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Cardtronics, Inc. (NASDAQ:CATM)

Q4 2009 Earnings Call Transcript

February 11, 2010 08:30 pm ET

Executives

Melissa Schultz - IR

Steve Rathgaber - CEO

Mike Clinard - President, Global Services

Rick Updyke - President, Global Development

Chris Brewster - CFO

Jerry Garcia - CIO

Analysts

Christopher Mammone – Deutsche Bank

Bob Napoli - Piper Jaffray

Chris Shutler - William Blair & Company

Reggie Smith - JPMorgan

Joshua Elving - Feltl & Company, Inc

Operator

At this time I would like to welcome everyone to the Cardtronics fourth 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

Thanks, operator. Good morning everyone and welcome to Cardtronics fourth quarter conference call. Participating on the call today are Steve Rathgaber, our 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 processing operation is Jerry Garcia, our Chief Information Officer. Our prepared remarks’ is scheduled to run for about 25 minutes, at which point we’ll open up the call up for any questions the listeners may have.

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 Securities and Exchange Commission. Actual events, results, or performance may differ materially, any forward-looking statements are based on current information only and we assume no obligation to update those statements.

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

I’d like to now turn the call over to Steve Rathgaber. Steve?

Steve Rathgaber

Thanks, Melissa. Good morning and welcome to the call. My name is Steve Rathgaber and I wanted to take a moment to introduce myself. I’m the new CEO of Cardtronics and I have been officially operating in that capacity since February 1st. so with eight days on the job, 10 if you count the weekend, I thought my best contribution to the call this morning, would take the form of a quick background description of myself followed by a brief discussion of my reasons for choosing to join the team at Cardtronics. I will then turn the call to Rick, Mike and Chris for a presentation of our results for the quarter and year.

I have been in the payments and network business essentially all of mine increasingly lengthy thirty three career. My EFT career started at ADP in 1981 when I joined them to form a new division focused on providing processing services to be emerging ATM and debit card industry. (Audio Gap) industry through the 1980s and was the seed for the division that does EFT processing at Fiserv today.

My last 19 years was spent with the NYCE Network where through a series of strategic acquisitions and product initiatives, we were able to build a statewide ATM network into one of the key surviving and driving national payment networks, processing ATM, PIN point-of-sale, PINless bill payment transactions and a host of emerging services including mobile and internet related payment services.

That 19 year journey at NYCE traveled through a variety of ownership models including an independent NYCE [owned] by 13 banks, a joint venture model with First Data as a primary owner, then Metavante as the sole owner and finally FIS as the owner of Metavante and NYCE. Each of these stops provided a fresh opportunity to grow the business as well as a variety of insights into the different cultures and strategies of the key processing companies in the payments industry today.

For the last five plus years, I’ve operated as a President of the NYCE networks and as the Payments Network division Executive at both Metavante and more recently at FIS. In that role I also had the opportunity to serve as a Director and share of a Canadian EFT processing joint venture between NYCE and a financial institution processor in Canada.

That ride sets the foundation from my assumption of a key role on the Cardtronics management team. I choose to join the team for a variety of profession and personal reasons, several of which I wish to highlight you now. I can actually tell you one of the reasons is not the seasonal experience know as summer time in Huston as everyone has warned me about that’s since I got here.

One key reason that I did choose to join is my belief that the team at Cardtronics has created a unique asset in the payments industry. The ATM foot print, the merchant relationships in presence, the quality of our in-house processing and services joined with the knowledge, commitment and expertise of the existing management team and staff, combined to create, what to my eye, is a very valuable, but underutilized and therefore undervalued assets.

The second reason is the state of the payments industry. We are at a time in the evolution and maturity of the industry, where a player with our scale and expertise is in demand. In a consolidating payments world, banks and merchants need strong and independent payment partners. I believe Cardtronics has an important strategic and unique value proposition to offer these constituencies.

The third key reason is my desire and the obvious to me, desire of this management team to create significant shareholder value. I believe this company is poised to deliver on its potential.

I look forward to leading this company and taking it to the next level. Our challenges are to leverage the investments already made to diversify and grow our revenue streams and to strengthen our focus on expense disciplines all with the overall goal of optimizing shareholder value.

I consider myself fortunate to be the product of the thorough search efforts by Fred Lummis and the Board of Directors of Cardtronics. I'm committed to delivering value to our shareholders from this unique payment asset and I look forward to future calls with you where I can share more of our evolving story, strategy, and performance.

With that windy background, I would now like to turn the call over to Rick Updyke, who will update you all on our strong performance for 2009.

Rick Updyke

Thanks Steve. For the fourth quarter of 2009 our adjusted EBITDA totaled $27.6 million, which represents an increase of over 44% when compared to the fourth quarter of 2008.

From a top line perspective, our reported revenues were up by roughly 6% primarily due to an 8% increase in revenues from our core business, which is basically our domestic and international company-owned ATM placement business, as well as our Allpoint network and bank branding business. That 8% core growth rate is consistent with the growth rate we saw pretty much throughout 2009, which means the strong transaction trends we saw during the year continued through the fourth quarter.

In fact, cash withdrawal transactions totaled over $61 million for the most recent quarters from $57 million during the same quarter in 2008. If you look at this trend on a per ATM basis, monthly withdrawal transactions totaled 615 per ATM during the fourth quarter of this year compared to 571 last year. The reasons behind these trends continue to be the same ones that we've touched on all year.

Increased transactions from stored value card, the continued mix shift of company-owned versus merchant-owned ATMs here in the U.S. and our efforts to deploy more ATMs in high transacting locations in all of our market. In addition, our branding relationships, both direct and indirect through Allpoint have continued to drive more traffic to our ATMs.

Finally, we continue to believe that transaction counts are being positively impacted by a shift in consumer preferences away from paying with credit cards and toward paying with debit cards and cash.

As we've touched on during our last quarterly call, it appears that in the U.S. a significant portion of our withdrawal transaction count gain in 2009 was the result of an increase from a number of stored value cards being utilized through Allpoint. Specifically, general purpose, payroll, and electronic benefits transfer or EBT cards.

Allpoint has 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 individuals that don’t have checking accounts and thus haven’t been able to use our ATMs in the past. However, through the use of their stored value cards, these individuals now represent a new customer base for us.

In addition to the favorable transaction and per ATM revenue trends, new ATM placements, especially in the UK, Mexico and Puerto Rico continue to contribute to our revenue growth. In UK for example, we added approximately 225 high transacting ATMs during 2009 in Welcome Break, a motorway rest stop operator; and Asda, a big-box retailer and subsidiary of Wal-Mart.

In Mexico we deployed an additional 464 ATMs during 2009, with OXXO, Latin Americas largest convenience store chain with over 7000 locations. 353 of those ATMs were installed during the fourth quarter alone and are still ramping, so we expect them to contribute nicely to our revenue growth in 2010.

And finally, in Puerto Rico, a market we entered just late last year. We currently have 30 ATMs operating and expect several hundred to be added over the next year or so. Recently we have expanded our growth efforts in the Caribbean to the U.S. Virgin Islands with a small number of initial machines currently operating there.

Of course we are always looking for new growth opportunities both domestic and international and are now working in active pipeline that includes traditional company owned deployments as well as managed services types of arrangement. In fact, the deals we recently announced with Carnival Cruise Lines and the American Airlines Center the home of the Dallas Mavericks and the Dallas Stars, are great examples of the managed services types of arrangements we are looking to sign.

Under these deals the customers will typically own the ATMs and simply pay us to manage certain aspects of their operations including monitoring, maintenance, cash management, customer service and of course transaction processing which we do through our in-house EFT operation. What’s nice about these deals is that they do not tie up capital resources and we get a fixed fee for managing the ATMs.

We simply bring our industry-leading kiosk management expertise to bear to insure that these machines remain up and running and that their customers have a positive experience when using those ATMs. Plus we can provide additional services above and beyond other outsourcing providers to further enhance the offerings, including custom screen sets through our EST processing switch and surcharge free access for all point numbers. Finally, the two deals I just mentioned while not terribly significant in size, do represent a nice departure from our traditional business model.

So, I expect you will hear more on our managed services offering throughout the year as we actively look to grow this aspect of our business and expand our network, managed ATM, the financial services key op.

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 many of our key operating metrics continued to show nice gains over our prior-year figures. You can find these statistics on the key operating metrics page of this morning’s press release.

Overall, we had another great quarter. Our transactions were up considerably across the board, despite the fact that the total number of transacting ATMs didn’t [look] pretty significantly.

From a margin standpoint, our per ATM operating gross profit per month increased nearly 43% from $277 in 2008, and $396 in 2009, essentially continuing the trends that we saw all year.

As Rick discussed, much of this margin growth is due to strong transaction trends and a continued mix shift we’re seeing in a revenue base especially in the U.S. However, we also saw a significant operating cost saving that helped contribute to the margin expansion we saw all year.

For example; we realized over $2 million in savings during the fourth quarter from lower maintenance and armored rates here in the U.S. under the terms of our recently renegotiated maintenance and armored arrangements, these savings are expected to continue at these levels in 2010 before increasing even further in later years.

From an initiative standpoint, we made great progress in 2009 in terms of converting most of our ATMs over to our in-house EFT processing platform. At this point, essentially all ATMs including those from the U.K. and Mexico have been converted to our switch with the exception of some legacy set 11 ATMs that will be converted by the end of the second quarter.

Internationally, we made great strives as well in 2009 in the U.K. for example; our in-house cash intransient operation, which serves nearly 800 of our existing ATM’s in that market continue to provide a more cost effective and efficient alternative to third party armored providers, because this operation has been very successful, we have decided to expand by adding another cash depot and we will service another 800 of our ATMs in the U.K.

The new cash depot, which will be located in or around Manchester is expected to become operational by the third quarter of this year. In Mexico, we continue to see the advantage of scale as we do deploy more ATMs on our existing platform as Rick mentioned earlier, we deployed over 350 ATMs in offshore locations during the fourth quarter and we are expecting to deploy an additional 1000 or so ATMs in Mexico at various locations during 2010.

To give you a feel for how that business has grown, our monthly per ATM operating gross profit increased $70 during the fourth quarter 2008 to $223 in 2009 demonstrating the type of leverage that we can expect from that operation as it continues to grow.

Also in Mexico, we recently added two experienced executives for the team down there, including Scott Abogado as the General Manager in-charge of running that business. Scott has significant management expertise in transaction processing where he served recently as General Manager of First Data, Mexico.

On the finance side of the house of Mexico, we hired Alejandro Garcia, a seasoned Finance Executive with experience of several large multi-national companies with his most recent stint at Pepsi Bottling in Mexico.

Together, we feel we’ve found the right combination of experience and leadership in both Scott and Alejandro to manage our continued growth in the operation of Mexico. So, now overall for the company, I’d just like to say that we are extremely proud of what we’ve accomplished in 2009, including the significant operational cost savings we were able to achieve in the past year.

However, I would like to say that I am even more proud of the progress that we made on our key initiatives to further improve our business offerings. With the continued evolution of our [ASG] processing operation here in the U.S. the expansion of our cash intransient operation in the U.K. and the development of our solid operating platform in Mexico, we really created a propelling foundation that will allow us to offer a broad spectrum of transaction processing and managed service offerings to financial institutions and retailers alike.

I would like to now call over to Chris Brewster who will provide some additional details on our financial results for the quarter and our expectations for 2010.

Chris Brewster

Thanks Mike, just to touch on a couple of numbers of briefly for the quarter revenues came in at about $125 million that was up roughly 6% from the $118 million we generated in the fourth quarter of 2008 revenues and GAAP gross margins were up considerably year-over-year coming in at about 31% compared to about 24% in the prior year that is pretty consistent across and compared to what we’ve seen across the year.

Finally, if you exclude our relatively low margin merchant ATM and equipment sales business, revenues in our core company-owned domestic ATM business in our two international operations taken together, revenues in those businesses were up over 8% year-over-year in the quarter, which also essentially continues as we saw in previous quarters in 2009.

This quarter I can say that is indeed a true growth rate and that foreign currency exchange rates for the quarter this year were essentially the same as they were last year. So, we don't have to adjust for that.

The growth that we’re seeing continues to come from higher margin components of our business, primarily the big U.S. company-owned ATM business and its associated branding businesses, as well as international operations, that is by design. These operations represented 84% of revenues in the fourth quarter and they generated gross margins of almost 35%, which is pretty similar, just slightly under what they contributed during the third quarter.

So to put it bluntly, what we’re seeing here we believe is the validation of this business model, which involves our ability to drive increased transactions in revenues from multiple revenue sources through a large existing network.

Great example of this of course is Allpoint, which is as most of you know, sales surcharge free access to our network of ATMs to financial institutions and issues of stored value cards. As Allpoint grows, sort of the revenues we earn from the fees that were paid by those financial institutions.

However, we also enjoy increased transaction volumes on our ATM from Allpoint activities, which also translates into higher interchange revenues for us over time. Most importantly, these are typically higher-margin revenues and are consequently a key component on the kind of margin expansion we saw in 2009.

So, I guess the key take away here really is that our core business generated roughly 8% year-over-year revenue growth during the quarter with expanding gross margins and this would seem to be a pretty respectable outcome given relatively poor economic conditions.

So, what drove the seven percentage points of growth in GAAP gross margins from 24% last year to 31% this year? It is basically the same story as in the third quarter, about four percentage points of the margin increase occurred because of the transaction growth across a relativity fixed cost platform and the favorable revenue mix shift that we've already talked about, of the remaining three percentage points in margin gain, roughly half of that was due to lower vault cash rental rates and we do continue to benefit there from today’s relatively low interest rate environment. And the remaining half is due to lower operating expenses primarily the armored car service cost and maintenance expense side of the business that Mike discussed previously.

With regard to SG&A expenses, we did show a slightly higher number in the fourth quarter than you may have been expecting, really due in large part to approximately $1 million of non-recurring personnel related costs, which includes the cost to finalize our CEO search efforts and certain incentive compensation accrual amounts all of which were produced in our reported adjusted EBITDA.

So, the net of all these moving parts was roughly a 44% year-over-year increase in adjusted EBITDA from about $19 million last year to $27.6 million this year. From a bottom-line perspective, we have generated adjusted net income of $6.8 million or $0.17 per diluted share for the quarter and that would compare with $700,000 or about $0.02 per diluted share in the same period last year.

As it was the case with adjusted EBITDA, the margin growth that I spoke about earlier contributed significantly to that year-over-year increase in per share revenues. On a GAAP basis, we generated net income of $1.5 million for the quarter and about $5.6 million on a year-to-date basis.

A couple of things, which you may notice in the numbers that I wanted to talk about just briefly. During, the fourth quarter we’ve recorded a $1.4 million non-cash charge related to our U.K vault cash rental rate hedging activities and that charge did serve to reduce the reported adjusted EBITDA, it was taken as an expense some against adjusted EBITDA, adjusted earnings per share and the GAAP net income figures that I just referred to earlier.

This non-cash charge arose from a unique set of circumstances that I truly don't expect to recur. We had put hedges in place against one month LIBOR against our U.K vault cash, when we put those hedges in place that was the pricing basis of the underlying vault cash agreements and that was deemed in accounting terms to be an effective hedge and using hedge accounting treatment for that, which means the sort of day-to-day variations and value of those hedges looked at in isolation don't back and forth through our P&L.

The underlying pricing basis was changed during the course of the quarter on those U.K arrangements on the vault cash to three months LIBOR. In accounting terms, that was then deemed to be an ineffective hedge, so at that point we had to start marketing it to market.

During that 20 days there was a markdown of about $1.4 million in the value of those hedges, the market value of those hedges. We took that through the P&L, we essentially redid the underlying hedges so that they were against one month LIBOR rather against three months LIBOR on a go forward basis rather than one month LIBOR, so we eliminated the problem on a go forward basis.

Closing on that, I would simply say it is a non-cash charge, but because it relates to an items that we normally take in operating expenses, our cash rental cost we took it as a charge against the adjusted EBITDA because we thought that was appropriated.

Turning now, the subject of amortization expense, we do subtract, as you know the amortization of our contract related intangible assets and our calculations of adjusted EBITDA or adjusted earnings per share, but I should mention that we had amortization expense somewhat above the norm in the fourth quarter, I’d expect that go-forward expense to be about $4 million per quarter.

Turning to the balance sheet, debt at the end of 2009 stood at just over $307 million that consisted of $297 million of senior sub-notes net of the issuance discount there on, 10 million of debt on our Mexico equipment financing lines and about $200,000 in capital leases. Now, you probably noticed that I didn’t mention I think about bank debt outstanding and that I’m happy say is because we paid off our bank revolver during the fourth quarter. We started the quarter with $17 million outstanding, the end of the quarter was zero. So, no bank debt outstanding at year-end.

We also ended the year with over $10 million in cash on hand. Now, one would logically expect that we take any excess cash on hand and pay down some of our indebtedness over the only meaningful debt we have left outstanding at this point is our senior subordinated notes, which cant be prepaid, but with somewhat of a penalty or what’s known in the debt world as a call premium.

It’s possible that we might do some form of refinancing transaction in 2010, that would utilize some of our cash to help reduce total debt, but at the moment that decision has not been made and I would encourage analyst to model us with essentially that $297 million of sub-debt at its 9.25% interest rate standing in place across 2010 and with the growing cash balance as we flow cash from operations.

I think it’s important to put our improved leverage profile into a little bit of a historical perspective. We ended 2008 with about $44 million outstanding under our bank revolver and we’re leveraged at 4.3 times our trailing adjusted EBTIDA.

During 2009, we fully funded our capital expenditure budget of $25 million. We made $28 million in bond interest payments. We repaid the entire outstanding balance under our revolver and we’ve increased our ending cash balance by about $7 million. As a result, we’ve reduced our (inaudible) from 4.3 times at the beginning of 2009 to about 2.8 times at December of 2009, meaning that we took a full 1.5 turns of our leverage in the course of one year.

As you might imagine, with all of that from a liquidity standpoint we’re in a quite good shape. Our $175 million bank credit facility which is good through May of 2012 is roughly $5 million in letter of credit outstanding at December 31, which leaves us with a $170 million in an available committed funding.

From a covenant standpoint, we’re in compliance with all of our covenants and we would continue to be so even if we substantially increased our borrowings or had an unanticipated reduction in earnings.

Turning to guidance, we are going to reiterate essentially for the most part the 2010 guidance we provided to you on the last conference call though this does include some additional details this time. Specifically, we’re expecting the following, total revenues of $520 million to $530 million, which is up slightly from the $515 million to $525 million that the communicated during our last call.

Gross margins in the range of 30% to 30.5%, adjusted EBITDA in a range of $118 million to $123 million, depreciation and accretion expense of $40 million to $41 million, cash interest in the range of $29 million to $30 million, adjusted net income of $0.75 to $0.85 per fully diluted share and we're using a share count of about 41.5 million diluted shares outstanding in that calculation.

We’re expecting capital expenditures of about $45 million in the year, net of the non-controlling interest relative to our 51% owned Mexican subsidiary. That number is up somewhat from the $35 million in guidance that we discussed on our last call, in the timing of that last call was of course prior to the conversation of our detailed CapEx budget for 2010.

Frankly, there were handful of items that really explained that difference one of them certainly is the decision to go forward with the construction and equipping of a new cash depot for the UK as Rick discussed, and also some additional ATM installations just for general growth purposes in each of our markets.

The guidance that we have given you assumes exchanges rates of $1.60 per UK pound and 13.5 Mexican pesos per U.S. dollar, which are quite close to today’s rates. This guidance also, we believe, reflects the upside we saw in 2009, such as strong transaction trends, favorable interest rates and cost savings that have helped us outperform this year.

While some of these benefits are certainly recurring, some like continuing low interest rates for example, may not be with us for an extended period of time, our guidance assumes that the LIBOR rates that are vault cash rental rates are based on will go up over the course of the year, and consequently will pay more for vault cash in 2010 and 2009.

Even if those rates remain where they are today over the full course of 2010, we did put some additional hedges in place as I talked about earlier in the course of 2009, and the fact that we have taken the conservative approach and now fix the cost on the significant majority of our UK vault cash will provide stability to the P&L on a go-forward basis, but that shifts from very short term rights to what’s effectively an intermediate term rate, brings with it about $5 million in annual cost.

So that we have certainly dialed into the expense structure that we’re assuming in our guidance and that we certainly fully expect that to be there in the numbers as we walk through 2010.

However, we do also expect the margin benefits that we’ve seen from our revenue growth in favorable revenue mix changes and other reduced operating expenses to be on going, barring any unforeseen events. So we took all these factors into consideration during the annual budgeting process and believe what we have you given you is a pretty fair amount of what reasonable expectations for 2010.

Most of this discussion has been around the fourth quarter of 2009, so I’d like to come back to talk for just a moment about the full years results. It was a strong year, we ended the year with nearly $110 million in adjusted EBITDA, which was well ahead of $80 million that we had projected for the year at this time and last year and well ahead of the $83 million in adjusted EBITDA that we achieved in 2008.

If I had to sort of pick two drivers of that rather significant our performance, one would certainly be what the team achieved on the cost side across 2009, the benefits that we’re seeing from the rise of the prepaid card business or stored value card business in the fashion in which that is driving transactions across our network. We simply didn’t have either of those fully in mind when we did our initial guidance for 2009 and they certainly benefited the year.

From a cash flow stand point, we generated over $46 million or over $1 a share in free cash flow during 2009 after capital expenditures, as we said, allow us to pay off all of our bank revolver, reduce debt to EBITDA by 1.5 turns, roughly [fits] our adjusted net income and net income per share amounts during the year, all of that and what some would say is the worst economic environment we’ve seen since great depression.

As you might imagine, the management team is pretty excited about these results, but I’d also tell you we are humbled by them. The attitude here is certainly we are not talkie about this. We deeply understand that 2009 results had a very high bar for the company and we are all dedicated to seeing that we improve on those results in 2010 and continue to generate value for our share holders.

I’ll close by just saying that we are very excited about Steve joining the company and we look forward to the addition of his leadership, his skills, his experience and his already demonstrated very high level of energy to the Cardtronics team. So with that, operator, that concludes our prepared remarks and we would like to (Inaudible) on the lines we have.

Question-and-Answer Session

Operator

Our first question comes from Christopher Mammone - Deutsche Bank.

Christopher Mammone - Deutsche Bank

The first question I had was just on the guidance. I realized that you sort of surprised us in October with an our early issuance of 2010 expectations and at the time they were decently above what we are expecting, but just wondering you know are you seeing anything that this causing industrial conservatism for you to sort of keep everything in tact right now.

Especially, I think, reading from your comments that you do continue to expect your momentum and your transaction trend that continues to flow through and the mix shift also to continue to work on your favor, so I guess sort of a tack on question to that is, what was the primary driver behind your gross margin expectations remaining relatively flat with 2009?

Chris Brewster

Well, if you think what is it we know now that we didn’t so back then, I guess the answer is not a lot frankly, I mean the quarter forth quarter finished up pretty much as we expected, we don't have full P&Ls on January, we do have some top line information and it's pretty close to what we expected. I’d say now significant factors really would cause us to bump our guidance if you will in an upward direction or really for that matter in a downward direction.

With regard to the question on margins, why relatively flattish margins being projected year-over-year, I think it really comes back to our assumptions on vault cash cost, because as I said, we have effectively hardwired because of our hedging activities we will even if floating rates stay where they are, we will have roughly a $5 million increase in vault cash rental costs brought to bare simply by the fact that through the interest rate swaps we have fixed the rate on the majority of our UK vault cash.

So basically what that means in application is LIBOR in the UK is about 60 basis points, the average rates on those hedges are a little over 3%. So we have hardwired in around 2.5% or 250 basis point increase in cost on net that ₤75 million of vault cash. So that's going to [countably] with us if you will come (inaudible). Now we have made assumptions as well that we’ll see increases in LIBOR across 2010 and that that will impact the unhedged portion of our vault cash which is about $300 million and it will have additional cost on that side of the vault cash portfolio as well.

So I mean if there is a thought out there that's sort of all the theme of world rising is better than this, given the various good things that are going on with the company. My response for that is, we have some known increases in vault cash cost and we’re definitely making the assumptions that interest rates will not stay where they are, and see upward moments in floating rates across 2010, I think those are the primary factors that contribute to that guidance, Chris.

Christopher Mammone - Deutsche Bank

Very helpful. I guess as a follow-up, like to welcome Steve to the company, thanks for your (inaudible) call. I guess try to keep this high level of the cost developments that you just started. I guess the two primary ways that Cardtronics can grow (inaudible) is adding the machines to the network and adding your revenue streams per machines, I guess as you look at that business, having just joined. What are you more excited about in the near term in new opportunities to and add more machine count and perhaps (inaudible) fewer areas in the U.S. hopefully, but in the international market that are more penetrated or new opportunities that fairly take the network (inaudible) and layer on additional revenue streams, so if you could gives us some color on that topic?

Steve Rathgaber

Sure. Just I’m going to repeat the question since you were breaking up a little bit and I’m not sure everyone got to hear all that and I want to make sure have the question right. Two sorts of basic revenues streams one is sort of machine count driven and the other is sort of incremental service type revenue. And which am I sort of more excited about from the perspective of the go forward view. First of all I would say thank you for the welcome, I am very excited to be here and looking very much forward to the opportunity here.

But secondly I would say that the company sort of doesn’t need me to do additional machine count, they’ve demonstrated a wonderful track record and a great performance this year against delivering on those elements of the strategy. We certainly believe that is very important a part of our future. We certainly believe that we don’t want to rest on the scale and size of our network at any point in time.

The notion of adding the right locations is certainly a principle that we are closer and closer to over time and one of the things that think differentiates us from some other in this market place. But one of the things that attracted me to the position and one of the areas I hope to strongly influence is to bring additional revenue flows to the company by leveraging the assets in place here with little different mindset than we have historically and in that sense what excites me is the opportunity to drive some new revenues from some new techniques around these core assets. That certainly stop, I will be looking to talk more about in the future calls as we develop that stuff.

Operator

Your next question comes from Bob Napoli - Piper Jaffray.

Bob Napoli - Piper Jaffray

A follow-up Chris on the margins for next year and if you think about the operating leverage within the business and the fixed cost base, it looks like based upon the revenue growth, you are thinking about transaction growth at around the same paces in 2010 that you had in 2009, is that a fair characterization?

Chris Brewster

I think it’s generally fair, I mean the way we tend to our perfections Bob is, if we are doing a forward projection we typically look at the last nine months of history or so. And to take a view of transaction count trend and that’s what we did basically in our 2010 planning process that may have a very, what I would call a very good slightly conservative tilt, but probably not significantly so.

Bob Napoli - Piper Jaffray

If you get that type of transaction growth, I understand they were sitting here in February, not changing your guidance at this point is certainly the right thing do, but if you try to think about where they are could be opportunities within the guidance, is it on the operating leverage on the margins if you get that type of transaction growth and if you had point or basis points of margin expansion this year from scale benefits and I understand the interest of cost and hedging and not rising interest rates, would that be a potential area of upside if we were looking for such items?

Chris Brewster

Frankly, we think we’ve modeled it out in a fairly discreet way, in a sense that we are anticipating increasing transaction counts over time and we are anticipating them, the benefits of operating leverage across the network as good things, if you will that help offset that the additional cost that we’re anticipating on the bulk cash side. The thing that we miss predicting on the front-end of 2009 and the thing that is relatively difficult to predict at this point because of sort of a nascent business if you will is the impact of the growth of the stored value business and prepaid cards on our network.

So, I guess if you were to ask me the question, if we’re looking back at the end of 2010 across the year and results were better than what we had anticipated where would that come from? I really do feel like we got a good grip on current transactions trends, we got a good grip on expenses; it would probably be something like better help out of the stored value card business than perhaps we have anticipated. I’d encourage you not to run too far with that because some of that’s already in our actual results and it’s already in our projections.

Bob Napoli - Piper Jaffray

Have you been able to pinpoint exactly how much benefits you’re getting from stored value cards, what percentage of your transactions they are now versus a year ago?

Chris Brewster

Well, I’ll tell you kind of what we know and what we don't know. What we have some feel for is the stored value transactions that come to us because those card issuers are using the Allpoint network to provide surcharge free access to those cardholders. I mean, we can specifically identify those and have some ability to gather data. What we don't know frankly is if someone shows up at one of our ATMs with a stored value card that is issued by someone who does not use Allpoint, we have no way to pinpoint that as a stored value transaction if you will.

So just focusing on the guys that are coming through the Allpoint network, this data, I’d call, still a little bit fuzzy, but I feel comfortable making a statement that we had about 5.5%, a little higher than that same-store withdrawal transactions count gain year-over-year in the fourth quarter on our domestic business and I’d say a good half of that relates to the year-over-year increase in the stored value card volumes that we’re running.

Bob Napoli - Piper Jaffray

Were you able to see an acceleration of that from the third quarter or…?

Chris Brewster

Well, I’d say, I have to be careful with my terms here, I’m not sure I would say the growth rate has accelerated. I think the year-over-year trend was somewhat similar, but then the bar was higher and that those numbers were higher in the fourth quarter of last year than they were in the third quarter of last year. So I guess what that would say in mathematical terms, I’m not sure the slope of the line has changed, but it’s still an upwardly sloping line.

Bob Napoli - Piper Jaffray

What are your thoughts on refinancing? If you refinance the debt today, what kind of a rate would you get? Is that something you do want to get accomplished in 2010?

Chris Brewster

Prior to the markets getting focused on things over in Greece, the current coupon on the debt is 9.25. We were being told we might be able to refinance that at, say 8.25, something like that. The markets focusing on the issues are rising out of the press commentary around potential default of the sovereign debtor that is Greece have rattled debt markets around the world, they’ve certainly rattled the high-yield markets a little bit in the States.

We probably couldn't get that execution at this incident and time, how long that last four remains to be seen. I guess the way we think about it, here there are really two issues that are on the radar screen. One is the fact that we are obviously every month we’re a month closer to the maturity of that debt.

At this point it’s 3.5 years out that’s a long time, we don’t feel like we have a gun to our head to refinance it just to push out the maturities, but we’re certainly not going to match it up right to the close to the maturity date and like a bad debt. The markets will be there to help us move that at that point in time, we’d be much more conservative about us on that.

Although doing it three and a half years ahead of time is pretty darn conservative. So that’s one issue. The second issue is, today there is a call premium of four and five-eighths percent to call those bonds, in order to prepay them, that falls in half in August of 2010 and then it goes away completely in August of 2011. So we’ve got that math that works.

And then lastly we have the fact that we’re starting to build a cash pile and that implies a negative arbitrate between having debt outstanding at 9.25% and perhaps earning 10 basis points, if we’re lucky on short-term investment of that cash. So that if we do some bad issue frankly I would tell at this point it’s a current hot topic on the part of the finance team here at Cardtronics, but we haven’t made any final decisions as to what to do in that regard.

I guess the encouragement I would give to the analyst community is since we haven’t made any such decisions to continue to run models as if that $300 million in high yield debt stays in place and we continue to bare all that interest expense. As far as the balance sheet goes, the positive cash flow just manifest itself as a rising cash balance on the balance sheet until we come to a final decision on our approach to that.

Operator

Your next question comes from Chris Shutler - William Blair & Company.

Chris Shutler - William Blair & Company

First question probably for Chris is just on the CapEx guidance. I know that you talked about obviously rolling out your armored car division in the UK. The second one, and then also adding new machines, but can you maybe help us understand the difference between the 45 and the 25 maybe a little bit more specifically or either look at it versus the 25 or versus what you put up this year which I think was around that same number?

Chris Brewster

Well, let’s say just to give you the perspective on the numbers, our actual spending in 2009 was about $25 million. Initial guidance we put out in October was for CapEx of about $35 million and the guidance we put out today was for CapEx of about $45 million.

If you look at that, year-over-year I would say, in other words the comparison between the 25 and the 45, we are certainly, we are going to see somewhat higher maintenance CapEx in 2010. We are replacing some relatively old equipment that we picked up in 7-11 acquisition that is a component of it.

We are targeting somewhat more unit growth in 2010 that we saw in 2009 that would be a component of it, we are absolutely dedicated to the concept of having a transaction processing operation that is as bulletproof as human beings can make it and we certainly have some hardware and software capital expenditures in the budget for that.

As we said, we’ve enjoyed enough success certainly with the performance of the first cash depot that we built over in U.K. that we have taken to our board a proposition and gotten approval of it to build a second cash depot in the U.K. and by the associated vehicles and the equipment that it takes to run that operation and that would certainly be part of them, with 2010 capital budget.

So, I would say that from on an ongoing basis, if one was thinking about a multi-year model that you should probably think about us in the context of $10 million to $15 million a year in maintenance CapEx and infrastructure CapEx, if you will and then beyond that, it is largely going to be growth CapEx related to our efforts to further expand the network.

Chris Shutler - William Blair & Company

The CapEx around the armor division in Manchester is roughly how much?

Chris Brewster

In the range of round or about $3 million to $3.5 million.

Chris Shutler - William Blair & Company

The second question just on the ATM count obviously 1000 ATM in Mexico is a pretty nice result or will be, but I might have missed you talking the U.S. and U.K. markets, may be you could speak to ATM count expectations there?

Chris Brewster

Well in the U.S, I mean we do see ATM count and I will speak to the company-owned end of the business separately from the merchant-owned end of the business. In the company-owned side of the business, I mean we would expect a few percentage points of machine count growth in the U.S year-over-year. In the merchant-owned side of the business, we are expecting some continued attrition although probably not to the level we had across 2009.

The U.K team is anticipating year-over-year machine count growth in the range of around 15% something like that, and the Mexico team is expecting substantial machine count growth, perhaps 1000 or so, which on their base would be something like 40%

Chris Shutler - William Blair & Company

And then a final question, just on seasonality, maybe you can just walk us through Chris, if there is anything we should be thinking about in terms of either top line or expenses that could skew the seasonality in 2010 versus 2009?

Chris Brewster

I wouldn’t think so; just think about whether there have been any changes in the business that would affect the basic seasonality of it. Nothing comes to mind I mean we would typically expect the first quarter to be the weakest quarter in terms of both revenues and margins.

The reason margins are expected to be weaker would simply be because revenues are expected to be weaker and the operating leverage in the platform. And we would have those expectations around the first quarter. So, really solely due to weather, ATM machines are to some extent dependent on people being out and about moving around in order to use them and it would be quite typical in our business and for many of our retailers to see the slowest quarter to be the first quarter of the year.

The second quarter would be a fair bit better; the third quarter would typically be the best, the third quarter would typically look a fair bit like second quarter, a little bit down from the third quarter. I mean that’s been the historical pattern and I can’t think of anything in the way of fundamental changes that would change that.

Chris Shutler - William Blair & Company

And to that effect I’m actually snowed in here (inaudible) New York today. So, has the weather actually given how strong it has been this year in terms of snow, has there been, have you noticed any downtick in transactions in New York?

Chris Brewster

I would just say that, we’d love to say that the snow storms have no impact on us, but they do. As you guys know, it affects the retailers that we do business, in some cases, some markets as retailers maybe closed. So, we won’t see any volume. In some cases the retailer maybe open and you still see the effects of lower food traffic. It also impacts the armors and maintenance providers that we do business with. However, those providers have been servicing banks, retailers and ATM providers for many, many decades.

So, they bounced back fairly quickly, in some cases you’d be surprised those maintenance in armored companies can work right through those snow storms in some cases.

I think the thing is and probably answer your question though is, this is what defines the seasonality and nature of the business in January and February, because of this experience, we expect snow storms and that definitely impacts how we forecast the business. So, again it does effect and we do expect it.

Operator

Your next question comes from Reggie Smith - JPMorgan.

Reggie Smith - JPMorgan

I guess I wanted to follow-up on the CapEx question. I think you said that maintenance is typically 10 to 15 million per year. Did you say this year would be a little higher? I mean above that range or towards the high-end of that range?

Chris Brewster

I think it would be towards the high-end of that range and the reason for that is what I mentioned about the equipment, the replacements that we intend to do in the 7-11 portfolio.

Reggie Smith - JPMorgan

On the store value side, how big is that I guess in terms of transactions today, relative to the $61 million withdrawal transaction that you do a quarter?

Steve Rathgaber

It’s down in single-digits as a percentage of those transactions and I am not going to be highly precise about it, because I think the data is still a little bit foggy, but if you think about it as a single-digit percentage of our total domestic transaction counts, you are in the ballpark.

Reggie Smith - JPMorgan

And then I guess on the bank branding side, similarly how large is that percentage of your 61 million?

Steve Rathgaber

How many of those transactions are bank branded transactions. Was that the question Reggie?

Reggie Smith - JPMorgan

Yeah, that’s the question.

Steve Rathgaber

I can’t answer that off the top of my head. I don’t know, I can get it and feed it back to you.

Reggie Smith - JPMorgan

Okay that works. And then I guess lastly on the bank branded pipeline, any changes there? Have bank started to look at that again as a source of portfolio growth fore those guys?

Rick Updyke

Reggie this is Rick Updyke and I think clearly since the first of the year with a new budget cycle and banks starting to look to spin more dollars this year in areas like advertising. We are seeing a lot more discussions than we did clearly last year, so we are cautiously optimistic although as that’s not necessarily a short sale cycle, so I wouldn’t expect anything in the early part of this year, it would be towards the middle and the later part.

Reggie Smith - JPMorgan

And then I guess finally, on the bank branding side, I think it was last quarter you guys talked about chasing Duane Reade and I think you are moving out of Duane Reade, but chasing and giving you guys another retailer to partner with, has that transition happened yet?

Steve Rathgaber

Firstly, we had a discussion. I will take the front end of that and then ask Rick to take the rest of it. We did talk about on I believe the last quarters’ call or perhaps it was the second quarter call or the situation we are in. We did move out of a specific retail merchant customer that we had and they installed there and also want some additional merchant branding business from a major financial institution, but never named names on that, if you will. With that let me let Rick pick up the substance of your question.

Rick Updyke

Yeah, I think at the end of the day Reggie, we ended up picking up about 1300 locations with one of our existing bank partners that we completed in the latter part of last year re-branding those key ops or branding those key ops, they do not have a bank brand on them at that time.

Operator

Your next question comes from Joshua Elving - Feltl & Company, Inc.

Joshua Elving - Feltl & Company, Inc

Just a quick question for you. I’m trying to kind of think a little bit about the opportunities you may have in front of you with regards to the managed services business. You kind of talked a little bit about American Airline Center Carnival, bigger picture what’s the opportunity to go in and perhaps take over, some of these I guess, for a like of a better term, field services for maybe some of the bigger banks that have their own bank networks or ATM networks I guess I should say?

Rick Updyke

Yeah this is Rick. For a long time we have had this idea that we could leverage our core expertise with banks and we are now starting to have some interesting dialogues with several banks about off-premise locations taking over their operations and even some retailers. So, I think the activity around that is starting to pick up. So we are pretty excited about that opportunity.

Joshua Elving - Feltl & Company, Inc

And do you have a number or a sense for what, like a number of ATMs that you are currently providing services on from a third-party perspective?

Rick Updyke

It’s not meaningful today. In the definition, that we call managed services.

Joshua Elving - Feltl & Company, Inc

Just one last question, with regards to the ownership position that some of your private equity investors have in the company and I know it has been something that has been talked about in recent weeks. I noticed that one of your private equity partners has been selling some stock here, thus far this year. Do you have any kind of sense for what kind of an appetite for doing a secondary they might have or have you had any conversations with any of your partners?

Rick Updyke

Obviously, we do talk to them some time-to-time although they don’t necessarily share with us what their intentions maybe. And frankly, I probably don’t have too much to contribute on this Josh.

Operator

We have no further questions in queue. I’d like to turn the conference back over to Chris Brewster for any additional or closing remarks.

Chris Brewster

No additional remarks, operator. Just to say thanks to everybody for joining the call. We appreciate your time and your attention and we’ll look forward to talking to you again in this context in late April. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. As a reminder, a digital replay of this call will be available through February 25, by calling 888-203-1112 or 719-457-0820 and entering conference ID 4035703. Additionally, you can access the replay through the Investor Relation section of the company’s website at www.cardtronics.com.

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

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Source: Cardtronics, Inc. Q4 2009 Earnings Call Transcript
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