Cardtronics, Inc. Q4 2008 Earnings Call Transcript

Feb.24.09 | About: Cardtronics, Inc. (CATM)

Cardtronics, Inc. (NASDAQ:CATM)

Q4 2008 Earnings Call

February 24, 2009 8:30 am ET


Melissa Schultz – IR

Chris Brewster – CFO

Mike Clinard – President Global Services

Rick Updyke – President of Global Development


Chris Mammone – Deutsche Bank

Rob Napoli – Piper Jaffray

Reggie Smith – JP Morgan


At this time I would like to welcome everyone to the Cardtronics fourth quarter 2008 earnings conference call. (Operator instructions) I would now like to turn the call over to Melissa Schultz of Cardtronics. Ms. Schulz, you may begin.

Melissa Schultz

Good morning everyone and welcome to the Cardtronics fourth quarter conference call. Participating on the call today are Mike Clinard, our President of Global Services, Rick Updyke, our President of Global Development, and Chris Brewster our Chief Financial Officer. Jack Antonini, our Chief Executive Officer has been attending to a death in his family during the past week and will not be participating in the prepared remarks portion of today’s call.

First, Mike and Chris will start today’s call off by discussing this quarter’s financial and operational results as well as the company’s current business outlook. Chris will then provide a more in depth review of our financial results and an overview of our expectations for 2009. Prepared remarks are scheduled to run for about 25 minutes at which point we’ll open the call up for any questions that the listeners may have.

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

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

Now I would like to turn the call over to Mike Clinard, our President of Global Services.

Mike Clinard

Thanks Melissa, for the fourth quarter of 2008 our adjusted EBITDA totaled $19.3 million which represents an increase of 6% over the fourth quarter of 2007. Excluding the impact of foreign currency exchange rate movements during the quarter the year over year change was 8.5%. As we noted in our press release this increase was attributable to our domestic operations as well as international growth.

For the full year 2008 our adjusted EBITDA totaled $83 million representing a 36% increase over the roughly $61 million earned in 2007. This amount was right in line with the guidance that we provided during our third quarter conference call. The year over year increase is mostly attributable to our acquisition of the ATM business of 7-Eleven in July, 2007 as the results of these operations were included in our consolidated results for the full year of 2008.

As noted in our press release we also recorded a noncash goodwill impairment charge of $50 million related to our UK operation. As we have been communicating throughout 2008 we have encountered a number of unique challenges with that portion of our business. Those challenges coupled with the significant decline in our stock price during the fourth quarter and a continued deterioration in the economic climate in the UK contributed to the charge.

Its important to point out however that the charge is noncash and had no impact on our debt covenants or cash position. As usual Chris Brewster, our CFO, will discuss our financial results in more detail later in the call along with our expectations for 2009.

As we discussed during our last quarterly conference call the management team here at Cardtronics continues to remain focused on ensuring that the company is positioned to weather the current global economic downturn. We have taken the view that the difficult operating environment we all find ourselves in will continue for the foreseeable future and we’ve taken steps to ensure that the company will not only survive this downturn but emerge from it stronger, and more diversified.

Rick Updyke, our President of Global Development will now provide some additional information on our current business outlook.

Rick Updyke

Thanks Mike, in our last call we communicated the reasons why we believe Cardtronics is well positioned to handle the challenges posed by the current economic downturn. They included, one the stable and recurring nature of our earnings model and free cash flow generation capabilities. Two, our extremely strong liquidity position, and three, our proven ability to diversify revenue beyond the traditional ATM surcharging model over the past few years.

Since these points continue to be relevant I’d like to briefly revisit each of them again. First, the significant capital investments we’ve made over the past few years have resulted in an operating platform that should continue to generate relatively stable earnings and consistent cash flows for us even in light of the current economic downturn.

While this premise certainly hasn’t been stress tested over a significant period of time all current indications point to the fact that ATM transaction volumes within our portfolio are holding up quite well. In fact, we continue to see stronger then expected transaction results from our domestic business during the most recent quarter essentially continuing the trend we saw all year.

Because of the recurring nature of our revenues and the fact that we’ve significantly reduced our planned capital expenditure budget from $60 million in 2008 to $20 million to $25 million in 2009 we expect to be able to generate roughly $20 million in free cash flow during 2009. Some of those funds will be utilized in connection with the $10 million share repurchase that we announced earlier this morning and the remaining funds in the short-term will be used to pay down a portion of our outstanding revolver.

Second from a liquidity standpoint we continue to remain in excellent shape. Our $75 million credit facility which is in place until May of 2012 has roughly $52 million outstanding including letters of credit leaving us with over $120 million in available committed funding. From a covenant standpoint we are in compliance with all covenants and would continue to be even if we substantially increased our borrowings or substantially reduced earnings.

Our remaining indebtedness absent roughly $7 million in capital leases and equipment loans consist of $300 million in senior subordinated notes. These fixed rate notes which mature in August of 2013, contained very limited incurrence covenants, require no amortization, and only require semiannual interest payments prior to their maturity.

So based on what I’ve just outlined I think its clear that we have ample liquidity. This is critical for us in that it gives us extra cushion in the event the economy continues to worsen or the current downturn lasts for a prolonged period of time. However its equally critical in that it gives us the flexibility to take advantage of any potential expansion opportunities that may arise.

Clearly the return hurdle required for a deal in this kind of market would have to be substantial to warrant the heightened economic and performance risk. However its good to know that we do have the dry powder to capitalize on those opportunities if and when they present themselves.

Thirdly the diversification of our product and service offerings beyond the traditional ATM surcharging model has positioned us to take advantage of certain growth opportunities that don’t require significant amounts of new capital. Examples include our in house transaction processing platform, our advanced functionality offerings such as remote deposit capture, and our surcharge free network we provide through [Altboy].

Internationally the recent launch of our internal UK cash in transit operation now gives us a full suite of managed services that we can offer to financial institutions in that market. These offerings include installation services, ATM transaction processing, monitoring, maintenance, and cash management.

We believe there are opportunities to expand our business in the UK in this regard and have recently hired a senior sales executive with significant experience marketing to UK banks to oversee the launch of such an offering. In addition to the investments we’ve already made we are also actively evaluating how to leverage our core competencies in adjacent self services businesses, developing remote deposit capture solutions beyond our current capabilities and continuing to explore a number of international growth opportunities primarily in Eastern Europe, Asia Pacific, and the Caribbean regions.

The important point here is that despite the current economic conditions we are still actively working on the development of potential new growth initiatives. Finally while we are optimistic about these potential growth opportunities, I can tell you that we haven’t specifically factored them into our financial guidance for 2009. Given the overall uncertainty in the market we felt it was prudent to take a conservative view as to how 2009 will play out.

In fact we’re hopeful that we’ve also taken a conservative view as to our legacy ATM operations including anticipated transaction levels as well as new bank and network branding opportunities. There is no doubt that we are operating in a very difficult market right now. However we think Cardtronics is extreme well positioned to not only ride out this storm but to emerge from it stronger and even more diversified by leveraging investments we’ve already made, controlling our costs, and maintaining our high level of customer service, we should continue to generate consistent cash flows that will allow us to strengthen our balance sheet and take advantage of future growth opportunities.

At this point I’ll turn the call back over to Mike who will provide you with some additional details on our operating results and what we are doing to address the current economic challenges.

Mike Clinard

Thanks Rick, as we noted in the press release during the fourth quarter of 2008 a number of our key operating metrics continued to demonstrate improvements over the prior year figures. You can find these statistics on the key operating metrics page of the press release. Specifically we continue to show an increase in the average number of transacting machines and overall transaction levels during the fourth quarter of 2008 when compared to the same period in 2007.

However we did see a slight decline in operating revenues and profits per ATM per month during the most recent quarter, the majority of which was related to our UK operation. In terms of operating revenues per ATM, lower FX rates during the fourth quarter of 2008 contributed to the year over year decline. In terms of per ATM operating margins the decline was primarily driven by what appears to be a shift in the mix of withdrawal transactions in our UK estate from surcharging or what we call pay to use transactions to non surcharging or what we call free to use transactions.

Free to use transactions are those on which we receive interchange only. While total ATM transactions in the UK were in line with our expectations we’ve seen fewer pay to use transactions per month per ATM in that market and greater then expected free to use transactions per ATM per month. The result of this has been lower operating margins. Also some of our contracts in the UK contain fixed or semi variable merchant fees resulting in further margin compression.

One of our key operating initiatives in the UK and also in the US and Mexico is a rationalization and/or renegotiation of underperforming sites. We are currently working to either restructure certain merchant contracts or de-install underperforming sites in all of our key markets. In the UK we are actively working with our existing customers to renegotiate the terms of our existing contracts to allow more flexibility in how those merchant fees are calculated.

In fact we’ve already successfully renegotiated one of our largest contracts in the UK which should provide substantial savings during this year. Additionally we are continuing to look for ways to reduce our operating costs without compromising the quality of our service. Along those lines we’ve recently distributed an RFP to a number of our existing maintenance providers with the goal of having them bid aggressively for a significant portion of our domestic maintenance business.

For many of these providers the prospect of capturing a much larger portion of our business dramatically changes the competitive landscape in their industry so we’re hopeful that this process will yield significant cost savings opportunities down the road for us. Finally we’re continuing to make very good progress on our key operational initiatives including our in house processing conversion efforts and the conversion of our ATMs in the UK to our own internal armored cash in transit operation.

As of today we are now processing transactions for over 27,000 of our ATMs including all of our ATMS in the UK. Our Mexico ATMs will be converted to our in house processing platform by the second quarter of this year. Regarding the conversion of our internal cash in transit operation in the UK we have converted over 250 ATMs and are on track to have nearly 1,000 locations converted by the end of the summer. While we don’t anticipate any cost savings in 2009 from our cash in transit operation we do expect to see improved ATM operating up times and more efficient cash usage which should lead to improved operating performance over time.

In conclusion I think its save to say that operationally we are focused on doing everything we can to keep our costs in line and making sure that we are laying the foundation for future profitable growth.

I’d like to now the call over to Chris Brewster, our CFO, who will provide some additional details on our financial results for the quarter and our expectations for 2009.

Chris Brewster

Thank you very much Mike, first I’d like to talk about our historical results a bit and then spend some time talking about 2009 expectations. Our consolidated revenues in the fourth quarter of 2008 were $118 million. As reported they were up 2% from the $115 million reported in the fourth quarter of 2007. However as is the case for most multi national companies these days, our fourth quarter results were negatively impacted by the strengthening US dollar.

This was especially true for our UK operating results where the average exchange rate during the fourth quarter of 2008 was 23% lower then it was in the fourth quarter of 2007. If you exclude the impact of unfavorable exchange rate movements, the year over year revenue growth was 7% and all of that was organic growth in this quarter.

Now if you compare this quarter’s organic growth rate to the last couple of quarters you’ll see that this quarter’s rate of growth is about the same as the 7.5% that we achieved in the third quarter of 2008 and down slightly from the 10% that we achieved in the second quarter of 2008. This decline can be attributed in part to the slowdown we have seen here in the States relative to signings of new bank branding deals and to the transaction mix shift issue in the UK that Mike just discussed and we can speculate as to why our surcharge transaction trends has been a little weaker then we might like, possible causes include new surcharge signing requirements there, the ban on smoking in pubs, additional free to use ATMs deployed by the banks, and the generally weak economy as well as the reliability problems we had with one of our third party armored car service providers in 2008.

As we cycle on these issues in 2009 we are hopeful to see these trends improve although frankly we have not included such an improvement in our guidance, rather as Mike said we are focused on controlling our costs, optimizing the location of our fleets, and renegotiating merchant contracts where necessary in order to achieve the best possible results we can whatever the environment may bring to us.

In terms of margins our overall gross margin percentage for the quarter was 23.8%, which is up from 22% during the fourth quarter of 2007. The improved margin percent is primarily due to higher margins earned on our US machines from the effect of historical branding arrangements put in place and better year over year results from the advanced functionality portion of the 7-Eleven portfolio.

These benefits were partially offset by lower margins in the UK. So our adjusted EBITDA totaled $19.3 million for the most recent quarter and $83 million for the year both of which were in line with the revised guidance that we put out on our last conference call. Finally as we said earlier we did record a noncash goodwill impairment charge totaling $50 million relative to the goodwill on the books relative to our UK operation during the quarter.

For the non accountants on the phone, let me give you a little basic background on what drives impairments. It used to be that goodwill was written off over time through charges to the P&L. A few years ago those accounting rules were changed such that goodwill is no longer amortized period after period through the P&L but companies are required to assess the carrying value of their goodwill at least annually and write that value down if the conditions would so indicate.

The goodwill impairment testing process analyzes each business segment that has goodwill involved with it and it involves a comparison of the total book value of all of that business segment’s assets to the fair value of the business segment taken as a whole. Now fair value can be a somewhat murky term but is generally assessed by looking at a discounted cash flow model of the expected future cash flows of the business segment and when you think about such a model the key variables in it are the discount rate that you use to discount those cash flows, the valuation multiple that you apply to the terminal value of the business and the projected future operating results. If that model says that your segment is worth less then the carrying value that you have for it on your books, the result generally would be a goodwill impairment.

So let’s look at each of those variables in that equation in brief, according to the valuation theoreticians, discount rates would logically be higher now because financial markets are so volatile and the use of higher discount rates in DCF calculation will result in a lower valuation. With regard to valuation multiples the rules do not specifically say that you have to use current trading multiples and I or others may not think that current trading multiples are truly representative of the long-term value of our business but valuation professionals and external auditors tend to view current market multiples as a form of safe harbor so that’s what we’ve used in our calculations.

At year end 2007 Cardtronics stock was trading about 8x EBITDA and at year end 2008 we were trading at about 4.7x EBITDA and that change in valuation multiple significantly impacts the calculated value of our UK business in the DCF model an its really this factor that is the primary driver behind the impairment or in other words if our stock was trading at year end 2008 at levels similar to where it was at year end 2007 its unlikely that we would have had to have taken an impairment charge.

I think its important to reiterate once again that the impairment charge had no impact on our cash position. It has no impact on our debt covenants and finally despite the fact that we’ve taken this write-down we still believe that we have a very solid business in the UK market especially when compared to our competitors there and we fully expect to see future long-term earnings growth there to substantiate the investments that we’ve made in that business.

Domestically our results were somewhat better then we had initially expected during the fourth quarter with transaction volumes showing a fair bit of resiliency in spite of the current economic climate. We are cautiously optimistic that this trend will continue but realize that we may be to some extent in unchartered territory here with the respect to the severity of this particular downturn.

To be a little bit specific domestic same store revenues were essentially flat year over year in the fourth quarter and they were up low single-digits in the month of January. Its worth pointing out as we talked about in our last call we continue to see a reduced level of new contract signings in our bank branding business. We attribute this primarily to the fact that the senior management teams at many banks are quite distracted at this time by a host of issues and decision making on new initiatives has slowed somewhat.

We believe that there is recognition in the banking community that retail deposits are a critical and stable source of funding, that branding with Cardtronics is a cost effective way to achieve better retail distribution, and that branding with Cardtronics is certainly dramatically less expensive then building new bank branches. We are in active discussions with a number of banks, we have an active pipeline, and we’re hopeful that we’ll have something to report to you on that front later during the first half.

Turning briefly to the balance sheet, debt at year end stood at $347 million consisting of $297 million of senior subordinated notes net of the discount, $44 million of senior debt outstanding under our bank revolver, $6 million of debt under equipment financing lines down in Mexico and $1 million of capital leases.

Given the anticipated reduction of our capital spending in 2009 we expect to generate enough free cash flow during the year that we can pay down some of those outstanding borrowings under the revolver while still funding the $10 million share repurchase program that was just authorized by our Board and announced this morning.

Speaking of the share repurchase program, we issued a separate press release this morning on that with additional details. In brief, I will tell you that management and the Board believe that using up to $10 million in internally generated funds to repurchase our shares in the open market is a prudent use of capital in today’s market especially given the current share price and the how we feel about the company’s long-term growth prospects.

This action will hopefully be seen as a reflection of our belief in the long-term value of the company and our continued commitment to increase shareholder value. In terms of our liquidity I’ll just simply reiterate what Mike said earlier and what we put in our press release, we have ample liquidity and financial flexibility, we have no near-term debt maturities, we have limited exposure to floating interest rates, and no need to go into these very unfriendly financing markets at this point to raise financing.

And in this kind of market I’d say that’s probably a pretty enviable position to be in. Turning now to guidance for 2009, as we said in the press release we’re currently estimating the following, total revenues in the range of $460 to $470 million, gross margins in the range of 24% to 24.5%, adjusted EBITDA in the range of $75 to $80 million, depreciation and accretion expense of $37 to $38 million, cash interest of $30 to $31 million, and adjusted net income of $0.12 to $0.22 per diluted share and that’s based on a share count of approximately 39 million shares.

The backdrop to this guidance that I would give you is that our primary goal for 2009 is to generate significant free cash flow. We spent $60 million on capital expenditures in 2008, we expect to spend around $25 million in 2009 on internal development and growth projects. We are going to run the business fairly conservatively in this time of financial uncertainty, keep our powder dry to take advantage of the kinds of opportunities that almost always become available in difficult times to those that have the liquidity to take advantage of them.

Now I’m going to give you a very short form explanation of guidance and then go into more detail by business segment. The short form explanation goes like this, absent any currency changes and given the environment that we’re operating in, our guidance probably would have been for roughly a flat earnings year versus 2008, perhaps $80 to $85 million in EBITDA in 2009 versus the $83 million that we reported for 2008 with slightly lower revenues and slightly higher margins primarily due to an improving margin situation in the UK.

However current exchange rates for the UK pound and the Mexican Peso are about 25% below the average rates for last year and we are assuming that they stay at current levels throughout 2009 and when you do the math you’ll realize that that alone is projected to cost us about $25 million in dollar reported revenue and $4 to $5 million in dollar reported EBITDA in 2009 thus our guidance is not the $80 to $85 million in EBITDA that it might have been once you take into effect the currency changes, it becomes $75 to $80 million of EBITDA.

Now to give a little more detail by business segment in terms of our plans, in the US we’re expecting around 9% machine count growth in our company owned business primarily with growth of existing customers partially offset by about 5% shrinkage in our merchant owned business. Now the latter may prove to be conservative at the end of the day but frankly we’re not sure what the effect of this economic downturn will be on the mom and pop merchants that make up our merchant owned population in large measure.

So in the aggregate when you take the two components together we’re budgeting machine count up about 4% over the course of the year but this growth will be somewhat backend loaded so in terms of average machine count we expect to be up a little over 1% in the United States. With regard to average revenue per machine we plan for about a 5% decline in the United States frankly just based on general economic conditions. Trends were somewhat better then that in the fourth quarter and they were better then that in January but nonetheless we planned that way to be conservative.

We expect US margins in 2009 to be consistent with 2008 levels. In the UK by background we grew our machine count very rapidly in 2007 and 2008 and in fact almost doubled the size of the business in that two year timeframe. Partly because of our desire to generate free cash flow and partly to provide better focus on dealing with margin issues, we decided to cut back on our growth somewhat in the UK in 2009. We do plan to install about 350 new locations but will move about 200 of what we believe to be our worst performing machines to new locations to optimize their performance so our net machine growth is planned to be the difference or about 150 machines or about 6% growth on the portfolio.

Much of that is being achieved through that installation of our new contract with Welcome Break that we announced a couple of months ago and that implementation is already well under way. With regard to average revenues per machine in the UK if we reported in Sterling, we’d be talking about a mid single-digit increase in average revenues per machine but as I said the dollar has appreciated 25% against the pound, we averaged about $1.85 per pound in 2008, we’re planning for $1.40 per pound in 2009. Consequently when reported in dollars that 5% increase in Sterling revenues per machine becomes a 20% decrease in dollar revenues per machine when you report it in dollars and that in fact is how we planned.

We expect percentage gross margins in the UK to be significantly better then they were in 2008 as the armored car situation there normalizes and our younger machines ramp up their volumes. We are also getting some help in that market from lower vault cash costs that arise from lower market interest rates. In Mexico we expect to add about 400 machines or about 20% to our 2,000 machine base in Mexico. Similarly to what we’re doing in our other markets this actually involves about 525 new locations but we expect to move the lowest performing 125 machines to new locations resulting in net additions of about 400.

We have seen that some of our most successful locations have been in resort areas and will continue to focus on these areas as well as on growth with our key merchant customers, the major chain merchants in that market. We expect average revenues per machine to be up somewhat in Mexico even in US dollar terms because we do expect a fairly significant increase in Peso terms in average revenues per machine in that market.

We’d also expect margins to be somewhat better in Mexico. So on a consolidated basis we expect average machine count over the year to be up about 3%. We are planning for a year where revenues are a bit lower then 2008, perhaps $460 to $470 million in 2009 versus $493 million in 2008, substantially all of that revenue decline is caused by the change in exchange rates with growth in machine count and average revenues per machine in the UK and Mexico being offset by a presumed bit of softness in the business in the United States.

We expect consolidated gross margins to be better in 2009 then 2008, reported GAAP gross margins were 23.3% in 2008, we’re expecting 24% to 24.5% in 2009 primarily driven by flattish margins in the US and improving margins in the UK and Mexico. SG&A should come in slightly lower then 2008 levels in dollar terms and about the same in percent of revenue terms. We expect depreciation of $37 to $38 million slightly lower then in 2008 driven by a lower capital budget and we expect an interest bill in the range of $30 to $31 million and all of this as we said was the result in EBITDA of $75 to $80 million and adjusted earnings per share in the range of $0.12 to $0.22.

With regard to CapEx again, we spent about $60 million in 2008 of which around $15 to $20 million was related to projects such as our triple [dss] security upgrades to build out our in house processing operation and the building of our in house cash in transit operation over in the UK. Those expenditures are behind us now and in 2009 the significant majority of our much small capital budget can be focused on growth related projects and as we said we expect to spend about $25 million in capital during the course of the year.

On a somewhat different note before we open the call up for questions, I need to let people know that we’re going to be moving our Houston corporate headquarters on Friday of this week. Over the last couple of years we’ve been operating in four separate spaces in Houston. We have found a nearby opportunity to consolidate into one office space that will give us a little bit of growth capacity. We are only moving about two miles, we don’t expect it to be a particularly disruptive move and the details of the physical address and so on and so forth will be up on our website. Unfortunately even though we’re only moving about two miles, our phone numbers will change so after Monday, March 2, we’re actually moving this coming weekend so on Monday, March 2 or later the main number at Cardtronics will be 832-308-4000, and my direct line will be 832-308-4128.

Our email addresses will not change so email will work normally as it always had. So in closing I’d just like to say that we’re focused here on generating free cash flow and running the business in a prudent way. We have a business that has a lot of inherent stability to it. We are going to grow in a measured way in 2009 and really focus hard on optimizing the value and results from what we have. This should position us to take advantage of opportunities whether they be buying in our stock, paying down debt, or taking advantage of an opportunity in the marketplace that might not be now apparent to us but may be brought to us in part because of the economic conditions that we’re all going through.

That concludes our prepared remarks and we’d now be happy to take any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Chris Mammone – Deutsche Bank

Chris Mammone – Deutsche Bank

Appreciate all the comments on the covenants and the liquidity I think you mentioned how covenants were set up and supported the substantially lower level of earnings could you just maybe frame that for us, what do you consider substantially lower on that front.

Chris Brewster

I think there’s two ways you can calculate flexibility under loan covenants or at least the way I would do it, one question you can ask is at today’s cash flow how much additional borrowing could we do before we would run into trouble under the loan covenants and the answer to that question is we could borrow the entire facility. We have something like $50 million utilized as of today, and we could borrow the remaining roughly $125 million before we’d run into covenant issues even with no additional cash flow.

So that’s one way to come at it, another way to come at it is to say, ask the question at today’s level of borrowing how much could our cash flow decline before we would run into covenant issues and that answer to that question is that it could decline, EBITDA could decline by around 45% before we’d have issues under the loan covenants. I guess it goes without saying that we think that we’re a long way away from having any sort of loan covenant issues here at Cardtronics.

Chris Mammone – Deutsche Bank

On the [inaudible] should we start modeling in slight profit for that segment starting in the first quarter.

Chris Brewster

Well I’ll tell you the way we’ve planned it, and the sort of dynamics of it, the what I’d call the, there are two pieces of what I’d call good news around [Vcom] one is that we have gotten it to the point largely by working on the cost side where its at or very close to a break-even. We have a in percentage terms a rapidly expanding business on [Vcom[ which is the taking of image deposits at the [Vcom] units. However that’s rapidly expanding on what I’d have to admit is a relatively small base.

Essentially in our view of [Vcom] in 2009 we don’t have it dialed in for significant profits.

Chris Mammone – Deutsche Bank

A full year.

Chris Brewster

That’s correct.

Chris Mammone – Deutsche Bank

But is it still expected to be [inaudible] loss—

Chris Brewster

Its close enough to a break-even where its probably not worth trying to quantify it one side or the other.

Chris Mammone – Deutsche Bank

Could you just expand on your comments on renegotiating with maintenance providers, what can be done there, what are the potential savings.

Mike Clinard

Its hard to quantify what the total savings are but today we have three main providers of maintenance service here in the US and I’d say substantially all of those ATMs are at the end of their contract life or the contract has actually ended and we’re going month to month and so we’ve always had a multi vendor strategy to make sure we keep everyone honest but we felt like there was such a substantial number of ATMs that all came up for renewal that this could mean a lot for one of those three providers and actually if you throw a fourth one in there which is [Wincore] who has come to the market a few years back and [inaudible] footprint we felt like we could see an offer that could be really special.

Not sure how you’d want to dial that in to numbers. We wouldn’t go to a single provider unless it was a substantial offer. We wouldn’t just move to another provider if it was more like a lateral move so it will be an interesting next few months. We probably on the next call will have something to report with regards to that initiative.


Your next question comes from the line of Rob Napoli – Piper Jaffray

Rob Napoli – Piper Jaffray

On your buyback and how aggressively do you intend to execute the buyback, is it going to be done gradually over the course of the year or are you going, what are your thoughts around the buyback.

Chris Brewster

I think its probably the best way to describe it is it will be responsive to market conditions. I think the feeling among the management team and on the Board is that the prices that we’ve seen here recently on Cardtronics stock represent a significant bargain. I’m not going to be highly specific in terms of what we would do and when we would do it or what price we would do it, that’s the basic sense that’s driving the effort.

Rob Napoli – Piper Jaffray

With regards, do you have any thoughts about buying back any of your debt, and did you contemplate buying back debt instead of buying back stock.

Chris Brewster

We did think about it, its an interesting series of trade offs. One of the reasons that we have the sort of financial flexibility that we have today is that we have very little senior debt. We are carrying some debt but most of that is in the form of our public subordinated debt and we have very little senior bank debt. If we basically, if we simply used internally generated funds to buy in some debt, frankly the numbers are probably such that it would not make a huge difference in the overall scheme of things. If we did it in a major way say drew down $100 million on our bank facility and used that to buy in public debt, it would represent a fairly significant shift in the structure of the balance sheet toward having significantly more senior debt, less subordinated debt and would put us in a position where we have somewhat less financial flexibility then we do today.

So that’s kind of the calculus that we’ve been through on it so far.

Rob Napoli – Piper Jaffray

With regards to the growth initiatives, I understand building free cash flow and I certainly agree with the way you’re managing that in this environment, I would love to see is some more growth of non capital intensive, i.e. processing or the like, and I know you’ve put that out there as something that is a strategy of yours, but can you give any update on growth initiatives, non capital intensive as well as capital intensive.

Rick Updyke

With respect to the non capital intensive growth opportunities as we’ve mentioned and as you’ve seen we built a pretty substantial processing platform in house. We have one major external client, that being a [C] store chain that we’re actually adding to this year a number of units and we have efforts in house to go out and explore additional opportunities like that where we’re going to leverage the capital expenditures that we’ve already made in that platform.

From a new growth perspective we’re also looking into businesses adjacent self service businesses and what we mean by that is looking to leverage our core competencies which is in a nutshell we manage large self service networks, that’s what we do best. And there are a number of adjacent businesses that are starting to grow and become pretty substantial in the US that we are looking and trying to figure out how to get into. In addition we continue to look at opportunities internationally. We’ve taken a pause and stepped back in terms of where we thought we would be given the current market conditions but those opportunities, we’re still exploring. We think that over time those will become even more attractive from a cost risk perspective.

Rob Napoli – Piper Jaffray

What types of adjacent businesses, if you can give some examples.

Rick Updyke

Think of any kind of self service type of vending, kiosk, informational kiosk, that’s probably the best analogy I can give you at this point.

Rob Napoli – Piper Jaffray

Did I hear you say that you expected US revenue per machine to be down modestly.

Chris Brewster

I made the comment that we had planned for revenues per unit in the US to be down around 5% and that’s just hopefully taking what proves to be a somewhat conservative view on the overall economic environment that is in large measure is what’s driving that.

Rob Napoli – Piper Jaffray

So transactions, you’re saying US transactions would be down a little more then 5% because you have slight growth in the US.

Chris Brewster

Well its, when we speak about per machine revenues, that’s a mix of substantially all of our revenue types, you’ve got surcharge, you got interchange, bank branding, network branding, so on and so forth. That’s our, the primary issue we’ve had over the last few months as we’ve said is we have not signed that many new bank branding deals. I think for us to see that sort of outcome we would logically have to see transaction counts somewhat worse then what we experienced in the fourth quarter and somewhat worse then what we experienced in January. But I guess I’d put it this way, I’m sure probably most people on the call feel this way, I have not seen a set of economic conditions like we’re operating in today in my business career. We’re gratified by the way our volumes seem to have held up so far but its just seems to be a pretty good time to be somewhat conservative in one’s planning and that’s what we’ve tried to do.

Rob Napoli – Piper Jaffray

You didn’t mention the surcharge free network, did you have any significant new customers added to the network and what kind of trend on revenues do you see there in 2009.

Chris Brewster

There’s really two primary customer bases for that operation, the one is the large quantity of smaller banks, credit unions, financial institutions of that nature that we have in the country and the other is the stored value card providers, people that are handling electronic benefits transfer cards, or other forms of stored value cards. The business development among the population of smaller banks and financial institutions continues to chug along at a pretty good pace. We really haven’t seen significant signs of a slowdown in that new business pipeline.

The business involving the big EBT providers and stored value card providers by its nature is episodic and off the top of my head I don’t recall a recent major signing but we continue to have a new business pipeline in that area as well.

Rob Napoli – Piper Jaffray

On the Citibank relationship win 7-Elevens, what would be your expectation for that relationship, and how long, that contract goes for how many more years, I think its another 7 or 8 years.

Mike Clinard

That’s correct, our expectations for that relationship is that we’ll continue to grow specifically we will be adding to our remote deposit capture platform the Citibank card base here in the next couple of months so in addition to the FSCC and the Coop, we will have Citibank customers being able to make remote deposits at the 2,200 [Vcom] located in 7-Eleven in the next couple of months.


Your next question comes from the line of Reggie Smith – JP Morgan

Reggie Smith – JP Morgan

Looking at the revenue guidance it was a little lighter then I would have expected, understanding that currency is going to be a drag, just curious what type of transaction growth are you assuming and then specific to the US, could you let me know what the transaction growth rate is today in the US and then how you see that going forward, because your transaction counts looks pretty good relative to my model, so any color there on how you’ve built up your revenue guidance would be helpful.

Chris Brewster

I’ll put it this way, you’re right in terms of the, taken at the top level the shift in foreign exchange rates is a major factor in terms of our revenue guidance as we said, its about a $25 million negative shift in revenue just based on converting the pound Sterling and the Mexican Peso at today’s rates rather then the sort of rates that we averaged during 2008 and that’s by far the biggest factor in revenue guidance.

In terms of getting a little more granular about it the way we generally think of it is in terms of either average revenues per machine or same store revenues per machine and essentially we’ve planned in the UK and Mexico for some increase in those metrics, in those two relatively smaller operations but we have planned for the small decrease in that metric in the United States and as I said earlier its frankly largely just revolves around trying to be a bit conservative.

The increases in Mexico and the UK are largely driven by the fact that we’ve got fairly young fleets in the those markets that are still ramping. The presumption behind a small decrease in the United States really just revolves around in the main the state of the economy in the US and trying to be fairly conservative in our planning in this environment.

Reggie Smith – JP Morgan

So in the US could you give us a sense for where your transaction growth rates are today.

Chris Brewster

Well again speaking in terms of overall same store revenues they were basically flat in the fourth quarter of 2008. That was a little bit weaker then they had been in previous quarters. Well let me correct that a little bit. That was a little better then they had been in the third quarter, slightly weaker then they had been in the second quarter of 2008. In January we saw same store revenues in the States up low single-digits and probably don’t have enough data on February yet to really comment on that.

I guess what I’m saying is we are, the very current data is a little bit better then our guidance but I still think its probably a time to be reasonably conservative in one’s outlook on the world.

Reggie Smith – JP Morgan

If I could follow-up on the surcharge free revenues, I think you coupled that with your branding revenues when you released the Q, can you just give us a sense for what the run rate is in revenues in branding and what’s the relative split between surcharge free and traditional bank branding and then the relative growth rates, the bank card branding isn’t growing much right now but what type of growth are you seeing in the surcharge free revenue bucket.

Chris Brewster

I don’t have the numbers at my fingertips so I’m going to give you an approximation and I’ll email or call with the more accurate figures but in terms of an approximation, those revenues have gotten to the point where they are at a run rate of approximately $50 million a year and the proportion is very roughly about half and half bank branding and surcharge free network revenues.

Reggie Smith – JP Morgan

And the surcharge free growth rate is roughly—

Chris Brewster

Its been running in the past couple of years, its been running 20% 25% or better year over year.

Reggie Smith – JP Morgan

I know in the past you’ve definitely talked about taking the processing in house and there was I guess and initiative to up sell some other services in doing that, maybe marketing directly at the ATM are you any closer to realizing that opportunity or has you thinking about that change in the last few months or quarters.

Chris Brewster

Could you ask that again, I’m not sure we completely understood it.

Reggie Smith – JP Morgan

I thought that in the past you talked about for your ATMs being able to advertise, do custom advertising and stuff like that, on the screen when people go their ATM, and I thought that the fact that you were doing your processing in house would kind of make that more possible, have you changed your thinking on that at all?

Rick Updyke

We are actually doing a small test, a small advertising test today. I mentioned earlier in the Q&A we are also have efforts underway to expand on some of our external processing deals like the one we have with the convenient store chain today and that’s really where we’re at from that perspective.

Reggie Smith – JP Morgan

I know I ask you this almost every quarter, pricing, I’ve noticed in New York City at least that a lot of the ATMs with bank brands on them are going to $3.00 and in the past I know you have been kind of reluctant to raise your prices, has your thinking along those lines changed at all in the last few months.

Chris Brewster

Well we’re doing some testing, its one of the advantages of having such a large network. We do have some testing underway on different price points and its too early for us to assess the results of that much less talk about them but we are trying very hard to figure out whether there’s an opportunity there, but you’re quite right, the trend over the last year, let’s say I guess it was first Banc of America put their surcharge up for non customers to $3.00, Wachovia followed, Chase followed, Citi followed, most of the major banks followed within about six months thereafter. So what we need to find out is I guess you could say, has the public just become accustomed to that price point and are they willing to pay it in this environment.

And that’s what we’re trying to figure out through these tests we have running. We have not assumed any heroic price moves in our guidance and we’ll test them carefully before we go down that road. Just to slightly correct one thing I said earlier, if you look at the proportion of bank branding revenue versus our surcharge free network revenue, its about a 60/40, about 60% on the surcharge free side and about 40% on the bank branding side.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Chris Brewster

Thanks to everybody for listening in, I know you’ve had kind of a rugged morning so far because there have been a couple of other calls to pay attention to but we appreciate your interest in Cardtronics and look forward to reporting on our progress next quarter. Thank you all very much.

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