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Cardtronics, Inc. (NASDAQ:CATM)

Q2 2014 Results Earnings Conference Call

July 30, 2014, 05:00 PM ET

Executives

Michelle Holway - Director, Financial Reporting

Steve Rathgaber - Chief Executive Officer

Chris Brewster - Chief Financial Officer

Analysts

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Robert P. Napoli - William Blair & Company

Ramsey Al-Essal - Jefferies

Michael Grondahl - Piper Jaffray

Reginald L. Smith - J.P. Morgan Securities

Timothy Willi - Wells Fargo

Operator

Good day, ladies and gentlemen and thank you for your patience. You joined the Cardtronics’ Second 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, the Director of Financial Reporting, Ms. Michelle Holway. Ma’am, you may begin.

Michelle Holway

Thanks, operator. Good afternoon, everyone and welcome to Cardtronics’ second 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 second quarter results and an update on some of our key initiatives and recent highlights. 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 the call up 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 these 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'd like to now turn the call over to Steve Rathgaber, our CEO.

Steve Rathgaber

Thank you, Michelle and welcome everyone. Good to speak with you all again following our announcement last week on the acquisition of Welch ATM.

I am pleased to report that Cardtronics completed another very strong quarter as we closed the first half of 2014 building on our durable growth story. Key growth results compared to the second quarter of 2013 include revenue growth of 25%, adjusted EBIDTA growth of 20% with adjusted earnings per share improving 24%.

I would characterize the quarter certainly as one of growth but also one of delivery and execution. Top-line growth came primarily from existing relationships with growing customers, execution against our pipeline of opportunities and the roll forward of value of acquisitions. Bottom-line growth was driven by pipeline delivery, acquisition earnings and management execution of acquisition synergies.

I want to provide a little more color on these items as they continue to validate our growth model. Remember that Cardtronics’ growth story is fueled from multiple sources. Growth is driven by new sales to retailers and finance institutions or FIs. Growth comes from existing customers in the form of more store locations that we get to enjoy as our retail clients grow and via extending branding relationships finance institutions looking to increase the benefit they already enjoy from extending branding relationships.

Growth comes from surcharge increases as well as surcharge free transactions from our Allpoint network. It comes from new products and services like [filler] and dynamic currency conversion and from more transaction volume of any flavor including withdrawals, balance increase or deposits.

Growth comes from acquisitions of similar companies such as Cardpoint in Europe last year or Welch ATM which we anticipate will close later this year. And from acquisitions of complementary companies like i-design that add new capabilities and elements to our value proposition.

And finally growth comes to Cardtronics in the form of expansion into new geographies which we’ve done in Germany and Canada in the last couple of years and will continue to do in the future.

The key to understanding Cardtronics’ unique value and growth performance is to recognize that in any given quarter or year we only need a subset of these laundry list of growth drivers to perform. And we spend our time day-in and day-out investing resource and efforts and to preparing each of these drivers of growth to deliver value again thus ensuring that they will continue to deliver as a group even if in any given period we rely more on one than the other within this very happy extended family of growth drivers.

As I march through the halfway mark of my fifth year at Cardtronics, I am constantly delighted by the resilience of the model as quarter-after-quarter and year-after-year some portion of the growth drivers stands at the ready and then kicks-in to deliver value creation for our shareholders. That diverse and resilient model is Cardtronics. Much more simply stated, we are never reliant on a single business driver or dimension to power our growth.

So what delivered this quarter? Well new sales growth with existing clients, relationship expansion and multiple existing geographies and some modest surcharge increases in one of our markets and certainly our acquisitions have all delivered for us.

Cardtronics contracted more than 1600 ATMs across four countries. Specifically we contracted more than 500 locations for Petro Canada through a managed services deal, more than 200 ATMs in the United Kingdom with the signing of the Central England Co-op business and we signed a new U.S. retailer Fresh & Easy in the Southwest that delivers a 150 Greenfield ATM locations which we expect to have operating by the end of the third quarter.

Current clients also supported our growth this quarter. We expanded our nationwide relationship with CVS to add 375 locations in three Midwest in the states picking up footprint previously occupied by a bank. We added 240 BI-LO supermarket locations previously processed by a relatively new international competitor headquartered in Japan. This win was interesting and that BI-LO acquired our client Winn-Dixie and then chose us as the ATM partner.

And we expanded our relationship with the Kroger, the leading U.S. grocery chain by adding a 100 locations in the Southeast. We also added branding to our new Petro Canada managed services account with the signing of CIBC to brand these locations. You may recall that we competed against CIBC for the 7-Eleven business in Canada not too long ago. And we are delighted and quite frankly flattered that they have now worked with us on two significant relationships. It is always gratifying when existing clients reward us with more business.

And I'm pleased to say that while pipelines ebb and flow and with the eternal caveat around the difficulty of assessing and projecting timing, we feel quite good about the quality of the inventory currently in the pipeline as we assess new opportunity for the remainder of this year and into next year.

Let's move to renewals. Top-line growth is always easier when new business is added to a stable base of existing business. Cardtronics continued in the second quarter to build on its impressive track record of renewal success. We signed long-term extensions with two key network partners and renewed our agreement with the significant prepaid client all for our Allpoint surcharge free service.

Together, these relationships drove north of 10% of our Allpoint volume in 2013. I believe these renewals provide validations of our value propositions of the issuer just as our traffic driving strategies are validated with new retail placements and renewals. It truly is a model where all constituents win.

Let's transition now to a different dimension of delivery and execution, innovation. Cardtronics has an active product pipeline to complement our sales and acquisitions pipelines. I want to briefly discuss three of the products that are in the pilot process and coming to market through the remainder of this year.

Following on our Allpoint renewal discussion let me update you first on our recently announced Allpoint deposits. The new Allpoint deposits functionality will enable cardholders of participating financial institutions to deposit checks and cash directly into select ATMs. Presently, around 2500 of them around the U.S. without using on envelopes or deposit slips.

While Cardtronic has historically supported deposits at these ATMs, it has not done so on a scale basis, it has been selective accounts. Through this addition, the surcharge free Allpoint ATM network will be able to facilitate both cash in and cash out transactions enabling consumers to manage even more of their banking needs at convenient retail locations. With the introduction of Allpoint deposits later this year, Allpoint will boast the largest retail based ATM deposit network in the United States. And you may find it noteworthy that the service is being launched at 7-Eleven locations in the U.S. The delivery of this innovation fits perfectly with the continuing favorable trend of branch closings and greater consumer self-service.

A second strategic innovation is our ALLTM spelled A-L-L-T-M. Fresh & Easy is an innovative retailer. They were anxious to try something new in their stores and we are working closely with this retailer to pilot the latest Cardtronics product innovation, the ALLTM in their stores in the Phoenix market.

The ALLTM brings together the cash and digital worlds. It includes a vibrant branded housing for the ATM and the retail environment, a large digital screen atop the ATM to deliver in-store product offers and enhance branding capabilities. It is a company by a mobile phone app which gives the consumer the opportunity to redeem product offers at the point of sale. The ALLTM is in early pilot phase now and we’ll have more to share with you in the coming months. But the clear objective of this product innovation is to drive the consumers to our retail partners and to drive additional spending while they are in the store.

ALLTM, Allpoint deposits, fee alert, locator search, dynamic currency conversion, multi-bank branding these are all part of our strategy to deliver foot traffic to retailers and greater value to consumers and financial institutions at Cardtronics ATMs but we are also delivering innovations to the retailer with information. We have launched Siteline and enterprise data warehouse product that we are now delivering to select retail clients. The Siteline product provides access to information we now track on cardholder usage and behavior at our ATMs giving us the ability to help our retailers understand things like repeat visits, share of ATM transactions at their stores, and usage patterns all on a unique cardholder basis.

Over the next several quarters we’ll be adding other sources of information to Siteline including mobile location data from our various mobile apps. This is a very powerful product which will ultimately be developed into customer dashboard that allow our retail partners to see and analyze transaction information the unique cardholders at ATMs located in their stores.

On the acquisition pipeline front, you’re already aware of our announcement of the Welch ATM acquisition last week. We’re very excited about this opportunity to add expertise of the well run ATM operator and many talented employees to our team including current Welch CEO Jeff Hewitt who will lead our new retail and financial institution sales and relationship management team in the U.S. We’re confident that this addition will provide some new competencies in the mid-market space, that will help us continue to grow with both retail merchants and financial institutions specifically with our Allpoint and multi-bank branding products that the Welch mid-market focused sales team will be able to sell. The Welch acquisition is expected to close later in the third quarter and we’ll deliver over 25,000 more owned or operated ATMs to our portfolio when the deal is complete giving us nearly a 110,000 ATMs under our management across the globe.

As we look forward to Welch it is worth reflecting on our performance with our last large acquisition. Our 2013 acquisitions were a big contributor to our success in the second quarter. On the top-line acquisitions accounted for about 17% of our 25% consolidated growth. But more importantly they were a big driver of profit growth in the quarter. In August 2013, we acquired the Cardpoint business which allowed to effectively double our UK operation and truly gain proper scale in that market. It also provided us entry into the German market where we see lots of opportunities to grow.

Last year in the second quarter, our European operation which at the time was just the UK generated revenues of 32.6 million and adjusted EBITDA of $5.8 million for an adjusted EBITDA margin of about 18%. This year in the second quarter with the combined UK business is now almost fully integrated as a result of a tremendous effort by our new management team there and a lot of hard work from all of our team, we generated revenues in Europe of $70.9 million and adjusted EBITDA of $16.5 million for the quarter which represented an 118% growth on the top-line and a truly remarkable 185% growth on adjusted EBITDA. Adjusted EBITDA margins for this segment now approach our consolidated margin.

Safe to say the Cardpoint acquisition is doing what we thought it would and thence. And this result is also in the face of substantially higher property taxes in this market from the previous year. This is truly a powerful testament to our ability to successfully execute acquisitions from choosing the right ones to pursue to appropriate due diligence and modeling and clearly and most importantly to integration and synergy extraction. So as I said at the beginning, the second quarter has been about growth, delivery and execution and for all the reasons we just discussed management is bullish on the opportunities for convenient cash access and for Cardtronics.

Now I would like to turn it over to Chris Brewster for a deeper dive into the numbers.

Chris Brewster

Well, thank you Steve. I want to start with a quick numbers recap. Total revenues for the quarter were $260 million up 25% from the same quarter last year about 17 of those 25 points came from recent acquisitions and the remaining 8 points were organic growth. Those 8 points of organic growth can be further broken down by growth driver as follows.

Growth with new merchants contributed about 1.5 points, this is mostly attributable to the late 2013 new contract wins particularly H-E-B and Timewise which together added about 500 terminals to our fleet.

Secondly growth in our surcharge free bank branding and managed services offerings accounted for about 2 points of that organic revenue growth. Thirdly, an uptick in our equipment and value added retailer sales, equipment sales contributed about 1.5 of organic growth to the 8 points. Exchange rates, particular the British pound to U.S. dollar exchange rate drove about a percentage point of that 8% figure. And the remaining 2 points are mostly attributable to new machine adds at our existing national retail customers and higher transactions at those locations.

Moving down to P&L notch. We continue to be able to leverage our scale to drive cost savings and improve gross margins. Gross margins in our core ATM operating business were up about 90 basis points year-over-year and that was accomplished even though we had about 100 basis points headwind from higher hedging costs from new interest rate swaps that took effect in January of 2014. That 90 basis points of margin gain in the ATM operating business was diluted a bit by the fact that we had outsized growth in our lower margin equipment sales business such that consolidated margins were up about 40 basis point on the top P&L. However I think this ability to grow core margins significantly in the phase of headwinds illustrate again the underlying strength of the business model here at Cardtronics.

Revenue growth and gross margin expansion contributed nicely to adjusted EBITDA which totaled about $65 million for the quarter up 20% from a year ago. The slightly lower adjusted EBITDA growth rate when compared to revenue is attributable to the effect on SG&A expenses of some significant platform building investments we’ve made over the last year and our effort to enable sustained double-digit revenue and profit growth in the future.

As a reminder, late last year we created a new function called the Enterprise Growth Group led by David Dove. We’ve added some cost in this group over the past year to support a variety of growth drivers including staffing to handle acquisitions in corporate development, staffing for product development and increased focus on financial institutions sales and also global account development. We now do business with numerous global brands and we are beginning to sale on a global basis.

We’ve already started to see some dividends from this group and I think the new product delivery will start to show up on the top-line in the next 12 months or so. We also spent money to significantly strengthen our information technology capabilities both in terms of bringing new products to market and in hardening our operating infrastructure, and we spent money on finance to support future growth with transactional, analytical and reporting horsepower.

Moving farther down to P&L. Adjusted earnings per share for the quarter totaled $0.61, up 24% from $0.49 a year ago. So adjusted EPS was up somewhat more than the adjusted EBITDA in percentage terms as we’ve been able to keep interest costs down. Solid EBITDA margins drive strong cash flow and that helps keep debt balances in check and that helps keep interest expense down.

On the balance sheet, total debt outstanding as of June 30 was $474 million or $541 million if you include the portion of our convertible notes that are accounted for shareholders equity under U.S. GAAP. This balance is down about $20 million from where it was at the end of last year. Net debt to adjusted EBITDA at the end of second quarter pro forma for 12 months of cash flow from last year’s Cardpoint acquisition was about 2.0 to 1.

Earlier this month we launched and priced a $250 million high yield bond offering with a 5.8% interest rate and an eight year maturity. And at the same time we issued a tender offer for the remaining $179 million of our old 8.25% senior notes that we had outstanding.

We were really pleased to be able to take advantage of historically low fixed rates for long-term debt capital to fund to takeout of our older high cost debt as well as funding upcoming corporate activities including acquisitions. We have called and we'll retire on September 1, of 2014 any of the old bonds that don't respond to our tender offer.

Now you may not see much beneficial impact in 2014 from that debt refinancing, in fact our interest expense guidance is actually up a bit for the year from our previous guidance. We upsized the new bond deal to get more dry powder for our active acquisition pipeline, so we're paying interest expense on additional 5% and 8% debt at the moment and have a lot of cash on the balance sheet right now that is essentially earning almost nothing. With the closing of the call on the old bonds and the closing of the Welch transaction this will resolve itself and we expect to enjoy the benefit in 2015 of effectively having exchanged 8.25% debt for 5% and 8% debt on a go forward basis.

Turning now to guidance. On the heels of a pretty good second quarter, along with better visibility into the rest of the year. We have made some adjustments to our 2014 guidance. Now I'd like to emphasize that this updated guidance does not include any estimated contribution from the Welch acquisition nor any other potential acquisition for that matter after we closed the Welch deal probably in connection with our third quarter earnings call will update full year guidance on a basis that includes Welch.

Now for those of you that are trying to update your models for 2015 before we closed Welch, we wanted to provide some preliminary thoughts to at least qualitatively guide thinking a little bit.

First I'd say the total deal synergies will take some time to harvest as I typically do with acquisitions of this type. On deal synergy timing, this deal, the timing will actually be pushed out somewhat longer than in some of our other acquisition transactions because there are some relatively long-term vendor contracts in place at this company that are going to take some time to roll off. Also I would say the depreciation as a percent of revenue will be somewhat higher than is typical at Cardtronics because much of the equipment at Welch is quite new and volumes are still ramping.

I wouldn't expect much in a way of accretion in 2014 due to the later and year timing of the expected close and the gradual synergy realization. I do expect accretion in 2015 expected to be somewhat modest, but I certainly expect that those numbers will rise in 2016 and beyond and we look forward to giving you more definition around all of that after the transaction is actually closed.

So on that basis, without Welch we've issued revised guidance for 2014 as follows. Adjusting revenue estimates up to a range of $1.5 billion that is 1005 to $1.20 billion that is 1020 due to the year-to-date results, increased visibility into the rest of the year that we now have and slightly higher British pound to US dollar exchange rate. We're also expecting adjusted EBITDA to be in the range of $245 million to $248 million and adjusted net income per share to come in between $2.28 to $2.32 that's based on approximately $44.9 million shares outstanding.

Depreciation expense guidance is unchanged at approximately $75 million to $76.5 million net of non-controlling interest. We're expecting cash interest expense of approximately $18.5 million to $19.5 million and that number could flex a little bit depending on the precise timing of the close of the Welch acquisition. And we're leaving capital expenditure guidance unchanged at around $100 million to $110 million for the year.

So I'll close by just saying that this feels like another strong quarter. We're excited about the prospects for the rest of the year given recent announcements and the other opportunities that we have in front of us.

And with that I'll turn the call back over to Steve for his final remarks.

Steve Rathgaber

Thanks Chris. By way of closing, I would observe that this past week, the Federal Reserve released its 2013 payment study. While I cannot claim to have fully absorbed all the bits and pieces contained in the nearly 200 page document. I found the following observations intriguing and thought I would share them with you.

First, the ATM transaction volumes have demonstrated no clear up or down trend according to the Federal Reserve, but withdrawal amounts have exceeded inflation for each year measured which is from 2009 to 2012. To me that bodes well for volume stability and for our transaction share growth strategies. Second observation is that branch withdrawals over the counter as opposed to ATMs are a $2.1 billion transaction market that may overtime migrate in part to ATMs if branches continue to shrink and branch traffic continues to diminish, only the future will tell on that.

Lastly, there are a $1 billion cash deposits at ATMs in the U.S. that are market opportunity at least at gross level for our new multi-user deposit capability one form of which can be seen in the recent Allpoint deposit announcement. And also these are some of the insights from the report that may impact Cardtronics and view these as favorable.

With that operator, I would open it up for any questions folks might have.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions). With that our first question comes from Andrew Jeffrey of SunTrust. Your line is open.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Thank you. Good afternoon guys. Nice to see the uptick in organic revenue growth. I know there has been lot of focus on that metric. Chris I am wondering if you might be able to drill down a little bit? It looks to me as though same machine cash withdrawal transactions ticked up may be 100 plus bps which along with the growth in ATM operating revenue got you the growth. Could you just geographically talk about what we saw in terms of domestic organic versus rest of world for example?

Chris Brewster

Organic I can in qualitative terms. Organic growth in Germany was double-digits, organic growth in the UK was somewhat stronger than the 8% overall average, organic growth in the U.S. a little under the 8% overall average. Those are probably the headlines Andrew.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Okay. As far as transaction growth Chris could we see the uptick in the U.S. in the quarter?

Chris Brewster

Not in a material way. The same store transaction numbers were fairly similar to first quarter.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Okay. And anything to read into that specifically as far as causality and would you expect the U.S. same machine transaction growth trends to improve? You are doing a lot of things obviously to drive traffic and to address consumer behavior. Should those start to inform the U.S. same machine growth at some point?

Steve Rathgaber

Andrew this is Steve. I think that the answer is not fully understood at this point. But we are developing some points of view and I’ll share them with you. I think there are three forces presently in play that are showing up in the slower growth rates. One is the fact that the prepaid wave of new issuance has peaked certainly and laws of large numbers and smaller size wave of continuing flow have less impact.

Second is just in reading the same newspapers you probably read, retailers have talked about little bit lighter foot traffic this quarter. And I don’t know how that plays in to the mix of things I will say that historically we’ve been obviously recession resistant. But if there is less people going into a store that might have some impact.

But I think the biggest item is the fact that I think banks as they’ve been looking for revenue sources have increased what’s called foreign fees or disloyalty fees. And those are the fees that a bank might charge to a customer of their institution who doesn’t use the banks own ATMs, okay.

So certainly all of our strategies or the vast majority of our strategies are about partnering with banks through branding and Allpoint and other services that hopefully eliminate those foreign fees. But I think there has been in the past year a wave of increases as that’s one of the more invisible fee that they can actually mess with. And I think that might be biting into it. But you know have a bucket of speculation that we are working hard to get better understanding of. But that’s our present thinking on it. But certainly all of the products I've just talked about are all about driving transaction share. And as Chris indicated, we don't expect things to turn on a dime, but over the course of the next 12 months we do expect to see impacts in our financial results begin to show from these and other initiatives that we have underway.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Okay that's helpful. Thank you. And Steve you've alluded to the trend of bank branch consolidation and of course the efforts by banks to call certain unprofitable customers and create this incentive in some cases them to visit the branches. Any movement at all sort of big picture longer term in terms of banks actually thinking about outsourcing their ATM fleets and operations to Cardtronics?

Steve Rathgaber

Well I think that the best way that I could answer that is to say that we have certainly seen over the past several years an interest by banks in partnering with us on off premise fleets that might have historically been something they chose to do on their own. I think in my prepared remarks I shared the CIBC story up in Canada and there is an entity that used to have placements of their own that we've now partnered with on multiple occasion. So that's a form of outsourcing if that's the nature of your questions. As it relates to branch outsourcing of ATMs, that's a whole another kettle of fish. I'm not sure we're interested in going there at any point in the near future, but we're always willing to help anybody with their off premise lead because that plays to our scale strengths and our ability to execute.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Okay. And then one last one if I may. When you look at Welch which looks like a nice deal for Cardtronics. Given Welch's growth rate, could you just comment on sort of how you've gone now you've competed with them head-to-head and whether they've been a pretty good competitor and so one of the fringe benefits if you will of doing that deal is taking out a pretty robust in market competitors. Is that the right way to think about it?

Steve Rathgaber

I'm not sure that is the right way to think about it. That certainly I suppose some would think that could be a byproduct. But we have a long history of rollup strategies. We think that Welch was a certainly a formidable competitor, but their strengths were in the mid-market. And we certainly can't claim to have seen them in many of the places we operate in, we would occasionally run into them as a competitor. And as you know there was certainly other competitors out there in the marketplace, but I think that the benefit from Cardtronics management perspective is that Welch represents a continuation of a very successful rollup strategy for Cardtronics. Perhaps the most amazing rollup strategy I've seen in my career in terms of natural synergy extraction. And in this particular case, it comes with the very valuable added benefit of focus on the mid-market where we think there is a fair room for growth for us as opposed to our national enterprise accounts which has been the historic footprint that has been our focus.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Great, thank you.

Operator

Thank you. Our next question comes from Bob Napoli of William Blair. Your question please.

Robert P. Napoli - William Blair & Company

Thank you and good afternoon. I'm sure you won't comment on rumors but I mean 15 minutes before the close an article came across, SkyNews suggesting that the Co-op Group in the UK has signed an exclusive deal with Cardtronics to buy their security group. I mean I am looking at the article and I just wondered if you could comment on that at to what extent strategically you might be able to comment on that or to say that this is a bad rumor. Whatever you could say.

Steve Rathgaber

Here is what I can say. If we were doing it, I would say we couldn't comment on it, if we weren't doing it, I would say we couldn't comment on it, what I'm going to say is we can't comment on it. Thank you for your question.

Robert P. Napoli - William Blair & Company

Strategically, would something like that I guess you do in-source the armored car portion of your business so that is something that and you could some of that kind of business is something you could have been interest in.

Steve Rathgaber

You know that we in the UK have a different model than we have in some other markets and we’ve grown that organically pretty much from scratch so that’s what I can say about that and it’s served us well.

Robert P. Napoli - William Blair & Company

Okay thank you. The Allpoint deposits business as you rolled I mean how many ATMs are currently have the capabilities of doing deposits and how much of an investments do you need to make, do you intend to have the deposit taking capabilities in Allpoint ATMs I mean you have what’s the cost to get there?

Steve Rathgaber

So no we don’t intend to have deposit taking capability at all Allpoint ATMs as you know that’s a very large number. We presently have the capability at 2500 ATMs largely located at 7-Eleven I do see that number growing overtime perhaps within 7-Eleven perhaps outside of 7-Eleven. But I definitely see an expanded number, I think that expansion would happened as part of other strategic initiatives that might be driven for example by EMV upgrades or something like that as we replace gear in the ordinary course or other contract renewals that might be in play from time to time provide an opportunity to roll out a certain gear. I think there is an opportunity for us to work with strategic partners to place deposit taking ATMs in locations that will make those locations special and I think that is an advantage we worked hard to build and I think it will be a very powerful tool for us going forward.

Robert P. Napoli - William Blair & Company

So we’re going to see a lot more ATMs I mean when you say you’re ruling this out I mean you have the capabilities I guess in the old -- the high functionality units and I mean are you rolling it out to more units are you going to support this with advertising or -- what is going to be different about?

Steve Rathgaber

So first of all it’s going to roll out towards the latter part of this year so that’s first consideration. Second we have not only the old V comps but we have a fair number of newer NCR devices that we’ve deployed in 7-Eleven that have deposit taking capability and I would expect overtime a number like 5000 or 7000 ATMs overtime that take deposits be possible sure, is it a number like 20,000 or 25,000 probably definitely not. But a 2500 it is the largest deposit network in the retail locations in the country and we’re pretty happy with that as a start and by opening up the pipe to many more banks than have had access to it before that can really use it to differentiate their services to their customers we think we’re doing something very valuable here and we think it’s perfectly consistent with the evolution of self service banking and with the evolution of the trajectory of branch closings.

Robert P. Napoli - William Blair & Company

Thank you. Last question on CapEx, you invested $42 million I think year-to-date your target is a $100 million to $110 million so you have a lot more investment to do in the back half of the year is that primarily how much of that is for adding new ATMs replacing ATMs, how much of it is growth CapEx versus upgrading EMV upgrades maybe some thoughts on because you do have a much heavier CapEx load in the back half?

Steve Rathgaber

Well there are a number of elements to it, Bob we have, we’re going to have some ramp in CapEx in IT as it relates to product development, Steve talked about 1600 new locations contracted within the quarter across markets and that implies CapEx going in the ground and we’ll have some activities underway with regard to EMV and other technology matters. So I mean at this point I don’t expect that numbers to be significantly different than guidance which suggest that the rate we spend would ramp up somewhat in the back half.

Robert P. Napoli - William Blair & Company

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Ramsey Al-Essal of Jefferies. Your line is open.

Ramsey Al-Essal - Jefferies

Hi guys. I have a question on the timing of these the new sort of installs that you announced with all these great deal wins this quarter. I know it’s sort of a more fragmented bunch than maybe what we're used to with Valero deal or some of the other deals which brings sort of bigger chunks of ATMs. But can you just speak a little bit to when those are going to roll on to -- when we’ll feel the P&L impact of all these new installations?

Chris Brewster

Well I think in the case of Fresh & Easy we are pretty much on track for that planning to know that it’s a third quarter. I would caution that those are greenfield sites those are brand new stores. So they might not enter with the same volume day one that site that’s more well-conditioned might. And I think that essentially for the vast majority of the locations they'll all certainly be in by the fourth quarter for as I understand certainly the Central England ones which certainly be new by the fourth quarter and I believe the Canadian ones as well.

Ramsey Al-Essal - Jefferies

Great. Last quarter you called out a strong sales pipeline in Mexico I believe. I was wondering if you still feel that’s the case? And sort of give us a little color on in terms of what types of deals you’re looking at there? And sort of more generally, are you feeling more comfortable that you have a roadmap back to sort of healthy growth in the Mexican market or is it still going to be sort of pressured for some time?

Steve Rathgaber

Yeah. I think memory maybe deceiving here, but I think I probably focused a comment more on Canada in terms of pipeline. Although I may have commented the fact that we have some opportunities in Mexico that if they come to fruition and I still believe they will, I always go back to my timing commentary on pipeline that they’ll help us produce a model that has once again feeling better about the way we do business in Mexico than we presently feel.

So I know till I know but I feel that there are opportunities to do business in Mexico that are worth doing. And I think we are on the pathway to do that. And it is dependent upon closing certainties of the business and those piece of business continue to operate in a broad pipeline that as I indicated in my prepared remarks has some good heft to it between now and in to next year.

Ramsey Al-Essal - Jefferies

Great. That’s helpful. One last one for me. Could you give us a progress report on DCC on the direct currency conversion product? I know you’ve got this nice set of ATMs you're about to roll on you have Welch's kind of book that you're going to take over at some point here. Do the new locations make a good fit here for DCC as your inventory sort of locations that you maybe haven’t rolled this product out to yet in your own book or whatever you're kind of bringing online? What kind of potential do you see moving forward in terms of that product?

Steve Rathgaber

Well, I would offer the following perhaps not too clear commentary. But I think there is decent potential for that product. I know there is more we can do in the UK and we are working on that.

In the U.S. Chris referred to in his comments some of the investments we’ve been making in platform and other things. Right now we are in several situations where we can either put one product on an ATM or another but not both. And one of those might be DCC and other might be multi-bank branding or something.

We are approaching a point with our platform investment where we will be able to put almost everything on almost all ATMs. And that is while you see some capital numbers that Chris referred for growth on the back half of the year in terms of investments by Cardtronics in technology. And as those investments take hold over the coming months and in to next year we will have more and more flexibility to do things that quite frankly we couldn’t do before.

A simple example, as we are rolling out something called One Image that we now have about 25% of our U.S. installed base operating on our owned base. We can now issue changes to screens across the entire customer base whereas before we couldn’t do that with the system architecture that we had. That might sound inane but we had been living with some rolled up systems for a long time.

The investments we’ve been making that you see showing up in SG&A and in capital are going to truly provide a very high quality, very flexible platform as we navigate our way into next year and I am one of the reasons I'm extremely bullish on our products strategies and our branding strategies is because we will have just really good flexibility for making screen modifications as we sit here in Houston versus having to run to every ATM for every little thing.

Now we will still have to run to the ATMs for certain major events, but we are appealing a way at that cost and appealing a way at that restriction and you're looking at a company that by the day gets more flexibility to offer better quality services in a quicker fashion.

Ramsey Al-Essal - Jefferies

Great, that's very helpful. And that's all from me.

Operator

Thank you our next question comes from Mike Grondahl of Piper Jaffray. Your question please.

Michael Grondahl - Piper Jaffray

Yeah thank you guys. What do you think was one or two factors that you won the 240 ATMs at BI-LO/Winn-Dixie.

Steve Rathgaber

Well it's I'd like to, I'm not the customer so it's hard to know exactly what was being thought. But I think we had a good track record with Winn-Dixie. I think they respected our service offering and our value proposition. I think they respected our economics customers always like those if there are good economics. And I think that our discussion of strategies and what we've been trying to do and what we talk about on these calls and with any customer that we can is appealing to folks. And I think we have the credibility and the believe ability to execute on it, which might be harder for certain other organizations just because of their time and market or their capability set. The fact that certain other entities might not even have their own operating platform for example.

So it could be a variety of things. I suspect it's in that range of things and couldn't really comment more than that about the relationship they had with the entity. But I like to thank it's because we're really, really good.

Michael Grondahl - Piper Jaffray

Great. You updated us on a couple of products, but any update on the multi-bank branding product or i-design.

Steve Rathgaber

Yeah that's all part of this, I view the term I believe on the phone before about this project we have called the great enablement sort of like The Great Escape, Steve McQueen movie there. But the great enablement has a four or five pieces attendant to it. One of the pieces is this one image thing I was just referring, another is getting certain software loads out to the ATM, another is doing some other upgrades. And that project is very actively engaged and it feeds right back into my comments to the earlier question from the other individual about you're talking to a company that is getting more and more flexibility and stronger and stronger in capabilities to deliver real-time value.

We have several thousand ATMs now migrated to the activate capability don't yet have the -- design capability on all of those, but that's one of the key software elements along with One Image that creates the ability to do the multi-branding in a more robust fashion. Having said that the ALLTM program with the screen top the ATM that is a very eye catching vibrant and colorful experience that has everything from weather and temperature and stock market reports like an elevator sort of does to branding and coupon and values. Those things will be yet another enhancement to our ability to message branding on behalf of the financial institution. Along with by the way the potential promotions from the mobile application from ALLTM that could further enhance on the phone, the banks brand as another value delivery mechanism for the bank to its customer that we are merely providing convenient cash access and great value exchange and coupons for at the ATM.

So that's an evolution every journey Mike that's going to continue and it's all about taking a fleet of 100,000 plus ATMs post Welch and feeding the right machines at the right time in the right order to optimize delivery. This is a big fleet and the Elephant doesn't dance easily, but the software capabilities and the investments we're doing are enabling the Elephant to do perhaps a pretty nasty little tap dance. So we look forward to continuing to execute on that.

Michael Grondahl - Piper Jaffray

Great. Thanks a lot guys.

Steve Rathgaber

You're welcome.

Operator

Thank you. Our next question comes from Regi Smith of J.P. Morgan. Your question please.

Reginald L. Smith - J.P. Morgan Securities

Hey guys thanks for taking my questions. I guess you guys mentioned kind as kind of I don't know it's really throwaway comment and talking about your new deposit product you mentioned that it would be rolled out at 7-Eleven. And I was just curious if you could kind a talk about how that decision or how that agreement came to be. And I have a few follow ups, thanks.

Steve Rathgaber

Sure. Well it's not a rocket science in the following sentence where we had the initial capabilities 7-Eleven has always had the most comprehensive fleet of ATMs in terms of feature function. And it's as we've replaced some of the old devices there with new devices we put in the same capability. So it's the natural starting place. I mentioned it only as evidence of continuing investment in that relationship and continuing efforts to drive new and fresh customers into that store with new services that hopefully strengthen the relationship more and more.

Reginald L. Smith - J.P. Morgan Securities

Got it, that make sense it makes a lot of sense. You also early on in your comments you mentioned there were pockets of where you guys have raised surcharges and I was just curious as you look across your fleet of ATMs be it domestic and international. Do you kind of see that as an opportunity or is there incremental opportunity there on the pricing side. And then as you kind of think about this is early obviously as you think about the Welch portfolio and how does pricing kind of stack up relative to your base and maybe some other providers in those particular regions. Thanks.

Steve Rathgaber

So I would say that the surcharge increase comment was a limited market. I think it was not a U.S. event. I would say that as I think we've commented in the past that is inflation takes route and we've seen certain banks in the U.S. go to $4 and $3.50, we're certainly well below that. We are not in a hurry to lead the market on that particular item anytime soon. But the feedback we've had of certain banks that have done that is they have not seen a material drop in volume and we keep an eye on that sort of things. So that's a one of our potentially growing hopefully in terms of opportunity dry powder sort of items that we might look to leverage overtime one of the growth drivers in that happy family of growth drivers.

So to be determined when it's right in the U.S. market, certainly retailers aren't necessarily looking to raise those fees if they think it's going to impact foot traffic. So in more challenging time for retailers that can be a factor that presses back on being aggressive with them. And as it relates to Welch I think probably best to talk about that when we get Welch. I mean it's difficult for me to begin talking about policy and opportunity there other than broadly before the close. So I would just say that we'll obviously be studying the opportunities there.

Reginald L. Smith - J.P. Morgan Securities

Got it. Thanks a lot.

Operator

Thank you. (Operator Instructions). The next question comes from Tim Willi of Wells Fargo. Your line is open.

Timothy Willi - Wells Fargo

Good afternoon guys. Just one question I think it's been touched in varying ways. But in terms of the value added strategy and what David is doing what's the products in i-design et cetera. Could you comment I guess in terms of how discussions with current customers and maybe prospects have evolved as you sort of solidified the product map and communicated more and more what you plan on doing. Are you seeing I guess a higher levels of interest and more genuine discussions about bringing those products into ATMs, first? And second of all are you engaging or finding that you are engaging with different people at a retailer than you typically do or you finding more like the marketing or the digital or different types of folks that want to understand just as opposed to your typical points of contact?

Steve Rathgaber

Yeah. I think that’s a great question, Tim. It is absolutely true that we are engaging customer dialogue different than we have in the past. It is absolutely true that for our largest customers we are engaging at different levels in the organization than we have ever dealt with before.

We've often come in through the treasury sort of function and now we are dealing with the Chief Innovation Officer at the retailer or the marketing officer sitting at the table with us perhaps still with the finance side of ours. But the table has grown in size. And we are sitting with the promotions people to coordinate when promotions might happen. We are having dialogues that I only dreamed four years ago in terms of potential.

So that’s a definite change. One way to crystallize it is when I talk about the Siteline product offering, the notion of plugging into the retailer's royalty program with data sets that can be cross pollinated is very exciting to the retailer, very exciting. And the notion of leveraging the retailer’s royalty program through the ATM is very exciting. That changes the conversation from how can I get another penny out of your pocket to how can we grow sales. And that transition in dialogue is underway. That’s not to suggest that they are going to stop talking about pricing. But that is to suggest that the conversation is richer, deeper, broader and much more focused on what’s really important to the retailer which was driving their top and bottom lines.

Timothy Willi - Wells Fargo

Great. That’s all I had, everything else has been addressed in the prior questions. Thanks very much.

Steve Rathgaber

You’re welcome.

Chris Brewster

Thanks Tim.

Operator

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

Steve Rathgaber

Well, I would just say thank you as always everyone for your interest in Cardtronics and enjoy the rest of your summer.

Operator

Thank you, sir. And thank you ladies and gentlemen for participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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Source: Cardtronics' (CATM) CEO Steve Rathgaber on Q2 2014 Results - Earnings Call Transcript
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