Brinks Co
NYSE:BCO
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
78.27
115.64
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Brinks Co
You don't have any saved screeners yet
Welcome to the Brink’s Company’s First Quarter 2018 Earnings Call. Brink’s issued a press release on first 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. For those of you listening by phone, the release and slides are available on the Company’s website at brinks.com. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 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 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. The call is copyrighted and may not be used without written permission from Brink’s.
It is now my pleasure to introduce your host, Ed Cunningham, Vice President of Investor Relations and Corporate Communications. Mr. Cunningham, you may begin.
Thank you, Andrew. Good morning, everyone. Joining me today are CEO, Doug Pertz; and CFO, Ron Domanico. This morning, we reported results on both the GAAP and non-GAAP basis. Non-GAAP results exclude certain retirement expenses, reorganization and restructuring costs, and certain items related to acquisitions, dispositions and tax-related adjustments.
In addition to these items, our non-GAAP results exclude Venezuela due to a variety of factors including our inability to repatriate cash, Venezuela’s fixed exchange rate policies and currency devaluations and the difficulties we face operating in a highly inflationary economy. We believe the non-GAAP results make it easier for investors to assess operating performance between periods.
Accordingly, our comments today including those referring to our guidance will focus primarily on non-GAAP results. Reconciliations of non-GAAP to GAAP results were provided in the press release in 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.
Finally, Page 2 of the press release provides the details behind our 2018 guidance including revenue, operating profit, corporate expense, non-controlling interest, income taxes and adjusted EBITDA.
I’ll now turn the call over to Doug.
Thanks, Ed. Good morning, everyone. Today, we reported strong first quarter results including revenue growth of 15% and operating profit growth of 34%. These results meet or exceed our strategic plan targets and support our 2018 guidance. The fact that our operating income growth is more than double our revenue growth demonstrates our commitment to driving operating leverage throughout our global markets.
Based on first quarter results and our results over the last year, it’s clear that our strategy to drive profitable growth organically and through acquisition is working. And we continue to have great opportunities to build on the momentum we’ve already achieved. I’ll start this morning with a reviewer of our first quarter results, summarize progress on our strategy and review our full year guidance. Both Ron and I will discuss how we expect to meet and potentially exceed our current 2019 target on EBITDA of $625 million.
Our first quarter results reflect both strong organic growth and growth from acquisitions that were completed in 2017. The 15% revenue increase includes $51 million of revenue from six acquisitions completed last year with most of this coming from South America, our fastest growing and highest margin segment. Organic revenue growth was 6% slightly above our full year and strategic plan guidance of 5% reflecting growth in each of our three geographic regions.
The 34% increase in operating profit reflects operating leverage of more than two times. That was driven by strong organic improvement in North America as well as strong organic and acquisition related growth in South America. Our margin rate increased 120 basis points to 8.4% up from 7.2% in the last year’s first quarter. This growth in operating profit was achieved despite a $9 million increase in corporate expenses due in part to higher security related costs that we expect to decline in subsequent quarters. Ron will address this further in our call.
$0.55 of earnings per share includes about $0.03 per share related to net interest expense on excess cash from our debt financing. This interest expense on the excess cash balance on our balance sheet negatively impacted EPS by about 5%. We borrowed these funds, which we think on very favorable terms and anticipation in the future acquisitions, which we’ll talk about more in a few minutes. I’m highly confident the excess interest expense are incurring now about $20 million annually in grows interest cost, we more than offset by profit contributions from accretive acquisitions in the near future.
In addition a highly – excuse me, higher year-over-year tax rate reduced EPS by another 5% or so or above $0.03 per share. As we move to 2018, we expect profit margin growth to accelerate as organic operational improvement initiatives gain momentum and as we achieve further growth from planned synergies and growth from completed acquisitions. We also expect higher revenue and earnings growth in the second half as we benefit from normal seasonality and from the addition of the Rodoban acquisition in Brazil.
Now let’s take a closer look at operating results for the quarter by segment. North America operating profit doubled over the last year on revenue growth of 5% reflecting a margin rate that increased more than 300 basis points from 3.3% to 6.4%. Organic revenue growth was 2%. But when you exclude the sale of recyclers in last year’s fourth quarter, organic growth was 4% in the U.S. and 5% in North American segment. This was for the first quarter this year versus first quarter of last year. I’m especially pleased to report the profits in the U.S. were up above 40% and again excluding the recycler sale in 2017 first quarter profits in the U.S. were up 70%.
Our full year 2018 target for U.S. margin remains at approximately 6% and we continue to target a 2019 margin exit rate of approximately 10% in 2019. We expect the U.S. margin to continue to ramp up as our breakthrough initiatives and investments kick in and as our stronger second half seasonality also takes hold. Continued growth income CompuSafe sales in the first quarter, which we’re on track to reach our 2018 target of 3,500 units or more, will also support achievement of these margins goals.
We’re pleased with the progress in the U.S., but the biggest driver of revenue profit growth in North America was Mexico, which carried its strong performance in 2017 over into 2018, reflecting growing revenue from retailers, improve productivity and lower labor cost. Similar to the U.S., we expect productivity initiatives to have an increasing impact throughout the year, especially again with stronger seasonality in the second half. Our team in Mexico as a 2019 margin target of 15% and they’re well on track of meeting or exceeding this target and a very – and I’m very pleased with the strong results year-to-date.
Revenue in South America grew by $53 million or 26% including acquisition related revenue of $37 million or 18%. Organic revenue growth was also 18%, reflecting continued strong throughout – growth throughout the most of the region. The strong 36% local currency growth was partially offset by the $20 million negative impact of currency translations, primarily in Argentina and Brazil. Operating profit was up 42%, driven by strong organic growth and acquisitions in Argentina, Brazil and Chile. The margin rate improvement improved by 240 basis points to 21.8% again demonstrating continued strong operating leverage.
We expect continued growth in South – from South America, which will be supplemented by continued acquisitions such as Rodoban later this year. In the rest of the world segment, revenue was up 19% due primarily to favorable currency translation and the acquisition of Temis. Operating profit was up slightly, but down 11% on an organic basis due to continued price and volume pressure in France, which was partially offset by profit growth in other countries.
We continue to believe that the competitive market disruptions and abnormally high volume of tender rollovers last year 2017 have had a significant impact on revenue and margins in France. We also believe that we will overcome much of this impact of both of these factors later this year. Unfortunately, when we – when the pricing pressure and volume decline began last year, we were in the processes of developing and implementing our strategic plan, which includes significant cost reductions that will benefit results starting this year.
As a result our team in France remains confident that we’ll achieve our 2019 strategic plan margin target of 12%. We’re encouraged by our strong results in 2018 and remain on track to meet our full year guidance. We continue to expect revenue growth of approximately 8% to a little over $3.4 million. This assumes 5% organic growth and another 3% net growth from acquisitions and divestitures. It does not include any additional acquisitions.
2018 operating profit is expected to grow more than 30% to a range of between $365 million to $385 million, reflecting a margin rate improvement of 210 basis points to about 11%. This is at the midpoint of the range. We expect 2018 adjusted EBITDA to increase by approximately $100 million to a range of between $515 million and $535 million. And we expect earnings per share growth of at least 20% to a range of $3.65 to $3.85 per share. This guidance includes full year contribution from the six acquisitions completed to date and the estimated six months of contributions from our pending acquisitions of Rodoban. It also assumes continued improvement in all three geographic segments, led by the U.S., Brazil and Mexico.
In addition, our EPS guidance assume that we will not – excuse me, it assumes that we will continue to pay interest on growing – on a growing balance of excess cash until that cash is deployed for new acquisitions that are expected to substantially improved earnings. While it is not our guidance, it is clearly part of our objectives to deploy this cash through added acquisitions.
Our EPS guidance also assumes an increase in 2018 tax rate to 37% up from 34% in 2017. Our target for 2019 adjusted EBITDA is $625 million, which assumes full year contributions and partial operating synergies from seven acquisitions including Rodoban. And continued organic margin improvement, especially, from larger countries as we stated before and which we've laid out in our Investor Day strategic plan. It does not include any contributions from additional acquisitions that we expect to make in 2018 and 2019.
Turning now to our strategic plan, with our organic initiatives continuing to gain traction, we're just beginning to layer in additional growth through acquisitions. And as we said in the past, we call this is our Strategy 1.5. We focus on acquisitions in our core business in core geographies or what we call core-core, and also on core acquisitions in adjacent geographies or core-adjacent.
In 2017, we paid $365 million to complete six acquisitions that are expected to be add about $60 million to $70 million in EBITDA in 2018. With the addition of Rodoban, the seven completed and announced acquisitions are expected to be added about $90 million in EBITDA in 2019 assuming that most, but not all of the synergies will have been achieved by them.
We continued to have a strong pipeline of acquisition targets that offer new opportunities to increase route density, add new customers and capture cross synergies with strong returns as we’ve seen so far.
Our plan is to spend an additional $800 million on new acquisitions over the next 18 to 20 months, the strategic plan period. Also that's about $1.2 billion spent on acquisitions over the three year plan period. Valuations will vary based on geography, growth potential and overlap on existing operations. But we’ll remain disciplined in our goal to achieve both synergy mobiles between six and seven times EBITDA. Similar to the multiples of about six times that are completed and announced acquisitions are expected to yield through 2019.
Our October 2017 capital raise of about $2.1 billion with more favorable debt covenants position as well to make additional core-core or adjacent acquisitions. While keeping our pro forma leverage of debt ratio below 1.4 times – excuse me, 1.5 times. It also gives flexibility should larger acquisitions become available, that could add significant strategic value to synergy capture or by enabling us to enter into higher growth markets that service what we call with total cash ecosystem.
I should add that during the quarter, we signed two relatively small transactions involving our core businesses in both France and Colombia. In France, we agreed to sell our aviation guarding business, which is a non-core operation that had 2017 revenue of approximately $80 million and sub-par returns.
This divestiture which is expected to close around mid-year, when enable our team in France to focus solely on its core cash management operations, including the integration of Temis. We also recently agreed to buy the 42% minority interest in our partner in Colombia. This acquisition which is scheduled close by the end of this year is expected to be accretive to earnings, cash flow and EBITDA. It also enhances our U.S. taxes position and enables us to better pursue regional acquisitions.
Turning to Slide 9, our Strategy 1.0 and 1.5, which include core growth and acquisitions combined to deliver the expected $625 million in 2019 and provide the platform for further growth. We're confident that over the three year period from 2019 – excuse me, 2017 to 2019 will achieve an operating margin improvement of over 460 basis points. This is from 7.4% margin in 2016 our jumping off point year to about 12% in 2019.
In 2017 last year, we added 140 basis points in margin to finish the year at 8.8% margin. And we expect to add, as we've said before in our guidance 200 basis points this year that will get us to about 11% around the midpoint of our 2018 guidance. So we're well on track to meet or exceed our 2019 margin goal of 12%.
This chart shows strategic plan target margin growth by region. And this is what we have presented in prior slides as well in our Investor Day. And we continue to show a contingency in red roughly equal to about 2.5 percentage points, somewhere again to what we showed in our March 2017 Investor Day.
This represents additional potential margin growth from our regions and provides a cushion, but also allows for potentially to be our 2019 target. It's important to note that a year ago, when we first released our strategic plan, our target operating margin was 10%, which we now increased to 12%. And remember, this is not including any contribution from additional acquisitions that we expect to make in 2018 and 2019, which will cover on the next slide.
As stated earlier, we spent – we will have spent $510 million on 2017 completed and announced acquisitions that are expected to contributed about $90 million of EBITDA in 2019. This equates to combined purchase multiple of about six times EBITDA with some additional synergies still expected to be achieved after 2019. Our 1.5 acquisition strategy targets another $400 million in acquisitions per year in both 2018 this year and 2019. And this includes $145 million already committed for Rodoban.
[indiscernible] purposes, let's assume we execute our strategy of another $655 million, that's the $800 million over two years minus the Rodoban $145 million. And this is for acquisitions this year or next year. This could potentially add another $110 million to $140 million in EBITDA after 2019, once we achieved full synergies on all acquisitions that were announced or completed by that point.
We have the financial capacity to execute on these acquisitions and still remain – and still maintain a pro-forma net debt to EBITDA ratio below 1.5 times. Just as important, execution of these potential acquisitions will reduce our excess cash on our balance sheet. Improved EPS growth and yield strong returns on our investor debt, as we’ve already demonstrated through the acquisitions to date.
Now Ron will provide some additional detail on the results and our financials.
Thanks, Doug, and good day everyone. In the United States, today is Administrative Assistant Day and I want to take this opportunity to personally thank [indiscernible] to provide Doug and me with outstanding support.
Now please direct your attention to Slide 11. As Doug noted first quarter revenue increased by 15% or $113 million on strong organic growth and acquisitions. Revenue grew organically and each of our three segments, but was driven primarily by South America which accounted for $36 million of the $45 million organic increase. North America grew organically by 2%, but excluding the 2017 sale of recyclers in the U.S. was up 5%. The rest of the world segment grew organically by 2% as lower revenue in France was more than offset by increases in Greece, Israel and several other countries.
The six acquisitions we completed in 2017 delivered $51 million in revenue with the largest contributions coming from Maco in Argentina, Temis in France and PagFacil in Brazil. The favorable forex impact of $17 million was primarily driven by the strength in the euro and the Mexican peso, partly offset by weakness in the Argentine peso and the Brazilian real.
Turning the Slide 12, first quarter operating profit increased by 34% or $18 million on strong organic and acquisition driven growth. The unfavorable forex impact of $4 million was due almost entirely to weakness in the Argentine peso. Organic profit growth of 24% or $13 million was driven primarily by increases throughout most of South America as well as Mexico and the U.S.
Acquisitions added $9 million with most coming from Argentina followed by France. We are rapidly integrating our acquisitions to achieve synergy capture. As we integrate the distinction blurs between our existing businesses in the acquired companies. As a result, we report the operating profit from acquisitions as the trailing 12 month performance of each company from the date of closing.
In total, our three segments had operating profit growth of 36% that was partly offset by $9 million increase in corporate expenses, related primarily to $5 million in higher security costs and $3 million increase in stock-based compensation, security costs are expected to decline in subsequent quarters.
Moving to Slide 13. This slide reviews operating profit, income from continuing operations and adjusted EBITDA. The variance from the prior year is shown at the bottom of the slide. The first quarter operating profit of $72 million was reduced by $14 million of net interest expense, which was about $9 million higher than last year, due primarily to our debt refinancing and senior note issuance last October. Taxes increased about $5 million to $21 million and non-controlling interest reduced profits another $2 million. The buyout of our Colombian partners that Doug just mentioned will eliminate about half of our non-controlling interest going forward.
I’ll cover interest expense and taxes in more detail on the next two slides. Income from continuing operations was $34 million or $0.65 per share up from $0.58 per share in the first quarter 2017. Depreciation and amortization of $33 million was up slightly versus the year ago quarter. EBITDA for the quarter increased $22 million or 25% to $110 million.
On to Slide 14. This slide illustrates the increase in our 2018 first quarter interest expense which was up $10 million. Last October, we closed new bank credit financing and a notes offering for a total of $2.1 billion of which $1.1 billion was cash proceeds approximately 55% is fixed at an attractive rate of 4 and 5x with the balance at a current floating rate of 3.6%. Future rate hikes will have an impact on our weighted average interest rate accordingly.
The $35 million used in 2017 to fund six acquisitions increased interest expense by about $4 million in the first quarter of 2018. As you just saw these acquisitions added $9 million in the first quarter operating profit, so as expected they were accretive in year one. On March 31, 2018 we had about $400 million in cash that will be used to fund Rodoban and future acquisitions. This excess cash increased interest expense in the first quarter by another $4 million partly offset by $2 million of interest income. We’re confident that our highly disciplined approach to acquisitions will generate solid returns that will more than offset the near-term interest cost of the yet to be deployed cash on our balance sheet.
Turning to Slide 15. This slide reviews our effective and cash income tax rates. I’m not going to go through all the details but we need to address some of the confusion about the absolute level of our tax rate and why we didn’t benefit from U.S. tax reform. As you can see, we generate most of our profits in countries that have high statutory tax rates. And our global weighted average statutory tax rate is around 32%. We also have adjustments including valuation allowances, non-deductible items and withholding taxes that increased our 2017 effective tax rate or ETR by 200 bps to 34%.
Our completed acquisitions were in higher tax countries and have raised our 2018 ETR by 100 bps. Another 200 bp increase was primarily driven by the net impact of U.S. tax reform, specifically deductibility limitations and reduced credits resulting in an estimated 2018 ETR of 37%. Timing differences and other tax credits will reduce our 2018 cash tax rate to approximately 27% down from 30% last year. So despite our projected increase in earnings total cash taxes year-over-year are expected to remain relatively flat around $85 million.
In 2019, we’ll begin to receive $32 million and U.S. tax reform, AMT refunds which are payable over four years. Brink’s does not expect to pay any U.S. federal taxes for at least the next five years. Looking ahead, we’re pursuing several tax reduction initiatives with a goal to reduce our future effective income tax rate by 200 to 400 basis points.
Turning to Slide 16. This slide is an EPS walks that illustrates the drivers of the change in earnings per share versus first quarter last year. Foreign exchange had a net negative impact of $0.05 per share primarily from Argentina. Organic operating profit growth added $0.16 per share, while the six completed acquisitions generated another $0.12 of earnings. There was $0.05 per share in interest expense associated with the completed acquisitions yielding positive M&A accretion of $0.07 per share.
We expect accretion to improve over the balance of 2018 as we realize increased synergies from further integration of the acquisitions into our existing operations. We incurred additional net interest expense of $0.03 per share on the yet to be deployed excess cash from the October 2017 debt issuance. And another $0.03 primarily from an increase in the weighted average interest rate from 3.8% to 4.8%. Higher effective tax rate discussed on the previous slide cost $0.03 per share while an increase in the fully diluted number of shares outstanding and higher income attributable to non-controlling interest explains the remaining variance. We expect earnings to accelerate as we invest our excess cash in additional accretive acquisitions over the balance of 2018 into 2019.
Moving to Slide 17. Let’s quickly review capital expenditures and cash flow. Excluding CompuSafe, we expect 2018 CapEx to be around $200 million versus $185 million in 2017. These capital expenditures support our breakthrough initiatives and include new generation armored vehicles, high speed money processing equipment, IT productivity improvement and other investments to drive operating profit growth. Investments are targeted to exceed 15% IRR and many are projected to return more than 20%.
Every investment we make over $1 million is subjected to post completion audits to affirm actual returns. As you can see in this chart, we increased our capital investment in 2017 to finance our breakthrough initiatives. This jump-started organic profitable growth. We expect to continue this increase investment through 2019. In 2020, we expect our capital requirements to decrease to around 4% of revenue consistent with historical levels in 2015 and 2016. Consistent with our debt covenants CompuSafe investment is excluded from CapEx as it’s considered to cost of services sold. In 2017, CompuSafe financing was $38 million and we expect approximately $25 million this year. CompuSafe sales and installations are expected to grow in 2018, but we anticipate a higher percentage to be financed through operating leases.
On to Slide 18. We have set cash flow targets for 2018 and 2019 that reflect significant improvement versus the $58 million generated in 2017. Working capital continues to be a challenge as customers look to extend payment terms. In 2018 for the first time working capital improvement is a component of the annual bonus. And we expect significant improvement across the globe. In 2018, we expect higher EBITDA, improved working capital management and a similar level of cash taxes to significantly offset higher interest expense. We expect capital expenditures including CompuSafe to remain relatively consistent throughout 2018 and 2019. And the combination of all these factors should allow us to deliver free cash flow of approximately $200 million in 2018 and $300 million in 2019.
Turning to Slide 19. My last slide illustrates our net debt and leverage position both historically and assuming additional acquisitions. As of March 31, 2018 our net debt was $681 million up $69 million from year end 2017, an increase in line with historical seasonality driven by factors such as insurance premiums, annual bonus payments and payroll taxes. If we achieve our 2018 and 2019 cash flow targets and complete no additional acquisitions, our net debt balance will decline to around $480 million resulting in a leverage ratio of 0.8 times.
If we complete another $255 million of new acquisitions in 2018 that’s the $400 million minus $145 million for Rodoban and $400 in 2019, the 2019 net debt target would be approximately $1.1 billion and the bank defined leverage that includes TTM fully synergized EBITDA would be 1.5 times.
I’ll now turn it back over to Doug.
Thanks, Ron. And thanks to the entire global Brink’s team for all of your dedication to implementing our strategic plan initiatives. While also assuring that your priority is on focusing on our customers and their needs. Thank you.
We’re now five quarters through our 12 quarter strategic plan period. And we have clearly – and we have now clearly not only accelerated execution of our plan but we’re also layering in additional strategies to increase shareholder value. Our 34% increase in first quarter operating income supports our full year 2018 op-income guidance of $375 million at midpoint with a margin improvement of over 200 basis points to 11%. Achieving this guidance represents a margin rate increase over two years of the strategic plan of 350 basis points, which puts us again well on our way to achieving or even exceeding our target for the 2019 strategic plan numbers.
We’re confident that we’ll continue to drive organic growth and leverage earnings through our core strategy 1.0 initiatives. And that will meet or exceed our close the gap strategic targets. Now with a track record of six accretive acquisitions, we're prime to fully execute our strategy 1.5 that’s to achieve our target of an additional $800 million in acquisitions that will continue to drive even greater shareholder value.
Thanks again for joining us this morning. Andrew, now let’s open up the calls.
[Operator Instructions] The first question comes from Jamie Clement of Buckingham. Please go ahead.
Gentlemen, good morning.
Good morning, Jamie and welcome back.
Thank you very much. I know you guys don’t guide quarterly. But considering, we don’t know the pace of synergy realization, the pace of productivity initiatives those kinds of things. Would you expect the first quarter to be the weakest quarter from EBITDA and earnings perspective of 2018? And can you give us a little bit more clarity on some of your comments about looking for growth to accelerate as the year progresses.
It's a reasonable question. And you're correct. We don't give quarterly guidance. We give full your guidance. That's why we've not only reconfirm, but are comfortable with what we provided with full year guidance. But I also think you're correct in suggesting as we woven into our comments that we expect to continue to see acceleration in our margin rates throughout the year and that sequentially to see continued improvement like you said versus the first quarter. And it varies by country, but in general, the second – the latter part of our years are stronger seasonally, which will help drive a lot of that. But I think as important if not me even more important are strategy 1.0, which is really the implementation of specific initiatives, specific breakthrough initiatives in many countries particularly the larger ones such as the U.S. and Mexico, Brazil and France.
And the investments associated with those will continue to ramp up over the plan period, which includes the quarters associated with this year. So that should continue to drive improvements in margins, improvements in obviously absolute margin dollars. So that is a key component to the acceleration to continued improvement that we should see year-over-year and by quarter as well as then the rolling in of the acquisition revenue margins and then the synergy achievement in each of those as well again that helps us ramp up not only throughout this year, but in the subsequent years that we spoke about earlier. As we achieve a greater percent of those synergies are generally take us up to two years to achieve.
Jamie, in addition if you look at the corporate expenses, which were approximately $30 million in the first quarter. Those seasonally are very high in Q1. They will come down. We did mention security cost will decline. Going forward we have a higher incidence of payroll taxes in the first quarter every year, some IT facing and things like that. So we do expect a reduction in corporate expenses to add on top of what Doug said at the improvement in the operating results in the field.
That's all really helpful and we all appreciate it. Doug if I could ask just one more question, for the lot about there is a core core acquisitions and what you look for and the benefits of route density and obviously the synergy capture is pretty easy I think for investors to understand. But if you look at core adjacent you evaluate those, what are your priorities?
Well, priorities core adjacent by definition says its in our core business, in this case heavily cash but it could be cash and BGS in particular and some payments, which are all we consider core businesses. But its adjacent geographies, right, we would still gain some synergies not to the fullest extent that we would in those that were core core. We're not going to see the route density improvements on that, but we'll still see significant amount of potential synergies anywhere from SG&A expenses, other fixed cost expenses we can take out to just operation of the business and efficiency gains.
So that's why we're saying those may be in the higher end of the post energy range versus the ones that we've already done, if you look at the numbers are historically now we're looking back on the six, are really at the lower end of the range.
Okay. Thank you all very much for your time. Good start.
Thanks for your support.
The next question comes from Tobey Sommer of SunTrust Robinson Humphrey. Please go ahead.
Thanks. I was wondered if you could describe what sort of DSO reduction you're targeting in 2018 and refreshments on how much each day might be worth in terms of cash.
We haven't disclosed those targets. I will tell you that in 2017, the increase in DSO was primarily driven by a lack of focus. And in some of our countries interest rates were actually negative for part of the year. And so it was just not a priority with the rollout of our breakthrough initiatives. We expect to recover a portion of that back from the math on DSO for an average for Brink’s and total. I think we report 57 days and you can see we have a wide range country by country, some of that is systematic countries such as India for example have very long DSOs. Canada is our top performer with very short where they have the portfolio customers that are primarily a large financial institutions who pay on time.
So we haven't disclosed that. Each business has a specific target that there will be shooting for they will be an improvement not only in days versus 2017, but actually in absolute reduction and receivable dollars despite increased growth in revenue. So its looks aggressive on the outside, but just getting back to where we were in 2016, will have a material impact on our cash flow.
Yes. And Tobey, if you look at our cash flow projections, we continue to show which I'm not sure, we are really want. We continue to show some additional use or negative working capital there, obviously that's a DSO we just kept them flat and then funded some of our new businesses with some of our new growth if you will. That's that type of number. If we can improve on that number of hopefully, we can at least do that and maybe better.
Excellent. I wonder if you could comment on pricing across the globe in please touch on the price increase that you instituted at the end of last year and in what the realization is like?
You're primarily speaking to the price increase at the end of the year in the U.S., which I think with the topic at the time, because in the third quarter we had increased cost, but not price. In the fourth quarter we did increase pricing. We did increase pricing around the October timeframe, starting to see the impact in the late November timeframe. Last year, we increased pricing that was at a level that was higher than normal heavily driven by some of the cost increases in labor. We're seeing very good traction in acceptance, in the marketplace and with that pricing, so that's good, that's positive.
So the U.S. is doing reasonably well with that. We also have pushed for higher pricing in other markets, particularly in South America, which has been generally accepted reasonably well. Brazil is one as an example of that, driven partially by higher cost for us in the industry, with the security and other things that we're helping to help support that. And so those are doing reasonably well that the price increases – those price increases are doing reasonably well as well. I think we are fairly straight forward and transparent about not seeing the benefits yet in France. And we would certainly like to see that and I think we'll be looking to take the lead with that as well.
Can you follow-up on that, what would you – how do you diagnose what happened in France at this point kind of a little bit of benefit of being in the rearview mirror. And could you refresh us on the top couple levers that you have in France to improve margin in achieve your 2019 margin goals.
Yes. I think I tried to again be very blunt and transparent in my comments. I'll elaborate a little bit more on them. We saw some disruption in the marketplace, which unfortunately some of that continues a little bit, but the disruption in the marketplace was heavily driven by the Temis sale process last year as well as other competitors buying for additional market share and gains as a normally high number of tenders came out last year, bank tenders FIs and even retailers came out last year. And buying for that as they came out for additional share and position is what disrupted the market and as continued to into the first part of this year. The industry needs to see some improvement in pricing. And that's only reasonable based on the margins and the pricing that has resulted – as a result of these tenders.
Certainly with the acquisition of Temis, they don't need to be a price leader or – well, they don't need to be a price leader as they were last year, when they were looking to position themselves for a sale process. So a lot of that has changed. I think as important as I said earlier, the plans are being implemented in France fairly significant cost reductions to help support our margin improvements as well, which is consistent with our strategic plan. And those are real reductions that are not related to specifically the business changes or the account changes in France.
These are changes in where we can reduce cost in our brand structure, in our operational structure and our management SG&A structure, consolidation of headquarter locations, consolidation of regional locations and so forth. These have been discussed with the worst consoles in France and I will continue to be implemented over the course of this year and next year and make meaningful improvements in our cost structure that will help margins going forward, in addition to what we think will be more favorable market positions and terms going forward in France as well.
Thanks. With respect to taxes you outlined a longer term potential to improve your effective tax rate by, I guess, 2 to 4 percentage points. Would the cash tax rate see a comparable improvement or what would the impacts of that lower ETR beyond cash taxes if any?
Yes, Tobey, it would be a percent to percent improvement over time. There’s always timing differences in taxes. So over the long-term, the effective tax rate and the cash tax rate will tend to equal out. So any improvement in our effective tax rate will also impact the cash tax rate over time. So it will be a percent for percent improvement.
Great. Just couple more for me. How would you describe since you’ve been on board in till now, kind of customer relations in the U.S. and how do you characterize your ability to kind of not only approach again customers that perhaps were lost in the past, but the state of those relations to try to reengage and win business back.
Yes, Tobey, actually – I’ll take that. Tobey, I think that’s actually a great opportunity for us. Well, I do agree that as a company and as Ron and I and other new members of the management team have seen issues, relationships that were not necessarily as we would like them to be, we didn’t see the customer focus in being necessarily, we like to in the culture. We think those are materially changing and turning around the other way. We’re materially improving our service levels to our customers. And I think they’re seeing the difference associated with that.
And on top of that, we’re looking about – we’re talking about the future and strategies with our customers including things such as our customer facing technologies in new systems and processes and services we’re looking to implement, which is part of our third strategic objective. So I think all of that is very important to improving our relationships with our customers and gaining back some of the businesses that we’ve lost over the last several years.
I think we’re well down that path, but we have still long way to go, which again is both an opportunity as well as a challenge that we need to do. So I think what we’ll see that we’ll continue to improve and gain account share, which I think is one of the objectives that we laid out in our first objective and then is gaining account share specifically in the U.S. with specific advise as well as retail customers as well. So in summary, it’s improving we have a ways to go. That’s good news and hopefully we should see that supporting continued ramping up of organic growth in the U.S.
Lastly and quickly, could you describe how you view your competitive positioning in the copy say recycler market both from a sales perspective now that you’ve have an organization stood up, as well as from a technology and product perspective. Thanks and I’ll get back in the queue.
Yes, thanks very much and that’s a very good question. I think we have a much better probably not the optimal yet sales organization, but much better and very competitive with the other competitors in the marketplace. We offer a product that is very similar, if not the best out there. On the other hand that product is also very similar to our largest competitor Loomis.
So the rest of the support and the services and the quality of services that we provide around that and the full package that we provide around is very significant. We now have a monitoring center that monitors on a central basis, all of our copy says, both in terms of the up and running and ensuring that we have availability of the copy says, but also monitors the cash it’s in there and that’s put into the machines and allows us to provide the same or next day credit for those machines again that’s all up and running now in Dallas, which we didn’t have before.
And then the interface of the systems and the processes along with – then allow us also to coordinate the cash forecasting and other services that optimize the returns in the benefits to the customers around that and integrating that all together both with the FIs that have a customers the retail customers as their customers as well as integrating the rest our systems, we think is and can be a competitive advantage and that’s a material change from where we were even six to nine months ago as a company in an offering.
So I think we’re very competitive, I think that will continue to improve our offerings to our customers and then continue to improve our sales and solutions offerings to our customers. And one of the things we’ll be talking about in the next couple quarters is continuing to roll out not just copy say another retail solutions, but other services such as our track and trace, that’s just our 24 hour – 24/7 app, Brink’s app and other unique and differentiated services to our customers. Thanks, Tobey.
The next question comes from Ashish Sinha of Gabelli. Please go ahead.
Hi, good morning. Thanks for taking my questions. I just wanted to dwells just a little bit on France. So in terms of the volumes you have seeing, the volume focus – is there some macro issue as well or is it everything is competitor lead and then when you talk about restructuring and improving France margins, is it just a matter of resizing that cost base for the last volumes. And I wanted to understand how you think about if some of these contracts were to come back and Brink’s were to bit for them again. How easy is it to build up your organization to deal with those volumes?
And then secondly within France as well, with regards to the Temis acquisition and your expectation of synergies. Does the pricing environment today in France change any of your assumptions in terms of synergies? And my second question is on corporate costs and you pointed out about $5 million high security costs, what exactly is this. Is this the cost of insurance or cost of risk? And then lastly, a ready mathematical, but housekeeping question. I’m not surprised – I’m surprised, in fact you did not grieve guidance by the MONI Smart Security deal, I mean, its $5 million this year, but you talk about it doubling next year. So why not, thank you.
Let me take the first one and I’ll take it actually backwards from the way that you asked it three or four parts associated with that. First Temis synergies and implementation of those, we are on track to achieve the Temis synergies as we laid out. And the change in the market competitiveness will and should not impact the achievement of the Temis synergies, which are heavily based on cost synergies, most of our synergies are based on cost energy. But in many cases, we also have a contingency in there about lost of customers.
So far in the Temis acquisition, we have not see any change in the revenue side of that which is positive and actually helps our integration overall targets. In terms of the cost reduction, as I tried to lay out prior to much of the change the sea change in terms of the competitiveness and the significant number of tenders that we saw in 2017, which drove some volume changes for us. Prior to that, we were looking at ways we could structurally reduce the cost, we being the team and that was integral and is integral two or three years strategic plan.
So I would suggest there were a two levels of cost savings in the primary one, the biggest one is the implementation of that strategic plan and the structural cost changes associated with that, which are not necessarily related to volumes and the like that related to the market changes.
So that is not something, that is driven by or a part of the market revenue changes. But they are significant and they are being driven still that we can see improvement in margins and support achieving our strategic plan targets. We also looking as needed to deal with a variable cost on top of that but that is not the bulk of the cost changes that help drive our margin improvements. And that suggests as well, with all that structure in place, we will be able to ramp up especially as we look at the integration of Temis, which is on top of these additional cost savings. We will be able to manage additional revenue if we see growth coming back in the marketplace. I think those were the key pieces.
Now we talk about corporate cost.
Yes, right. So as you mentioned the corporate costs, we did have security losses in the quarter that were unseasonally high. We typically don’t comment on those because every single one of them is under active investigation. We also did increase our insurance premiums this year to reduce future volatility of losses impacting the P&L. So both of those combined were about $5.2 million higher in Q1 2018 versus Q1 2017. Again, 2017 Q1 was a relatively safe and benign quarter. And the Q1 this year was the opposite. But we don’t comment on specific incidents for those reasons. As I did mention the other costs that were higher in the quarter are expected to moderate. The payroll taxes, IT phasing et cetera. So it was a perfect storm for corporate method.
And the other thing you mention was guidance and money. In our guidance we had about a half year of Rodoban. That timing is still on certain because as you can imagine it’s in the hands of the Brazilian regulators as far as approval of that deal. And so until we have a further grasp upon the timing of the Rodoban closure we really didn’t want to put money in there as well. And then typically our pattern has been in the second quarter where we have six months under our belt and a higher degree of confidence to review guidance at that time.
Understood. Thank you.
The next question comes from Jeff Kessler with Imperial Capital. Please go ahead.
Thank you. I’ve had about five questions to ask. I think they’ve all been asked. But I will come up, I’ve got a question regarding a follow-up on one of the early questions asked to ancillary services. What are you doing to bring your value proposition? As you talked a lot about cash, Cash in Transit and then we have one question about CompuSafe about cash recycling. You sold off part of your cash recycling business, but I’m sure the service that you’re offering is still there.
So the question I have is with regard to these businesses that are – let’s call them ancillary in nature but importance to bringing a value proposition to Brink’s customers that they will – that there is a deeper penetration into their cash businesses. What is your strategy toward building those businesses up? And do those businesses ultimately have a higher – can have a higher margin then the Cash in Transit business.
That’s a very good and insightful strategic question. Let me answer a couple things around it and then emphasize where we are following. First of all, we did not sell off a cash recycler business if anything we’re continuing to expand on our retail offering – solution offerings. CompuSafe is one of those examples of our continued expand on that significant investment in the – obviously the sales in that network to sell that. But as important, as I mentioned earlier is the monitoring center, the support teams, the implementation teams et cetera to provide added services in a total package to that.
As an example, I think what you’re alluding to is the CompuSafe is a full package of solution that includes CIT, vaulting, money processing and obviously monitoring of the equipment and all the things around that to really give a solution to the customer that only needs to worry about is if somebody is taking care of his cash and he has something to put into every day to secure. So that’s really what we’re looking for and that is a good example of what we’re looking to do in the future.
The cash recyclers that we talked about last year was a significant one customer sale and the residual associated with the actual sale of the equipment is what we’re really alluding to that because it was sold as a separate equipment sale versus what we do with CompuSafe. In most of our CompuSafe sales they are made as an integral ongoing five year sale of services as paid for every month that includes as part of that package the equipment.
In the case of the recyclers last year in the fourth quarter of 2016 and the first quarter of 2017 the actual recyclers were sold by us to the end customer and then we – those are separated out from the rest of the ongoing recurring revenue and the packages services that we provide over a six year period of time to this customer. And that’s why we’re pointing that out because it was reasonably significant in terms of the one-time sale at a relatively low margin.
So we’re not getting out of the recycler business that was just to give a true year-on-year. So you know that our organic sales adjusted for that in the U.S. was up 4% and not down or not flat. And their margin was actually improved more that if you adjust for that. That’s what we’re trying to do there, we actually very strong in recycler business probably stronger than any of our competitors in the business – our direct competitors anyway. And we’re going to continue to grow that as one of our basket our stable of solutions.
I alluded to we’re looking as our strategy is to expand the services that we offer to retail and FY customers to help them in their total cash ecosystem. Basically suggesting what can we do to help better service them in anything dealing with their cash ecosystem? And we want to be the ones that they talk to, that they relate to, that they partner with to help service their customers whether it be CompuSafe, whether it be how we figure out to better service our retail customers and expand that customer base. But expand it in a way that it’s a total basket of services and they generally are at – like CompuSafe at higher margins because they’re a total solution.
So our strategy that we’re talking with very aggressively with FIs and hopefully to expand beyond that as we launch our what we think will be the new industry standard as we start rolling this out and improving on it support the customer facing IT as part of this. So our track and trace, our ability for our customers through a portal or through a Brink’s app to be able to track what’s going on with their business, to provide orders and change orders through that portal and that interface. And to be able to know exactly in real-time what’s going on with their business and how we’re providing the services.
I realize that you have a competitor who has a group of these services as well. But looking at – looking down the line and looking at other companies including other companies we cover that are more on the ATM side but I’m trying to get into this business. It appears that you folks have a compliment of services that except for one competitor you are – you’re basically ahead of the game, it’s up to you folks to put that into a package that your customers want to take.
I can’t argue with you. I think we need to – as an add-on to an earlier question, we need to make sure that our base services, our customer facing relations, our customer focus, our performance against SLAs and customer expectations as metrics are equal to or better. We’re ramping that up, we’re investing to make sure that happens. We’re putting the right systems and people in place to do that. And then adding to that like you’re suggesting this layering in of customer facing technologies and support and system solutions.
And we think that as we do that we will have a better offering and a differentiated offering for customers. And we think there will be offerings that will allow us to reach more customers as well as ended up being a higher margin in stickier offering for these packages. More coming on that as we look to this year, as we said before to be the year of IT internally as we roll out these services and hopefully provide that competitive strategic advantage.
All right. Great. Thanks Doug for taking the question.
All right. Thank you very much Jeff.
The question-and-answer session and the conference have now concluded. Thank you for attending today’s presentation. You may now disconnect.