Cardtronics' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Cardtronics, Inc. (CATM)

Cardtronics, Inc. (NASDAQ:CATM)

Q4 2013 Earnings Conference Call

February 6, 2014 05:00 p.m. ET

Executives

Mitzie Pierce – Investor Relations

Steve Rathgaber – CEO

Chris Brewster – CFO

Analysts

Ramsey Al-Essal – Jefferies

Andrew Jeffrey – SunTrust

Mike Grondahl – Piper Jaffray

Reggie Smith – JPMorgan

Bob Napoli – William Blair

Operator

Good day, ladies and gentlemen, and welcome to the Cardtronics Fourth Quarter Earnings 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.

I’d 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 fourth quarter conference call. Presenting on the call today, we have Steve Rathgaber, our Chief Executive Officer and Chris Brewster, our Chief Financial Officer.

Steve will begin today's call with an overview of our fourth quarter and full year results and update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly and full year results as well as our financial guidance for 2014. Our prepared remarks are scheduled to run for about 30 minutes, at which point we'll open up the call for any questions.

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

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

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

Steve Rathgaber

Thank you, Mitzie and welcome everyone. Cardtronics completed another strong quarter to close out 2013 with financial results up solidly over the fourth quarter of 2013 and comfortably in line with our expectations. The financial headlines include: revenue growth of 20%; adjusted EBITDA growth of 14% for the quarter and adjusted net income per share growth of 20% for both the quarter and the full year. This marks our 20th consecutive quarter of consolidated adjusted earnings growth, 19 of which were double digit growth with the lonely outlying quarter being 9%.

The point is that the Cardtronics model is a steady reliable growth model for investors. In a world still finding its way on securing electronic payments, we believe cash continues to deliver value and security for the consumer and the retailer in ways no electronic payment can, and we believe that the Cardtronics model continues to deliver for our investors in a world where the consumer relies on cash.

Let me touch on just a few fourth quarter highlight and then a recap of 2013. After Chris reviews the numbers for 2013 and guidance for 2014, I will close with insights around the 2014 environment.

Quarterly highlights include announcement of branding partners for one of our third quarter merchant sales, HEB who you may recall as the largest grocer in Texas, BBVA Compass and Frost Bank will respectively be the primary and preferred branding partners but it's important ATMs owned and operated by Cardtronics. This is the first major retailer to enjoy our primary and preferred branding products. We announced this product set earlier this year.

This branding suite of services provides multiple financial institutions unique branding experiences at the same ATM. The significance of this for our shareholders is additional revenue source from the same ATM and a validation of the model for multi-branding at a single ATM from partner institutions looking to deliver the best ATM experience to their cardholders.

Next, we were pleased to announce that the Allpoint network will provide surcharge free access to the recently announced prepaid card initiative between T-Mobile and Blackhawk. We also completed a key renewal effective January 1, 2014 with Walgreens and lastly for the quarter, we had some fun with finance with the shareholder friendly issuance of our first convertible bond offering, providing the company with a very cost-effective source of funding for future growth.

Turning to a full year recap of 2013. It is fair to say that management was pleased with the performance of the company and to lead through the end of the year, pleased with the value created for shareholders. This year was a remarkable blend of solid performance from the traditional core drivers of the Cardtronics business model, supplemented by two transformative acquisitions and then, further complemented with the series of strategic investments to drive the future growth of Cardtronics.

Let’s review some key metrics. In 2013, our total ATM fleet, both owned and operated, grew more than 28% year-over-year to more than 80,000 ATMs. Transactions processed grew almost 24% to over 920 million transactions by consumers at Cardtronics ATMs. We now operate more than 20,400 branded ATMs in three countries: the U.S., Canada and Mexico. Our branding model, which provides the free access to our branding partners’ cardholders continues to grow in the U.S. and has now been successfully exported. The model continues to drive more traffic and consumer spend to our retail partners.

Our Allpoint surcharge free network now with over 55,000 locations on three continents continues to expand. Allpoint enjoyed a nearly 25% increase in transactions in 2013. As always, the growth comes from existing and new institutions as well as existing and new prepaid issuers. Prepaid transactions grew 22% in 2013.

On the retail side of our business, we grew our own ATM global fleet by approximately 3000 locations between new and existing clients. This represents growth of our own location base globally of about 8% before counting ATMs from acquisitions. And this growth occurred across all of our geographic markets, except Mexico.

New growth is obviously critical but preserving the business you have is no less critical. It was a good year for renewal activity. In the U.S. alone, we renewed six significant brands, each from a different market segment, including the grocery, convenience, fuel, big-box, specialty and drugstore segments. These renewals secured nearly 5000 Cardtronics ATMs across this diverse retail group with an average contract term over six years. And it is fair to say that management is pleased with the terms and conditions of these contracts.

We believe the terms reflect the unique strength and value of the Cardtronics product offering. We were busy in 2013 with acquisitions that were strategic, transformative and a bit roll-up traditional. Cardtronics own ATM count from acquisitions were [ph] another 8,000 plus locations into the family and we added more than 8000 merchant owned locations through acquisitions.

But we also added a strategically significant software and services company. In the spring, we completed the acquisition of i-design, a Scotland based software services and advertising firm that had been a Cardtronics partner for several years. This deal emerged Cardtronics in the world of digital advertising and marketing and brought in-house the technology needed to create a more valuable consumer experience at Cardtronics ATMs.

Since the acquisition we've been strategically installing the i-design ATM technology at ATMs across our portfolio in the UK and Canadian markets and have been reengineering the software for application within the U.S. Based on continuing discussions with retail clients in multiple markets, we believe that the i-design’s suite of capabilities is and will continue to be a key differentiator in our renewal activities.

And then in August, fresh off of the successful turnaround activities, which produced the 600 basis point margin expansion in our newly profitable UK operations, we announced the acquisition of Cardpoint Limited, a transaction that grew our UK portfolio by 7,100 ATMs and gave us the opportunity to enter Continental Europe, specifically Germany with 800 ATMs.

In addition to the capabilities and footprint expansion delivered by these acquisitions, Cardtronics benefits from an infusion of executive and specialist talent that will assist in our continued growth. We are pleased to report that integration activities of our European assets are moving largely on schedule and on budget.

Another byproduct of these transactions is the diversification of our revenues and profits across a broader geography. It is noteworthy that the Cardtronics Europe business now represents 25% of corporate revenues on a run rate basis. Despite mostly good news internationally, we did face some challenges in Mexico that impacted the fourth quarter.

After strategic review of our location inventory, we called a number of unprofitable sites. This activity in conjunction with a significant spike in cash thefts and the resulting increased investments by Cardtronics in-physical ATM security to combat future cash thefts, caused the decline in our Mexico revenue and profitability in the fourth quarter.

We believe that this work once again resets the stage for a better performing 2014 that is often a challenging market. In addition to successful selling, renewing, refinancing and acquiring, we were busy in other ways in 2013. We invested heavily in the people and technology to continue to build the next generation Cardtronics capabilities and candidly to do some infrastructure to catch up due to our rapid growth.

We formed an enterprise growth organization headed by David Dove, a seasoned payments industry veteran, to drive the transaction growth strategies and products that we believe will transform the Cardtronics model. We retooled our development and technology areas under a new CIO Mike McCarthy an ATM and payments technology processing veteran, to drive the build of the products and services to support David’s team as it executes our growth strategies.

And we focus on protecting our reputation and information security with the formation of an information security function led by a senior Cardtronics technology and information security executive Gerry Garcia.

In summary, it was a year of solid execution, growth strategic investment and creation of shareholder value.

Now I'd like to turn it over to Chris Brewster for a deeper dive into the 2013 numbers and a look at our 2014 guidance. Then I will wrap up with some thoughts about 2014.

Chris Brewster

Thank you, Steve. Our consolidated revenues for the fourth quarter were $242 million, that was a 22% increase over the fourth quarter of last year. Adjusted net income per share came in at $0.49, up $0.08 or about 20% from the same quarter a year ago. The revenue gains continue to be fueled by a mix of acquisitions and organic growth. The fourth quarter was the first full quarter where the results from our Cardpoint acquisition were included in consolidated results. That acquisition accounted for the majority of our acquisition related revenue growth in the quarter which contributed about 17 points of the total 22 percentage point of revenue growth.

Organic growth provided the remaining five percentage points of revenue growth. That growth rate is a little lower than our typical 7% to 9% target range but still solid and reflects contributions from several components in our growth strategy. We continue to see demand and growth in our surcharge free offerings, including both network and bank branding in our Allpoint network. These offerings represented approximately 2 percentage points of organic revenue growth in the quarter.

Our same-store same ATM transactions and revenue growth in the U.S. for the quarter also were up about 2%, that’s a little lower than our recent past experience and like many other retail businesses we think our transactions were somewhat negatively impacted by the colder and wetter than normal weather in both the US and the UK primarily in the month of December. We estimate that weather variability caused us about one percentage point off of revenue growth in the quarter.

As we discussed in our third quarter call, we won new business during the fall that totalled over 700 new units but they did not become fully installed until very near the end of the quarter. We also installed about 550 locations for existing customers during the quarter, very solid growth but fairly weighted toward the back end of the quarter.

Partially offsetting some of that revenue growth was the taking out of service a portion of our ATMs in Mexico which Steve touched on earlier and that probably caused us about a percentage point of topline revenue growth in the quarter.

So in summary, organic revenue growth in the quarter was solid, driven by continued execution on several of our growth drivers. But quantitatively we think we probably would've been in that 7% to 8% organic revenue growth range absent the actions we took in Mexico with the full quarter of a new business win and absent the weather headwinds that we had.

Turning to gross margins, they came in at 32.5% which was roughly flat from margins in the fourth quarter of last year. However absent the few items that I will quickly highlight, overall gross margins would have once again been up about 130 basis points mostly as a result of the leverage involved in continued revenue growth on a relatively fixed cost structure.

The first item I would imagine is our ATM equipment sales. These low-margin sales had been declining since the March 2012 Americans with Disability Act deadline but were actually up year-over-year in this most recent quarter for the first time since March of ’12.

Our gross margins on equipment sales are typically around 10% as compared to our companywide average margins of over 30%. So those higher margin equipment sales served to reduce – sorry, those higher equipment sales served to reduce reported percentage gross margins and this cost us about 40 basis points a margin in the quarter but now that’s a headwind it is probably not with us in 2014.

Higher property taxes on some of our ATMs in the UK also had an impact on consolidated gross margins in the quarter of about 40 basis points. We talked about this issue extensively last quarter and I won't go over all of that again. This was an expected issue in margins in the quarter but it was a headwind in comparison with prior year.

While we have a number of efforts underway to mitigate and challenge these higher property tax charges, these higher costs probably will be with us on an ongoing basis in the near term and a bit of a headwind to margins in the first half of 2014. We will cycle on this in July.

Finally some of our estate management and optimization efforts in Mexico caused about 50 basis points of margin headwind in the quarter but we expect this effect to be roughly neutral in the first quarter of ‘14 and turn into a tailwind late in the year.

So to repeat, we had some specific issues mostly temporary that matched the underlying margin trend in the quarter. Without those issues margins would have been up about 130 basis points again due to continued organic growth and leveraging our fixed cost.

Moving on to earnings. Adjusted net income per share was $0.49 for the quarter, up about 20% from the $0.41in the same period last year.

And turning to the balance sheet, as Steve alluded to in November, we took advantage of favorable market conditions and issued a $287 million convertible senior notes offering. We used a portion of those proceeds to pay down over 150 million on our bank revolving credit facility. We bought back $28 million worth of our common stock and we used a portion of the proceeds to enter into a call spread overlay which effectively raised the conversion price on those bonds to over $73 a share.

We're pleased with the outcome of the transaction which in one stroke accomplished several things. It reloaded our revolving credit facility and put over $80 million in cash on the balance sheet. So we are positioned to continue to pursue strategic growth opportunities and we do have an active pipeline.

It lowered our cash interest expense with a very low cash coupon of 1% and the transaction seven year life pushed out and staggered our debt maturities. Total debt outstanding as of December 31 was $561 million, up somewhat from third quarter levels primarily due to the convertible debt offering. And that number includes the convertible debt issue at full face value rather than the discounted value that’s reflected on our balance sheet.

Our ratio of net debt outstanding to trailing 12 months adjusted EBITDA pro forma for a full year of the cash on acquisition was approximately 2 to 1.

Switching to 2014 guidance. With respect to revenues, we are expecting to see $980 million to $1 billion in gross sales. We expect gross margins in a range of 33% to 33.5%, that would compare to 33.1% on an adjusted basis in 2013. We are expecting some margin expansion in our core business driven by revenue growth primarily but we expect that to be at least partially offset by higher costs associated with interest interest-rate swaps. These costs will cost us about 100 basis points of margin we anticipate next year.

Our guidance includes approximately $11 million of additional expenses related to interest-rate hedges that became effective on January 1 of this year. These hedges were put in place a couple of years ago to mitigate our exposure to floating interest-rate that impact our all [ph] cash rental costs. While it’s certainly painful to absorb this cost increase in light of the current continuing low interest rate environment, we have a lot of protection this year and for several years to come on the cost side should rates begin to climb at some point.

On adjusted EBITDA, we’re expecting results to range from $236 million to $243 million. We’re expecting depreciation expense of around $74.5 million to $76.5 million net of noncontrolling interest. We’re expecting cash interest expense of $17 million to $17.5 million. We are using a long-term non-GAAP tax rate of 32% and this is lower than the 35% US federal rate primarily because the corporate income tax rate in the UK where we have a large business is only 20%. And lastly we’re expecting adjusted net income per diluted share to be about $2.20 to $2.27, and that’s based on 44.7 million diluted shares outstanding.

With regard to capital expenditures, we are seeing a range of $95 million to $100 million. That represents about 40% of EBITDA for the year, somewhat above our typical target of about a third of EBITDA for CapEx. The primary reasons for this uptick include the following: one, we will be in the process of updating or replacing a portion of our non-EMV compliant ATM fleet during the course of 2014 to ensure that the company will meet compliance deadlines that begin in late 2016.

Secondly, our Cardtronics Europe division is delivering enhanced investment opportunities driven in large part by the Cardpoint acquisition that we concluded back in August of 2013. And then lastly, we intend to spend additional capital on strategic investments related to product development that will serve to drive future revenue growth in the company in 2015 and beyond.

Just to comment on the guidance from a cash flow perspective. For the first time, we are facing what I would call a high class [ph] problem that comes with significant profitability over time and that is that, we are going to have to start paying meaningful cash taxes in 2014 as we will have used up much of the net operating loss carry-forwards that we generated or acquired in prior years. We are currently projecting that cash taxes in 2014 will about $27 million, up from $7 million in 2013. This will reduce free cash flow somewhat but we still expect to generate almost $100 million in free cash flow after CapEx in 2014 and those funds [ph] could be used to reduce leverage to fund acquisition or to otherwise drive shareholder value.

As you know, we typically do not issue quarterly guidance as a matter of course. However I do want to comment on one anomaly that I do see in the quarterly consensus analyst estimates that are out there for 2014. Specifically, the consensus first quarter estimates imply a better sequential earnings growth over the fourth quarter of ‘13’s level which I would not – which would not be normal for us given that the first quarter is our seasonally weakest quarter. I do not currently contemplate that the first quarter of ’14 results would exceed those of the quarter that we just reported.

I would also point out that we are expecting to continue to realize cost synergies on the Cardpoint acquisition through 2014 and this is also driving expectations for an earnings pattern that is a bit weighted toward the back half of the year. I will conclude the guidance discussion by saying that while our implied adjusted earnings growth rate in 2014 guidance, a 14% to 18% is nothing to be sneezed at. Absent the incremental hedging costs we’d be looking at a year over year growth rate and adjusted earnings of 22% to 26% and I think that speaks to the underlying power of the company’s business model and its strategies and execution.

Steve, with that, I will turn the call back over to you for your closing remarks.

Steve Rathgaber

Thank you, Chris. Management is excited about 2014 and more broadly the future of Cardtronics. One window into our optimism is through our pipelines. There are four that I focus on as I evaluate the potential for the year. They are the sales, renewals, product and acquisition pipelines. The Cardtronics, each of these is in a healthy state.

The sales pipeline is definitely stronger than last year and while always difficult to project timing looks to be a lot more evenly spread this year than it was last year. We feel good about our efforts on renewals and the feedback we are getting about our strategy and products in support of the renewal cycle. This will be a significant year for product delivery and we look forward to sharing more detail on product rollouts as the year unfolds.

And the finally, there continue to be acquisition opportunities, large medium and small, strategic and roll up and in multiple geographies for Cardtronics to evaluate and seize as appropriate. 2014 will surely have its challenges. We will deal with EMV upgrade distractions in the US as we have successfully dealt with them in Canada, the UK, Mexico and Germany. And we will work to manage regulatory challenges that are now ordinary in most payment services and in most countries.

These are neither intimidating nor overly threatening to our model but there are always present for us in any other business these days. Cardtronics is strong and getting stronger. It is from this position of strength that we launched a year of significant opportunity in 2014. This organization continues to deliver on the core drivers of our business model that have historically performed and has the opportunity to build upon our transformative acquisitions to further diversify our revenues.

We have made what we consider strategic investments to position us for the next generation of Cardtronics and we're excited for what the prospects will offer for 2014 and beyond. Finally I would like to thank the Cardtronics team for an excellent performance in 2013 and I thank all of you for your attention today and now operator, we would be happy to open it up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ramsey Al-Essal with Jefferies. Your line is open.

Ramsey Al-Essal – Jefferies

Congratulations on the nice results here. Did the higher ATM product sales, I noticed that – this number has been coming a little bit higher than I expected versus the first half of the year, does this have anything to do with you guys kind of picking up these merchant owned ATM acquisitions in the sense that those types of businesses might sell a little more hardware, is there a mix shift to that business that’s palpable in this line?

Chris Brewster

I don't think that’s the major driver, Ramsey. There is some of that. I mean as we – as the merchant owned side of the business has grown, that’s provided some growth in equipment sales. I think the larger issue in that uptick was in what we call our barb [ph] business which is selling hardware to folks that build branch banks and various other generally smaller users of ATM equipment and we had a somewhat of a burst of activity late in the year that I'm not sure I could really explain but that but it did happen.

Ramsey Al-Essal – Jefferies

Okay. You haven’t spoken about your managed services business in a while but it enjoyed some decent growth. What’s the status of that business and what’s the kind of pipeline they are looking like, what types of clients are you contemplating that are you’re sort of targeting with that business?

Chris Brewster

I guess if I may staff off on that -- I think first of all, let’s define that business. I mean basically what we’re calling managed services is a business where in contrast with our conventional business if you will and what I call our conventional business, our revenue sources are things like surcharge, interchange, branding fees and we’re typically paying a location owner for the pleasure of being in his place of business. In the managed services business that’s sort of flipped. Typically those normal revenue sources, surcharges, interchange are going to the location owner and instead of us paying him he's paying us to operate that hardware in his place of business, and it's a very diverse business. I mean it basically runs anywhere driving merchant owned ATMs and getting paid on the transaction basis, to for example, running the ATMs on a carnival crew ship. They are moving across the high seas.

It tends to be in terms of the merchant owned side of the business I think that sent per transactions sort of model will continue to grow, we like it because it takes a certain risk factors out of that side of the business. In terms of major corporate customers for that sort of the business it is relatively niche. I would expect to see some continued growth there but it takes a particular type of client to want that sort of structure.

Steve Rathgaber

Ramsey, I tend to think of it as more of a price model than it is a segment. It’s just what works to win a particular piece of business and what fits the client’s needs. That’s perhaps one way to think about it.

Ramsey Al-Essal – Jefferies

Okay. One quick last one for me, Steve, you mentioned the regulatory environment, it's always a kind of perennial concern in the payments business. When I look at the ATM space, there is not a lot that really jumps out at me is kind of acute concerns. But what do you -- when you think about the regulatory environment whether there’s things that sort of give you pause or that are worth monitoring?

Steve Rathgaber

I think about it globally for one thing. So in the U.S. I would say that it is pretty quiet right now. In Canada, yesterday, there was a nail-biting vote on capping surcharges in their regulatory bodies and it was voted down. So they're not going to mess with that. In over in Europe, you know the whole PST2 thing is going on and I worry about those things and watch those things for the proverbial unintended consequences. And in the UK we're dealing with business rates, as Chris has talked about, and we're always watching what's going on there.

So it's the classic items. It is nothing under the covers. It is just folks tend to think about ATM access from time to time, and how it should be priced. Folks tend to think about other payment vehicles and how they should be priced. And quite frankly, I worry more about those and their ripple effect through, than I worry about direct attacks on ATM environments, if that helps.

Operator

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

Andrew Jeffrey – SunTrust

Hi guys, thanks for taking the question. Steve, you mentioned the EFD database you are seeing -- has there been any change in traffic or withdrawal patterns at your U.S. machines since most notably the Target breach at the end of the year?

Steve Rathgaber

It is. We’ve just gone to tend that [ph] but it is very difficult to see because the weather has been so whacky. And so broadly whacky, that it’s just impossible to discern the moving parts. What I can say is that I'm reading a lot more articles about people retreating to cash for safety purposes, and I'd like to think that those articles are written based on some experiential insights by other parties. But that’s not the same as being able to answer your question from a data-driven perspective.

Andrew Jeffrey – SunTrust

Okay. So maybe stay tuned as the weather improves. Would you anecdotally think that if consumer behaviour were to change, I think we all read the same articles, and this is the space -- you living ATMs every day, would that be interim behaviour or do you think that could be structural? And I don't know if you can answer the question, but I'll throw it out there.

Steve Rathgaber

Well I'll offer an opinion. I've got lots of those. So I would say to you that if -- some of the articles I've read, which you've read I'm sure, you find that people are enjoying the benefits of cash from a budgeting perspective. And so it's not just the safety thing. Because certainly the safety thing will be chipped away at as the various constituent groups try to retrain people to go back to cards, particularly as EMV cards come out and that sort of thing. But there were a number of quotes in several of those articles about gee, it’s nice when I don't have the money in my pocket anymore I don't spend. We're okay with that.

And we've said for some time that a lot of segments of the population prefer cash regardless of age. Even some of the young people, in particular, prefer cash, because it helps them manage their finances more effectively than that card that seems to have no consequences. So I think that could be semi permanent infrastructure but guessing at impacts and I am certainly not able to project measurements of them, but I like to believe.

Andrew Jeffrey – SunTrust

I always like to hear your opinions. Chris, you noted whether or otherwise perhaps slower machines withdrawal transaction growth, but it looks like the revenue per machine was pretty good, revenue per transaction we can see -- can you just comment on, is this Allpoint, is it branding, is it a combination of things? And do some of the multi-branded machines, for example, that you cited, Steve cited in the prepared remarks, do you think that can continue to drive up revenue per machine? I guess a little more mix on that because transactions have been growing a little slower for several quarters now.

Chris Brewster

I would say in terms of revenues per machine, I mean, there is an upward bias just from the continuing growth of transaction counts. In any given quarter you're going to see movements in that stat one way or another due to mix-shift in the sense of the revenues per machine on a U.S. merchant-owned ATM, maybe a tiny fraction of the revenues per machine, on a high-volume ATM over in the UK. So the mix-shifts on that can be fairly important.

Revenues per transaction, the impact of bank branding can be a significant driver there. We're starting to get some help from DCC, Dynamic Currency Conversion on that parameter. I would say Allpoint is probably more a driver of transactions than it is a raiser of revenues per transaction. But nonetheless a nice driver of transaction count and revenues per location if you will.

Andrew Jeffrey – SunTrust

Okay. Thanks. I will jump back in the queue.

Operator

Our next question comes from Mike Grondahl with Piper Jaffray.

Mike Grondahl – Piper Jaffray

Yes, two questions guys. You talked a little bit about some product delivery over the course of 2014. Can you give us a sense of sort of what you're thinking about there? And then is there also any update on the DCC activity over in Europe?

Steve Rathgaber

Well, I'll let Chris comment on the DCC first and then I'm come around to the product.

Chris Brewster

We've got -- we're off to a nice start. We initially enabled DCC on a subset of our bank machine locations and we're happy with the results of that. It's a nice -- frankly a relatively small revenue adder in the overall scheme of things but it is very high-margin revenue. Almost about as close to 100% as you see in business. And so that's on a subset of our legacy ATMs over in the UK. We're working to begin to get it up and running on some of the acquired ATMs. In some cases that takes some software work and in some cases it takes some hardware work. But we're working to get that going as well.

Steve Rathgaber

And relative to the products, I mean clearly we've talked about the fact that our strategy is to drive more transaction volume to our ATMs, because our ATMs are in the most convenient places where consumers already are. So the key to our product strategies is trying to create product capabilities that cause the consumer to use the ATM more frequently when they're in the store and to avoid quite frankly trips to the bank ATMs, which are less convenient because they're not the in the store unless we branded them.

So without going into more detail than that, it's about creating a set of deliveries that help to do that, and the notion of staying tuned has got to keep you guys excited. So I'll just have to ask you to be patient while we plot our rollout strategies and communicate them to you as they occur. But at the end of the day the focus is on getting more transactions at each ATM and helping our financial institutions get more value out of our ATM fleet for their customers, tie it in perhaps to loyalty notions and helping our retailers get more sales out of our ATM placements in their store at the point of sale tied to things that we're doing. So it is a next level of sophistication, and not just sort of brute force activities. And as I said, we look forward to sharing more as the year unfolds.

Mike Grondahl – Piper Jaffray

Hey, I look-forward to that. Thank you guys.

Operator

Our next question comes from Reggie Smith with JPMorgan. The line is open.

Reggie Smith – JPMorgan

Hey guys, nice quarter. Thanks for taking my question. I thought you guys – it sounds like you talked about – you may have gotten your first, I don't know if the word is co-branded ATM or primary and secondary branding. I was wondering if you could talk a little bit about that and kind of how that conversation went. I'm curious, how you convince the primary to allow secondary and then I guess my kind of follow-up to that is, does this type of arrangement only work in locations where there wasn't a previous branding? So could you, or have you approached the issue of banks that have branding locations now, and ask them if they would mind having a second bank on the ATM, if that makes sense.

Steve Rathgaber

Yes, so it does make sense. And I think we've talked a little bit about this in past calls. But it certainly is a truth that not one size fits all. So there will be certain customers who might prefer a more exclusive model at an ATM. But even an exclusive model at an ATM allows Allpoint, for example, at one of our ATMs, because our secret sauce is basically about driving more transactions into the retail store than any particular financial institution can do on their own.

So in terms of new placements, like the one I referred to in my prepared remarks, that’s easiest because that’s the way it gets contracted out of the gate. And the primary brand experience for the primary -- the guy that has the sign on top of the ATM, that remains the same experience as it has been. And for the preferred branding experience, that's more of a modified placement of a brand further down on the ATM. But also over time a better experience at the ATM recognizing that consumer as a member of that particular bank, and treating them with screen sets and with receipts in a way that creates some custom experience that doesn't interfere with the ultimate brand on the ATM. But as I've talked about in the past, think condo time share in Orlando, when you've got the condo for the week, it's yours. Next week it is somebody else's.

When a bank is at an ATM -- when a consumer is at an ATM doing their thing, that ATM effectively transforms into an experience for that consumer and his bank versus a different bank. And the more we can do that with software technology and experience, we think the more loyal following we have at our individual ATMs, and quite frankly everybody wins. And I like doing business where everybody wins, and this truly has elements of that.

Reggie Smith – JPMorgan

That actually leads into my next question. You guys, you mentioned i-design in your prepared remarks and I was multi-tasking, I didn't catch the full comment there. Could you provide an update there, or maybe elaborate a little bit on what –

Steve Rathgaber

Sure. We have been focussed on rolling out i-design in the UK and Canada, is what I had mentioned, for some specific applications to test some specific couponing things and the other values that the i-design software brings. And we have been sort of re-engineering it for U.S. application because we want to make sure that we roll it out on our own ATM fleet here in a particular fashion and make a particular set of services available. So it is sort of a two-staged thing going on there. And we look forward to that delivery being available. It’s another one of those product things I was referring to in my earlier comments that will be available sort of mid-year timeframe for Cardtronics. That would be deployed in the U.S.

Reggie Smith – JPMorgan

If I could sneak one last question in. You talked about EMV as far as CapEx goes. I'm curious does that cover your entire U.S. fleet or is it select markets that you're doing that in, and of the $90 million or $100 million in CapEx this year, how much of that was dedicated or earmarked for EMV upgrades?

Steve Rathgaber

Well, it does not cover the entire thing, because it will be a multi-year initiative. It's been a multi-year initiative. We've already been doing it certainly every new machine we bring in has EMV capability for the last year plus. But candidly I prefer not to identify those amounts for competitive reasons, as to what we're spending on capital on those particular items. We have said broadly that there is a number in what the K, the 10-K -- and I think that number is in the 35-ish million range, and that's a thing to contemplate in terms of a gross number.

Chris Brewster

And that's 35 million over a multi-year timeframe in terms of the increment above what we would normally spend, putting new equipment into new retail locations that we win, and, occasionally refreshing equipment in existing retailers that we're operating in. And that $35 million number is the increment above that, that we think we're going to have to spend to become EMV compliant on machines that we would otherwise not be touching. And that's sort of a 2014, ‘15, ‘16, sort of total figure.

Reggie Smith – JPMorgan

Guys, that’s $35 mill, that would cover the entire U.S. fleet or still no?

Chris Brewster

It would cover the entire U.S. fleet as we've presently modeled it with other business assumptions about replacements and adds in the ordinary course of we manage the business.

Reggie Smith – JPMorgan

Got it. Okay. Thank you. Nice quarter guys.

Steve Rathgaber

Thank you.

Chris Brewster

Thank you.

Operator

Our next question comes from Bob Napoli with William Blair.

Bob Napoli – William Blair

Thank you. Good afternoon. I was hoping to get an update on your Europe strategy. I mean you’ve fully owned Cardpoint for a handful of months but I just wondered if you could give a little more color and as you look at your pipeline of opportunities M&A wise, I think you said you’re geographically dispersed, are you looking broadly – are there opportunities broadly in Europe?

Steve Rathgaber

There are. In a nutshell I can say that we're pretty pleased with – it’s about everything other than regulatory noise in the European market. We think there are opportunity -- we are enjoying a modest successes in terms of sales in the UK. We believe there’s acquisition opportunities not all of which will be attractive to us in the whole array of Europe but certainly in countries we’re already in, and in countries we are not in. We are increasingly being approached by other parties, even banks in the European theater that are reaching out to us to talk about ATM strategy and how we could assist them.

So I am finding nothing but positive energy in dividends coming out of those moves we did last year and feeling very good about it, which is not the same thing as saying magic is going to happen Tuesday but I am feeling good about the opportunities for growth there and with that statement, I always say I'm still learning about the opportunities for regulatory involvement over there and they were different than they are over here and over here gets me a little paranoid from time to time. So if I can balance the opportunity basket with that regulatory weight, I would say it looks pretty good from here.

Bob Napoli – William Blair

What are the regulatory concerns or changes that you are seeing?

Steve Rathgaber

I mean as I said earlier it’s the PST2 thing which is involving ATMs for the first time. Potentially it is a business rate that taxes being deployed on ATMs. There are occasionally pressures as I illustrated yesterday there was voting Canada that’s obviously not Europe but similar kind of things happen there for every now and then. Somebody comes out and says gee, ATMs should be free and those things blow in the winds and come and go and we just have to man up and have good stomach lining to deal with them as they come and go. But for the most part year in and year out we navigate and we find ways to grow and succeed and for the most part they don't interfere with our business model. So – but it doesn’t mean I don’t watch it like crazy and doesn't mean I don’t worry like crazy, and it doesn’t mean that we don't have a routine burden to make sure we have an educated regulatory body about the economics of the business, so that nothing, no unintended consequence happens.

Bob Napoli – William Blair

Now what would be your – what would you consider your words as today – with the converts that you have done, how much liquidity capital do you have to do acquisitions and are you interested in doing larger deals than maybe you've done in the past?

Chris Brewster

I will take the first part of that, Bob. At the moment we've got about $300 million in undrawn capacity on our bank revolver and we’ve got about $87 million in cash.

Steve Rathgaber

And I'll take the second part and the answer is we're interested in doing things that optimally grow shareholder value at the risk of sounding a little motherhood and apple pieish but let me put some color on that. I believe Cardtronics is well on its way to establishing a unique position in the marketplace with our capabilities. To the extent we can do acquisitions that are strategic and I would put i-design and locate or search [ph] and Allpoint in that bucket and continue to create more value and more experience at our ATM than other parties that are just routinely in the business, we want to continue to do that because we think that strengthens our renewal hand this year and in future years with various business clients that we have today.

So those kind of investments I am always counting for and that’s one of the reasons we brought in some dedicated talent on to the Cardtronics staff last year in the form of Phil Chin to focus on looking for those. But I have already indicated, I see Germany as having some roll-up opportunities, don't know when but they are out there. And we think that a large and small opportunities in countries we are in and in countries we’re not in, will be presented to us. Not too many days go by where we don't get a phone call, so we will continue to be very selective in our choices but we will look for things that strengthen our hand relative to differentiation and strengthen our shareholder value creation relative to just geography and scale, economics when we can further improve our position in the local market. So I hope that helps.

Bob Napoli – William Blair

Last question, just on the pricing strategy you guys have talked about trying to reduce your interest rate risk in the cost -- hedging cost that you laid out there, Chris, they’re a pretty hefty that to hedge that bulk cash and – you suggested that you are having some pricing success I guess. I was wondering could you, maybe go through that strategy a little bit more and how material can it be?

Steve Rathgaber

Well I think we'll have to wait and see about the materiality and Chris can maybe talk to that in future calls but the strategy is quite simply to take the risk profile that we face with interchange and interest rates, and find ways to share the wealth, or the opportunity on those things. And I am happy to give a little more to the retailer today for future protections on downside risk associated with interchange and interest rates. And I am pleased to say that over the past two years we've not written a contract that doesn’t have some form of that in it. So we've been 100% successful in advancing that. But when you have a body of contracts that roll over 7+ year timeframe it’s going to take a while to get on group and I am not going to pretend that each one is identical but we are making progress, and I'm pleased with it. When it becomes tipping point progress, when it allows me to say or Chris to say we are out of the hedging business, well that’s a bit off in the future, okay.

So I don't want to set an expectation that that's going to change. But I would like to think we look two and three years out and we look to renew hedges that we will continue to shrink the percentage required of our outstanding cash because it is a more balanced thread of risk between all the affected parties which obviously include retailer, the financial institution and ourselves as a contributor in that. We don't expect to get off scot free.

Bob Napoli – William Blair

If you were to get a 100% coverage on those type of contracts does that essentially remove the interest rate risk on bulk cash?

Steve Rathgaber

If we were to get 100% which I wouldn't represent that we’re asking for routinely, it could do that but 100% coverage would mean that an extraordinary amount of volatility has been passed through to a single customer and while they might accept it today when it hits later on they could react negatively. So I wouldn't pretend that that's what we're trying to do. We are trying to get a lot of the coverage spread across multiple parties as opposed to us just carrying that order. And the good news about that is, it should make -- it should take out of our growth of earnings and volatility associated with interest rate swings and all the risks.

Bob Napoli – William Blair

Thank you.

Operator

Thank you. This ends our Q&A for today. I will turn the call over to Steve Rathgaber for closing remarks.

Steve Rathgaber

Well, I would just like to say happy new year everyone and thank you for your interest in Cardtronics. And we look forward to an exciting year and future quarterly calls with you all.

Operator

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

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