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Cardtronics, Inc. (NASDAQ:CATM)

Q1 2014 Earnings Conference Call

May 5, 2014 17:00 ET

Executives

Christl Setchell - Accounting Director

Steve Rathgaber - Chief Executive Officer

Chris Brewster - Chief Financial Officer

Analysts

Andrew Jeffrey - SunTrust

Ramsey Al-Essal – Jefferies

Bob Napoli - William Blair

Mike Grondahl - Piper Jaffray

Reggie Smith - JPMorgan

Operator

Good day, ladies and gentlemen and thank you for your patience. You joined the Cardtronics’ First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the call over to your host, Accounting Director, Christl Setchell. Ma’am, you may begin.

Christl Setchell - Accounting Director

Thanks, operator. Good afternoon, everyone and welcome to Cardtronics’ first 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 first quarter results and an update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly results. Our prepared remarks are scheduled to run for about 30 minutes, at which point we will 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 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 afternoon.

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

Steve Rathgaber - Chief Executive Officer

Thank you, Christl and welcome everyone. Cardtronics completed another very strong quarter as we kicked off the new year in 2014. Our key growth metrics versus the first quarter of 2013 were as follows: revenue grew 24% across all markets; adjusted EBITDA grew 17%; and adjusted net income per share grew 28%. It is fair to say that the first quarter exceeded our expectations. We are delighted that the Cardtronics model continues to deliver, especially in light of the recent choppiness in the stock price.

The first quarter performance in combination with our view of pipeline and the expected timing of conversions leave us feeling unusually comfortable at this still early stage of the year about revenue for the full year, particularly and let me again emphasize the context particularly when compared to the same time last year. One of the bright spots for the quarter was our European segment. Our UK business grew 87% through a combination of acquisition and organic growth. We are pleased with the organic growth rate in the UK this quarter, which registered above 10%. And while we did not own it a year ago, Germany logged almost 14% organic growth. To me, that represents a powerful validation of our acquisition activity in that market.

U.S. organic growth was respectable given the challenging weather story at 6%. Absent the weather story, maybe we get 1% or more added back bringing us over our target of 7%, but hard to say. But Canada and Mexico are two smallest markets disappointed a bit largely, but not exclusively on timing. However, two of our strongest pipelines are in Canada and Mexico, so we are hopeful for a nice in-year recovery in these two markets.

A key element of our growth story is the geographic diversity of our ATM placement sales wins. We announced new deals in four markets, the U.S., Canada, the UK and Puerto Rico. These deals with a combination of new and existing clients aired over 400 ATMs our conversion pipeline. They highlight one of our very best sales weapons, our existing customers. We became the exclusive provider of Tadeschi Food Shops in the Northeast region of the United States after historically sharing this portfolio with another provider. In the Southeast region, our relationship with VP Petroleum, not BP, but VP in Puerto Rico, which by the way is the largest petroleum distributor and convenience store operator on the island is now exclusive. And over in the UK, our deal with East of England Co-op stores, a high traffic grocer, is the fourth regional co-op group that our Cardtronics UK team has won in recent months.

Expansion of our relationship with Pioneer Energy in Canada to become their exclusive full-service ATM provider was a slightly different story. We took ownership of the portfolio from Pioneer, a client where we had previously acted only in a processing role and immediately branded it with a new relationship with CIBC bringing a second large Canadian Bank into our portfolio of branding partners. With the addition of CIBC, we have announced three major bank branding deals since the start of 2014. In our year end earnings release, we announced that BBVA Compass would purchase the primary brand and Frost Bank would take one of our new preferred branding positions on the H-E-B grocery stores across Texas. Those brands are now fully implemented across the H-E-B portfolio as is the Pioneer-CIBC deal up in Canada.

Cardtronics presently has more than 10,000 ATMs in our brandable inventory. We are excited about the organic growth potential this inventory represents and have a belief that we are seeing increasing interest in branding in several of our markets. Allpoint had almost two dozen signings, new signings in Q1. More importantly, we know that from many of our key retailer relationships, Allpoint represents materially more than 20% of their in-store ATM transactions. That is significant for reasons I described below.

The sweet spot at Cardtronics is that special connection we make between the finance institution, the retailer and the consumer, that connection where cash not only meets commerce, but actually drives commerce. I have spoken previously about our efforts to drive cardholders to our retail ATMs, not only for convenient access to cash, but to have the ultimate impact of new and greater dollar spend in retail partner locations. We have been investing in an enterprise data warehouse with the goal of establishing proof points for our value proposition.

Two examples of early returns from this investment follow. A financial institution joined Allpoint this year for the debit card program and started promoting access to its cardholders shortly thereafter. Allpoint surcharge free access and the FI’s promotion of Allpoint drove ATM transactions from almost nothing before to more than 2,000 withdrawals per month. It was a small card base and the volume was nice, but the real punch line follows. In-store spend by the financial institution’s cardholders at the point of sale or not the ATM transactions, but in-store spend by that financial institution’s cardholder was at the point-of-sale just with debit cards, okay, sales from that card base rose from $31,500 per month prior to that institution being in Allpoint to nearly $270,000 per month or a 750% increase after that institution joined Allpoint at that store set.

While this is just a snapshot from one program, it illustrates how Cardtronics ATMs and products drive new traffic and incremental sales. Now we add the multiplier from the number of Allpoint institutions and cards and you begin to see the unique value Cardtronics alone brings to the retailer. A second example demonstrates the comparable POS impact from bank branding customers. A regional bank branded several 100 ATMs in one convenient store chain and slightly more than a year later, it’s cardholder spending in the chain had increased from approximately $1.85 million per month to nearly $3.25 per month. This is a 76% increase in sales at the point of sale from a card-based that absent our branding product, simply would not have happened in those store locations, and that only tracks debit card spend, not cash, or credit card spend, both of which would clearly lift the metrics.

Now add example one and example two together, because we combined these services at our ATMs and then add in the impact on sales of cash and credits and you begin to understand the incredible value of Cardtronics. While there are several morals of this study, one is somewhat counterintuitive. Cash and debit going hand-in-hand. We help the retailer with sales and the bank with debit card spend and the consumer with convenience and value at the ATM. Everyone leveraging a Cardtronics ATM placement wins. And by everyone, I mean, Cardtronics shareholders as well.

As we serve the retailer, the financial institution and the consumer with the unique value proposition surely our shareholders win. We believe that win is delivered in different ways, a clearly one way is with our ability to renew contracts. Consider this stickiness of a Cardtronics relationship with the various parties. The retailer is on the receiving end of additional trackable spend from our branding products, our unique Allpoint asset and our traffic pointing products like LocatorSearch and our patent-pending FeeAlert. The financial institution benefits from delivering a network of convenient fee-free ATM access that is superior to any bank in the land. And the consumer gets accessed to the most convenient ATM network in the country for free in certain models. That is a powerful tri-sector of value delivery and that is the unique Cardtronics value proposition.

With that as background, I was pleased that we were able to announced earlier this quarter, the renewal of Walgreens and it’s more than 3000 U.S. locations, many of which carry a financial institution brand. Cardtronics is a long and strong history of successful renewals and we believe that the value proposition for renewing with Cardtronics strengthens every day. As our traffic pointing products take root and grow, and as our traditional products grow both in size and the number of active cardholders, they delivered to a location, our offering becomes increasingly mission critical to the retailer.

We look forward to our renewal negotiations because we are proud and excited about the story we have to tell and the results we know we can deliver. Results driven by products than in many areas are unique to Cardtronics. That being said we will never take renewals for granted. It is important to note that no existing contract has any requirements for when a renewal must be completed. Some might set out guidelines for initial discussions, but none require renewal by a predetermined date and not preclude the ability to renew very late into the term. And history shows that some renewals will occur early and some renewals will occur late in the lifecycle of a given contract.

It is simply the nature of the business. So, we believe that the future is loaded with opportunity. That does not suggest that Cardtronics will not be without our fair share challenges. But when they come and they always do for any company, we will manage them as we did most recently with interchange. Our exposure to interchange has been radically reduced in the past three years to the point where it is barely discussed today. And the challenge for the future not one that is new to us is the management of the impact of interest rates on our business. We have been working this issue for several years in a variety of ways. In his section, Chris will tell the approach and the impact of our efforts on managing interest rate risk. We are making good progress. And of course, we have the challenges of the EMV migration and ultimately the Windows migration. But in those ATM visits to complete these upgrades, we have an opportunity to upgrade our software that ATM to provide our customers a better ATM experience. So, we hope to make lemonade out of any lemon situation that come along.

Lastly on the news front, I would mention at last week, the Federal Reserve Bank of San Francisco came out with its Diary of Consumer Payment Choice survey conducted in October 2012. The prognosis for cash is that remains a dominant and very healthy player in the payment infrastructure for many years to come. I believe it will remain so until someone invents something more useful or valuable, not just something more technically cool. So as I reflect on the first quarter and as I consider the product pipeline, the acquisition pipeline, the opportunities for geographic expansion, and our ability to manage cost and extract synergy value from acquisitions, I find myself more optimistic about the value to be created for Cardtronics shareholders at any time in my tenure at Cardtronics.

Our value proposition is strong and improving. Our future is bright. And our management team is largely assembled to deliver on this future and meet any challenges that come along the way. We are in the early innings of value creation for our shareholders.

With that, I’ll turn it over to Chris.

Chris Brewster - Chief Financial Officer

Thank you, Steve. I’ll give you a few more details on first quarter results and then give you a quick update on full year 2014 guidance. We had, I believe, a strong top-line growth trajectory in the first quarter up 24%, approximately 18 percentage points of that growth were attributable to recent acquisitions with the remaining six points being organic revenue growth. That six points of organic growth feels solid, especially when considering the unusually cold winter weather we had across much of the U.S., which certainly impacted the retailers were our ATMs are located.

Organic growth was driven by higher ATM unit count, which was fueled by growth with existing merchants and growth from new merchant relationships particularly HEB and Timewise business that we won last fall. Moving on to transaction volumes, our U.S. same-store transactions were just a little bit of a flat for the quarter, several of our large retail partners have indicated that their same-store sales and foot traffic were down in the first quarter as a result of a colder than normal weather throughout a good portion of the U.S. and Canada with a severe snowstorms in the Northeast and Midwest, ice storms in the south, all accompanied by very cold temperatures.

While this is, as Steve said, it’s difficult to precisely quantify, we believe that adverse weather conditions also impacted our ATM transaction volumes. We’ve seen convenient store retailers reporting the weather caused him 1 to 2 percentage points off of their same-store sales and I would surmise that the impact on us was probably somewhat similar to that.

Moving to gross margins, we brought the quarter in at 32% which was down 40 basis points in comparison with last year. This result is in line with where we thought we’d be for the quarter. We did recognize additional vault cash to interest expense associated with the new interest rate swap agreements that we put in place that become effective on January 1st of this year and that represented about 110 basis points of margin pressure.

Additionally, incremental UK property taxes in the quarter resulted in about 60 basis points of margin pressure versus prior year. And lastly our lower margin equipment sales business was up fairly significantly in percentage terms in the quarter and that accounted for about 40 basis points of margin dilution compared to prior year. So in total, these three factors accounted for about 210 basis points of margin pressure in the quarter. The swap cost, the interest rate swap cost will impact our margin comparisons throughout 2014, but we expect to largely cycle on the UK property tax issues during the third quarter. These numbers also say it is without the property tax issue, the swap cost and the equipment sale increased margins would have been up about 170 basis points and I believe that speaks to the underlying power of the business model and its ability to handle a certain amount of adversity.

With regard to earnings, we have recorded adjusted net income per share of $0.51, up 28% from the first quarter of 2013. Adjusted EPS was up somewhat more than revenue even with slightly lower gross margins, primarily as a result of lower depreciation and lower interest expense as a percent of revenues and a lower non-GAAP tax rate that results from growing profitability from our operations in countries with lower tax rates, particularly in the UK with its 20% rate.

Moving from the P&L to the balance sheet, our ratio of net debt outstanding to trailing 12 months EBITDA in the quarter was approximately 2.1 to 1 and that calculation considers the entire gross principal balance of our convertible notes as outstanding debt and as pro forma for full year EBITDA contribution from our prior acquisitions. Absent future acquisitions, we would expect to see a continuing reduction in our leverage ratio over the rest of the year. Ever we continue to have an active acquisition pipeline and are hopeful of continuing our track record for effectively and accretively deploying capital in that fashion. Lastly, on the subject of debt, I would tell you that we amended and extended our bank credit facility last month resulting in a 50 basis point cut in interest spreads more flexibility with regard to various matters, including share repurchase and a maturity date pushed out to 2019.

Due to seasonality and timing of major payments, the first quarter typically generates the lowest cash flow when compared to the other three quarters in the year. In the first quarter, we paid annual bonuses to our employees. We made a semiannual bond interest payment of a little over $8 million. And we funded an acquisition for a little under $9 million. We had a temporary working capital usage swing in the first quarter due to the timing of payments to certain suppliers. This benefited cash flow in the fourth quarter of last year, but it normalized out in the first quarter this year. With regard to capital expenditures, our first quarter CapEx totaled $16.7 million close to where we thought we would be at this point.

Now, for a quick update on 2014 guidance, I think it’s fair to say that overall with the first quarter came in a little better than what we are expecting both top and bottom line. So with that under our belts and increased visibility into certain parts of our sales pipelines and key business drivers, we are raising some of our guidance measures. On revenue, now expecting total revenues of $990 million to $1.10 billion, each of those figures is up by $10 million from the prior guidance of $980 million to $1 billion.

We are leaving gross margin guidance unchanged at 33% to 33.5% on adjusted EBITDA now expecting $239 million to $244 million, up from prior guidance of $236 million to $243 million, estimating depreciation essentially the same as for our guidance at $75 million to $76.5 million reducing our cash interest expectations a little bit for the year now expecting about $16.6 million leaving our estimated non-GAAP tax rate unchanged at 32% and expecting a fully diluted share count of 44.8 million shares were because of the of those expected results, we are adjusting our expected net income per diluted share now to be in the range of $2.24 to $2.29 per share for 2014 and that’s up from prior guidance of to $2.20 to $2.27.

Now, with regard to CapEx, our prior guidance was $95 million to $100 million. Actuals may prove to be somewhat higher than this, but this is dependent on timing of contract renewals that may involve a hardware refresh, timing of new business wins, and our evolving strategy for new product rollouts and the staging for EMV compliance. So at the moment, I am thinking in the range of $100 million to $110 million for CapEx for 2014. And just as a reminder, we don’t forecast acquisition activities. So, these guidance numbers do not include any future acquisitions.

As Steve said in his last topic, I’d like to take on the subject of Cardtronics’ sensitivity to interest rate changes as they affect our cost of running vault cash. During the first quarter, we were running an average vault cash balance of $2.7 billion across the five countries we operate in. All of that cash is rented under agreements that prices based on a floating rate index, usually LIBOR or a local currency equivalent of LIBOR plus a small spread. We have taken a number of actions to mitigate our sensitivity to rising rates, including the following. First, we have the cost of $1.3 billion of that vault cash fixed at a weighted average fixed rate of about 2.8% using interest rate swaps that run forward for a number years. Second, we have contractual protections in many of our bank branding contracts that call for branding fees to go up if interest rates increase and we continue to have good success in achieving this protection in renewals and in new business.

We also have protections written into a growing number of merchant contracts that caused the fees that we pay merchants to go down if interest rates increase. Today, merchant and branding contracts provide protection on more than $200 million of vault cash and we expect that number to be up over $500 million by the end of 2015 as we work through renewals during the intervening time. Now, to be clear, this is not always dollar one protection. In some of these deals protections do not kick in until rates have moved by a certain amount.

Third, we believe that approximately 90% of our UK vault cash or around $600 million is partly protected by the interchange setting mechanism used by LINK, the single interbank network that operates in the UK. LINK sets its interchange rate, which is a revenue item for us based on an annual cost study, in which cost of cash is a component. However, under current LINK procedure, this reset is only done annually, so there could be a lag if interest rates moved up sharply within a single year. We are working to achieve a more frequent reset methodology.

We also have an ability to do self-help by drawing down vault cash balances. When cash is cheap, we make fewer larger cash deliveries and consequently we run higher vault cash balances. We do that to save money on armored car service. When cash is more expensive, we pull vault cash balances down by making smaller, more frequent cash deliveries. Now, additional cash deliveries cost some money, so this is not all pure savings, but taking that issue into consideration, we think it is reasonable to view about $200 million of our vault cash is being protected in this fashion. So, with $2.7 billion in total vault cash today, we currently have some form of protection we believe on about $2.3 billion of that cash although not always $1 protection. And I expect the amount protected to increase over time in a meaningful way as we gain more protection particularly in our merchant and branding contracts.

When you consider – when you think about this issue more broadly in the context of our industry as a whole, you quickly realized that to put it in a certain way all ATM boats are floating in the same ocean. When interest rates rise, every operator will be affected. We believe that most operators are not hedged to the extent that we are. You may see market pricing go up on surcharge rates, which have been quite stable over the last three years. Allpoint’s interchange fees that we collect on almost 20% of our domestic traffic might go up. We have not increased these fees in six years. The point of that is simply to say that cost increases in an industry tend to draw out offsetting pricing behavior and I see no reason why that wouldn’t happen in the ATM business.

As Steve said to put this in the context of the prior issue, we have talked about at some length in the past, there was a point in time when we and Wall Street were concerned about the fact that 21% of our revenues came to us in the form of interchange that we received from the major U.S. interbank networks, where we had little or no control over the pricing of that revenue component. Now, that number is down to 6%, because we manage the business over time to improve our position. Similarly, we have been – we have been and are hard at work to manage the business in a fashion that reduces our exposure to interest rate changes.

So, operator, with that, that concludes our prepared remarks. We’d now be happy to take any questions that participants may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Andrew Jeffrey of SunTrust. Your question please.

Andrew Jeffrey - SunTrust

Hi, guys. Thanks for taking the question. I appreciate it. Chris, that’s very helpful, the detail on the vault cash exposure, thank you and I have got a lot of questions about that. Can I parse hypothetical? For example, it sounds like Cardtronics overall is looking to increase its hedging exposure or the (indiscernible) I guess. If we remain in usually low interest rate environment out in the ‘15 or beyond and you mentioned a few different mechanisms, is that what you hedged? Should we expect sort of a similar kind of headwind to gross margin is what we are seeing this year by virtue of having the swaps on? Does it get better, does it get worse? I know there are a lot of different variables in there, but I am just – how are you guys thinking about that longer term recognizing maybe it’s very difficult to predict interest rates?

Steve Rathgaber

Let me, I am going to repeat the question, Andrew because I want to make sure I got it right. What I think you are asking is if floating rates stay around or about where they are today, is there anything we are doing in our hedging programs that would cause our overall cost of vault cash to go up next year or the year after, is that roughly the question?

Andrew Jeffrey - SunTrust

Well, yes, I guess more specifically you mentioned you carved out 110 basis points gross margin pressure from the swaps. So, if all else is equal, does that number go up or down as we go out over time?

Steve Rathgaber

I’d put it this way, the – it probably stays flat to down. And I will tell you what that turns on. I mean, as you can tell from the comments, we are making very strong efforts to move away from say relying on the financial markets to manage our interest rate risk toward managing our interest rate risk with our contract counterparties. So, we have been having some success at that and I have no reason to think that success will do anything, but continue. And in that scenario, we could find ourselves in the spot where over time we are letting the current hedges roll-off and not putting any new ones in place. Now, it’s possible that we could extend the term on some that we currently have in place, possibly even bump the amount a little bit, but I don’t see any activity of that nature being approaching the materiality of the headwind that we took on in 2014 that led to that 110 basis points of margin pressure.

Andrew Jeffrey - SunTrust

That’s great. Thanks. I certainly don’t want to beat dead horse anymore and needs be. So, I guess the question more on the business, this is the second quarter in a row in which we have seen machine yield or revenue per machine, you are really strong despite some of the weather-related destructions to same-store sales and same machine transaction growth. How sustainable is that? And is that part of the overall Cardtronics’ strategy we think about Allpoint and branding all of the things you are doing beyond just driving surcharge in interchange volume. If same-store sales do pickup to blend out some of those yield gains or is that just a bonus? Is that an incremental tailwind?

Steve Rathgaber

Well, let me take a swing of that. I think that as we execute our strategy, I would expect same-store sales in selected retailers. The premium retail locations were a strategy that’s primarily targeted to enjoy an increasing growth rate, okay through largely gathering existing transaction share occurring at non-Cardtronics ATMs right. So, it’s a whole process of training the consumer to favor our ATMs. So, I think that as the strategy executes with the products like FeeAlert, LocatorSearch, others that we haven’t announced yet, that we would be rolling out mid-summer this year that we expect to drive more and more traffic to the existing machine base. That is a big part of our hope for both margin growth for the future as well as just our organic growth plan, particularly in the U.S. Beyond that, we are continuing to see in different markets, the opportunity to gather new locations. I mentioned, several examples in my comments, we have become the exclusive provider, where before it was a shared relationship of different providers. So, we are going to see continued growth in placements. We are going to see continued growth in transaction share. And we’ll see continued growth in geography expansion. I think it’s a nice story that Germany, for example, had 14% organic growth and UK had north of 10%. So, it’s a combination of things which quite frankly has been the Cardtronics story since I have been here. It’s always one thing or another, but in a good way. So, I don’t know if that answered your question, Andrew?

Andrew Jeffrey - SunTrust

Yes, I think I guess it just did certainly. Still I want to dig in through it offline. I will give it back to you. Thanks. I appreciate it.

Steve Rathgaber

And let me make one other observation just related to the first question. We spend a bunch of money on hedges as is identified in our documents. And that of cost could be translated to a significant number of pennies per share in terms of what we laid out, north of $0.50 is what we carry today if we didn’t have those hedges. As we execute the strategy that Chris was talking about, in the future, I actually hope for there to be some relief from that burden that could be a positive flow through. Now, just to put that in context that might mean that we take some price compression on the basic service to facilitate the opportunity to pass-through those costs to the customers, but that would be welcome I presume because it would mean stability of earnings or improvement of earnings over time. So, just to round out the comments on that first question.

Operator

Thank you. Our next question comes from Ramsey Al-Essal of Jefferies. Your question please.

Ramsey Al-Essal – Jefferies

Congrats on a great quarter. Your bank branding business seems to be getting some nice traction in Canada, it’s obviously well-established in U.S. what – how can I ask this question, what do you think the drivers will be another market I guess specifically UK, potentially the Mexico. I guess what holds up adoption there. What are the factors in UK that make it less sort of amendable and less receptive to branding?

Steve Rathgaber

The trouble with the UK market historically and relative to branding has been that essentially everything is free. So, there is not historically been a great advantage in the mind of the financial institution for having their name on an ATM plus the link network in sort of its fashion in terms of the rules you said had not encouraged branding. I wouldn’t say they’re actively discourage it, but they hadn’t encourage it. I think what’s happening in the UK market that is shifting that will ultimately create a favorable market for branding, although perhaps not at the same value that we enjoy here in U.S. is that the banks are reasons of cost pressure or exiting some of their retail locations. But they don’t like losing their name locally. So, is that process unfolds, I think you will see an increased adoption for putting the banks name on an ATM. So, I think the UK market overtime will involve into a brand friendly market. We already believe that Germany is a brand friendly market, although a very young one because of the wide number of banks that are house in Germany and because of the way the business model operates there. We think that will become a good space for branding. And we’re seeing in Mexico and Canada, different rates of adoption, but nevertheless interest in the branding service is evidenced by the announcements this quarter.

Ramsey Al-Essal – Jefferies

Great. Has the rough weather in the U.S. kind of subsiding, have you seen your metrics kind of normalized a little bit.

Steve Rathgaber

I’d say from what we know at this point – at this distance into the second quarter, it gives us the courage of our conventions that weather was a meaningful negative in the first quarter.

Ramsey Al-Essal – Jefferies

Okay. A last one from me, equipment sales are kind of maintain their modestly elevated levels, do you think that has anything to do with the XP retirement issue or more on is getting to upgrade to support a more bigger operating system effectively in the machine? Is that what’s driving the uptake – it kind of depth down a little more than this and it’s sort of as rebounded, I am trying to isolate the factors it seems like XP might have something, what are your thoughts there?

Steve Rathgaber

Well, I think that we don’t know that is the answer. I hesitate to put a specific pattern on a quarter or two performance on it. Certainly, EMV is looming in people’s minds and certainly, I don’t think of the community that we felt to was being particularly concerned about sort of XP Windows sorts of things, although they will be concerned about EMV, but Windows can require more memory on the machine and that can require – but that can be more upgraded than anything else. So, it’s hard to say – it’s a small number and we just don’t overanalyze that particular number.

Ramsey Al-Essal – Jefferies

Got it. Great, thanks for your answers. I will get back in queue.

Operator

Thank you. Our next question comes from Bob Napoli of William Blair. Your line is open.

Bob Napoli - William Blair

Thank you. Good afternoon. I guess I’d like to get a little more color, Steve, if I could, you gave out some pretty dramatic statistics on the increase in business that a retailer from the Allpoint network, I think from 31, just the one example you gave, 31,000 to 270,000 in branding from 1.85 million to 3.25 million. I mean some pretty dramatic numbers and I just was wondering if I mean how much have you been able to parse this down by retailer, by I mean are you – is this to the point where are things like this was at significant in the Walgreens renewal. I mean, what level of data do you have by retailer and how was it being received by your merchant customers?

Steve Rathgaber

Well, I can say broadly, but without speaking specifically about any particular client situation, I can say broadly that we have the detail at all the levels one would expect us to have the detail at. And that means by client, almost actually down to in a lot of cases store location. We are building this enterprise data warehouse, specifically for the purpose of having access to this rich data source, so that we can essentially prove our value proposition to the retailer community. We believe that it will be increasingly important in future renewals. We believe it has been as the story has been important historically in renewals. The proof points will be increasingly valuable to make the story real in the retailers’ mind. We love retailers, but they are all from Missouri, so they saw show me. And now we can show them. And we think that is exciting for reasons about the value that Cardtronics, in case I didn’t use the word 6 or 7 times already uniquely can bring to the market, because of our Allpoint proposition in conjunction with some of our other product offerings for any renewal this one or anyone coming down the pike.

Bob Napoli - William Blair

Great, okay, that’s helpful. Just on the UK and the European business, I think you have talked about two of your strongest pipelines, the two strongest pipelines being Canada and Mexico, well what is – how are the pipelines in the UK and Germany, and what are your thoughts about more broadly about the European business?

Steve Rathgaber

Well, feeling very good. So, just to put some color on the commentary in Mexico and Canada, it’s less than number of deals than the size of them, that the size of the deals are pretty good in those two countries, both of them and in one few more than in the other. But in Europe broadly, now moving across the ocean there, we feel very good about the organic growth rates in the business. We have had some very good success in sales in the UK just in the short time we have been together, I guess rough to four or five nice deals there. We have got pipeline of more in both of those countries, Germany and the UK, but the pipeline is sort of longer and smaller, but nevertheless are happy, I think in terms of the Mexican and Canadian pipeline just because of the size of some of the deals.

Bob Napoli - William Blair

And then last question and I’ll turn it over, the DCC in Europe and that’s a nice product and I think if I recall the acquisition in the card zone was not – was not fully operational with DCC and you really kind of on the Cardtronics ATMs expanded that last year? Is there still a significant opportunity as the growth of DCC something you expect to add value, a lot more value this year than last year?

Steve Rathgaber

We expect it to add more value still. I would say that what’s happened with the conversion as we have moved most of the ATMs on to our platform, which obviously facilitates the implementation of DCC. So, the conversions have gone well, but what we haven’t enjoyed is the full year impact of going through all the seasons, where DCC might be exercised in different ways. So, I would say, there is some additional upside, but I wouldn’t say it’s going to come from brand new waves of ATMs coming on that haven’t had the capability before other than as we sign up new clients, where we can add the capability, because the client is a good target for that particular application. So, there will be more, but I wouldn’t call it a dramatic way.

Bob Napoli - William Blair

Okay, thank you.

Operator

Thank you. Our next question comes from Mike Grondahl of Piper Jaffray. Your line is open.

Mike Grondahl - Piper Jaffray

Thank you. The 1,318 new ATMs in the U.S. that seems like a pretty strong number for our first quarter, could you kind of talk a little bit about what’s driving that?

Steve Rathgaber

Yes. It’s a year-over-year views though it’s not the first quarter unique thing, we added –we signed up 400 ATMs across the business. A portion of those were in the U.S., but what you are seeing is the benefit of last between first quarter 2013 and all the activity we did in the U.S. leading up to first quarter 2014, a difference between those two quarters of 1,318 ATMs.

Mike Grondahl - Piper Jaffray

Okay.

Steve Rathgaber

Did that make sense?

Mike Grondahl - Piper Jaffray

Yes, it does.

Steve Rathgaber

Okay.

Mike Grondahl - Piper Jaffray

Were you surprised at all by the organic growth in Germany or the UK?

Steve Rathgaber

I wouldn’t say giddily surprised or anything like that, we are pleasantly surprised. We know they are good markets, but I would say they operated a few points stronger than we would hope. And we issued for the 7% to 9% sort of broadly across the company, didn’t quite make it this quarter. I am not looking for absolution here, but blame maybe a 1% on weather, but I think the 14% in Germany and the 10% in the UK are not, I wouldn’t expect 10% in the UK every quarter, but I am happy to be in Germany as I said to you previously. And I think those are just good reflections of good business choices we have made about the countries we want to operate in.

Mike Grondahl - Piper Jaffray

Okay, great. Thank you.

Operator

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

Reggie Smith - JPMorgan

Hey, guys. Thanks for taking my questions. I guess the first, just thinking back I guess last week MasterCard reported and one thing that MasterCard and Visa as well have talked about is that they are seeing an increasing mix of I guess volume in emerging markets. And in the past, you have talked about this market started out with people using their cards at an ATM and they eventually migrate to point-of-sale. I guess my question for you guys is how do you think about expansion or the attractiveness of some of these emerging markets? Clearly, you have expanded the Germany and Canada, but thinking more along the curve of some places where people are probably just start to get cards in. So, how do you guys think about those markets, the opportunity there? Is there any just kind of move into those markets?

Steve Rathgaber

Well, I would say, Reggie that there is interest in moving into markets, where we can make money, okay. And we think that we are better at that in the ATM business and quite frankly anybody on the planet, but we don’t historically have a track record of making money where there aren’t cards or ATMs. And there are a lot of countries out there and that are getting into the game, into the expansion and we’d like to see how those model sort out. Having said that, it’s the right opportunity comes along to acquire all way into a market that we think has good potential and that we think has formed enough to remove some of the crazy guess work as to whether or not we can make money. We would certainly take a swing at that if it was proportional to our total risk appetite. But I don’t think it means they’re going to run around entering seven new market where we don’t have a good understanding in the economic. And it just – it’s just the way we’ve operated, but I do think you should conclude that overtime Cardtronics will expand globally and will expand globally in mature markets and less mature market, but may be not really, really emerging market as we go forward.

Reggie Smith - JPMorgan

Got it. And I guess that brings me to Mexico, I mean, you guys moved into Mexico two years ago, it’s been I guess kind of choppy would be how I would describe it. How do you think about kind of the opportunity there to expand your fleet? What you think addressable kind of market is from the ATM perspective there and then I have one follow-up.

Steve Rathgaber

Yes, I think I couldn’t agree with you more about the choppiness in Mexico, a lot of it is introduced by regulators changing the rules, by Visa and MasterCard changing the rules and we’ve sort of had to react and adapt. What I would say about the market presently is that while the history has been challenging. We’re actually in the midst of reshaping the business model we operate with in Mexico to substantially do risk it and I would just invite you to stay tuned if we can close one or two of these opportunities in the pipeline. We think we’ll be very happy with the expansion in Mexico with the ability to manage the downside risk in Mexico and I think it is the next kind of dealer too could indicate the answer to your question about how big is the potential market. The circumstances in Mexico have created a desire for branding by the biggest banks, okay. If we can formulate the right deal structures with the biggest banks, I think we can kill several birds with one stone ranging from banks that protect us on cost of cash, the things that protect us from volume, vagaries in terms of surcharge or interchange rates to the way we craft the deals. So, that might be more than you wish you hear about it, but it says I’m super cautiously optimistic. About the possibilities in Mexico and if our new model work, I think there is some pretty decent location growth that we can bring to the table, not counting on after this year, okay, but I do believe that remains a viable and opportunistic market for us.

Reggie Smith - JPMorgan

Got it. And then I guess lastly I get this question all the time that focus. You guys provided some pretty good metrics on the value that you bring to merchant location. Is there anything that you guys can share on the 711 contract had you guys been in discussions? Is there anything you can tell you in that regard if you have engaged you guys in conversations or is it just kind of status grow.

Steve Rathgaber

I think, Reggie it’s important for a variety of reasons, ranging from traditional confidentiality agreement to just good old-fashioned common sense for Cardtronics not the comment on any specific deal. But I would invite you to reflect on all the commentary I gave on the way we are approaching renewals and use that to evaluate have any retailer might choose to think about Cardtronics and the importance of our partnership and relationship. So, that is – that’s staging was intended to provide guidance on any and all of renewal opportunities.

Reggie Smith - JPMorgan

Got it. And actually that’s pretty good color. I appreciate it. Thanks for taking the questions and good quarter.

Steve Rathgaber

Thank you.

Operator

Thank you. We have a follow-up question from Bob Napoli of William Blair. Your line is open.

Bob Napoli - William Blair

Thanks. Just a couple of quick follow-ups, the UK, property tax issue, any movement on that being included in the cost base for you, I mean, it seems like it’s relatively an unfair tax for non-bank ATM providers and has there been any discussion, are you optimistic on any changes in that at all?

Steve Rathgaber

I think honestly stated it’s probably too early to tell, I mean, we – I’m somewhat you could take their various arguments we could use to mitigate the level of tax that are fairly technical in nature and their various arguments we might make to prove up a position that would logically not taxable at all. I’d say at this point, it’s early days in both of those effort. So, basically we just continue to accrue on a base that effectively assumes no success at that. We tend to be kind of conservative by nature in that regard. And we’ll see how it goes. I suspect that’s a multi-quarter journey and you’re not likely to hear a lot of new news out of us on that front in the next three months or so.

Bob Napoli - William Blair

Okay. And then you repurchased $8 million and $9 million of your high yield notes this quarter and is that just an opportunistic moment or what was going on there.

Steve Rathgaber

I think it’s fair to call it an opportunistic moment, I mean, we have – we’re sitting on cash in the bank. There is not much yield on that at this point. There was about a yield to be hit buying in some bonds, couldn’t find many frankly that were up for sale, but we found a few.

Bob Napoli - William Blair

And then your CapEx – you raised your CapEx guidance, I am sorry, I missed, I am not sure I caught the commentary on the CapEx adjustment?

Steve Rathgaber

Basically – so we’ve got various renewals in the work. It could be some of those refresh of the hardware may come into play. But we’re continuing to work our way through the EMV conversion and we’ve got certain pipeline situations that are relatively robust. So, I thought it made sense to carve out a little headroom if you will on the capital number. And you haven’t seen that higher level of spending manifest in the first quarter, but it could be depending on how number of things fall that we see it later in the year.

Bob Napoli - William Blair

Yes, the Mexico thing sounds interesting, looking forward to it. The merchant owned business, you have 22,000 merchant owned ATMs, you made a number of acquisitions in that space. I just wondered is there – what is your strategy around these merchant owned ATMs and is it adding value to the Allpoint network, other opportunities within that to convert those to owned or what is your thought around that piece of business, there is a lot of ATMs.

Steve Rathgaber

Yes, there is a bunch of opportunities quite frankly, Bob, and it’s a great question. The fundamental opportunity is just as a stabilizer for the business where we tend to operate on more of a fixed contract basis. So, it has no interchange risk or interest rate risk because the cash is used from the merchant. So, those are things that allow us to have more of a fixed margin and just diversifies the quality of revenue that we have into different bucket. That’s one reason for it and that will stay a reason for the foreseeable future. But another reason for it is the some of the clients are larger than other clients and we end up with an opportunity to do more. I mentioned in this particular briefing. The pioneer deal up in Canada, we were just a – that was sort of merchant processing type business prior to us taking the ownership of it and providing a branding opportunity to it. So, that’s the case where it feeds into the model in a productive way for both the retailer who was able to get an upgrade get of ATMs and more volume into his stores. And for us who were able to turn it into a more traditional owned company model. We also hope in the future, this is a little trickier based on the software that is employed at the ATMs to leverage some of our i-design capabilities and screen advertising capabilities at this ATM fleet, more screens is better when you’re selling advertising. And as you point out, selectively we bring some of these clients into the Allpoint fold, because it makes good business sense to do so. So, it’s a multiple play, multiple scenarios during play to extract value and it’s one of the joys of being Cardtronics, we can do more things with more assets.

Let me give you a last one, it’s not necessarily something we talked about in the press, but we just took the sales force that we collected across all of these organizations and restructured it not so much by merchant business and owned terminal sort of business, but by market segments, now we have a large segment and medium size segment and small segments, smaller merchant sort of sales force, that we now have broad and consistent coverage across the market in ways quite frankly we have never had it before. So that’s another value that we are extracting from pulling together a strong sales engine from all these disparate parts. And as a byproduct of all these acquisitions, we have now got 6 to 7 offices in every major geography of the country we have got covered from California up to Oregon to Phoenix to the East Coast and in between Minneapolis and such. And that gives us great local penetration for deepening the business relationships with distributors and other merchants that we have. So, it’s just a pile of good things that come from it that we feel quite good about.

Bob Napoli - William Blair

Thanks. And just last question, I don’t know if you could give any characterization of an M&A pipeline the kind of things that are out there? And is there more or less than there has been historically or the opportunities and they brought in a few investment bankers to work on the growth of the business with you? So, I mean, maybe a little color there if you can?

Steve Rathgaber

Well, the way I would characterize it is in, I mean, as you well know in any given year, the potential participants in being very different right. They can be different because of the geography. They can be different because of the nature of the asset. They can be last year we focused a lot on smaller deals, not necessarily the focus for this year, okay. So we obviously react to what’s available. And I would just say that the pipeline has domestic and international dimension. And it has properties that we are pleased to evaluate, which isn’t the same as saying we are – we will definitely acquire or that they will come to close, but we like the pipeline and I would say I like it better this year than I did last year.

Bob Napoli - William Blair

Thank you very much.

Operator

Thank you. At this time, I’d like to turn the call over to Mr. Rathgaber for any closing remarks.

Steve Rathgaber - Chief Executive Officer

Well, I would just like to say thank you to all of the listeners for your continued interest in Cardtronics and I look forward to talking to you all next quarter.

Operator

Thank you, sir and thank you ladies and gentlemen for your participation. That does conclude Cardtronics’ first quarter earnings conference call. You may disconnect your lines at this time. Have a great day.

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