The Brink’s Company (NYSE:BCO) Q4 2023 Earnings Call Transcript
The Brink's Company (NYSE:BCO) Q4 2023 Earnings Call Transcript February 29, 2024
The Brink's Company beats earnings expectations. Reported EPS is $2.76, expectations were $2.49. The Brink's Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Brink’s Company’s Fourth Quarter and Full Year 2023 Earnings Call. This morning, Brink’s issued a press release detailing its fourth quarter and full year 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.brinks.com. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the 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. 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.
Jesse Jenkins: Thanks, and good morning. Joining me today are CEO, Mark Eubanks and CFO, Kurt McMaken. This morning, Brink’s reported full year 2023 results on a GAAP, non-GAAP and constant currency basis. Most of our comments today will be focused on our non-GAAP results because we believe these results make it easier for investors to assess operating performance between periods. Reconciliations of non-GAAP results 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’ll now turn the call over to Brink’s CEO, Mark Eubanks.
Mark Eubanks: Thanks, Jesse. Good morning, and thanks for joining us. Starting with the fourth quarter on Slide 3, we delivered total growth of 5% with organic growth of 9%. The organic growth was driven by strong pricing discipline and 17% growth in AMS and DRS revenue. Profit margins were impacted by geopolitical and economic pressures in certain markets and lower than expected growth in high margin services in North America. Q4 operating profit was $190 million with a margin of 15.2% and adjusted EBITDA of $252 million with a margin of 20.2%. EPS was up 31% to $2.76 per share, benefiting from a few unique items in the quarter that Kurt will discuss later in more detail. We also delivered another strong quarter of improvement in free cash flow on our way to a record year.
Free cash flow was up 36% from the prior year, with sustainable conversion improvement to a rate of 70% in the quarter. Moving to the full year, revenue was in line with expectations with 9% organic growth. Approximately 40% of that growth came from AMS, DRS revenue, which was up 21% organically in the year. Adjusted EBITDA was $867 million with a margin of 17.8%, expansion of 40 basis points. Full year EPS improved $1.36 to $7.35 per share. We delivered record free cash flow through record EBITDA, improved working capital and a reduction in CapEx as a percentage of revenue as well as lower cash taxes. For the full year free cash flow, it nearly doubled to $393 million with 45% cash conversion of adjusted EBITDA. 2023 reflects consistent progress executing against our strategic initiatives.
We ended 2023 with over $1 billion or 21% of our revenue, now represented by higher margin AMS and DRS offerings. This improved revenue mix and cost productivity across the business led to expanded profit margins for the full year. We delivered record free cash flow through increased focus and operational discipline at all levels of the organization. We also increased our financial flexibility by reducing leverage to 2.9 times within our target range of 2 to 3 times. And finally, we returned over $200 million of capital to our shareholders through the repurchase of 2.3 million shares of common stock as well as our dividend, which was increased 10% in May of 2023. As we look forward to 2024, our guidance represents continued progress on our key objectives.
We expect revenue growth in the mid-single digits with low to mid-teens organic growth and another year of double-digit growth in AMS and DRS. We expect adjusted EBITDA to be between $935 million and $985 million with margin expansion of 80 basis points at the mid-point, driven by strong revenue growth, continued revenue mix improvement and cost productivity initiatives. EPS is expected to be between $7.30 and $8 per share and free cash flow is expected to grow to between $415 million and $465 million with conversion at the mid-point of approximately 46%. We’ll provide more detail on the guidance later in the presentation. Turning to Slide 4, our full year performance demonstrates good progress against our goals. Total revenue in 2023 was in line with our expectations with 9% organic revenue growth and a 2% contribution from M&A, partially offset by a 4% headwind from FX.
I’ll go into much more detail on revenue and operating profit by segment on the next slide. Adjusted EBITDA was up about $80 million due to the flow through of higher revenue, good pricing leverage and cost productivity, which includes restructuring savings from the program that we announced late in 2022. Earnings per share was $7.35 per share, reflecting the flow through of higher net income and a reduced share count. Our focus on free cash flow led to a $190 million increase year-over-year, reflecting improved working capital and lower cash taxes that more than offset the higher cash interest. Kurt will have more specifics on the free cash flow cadence and expectations into next year. On to Slide 5, I’d like to take a moment here to discuss the segment level performance in both the full year and fourth quarter.
Starting with North America on the left side, organic revenue growth of 1% for the full year includes an organic decline of 2% in the fourth quarter. The quarter was impacted by the portfolio rationalization we discussed in Q2 and the lower volume growth from our global services revenue. There were also several large new DRS customers that delayed device installations from the Q4 peak retail season into 2024. As we look at the year, we’re well-positioned to accelerate our DRS revenue in the North American market as we convert our backlog to revenue. We continue to make progress on a robust sales pipeline that’s up over 50% year-on-year, with a much more mature outlook than a year ago. Operating profit in North America was up 160 basis points on the year to a record of 11.6%.
Good pricing efforts, portfolio rationalization and cost productivity, especially in direct labor, were the main drivers of the margin expansion despite the revenue mix headwinds that we saw in Q4. We also continue to make good progress on our safety and quality initiatives. With Q4 total recordable incidents at the lowest it’s been in the last three years and quality scores that improved year-over-year again this quarter. In Latin America, strong organic revenue growth in Q4 and the full year was driven by our pricing efforts to offset inflation as well as strong DRS and AMS revenue growth. Geopolitical and economic headwinds in several countries in South America, including the impact of the currency devaluation in Argentina, impacted profitability in the fourth quarter and the full year.
As we’ve discussed previously, we continued experience economic headwinds in Brazil. The country has taken action to spur the economy as evidenced by the five consecutive interest rate cuts, and we feel good about our outlook. Our local team are offsetting these impacts through our continued shift to AMS and DRS revenue, which are strong in Q4 and we continue to streamline our cost structure to match the demand shifts. Looking to 2024, we have a strong business in Latin America, good momentum on DRS and AMS in the region and are encouraged with our outlook, despite a forecasted impact in Argentina from the recent devaluation. Europe has performed well in 2023 as they had success with DRS and AMS early in the year and have driven growth in both of these areas throughout the year.
The strong growth in these higher margin areas has helped profit margins expand by 40 basis points on the year, despite the economic backdrop. With several new AMS contracts set to come online in early 2024 and similar to North America, a DRS pipeline that’s up 50% year-on-year, we feel really good about the trajectory of the segment next year. In the Rest of the World segment, we realize modest growth and margin expansion in the year. As we previously discussed, our global services business, which represents more than half of the revenue in the segment was impacted by the slowdown in the movement and storage of commodities worldwide. We’re encouraged by a nice recovery we’ve seen in BGS late in the year and we continue to see that here in Q1.
DRS has done well and the AMS pipeline in the region is very active with several ongoing pilots. With the growth of DRS base in 2023, we are targeting margin expansion in the segment next year. So far this year, we’ve seen a recovery in our BGS business outside of North America and an accelerating progress in DRS in all regions highlighted by North America. I’m encouraged by the strong progress on our strategy as evidenced by the growth we delivered in AMS and DRS in both the fourth quarter and full year. As we continue on this growth trajectory, our business will naturally shift to a larger base of predictable higher margin recurring revenue business mix. As we exit 2023, our AMS, DRS revenue makes up 21% of our total revenue. Over the long-term, we feel good about our ability to continue to increase that percentage going forward.
On Slide 6, you can see the EBITDA performance over time, including the mid-point of our 2024 guidance. The company has performed very consistently through challenging economic cycles. The 14% CAGR is well ahead of our revenue CAGR over the same period as we continue to make strides increasing our margin profile. On average, EBITDA margins have expanded by more than 80 basis points annually and that aligns with our expectations for next year. There are several drivers of margin expansion, starting with the work we’ve done to improve our revenue mix. Since 2020, we have nearly tripled the size of our AMS and DRS recurring revenue base, growing the business by over $600 million incrementally. In 2024, we expect another double-digit organic growth year in these higher margin offerings as we continue to convert and penetrate the retail market for DRS, as well as help financial institutions and independent ATM operators simplify their ATM ownership and operation through our AMS offering.
Operationally, we continue to drive waste out of the system through the Brink’s business system. We’re doing this by leveraging lean philosophies and sharing best practices across our global branch network as we continue to unlock savings opportunities. We’ve also recently started a transformation of our North American business that we expect to eventually scale globally. The transformation is focused on commercial and operational excellence as well as support function optimization. Even with the record margin performance in North America, we realize we have significant room to continue and expand our margins. The transformation supports our margin expansion efforts in 2024 as well as the years beyond. We remain focused on our mid-term goal of approximately 20% EBITDA margins across the business and believe we have a clear path to continued margin expansion.
Turning to Slide 7, I’d like to take a moment to touch on the developments in each of the customer offerings. Starting with cash and valuables management, we saw good growth in the fourth quarter driven by disciplined pricing efforts, which more than covered our inflation in all segments. As I mentioned earlier, we did experience headwinds in our BGS business due to elevated interest rates and market trends globally. We’ve made good progress instilling a culture of lean into our operations and are driving cost productivity throughout the organization and across the network. DRS was up sequentially from the third quarter on strong growth in Europe due to the onboarding of several new customers in the quarter. North America was up sequentially as well despite the impact of several larger customers delay in installations out of Q4 into 2024.
I’m encouraged by the improvement in the pace of installations early this year with several days setting record highs, and the month of February has been our best on record. Our sales pipelines in all regions are up approximately 50% versus the same time last year. AMS also had a successful year of progress as we established our global team and increased our visibility with customers. Over the year, we developed several key wins in both Latin America and Europe as we continue to build scale and improve our service levels in AMS. I’m encouraged that we remain on the right path, when I see the size of our pipeline and the various pilot programs we have going on across the globe. As you can see from the chart on the left side of the slide, AMS and DRS are now 21% of our total revenue.
As I mentioned, we expect to see at least double-digit organic growth in these offerings next year. I believe we’re still in the early stages of the transition to these high margin recurring revenue offerings and am excited about the opportunities that remain in front of us. With that, I’d like to turn it over to Kurt to talk through the quarter and provide more color on our guidance assumptions. I’ll return with some closing thoughts before we open up for Q&A. Kurt?
Kurt McMaken: Thanks, Mark. Looking at our fourth quarter results on Slide 8, 9% organic revenue growth was offset by 4% translational FX, primarily in Argentina. Adjusted EBITDA was up $5 million to $252 million and a margin of 20.2%. EPS was up 31% and includes a $0.48 benefit from gains on the sale of marketable securities. These were primarily in Argentina as we monetized certain investments that protected our assets from devaluation during the uncertain geopolitical backdrop in the country. EPS also benefited from a lower than expected foreign tax expense relating primarily to higher tax deductible inflation adjustments in Argentina. We have not included additional benefits from these items in our 2024 outlook. Free cash flow in the fourth quarter was $177 million and converted at a 70% rate from our EBITDA, representing a strong improvement year-over-year as we continue to stress the importance of free cash flow across our business.
Realizing the heightened interest of this metric by our investors, we plan to present a trailing 12-month view of this metric when we share quarterly performance going forward. On Slide 9, you can see that roughly 40% of our organic growth in the quarter came from AMS and DRS. In total, $102 million in organic revenue produced $31 million of organic operating profit for an incremental margin of around 30%. Translational FX reduced revenue by $46 million and operating profit by $29 million with higher margin Argentina currency devaluation offset by favorability in relatively lower margin Euro denominated countries. On Slide 10, would like to walk you from operating profit to adjusted EBITDA. Starting on the left, interest expense was up $9 million year-over-year to $52 million.
The increase is related to higher interest rates and higher debt needed to fund DRS growth. Tax expenses were $42 million in the fourth quarter and $118 million for the full year. Our effective tax rate was 24.8% lower than our expected 30% target due to an increase in tax deductible inflation adjustments associated with Argentina’s currency devaluation in mid-December. We expect these rates to normalize back to slightly below 30% in 2024. You can also see the $29 million in marketable securities gains that I mentioned earlier. Income from continuing operations was $127 million along with a reduced diluted average share count of 45.9 million shares equates to $2.76 per share, an increase of 31% with approximately 2.3 million shares purchased in 2023, we ended the year with 44.5 million shares outstanding, a reduction of approximately 4% from the prior year.
Working back to adjusted EBITDA, you can see where we removed the marketable security gains to aid comparability to past and future periods. In total, EBITDA was up $5 million to $252 million. On Slide 11, I’d like to talk you through one of our more significant successes of the year, free cash flow generation. We delivered a record $393 million in free cash flow in 2023, up 93% over last year. In the chart on the top right, we have provided three-year trends on the major components driving free cash flow, record EBITDA was up approximately $80 million in 2023 and at the midpoint of guidance is expected to increase by another $90 million in 2024. We made considerable improvements year-over-year in working capital as we worked our way back from a challenging 2022.
Improvements were mostly driven by meaningful gains in DSO across all of our segments. The change in our annual incentive plans to include free cash flow for our top 300 leaders has engaged and motivated our leadership to drive results. Looking to 2024, we expect to see slight working capital usage as we lap the strong improvements made in 2023. Cash taxes were lower in 2023, primarily due to lower foreign tax driven by higher inflation adjustments. We expect cash taxes to increase in 2024 as these benefits are expected to lessen going forward. Cash interest is expected to rise in 2024 due to higher floating rates early in the year and increases in the lease debt and provisional capital to fund our planned DRS growth. CapEx was down as a percentage of revenue in 2023 and we expect to continue this trend in 2024 as we make progress reducing capital intensity through growth in AMS and DRS.
For 2024, we expect total free cash flow to grow by approximately $50 million and conversion to be about 46% at the midpoint of our guidance. Turning to Slide 12, you’ll see a familiar slide that displays our capital allocation framework. In short, we are not planning any major changes to our framework going forward. Starting at the top, we have an attractive menu of organic investments that will increase revenue growth, profitability and ultimately future free cash flow. These investments are primarily OpEx related and fit within our broader profit guidance. I’m happy to report that we have successfully reduced our leverage below 3 times to within our target range. As expected, this reduction came largely through EBITDA growth, although we continue to shift our debt by paying down our revolver to offset growth in leases and provisional capital needed to fund our DRS growth.
With leverage now within the targeted range, we have increased our financial flexibility to pursue additional capital returns and accretive M&A. Shifting to capital returns, in 2023, we completed $170 million of share repurchases, reducing outstanding share count at year end by approximately 4%. Looking forward, we have $500 million of capacity available in a new share repurchase program that expires at the end of 2025. We continue to see share repurchases at our current valuation as attractive, and we plan to be active in the market through a combination of systematic and opportunistic purchases. On the M&A side, our philosophy remains consistent. Our pipeline is robust with most of our targets prioritized in the AMS and DRS space. Any of our potential M&A opportunities require attractive returns and a strong strategic fit and need to fit within our current capital allocation framework.
We remain focused on accretive capital allocation that will drive profitable growth and increase cash generation in our businesses. Our disciplined capital allocation framework is designed to maximize shareholder value for years to come, and I am encouraged by the strong year we delivered in 2023. On Slide 13, you can see our 2024 guidance. We expect total revenue growth to be in the mid-single-digits. Organic growth is expected in the low to mid teens, offset by translational FX, primarily in Argentina. Net of FX, we expect mid-single-digit growth in 2024, evenly split between high margin AMS/DRS offerings and growth in our cash and valuables management businesses. Adjusted EBITDA is expected to grow about twice as fast as revenue due to revenue growth and mixed benefits, as well as expected productivity in our core operations led by the Brink’s business system.
As is our normal practice, this guidance factors in FX expectations for Argentina, which we expect to be more pronounced in the first half of the year. All other currencies reflect rates as of December 31, 2023. Free cash flow is expected between $415 million and $465 million with conversion from adjusted EBITDA of approximately 46% at the midpoint. EPS is expected to be between $7.30 and $8 per share. EPS growth is partially muted due to the lapping of higher marketable securities gains in 2023 that we have not factored into our guidance for 2024. We also expect a return to more normalized effective tax rate, slightly better than 30%. Interest expense expectations reflect market assumptions for interest rate reductions in the back half of 2024 and are based on our current capital structure.
You may notice that we are not providing guidance to operating profit as we have historically. We have found that EBITDA is the preferred valuation and profitability metric of our analysts and shareholders, and we believe guiding adjusted EBITDA maintains the same amount of visibility into the expected future performance. With that, I’ll turn it back over to Mark for some closing comments.
Mark Eubanks: Thanks, Kurt. Before we turn to Q&A, I thought it’d be helpful to investors to provide a comparison of our 2024 guidance against the targets that we set out in our 2021 Investor Day. Through the first two years of this three year framework, we’ve outperformed those Investor Day targets when considering the FX and interest rate headwinds. As a reminder, our targets were given on a constant currency basis and excluded the impacts of FX over the multiyear period. While reported revenue is a little short of the number we communicated over two years ago, there has already been over $400 million of currency headwinds to revenue. Strategically, we also communicated a growth plan that focused on acceleration of our higher margin businesses of AMS and DRS, which we called Strategy 2.0 at the time.
Our commitment was to deliver an incremental $500 million over the three year period, and we’ve already delivered $482 million over the first two years. With our 2024 guidance, we expect to deliver over $600 million in total, an outperformance of over $100 million of revenue. Our 2024 guidance has margins of 18.6% at the midpoint, driven by the improved revenue mix exceeding our 18.5% target we set back in 2021. Looking at the EBITDA dollars, we expect to deliver $960 million at the midpoint, $80 million higher than our original target when taking into account the $120 million of negative FX we’ve already experienced in the first two years. Looking at free cash flow, we’ve seen a rapid rise of interest rates over the last 2.5 years that has moved the assumed rates on our debt from only basis points to over 5.25% today.
Free cash flow conversion is higher than our original expectations when factoring in the impact of $130 million, largely from higher interest rates. Over the last couple of years, we’ve also sharpened our focus on value creating capital allocation. We completed the Note Machine acquisition in 2022 to bolster our global capabilities in the ATM managed services market. We’ve also returned significant capital to shareholders, approximately $300 million in share repurchases and dividends over the last two years. In addition, we recently announced a two year, $0.5 billion share repurchase authorization. Even with these investments, over the past two years, we were still able to reduce our leverage by a half a turn to 2.9 times. As I look back over the strategy period, I’m confident in the progress we’ve made and remain committed to our strategic direction.
The future growth prospects for AMS and DRS remained strong and the demand for our essential services remains high. With the increased financial flexibility and improved operating model that we’ve built over the last two years, we will continue to grow our business and create additional shareholder value during 2024 and beyond. Now let’s open the line for questions. Operator?
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