $315 million projected free cash flow is $77 million higher when adjusted for $67 million in third quarter 2022 hedge monetization.
<unk>, which I'll discuss more in a moment and $10 million in 2020 payroll taxes that were deferred due to the pandemic.
Adjusted EBITDA is expected to range between 755 and $790 million and at the midpoint would be about $90 million more than last year.
We expect to use about 70 million of cash for working capital restructuring and the $10 million and deferred tax payments.
Cash taxes are estimated to be $110 million up $26 million versus last year, due mostly to higher income as well as the timing of payments and refunds cash.
Cash interest is expected around $115 million, an increase of $9 million versus 2021 due to the incremental debt associated with the previously mentioned share repurchases. The P. A I acquisition that closed on April one last year and higher variable interest rates.
Net cash Capex is targeted at $180 million.
2022 free cash flow conversion ratio is targeted to be about 40% of adjusted EBITDA and equate to approximately $6.15 per share.
To slide eight.
This slide illustrates our actual net debt and financial leverage at year end 2021 at the end of the first half of 2022 and our estimate for year end 2022.
There was a $165 million increase in net debt from year end 2021 to June 32022 about half of that increase was due to our first quarter change in Mexico Invoicing regulations that has temporarily increased accounts receivable and the balance was due to.
The revenue growth and normal seasonality.
We expect Mexico DSO to return to normal by year end the.
The approximate $180 million decrease in net debt from year end 2021 to 2022 is expected to be driven by free cash flow and $67 million in third quarter 2022, hedge monetization, partly offset by dividends financing leases and <unk>.
Other strategies to point no device investment well.
Well, we have authorization for another $250 million in share repurchases nothing has been built into this estimate.
Dividing our estimated $2 1 billion dollar 2022 year end net debt by the midpoint of our expected EBITDA range should generate a net debt leverage ratio of 2.7 turns.
Our credit facility has a covenant based on net secured leverage with the ratio maximum of 3.5 terms with a half turn increase if theres a material acquisition.
Our 2021 secured leverage ratio was 2.0 turn we expect that to decline to 1.5 to one six turns by the end of 2020 to.
The only other credit facility financial covenants interest coverage, which must exceed three times, we have considerable room with both covenants even in an economic downturn.
Moving to our debt maturity profile on slide nine.
In the second quarter 2022, we amended and extended our credit facility.
We retained a $1 billion revolving credit facility.
And we expanded our term loan a by $200 million to $1 4 billion the.
The amended facility reduced our used pricing grid by 25 bps and is expected to provide significant interest expense savings going forward.
Maturity was extended out five years and meaningfully expanded our capacity to make restricted payments including share repurchases.
On this slide the light gray bars reflect our debt maturity before the amendment extend in the dark blue bars afterwards.
Our five 5% senior notes mature in July 2025, and otherwise we have no material debt retirement obligations until 2027.
As I mentioned earlier in July we monetize a cross currency interest rate swap on our $400 million five 5% senior notes, we received $67 million in cash and entered into new swaps to hedge similar exposure going forward, the cash proceeds and reduce our net debt and.
<unk> leverage and increase our capital allocation flexibility with that I'll hand, it back to Mark.
Thanks, Ron.
I mentioned at the outset, our strong second quarter results were achieved in a challenging macroeconomic environment like most companies brings is not immune to these challenges. However, we firmly believe that we are better positioned than most due to the fact that the services. We provide are critical to our customers and remain our central throughout economic cycles.
Our largest cost by far is labor and we are continuing to offset rising wages with disciplined pricing actions.
As previously discussed in prior quarters, we implemented several price increases in our U S business that went into effect in the latter part of 2021 and the first half of 2022.
Both of which were well above our historical averages. These pricing actions have positioned us to more than offset labor cost increases in the current quarter and as we move through the year, we expect pricing actions to continue to offset inflationary pressures both here in the U S and around the world.
As a service business with locally sourced people and assets, we are far less vulnerable to global supply chain disruptions than many other industrial service businesses.
And where necessary, we secured long term partnerships with global suppliers and made early purchases to avoid any potential disruptions.
Rising fuel costs have also historically not had a material impact on our profitability as most of our customer agreements have fuel surcharge clauses.
We have a track record of relative stability during recessions and other times of crisis due to an increase in cash usage and security concerns.
This history combined with proactive pricing actions and our operational excellence initiatives gives us confidence that we will sustain our recent momentum and achieve our full year guidance.
Moving onto the next slide.
We're off to a great start in 2022 and on track to achieve revenue growth of 8% to 11%.
Our full year guidance provided at the beginning of the year was based on FX rates at the end of last year. Since then we've seen significant strengthening of the U S dollar, especially against the Euro.
Based on current rates versus last year, we expect to see some continued FX headwinds in the second half.
Despite these FX moves which resulted in a 5% unfavorable impact in the quarter, we still delivered record results.
We're also on track to achieve operating profit growth of 16% to 23%, reflecting a margin increase of approximately 100 basis points versus last year and we also expect to deliver double digit increases in EBITDA free cash flow and earnings per share.
It is important to note that while our revenue has now recovered to 100% of pro forma 2019 pre pandemic levels. Our full year 2022 revenue guidance exceeds our 2019 reported revenue by close to $1 billion and our operating margin is expected to expand by 150 basis points over the same period.
In other words, today's brakes is far larger and far more profitable than it's ever been.
We achieved this through disciplined execution of our balanced growth strategy focused on both organic improvement and accretive acquisitions.
We plan to drive additional organic growth and margin expansion by continuing to build a strong culture of continuous improvement and customer focus by leveraging fixed cost reductions as volume grows by aggressively managing our price cost equation and by further streamlining our operations.
On the M&A front, we've demonstrated our ability to buy good assets integrate them effectively and improve the business mix with access to new markets and service offerings.
For additional perspective, it's also important to note that our three year targets are driven primarily by growth and continued operational improvements in our core business, which accounts for approximately 90% of our 2024 revenue target and 85% of our operating profit target.
Conversely, our new ATM managed services and brings complete initiatives combined to account for about 10% of our 2024 revenue target and 15% of our operating profit targets.
Given our strong start to the year, the resiliency of our business in challenging environments. The ongoing reopening of global economies and with our growth and productivity initiatives I'm confident that we'll deliver our financial targets.
Now, let's open it up for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Tobey Sommer with Chewy Securities. Please go ahead.
Hey, Good morning. This is Jasper bibb on for Tobey. Thanks for taking our questions. So I was just hoping you could update us on kind of the brink's complete deployments and how the sales activity is tracking there relative to your to your expectations yes.
Yeah sure Thanks, Jeff and good morning.
Yes, continuing to progress as planned and still continuing to see more customer interest in <unk>.
Total solution versus.
Traditional <unk> services, we talked about it last quarter.
Globally, our tech enabled solutions that includes our brink's complete.
Offering.
Grew by more than 20% over the prior year.
In the quarter this quarter, we saw it grow over 28% so continuing to accelerating growth.
In the U S alone as we mentioned that represented over 20% of.
Our revenue.
In Q1, now thats pushing up towards 26%, so really seen that.
Kind of penetration, we would expect of course listen the.
The economy still.
In transition certainly as the looming recessions retail while continues to see some bumpy reports out there from some of the big retailers. We are seeing in person retail continuing to accelerate and you've seen the numbers I'm sure. Many have about the transition from online shopping bag.
To you in person which of course favors.
Cash usage, where we still represent almost a third of all the payments for in person charges. I think the other thing that is also changing in that App and that environment is as you look at as people start to get squeezed and household incomes are being challenged with inflation.
Youre starting to see more people more discount buyers more discount retailers, having success again smaller transactions smaller purchases, which again lend themselves towards more cash transactions. So.
That's.
Supporting both the interest not only in our core business, but in our more technology enabled offerings with brink's complete.
Thanks, and then just wanted to ask about the high value services business.
What's been the slope of recovery for your foreign exchange services, given what seems to be a relatively strong summer travel season, so far.
Yes, Jeff.
So we certainly saw.
Yeah.
That business subside and in some cases.
<unk> <unk>.
Significantly during the pandemic.
And as you can imagine in the high value services area for Us and our global services business, we saw a.
Shifting toward more precious metals.
Moving around the globe and we are.
Obviously, a large player in that market, but as we've seen things shift back to travel we have seen more bank note movements now certainly.
That is to due to FX and due to travel which.
I think you've seen some of the the Eurocontrol data that's out there.
Tourism continues to recover our travelers continue recover particularly into Europe , but we're still seeing southeast Asia still slow to recover although our segment results continue to improve in that region.
But still there is still some some recovery going on I think the other thing of note.
Is that the.
The FX markets.
Between central banks and governments, obviously has been volatile which also drives.
Quite a bit of banknote transmission globally.
Okay.
Got it and then you you mentioned the relative weakness in Asia Pac, but the rest of the World segment overall, its pretty strong here. So what are some of the markets that might be lagging on a relative basis first the overall side not sure Hong Kong and Macau I think continue.
Continue to have some pretty significant restrictions relative to travel in and out which is obviously restricted.
Not only tourism, but business commerce, the gaming industry is seeing quite a bit of fits.
<unk> fits and starts in Macau, certainly, which again is a big travel area in a market we serve the.
The other big markets that we serve Singapore, Malaysia, Philippines.
Continue.
To exit there.
Their pandemic restrictions and are gaining momentum.
Each month as we go through the summer season.
Last question for me Theres, just been some media reports about a large potential <unk> loss on the high value shipment in California.
Just clarify how you're approaching that item in your guidance yes.
Yes sure.
Just maybe just to clarify.
I'll clarify the.
What happened and maybe a little bit of the media reports and stuff maybe set the record straight from our side here the robbery, what's still under investigation, we're not going to we can't really comment on the specifics of what happened with the details, but we can say is that the amount.
Of the loss would be less than $10 million.
At the worst case, and that's contrary to some fairly salacious media reports out there and $100 million to $150 million, So I want to make sure that.
That's clear our guidance.
On an ongoing basis routinely includes estimates for losses. This is this is part of part of our business, we use historical data to do that.
And while.
This is quantified and we're sort of in the media the impact on this loss should not.
It would be material to our results.
I appreciate the color there thanks for taking the questions guys sure.
The next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
Could you talk a little bit about what macro assumptions, you're including in guidance and how you're expecting the economy to impact performance in the second half of the year.
Yeah.
Yeah.
George I think we are.
We're not building in any significant.
Traction in our business in fact, we're not seeing any slowing and velocity of our business.
The results we have so far had been.
As we expected.
And as I mentioned in the in the prepared remarks.
Historically, even with recessions, whether its a technical recession or a mild recession or maybe something more protracted we tend to to to.
Be really resilient.
People tend to return to cash in many cases.
And with more cash usage becomes for us more.
Not only more volume, but more opportunity.
For.
Attracting new customers, so that's sort of the.
The macro view on the recession, we don't have any.
Large step function changes built in of course, we're going to operate the business.
Flexibly and make adjustments either way, but nothing big in front of us that we've seen or are hearing from our customers in fact, whether it be retailers or our financial institution partners.
Got it that's helpful and then with respect to margins.
Could you discuss some of the latest initiatives you have that you're deploying to continue to close the gap.
And EBITDA margins relative to peers and when you might expect that over the medium term to close.
Sure George but listen we.
Feel very good about where our guidance is right now this.
Our three year targets, we laid out at a 100 basis points a year, we expect that to continue.
And have line of sight to that this year as we've had.
Built into our guidance in the first of the year and don't see us coming off of that.
The only thing I would say is listen we have.
We have a mix of businesses around the globe that have different margins in.
Are you at our North American business, particularly is one that we know is and recognize has lagged some of our peers. That's something that we're addressing directly and are already starting to see fruits of.
Of those improvement activities. We've we've also recently made and announced a leadership change there.
Danny Castillo, who leads our North American segment.
Our seasoned executives, that's really going to be able to already identify some of the areas of improvement that.
Maybe we recognize but certainly now are taken action on and I think this is something we expect to drive continuous improvement quarter to quarter. We saw good improvement quarter, one to quarter two already about 20, 28% sequential earnings leverage out of Q1 to start the year.
And expect if you look forward in our results from prior year Atlas and expect to continue to deliver.
Good improvements quarter on quarter for the rest of the year. This is.
Again, an area that will obviously help not only as one of the largest segments, but will help us.
Closed the gap in a significant way in a disproportionate way not just in North America, but on the global portfolio and again as I think about peers.
I don't think just about peers.
In the.
In the logistics space, we think about peers.
Across all investment categories in this as well.
We're all competing for investors.
Against our peers, and we think that our.
Our growth rates, both in our EBITDA and free cash flow.
Compared with with any.
Got it very helpful. Thank you.
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