Q2 2023 Brinks Co Earnings Call
Okay.
Hello, and welcome to the Brink's company's second quarter 2023 earnings call.
This morning, Brink's issued a press release detailing its second quarter 2023 results. The company also filed an 8-K 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 Dot Brink's Dot com.
At this time all participants are in a listen only mode.
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 bring.
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 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 break CEO , Marc <unk> and CFO Kurt Mcmackin. 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.
<unk> 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 8-K filing I will now turn the call over to brink CEO Mark Eubanks.
Thanks, Jessie 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% again 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 remain vigilant in our pricing efforts and 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 at a M. S. N Drs continued to bolster our results with 44% growth year to date and positive momentum in the back half with good customer interest gain actionable pipeline.
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 brink's.
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 dollar year on year improvement that we laid out with our full year guidance.
On the operating margin side, we continue to drive cost out of our business with a rigorous implementation of lean to the brinks business system. The execution of our 2022 global restructuring plans and the revenue mix 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 and our global services line of business.
Karl 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 our 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 can provide a few more details on our customer offerings are driving our performance.
The cash and valuables management line of our business grew 5% organically 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 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 brakes 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 well 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 of metrics, which is measured by our customer S. L. A's 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 in here from our top customers.
We also continue to make meaningful progress in employee relations as we focus on the health and safety of all brings 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 train 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.
N D. R. S. Our sales team is gaining momentum and customers are responding to our solutions based sales approach in.
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 and 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.
These customers were represented by a large arts and crafts 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.
Yeah.
And a N S. We completed the rollout of the BPC 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 'twenty 'twenty four.
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 a M. S 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 a M S portfolio in Jordan and have initiated several new customer pilot 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 were 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 a M. S D Rs 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 D. R. S 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.
Reported 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've 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 execution of our restructuring actions and their revenue mixed benefits as we shift to higher margin Ams and Drs revenue the.
The <unk> 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 onetime security laws.
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 a 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 in Ams volume and a 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 Kirk 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.
Kurt.
Thanks Mark.
Beginning on slide six revenue was up $122 million or 11% on a constant currency basis, primarily from 8% organic growth, which benefited from a M. S. N D. R S organic growth of 19% and price realization across all segments.
We achieved record revenues in the quarter highlighted by 21% organic growth in Latin America, and strong EMS Drs growth in Europe .
As Mark mentioned North America revenue was down 1% organically, which was in line with our expectations the.
The decline was driven by the impact of onetime items in the period, primarily from equipment sales in the prior period related to Onboarding, a large D. R S enterprise customer.
The decline also included the continued rationalization of our customer portfolio to optimize profitability.
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 million or 4% versus the prior year.
Primarily due to the Argentine peso.
Reported revenue was $1 2 billion up 7% versus last year.
Second quarter operating profit in constant currency was up $22 million or 18% versus last year, primarily from organic growth of 13%.
Organic profit growth across each of our segments was driven by profitable growth in higher margin lines of business disciplined pricing that offset inflation cost productivity, leveraging the brinks business system and the execution of our 2022 global restructuring plans.
Segment profit growth was partly offset by $6 million and higher unallocated corporate expenses, including a $12 million increase in security losses, primarily stemming from a large loss event and 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 second quarter occasionally large losses occur that extend beyond our budget and discrete quarters.
Due to the way that we manage risk we see the second quarter increase is a timing matter. It 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 million and our organic incremental margins were approximately 33%.
Acquisitions added another 5% to operating profit and foreign exchange was a 12% headwind, resulting in reported total operating profit of $132 million up 6% versus last year.
Next we'll turn to EBITDA and EPS on slide seven.
Starting with our operating profit and walking left or right.
Second quarter interest expense was $51 million up 19 million 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 million $4 million 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 $132 million of operating profit less interest expense taxes, and noncontrolling interest in other generated $56 million of income from continuing operations, which generated a dollar in 18 cents of earnings per share.
Excluding the impact of the $12 million increase in security losses, EPS would've been $1 36 per share.
Depreciation.
And amortization were 54 million up $6 million versus the prior year due primarily to the note machine acquisition.
As discussed interest and taxes were $51 million and 25 million respectively.
Noncash stock based compensation expense and other were $9 million down $5 million versus last year.
The reduction was in line with expectations and the 9 million run rate is roughly the expectation for the remaining quarters of the year.
Second quarter, adjusted EBITDA of $194 million was up $8 million versus last year, primarily due to the flow through of higher operating profit.
Now turning to slide eight 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 million of free cash flow, representing a $115 million increase over last year and a significant portion of the $147 million increase we're targeting for the full year at the midpoint of our guidance.
The year to date increase was primarily from adjusted EBITA growth and sustainable working capital improvements.
The working capital results 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 to invoicing requirements.
We're also starting to see working capital benefits from our shift to subscription based D. R. S. M. S 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 laws.
As a reminder, our floating rate debt makes up about 40% of our total debt.
Looking at our capital allocation priorities, our first priority remains organic investments in our business.
We continue to make investments in the business that will drive growth and as Mark discussed in detail, we're driving productivity gains through investments in the <unk> business system.
These investments will largely be opex related and managed within our operating profit and EBITDA guidance.
Turning to leverage our second quarter leverage ratio remained at 3.2 times, we're firmly on track to achieve our targeted leverage of between two and three times by year end.
And capital returns, we have $180 million in remaining capacity on our existing share repurchase plan after purchasing approximately $18 million of shares year to date through June 30th.
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 third quarter and beyond.
We remain focused on the capital allocation priorities are a 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.
Now I'll hand, it back over to Mark to discuss guidance.
Thanks, Kurt the table on the left provides a summary of our affirmed our full year guidance.
We're off to a strong start so far in 2023 and on track to achieve revenue growth of 69% driven by organic growth of 7% to 11%. We expect a M. S. 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 million each with margin expansion of approximately 120 basis points and 90 basis points respectively.
Free cash flow is expected to improve by approximately $150 million year on year to $350 million at the midpoint.
Well year to date, an improvement of $115 million in the first six months, we're well on our way to achieving this step change in cash conversion for the business.
Earnings per share are still expected between $6 45, and $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 third quarter as Kurt mentioned.
I'm pleased with our performance at this point and we remain on track with our full year expectations are a M. S. N D Rs growth strategy underpinned by improving operating productivity because it brings business system.
It is generating margin expansion and compounding free cash flow.
Through the hard work of our teams we've made meaningful progress in these areas 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 in the year and beyond.
Now, let's open up for questions.
Operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.
At this time, we will take our first question, which will come from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
Passion and Valerie good morning grew 5% high.
So Patrick valuables grew 5% organically this quarter whats a reasonable and sustainable rate of growth in this business and how does that growth break down into pricing and volumes.
Yeah, George as we've talked about before we can look back and sort of demonstrate this.
Over the last 10.
12 years, a continued mid single digit growth and we expect that to.
<unk> and both are the same framework of sort of a 50 50 price to volume as we think about that over time as we talked about last year. During this COVID-19 recovery cycle and high inflation, we were closer to 60 40 more price to volume.
I see that continuing to moderate and I think you saw in the quarter, we talked about it last quarter that looking forward, we thought pricing would moderate coming out of that unusual inflation period.
Got it that's helpful. And then secondly, your D. R. S. M. S business combined grew a strong 19% organically in terms of mix was 19% of total trailing 12 month revenue can you elaborate on how E or F. N E. M. S. Individually are performing basically trying to see if bo.
With our approximately equally contributing to the growth and mix or one has more of an impact than the other.
Sure George we don't.
Explicitly disclose those separately, but they're largely in line with each other both contributing theyre both similar a similar scale and so we continue to see the.
The organic piece of that continuing obviously, a little bit of extra inorganic growth from the note machine acquisition. We closed last year in Q4, we also though you know as.
As we think about.
The customers acquisition and the sales.
A lot of times these E&S contracts could be larger so they could be lumpier, just like we would see with the BPC contract we brought on.
End of last year, fully where ams might be.
A smoother ramp, let's say, but both are continuing to grow in both are not only contributing to with new customers, but also converting customers that we already have from a traditional cit's solution to a drs solution or a traditional.
ATM replenishment to our ATM managed services agreement.
Got it very helpful. Thank you.
Great. Thanks George.
And our next question will come from Tobey Sommer with true Securities. Please go ahead.
Thanks. So I was wondering if you could give us a little bit more color on the the the win in progress in the French market.
MFS and how.
Your existing customer and the new customers, how that's going to function.
Sure.
Good morning, Tobey this is mark.
So the way that the.
These.
These contracts go.
We were taking on basically their ATM network and responsibility for operating their ATM network and Thats everything from monitoring to dispatch and dispatch of both.
First and second line means as well as cash replenishment 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 that's really there's not a whole lot of interaction between the customers themselves. It's more us leveraging the investments in both technology and infrastructure that we built.
Yeah.
Okay. Thank you.
I had a question about your incremental margin comment I think you said it was in the thirties, if you exclude the.
The security loss is a good <unk>.
Framework.
Or is that is the quarterly performance ex the security law sort of.
<unk> are lower than you would expect overtime.
Yeah, I'd say, it's about right Tobey.
Largely is largely in line with what we had expected and where we're seeing the improvements in the business that we're driving not only.
You know from the restructuring that we that we've talked about explicitly but also the ongoing performance.
Both commercially and operationally first on price you know 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 you know, 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 <unk> business system, continuing to drive productivity and.
Putting a wrapper and a name around a program doesn't do that it's people it's 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, Yeah, Hey, Tobey its Kurt I was just going to add on to <unk> com.
I mean, traditionally I think you'd see the business.
We're between 25% and 28% incremental basis, if you want to look at it that way and to Mark's point, 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.
That's exactly right, we think that what we're trying to do between pricing and brings business system operational improvements is continue to March that income incremental rate up.
<unk> 30 in lower thirties, yeah, and I would say that the 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.
And then the incremental adds of additional onto the network are very similar to let's say the traditional you know C.
<unk>.
Kind of marginal cost adds as we think about adding customers next door to each other 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 second half.
Thanks.
I wanted to get your perspective.
Came out with your.
Cash flow guidance and focused on that improving spread out.
Some incentive compensation within the organization.
You've now been in the throes of working that direction for a while so I'm wondering.
If you have.
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.
Yeah, Yeah, Tobey its Curt let me, let me just try to address that.
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 you know.
Number one we've talked about in the past is also just they are understanding the importance of of the Drs Ams mix and how that actually improves the cash flow profile of the business because they tend to be recurring revenue contracts and because those contracts tend to have much shorter payment terms on them.
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 is also more ideas coming out throughout the balance sheet.
So we mentioned accounts receivable, but we were also seeing it on the payables side, we're seeing it in other areas of the of.
Of the balance sheet coming up from from the business. So.
I looked at 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.
Lot of what gets into success around accounts receivable is just being rigorous around it and the discipline around it and the just working it day in and day out and staying on top of it.
And we've definitely seen that and the business increase.
Thank you very much.
Okay.
And that concludes our question and answer session.
Great. Thank you 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.