Cardtronics, Inc. Q3 2009 Earnings Call Transcript

Oct.28.09 | About: Cardtronics, Inc. (CATM)

Cardtronics, Inc. (NASDAQ:CATM)

Q3 2009 Earnings Call Transcript

October 28, 2009 5:00 pm ET

Executives

Melissa Schultz – IR

Fred Lummis – Chairman and Interim CEO

Rick Updyke – President, Global Development

Mike Clinard – President, Global Services

Chris Brewster – CFO

Analysts

Chris Mammone – Deutsche Bank

Franco Turrinelli – William Blair & Company

Reggie Smith – JPMorgan

Bob Napoli – Piper Jaffray

Operator

At this time I would like to welcome everyone to the Cardtronics third quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

I’d now like to turn the call over to Melissa Schultz of Cardtronics. Ms. Schultz, you may begin.

Melissa Schultz

Thank you, operator. Good afternoon everyone and welcome to Cardtronics third quarter conference call. Participating on the call today are Fred Lummis, our Chairman of the Board and Interim Chief Executive Officer; Mike Clinard, our President of Global Services; Rick Updyke, our President of Global Development; and Chris Brewster, our Chief Financial Officer. Listening in and available for technical questions regarding our transaction processing operation is Jerry Garcia, our Chief Information Officer. Prepared remarks is 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 statement regarding forward-looking information. During the course of this call, we will make certain forward-looking statements regarding future events, results, or performance. Any forward-looking statements made on this call are subject to risks and uncertainties including but not limited to those outlined in our reports filed with the Securities and Exchange Commission. Actual events, results, or performance may differ materially and 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 those measures is included in the press release issued this morning.

I’d like to now turn the call over to Fred Lummis. Fred?

Fred Lummis

Thanks, Melissa. Good afternoon, everyone. I know how disappointed you must be to hear from me again. But I want to tell you that we are still working hard to find a new CEO. In fact, our search is taking longer than we originally expected, largely because of our own doing.

On the one hand, as the company continues to perform well and our profile is more enhanced within the payments community, there is more and more interest from the marketplace in our CEO position. On the other hand, our existing management team keeps raising the bar through their own performance and the Board just won’t settle for second best. So it’s taking longer than we expected to complete our work.

We are still focused on the same set of qualifications now as when we started the search and I can tell you, there is lots of interest in the position. So we believe that you won’t be disappointed when we do complete the search and announce our new CEO.

Okay, now for the business. I’d like to steal a little thunder from the other guys by saying that we posted another record quarter, highlighted by the following. Revenues were up year-over-year, EBITDA was up almost 50% over last year, adjusted net income was $0.24 per diluted share and we were able to pay down our bank revolver by more than $7 million.

Now with that top line summary, let me turn the call over to Rick Updyke to explain exactly how that was accomplished.

Rick Updyke

Thanks, Fred. For the third quarter of 2009, our adjusted EBITDA totaled $32.4 million, which represents an increase of over 47% when compared to the third quarter of 2008. Excluding the impact of negative foreign currency exchange rate movement, this year-over-year change would have exceeded 50%.

From a top line perspective, our reported revenues were up just slightly. However, when you exclude the effects of negative foreign exchange rate movement, our revenues were up nearly 5% when compared to last year and up nearly 8% when you look at our core business, that is our domestic and international company-owned ATM placement business, as well as our Allpoint network and bank branding program.

There are a number of factors helping to drive the impressive revenue growth we’ve seen so far this year. First and foremost, overall transaction levels at our ATMs have continued to increase. Cash withdrawals totaled nearly $64 million for the recent quarter, up from $59 million during the same quarter in 2008 and up from $62 million during the second quarter of this year. If you look at this trend on a per ATM basis, monthly withdrawal transactions totaled 642 per ATM during the third quarter of this year compared to 595 last year and 627 during the preceding quarter.

As you would expect, there are a number of reasons behind these trends including the continued mix shift of company-owned versus merchant-owned ATMs in the U.S. and our efforts to deploy more ATMs in high-transacting locations, especially in the U.K. In addition, our branding relationships, both direct and indirect through Allpoint, have continued to drive increased traffic to our ATMs. Finally, as highlighted during our last conference call, we believe transaction counts are also being driven by a shift in consumer preferences away from paying with credit cards and toward paying with debit cards and cash.

In addition, in the U.S., a significant portion of our U.S. withdrawal transaction count gain this year is a result of increasing withdrawal transactions from stored value cards utilized through Allpoint. Specifically, general purpose payroll and electronic benefits transfer or EBT cards. Allpoint is partnered with a number of card issuers to provide holders of stored value cards surcharge-free access to their funds through our network of ATMs. Many of these cardholders represent new customers for us. Individuals that don’t have checking accounts have been unable to use ATMs in the past, but now with their stored value cards, they can.

I think it’s important to point out that what we are seeing is not just growth in transactions and transaction revenues, but an overall expansion in the revenues earned per ATM. That’s a fine, but important distinction. Historically, we’ve measured our revenue growth primarily through our ability to generate incremental surcharge revenues through increasing transactions and/or surcharge rates.

What we are seeing now are the benefits of a successfully diversifying the revenues that we earn from each ATM. A great example of this is Allpoint, which as you already know sells surcharge-free access to our network of ATMs through financial institutions and issuers of stored value cards. As Allpoint grows, so do the revenues we earn from the fees charged to those financial institutions and card issuers. However, we also enjoy increased transactions on our ATMs from Allpoint’s expanding customer base, which translate into higher interchange revenues for us over time.

Most importantly, these incremental revenues are typically higher-margin revenues and thus, are a key reason behind a significant margin expansion we’ve seen so far this year. In addition to the favorable transaction and per-ATM revenue trends, new ATM placements made during the last 12 months, especially in the U.K. and Mexico, helped contribute to the revenue growth we are now seeing.

In the U.K. for example, we have been winning deals to deploy ATMs into well-known retailers and other high transacting locations like Welcome Break, a lean operator of motorway rest stops. In some of these estates, we expect to see volumes exceeding 7,000 transactions per month per ATM once they are fully ramped.

In Mexico, we continue to deploy ATMs in Latin America’s largest convenience store chain, OXXO, as well as selected resort locations. In fact, we plan on deploying ATMs in several hundred new OXXO locations between now and the beginning of next year as we continue to expand that relationship.

On a related note, we announced during the quarter that we have expanded into the Puerto Rican ATM market through a new relationship with To Go Stores, a leading convenience retailer in that country. Installations are progressing as planned and should be completed by early 2010. We also just completed a deal with a large supermarket chain, which we expect to more formally announce in the near future and are in active discussions with other retailers and financial institutions in the Puerto Rican market.

Finally, we are continuing to explore numerous opportunities for growth, both domestically and internationally that leverage our key strengths and assets, mainly our ability to effectively manage large disbursed networks of ATMs and the relationships we’ve established with key retailers and financial institutions.

We are working in active pipeline of opportunities that include traditional company-owned deployments, as well as managed services or outsourcing types of arrangements. These are in various stages of discussion, but include some of the largest retailers in their respective countries and global financial institutions, as well as some non-traditional placement opportunities. We hope to be able to provide you with more specific details on these opportunities in the near future.

At this point, I’d like to turn the call over to Mike Clinard, who will provide you with some additional details on our recent operating results.

Mike Clinard

Thanks, Rick. During the third quarter of 2009, a number of our key operating metrics continued to show improvements over prior-year figures. You can find these statistics on the key operating metrics page of the press release.

As shown in the release, we had a great quarter. Transactions were up considerably across the board and this was despite the fact that we had a slight drop-off in total number of transacting ATMs due to the continued rationalization of our merchant-owned portfolio.

From a margin standpoint, our operating gross profit per ATM increased substantially during the third quarter when compared to last year and that was despite the negative year-over-year FX trend. If you exclude the FX impact, per ATM operating gross profit per month increased from $297 in 2008 to $431 in 2009, which is over 45% and continues the trend we’ve been seeing all year.

As Rick discussed, much of this margin growth is due to strong transaction trends and a more profitable mix of revenues. In addition to that, we realized cost savings during the most recent quarter that further contributed to our gross margin expansion. For example, we realized nearly $2 million in savings during the quarter from lower maintenance and armored rates here in the U.S.

Under the terms of our recently renegotiated domestic maintenance and armored arrangements, these savings are expected to continue to at these levels through the remainder of this year and 2010 before increasing even further in later years. The U.K. is another good example of where lower operating costs helped contribute to the significant year-over-year margin expansion. In particular, our armored costs in that market are much more favorable today than they were a year ago due to a couple of factors.

First, our in-house cash and transit operation has allowed us to service nearly 800 of our existing ATMs in that market on a most cost-effective and operationally efficient basis. This initiative, plus other changes to our third-party armored providers have enabled us to put last year’s service problems behind us and we now enjoy lower costs, better cash utilization, and improved ATM uptime.

In addition, the management team in the U.K. has done a good job of removing underperforming ATMs this year and also renegotiating merchant fees under selected contracts in an effort to further improve the profitability of that portfolio.

So now – turning now to a company-wide operational view in all of our markets, what you are seeing here is a couple of things. First, the continued benefits we are able to realize from our size and scale, which allow us to negotiate the best possible rates and service levels with our vendors. And second, our continued efforts to take on initiatives that not only improve our cost structure, but also improve our business offerings. Examples of this include our in-house processing operations here in the U.S. and our in-house cash and transit operation in the U.K.

What's compelling is that we are identifying new ways to leverage these operational initiatives to not only lower our overall costs, but to also grow our top line revenues by adding new business arrangements such as transaction processing relationships and managed services offerings.

In – and in conclusion, I am very pleased with the progress we’ve made so far this year on our major operational initiatives and I look forward to providing you with further updates on these and other initiatives during our next quarter1y conference call.

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

Chris Brewster

Thanks, Mike. Our consolidated revenues for the quarter were roughly $129 million. That was up slightly from the third quarter level of 2008, but GAAP gross margins were up fairly considerably coming in at just under 32% compared to around 24% in the same quarter last year and my primary objective on the call today is to explain to the – these trends to you and particularly, the dramatic increase in gross margins.

If you exclude the impact of the unfavorable foreign exchange movements that we saw between the two periods, this year’s revenues were up roughly 5%. Additionally, if you exclude our relatively low-margin merchant-owned and equipment sales businesses, which showed year-over-year revenue declines due to attrition and due to current market conditions for equipment sales, our revenues in those remaining core businesses, that is our U.S. company-owned business and the two international operations, were up slightly over 8%. And I think this is pretty telling in that we continue to show a fairly robust year-over-year and sequential growth in revenues and margins even in this rather difficult economic environment.

However, it should probably also be pointed out that there were some events that negatively impacted our transaction trends in the quarter last year, namely hurricane Ike here in the United States and the third-party cash and transit armored service issues that we had in the U.K. So as we look at our results in 2009, it’s important to keep that comparative aspect in mind. You are seeing the combined effect of a very good quarter this year against a quarter last year that did have some weakness in it.

Now, as I touched-on on our last conference call, the growth we are seeing in our business is all coming from the higher-margin component of our business, namely our large U.S. company-owned ATM and branding businesses, as well as our international operations. These operations generated 83% of our revenues for the quarter and they generated gross margins in excess of 35%. Revenues in this core component were up 8% year-over-year as I said before on a constant currency basis, driven primarily by increasing transactions and revenue per machine and to a lesser degree, higher machine counts.

Again, what we are seeing here is really the power of our network and our ability to drive and increased transactions and revenues from multiple sources through that existing network. And the beauty of all of that in my mind is that as we drive incremental revenues from our installed ATM base, the gross margin impact from those revenues is greatly enhanced simply due to the fact of the relatively fixed-cost nature of our infrastructure.

Revenues in our U.S. merchant-owned ATM and equipment sales businesses did decline year-over-year. However, these businesses represent only 17% of revenue and generate much lower gross margin percentages. So that decline had no material impact on our consolidated gross profits or bottom line.

Similar to what we said last quarter, the real takeaway here is that our core business consisting of our U.S. company-owned and international businesses generated 8% year-over-year revenue growth in the quarter with expanding gross margins and that would seem to be a pretty respectable performance, particularly given the fact that we are in a pretty nasty recession.

So with that as background, what specifically drove the 8 percentage points of growth in GAAP gross margins from 24% last year to 32% this year? Basically, by my account, about 4 to 5 percentage points of that margin increase occurred because of the transaction growth and the favorable revenue mix shift that I just touched on.

Of the remaining 3 to 4 percentage points in margin gain, I’d attribute about half of that to lower vault cash rental rates, which are being driven by today’s relatively low floating interest rate environment and the remaining half is due to lower operating expenses, mainly on the armored car and maintenance size of the business as Mike was discussing.

So the net effect of all these moving parts was a 20% year-over-year increase in our adjusted EBITDA, up from $22 million last year to $32.4 million this year. And if you exclude the negative year-over-year foreign exchange changes, that increase would have been somewhat over 50%.

From a bottom line perspective, we generated adjusted net income of $9.7 million or $0.24 per diluted share for the quarter and that would compare with $2.7 million or $0.07 a share in the same period last year. As was the case with adjusted EBITDA, the margin growth that I spoke about before really contributed to most of this year-over-year increase.

So it goes without saying that we had a positive quarter, especially in light of economic conditions, but I think what excites me the most about all of this is not just that we’ve been able to increase profits in this challenging environment and I think many companies have been able to do that by essentially riding a wave of cost cutting and costs reductions, but all – but really the fact that we’ve been able to do so through a mix of revenue growth and cost reductions, which I think is a nice combination to have.

Turning for a couple of minutes to the balance sheet, our debt as of September 30, stood at just over $321 million. That consisted of $297 million of senior subordinated notes net of their discount, $17 million of senior debt outstanding under our revolving credit agreement with our bank group, $7 million in debt outstanding under equipment financing lines in our Mexico operation, and about $400,000 in capital leases.

Consistent with the second quarter, total debt continued to decline over the third quarter. In the case of the most recent quarter, the reduction was about $8 million. Now, that's a considerably lower level of reduction that we achieved in the second quarter where we brought debt down by about $24 million. However, we also had to make a $14 million semi-annual bond interest payment during the third quarter and we made no such payment in the second quarter. So the cash flows generated in both quarters were comparably strong if you will.

In fact, assuming no changes in our capital spending plan between now and year-end, there is a possibility that our $17 million revolver balance could be paid off entirely by the end of the year, although I wouldn't be surprised at all to see a small balance remaining at that point in time.

From a liquidity standpoint, we continue to stay in good shape. We have – continue to have our $175 million revolving credit facility with our bank group. It’s in place through May of 2012. Including letters of credit, we have $23 million outstanding under that facility as of September 30th and consequently, we have over $150 million in available committed funding.

From a covenant standpoint, we are in compliance with all of our covenants. We would continue to be in compliance even if we had substantially increased borrowings or had substantially reduced earnings. So I think as well as having significant positive cash flow, the balance sheet is in good order and we have substantial access to liquidity.

Turning to guidance. I think it’s clear once again that our existing 2009 guidance is probably no longer meaningful given the out-performance that we’ve seen in the September quarter. And as a result, we have revised 2009 guidance upward again and this is what we are now expecting for the 2009 year.

Total revenues in a range of $485 million to $495 million and that’s up from prior guidance of $470 million to $480 million. Overall gross margins of about 29.5% and that’s up from prior guidance of 28.5% to 29%. Adjusted EBITDA in a range of $107 million to $109 million and that’s up from prior guidance of $95 million to $100 million.

Depreciation and accretion expense of $39 million to $40 million, up slightly from the $38 million to $39 million that we guided previously and that’s primarily due to exchange rate changes. Cash interest expense of $30 million to $30.5 million, consistent with prior estimates.

And adjusted net income per share of $0.60 to $0.64, up from previous guidance of $0.40 to $0.50 and that’s based on approximately 40 million diluted shares outstanding. And we continue to expect about $25 million in capital expenditures this year, which is unchanged from prior estimates.

This guidance assumes exchange rates of around $1.60 per U.K. pound and about 14 Mexican pesos to the U.S. dollar, which tie pretty closely with today’s rates. And I’d say I believe this guidance really represents a straightforward appraisal of our prospects for the rest of this year and our management team would be somewhat surprised if performance fell outside of this range really on either end and I think it’s probably a pretty close-in view of the world.

Given the recent strength we’ve seen in our business, we thought it would also be helpful if we provided you with some high-level guidance for 2010. Those of you on the call that have had followed for us a while know that this is somewhat of a departure from what we have done in the past. Usually, we would wait until after we have completed our annual budgeting process in December to provide guidance for the upcoming year.

However, I think there are enough moving parts here to make it sufficiently difficult for people outside the company to get a good beat on what our results might be next year, based on what we’ve seen so far this year.

For example, we have the positive upsides such as strong transaction trends, low interest rates, and cost savings that have really helped us outperform this year. While some of those benefits are certainly recurring, some and in particular, possibly low continuing interest rates for example, may not be recurring. So we spent some time internally looking at all of these factors and come up with what we believe is some fair-minded high-level guidance for 2010.

Now, of course we are going to fine-tune new figures as we go through our formal budgeting process over the next couple of months, but for now we feel pretty comfortable with the following. And that’s total revenues in a range of $515 million to $525 million, which would represent year-over-year revenue growth in a range of about 6% to 8%; adjusted EBITDA in a range of $118 million to $123 million, which would represent roughly 10% to 15% year-over-year growth; and adjusted net income per share in a range of $0.75 to $0.85, which would represent about 25% to 30% year-over-year growth on that metric.

As I’ve mentioned in the past, interest rates are – one would think are almost certain to go back up at some point in the future. But even if they remain where they are for an extended period of time, certain long-term fixed-rate interest rate hedges that we put in place this year will serve to increase our vault cash rental costs by about $5 million in 2010.

So some of the current benefits we are realizing from this low-rate environment today will clearly not be with us in 2010. In other words, we have some new hedges that we put in place in 2009 that start January 1st, 2010 that will take vault cash that we are currently paying those 70 or 80 basis points for and put it in a position where we will be paying about 300 basis points for it. Now, the reason we are doing that is to fix that rate in for an extended period of time, between two and three years, to take the volatility out of our P&L. The price of that insurance, if you will, is that level around $5 million increase in costs over current rates next year.

However, having said that about interest rates, we do believe that the margin benefits that we are seeing from our revenue growth and our reduced operating costs should certainly be ongoing. I don't see any reason why the beneficial mix changes that we have seen will not be ongoing, barring any unforeseen events. So we think these – and we think basically all of those factors are adequately reflected based on what we can see today in the guidance that we just gave you.

We didn’t put specific CapEx guidance in the release for next year, but I would tell you that based on what I know today, I think a figure of around $35 million is probably a reasonable assumption at this point.

Finally, I’d like to provide a quick update to you on a topic I touched on during our last call and that is the improvements over the course of this year that we continue to see in our cash flows and our leverage profile.

As you may recall, in mid-2007, we completed a large debt-financed acquisition. And one measure of our leverage, total debt divided by trailing 12 months EBITDA. Debt-to-EBITDA peaked at 5.6 times. We went public in late 2007, used the proceeds of that offering to pay off debt, and we finished the year with debt-to-EBITDA of about 4.1 times. With a relatively high capital budget across 2008, that number did not change very much and we began 2009 leveraged at 4.25 times.

With improved profitability and a lower capital budget, we have reduced leverage to 3.5 times as of September 30, 2009. And based on the guidance that we just gave you, I would expect us to have leveraged down to about 2.9 times at year-end 2009. In other words, we will have taken off 1.25 turns of leverage in only one year, which I think is a pretty impressive accomplishment in any environment.

So in closing, I’d say we are – have been quite encouraged by these results for the most recent quarter. We feel good about our ability to continue to deliver solid earnings and cash flow growth in the future, which we would certainly hope would continue to create additional value for our shareholders.

Operator, that concludes our prepared remarks and we are now ready to take any questions that our callers might have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll go first to Chris Mammone with Deutsche Bank.

Chris Mammone – Deutsche Bank

Hi, thanks. Can you guys hear me?

Chris Brewster

Yes, we can.

Chris Mammone – Deutsche Bank

Great. Well, let’s see. I guess I’ll start with the 2010 guidance. Thank you for the early read on 2010. Maybe could you just dove a little deeper there and give us some of your underlying assumptions, transaction growth or ATM counts, anything more that you could provide there that’d be helpful.

Chris Brewster

I can give you a little bit, Chris. I’d say the underlying assumptions largely – so before I do that, let me mention one thing. We have just seen the lights go out here in our building in Houston, although the phones apparently are still working. It’s a possibility I guess that we might get cut off, but I think the conference operator would assist in getting us connected back together. So if that does happen, I would encourage people to stay on and we’ll continue on.

But to pick back up on your question, Chris, I mean the – our – I guess our primary underlying assumption is we continue to see similar trends in transaction counts, which would imply a level of transaction count growth. We would expect some gross margin growth next year, although not nearly of the magnitude that we had this year on a year-over-year basis. In terms of machine count, a few percentage points, nothing out of the ordinary really planned in that regard.

I guess those would be the high points, Chris.

Chris Mammone – Deutsche Bank

Okay, great. And I guess, on your recent – on the withdrawal trends and – I mean, it sounded like they’ve been pretty strong, again just at least still in the U.S. Any sense for delineation month-to-month? I mean, how does it look through the end of the quarter and into early fourth quarter on your sort of withdrawal trends?

Chris Brewster

Well, let’s see. The – there were some strengthening – and so if you look across the months of the third quarter, there was some strengthening in September. The – it’s not – wouldn't quite be accurate to say it was completely consistent month to month. September was somewhat stronger than July and August.

From what we’ve seen on October at this point, it would appear to be another good month, which would be consistent with the overall trend that we saw on the – in the third quarter. I'm not sure I know enough at this point to tell you in terms of year-over-year trend whether October is likely to be as good as September or maybe slightly better or slightly worse.

Chris Mammone – Deutsche Bank

Okay, great. And I guess maybe one last one and I’ll get back into queue. I guess that Wal-Mart payroll deal that was signed recently with – I think it’s a MasterCard prepaid payroll card with FDC as the processor, just – your comments on seeing more volume from those type of cardholders that just sort of haven't had bank accounts, stored value cardholders and alike, I mean, how are you viewing deals like that in the market? I mean, is that sort of signaling – I mean, should we look at this Wal-Mart deal like a landmark deal on a way that – is that signaling sort of a shift in landscape? I mean, is that something that is a beginning of a big trend. I mean, maybe any color on how you are viewing deals like that that are happening in the market. Thanks.

Rick Updyke

Yes, Chris. This is Rick Updyke. It’s my opinion and having worked at 7-Eleven for quite a while and had a similar challenge with paying employees across the country with checks, I think this deal will lead to a lot of other retailers and large employers doing exactly the same thing, which as I mentioned, bodes well for us because that is a customer that typically we don't see today. They are going to a – any check cashing location for example and cashing that payroll check and turn it into cash and we don't ever see them. So by loading it on to that payroll card, they are coming to ATMs, in a lot of cases our ATMs, to withdraw money. So that’s – I think that bodes well for us.

Hope that answers your question.

Chris Mammone – Deutsche Bank

Yes, it does. Thanks. I’ll just – I’ll get back in the queue. Thanks, guys.

Operator

And we’ll go next to Franco Turrinelli with William Blair & Company.

Franco Turrinelli – William Blair & Company

Good afternoon, guys. Could you tell us a little bit a couple of things? It sounds like Puerto Rico is tracking well for you. Just give us an update on that and maybe if there is any particular lessons there learned that make you more or less enthusiastic about other potential international markets?

Rick Updyke

Yes, I think we are excited about Puerto Rico. I think one of the things to keep in mind, it is fairly close to the United States and while it is somewhat of another country, it’s not truly an international faraway opportunity for us, but I think you’ll see us be able to do things similar to that in and around the U.S. and in that region in the future. Puerto Rico is probably a couple of hundred ATMs type of opportunity for us in the near term.

Mike Clinard

And maybe to add to that Franco, I think what we’ve learned is smaller countries around our base, specifically in North America, we can easily leverage a lot of the assets that we already have in North America to manage those smaller countries.

Franco Turrinelli – William Blair & Company

Okay, that’s helpful. Turning to Mexico for a second, do I remember correctly that the only partnership there is with OXXO? Is that correct or are there other retailers that you are working with?

Rick Updyke

No, we have a number of other retailers that we are working with, but OXXO is by far the largest and has roughly 7,000 convenience stores in Mexico and are opening one convenience store every 16 hours. So we do have other retail relationships with a number of the pharmacies down there, is one example, some of the gasoline retail outlets, the individual outlets we have relationships with, but OXXO is by far the largest.

Franco Turrinelli – William Blair & Company

So, my question was what is determining the rate of growth of your ATMs in Mexico because it’s clearly not lack of opportunity. In fact, just looking at the numbers it looks as well you are not even putting one in every new OXXO store. So what are you – how are you really thinking through Mexico and the number of ATMs that you are putting into that market?

Rick Updyke

The way I think about it is Mexico is at a certain socioeconomic level and it’s obviously higher in the large metropolitan areas and OXXO has a lot of stores across the entire country, some of which are in more remote areas that we are not going to be getting into for quite a while. We are primarily concentrating in the large metropolitan areas.

Franco Turrinelli – William Blair & Company

Okay, one last thing if I may. Could you give us a little bit of an update on discussions here in the U.S. with financial institutions regarding branding deals and how that will play into more ATM deployments? I mean, obviously over the last year or so, that side of the business has been a little bit stalled, I think you yourselves have indicated, although we've seen some I think positive signs there. But could you just kind of give us the latest and greatest on what’s going on there?

Rick Updyke

Yes, I think from a branding perspective, it continues to be a longer process as we’ve indicated in the past couple of quarters. The interest has not changed; we don't see the opportunities that we’ve been talking to dropping away or falling away. It’s just taking a longer cycle for them to work through it given all the other issues that they have going on at the banks today.

What we are seeing is conversations around a broader opportunity that involves managed service for the first time ever really. The banks are now considering and thinking about how they can lower their costs and are looking for people that are capable of managing large self-service networks to come in and help them do that and we are perfectly positioned to do that.

Franco Turrinelli – William Blair & Company

Great, thanks. And I’m sorry; I can’t help myself, congratulations on a lights-out quarter.

Rick Updyke

Thank you. Thank you.

Operator

And we’ll go next to Reggie Smith with JPMorgan.

Reggie Smith – JPMorgan

Hey guys, nice quarter.

Rick Updyke

Thanks, Reggie.

Chris Brewster

Thanks, Reggie.

Reggie Smith – JPMorgan

I guess most of the higher-level questions have kind of already been asked. But I was curious, hoping if you guys can kind of break down – when you talk about withdrawal transactions, I guess there are three kind of broad categories. You have transactions where – with the bank branding relationship, you have transaction where people actually pay for the withdrawal, and then you have kind of your Allpoint. How do those three buckets – like what’s the mix of those three buckets within your, call it 63 million ATM transactions like, that – what’s that breakdown?

Chris Brewster

I’m going to turn to trace to give you a break between our sort of non-branded and non-Allpoint transactions, which would basically be our surcharge transactions. We can – we could have data here at the fingertips where we can kind of give you the split between the total of branded and Allpoint transactions that we do not surcharge versus transactions that are not in that category that we do surcharge. To get anymore granular than that, Reggie, I would have do a little research with some data that I don't have here in the room with me.

Mike Clinard

Yes, Reggie – I mean, I can tell you that for the quarter we had about 33 million in surcharge transactions out of the 63 million of total withdrawal transactions.

Reggie Smith – JPMorgan

Okay. And then I guess drilling a little deeper within those two buckets, do you have an idea what the relative growth rates are of those within the two buckets?

Chris Brewster

Well, I’d say directionally surcharge transactions at this company have been flattish to down a bit and the other withdrawal transactions driven by bank branding and our surcharge-free activities have been up materially. The – I should probably add to that comment, it’s not a function of transactions and we get paid for declining in transactions that we don't we get paid for increasing. It’s a – simply a function of the fact that we are getting paid in a different way. Instead of the consumer paying us the surcharge, his financial institution whether it’s a branding bank or a – an Allpoint client, financial institution, is paying us instead of the consumer paying us.

Reggie Smith – JPMorgan

Right. That’s helpful. I guess, thinking about CapEx for next year, I guess you are indicating that it could be up a little bit over this year, about $10 million or so. But I thought to Chris’ question you guys kind of hinted that there probably wouldn't be lot of ATM growth. Did I hear that right or – and if so, what is the CapEx spend going to be focused on from next year?

Chris Brewster

Well, we are looking at installing somewhere in the vicinity of a couple of thousand new machines in our – I was going to say three primary markets. I’ll say four primary markets now and include Puerto Rico. So there is – and so there is – I didn’t mean to sort of denigrate the growth aspect of our CapEx, it is there.

We have some equipment replacements we need to do. We are in the kind of front-end stages of considering the possibility of putting in a second cash depot and a second armored car in the U.K. to further serve that operation. And – so I think it would – it’s – it would probably represent, Reggie, some increase in growth CapEx, as well as some increase in infrastructure CapEx, if you will.

Reggie Smith – JPMorgan

Okay. And if I could sneak one more in, kind of follow-up to that question, given that you guys kind of pulled back on CapEx this year, as you kind of look out at the opportunity to deploy new ATMs, I mean, do you feel as though there is a – I mean, there are lot of obvious locations where that are just right for you to put an ATM in there that you might not have done this year that you are going to be doing next year or is it – you feel on kind of getting out there?

Chris Brewster

Yes, I would put it this way. I mean, I don't think as a company we really feel like we’ve been capital constraint in 2009. I mean, we changed somewhat our growth philosophy in this sense. I mean, domestically, we’ve been focused primarily on installing new equipment when we can install it simultaneously with the winning of a new branding deal because that’s the way we get the best returns. If we can install that new machine and immediately have $300 a month of branding revenue as well as a ramping up of surcharge and interchange revenues, we can get a nice payback on that and it represents a fine investment.

In the U.K., I’d say our growth strategy has changed somewhat as well. We were doing quite a number of one-off installations in the U.K. Here, more recently, we’ve been more focused on trying to and successfully winning new business with major multi-unit retailers in the U.K., which put – typically puts us in a setting where it’s harder for somebody else to build on it and putting a machine down the street that competes with us. So – I mean, based on that philosophy, they have certainly not been starved [ph] for capital either in terms of doing what they want to do.

If there is any place we might say that we’ve taken – and I’ll see if Mike and Rick agree with this, but if there is any place we might have taken a little bit of a pause, perhaps it was Mexico and that was really a – to really carefully assess the first wave of installations we did in Mexico, bearing in mind that we rather quickly ramped up a 250-machine operation to around – over 2,000 machines. To really look at how those machines were performing and to learn some things about what works and what doesn't work to guide our installations on a go-forward basis.

So I would say that if there is any place maybe we slowed down a little bit, in that sense on purpose, it was probably Mexico for that reason.

Reggie Smith – JPMorgan

Understood. Thank you, great quarter.

Chris Brewster

Thanks.

Operator

(Operator instructions) We’ll go next to Bob Napoli with Piper Jaffray.

Bob Napoli – Piper Jaffray

Thank you. It’s been a pretty good year I guess as – to look at it that way. And I guess, I appreciate you guys really cutting expenses and shutting off your electricity tonight, your lights.

The transactions per ATM moving up, is there a way – can you break out how much you are getting you think from some of these prepaid cards and payroll cards? Do you have a – I mean, have you been able to track that?

Chris Brewster

We are working on it, Bob. I’m going to give you an – I’m going to give you an opinion, which is not – I don't know quite how to put, it’s not unsupported by facts, but we are not really finished with all our research, but I think if you think of that as being an important part of our year-over-year transaction count gains, you are on the right track. It could be half of it. I mean, it’s – but it’s clearly has been a meaningful help to us in our transaction counts in 2009.

And I understand the appetite for a tighter answer on that and we are working on the data to be able to get something out to you that would be a little more precise than what I just said.

Bob Napoli – Piper Jaffray

Do you think that that has kind of picked up quarter-to-quarter through the year?

Chris Brewster

I think it has. I think there is no question about it.

Bob Napoli – Piper Jaffray

And I mean, this is – I mean, I think this has kind of surprised you by how strong that has been or – ?

Chris Brewster

I guess my mother would probably tell me never to admit being surprised, but I think that’s probably an accurate statement. I mean, we did not – we certainly didn’t have it in our 2009 plans as we started the year that we based our initial guidance off of that we’d see this kind of growth in Allpoint-related transactions.

Bob Napoli – Piper Jaffray

Now, when I look at the – I mean, thank you for the breakout of the bank branding and surcharge-free network revenues that you have in the release, up 26% year-over-year. Is the majority of that growth in the Allpoint network?

Chris Brewster

Yes, it is.

Bob Napoli – Piper Jaffray

And do you expect that – I mean, looking at your 2010 plan, do you expect that type of revenue growth from that product, from Allpoint or – and bank branding again?

Chris Brewster

I – we would expect that. We see no reasons at this point why that sort of growth wouldn’t continue. If you think about their business, I mean, they have two very different customer bases. One customer base is the roughly 1,200 smaller credit unions and community banks that use Allpoint access as a way to provide ATM access to their customers so that they can compete with the big banks, with the big owned ATM fleets. I mean, we are currently serving less than 10% of the institutions in that market. So I think there is a good runway for growth there that’s continuing. That’s issue number one.

Issue number two would be the price of one of their major alternatives has gone up fairly significantly in recent times in that what a lot of these institutions might do is basically – as a way to compete, is they would simply reimburse the ATM surcharges that their customers might pay to other institutions.

Well, when the typical bank ATM surcharge was $2 that cost a certain amount of money. But the typical bank ATM surcharge today is probably more like $3. So you got a kind of a direct transfer of cash from the P&L of the small banks to the P&Ls of Bank of America and Chase and so on and so forth. That makes Allpoint as an alternative way to provide surcharge-free access to their customers relatively more attractive.

So that’s helpful to that as it relates to the small institution side of their customer base. The other side of their customer base is the stored value card issuers and I think we probably already discussed the growth that’s going on there. So – I mean, I think our assessment would be they’ve got a pretty good continuing run rate to generate growth.

Bob Napoli – Piper Jaffray

Great. The – one – do you expect – do you hope to have an announcement for a CEO by the end of the year or do you have a time frame when you would hope to announce something?

Fred Lummis

Well, I’ve been wrong twice already. So I hesitate to make projections. But I’d say we are very close. I’d be very disappointed if we don't have somebody by the end of the year.

Bob Napoli – Piper Jaffray

Okay. And with the background of a person that you want to hire or is there anything you could broadly say the key characteristics?

Fred Lummis

There are two or three things that are the top of our list and have been there really since we set out on this search back in March. I think first, we are looking for payments experience and expertise. We are looking for somebody who is managing a business at least the size of Cardtronics.

And I think we are looking for somebody who is ready to take the mantle of a public growth company. I mean, we’ve got a great trajectory here. We’ve – are set, I think, for finishing this year strong and the outlook for next year is, I’d say, just is positive. And I think we are looking for somebody who can grab the bull by the horns and carry it forward for the long term.

Bob Napoli – Piper Jaffray

And just – I mean, with your balance sheet having improved so radically this year and your returns having moving up and looking at your opportunities, I mean, are you – I know you don't have anything in 2010, but I mean are you increasingly looking at strategic opportunities? Do you want to wait until you hire a new CEO before you would make some type of strategic move, whether it’s a platform acquisition into a new market or – I mean are those opportunities increasingly there given, I would imagine, your optimism or confidence in your balance sheet is – got to has to have improved through the next year, not that it was low at the beginning of the year?

Fred Lummis

Yes, I’d say this that this year, we’ve done a lot of work on establishing a long-term strategic plan here. We didn’t want to get too far ahead of ourselves and finish that up or not include the input of the new CEO. So we are going to wait until the search is completed before we complete that. I would say that we have been and we’ll continue to be opportunistic.

I mean, there are lots of opportunities that come through in here all the time and we are very selective. I mean, we are proud of the free cash flow we’ve generated this year and de-leveraging of the balance sheet and I think it makes us stronger and gives us more financial flexibility for the foreseeable future.

Bob Napoli – Piper Jaffray

Yes.

Fred Lummis

And – so I would say that we are window-shopping and we might make a purchase, but we are going to be very careful about it.

Bob Napoli – Piper Jaffray

Thank you and congratulations.

Rick Updyke

Thanks.

Operator

And we’ll now take a follow-up from Franco Turrinelli with William Blair & Company.

Franco Turrinelli – William Blair & Company

Hey, Rick. I promise, no more bad jokes. I think you had mentioned that you are kind of looking at sensitivity of transaction volume to surcharge rates given that your average surcharge is so much below the industry average. Any early indications from that?

Rick Updyke

Did you that address that to someone in particular or –

Franco Turrinelli – William Blair & Company

For you Rick, I guess, right? I think Rick (inaudible) maybe talk about this most.

Rick Updyke

Yes. Yes, I mean, we continue to look at that as an opportunity. We are going to be very prudent. We don't want to do anything that would dramatically affect our volumes or negatively affect our bottom line, but I think there is clearly going to be in the future some opportunities there, especially with the banks having gone up to $3 over the last couple of years.

Franco Turrinelli – William Blair & Company

And then maybe as a follow-up and I guess this one is directed a little bit more to Chris Brewster, one of the – thank you for giving us the disclosure on the surcharge transactions versus the total transactions, but problem is that that always creates a follow-up question.

So if you are saying that surcharge transactions are flat to slightly down, we – obviously, surcharge revenues are slightly down. I’m assuming, however, there is a fairly significant foreign currency component in that since presumably a lot of the surcharge transactions are Mexico or U.K. Is that correct?

Chris Brewster

That is correct.

Franco Turrinelli – William Blair & Company

Okay, great. Thank you very much.

Operator

And at this time, we have no further questions. So I’d like to turn the call back over to Mr. Brewster for any additional or closing remarks.

Chris Brewster

No specific closing remarks. Thank you, operator. We appreciate everyone joining the call, we appreciate your time as always, and we’ll look forward to talking to you again in this fashion after we close out the year. Thank you very much, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. As a reminder, a digital replay of this call will be available through November 11th, by calling 888-203-1112 or 719-457-0820 and entering conference ID 7354461. Additionally, you can access the replay on the company’s website at www.cardtronics.com.

Again, thank you for participating. You may all now disconnect.

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