Earnings Call Transcript - BCO Q3 2021

Operator, Operator

Welcome to The Brink's Company's Third Quarter 2021 Earnings Call. Brink's issued a press release on third 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 in the Investor Relations section of the company's website www.brinks.com. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now, for the company's Safe Harbor statement. This call and the Q&A session will contain forward-looking statements. Actual results could differ materially from 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.

Edward Cunningham, Vice President of Investor Relations and Corporate Communications

Thanks, Jason. Good morning, everyone. Joining me today are CEO, Doug Pertz, CFO, Ron Domanico, and recently appointed Chief Operating Officer Mark Eubanks. This morning we reported third quarter results on both a GAAP and non-GAAP basis. The non-GAAP results exclude a number of items, including our Venezuela operations, the impact of Argentina's highly inflationary accounting, reorganization and restructuring costs, items related to acquisitions and dispositions, and costs related to an internal loss and certain accounting compliance matters. We're also providing our results on a constant currency basis which eliminates changes in foreign currency rates from the prior year. We believe the non-GAAP results make it easier for investors to assess operating performance between periods. Accordingly, our comments today will focus primarily on non-GAAP results. Reconciliations are provided in the press release, the appendix of the slides we're using today, and in this morning's 8-K filing, all of which can be found on our website. I'll now turn the call over to Doug.

Doug Pertz, CEO

Thanks, Ed, and good morning, and thanks for joining us. Today we reported third quarter results above the guidance we provided in September, with double-digit increases in revenue, profits, and earnings per share. Importantly, despite slower-than-expected revenue recovery from the pandemic lows, third quarter revenue versus pre-COVID levels did grow sequentially over the second quarter. Despite other operational issues that impacted the quarter, including labor shortages and wage inflation in the U.S., operating profit margin improved by 50 basis points to 10.8%. With continued revenue and margin improvement, this positions us well for 2022 and the future. We're affirming our full year 2021 guidance, which includes revenue in the range between $4.1 billion and $4.2 billion, with a bias to the higher end of the range due to the strong third quarter results. Operating profit of approximately $465 million, which reflects a margin increase of close to 100 basis points versus prior year, and adjusted EBITDA of approximately $660 million reflecting an EBITDA margin of approximately 16%. We're also affirming our preliminary 2022 adjusted EBIT target range between $785 million and $825 million. After an unexpected margin improvement of approximately 100 basis points this year, we expect a similar operating profit margin increase next year, driven by our strategy 1.0 lean cost initiatives and further margin leverage driven by sustained fixed cost reductions and revenue growth. We expect continued revenue improvement in 2022 driven by continued revenue growth from the pandemic lows, organic revenue growth partially driven by higher-than-normal price increases that will offset wage inflation and further revenue growth driven by initial contributions from our digital solutions that will be stronger next year. Based on these revenue drivers and an expected higher 2021 year-end revenue run rate, we believe revenue in 2022 will exceed 100% of the adjusted pre-COVID revenue level of approximately $4.55 billion, which includes historical revenue acquired with G4S and PAI. As a reference point, at 100% of the adjusted pre-COVID revenue level, we would expect 2022 adjusted EBITDA to be about $755 million. We'd expect continued margin and growth and margin leverage as revenue grows above these pre-COVID levels, supporting our initial 2022 targets as we provided. We're also pleased to announce today our plan to enter into a $150 million accelerated share repurchase agreement that would represent the repurchase of approximately 5% of the company's outstanding shares at the current share price. Based on our current share price and projected earnings for 2021 and 2022, we believe the best investment for our shareholders is to buy Brink's shares. We expect the $150 million ASR we are announcing today will be substantially completed by early November. Our board has approved another $250 million authorization to be used from time to time over the next two years. Finally, we're pleased to confirm that we will host an investor day on December 15. It will be a hybrid event with a virtual presentation of our strategic plan and financial targets, followed by a live Q&A with our management team. We hope you'll attend. Our third quarter results came in, as I said, above September guidance, with revenue, operating profit, and EBITDA each exceeding our outlook and analyst consensus. Revenue was up 11% with organic growth of 6%. While not as strong as originally expected, organic revenue grew sequentially from the second quarter, and revenue compared with pre-COVID levels also improved. Operating profit grew 16%, reflecting a margin increase of 50 basis points to 10.8% and demonstrating earnings leverage with our revenue increase. Adjusted EBITDA was up 15%, with a margin increase of 60 basis points to 15.8%. EPS grew 28% from $0.89 per share to $1.14. We achieved these results despite the ongoing impact of the global pandemic in several key markets and wage and labor issues in the U.S. As Mark will cover in a minute, we expect these conditions in the U.S. to improve as we move into 2022. On a global basis, we see encouraging trends indicating that revenue is recovering to pre-pandemic levels and above, as evidenced by the significant revenue recovery so far this year compared to those levels. Though the rate of recovery may continue to be choppy and vary from country to country and region to region. On that note, I'm happy to turn it over to our new COO, Mark Eubanks, who will provide an overview of our segment reporting results and actions being taken in the U.S. Please join me in welcoming Mark to Brink's.

Mark Eubanks, COO

Great. Thanks, Doug. Hello, everyone. I'm excited to join the Brink's leadership team. I look forward to getting to know all of you over the next several months. I'll start by adding some high-level comments to our third quarter results at the segment level. In North America, third quarter reported revenue grew 14%, while operating profit grew 11%, which includes the impact of the PAI acquisition we did last April. These results were less than our expectations as we entered Q3, primarily driven by labor shortages across the U.S. market. The impact of this tight labor market reduced segment revenue by about 1% and reduced segment margins by approximately 300 basis points. This was due to lost revenue and higher labor costs. In August, several of our branches didn't have enough drivers. As many of you know, CIT revenue is largely based on a revenue-per-stop model. When we're short on drivers, we can't service all our routes. Missing stops means missing revenue. On the cost side, like many in the transportation and logistics industry, we've had to aggressively increase frontline hourly wages not only to attract new associates but also to reduce the attrition rates of the current Brink's workforce. The good news is we've recently seen improvement on both fronts—hiring and retention. The expiration of the federal unemployment benefits seems to be driving a meaningful increase in job applications. While we're still slightly understaffed, we're seeing sequential improvement week-over-week in the volume of new applications. In fact, our staffing level is currently the highest it's been in five months, and our U.S. HR teams are working diligently to resolve the ongoing labor shortages. It's also important to note that rising fuel costs generally have not had a material impact on our profitability, as most of our customer agreements have fuel surcharge clauses as a cost recovery mechanism. To offset our rising costs that we've seen here in the U.S., we've announced and implemented several price increases in our business in Q3 that are well above historical annual averages. Additionally, we've announced this month that our upcoming 2022 annual general price increase will also be well above the historical average increases to account for the ongoing impact of the extraordinary 2021 wage inflation. We anticipate meaningful lift in this price increase that will take us back in balance relative to our price versus cost inflation ratio as we start 2022 and into the first quarter. I want to make the point that we are confident in our ability to pass on inflationary cost pressures to the marketplace in the form of these price adjustments. Now for Latin America, where revenue continued its double-digit growth trend with reported revenue of 13% and operating profit of 26%, reflecting a margin increase of 240 basis points to 22.3%. Our lean transformation in Latin America, particularly in Mexico, continues to produce good results in both organic growth and strong earnings leverage despite the lingering impact of COVID across the region in Q3. In Europe, we saw modest organic revenue growth and strong profit growth. Operating profit improved by more than 300 basis points to 11.8%, a result of strong cost management and the benefits of prior year restructuring actions coming through. For the rest of the world, segment revenue grew 8% on a reported basis, accounting for the contribution of the G4S acquisition. On an organic basis, revenue and profits declined, reflecting the impact of government-mandated COVID restrictions across the region and tough 2020 comps in our precious metal logistics business. Moving to Europe, we are beginning to see signs of improvement in September as economies begin to reopen. Now let's move to slide 6. Slide 6 presents the 2021 quarterly revenue by segments showing the revenue recovery percentage versus pre-COVID levels. The local currency recovery percentage is helpful in understanding the underlying resiliency of cash usage in each region, and the U.S. dollar recovery percentages factor in the impact of foreign currency translation, which is how we report our results. Beginning on the left side, we'll start with North America. You can see modest sequential improvement from 93% to 97% from the first to second quarter. We then saw a slight dip down to 96% in the third quarter, and we expect the fourth quarter recovery to be north of 100%. Now moving to Latin America. You can see that on a local currency basis, recovery has been significantly stronger than North America, with the third quarter at 108% of adjusted 2019 levels. A large part of this recovery is attributed to the inflationary environment in Argentina. But even excluding Argentina, local currency recovery was robust in Q3 and expected to be over 100% in Q4. As we move to Europe, notice the U.S. dollar reported recovery percentages are greater than the local currency percentages. The impact of the Delta variant has had a significant impact in this region, but Forex has helped offset some of this impact. Still, we expect the fourth quarter to be about 94% recovered in local currency. For the rest of the world, we're seeing a similar dynamic. In local currency, we're seeing levels similar to North America in the mid-90% range. Forex translation has been helpful in the region as well, and we expect our fourth quarter to come in around 96% on a U.S. dollar basis. In total, we expect our consolidated results in the fourth quarter to be about 95% on a reported basis and around 100% on a global currency basis. This suggests our business is back to pre-COVID levels as we exit the year, supporting the underlying resiliency of cash usage in the global economy and providing an ability for us to continue to grow in the future. With that, I'll turn the call over to Ron, who will take you through the financial results for the quarter.

Ronald Domanico, CFO

Thanks, Mark. You really hit the ground running and are a great addition to the team. Good day, everyone. On slide 7, please remember that we disclosed acquisitions separately for the first 12 months of ownership. After 12 months, they're mostly integrated and then included in organic results. Included in acquisitions for this quarter are primarily PAI and about 20% of the former G4S businesses. 2021 third quarter revenue was up over 10% in constant currency with 6% organic growth versus last year and 5% from acquisitions. Reported revenue was $1.076 billion, up $105 million, or 11%, versus the third quarter last year. Third quarter reported operating profit was $116 million, up 16% versus last year. Organic growth was 2%, acquisitions added 7%, and Forex another 7%. Our operating profit margin of 10.8% was up 50 basis points versus 2020. This is evidence that our 2020 cost realignment initiatives are holding and that our strategy of going wider and deeper is gaining traction. Now to slide 8. Third quarter interest expense was $27 million, up $1 million versus the same period last year, as higher debt associated with completed acquisitions was partly offset by lower average interest rates. Tax expense in the quarter was $31 million, $8 million higher than last year, driven by higher income. Our full-year non-GAAP effective tax rate is estimated at 33% versus 32% last year. $116 million of third quarter 2021 operating profit, plus interest expense, taxes, and $1 million in minority interest and other generated $57 million of income from continuing operations. This is $1.14 of earnings per share, up $0.25, or 28%, versus $0.89 in the third quarter last year. The gain in marketable securities positively impacted EPS by about $0.03 this quarter versus a negative $0.02 in the quarter last year. Third quarter 2021 adjusted EBITDA, which excludes $2 million in gains on marketable securities, was $170 million, up $22 million, or plus 15%, versus the prior year. Turning to free cash flow on slide 9. Our 2021 free cash flow target is $185 million, which reflects our adjusted EBITDA guidance of $660 million. We expect to use about $60 million of cash for working capital growth and restructuring and another $35 million in 2020 deferred payroll and other taxes payable. Cash taxes should be approximately $95 million, up $18 million versus last year, due primarily to the timing of refunds. Cash interest is expected to be about $105 million, an increase of $27 million due primarily to the incremental debt associated with the G4S and PAI acquisitions. Our net cash CapEx target is around $180 million, an increase of $67 million over the last year, driven by acquisitions and a return to more normalized investment. Our free cash flow target, excluding the payment of 2020 deferred taxes, would be $220 million, generating an EBITDA to free cash flow conversion ratio of about 33%, up from 28% achieved last year. While not included in cash flow from operating activities in July, we opportunistically sold all of our shares in MoneyGram for $33 million. We purchased those shares in November 2019 for $9 million. Our preliminary 2022 target is to increase our free cash flow by over 50% to a range of $350 million to $400 million, which equates to $7 to $8 per share. Advancing to slide 10. This slide illustrates our actual net debt and financial leverage at year-end 2020, September 30, 2021, our year-end 2021 estimate, and the 2022 year-end preliminary target. The current year-end estimates include the $213 million acquisition of PAI, our adjusted EBITDA guidance, and our free cash flow target. The shaded blue box on top of the 2021 year-end bar represents the impact of the planned $150 million accelerated share repurchase announced today. Net debt at the end of 2020 was $1.9 billion. That was up over $500 million versus year-end 2019, due primarily to the debt incurred to complete the G4S cash acquisition. As of December 31, 2020, our total leverage ratio was 3.3 turns. At the end of 2021, given our free cash flow guidance and the completion of the G4S and PAI acquisitions, we are estimating a net debt of $2.175 billion, or $2.325 billion, including the planned ASR. This is expected to generate total leverage of 3.3 turns and 3.5 turns respectively. Our 2022 EBITDA target range of $785 million to $825 million, combined with the estimated year-end 2022 net debt of $2.035 billion to $2.095 billion, would reduce the total leverage ratio to approximately 2.5 to 2.7 turns. Moving to slide 11. The last few quarters, I spoke to you about Brink's sustainability program—a comprehensive program under my leadership, and directed by the Brink's board—I discussed the significant progress we're making. We're a signatory to the United Nations Global Compact. We pledged to support CEO action for diversity and inclusion. We've hired dedicated leaders for diversity, equity, inclusion, and supplier diversity. We've expanded the Brink's Women's Leadership Forum and created employee resource groups. We've been reducing our environmental impact by modernizing our fleet, taking thousands of diesel trucks off the roads, implementing dual fuel and alternative fuel vehicles, and continually optimizing routes to minimize miles driven. Our strategy 2.0 solutions, which you'll learn more about at our December 15 investor day, target not only increased customer service, but also a major reduction in weekly stops that could take many more trucks off the roads. While we're very proud of our progress in these areas, what I want to focus on today is Brink's social impact. One of Brink's most compelling roles is that of facilitating economic inclusion. In the United States, 28% of in-person transactions are in cash, and approximately 18% of the population is unbanked or underbanked, lacking access to credit and must rely on cash. We estimate similar demographics for other developed countries, but the reliance on cash is much higher in developing markets. Mexico, Brazil, and the Philippines are just three examples where over half of in-person transactions are in cash. Importantly, cash use is often highest among many underrepresented groups—people of color, the elderly, immigrants, veterans, and the poor. As the world's largest cash management company, Brink's has a critical role in facilitating the global cash ecosystem to serve everyone, but especially the most vulnerable. For this reason alone, I believe that VCO belongs in every impact investing portfolio. With that, I'll turn it back to Doug.

Doug Pertz, CEO

Thanks, Ron. Turning now to page 12. As we reviewed during past earnings calls and plans are discussed in much more detail in the upcoming investor day, we have three layers that support our current multiyear strategy plan. The first two represent an extension of our proven first strategic plan. The bottom layer outlines our 1.0 strategic initiatives that drive core organic growth and cost reductions. Our target is to achieve annual mid-single-digit organic revenue growth. This has been proven during our first strategic plan period and will improve operating profit margins by approximately 200 basis points over the two-year period of 2021 and 2022. We expect to drive cost reductions wider and deeper than we did over the last strategic plan, expanding into more countries and the number of lean initiatives. We also expect to leverage the significant fixed cost reductions we've made over the last year and a half into higher margins while maintaining fixed cost levels as revenue increases. The middle layer, Strategy 1.5, represents our acquisition strategy, including G4S and PAI, which are acquisitions completed early in our current strategic plan. We've invested a total of $2.2 billion in over 17 acquisitions since 2017. Since we added acquisitions as a part of our overall strategy, we have proven that we can acquire and integrate such businesses with strong returns and strategic benefits. As demonstrated by our recent PAI acquisition, future acquisitions may focus more on supporting strategies 2.0 and our digital initiatives. We'll also be considering smaller tuck-in core acquisitions that offer attractive returns. What’s new in our current strategic plan is the top layer of our strategy, which introduces digital cash management solutions. We've created an integral platform of services, technologies, and devices leveraging our core CIP and money processing capabilities. These new digital cash management solutions will be as easy to use as debit and credit card payments. We believe our existing operations form a strong foundation that will drive mid-single-digit revenue growth and double-digit profit growth well into the future. This strong base of growth is expected to be supplemented by additional revenue growth and margin improvement as our digital solutions gain traction beginning in 2022 and well into the future. As we said before, we'll provide more detail in the investor day coming up. The next slide, I'd like to close with a slide that summarizes our recent performance and our outlook going forward. For 2021, again, we're targeting revenue growth of 12%, operating profit growth of 22%, reflecting a margin increase of almost 100 basis points over last year, adjusted EBITDA growth of 17%, reflecting an EBITDA margin of 16%, and EBIT EPS growth of 21%. We expect substantial improvement in 2022 and beyond, as we've discussed with strong increases in revenue, operating profit, margins, EBITDA, and EPS, as our existing operations continue to grow and we layer on our new strategies. The right-hand side of this slide provides additional perspective of our 2022 outlook. Our 2021 revenue, as compared to adjusted pre-COVID levels, as Mark pointed out, has improved from 89% in the first quarter of this year to 93% in the third quarter that we just reported. This trend supports our expectation of continued revenue recovery and a strong year-end jumping-off point expected to be at least 95%, which is a great starting point for next year. So we would need just an approximately additional 5% revenue recovery from the fourth quarter run rate throughout 2022 to reach 100% of our pre-COVID revenue levels. We expect our 2022 revenue recovery will also be supported by additional organic growth, including higher-than-normal price increases in the U.S. that will offset wage inflation that we've seen this year. These higher-than-historical increases will also help improve our margins. Further growth in 2022 will be driven by initial contributions from our digital solutions. All these indicators support our belief that 2022 revenue will exceed adjusted pre-COVID 2019 revenue, which corresponds to our preliminary EBITDA range of 785 to 825 million. Brink's is a stronger company today than it's ever been and is clearly stronger as we transition to the other side of the pandemic. We have substantial growth opportunities and are well-positioned to capitalize on a large under-penetrated global cash payments market. We have a proven global management team, a strong balance sheet, ample liquidity, an expanded global footprint, a realigned cost structure, and a compelling strategic plan to expand our presence in the cash ecosystem with digital solutions. I'd like to take this time to end this opportunity to again thank our over 70,000 strong global Brink's family for all of their hard work and dedication, as together we've been making it through the pandemic and are now close to seeing the other side of the pandemic, in which we will together be stronger. We look forward to disclosing more information on our future strategy when we host our investor day, hopefully for all of you on December 15. Jason, let's turn it back to you now for questions.

Operator, Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Tobey Sommer from Truist Securities. Please go ahead.

Tobey Sommer, Analyst

Thank you. In the press release, you cited your 2022 EBITDA targets, but also have a sentence that says something about what you would generate at 100% of pre-COVID. Could you distinguish those for me and maybe put a finer point on which one's the target and which one's just a reference point to help us frame things?

Doug Pertz, CEO

Yes, Tobey, I think it's a good question. Hopefully, we tried to provide some additional understanding around various revenue levels going into next year as to what the EBITDA and the margins would be associated with that. We provided you, at the end of the second quarter, some preliminary targets—not guidance, but preliminary targets—for 2022 for EBITDA. The specific revenue numbers that the data would suggest, similar to what we did during, I guess it was last year; we provided ranges of revenue that suggested, along with that, what we think the EBITDA and our generation of profit will go with that. The key piece, as you can see, we expect operating profit margins to increase about 100 basis points this year, and we expect that to be what we will achieve next year as well. Those combined with the strong revenue growth that we anticipate for all the reasons laid out, suggest that we think revenue next year will be more than pre-COVID levels. At a margin that approaches an increase of 100% of pre-COVID levels suggests a revenue level in 2022 adjusted EBITDA should fall into the ranges we disclosed and will continue to provide more information as we head into next year.

Tobey Sommer, Analyst

Thank you. Could you give us a little more color on your visibility into price increases in the U.S. offsetting labor pressures you faced in the next year? Because if memory serves me correctly, you traditionally increased prices on January 1 but socialize those pricing increases with customers during the fourth quarter, with a portion of them may accept the price increase earlier to get the advantage of a slightly lesser price increase. How is that progressing during the fourth quarter?

Mark Eubanks, COO

Yes, Sir Tobey, this is Mark. I'll take that. Price increases continue to be the theme here, as we see the cost inflation and wage inflation. That was a topic of our discussion in the quarter, particularly in the U.S. as we faced this wage inflation in advance of the realization of price increases. That said, we announced price increases starting in Q3. Realization for that is continuing to ramp up. Additionally, we've just announced our annual price increase that starts in Q1, and as you mentioned, customers do have the opportunity for a slight discount to pull that forward into Q4. Our message is we continue to believe we can balance this cost versus price equation and expect to be in full balance as we enter Q1 going forward.

Tobey Sommer, Analyst

Okay, last question from me, and I will get in the queue. How is your progress in terms of putting in the limited, probably small size sales infrastructure for your strategy 2.0? Just a preview of the December day.

Doug Pertz, CEO

I guess you said that well, it's December discussion that I think we'll provide a lot more detail around. What we suggested in the past is we invested this year to the tune of less than $20 million in expenses, which includes sales, marketing, product development, third-party development, etc. That investment allows us to set up sales related to strategy 2.0, which is expected to generate positive revenue and margins going forward. I hope that gives at least a little bit of background around that, and we'll certainly provide more detail in December.

Operator, Operator

The next question comes from George Tong from Goldman Sachs. Please go ahead.

Doug Pertz, CEO

Good morning, George.

George Tong, Analyst

Hi, thanks. Good morning. In September, you provided the business update with revenue guidance for Q3, and you came above the high end of the range for revenue. Which markets are performing above your initial expectations? Would you expect that positive momentum to continue?

Doug Pertz, CEO

The performance varies dramatically by country and the way that each country and government have implemented policies. That obviously changes and has changed several times in many countries throughout this year already. We provided reasonable color around that in Mark's presentation on slide 6, which detailed some ups and downs by region. We anticipated we would see a greater improvement versus 2019. As you noted, we've seen improvement. It didn't fall back down. While that improvement hasn't been as much as we expected, we also see continued improvement almost across the board. It varies significantly, but we remain optimistic given the 95% range we aim for to come out of this year.

George Tong, Analyst

If you look at North America, Latin America, Europe, and the rest of the world, which are performing the best and have the most upside potential relative to your initial expectations?

Ronald Domanico, CFO

I wouldn't characterize any of these individually as better than the others. I would reiterate Doug's point that it's spotty by country. While some countries showed growth, it was less than we expected across almost all four regions globally.

George Tong, Analyst

Understood. You talked about wage inflation and pricing adjustments to adapt. You also discussed fuel surcharges that help pass along oil price increases. Are there any other input cost dynamics that could impact your margin performance over the next 12 to 18 months?

Ronald Domanico, CFO

I wouldn't characterize any other big impacts. These are really the biggest two input costs: wages and fuel. Of course, uncertainty out in front would be COVID and seeing how we get through the winter months with that, but other than that, I wouldn't be able to call out anything else. Doug, any further thoughts?

Doug Pertz, CEO

No, I do think we need to look at the other side, George. We clearly saw the need to increase wages in the U.S. and did so starting in the latter part of the second quarter into the third quarter, with massive increases. We have a high degree of confidence, as Mark suggested, that we will catch up with the pricing increases. The market is generally accustomed to these wage increases, which helps us in passing through costs in price increases. We are confident we will see that as we go into next year.

Mark Eubanks, COO

George, I would add that unlike other companies, we're not subjected to many of the supply chain constraints that you're seeing around the globe, particularly in the U.S. That's a positive. Moreover, we got out ahead in purchasing both PPE and COVID tests to comply with state and federal requirements, so we wouldn't expect any disruption in those respects.

Doug Pertz, CEO

For context, in the U.S., we saw significant business impacts from wage increases, which we estimate negatively impacted us about 3% on operating profit margin for the quarter.

George Tong, Analyst

Got it. That's helpful. Thank you.

Operator, Operator

[Operator Instructions] Our next question comes from Samuel England from Berenberg. Please go ahead.

Samuel England, Analyst

Hi, guys, thanks for taking the questions. The first one I had, you're expecting quite a step up in revenue recovery in Q4 in North America in that slide 6 chart. I just wondered what gives you the confidence there and how much of that step-up is just price versus volume recovery?

Doug Pertz, CEO

It includes labor recovery, as Mark talked about. Our ability to hire and retain frontline workers has dramatically improved over the last couple of months and that will aid what I would call the volume component in addition to the price component. Both combined give us confidence.

Samuel England, Analyst

Okay, great. And then the second one, I just wondered if you could talk a bit about how the acquired business G4S is performing? First, on an organic growth basis, and then, secondly, are you identifying more cost opportunities within those acquired businesses now that they have been part of the business for a bit longer?

Mark Eubanks, COO

Yes, Sam. As we said before, we're very pleased with the integration. They're integrated and ahead of schedule. Our synergy targets are well on track on an annualized basis. Looking at segment results, you can see the nice improvement in margins in Europe, for example. Despite some countries having COVID challenges in Q3, we saw margins improve nicely. We're pleased with both the management in those countries and the cost reductions implemented. Overall, the integration is going very well, and we are ahead of schedule.

Samuel England, Analyst

Right. Thank you very much.

Mark Eubanks, COO

There are certain countries in Europe and others where we haven't seen a full recovery. We're positioning ahead of that to see margin leverage as additional revenue recovery comes back, which is what we're all looking forward to.

Operator, Operator

The next question comes from Wayne Archambo from Monarch Partners. Please go ahead.

Wayne Archambo, Analyst

Hi, good morning. With the net debt number coming down as much as it has, are you reloading on the M&A side? Are you folks done on the M&A side? You have certainly acquired a lot since your joining Brink's, but you've got more debt capacity now. What are your thoughts on that?

Doug Pertz, CEO

I think there are a couple of things we probably are signaling today, as we've in the past. We look at our allocation of debt capacity, what returns are, and balance that with returns for the company and investors. Historically, we've generally said that we see better returns for strong CapEx use, which we know we can manage and get returns on. We are managing that, and we want to continue to do so. We expect CapEx to continue to reduce as a percentage of revenue due to better route optimization, etc. The next part is identifying the best returns with the balance of buying businesses, M&A, versus buying back shares. We believe buying back shares is likely a better return for shareholders, but we will consider acquisitions that align strategically and can provide value.

Wayne Archambo, Analyst

Does that make it more difficult to find acquisitions that will really move the needle?

Doug Pertz, CEO

What we've indicated is we're moving toward acquisitions that will help us strategically, which we think, like PAI did for our 2.0 strategies, enhances our capabilities. PAI was a terrific acquisition for providing a base with ATM outsourcing for banks like we have in France. That combination gives us a strong position for ATM outsourcing and management globally, an area where we previously had little presence. We expect this to develop into a strong business for us moving forward.

Wayne Archambo, Analyst

Great, thanks, guys.

Doug Pertz, CEO

Thank you.

Ronald Domanico, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes The Brink's third-quarter conference call. Thank you for your time today. You may now disconnect your line.