Cardtronics (CATM) Steven A. Rathgaber on Q4 2015 Results - Earnings Call Transcript

| About: Cardtronics, Inc. (CATM)

Cardtronics, Inc. (NASDAQ:CATM)

Q4 2015 Earnings Call

February 04, 2016 5:00 pm ET

Executives

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Steven A. Rathgaber - Chief Executive Officer & Director

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Edward H. West - EVP Finance

Analysts

David E. Ridley-Lane - Bank of America Merrill Lynch

Kartik Mehta - Northcoast Research Partners LLC

Christen Chen - Jefferies LLC

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Robert P. Napoli - William Blair & Co. LLC

Timothy Wayne Willi - Wells Fargo Securities LLC

Gary Frank Prestopino - Barrington Research Associates, Inc.

Operator

Good day ladies and gentlemen, and welcome to the Cardtronics Fourth Quarter 2015 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 follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Phil Chin, EVP Corporate Development. Please go ahead.

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Thank you. Good afternoon, and welcome to Cardtronics fourth quarter conference call. On the call we have Steve Rathgaber, Chief Executive Officer, Chris Brewster, Chief Financial Officer and Ed West, EVP Finance. We will start off with prepared remarks and then move to Q&A.

Before we begin, a 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. The statements on this call are made as of the date of this call and are based on current information even if subsequently made available by us on our website or otherwise. We assume no obligation to update any forward-looking statements made today to reflect events that occur or circumstances that exist after the date on which they were made.

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.

With that, I will turn the call over to Steve.

Steven A. Rathgaber - Chief Executive Officer & Director

Thank you, Phil, and welcome everyone. Cardtronics for the fifth consecutive year delivered double-digit growth in revenue and adjusted net income per share. We reached a meaningful milestone of $1.2 billion of revenue delivering 14% top line growth over 2014. And recall it was only a year ago that we broke the billion mark for the first time.

As part of a brief look back on the year, I want to spend some time recapping performance highlights delivered by our durable growth engine before turning to some industry trends and how they may impact us in 2016 and beyond.

So what drove the growth? Well, given the consistency of our model there should be no surprise that it was the usual collection of performance categories. In aggregate, we grew our owned ATM footprint by 6.5% with new sales and acquisitions across Europe and North America. Now, we started with some housekeeping to eliminate 600 unprofitable units in Mexico, and then proceeded to add 4,200 units in other markets. These split between 60% organic and 40% acquisition.

Importantly, three quarters of the growth came from outside the U.S. demonstrating our growing international muscle and geographic diversification. We produced new revenue generating branding relationships for more than 2,200 locations, almost doubling the number signed from 2014. We grew revenue at owned ATMs with strong sales performance with our surcharge free network Allpoint beating last year's new card signings by more than 50%.

Branding deals generated new traffic and revenue as well. And of particular note, we are seeing accelerating growth in the high teens in the payroll card segment of our Allpoint network.

We closed on CDS in the U.S. giving us more processing muscle, more transaction scale and strengthening our technical resources. And we completed the conversion of the Co-Op ATM fleet, which was acquired at the end of 2014. We are very pleased with these acquisitions.

Now, all of this shows up in the fourth quarter year-over-year comparison in the reported revenue growth of 7%. But look underneath that number, and the strength of our organic performance truly emerges. Our core business is best represented by the ATM operating revenues measure.

If you take that performance on a constant currency basis, you have 14% growth in revenues in the quarter with half of it organic and half of it acquired. Chris will take you through that detail on a more comprehensive basis, but it is well worth repeating in my mind.

The bottom line for Cardtronics and our shareholders is simply this – our revenue growth engine is strong, active and productive. The drivers of that growth today are the same drivers as yesterday, but they are strengthened by our growing scale, our growing geographic reach, enhanced processing and servicing capabilities from our recent acquisitions and our growing suite of products.

The result is currency-adjusted organic growth rates for 2015 of about 7%, and we anticipate continuing a similar organic profile for 2016. The second valuable element of our model relates to the margin leverage naturally inherent in our business. Gross margins improved 250 basis points over the prior year.

What drove this? Our increasing scale coupled with the network effect of our business model combined to drive increased traffic and revenue to our ATMs. Allpoint branding, surcharging, dynamic currency conversion and other product initiatives are delivering. The headline here is the best same store revenue growth per owned ATM of nearly 5% in the U.S.

The bottom line for our shareholders is simply this – scale plus the network effect of our products provide a long runway for continuous margin improvement. This year's 250-basis-point improvement is more evidence of the strength of our model. So our model is performing as advertised, and it is doing so year after year and we are pleased with the consistency and the durability.

Now, let us use this look back on 2015 and see how emerging trends from 2015 might impact Cardtronics in 2016 and beyond. I have stated that Cardtronics is a growth company in a growing global industry. Industry statistics continue to indicate that both ATM placements and withdrawal transactions are growing in the high-single digits around the world.

We are not claiming that growth is happening evenly, but we are seeing some research that suggests emerging trends in the retail banking business are blowing favorable tailwinds toward the Cardtronics model in several of our current markets.

I would like to focus on three trends that are frequently discussed in the industry. These are branch transformation with a drive towards self-service, branch closings in support of challenges to the banking core structure and mobile payments.

Branch transformation has, as a core element, self-service in the use of ATMs. So what is the impact on Cardtronics? According to Mercada's (07:22) 2015 report about self-service ATMs and other channel banking, this trend is unsurprisingly appearing to stimulate ATM use.

Banks are actively guiding the consumer to use ATMs more, as teller staff dwindles. We believe that over time this translates to more traffic outside the branch and more need for off premise branded ATMs to provide a convenient, competitive distribution network.

Research also shows that users of mobile banking apps, another element of self-service outside the branch are more likely to use an ATM than customers who don't use that channel. Our view is that a behavioral shift to self-service is good for Cardtronics and our shareholders.

Turning to branch closings, data indicates this trend is quite real and continuing. The FDIC reports that branches nationwide declined 1.5% in the year prior to its report of last June, and 6.3% overall since 2009. So, how does Cardtronics win? If FI branched ATMs vanish, consumers are pushed to our retail ATMs for convenient cash access.

When banks need to replace their loss distribution due to the loss of physical branch presence, they can turn to our convenient ATM network for branding. So, the bottom-line for our shareholders is the trend of reduced branches in the market is a positive for Cardtronics.

The third trend of note and commonly discussed is mobile payments. Here's what we know. We funded a study recently that shows that millennials are embracing cash usage along with other payment methods, but nearly half of the millennials surveyed said they are more likely to pay with cash now than they did a few years ago.

A Bankrate survey last November about planned holiday purchases found that cash came in first place as the preferred payment choice at 39%, followed by 31% intending to use debit cards and 22% credit cards.

Mobile payments definitely have a cool factor and cool factors breed initial interest, but once the cool factor passes, then the search for a reason to really change your behavior as a consumer begins.

So, there's no question that there will be some adopters and perhaps over time a value proposition emerges that has the appeal necessary to move market share, but the message for new payment types seems to me to remain as consistent and steady as the Cardtronics business model. It is difficult to change consumer payment behaviors.

Cash is still cash. The consumer is still a consumer, and millennial or other – and cash is chosen by the majority of payment users for a big part of their payment mix. I submit that share will begin to shift when there is actually a better payment experience, not just a different payment experience. Cardtronics and its shareholders should benefit from this slow growth of mobile payments in the physical world.

So, what is 2016 about for Cardtronics and how will we create value for our shareholders going forward? Well, at the risk of being both consistent and repetitive, just like our business model, we're going to do what we always do. Our focus will be on quality execution of our model; specifically, we will find new profitable, attractive locations to place ATMs in current market and new countries.

We will tirelessly work with our bank customers, our retail customers, and the card and mobile phone carrying consumers that we all share to guide consumers who need cash to the most convenient ATMs available. We will accomplish this with our classic proven products including branding, Allpoint, and our pointing services like our locator search engine.

We will ride favorable tailwinds of branch closings and self-service oriented consumers and work to create the best ATM experience for them, so getting their cash while they shop is simply the logical thing to do.

We will continue to build proof points of our ability to drive sales to our retail partners who allow us to serve in their stores. And we will focus a great deal of energy on U.S. EMV preparedness.

We will continue to work to find the silver-lining in that expensive and distracting EMV cloud by leveraging the event for an active upgrade of our fleet and capabilities, all of which should give us our best performing – our best platform for future function launch in our corporate history as we head into 2017. We look forward to a good year.

Before I turn to Chris Brewster for his traditional dive into the financials, I wanted to touch on the transition for this important position of trust at Cardtronics.

Early in 2015, we shared the news that Chris had announced his planned retirement, and we initiated a comprehensive search for his replacement. In December, we announced that we had found that successor to take the financial reigns from Chris as we move to the next era for Cardtronics and we're so very excited that Ed West that has joined our team.

Ed brings a rich set of public and private C-suite experience, both at the financial and executive helms, and you'll have a chance to hear from him after Chris' remarks on our fourth quarter performance. So this will be Chris' earnings curtain call, if you will. After Chris' comments, he will turn the line over to Ed for some brief introductory remarks.

Now, I would like to turn it over to Chris to close out his financial assessment of the quarter and deliver for a final time guidance for the coming year.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Thank you, Steve. I'd like to just start by highlighting a couple of factors that are going to be prominent in our discussion of 2015's numbers and in the 2015-2016 guidance discussion.

The first of those factors is currency exchange rates and this is becoming ever more important now than in the past, because about a third of our revenues now originate outside the United States, and we're particularly sensitive to movements in the British pound given the size of our U.K. business.

The second factor relates to the revenue and profit contribution we had in the fourth quarter of 2014 and in the year of 2015 from businesses that we have since divested. Divestitures are a new matter for us. We haven't done that before, so it deserves to be highlighted, and we believe you need to understand these two factors and the effect that they have on our numbers in order to have a sound basis for evaluating our underlying business performance, so I'll highlight these as we go through the numbers.

Starting with fourth quarter results and now I'm referring to the revenue breakout shown on our consolidated statement of operations that's in the earnings release. Total revenue was $303 million, up 7% from the fourth quarter of last year, or if you put it on a constant currency basis, up 9%.

If we look at just the core, high margin, ATM operating revenues of $292 million, thereby, excluding our lower margin ATM product sales and other revenues, we see that ATM operating revenues are up 12% year-over-year in the quarter or 14% on a constant currency basis. There's noise in that product sales and other revenue line, which I'll come back around and explain in a moment.

Of that 14% constant currency growth in ATM operating revenues, about 7% of that was organic and the remainder driven by acquisitions. The two primary drivers of that 7% organic figure are the performance of our U.K. business, which continues to do quite well, had another quarter of double-digit revenue growth, driven primarily by additions to our unit count through growth with new merchant accounts.

In North America, our surcharge free offerings Allpoint and bank branding grew nicely, and they were a key driver. While the same-store transaction increase in the quarter in the US was in line with recent quarters, that is up about 8/10 of a percent in the fourth quarter of 2015 versus about 0.5% in the third quarter of 2015.

Same-store revenues were up just under 5% in the fourth quarter of 2015 and they benefited from new branding and Allpoint driven revenues along with some selective surcharge rate increases. The same store figures I'm quoting here do exclude, as we have in the past, the effect of the recently debranded Chase locations.

The balance of that 14% growth in ATM operating revenue was from two acquisitions, the CDS acquisition, completed in July of 2015, and the Co-op Food ATM estate acquisition in the U.K., which closed in November of 2014, but did not fully migrate across to us until April of 2015. So in summary, 14% growth in our core ATM operating revenues on a constant currency basis, half organic, half by acquisition.

Now I'd like to back up a step and explain that sharp decline in the ATM product sales and other revenues line that you see in the P&L in the press release. This decline is due to the sale of two components of the Sunwin business that we had bought in the U.K. in late 2014.

We acquired Sunwin primarily for its ATM field maintenance and ATM related armored car transportation operations which we merged in with our similar legacy operations in the U.K. to reduce costs by driving density and scale, and to get the capacity we needed to serve the large ATM fleet that we bought from the Co-Op.

Sunwin owned two businesses that we decided were not strategic to us, and we sold them both. The manned guarding business which involved the renting of security guards was sold in February of 2015 and the retail cash and transit business which involves transporting cash to and from retailer stores was sold in July of 2015.

Also, while Sunwin was serving ATMs operated by Co-Op Bank, revenues for that service were third-party revenues and reported in this line on the P&L. Once we completed the transition of the roughly 2,000 Co-Op ATMs to the Cardtronics platform, those revenues for those services became intercompany revenues and are thus no longer included in our consolidated P&L.

To quantify this for you, we recorded $13 million of third-party revenues at Sunwin in the fourth quarter of 2014. We only recorded $500,000 in the fourth quarter of 2015 and across all of 2015 we recorded about $25 million of third-party revenues at Sunwin on those divested businesses. So if you strip out the fourth quarter Sunwin revenues from both periods, what you would conclude is that our ATM equipment sales were up rather nicely.

Remember that full year 2015 revenue number of $25 million when we come to talk about 2016 guidance. Due to this noise in the ATM product sales and other revenue line, we think that focusing on ATM operating revenues at this point is particularly warranted and just to be clear, one more time, that line was up 14% on a constant currency basis, half organic and half acquired.

Moving down the P&L a bit to the gross margin line. Gross margin for the quarter came in at 35.5% up 250 basis points year-over-year. That's consistent with the 240 basis point expansion that we saw in quarter three and the drivers of that margin expansion were similar, streamlining our U.K. CIT infrastructure to integrate Sunwin and get those scale efficiencies, continuation of synergy execution on the Welch acquisition and ongoing margin accretive contribution from the CDS acquisition all helped us generate that margin gain.

Adjusted EBITDA at $73 million was up 12% from last year and similar to last quarter, our level of SG&A spend reflects ongoing reinvestment in the business. We're making what we think are prudent and calculated investments in people, product and infrastructure that we believe will yield returns later next year, and in the years following, or later this year, rather, and in the years following, but right now, we're on the frontend of the investment cycle where the strategic and financial benefits are not yet there to offset the spend. We look forward to speaking more specifically about these investments as we get further into execution mode.

This elevated SG&A spend will continue through the first quarter of 2016 and partially into the second quarter thereafter SG&A should revert back to early 2015 levels as a percentage of revenues. Adjusted net income per diluted share was $0.71, up 11% year-over-year. That figure includes about a $0.03 headwind from foreign exchange rates and about a $0.04 headwind from the elevated SG&A expenditures that I talked about just a moment ago. So absent these two items, we would have delivered about something in excess of 20% EPS growth in the quarter.

Turning to the balance sheet, we continue to have strong liquidity, modest leverage, plenty of access to capital. Total debt outstanding at the end of the quarter was $575 million. That's down $37 million over the course of the year, even though we spent $80 million on the CDS acquisition, and $142 million of CapEx during the year. This obviously reflects the continued strong cash flow generation characteristics of this business.

At year end, we had $91 million drawn under our revolving line of credit, leaving us $284 million in unused capacity, and that debt structure is truly long-term in nature with the bank revolver, the convertible debt and our 5 1/8% notes due in 2019, 2020 and 2022 respectively. Net debt over adjusted EBITDA at December 31 was two times, down from about 2.3 times at the end of the September quarter.

Now let me dive into 2016 guidance. And I'm going to start at the bottom of the P&L, and then come back up to the top. And start really with a look at the 2015 baseline. Now we sold businesses that earned about a nickel a share for us in 2015. In 2015's P&L was also advantaged by about a nickel per share by 2015 exchange rates that were more favorable than the rates we're anticipating in our planning for 2016.

So you can think of our 2015 baseline in terms of earnings per share as the $2.88 that we reported today, less $0.10 for those two factors, suggesting a baseline of $2.78 as a comparison point. Based on – our guidance says we're expecting adjusted net income per diluted share to be in the range of $3 to $3.13 in 2016 on 45.8 million diluted shares outstanding and that would imply EPS growth of about 10% over that baseline.

Now, coming back up to the top and looking at revenue, we're guiding to a range of $1.24 billion to $1.27 billion in 2016. This figure incorporates recent exchange rates which in comparison to 2015's rates reduced revenue by about $28 million. As I said earlier, the Sunwin businesses that we divested contributed about $25 million of revenue in 2015. That's not with us in 2016. So if you adjust 2015 for these effects, we would have reported about $50 million less revenue in the year, we would have reported about $1.15 billion instead of the actual $2 billion we reported today.

The midpoint of our 2016 revenue guidance is about 9% above that level and the organic component of that expected growth is in the 6% to 8% range that we would typically target. Gross margins expected to come in, in the 35% to 35.5% range versus the 34.8% we booked in 2015. We've recently delivered strong gross margin expansion. We're focused on continuing that. But we do have to contend with a rising interest rate forecast in our forward guidance and we're assuming in guidance that the fed bumps interest rates three or four more times before the end of 2016.

On adjusted EBITDA, we're expecting $315 million to $325 million. At the midpoint, this is about an 80 basis points increase in EBITDA margin over 2015. That reflects the continued driving of scale efficiencies and operating leverage but also absorbs the elevated SG&A that we're expecting in the early part of the year, as mentioned previously in comparing adjusted EBITDA to 2015. If you did similar adjustments on the 2015 base for currency, and the divested businesses, you would drop the 2015 base from $296 million down to $286 million. So our guidance implies growth in EBITDA over that number of about 12%.

We expect depreciation expense to be in the range of $94 million to $96 million up from $85 million in 2015 due primarily to new locations and our fleet upgrades that are underway. The 2016 capital expenditure budget is in a range of $150 million to $160 million versus $142 million in 2015.

We have a robust new business pipeline which accounts for about 45% of that CapEx, mostly for new ATMs and their installation costs. About 35% of the CapEx relates to equipment replacements and upgrades in existing locations.

Some of this relates to EMV, some of it relates to enabling our fleet to run a broader set of revenue generating products. The remaining 20% is infrastructure spend including some significant spend in our U.K. armored car operations to gain operating efficiencies there.

So in summary, 45% of the CapEx is for new locations, 55% is for equipment upgrades in existing locations and for infrastructure. And I would say that I expect to see that 55% slice reduced considerably in future years, as we'll come out of 2016 with a very modern fleet. Substantially, all of our U.S. fleet will have been upgraded or replaced in 2016 – in 2015 or 2016, and we should need less of that type of CapEx in future years.

Coming back to the P&L, we're expecting cash interest of $18 million to $19 million. We continue to use a long-term non-GAAP tax rate of 32%, and expect the GAAP tax rate to be fairly similar in 2016. The budget's based on an average exchange rate of $1.45 per British pound, and the other exchange rates we're using are shown in the press release.

From a cash flow perspective, we're currently projecting that cash taxes in 2016 would be $23 million to $25 million. So even after what we think will be a pretty heavy CapEx year, we expect over $100 million of free cash flow after CapEx in 2016, that we can use to reduce leverage or fund acquisitions or otherwise drive shareholder value.

So I'd like to close off the guidance discussion with a comment about the distribution of earnings across the four quarters. We expect that the first quarter will be our weakest year-over-year comparison. The businesses we divested contributed about $0.02 in the first quarter of 2015 that we won't have in 2016. And using current exchange rates in the first quarter of 2015 would have dropped EPS another $0.01 or so.

We also expect continuation of the elevated SG&A into the first quarter as referenced earlier. Consequently, we expect the year-over-year earnings increases to occur primarily in the back three quarters with the first quarter being relatively more flattish year-over-year.

I would like to just close briefly by saying that this will be the last time that I speak on behalf of the Cardtronics team on a quarterly earnings call. I have to say I have thoroughly enjoyed working with the team here, and with helping this company grow over the last 12 years. And I have likewise much enjoyed the relationship with our shareholders and the analysts who spent so much of their time and their dollars supporting us. I'm really very sincerely appreciated.

I've had the opportunity to work with Ed West over the last few weeks, and I believe frankly that except for my sparkling wit, you're just not going to miss me very much. Ed brings tremendous experience and talent to the CFO position and to the senior team broadly here at Cardtronics. There's solid depth behind him in the finance shop here, and I believe I'm leaving its leadership in very, very capable hands.

And with that I'd like to turn the call over to Ed for his comments.

Edward H. West - EVP Finance

Well, thank you, Chris. It's an honor for me to join the team at Cardtronics. I've been very impressed with the people since starting at the company, as well as my meetings with the Board of Directors prior to joining on. I was personally attracted to the company for several reasons; first, its leadership position in our segment and the large global market opportunity ahead. Second, the business' ability and opportunity to benefit from a network effect and scale. Third, the company's stage in the overall business maturity cycle and finally, the quality of people and a history of execution built on a solid foundation of integrity.

Now, since my first day three weeks ago, I had focused on learning the operations, spent time with sales team and working with the team on some key initiatives and priorities. I will be spending more time in the field over the next few weeks meeting with employees and customers. I look forward to working with many of you going forward and I want to say that I'm truly grateful for Chris' leadership, professionalism and management of an orderly and smooth transition. They are truly big shoes to fill on my part.

So with that, Steve, back to you.

Steven A. Rathgaber - Chief Executive Officer & Director

All right, sir, thank you. Well, while it's still quite early, Ed, we are cautiously optimistic that you'll make it through the probationary period. Now, it is typical for me to take a moment at the yearend earnings call to thank the Cardtronics' staff for their tremendous efforts and a year of great accomplishment. As always, people do make the difference and I'm fortunate to be blessed with a team that is absolutely committed to creating shareholder value. So to the Cardtronics team, a heartfelt thank you for the difference each of you makes each and every day.

Now, when I think about thank-you's, it's actually difficult to figure out how to say thank you to the retiring Chris Brewster, an extraordinary CFO, perfect for Cardtronics during the time of his service, but also just a remarkable person, a gentleman, and a wonderful partner for a first time public company CEO like myself. Chris' contributions are simply too numerous to mention but we can start with the fact that he was critical to our launch as a publicly traded company back in 2007.

I guess that makes him responsible for having to do this every quarter. And I think everything else can be summed up in a single word, which is trust. His impact on people inside and outside the company is built on a remarkably strong foundation of character and integrity. He is, as you all know, one of a kind. I will miss his contributions and his collaborative spirit. And I will miss his wisdom, common sense, and quite frankly, the ability to just make sense of it all. So Chris will continue to operate as CFO through the release of the 10-K and then continue on retainer for a year of transition support for Ed and myself. And we look forward to getting that continuing support.

With that operator, I would turn it back to you and open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. And our first question comes from the line of David Ridley-Lane with Bank of America, Merrill Lynch. Your line is open.

David E. Ridley-Lane - Bank of America Merrill Lynch

Sure. Just sort of wondering, I heard you that you're expecting three to four further fed rate hikes in your guidance. Any quantification you could give on the gross margin impact that's embedded from that assumption?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Well, let me come at it this way. So it's a complex answer, but I'll take a run at it. So we have in the United States, we have roughly $2 billion of cash out on our ATMs. We've got $1.3 billion of that fixed rate through interest rate hedges.

The other $700 million is effectively on floating rates. We've laid off some of that risk through contractual provisions with customers, at this point around $450 million of it. So the residual risk in terms of interest rates exposures in the United States is frankly not that large. Year-over-year versus 2015, that interest rate – the interest rate increases we're anticipating or have used in our guidance represent a few cents a share in the U.S.

In the U.K., the story's a little different. In dollar terms, we've got about $1.5 billion in vault cash. We don't have hedges in place, and we don't have the sort of contractual protections we have in the United States.

So if you just took that and knew nothing else, you could do the math in terms of what a 25 basis point rise in interest rates would mean to us in terms of increased cost. Having said that, the current way that ATM transaction interchange gets set in the U.K. by the one interbank network that operates in the U.K., that being LINK, is they take – this year they will take last year's interest rate and consider that when they're setting next year's interchange rates which are a revenue item for us.

In other words, as our cost of sourcing vault cash goes up, based on the current methodology, we would also expect our revenue item, interchange to go up but with somewhat of a lag. And the overall effect of that effectively means that the impact on us would depend on the pace of interest rate increases.

If interest rates went up by 25 basis points in a year, you probably wouldn't really notice it. If interest rates went up by 100 basis points in a year, it would be more noticeable until we got that cost recovered through the interchange mechanism.

So, I apologize for the complexity of the answer, but that is the reality of the situation. To come back to the way you framed the question in terms of how much pain do we have in our guidance based on a presumption of rising interest rates in the U.K., that's up north of a nickel.

David E. Ridley-Lane - Bank of America Merrill Lynch

Got it. Got it. And then let's give you an opportunity in a public forum to make any comments on the recent press speculation around the acquisition or potential acquisition of U.K. ATM company note machine, and maybe more broadly your plans to enter new markets. Thanks.

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

I'll take the first part of that. It's Phil here, David. And I'm aware of the speculation that's been out there through the press, and we're just not going to comment on market rumors.

Steven A. Rathgaber - Chief Executive Officer & Director

And I can take the second part and say that it is Cardtronics' intention to enter additional new markets next year. I think, one, sure, and possibly more and stay tuned and we'll let you know what those are as we enter.

David E. Ridley-Lane - Bank of America Merrill Lynch

Thank you very much.

Steven A. Rathgaber - Chief Executive Officer & Director

Appreciate it.

Operator

Thank you. Our next question comes from the line of Kartik Mehta with Northcoast Research. Your line is open.

Kartik Mehta - Northcoast Research Partners LLC

Good evening, gentleman. Chris I just wanted to make sure I understood the point you made about the interest expense. Did you say the U.K. expense was a nickel, is that just related to U.K. or was that the entire?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

That's the U.K. Yeah the statement was in terms of what we're contemplating in our guidance. We are contemplating rates that would essentially follow the forward curve as it sat at around year end, and the forward curve today is actually somewhat under that for sterling LIBOR, but we contemplated rates that would follow the curve as it was, when we locked down our budgeting plus, frankly, some conservatism on top of that.

So, essentially we're contemplating rises of interest rates in the U.K. that would have an impact on our earnings per share of somewhat in excess of a nickel.

Kartik Mehta - Northcoast Research Partners LLC

And then as you look at the guidance for 2016, I think Steve in your remarks or maybe Chris did, talked about a little bit of a benefit from surcharge increases, so the guidance you gave, does that include any more surcharge increases or is the guidance based on what you currently have in place?

Steven A. Rathgaber - Chief Executive Officer & Director

So, the guidance would include a range of initiatives that Cardtronics undertakes, which would certainly include an allocation for some surcharge increases, as you know, Kartik, it is a practice in Cardtronics that we work with the partners on those increases and there are lots of variables that go into effect before an increase gets deployed. But we have in the guidance actual surcharge increases as presently planned. So, the answer would be yes, it includes it.

Kartik Mehta - Northcoast Research Partners LLC

And so what's the average surcharge now for Cardtronics at least from a company-owned machine standpoint?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

$2.80

Kartik Mehta - Northcoast Research Partners LLC

$2.80?

Steven A. Rathgaber - Chief Executive Officer & Director

That's a broad sort of average. Right. So we have environments where the retailers like to operate with a low-cost service to match their corporate personality that they try to portray to the consumer. And we have a bunch of machines that are at $3.

Kartik Mehta - Northcoast Research Partners LLC

And then, just finally, Steve, I realize this is a little further out but the 7-Eleven contract in 2017, and I imagine people had started looking at 2017 estimates. Is the best way to think about that is that, when the contract ends, almost all that revenue and earnings will be gone or are there other stipulations maybe in the contract or how you're looking at it that would help us kind of think through 2017 at least as it relates to 7-Eleven?

Steven A. Rathgaber - Chief Executive Officer & Director

So a couple of observations that we've talked to along the way would include the following. First up is the fact that the contract expires late July in 2017. So there is a conversion tail to that contract that is expected to carry well into the back part of the year. So that, I guess, implies some stability to the model for a good part of the year.

And the second thing we have said pretty consistently is that through a series of initiatives we hope to retain large portions of the volume and the revenue either through partnerships with customers that worked with us to use the 7-Eleven ATMs or, potentially depending on how things unfold even, a relationship of sorts continuing with 7-Eleven. Unclear if that will happen or not.

So we don't have any visibility – additional visibility that I can share. We do have very active plans and are working very hard to protect as much of that revenue as we can. So I can say I would be terribly disappointed, if all of the 7-Eleven revenue disappeared. We still believe we can move some share to our ATMs. We still believe there are possibilities for other arrangements.

Kartik Mehta - Northcoast Research Partners LLC

Thank you very much. I really appreciate it.

Operator

Thank you. Our next question comes from the line of Ramsey El-Assal with Jefferies. Your line is open.

Christen Chen - Jefferies LLC

Hi. Good evening. This is Christen Chen for Ramsey. How are you guys doing?

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

We're doing fine. How are you?

Christen Chen - Jefferies LLC

I'm fine.

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Having a little trouble hearing you.

Christen Chen - Jefferies LLC

Is it better now?

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Yes.

Christen Chen - Jefferies LLC

So just to dig into the guidance a little bit more. So I know you guys talked about the interest rate and then kind of the surcharge assumptions. I think the other issues that you guys called were Forex. So, I guess, could you just help us a little bit understand what are your assumptions there? And are you guys seeing any underlying softness in the business that has helped driving the guidance that was actually a little bit below our estimates?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Well, I think, the – I mean, let me sort of go backwards through your question. I think in terms of – say, so we put out – the high end of our guidance range was $3.13 versus consensus street estimates, last I saw, of about $3.22. And bluntly stated, that's why I went through so much pain to describe two things that I think were probably not reflected or not fully reflected in the Street estimates. One of those was the profitability we got in 2015 from the businesses that we divested which was about a nickel a share, and the other was the impact of year-versus-year exchange rates, which impacted 2016 versus 2015 by about another nickel a share.

And frankly the – I mean, the way we see it, and the way we parse the numbers is at the guidance levels, that represents a continuation of the sort of, seven or so percent organic growth that we generated in 2015. The actual exchange rates that we're using in terms of Forex in the guidance are published in the press release, sterling is $1.45 and that's the most important one and then the others are in the press release.

Christen Chen - Jefferies LLC

Okay. Great. Thank you for that one. And also can you just update us on your thinking around potential adjacent markets that Cardtronics might enter? Should we view kind of the diversification of your business away from core ATM as an inevitability at some point in the future or are you guys – just how are you guys thinking about that?

Steven A. Rathgaber - Chief Executive Officer & Director

Well, we think all the time about strategic opportunities and I think it's fair to say that we've been active in thinking about how to leverage who we are and to try to evolve where that can go. But having said that, we've been very consistent that we believe we are in a growth business.

I stated in my remarks today and previously that around the world there is high single-digit growth in both ATM placements and in ATM withdrawal transactions. And we think over time, as we continue to deploy into different geographic markets, we'll find good opportunities for growth.

We think over time as we deal with what is essentially, a 5% transaction share possibly in the United States, for example, that there's continued great opportunities to move transaction share. We think there are opportunities in our other markets to do the same. And we see possibilities in the future to help banks in more ways than we do today.

So we're not prepared to make any announcements about adjacencies, but we certainly believe that a company like Cardtronics that has operations in six countries and heading into more, and that has the scale and scope that we have, we can do a lot of things for the banking industry and we look forward to continuing to do that.

Christen Chen - Jefferies LLC

All right. And just a last one for me before I hop off, this one goes back to what Steve was mentioning, the emerging trends. So we've been hearing about some mobile phone functionality at ATMs where the press was saying that Chase and Bank of America were running pilots for NFC or contact lists, you know, interaction between the phone and the ATM. Do you all have any incremental CapEx built into the medium or longer term to budget for this kind of stuff or anything of that nature?

Steven A. Rathgaber - Chief Executive Officer & Director

Well, we think that there are – in the existing inventory, there is a lot we can do to accommodate in software, certain kinds of capabilities and like a lot of these initiatives, there will be 47 different versions that emerge between now and when they become genuinely routine. And the only thing I can assure you is that if the consumer wants to use the mobile instrument to access the ATM, we'll be there. We have done cardless transactions at our ATMs in the UK for a number of years, so this is not a new concept to us. The mobile twist is a bit different. But we believe that Cardtronics is better equipped than most to react to those kind of trends, and to make the investments necessary to make that capability available when the time is ready.

Christen Chen - Jefferies LLC

All right. Great, thanks and best wishes to Chris.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Thank you much.

Operator

Thank you. Our next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Hi, guys. Thanks for taking the question. And Chris, certainly we'll miss working with you. But I think you'll probably relish not hearing so much from those of us on the sell side. I wonder if you could dig a little bit deeper into the investments you're talking about specifically. There are obviously some puts and takes which we appreciate you describing that affect 2016 versus 2015, but the call out of the investments I find curious, and I just wonder what they are specifically and how you're thinking about ROI around those investments.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Andrew, just to make sure we're understanding your question, are you speaking to the SG&A investments we were talking about.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Yes, specifically, I think you were pretty clear on the CapEx, Chris. More just around the SG&A that's going to hit the P&L, especially in the first half of the year.

Steven A. Rathgaber - Chief Executive Officer & Director

Well, the way I would characterize that Andrew, is that there are a number of things we're investigating as we attempt to get ready for a post 7-Eleven world, which is still a good amount of time away, and we think it was prudent to make some early investments in everything that I would call research ideas to other capabilities, just to keep a certain cloud of mystery around it, that would help us in the future, offset some of the impacts of a time and place when 7-Eleven is no longer a major contributor, so we accelerated, I would characterize it some investigations into different areas, and it's my hope that from those investments we'll begin to see some returns, possibly in 2016, but certainly after that we would be able to point to.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Okay. So I can pursue that with you a little bit I guess more offline. With regard to the UK, where you're seeing nice growth, 10% plus, I think is what you said, Chris, in constant currency, it sound like that's being primarily driven by unit count. What kind of line of sight do you have for sustainability of that growth? In other words, how penetrated are you in that market? Can we expect that to continue for a significant period of time?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Well, let me jump in on that one. I think we can expect it to continue. Certainly, we have announced recently, I believe, the Aldi contract that's another 400 ATM deal that I think was in the press release that is another major supermarket chain. We've got a good number of locations in the U.K., but we're very comfortable adding 1,000 plus ATMs a year in our, you know, non-corporate area, and winning contracts like the Aldi one going forward, so there's volume there.

The challenge there is the growth rate of the ATM transactions, and we are a little bit cautious about the same store numbers that could be implied in the future. But we also believe that the UK is another market that's announcing branch closings and branch closings will bring volume in our direction. So we think that between properly and smartly placed ATMs with major corporate customers between properly placed pay-to-use devices, which we're exceptionally good at deploying. And the right focus we can keep volumes high and we can keep the revenue growth curve there reasonably good for several years.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Andrew I'll just throw data points on that. So over the past three years in the UK, bank ATM count has declined by 9% while IAD (52:08) count has increased by 25%. So the opportunity for us is not static. It's growing over time, and that's going to help us sustain the unit growth that we experienced in addition to just good execution.

Steven A. Rathgaber - Chief Executive Officer & Director

Now, the fascinating thing about the free-to-use market over there is that the consumer really does embrace the convenience of the ATM because there's no cost differential for them. And we're seeing a shift from bank ATM locations to the off premise locations that are ordinary for Cardtronics.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Okay. And then as a corollary, I guess, any thoughts on revenue enhancement offerings beyond DCC in the U.K.?

Steven A. Rathgaber - Chief Executive Officer & Director

Well, we have assembled a team of folks that are working on that very thing. There are a numbers of ideas, and we expect to see some results on that later in the year. So nothing I can announce, but we do have folks working on different kinds of initiatives that I'd rather not be public on at the present time.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Okay. Thanks.

Steven A. Rathgaber - Chief Executive Officer & Director

Thanks, Andrew.

Operator

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

Robert P. Napoli - William Blair & Co. LLC

Thank you. Chris, it's been great working with you all the way from prior to the IPO until today, and Ed, you have big shoes to fill. We've heard good things about you, so look forward to working with you.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

He's got big feet, Bob.

Edward H. West - EVP Finance

I will look forward to it. Thank you.

Robert P. Napoli - William Blair & Co. LLC

Let's see. So I guess maybe I'll just try one more time, just on the investment, the G&A investment, can you give us an idea of how much that is per quarter that you're making? It looks – I mean, the G&A line was elevated this quarter, you're suggesting the next two quarters, and then it goes back. So do you have like a bunch of consultants hired that are building plans for you, or what is that G&A investment? How much is it, and why does it – why will it be there for a few quarters and then disappear?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Well, I'll size it for you; in the context of the fourth quarter, it was about $2.4 million in terms of G&A spend that I would consider to be above the norm. And we haven't gone and bought a corporate jet. It doesn't relate to hiring a bunch of additional internal staff. It's basically, and I realize this will continue to be a bit vague, but it has to be. It basically relates to putting in some added horsepower against some developmental opportunities that we think, and firmly believe will generate some real shareholder value. And it just – we've got a – it's the kind of thing where we're going to be putting a full court press on it in the fourth quarter and will continue to be here in the first quarter.

Robert P. Napoli - William Blair & Co. LLC

And so you expect it to be there the next two quarters and then that – you won't need that additional horsepower because it will be up and running?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Well, I certainly expect it in the first quarter. It could taper in the second quarter, but I don't see it as part of the – a continuing part of the cost base, if you will.

Robert P. Napoli - William Blair & Co. LLC

Okay. Thank you. Then I mean, with the rumors, I mean, I know you already said Phil, that you obviously can't comment on the rumor that we all have to ask you about, but from a capital perspective, if you did a large transaction like that in today's market – I guess there's some feedback, oh, no they're going to do that deal, the credit market are terrible, they're going to have to raise 10% debt to do this deal, and everybody hates debt today because the credit spreads are wide, and we'll see three months from now that hopefully they normalize.

But anyway, what are your thoughts on doing a transaction, a larger transaction from a capital perspective. You, obviously, have leverage low enough to be in the history and stability, so maybe just give some thoughts on doing a large deal in today's volatile markets?

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Well, so I think the first point that I'd make is that the M&A opportunity set continues to be robust in the core ATM markets, we're an acquirer of choice for anything ATM-related globally, so we're seeing a range of things across size and geographies. It's a matter of prioritizing. As it relates to more sizable things, we do have a fairly clean credit facility that we can leverage, so that would be kind of the first source of financing.

And then, you know, as it relates to any additional financing we'd need, we'd have to take a look at prevailing cost of capital at that time, and figure into the math, but we're continuing to be active in evaluating things, and I think we'll just have to deal with the financing costs as they come. It maybe at this point in time somewhat of a headwind, but these things tend to be dynamic and I think there is also an opportunity to reflect the financing environment to some extent into the pricing dynamic of the acquisition opportunity.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

Bob, I'm wondering, there may be a bit of a question behind the question in terms of, would we throw a Hail-Mary pass just to, sort of, fill the hole that 7-Eleven leaves when that contract comes to an end. And that's not the mentality of this team.

I mean, do we want to – would we want to do a really good solid acquisition that generates good returns, absolutely. But we, put the company in a corner that it shouldn't be put in just for that purpose of trying to offset the 7-Eleven situation, that's just not the nature of the way the team works here.

Robert P. Napoli - William Blair & Co. LLC

Great. And just one real quick follow-up, if I could, on 7-Eleven, are you suggesting that – Steve, that maybe that there are discussions about possibly splitting up that contract and keeping the...?

Steven A. Rathgaber - Chief Executive Officer & Director

No. I am not suggesting that at all. I'm just suggesting that there's a pool of transactions in revenue, and we're doing our best, as we've said all along, to optimize our retention of that. It could range from different branding arrangements and I don't rule out the possibilities of working with any party to preserve and create value for our shareholders.

And all's I'm saying is that there's no reason anybody should think that all of the revenue from 7-Eleven and all of the earnings from 7-Eleven goes away. We have a great opportunity to move transaction share around, and we'll exercise it.

Robert P. Napoli - William Blair & Co. LLC

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Tim Willi with Wells Fargo. Your line is open.

Timothy Wayne Willi - Wells Fargo Securities LLC

Thanks, and good afternoon, and congratulations again Chris. I just have two quick ones here. The first one, if I could go back, Steve, to your comments about the broader opportunity with self-service banking and everything that's going on. Is this something that you believe while it's not in the next 12 months or maybe 18 months, do we wait five years to all of a sudden see you guys engage in a strategy that's clearly more about broader financial services or a partnership with a bank?

Is this something that can happen in, sort of, a five-year window, or is it something that just quietly occurs? And over time we look back and say, yes, Steve said this was going to happen, and here we are 10 years down the road, and it did. Just, sort of, how are you thinking about like a timeframe on that and how it might really sort of show up?

Steven A. Rathgaber - Chief Executive Officer & Director

Well, I think, Tim, it's a really great question. And you're probably as educated as any of us in the dynamics of the banking business today. I believe these trends are already underway, and I think it's fair to say that Cardtronics sees a variety of opportunities to different degrees of depth within a banking partnership where we can add value in our core expertise.

So what does that translate to in English. I think we are hearing more inquiries inbound from banks saying, gee, we've got to manage all this cost infrastructure around ATMs, can you help us. I think that that question for banks that aren't calling us about that kind of thing will be a more prominent question over time in banks' minds. I don't think it's five years, I don't think it's seven years. I think it's next year or possibly even this year.

So I think that the industry is evolving, banks are going through great change and as they do that, as they deal with their new branch model, I think there's an opportunity for the specialist Cardtronics to play a larger role.

Timothy Wayne Willi - Wells Fargo Securities LLC

Yes. I definitely do agree that the time will always be the question there. That makes sense. Second is just going back to some of the initiatives that you guys started on, I guess probably now about two years ago, just sort of around the data warehousing and a lot of the value add, and I know you have done some piloting with certain retailers on some advanced functionality and marketing and advertising, just any sort of updates there. I think you had said that would come a little bit quicker once you had gotten past sort of the replatforming of ATMs, et cetera, so just anything you might be able to add there would be great?

Steven A. Rathgaber - Chief Executive Officer & Director

Yes. So I think I can say the following, the replatforming has taken a bit longer than we hoped with EMV. It's a complicated process, but it's underway. We are running actively a series of pilots in one market in particular. We are seeing different, we're running different kinds of tests to try to see what happens with volume shifts and we are getting some traction.

And I think that I hate to say it again, but there will be a time where I can reveal, you know, more numbers and more volumes from particular activities that we do without revealing too, too much to give away anything to competitors, but we are exercising our muscles on moving transaction share, and we are liking some of the early returns we are seeing.

Having said that, we haven't doubled the traffic on any particular ATM just yet, but we are seeing some interesting responses from some of the smaller programs that we're running.

Timothy Wayne Willi - Wells Fargo Securities LLC

Great. That's all I had. Thanks very much.

Operator

Our next question comes from the line of Gary Prestopino with Barrington Research. Your line is open.

Gary Frank Prestopino - Barrington Research Associates, Inc.

Hey. Good evening, everyone. Hey, Chris, I just want to make sure I got this right with the guidance. You're saying there's about $0.05 from foreign exchange, elevated SG&A is $0.04, profitability from divested businesses is $0.05, and it looks like incremental interest expense is about $0.07 to $0.08 so we get about a $0.21 to $0.22 differential there, is that about right?

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

It's, well, if you kind of parse through it piece by piece, you know, I'd say the aggregate of those headwinds may be a bit smaller than that, but, you know, they are there, and you know, they are incorporated in that guidance.

Gary Frank Prestopino - Barrington Research Associates, Inc.

Okay. I just wanted to make sure I had that right, and best of luck to you. I have enjoyed working with you over the last almost 10 years now.

J. Chris Brewster - Chief Financial Officer, Cardtronics, Inc.

And likewise, thank you, Gary.

Operator

Thank you, I'm showing no further questions at this time. Ladies and gentlemen, this does conclude today's program. Thank you for your participation. You may all disconnect. Everyone have a great day.

Steven A. Rathgaber - Chief Executive Officer & Director

Thank you, everyone.

Phillip Chin - Executive Vice President-Corporate Development and Investor Relations

Thank you.

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