Coinstar, Inc. Q4 2008 Earnings Call Transcript

Feb.13.09 | About: Outerwall Inc. (OUTR)

Coinstar, Inc. (NASDAQ:CSTR)

Q4 2008 Earnings Call

February 12, 2009 5:00 pm ET

Executives

Brian V. Turner – Chief Financial Officer

David W. Cole – Chief Executive Officer & Director

Paul D. Davis – Chief Operating Officer

Gregg Kaplan – Chief Executive Officer Redbox

Analysts

John Kraft – D. A. Davidson & Co.

Bob Evans – Craig-Hallum Capital Group

Steven Rees – JP Morgan

Nate Brochmann – William Blair & Company

Operator

Welcome to the Coinstar, Inc. fourth quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, February 12, 2009. I would now like to turn the conference over to Brian Turner.

Brian V. Turner

With me on the call today is Dave Cole our current CEO and Paul Davis, our COO and incoming CEO as of April 1, 2009. Before we start I have to remind you that during the course of this call various we remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from expectations, plans and prospects contemplated in these forward-looking statements as a result of these various factors including those discussed in our previous 10Qs and 10Ks filed with the SEC. I’d also like to point out that we’ll be discussing certain non-GAAP financial measures including but not limited to EBITDA, pro forma revenues and adjusted earnings per share on a historical and forward-looking basis during this conference call.

These are non-GAAP financial measure under Regulation G. Definitions of these non-GAAP financial measures, the importance of the measures to investors and reconciliations of these measures to the most directly comparable GAAP measures can be found in today’s earnings release and related Slides which are posted in the about us investor relations section of Coinstar’s website at www.Coinstar.com.

A replay of this webcast will also be available on the about us investor relations section of our website. We have posted a copy of today’s prepared remarks and a series of charts mentioned in today’s call to the about us investor relations section of our website. We encourage you to go to our website and bring up the accompanying PowerPoint Slides so that you may follow along with us.

With that, let me turn the call over to Dave Cole.

David W. Cole

Over the last seven years Coinstar has evolved in to the category captain for the 4th Wall. Today’s announcement of our intent to acquire the remaining equity stake in Redbox, we have taken yet another step in that evolution.

As many of you know, when I arrived here in 2001 we were a one product company in a single channel and at that time our revenue was $129 million with EBITDA of about $36 million. Just seven years later Coinstar has a platform of technology, customer relationships, field operations and infrastructure that reaches 140 countries and 90,000 points of presence and all of this has translated in to significantly higher revenue and EBITDA.

In 2008 we had our best year ever in terms of revenue, EBITDA and installations and in 2009 we expect revenue to be over $1.2 billion with EBITDA just shy of $200 million well ahead of plan. Of course, not everything is perfect but against the current economic background our bundle of products and services is delivering superior value to retailers and consumers.

We’ve come this far because we’ve formulated a strategy that appeals to both retailers and consumers and we’ve assembled the right team of people committed to excellent execution. This strategy combined cyclical and counter cyclical product lines and include early stage, adolescent and mature businesses and includes home grown as well as acquired product lines. But, as a whole we believe Coinstar’s 4th Wall business model is our growth engine and has the relevance and durability to deliver results to stockholders for years to come.

This is my last conference call as CEO of Coinstar so before turning the reins over to Paul I want to thank our dedicated employees, our loyal customers and our shareholders who I’ve gotten to know over the years. It has been a privilege to lead this organization since 2001 and I know the company has exceptionally strong management as Coinstar embarks on its next stage of growth.

Thanks to all of you for making the experience a special one. With that, I will turn the call over to Paul.

Paul D. Davis

On behalf of everyone at Coinstar I want to pass along our heartfelt thanks for your leadership over the years. A strong foundation has been developed over the past several years and we believe we have a tremendous opportunity to grow not only the company’s revenues but also its profitability well beyond where it is today.

That’s the opportunity that I saw when I came here and I have a great deal of enthusiasm and confidence in our unique business model and our future. Our vision for Coinstar is to be the leading supplier of valuable services that make life easier for consumers, generate strong returns for our retail partners and provide robust value creation for our shareholders.

Coinstar was founded on a truly innovative idea of turning consumer change in to cash conveniently and at a self service kiosk. Over time the company has not only expanded its footprint and product lines but we’ve leveraged our expertise to bring incremental value to consumers and retailers at the front of the store. We will continue to innovate focusing on consumers’ needs and we will look both inside and outside the company to add even greater value to our 4th Wall offering.

As you expect from an incoming CEO I’m looking in depth at our overall business model and at each of our product lines and specifically I’m looking for relevance and value as it relates to our retailers. I’m also looking at crossing selling potential and short and long term trends. I’m reviewing how we will organize the revenue and cost synergies we’ve achieved and finally, I am looking at the value we have the ability to create for our shareholders.

Now, let’s turn to the business of the moment. Looking at chart one for the year ended December 31, 2008. Coinstar posted record consolidated annual revenues with record EBITDA. We generated $0.50 of GAAP EPS and $0.84 of adjusted EPS. We installed more Coin units in 2008 than any year in our history. In just over three years we now have a DVD kiosk network that rivals our Coin network in terms of size and profitability and has more physical locations for consumers than any DVD rental operator in the US and we exceeded the revenue and EBITDA guidance we provided at the beginning of the year.

As shown in chart two we outperformed some product lines offset by lower than expected results in others. Specifically, our DVD kiosk business performed very well. Coin, entertainment, money transfer and EPay all were affected by the economy however, we believe they performed fairly well all things considered.

Now, let me take a deeper dive on each of our product lines starting with the DVD kiosk space. Today we announced our intent to purchase GetAMovie or GAM’s 44.4% equity stake in Redbox Automated Retail, LLC. For those of you who are unfamiliar, GAM is a wholly owned subsidiary of McDonalds Corporation. In addition to acquiring McDonald’s share we expect to exercise our right to acquire the remaining interest owned by other minority holders. Brian will go through the financial details shortly.

We entered in to this agreement for two simple reasons, first the return on investment and second Redbox’s attractive growth characteristics. To that point, if you turn to charts four through 16, we are seeing some exceptional trends in the current environment. As shown in chart five, 2008 pro forma DVD revenues increased 179% to approximately $400 million with 2008 pro forma EBITDA increasing approximately 382% to $72 million. These results were driven by approximately 1,900 net installs for the fourth quarter on the heels of 4,800 through the first three quarters of the year.

Between DVDXpress and Redbox we now have over 13,700 units installed and our same store sales growth for the full year 2008 was 52%. Factors driving success continue to be strong installations, the terrific unit economics which I’ll revisit in a moment and the counter cyclical nature of DVD rentals to the economy. As shown in chart six through eight, utilizing the Coinstar sales force Redbox as seen an exceptional installation pace over the last there years resulting in Redbox having by our estimates more than twice as many locations as the next largest DVD rental operators and more than five times as many locations deployed in the next leading kiosk operator.

As for 2009 we expect Redbox to install in the vicinity of 6,000 to 8,000 new units up from our prior expectation of 4,000 to 6,000 kiosks. This will bring our total to over 20,000 units by the end of 2009, twice our original expectations when we made our initial investment in 2005. These increases are being driven by escalating retailer demand and the consumers desire to find a more convenient alternative to brick and mortar locations without sacrificing quality.

In terms of how those installations affect financial performance, we expect our DVD revenues to increase about 80% in 2009 to between $690 to $750 million with corresponding EBITDA of 14% to 16%. These margins reflect a network mix that’s skewed heavily to immature machines which typically experience lower margins as they ramp. To that point, as shown on chart nine the revenue ramp continues to remain strong with year three revenues of over $50,000 per unit.

Per unit manufacturing and installation costs continue to decline with units costing between $14,000 and $15,000 for 2009. Therefore, with a per unit capital cost of just over $14,000 and increasing revenue trends a Redbox unit produces a healthy ROIC. In charts 10 through 12 we see Redbox rentals progressing quite rapidly resulting in steady market share gains for all DVD rentals. You can see the effect of combining and excellent Redbox management team with Coinstar’s 4th Wall sales force starting 2006 and particularly successes is evident in the markets where we’ve had the longest presence.

When we made the initial investment in 2005, we thought we might be able to get 15% share in any given market. As is shown in chart 13, Houston and Denver, two of our oldest markets would suggest our ability to gain more than 20% share, a result much greater than expected. We’ve achieved this growth with relatively minimal marketing so you might ask why are so many consumers using Redbox?

Consumers tell us price point, ease of use, convenience, selection, the return anywhere option and online reservation feature guaranteeing in stock status. One of the more startling revelations as shown on chart 14 is Redbox net promoter score which is a major that asks, “Would you recommend this product or service to your friend?” Redbox’s net promoter score was a whopping 80% putting it in elite company with the likes of eBay, Apple, Amazon and others. A net promoter score of 60% is considered quite good, a net promoter score of 80% is outstanding.

In chart 15 you will note that Redbox’ margins have expanded with scale. For 2009 the margin will take a slight dip due primarily to a higher than expected installations which will push the mix further towards immature machines. We believe this is great for long term profitability however, it does put pressure on short term margins. Additionally, we are seeing the resale price of previously viewed videos decline somewhat and the logistics cost for new videos increasing.

So, we are pleased to have announced our intent to acquire the remaining equity in Redbox. The company has an excellent management team, a proven record of execution and when combined with Coinstar’s 4th Wall platform sales force it has shown exceptional growth and has great opportunity. Finally, it represents an allocation of capital in a known entity that has already proven itself financially.

Turning to our Coin product line, as shown in Chart 17, Coin revenue for fiscal year 2008 was up 4% to $261 million compared to $251 million a year ago. This growth reflects a combination of revenue from new units installed less than 12 months and same store sales in units greater than 12 months old. Although lower than expectations we laid out early in 2008, we were pleased to show positive growth in the current economic environment.

Looking at the two pieces, results were driven by continued strength in installations where we set an annual record in 2008 of 3,000 net placements. This is triple our normal installation of 800 to 1,000 per year and exceeded our beginning of the year expectation of 2,000 to 2,500 units. With the placement of almost 5,000 units in the last two years I believe we are well positioned for revenue and EBITDA growth in 2009 and 2010 as these units ramp.

You may recall that after being installed for five years a typical Coin unit produces an average of $16,500 in annual revenue. However, in its first year it will only generate about 60% of this average and in its second year only about 80%. Therefore, in 2009 the 1,900 units placed in 2007 would be expected to generate about $13,000 on average with the units placed in 2008 generating about $10,000 on average. We would expect both classes to improve from there. In terms of unit growth, after the extraordinary number of installations in 2007 and 2008 we expect to return to our normal installation target of 800 to 1,000 net new units in 2009.

Moving to same store sales, they were -3.2% for the full year. As shown in chart 18 this was partially due to the significant increase in installations over the past 24 months along with the struggling economy. While Coin exchanging is not in and of itself cyclical or non-cyclical we do believe that the economy and weak store traffic patterns due impact our machine usage and to that extent that the machines show some cyclicality.

However, as mentioned on previous calls, we have seen a second indicator that seems to have a high correlation in troubled economic times. As shown in chart 19 we have seen an emerging correlation between Coin usage and the consumer confidence index. Recognizing these same store sales trends we are going to take two specific actions in 2009.

First, we have already started to look at individual locations ROIC for each Coin unit. For those locations that do not meet minimum thresholds we will consider redeploying those units to other locations. These expenses will be incurred in the first and second quarters of 2009. Second, we will be increasing our marketing spend the last three quarters of the year and we believe this will drive more consumers to our Coin kiosk and will drive incremental profitability.

Finally, we remain very excited about the future prospects for the Coin business and see significant volume potential for immature machines. We see excellent leverage in driving more first time users to our domestic locations and significant installation opportunities in international markets in future years. For these reasons we believe we can continue to drive top line and EBITDA growth for years to come and that this growth will be more apparent under more normalized economic circumstances.

Now, let’s move to money transfer in chart 20. On a pro forma basis, wire transactions were up approximately 20% for fiscal 2008 from 2007 and the average transaction was roughly $570. With our acquisition of GroupEx in January, 2008 we now have over 38,000 agents in approximately 140 countries. Certainly the news in money transfer is mixed. With the industry the crucial US to Mexico corridor transactions were down 7% in the fourth quarter which contrasts with Coinstar’s US to Mexico money transfer business which was up 10% in the period.

So, while we are certainly affected along with the industry, Coinstar is advancing its money transfer initiatives albeit at a slower pace. These improvements were offset by the planned de-emphasis of money orders and home deliver for money transfer in Mexico. Outside the US to Mexico and Guatemala corridors we saw our 2008 revenue and transactions up approximately 38%. Plus, as we previously stated we are seeing the emergence of China as a corridor of interest.

Within the fourth quarter we agreed with the China Construction Bank or CCB, one of the their largest banks in China to extend our current money transfer services across all CCB locations in all provinces of China. System integration was completed with CCB in the fourth quarter. As is shown in the chart on the lower right portion of chart 20, as transactions and revenue have increased the cost per transaction has declined.

Based upon these trends we continue to believe that driving increased volumes across our fixed costs will get us to profitability. Part of the decline and the cost per transaction is integrating our two money transfer acquisitions. During 2008 we undertook significant integration efforts to combine our compliance and IT systems and to reduce our overhead costs. We also combined our management teams and moved our back office centers from London and Los Angeles to lower costs centers in Mumbai and Guadalajara. These efforts will continue this year.

Looking to 2009, it’s our belief that the transitory workforce will continue to be affected by global economic forces. People have less discretionary income to transfer and there are fewer jobs for immigrants especially in the manufacturing and construction sectors in Europe and the US. So, while our money transfer business continues to grow and outperform the industry, we do not expect it to grow as fast in 2009 as we did in 2008.

However, in looking at charts 21 through 22, we do view the current economic situation as an opportunity to gain market share and position ourselves for the next three years. Secular trends continue to indicate strong underlying fundamentals for the money transfer business. So, while the short term trends are not as strong, we continue to believe money transfer is an area the retailers will care about on their 4th Wall for a long time. For this reason as we gain scale of money transfer business, our goal is still to be EBITDA positive exiting 2010.

Moving to EPay, as reflected in chart 23, Coinstar solid $525 million in face value, a 22% year-over-year increase resulted in commissions to Coinstar of approximately $25 million. In the US our 2008 transaction volume increases approximately 22% and we added more than 230 Travel Center of America locations, 850 Hess locations and just one to Stripes, a leading convenience store chain in Texas where we be installing 500 locations in the first quarter of 2009.

In the UK, in 2008 our gift card transaction volume increased 511% versus 2007. We added over 4,000 locations bring total UK EPay locations to over 6,700. We added new retailers like Birthdays, BP and SuperDrive and we added 23 new cards bringing the total to 44 cards and over 80 SKUs in the UK. As we look at the demand side of the business, it’s becoming consistently a top draw for retailers and consumers.

In fact, Coinstar just won top honors at the recent UK Pre-paid Awards. In addition, through our EPay convenience store relationships we are successfully showing that the 4th Wall category management strategy resonates beyond big box retailers. Today, Redbox has agreement with over 30 C store chains including 7-11, Valero, Maverick, ExxonMobil and Cumberland Farms to name a few and we have our premium coffee kiosk in pilot in a number of well known convenience store retailers.

Therefore, while the economy has certainly slowed our growth in EPay in 2008, we saw healthy trends and as we look to 2009 between the UK and the US we expect to continue to add locations, cards and retailers and the face value of cards sold to increase another 10% to 20%.

Turning to entertainment, revenues totaled $150.2 million for fiscal year 2008 which is at the lower end of our original range. The year-over-year decrease reflects the deinstallation of machines during 2008. In addition, much like the overall trend in 2007, the broader economy negatively affected performance.

Finally, with respect to the coffee pilot we continue to be encouraged by the early results. Throughout the year we rolled out 85 coffee units to grocery and convenience store customers. As expected the convenience store format yielded the highest cup count and highest returns. We’ve learned a lot during the pilot and will continue to run this pilot throughout mid 2009 before making a decision relative to a larger scale roll out.

With that, let me turn the call over to Brian.

Brian V. Turner

Coinstar generated $911.9 million in 2008 revenue. We generated EBITDA of $159.9 million for the full year, up 27%. Our GAAP fully diluted fully taxed earnings per share was $0.50 with adjusted fully taxed fully diluted earnings per share of $0.84. For the quarter Coinstar generated $261 million in revenue. We generated EBITDA of $45.5 million and our GAAP fully diluted fully taxed earnings per share was $0.15 with adjusted fully diluted fully taxed earnings per share of $0.23.

Looking at charts 24 and 25 you’ll see a comparison of both full year and quarterly revenues by product line on a pro forma basis. Similarly on charts 26 and 27 is a comparison of both full year and quarterly EBITDA on a pro forma basis. As we’ve stated, due to the fact that a high percentage of direct and indirect costs are shared among business lines, exact EBITDA by product line is only an estimate.

As we look to pro forma full year 2008 EBITDA you will note the decline in Coin entertainment EBITDA. This is primarily due to the planned transition in the entertainment product line where we saw a corresponding revenue decline. The Coin EBITDA margins remain consistent with prior years so more than anything, it’s a mix issue.

With respect to EPay pro forma EBITDA declined primarily as a result of expansion in the UK. As you compare EPay year-over-year, please recall that the third quarter 2007 includes the telco refund of $11.1 million. From a business that was losing money when we made our first acquisition in 2004, EPay has begun to achieve operational leverage and EBITDA margins have now settled in around 30% in the US. We expect the same will happen in the UK after getting through the initial losses that are required to start up the business.

Moving to expenses shown on chart 28, as a percentage of revenues, direct operating expenses for the full year increased to 69.6% of revenues. This is primarily due to the inclusion of Redbox which runs at a higher direct operating cost percentage than our other product lines. General and administrative expenses stayed relatively flat as a percentage of revenues at 10.4% from 10.1% compared to 2007. This is attributable to leverage we are achieving in the DVD product line offset by deleveraging in the entertainment product line.

Depreciation and other for the year totaled $76.7 million versus $58.8 million in 2007. The increase was primarily due to the consolidation of Redbox for 2008, the installation of 3,000 Coin units and 6,700 DVD units over the last four quarters.

Moving to interest expense, during the fourth quarter our average interest rate was 4.5% or LIBOR plus 150. This compares to our expected interest rate for the fourth quarter which was approximately 4% to 4.5%. In this very volatile debit market I am very pleased that our average interest rate was only 4.5% when many borrowers are being hit by much higher borrowing costs.

Within the quarter we continued to see foreign currency gains and losses. Consistent with past quarters depending on the strengthening or weakening of the dollar, we have offsetting currency effects from our UK Coin profits, foreign currency exposure on our daily money transfer transactions and the UK gift card mall losses and the international money transfer losses. For 2008 we recorded a loss of $3.9 million through our income statement resulting from foreign currency transactions.

Moving to taxes, our effective tax rate for the year was 53.4% which was considerably higher than we anticipated at the start of 2008. As we have stated in recent quarters, the greater than expected effective rate was due to the interplay of foreign and domestic profits and losses. The results of the greater than expected rate was a -$0.04 in GAAP EPS. Please remember that this is the book rate and is not indicative of cash taxes paid during the year. Actual cash taxes paid during the year totaled just $3.6 million, significantly less than the $16.2 million recorded for book purposes.

With respect to cap ex for 2008 which is reflected in chart 30, excluding Redbox, the company spent $83.1 million of which the majority was for new Coin units. This was higher than anticipated at the beginning of 2008 due to retailer demand for Coin units. For 2008, Redbox’s cap ex was $100.6 million which was funded by Redbox’s cash flows and some lease financing.

Finally, I would like to discuss our debt. At the end of December, Coinstar had $270 million in revolving debt due in November of 2012. Our leverage ratio at December 31st was just 3 to 1 and we’ve been very judicious over the last several years in keeping our debt modest relative to our EBITDA. This has certainly paid off and with the anticipated closing of today’s Redbox equity piece we believe our balance sheet will be even stronger which I will describe in a moment.

At December 31, 2008, our fully diluted outstanding share count was 28.5 million shares and we estimate that our average fully diluted share count for 2009 will range between 30 and 31 million shares excluding any buyback activity. Before I go to our outlook I would like to give you the particulars of today’s acquisition announcement.

Today Coinstar entered in to an agreement with GetAMovie or GAM and affiliated McDonalds Corporation. Coinstar has agreed to acquire GAM’s 44.4% voting interest in Redbox and GAM’s right, title and interest and $10 promissory note made by Redbox in exchange for a combination of cash and Coinstar common stock. Coinstar will initially pay GAM $10 million in cash and 1.5 million in shares of Coinstar common stock on the closing date which is expected to be February 26, 2009.

In addition, Coinstar will pay deferred compensation to GAM that will be payable in cash and/or shares of Coinstar common stock at Coinstar’s election and subject to the satisfaction of certain conditions. The agreement with GAM also provides that in no event with the shares of Coinstar’s common stock issued to GAM as consideration exceed 5,653,398 shares. At least 50% of the deferred compensation is payable by July 31, 2009 and the remaining portion is payable by October 30, 2009.

The total consideration to be paid to GAM is expected to be between approximately $134 million and $151 million. GAM will be entitled to registration rights under the Securities Act of 1933 as amended with respect to the shares of common stock acquired in connection with the transaction. In addition, Coinstar is expected to purchase the remaining outstanding interest of Redbox from minority interest and non-voting interest holders in Redbox. Consideration will be paid on similar terms as those of the GAM purchase agreement.

The total consideration to be paid in these transactions is expected to be between $21.5 million and $24.9 million. The closing of these transactions are subject to various closing conditions. At this time it is Coinstar’s intent to pay off the sellers note in cash not in stock and we will decide on the prepayment option over the next few months. Including the $37.5 million paid for our original 51% of Redbox this will bring our total investment in the brand to approximately $200 million.

Additionally, for certain key employees we intend to grant a combination of new performance and time based restricted stock options and retention cash payment as part of their compensation packages going forward. Pro forma for the transaction our balance sheet will be stronger. In fact, we expect our leverage ratio to improve from the current 3 to 1 to 2.6 to 1 immediately after this transaction closes.

Concurrent with today’s transaction, we also amended our credit facility. Key terms include pledging the Redbox assets as collateral for the credit facility which allows us to borrow against the combined EBITDA of Coinstar and Redbox. Additionally as shown in chart 31, the bank syndicate increased the capital lease and cap ex baskets. In return, Coinstar paid an amendment fee and bank syndicate plus adjusted the interest rate pricing grid. The amendment along with our forecasted cash flows enables us via available credit facility to pay off the remaining transaction value in cash not in stock should we choose to do so.

Before the next earnings call Coinstar will review the purchase accounting for this transaction. Under the newly amended accounting standard for business combination, all deal costs related to the transaction will be expensed within the first quarter of 2009. In addition, the transaction may give rise to greater intangible assets and the associated amortization of intangible assets. Taking these items in to consideration, Coinstar believes that the transaction will be accretive for 2009.

Now, on to full year guidance which represents an upward revision. Starting with the top line, we’re estimating that Coinstar’s revenue will be between $1.2 and $1.3 billion representing a 30% increase at the midpoint which is reflected in chart 32. This accelerates our revenue growth from what we had previously estimated which was to be at a billion run rate beginning in mid 2009.

The revenue range is based upon certain assumptions including Coin revenues ranging from $265 to $280 million driven by 800 to 1,000 net new Coin units and a same store sales estimate of a -3% to a 3%. We expect Coin EBTIDA margins to remain consistent with 2008 levels. With respect specifically to DVD we are looking to install 6,000 to 8,000 new units in 2009. Along with the existing units, this will produce a revenue range of between $690 million and $750 million with EBITDA margins between 14% and 16%.

Our entertainment revenue range is based upon certain assumptions including stagnant retail traffic in most locations. In this segment we expect revenue of between $130 million and $145 million. Moving to EPay, we expect 2009 revenues inclusive of CMT to be between $115 and $125 million. The economy is affecting money transfer throughout the world and the Latin America corridor is one of the hardest hit.

Fortunately, the business model of money transfer and prepaid card business allows for significantly leverage on the upside as well so when the economy turns we are confident that our market share gains will translate disproportionally to the bottom lines. Therefore, we expect consolidated EBITDA for Coinstar to grow between 15% and 22% in 2009 to between $185 and $195 million. With respect to taxes we anticipate an effective tax rate for 2009 of between 53% and 57%.

Finally, with respect to cap ex for 2009, looking to chart 33 we expect to spend in aggregate $155 million to $165 million. Our 2009 cap ex includes approximately $25 million in new Coin machines, approximately $8 million in new equipment for EPay including CMT and approximately $120 million on new DVD kiosks.

Turning to the first quarter of 2009, based on current trends we expect first quarter of roughly $260 million to $270 million with GAAP earnings per fully taxed fully diluted share in the range of $0.04 to $0.10. In the first quarter several factors will affect GAAP EPS including the implementation of FAS 141R which will require expensing of past capitalized and currently incurred acquisition costs of approximately $2.5 to $3 million. The implementation of FAS 157 and FAS 160 and potentially purchase accounting effects of the acquisition of the remaining equity of Redbox.

In addition, we are making certain investments in the first quarter in the infrastructure of Coinstar especially in the area of IT, HR and business intelligence to better serve our retailers. These investments which total approximately $2 million are primarily in the first half of 2009. We are also further integrating our money transfer acquisitions in the first quarter of 2009. This will include incurring additional expense to optimize headcount, restructure corridors and closing offices to consolidate in lower cost countries. These money transfer moves will increase expenses by approximately $1 million in the first quarter. However, will ultimately create a lower cost structure.

I’ll now turn the call back to Paul for closing remarks.

Paul D. Davis

We are fortunate to have a diverse product portfolio, a diverse customer base, the financial and technological resources to manage large networks for thousands of retail stores and importantly we have a unique business model that allows us to add value to our retailers every day giving us the opportunity to introduce new products and services over time.

As we’ve said before, due to declining foot traffic and softening sales, we’re seeing retailers increasingly op for professionally delivered services in fewer vendors. We believe they prefer to outsource this function to a group that brings in an overall category management strategy to the table. For this reason, smaller one product or one service providers are often times at a disadvantage unable to get credit and unable to invest in technology in our multiple network products.

All-in-all we see 2009 and 2010 as a significant opportunity for Coinstar to gain market share and separate ourselves from the competition. We believe the platform we’ve created is ideal for that. We evolved in to the 4th Wall layer. We are aligned with leading retailers including Wal-Mart, [Tessco], Walgreens, McDonalds, Kroger, [inaudible], SuperValue and many others. We continue to nurture these relationships and establish new ones that we believe are unmatched by our competitors.

If you look at it from the retailers perspective, Coinstar pays for all the cap ex, takes care of all the labor and servicing and bears all the theft risk. We monetize underutilized space and deliver some of the higher profit per square foot anywhere in the store. Low capital costs and high returns in this economy, that value proposition speaks volumes to the retailer. Finally, I’m proud to be accelerating our outlook for revenue and EBITDA.

With that, we’ll open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Kraft – D. A. Davidson & Co.

John Kraft – D. A. Davidson & Co.

The one thing that you did not talk about at all was the lawsuit between you and Universal. Is there anything new there that we could hear about?

Brian V. Turner

There’s really not a lot new at this point. We’ve continued to do the work arounds that we’ve talked about in the past. It hasn’t really been a major disruption at all to our business. So, not much new to really report.

John Kraft – D. A. Davidson & Co.

Is the decision on McDonalds’ part to actually sell to you rather than go with the IPO is it related at all to the lawsuit?

David W. Cole

I think for that you’d have to ask McDonalds.

John Kraft – D. A. Davidson & Co.

Is it fair to at last blame some of the EBITDA reduction in 2009, at least relative to kind of some of your targets due to some of the higher logistical costs that you talked about with handling the Universal DVDs?

David W. Cole

Yes, we talked about that before, there will be greater logistic cost in connection with obtaining Universal titles. So yes, that is part of it.

John Kraft – D. A. Davidson & Co.

As you kind of foresee the potential scenarios of how this may pan out, is it possible that you’ll be sticking with kind of the status quo for several quarters or even years?

Paul D. Davis

What do you mean by status quo?

John Kraft – D. A. Davidson & Co.

Sort of working around the studios and packaging them in your jewel cases yourselves?

David W. Cole

I hope that we successfully resolve this with Universal. You just never know with these things but often civil suits take years and years to resolve and we’ll just have to see.

John Kraft – D. A. Davidson & Co.

Paul, at the very beginning of your comments you mentioned that you’re looking around and reviewing the business lines. Have you taken any thought to potentially making divestitures?

Paul D. Davis

I don’t think I’m there yet John. We’re just doing as you would expect, a deep dive on each one of our verticals and looking at the role it plays in the portfolio. I’ve always believed a business needs to stand on its own two feet but never to the point that we’d make short term decisions because a lot of our businesses when we’re in the investment mode, it takes a while for them to really start turning to profitability. So, we’re taking all that in to consideration. We’re doing the work as we speak.

John Kraft – D. A. Davidson & Co.

Then as far as the Redbox they’ve certainly proved themselves as a great management team. I assume you’re going to be taking a somewhat of a hands off approach. It sounds like you want to let them kind of be and leave their facilities in Illinois alone?

David W. Cole

The team there is one of the best teams we’ve ever seen. We’re very, very proud to be working with them. They’ve had great leadership and the continue to lever year-over-year. We’ve always worked with them, we have our sales organization at the Coinstar side has been the sales agent for the past three years so we’ll continue that relationship. We’ll look as we move down the path together but it’s a great team.

John Kraft – D. A. Davidson & Co.

Just the last question on Redbox, I think you’ve talked in the past about some seasonality, will you just I guess remind me of the seasonal nature? There’s some certain lulls and when good or new releases are released.

Brian V. Turner

I think if you look at chart 10 that we provide you see certain seasonality and what you see there is some peaks in July and then another peak around sort of Thanksgiving to December. What this matches is the release from the studios of the DVDs to DVDs. So, you have your theatrical releases and then you have a time lag and then they hit DVDs. So, where you see those blockbusters coming out where again the studios tend to group them in two groups. You will see that sort of June/July and then the November/December type grouping.

John Kraft – D. A. Davidson & Co.

Just one more for you Brian, as far as the tax rate, as you look out in the longer term and work through I guess some of these international losses, do you see it moving to sort of more normal ranges that you’ve had soon?

Brian V. Turner

Absolutely. I think if you were to normalize this all out we’d be somewhere in the 38% to 40% range. Eventually we’ll get back there. Book taxes are always interesting. I worry frankly more about the cash taxes we’re paying. So, at the end of the day of course we want to pay our fair share but minimize our cash taxes.

Operator

Your next question comes from Bob Evans – Craig-Hallum Capital Group.

Bob Evans – Craig-Hallum Capital Group

First, a few questions the $2.5 to $3 million that you had mentioned Brian on the 141R charge, is that part of the guidance that you gave?

Brian V. Turner

Yes. We gave GAAP EPS guidance that includes this $2.5 to $3 million.

Bob Evans – Craig-Hallum Capital Group

And the EBITDA guidance includes that as well?

Brian V. Turner

Yes.

Bob Evans – Craig-Hallum Capital Group

If you were to quantify kind of investments and accounting charges, how much – I’m just trying to get a sense of kind of non-recurring if you will items that are part of that EBITDA guidance.

Brian V. Turner

There’s several things, the $2.5 to $3 million which is both the current Redbox thing that we intend to finish and then past ones. So, we had a couple of things that were in process which under the new accounting standards you can no longer capitalize they have to be expensed. So, there’s a little cumulative one there. So, first the $2.5 to $3.

If you look at the first half of the year, the $2 million that we’re investing in infrastructure such as IT, HR, business intelligence, those are things that as Paul has come on he’s identified some things that he would like or as we’ve talked to our retailers there’s things we’d do there. We’ve just decided to invest in those in the first half of the year so I look at those as really non-recurring.

Then lastly, money transfers Paul talked about in his part and then I talked about it in my part. We’re going to spend about $1 million optimizing our money transfer headquarters. Such things as moving from London and Los Angeles which are very high cost places to do business more to Mumbai, Guadalajara lower cost. We pay costs now so that we can get the lower cost structure for the long term. That will add almost $1 million primarily to Q1. So, you total all that up and just in Q1, there’s easily $3.5 to $4.5 million of non-recurring charges.

Bob Evans – Craig-Hallum Capital Group

And the money transfer doesn’t really hit Q2 to any large extent?

Brian V. Turner

Of the $1 million it all depends on timing. Sometimes you take your best guess but I would say the majority of that million is going to hit in Q1. Some of it will hit in Q2.

Bob Evans – Craig-Hallum Capital Group

Can you give us any sense of potential cost savings from the money transfer and IT infrastructure investments?

Brian V. Turner

If I look at money transfer it will easily save that amount plus 50% to 60% per year each year as we go along. A lot of those benefits you won’t see till ’10 or ’11. But, it something as we look at the long term, it’s worth investing now for the long term.

Bob Evans – Craig-Hallum Capital Group

As it relates to Redbox and the service infrastructure is there any opportunities to integrate what you have existing with Coinstar and Redbox?

David W. Cole

That’s a good question. We often times are asked that and I don’t think so. We would explore that but it’s not on our radar screen right now. It’s not an obvious opportunity because what’s required inside the stores, the service frequency are quite a bit different so it’s not there right yet.

Bob Evans – Craig-Hallum Capital Group

Could you give us a little more insight given the magnitude of your revenue increase ’09 versus ’08 given your EBITDA increase, the percentages are certainly down in terms of EBITDA margin percent ’09 versus ’08? Give us a sense of how much of that is conservatism on your part versus something that maybe I’m not fully seeing?

Brian V. Turner

No, we always try to guide to where we think we’ll end up. We don’t intentionally try to be overly conservative or overly optimistic. With that, I think you know we had talked about before if we install 4,000 to 6,000 Redbox units where we would. Clearly, the market demand is much greater than that and so we upped our guidance to 6,000 to 8,000. That puts quite a bit of pressure in EBITDA.

So, you’re seeing that reflected in the EBITDA growth rate. With that said, in this economy seeing 15% to 22% EBITDA growth, boy I think we’re happy with that in this economy.

Bob Evans – Craig-Hallum Capital Group

Is it fair to say given more scale and maturity of the machines that 20% EBITDA target that we’ve seen in the past can occur again in the future?

Brian V. Turner

Sure. As you look at things like that you saw that peak through in Q1 and Q2 of ’08 because there were lower install quarters in Q4 of ’07. Then, as we started to install aggressively again in the mid part of the year the EBITDA margins came down because it’s a blended. If you look to next year, let’s say we put out the midpoint between 6,000 and 8,000, say 7,000 units, we’ve got 13,000 out between Redbox and DVDXpress, now that’s another 60% on top of what we’ve got. That’s quite a bit of immature machines affecting your EBITDA margin.

Bob Evans – Craig-Hallum Capital Group

I’m wondering from a business model standpoint basically you’re saying the business model that’s been there from a margin standpoint remains intact, it’s just a function of you’ve got more and more immature machines out there.

Brian V. Turner

Absolutely. We believe the business model for Redbox, Coin and our other businesses are as vibrant as ever.

Bob Evans – Craig-Hallum Capital Group

Finally, depreciation and amortization, I know you’ve got a lot of data out there and maybe I missed it, what should we look at for ’09 as an all in kind of range for D&A?

Brian V. Turner

That’s a good question. Do you have another question while I look that one up? Let me look that up as we go to the next question.

Operator

Your next question comes from Steven Rees – JP Morgan.

Steven Rees – JP Morgan

Just given the counter cyclical nature of the DVD business can you just comment on how the same unit trends trended throughout maybe the second half of this year when it seems like retail foot traffic decelerated throughout the year? Just comment on that please.

Paul D. Davis

I think I’m going to ask Gregg Kaplan who’s on the phone with us. Gregg’s the CEO of Redbox. Gregg do you want to answer?

Gregg Kaplan

Over the course of the year we generally saw same store sales remain relatively constant in this sort of 50% range, sometimes a little bit higher, sometimes a little bit lower. That’s often affected by installations as Brian was talking about before as we install a lot of machines and machines are sort of becoming their 13th month, that has impact. But, we’re seeing pretty consistent same store sales growth in that 50% range.

Steven Rees – JP Morgan

Then just on the decision to increase the installs to 6,000 to 8,000, can you just sort of talk about what’s driving that? Are there any major new retailers that you’re going with or is it just more of working with your existing partners?

David W. Cole

When we’ve gone out there and looked at the pull in the marketplace there’s a pretty significant demand so upping it from kind of a run rate of 6,000 up to 8,000 the number could have actually been a lot bigger than that but just in terms of trying to balance it out and how much capital we can afford to spend and trying to have good predictable returns we opted for the 8,000 target but candidly it could have been a much bigger number.

Steven Rees – JP Morgan

Then as I just think about the overall DVD base of about 14,000, how much overlap is there today with your other product suites? I mean, how many of those 14,000 are co-located with a Coin machine or something else?

Brian V. Turner

We’re seeing more and more overlap and so if you look at – the exact number I don’t have right at my fingertip but I would say the majority have some overlap. Now, as you see from our recent announcement, we’re going in to new channels. So, as Redbox goes in to let’s say the [commune] store channels we won’t have quite as much overlap. So, that number is going to jump up and down but we see that as an opportunity. That will actually open up more cross sell opportunity for our other product lines.

The desire is to have the majority of the locations overlap between Redbox and some other product line or vice versa, some other product line and Redbox.

David W. Cole

Where the Coin line is deepest in its penetration, the super market channel, that’s also the case where our deepest penetration is with DVD. Brian is right, as we’re broadening the footprint and going in to convenience stores you’ll start to see more diversity there.

Steven Rees – JP Morgan

As I think about the Coin deceleration in same store sales, is there anything in particular with regards to the type of retailer or geography that you saw change in the fourth quarter? Or, is perhaps the cannibalization impact rising or higher than you originally thought?

David W. Cole

Cannibalization is always going to be a small percentage of the issue. Really, the major issue to point to is the economy and what’s happening with kind of foot traffic and that direct correlation with consumer confidence index. What’s good here is as we’ve expanded, especially we’ve talked about Wal-Mart expansion and in the mass merchant channel and their superstores over the last year and in to this year, that’s where a lot of the traffic is moving to.

So, in particular where you get in to high penetration where there’s really tight overlap you might start seeing the same store sales dip a bit but mostly it’s foot traffic as a result of the economy.

Paul D. Davis

One of the things we saw is the Fed just realized what the saw for coin shift by the Fed. Now, this is not total in circulation, it’s dropping less but just new coin shipped dropped 28% in 2008. That just came out from the US Mint. That’s a reflection of the economy. Now, certainly the overall that’s in the economy dropped much more minor than that. But, we’re seeing coin in the overall economy as well as just general purchases in the overall economy, they’re down. Last we saw somewhere between 6% and 8% so that certainly affects the coin people are generating.

Steven Rees – JP Morgan

At this point would you expect that same store sales trend to decelerate further or will a lower install plan help that?

Paul D. Davis

We always said the piece of that would be Q1 ’09. Now, we don’t know exactly. It’s the interplay of the economy to the installs. But, as we looked at the installs we put in last year, as they’re moving up the ramp curve, as they lap 12 months and one day our theory has always been and this has been consistent for about five quarters, that the peak would be a Q1 2009 of that affect and then it starts to trend the other way. Now, we’ll have to see where the economy goes and let’s all hope the economy gets better.

David W. Cole

We’ve modeled that out and I think the range we’ve talked about is in safe grounds just given the kind of new machine ramp and the sort of historical predictive levels.

Brian V. Turner

Before we go to the next question Bob, back to your question, D&A for 2008 was roughly $86 million. As we look to ’09 we see it landing somewhere between $110 million and $115 million. Hopefully that answers your question.

Operator

Your next question comes from Nate Brochmann – William Blair & Company.

Nate Brochmann – William Blair & Company

I wanted to talk a little bit about where we stand with Wal-Mart? I know that’s largely over in terms of the installs and deinstalls and how you see some of the initial performance there and maybe what’s left in that area?

David W. Cole

We will have completed Coin in to this year that we’re just through.

Brian V. Turner

In Coin we still have about 400 more to go and we expect those to finish by Q1 and so that’s on track. Then Redbox, I don’t have quite the number in front of me but we have more to go on Redbox but we expect to finish those in ’09 right on schedule. So, everything is right on schedule for Wal-Mart. As we look at the ramp curves for Wal-Mart they’re doing as we expected which is good in the current economics. We’re actually quite pleased with both the timing of the roll out and how the ramps are.

Nate Brochmann – William Blair & Company

Paul, this is another strategy question but given where we are in the economy and given kind of digesting the opportunity with Redbox this year, how do you think about the kind of foreign strategy with each of the different units maybe today and also three years down the road?

Paul D. Davis

You’re asking by line of business the expansion outside of sort of domestic?

Nate Brochmann – William Blair & Company

Correct.

Paul D. Davis

I think for sure there’s a big opportunity in Coin. We have been just so busy on executing primarily in the UK and the US. We did expand in to Canada and in to Ireland and those expansions have gone very well. The teams, they have done a deep dive and have a great understanding of what would be some likely next countries if we were to do that. It gets down to capital allocations and just priorities. So, within the next three years I suspect you’ll see us start to expand broader than where we are today.

We are expanding as you know with our EPay business. What we did a year and a half ago and started in the UK, gift card mall and based on early results, I mean you saw were up 500% on that business versus a year ago and we had the first mover advantage there so that’s proven to be very beneficial. If I were to project forward and say could you take the success of what we’re doing in the UK and expand that across the continent the answer is absolutely.

But, we’re going to be really prudent and diligent on that roll out to make sure that this is something that’s really got legs. Early results we’re getting great top line and we have a good line of sight on what it’s going to take on a transaction basis to make that EBITDA positive. Money transfer speaks for itself, that is the business it’s in. Relative to DVD, Gregg if I don’t get this right chime in, but we have so much opportunity right in our own backyard in the states that that’s really where we’re focused right now. I know that Gregg and his team they’ve scoped out kind of rest of the world and there are some big opportunities but it just gets down to pace.

Gregg Kaplan

I would agree with that. We get what feels like weekly invitations to try and take this to other countries which we investigate but we’ve continued to say that our best opportunity is to just continue going after the US and stay focused there. But, we’ll continue to look at the international opportunities which may be very promising.

Nate Brochmann – William Blair & Company

Kind of in conjunction with that, not to give away any competitive type of information but how do you allocate as you decide the number of installs you’d like to target for say ’09 and I’m sure that there’s a lot of convenience stores and a lot of other chains that I know there’s a lot of demand for the DVD product, how do you kind of allocate where those go and prioritize that?

Paul D. Davis

This gets in to the overall allocation strategy. So, we’ve always said we never want to put all our eggs in one basket and so we try to run a diversified portfolio of ideas. If you look at just the top level allocation and you can see this in our cap ex for next year we’ve got some investment in Coin, investment in DVD but investment in other lines of business as well as new product ideas. We’ve always got a couple of things back in the lab.

That goes to any individual product line. For Coin for example, we’re going in to banks, we’re going in to more grocery, we’re going in to mass merchants. For Redbox, we want to run a diversified strategy of grocery, mass merchant, QSR or quick service restaurants and convenience stores. So, as we look at this certainly we’re looking at the ramp curves of individual units within a channel but we’re also trying to run a portfolio approach so we don’t have all our eggs in one basket.

Operator

Your next question comes from Bob Evans – Craig-Hallum Capital Group.

Bob Evans – Craig-Hallum Capital Group

First just to clarify on the D&A you had give, the $110 to $115 does that include amortization of intangibles?

Brian V. Turner

Yes. By the way that includes amortization of intangibles that we know of. We still have to do the work around Redbox and we won’t know the final answer to that over the next conference call.

Bob Evans – Craig-Hallum Capital Group

So it could be a bit higher then?

Brian V. Turner

It will be I just don’t know exactly.

Bob Evans – Craig-Hallum Capital Group

Then I think Redbox same store sales I think you said 52% for the year. Do you happen to have Q4 same store sales?

Gregg Kaplan

I’m doing a little bit of calculation here, I can get you an approximate number in the mid 60s.

Bob Evans – Craig-Hallum Capital Group

I know you broke out revenue by segment for ’09, I don’t know if I see EBITDA by segment. I’m just wondering if money transfer if can give us some general idea in terms of how you view money transfer from an EBITDA standpoint in ’09.

Brian V. Turner

I think it’s very consistent with what we’ve been saying in the past. We do expect money transfer to be EBITDA negative for ’09. We expect it to exit 010 being EBITDA positive so our goals have not changed there. I don’t have the exact percentage in front of me but if we look at dollars somewhere between $4 and $9 million of EBITDA losses for next year. I think that will largely depend on the money transfer flow and there are quite a bit of opinions about this.

Listening to the Western Union conference call, listening to the World Bank, seeing our own growth is going against the industry. The industry is struggling more, we are growing there. I’m giving you a wide range because it is not exactly clearly what immigration patterns will be for all of ’09.

Bob Evans – Craig-Hallum Capital Group

By the end of ’09 do you think you’re closer to breakeven on money transfer on a quarterly basis?

Brian V. Turner

I’d like to say yes but this one I am going to be conservative because you asked that earlier in the call. We’re looking at the construction industry and the manufacturing industries in Europe and United States, we’re not seeing a lot of strength there. That is what employees a lot of first generation legal immigrants so with the weakness there it is going to slow our progression with money transfer so no, I don’t think we’ll be at breakeven exiting ’09. I think it just pushes it off a year to 010.

Bob Evans – Craig-Hallum Capital Group

Final question and maybe it’s more appropriate for Gregg, Blu-ray and Redbox, I know you’re doing some testing there. Can you give us a sense of how that’s going and is there a potential for a potential higher price?

Gregg Kaplan

Sure. We are testing Blu-ray and so far have good results. Clearly there’s Blu-ray adoption is still in its early stages so we continue to test and we expect Blu-ray results to continue to get better. In terms of pricing we will test at different price levels with Blu-ray and haven’t made a decision yet as to ultimately what the price will be. We need to see what the results come out at.

Operator

At this time there are no further question in the queue.

David W. Cole

Thank you everyone. We do appreciate everyone’s support and attendance. We look forward to the next call. Please call us if you have any questions. Thank you.

Operator

Ladies and gentlemen this concludes the Coinstar, Inc. fourth quarter 2008 earnings conference call. This conference will be available for replay. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 3965612. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!