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Executives

Dave W. Cole – Chief Executive Officer

Paul Davis – Chief Operating Officer

Brian Turner – Chief Financial Officer

Analysts

T.C. Robillard - Banc of America Securities

Simeon Gutman - Goldman Sachs

Steven Rees - JPMorgan

Bob Evans - Craig-Hallum Capital

Pat Schaefer- Chartwell Capital Investors

John Kraft - D.A. Davidson & Co.

Coinstar Inc. (CSTR) Q3 2008 Earnings Call October 30, 2008 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Coinstar Incorporated third quarter 2008 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Dave Cole.

Dave W. Cole

Good afternoon and thank you for joining us today to discuss our results for the third quarter ended September 30, 2008. With me on the call today is Paul Davis, our COO, and Brian Turner, our CFO.

Before we get started I have to remind you that during the course of this call various remarks we make about future expectations, plans, and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans, and prospects contemplated in these forward-looking statements are the result of various factors, including those discussed in our previous 10-Qs and 10-Ks filed with the SEC.

I’d also like to point out that we will be discussing certain non-GAAP financial measures including but not limited to EBITDA, pro-forma measures, pro-forma revenues, and adjusted earnings per share on a historical and forward-looking basis during this conference call. These are non-GAAP financial measures under Regulation G. A definition of these non-GAAP financial measures, the importance of these measures to investors, and reconciliation of these measures to the most directly comparable GAAP measures can be found in today’s earnings release and related slides which are posted in the About Us Investor Relations section of Coinstar’s website at www.Coinstar.com.

A replay of this webcast will also be available on the About Us Investor Relations section of our website. Let me also note that we have posted a copy of today’s prepared remarks and a series of charts mentioned in today’s call to the About Us - Investor Relations section of our website. We encourage you to go to our website and bring up the accompanying power point slides so that you may follow along with us.

Now let’s turn to the quarter and Chart 1. Coinstar posted record consolidated quarterly and year-to-date revenues. We posted record quarterly and year-to-date EBITDA. We achieved $0.16 EPS which is on the high end of our guidance range despite a very high effective tax rate for the quarter. We installed more coin units in the first nine months of 2008 than we have ever installed with more to come. In the last 60 days we hedged over 70% of our debt into fixed LIBOR rates resulting in an effective interest rate of just over 4.25%.

We did all of this in an economy that is arguably the worst in our lifetimes including volatile gas prices, anemic retail foot traffic, and extremely low consumer confidence. We did all of this because in 2004 we had the vision to create a bundle of products that is an unparalleled value and convenience proposition for our retailers and consumers, a bundle that retailers and consumers want in a tough economic environment and that as shown in Chart 3 have led to revenue and channel diversity for Coinstar, a bundle that continues to build on our leadership position, resiliency and performance.

As shown in Charts 4 through 7, we outperformed in some LOBs offset by lower than expected results in others. To that point, coin is performing very solidly. Money transfer continues to be integrated and shows progress although results have been affected by softening activity in the Latin American corridor. Our DVD kiosks have performed exceptionally well, capping nine months of stellar performance. Entertainment continues to face challenges. Therefore, over 75% of our revenue is being pushed by lines of business that are performing solidly to exceptionally well.

Less than 25% of our revenue comes from entertainment and Money Transfer which are challenged. We believe this sets us up very well for 2009 and 2010. Additionally, regardless of the economy today, which we believe will improve with time; we are pleased to be pushing ahead with our retailers.

As many of you are interested in our progress with Wal-Mart, let me update you. To date, we have completed the de-installation and reallocation of all affected entertainment machines and as of September 30th we continue to have an entertainment presence in over 1,600 Wal-Mart stores. In terms of Redbox installations, we started 2008 with 800 DVD kiosks installed in Wal-Mart. As of September 30th, we had 2,600 Wal-Mart locations installed, and we expect the remaining balance to be installed by the end of next year.

For coin, we started 2008 with 400 units in Wal-Mart and by the end of the third quarter we had 2,000 coin units installed. We now expect 1,200 additional units to be installed by July 2009, bringing our total to roughly 3,600, about 1,000 units higher than our original estimate of 2,600 locations. These are certainly unprecedented times but we are fortunate to have a diverse product portfolio, a diverse customer base, and the financial and technological resources to manage large projects for a retail customer base, and they are keenly interested in enhancing convenience and value for their shoppers while generating extra profit from underutilized space at virtually no cost. We are their go-to source for that solution.

Now let me turn the call over to Paul to discuss the specifics for the lines of business:

Paul Davis

Thank you Dave. Coin revenue for the third quarter was $71 million compared to $67.4 million a year ago. This reflects a quarterly year-over-year growth rate of 5.4% or a trailing twelve month revenue growth rate of 6.4%. The increase was driven by net new installations offset by same store sales.

As reflected in Chart 8, installs for the quarter were once again a record with 1,009 net placements. This was primarily due to Wal-Mart, along with RBC Bank, Food Basics, and Loblaws in Montreal. This brings our total for the first nine months to 2,043 net installs - our highest nine month total ever. Same store sales were a negative 1.8% in the third quarter which was a definite improvement over the second quarter of 2008.

As shown in Chart 9, this was partly due to the significant increase in installations over the past 12 months. However, as we stated last quarter, the larger effect may be due to macro-factors which have seen the economy generate less coin than in prior periods. Due to the continuing challenges in the economy, for the next several quarters we anticipate that same store sales will range from a negative 2% to a positive 2%. However, looking to the latter half of 2009 we expect that same store sales will rise as the economy improves and the units we installed in 2008 enter into the same store sales calculation at 12 months and one day later.

With respect to EBITDA, our coin EBITDA margins continue to remain steady at 30% plus. As we’ve stated, we believe that coin is slightly cyclical with the economy, however, we believe coin remains robust with excellent growth prospects and strong unit economics. In fact, we remain very excited about the future prospects for the coin LOB. We see excellent leverage opportunities in driving more first time users to our domestic locations and significant installation opportunities in the international markets.

We also see significant volume growth as the 1,900 installations from 2007 and the projected 2,900 installations for 2008 continue to mature. These 4,800 installations alone represent potentially more than $50 million in incremental revenues once mature. For these reasons we believe we can continue to drive top line and EBITDA growth for numerous years to come, all while continuing the cash flow generation from the coin line of business.

In terms of DVDs, as reflected in Chart 10, third quarter pro forma revenues increased approximately 166% to $104.2 million. These results were driven by approximately 2,200 net installs for the quarter on the heels of 1,700 in the second quarter and 900 in the first quarter. The third quarter was the highest installation quarter yet for our DVD businesses. Between DVDXpress and Redbox we now have over 11,800 units installed, and our same store sales for the third quarter were over 45%.

Looking at the unit economics, DVD units cost approximately $13,000 to $18,000 to manufacture depending if they are an indoor or outdoor unit. A unit in its first year produces in excess of $20,000 in top line revenue while a second year unit generates in excess of $40,000. In the third year, that top line, on average, breaks $50,000. Further we continue to see that a unit gets to EBITDA breakeven in the first year of operation and achieves approximately 20% EBITDA margins by the end of its second year of operation.

Our EBITDA from the DVD businesses was $18.7 million for the period and $51 million for the first nine months of 2008. Factors driving success continue to be the terrific unit economics as I just described, the counter-cyclical nature of DVD rentals to the economy, slightly offset, particularly in the third quarter, by a sub-par summer movie slate and numerous distractions during the period including the Olympics and both political conventions.

We continue to be very enthused about the prospects for the DVD kiosk space. Despite that fact, as many of you have noted, the IPO market has been inhospitable, and as such it has been determined that now is not the time to pursue an IPO but we will continue to monitor market conditions.

Now let’s move to Money Transfer in Chart 11. With our acquisition of GroupEx in January 2008, we now have over 35,000 agents in 140 countries. On a pro forma basis, transactions were up approximately 18% for the third quarter versus Q3 of last year and the average transaction was roughly $560, up from $510 last year at this time. Certainly the news in Money Transfer is mixed.

For the industry, the crucial Mexican corridor was down 7% in the third quarter which contrasts with Coinstar’s Mexican money transfer business which was up 7% in the same period. So while we are certainly affected with the industry, Coinstar is advancing its money transfer initiatives while the rest of the industry is receding – albeit advancing at a slower pace than we desire.

As shown in the chart in the lower right portion, as transactions and revenue have increased, the cost per transaction has declined. Based upon these trends, we continue to believe that driving increased volumes across our fixed costs will get us to profitability. The main question being asked of us lately has been the effect of the broader economy on Money Transfer. The answer is there is definitely an effect. People have less discretionary income to transfer and there are fewer jobs for immigrants especially in the construction industry.

However, with that said, Coinstar is experiencing revenue increases in all of our major corridors. So while our money transfer business is not growing as fast as we previously expected, we view the current economic situation as an opportunity to gain market share and position ourselves for the next 3 years.

Moving to EPay, as reflected in Chart 12 of the $375 million in face value sold year to date, $135 million was sold in the third quarter resulting in commissions to Coinstar of $6.2 million dollars, an 11.6% year over year increase. While the EPay industry is growing slower due to the overall economy Coinstar is seeing growth. Our transaction volume increased 22% domestically and 1487% in the UK over 2007.

As we look at the EPay pipeline for new retailers, it is one of the strongest in years. In fact Coinstar just won top honors in the UK at the recent UK Prepaid Awards. Our nomination was a result of the marketing and promotional initiatives we delivered to our retailers, especially retailers like Clinton Cards. Is EPay cyclical? Yes. As I look at the fourth quarter, I do expect that people will load lower dollar values than originally anticipated. However, we still expect EPay revenues to increase in the fourth quarter over the prior year. EPay is continuing to thrive in this economy and is well positioned for 2009 and an eventual economic turn.

Turning to entertainment, revenues totaled $37.1 million for the third quarter, or 15.4% of our consolidated sales. This compares with $62.4 million or approximately 43.6% in the prior year’s quarter. The year over year revenue decrease reflects the de-installation of machines from Wal-Mart and other de-installations that were unprofitable. These two factors accounted for approximately 71% of the decrease in entertainment revenues in the quarter. Additionally, much like the overall trend in 2007, the broader economy affected performance which accounted for the remainder of the decline. With that let me turn the call over to Brian.

Brian Turner

Thanks Paul. For the third quarter...Turning to Charts 13 and 14 Coinstar generated $240.5 million in revenue. We generated EBITDA of $42.1 million dollars. Our GAAP fully diluted fully taxed earnings per share was $0.16 cents, with adjusted fully taxed, fully diluted earnings per share of $0.20 cents. Revenue for the quarter totaled $240.5 million dollars. As reflected in Chart 4, revenue was comprised of $71 million from coin, $37.1 million from entertainment, $22 million from Money Transfer, $6.2 million from EPay and $104.2 million from our DVD kiosk business.

EBITDA for the third quarter totaled $42.1 million, our highest ever for any third quarter. As we’ve stated, due to the fact that a high percentage of direct and indirect costs are shared among business lines, exact EBITDA by product line is only an estimate. So in that spirit, as shown in Chart 6, coin and entertainment EBITDA was about $23.6 million. EPay, including Money Transfer generated negative EBITDA of about $200,000, and DVD EBITDA was about $18.7 million.

As you compare Epay in particular, year over year, please recall that the 3rd quarter 2007 included the telco refund of $11.8 million dollars. Moving to expenses, as a percentage of revenues, direct operating expenses for the third quarter increased to 70.2% of revenues. This was primarily due to the inclusion of Redbox which runs at a higher direct operating cost percentage than our legacy businesses. We also felt the elevated fuel prices during the quarter resulted in an unfavorable $750,000 variance from our budget.

General and administrative expenses decreased as a percentage of revenue to 9.5% from 10.9% in the prior year period. This decrease is attributable to leverage we are achieving in the DVD business and cost containment measures across other business lines. Depreciation and other for the third quarter totaled $17.7 million versus $15.1 million in the third quarter of 2007. The increase was primarily due to the consolidation of Redbox for 2008, the installation of 2,900 coin units and 6,000 DVD units over the last 4 quarters.

Moving to interest expense, during the third quarter our average interest rate was 4.5% or LIBOR plus 1.25% to 1.50%. This compares to our expected interest rate for the third quarter which was approximately 4% to 4.5%. In this very volatile debt market, I am very pleased that our average interest rate was only 4.5% when many borrowers are being hit with much higher capital costs.

Within the quarter we continued to see foreign currency gains and losses. Consistent with past quarters depending on the strengthening or weakening of the dollar, we have offsetting currency effects from our UK coin profits, foreign currency exposure on our daily money transfer transactions, and the UK gift card mall losses and international money transfer losses. For the third quarter we recorded a loss of $700,000 through our income statement.

Moving to taxes, our effective tax rate in the third quarter was 59.7% which was much higher than expected. The elevated rate was primarily due to the mix of foreign and domestic profits and losses as well as the lapse of the Research & Development tax credit in as the third quarter. Because the R&D tax credit was reinstated in October 2008, as we look to the fourth quarter we expect to be back within our range of a 50% to 55% effective tax rate.

At the net income line for the third quarter we reported $4.5 million or $0.16 GAAP earnings per fully-taxed, fully-diluted share and on an adjusted basis we reported fully taxed, fully diluted earnings per share of $0.20 or $6.2 million for the period. This is illustrated on Chart 14.

With respect to CapEx for Q3 which is reflected in Chart 15, excluding Redbox, the Company spent $24.8 million of which the majority was for new coin units. Before I turn the call back to Dave, I’d like to comment on guidance. Starting with guidance for 2008, as shown in Charts 16 through 18, we should exceed the top end of our previously provided revenue guidance of $850 million to $900 million dollars. We should exceed the top end of our previously provided consolidated EBITDA guidance of $135 million to $145 million dollars. Both of these statements highlight the power of our bundled portfolio approach as Dave outlined.

Now, let’s turn to specific guidance for the fourth quarter of 2008: We estimate that revenue will range from $250 million to $275 million. We expect to install an additional 900 coin units and 1,900 DVD units in the fourth quarter. This would place us at over 2900 coin units and 6,700 DVD units installed for the year, incredible gains against this economic backdrop.

We expect our overall operating costs to remain in proportion for each LOB. We expect our tax rate to be somewhere between 50% and 55%. As a result of all of the above we expect GAAP earnings per fully taxed, fully diluted share will range from $0.11 to $0.17 for the fourth quarter.

Finally, I would like to discuss our debt. At the end of September, Coinstar had $291 million in revolver debt, due in November of 2012. Our leverage ratio at September 30th was just under 3 to 1 and we’ve been very judicious over the last several years in keeping our debt modest, relative to our EBITDA. This has certainly paid off in this economic environment. Additionally, our primary bankers are Bank of America, JP Morgan, Key Bank, Wells Fargo and US Bank – all stable and solid banks, and outside of a few small depository accounts we do not have any significant credit or investment exposure to any of the banks that failed or were taken over in the last 6 months.

Additionally, over the past 60 days we entered into 2 hedge transactions. The first was to fix $150 million of our floating rate debt at a LIBOR rate of 2.96% through February 2011. Second we entered into another hedge to fix another $75 million of our floating rate debt at a LIBOR rate of 2.57% through October 2010. Adding in our pricing grid, these 2 hedges fix over 70% of our debt at a range of 4% to 4.5%, and in this debt market I believe this is a low and very attractive interest rate with an outstanding and solid banking syndicate. I’ll now turn the call back to Dave for closing remarks.

Dave W. Cole

Thanks Brian. We’re seeing an increasing number of retailers gravitate to fewer partners, who develop and manage the multiple products and services on the 4th Wall. Simply put, smaller, one-product or one-service suppliers are having a more difficult time competing due to the lack of credit financing, technology, or multiple networked products. For that rea0son, we’ve evolved into a leader in the space with international installations in over 50,000 retail locations.

And in a tough economy, we’ve seen even more demand for a managed approach that maximizes store level traffic, profitability and enhances the shopper experience by enabling them to make fewer stops in what is otherwise a very busy day. We are aligned with some of the country’s leading retailers, Wal-Mart, Walgreens, McDonalds, Kroger, Supervalu and many others. We continue to nurture these relationships and establish new ones that we believe are unmatched by our competitors.

But more importantly, we are always positioning ourselves to be where the consumer wants to complete coin transactions, rent DVDs, transfer money, and buy gift cards. Consequently, we are taking advantage of a great opportunity to increase our market share in a tough economy by adding new customers and upselling additional profit generating products and services to our customer base. And our results suggest that’s happening. For the third year in a row we have been named 4th Wall category captain by Progressive Grocer, an honor recognizing our value to the retailers.

As I look to the future, building on our record third quarter, I see tremendous opportunity and would reiterate the fact that we are well on our way to $1 billion in revenues and $200 million of EBITDA. So with that I’ll turn the call back to Adrian, our operator, who will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from T. C. Robillard with Banc of America Securities.

T.C. Robillard - Banc of America Securities

I just wanted to drill down just on a couple of quick things on the numbers. I guess, Brian, on the fuel, your comment, I want to make sure I understood this right, I think your comment said you guys saw an incremental $750,000 expense above and beyond what you were expecting?

Brian Turner

Above the budget, yes.

T.C. Robillard - Banc of America Securities

Just when you look at the price of gas throughout the quarter on average seemed to kind of come down. I know a big chunk of your expense is around fuel, also include kind of shipping costs and things like that, but can you give us... I would have figured up to what happened in the last quarter and then what we’ve subsequently seen in fuel costs that... I was just surprised to see that come in much above where you guys were expecting. Can you just give me a sense as to kind of what changed through the quarter or what I might have been missing?

Brian Turner

So there’s three components to petroleum costs for us. One is freight in for the toys coming in from China. That we book almost six months in advance, so there’s a lag effect in that coming through. The second one is the actual polyester that’s in the toy which we try to manage. Again, you’re ordering 6 to 9 months out, so you have to look at petroleum price six months ago. Then the last one is fuel at the pump, which we saw. In the last conference call we said we expected to be $1 million over budget in Q3. We actually only ended up to be $700,000 over the budget that we had. That was because fuel prices as you noted came down during the quarter. The biggest decrease was actually in October so that of course wouldn’t be Q3, that would be more Q4, so I think we’ll continue to see benefit in Q4, but the shipping that we booked six months ago or the polyester we booked six months ago, there will be a lag effect on that.

T.C. Robillard - Banc of America Securities

So when you’re talking against the budget, are you talking kind of on the budget you set in corporate budget at the beginning of the year or are you talking relative to kind of quarterly guidance?

Brian Turner

The corporate budget we set at the beginning of the year.

T.C. Robillard - Banc of America Securities

That makes more sense. So relative to... Obviously you guys coming in towards the high end of your numbers, you would have accounted for that in terms of the guidance to the street.

Brian Turner

As we look to that, again, oil prices came down a little more in the quarter than we expected and certainly for Q4, we hope that the price per barrel continues to remain low. Relatively low. Now let’s see what we expect is low now.

T.C. Robillard - Banc of America Securities

Okay, that’s great clarification, thank you and then just on your guidance range on the top line, this seems to be a pretty wide range relative to how you guys have guided in recent quarters last couple of years. Is this just simply a reflection of same-store unit deltas that you guys talked about minus 2% plus 2% or is this just kind of the tougher visibility with the economy? I’m just trying to get a sense as to the wide range relative as to the past few quarters.

Brian Turner

There’s multiple things happening there. One, the economy is not clear where it’s going to go. Whether it gets much worse, whether it stays bad like it is. I don’t think we hold out a lot of hope that it’ll get significantly better. So yes, the crystal ball is cloudier than in some quarters due to the economy. Second is the movie release schedule. So as DVD revenue has made up a bigger portion of our revenue, we saw in Q3 as an example, that the movie studios did not release good movies around the Olympics. They didn’t release good movies the debates.

As we look at Q4, we’re seeing not really good movies being released around the election time onto DVD, so that puts into the crucial December time frame, sort of after the elections. Then you just have the consumer sentiment around Christmas and so how much will they buy in telephone or gift cards? I think as we look to the fourth quarter, I think we just said our crystal ball is not as sharp as if we were in a good economy, so we’re just trying to reflect that in our estimates.

T.C. Robillard - Banc of America Securities

Just lastly on your CMT, the money transfer side, if we’re looking at kind of the, Paul your comments about looking to take advantage, gain share, continue to invest, is kind of the three to five year outlook. I agree with that and not to gloss over that, but to be a bit near term pessimistic, does that mean that we should be continuing to expect you guys to see kind of break even, kind of push out a little further into the future because obviously you guys are executing well on the revenue side but if you’re going to continue to push hard for share gains down the road, it sounds like OpEx should be creeping up there.

Dave W. Cole

That’s a fair assumption, where originally we thought we’d cross the line sometime next year. I think as we’re seeing the softening in some of these corridors as to what’s happening globally, it’s pushing that out a bit further than what we first thought. I mean, we’re still seeing terrific growth in all the send and receive corridors that we compete in, but where we originally through the kinds of growth rates we were originally expecting, they’re not quite there, especially impacted by the north-south corridor going into the Mexico and Latin American corridors.

T.C. Robillard - Banc of America Securities

Is there any way without tipping your hand competitively to give us a sense as to where you guys are looking to invest?

Dave W. Cole

No, not right now. I think as we get to the January conference call we always give a longer conference call at that time and we talk more of our strategy for next year. We’re doing budgeting as most companies are right now. We’re actually determining that exact question over the next few months and so it’s a little premature to comment on that.

Operator

Your next question comes from Simeon Gutman with Goldman Sachs.

Simeon Gutman - Goldman Sachs

First on the coin comp, I think based on the conventional wisdom and the charts that you guys have been showing regarding consumer confidence, I know we’ve talked about foot traffic. I don’t think it would have been a crazy assumption to have thought that number might have gotten a little worse, so what’s driving the bottom? Are there certain reasons that are picking up? Is it velocity as opposed to transaction?

Dave W. Cole

The key reason that we’ve saw it starting to lift up is as we’re penetrating new areas across the company, I think as we expand with Wal-Mart that’s putting in a new space we weren’t in before, so the effect on cannibalization as well, you would say it was a more traditional kind of roll out. Then just the overall performance. It’s really starting to come through.

Simeon Gutman - Goldman Sachs

And the range that you provided I guess is more or less suggestive that you think you’re basically near a bottom as far as a coin comp?

Dave W. Cole

I think what we’re trying to indicate is that normally we were expecting 0% t 3% positive and we’re looking at the economy and what it’s doing to consumer spending, and we’re just cautious, and so our best guess right now is a negative 2% to a positive 2%, but again I think this goes back to the murky crystal ball. I think we’ve got some indicators but it really depends on what consumer spending does. Certainly we’re not happy about the most recent drop in the consumer confidence index but it’s dropped before, it comes back, and I think we’re just going to have to monitor it through this fourth quarter.

Simeon Gutman - Goldman Sachs

I don’t know if we can have a little discussion on Redbox, but I think after end of December, early December, there are some changes and I think there’s some different implications regarding strategic and I don’t think anything financial but what are the couple of changes that could happen if there is no Redbox IPO before then?

Dave W. Cole

I think we just continue to operate it like we have. Redbox, its management team, has done excellent. I mean really, hats off to their management team. You know, the IPO market just has been inhospitable right now and we’ll just watch where it goes, but in the meantime, we’re going to keep encouraging that team to grow that business and make a very sustainable, durable business.

Simeon Gutman - Goldman Sachs

And from a control perspective, percentage ownership obviously doesn’t go anywhere, but as far as the votes and the board goes, that all remains the same?

Dave W. Cole

Yes, and you know, we have a good partnership with McDonald’s. We have a lot of respect for McDonald’s and our partner there, and I think we work well together.

Simeon Gutman - Goldman Sachs

Lastly, regarding the DVD business in general, just to ask generically, what is the movie studios’ interest? They’re not seeing pieces of business on their side and they want to take a piece of the kiosk world? What exactly is the, I guess any of the issues that are arising there, what is the source of that?

Dave W. Cole

You know that’s a good question and I assume you’re referring to the Universal issue, and so obviously we can’t comment too much on that because it’ active litigation, but to be honest, we don’t know. We don’t know precisely what they’re driving for at this point.

Simeon Gutman - Goldman Sachs

Just last then, on the unit economics that you provided, so it looks like the first year comps are probably 100% or so on the DVD box, still north of 20% in the latter year. As you forecast this business going forward, how do you take into account just increasing, not saturation, just increasing foot print, not only from you but from others as well?

Dave W. Cole

As you look at that like any new start up business it’s going to have high comps in the beginning and then as the business matures the comp comes down to a more normal range. If you notice the comps on our DVD business, they jump around a little quarter to quarter, and that really relates to what units went in 12 months ago and are now coming to the same-store sales comp. So the coin business originally, you went out in chunks, and as we’re seeing the DVD business, you get a new chain, you go out in a chunk, and that will affect the same-store comps 12 months and 1 day later. So you know, you should expect the comps over time to go down to normal comps, you go down to large, big numbers, and as they go into overtime, the chunkiness will start to smooth out.

Simeon Gutman - Goldman Sachs

Just anecdotally, are you finding that in the places where you’re expanding into, are there a greater presence of other machines, either yours or others, or are there still about the same landscape in this business?

Dave W. Cole

You know there’s a lot of opportunity here. We originally said we thought there was 90,000 to 95,000 potential locations and we said... Two years ago we said we were going to hedge our bets and say there was only 60,000. You heard that on the very first acquisition conference call. You know, looking at it now, 60,000 is too conservative now. It really probably is a marketplace of 90,000 to 95,000 available spots, so it’s less than 15,000 of that between all the competitors taken up. There’s a whole bunch of room for this business to go.

Paul Davis

The good news too is we’re going into new channels that we hadn’t been in before so with the outdoor machines, it’s opened up the C-store and even the drug store channel. We’re seeing terrific results. The team’s done a great job in expanding the footprint. They have a sizable lead on the next closest competitor in this space.

Operator

Your next question comes from Steven Rees with JP Morgan.

Steven Rees - JPMorgan

I had a question about the Wal-Mart coin units, how those units are performing from a volume perspective, whether it be higher or lower than the system average, and then how do you expect them to impact the overall reported same-store sales base as the first ones start to enter the comp base in early ’09.

Dave W. Cole

So if you look at the units as we’ve said before, they’re performing exactly how we expected, so it really depends on the size of the Wal-Mart and not all Wal-Marts are the same square footage, so depending on the foot traffic that goes in, the demographics for the neighborhood... But if you take them as a whole, they perform very much like a typical coin machine, slightly better, and so that’s what we expected. So they are performing at or above our expectations, so that’s all good. As they enter into the same-store sale comps, it will have a definite effect, because as we look now they are not in the numbers, but we admit there is a certain cannibalization, so that pushes down your same-store sale comp when they’re rolling out. When you get to that 12 month and 1 day and they start to enter in, it’s going to let that same-store sale comp rise back up to a more normal level. So as you look at it, we start putting them in May of 08. We said it would take us to the end of the year to get 2600 in, then we have more going in next year, so you’ve really got to sort of look at the midpoint of that roll out schedule and then calculate 12 months and 1 day from that point, and that’s really where you’re going to start to see the effect.

Steven Rees - JPMorgan

Just maybe on the first coin machines, the ones that are in close proximity to the first bunch of Wal-Marts that you opened up, can you just talk about how those are holding up to date and maybe just provide some color regarding how long it takes for those units to recoup any cannibalization they may have seen from Wal-Mart?

Dave W. Cole

We’ve said that as the Wal-Mart units go in, we do expect cannibalization of the whole network of somewhere between 2% to 5%. This is no different than if we’re installing another retailer and they have stores next to each other, so I don’t think there’s anything unusual here to speak of. As you look at that, those units tend to grow right back past that cannibalization within under a year so those stores come right back and it’s fine.

Steven Rees - JPMorgan

Then finally just bigger picture on just the total number of units I think you’re going to do about 2900 coin units this year, up about 50% year-over-year, and I guess I’d be curious to hear your thoughts in terms of the infrastructure you have today. How many coin machines can you do or are you comfortable doing on an annual basis going forward?

Dave W. Cole

We’ve had more numbers than what we’ve had the last 18 months but what’s great about the organization is that it’s all variable labor so they are able to ramp nicely and still get leverage and the P&L and as you get more and more machines that they’re servicing in a market because as we fill in, it just helps our route efficiency, so from an operating standpoint, more is better.

Steven Rees - JPMorgan

So should we think about the 2900 potentially not being a cap then to your potential?

Dave W. Cole

I think it wouldn’t necessarily be a cap but you have to recognize the chunkiness. We have a very large chain. There’s no other chain out there like Wal-Mart for that just sheer quantity. Certainly we see opportunities internationally that could get big chunks like that again. But I think as we go out of ’09 we’ll be looking at more normal install years which is what we said a year ago, so I think this will come back to normal. Now, if we open up another country or two countries and there’s significant activity there, all bets are off and we have to re-look at it and that’s a long winded way of saying we’ll take each year as it comes.

Paul Davis

Another opportunity is in the banking channel which we think has significant opportunity for the company over time.

Steven Rees - JPMorgan

Have you seen any variance in performance across channels, traditional grocery, mass convenience, and drug among your coin machines or are they all performing pretty similarly?

Dave W. Cole

It’s a fairly tight range. There’s a direct correlation between the performance of the coin machine and foot traffic so having said that, your super centers like Wal-Mart Super Centers as an example, larger footprint, more traffic, would have better averages and then you step down and next would be supermarkets, and then where we do, we don’t have a lot of presence in the drug channel, but that would be toward the lower end.

Operator

Your next question comes from Bob Evans from Craig Hallum Capital.

Bob Evans - Craig-Hallum Capital

I’m not sure if I missed this, but speaking of international coin, could you let us know where the Tesco test is and what your thoughts are that?

Dave W. Cole

Tesco continues to roll out. We have Tesco units in the UK which are performing very well. We’re rolling Tesco units in Ireland. Those are starting to ramp up. So we’re very happy with the developing relationship with Tesco.

Bob Evans - Craig-Hallum Capital

Has the unit count changed since previous comments in Ireland?

Brian Turner

It has changed but I apologize Bob, I don’t have it right at my fingertips, but it should be, If you just look at our website, it should be on there.

Paul Davis

I think it’s 25 to 30 but the averages are very positive, they’re doing a terrific job there There’s a lot of coins in the euro coin set and they fill those up pretty quickly.

Bob Evans - Craig-Hallum Capital

Also let me ask you this, do you have any time frame in terms of if this test goes well, when we might be able to see more from an international growth perspective?

Dave W. Cole

I think you’ll have to wait for another conference call for that.

Bob Evans - Craig-Hallum Capital

How about the coffee kiosk business, can you give us a little bit more color and perspective there?

Dave W. Cole

The original test was in the supermarket channel and those stores are doing well. We’re generally pleased with the results, however, we think the big win here is in the small format. If you think about that somewhere likely destination for coffee, especially given the morning traffic, so we are now focusing our efforts on small format tests in convenience stores and travel centers and it’s very early, we don’t have a lot of details, but we have a pretty high level of confidence that we get those in the right stores and set up the right way, that could be a nice business for us, but it’s real early right now.

Brian Turner

We’re continuing to get learnings, we’re in the beta product as we said, so we’re happy with how the beta products perform but we need to keep learning from that and adjust our model and adjust our labor force, adjust the machine itself, and I think we’re really going to get something really good as we go into ’09.

Bob Evans - Craig-Hallum Capital

How many units are we there? I apologize, I don’t have the website --

Dave W. Cole

Right now we’re at 87 units for coffee and we hope to be at 100 units by the end of the year. That’s what we said last conference call and that’s still what our thinking is. Then monitor those for a little bit and then re-visit this whole question in mid ’09, maybe early ’09, but we want to see how the betas perform.

Bob Evans - Craig-Hallum Capital

Can you comment further as it relates to the DVD business where some of the installs went this quarter?

Dave W. Cole

Sure you had some in Wal-Marts, some in Walgreens, really across the board. Grocery, convenience stores, some gas stations, so it was quite a list of installs, so it was all good.

Bob Evans - Craig-Hallum Capital

Any other new meaningful change that were added that we maybe haven’t heard yet?

Dave W. Cole

We are close on a few but not yet ready to make an announcement.

Bob Evans - Craig-Hallum Capital

The pace of installs this quarter, as relates to DVD, is that a pace that we should expect to be continued in Q4?

Brian Turner

You know we gave Q4, I can find in the script, but its’ in there as to what we expect for the quarter. I think as you look at it, it’s really the win that you get six months ago because what it takes is some coordination with the prospective retail chain. We look at when they’re going to allow us in the store, when our installation teams can do it. So a win that we get today will translate into something we’ll install in Q1 but we’re very pleased with the funnel right now. We’re very pleased with how many we installed in Q3, what we’ve got for backlog for Q1, and matter of fact, the backlog for Q2 is shaping up very nicely for next year and that’s quite a bit of visibility for a business such as that so we’re pretty happy. Dave, what’s the number for Q4?

Dave W. Cole

The number in Q4 is 1900 DVD units. It’s in the guidance.

Bob Evans - Craig-Hallum Capital

Also on the money transfer business, could you give us a sense of for this year, ballpark what you think you might, ballpark kind of EBITDA loss this year or however you want to characterize it.

Brian Turner

We really haven’t deviated from our comments at the beginning of the year. We said we expect to lose somewhere between $6 million and $9 million and that’s still where we’re at.

Bob Evans - Craig-Hallum Capital

From your previous comments, does that mean getting to that break even level next year basically is pushed off for money transfer?

Brian Turner

I don’t think we’re ready to give guidance quite yet. You need to wait for us to get through budgeting and look at where the quarters are advancing. So you know, we’re going corridor by corridor in budgeting. We’re looking at opportunities, we’re looking at the growth rates, we’re looking at the immigration trends, we’re looking at the drops in the per transaction costs, so we’re examining the whole thing and trying to get that to profitability as quickly as we can, but yes, in the current environment, I think with the softness in the north-south corridor, it’s going to push it off a little. The question is how far. That we’ll come back to in the next conference call.

Bob Evans - Craig-Hallum Capital

That biggest driver I assume is... I know you’re trying to [inaudible] on the expense side but it’s really volume driven.

Brian Turner

You know it’s really volume driven and the load and so what we’re seeing right now is the load or the amount that the person’s putting on at each transaction is just less, and I think that’s a direct reflection of the economy. People just have less discretionary income right now.

Operator

Your next question comes from Pat Schaefer with Chartwell.

Pat Schaefer- Chartwell Capital Investors

I’m sorry if I missed this in your prepared remarks but I’d like to get some additional information on Redbox. Slide 15 showed CapEx by division with the exception of Redbox. What was CapEx for Redbox in the quarter?

Brian Turner

You know we never talk about Redbox specifically, we always talk about Redbox and DVDXpress together and let me try to get that while you... do you have another question or is that your only question?

Pat Schaefer- Chartwell Capital Investors

I also wanted to get a sense of sort of related to this, is there a debt at Redbox?

Brian Turner

Yes, there is debt at Redbox. We’ve encouraged them to get leased financing or capital leases to finance what they could to grow their business and in addition to that, we loaned them $10 million and McDonald’s loaned them $10 million, it must be over a year ago now, I don’t have the exact date, so they have about $40 million of capital leases in that ballpark and $20 million worth of debt. It would have a little accumulated interest on the debt that they owe us in Redbox so you add that all up, somewhere around $65 million? That’s off the top of my head. But somewhere in that ballpark.

Then CapEx for the year-to-date, I have year-to-date at $58 million roughly and for Q3, I’m adding it quickly so I might be a little off, somewhere around $28 million or $29 million.

Pat Schaefer- Chartwell Capital Investors

Then one more issue, you stated that you can’t comment on universal’s proposed change in their distribution policy because of the pending litigation and I totally understand that, but perhaps you can comment on that development a little bit more broadly. Have other studios indicated similar intentions or is this strictly a universal policy change at this point?

Dave W. Cole

Thus far we haven’t heard from any other studio so at this point in time that action is just restricted to Universal.

Pat Schaefer- Chartwell Capital Investors

Okay, and do you have a sense of when that distribution policy would take effect if they were successful in implementing it?

Brian Turner

As the lawsuit indicates, it’s December 1, and we already have figured out how to work with that and still have movies in the kiosks on the day of release, Universal movies, so we do not intend to let this slow us down.

Operator

Your next question comes from John Kraft with DA Davidson.

John Kraft - D.A. Davidson & Co.

Brian, in the past I think you’ve given us a sensitivity into cost effects given gas prices. I was wondering if you could remind us of that again, and then also, if you’ve done a similar exercise for foreign exchange, obviously in light of what’s happened in October with gas prices coming down and then the dollar appreciating, then we could have some pretty big swings there.

Brian Turner

So what you get is... Let’s start with the gasoline. We calculate for every $5 increase or decrease in the cost per barrel we experience an extra $250,000 in our quarterly cost structure. Again, that’s to what we anticipate, so we don’t release our forward curves like the big investment banks do, but in general we anticipate that barrel oil prices will go up in February, March, with home heating oil, they drop in the spring, they go back up in the summer with vacation, and they drop back down in late fall. So like right now, we anticipated that the price per barrel would drop and what you can gather from our comments is that we were off by roughly $15 per barrel by being off $700,000 in the quarter. So we were good. Maybe we should go into the investment banking business, I don’t know. No, that’s a bad business too.

John Kraft - D.A. Davidson & Co.

Easy. How about on the FX side?

Brian Turner

On the FX side it’s much more complicated and the reason for that is you’ve really got three variables. The first one is the UK coin is turning a profit and so we have to translate the pound into the dollar, so as the dollar is strengthening, the pound is worth less, therefore it appears less in the income statement. As you go the opposite way, country by country we’re offering 140 countries. We have daily transactions every day which we try to trade the currency either into the euro, the pound, or the dollar as quickly as we can, depending on where the hub is, so you take a lot of the African transactions, go to Europe, we try to change them into the Euro.

So it’s a very complex... Country by country it really changes, such as Japan right now is really strengthening where the peso is way off compared to the dollar, so that one’s tough to predict, and then I’m missing the third one. There’s one other effect, it will come to me. But as you look at it, on any given quarter, it could go either way depending on whether money transfer or UK coin is doing better or worse, but we’ve been doing a good job... they’ve been roughly offsetting each other. If they’re under $ 1 million either way, it’s roughly offsetting each other.

John Kraft - D.A. Davidson & Co.

Maybe you could just give us the percent of revenue that I guess that comes in via pounds and euros.

Brian Turner

Sure, if you look at our international business, it’s about... Sorry, I should go X money transfer. Everything but money transfer. It’s about 10% of the overall business. Money transfer right now, oh, I’m calculating it in my head, about half of it is outside the US so that would be in Euros or pounds. The money transfer business is roughly a $90 million to $100 million business this year.

John Kraft - D.A. Davidson & Co.

Okay, that’s helpful. Last question, just a follow up on the coffee kiosk question, two parts I guess. What’s the cost difference between the small format and the large format that you talk about, and also has there been any concerns about potentially competing with that McDonald’s is trying to do in their efforts?

Dave W. Cole

To answer your first question, I’m assuming you asking the capital cost for the kiosk itself. Because the footprint needs to be smaller just given less square footage in the small format stores as you would expect we’re able to cut the capital cost. Right now we’re targeting capital costs to be cut about in half. Now it’s what’s difficult I don’t really want to give you a number because we’re in prototype stage, but there’s clearly a cost savings there.

The core machine remains the same, it’s everything we built around it. Then as it relates to concern with McDonald’s, they’re doing a terrific job and they’re really built their footprint of premium coffee, however, if you look, there are 120,000 convenience stores in the US alone so with probably 40% to 50% of their customers going in the morning. so there’s a big upside there if you can figure that out and trade people up to a more premium offering.

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