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Cardtronics, Inc. (NASDAQ:CATM)

2Q 2013 Results - Earnings Call Transcript

July 31, 2013 05:00 PM ET

Executives

Mitzie Pierce - Director, External Reporting

Steve Rathgaber - Chief Executive Officer

Chris Brewster - Chief Financial Officer

Mike Clinard - President, Global Services

Rick Updyk - President of North America

Analysts

Andrew Jeffrey - SunTrust Robinson Humphrey

Bob Napoli - William Blair

Ramsey El-Assal - Jefferies

Gary Prestopino - Barrington Research

Mike Grondahl - Piper Jaffray

Reggie Smith - JPMorgan

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Cardtronics second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will begin at that time. (Operator Instructions)

As a reminder, today's conference maybe recorded. It's now my pleasure to turn the floor over to Mitzie Pierce. Please go ahead.

Mitzie Pierce

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

Steve will begin today's call with an overview of our second quarter results, then update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly and year-to-date results as well as an update to our financial guidance for 2013, 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'd 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 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'll reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures together with a reconciliation of such measures is included in the press release issued this afternoon.

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

Steve Rathgaber

Thank you, Mitzie and good afternoon everyone and welcome. In the second quarter, Cardtronics once again delivered for our shareholders. The financial growth headlines we are particularly proud of this quarter include consolidated revenue growth of 8% year-over-year, ATM operating revenue growth of 12%, organic ATM operating revenue growth of 9% consistent with the high end of our target range, adjusted EBITDA growth of 19% and all of those things coming together to deliver adjusted net income per diluted share growth of 29%.

A particularly gratifying headline and an indication of the team's skill of extracting synergies and leveraging scale on a global basis was our record gross margin performance. Our gross margin of 33.8% for the second quarter exceeded last year's mark by 310 basis points. This is a highest quarterly margin level in the company's public history. This record margin performance is sourced from multiple markets and multiple components of our business model. Chris will detail all of these numbers later in the call.

It was a strong quarter for Cardtronics and it again demonstrates the fundamental strength and durability of our business model. Like the product we distribute more than a million times a day, cash, our business model has staying power. Management continues to focus on execution of our strategies and operating plans to drive shareholder value.

In addition, to record gross margin performance, this quarter's performance highlights include growing past the 70,000 ATM mark globally, dramatically improved financial performance in the UK.

Allpoint year-over-year transaction growth of 30% on Cardtronics' ATMs which translates directly to increased foot traffic and in-store sales for our retailers. Prepaid card year-over-year transaction growth of 23%. Completion of several tuck-in acquisitions in our high margin merchant on a load portfolio, a continuous focus on product innovation supported by the continuing build out and roll-out of our product pipeline and continuing execution against sales renewal and acquisition pipelines.

Our latest and best example of the strength of the model is our UK business segment. As you know Cardtronics has invested heavily in recent years to create a one of a kind vertically integrated operating model in the UK.

Last quarter I provided insight into renewed efforts to extract bottom-line value from those investments. I noted that we were beginning to realize results and that we anticipated further positive impact as we progress through the year. Those anticipated positive impacts have become real money as we look at our UK results for the second quarter.

Year-over-year, UK's revenues increased 15% for the quarter and more importantly adjusted EBITDA was up at substantial 55% or $2.1 million U.S. for the quarter. The UK contributed about a third or $0.035 of our adjusted earnings growth in the second quarter.

This is the first quarter where the UK has contributed, the significant profitability to Cardtronics since the quarter 2010. Our transformative investment task is now largely behind us and we believe this to be just a beginning of the continuing positive margin and profit trend in this segment of our model. These results and the performance of our UK team in achieving them have renewed our enthusiasm for this sizable and highly cash dependent marketplace.

In our U.S. markets, Cardtronics benefited from the across the board performance execution. We scored the high profile win with the announcement of Discover as the latest card issuer to join surcharge-free Allpoint network. Discovery is in the midst of major expansion of its direct banking business model.

Direct banking models, as you know, rely less on traditional branch presence and more on a combination of electronic service access and physical ATM access. That model creates a natural customer for Cardtronics. As discover grow this business segment we will along for the ride, renewals in the U.S. include big box retailers like Costco, super markets like Winn Dixie!, convenient stores like Circle K and specialty providers like Travelex.

We remain active in other renewal discussions and generally feel good about retention prospects. Our retail sales pipeline across the North American marketplace is active and we believe will yield new installations in the latter part of this year. This is slightly behind our timing expectations and will therefore impact when revenue starts to flow, but we still expect to close on several transactions in several countries and have largely maintained our capital projections, even though the revenue associated with these transactions will be bit lighter this year because of timing.

Finance institutions sales pipelines have broadened and strengthened with the gradual expansion of the Cardtronics product set and the recent expansion of the sales resources in the field. We recently announced an expansion of our market leading ATM branding mix product.

We have added a Preferred Branding Option for financial institutions. This new offering provides finance institutions a more cost effective way to extend fee free access to our convenient ATMs and premier retailers. Thus we can provide multiple banks with brand identity on an ATM instead of just one.

Our goals with this offering include expansion of revenue opportunities per ATM and additional foot traffic for the retailer. On balance it is fair to say that our pipeline for financial institutions are larger than at any time in our recent history.

Our acquisition pipeline in (Inaudible) continues to be healthy, although by its very nature it can by choppy. And generally speaking we continue to walk away from more opportunities than we act on. In the second quarter, we announced the acquisition of two small primarily merchant owned ATM fleets driving our total global ATM footprint of owned or operated machines above the 70,000 mark.

These two acquisitions now provide Cardtronics with West Coast offices. We continue to evaluate acquisitions of both the strategic and roll up nature and have added a senior executive formerly from the both (Inaudible) investment bank with these expertise and payments to lead that effort.

We also continue to monitor the increasingly active legal and regulatory marketplace for changes that may impact the Cardtronics business model. A vast majority of these actions are typically focused 100% on the point of sale and have no direct impact on Cardtronics.

A classic example of this is the announcement last week of the European Commission had adopted a recommended legislative package formerly proposing a revised payment services directive and regulation for credit card and debt interchange fees as a point of sale in Europe.

This payment service directive does not directly impact our business but warrants close watching for unintended consequences. Another regulatory opportunity occurs in the U.S. where selected (inaudible) have called on regulators to investigate the fees and practices associated with payroll cards. Our all point business currently has relationships with many of the key payroll card program operators. As the benefits of surcharge-free access are significant for the consumer, we do not anticipate any difficulties.

Finally, under the heading of never a dull legal or regulatory moment, there was a court ruling earlier today that found that the Fed failed to implement the Durban Amendment consistent with the law's intent. The Durban Amendment only legislate point-of-sale interchange and does not legislate ATM interchange. However, one always worries about the unintended consequences of a change of this magnitude, so Cardtronics pays attentions and tracks these rumors.

While appeals will almost certainly be filed a new cloud of uncertainty is once again kept over point-of-sale debit interchange. Some early readings suggesting that among other things, this could yield the decrease in point-of-sale debit fees from $0.21 down to $0.12. This could obviously stimulate all kinds of consequences intended and unintended. One of our early hypotheses on this outcome was that as banks lost POS debit revenues, they would refocus on POS credit revenues and retailers advert to steer credit users where possible to cash.

Additional reasonable people can conclude that fees will be made up somewhere and that could result in a cost structure for consumers that limit the use of debit. These would be favorable outcomes for Cardtronics. I'm sure that there are unfavorable scenarios as well but it is simply too soon to tell. In the short-term however, we anticipate no impact positive or negative.

So the legal and regulatory forces remain active and that appears to be the new normal. But through it all, the unique Cardtronics model continues to perform. Our success in growing our margins on a global basis has clearly exhibited this quarter, coupled with solid revenue results, smart acquisitions and an expansion of our product capabilities continues to deliver for our shareholders.

And now to Chris for a more in depth look at the numbers.

Chris Brewster

Thank you, Steve. As Steve said, our consolidated revenues for the June quarter came in at $208 million that was up 8% from the same quarter last year and similarly to the first quarter of this year, we posted strong growth in our high margin ATM operating revenues of 12% and our lower margin equipment sales revenues were actually down year-over-year. So let me explain that a little bit further.

As many of you know, we have an equipment sales business where we access the value added reseller for one of the big equipment manufacturers. Historically, that business has been perhaps 3% of revenues. It became more important in the latter part of 2011 and early part of 2012 as the new ADA regulations required the implementation of voice guidance so that sign impaired people could use ATMs and that drove somewhat of an equipment replacement cycle.

So we saw a big bubble in our ATM hardware sales business as we came through 2012. Equipment sales in the current quarter were $4.4 million versus $10.5 million in the second quarter of 2012. As we mentioned in the past, these revenues are little difficult to forecast in terms of timing and size and margins are fairly lowered around 10% but we believe what we've seen in the last few quarters represent a more normal run rate for these non-core revenues.

Our core high margin ATM operating revenues continue to perform quite nicely as evidenced by our year-over-year growth of 12% and to break that apart for you of the 12%, a roughly 3 percentage points was due to acquisitions. One of our core competencies we believe is the ability to execute high return and EPS accretive acquisitions and at safe side, we will continue to actively evaluate opportunities both here and overseas.

We also enjoyed organic revenue growth of roughly 9% in our ATM operating revenues, about 4 percentage points of that related to unit growth with both new and existing merchants. As we mentioned also in previous calls, we had a three large customers in the first half of 2012 that being Valero in the United States, 7-Eleven in Canada and Shell in the UK. Our installations for all three of these programs started up during the second quarter of last year and they all became fully ramped within the third quarter of 2012 and these three major customers accounted for a significant part of that 4 percentage points of the revenue gain.

Our banking network branding revenues were also really strong in the quarter, these high margin activities contributed by 4 percentage points to revenue growth also. Our bank branding locations in the U.S. and Canada now total over 19,000 units across the company up from 16,500 at the end of the second quarter of last year. The remaining 1% of growth is mostly attributable to same-store transaction growth and that was partially offset by interchange rate reductions in the effect of network routing shifts that we've talked about in the past.

So in summary, I would say we have solid contributions across several of the revenue growth plans that resulted in a 12% gain in ATM operating revenues of which 9% was organic at the high end of our expected range.

Moving to earnings, adjusted net income per diluted share was $0.49 for the quarter, up 29% from $0.38 in the same period of last year. Strong earnings performance was driven by several factors as you would expect with strong core ATM operating revenue growth of 12% was a significant earnings driver, but we are also benefited from lower unit operating cost in the U.S. which feel gross margin expansion in the quarter and we achieve significant improvements in our financial results from our UK operations and I will talk more about that in the few minutes.

But first, let's talk about the margins a bit. Margins were 33.8% in the second quarter that is the highest totally result we recorded in our history as a public company, that represented as Steve said 310 basis points of improvement from the same quarter of last year. And the major drivers of that included the following. First, the higher level of equipment sales a year ago was a drag on gross margins in that period because of the relatively low margins but this year the decline year-over-year in equipment sales resulted in roughly a 60 basis point year-over-year improvement in consolidated margins.

Secondly, we continue to realize cost synergies on our 2011 acquisitions particularly EDC and access the money and those two operations were margin accretive to our consolidated results year versus year by about 90 basis points in the quarter. Our most recent acquisitions of ATM network (inaudible) and Merrimak came on board with higher than average gross margins and these acquisitions added about 50 basis points margin in the quarter.

Gross margins in our UK operations were up 360 basis points from a year ago and that was sufficient to drive consolidated margins up by about 50 basis points, and then the remainder of the margin improvement came from the remainder of our U.S. business as we continue to leverage our scale and drive efficiencies into our cost structure.

You may recall that a major global network reduce the interchange it paid on ATM transactions in April of 2012. This was an immediate negative to margins when it occurred and that impact got somewhat worse later in 2012 as banks rerouted transactions over the rest of the year seeking out that lower interchange rate.

In the second quarter of 2013, we cycled on some, but not all of that paying. The margin gain that you saw in the quarter that we just ended was in spite of about 30 basis points of margin paying from those year-over-year interchange changes.

Now turning to performance in the UK ATM business. As Steve said, revenues up 15% over last year. Adjusted EBITDA up $2.1 million or about 55%. The year-over-year turn around in the UK business contributed over $0.03 a share for the total of $0.11 of adjusted earnings per share increase that we reported. So this improvement is significant and it results from a number of initiatives.

We have implemented dynamic currency conversion and those transactions and other non-monitory transactions in accounted for a meaningful part of our UK revenue growth. These are relatively higher margin revenues and these increases with the direct result of an increase management focus on driving transactions. We had new customer growth earlier this year. We added some high traffic ATM locations associated with the contract win locations in major very high traffic train stations in the United Kingdom.

And lastly, unit costs have been reduced. Unlike the U.S. we operate a fairly highly vertically integrated business in the U.K. wherein we perform with our own staff a large part of the cash deliveries maintenance and installation functions. Typically in the U.S. we subcontract all of that out. We've made some great strides to improve efficiencies in these areas in the U.K. and we expect to make additional efficiency improvements in the coming months ahead. So I'm really encouraged frankly by the recent financial results in the U.K. I'm excited about the future of our business prospects in that key market and I expect to see increasing bottom line contributions from the U.K. as we move forward.

Moving on to capital expenditures and the balance sheet, our capital spend for the first six months was approximately $30 million. Our 2013 full year guidance for capital expenditures has been and is $70 million for the year. And while we are a little behind where I thought we would be at this time of the year, I still think we will come in around or about this number as we have a number of midsized new ATM deployment opportunities that we are working hard on and hope to close upon within the next few months.

Our ratio of net debt outstanding to trailing 12 months adjusted EBITDA was 1.5 to 1 which is the lowest level of leverage we've carried since we've been a publicly traded company. We are continuing to see interesting acquisition opportunities and obviously we are in good shape financially to take advantage of higher return accretive deals as we come across them.

Now turning to guidance, on the heels of what I think was a good second quarter and along with increased visibility in the rest of the year, we believe it's appropriate to adjust our full year guidance somewhat. We're now expecting revenues to range from $825 million to $840 million versus prior guidance of $835 million to $850 million, a reduction of about 1% which could be explained by the following factors.

First, we had assumed in earlier guidance a slightly higher exchange rate between the British pound and the U.S. dollar than we've seen so far this year and that we're now expecting for the rest of the year. This change in exchange rates accounts for about $6 million or about half of the revenue adjustment. Second, our equipment sales coming off the big boost we got from the new ADA rules last year have tailed off somewhat more sharply than we expected. These lower margin equipment sales are not highly important from a profitability perspective, but they do impact topline revenues and we're expecting equipment sales to be about $6 million and below what we're originally for the year, not significant profit impact but some revenue impact. Partly offsetting those two factors are the tuck-in acquisitions we've completed so far this year and those will add about $6 million of revenues in the year.

The last factor relates to what Steve mentioned in terms of seeing some delays in expected retail and new business wins. We forecast a certain amount of new business each year based on the pipeline, nothing of any significant size has dropped out of the pipeline but it has been pushed out timing wise a bit. I do think we will see some new customer wins in the back six months, but we originally anticipated that the couple of these starting to impact us a little earlier the year.

On adjusted EBITDA line, now expecting $206 million to $211 million versus prior guidance of $202 million to $209 million, expecting adjusted net income per diluted share to be $1.79 to $1.84 based on 44.7 million diluted shares outstanding versus prior guidance of $1.72 to $1.79 on the same share count. We are expecting depreciation to be $63 million to $64 million, no significant change and we are expecting cash interest expense of $19.8 million to $20.3 million also no significant change.

With that, I will turn the call back over to you Steve for a few final comments.

Steve Rathgaber

Thanks, Chris. In closing, I'd just like to mention that during the past year we've had to explain the negative effect on margins of certain acquisitions which came in the door running margins below our average at the time and the effects of interchange reductions by measuring the bank network and related system volume between the networks as Chris alluded to earlier.

We said at the time that you would see margins improve as we harvested acquisition synergies and as we cycled on the interchange changes and that the core revenue and margin growth engine of the company was in good shape, [identifies] quarter's results with core organic revenue growth of 9%, margins up 310 basis points and adjusted EPS up 29% provide validation of our statements to you.

And with that operator, we would be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust Robinson Humphrey

So I wanted to dig a little bit deeper on the new business pipeline and sort of how much of the timing slippage is just sort of organic if you will, I mean it's the nature of this presenting specific going on and if the implication as you gain visibility to assigning some of this new business in the back half Chris that what we might expect in ‘14 would be acceleration of your growth rate all us being equal above your 7% to 9% organic expectations that you've laid out from a longer-term standpoint?

Steve Rathgaber

So I will take a little bit of swing at that and probably Chris come in with any opinions he might have, but I would say that in the ordinary of course what we are seeing it is just the nature of the business that one of the hardest things to do in our business is and I have mentioned this things in previous calls is to pin down when you can get a contract executed with any great specificity. It is not like a service that expires on two things if you don't have another contract in place you lose your ability to operate, people do routine miniature extensions and let things roll as just sort of the ordinary model.

So what you are seeing and I am answering the first part of your question is essentially that we are just seeing business be the business and sometimes we get better than other times and that sort of thing. So there is nothing particularly deeper meaningful in that other than ordinary activity sets which is why the capital numbers staying the same essentially and we're just talking about when banks might start. We do have to say to close them, but we feel good about what's out there and it's a multi-country view, it's not a single deal or a single country that's involving this thing there, there are multiple activities in play.

As it relate to sort of preliminary 2014 guidance, I will defer to Chris on how he wish to fill then I guess.

Chris Brewster

I think I'll defer that when we actually put out some 2014 guidance.

Andrew Jeffrey - SunTrust Robinson Humphrey

Right. And I'm not asking you for guidance Chris, I'm really just trying directionally or qualitatively, is there anything that would also the view that if the revenue were pushed out of ‘13 that it wouldn't be additive to what the business would do anyway as far as growth in ‘14 or is it not like to think about it that way, because perhaps there is, you have a more conservative deal of what the closing rates are in your ‘14 pipeline. I guess that just, I'm just trying to directionally get a sense of whether this is truly timing or kind of the whole pipe gets pushed out?

Chris Brewster

I guess in that context, I do offer the following. I have no reason at this point to alter the general statement of our 7% to 9% organic engine as it deemed. It has run consistently over the past three years in a bandwidth close to that, sometimes higher, hardly ever lower, near the bottom and went to price, but that continues to be our model and there is nothing that's going on this year that would cause me to alter a view of that at the present time for next year.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. Steve you mentioned a few pretty big contract renewals, would you comment just generally that average pace of renewal, are there other significant deals coming up over the next six to 12 months and what's the renewal pricing environment like.

Steve Rathgaber

I would say that the Cardtronics has an average life of contracts that is in the five to seven year range and therefore we're typically rolling in a rhythm that's fairly consistent although I think we've indicated it over the last couple of years it was a little bit on the lighter side in terms of renewable activity and therefore over the coming years there'll be a little bit heavier renewal cycle but not materially off the pace of that math.

So I think that what we're seeing so far this year provides comfort relative to what we deliver. We see great value for example in our Allpoint network which is a traffic driver and which comes essentially only with Cardtronics ATM placements, essentially, there are one or two exceptions to that and we think that helps us from a stability in the renewal process and I would say that through the present part of the year the renewal cycle has certainly met expectations in terms of pricing activities and we're neither surprised nor particularly concerned.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. and then one last one if I might, if you look to some of your new technology initiatives I know you mentioned multi bank branding as one of them some of your loyalty and app based surcharge-free network related initiatives still on track for those to potentially contribute to revenue growth in a meaningful way next year.

Steve Rathgaber

Yes, I think the way I would phrase that is that the combined to help drive foot traffic into the store. The Cardtronic strategy has a long tail in terms of transaction share that we hope to drive in to our ATMs because of their convenience and because of their increasingly useful capabilities and because of the way we partner with finance institutions to drive traffic there and that is a key element of our strategy and we hope for it to pay dividends increasingly over the out years, whether or not I would call the impact for next year, material or not, I'd have to think about but all the trend lines should be favorable.

Operator

Thank you, sir. And our next question will come from Bob Napoli with William Blair. Please go ahead. Your line is open.

Bob Napoli - William Blair

Nice job on the synergies in expense side in particular, I guess the UK, that was easy apparently. Why didn't you do that -- did that sooner?

Steve Rathgaber

You want to get yourself [heard], go over to the UK and tell that to those people.

Bob Napoli - William Blair

What were the main changes that you made, not such a dramatic change, I know -- what seems to be impressive to me I think is the revenue growth that you're getting on top of that and I guess that 15% revenue growth had to be a little bit higher in constant currency but what, maybe a little more color on what you've done to be able to turn that business so quickly and need to be able to get to topline the dynamic currency conversion product, it sounds like that's a significant driver and what was the decision point there?

Steve Rathgaber

There literally, the UK story is a little bit of a lot of things, and it has to do with good margin revenue like the DCC opportunities which are growing and when we get the right kind of ATM placements DCC becomes a super value add on those because they're in the right kind of touristy locations. It has to do with the proportion of balance increase that generate fees at our ATMs in relation to the withdrawal rates, it has to do with classic Cardtronics muscling of the vendor community that serve us over in the UK, where we re-leverage our scale which is now, across several countries and several of our vendors are across several countries. So it provides a leverage opportunity there and it has to do with the classic lean process management things that we look at in terms of the services we do in-house.

And we've been able to make improvements in for example, the number of ATMs that can be serviced by truck in a given day for cash and transit, or maintenance activities that can be done similarly. So it literally a dashboard Bob of a whole host of items, little bits of increments that have added up to a very attractive outcome and as I say, we believe that it's a beginning in the journey, so we think there is runway there.

Bob Napoli - William Blair

Now you say there is runway with the margins moving up so much, that seems to make you probably more willing to invest in that market, you talk about your pipeline is their -- the growth initiatives on adding ATMs or moving into other western Europe countries or anything like that involved?

Steve Rathgaber

In the UK is specifically and what all of this margin opportunity does is allows us to be more competitive for new sides and still provide good margin, so that should help us in the ordinary course of just how we complete in the marketplace. And as I've indicated in the past, we are looking at selected other countries and when the opportunities present themselves to enter on the right terms and conditions, we hope to do so just not in the position to declare any of that today.

Bob Napoli - William Blair

Okay, now when you talk about the pipeline of ATMs in different countries are they all in current countries or are there any potential new countries in that pipeline?

Steve Rathgaber

They're all across the primary four countries we operate in today.

Bob Napoli - William Blair

Okay, and then just on, I mean the balance sheet as you mentioned, Chris, 1.5 your leverage low as it's been since you've been a public company, what types of things are you looking at from an acquisition standpoint? I would imagine you're not really thinking about returning capital at this point, it seems like you have more than enough investment opportunities toed onto that capital at this point. And don't know that there's much left to acquire in the U.S. although you guys keep surprising us with little tuck-ins?

Chris Brewster

Well, I think there are some things that could be interesting in the U.S. and there's certainly some things that could be interesting overseas. I mean at the moment I would say and our focus is primarily on investment opportunities, and as it relates to acquisitions could represent some meaningful spending in the future. To the extent that doesn't materialize over some reasonable timeframe, I mean we would probably have to start thinking of returning capital to shareholders. But I'd say certainly over the last 3 years, we've had pretty good success, it's finding accretive acquisition opportunities to put capital to work in.

Steve Rathgaber

And you may have noted Bob that I made comment in my notes that we've added somebody to essentially help us with M&A activities coming from a background that has a view of the payments industry that's more broadly than just some of our classic rollup opportunities. So we continue to be interested in strategic company fits as well as classic rollup hits both domestically and internationally.

And that the risk of being somewhat repetitive be -- i-design and locate and search types or of a different kind of strategic versus the two smaller deals we just did that are sort of more classic rollup. So the acquisition pipeline is active and we will continue to work it in ways that we think make sense.

Bob Napoli - William Blair

Great. Last question just your financial institution pipeline, I'd like to understand is that primarily again just a little color for bank branding deals and is this new ATM preferred, is that part of the pipeline and are you I mean do you get how does the economics work when you're putting multiple banks on one ATM versus one.

Steve Rathgaber

So, we think, so let me try to answer the first part and then the second part there. The pipeline is essentially, we now have more reasons to talk to financial institutions and they can [commit] us in different ways, somebody that wants to do locate or search application and sign up from Allpoint; we now have an opportunity to offer them a few branded ATMs in a specific marketplace that might be local. So instead of doing you know, 200 ATM branding deals we might begin to do some 10 ATM branding deals or we might on top of or underneath a large branding deal be able to offer an Allpoint participation of locate or search application or pre-alert offering to drive foot traffic into those stores along with five preferred branding options.

So the whole opportunity to communicate with our FI sales wasn't the whole reason we made the investment in the FI sales force is to talk to financial institutions more broadly about ways to get more value from our ATM franchise to their cardholders to help make them more competitive in the banking space.

So that is the nature of the pipeline. The conversation begins with product A and quickly can migrate over time if not day one over the course of the relationship to product B, C, and a small product tweak D as an addition. So we just have a whole new language and a whole new approach to the FI side. That's one of the more exciting things about the future of Cardtronics and one of the more exciting parts about our ability to drive foot traffic and ultimately sales to our retailers through the proper transaction share of growth model that we are laying down.

So that would be my windy sort of answer to your first question. As it relates to the economics on an ATM well more is better. So if an ATM historically had a profile of ex-dollars that was available to request and granting, what we hope to do with the preferred granting is materially enhance that, maybe double the capability from branding fees attendant to that. Now that's not going to be true of every ATMs. So don't do a growth doubling of the 19,000 branded ATMs, but it certainly will be true in selected high density markets where multiple players are interested in having a stake and making their presence known and stretching their brand by providing convenience to their cardholders in a way that only Cardtronics can help them do.

Operator

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

Ramsey El-Assal - Jefferies

It's great to see the strength in your margins. I guess how much longer do you think the efficiency program in the UK and I guess separately maybe the cost synergies from the 2011 acquisitions, how much longer are you expecting those each to make a positive contribution? Is this something where we're going to see an impact for the next couple of quarters and then kind of normalizes or is this really, there really could just be a sources sort of margin upside for quite a long time, I guess especially of the UK efficiencies?

Steve Rathgaber

Well, I would offer that from a UK perspective. We feel comfortable that the journey we're on will carry well in to next year in terms of constructive impact. It's not all done by any stretch, harder for me to look beyond that quite frankly with any practical basis but as I indicated earlier, there are number of moving parts we are further along on some then others and we're continuing our learning experience as part of the way we altered our management structure over there in the way we're operating. So it is a full court press but it occurs, the impacts occur on different timelines and therefore I think the simplest answer is to say that next year we would expect to see some continuing impact.

Chris Brewster

I don't think I would add to that, on the U.S. side is that the two large acquisitions we did back in 2011, I think you will largely be seeing the acquisition specific related synergies and then in our numbers this year. There are probably be bits and pieces of to come on the more recent acquisitions yet, but I would also say that our operating people just continue to find ways to do things more efficiently and take cost out of the business and you may recall we hired a fellow by the name [Rick Davis], a little over year or so go to come in and lead and its very senior level, process improvement projects. And they are already planning and scheming in terms of what they are going to bring to bear next year. So I don't think that's the end of the story is over.

Steve Rathgaber

And to make an important, important point, this is not one of these margin improvement gains that come at the expense of service quality. The fact of the matter is there are availability of the ATMs, this month is probably at its highest level in many, many years if not ever in terms of the whole portfolios availability and that's an indication of doing things smarter and better not just doing things cheaper. So we feel very good about the balance of that and as Chris indicates, we continue to enjoy new findings there.

Ramsey El-Assal - Jefferies

Great, that is helpful. I always think of the merchant owned business, its being lower margin than the company onside, and but I noted that the two merchant owned kind of tuck in recently have been nicely accretive, has the profitability dynamic for merchant owned business changed for Cardtronics due to your larger scale or there is something just special sort of best-in-class about these two businesses you picked up or my understanding that dynamic between merchant owned and company on the margins?

Chris Brewster

I would say it's largely a function of the style of contracting within a specific business and the language we are using internally around that length to some is gross revenue accounting versus net revenue accounting. If the nature of the contract where the retailer is such that we as ATM operator, we have rights to all the surcharge and we have rights to all the interchange revenue, Allpoint revenues and anything else we may earn and pay the merchant a merchant fee, we book all of those revenue streams as revenue and we book the merchant fee as a cost item. So that is gross revenue accounting.

If on the other hand, the contract is written in the fashion for example where we have no interest in the surcharge, we may have an interest in the interchange, we may have an interest in for example Allpoint revenues, in that setting we would not, if we have no economic interest in the surcharge if all of that just goes directly to the retailer and we simply act as a pass through agent to collect it for him, in that case we don't record the surcharge revenue. We don't record the surcharge as revenue that goes directly to the merchant. All we would record as revenue is interchange and any other ancillary revenue streams we might pick up. And the merchant fee if any in that setting would be much, much smaller, but it may will be that the merchants take simply the surcharge that he is getting.

So by the nature of that, if the same, you can take the same ATM running the same transaction count, if the way the contract is written, the fact that gross revenue accounting is appropriate you might see margins in that in the high-teens, if the way the contract is written is a net revenue accounting is appropriate for, you may see margins up in the 40s in terms of percentages of revenue.

Steve Rathgaber

And the additional benefits that come from that relationship is when we bypass the interchange and surcharge models completely and we end up with a fee based model that has the pragmatic value of reducing our exposure to interchange broadly, which diversifies our portfolio and we additionally get from having all of these ATMs and providing services to them, the scale that comes from having 30,000 odd ATMs in addition to the 30,000 odd we own, the scale that comes from being able to leverage vendor opportunities on that side of the house as well. So when we think about extracting synergies, they come from strange places at strange times based on a particular small perhaps acquisition putting us over a threshold of ATM count that allows us to renegotiate something.

So the merchant owned on lowered space can be high margin when the revenue model is proper. It can be diversifying in terms of reducing risk exposure to interchange and can be and is contributory to some of our synergy extraction in the ordinary course of the business.

Ramsey El-Assal - Jefferies

One last one for me. Following up on Bob's direct currency conversion question, how fully penetrated is your ATM footprint right now with DCC, I mean for those eligible locations, those appropriate locations, are you guys have the sort of fully rolled out and sort of the impact of this is largely baked in or is this something where you are seeing a ramp or either ramp and transaction counts from existing machines where it pulled out or maybe even a portion of your fleet that hasn't been penetrated by this yet that where it was appropriate, where it might could be penetrated?

Steve Rathgaber

There is opportunity still in both the U.K. and the U.S. there. It's difficult to quote literal percentages on that kind of thing because not every location is as appropriate DCC and quite frankly we've been added for a year, less than a year in some cases and it's just hard to know yet how the rhythm of that stuff and where we can roll that out. And it is not an automatic dead water and start roll out, there is some tweaking that has to be done so it's not just the kind of thing where I could say placed on every ATM and see what happens. Having said that, when we look at the U.K., there is the opportunity to add another major network there in coming months and draw additional DCC volume from that entity so that would be the next larger increment that comes all way.

Operator

Our next question in the queue comes from the line of Gary Prestopino with Barrington Research.

Gary Prestopino - Barrington Research

With the signing of Discover, how many cards do you now have that can have the Allpoint network?

Steve Rathgaber

Well, that's more of a tricky question than you might wanted to be. There are tens of millions of cards that have access to the Discover network and the Discover credit cards tens of millions more, but they're not likely active users. The opportunity with Discover is less about credit card cash advances at our ATMs which would make the number of cards seem very big, but it would be misleading versus the opportunity for Discover to grow is the right banking franchise, which is very committed to and which we think it has a very successful shot at. And as it does that, that's where we see the opportunity for traditional debit cards accessing our ATMs. There will just be debit cards that are generated by Discover as opposed to other entities.

Gary Prestopino - Barrington Research

Well, do you have any debit cards Discover has?

Steve Rathgaber

It's a relatively modest number at this point.

Chris Brewster

It's on the front end, that was in the press release. We didn't announce that.

Gary Prestopino - Barrington Research

It's okay. I can look that up.

Steve Rathgaber

It's small.

Gary Prestopino - Barrington Research

A few branding option that you have, explain to me if you got like a bank, like you got a Chase Bank that you are branding for as the lead bank in, say, Walgreens and to the customer and the bank, to the customer that looks like and feels like a Morgan ATM, it really isn't, but how do you split it up where if you start in a brand with other banks on that JPMorgan bank, how does the lead bank or the bank with the biggest signage, how do you get around that the whole issue of that, it's not really then just as JPMorgan or Chase ATM?

Steve Rathgaber

That's an excellent question and certainly one that has challenged us in the evolution of our banking on this. And I would say it is the primary reason that I said earlier don't take 19,000 branded ATMs and multiply by two in terms of the revenue opportunity. It depends on the contract terms you've negotiated, which often depends on the pricing terms we've negotiated as to what an ATM can be enabled to do.

Certain of our contracts give us more flexibility to do more and certain of our contracts give us less flexibility to do more. Certain institutions are more proprietary about brand management and certain institutions are more flexible based on fee structures. So it is a journey to optimize that and one of the banks that will keep Cardtronics busy over the next three or four years I hope.

And as we do that, the question of the sophistication that we do that with I often acquit to sort of a time share model, where if you walk up to an ATM and you stick in a card that says, Bank A, even though at the top of the ATM it says Bank B, but you are greeted with the screen just for that card that says welcome to Bank A, Bank A is bringing you this transaction on sort of time share basis as the temporary owner of the ATM. And then you provide a receipt that supported by Bank A and you create a Bank A customer experience, but when Bank B's customer walks by they are just seeing the Bank B sign and the Bank B screens which are same Bank B screens until they activated by a Bank A card. So hopefully that is not too overwhelmingly confusing, but it has to do with how do we use technology to create a customize experience and not dilute the significance of the brand experience that is very powerful for any major organization that what should to put the sign in the window along with the top around the ATM, along with all the screens activity that ordinarily focused on it while the ATM is not in use as people walk by in that sort of thing. So it's a question of sort of getting more banks for the ATM buck literally no pun is intended.

Operator

Our next question will come from the line of Mike Grondahl with Piper Jaffray.

Mike Grondahl - Piper Jaffray

Yes, thanks for taking my questions. In terms of DCC in the U.K., do you comment on what the contribution was from DCC to that 15% revenue growth?

Steve Rathgaber

Yeah, I would say it's -- I won't be real quantitative about it, I would say it is a relatively small proportion of the revenue growth, but it is important higher margin revenue.

Mike Grondahl - Piper Jaffray

Okay. And I think you have commented in regards to the renewals that pricing was basically consistent or stable, any other terms change that were sort of meaningful with those renewals.

Steve Rathgaber

In the set we have talked about there is a evolution of the Cardtronics business model that is attempting to do in the ordinary renewal cycle a series of things that reduce our risk and exposure to everything from interchange issues to interest rate issues relative to the cash that we rent and to the kinds of things I was just referring to in terms of flexibility for doing different things at the ATM that drive more traffic for the retailers in-store sales benefits.

So I would say that generally speaking you are seeing the Cardtronics contract evolve to incorporate things that enhance the service offering and the benefits for all the parties participating in the contract and at the same time work to reduce the risk profile to Cardtronics from some of the things that could be more volatile like interest rate impacts and that sort of thing.

Mike Grondahl - Piper Jaffray

Okay. And then just lastly, what should we expect or think about when it comes to Allpoint over the next couple of years? How would that continue to evolve and sort of support your growth?

Steve Rathgaber

I think the Allpoint story is one that can be made better year after year for many years to come by doing things like adding future functionality, say for example deposit taking capability at selected machines by adding a product value in inserting coupon capabilities for certain Allpoint classes of membership or that kind of thing by adding more programmatic focus on driving more transactions by the institution to the Allpoint location through things like fee alert management, where fee alert reminds the consumer through the bank's offering of our fee alert service that they went and just lost money by doing a surcharge when they could have gone to a Allpoint ATM and save money. Two other things that I can go on about but wouldn't want to reveal at this point.

Operator

(Operator Instructions) And our next question will comes from Reggie Smith with JPMorgan. Please go ahead. Your line is now open.

Reggie Smith - JPMorgan

Just kind of digging through the numbers in the I guess the supplement, it looked like and I apologize if you've covered this already but it looks like your interchange revenue growth accelerated a little bit and I wasn't sure, is anything behind that, is it the comps are getting easier there or has anything gone on to kind of improve your performance there?

Chris Brewster

Well, I think we got a couple of things going on, we have partially cycled on the adverse interchange rate changes that hit us last year, initiated when one of the major interbank networks reduced their cost as interchange rates. So we've cycled on, I would say most but not all of that. So that was sort of a damper on interchange growth that is not fully removed but is partially removed.

And then the other thing is the revenue growth we've seen in the UK, a lot of that is arising from either free-to-use transaction in the UK as we call them, which are interchange only. There is no surcharge to the consumer or to some extent from balance inquiries whichever transaction that generates interchange. So we had, the significant majority of the UK revenue growth would be interchange revenue growth. So that's in large measure I think why you are seeing that dynamic in the numbers.

Reggie Smith - JPMorgan

And then, it sounds like you kind of touched on this earlier but thinking about the acquisition you did earlier this year where you acquired the company that does kind of screens for the ATMs and marketing and it sounds like with the new branding program, you maybe leveraging a little bit of that. Is that in fact the case and also what other things that you kind of looking and thinking about with that particular asset, so far as marketing on screening. Any updates you can provide on that subject would be great? Thanks.

Steve Rathgaber

So, yes is the answer to your question. We're leveraging that capability for the specific sort of multi-bank branding examples we were just discussing. That is specifically i-design software on our ATMs that is that enabling capability. There are current generations and future generations of that software under evolution and we're sort of using an older version now. We'll be migrating over time to the version that give us a little more flexibility and control and adaptability.

We are continuing in the i-design part of the family of Cardtronics to do what they do, which is to sell software as well as sell advertising services to banks and to consumer goods firms. So they are in the ordinary course doing that sort of things, and we are working on a plans for how we bring some of that capability in the right bite size chunks into the U.S. market at the appropriate time. So, that would be sort of 50,000 foot answer to that question.

Operator

Thank you. And presenters at this time, I am showing no additional questions in the queue. I'd like to turn the program back over to Mr. Rathgaber.

Steve Rathgaber

All right, well, thank you everyone for your attention today. And as always, we appreciate your interest in Cardtronics and we look forward to talking to you all on the next call.

Operator

Thank you, presenters. And thank you, ladies and gentlemen. Again, this does conclude today's conference. You may now all disconnect and have a wonderful day.

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Source: Cardtronics' CEO Discusses 2Q 2013 Results - Earnings Call Transcript

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