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Cardtronics, Inc. (NASDAQ:CATM)

Q2 2012 Earnings Conference Call

July 31, 2012 17:00 ET

Executives

Mitzie Pierce – Investor Relations

Steve Rathgaber – Chief Executive Officer

Chris Brewster – Chief Financial Officer

Analysts

Jim Kissane – Credit Suisse

Ramsey El-Assal – Jefferies

Michael Grondahl – Piper Jaffray

John Kraft – D. A. Davidson

Bob Napoli – William Blair

Andrew Jeffrey – SunTrust

Gary Prestopino – Barrington Research

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to 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 follow at that time. (Operator instructions) As a reminder this conference may be recorded.

And now it’s my pleasure to turn the floor over to Mitzie Pierce. Please go ahead.

Mitzie Pierce – Investor Relations

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. Also on the call today and available for questions we have Mike Clinard, President of Global Services and Rick Updyke, President of US Business Group. Steve will begin today’s call with an overview of our second quarter results and an update on some of our key initiatives. Following Steve Chris will provide additional details on our quarterly and year-to-date results. Our prepared remarks are scheduled to run for about 30 minutes, at which time we’ll open up the call for any questions.

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

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

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

Steve Rathgaber – Chief Executive Officer

Thanks, Mitzie and welcome everyone to our update on the second quarter. Cardtronics completed another solid quarterly performance with financial results up significantly over the prior year and comfortably in line with our expectations. The financial headlines include revenue growth up 30%, 12 of the 30 points are organic growth with nine of the 12 points being core organic versus three points of equipment sales. We continue to love a business model that delivers this kind of core organic growth in these economic times.

Revenue growth was complemented by adjusted EBITDA growth up 20% and adjusted net income per share growth up 12% to $0.38 per share. Although organic growth number is strong, management is particularly pleased to have delivered earnings per share of $0.38 which allows us to match our impressive in the start first quarter results despite the ramping up of expenses associated with our healthy backlog of installations and a recent headwind from Visa interchange rate reductions that started to impact us in the second quarter.

Now let me share some of the operating numbers behind the financial numbers. These are the metrics that drive our current business model forward. Let’s start with sales activity. You will recall that in the first quarter Cardtronics delivered record sales activity on behalf of our shareholders. We closed three major deals in three countries adding more than 2,000 ATMs to the Cardtronics fleet of owned ATMs.

One of the attractive aspects of the Cardtronics business model is that the sale and installation is just the beginning of our profit-generating journey after the placement of the ATM kind of the branding opportunity and the second quarter is a record quarter for signing branding deals for Cardtronics. We signed branding deals for over 1700 ATMs in the US and Canada across a mix of new clients and current branding clients. Five major financial institutions are part of the mix. Let me break those down.

Two of those are expanded relationships with existing domestic clients. One of the deals is a significant expansion with the key international financial institution and perhaps most importantly two are brand new relationships with top 50 financial institutions in the US. When you couple these five more significant branding deals and extended relationships with a few smaller FI deals and some organic growth with existing clients we will grow our branded ATM base by nearly 2,000 locations by the end of the third quarter.

Now, not all of these deals have had press releases issued about them yet, so let me just recap several of the largest successes. We have expanded our relationship with PNC to brand almost 200 Harris Teeter locations across eight Mid-Atlantic and Southeast states with the majority to be in place by the end of the third quarter. We are building on the relationship we successfully rolled out last year with USAA and will expand the USAA brand to more than 210 additional locations across seven states by the end of the third quarter. Scotiabank which we have worked with in Puerto Rico and the Caribbean has signed with us to brand the entire 7-Eleven portfolio in Canada more than 470 ATMs.

New branding partners include BBVA Compass which will brand almost 200 ATMs in major national and regional retail locations in Colorado and Texas before the end of the third quarter. Frost Bank will brand more than 600 ATMs across Texas with the Valero Corner Store inventory of locations. We were delighted that Frost management was so excited by this deal that it became a key message in their own earnings call last Thursday and this particular deal has the additional trivia value of bringing together the three companies headquartered in Texas.

When you combine the impact of the recently signed agreements with our current portfolio, Cardtronics will have nearly 18,000 ATMs branded across North America by the end of the third quarter while still providing us room for continued growth with over 10,000 locations still available for new branding partners in the future, so also exciting that we have successfully exported the branding model to Canada and Mexico over the last 18 months, but the profit-generating journey does not end with branding.

It was also a great quarter for Allpoint our surcharge-free network. Banks, credit unions, government benefits cards, payroll cards and consumer generally continue to seek access to surcharge-free ATMs and the best network for delivering that service is Cardtronics Allpoint network. The world’s largest network for surcharge-free transactions continue to get larger this past quarter with a more than 30% increase in volume over the same quarter last year. Additionally, we saw 32 new issuers across 18 states go live in the second quarter our best second quarter in over four years from an issuer growth perspective for Allpoint.

These real successes do not only deliver great value to our financial institution partners, these deals mean more traffic for our retailer partners and more traffic means more sales growth retailers who use Cardtronics services.

Some of you may have seen an article last week about a large national bank franchise that had eliminated 1500 ATMs at retailer site. I know some of you heard because you called me about it. The key takeaways from that piece Allpoint to a validation of the Cardtronics specialist model for this bank and most banks these -- expense. For Cardtronics these same exact sites deliver an opportunity, an opportunity for Cardtronics shareholders to enjoy multiple fees on every transaction, an opportunity for all banks to have convenient cost-effective access through relationship of the Cardtronics. And then opportunity to put cost -- the cost-effective payment mechanism called Cash in the hands of consumers for the benefit of retailers looking for cash-rich consumers in their locations. In short, this news was a great validation of our business model.

Let me shift focus for a moment to another strength of Cardtronics, execution. We installed a bunch of-- in this quarter over 1,600 ATMs in three countries to be a bit more precise. That’s a record for company-owned machines and it is the ultimate enabler of all the other value that we create. I want to acknowledge the global Cardtronics team for their truly outstanding performance on these large and challenging projects.

Along with the good news presented so far, Cardtronics faced some challenges and hurdles in the second quarter that will continue throughout the year. The Visa interchange headwind is well known and that has clipped $0.03 off of Q2 earnings per share again in line with our expectations. We have also been absorbing several acquisitions and while we do that extremely well the integration schedules don’t always go exactly as expected and I think it is fair to say that to strengthen the full value is taking a little longer than expected on our Access to Money acquisition. We do however have several initiatives well underway that we anticipate will led out to make significant economic improvements to this part of our business late in the year and in 2013.

Finally, the most challenging management component of our business is coordinating and scheduling large clients’ installations. And this year we are doing several thousand sites across three countries. When dealing with that scale one has to do a lot of guessing about live dates and that leads to incurring expenses now to make live dates happen then. If then is later than we thought for any assorted retailer sites related reasons then we have to live with the expenses without the revenue for that extended window.

Said differently, it can be challenging to coordinate the timing of the expenses and revenue optimally. Specifically we have completed the large US installation project. We are almost complete with the large Canadian installation project, but our UK installations are proceeding at a slower pace and that slower pace will squeeze margins a bit until the transaction revenue starts to catch up with the installations and startup expenses.

However, our business model is delightfully strong as evidenced by the accomplishments presented this quarter. For folks new to our business let me just quickly recap our basic growth model. We previously outlined six growth lines that all comply a part in our successful growth, adding new merchant customers which we did a lot of in the first quarter, growth with existing merchant customers which we did a lot of last year, bank branding which we did a lot of in the second quarter, growth in surcharge-free Allpoint network which we did -- also did a lot of in the second quarter and new products and services such as our LocatorSearch capability or managed services along with international expansion opportunities. It is this solid model that continues to work well in all sorts of economic climates.

The prepaid card business has been in the news quite a bit recently and I’d like to close by sharing with you some data from our experience. Prepaid card transactions at our ATMs continue to be a meaningful driver of results and now represent 14% of transactions at our US ATMs. About 80% of those transactions are on payroll cards or government benefits cards. Only about 20% are on general purpose reloadable cards. Organically, after filtering off the impact of acquisitions, prepaid card transactions are growing at over 20% year-over-year. This continues to be a wonderful growth engine for us and we look forward to serving more of these valuable cardholders in the future.

And now I would like to turn it over to Chris Brewster for some more detail on our financial metrics for the quarter.

Chris Brewster – Chief Financial Officer

Thank you, Steve. And as I usually do I’d like to first highlight a few of the key financial and statistical metrics of interest and I’ll start with the top-line revenues. Our consolidated revenue for the quarter was $192 million. That figure was up 30% from the same quarter last year and I’d like to recap what drove that strong revenue performance in the quarter which continues to be driven by various elements of our growth strategy.

As Steve said 18 of those 30 points of growth are attributable to the acquisitions that we completed in the second half of last year. We’ll begin to cycle on those acquisitions in the third quarter, the quarter we’re currently in, but we won’t completely cycle on them until we get through the month of November. The other 12 points of the 30 points of organic growth is represented by organic revenue growth. Now currency conversion rates were a slight headwind in the quarter. On a constant currency basis, the organic revenue growth was 13% or slightly better than the 12% unadjusted for currency. Of that 13%, 10% came from growth in our core ATM operating business and the other 3% came from growth in equipment sales. So, let’s talk about each of these components in a little more detail.

First we continue to see solid same store transaction growth. On our US portfolio which accounts for over 80% of our total revenues, we achieve same store withdrawal transaction growth of over 6% for the quarter. While the 6% same store withdrawal growth figure was down a bit from the first quarter’s 11% rate, that was certainly expected as we knew that the first quarter figures as we talked about in our last conference call were buoyed by a number of relatively temporary factors including the fact that it was a leap year and we had an extra day in the first quarter; we had unusually mild winter weather compared to prior year and we had a rush of new transactions on tax refund prepaid cards that tend to be a first quarter only phenomenon.

At 6% same store transaction account increase, the second quarter trend in the US was the second half quarterly growth rate posted in the last three years and higher certainly than our typical 4% to 5% run rate that we’ve run in most recent quarters prior to the first quarter. That same -- that 6% same store transaction growth provided same store revenue growth of approximately 4% with most of that 2% difference between those two figures being the impact of Visa’s interchange rate reduction.

Next on the organic revenue growth front, we had significant unit expansion across our operating segments. Our average transacting ATM count increased by about 7% year-over-year excluding acquisitions so organically by about 7% and as Steve mentioned we added three large customers during the quarter, Valero, 7-Eleven Canada, and Shell in the UK the addition of these three premier retail operators accounted for about 4% of the unit growth with most of the remainder of that 7% coming from existing merchants that we’ve had contracts with for some time.

Now none of those new merchants were fully ramped during the quarter as installations were ongoing throughout the quarter and some installations will continue on these large program rollouts in the third quarter. So, in summary terms in our core ATM operating business we achieved 10% organic revenue growth on a constant currency basis certainly with a big boost coming from the significant unit count growth that we achieved organically.

Finally, with regard to revenue, we also had strong results in our equipment sales business. Revenues from that line of business were up about $4.5 million year-over-year and as I said accounted for about 3% of the total revenue growth in the quarter. Now, we expect equipment sales volume to decline later in the year. This line has been driven recently by requirements for machine upgrades and the replacement sort of brought about by some fresh rules under the Americans with Disabilities Act that went into effect in March of this year and at some point we expect those volumes to tail off bear in mind that our percentage gross margins on equipment sales at about 9% to 10% are much lower than the margins in our ATM operating business. So, there is outperformance in equipment sales added proportionately less profits than our other revenue growth and its relatively low margins served to actually dilute our consolidated gross margin percentage in the quarter.

All of that nice revenue growth contributed to some solid year-over-year earnings growth with adjusted EBITDA up 20% year-over-year and adjusted net income per share up 12% year-over-year. The earnings growth was directly attributable to the strong revenue growth, but was negatively impacted as we expected and forecasted by a recent interchange rate reductions implemented by Visa. As Steve said absent this rate reduction we estimate that our earnings would have been higher in the quarter by approximately $0.03 a share.

Turning to gross margins reported consolidated gross margin in the quarter was 30.7% of revenue that’s down about 2.5 percentage points from the 33.2% that we’ve recorded in the same quarter last year. This also was as we expected and the decrease is attributable to four primary factors. First the anticipated interchange rate reduction that took effect in April reduced reported gross margins by about 6/10ths of a percent. Second, the 2011 acquisitions we did came in the door with somewhat lower gross margin rates than existing margins and the process of harvesting our cost synergies on those acquisitions in some cases by its nature has to involve the expiration of preexisting unfavorable vendor contracts which is typically a multiyear process. Third, our very heavy installation schedule cost is to have a relatively high number of units in the quarter that have not yet ramped to their long term potential and finally, growth from our higher equipment sales at their roughly 9% margins served to dilute the current quarter gross margins.

Now, as a final comment on to gross margins, if you look at the key metrics pages of the earnings release, which show the metrics for our ATM operating business, there is a page in there headed without acquisitions. So, if you look on the numbers on that page you’re seeing figures which are on the ATM operating business. They do not include equipment sales and on that particular page they also filter out the acquisitions. And what you see there is our ATM operating gross margins without acquisitions, without equipment sales went down slightly from 34.2% last year to 33.8% this year. In other words it dropped by about 4/10ths of a percent.

Now, if you exclude the 6/10ths of a percent of impact from the interchange rate reduction, margins in the core ATM operating business ex of acquisitions would have been up by about 2/10ths of a percent even with the drag from a lot of immature units. In other words and as we said on the last couple of calls our base ATM operating business continues to be margin healthy and we continue to be able to leverage our partially fixed cost infrastructure through both additional transaction volume and unit growth.

Turning to capital expenditures, CapEx was $33.5 million for the quarter driven primarily by the large amount of organic unit growth and to some extent by the tail end of ADA compliance requirement, these capital expenditures were in line with the CapEx guidance we issued previously and we expect CapEx in the third and fourth quarters to be significantly lower than what we experienced in the quarter we just reported.

On the balance sheet we continue to maintain a strong liquidity position with approximately $78 million of available committed credit through our revolving credit facility which if we need to we could further expand by another $75 million under certain conditions. Net debt to EBITDA ratio was 2.1 times, down slightly from the 2.2 times that we reported in the first quarter and we were able to slightly reduce this leverage ratio in spite of the rather substantial capital investments we made during the quarter and effectively we were able to finance our CapEx through the strong operating cash flow that we had in the quarter of about $37 million.

Now turning to guidance, we are reiterating the guidance that we issued on our first quarter call and see no reason to change it at this point. We’re expecting revenues of $755 million to $770 million. If you simply doubled our first half total actual revenues of $383 million that would imply $766 million twice $383 million in revenue for the full year which might seem to make the $770 million top of our guidance range but not particularly aggressive on the surface. However, within our guidance there has been and there continues to be the presumption that in the second half equipment sales will be considerably lower than what they -- than what we saw in the first half and considerably lower than what we saw in the second half of last year.

Now, to put this in perspective for you and you can see all these numbers in our prior earnings releases in the two halves of 2010 the first half and the second half of 2010 we had about $4.5 million of equipment sales in each half, about $9 million for the year as ADA compliance started to come on people’s radar screens that began to ramp up. So, in the first half of 2011 we sold $10.8 million worth of equipment. In the second half of 2011 that number went to $16 million and in the first half of 2012 we sold $23.7 million of equipment. ADA compliance deadline was March of 2012 and we have to believe that many of the compliance driven replacements have probably been done at this point and as I said we’ve always incorporated much lower second half equipment sales figures in our 2012 guidance.

We ran a 10% constant currency organic revenue growth rate in the second quarter in the core high margin ATM operating business as I said earlier and I would expect that we’d continue to see some good results there, but you can’t expect the equipment sales business to slow down significantly and start showing year-over-year declines. This will put some pressure on the reported top-line growth number, but in recent quarters we’ve been pretty careful to try and explain to folks where our revenue increases have been coming from and to distinguish the high margin ATM operating revenues from the lower margin equipment sales revenues.

Those who know us well model ATM operating revenues and equipment sales revenues separately and they will certainly understand that the key metric here is growth in the high margin ATM operating revenues and the declines in low margin ATM equipment sales revenues are not that impactful to us from a profit perspective and will actually help our reported gross margin percentage.

Continuing on with guidance, our guidance for gross margins, EBITDA, depreciation and interest have not changed and we continue to expect adjusted net income to range somewhere between the $1.58 and $1.64 per diluted share. That calculation is based on $43.9 million diluted shares outstanding. Now, as Steve said in his remarks this organization has been pretty well loaded this year with a great deal of physical in the field activities, machine installations, negotiation of branding deals for these new portfolios and existing portfolios, physical implementation of those branding deals, getting branding collateral installed on machines in the field, lots of acquisition integration works and on and on.

In some cases the timing of those activities has not been totally under our control. And in -- and some of those activities may not have happened on our preferred schedule. For this reason, based on what I noted I don’t expect us to perform above this earnings guidance range. I expect us perform within it. We are confirming capital expenditure guidance at about $70 million. However, as always that number could flow it up a little bit depending on exactly what transpires in terms of new business development. And all of this guidance is based on exchange rates as per the prior guidance at $1.55 for UK pound, 13 Mexican pesos per US dollar and one Canadian dollar per US dollar all unchanged from the previous guidance.

Now I’d like to turn the call back over to Steve for a few closing remarks.

Steve Rathgaber – Chief Executive Officer

Thanks Chris. I talked there earlier in the call about current events validating the Cardtronics’ model. I feel it would be at the service to Cardtronics’ shareholders if I fail to acknowledge an additional current event in the news this weekend that makes the same point better than earnings call possibly can. Over the weekend the sole method of electronic payment available at Wembley Stadium in London, an Olympic venue for soccer malfunctioned during the event and were shut down and it stayed down for hours.

Thousands upon thousands upon thousands of hungry and thirsty consumers were left without a functioning payment method. The pictures at the concession lines speak volumes. Those that got to be in drink did so with cash and had the foresight to carry cash with them. The rest did not get the eat and drink, because most of the ATMs removed from the venue to promote the malfunctioning alternative. The experience speaks loudly to the simple practical utility of cash. It speaks to the consumer need for cash. It seems so obvious and this simple obvious need is what we believe positions Cardtronics’ shares for gold medal performance in the future.

And with that operator we’ll open it up for questions.

Question-and-Answer Session

Operator

Yes, sir. (Operator instructions) Our first questioner in queue is Jim Kissane with Credit Suisse. Please go ahead. Your line is open.

Jim Kissane – Credit Suisse

Hi Steve and Chris. And Steve that was classic. Thank you for that.

Steve Rathgaber

You’re welcome.

Jim Kissane – Credit Suisse

But I guess given some of your challenges in UK as well, can you give us a little more color in terms of you know what you’re running up against there and maybe put some numbers around what that hit is you know in terms of the delays on the implementation in UK and maybe you know related to that I think you mentioned some challenges around you know the Access to Money acquisition that we did see that the merchant-owned ATM attrition seem to pick up in the quarter maybe that’s related, maybe that’s not related to ATM, just a little more color on that? Thanks.

Steve Rathgaber

Sure. That’s a lot of color point there. Let me try to hit them one at a time and we’ll ping-pong here between Chris and I. In the UK situation it’s as simple as this. A lot of the environment that we’re moving into with Shell is an environment that has a cycle that candidly we didn’t fully anticipate and appreciate with corporate approvals of sites as you know they are made available. The contract is a contract, but the actual approval of the mechanics for the site are taking just more time than we thought and the result is that as we’ve amped up the expense side the installations are just spreading more. It’s not something that will go on forever. It’s something that it represents you know maybe a couple of months delay per site which has the impact of just putting a little strain on things. So that would be my answer on you know specifically what's happening in the UK. It’s not -- nothing evil or bad or failing to happen. It’s just working with the large corporation approval cycle is more complex than we’re used to with the lot of the sites we’ve dealt with in the past. And so that’s sound.

On Access to Money it’s simply a question of and I want to be as politic as I can here, the business -- oh I’ll tell you what I had originally ridden and my team invited me to take it out that the business just had a little more hair on it than we do it at the beginning. And there are just things that have to be on hold and undone. And there are things that have to be understood a little clearer. Nothing that scares us; nothing that is ultimately problematic or threatening to the value of the acquisition, so don’t get me wrong here in terms of perspective. It’s just dirtier than some other models we’ve had like EDC for example was a wonderfully clean company doing exactly what we did very similar to the way we did it. Access to Money is the un-EDC. It’s just different and it’s taken little more effort. So again it’s just a timing thing not a fundamental thing, so that would be my commentary there and I forgot the third one.

Jim Kissane – Credit Suisse

It’s on the merchant-owned ATM attrition which I thought maybe was related to Access to Money, but maybe not.

Steve Rathgaber

Yeah, there is probably just sort of couple of things going on there that have to do -- well, probably the primary thing going on there is ADA. So, we have been sort of pounding on the community out there to get compliant and compliance with a cost. Those that follow the rules lose in some respects. So, you’re seeing some shrinkage -- we think we’re seeing some shrinkage because the ADA compliance activities are driving folks to either just shut down ATMs rather than reinvest in a new one when there is no return for that investment in any classic business sense and/or moving them to other providers who are less conscientious about compliance with the law. So those would be a couple of things that would be creating some shrinkage there and Chris I would now invite you to make any comments.

Chris Brewster

The only thing I’d add to that would be that the average volumes on those units were pretty low as I recall less than half of our average volumes in that portfolio, so as you would sort of suspect in that circumstance the guys that may have decided to give up rather than make the ADA related expenditures are the guys that had the low volume machines in the first place which have you know considerably less effect on our revenues or our profitability than the average machine would.

Jim Kissane – Credit Suisse

Okay. That’s helpful. Thank you.

Operator

Thank you. Next questioner in queue is Ramsey El-Assal with Jefferies. Please go ahead. Your line is open. Your questions please.

Ramsey El-Assal – Jefferies

Thanks guys. I noticed that is one of the components of your nice organic revenue growth increase was in revenues from managed services agreements. Can you elaborate a little bit there in terms of you know are you seeing organic growth, did your existing customers have a new prospects out there that you’ve been able to capture or just probably a little color there?

Chris Brewster

I think it’s fair to say it’s primarily existing customers. Some of that on a year-over-year basis is going to be you know growth within the Kroger family. We originally won the Kroger corporate relationship. Kroger is fairly divisionalized and they have a number of other divisions and brands that they operate. For example, Ralph’s in the West Coast is one and as time went by we won some more of those. That’s been generally growth within you know existing corporate families if you will.

Ramsey El-Assal – Jefferies

Okay. And also could you give us an update on the Canadian pipeline both in terms of potentially piggybacking on existing US relationships like you did with 7-Eleven, but also maybe how you might be able to take share up there from competitors given your you know your kind of US generated cash scale advantage?

Steve Rathgaber

Yeah, I think what we can say about the Canadian environment is that it’s active. We were in dialogue with certain folks on certain business possibilities. Those possibilities are based on the schedules of those retailers as opposed to what I might ideally like to do, but I think it’s fair to say that our presence and our initial success up there registered well with the organizations we serve in the US that have eyes looking north and we will look forward to not announcements next Tuesday, but over time performance up there that is consistent with our historic performance.

Ramsey El-Assal – Jefferies

Okay. The last one for me is you’ve been successful in the past boosting the performance of your ATMs by overlaying programs like Allpoint and bank branding. Can you speak a bit about the potential for more of these types of programs things like you know non-bank branding deals or tie up with money transfer operators or any other sort of Allpoint like overlays that might drive incremental transaction in your machines? What would you bet on in terms of what the next kind of Allpoint like solution might be for you guys?

Steve Rathgaber

Well I think the way to answer that is to think in terms of the need for banks to have more and more convenient access to locations that provide value. And one of the things that Cardtronics is looking at heavily is how to sort of turn the ATM into a sort of timeshare condo at Disneyworld. I envision a world in the future that has banks and credit unions thinking of our ATM as their own and when a customer of theirs uses our ATM and experiences very customized for them. So there are technological things we need to do to upgrade the software componentry of the ATM. There are business relationships we need to form, but at the end of the day we think we can drive an overlay additional products and services that are not Allpoint specific, but are network like that will drive volume to those ATMs and perhaps price points that are lower than we might average today, but we’d be happy to trade that for volume especially if we can convince the retailer grew the proper tracking of transaction detail that we impact their sales lines and that can provide relief in other cost lines we have.

So, the world is our -- the transaction world is sort of our voice through if you will and we will continue to work on ordinary things like sweet stakes and other ordinary things like coupon programs and other more secretive things like packaging up transaction access in different ways and models that drive more and more traffic to the base we’ve planned it out there. The big returns and margin increases available to Cardtronics going forward by pouring more of that transaction activity into our footprint and we’re very committed to doing that in a methodical and continuous lay over time.

Ramsey El-Assal – Jefferies

Okay, great. Thanks for taking my question.

Operator

Thank you, sir. Our next questioner in queue is Michael Grondahl with Piper Jaffray. Please go ahead. Your questions please.

Michael Grondahl – Piper Jaffray

Yeah, thanks for taking my questions guys. The first question is could you just help us understand how penetrated you are in the prepaid card market? You know what do you see the opportunity as in how kind of penetrated you are today? And then secondly, try to help us understand the main drivers that are going to help your EBITDA margin expand in the second half in 2013. Thank you.

Steve Rathgaber

I’ll take the first one and you can reflect on the second one.

Chris Brewster

All right.

Steve Rathgaber

So, in terms of the prepaid opportunity, you know I talked at the end of my remarks about 20% year-on-year growth of prepaid cards and I think that it is reasonable to believe that we are at the early stages of the prepaid story. I can’t claim expertise in the future of prepaid cards you know in the same way that somebody had greened out or Chase might from launching their own programs and doing their own research, but from all the research we do and it is consequential and deep it seems like we are at the very early stages of enabling a market. I mean the classic language has been about the fact that 25% of the population is under banked or unbanked or underserved pick your phrase as your and the belief is that that is only marginally penetrated with prepaid cards now.

You’re seeing large institutions like Chase recently announced their liquid card. You’re seeing Amex make big inroads with their products although not always successfully in every area where they’ve gone, but nevertheless being very aggressive in the space. You’re seeing the continuing stream of government benefits being transferred over more and more to cards. There is $4 million for example more card hold -- more consumers receivers of government benefits that for social security sake will be converted away from checks on to cards over the coming period of months. Those kind of things create some instantaneous pipeline, but there is a much larger longer term pipeline for just activating those folks with cards. So, the population that today is in the you know the check cashing places is the population that’s targeted. It’s a large population and we believe that as that population gets equipped with cards we will be a natural beneficiary whether the card is Allpoint or not. If it’s in Allpoint it gets one rate. If it’s not we get more money, but maybe fewer transactions, but still year after year 20% growth seems pretty rational and safe for the foreseeable future.

Chris Brewster

I think with regard to the -- I think the question Mike was what would be the margin drivers that we’re likely to see in play in the second half of next year. I think a couple of these are what I’d call just mechanical, but by that time we certainly will have cycled on the acquisitions that we did in 2011 and we should be well down the road in terms of harvesting the synergies on those acquisitions. So that would be point one.

The second, I also think of is just sort of mechanics and that is I would expect we would see much more normalized equipment sales volumes you know with the reduction in that low margin volume that has the mechanical effect of you know increasing the reported percentage gross margins of the corporation as a whole. I would expect by that time that we’d have these three big new portfolios fully ramped, but we’d see the full benefit of the branding deals that we’ve cut that relate to them and that should be helpful to margins.

Generally speaking, you know Allpoint is growing nicely. Our bank branding product offering is growing nicely. Both of those are margin accretive and we’re running things toward transaction gains on a relatively low variable cost sort of platform. So that’s helpful to margins. I guess from the spirit that all -- not all news is good news, I would also say that you know we do have a meaningful mixed shift underway in our business over in the UK and that is that you know we’re running proportionately fewer lower volume pay to use ATMs, surcharging ATMs as we call them and we’re running proportionately more very high volume free to use ATMs that basically live off on interchange only revenue model and don’t charge the consumer surcharge. And in brief, I would describe that that free to use ATM business as a much higher volume for lower revenue per transaction somewhat higher revenue per machine skin your percentage gross margin equal or higher dollar gross margin sort of business.

So if you followed me all the way through that sort of mental gymnastics it’s a -- you know it’s a business that you know contributes considerable -- lot of transactions, considerable revenue you know higher than we would typically average in the UK, but does it, it’s somewhat slender percentage margins, but has a good you know absolute dollar sort of contribution. The mechanical effect of all of that you know can be some dilution in overall in our reported consolidated corporate gross margins. So, hopefully I didn’t tell you had to build a watch when you just ask what time it was, but those were the major moves -- moving pieces that I see.

Michael Grondahl – Piper Jaffray

Well, thanks Chris. That’s helpful.

Operator

Thank you, sir. Next questioner in queue is John Kraft with D. A. Davidson. Please go ahead. Your line is open.

John Kraft – D. A. Davidson

Hey guys. Just first of clarification on the interchange changes from Visa, that was implemented very beginning of April right? There won’t be any sequential step down again in Q3?

Steve Rathgaber

Right. That’s correct.

John Kraft – D. A. Davidson

And as far as commitment or a window for how long that new pricing last as to given a sort of a commitment that that won’t change for the next year or something?

Steve Rathgaber

They’re not same as for giving commitments. They’re famous for getting into lawsuits I think, but it’s true that there is a cycle historically with interchange modifications and I think that cycle is often a year or two. One of the things about the last sort of change is John what that it was such an enormous change in terms of the absolute delta that there is not a lot of changes left that they can do quite frankly in terms of impacting interchange in a way that doesn’t damage you know financial institutions which are their customers. So, I can’t speak to what their plans are that I certainly have no particular insight.

I can speak to the fact that Cardtronics now has you know 55,000ish ATMs under our umbrella and that is a sizable access that should be important to any rational organization. I emphasize on the word rational and that should cause people to consider the appropriate business relationships with them for these if they wish to have access. So don’t know when the next changes might be; don’t know if the next changes would affect us. So, you know that’s all a stay-tuned sort of thing, but it remains dynamic in our business that we are working to get out from under.

Chris Brewster

Yeah, I would just follow that quickly John by saying the -- you know the primary trust of this management team with regard to that issue is simply to be -- to do the best we can do to make it less and less important to us and every time we sign up a new Allpoint customer it makes it a little less important to us, because in the Allpoint network we get to set the interchange rate. We’ve also sort of dialed into our standard form contracts, the concept of interchange rate protection in merchant agreements and in branding agreements where appropriate.

So, you know that’s what we can do as a team on a day-to-day basis and that’s primarily where our focus is you’ve seen the numbers that we’ve talked about publicly where if you go back into 2008 the interchange flow that we had from the major US networks represented about 21% of corporate revenues and today that’s down to around more like 11% or 12% of corporate revenues where we’re you know vulnerable to changes such as the one Visa main and you know we’re just determined to drive that as long as we can.

John Kraft – D. A. Davidson

Okay. That’s helpful. And I just wanted to also touch back on the strength and the branding. And just -- and Steve you talked about the article and you know we know that this is happening, but as far as why the banks are starting to reevaluate this, is this really a kind of a back to the basics with them and then the lack of resources or is this a recognition of your value proposition or you know what's going on there and maybe more importantly, how does your pipeline for new deals look?

Steve Rathgaber

So just to follow your order there, I think it is difficult to make declarations about the banks’ position on these kind of things. I think some banks are we treating for very specific situation or reasons from certain things where they’re investing in other banks and we’ve been the beneficiary of that. I think in other cases things that have yet to try are offering with branding. Well, we’ve got two that have come to the four this quarter and that’s a validation of bringing new player for the table and there is a bunch of top banks that we don’t do business with that are opportunities for us.

So, it’s hard to say that all banks are in retreat from retail locations. I would never suggest that. And in fact we have some evidence where in some parts of the country some banks are investing a little further in it and you know I still think a lot of our competition for sites is with the largest banks in the land. Having said that, our pipeline generally is good for our -- the services we’re offering. I would say numerically on the ATM front it is comparable to what it’s been in the past, maybe a little thinner in some areas, but we had a very healthy pipeline and did have delivered for us as you’ve seen in first quarter and in proceeding quarters.

In terms of branding that is an ongoing journey for us. We have a solid pipeline of opportunities there. As I mentioned in my notes we have over 10,000 ATMs available for branding. And we continue to work to get those ATMs branded, but we are feeling very good about the whole branding offering and we believe bringing new branding partners on to the table you know is a wonderful sign. And we believe classic branding partners like PNC and USAA are expanding with us are declaring that the model works. So, it’s all good news from my perspective relative to the branding service and relative to the business model and I feel very good about the pipeline across financial institutions and in terms of ATMs available and retail sites for placement.

John Kraft – D. A. Davidson

Great. That’s all I’ve got. Thanks guys.

Steve Rathgaber

Thank you.

Operator

Thank you, sir. (Operator Instructions) Next questioner in queue is Bob Napoli with William Blair. Please go ahead. Your line is open.

Bob Napoli – William Blair

Thank you. Good afternoon.

Steve Rathgaber

Hi Bob.

Chris Brewster

Hi Bob.

Bob Napoli – William Blair

Like to getting old, I used to hit the one, four button much quicker and I got in the queue much earlier. I also take lesson from Jim Kissane I think. I think he is older than I am. It’s a question on the growth of the business on -- I mean you guys have added a lot of ATMs through acquisition over your history. You’ve also added a lot organically in nice combination, but you now have you know comfortably over 40,000 ATMs in the US. How much more opportunity is there inorganically as well as organically for expansion? I mean it can -- are you getting relatively maxed out in the US? Do what -- are you seeing opportunities to continue to add inorganically in this market and in other markets?

Steve Rathgaber

So, by inorganic I’m assuming you mean acquisition sort of opportunities and…

Bob Napoli – William Blair

Correct.

Steve Rathgaber

What I can say is that we continue -- I think I mentioned on the last call and that continues to be true that we’re seeing more properties available out there you know than in my first two years here combined on a regular basis now. We don’t necessarily see an opportunity for Cardtronics in all these properties, but there are ones out there that we explore from time to time and I would expect to make announcements from time to time on acquisition that we believe make sense for our shareholders. So, the pipeline is far from barren. Now, the properties are not all of the same caliber and quality or size, but there is some interesting stuff that comes along and we are interested in it when it’s available at least tests the fit.

As it relates to organic, you know there are well over 400,000 ATMs in United States and I believe that it is in our shareholders’ best interest for us to continue to create a network effect for Cardtronics that increasingly puts us into position to extract the value from our network for our shareholders and by that I mean if we can get to 50,000 or 60,000 ATMs in United States I think that gives us the opportunity to do bilateral arrangements with networks that could be another course of action for reducing exposure to interchange for example.

So, there is room for us to grow and there is reason for us to grow, but when I think about Cardtronics and future growth, I focus mostly on transaction share. That’s where I think the magic can happen for our retailers and for our shareholders and that is the continued focus over the longer term, but then the short term both you know cues are meaningful to us both cues have inventory and will continue to assess it.

Bob Napoli – William Blair

What about additional markets? I mean our -- talked about the US, are there opportunities -- are you seeing opportunities in Canada, in the UK and are you looking at other countries?

Steve Rathgaber

So, we obviously are seeing opportunities in other countries the ones we’re in specifically. We moved into candidly last year as you know followed that with the 7/11 deal and believe there is additional opportunity up there for us and are happy with the investment we made and quite frankly think we’ve made it wisely going in with the smaller asset versus a larger asset. In the case of the UK, we’ve recently announced the Shell deal which is a very sizable deal and a partner with sort of global legs in terms of expanding the relationship. We have other deals with international players where we routinely talk about the possibilities of expansion and we’ll wait for the moments to be right there.

I have a more difficult time jumping into new markets that don’t have some of the characteristics that we think can deliver value. So, for example you know we’ve recently been looking at India on and off and if you follow the trade crest on India you’ll see that you know the government is smacking the middle of auctioning off ATM sites and one part of the government is saying you can’t have feasible at a certain level and another part of the government is saying but we want to create ATM incentives. And you just have the feeling that people are winning business there on pennies of transactions not our dollars of transaction model.

So that’s not an environment that I think would necessarily at this stage at least be conducive to our shareholders. We recently witnessed our Australia selling some assets to competitor of ours north of the border and we looked at those assets and didn’t reach a conclusion that it was a good fit financially or from a growth opportunity for Cardtronics. We think we had better fish to fry and that you use for our capital dollars. So, it continues to be selective acquisitions. There is lots to buy out there internationally, but I’d rather buy things that are going to fit the model and drive shareholder value. And so far we feel we got enough of the really good opportunities to avoid reaching down a little bit further into the barrel quite frankly.

Bob Napoli – William Blair

And then just last question as far as you really haven’t mentioned Steve the managed services side of the business as far as pipeline or opportunities? And I mean is there anything going on in the managed services business with FIs or retailers?

Steve Rathgaber

Yeah, I think my answer on that is pretty vanilla in terms of what it’s been in the past. You know the managed services model is really a model that is for entities that want to stay in the game from a collecting surcharge and interchange model type perspective, but don’t want to do all the managing of the ATM fleet and that sort of thing. And that’s a subset of a subset sort of a market perspective on the retailer side. And where those deals pop up as you know we go in and bid them and we bid the multiple ways one to own the equipment and go for a large relationship and other times to just go for the managed services relationship.

We like the managed services relationship, because it’s fixed revenue streams. It takes any volatility out of the transaction side of the business, so we think it’s a good blend, but we don’t think we’re sitting on a model where someday soon dozens of financial institutions are going to start moving away from their ATM fleets to an outsource model. That’s not again what we were focused on with managed services and I think again we have better richer opportunities in front of us like the ones we shared with you on this earnings call that are going to drive better shareholder returns than some of those markets.

Bob Napoli – William Blair

Thank you very much.

Steve Rathgaber

You’re welcome Bob.

Operator

Thank you. Next questioner in queue is Andrew Jeffrey with SunTrust. Please go ahead. Your line is open.

Andrew Jeffrey – SunTrust

Hi guys. Thanks for taking the question. I apologize I jumped on late, so if I’m repetitive please just slap my hand. I’m just looking at the revenue per cash withdrawal transaction in the quarter and I understand what's going on with surcharge and interchange clearly, but it looks like branding and Allpoint as well as managed services revenue per transaction is down year-on-year. Is that just purely mix from acquisitions or is there anything else going on there is down sequentially too?

Steve Rathgaber

I’m not sure I completely follow the question yet Andrew. Point me to if you would what you’re looking at in the release.

Andrew Jeffrey – SunTrust

I’m just looking at revenue per cash withdrawal transaction on your -- and I realize it’s the revenues and always generated on a per transaction basis when we get into branding and Allpoint as well as managed services, but it just looks on a per transaction basis to form little bit sequentially and I don’t know if that’s a function of mix or you know the denominator getting bigger given a larger number of ATMs or if there is something else going on I guess overall on pricing outside of surcharge and interchange of that should be thinking about?

Steve Rathgaber

No, I think primarily what you’re seeing is the effect of placing very high volume non-surcharging ATMs in the UK. In other words, to put it in simple terms the -- you know the -- these numbers are taken as example numbers as opposed to pure 100% fact, but say if your average ATM in the US is running something like five transactions a month at $2.50 surcharge and say $0.40 of interchange or something like that you know you’re seeing an average revenue of $2.90 in that model.

Over in the UK in a high volume free to use ATM we may be running 5,000 or 6,000 or 7,000 transactions a month at revenue per transaction of a little over $0.40 US and the fact that that free to use business in the UK is growing quite rapidly, you know in terms of the machine count it’s in place devoted to that and the fact that you know the volumes can be 10 times of the typical volumes that we see on an ATM. That simple fact is causing some you know dilution in that top level metric in terms of revenue per transaction.

Andrew Jeffrey – SunTrust

Is there anything changing outside of the transactional component of the business though as far as branding and Allpoint or managed services on a pricing -- from a pricing perspective, new customers, new contracts or is that all pretty status quo?

Chris Brewster

You know if you think -- if I think of it in its components you know the moving parts in the core sort of US surcharge and interchange I mean we certainly talked about interchange a bit of a headwind there you know surcharge is year-over-year. Surcharge rates are up a little bit not dramatically, but up a little bit. Managed services you know no change and I’d tell you Allpoint’s pricing model no change, bank branding pricing model no change. So, in other words if the question behind the question is you know for example have we you know gone through our renewal where we had to make a major price concession or something like that the answer is no.

Andrew Jeffrey – SunTrust

Okay. Yeah, I guess that’s someone driving I just wanted to get a sense if anything had changed on that front. And as you look out from an ATM count perspective, do you contemplate adding more company-owned ATMs you know I guess it’s two-part question. One is I think you talked a little bit about the pipeline, but should we continue to expect company-owned ATMs in the US to grow basically lock step with your customers or are there any other factors outside of some incremental contract wins that might affect growth rate in the US?

Chris Brewster

Well, we continue to have you know one of the fundamental things that we like about the company-owned company-operated ATM business in the US and the fact that we do that with these major wealthy in the retailers is they themselves are growing and provide us with some fairly significant organic growth. As I recall trailing 12 months 7/11 alone has added 600 or 700 units you know either by you know internal new builds or by acquisition and all of that’s represented opportunity to us. And I’m not looking at our head market peer here as I say this, but I’m not aware of any major change in the plans on the part of our big US customers to reduce their square footage add to their acquisition plans. So, I’d expect that piece of the model to continue. And as it relates to new retailers I mean we do have a pipeline and we’re you know selling against that pipeline.

Andrew Jeffrey – SunTrust

Okay. And on CapEx is this you know $70 million is that kind of a normalized year for CapEx or do you expect to see that number down next year in light of the ADA stuff going away?

Chris Brewster

Well, I think the influencers would be this certainly with ADA being in the rearview mirror that will help some. I mean we had a -- you know 2012 is proving to be a very big year in terms of new machine installations. You know we may or may not see that tail off a little bit. You know at the moment I guess I’m not seeing anything that would tell me that next year’s CapEx would be higher than this year and I could think of a couple of reasons you know particularly the ADA thing where it might be a little bit lower.

Andrew Jeffrey – SunTrust

Okay, great. Thank you.

Chris Brewster

Welcome.

Operator

Thank you. Next questioner in queue is Gary Prestopino with Barrington Research. Please go ahead. Your line is open.

Gary Prestopino – Barrington Research

Yeah, I’ve just two quick questions. You said you had 10,000 company-owned ATMs still available to brand.

Steve Rathgaber

Correct.

Gary Prestopino – Barrington Research

And then am I mistaken or with every off- premise bank ATM be a target for your company in some way, shape or form Steve?

Steve Rathgaber

I think that’s a fair statement target. So, I’m not saying every one of them is a good performer or anything like that, but rationally speaking, we think that there is a different expense model attendant to an off-premise bank ATM than an on-premise bank ATM. And we think that there is an opportunity there. So, depending on the type of bank they either want to control more of that or less of that, but absolutely I think it’s fair to say yes is the answer to your question fundamentally.

Gary Prestopino – Barrington Research

Well, how many of them are there out in the US?

Steve Rathgaber

The belief is that out of the 400,000 there is probably 65% of them or something like that are off-premise versus on-premise is what I’ve been led to believe.

Gary Prestopino – Barrington Research

And have you seen any movement of the bank to really start looking at someone and anything like yourself to take over these ATMs or are they still basically doing it themselves?

Steve Rathgaber

I think like most things in life it’s a mixed bag and you know we’ve seen the history of wins you know recently this quarter and then the first quarter that are attendant to at least one bank you know moving away from it. And we talked with folks all the time and budgets matter and when folks are looking for some relief we’re there, but it’s hard to paint the broad brush stroke and say everybody is ready to move out of that bank and give it over to us. I wouldn’t declare that at all, but what I would declare is that as we do more and more and get better and better and the case becomes more and more well-known, I think it invites more and more questions internally as to gee, why don’t we use them, because that’s less capital intensive for them and it’s lower cost for them. So, I think that is the opportunity that’s the ramp we’re building with the announcements in today’s earnings call and with the growth in our own portfolio. It keeps making the case more and more.

Gary Prestopino – Barrington Research

Okay, thank you.

Operator

Thank you, sir. And at this time presenters I’m showing no additional questioners in the queue. I like to turn the program back over to Mr. Rathgaber for any additional or closing remarks.

Steve Rathgaber – Chief Executive Officer

Alright. Well, again let me thank everyone for their interest in Cardtronics and hope you’re all enjoying the Olympics and have a great day.

Operator

Thank you, sir. Again ladies and gentlemen this does conclude today’s conference. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.

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