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Cardtronics, Inc. (NASDAQ:CATM)

Q1 2013 Earnings Call

May, 02, 2013, 05:00 pm ET

Executives

Mitzie Pierce - Director, External Reporting

Steve Rathgaber - CEO

Chris Brewster - CFO

Analysts

Ramsey El-Assal - Jefferies

Andrew Jeffrey - SunTrust Robinson Humphrey

Bob Napoli - William Blair

Jason Nacca - Sidoti & Company

Mike Grondahl - Piper Jaffray

Reggie Smith - JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the Cardtronics First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host Mitzie Pierce. Please go ahead.

Mitzie Pierce

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

Steve will begin today’s call with an overview of our first quarter results and an update on some of our key initiatives. Following Steve, Chris will provide additional details on our financial performance. Our prepared remarks are scheduled to run for about 25 minutes, at which point we’ll open up the call for any questions.

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

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

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

Steve Rathgaber

Thanks you, Mitzie. Good afternoon everyone and welcome. The quarter once again demonstrated a solid performance on the key metrics that drives shareholder value. Let me briefly recap the financial headlines before updating you on other elements of Cardtronics progress.

Two financial headlines are noteworthy for this period. The first is that our core business grew just under 9% for the quarter versus last year. More than 7% of those 9 percentage points were pure organic growth. This is within our target goal for organic growth and I believe a significant accomplishment in light of the Q1 2012 comparison.

You may recall that Q1 2012 was an unusually strong revenue quarter for our company with organic revenue growth of 18%. So this growth is on top of our best organic revenue quarter certainly in my time here. Management is pleased with this growth and believes to be another affirmation of our strong and durable business model. Chris will give you some more detail on this.

Our accomplishments for the quarter go beyond the revenue hurdle we jumped and that brings us to our second financial headline. Through our focus on cost management, synergy extraction and in spite of last year’s interchange headwind we grew gross margins by 170 basis points. Last year, we told you we needed a bit more time to complete the synergy value extraction. This quarter benefits from our successful use of that time. These headlines together delivered EPS growth resulting in $0.40 of adjusted earnings per share.

While we are on the subject of gross margin improvements and EPS contribution, I would like to comment on our UK business. Historically, management has been focused on both revenue growth and investing in the build-out of our vertically integrated service delivery model in the UK. As you may recall, in England Cardtronics directly operates essentially all elements of service delivery. Specifically, we do our own maintenance, cash and transit and even site construction. There are multiple reasons for this strategy which is nearly the exact opposite of our approach in United States. We believe it is appropriate in the UK because it provides a strategic and service level advantage for our retail and financial institution clients.

The UK model helps make us smarter about all facets of the business and we believe that drives value to all the countries we operate in, because we know first hand what to expect from our vendors and what challenges they face. But it has been an expensive approach in the short-term. We believe the result to-date is that we have built arguably the best service provider in the market poised to take advantage of opportunity. But frankly, we expect more and in the past year, we have made changes and intensified our focus on the financial performance of this important asset. Results are now emerging.

For the first quarter of 2013 our gross margin for the UK business averaged 80 basis points of growth across the quarter with an exit rate of improvement that was accelerating. And these results were generated during the quarter in which the UK experienced one of its worst winters in decades which always dampens literally and figuratively ATM traffic.

Looking ahead, we believe many of the core saving initiatives that had been underway in the UK will become even more evident in our financials and we are expecting that portion of our business to begin positively impacting our consolidated bottomline for the remainder of this year and beyond. I am encouraged by the progress that the team is making in the UK and I am reinvigorated in my enthusiasm for further growth and margin expansion in this important international market.

While the team has been working hard to deliver shareholder value now, we are also executing on plans to create and drive future value. We strongly believe that Cardtronics’ best days are in the future. So we make strategic investments today designed to deliver that future. We invest to drive transaction growth at our established ATM portfolio and to create new sources of revenue for Cardtronics. In March, Cardtronics acquired i-design, an established Scotland based ATM software, advertising and marketing firm that has been a service provider to Cardtronics for several years.

Although modest in size, we view this acquisition as strategic on multiple levels. In a world where digital screens of all shapes and sizes, smartphones, tablets, laptops and TVs command and dominate consumer retention, i-design enables financial service providers, retailers and third-party advertisers to bring the ATM screen into that screen experience mix for the consumer operate and an integrated and value-added fashion. Simply stated, i-design enables a more rewarding consumer experience at the ATM.

We will soon deliver capabilities ranging from consumer preferences at the ATM by remembering favorite transactions to customize screen and [VC] capabilities as well as mobile phone interactions with the ATM that provide unique value to Cardtronics’ ATM users. The byproduct of this activity supports our goal to drive sales and foot traffic to our retailers. It is our intention to leverage the i-design platform across our ATM fleet to create greater consumer loyalty for both our retailer and financial institution clients.

Additionally, whether through a desired purchase of software license to access these features on their own ATM fleets or to leverage the i-design suite of media and advertising capabilities, we are confident that i-design will give financial institutions and retailers more reasons to work with Cardtronics. This will extend the reach and depth of our client relationships. The acquisition also provides another pathway for Cardtronics to grow internationally; i-design is actively selling in more countries today than Cardtronics.

In summary, this offering in conjunction with our patent pending fee alert service and our mobile based ATM locator products continues our strategic march to drive more value for all our constituents before, during and after the ATM transaction.

Beyond these investments however, the Cardtronics core business continues to grow. Our global relationship with Scotia Bank continues to broaden. In this quarter, we move beyond branding and servicing relationships in Canada, Puerto Rico and the Caribbean to a branding deal in Mexico that encompasses over 500 ATMs. Our stable of global clients with ATM interest that are allying with our own is growing. We think that represents another fairly unique future opportunity for Cardtronics to harvest.

Close to the home, and I literally mean Texas, we have expanded our Bank of America relationship to include branding nearly 40 ATMs in grocery store locations in the Houston market. We now provide services to four of the top five financial institutions in the United States. Also in Texas, we were awarded a renewal for a long term contract as a provider of ATM services at Love Field in Dallas. These locations will be branded by Frost Bank who already brands over 600 locations with us. We like this deal because it retain some great old point locations and shows us a pathway to compete more effectively in airports where the largest banks usually like to go at alone and we love it when existing branding clients see the value in branding and want more of it.

We already completed our installation in the UK, the network rail deal announced last quarter and appreciate these high volume locations and their ability to drive currency conversion revenues as well as interchange revenues. Several of our recent acquisitions have facilitated nice location growth for Allpoint. We now have over 55,000 Allpoint locations for our nearly 1200 financial institution partners to send their customers and members to for free ATM access. Retailers and finance institutions increasingly value this unique asset, which is reflected in some statistics. Over the past two years, total Allpoint volume has grown by more than 50%, but in that same period Allpoint prepaid card volume has more than doubled. But even prepaid cards that are not part of Allpoint continue to be good to Cardtronics with surcharge paying prepaid volumes almost doubling in that same two year timeframe.

And finally on the new development front; you may have seen our press release yesterday announcing the closing on the purchase of the assets of Aptus Financial. This merchant owned and load operator of 3300 ATMs is a small tuck-in acquisition of a very well run portfolio headquarter in Portland, Oregon. We are bringing some great people onto the Cardtronics team and we’ll now have the west coast sales office for our merchant owned business. Revenues are less than 1% of our corporate total and EPS contribution will be immaterial this year as we begin but will have not completed the synergy harvesting process. Our rational for these deal is that we like the economics of some of these companies because they allow reduced interchange exposure due to fixed repricing models and they delivered solid margin performance with net revenue accounting.

The Cardtronics model continues to perform at multiple levels and multiple dimensions. We are improving our margins across our global footprint. We are selling across our global footprint and we are investing to grow shareholder value with Cardtronics unique model. In short we are executing on our plans. And now to Chris for the depth and perspective you can only get from a deeper look at the numbers.

Chris Brewster

Thank you, Steve. So lets’ dive into the numbers. Most of these numbers that we break our revenues into two categories, those being our high margin ATM operating revenues which were up 9% in the quarter and our lower margin equipment sales and other revenues which were actually down somewhat year-over-year in the quarter. Total consolidated revenues were up about 4%, that's somewhat lower figure than we've been reporting recently, so I would like to go into some detail around the moving parts within those numbers. The primary reason why total revenues grew somewhat slower in the quarter was simply that our equipment sales and other revenues were down fairly significantly. They were $13 million in the first quarter of 2012 versus $4.5 million in the current quarter. As a reminder, most of these equipment sales arise from our activity as value added reseller for NCR. NCR uses a direct sales force to sell ATMs to large banks and they use indirect channels of which we are one to sell to smaller financial institutions. We like to do this because it gives us another reason for a relationship with these financial institutions and it books up our total ATM purchase volume.

New rules regarding a requirement for voice guidance at ATMs so that they can better serve the visually impaired became law under the Americans with Disabilities Act in the US in March of 2012 and this deadline drove a major equipment upgrade and replacement cycle in the industry broadly. Because of this, our equipment sales to smaller financial institutions ramped up significantly in the quarters immediately before the March 2012 deadline, with the peak quarterly sales volume actually being reached in the March quarter of 2012. We expected that equipment sales would tail off significantly after the deadline passed and that has indeed happened. So in the quarter that we just reported, we are comparing back against a historically high equipment sales figure and this reduces our growth in total revenues. I would remind you that these sales carry gross margins of around 10%, so the profit impact of the sales decrease in this area is not severe and I've only gone into this level of detail to simply put our total revenue figure in the proper context.

Turning to the 9% growth rate in ATM operating revenues, it breaks down as follows. About a 1.5% of that growth was due to acquisitions, that's a smaller figure than we've seen in previous quarters simply because we’ve cycled on our major 2011 acquisition activity at this point, most of the 7.5% of organic revenue growth came from unit count with both new and existing customers. We landed three large customers at the beginning of 2012, Valero in the United States, 7-11 in Canada and Shale in the UK. Additionally unit growth with existing customers was also up in the company owned part of our business over that timeframe. In total, unit growth with new and existing merchants accounted for about 8% of ATM operating revenue growth in the quarter; 8 percentage points of ATM operating revenue growth in the quarter.

We continue to grow our bank branding business as well as our Allpoint surcharge free network business and additional revenues from these sources contributed approximately 3 percentage points of growth in ATM operating revenues in the quarter. These growth drivers were partly offset in the quarter by a lower interchange rate per transaction which cost us about 3% points of revenue growth in the quarter. Additionally I should say that same store transactions in the US statistically usually report to you were actually down approximately 1% in the quarter from a year ago. Over the past eight quarters our US same store transactions have generally been up in the range of about 4% to 6% year-over-year, so its worth some time to dissect the current quarter’s result.

In brief we think this was a function of non-recurring positive forces last year and non-recurring negative forces this year, rather than any major underlying shift in trends. For example, the first quarter of 2012 was a record quarter for same store withdrawal transactions on the upside. They were up about 11% at an all-time high and with that number, as we said at the time, we reported in the first quarter of last year included we felt a number of one-time benefits such as last year was a leap year. So the first quarter of 2013 had one less day, which accounts for about 1% fewer transactions. Secondly, weather does affect our business. The first three months of 2012 were a record more months compared to first quarter of 2013 a rather tough winter in both US and UK, in particular with March of this year being a record cold month for both countries. Now quantifying weather impact is a bit difficult, but we mentioned last year that we thought about 3% of the outsize growth was weather related. We believe the inverse to be true for the first quarter of 2013. In other words that weather had a negative impact of around 3% on that same store trend.

There are also (inaudible) other macro factors that probably impacted us as well during the quarter, including a delayed tax refund season due to late issuance of tax rules by the federal government. Lower tax refund dollars paid out across the country and higher payroll taxes led individuals were having deducted from their pay checks, and those logically impacted consumer spending. Many of the retailers that were co-located with did report relatively weak same store sales in the first quarter. So in summary, if you normalize the first quarter of ‘12 for one-time factors, we think that 11% gain that we saw last year normalizes to about 5% and that's what we said about it at the time we reported it. And if you normalize the first quarter of 2013 in a similar fashion, I think you also come back to about a 5% gain. And this is the logic behind the statement that we believe our experience in the first quarter of 2013 is a function of short term anomalies rather than a change in underlying trend.

I can also say that based on an early look at results, the same store transaction trend for April is positive. With regard to gross margins we turned the corner in the fourth quarter of last year, with margins up about 50 basis points year-over-year. Consolidated gross margin for the first quarter of 2013 were 32.4% which as Steve said was up 170 basis points over the prior year. This improvement is all the more notable given that interchange headwinds related to a major networks reduction of interchange rates paid to us and related volume shifts between networks reduced our margins in the quarter by about a 130 basis points. So the past you have turn around in margin can largely be explain by the following.

As mentioned earlier, ATM equipment sales were down significantly from the first quarter of last year, gross margin on equipment sales is closer to 10% much lower than our corporate average of low 30s, the year-over-year decline in these relatively low margin sales mechanically drove about an 80 basis point improvement in the company’s consolidated gross margin percentage. We continue to realize synergies on our 2011 acquisitions in particular EDC and Access to Money and they were margin accretive to the company as a whole by 80 basis points in the quarter. Our 2012 ATM network acquisition came on board with higher than average gross margins and including synergies and this added about 50 basis points of margin improvement in quarter and the remaining improvement came from cost improvements in the US, company owned and merchant owned business as we take advantage of our scale and drag down cost, and as Steve said margin improvements in the UK.

Coming farther down to P&L, adjusted earnings per share for the quarter were $0.40, up 5% from our reported number of $0.38 a year ago. As I mention in my revenue and margin remarks, we were significantly impacted by interchange rate reductions that occurred in April of last year and we estimate that this rate reductions cost us about $0.06 of earnings per share in the current quarter where in the first quarter of 2013 we have not yet cycled on the beginning of those increases and changes.

Absent that $0.06 hit, our year-over-year earnings growth would have been over 20%, so that there is no use drilling in particular on what might have been, but I mentioned it’s mainly the highlight that the core business of the company is strong, we are realizing our acquisitions synergies as we planned and continuing to grow revenues that leverage our platform with a significant scale.

Moving to the balance sheet, the ratio of net debt outstanding to trailing 12 month EBITDA ended at 1.7 to 1, down slightly from 1.8 to 1 at year end 2012 and down more significantly from 2.2 times at March of last year. Due to seasonality and timing of major payments, the first quarter typically generates the lowest cash flow when compared to the other three.

In the first quarter, we paid annual bonuses to our employees, we made $8 million semi-annual bond interest payment and we funded the i-design acquisitions to the tune of about $13 million. This cash uses were partly offset by the collection of the $13 million insurance receivable during the quarter.

Absent acquisitions we would expect to see continuing reductions in our leverage ratio for the rest of the year. (Inaudible) also say we continue to be busy evaluating potential acquisitions and are hopeful of effectively and accretively deploying some capital in that fashion.

With regard to internal CapEx, our first quarter capital expenditures totaled $16 million and we currently believe that our $70 million guidance figure for the full year is solid. With only one quarter under our belt, no significant changes in our business and the first quarter that came in roughly where we expected, we don't see any reason to change guidance for 2013 at this time and the guidance you see in our press release is consistent with what we issued in our earnings release we put out when we reported the fourth quarter of 2012.

Based on what I know today, I'd say that revenues may not trend toward the highest part of the guidance range with a major factor underlying that statement being exchange rates, with the British pound being down against the dollar. We are now forecasting based on $1.50 to £1 where earlier we were forecasting based on $1.60 to £1.

Additionally, we've seen our equipment sales tail off a little more sharply than we expected, but I would remind you that equipment sales are pretty low margin sales for us. These top line impacts are not expected to have any significant impact on the bottom line as I expect a somewhat richer margin mix.

Based on what we know at this time, we expect that bottom line profits will likely trend towards the higher part of our guidance range.

So operator with that, that concludes our prepared remarks and we would be happy to take any questions that our listeners may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ramsey El-Assal from Jefferies.

Ramsey El-Assal - Jefferies

I wanted to ask if you have seen any additional signs of interchange-related mix shift like kind of that affected you last year. I'm thinking the answer is no because maybe we have seen in the numbers, but I wanted to see if you can comment on that?

Chris Brewster

We really haven't Ramsey. The sort of transaction proportions that run through each of the networks that we run transactions through have really been pretty stable across the call it the last couple of months of the fourth quarter and throughout the first quarter of this year. So I would say no change in the position for example that we articulated back in December.

Ramsey El-Assal - Jefferies

So this past quarter, the GAO released their interchange study and it seemed really benign. At the same time, Harkin and some other senators put out some statements pretty critical of surcharging. Do you see any uptick in regulatory heat related to the GAO study or have you heard any rumblings from mail about anything?

Steve Rathgaber

I would say that we share your point of view that we thought the GAO study indicated increasing costs and keeping up with increasing costs, means increasing surcharges. So in that sense thought it was actually from benign to somewhat friendly in terms of explaining the business.

But having said that, no, we do not see any direct feedback on this, any direct energy at this stage, certainly that seems to be quite occupied, the CFPB and other organizations with a raft of other superior opportunities to pursue for lack of a better phraseology. So that in conjunction with the fact that I believe Harkin is retiring that will end the focus, but he was certainly one of the big proponents suggest that we are not aware of anything eminent, but as you well know anything can happen in politics.

Ramsey El-Assal - Jefferies

Great, thank you. And last one from me. Can you give us an update on the Massachusetts National Federation of Blind issue? Was there a special master auditor signed by the court? What are the next steps there? Any kind of color you can give will be helpful?

Steve Rathgaber

Sure. So as you know, depending on what you read because a lot of the stuff that gets published out there isn’t accurate in certain trade press. But as you know, Cardtronics is and has been fully compliant with all the 88 legal requirements for some time, certainly from the date that all was required to be compliant. And separate from that and above that, we have some additional obligations that Cardtronics uniquely has above and beyond what must be done to comply with the ADA law, extra Braille stick is, things of nature.

And the latest update is essentially that a special master has been appointed or will be actually appointed in the next week or so, couple weeks may be. That is something Cardtronics has asked for because we believe it is in the best interest of final resolution to have a party that can be more educated in the specifics, so they can appreciate exactly what has to be accomplished and what it takes it to get it accomplished.

We don’t actually believe there is much left to do. We have volunteered to do some considerable extra beyond the requirements and certification proof work to calm many concerns that the group may have about or various levels of compliance on all the features. And we believe that that will ultimately put the whole issue to bed. There is a potential as has been identified in documents published by Cardtronics for the potential of a fine, but the intention is that fine would be calculated with guidance from the special master, after the special master had an opportunity to evaluate the circumstances.

So where as much as one can claim to be pleased with where we are, we actually are given the circumstances and belief we are on the final ramp of this and some quality communications between the parties that the special master can facilitate, can bring this thing to a close soon.

Ramsey El-Assal - Jefferies

That sounds relatively manageable.

Steve Rathgaber

Yes.

Operator

Our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

Andrew Jeffrey - SunTrust Robinson Humphrey

Couple questions, Steve when you look at your sort of increasingly integrated offering and sounds like a ramped up focus on consumer experience new technology especially with the i-design deal? Could you lay out sort of high level, the timeframe over which you think can roll out some of these new advertising solutions, where you think you can start to -- when you think it starts driving more traffic to machines, when you think it actually has a sort of measurable tangible impact on your same machine transaction growth as types of considerations?

Steve Rathgaber

Well, I think that’s a great question actually, I think that you should think in terms of Cardtronics being on a continuing multi-year ramp to drive transactions to the ATM with all kinds of different products and arrangements, I would say that we fully expect to feel impact this year and we expect the level of that impact to grow overtime; how I’ll be able to pointed out in future earnings calls might say a little mysterious for a bit, but it should ultimately manifest itself in more transactions. We will rollout capabilities based on retailer relationships contract length duration left state of the inventory in terms of the capabilities of the ATM combined with the software, so its not an complex integration, I wouldn’t want you to think its an add water and stir, sort of thing, but it is certainly something that give us a ramp to begin to drive transaction volume up with and I think it’s a ramp that will be implemented over several years and serve us well with growth and actually a plank of the growth if you will going back to the sort of original six planks, sort of adding a seventh, with transaction generating activities that go beyond what you have seen as the Cardtronics profile of past.

Andrew Jeffrey - SunTrust Robinson Humphrey

And do you think will same machine transaction growth to be the best metric by which to measure the attraction you are getting….?

Steve Rathgaber

It will be a good one, but we have other measures in mind that we’ll reveal to you further in the future; but that one in selective markets as we do certain things, you might not see it if we roll something out in Georgia for example, and you might not see a show up across the national number that Chris would recite in the ordinary update, but we will be watching closely for impact in specific markets as we do specific things and begin to share that with you as we have quality data to share.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. And Chris with regard to social securities’ move to electronic disbursements for all of their distinct beneficiaries in the first quarter; did that move the needle at all or do you expect it to, I understand tax refunds were a little late which seems to have had some depressing effect on the first quarter same machine growth, but what about this potential tailwind from social security?

Chris Brewster

Well I'd say you know it’s not one that manifested itself all at one time, because they converted, as I recall their rough dates on that Andrew, they quit putting new beneficiaries on checks back in March of 2012 and articulated a deadline to convert the existing check based beneficiaries over to a card based system by March of 2013 and started moving in that direction you know in that intervening year. So you've had that conversion going on underway across the year and you know we have seen a continued ramp up in the quantity of transactions we are running on those cards across that timeframe. So I guess that's a very windy way of saying, yes, the social security program has been helpful to our same-store figures.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. So manifesting largely probably in the prepaid numbers to some degree; as Steve cited in his opening remarks, okay.

Chris Brewster

Yeah, absolutely.

Andrew Jeffrey - SunTrust Robinson Humphrey

And then finally, any meaningful changes in US surcharge levels that might be hidden or disguised by the ongoing rapid growth in your UK machine and transaction growth rates?

Chris Brewster

The price surcharge rate changes in the US were quite minor, I would say year-over-year in the quarter.

Operator

Our next question comes from Bob Napoli from William Blair. Your line is open.

Bob Napoli - William Blair

Just a question and Steve maybe in response to you growing the transactions and your focus on adding services to grow transactions, but you had huge growth in the ATMs, and the ATM count last year, very strong growth. But in the first quarter, not so much, I think you kind of, I mean obviously suggested that it would be slower this year. Should we think of the model to get to that target of high single digit organic growth over the long run now be less from growth of ATMs and more from growth in transactions per ATM or should we only be expecting that kind of low to mid single digit growth of owned ATMs if you would?

Steve Rathgaber

Yeah, what I would say Bob is that that's a broadly a reasonable observation and the beauty of the Cardtronics model in the three years I have enjoyed living it is that each quarter each year there is another dimension, another lever that gets pulled to help us drive to our numbers. And you are certainly correct that last year in the first quarter with that sort of tri-facto that we had with the three big sales, it was very unusual in Cardtronics’ history and that created a disproportionate weighting on machine count. But having said that, we expect to have machine inventory added this year and we expect as well to add machine inventory selectively with existing partners.

That in conjunction with some of the classic prepaid ramp that Chris was just discussing on the prior callers question in conjunction with the fact that we have a sales force on the ground now of four additional people that I've talked about in past calls, reaching out to finance institutions to specifically work with them to drive traffic to our ATMs, in conjunction with other programs we're doing like the software features that we're adding, all of that looks to create in my mind a more blended and in a lot of respects a more sturdy mix that is less dependent on any particular plank and more delightfully integrated across a series of planks that as we tweak each one, we continue to make and grow our performance.

Bob Napoli - William Blair

Thank you. You’ve had continued strong growth of the bank branding surcharge free line revenue and I was wondering if you could break that out between bank branding and surcharge free if you could and give us a feel for the level of each and the growth rates?

Chris Brewster

Historically, we've not broken those out, Bob and I guess I wouldn't be prompt to do so.

Steve Rathgaber

I tried to talk you alone with that, Mike, ending comments there on that one with the doubling sort of numbers. So that’s what to work with that one. There are competitive implications on these numbers that we have to be very careful about it; it’s not to be mysterious.

Bob Napoli - William Blair

Okay. And then last question, just on the UK a little more color, I mean the changes that you made there were primarily on the expense side and it sounded like, Steve when we start looking at your 10-Q and the UK in the second quarter, we might actually see profitability?

Steve Rathgaber

It is a possibility.

Bob Napoli - William Blair

But it's mainly tightening down on the expense side.

Steve Rathgaber

We have done several things and in fairness it's both sides, it's a little bit, it's revenue adjustments, from a couple of different things, we are rolling out at DCC product the currency conversion product that has been very productive for us, and I say very productive. That’s not huge number, but it's just another value add point, and we have done things to manage the customer experience relative to balance increase that we get paid on over there so we see a little bit more that than we have seen in the past. We have done things with machine, redeployments; we have done things certainly on the expense side, a whole raft of things on the expense side. But I wouldn’t want you thinking it’s just on the expense side, it's a full [code] press multiple dimensions top and bottom-line impacts. And yes I look forward to having more traditionally classic Cardtronics to set up numbers on the UK pages then you have seen recently.

Bob Napoli - William Blair

In the M&A pipeline, you were quoted out as more non-traditional and then you came through with that with i-design. Would you still call the M&A pipeline more non-traditional and does it include any new geographies as potential?

Steve Rathgaber

So the way I would answer that is, certainly I added the element of non-traditional and i-design certainly is that in prior calls. But I would say broadly the pipeline, we continue to see and be invited to bid on lots of different properties in lots of different classes, ranging from the type of that we just did that we announced Aptus; I think a very small tuck-in to properties that are potentially a little bit larger than that in multiple countries. So we see lots and quite frankly it’s distracting because we are not interested in buying all of them, but we see lots and we are learning a lot from looking at them, and we are learning, we are getting a lot smarter but we like and don't like in a property and we actually always done that pretty well, but getting even smarter at that I think. So it’s a blend and I just think it’s a fertile time in our space for acquisitions.

Operator

Our next question comes from Jason Nacca from Sidoti & Company. Your line is open.

Jason Nacca - Sidoti & Company

First one to talk about the Canadian landscape maybe you’d provide some color on kind of what you are seeing in that market and if we still see foresee Canada as a roll of opportunity with these smaller regional players?

Steve Rathgaber

I would say that Canada is evolving; we are there for a relatively short period of time. I think you are aware that we have done some tuck-ins up there, building out the team, getting stronger. We are seeing organic opportunities to pursue there and we are probably less interested in a major acquisition there for environmental reasons and then quite frankly for not feeling a need to ignite growth there. I talked earlier about relationship with Scotia Bank that is up in Canada but growing across multiple geographies and the success of that relationship, I think its fair to say has inspired some dialogue with other institutions up there both on the retail side and financial institution side, and that’s just go to work each day and grind away sort of thing. But I don't think it’s likely to be dramatically large sort of acquisition opportunity. You know i-design is also active up in that space and as I said earlier one of the beauties of that product is we are getting invited to meeting now for multiple reasons and getting invited to some meetings we wouldn't have been invited to before start with an i-design discussion and goes beyond. So that's not just a Canada thing, but they happen to be active up in Canada and we see lots of potential from that.

Jason Nacca - Sidoti & Company

Okay and also moving to Mexico, I know it’s a (inaudible) challenge is there, but maybe just related to me what you are seeing there if you are seeing some consumer starting to come back to you guys.

Steve Rathgaber

Yeah, I think what you've heard us talk about is the model shift that we've undertaken there where because of the challenges which as you will recall were government inspired in terms of trying to drive outcomes that they through for the ideal outcomes, which I'm led to believe haven't heard this quoted directly from them sort of work that exactly opposite the way they want them to which doesn't sound like any government program I have ever heard of. But nevertheless the results have been more interest in branding and what you are seeing in this Scotia Bank announcement is certainly an example of that, and those kind of relationships are the very specific way that we are trying to draw additional traffic back to the ATM and we do these what I would call integrated deals in terms of cash supply opportunities and other things that help us manage margins on that stuff much more effectively than our traditional model and we think that that is a very productive interim step for keeping that environment stable as it continues to develop.

Operator

(Operator Instructions) our next question comes from Mike Grondahl from Piper Jaffray. Your line is open.

Mike Grondahl - Piper Jaffray

Could you maybe Steve give us a couple of examples of what you can do with i-design.

Steve Rathgaber

Sure. So what the software essentially does is lots of different things, but I will just give you two examples of a very specific nature. One of the applications that a customer over in the UK uses and its been adopted if I recall correctly by about 80% of their customers and this is a recognized name in the UK financial institutions is they leverage the software to do what's called customer preferences. So the customer, the software remembers in effect what the customer did last time they were at any of the ATMs in that portfolio. So if they did a $50 withdrawal, it will ask them if would you like your usual $50 withdrawal or would you like me to change it.

That kind of thing is sort of a personal intimacy thing that allows the customer to feel that this ATM knows them and hopefully can build some bonds of loyalty with that. Another example, completely different sort of example is the i-design actually manages advertising for a large number of ATMs in the UK including our own over there as one of the large inventory with other banks and other IEDs, independent deployers. And what they do is they actually broker advertising to the ATMs that generates fee income to the ATM deployer from the advertisements that are done, and the goal there is to take essentially the screens that are available and to inject brief advertising snippets that do not in any way and I want to be clear about this, delay the transaction timing or create the appearance of delaying the transaction timing, because we're not looking to make customers stand and wait for their money.

We're looking to take advantage of the weight screens and things of that nature. So that are already in play anyhow and just make them more interesting. So, one is an example of a better customer experience, the other is example of a new revenue source. But a promotional opportunity for either of the financial institutions or some third-party like Pizza Hut or somebody who is actually an advertiser over in the UK.

Chris Brewster

One of the retailer.

Steve Rathgaber

Or the retailer to promote in the individual. The TESCO for example is, I think (inaudible) is a customer over in the UK and they leverage us to do the advertising at the ATMs to help drive in-store sales activity for example. So there is a number of ways to interface for loyalty, for driving sales, for interfacing with the consumer. There is a lot of dimensions here and, they have to be rolled out in a fashion that neither overwhelms nor confuses in terms of complexity and as part of the journey will travel and part of the reason I answered an earlier question that it's not add water and stir. But that’s two ends of the spectrum and there is stuff in between.

Mike Grondahl - Piper Jaffray

Those two examples help a lot. And then I might have missed it but did you guys what prepaid transaction growth was? I remember it being 29% in the fourth quarter but did you say what it was in the March quarter?

Chris Brewster

I don't think we did. It was in the 20s.

Mike Grondahl - Piper Jaffray

Okay, and then just one last question, Chris. Have you guys thought about refinancing that debt or is that a possibility, the 8.25%?

Chris Brewster

Well, we certainly thought about it, frankly to do today is not particularly compelling, when you work through the economics of it all, when we get to the first call date, which August of 2014, it gets pretty interesting.

Operator

Our next question comes from Andrew Jeffrey from SunTrust. Your line is open.

Andrew Jeffrey - SunTrust Robinson Humphrey

Chris, I just wanted to follow up. Just when I look at your full year gross margin guidance, especially in the context that the comments you made about the UK, it looks -- and given the first quarter performance, it looks like it's pretty conservative, are there any specific call out considerations there?

Chris Brewster

I wouldn’t say so frankly Andrew, rather than it being early in the year.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay, because you guys are obviously doing a good job and getting some of those acquisitions synergies. And similarly you mentioned that the first quarter tends to be an expense heavy quarter, was there anything particularly unusual in the SG&A line this quarter that caused the bump-up?

Chris Brewster

Not, put it this way, I wouldn’t call it an expense heavy quarter, it is a cash flow heavy quarter in the sense that certain payments that we approve for across the year and they get expensed off across the year actually get made in a specific quarter like the first quarter and examples I gave were the -- for example paying our annual bonuses and we have two big bond interest payments to make in the year, one of which falls in the first quarter and one in the third. We had part of what you are seeing in the SG&A number is above in stock comp expense that just relates in large measure to the timing of the frac that we also put in place our equity incentives for the coming year in the first quarter.

I’d say in terms of sort of cash cost, we did as I think we have discussed a bit on December call, we did make some meaningful additions to our sales force in the first quarter, particularly folks focused on financial institution sales, so there were some ramp in just the basic payroll run rate for that growth addition.

Steve Rathgaber

And there is all been some additional consulting dollars that have been thrown out some of this lean process projects and some of this expense improvement initiatives just to get a few more hands on that with some analysis and things. So that’s all I want to mention.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. So should we expect SG&A leverage this year to go along with improved operating margin or -- sorry gross margin, is that going to be -- might that go the other way hence?

Chris Brewster

I don't think it will go the other way in any significant way, but I would expect SG&A as a percent of total revenue to be probably fairly constant vis-à-vis prior year based on what I know at this point.

Steve Rathgaber

Yeah, and then I would just say dramatically Cardtronics is building for the future and we’ve got to have the team in place today that is going to take us to tomorrow and so we will continue to do some incremental building along the way that will keep that number in the line that Chris has just described.

Operator

Our next question comes from Reggie Smith from JPMorgan.

Reggie Smith - JPMorgan

I apologize if this was covered, I'm juggling a few calls tonight, but I think the last time we spoke you guys talked about that there were some investments you were thinking about making this year that you hope to make, but that you aren't sure if that would actually happen as it relates to kind of I think margin expansion. I guess my question is now that we are four, five months into the year, do you have any more visibility there? And I guess could you talk about little bit maybe what some of those investments are?

Chris Brewster

Well, let me see if I can get calibrated with you Reggie. I think we did talk about earlier on making some investments in the context of expense investments to build the business over the long term. The example we are just talking about in terms of additions to the sales force is a piece of that. What Steve -- in large measure what Steve was mentioning in terms of some consulting fees we've been paying is in large measure focused at that and those are -- you know they did a quantum of that flow through the P&L in the first quarter and we'd expect it to continue to do so across the years.

Steve Rathgaber

But another example Reggie would be having now ownership of i-design to begin to leverage it requires some expenditure beyond what would have been our ordinary customer relationship with them, so that that kind of thing is the kind of thing that we are also talking about.

Reggie Smith - JPMorgan

And I guess to kind of follow up on that with i-design, how quickly do you think you can I guess kind of integrate that into some of our domestic ATMs.

Steve Rathgaber

Well, as I was saying earlier and I don't know if you got a chance to hear this, so I apologize if this is repetitive, but the notion is that this is a multi-year journey, the ingredients that get poured into the stew have to do with the ATM capabilities, have to do with contract life with certain retailers, have to do with platform readiness. We run multiple platforms here and the intent would be that we are going to move in certain clients and certain markets at a pace and hopefully build a very attractive ramp of transaction growth over the coming quarters and have somewhat long tail to it as we continue to stretch into other functions of the capabilities of the markets and other ATM fleets that become ready with the offering.

So it’s not an add water and stir sort of thing, and it gets rolled out on every ATM and all the capabilities automatically there. It’s a build process and quite frankly one of the reasons we wanted to own the asset was to make it do some of the things we wanted to do and create an ability to execute more aggressively and faster than if we were just an ordinary customer. So don't know if that's answering your question or not but it’s all in the mix.

Operator

(Operator Instructions) This concludes our Q&A session. I will turn it back to management for closing remarks.

Steve Rathgaber

I believe operator we are done and just let me say thanks to everyone on the phone for their continued interest in Cardtronics.

Operator

Ladies and gentlemen, thanks for participating in today’s program. This concludes the program. You may all disconnect.

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