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Cardtronics, Inc. (NASDAQ:CATM)

Q3 2010 Earnings Call

November 2, 2010 05:00 pm ET

Executives

Steve Rathgaber - Chief Executive Officer

Mike Clinard - President of Global Services

Rick Updyke - President of Global Development

Chris Brewster - Chief Financial Officer

Mitzi Pierce - Investor Relations

Analysts

Chris Mammone - Deutsche Bank

Bob Napoli - Piper Jaffray

Chris Shutler - William Blair

Reggie Smith – JPMorgan

Gary Prestopino - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to Cardtronics Third Quarter Earnings Conference Call. (Operator instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Mitzi Pierce. Ma'am, you may begin.

Mitzi Pierce

Thanks, Operator. Good afternoon everyone, and welcome to Cardtronics Third Quarter Conference Call. Presenting on the call today, we have Steve Rathgaber, our Chief Executive Officer, and Chris Brewster, our Chief Financial Officer. Also on the call today and available for questions we have Mike Clinard, President, Global Service, and Rick Updyke, President, US Business Group.

Steve will begin today’s call with an overview of our Q3 results, and an update on some of our key initiatives. Following Steve, Chris will provide additional details on our quarterly results, and an update on our expectations for the remainder of 2010 and some high level guidance for 2011. Our prepared remarks are scheduled to run for about 25 minutes, at which point we’ll open up the call for any questions.

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

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

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

Steve Rathgaber

Thanks, Mitzi, and thanks to all the listeners who have joined us today, and I guess happy election day to everybody. Once again, I am pleased to be able to report that Cardtronics had a very solid quarter, which modestly exceeded our expectations. The quarter produced record revenues, EBITDA, and earnings per share. From a top line perspective, our revenue increased over 6% from the same quarter in the prior year to $136.6 million. Adjusted EBITDA for the quarter totaled $3.9 million, presenting an 8% increase over the prior year.

As we noted in the press release, the record levels of revenue and adjusted net income per share generated during the quarter, as well as the year over year growth and adjusted EBITDA were driven by the successful execution of key growth initiatives. As you may recall, I outlined six growth tracks for Cardtronics during our Q1 call, and have repeated our focus on these in our subsequent secondary offerings and investor meetings. These growth tracks remain the foundation for creating and delivering value to our shareholders.

This quarter is characterized by solid performance across four of these growth tracks, specifically we continue to enjoy the unique value created by our Allpoints surcharge fee network offerings. We continue to benefit from the matchless strength of our ATM placements and key national retail locations, which in turn drives our finance institution branding strategy. We have experienced new revenue growth in our still youthful managed services offerings, and finally, we remain the beneficiary of the continuing contribution of old reliable, our convenience fee implementation strategy.

Let me offer a little more color on each of these. Perhaps the most exciting milestones for the quarter involve our Allpoints surcharge free network. You may recall that the Allpoint network delivers value to our shareholders because of its margins, and the key fact that we set the interchange pricing. This interchange model is totally under our control. That translates to revenue stability, which of course translates to shareholder value. A key long term goal for Cardtronics remains the ability to price all of our own products and services and to continue to reduce any reliance on pricing models or in fact, other network interchange outside of our control.

Our march toward this goal continued in September. We announced that we entered in an agreement with MasterCard worldwide, under which we will provide holders of MasterCard prepaid cards, surcharge free access to the 40,000 plus ATMS in Allpoint. As we noted on our last call, prepaid cards continue to flourish and prosper as evidenced by two recent and quite successful IPOs of prepaid issuer icons, and we continue to believe that our Allpoint network is a very valuable asset in the prepaid world.

Specifically, through Allpoint we provide card issuers and prepaid program managers the ability to expand their ATM footprint, allowing them to provide their customers with access to over 40,000 ATMS located in the very places where people shop and perform their daily activities. Additionally, the surcharge free aspect of Allpoint allows prepaid program managers to not only meet but actually exceed the surcharge free requirements of certain government programs. Additionally, the surcharge free networks bring new foot traffic to the retailer, and that ultimately facilitates retailer sales.

A second exciting milestone for our Allpoint franchise involved international expansion of our Acquire ATM locations. In October, we announced an agreement with Customers Ltd., the largest ATM owner/operator in Australia. In this contract, the ATMs deployed by Customers Ltd., will be branded with the Allpoint logo and cardholders of financial institutes that participate in Allpoint will receive surcharge free access to Allpoint ATMs, both in the United States and Australia.

This agreement not only expands Allpoint by more than 5000 locations, but also provides us with an entry into a new market. It also puts us on the right side of a possible early trend in several countries, that seem to be moving toward more surcharge friendly environments. An example of this is Germany, who is moving, I think in a surcharge direction. This could bring a whole new dimension to Allpoint’s value and we are watching it carefully.

These new alliances, first with MasterCard, to bring more issuers or cards to the networks, and second with Customers Ltd. in Australia, to bring international ATMs, which by the way is a nice point of balance between expanding both the issuer and acquire size, further validate that Allpoint is another powerful Cardtronic asset from which we can continue to create shareholder value and organically grow revenues in a non capital intensive fashion.

Our financial institution branding initiatives also enjoyed some successes in the quarter. In August, we announced the long term branding deal with ScotiaBank, one of the world’s leading finance institutions. Under this arrangement, ScotiaBank will initially place its brand on 200 of our ATMs in high profile retail locations throughout Puerto Rico. ScotiaBank represents the first branding deal for us outside the United States mainland, and establishes the framework for Cardtronics to brand additional ATMs in other markets.

In addition to adding new customers to our portfolio of branding clients, we secured a renewal and an expansion with an existing customer, Huntington Bank. The renewal and expansion of our branding relationship with Huntington, which began way back in 2005, demonstrates the retentive value of our ATM location franchise and further validates this component of our growth strategy.

Another dimension of Cardtronics is our operational execution capabilities. Even as we continue to work on building our business development muscles, we remain strong in our operational execution. As discussed on last quarter’s call, we added Kroger to our managed services clients, and to our premier list of retail partners. Their addition now gives us relationships with eight of the top ten national retailers with ATM programs.

This relationship initially covers about 800 machines. The headline here is execution. Signed in Q2, 800 machines converted and operating well before the end of Q3, with very positive operating reviews from the client. This result, even as we continued and completed a major migration of a portion of our own portfolio of ATMs off of a third party processer onto our own platform.

As an indication of our singular, laser like focus on ATM availability, I can report that with that portfolio now completely operational on our inhouse platform, the enhance availability and uptime of the ATMs is yielding approximately $50,000 per month in revenues. That’s a great example of the value of focus and the skill of the Cardtronics team. That’s what we do day in and day out to deliver value to our clients and our shareholders.

With respect to our UK operations, I’m pleased to report that our second armored cash depot is up and running. This depot, which is based in Manchester, is currently servicing a little over 400 ATMs and we expect to convert over 300 more by the end of the year. This is a key element of our strategy to become the scale player in the UK, even as we leverage these depots to perform just in time cash deliveries, yielding superior ATM availability and reducing cost of servicing.

We continue to be a service leader in the UK market. Anecdotal client evidence suggests that our ATM average uptime exceeds the industry average by a significant margin, and with our growing service reputation we believe that we will be able to continue to expand market share and attract financial partners willing to outsource ATM operations. Switching back to my earlier comments on surcharging, I can say that it is the growth lever gift that keeps on giving. We have successfully grown revenues per store with this asset and have staged a modest continued expansion of surcharge revenue growth for 2011.

Next, I would like to update you on our evolution as an organization. We have recently restructured the management team to align more closely with our strategic goals and our growth strategies. One of the key elements of the restructuring is our focus on our clients in the US market. We believe this market, with more than 10 billion ATM transactions annually, holds great untapped potential for Cardtronics.

And now, for the first time in our history, we have a senior executive, Rick Updyke, focused solely on the US market. He is in turn supported by two business line leaders. One, focused on the merchant, or acquire business which spans both our owned ATM portfolio, as well as our merchant owned terminal business, and another business leader focused strictly on delivering value to our financial institutions or card issuers.

These executives are supported with sales and account teams focused solely on their lines of business. They are additionally supported by product teams and a marketing team that will bring a new set of competencies and skills to our company. I am pleased to announce that our new chief marketing officer, Mr. Tom Pierce, started yesterday, and I look forward to a significant contribution from his team in helping our US franchise attract additional transaction share, among other things.

We have many opportunities in front of us, from the rich sales pipeline that we discussed on the last call, and are actively working, to increasing in store foot traffic using our ATMs, to extending utility of our ATM placements with targeted service expansion of new capabilities. There is much to do. I believe we now have in place the organizational framework to continue the transformation of Cardtronics, and to build on the unique asset that the Cardtronics team crafted through the acquisition strategy of prior years.

This past year, in our current quarter’s performance indicates that we are beginning to take advantage of our opportunities. Our new organization and the talents applied to it says that we are fully committed to extracting for our shareholders the value created by this one of a kind franchise. Chris will now provide you more specifics on the quarter, and financial guidance for the rest of 2010, as well as a peek into 2011. I will return after that with a few summary remarks. Chris?

Chris Brewster

Thanks, Steve. As Steve said, I’ll touch briefly on Q3 results, give you a little more detail on some of the moving parts within the numbers, and then talk about what we’re expecting for the remainder of 2010 and some preliminary thoughts on 2011. In the quarter, Q3 of 2010, consolidated revenues were about $136.5 million up about 6% over the $128.5 million we generated in the same quarter last year. From a gross margin perspective, we had a solid performance, with consolidated gross margins at 33.1%, compared to 31.8% last year, and I’ll return to that in a couple of minutes.

Although the growth rate in margin was somewhat smaller than the 400 basis point increase that we saw in Q1 of the year, and the 240 basis point increase that we saw in Q2 of the year, this was expected, as we’ve now cycled on some of the cost savings that gave rise to the substantial margin gains earlier in the year, particularly the cost reductions that we achieved on our domestic armored car and maintenance cost, which began to go in effect in May of 2009.

Despite this, our domestic operations team did drive some incremental armor savings as result of their efforts to further reduce cost. That resulted in fewer cash fills being required during the period, and that helps us on the cost side. Additionally, we were able to lower our domestic processing cost somewhat as a result of the completion of the conversion of our ATMs located in 7-11 locations over to our in house which switched during the quarter.

Returning to gross margins for a second, gross margins during the quarter were influenced by a couple of minor, non-recurring items, which had the effect in increasing our gross margin percentage by about eight-tenths of a percent, or by about 80 basis points. I should say that I don’t expect such a benefit to occur in future quarters. When you go further down in the P and L, that benefit was essentially offset by about $1 million in non-recurring costs in the SG&A section, including the cost of mounting the secondary equity offering that we conducted in the month of August.

So my message to you is really this, and that is the top line and bottom line numbers were essentially not impacted on a net basis by such items, but gross margins were about 80 basis points higher than they otherwise might have been, SG&A was about $1 million higher than it otherwise might have been, and the year over year percentage gross margin gain, which on the face of the P and L appears to be about 130 basis points, is really about 50 basis points, when you factor out that one time increase in gross margins.

On the adjusted EBITDA line, we reported a 8% year over year increase, up from $32.5 million to almost $35 million in Q3. From a bottom line perspective, we generated adjusted net income of $11.4 million, or $0.28 per fully diluted share for the quarter this year, compared to $9.9 million, or $0.25 per fully diluted share in the same quarter last year.

Now, switching to a discussion of our reported GAAP net income figures, as we noted in the press release, we did have a couple of fairly substantial onetime items that have affected those numbers. One was the effect of the reversal of some valuation allowances that we’ve been carrying on our deferred tax assets. That was an additive to the P & L, and the other was some onetime charges related to our debt financing, refinancing activities, which were a negative to the P&L, and I’d like to explain these to you.

With regard to the tax issues, our income tax provision, which is actually a credit, or a net tax benefit for the quarter, reflects the release of valuation allowances that had been placed on our domestic deferred tax assets.

Essentially, for the last few years, we’ve not been recording any tax benefits in the periods in which we recorded operating losses, because under the generally accepted accounting principles, there is a requirement to demonstrate the company will actually be more likely than not able to use its net operating loss carry forward and other deferred tax assets through future operating profits, to use the accounting and technical terminology.

There are several requirements and guidelines that are utilized in making that determination, and after several straight quarters of solid pretax operating profit, coupled with our forecast projections for 2011, along with other factors, we determined that we would be more likely than not to be able to use our domestic deferred tax assets in future periods. The result of that determination was a net of $20.7 million in credit to our tax provision for the quarter, which obviously had a fairly significant tax impact on our reported GAAP results for the quarter.

Now, let me go back through that with you just quickly in what I would call laymen’s terms. If a company, and I’m going to use a hypothetical example here, if a company has been historically profitable over time, and a tax payer over time, but it had a loss in a given period, typical accounting would be for that company to book a tax credit against that loss, such that you might see, for example, a $10 million pre-tax loss, a $3.5 million tax credit, and a $6.5 million after tax loss. The other side of that tax credit entry is, in layman’s terms, a receivable. Effectively a receivable from Uncle Sam, from the government, based on the presumption that you will collect cash for that credit, either by carrying that loss back against prior profits or carrying it forward against future profits, and claiming a tax refund, thus collecting the receivable, if you will, from the government.

However, if a company does not have a history of consistent profits, general accepted accounting principles take a view that the receivable might never be collected from uncle Sam, and consequently GAAP requires that it be 100% reserved. And that is what we have been doing, up until now. Since we’ve now established a track record of profits, and expect that to continue, we believe that our receivable is collectible and generally accepted accounting principles call for us to eliminate the reserve we were carrying.

The other side of that entry is essentially the big credit that you see on the tax line in the P&L, so in parting on that subject, I would just say that credit has no impact on our reported adjusted EBITDA, has no impact on our adjusted net earnings per share, it simply affects the GAAP numbers.

I’d now like to take you to the key operating metrics section of the earnings release on page 12. Specifically to the average number of transacting ATMs data on the top of the page, because we’ve added some things there. For the first time, we’re including data on our counter machines, for which we provide managed services. That is, those machines where our revenues are not based on surcharge and interchange fees, but rather are composed of operating fees paid to us by a location owner. That’s typically the way we distinguish between our ordinary, traditional ATM operations and our managed services business.

We had not included any of these managed service machines in our machine count or our transaction accounts in the past. Looking at the table on page 12, the 1600 managed services machines shown in Q3 of last year were primarily machines located in a large convenience store chain, for which we only provide transaction processing. The year over year growth to 300 machines average for the quarter this year is primarily driven by our Kroger and Travelex managed services contracts that we brought up and running in the intervening time.

Similarly, as we move down that page, we’re providing data on the transaction volumes that we’re seeing on the managed services side of the business, but since the per unit revenue and cost metrics on the managed services business are quite different from our traditional business, we’re showing our per ATM per month amounts for the traditional business only, so we don’t distort the year over year comparisons that you’re used to seeing.

Moving on to the balance sheet, debt at the end of September stood at just over $282 million, down roughly $25 million from where it was in the prior quarter. That amount consisted of $200 million of senior subordinated notes, $73 million of borrowings under our revolving credit facility, and about $9 million of equipment notes down in Mexico. At the end of the quarter, we had just a small amount of cash on the balance sheet, as a result of our current net borrowing position, and using all the cash that we can to help pay down our bank credit facility.

As I mentioned on our last call, we had set about a series of actions to rework our debt structure. All of these were completed during Q3. These included the execution of a new $175 million bank credit facility, which gave us the flexibility to redeem our previously outstanding 9.25% senior subordinated notes, and we in fact redeemed all $300 million of these notes, which were due in 2013, and we issued $200 million of new 8.25% senior subordinated notes due in 2018.

So it was a lot of activity, it made for a busy quarter, but these actions provide us with several benefits. The first is simply greater financial flexibility, and extended maturities on our borrowings. Our bank debt is not due for five years, and our bonds are not due for eight years. So we have quite a lot of time to run before we have any significant debt maturities.

Secondly, we have a more efficient capital structure. With the business now producing significant free cash flow, we’re able to utilize that cash flow to further drive down debt and pay down debt as we generate cash, which we previously were not able to do, with our only borrowings being in the form of those fixed rate notes.

Lastly, all this activity will save us some interest expense on a go forward basis. The cash interest savings in 2011 is in the ballpark of $8.5 million on a pretax basis, when compared to the run rate where we were prior to the refinancing. Since we have some of that benefit late in Q3 2010 and will have full benefit of it in Q4 2010, when you look at it on a year over year basis, comparing 2011 to 2010, I would expect the 2011 interest bill to be about $5.5 million lower than it was – then we would expect for full year 2010.

We recorded, relative to those refinancings, we recorded approximately $14.5 million in non-recurring one time charges during Q3, associated with the refinancing activities. Of those charges, about $7.2 million was the result of the method by which we retired those 9.25% bonds, which basically required us to pay a call premium to those bond holders, so that was a cash cost to us. The remaining $7.3 million of charges were associated with the write off of the remaining unamortized deferred financing cost and original issue discount associated with the notes that we retired, and also the write off of a portion of the unamortized deferred financing cost associated with our previous bank credit facility.

While none of these charges impacted our reported adjusted EBITDA or adjusted net income per share, obviously they did impact our reported GAAP net income. Now, turning to guidance. Based on the performance we saw in Q3, and the refinancing events that we recently completed, we think it’s appropriate to modify our guidance for the full year 2010, somewhat.

We moved our revenue guidance to the higher end of our previous guidance range, specifically we’re now expecting revenues of $528 to $529.5 million for 2010. We’re increasing our guidance on gross margins from prior guidance of 31.5 to 32%, to a range of 32.1 to 32.2%. We’re also increasing our adjusted EBITDA guidance from a range of $123 to $127 million, up to a range of $127 to $129 million. We’re expecting about $1 million more depreciation than we had previously guided to. Increasing that number from $40.5 to $41 million, to new guidance of from $41.5 to $42 million.

Cash interest, we’re now expecting between $26 and $26.3 million, down a little bit from the $26.5 to $27 million that we guided to previously, and now expecting adjusted net income per share between $0.95 and $0.98, based on a share count of about 41.5 million fully diluted shares, and that $0.95 to $0.98 compares to the prior guidance of $0.87 to $0.93.

We expect capital expenditures to come in at about $48 million, netting our non controlling interest up a little from our previous guidance of $45 million. Our net revenue guidance for the year implies a Q4 which in revenue terms would be slightly down, sequentially from Q3 that we just reported. That would be consistent with our history. It’s what we would expect. It’s normal seasonality in this business, and it simply relates to the impact of more adverse winter weather and holidays on our business and our transaction counts.

Now, to turn to 2011, as we did in the press release, I just want to review high level guidance that we’ve established for next year. Anticipating revenues in the range of $559 to $569 million, adjusted EBITDA in the range of $136 to $141 million, and adjusted net income per diluted share of $1.14 to $1.20. We have a number of things going on at Cardtronics that are working well to drive revenue and profits up, but we also have to consider matters that might be adverse to us. We’re planning for some increases in floating interest rates, which would have the effect of raising our bulk cash rental cost hedged portion of our bulk cash. Now, those increases may or may not happen. Time will tell, but we believe it’s prudent to plan for events such as that nature.

We also know, as a factual matter, that the per transaction interchange that we receive in the UK will decline in 2011. Interchange in the UK is set by Link, the network that clears all the domestic UK ATM transactions, and they set interchange using a cost based methodology. Every year, they have KPMG do a study of the prior year’s cost, and the results of that study are used to set the following year’s interchange level. For example, in 2010 the study looked at 2009 costs and used that to set interchange levels that Link recently announced, beginning in January of 2011.

In the general case, we like this methodology for setting interchange, because it’s fact based, it’s fair minded, and it’s not subject to the commercial whims of a particular party, and it’s even handed to all parties involved in the system. However, the short term effect of this is the 2011 interchange is being set based on a cost study that picks up 2009’s interest rates and cash costs. Those cash costs were lower than 2008’s cash costs that were used in setting the 2010 interchange rate, so the hard truth is that interchange is coming down in 2011 versus the 2010 level.

Link has announced a reduction in interchange of five pence, five UK pence per cash withdrawal transaction, effective on January 1, 2011, and based on the number of cash withdrawal transactions that we expect to do in 2010, we would expect that to have about a $4 million negative revenue impact in 2011.

So we’ve factored that into our thinking as we’ve considered guidance for 2011, as it represents a headwind that we have to overcome. Although I do see it as a 2011 issue, I don’t really see it as a long term issue, as interest rates inevitably rise over time, under this methodology interchange in the UK will also rise, however, our cost will not increase as much, since we’re largely hedged in that market, in terms of our wall cash cost. What’s a negative effect in 2011 may well become a positive for us as we go farther out in time.

We’ll complete our more detailed planning work on 2011 over the coming weeks, and we’d expect to update you again on 2011 guidance on our yearend earnings conference call in February. With that, I’ll turn the call back over to Steve for a few closing remarks. Steve?

Steve Rathgaber

Thank you, Chris. I thought it would be useful to offer some brief comments focused on 2011. I worked, in a prior life, with this salesman who would walk into a client, and apologize to his competitors as his first remarks to this prospect. His apology involved the fact that because of who he worked for, and the nature of that company’s product capabilities, and their seamless integration and the like, that he simply had an unfair advantage over the competition and always felt guilty about it. The important point is, he always made quota, and the quotas were always big.

When I think about Cardtronics, I think about our natural advantages. I do not believe they are unfair, however. They are a result of the solid execution and the right strategy. In 2011 we will continue to build on our advantages. We will drive value to the retailer and work harder to drive foot traffic and sales to become ever more valuable to our retail partners. We will help financial institutions of all sizes gather new customers and retain the customers they have with the power of our ATM franchise. If you observe any national bank advertising these days on the TV or Internet, the focus, or at least a big part of the tagline involves ATM capabilities. We are there to help with this core and critical consumer service. We are excited about our potential in 2011 and we look forward to driving superior shareholder value from this unique franchise. Operator, that concludes our prepared remarks, and we will be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Your first question comes from Jason Coverburg with UBS.

Ramsay Allsel (sp) – UBS

Hi, this is Ransay Allsel for Jason. Quick question on the MasterCard deal. Can you quantify the opportunity a bit and provide some color as to how much new business you think the relationship might bring?

Steve Rathgaber

I’ll put it this way Ramsey. We would prefer not to quantify that at this point. It’s a little difficult to do so, in the sense that basically the way you can think of what we have agreed with MasterCard is they are selling, essentially on our behalf, as part of their product offering, surcharge free access to the Allpoint network. So in large measure, our revenues at the end of the day will depend on their success in doing that. Obviously, we’re optimistic that it’s going to be additive to our results as we go forward, but it’s hard to specifically quantify at this point.

Ramsay Allsel

Okay, is there any change that existing Allpoint customers might be able to kind of go that direction, instead of to you directly, to gain access to Allpoint? Is MasterCard offering favorable pricing to new customers, or is it sort of pretty even, whether they go direct to you or MasterCard?

Steve Rathgaber

I think, based on my understanding of the situation – well, first of all, we generally have contracts in place with existing Allpoint customers that have some term to them. I would make a rough comment to the effect that I’m not sure we would be particularly troubled by that, frankly.

Ramsay Allsel

Right, good problem to have. One other followup. You recently raised your ATM surcharges in Mexico in response to the regulation there, and I think you mentioned last quarter the transaction volume understandably slipped a little bit after you did that. Are they recovering now? Do you see consumers in that market kind of getting used to the new model, or is it still sort of too early to tell?

Mike Clinard

Yeah, I think just in summary it’s still too early to tell. This is Mike Clinard, by the way. It’s still too early to tell. Immediately when the regulatory changes went into effect in May, transactions immediately went down, and essentially they’ve been stable ever since. We did increase surcharge a few months ago, and saw very little impact from that, other than higher revenues. So I think as far as the long term impact, it’s just too early to tell.

Ramsay Allsel

Okay, that’s all for me. Thanks a lot guys.

Steve Rathgaber

Thank you.

Operator

Thank you, Sir. Our next question comes from Chris Mammone of Deutsche Bank.

Chris Mammone - Deutsche Bank

Good afternoon guys. I appreciate the early read on 2011, and I guess also some of your assumptions behind those ranges. Could you also maybe talk to some of the things that could break your way that could lead to revenues coming in maybe for the higher end, and are there any further opportunities to drive surcharge increases built into that? I know that’s been an area of focus this year. I was wondering how much more room you might have there.

Steve Rathgaber

Sure, Chris. This is Steve. I think what we can say is that the guidance is early at this point in the cycle. I think that we can say that upsides to the guidance would certainly include a performance against the sales pipeline that we have. We’ve made some assumptions about a certain amount of wins there, but as this is a relatively new component for us, in terms of this kind of queue of activity, you might argue we’ve been a little conservative on that, but that can break either way, right? So that would be a potential. In terms of surcharges, we continue to have opportunities and will manage that for hopefully the most consistent opportunity to march to our intended growth rates over the coming years. I think we’ll keep some of that powder appropriately dry, as it also helps us manage transaction volume, so you do get to a certain point where there are tradeoffs in transaction volume against revenue increases. and I think that we’ll continue to have opportunity there going forward, so we’re coming off a solid year, we’re strengthening the organization to grow for next year, and we think there are dividends to be identified as part of that reorganization that can also help with our future view.

Chris Mammone - Deutsche Bank

That’s helpful. Could you provide, maybe, any more concrete examples on how some of the organizational realignment might help Cardtronics better address some of the historically great pipeline that you’ve talked about before, and I guess related to that, are there any significant head count additions that are going to be needed to drive that strategy?

Steve Rathgaber

So the last question first. Not any material head count additions. We’ve also made some other adjustments in staff to make room for some things. So we’re not anticipating any material head count addition in the whole mix. But by way of focus, what’s happening is we have dedicated teams now on our merchant businesses and dedicated teams on our financial institution segments, and we’re in a position to target our products and our branding offerings and our Allpoint surcharge free offerings, and other ways to participate in our networks differently than we have in the past. There are people with singularly focused charters and if you – I’m sure in all aspects of life, when you focus on something, different things and better things happen with it. So that’s probably the most useful thing I can saw. By splitting the business on business lines, we can now have very targeted growth plans around revenues for those businesses.

Chris Brewster

I guess the thing I’d add quickly to that, if I may, Steve, the other thing that comes out of that reorganization is much more of a focus on the consumer than we’ve had in the past. Really from the fact that we now have an executive who’s clearly responsible for figuring out how to get more folks to do more transactions at our ATMs and we’ve added a very senior seasoned marketing executive as a director reporting to Steve, who has a very solid background in consumer marketing. So I would hope all of that would be helpful on a go forward basis as well.

Mike Clinard

We’re moving in effect into a more sophisticated model for driving transaction activity and for grabbing transaction share. Things ranging from the way we approach research on consumers to the way we productize access to our ATMs, to the way that we can potentially work with retailers to drive sales. So it’s just a new era for Cardtronics, and one that we’ll be exploring and researching as we head into next year.

Chris Mammone - Deutsche Bank

Right. Good luck on that, and I guess just one final follow up, a clarification on – I think you commented, when you were talking about Kroger, about 50,000 additional revenues per month. Is that versus what the Kroger model was generating?

Steve Rathgaber

No, actually that was the other portfolio that we were converting, that by having that platform on our – so it wasn’t Kroger specific, it was another platform. But by moving those ATMs over to our platform, we essentially, with the increased availability are just seeing more transactions and as a result, more revenue. It is – it just goes to our focus.

Chris Mammone - Deutsche Bank

Got it. Okay, great. Thanks guys.

Operator

Thank you. Our next question comes from Bob Napoli with Piper Jaffray.

Bob Napoli - Piper Jaffray

Thank you, good afternoon. Question on the Australia addition, and just kind of strategically, Australia is kind of a long way from the United States, there’s a lot of countries in between, last I checked. What led you to the opportunity in Australia and what are your thoughts – obviously UK and Mexico, but what is your international strategy?

Steve Rathgaber

Okay, well that’s a big question, in terms of what’s our international strategy. If you’ve got a couple of hours I can certainly guide you through that one. But to be more specific in the context of Allpoint and Australia, I would offer that what we’re seeing in terms of international strategy – so we talk with like minded entities around the globe, and that’s with an eye toward building out an international strategy as to how we might combine assets in the future and in terms of how we might do business together. That’s just the ordinary cost good business practices. What we are seeing and what we are hearing is that there is an opportunity to stretch a network, potentially through Allpoint, for surcharge free access as countries continually introduce more surcharging capability, and Australia has done that, Germany’s in the process of doing that. Mexico is more focused on that, and we think, potentially, other countries will do that over time. As that happens, it creates a gateway to create a global network as opposed to just the US franchise, and that is a value add in any sales proposition, essentially for providing services to customers. It might be a small percentage, but it’s one of those nice to have. So that’s one element of the strategy. It’s an opportunity to talk to folks, it’s an opportunity to build relationships, it’s an opportunity to get to know like minded entities who run a business similar to ours. Beyond that, we continue to look at the international markets in terms of are they friendly to our business model, and we’re continuing to explore that. One of the results of our reorganization is that Mike Clinard will be focused on helping develop our international strategy more specifically and diving into those opportunities as we go forward into the year. Does that help?

Bob Napoli - Piper Jaffray

Yes. That’s helpful, the quick notes version, and we’ll go for the longer version when I see you in a few weeks. The last question just on the US business and the opportunities. I think last quarter you talked about an unusual number of ATMs that are coming up for bid through 2011, I just wondered if you can give any color on whether you still see that opportunity to the same extent that you did, or if for any reason that opportunity isn’t as great as you thought, or maybe there’s some color on that.

Steve Rathgaber

I continue to feel quite good about that opportunity, and the pipeline is as rich as we thought. Some elements of it have gone out, some other elements have come in, we are smarter about it than when we talked to you last, in terms of qualifying the opportunities, and we’re actively engaged in several components of process with parties in that pipeline, would be about what I could offer on that right now. I guess the new thing I would add is as we transform ourselves from this old Cardtronics 1.0 acquisition strategy model into a classic growth business driving through organic sales growth and that sort of thing, we’re getting more sophisticated about identifying within the US and elsewhere what the opportunities are to sell into. There are 400,000 ATMs in the United States, and we’re beginning to catalog those in a constructive fashion in a database, for which ones might become opportunities for us, if not in the next 12 to 18 months, periods after that. So I’m becoming hopeful that this business will build a routine pipeline flow that will have some nice substance to it as a continuing organ for growth for us. And make, as we exit 2011, maybe that surge in activity less of an anomaly than we’re seeing it now, because of the historical way we went about growing the business.

Bob Napoli - Piper Jaffray

Thank you.

Operator

Thank you, our next question comes from Chris Shutler with William Blair and company.

Chris Shutler - William Blair

Hi guys, good afternoon. Obviously a lot of moving pieces, most of it positive, but just a bit of a high level question, Steve. Could you just narrow it down for us a little, the top one or two strategic priorities that you’ve been focused on the most in recent months?

Steve Rathgaber

Yes. So we’ve been focused on making sure that we’re going to grab more than our fair share, to continue on that fairness theme, of the pipeline of being actively engaged in that activity, and we’ve been focused on restructuring the company to go after the transaction share, which I think is a fundamental underpinning of our long term growth engine. It’s the 10 billion transactions that we have a very light penetration into, that because of our natural retailer destinations, where people go to do their shopping and living, we think we should be developing programs to get a larger and larger piece of. That is what the reorganization is about, that is what our investment is a new chief marketing officer is about, and that is what a key element of our growth is, going forward. Beyond that, the other routine planks of growth, the Allpoint network opportunities, the surcharge convenience fee increase opportunities, the increasing the penetration at the existing retailers in terms of ATM placements, the growing the new retailers, the Kroger type opportunities, that’s the ordinary bread and butter that we get out of bed each morning and do. But the longer term focus is on making that pipeline come to fruition and making sure that independent of pipelines we get a model for growing transaction share.

Chris Shutler - William Blair

Okay, thanks. That’s helpful. And on a different tangent, maybe Chris, could you just give us a quick update on the vault cash hedging program that you have in place? How much of the 2011 vault cash is hedged as of today, and maybe any updates on your thinking around that front?

Chris Brewster

Yeah, I’d be glad to. We are roughly 70% hedged for 2011. We haven’t put any new hedges in place in the last little while here, so the information that’s in the Q2 is actually still current, and we’ll have our Q3 10-Q here in a few days.

Chris Shutler - William Blair

Okay. and then looking at the US company owned machine count, it looked like it declined a little bit sequentially. Could you maybe just talk about the drivers of that, and then as kind of a follow question, I don’t know how granular you can get, but the unit count expectations that are built into your 2011 preliminary guidance, is there anything you can speak to there?

Chris Brewster

I think in terms of your question on the sequential machine count, we talked on the last call about a piece of business that we lost in Q2 , I think we described it as a regional retailer that we lost in Q2 of this year. That essentially came out in May, as I recall. Was in for the month of May, but was out in June. So primarily what you’re seeing in the company owned machine count in the US is that issue. We do have a fairly healthy pipeline of company owned machines in the US that will be going in in Q4, so you may well see that turn around here in Q4. I’m sorry, Chris, what was the second part of your question?

Chris Shutler - William Blair

Just based on the revenue expectations at this stage for next year, what are you looking at in terms of machine count for – at least for the US or UK?

Chris Brewster

Well, I think if you take the company as a whole, and just look at the aggregate machine count number, and I’m speaking to what I call our conventional machine count, not including the managed services machine count, I would expect if you take the guidance for 2011, you divide it by the guidance for 2010, that implies revenue growth in the range of 6 to 8%, something like that. And if you think in terms of very round numbers, around half of that coming out of growth in machine count and half of it coming out of revenues per machine, that would be a pretty close in the ballpark.

Chris Shutler - William Blair

Okay, thanks a lot, Chris. And then just final question. Prepaid cards, in the past you’ve talked about the growth that has contributed to your same store transactions. Can you maybe give us a quick update there?

Chris Brewster

Well, they continue to grow nicely. We’ve talked in the past about the fact that we can do a pretty good job of tracking prepaid card transactions, where Allpoint has a relationship with those issuers and we have precise information on the – bank identification numbers on those cards, and so on and so forth. I would not alter the comments I’ve made in prior quarters on that. We continue to see a nice year over year growth rate in our transactions coming off of store value cards.

Chris Shutler - William Blair

Okay, thanks guys.

Operator

Thank you. Our next question comes from Reggie Smith from JPMorgan.

Reggie Smith -- JPMorgan

Hey guys, thanks for taking my questions. I guess a lot of them have already been kind of covered, and I apologize if you guys talked about this earlier, but it sounds like you have pretty good liquidity (inaudible) cash flow. Just curious, how are you guys thinking about acquisitions? Is this something that you’re interested in, or domestic, international? How do you kind of view and think about that? And then I have a few follow ups.

Steve Rathgaber

Well, Reggie – this is Steve – I think we think about it a couple of different ways. Maybe the first thing is one of the things I’ve said since my arrival here, is that we want to demonstrate to you all and to our investors that we can leverage the capital that’s already been deployed in this company. This company is the result of 15 acquisitions and it’s created a great franchise, a unique franchise, and what we want to spend this year and next year doing, in part, is demonstrating how we can lever that. Secondly I would say that because of the refinancing that Chris and his team have so successfully pulled off, we are in a position to manage opportunities as they come our way. I have a pretty high set of standards relative to acquisitions, in the sense that I want to make sure we’re entering environments that are conducive to our business model, as opposed to one trick ponies on either just surcharge revenue or interchange revenue that might be controlled by someone else. Part of the reorganization efforts, as I said earlier, Mike Clinard is going to focus on scouting those things. We’re also entertaining some sort of tip toe models, if you will, where we can partner with some entities. Not suggesting the Australia Allpoint case, or anything like that, but where we talk to entities, learn about them, partner with them, entities on some business opportunities and use that as sort of a leverage point to begin a dialogue that could ultimately lead to an acquisition opportunity. We feel good about our abilities to do so, what we’re interested in is finding the right opportunities that are going to contribute a margin level, and on a scale level to help make the shareholders increasingly happy.

Reggie Smith -- JPMorgan

That’s helpful. Did you guys provide your currency assumptions, embedded I guess in your guidance for next year? And could you talk a little bit about the sensitivity, the movements there? Particularly the UK pound?

Steve Rathgaber

What we have, what we have been thinking about for next year is a $1.50 pound, which would be a little weaker than it is currently, but not a lot. And in terms of let’s see, a dime one way or another on the pound would be in very, very round numbers, maybe around or about a 1% point shift in revenue for us.

Reggie Smith – JPMorgan

Okay. And then I guess lastly, someone asked about it earlier, but you know as we kind of think about the repricing and the surcharge pricing opportunity in the US, what inning do you kind of feel like you’re in there, as far as pricing changes? Are there some ATMs where you’re charging $3 like some of the big banks? Can you talk a little bit about the range of kind of where your surcharges kind of fall?

Steve Rathgaber

Sure, I guess – we have a large portfolio, and it’s a diverse portfolio, and we have some locations that are at the $3.00 mark, we have some locations that are well below that. And we basically strive to manage that based on market conditions, based on the retailer partnership and what they’re looking to do, there are some retailers that prefer to be the low cost provider. And we work with them when we do an increase with them it’s on a much smaller scale than another retailer who might be just interested in optimizing the pure dollar flow. So it’s a mixed bag. It will remain a mixed bag. We are managing it to optimize the performance. What inning we’re in? Well we’re doing better than the Texas Rangers, I guess. From the World Series (laughter) that’s not hard, and something in the sixth or seventh inning, depending on your point of view of future upside and the number.

Reggie Smith – JPMorgan

Great. I appreciate it guys. Good quarter.

Steve Rathgaber

Thank you

Operator

(Operator instructions) Our next question comes from Gary Prestopino - Barrington Research

Gary Prestopino - Barrington Research

Hi, good afternoon. Most of my questions have been answered, but can you possibly elaborate on the Allpoint expansion into Australia. This Customers Ltd., that’s not a bank, that’s just an owner/operator of ATMs, correct?

Steve Rathgaber

Correct. It’s the largest owner/operator in Australia. I believe they have about 5500 machines.

Gary Prestopino - Barrington Research

In order to make this work, don’t you have to get the banks to support what you’re doing there, as far as getting the Allpoint logo on your cards? On their cards? Or am I incorrect with that?

Steve Rathgaber

No, this is about – just to pick an example, if you have a classic credit card today, like a MasterCard or a Visa card, or a Discover card, you can use those cards overseas. Most people don’t because most people don’t go overseas. They go where they are. Essentially, what’s happening with the Allpoint network is we have enabled the United States card base to have access to that machine pool in the event that they’re surfing the wild beaches of Australia or doing some other touristy type activity or business activity that bring them in that area. It’s just another feature that gets added on to things in terms of value proposition. You are correct in the reverse, to the extent that banks in Australia want to have access to the Allpoint network in the United States, for their travel, that’s something that would have to be nurtured. That’s not what this deal is about. This deal is about expanding the ATM footprint available to Allpoint issuers in the United States, but it can become a springboard for expanding the Allpoint brand in other parts of the globe as well. That’s the TBD, though.

Gary Prestopino - Barrington Research

Okay, thank you.

Operator

Thank you, I am showing no further questions at this time.

Steve Rathgaber

Thank you everybody for your attention. We appreciate you joining the call, and we’ll look forward to doing this again in February. Thank you very much, Operator.

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