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Cardtronics, Inc. (NASDAQ:CATM)

Q3 2013 Earnings Conference Call

November 4, 2013 05:00 AM ET

Executives

Mitzie Pierce - IR

Steve Rathgaber - CEO

Chris Brewster -CFO

Analysts

Bob Napoli - William Blair

Mike Grondahl - Piper Jaffray

Jason Nacca - Sidoti & Company

Ramsey Al-Essal - Jefferies

Andrew Jeffrey - SunTrust

Reggie Smith - JPMorgan

Gary Prestopino - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to the Cardtronics Third 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 follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Mitzie Pierce

Thanks, operator. Good afternoon, everyone, and welcome to Cardtronics third 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 Services and Rick Updyke, President of North America.

Steve will begin today's call with an overview of our third quarter results and an 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. Good afternoon, everyone and, welcome. The third quarter for Cardtronics was a productive blend of traditional performance, one transformational historic acquisition and a strategic organizational investment for future. I will briefly discuss each of these items before Chris dives deeper into the numbers.

Let’s start with the traditional performance. I am pleased to say that Cardtronics again delivered the strong financial results that drive value creation for our shareholders. Core ATM operating revenue grew 16% and consolidated revenues were up 15% year-over-year. Revenue growth drove adjusted EBITDA growth of 19% and adjusted net income per share growth of 28%. Additionally, margin expansion continued with third quarter adjusted gross margin or 33.6%, 230 basis points above third quarter 2012.

In the quarter we renewed several key national accounts. Costco and CHEVRON corporate stores have both signed extensions for their ATM operating agreements with Cardtronics. This secures more than 700ATMs in 43 states as part of our franchise of quality retail locations.

In addition to these new renewals, we recently signed three notable retailer deals, two in the U.S. and one in the UK, which commit more than 600 ATMs for long term contracts. These deals are interesting in several respects. In all cases the retailers were previously operating their own ATM fleets. They realized that needed to change. In one case the relationship that led to the contract started with the sale of ATM equipment by Cardtronics to the retailer several years ago. It was nice to leverage that one-time sale into a relationship and we consider the U.S. wins very attractive locations for bank branding.

In addition the UK win is our first as the combined Cardtronics Europe. We look forward to growing with these successful franchisees and are working hard to bring these ATMs to revenue generating status as rapidly as possible to catch up on some of our revenue timing slippage this year and to prepare additional foundation for next year's growth.

Importantly we remain actively engaged in sales discussions with several entities in all five countries that we serve. We feel good about our short term pipeline, as well as our long term pipeline for new merchants and new financial institutions. For merchant deals however, it remains challenging to predict timing, particularly when the merchant controls its own ATM fleet.

Turning now to Allpoint, the surcharge free network engine is delivering transaction growth rates north of 20%. It is worth noting that the Allpoint card base is now larger in card counts than the very largest U.S. financial institution card basis. This remains a unique and critical traffic driving asset for our retailers.

Investment continues in our merchant owned ATM business. Our merchant owned portfolio expanded with the acquisition of Arizona based CGI Inc. which added roughly a thousand ATMs to our fleet. We call that this business segment helps us diversify revenues, reduces direct exposure to interchange and contributes attractively to corporate margins. We are investing in services and tools for this business that will further enhance our competitive position in the coming months. Our expectations call for a continuation of small tuck-in acquisitions and the pipeline remains active for these assets.

Moving overseas, I want to update you on our continuing progress on delivering shareholder value from our bank machine franchise. Even though we are actively engaged in the integration of our recent Cardpoint acquisition in the UK, we remain committed to finishing the work we have started, to drive profitability from our pre-acquisition UK franchise. This quarter’s headline from these efforts which Chris will detail in his comments is margin expansion of 660 basis points versus the same quarter last year. I am enormously proud of the efforts and accomplishments of the team that is delivering these results. So clearly in the traditional business as usual arena, the company is moving successfully on multiple fronts.

Now moving to the historic component, it is important to acknowledge that the financial results summarized in my opening were delivered in part through completion of the largest acquisition in Cardtronics's history, which significantly expanded our European operations and diversified our geographic revenue and earnings mix.

As you are aware, we announced this past August the completion of the acquisition for Cardpoint Limited. This transaction grew our UK portfolio by 7,100 ATMs that feature the Cashzone brand and brought us into continental Europe, specifically into Germany with 800 ATMs that operate under the Cardpoint and Moneybox brands.

Our German business is the largest independent ATM portfolio in that country. The Cardtronics team has been hard at work at the integration of our two UK businesses. The early results are promising and well within our expectations. Key milestones include commencement of office consolidations and ATM moves to the Cardtronics platform. While these are important integration milestones, I am most excited about our first piece of new business as Cardtronics Europe, a modest size but nevertheless important 100 ATM deal with a major supermarket brand which I referred to earlier in my sales recap.

Rounding out the historical nature of our largest acquisition is the fact that in the third quarter we crossed the 80,000 ATM milestones in our total portfolio size. The significance of that milestone can be hard to truly appreciate. Let me share two perspectives. If you look at some of the largest financial institution portfolios, you will see numbers like 10,000 to 20,000 ATMs. But if you measure the portfolio in terms of location, you are probably looking at something closer to 5,000 to 7,000 locations for some of the largest banks, because many banks will have multiple ATMs in a given location like a bank branch.

Cardtronics on the other hand has 80,000 locations, as we typically have one ATM per retailer outlet and we are only in general retail outlets. When you do the math, Cardtronics is present in about 10 times the number of locations of some of the largest banks. That is a powerful and valuable asset for communicating with people.

Looking at this from the perspective of consumer eyeballs or visits, we connect with more than 45 million consumers each month for the duration of at least one ATM transaction. If we would have compared ourselves to certain classes of websites, the breadth of our reach becomes more evident. We would rank third in visits of business sites, third in visits to sport sites and seventh at news sites. As you contemplate the role of digital advertising and our ability to drive consumer engagement within a retailer or the ability to focus consumer attention on a product to drive additional revenue, this comparison takes on a deeper meaning for the future. As part of our plan to continue to create new and incremental shareholder value, we intend to leverage this unique asset.

And that brings us to our third item for review in this call investing for the future. We must continue to invest in blocking and tackling basics to maintain our business and fuel our growth. We will continue to invest in acquiring the right assets in the right places as the right price to fuel our growth globally and to build the next generation of Cardtronics’ value and services, we are already investing in the people and products that can drive enterprise growth in the future well beyond the basic model we operate today.

We are committed to driving more value to our retailers and to our financial institution clients. The Cardtronics ATM experience should be more valuable to all of our constituents. And to help accomplish this goal we have formed the enterprise growth team within Cardtronics. In August, I announced that David Dove, a 30-year payments retail financial services veteran, who had worked with Cardtronics very closely in the past would be joining our senior leadership team as our new Group President of Enterprise Growth.

In this new role, David and his newly formed team will focus on key strategic initiatives including transaction share growth, new products that will enhance the consumer experience and strategic mergers and acquisitions. Given his extensive payments and financial service background, combined with his intimate knowledge of Cardtronics, David is well suited to help us enter a new area of transaction growth and I am very pleased to have him now officially as a member of our team.

Cardtronics is working hard to create shareholder value. We believe that this past quarter, with strong financial performance completion of a transformative multicounty acquisition, and creation of enterprise growth team to deliver the most valuable consumer ATM experience is a great reflection of that hard work.

And now, let me turn it over to Chris for the always informative CFO perspective.

Chris Brewster

Thank you, Steve. I would like to start with a quick recap of just headlines on what I think all around was a good quarter for us and then go into some more detail on some of key things that drove that performance and then close talking about a couple of usual items that affected the GAAP P&L and then talk briefly about our revised guidance for 2013.

Consolidated revenues for the quarter were $229 million. That was 15% increase over the prior year. Adjusted EBITDA totaled $59 million, 19% from the level of a year ago and adjusted net income per diluted share at $0.55, up 28% from its level a year ago. Speaking to revenue growth, it continues to be fueled by a mix of acquisitions and organic growth. As Steve mentioned in his opening remarks, we significantly expanded our position in the UK market and in the German market, through the Cardpoint acquisition that we completed on August 7th and the results from these acquired operations have been included in our financial statements since that date.

This acquisition drove a majority of our acquisition related revenue growth in the quarter, which totaled about 12%. Our core ATM operating revenues grew organically at about 4% in the quarter. This rate is a bit lower than we’ve seen in the recent prior quarter but this was expected by us. There were several factors that contributed to this result, most related to unit count growth.

First, we cycled on our big three customer wins that we had in the first half of 2013. That included Valero in the United States, 7-Eleven in Canada and Shell in the UK. Secondly, some of our existing merchants delayed some of their new store growth plans into the back part of the year and that delayed some scheduled implementations on our part. And lastly, our expected pipeline of new business wins for 2013 pushed back a little farther than we had originally expected at the beginning of the year. But as you heard, they are starting to come through.

As Steve mentioned, we have recently signed three retailer deals involving over 600 locations and had this new contracts been operating in the third quarter, organic growth and ATM operating revenues would have been about 6.5%, rather than the 4% that we reported.

Turning to gross margins, you will notice in our earnings release that we’re providing a GAAP and adjusted or non-GAAP view of our margins on a page stored the end of the earnings release document. Excluding a one-time item that I will come back around and explain in a moment, consolidated gross margins for the quarter were 33.6%. This represented a 230 basis point improvement from the same quarter last year and this was driven by series of factors.

The U.S. Merchant owned acquisitions that we closed prior to June 30 that being ATM network Merrimack and Aptus came on Board with higher than averaged gross margins and that accounted for about 40 basis points of the year-over-year margin gain.

As Steve said gross margins in our legacy bank machine operation in the UK were up by 660 basis points from a year ago, due in large part to higher revenues driven by higher transaction volumes overall and particularly by an increase in our dynamic currency conversion transactions. We also made significant cost side improvements in several areas in this business over the past six months and all taken together, this was sufficient to provide a 100 basis points of improvement to our consolidated corporate margins in the quarter.

And the remaining 90 basis points of gain in the consolidated margins came primarily from cost improvements in the U.S., in our major retailer business as we continue to leverage our scale, realize acquisition synergies and drive efficiencies in our cost structure, particularly including cash utilization, communications cost and lower per unit cost on the outsourced services that we buy.

You might note that the Cardpoint acquisition did not cause any movement in our gross margin percentage. It came in the door at margins essentially identical to our pre-existing corporate average margins. This should be a source of margin improvement, as we move forward, as we realize the acquisition synergies related to this deal over time.

Moving down to P&L; SG&A expense as a percent of sales was up in the quarter up from 6.9% last year to 7.9% this year. So we gave part of that gross margin gain back at the SG&A line. We initiated our enterprise growth organization with some new hires and we’ve been adding product development muscle and it supporting software development resources. This spend is targeted on driving more transactions across our existing fleet, which we believe is the most shareholder value enhancing thing that we can do as a management team.

Moving farther down the P&L; depreciation expense was up only 7% on a 15% revenue gain. So we’ve picked up some bottom line leverage there. Interest expense was flat year-over-year, on a total average debt balance that we’ve closed to flat year-over-year and I think that is an under-appreciated fact about Cardtronics; we generate a lot of cash, we have significant ability to fund acquisitions from internally generated cash flow and this is a significant bottom line driver. All of this led to a 180 basis point year-over-year increase in adjusted pretax profit margin as a percent of revenue, which was 16.3% in the quarter this year, versus 14.5% last year.

Moving a notch farther down the P&L; I should make mention of a slightly lower non-GAAP cash tax rate that was recorded in the third quarter. For the back half of 2013, we’re now using a non-GAAP tax rate of 33.5%, which is down slightly from our historical 35% non-GAAP rate. The rate may go even lower next year and the cash tax rate is changing for a series of reasons.

First, our legacy UK business has become increasingly profitable, effectively sourcing a higher percentage of our profits in a lower tax rate jurisdiction, the UK, where corporate income tax rate this year is 23% and it’s scheduled to go to 21% next year. We restructured our legacy UK business from a tax perspective in the current quarter so that in future periods its profits will not be immediately subject to U.S. tax. The recently acquired Cardpoint UK business also benefits from those low 23% - 21% UK tax rates.

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While earning profits in our Cardpoint business in Germany, where the corporate tax rate is approximately 30% and we implemented a financing structure during the quarter that will facilitate the growth in our international operations and further improve our overall effective cash tax rate on a go forward basis.

So now I’d like to jump over to the GAAP P&L and explain a couple of non-recurring items that impacted it during the quarter. First, as a result of that tax restructuring work, we recorded a $13.5 million non-cash charge to the income tax line on the GAAP P&L, relative to the write off of certain deferred tax assets in the third quarter. However, as I said, as a result of this restructuring, cash taxes will be significantly lower over the next several years, because our UK profits will not be immediately subject to U.S. and this provides cash that we can deploy in the business to drive shareholder value.

Moving on to the second matter that had an impact on our reported GAAP figures, we recorded an $8.4 million one-time charge relative to a UK property tax issue that has impacted cost of revenues and consequently gross profits in our GAAP P&L.

In summary, the UK ATM industry was recently notified by an arm of the UK government that certain ATMs, not previously taxed will be subject to property taxes and that such taxes may be due retroactively, back to early 2010, as well as in the future. This is not just a Cardtronics issue, it’s an industry issue that affects the ATM industry broadly in the UK. So our competitors will also be dealing with it and hopefully helping us lobby for a different outcome.

The mount of these taxes is complex to calculate and subject to some interpretation. We have made a good faith estimate of what the historical liability could be, going back to 2010 and we have recorded an $8.4 million one-time charge to reserve for that potential historical liability.

With regard to potential future impact of the issue, if we were unable to mitigate these amounts we could see about $3 million per year in incremental property tax expense in the UK. We have hired commercial and legal experts and are exploring options to mitigate this figure but outcomes in that regard will not be known for a while.

Specifically in our third quarter reporting, the full amount of this charge is reflected in the GAAP P&L. In the non-GAAP P&L, we have not included as an expense the one-time charge to reserve for the estimated historical liability from 2010 up through June 30, 2013, but we have burdened our non-GAAP P&L with approximately $700,000 of incremental property tax expense in the September quarter and we will be burdening our non-GAAP P&L with an incremental expense accrual amount in that ballpark in the future until we’re sure we can mitigate these costs. So at this time I believe we have the scope to absorb the go forward effect of these costs without any downward guidance adjustment.

So in summary, adjusted EPS in the quarter was $0.55 versus $0.43 last year and I’ve described those results as being slightly ahead of our internal forecast, which assumed a stronger third quarter and a seasonally weaker fourth quarter, which would track the normal seasonal decline that we see from the third to the fourth quarter in this business and which we’ve reflected in our updated guidance for 2013.

Now moving to that subject, 2013 guidance, with respect to revenues we’re expecting $867 million to $872 million. On the adjusted EBITDA measure now expecting $216 million to $218 million of adjusted EBITDA, we’re expecting adjusted net income per diluted share to be in the range of $1.89 to $1.92 and that’s based on having approximately 44.7 million diluted shares outstanding. Depreciation is expected to come in at $66 million net of non-controlling interest; expecting cash interest of about $21.5 million; and we’re leaving our capital expenditure guidance unchanged at about $70 million for the year.

At this time, we’re not planning to update the 2014 guidance, the preliminary guidance we issued in early August after completing the Cardpoint acquisition. We haven’t yet completed our detailed annual budgeting and planning processes for the year. We have a number of synergies we’re working on to realize from the Cardpoint acquisition and while I would say we’re tracking closely to where we thought we’d be on synergy expectations, there is still some work to be done to get a precise view on timing. So it simply put I think it’d be premature for us to update 2014 guidance now.

With regard to the balance sheet, our ratio of net debt outstanding to trailing 12 months adjusted EBITDA was 1.9:1. Total debt outstanding as of September 30 was $457 million. That’s up $122 million from June 30th level, primarily due to the $160 million roughly that we borrowed in August to fund the Cardpoint acquisition.

So with that Steve, I’ll turn it back to you for any final comments you might have.

Steve Rathgaber

And my final comment is operator, we are open for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bob Napoli with William Blair. Your line is open.

Bob Napoli - William Blair

Just an update on your growth plans in Europe. I know you were in the heart of integrating businesses but I know you want to use that platform that you now have in UK and that management team to grow more broadly in Europe. I just wondered if you have any thoughts on markets. Germany, I guess Germany historically has been known to be somewhat of a difficult market but it sounds like you like that market. So if you could talk at all about organic growth or the potential for non-organic - inorganic growth in those markets?

Steve Rathgaber

Sure. So I can say the following pretty comfortably. One thing is that the pipeline that we’re involved with in Europe, both in the UK and Germany, is a good pipeline. We are active in discussions with a number of prospects. They are different stages and it’s unclear what the timing will be of them. But the message I can unequivocally state is that we’re not just focused on integration. We are focused on growing the business as we do the integration activities. So I’m pleased that the amount of activity on the sales front over there.

The second thing I would tell you is that Cardtronics as a rule intends to invest in acquisitions that are as I’ve said in my comments at the right price and in the right place and we see no reason to think that the European market isn’t right for some of those opportunities and I would expect that as the right opportunities become available, we will pursue them. So again can’t be more specific in terms of timing but believe there are opportunities, which is one of the reasons we’re very pleased with the acquisition.

I can say that as happy as I was about the Cardpoint acquisition, back on August 7th, I think it’s fair to say I’m even happier now in terms of what the potential is and that includes dealing with that property taxing. So that says we're bullish without being crazy optimistic.

Bob Napoli - William Blair

And the Allpoint asset, are you able to track today the number of Allpoint transactions by retailer and is that an important part of your digital marketing efforts? Are you able to say for example 7/11, we had x transactions from our Allpoint network this month or this quarter? I doubt if you could it take it a step further and say well they spent this much money in your store.

Steve Rathgaber

You are beginning to tread into the secret sauce opportunities I think. So the answer to your question is yes, we can know by retailer what the Allpoint traffic is and absolutely we want to know by retailer what the Allpoint traffic is because that is a key differentiator for Cardtronics, a value add to the retailer because that is foot traffic and that is sales opportunities at the point of sale. The art form that we have to develop and our continuing to invest in capabilities on is to enrich the data collection beyond that point to be able to track additional sales and identify relationships between what we do and what the consumer does in the store. And that's why David Dove is on Board and that's why we're investing in the resources and the technology to stretch beyond what we have been to what we want to become. So that is the pathway.

Bob Napoli - William Blair

And last questions the organic growth of the prepaid business, can you give an update on that, the percentage of your business from prepaid in the U.S. and the growth of prepaid?

Steve Rathgaber

Well I can give you a rough cut on it Bob. The prepaid transaction counts year-over-year continue to grow at around 20%, and prepaid as a percent of total U.S. withdrawal transactions is in the range of around 15% -- or rather 16%. So it has some importance to us and it continues to have a nice growth for it associated with it.

Operator

Our next question comes from Mike Grondahl with Piper Jaffray. Your line is open.

Mike Grondahl - Piper Jaffray

The first one, how do you want investors to think about ATM count, ATM transactions and pricing? How should we think about those three interplaying over the next year or two?

Steve Rathgaber

I am going to turn this over to Chris for more clarification. But just to stage I think what you are asking, in terms of ATM counts there will be more. We will have years that generate more organic ATM sales and other years, we will have years that generate more acquired ATM footprint than other years, but they will continue in my mind at least to be a blend and that's why we’re so happy with our ability to leverage our cash flow for purposes like that. As it relates to the revenue per trend, is that one of your items?

Mike Grondahl - Piper Jaffray

Yes just trying to -- you also have transactions and pricing. I have just been under the impression pricing is a little softer but transaction is a little greater. So just trying to think about the mix.

Steve Rathgaber

So in terms of transactions itself I would say that there is different kinds of transactions and those different kinds of transactions come with different price points. So to go into the UK for example, there is the free to use transaction versus the pay to use transaction, different revenue streams, different margins and different volume projections with each of those.

In the U.S. everything ranging from a surcharge transaction and its revenue to an all point transaction and its revenue to an Allpoint transaction and its revenue to a branded transaction and its revenue and of course the good old fashioned interchange that we increasingly try to protect with contract terms.

So I think if you would ask for just a bottom-line statement, the goal of Cardtronics in the transaction arena is to drive materially more volume over time at probably a lower unit revenue on a gross basis, because we think that serves the shareholders and the retailers and the financial institutions very well for concentrating volumes at the retail locations where we house ATMs. Having said that, within any of the categories I mentioned different things will be floating and going on. But on a pure, collected, blended basis, I would imagine it would head in that direction.

I don't know Chris if you would want to comment or clarify anything I am saying there.

Chris Brewster

Maybe just a couple of additions. When you think about pricing in our business or revenues per transaction, it does have a number of drivers. Surcharge rates are a driver. We have been operating in an environment of pretty steady surcharge rates with very, very modest increases from time to time but nothing particularly significant. We tend to like to stay under the banks and the banks for some time generally have been charging noncustomers $3 pretty typically. We started to see some movement above that, with a couple of sizable retail banks at $3.50 and $4, but I would not call it an industry trend yet at this point.

So at the moment not thinking that we have got a ton of upward movement on surcharge rates, that’s sort of a wait and see. Relative to interchange, as Steve said, we’re doing everything we can to reduce the amount of interchange as a percentage of revenue, that we don’t directly influence the rates on and increase the amount of interchange as a percentage of revenue where we bilaterally negotiate and interchange rate directly with the card issuer. We have been pretty successful at that over time.

But that notwithstanding, it seems that the interchange environment is relatively stable and our expectation is it’s likely that to stay that way. That’s not an assurance that it will, but it seems likely that it will here for a while, as opposed to some of turmoil we had had over the last couple of years. So just throw those adds up maybe on the pricing side.

Steve Rathgaber

And I would add one another in that as we add more merchant owned terminal to some of these acquisitions, we are bringing a net revenue model that is a different kind of transaction revenue because remember here, we don’t own those terminals, we don’t have the capital expenditure. But you will terminal counts and you will see revenue numbers that shift on per transaction basis as we collect this mix of assets and services and transactions. So it’s going to get harder to do a bottom line averaging in some respect just because we were in more diverse categories, which I think is strength of model. And I would just put that out there is a final note on your question if you were just trying to get a point of single set of averages. That’s going to be harder to do.

Mike Grondahl - Piper Jaffray

Okay and then just secondly in 2012, you had about $93 million in CapEx and there was some reason why it was larger than the normal of your will, and this year you’re down at $70 million. Do you think as you look forward now, is the business getting more capital intensive or less?

Steve Rathgaber

Well, that’s a question of relativity right. So I said some number years ago that had sort of place hold the goal was that, capital would flow in the areas of about third of adjusted EBITDA and we’ve sort of floated close to that, some years higher some years lower. This year we have opportunity to get come in lower. And that is obviously subject to the volatility of sale cycles and rhythms and it’s subject to the volatility of events that are often outside of our control, like ADA, upgrade paths and the rate that we have to swap out gears.

But as the business has grown and as we operate in more countries, if you look the absolute number, you should expect that absolute number to drift higher overtime. But as a percentage of the adjusted EBITDA, we’re hoping that it doesn’t and in fact as we get more successful over the coming years at driving more transaction share to the existing fleet we would hope that you’d see a reverse trend there that would be great return on the investments we’ve already made for our shareholders and a depreciation expense that begins to normalize, subject of course to the vagaries of MV upgrades and the other kind of things that might come from time to time in the marketplace.

Operator

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

Jason Nacca - Sidoti & Company

My first question is, now that you have better chance to kind of look at the offering environment in Europe, given the accusations, could you point to any additional countries within Europe that you see viable for some penetration?

Steve Rathgaber

Well under the heading of eyes are being bigger stomach, I wouldn’t choose to do so today. I think there are lots of opportunities in the counties we’re in and I think we’re going to use the resources to get smarter about the countries that surround of the countries we’re in and we will go from there. I am not prepared to say that we’re marching to Pretoria anytime soon. We have got a good base of counties to work in. Having said that, as I talked in the past, we are always looking at markets that fit a set of criteria that we’ve defined for what is a healthy market and we believe that Germany fits that profile very attractively; a large number of financial institution, a high care civilization society, a stable network environment and an opportunity potentially for branding because of the fairly limited independent footprint historically in that market place. And as we find countries like that, we will continue to expand.

So I don’t mean to deflect the question but I just am not prepared to declare certain countries as particularly right for our next step. The usual suspects you know Eastern Europe, that kind of thing, I wonder about the possibilities of Italy and France and places like that may, not feel particularly robust opportunities at the moment but we’re still learning and we're going to learn a lot more as we spend more time in those markets.

Jason Nacca - Sidoti & Company

Okay fair enough, and then my second question is about UK, in which you do operate in house armor trucks. Now is there any motivation to perform these services now with Germany? Now given my experience and understanding, it's much more competitive environment operating armored trucks. So is there any opportunity there.

Steve Rathgaber

Well I think probably not, as we sit here today, nor probably much desire, let alone opportunity on our part. The reason we do that in the UK, we’ve talked about in the past and quite frankly we view it as a competitive differentiator. We think our ability to get cash, just in time to locations, our ability to do our own machine repairs, our own data center to drive the ATMs, our focus on uptime we think places us 300-400 basis points better than the average financial institutions or other ISOs in terms of availability and availability on a free to use market place where transaction volumes count, translates to earnings. So we’ve got a business justification that's right at the core of what we’re trying to do.

In the U.S. we obviously don't do that because we've got an environment with lots of healthy competition, with solid providers that aren’t in the way of our availability. They actually are helping it. So to the extent that Germany ends up appearing to be a market of one type versus the other, we might choose to take a particular action but right now we believe we’ve got plenty of room to maneuver without having to make those investments in the German markets.

Operator

Our next question comes from Ramsey Al-Essal with Jefferies. Your line is open.

Ramsey Al-Essal - Jefferies

Given the terrific margin expansion in your UK business this quarter, have there been any pull forward in the margin opportunity there? Are you still feeling comfortable that there's room for kind of continued margin expansion opportunity in the UK, kind of going into next year? Is there anything shifted in your thinking there.

Steve Rathgaber

Well I would say that next year has two opportunities in it and without overplaying the hand, there is some continued slight increase in margin expansion there, still some things we're working on that haven't come to full fruition, and there's also a, we had hoped next year, as Chris pointed out, the Cardpoint acquisition came in at margin equivalency across the company. And we know we’re sitting on some synergy opportunities as we begin to execute the integration and we believe that represents upside potential.

So we think the business has sturdy characteristics in terms of margin contribution and I wouldn’t say for sure we’re not finished up with synergies. We’ve barely begun but I think there is a little more room on the ordinary business activities prior to the introduction of synergies.

Ramsey Al-Essal - Jefferies

And before you bought Cardpoint didn’t have the direct currency conversion piece operational or did it?

Chris Brewster

That is true. They did not and we’re in the process of beginning to implement that with a focus first on locations that are high volume and tourist sorts of locations.

Ramsey Al-Essal - Jefferies

Okay, another one on Europe. What’s the status of your big branding kind of program there? How would you kind of gauge your pipeline at this point? Is that an opportunity that could be meaningful going forward or is it a slow moving kind of a thing?

Steve Rathgaber

Are you asking specifically in Europe?

Ramsey Al-Essal - Jefferies

Yes, I am UK and Germany too maybe.

Steve Rathgaber

Yes, in the UK in particular, branding is not a routine product because of the environment there, just hasn’t been that opportunistic for that. We think that that is subject to change as the environment matures over there. One of the trends we’re hopeful about is that banks that have placed terminals in off premise locations will be less interested just because of the health of banks in making the capital investments and more interested in leveraging footprints like ours and that may ultimately lead to branding.

We think in the German market it’s a new concept that has been introduced at the right place, at the right time and we hope to be the lead architect of that as we continue to get our footing there. But I would say that these are early stage notions in both environments.

Ramsey Al-Essal - Jefferies

Okay, and last one from me is an update on the multi-bank preferred branding program in the U.S., just trying to gauge traction or pipeline or any indicators there about the uptick of that program?

Steve Rathgaber

So I would say that think in terms of that program in two phases. One is sort of the poor man’s version of just slapping a sticker on the ATM and the other is a more sophisticated version where in the mid part of next year or sometime in the second quarter we will be able to deliver a certain kind of experience for that preferred customer that involves a more complex offering, including screens unique to that individual preferred banking customer.

In the early stages it’s a less exciting product and in the later stages where it has more sophistication, we’re seeing some interest in the preferred branding. I wouldn’t call it bond burning but I’d certainly call it interest and we think that it is a market that as we mature the product we’ll expand nicely and as we enrich the product hopefully at some point with coupon values and other things, will become a bond burner. But you’re going to have to wait and see with us as to whether or not that fully happens or not.

Operator

Next question comes from Andrew Jeffrey with SunTrust. Your line is open.

Andrew Jeffrey - SunTrust

Couple of things, one it sounds like certainly -- it would appear anyway that you had some pretty nice customer renewals in the third quarter. Can you talk about sizable deals that might be coming up in the back half of the last quarter ’13 and into ’14? How much visibility do you have on any sort of midi renegotiations you might have forthcoming?

Steve Rathgaber

We have a handful actually just less than one handful I suppose. Anything that I would consider significant in terms of the remaining quarter of this year early part of next year and next year quite frankly is pretty light on the renewal front, which is not say that won’t be working to pull renewals in ’15m earlier if we have an opportunity to do so. So there is not a lot of renewal activity on the horizon at the moment. There is one or two things that are important to us, don’t get me wrong. But it’s not a giant pipeline of activity at the present time in the near next couple of quarters.

Andrew Jeffrey - SunTrust

Okay, and Steve you’ve characterized the pipeline in Europe, it sounds like it’s pretty robust. I know [Audio Gap] [0:02:39] to [0:02:50] up to your expectations perhaps heading into ’13. Could you quality that a little bit? You’re a more global company which is great today I am just wondering about U.S. specific pipeline at this point?

Steve Rathgaber

Yes, I would say that when I’ve talked about the pipeline throughout the last six or eight quarters, I’ve talked about it in terms of large accounts, the big 1,000 plus sort of ATM type deals and mid-sized accounts. And I would say that the 700 or so -- 600 or so ATMs we’ve reported on this quarter would be reflective of mid-sized accounts, certainly the two that we signed in Texas of that flavor, 400 ATMs plus, 250 ATMs plus, things in that order.

The pipeline I would characterize as solid in terms of volume of ATMs but larger in terms of the number of players that have the ATM. So we have to sign more deals than less deals to get higher volume. So the ATM count is there. It’s just that one deal doesn’t carry you across the finish line. And in the UK for example I would say that we’re seeing some bigger deals in the pipeline and in some of the other countries wherein we’re seeing some bigger deals in the pipeline.

So the beauty of the Cardtronics model as it continues to evolve is that that diversity helps us keep the pipelines flowing large, medium and small and I think that’s a pretty cool thing. But if you would ask me to name some super large accounts in ’14 that are available I would say they wouldn’t be of the grade A variety; they’d be grade B sized eggs rather than grade AA eggs if you will in terms of size. But they’re all good eggs as far as I’m concerned.

Andrew Jeffrey - SunTrust

And then last Chris thanks for the detail on the gross margin drivers. I know that one of the things that Cardtronics tries to promote is the extent to which your branded and surcharge pre-machines drive merchant traffic and span and so forth. Are you seeing any evidence within your merchant commission line? We’re obviously gaining some scale of the ability to quantify those returns for the merchant and translate that into better merchant level profitability.

Chris Brewster

So that’s a question that’s right on the nub of the value proposition that we’re trying to create. So if you think in terms of the data that we’re working to assemble over time I’ve said that takes investment in systems, it takes investments in contract business models where this data gets exchanged. And I would argue that that is the destination that we’re headed in. I would also argue that any good retailer work there is always going to be saying that their retail space should command great value because their retail franchise. And so that will be the internal tension that we managed to and I think there is room to help the retailers enjoy great category in the ATM and I think there is room for Cardtronics to enjoy at the appropriate time and when the appropriate value is delivered which we are working towards margin opportunities attendant to delivering greater value.

Operator

(Operator Instructions) Our next question comes from Reggie Smith, JPMorgan. Your line is open.

Reggie Smith - JPMorgan

Hey guys, nice quarter. I just had a couple of questions I guess on the renewal. Could you guys talk about or talk a little bit about what is some of the I guess I don’t know if that’s a terms or what is some of the hard buttons that some of your retailers are talking about or negotiating about over for the renewals so is there any particular topics within ATM refresh is it pricing? What some are negotiating points on these renewals?

Steve Rathgaber

Well, I would say that it’s probably easy to conclude that I never met a retailer or any buyer that wasn’t interested in price. So that’s always relevant. And one of the reasons we’re comfortable with price is because we work very hard to lower our cost, so that scale gives us room to maneuver. But I would say that as we are in the process of renewing first of all there hasn’t been a whole bunch of them there just hasn’t been all bunch on our radar screen so it’s hard to drive any particular pattern. But I think that we’re interested in making sure that some of the key features of our business model are protected things like interchange and things of that nature and they are interested in getting the best price they can and we’re both interested in getting the most volume we can.

So we work to develop partnerships where we’ll be working together towards the greater good of driving retail or sales and as we focus more and more on that some of these other items get easier to deal with rather than harder to deal with in a general sense. So I don’t know if that answers your question but that sort of state of things.

Reggie Smith - JPMorgan

No, it does. And I guess just kind of be specific. I guess there wasn’t any pressure on renewal and refresh in ATMs I guess not a -- that's not a conversation point the renewals…

Steve Rathgaber

When you say refreshing ATMs you mean placing new ATMs?

Reggie Smith - JPMorgan

Yes.

Steve Rathgaber

We will certainly as the matter of our own account planning plan on ATM replacements that make sense. When you’re managing a portfolio of 80,000 ATMs you’re going to have retailers with different needs and different objectives and there might be certain retailers that are interested in a better price and a less fancy or less robust ATM experience.

But certainly when you get to your national chains and some of our more premier clients in terms of their objectives and goals it’ll typically be a key part of the renewal for the appropriate length of term to place new ATM gear at which we’ll want to do because that’s the gear that can support the investments we’re making in software applications, feature functional richness and the transaction set and customer experience that we are going to leverage over time to drive more transaction share to those ATMs. So it’s a mix bag Reggie it’s almost everything else.

Reggie Smith - JPMorgan

Got it, if I could sneak one more in on the U.K. grocery win I am not sure if you guys mentioned this. Are those going to be surcharge free ATMs and I guess if you could talk a little bit about how those ATMs I guess are used in U.K.? Do you find a lot of people go to grocery store or is it more of these outside wall type ATMs and not super familiar with the market out there. So any color you could provide on those will be great.

Steve Rathgaber

Sure. The U.K. supermarket model is fairly different than the U.S. model in terms of ATM placement actually as I think about probably the closest thing in the U.S. would be publics if you’re familiar with that way they used to have through the wall ATMs. I don’t know if they still do that as much as they used to. But the typical U.K. supermarket environment will be through the wall environment where outside the supermarket you can often access the ATM for cash before you head into the supermarket and including possibility of getting a coupon or something for some value in the store.

That might not be universally true but it’s typically true. And in the case of the deal we were talking about those are free to use high volume locations and part of what makes them high volume is the through the wall access although there are certainly in-store ATM placements as well. So that market would be sort of generally different from the UF supermarket experience where you typically find the ATM in a corner some place in the store as opposed to through the wall greeting you sort of experience if that helps.

Reggie Smith - JPMorgan

No it does. And that actually made me think of one other question if you have time. So in UK obviously interchange is kind of set and it’s kind of based on a look back type base so thinking the interest rate factors inside as well as other things. Just curious if this tax changes probably tax change will go into the interchange calculation?

Chris Brewster

Reggie, I would expect that that it would I should say that it is a look back calculations to kind of give you the timeframe for it. For example in the summer of 2014 interbank network link will be performing the study on 2013’s costs which would impact the interchange rate that would go into place January 1, 2015. So there is some lag time there but I would expect overtime I would expect property taxes to be picked up in the link study.

Operator

(Operator Instructions) The next question is from Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino - Barrington Research

Just a quick question, Chris did you give the bank branding amount of ATM’s a number that you have ended the quarter and year over year growth?

Chris Brewster

No it’s approximately 19,000 and I don’t have the number of the same quarter last year at my finger tips Gary but I will get it to you.

Operator

I am showing no further questions in queue. I will turn it back to Steve Rathgaber. Please go ahead.

Steve Rathgaber

Well, thank you all very much for your interest in Cardtronics and we will talk to you soon.

Chris Brewster

Thanks a lot.

Operator

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

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