Cardtronics Inc. Q3 2008 Earnings Call Transcript

Nov. 6.08 | About: Cardtronics, Inc. (CATM)

Cardtronics Inc. (NASDAQ:CATM)

Q3 2008 Earnings Call Transcript

November 6, 2008, 8:30 am ET

Executives

Melissa Schultz – IR

Chris Brewster – CFO

Mike Clinard – President of Global Services

Jack Antonini – CEO

Rick Updyke – President of Global Development

Analysts

Chris Mammone – Deutsche Bank

Franco Turrinelli – William Blair

Reggie Smith – JP Morgan

Operator

At this time I would like to welcome everyone to this Cardtronics third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator instructions) I would now like to turn the call over to Melissa Schultz of Cardtronics. Ms. Schulz, you may begin.

Melissa Schultz

Thank you, operator. Good morning everyone and welcome to the Cardtronics third quarter conference call. Participating on the call today are Jack Antonini our Chief Executive Officer, Chris Brewster our Chief Financial Officer, and Mike Clinard our President of Global Services.

First, Chris will begin today’s call with an in-depth discussion of our quarterly financial results and our expectations for the reminder of 2008. Mike will then provide a brief overview of our operations and business development efforts and finally, Jack will wrap things up with the discussion of the company’s strategic focus and positioning in light of the current economic event. Prepared remarks are scheduled to run for about 30 minutes at which point we’ll open the call up for any questions that the listeners may have.

Before we get started I would like to make the following cautionary statement regarding forward-looking information. During the course of this call we will make certain forward-looking statements regarding future events, results or performance. Any forward-looking statements made on this call are subject to risks and uncertainties including but not limited to those outlined in our reports filed with the Securities and Exchange Commission. Actual events, results or performance may differ materially. Any forward-looking statements are based on current information only and we assume no obligation to update those statements.

In addition, during the course of this call we will reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures together with the reconciliation of such measures is included in the press release issued this morning and filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Chris Brewster our Chief Financial Officer.

Chris Brewster

Thanks, Melissa. I’m going to speak first to our consolidated figures and then I’m going to give you some more granularity related to the geographic segments that we operated. So beginning with consolidated numbers, our revenues for the quarter were $127 million they were up 15% from the $111 million we have recorded in the third quarter of 2007. To break that revenue again apart and bearing in mind that the acquisition of the 7-Eleven Financial Services Business occurred on July 20, of last year about half of the growth in revenue year-over-year came from net acquisition and about half came from organic growth in the rest of the business.

The organic growth was driven largely by an increase in the average number of transacting ATMs that occurred primarily in the U.K. and Mexico and somewhat higher revenues per machine which itself is doing impart to higher banker branding and network branding revenues.

If you compare the organic growth rate this quarter of about 7.5% to the organic growth rate we have reported last quarter which was about 10%. Obviously that figures down a bit. Of that roughly 2.5% change, we think that about 1% is due to currency movements particularly the recent very rapid appreciation of the U.S. dollar against the British pound and the Mexican peso and something less than 1% was attributable to the effect of hurricane Ike on our business.

Our consolidated gross margin for the quarter was about 23.8% that was up from 22.5% in the third quarter of 2007 and the primary drivers of that margin increase were higher margins earned by our legacy non-7-Eleven U.S. ATMs much of that margin gain in that portfolio was driven by year-over-year increases in bank and network branding revenues also contributing to the consolidated margin increase were our Vcom operations which essentially has achieved the breakeven at the gross profit level in the third quarter of this year compared to about $2 million in losses at the gross profit level in the third quarter of last year.

So, that improvement on results and that business was fairly help margins. Those margins improvements in the U.S. were partially offset by lower margins in our U.K. business and I will talk about that in somewhat more depth here in a couple of minutes. Despite the organic revenue growth that we saw in the quarter and the gross margin increase year-over-year the adjusted EBITDA figure of $22.1 million that we have reported for the third quarter was about $2.5 million to $3 million lower than what we had originally anticipated. I will tell you that our U.K. operation contributed the majority of that shortfall and U.S. results primarily occurring in the month of September contributed the bulk of the remainder of that shortfall.

Turning to the U.K. in a little more detail that operation continued underperformed during the most recent quarter do we think impart to the same issue that has negatively impacted that operation all year along or for most of the year. In particular we continue to see lower than expected surcharge withdrawal transactions in that market which we attribute impart to the armored carrier services issues that continue to negatively impact many of our ATMs there, and that really hurts us in two ways both on the revenue line and on the cost side of the business. We lose revenue if machine is out of cash due to our miss delivery and if deliveries are not solidly reliable, we have to load more cash into the machines to trend avoid those cash outs and that increases our vault cash rental costs.

In addition to that issue, we now believe that there maybe other factors it could be negatively impacting our transaction count somewhat in the U.K. and it’s obviously hard to precisely partially effect of particular issues on an aggregate statistic, but by example some of the things that have been going on in that market and in recent months is that there been ban put on smoking in many public places where people tend to congregate for leisure like pubs for example. There have been new signs requirements put in place regarding ATM surcharging in the market, that make it somewhat more obvious that certain ATMs will charge the surcharge. In comparison with past history there’s been a relatively larger number of new free-to-use ATMs that have entered the market. Although that later trend appears to be slowing down at this point.

Unlike the U.S. where the majority – the vast majority of our contracts have merchant fees structures that vary with transaction counts a little over 20% of our U.K. locations are under contracts that do include a fixed fee component. Now, the import of that is that if you have a fixed fee component in the cost structure and you have a transaction disappointment that obviously service to amplify the margin impact of that transaction disappointment.

Our U.K. results were also somewhat negatively impacted by the strengthening US dollar during the most recent quarter. Although, this was not a major issue during the quarter. At the EBITDA line it was about a $50,000 issue, not significant in the third quarter. Although, we do expect to have a more pronounced impact in the fourth quarter. Because as of yesterday that the pound sterling was trading about 20% below, it’s recent times and that was not true through the course of the third quarter, but it is true today. I can tell you that, we do not face the problem that some companies may have were in they earn revenues in the foreign currency, but have a large component of their cost structure in U.S. dollars and consequentially have a significant margin squeeze when the dollar strengthens.

Our U.K. revenues were in pounds; substantially all of our costs were in pounds, so our U.K. margins are not affected by exchange rate changes. In other words just pound sterling to values by 10% against the dollars; so the dollar we will simply report about 10% less U.K. revenue, 10% less U.K. cost and 10% less U.K. profit, but percentage gross margins for the U.K. operation would not change.

Domestically, in terms of results for the quarter, I would tell you that we were largely inline with our expectations in July and August. However, the month of September was a disappointment to this both in terms of revenue and profit. Revenue trends in September were about 5% of the July, August trend. We know that Hurricane Ike was an issue during the month of September, given the fact that we have a large operation in Texas and that storm not only cause significant disruption in Southeast Texas, but also clause flooding through the center of the country all a way of through Chicago.

However, we don’t think that hurricane fully explains the disappointment we saw in September, in terms of transaction counts in revenue. We could speculate that the consumer reacted somewhat through the brash of bad economic news in September. In a fashion that impacted our transaction counts, it somewhat hard to say, I can tell you, however that October’s U.S. transaction trends look a lot more alike what we were seeing in July and August and then it look like what we saw in September. So, I don’t see any signs in our October U.S. transaction counts that September’s weakness is a trend, it looks like it was more of an normally at this point and consequently it appears to me, that our basic view, this business as a recession resistant business continues to be a reasonable view.

One area where the economic crisis has had some impact on us is in the bookings of new bank branding business. Bank managements have been and continue to be in the main very distractive decision making on wide and variety of business decisions has slowdown significantly in those institutions. We believe that our existing book of business that is the revenue we will putting through the P&L, but today is secured and it certainly tied up under long-term contracts and we’ve seen no indications that it is at risk, but we are not signing new business at the rate that we would anticipated. This impacted quarter three results and we would also expect it to have an impact on quarter four.

Given that we weren’t particularly happy with our third quarter numbers. I think it is important to point out that we have already taken some actions to help ensure that we are operating as efficiently as possible in light of those results. Specifically, in late October we’ve reduced our headcount by 8% in both the U.S. and U.K. and we’ve made all the reductions in non-payroll expenses in the company. While, we’ll incur small charge in the fourth quarter related to the workforce reduction, we do expect it combined effect of these efforts that will save us between $4.5 million and $5 million a year on an ongoing annual basis.

We are also already working with some of our merchant customers to either remove on profitable underperforming ATMs or restructure those underlying merchant contracts to get them the profitability and as you might imagine, we have a particularly strong push on in this regard in the U.K. While I can’t place the precise number on the financial benefit that we would expect to see from those efforts, I do think that it will be workflow.

Finally, in addition to the steps I’ll just outline. We’ve raised our hurdle rates for new capital expenditures and we expect capital expending to decline in a meaningful way in 2009 relative to what we’ve seen in the past two years. By improving our cost structure and reducing the amount of our capital outlays, we expect to be able to generate significant free cash flows in 2009, possibly in the neighborhood of $25 million to $30 million, which should allow us to pay down a significant portion of our bank debt thus further strengthening the balance sheet and our liquidity position.

In these times its probably we’re taking a moment to talk about liquidity and I want to assure you in that regard that we are in continue to remain in a very strong position and as I mentioned we expect that position to strengthen throughout the course of 2009. We have a $175 million bank revolving line of credit available to us. As of September 30, we were only using about $45 million of that line for cash borrowings and letters of credit and even with its covenant restrictions, we could borrow roughly in additional $130 million under that facility as we stand today based on current cash flows.

This facility doesn’t expire for almost an additional four years, its back by our group of very strong banks. We having our amortization required on this facility until 2012 and our fixed rate bonds, public bonds do not matured until 2013. So, as a short-term I would tell we have liquidity, we have financial flexibility, we have no near-term debt maturities and we have limited exposure to flooding interest rates in our debt portfolio.

Turning now to our guidance portfolio 2008; I said earlier that our third quarter EBITDA was about $2.5 to $3 million disappointment to us. I expect the fourth quarter to be generally okay in the U.S., but continue to be difficult in the U.K. because it will take sometime to make the adjustments such as contract renegotiations and the ramping up of our in-house armored car operations that we have been building that need to happen to improved results there. We are now expecting the following for full year 2008 and as I go through again the guidance items, I will compare them with the prior guidance that we have given you.

Total revenues are $490 million to $495 million and that compares to our prior guidance range of $490 million to $505 million. So, we have taken a little bit out of the top end of the guidance range on revenues. Overall gross margins of around 23.5% down from our previous guidance of 24.5%, primarily due to the issues that we discussed previously relative to the performance of our U.K. operation.

Adjusted EBITDA in the $82 million to $84 million range versus prior guidance of $86 million to $90 million as I said we had about a $2.5 million to $3 million shortfall to our expectations in the third quarter and due to the issues that we previous discussed relative to the U.K. and somewhat cautious outlook in the U.S. and the fact that our bank branding new business bookings have slowed down.

Our currently expected shortfall to prior expectations and consolidated EBITDA in quarter four, that’s relatively similar to what, we saw in the quarter three. Now moving on down to P&L, we have now expect depreciation and accretion expense of $39 million versus a prior range of guidance of $38 million to $39 million. We expect interest expense of $31 million versus prior guidance of $29 million to $30 million due to the slightly higher overall debt levels and we expect adjusted net income of $0.20 to $0.23 per diluted share based on $40 million diluted shares outstanding versus prior guidance of $0.30 to$0.35 per diluted share on $40.5 million shares outstanding.

With regard to capital expenditures, we now expect to spend about $57 million to $60 million in 2008 versus the prior guidance of $53 million to $55 million the bulk of that the vast majority of that CapEx has already been spend and we expect capital expenditures will be quite low in the fourth quarter. We are currently in the process of completing our detailed 2009 operating and financial plan and we would expect to come back to you early next year with our full year 2009 guidance.

So, to summarize things from my perspective is the company’s CFO as I said we are not happy with our September recorded results. We have acted to address the issues that we can address. Our liquidity is quite strong, our earnings in cash flow generation capabilities are unstapled ground and we expect that we will be well position to take advantage of opportunities as they arise over the coming quarters.

At this point I would like to turn the call over to Mike Clinard, our President of Global Services, who will give you an update on operations and on our business development efforts. Mike?

Mike Clinard

Thanks, Chris. As noted in our press release during the third quarter of 2008, we continue to show improvements and most of our key operating metrics when compared to the third quarter of 2007. You can find these statistics on the key operating metrics page of the press release. Also you will see that we have had some year-over-year issues when you compare the effects of the 7-Eleven acquisition and that’s simply because the third quarter of last year only included 70 days of activity versus a full quarter of this year.

During the most recent quarters for overall business the average number of transacting machines and overall transaction levels continue to show increases when compared to the same period last year.

However, our ATM operating gross margins were essentially flat on a year-over-year basis, despite the increased transaction levels. This is primarily due to the fact that the gross margins in the U.K. were substantially lower this year when compared to last year, which essentially was offsetting the increased margins that we seen here in the U.S.

As we discussed throughout the year, we’ve encountered a number of operating issues in the U.K., but have impacted our transaction counts and related operating margins. Most notably and as Chris mentioned earlier we continue to encounter issues with our largest third-party armored provider, which have resulted in a high number of cash outs thus resulting in loss transactions. As a result, we’ve been forced to maintain higher vault cash balances in those ATMs and an effort to avoid running out of cash, which further increases our operating costs and places downward pressures on our margins.

As we noted earlier this year, we’re in the final stages of the implementing our own internal armored service and expect to begin transitioning many of these problem locations through our own service internal service during the next three quarters. Once completed, we should continue to see improvements in uptime and profits for these ATMs. As Chris mention earlier, we are also taking additional steps to improve our operating margins in the U.K. including de-installing underperforming locations, we are working with our merchant customers to restructure some of the fee agreements.

I’d like to briefly mention that we did obtained formal MasterCard EMV certification in the U.K. during the most recent quarter. As you may recall from our last conference call, delays experienced in this certification process have contribute to a charge that we had to take during the second quarter related to certain fraudulent MasterCard transactions. Now that we’ve officially obtained the certification will no longer be financially responsible for any fraudulent MasterCard transactions that may occur on our ATMs in the U.K., so we believe that this issue is well behind us.

On the domestic front, we continue to see solid financial and operational performance during the most recent quarter with ATM gross margins increasing to just over 26% versus 24% during the same period in 2007. This increase is primarily due to the higher year-over-year bank and network branding revenues. So far this year, our domestic legacy business has performed quite well and we continue to see some strength in this portion of our business during the most recent quarter.

In terms of growth opportunities, we just signed a new ATM operating agreement in the U.K. with Welcome Break, who is a leading operator at motorway rest stops with service offerings that include retail, gasoline, lodging and restaurants. The deal, which we won from an incumbent ATM provider, includes a 150 high transacting locations and the deal officially kicks off in February next year on a phase stand basis

Looking ahead our overall business development strategy can best be described as optimistic, but cautious. We continue to work hard behind the scenes to identify opportunities that bring the right balance of risks and rewards. As we have always said we are not in a business of growing simply for the sake of growing. In fact we recently walked away from a couple of international expansion deals, but in this current environment just didn’t have a level of returns that we felt were necessary to justify the underlying risk.

This is something that we have – that there has always been a real strength for this company and the key reason, why we are talking to you today about growth opportunities in an environment where most of our competitors are not in a position to finance the road plans. So, with that said we will continue to invest sometime and effort and identify new business opportunities, but we will be extremely selective in that pursuit.

I would now like to turn the call over to Jack Antonini, our Chief Executive Officer, who will provide an update on the company’s strategic focus and positioning.

Jack Antonini

Thanks, Mike. In light of the remarks (inaudible) that we’ve seen them building in the global and equity markets here recently, I thought I’d take a different approach on this quarters call and after the credit positioning for the company in the market, why I believe that’s the macroeconomic environment or no doubt challenging actually could provide Cardtronics, of some interesting opportunities and years ahead.

Now, the first is that, for a little history, for those of you who have been following Cardtronics for sometime that we’ve made significant capital investments in our business over the last few years. We acquired a significant ATM operating platform in the U.K. in 2005; we expanded in the Mexico in 2006. We acquired the Financial Services Business with 7-Eleven in 2007 and we lost our own in-house EFT processing platform during that same timeframe.

During this period, we also continue to deploy new ATMs in selective high traffic retail establishments in all of our key market. Further expanding our installed base of high transacting ATMs. Now, domestically these installations have led to expanded relationships with large financial institutions primarily in the form of bank branding arrangement and we have also enhanced the value of Allpoint our wholly owned Surcharge Free Network.

Internationally these installations have positioned us the strongest, the most stable independent ATM deployer in the U.K. and in Mexico and then finally during the same period we would invest in the significant amount of time and effort cultivating relationship with both financial institutions and other ATM deployers and service providers around the globe. We think this uniquely positions us to take advantage of additional international growth opportunities as they arise.

Because of these past strategic action as all of our strong liquidity position, as Chris talked about earlier, at least the Cardtronics is well position to not only weather the current economic crises, but also to take advantage of potential opportunities that may rise because of that, this conclusion can be supported by other followings with that. First, significant capital investments that we have made over the past two years that provide us with an operating platform that should continue to generate relatively stable earning to consistent cash flows.

Even if the current economic downturn continues for an extended period of time, our long-term contracts on the recurring nature of our revenues are expected to continue to generate relatively stable operating cash flow and with relatively a little capital investment need to that for the cash flow. In addition the system, what we have told potential investors that during our IPO last year, we fully expect that our 2009 capital expenditure will be substantially lower than those that we heard in 2007 and 2008. This will be the generation of what we believe what the substantial free cash flow in 2009 and as Chris noted earlier, we could be looking at the free cash flow nearly $30 million next year.

Second from the liquidity standpoint, we are in excellent shape. A $175 million credit facility doesn’t expire until May of 2012 and it’s led by as indicated strong bank, including BNP Paribas, Bank of America, Wells Fargo, JPMorgan Chase, and BBVA Compass. As of September 30, we had roughly $45 million outstanding into this facility including letters of credit leaving us nearly $130 million to available committed funding.

Ensure, we’re not step for liquidity we have the flexibility to run our business and we’re position to take advantage of opportunity.

Given the significant free cash flow that we expect to generate during 2009, we fully expect to pay down a significant portion of our outstanding borrowings under this facilities with relieve us to even more financial flexibility as we go forward and finally, as Chris already alluded to our remaining indebtedness other than very small amount of capital lease in the U.S., the equipment loans in Mexico consist of $300 million of Senior Subordinated Notes. These fixed rate notes, which don’t matures until August of 2013, contain very limited incurrent covenants. We required no amortization and only required semiannual interest payments prior to the maturity day.

Because of our strong liquidity position, we expect which we expect frankly to be able to improve in 2009. We believe we will be able to selectively take advantage of potential acquisition opportunities over the next 12 months to 18 months to 24 months as evaluations comedown and companies that lack sufficient liquidity look for variable suitors. In addition we think that we will have opportunities to win new merchant customers, which maybe looking to defect from current ATM and processing partners as a result of we could stated those partners and are looking for someone strong like Cardtronics.

Thirdly, the diversification of our products and service offering, we are the traditional ATM surcharging model that we have consciously undertaken over the past few years. This position as to take advantage of certain growth opportunity and these don’t require to extent the significant amounts of new capital. An example of this, as I stated the EFT transaction processing platform, which is a valuable asset that we should be able to leverage drive future revenue growth, but other than recognition of costly capital outlays.

Along those lines during the third quarter, we converted in additional 4,500 of our existing ATM to our internal processing platform, bringing the total number of ATMs in our platform to over 25,500. We expect to continue the transition of our remaining ATM including those in Mexico to our platform over the remainder of this year and into next year with a conversion concluding with roughly 3,500 ATM that are under our contract with another process at end of 2009.

Another example of leveraging past investment, our ability to offer new our expanded services on our 7-Eleven advanced functionality Vcom machine, such as the ongoing rollout of the image deposit acceptance. Speaking with advanced functionality, I think it is important to point out, we generated an operated loss up about $300,000 from the most recent quarter that down from the $600,000 loss in the second quarter, $1.3 million loss in the first quarter and a $10 million loss run rate as of the acquisition date in July of last year. So, while the most recent quarterly, last week we may move a little bit in the fourth quarter for all practical purposes, we have got in that business to breakeven within the timeframe that we thought we would. In overall that we establishing the very profitable when you include all the revenue source some of these machine.

In addition of the growth opportunities I just mentioned, we have continued to see a strong interest in our surcharge-free offering, mainly to our Allpoint surcharge-free network. In fact, with several of the large National Bank suffered significant losses for the global credit crisis. A lot of concern making customers of the troubles financial institution, our concern is to look profit and replace for their safe, for the deposits something will be safer, also looking to smaller Regional Banks to credit unit.

The challenge at these smaller institutions base, the cost compete with the breadth of the locations offered by the bigger bank. Our Allpoint surcharge-free network provides 37,000 convenient location, where the customers can go and taking cash for the shop and get that from by groceries without having to make a special trip to the branch and if fact in that convenient ATM access, is the number one criteria we had, why people choose the particular bank. The value to Allpoint to smaller Regional banks, as well as to credit units become even more compelling.

We think that this trend should continue to result in growth for us in the aspect of our business and this doesn’t require any meaningful new capital investment on our part. Now despite the fact that we positioned ourselves about as low as I think we could have relative to the current unexpected economic environment. There’s no doubt that the issues that are currently playing in the economy at many of the nation’s largest banks will have an impact on our ongoing operation.

As Chris mentioned a few minutes ago, we’ve definitely seen a drop-off in demand on new bank traffic deal. This is frankly to be inspected given the distractions that many of the banks are currently facing and the forced consolidation that’s occurring within the industry.

While we think that the compelling value proposition of our bank branding platform and solution and the critical importance that this has to banks that they’ve tried to maintain the stable retail deposit base, should ultimately results to do branding deals down the road. We are not sure exactly when this will really get going again and frankly don’t really expected it to until banks work their ways through their credit issues, the uncertainty of the market stabilizes and you see some opportunity for growth again for banks to turn their attention back towards growth opportunity.

The unprecedented consolidation trend that we are witnessing within the banking industry also improved a couple of our branding partners that acquired our larger more stable financial institutions here recently; some of which our existing branding customers of ours or institutions with whom we’ve been investigating and establishing a relationship. For example Wahoo which currently has over 950 ATMs branded with us recently agreed to be acquired by JP Morgan Chase. Fortunately, JP Morgan Chase is also an existing branding customer.

In addition, Wachovia which currently has 15 higher transacting ATMs branded with us recently agreed to be acquired by Wells Fargo, now that’s a bank we’d love to have whose a branding customer frankly and then finally Wells Fargo Bank, which currently has approximately 11,050 of our ATMs branded with us entered the process of being acquired by banks of (inaudible) which is one of the largest banks in Europe.

There is no change expected to occur with respect to the proper branding program. In fact I saw an advertisement in the newspaper earlier this week that Fargo has placed, counting the fact that was in the Santander family of banks there’s 35,000 ATMs that their customers have the ability to use, which includes our branded ATM. So, something we clearly see that’s an important competitive advantage. I don’t really expect to see any changes to this program.

Now what I can tell you is that all of these branding relationships are governed by solid long-term contracts. We have positive and active discussions with most of the acquiring banks to determine how we can best meet both their near and long-term ATM needs; whether that is by branding, expanded surcharge-free ATM access for the customers or even help them without sourcing their ATM business in their upcoming fleet to help reduce their cost.

In all cases the acquiring banks have expressed a keen understanding of the importance of retaining these branded locations. Especially, as they look to calm the depositor base of each of the acquired bank, to keep them from taking their accounts elsewhere. Based on the conversations that we have had so far, we feel pretty comfortable and these existing arrangements will be continued and we actually even open the door for potential new relationships or expanded relationships down the road.

Finally, we are closely monitoring our ATMs to determine if the downturn in the consumer spending and the uncertainty in the market is having an impact on our ATM transaction level in any of our key market. While, it’s still took early to detect any discernible trends in this regard, Octobers transaction levels appear to be holding up quite nicely and we don’t expect at least based on past recessions to see a significant drop off in ATM transaction.

As Chris discussed earlier, we’re taking certain actions to make sure that we’re operating each of our businesses as sufficiently as we can. These included a 8% reduction in headcount during the fourth quarter, it significantly reduces our capital expanding in 2009 and tighter cost controls across all areas of our business. We think that this will strongly position us for the future, it strengthens our balance sheet and it will allow us to take advantage of the liquidity and the financing that we have to be able to take advantage of growth opportunities as they come along.

So, while there is no doubt; we’re all operating in an unprecedented and very difficult environment right now, we do think that Cardtronics is uniquely positioned to take advantage of the types of opportunities that do think and present themselves to strong companies when you go through periods of economic uncertainty.

Leveraging the investments we’ve already made as I mentioned controlling your costs, maintaining the high level of customer service that our customers have come to know and expect from us should allow us to generate significant free cash flow. This will further strengthen our balance sheet and give us the ability to take advantage of opportunity.

Operator, that concludes our prepared remarks and we’ll now be happy to take any questions that our listeners may have.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll hear first from Chris Mammone, Deutsche Bank.

Chris Mammone – Deutsche Bank

Hi, thanks. I guess on your CapEx assumptions for 2009; how does the change there effect with you otherwise would have done on ATM fleet expansion? Are you mostly going to scale back machine locations, you might have added in the U.K. or Mexico or other U.S. locations. I guess could you just expand on that?

Jack Antonini

I guess the way I would respond to that Chris is essentially what we’ve done is raised on hurdle rates and in terms of the sort of financial conditions and returns that we want to see in order to make new equipment investments and put new installations in the ground and we are probably also a little more risk diverse in that regard as well as having raised hurdle rates. So, the capital will flow to those markets have provide the best opportunities in that regard. I realize hat’s a rather generic answer I think to perhaps trying to be a little more discrete.

I think you will see some reduction – they are likely do a significant reduction in the U.K. just because such a substantial portion of our capital has been invested there in recent times. There will clearly be a reduction in the U.S. that may not be that much of a reduction in Mexico.

Chris Mammone – Deutsche Bank

Okay.

Jack Antonini

I also should obligation to say that as you might imagine given where we sit on the calendar we have not finished our 2009 business planning at this point and have a fair bit of work left to do in that regard to get the position to give you more precise guidance.

Chris Mammone – Deutsche Bank

Okay, sure and then I guess on the U.K. I think you mentioned in your prepared remarks that you, one of the tactics you are using to address the slowdown there the margin pressure with you renegotiate fees with some merchants. I guess what allows you to do that? Aren’t those contracts similarly long-term in nature? I mean what give you flexibility to go and renegotiate with the merchants there?

Chris Brewster

Well typically the way they work is if we have machine installed there maybe a fixed fee component, but we have the right to do install the machine and that’s the tension from the merchants perspective is, I mean they have typically want to have an ATM in their store. It has two benefits, at least two benefits for them I mean one is merchant fee we pay them, but the other and its been proven that its pretty important the merchants just has the traffic door and then the people look at machine brings into their store and the fact that it puts cash in their hands while they are in that merchant store. So, the fact that these contract don’t require us to have a machine in every store, but give us the option of having one there or not essentially puts us in a position where we have shot at influence in this situation.

Chris Mammone – Deutsche Bank

Okay and that make sense and then I guess just on your organic growth. I think based on your comments, so if you normalize for currency and I guess the slowdown in September the organic growth would have been much closer to that 10% and I guess well right, so, I guess based on what you are seeing in October, if trends stay reasonably consistent with what you saw through October, would organic growth still be in that sort of a 10% range for the fourth quarter in your view?

Chris Brewster

Well, I think then the probably the missing piece there is as we said as we had seen a slowdown in our new bank branding bookings and that might cool it off a little bit, certainly we would get some help in staying closer to 10%, if you don’t factor in the currency changes, but I mean the reality is at this moment, I mean both the pound sterling in the Mexican peso were trading at something like 20% less against the U.S. dollar than they were 60 days to 90 days ago. So, that I mean the currency issues are going to be with us.

Chris Mammone – Deutsche Bank

Okay, that’s it thanks.

Chris Brewster

You’re welcome.

Operator

(Operator instructions) And we will now move to Franco Turrinelli with William Blair.

Franco Turrinelli – William Blair

Hi, guys.

Jack Antonini

Hi, Franco.

Franco Turrinelli – William Blair

I think just kind of following on from Chris’ question. I think what we are trying to figure out on the CapEx side is whether or not we should thing of a lower internal growth rate as a result of constrained CapEx?

Chris Brewster

I think if you think back to what we’ve told you in the past Chris, sorry Franco. We’ve talked about a sort of a target long-term revenue growth rate and described a little over half of that is coming from new unit growth and a little over half of that’s coming from new or enhanced revenue sources, growth in revenues per unit if you will and the half or little more than of half of that equation that relies on new unit count, would logically be somewhat impact if we are spending less on CapEx and putting fewer no machines in the ground.

There is one thing that we’re going to be working hard on to that may tend to mitigate that, but it’s hard to get very quantitative review at this point and that is a fact that part of the way we’re trying to reduce CapEx is by moving machines from locations as which their hardest productive as would like them to be in the locations where they can do better volumes I mean to be and I think it’s due to any large population, but I mean when we have population of 33,000 ATMs any large population has a bottom and I mean we have a bottom 10% and the bottom 20% and that is going to be a big focus in 2009 as dealing with that and – we’re necessary getting and where we can getting machines out of locations where their volumes might be disappointing and into locations where they can be more productive.

Franco Turrinelli – William Blair

Okay that is helpful. Okay, Chris, are you able to give us some more segment information or that we have to wait it for the queue.

Jack Antonini

Probably, best to wait for the Q, but we are going to Chris -- whenever we expect to have the Q out do you think?

Chris Brewster

Probably most likely in the middle part of next week.

Mike Clinard

We should have it in your hands in a very few days.

Franco Turrinelli – William Blair

Turn the question over to Mike, if may. You mentioned walking away from some international opportunities. I am kind of curious to see if you could give us a little bit more color on the sense of, what it is that is causing you to walk away from these and whether or not you remained confident that there are in fact you have potential opportunities out there that would meet your standards?

Mike Clinard

Hi, Franco, I am going to pass it over to Rick Updyke. It covers his area; he could give us an overview there.

Rick Updyke

Yes, good morning Franco. What the issue is as primarily is these opportunities a lot of them are more start up in nature and as a result of that they trend with the higher risk and I think as Mike mentioned earlier in this type of environment we are just being a lot more cautious still see a lot of opportunities out there in fact most recently some of the opportunities are starting to turn to more of an outsourcing types of opportunities which have a very different, potentially a very different risk profile.

Franco Turrinelli – William Blair

Okay. Thank you. I will get back in queue and obviously I will ask some question.

Operator

And now moving to Reggie Smith, JP Morgan.

Reggie Smith – JP Morgan

Hey guys, I was hoping that you guys could at least talk a little bit about the absolute level of branding revenues in the quarter and maybe how that’s just trended sequentially year-to-date. I don’t think you guys break that out in queues any more?

Chris Brewster

Branding, I don’t think I have the year-over-year figures at my finger tips Reggie. Sequentially quarter-to-quarter they were relatively flattish between the second quarter and the third quarter. As we have said, we did not see – we saw a significant slowdown in new bank branding bookings in the third quarter which led that result.

Reggie Smith – JP Morgan

Thanks, can you guys give us kind of a ballpark range of kind of where they are?

Chris Brewster

For the company as a whole very ballpark here around $5 million a quarter.

Reggie Smith – JP Morgan

Alright that’s helpful. I guess moving along to kind of Vcom really good progress on the expense side this quarter you guys are narrowing the operating losses. I am just curious has the macro picture or anything else kind of changed your outlook for kind of flowing revenues in that segment and if you could – and I guess give any anecdotes about progress you are making on that front as far as client usage of marketing or anything like that?

Rick Updyke

Yes, Reggie this is Rick Updyke. One of the things that we have done in the past three to six months as we have actually started our image deposit business and that is showing some very nice increases in both transactions and starting to result in some additional opportunities to add more financial institutions to that product there and that’s why we are receiving largest growth in the business right now.

Reggie Smith – JP Morgan

Okay, I guess incrementally your outlook hasn’t changed within that channel I guess over the near-terms it’s consistent with which you are thinking a quarter ago or may be early this year?

Rick Updyke

Yes, I think so.

Reggie Smith – JP Morgan

Okay, I guess I will get back queue. Thanks a lot.

Operator

(Operator instructions) now moving to a follow-up from Franco Turrinelli, William Blair.

Franco Turrinelli – William Blair

Okay, really to get [ph] time to get my follow-up you are ready. Now, I guess I am a little I want to just kind of push you a little bit harder on this U.K. issue and I guess I have several questions here I mean first is that this has being going on from hopefully long time. It seems like, I think you have given us updates that seem to suggest, but it was getting better and then I just never seems to get better and I guess I am not sure, but I totally understand why that should be the case and then the other part of it is I guess I am little worried as yourself start to build up your capabilities and presumably take business away from this third party or parties that level you down, is the service can get even worse on the remaining ATMs, or the cost going to get even worse on the remaining ATMs. How are you thinking about that whole transition?

Chris Brewster

If I could take that one on Franco, with regard to the first part, I think to be candid with the – through the earlier part of the year, I mean we, the armored cars used were pretty severe and we did attribute what we were seeing on the transaction count side to the operating problems that we were having and driven by the armored issues.

Franco Turrinelli – William Blair

Hey Chris, when you say really severe I mean, I am sorry, none of us are professional ATM operators I mean I guess I don’t understand what that means, is that means normal up-time or would be 99% is being reduced to 90% or is it 50% I mean, I guess we don’t really have a good way of scaling severe?

Chris Brewster

One way we get put it as, I mean we might typically operate with say a 150 cash out days per month or something like that and its worth we were seeing up above a 1000 cash out days per month and in some ways that may not sound that severe, but what it does is it from in the consumer mind, it impacts that you apparent reliability of your service. I mean, if they are used to come into a location and getting cash and then once or twice they can’t do that then next time they may go somewhere else and it may take a little or while to come back.

So, I mean it had a meaningful impact, but certainly to sort of take your question ahead on, as we saw that statistics the number of cash out days per month continued to be pretty variable during the third quarter and but generally better than it was at the darkest days, but we still started seeing the, we were still seeing transaction counts that we didn’t like. We started digging into that harder and basically it can do of use it that all of that issue was the transaction kind of issue was not attributable to the armored problems that there were some environmental things that have occurred in the U.K. that maybe having an impact on us as well.

With regard to them and those we talked about a bit in terms of the specifically the smoking ban in a number of public places in the U.K. like pubs, the ATM signage requirements and possibly also the in relative terms if compared to history of relatively large number of new pretty user machines being installed all the results have said that trends seems to have slow down here recently. With regard to that, I guess the question relative to the new Welcome Break deal was well, if we add a new block of 150 machines or we just putting further strengths on the armored system and possibly making our situation worse and I guess for two reasons we don’t thing so. Number one is they are being served today those locations are they currently have ATMs they are being served today, so the capacity is very little to serve them.

Number two, they may be some of the earliest locations that we put on our in-house armored operation. It would be very efficient for us to do that. They typically all of those 150 or so machines are spread across only about 30 locations and I’m very efficient to serve from an armored car perspective in terms of being able to hit five machines in one location. So, that we would optimize our economics by serving those locations ourselves and I would expect that we will do that.

Franco Turrinelli – William Blair

I guess a little of what I am asking about is just if one armored car service currently servicing a thousand machines and you are going to take 500 or 1000, 2000 in-house that’s the cost per machine, but the remaining one go up to the extent, but it will offset or you can overwhelm many savings that you would get from running your own in-house service?

Rick Updyke

Not, Franco I mean when you look at it, we’ve got a contract in place with the armored provider and so that the cost doesn’t increase I mean sustain pre bill as to whether we have 500 machines with them or a 1000 machine that cost doesn’t change. Taking machines away allows them to focus better and make sure that they are doing a good job on the remaining machine. So, we think that hopefully should improve their efficiency and I mean as when you look at the trends that we win when we look at the second quarter we saw a declining trend in terms of the number of cash out days with the very lowest number of cash out days that we have had since this problem began occurring in the month of June.

Now the third quarter, we actually had more cash out days that we hit in the entire second quarter. So, when obviously flared up again to the major way hardly, frankly because they were going to do a major reconciliation process of cash in the machine, so things like that that the cash provider wanted to go through and I think that was a fairly significant distraction for the armored company, so I mean at least some reasonable understanding of why they were struggling so much.

In October we’ve seen that comeback down significantly actually the lowest levels that the problem began nearly a year ago and so, between that trend they have done this reconciliation process we saw the improve in October, in our own operation started and the factors we moved machine away they can better focus with their existing resources on a smaller number of machines they should be able to a better job and have cost does go up with that and to the point what Chris mentioned on the welcome brand deal. Traditionally you paid current ATM that being filled so with we have five ATMs the one location you paid for five separate bills even though the they are always driving to one location it self our cost to maybe at third what traditional it would have been to be able to have those machines still by our traditional harbor carrier so we do see some cost savings we do think there slowly beginning to hit around this very frustrating situation with this armored provider and don’t expect our cost to go up in this area at all.

Franco Turrinelli – William Blair

Okay, that’s extremely helpful thank you. I think one of the conference is or in previous comments you had noted expansion of the 7-Eleven relationship to include some locations in Mexico I mean first I would like to just check that I have that right may be you could us some progress report if I do?

Jack Antonini

We have fewer ATMs with 7-Eleven and are currently discussions still adding slightly less than a 100 machines with them don’t have a deal finalized, but we are working with into there.

Franco Turrinelli – William Blair

Great and finally maybe Jack this is – I think you talked a little about this in your prepared remarks, but obviously we are getting bombarded everyday with I guess personal issues from Visa MasterCard that their replacement cash and check and at the same time we are getting bombarded everyday with stories of a week consumer and stuff and I think what the major reaction to the weakness in the quarter is going to be this is consumer driven and this is a start of a broader and deeper problem that we will see right now. I mean what do you see from your perspective it can to some extent to address my question?

Jack Antonini

I mean basically the weakness that we saw in the third quarter was almost entirely at least in our U.S. business in September post hurricane Ike I mean we literally look at transactions on the daily basis, write-ups of hurricane Ike and everything was trying moving along just like normal.

When we are seeing nice transaction increases year-over-year, hurricane Ike get that impact that’s in a major way just a big swap the machines out across the center of the country and then post Ike and I think you had the situation where a huge amount of the population which is just kind of sitting and holding their breadth watching the unbelievable ups and downs in the stock market and watching all of them going onto congress trying to come up with the rescue plan and having scared a lot of people frankly and I think people just kind of hold back and set there and have breadth of my god let’s going on, let’s going to happen rescue plan got put in place people turn their attention back to things like the presidential election and things just had to seem to get back to normal in October, that same level of consumer has it is to be to even go out and do thing.

So, when we looked at October and again we just get attracted day-by-day and we are watching it. We literally for the month of October, we see things right back up for the same kind of increase the transactions and transaction revenue as what we have seen throughout the rest of the year at 2008.

Others that a little bit from the last part of September, So we from the U.S. perspective, it was a very kind of focused to normally I guess in terms of what we see, most of the hurt that we had in September related to the issues over in the U.K. that we have talked about and then from the higher cost from our consulting work that we are having done on some others strategic projects that frankly. This with this economic environment we are just pulling back from. So, we are reducing our cost and all of which will significantly help things that over transactional perspective.

We do not really expect I mean again it is something like the unprecedented times that we are in right now in terms of the due to this kind of an economic and our financial crises if you will, but historically in down period our consumers don’t really modify that their behavioral that much which again and it will be soften get back to normal, in October and lot of people were here and, but go through the point where in terms of managing their finances in difficult times.

Apart from this we just effects the credit card issues or cutting their credit line and things like that, a lot of people just put the credit cards away and started operating from the cash from their wallets and their pockets bucks. It’s a big sure that they don’t overspend don’t get themselves in trouble again what we have seen in past recessions and difficult economic times. We expect frankly other few that kind of thing continue to happens here so, we haven’t really see the big change in terms of the transaction level.

The other side of this in terms what we are doing, while a lot of our competition frankly didn’t impact because of the surcharge impact. We have been able to expand our transaction, to expand our transaction revenue that will sub branding in surcharge fee programs that’s clearly helping and then new programs that are happened in whether it is the EVT programs or payroll cards programs I mean they typically have to provides some kind of free access to the people cash and typically, we are waiting those deals to out point. So, let’s bringing new customers to our ATM machine that we traditionally haven’t seen, so overall I do not really expect macro respective into the obviously will be what ever the impacts going to be from the downturn but I haven’t yet seen a substantial migration away from people using cash, using ATMs and thus its ruling position of the value of provider of those services to the financial industry and we’ve got some 1200 banks that will provide the service to that is still as critical element of their service deliver to the customer base. So, I think we’re pretty well positioned, but even if there is some erosion that we should see it impact us in a really dramatic way.

Franco Turrinelli – William Blair

Good thanks Jack, thanks guys.

Jack Antonini

Thanks Franco.

Operator

And at this time, I’ll turn the call back over to your host for closing remarks.

Chris Brewster

If there are any more questions on the line, operator?

Operator

No, there is no additional questions.

Chris Brewster

Thank you. With that, we will conclude the call. We appreciate everybody joining us and we will talk to you next quarter end. Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. As a reminder, a digitized replay of this call will be available through November 13 by calling 888-203-1112 or 719-457-0820 and entering in the confirmation code of 6714843. Additionally, you can access the replay on the company’s web site at www.cordtronics.com. Again, thank you for participating. You may now all disconnect.

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