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Executives

Mitzie Pierce – Director, External Reporting

Steve Rathgaber – Chief Executive Officer

Chris Brewster – Chief Financial Officer

Analysts

Bob Napoli – William Blair

Ramsey El-Assal – Jefferies

Mike Grondahl – Piper Jaffray

Reggie Smith – JPMorgan

Cardtronics, Inc (CATM) Q4 2012 Earnings Call February 7, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Cardtronics Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions) As a reminder, today’s conference maybe recorded.

Now, it’s my pleasure to turn the floor over to Mitzie Pierce. Please go ahead.

Mitzie Pierce

Thanks, operator. Good afternoon, everyone, and welcome to Cardtronics fourth quarter conference call. Presenting on the call today, we have Steve Rathgaber, our Chief Executive Officer; and Chris Brewster, our Chief Financial Officer. Also on the call today, and available for questions, we have Mike Clinard, President, Global Services; and Rick Updyke, President, North America.

Steve will begin today’s call with an overview of our fourth quarter results and an update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly and full year results as well as our financial guidance for 2013. Our prepared remarks are scheduled to run for about 30 minutes, at which point we’ll open up the call for any questions.

Before we get started, I’d like to make the following cautionary statements 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 SEC. 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 a reconciliation of such measures is included in the press release issued this afternoon.

I’d like to now turn the call over to Steve Rathgaber, our CEO.

Steve Rathgaber

Thanks, Mitzie. Cardtronics completed another strong quarterly performance. Our financial results are up solidly over the same quarter the prior year and comfortably in line with our expectations. The financial headlines include transaction growth of 28% for the quarter, revenue growth up 14% and adjusted EBITDA growth of 20%. Adjusted net income per share grew 14% to $0.41 per share. I would note that this is the 16th consecutive quarter of consolidated adjusted earnings growth and 15 of those 16 quarters were double-digit growth with just one quarter as an outlier at 9%.

The fundamentals of our business remain on solid footing. Our model is durable and scalable. As evidence of this point, we have managed to improve our gross margins 50 basis points year-over-year to 32.5% despite the interchange headwinds we experienced in the past two years.

Let’s quickly recap some 2012 number. Our total ATM fleet, both owned and operated, grew nearly 19% year-over-year to almost 63,000 ATMs. In 2012, we installed more new ATMs from successful execution against our pipeline and installed more replacement ATMs with existing clients than ever before in our history. A total of 8,175 ATMs, which represents one install every 65 minutes, 24 hours a day, each and every day last year. I believe that is best-in-class capability. And this activity is not just installation activity, it is strategic investments in that all of these new ATMs are capable of providing enhanced consumer experiences in support of our transaction driving and retail sales driving initiative. Every new installation and every replacement installation prepares us for acquiring more transaction share.

And across this fleet throughout the U.S., Canada, Mexico, the Caribbean and the U.K. we realized nearly 750 million ATM transactions in 2012. That’s an increase of over 37% from 2011 levels. While some of this growth was realized from our new retail locations established in 2012 and the continued ramp-up of some of our acquisitions there is more to the story. Our transaction growth strategies for bank branding, surcharge-free networks and consumer promotional programs have strongly contributed to this significant transaction increase.

We are continuing to evolve the retail ATM from a largely surcharge-paying model to a Cardtronics driven B2B model where we sell surcharge-free access at our ATMs to a host of financial services organizations. This drives consumer loyalty for retailers and FIs and further reduces our already shrinking reliance on interchange as a source of revenue.

We now have over 18,500 Cardtronics owned ATMs in the U.S. and Canada that carry a financial institution brand. That’s a greater than 21% increase in one year, thanks to the success we’ve seen with branding both the new 711 Canada stores and the Valero Corner Store locations. We also announced this past quarter that BBVA is in the process of branding nearly 300 retail outlets in Colorado and Texas.

Even with this substantially growth in 2012, we still have thousands of ATMs available to brand in the future. Our increasingly global all point surcharge-free network continues to expand. Now bursting with over 50,000 locations on three continents Allpoint enjoyed a nearly 30% increase in transactions in 2012 over prior year levels. All our financial institution reach through Allpoint continues to expand, prepaid card transactions also continue meaningful contribution and they grew organically at 29%. We expect this pace of growth to continue.

The importance of Allpoint surcharge-free access was further highlighted with the recent Green Dot announcement of its GoBank initiative with the Allpoint fleet of U.S. ATMs providing surcharge-free access to cash. In the U.K., we continue our focus to seek out and install ATMs at high traffic profitable locations. In the fourth quarter, we executed a deal through our bank machine division to install 38 ATMs with network rail at the some of the highest traffic train stations in the U.K.

In addition to the prospects these sites present for high volume traditional withdrawal transactions, we are excited due to the significant international foot traffic in these venues for the chance to introduce our new dynamic Currency Conversion Product. Dynamic Currency Conversion or DCC is a financial service provided by Cardtronics that allows customers conducting International transactions at an ATM to see the exact amount their card will be charged, expressed in their own home currency. It’s a tremendous service for the international ATM user and a new source of high margin revenue for Cardtronics.

We had a very solid quarter to close 2012 and I am very optimistic regarding the opportunities on the horizon for 2013. The base for my optimism extends across the company. One area is our U.K. business Bank Machine. Always a part of our revenue growth story, we see 2013 as the year where Bank Machine begins serious profit contribution. We have launched an intense focus on operational process improvement that will produce measurable results in core savings this year.

On the business development side, we have the network rail implementation previously discussed. We also have our new partnership with Ukash, which will allow for a cardless transaction to convert Ukash eMoney to real cash at Bank Machine ATMs.

We are seeing opportunities to leverage our cash-in-transit business into deeper relationships with financial institutions and retailers. All this in combination with our historical advantages in delivering service will result this year in attractive margin improvement.

We are seeing positive growth prospects both north and south of the U.S. border. In Mexico, we anticipate expanding our branding model. And in Canada, with our recent acquisition of Can-Do-Cash – got to love some of these names – we have already amassed a fleet of nearly 2,000 ATMs in a short timeframe and are poised to build on that base with continued sales and targeted acquisitions.

In the U.S., we are excited about the prospects of growing transaction share by continuing to leverage the largest owned retail ATM fleet in the nation. We are working on every dimension of our business in the U.S. – from continued focus on lowering our unit costs through to techniques that drive solid same-store transaction growth at our ATMs.

The same operational improvement process I just represent – I just referenced in driving anticipated results in the U.K. is expected to pay even higher dividends right here in the U.S. While we continue to enjoy healthy pipelines for new placements, new products and new acquisitions, our focus is increasingly on driving more transactions to our existing footprint.

To do this, Cardtronics will continue to invest in our future. While we are pleased with the prospects for solid margin delivery this year, 2013 will also be a year of investment for Cardtronics. To deliver long-term performance as good or, perhaps, even better than our historical performance requires investment in talent, infrastructure and new products.

We spoke earlier in the year of an addition to our executive team of a seasoned sales executive leader in the person of Todd Clark, a veteran of the payments industry and an early provider of ATM services to ISOs. Todd has recently added four people to his team dedicated to selling services into financial institutions. This is a doubling of the talent focused on attracting cardholders and transactions to our existing fleet of ATMs.

We also recently announced the establishment of a Chief Information Security Officer position, staffed by Jerry Garcia, our former CIO, to proactively address our data management security needs for the future.

As we evolve our business model, we will access more consumer data related to sales. Protecting that data will be a mission-critical duty. It is important to reiterate that the creation of this position is not a reaction to any current issue or problem. This is about planning and building necessary muscle for our future.

Jerry’s CIO role has been filed by Mike McCarthy, a technology veteran in the payments industry, who will help us deliver on our product pipeline and our transaction acquisition strategies. We are building for the future, while continuing to deliver results today.

Before I turn it over to Chris Brewster for the numeric main course and 2013 guidance, I would like to offer a word or two about some challenges in 2013 and beyond. There was much talk this past year about the impact of interchange on our model.

While one can never be certain about trends outside of our direct control, our own industry expertise and our own recognition of our importance to the networks we participate in, cause me to have an opinion about the stability of interchange for this year. I believe that the worst of the impact is behind us. And that worst was absorbed by Cardtronics with a year-over-year increase in gross margins. 2013 should be less volatile in this regard.

The second challenge is EMV. At Cardtronics we’ve proven our ability to face challenges that the governments or the networks may throw at us from regulatory adjustments to ADA to interchange adjustments. The requirements of EMV are not a foreign topic to Cardtronics. We are already EMV capable at our machines in the U.K., Canada and Mexico.

The process is underway in the U.S. that will allow us to prepare for the appropriate compliance dates. While, the overall capital requirements for these upgrades will not be insignificant, sort of in the bubble-digit millions of dollars over a multi-year period, it needs to be looked at on the context of a company that spent 90 million in capital in 2012. EMV will be managed well within the ordinary course of our business. And now to Chris.

Chris Brewster

Thank you, Steve. First I’d like to recap some of the fourth quarter financial highlights and then I’ll provide input on our guidance for 2013. Consolidated revenues for the quarter came in at $198 million. That was up 14% from 174 million recorded in the same quarter last year. Adjusted net income per share was $0.41, which was also up 14% from a year-ago.

Organic revenue growth accounted for 11 percentage point of those 14 points of growth in the quarter. This is particularly notable because our equipment sales business which grew significantly over the last eight quarters as new Americans with Disabilities Act requirements drove an equipment replacement cycle in the ATM industry.

Our equipment sales business was down year-over-year in quarter four. That decrease accounted for about 2% of negative consolidated revenue growth in the quarter. So the punch line from that is, if you excluded the impact of the revenue decline in this lower margin equipment sales revenue category, our core revenues, what we call our ATM operating revenues, the higher part – margin part of our revenue structure, were up organically by approximately 13% for the quarter. This 13% core revenue growth is being driven by several elements in the growth strategy and I’ll recap the rough contributions of each.

Now, we had a strong 2012 with new merchants. We added three large merchant customers in 2012, Valero in the U.S., 7-Eleven in Canada and Shell in the U.K., and those three programs contributed about 7.5 points of the 13 points of organic revenue growth. Unit growth with other existing merchants was also quite strong and this is, you see, reflected in our capital spending numbers in the year. Unit growth expansion with existing merchants was about 4.5% of that 13% revenue growth.

Same-store revenue growth in the U.S. for the quarter was solid. Accounted for about 2 percentage points of revenue growth and that was driven by same-store transaction growth of 4% and that was partly offset by the interchange rate reductions that we saw during the quarter.

Bank branding and Allpoint surcharge-free network revenues added about 3.5 percentage points of growth. We added over 3,000 branded locations compared to a year ago. All of those revenue gains were partially offset by some attrition in our merchant-owned business and that resulted in the overall 13% organic revenue growth rate in our core ATM operating revenues.

So in essence, while the big three new merchant wins were certainly impactful in the quarter, there were contributions from across the scope of our various initiatives that contributed to the overall strong revenue growth in the quarter. Acquisitions accounted for three percentage points of revenue growth in the quarter.

Mostly coming from our ATM Network acquisition that was completed in August and from having a full quarter’s contribution from the core fourth quarter ‘11 acquisitions of access to money in the U.S and cash in Canada, which provided a full quarter of revenue this year versus only a partial quarter last year. Our largest recent acquisition EDC closed in July of ‘11 so it was fully in our fourth quarter numbers in both years. And in short, I would say we have now cycled on the substantially majority of our recent significant acquisition activity.

Turning to margins, gross margins grew from 32% flat in the fourth quarter last year to 32.5% this year. That 50 basis point improvement represents the first year-over-year margin comparison gain since the September quarter of ‘11 and was attributable also to a number of factors. First, cost leverage on that same store revenue growth. Second, we cycled on the 2011 acquisitions that had come onboard with somewhat lower gross margins than existing company averages.

Third, we continue to realize synergies on our acquisitions. Fourth, we continue to enjoy growth in our higher margin bank branding and all point revenue categories. Fifth, we cycled on significant growth in the lower margin equipment sales business. And lastly, profit margins are improving over time on the three large 2012 customer wins which generated relatively low margins during their ramp-up period earlier in the year.

These significant margin improvement drivers were partially offset by interchange rate reduction, which costs us about 130 basis points of gross margin in the fourth quarter. SG&A costs including – excluding cash – non-cash or non-recurring costs in both periods were down as a percent of revenue at 7.2% this year versus 7.8% in the fourth quarter a year-ago. So with better gross margins and lower SG&A as a percent of revenue adjusted EBITDA margins were up 130 basis points year-over-year in the fourth quarter and EBITDA in total dollars grew by 20%.

Capital expenditures and the balance sheet, CapEx for the year totaled about 92 million, net of non-controlling interest as we’ve discussed on previous calls capital expenditures were higher in 2012 for a number of reasons. We added almost 2,100 ATMs with new merchants during 2012 including the big three that we just discussed. We added 2,250 new ATMs with existing merchants during the year, which was frankly somewhat more than we had planned for.

And lastly we swapped out about 2,800 existing ATMs in our fleet with new ADA compliant ATMs many of which now have significant additional technological capabilities. We will go through that guidance in detail in a few minutes but let me just say that we expect CapEx in 2013 to return to previous levels of approximately a third of adjusted EBITDA.

Turning to balance sheet related issues, as of the end of the year, our ratio of net debt outstanding to adjusted EBITDA was 1.8 times, down significantly from the 2.3 times where it stood at the end of 2011. Absent any significant acquisitions we would expect this ratio to continue to trend downward due to expected strong free cash flows in 2013. At the end of 2012, we had just under $100 million in available but unused credit capacity under our bank revolving line of credit.

I’m also pleased to report that in January of 2013 we collected $13.4 million from the relevant insurance company related to a loss we incurred in early 2010 involving a major cash theft at a U.S. regional armored car service provider.

This payment coupled with $2.8 million of cash we recovered previously provided complete recovery of the stolen cash. This recovery has no P&L effect, but it simply cleared a receivable that we had on our balance sheet at the end of the third quarter.

With the continued availability of bonus federal tax depreciation and with our remaining unused net operating loss carry-forward, we expect to pay less than $5 million in income taxes in 2013. We expect to almost fully use our net operating loss carry-forwards in 2013. So cash taxes will be at a more normal level in 2014.

Now, turning to guidance. Revenues of $835 million to $850 million are what we expect in 2013. We’re anticipating gross margins in a range of 32 to 32.3%. That would represent about 100 basis points of gross margin improvement over 2012.

We’re anticipating adjusted EBITDA of between $202 million and $209 million; depreciation expense of approximately $64 million to $65.5 million; cash interest expense of $20 million to $20.5 million; adjusted net income of $1.72 to $1.79 per diluted share, and that’s based on approximately 44.7 million weighted average diluted shares outstanding; and capital expenditures of about $70 million.

This guidance assumes exchange rates of $1.60 per ₤1, CAD1 per US$1 and MXP13 per US$1. To give you a little more granularity on some of these metrics, the revenue guidance implies organic revenue growth in the ballpark of our intermediate term 7 to 9% target range. And as is our practice, we’ve not included any additional revenue or profit from potential acquisitions.

We are forecasting continued execution across multiple elements of our growth strategy, including adding new retailers, growth with existing retailers, growing our Allpoint and bank branding businesses and driving additional transactions to our very conveniently located fleet.

We said on our third quarter conference call that the interchange rate changes that occurred in April of ‘12 and the network routing shifts that occurred across the last nine months of last year would have a negative rollover impact on 2013 earnings of about $0.8 a share, even if no further rate changes or network shifts occurred.

Since we made those statements back on November 1st, we have seen no further interchange rate changes or network shifts of any consequence. However, we have included an assumption of some modest further adverse movement in our guidance.

Forecasted margins at 32 to 32.3% are expected to be up from 2012 full year results of 31.3%, and that year-over-year improvement relates primarily to continued costs synergies from acquisitions and ramping on our significant 2012 unit adds, partly offset by interchange decreases.

The implied adjusted earnings per share growth rate in the guidance is in the 7 to 11% range, and I’d like to expand on that a little bit. First, as we’ve discussed on this call and on previous calls, the interchange rate reductions are having an impact on profits, and about 75% of an interchange rate reduction hits the pre-tax profit line. These have made their major rate change in April of 2012. Consequently, that change was not in effect in the first quarter of 2012. So the year-over-year interchange rate declines are much more pronounced in the first quarter of 2013. The year-over-year decline is expected to be much less in quarters 2, 3 and 4 of 2013 because we will then be comparing back again to quarters in 2012 that already included the Visa change.

Additionally, as you may recall, we had a really strong first quarter in 2012. We recorded organic revenue growth of 18% and adjusted earnings per share growth of 41%. As we said on our first quarter of 2012 conference call, that very high organic revenue growth number was driven partly by non-recurring effects. We had an extra day, 2012 was a leap year and we had very favorable weather comparisons. That is a very warm winter in the Midwest and northeast which we believe helped our volumes.

So as a result of these various factors, we have a particularly difficult comparison in the first quarter of 2013. I would not be surprised to see adjusted EPS grow flat or close to flat year-over-year in the first quarter. However, I also expect that the back nine months of 2013 would show adjusted earnings growth in the ballpark of our intermediate term target of 12 to 15% year-over-year. The other point I would like to make is that our P&L guidance assumes some fairly healthy spending on growth initiatives. We may not spend all of what we have projected but frankly we hope we do.

We believe the investments are necessary to not only continue to generate outsized revenue growth in future periods but will make us the ATM operator of choice for not only our existing merchants but new merchants in the future. So to quickly wrap things up on the financial side I’d just highlight one last time the following themes. 2012 was a strong year for the company, driven by really strong organic revenue growth in spite of interchange headwinds.

For 2013 we’re expecting continued solid organic revenue growth and except for the first quarter of the year I think we’ll achieve very respectable earnings growth. The company is well-positioned financially, we have a strong balance sheet, we have strong merchant relationships, we have strong free cash flow. All of this gives us considerable financial flexibility to pursue both organic and strategic growth opportunities.

So with that, Steve, I will turn the call back over to you for closing remarks.

Steve Rathgaber

Thank you, Chris. So the end of the year, the end in earnings year is a time of reflection and last week actually also was the completion of my third year at Cardtronics on February 1. So I have sort of a double motivation for reflection. And what I wanted to offer was, a couple of comments on the last three years. In the last three years, this company has increased their ATM count by 79%.

We have more than doubled our transactions. We have more than doubled our adjusted net income per share. That’s up 136%. And we have more than doubled the shareholder value. That’s up 116% or more than $620 million. And we believe we’ve only just begun. So we look forward to the future and hope you’re looking forward to it with us.

We’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bob Napoli with William Blair. Please go ahead. Your line is now open.

Bob Napoli – William Blair

Thank you. Nice job, guys. Question, I guess, I am trying to understand the expenses a little bit more. I mean your guidance is, looks really solid, but you had given the guidance by piece, Chris. In order to get within your guidance range you really have to jump up those – I guess the SG&A expenses, your gross profit looks fine. You know, looking at depreciation and interest expense that leaves SG&A and I know you have hired a number of sales – a number of people, as you said, in the sales area, but we would have to see a pretty good jump up in SG&A expenses, pretty early in the year. Is that all sales and is that – am I missing something there? That’s where the expense has to be and maybe a little color on those initiatives and what you think they’re going to get you in the medium to long-term?

Chris Brewster

Well, I’ll speak to the numbers part of it, Bob, and perhaps, Steve will speak to the underlying business purpose. So I would say those expense investments, they certainly include people. They include the senior ex we brought in on the IT side. They include the recruitment of some senior sales executives that have been brought in under Todd Clark.

We’ve also programmed in some more marketing expense. Some of that relates to research, some of it relates to product testing, some of it just relates to transaction driving strategies. And obviously bits and pieces of additional SG&A else where in the company, just to handle growth, but most of that spending in one way or another is focused to a future of Cardtronics, which is about driving transactions across the big ATM fleet that we already own and operate.

Steve Rathgaber

Yes. I would just add, Bob, that what we are trying to do this year is make a very conscious and targeted investment in a series of techniques which I would want to hold relatively close to the vest for obvious competitive reasons for a period of time, but what we are hoping to do is experiment with a number of ways of having a material impact on driving transactions to our ATM fleet and essentially building out a pipeline of products, new product activities, and getting those engaged with customers in a away that helps achieve that sets of objectives.

That is a journey. It’s not going to happen overnight, but we want to start aggressively investing in that early in the year and ready ourselves for a meaningful 2014 and beyond, as we continue to do what I think we do better than anyone else, which is provide cash access at the most convenient locations on the planet here so.

Bob Napoli – William Blair

Thanks. As far as Allpoint goes and – how closely can you track – or can you track the transactions that your Allpoint customers do at the various merchants? Like can you go to 711 and say we’ve had 300,000 transactions this year that were driven by – we had people in your stores a certain amount of times. Can you do that and are you using that in your – you must – I’m sure you’re using Allpoint in your sales pitch, but do you have the specific data that you can backup the sales pitch with?

Steve Rathgaber

Yes and no. So yes, we have a whole bunch of data and part of what we’re trying to build out with some of the investments we were just referring to in your last question is the machinery to get even more data. I believe Cardtronics is more able than most to deliver sales to the retailer by attracting foot traffic into the store through the ATM vehicle and I believe a Cardtronics that can track that date and leverage that data receiving that data from both the retailer and the FI can create tremendous value for our shareholders as well as facilitate sales activity in the stores we reside in.

Bob Napoli – William Blair

Thanks. Just last quick question. Chris, on your revenue growth what do you expect for product sales? So what’s the breakout between core revenue and product sales?

Chris Brewster

Well, we’re budgeting a shrink in – in product sales, so I would expect after having a number on product sales that’s up in the high 20s, you may see something that’s more like low teens in that neck of the woods.

Bob Napoli – William Blair

Are low teens the run rate of the fourth quarter you did $5 million, so a little bit less than that?

Chris Brewster

Yes. Somewhat under that.

Bob Napoli – William Blair

Okay.

Chris Brewster

I would say more than a little bit under that. And I guess it’s clear but when I said low teens, I’m thinking in terms of millions of dollars for the full year.

Bob Napoli – William Blair

For the full year. So that means you have very strong core revenue growth. Thank you.

Operator

Thank you, sir. Our next question comes from the line of Ramsey El-Assal with Jefferies. Please go ahead. Your line is now open.

Ramsey El-Assal – Jefferies

Hi, guys. Thanks for taking my call. What inning would you say that we’re in now when it comes to realizing the synergies from EDC and access to money, are we – is this something that’s going to be mostly taken care of in ‘13 or is it something that might stretch into ‘14 a bit?

Steve Rathgaber

I guess in terms of innings I would say probably eights or something like that. We’re fairly – fairly well along. We’ve got – and I will put it this way. You don’t see all of that recognized in the – in the December quarter of 2012 but in terms of actions taken, we think you’re likely to see most of the rest of it manifested within the relatively early part of the 2013.

Ramsey El-Assal – Jefferies

Okay. Great. That’s very helpful. On your Mexico revenues it looks like they’ve rebounded this quarter and last on what also looks like a pretty stable maybe even slightly declining base of ATMs, if I have that pumped into my model correctly. Are you – what are your thoughts on what’s driving out there? Is it increased consumer usage or is it more branding fees or is there something going on in the market that’s kind of helping revenues along?

Steve Rathgaber

At the highest order it has to do with the implementation over the past year or two of a new slightly – significant actually adjustment to our business model there that is much more wired into branding so you know that we’ve done that branding deal that has been successful for us and we anticipate additional branding deals of that type and flavor going forward. So what you’re seeing as a byproduct of that deal structure is a slight shift in the economics that are creating and improved outcome in Mexico.

Ramsey El-Assal – Jefferies

Okay.

Steve Rathgaber

All of that is true as you said Ramsey but you may be reacting to is we split our revenues and our – in the detailed metrics behind our earnings release between United States, United Kingdom and Other International. And Other International includes Canada as well as Mexico. So part of that year-over-year revenue growth you’re seeing simply relates to the growth in – if that’s the line item you’re referring to, part of that revenue growth relates to Canada.

Ramsey El-Assal – Jefferies

Okay.

Steve Rathgaber

And that’s why we now have a 2,000-ATM presence.

Ramsey El-Assal – Jefferies

Okay. Thanks a lot. That’s helpful. Last one for me is can you give us an update on your M&A pipeline? In terms of the deals that you’re looking at, is there any way that you can give us a little color on the mix between classic kind of rollup type of opportunities versus technology deals along the lines of Allpoint? I mean, understanding that any type of deal can happen, is there a deal type that we’re more likely so to see come over the wire at this point?

Steve Rathgaber

I think you’ll see different times. I think you’ll see a mixed bag in 2013. I think they’ll be probably on the smaller side, and they’ll be targeted based on geography. I think you’ll see a type of deal that would be a little bit outside our normal range is a real possibility. And there is always the possibility, at least, of something larger, but those tend to be onesies, and they tend to be opportunistically created.

And if – I can’t say we’ve got one of those largers in the pipeline or not. But I can say that we continue to be worked pretty hard by an industry that has a lot of opportunities served up. And we continue to be fairly discreet, in particular, about which ones we choose to align ourselves with. But we do keep busy looking at things.

Ramsey El-Assal – Jefferies

Great. That’s all for me. Thanks a lot.

Operator

Thank you, sir. Our next question comes from the line of Mike Grondahl with Piper Jaffray. Please go ahead. Your line is now open.

Mike Grondahl – Piper Jaffray

Yeah. Two things, guys. Could you talk a little bit about your DCC product in Bank Machine like how many machines you’re rolling that out to and then, maybe, just some of the things you’ve done in the U.K. to kind of specifically drive that profitability in 2013?

Steve Rathgaber

Sure. So the DCC application – I mean, London is obviously a very international city. And a great number of our locations will lend itself to that model being deployed on it. We tend to try to do everything on all of our machines in London pretty consistently and maybe less so in some of the outlying areas of the U.K. So it will be a fairly active deployment across our inventory.

In terms of the kind of things we’ve been doing to improve our core structure, well, it has to do with a classic focus. You may recall, I spoke earlier last year of the hiring of an individual to help us with lean process management. And we have spent a lot of time in the fourth quarter going over the way we’ve done things in the U.K. across the entire set of services we offer – from the way we install ATMs to the way we deliver cash to the just the order that we do things in.

And that in conjunction with the amount of cash we deploy to our ATMs and the amount – the number of ATMs we deploy cash to are giving us opportunities to just enjoy a lot more scale from the investments we made. So it’s pretty much an across-the-board aggressive look with the help of a very engaged U.K. staff to get more out of the assets we already operate by doing things smarter. It’s not rocket science. It’s good old fashioned lean process management.

Mike Grondahl – Piper Jaffray

Okay. Thank you.

Operator

Thank you, sir. (Operator Instructions) We do have a follow-up question from the line of Bob Napoli with William Blair. Please go ahead. Your line is now open.

Bob Napoli – William Blair

Thank you. The ATM – you had a lot of ATMs, company-owned ATMs in 2012. What is the outlook for adding ATMs in ‘13? What would you – what kind of organic growth in ATMs, company-owned ATMs would you expect?

Steve Rathgaber

Well, we come – we don’t come into the year, Bob, with three large brand new contracts like we did in 2012. So we’re not budgeting quite as robust a year for machine additions in 2013 as we had in 2012. But we are budgeting machine adds on the company-owned side of the business so that will certainly provide a few percentage points of organic growth. Probably not quite as big a year as 2012 just related to machine adds, though.

Bob Napoli – William Blair

More focused on which countries do you have – do you expect to see the most growth in?

Steve Rathgaber

Primarily the U.S. Certainly some in Canada. Probably not much in Mexico. And a somewhat less robust growth rate in machine count in the U.K. than in prior years. Heavily focused in the U.K. on driving margins and driving profitability at this point.

Bob Napoli – William Blair

Okay. And your financial institution sales force, we – you expect to see some – should we see some announcements in the early part of the year or what – how we’ll may be able to measure that investment – the return on that investment?

Steve Rathgaber

Well, their job is essentiality to take our product set which gets bigger and bigger each quarter in terms of what we have to offer, things like we added last year like FeeAlert and work with institutions to get them to brand ATMs, get them to partner with us to drive transactions through Allpoint and get them to partner with us to drive transaction through other vehicles that we’ve been creating.

So you would see it over time in transaction growth and in – continuing our branding activities in those numbers primarily. And I would expect that these folks hit the ground relatively late in the fourth quarter of last year, so pipelines need to be built. But I can tell you they are seasoned sales people with good role indexes. We’re very pleased with the hiring that we’ve done.

And I wouldn’t look for announcements next week, but I would certainly hope you’ll see some this year that are not necessarily going to be homerun type announcements, but I think what I’m looking to queue up with this inventory of staff is continuous slow of singles and those continuous flow of singles will add up to some nice volume over time.

Bob Napoli – William Blair

And so it’s Allpoint – so they’re focused on Allpoint and branding primarily?

Steve Rathgaber

Allpoint, branding and some other offerings that we’ve created that are focused on driving transaction volume at our existing fleet, yes.

Bob Napoli – William Blair

Then just last question. Chris, with the cash flow you’re generating, should we just expect to see debt being paid down in 2013, or do you have other thoughts with the use of that cash flow?

Chris Brewster

Well, I think in brief the – to some extent it depends on acquisition activity. I mean, we’re not certainly not dedicated to the thought of taking the company completely out of debt. I think that would be in efficient capital structure. You know, if acquisition opportunities present themselves that we think are, you know, accretive to shareholder value, we’ll spend capital on those. if we can’t surface those sorts of opportunities, then at some point we probably have to think about returning some cash to shareholders.

Bob Napoli – William Blair

Thank you.

Operator

Thank you. Our next question comes from the line of Reggie Smith with JPMorgan. Please go ahead. Your line is open.

Reggie Smith – JPMorgan

Hey, guys. I guess most of my questions have been answered. I just had a question on kind of Allpoint and the revenue model. Is it possible to kind of give us a sense for how an Allpoint transaction with the revenue yield on that transaction is versus say one of your typical standard surcharge transactions? And then I have a follow-up after that. Thanks.

Steve Rathgaber

Well, I will put it this way, Reggie. We tend to be a bit proprietary about pricing on that particular business model. I would tell you that total revenues on an Allpoint transaction would typically be lower, not always, but typically lower than on a surcharge transaction, but we tend to be fairly happy with that for a couple of reasons. One is that we believe they’re generally incremental transactions. If you start from the premise that roughly 70% to 75% of U.S. ATM transactions are done for free, in other words, only 25% or so are done with the consumer paying a surcharge, Allpoint essentiality goes after 100% of the market where a surcharging model only goes after about a quarter of the market.

So we think we get a lot of incremental transaction, out of that and on the cost side as a company our largest single cost is merchant fees. As you know, they take – we pay about 30% of total corporate revenues out the book door as fees to merchants and in many cases, not all, but in many cases we don’t pay merchant fees on none surcharge transactions. So we look at Allpoint transactions may be somewhat lower in terms of revenue per unit they tend to generate higher margins for us than the norm and all-in-all we’re happy with the business model.

Reggie Smith – JPMorgan

Okay. And then I guess just kind of thinking about surcharges in general, I know it’s been a couple of years since you guys have done I guess anything dramatic there. Are there any – are there any plans to maybe tweak surcharges in different regions or is there an opportunity there to kind of do that next year or this year rather?

Steve Rathgaber

We tend to be a little conservative on those tweaks at this point. Each year we do something so – but it’s fair to say that each year it’s been a little smaller than the preceding year at least in my time here and I think that the nature of the environment right now, the nature of the economy, it’s probably not the ideal time to look for material increases in surcharges, but I do think over time as you know, money inflates and all the things that happen in the economy continue to happen, the ceiling will lift again for putting surcharges back into a more active role. So probably not much in the way of activity this year and it’s a stay tuned thing for future years, but there will be some activity this year. We have a large portfolio and there is always pieces that can be tweaked and we’re always looking for where those pieces can be tweaked.

Reggie Smith – JPMorgan

Got you. And if I can sneak one more in. I know in the past you’ve have talked about Visa and MasterCard and some of the changes they’ve made to the reverse interchange rate and the network fees and we kind of looked at – what the alternative guys could do and your sense was that they probably wouldn’t try to chase market share by cutting reverse interchange. I guess my question is, could they potentially raise their network fees and, if so, you know, kind of how could you respond to that, so not specifically Visa and MasterCard but maybe some of the other networks. Is there any concern on your part that they may try to offset some of their lost revenues by raising networks fees to you guys?

Steve Rathgaber

Well, I think what we have seen in the past couple of years, Reggie, is their ability to do that has been largely expanded. The fee structures are such that there isn’t a whole lot of room for them to do something without damaging significant portions of their bank base as well as entities like Cardtronics. So – and in discussions, you know, testing the market, trying to understand what’s going on.

As I said in my comments, we feel the biggest changes are behind us, and as Chris indicated in his comments, we did put a little reserve in this year, but don’t anticipate quite frankly any material adjustments and do believe from discussions we have with industry that folks understand, you know, Cardtronics has options and would exercise them over time in different ways to optimize its shareholder value. So I think we’re headed for a period of greater stability in that area for at least 2013 and I’m hoping beyond for obvious reasons.

Reggie Smith – JPMorgan

Perfect. Thank you.

Operator

Thank you, sir. (Operator Instructions) Presenters, I am showing no additional questioners on the phone lines. I’d now like to turn the program back over to Steve Rathgaber for any additional or closing remarks.

Steve Rathgaber

I would just say thank you, everyone, for your continued interest in Cardtronics and have a great week.

Operator

Thank you, presenters. Thank you. Again, ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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