Cardtronics' (CATM) CEO Steve Rathgaber on Q2 2016 Results - Earnings Call Transcript

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Cardtronics Inc. (NASDAQ:CATM) Q2 2016 Earnings Conference Call July 28, 2016 5:00 PM ET


Phil Chin - EVP, Corporate Development & IR

Steve Rathgaber - CEO

Ed West - CFO & COO


Kartik Mehta - Northcoast Research

Bob Napoli - William Blair

Andrew Jeffrey - SunTrust

Ramsey El-Assal - Jefferies

David Ridley-Lane - Bank of America


Good day, ladies and gentlemen, 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Phil Chin, EVP, Corporate Development, Investor Relations. Sir, you may begin.

Phil Chin

Thank you. Good afternoon and welcome to the Cardtronics' second quarter conference call. On the call we have Steve Rathgaber, Chief Executive Officer and Ed West, CFO and Chief Operations Officer. Steve will start off with an overview of the quarter, followed by Ed with details on our financial performance. Then we will take questions.

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, including our Form 10-K for the year ended December 31, 2015 as amended and other factors set forth from time to time in our other filings, including the definitive proxy statement filed on May 19th of this year.

Actual events, results, or performance may differ materially. The statements on this call are made as of the date of this call and based on current information, even if subsequently made available by us on our Web site 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 a reconciliation of such measures, is included in the earnings release issued this afternoon and available on our Web site.

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

Steve Rathgaber

Thank you, Phil. And welcome, everyone. There are three key messages I want to communicate today. First, we continue to execute and deliver against our plan. It was another solid quarter, and I will share some highlights.

Second, secular trends continue to bode well for Cardtronics. We are well positioned to support the transformation underway in the banking industry. The transformation I refer to drives the focus on self-service, digital and mobile engagement and a shrinking number of bank branches, coupled with increasing demand for consumer convenience. And third, our own transformation journey logged another milestone with completion of the re-domiciliation to the U.K. It provides a powerful statement about our commitment to global growth and is poised to deliver meaningful results for our shareholders.

Now we turn to execution highlights. We continued our strong start to 2016, posting solid Q2 numbers. Ed will cover these more completely, but I wanted to highlight two of my favorites. ATM operating revenues were up 11% on a constant currency basis and we continued our journey of margin expansion, adding 110 basis points of gross margin improvement year-over-year.

On the retail side, we contracted over 1,200 new ATM turnkey locations in the second quarter, the best organic quarter since the first quarter of 2015. And it is noteworthy that six of the seven countries we serve contributed to this total. Our global expansion muscles are firming up.

The mix was geographically balanced 60/40 between North America and Europe and they represent a nice collection of high footfall locations, including college campuses, transit centers, and retail stores. We are seeing traction from our focus in the mid-market retailer segment in North America.

The financial institution segment also had a strong business development quarter. Allpoint, our surcharge-free ATM network, delivered the most successful sales quarter in my six and a half years at Cardtronics.

Twenty-nine financial institutions joined our network, and these banks and credit unions brought over 2.5 million cardholders with them. That brings to 65 million the number of cards that have surcharge-free access at our ATMs. And for Cardtronics retailers, that is great news.

It means tens of millions of consumers have another reason to visit these retailers. Consumers get surcharge-free convenience and the retailer gets shoppers with cash in hand, ready to transact. And in the competitive retail world, tens of millions of consumers is a fairly unique and very valuable offering and presents a strong incentive for any retailer to contract and renew with Cardtronics. But Allpoint's value proposition extends beyond consumers and retailers. We announced that Fifth Third Bank had joined the Allpoint network. Allpoint now has relationships with five of the top 25 retail banks in the country and serendipitously Fifth Third is the fifth.

It is a significant milestone. Fifth Third has $142 billion in assets and over 1,200 branches. Like many banks, Fifth Third is investing in digital channels. And Fifth Third customers want what all consumers want, convenient fee-free access to cash, despite going digital in other areas of their banking relationship. To meet their customers' needs for cash access, Fifth Third operates over 2,600 ATMs, including 1,100 off-premise locations. But even at that scale, they see Allpoint as critical infrastructure for transforming how they serve their customers.

Fifth Third was attracted to Allpoint's national footprint, density of coverage, high quality retail locations, and the quality of our service. Allpoint is the perfect complement to a bank or credit union's digital strategy. Our low cost, high value infrastructure lets the bank focus on building their digital channel. But Allpoint is not the only way we help banks execute their transformation strategies. A second illustration of the Cardtronics' value is with TD Bank, a longtime branding customer. We recently expanded our relationship to become their outsourcing partner for 140 off-premise ATMs in the U.S. and Canada. We can provide multiple models tailored to the bank's specific needs. And each product we engage with carries the possibility of even deeper relationships with our clients.

Next I would like to provide some insights into secular trends and their impact on our business. First trend, a Visa study from 2014 indicates that 57% of consumers say ATM convenience is the number one reason they choose their financial institution. And for much of the rest, it is the number two reason, so very important. My conclusion? Banks and credit unions need convenient access to ATMs because their customers demand it.

Second trend, a Mercatus study from 2014 says 73% of consumers will do, "anything" to avoid a surcharge. And since 2014, those fees have only gone up. Conclusion, banks and credit unions need surcharge-free access to cash because their customers demand it. And that sounds like a job for Allpoint or bank branding, particularly if you are looking to reduce costs by closing branches.

Third trend, a 2013 Fed study showed that the ATM channel now accounts for more withdrawals and deposits within the U.S. than branch tellers. Conclusion, ATMs are part of the solution for lowering branch costs and providing convenient self-service. They are critical infrastructure.

Fourth trend, a presentation from a Chase Investor Day states that at the end of 2015, 80% of its millennial banking customers used the ATM channel an average of 3x per month. That is more than 3x as often as they use the branch. And a greater percentage of millennials use the ATM than non-millennial Chase customers, meaning the digital folks raised on ATMs use ATMs.

Finally, the frequency of usage is the same for millennials as non-millennials. Conclusion, for the digitally engaged millennial, the ATM is part of the digital service delivery model and cash is part of their life.

Cardtronics sees the ATM as the physical component of the digital banking model and as banks reduce branches, our ATMs become more valuable. These trends, in combination with the continuing trend of branch closings, position Cardtronics extremely well for the future. We are working hard to become your neighborhood ATM in every market we play. Our consumer value proposition is well understood and we are now seeing a strengthening value proposition for financial institution partners.

Cardtronics is the capital and cost efficient physical distribution network for banks and credit unions that find it increasingly difficult to justify a dedicated branch infrastructure. We are the specialist that operates at scale and we do ATM services better, faster and cheaper than anyone else.

The last area I want to comment on today is the July milestone of completing our re-domiciliation to the United Kingdom. We are enthusiastic about our prospects in both North America and Europe. Our new home of incorporation strengthens our global position and perspective and that will help us continue our growth into Europe and beyond.

Now, much of the secular trend data I covered with you today was U.S. centric, but the prospects are equally exciting in other countries. Banks are in transformation mode in many countries and we are prepared to help them with our portfolio of ATM service models. Each year I find myself increasingly bullish on the future of Cardtronics.

And now I'd like to turn it over to Ed to provide more color on the financials and some of the early benefits of our re-domiciliation. Ed?

Ed West

Great. Thank you, Steve, and good afternoon.

The key takeaways of my comments today are as follows.

First, Q2 was another solid quarter of execution, highlighted by continued growth and margin expansion. Second, our financial institution offerings continue to resonate with the market, as illustrated by Fifth Third Bank joining the Allpoint network. And third, we are updating our 2016 guidance to incorporate business performance to-date, expectations for the rest of the year, and our re-domiciliation to the United Kingdom. Now let's get into the details.

Starting with total revenues for the second quarter, we reported $324 million of revenues, up 7% year-over-year, or 9% on a constant currency basis. If we focus on our core ATM operating revenues, which exclude equipment sales, they grew 9%, or 11% on a constant currency basis. On an organic basis within ATM operating revenue, growth was 5% on a constant currency basis.

Now breaking down revenues into our business segments, ATM operating revenue growth in North America was 8%, of which less than half was organic. ATM operating revenue growth in Europe was 11% on a constant currency basis, which was mostly organic.

Acquired growth in the quarter came from our recently acquired Chase portfolio, the CDS acquisition, which we completed on July 1st last year and the portion of the U.K. co-op estate that we had not transitioned by the second quarter of last year.

Now moving on to the same-store growth metrics, the U.S. experienced same-store revenue growth in the quarter of 2.5% and same-store withdrawal transaction growth of approximately 1% when adjusting for locations that were recently de-branded. This is consistent with the 1% result in Q1.

Our strategy in North America is geared towards driving more transactions to our existing ATM estate and ultimately providing lift to the same-store growth. The Fifth Third announcement that Steve talked about is evidence that we're executing on that strategy, and then, we have a compelling offering for financial institutions to drive their customers to our ATMs over time. The U.K.'s same-store transaction growth was down about 2%, which is consistent with recent trends.

Now moving down the P&L, gross margin was 35.1% compared to 34% a year ago. The margin improvement was driven by a number of factors, including the disposal of non-core portions of the acquired Sunwin business in the U.K., which was lower margin, the CDS acquisition, which was higher margin and margin accretive and continued positive operating leverage in our U.K. business.

Gross margin in North America was down slightly for the quarter, which was driven by higher than usual ATM maintenance costs and the recently acquired ATM portfolio from Chase, which is under a more costly temporary transition arrangement.

And adjusted EBITDA of $81.7 million was up 10% year-over-year, or 13% on a constant currency basis. SG&A costs, excluding the costs related to the re-domiciliation and the stock compensation came down sequentially as a percentage of revenue from Q1, as expected.

Adjusted earnings per share was $0.80, up 13% from $0.71 a year ago. We estimate that adjusted EPS would have been approximately $0.03 higher, to $0.83, absent the unfavorable foreign currency movements.

Moving on to the balance sheet, total debt outstanding as of June 30 was $491.3 million. This is down $77 million from the end of 2015. The net debt to adjusted EBITDA was 1.7 times at the end of the quarter. Subsequent to the end of the quarter, our credit facility was fully paid down, leaving the full $375 million of capacity available. We amended and extended our credit facility to 2021 in conjunction with the re-domiciliation. Our senior notes go out to 2022 and our convertible notes go out to 2020. We have ample flexibility to fund future growth related initiatives.

Now before I turn to guidance, I want to make a few comments on the re-domiciliation to the U.K., which was completed on July 1st. As we think about our continued global expansion, there is a lot to like about our new PLC parent structure, including enhanced opportunities to service global banks, increased competitiveness on global acquisitions and other longer term Treasury and tax benefits.

Since the June 24 Brexit outcome, we have received numerous questions on how Brexit impacts our re-domiciliation and our expansion plans in Europe. As it relates to the re-domicile, we were fully aware of the possibility that the U.K. could leave the EU prior to making the decision to re-domicile.

After significant consideration and analysis, we did not see a practical scenario where the U.K.'s exit from the EU in conjunction with the re-domiciliation would put us in a worse position than not re-domiciling the company.

As it relates to our business operations in the U.K. and Europe, we are no different than any other multinationals with a U.K. presence in that there is now a little more complexity and uncertainty in the business and regulatory environment. However, we do not expect U.K.'s separation to significantly impact our ability to grow in Europe.

Brexit has impacted us in the way of lower interest rates and a weaker British pound. These two effects in our case work to partially offset one another. In the near term, the currency translation of our GAAP financials have been more impactful.

And turning now to guidance, a few overarching comments before I get into the numbers. First, regarding exchange rates, the movements in GBP to USD exchange rate adversely impacted our financial outlook. Our previous guidance was based on 1.4 USD to sterling. In our revised guidance, we are now assuming 1.3x in response to the current FX environment. Next, flatter forward interest rates are favorable to our cost to borrow cash.

And finally on taxes, this being our first quarter as a U.K. domiciled company, I will give extended commentary on how to think about our effective tax rates in 2016 and beyond. And I'll come back to that in a minute, but now on to the guidance numbers for the calendar year.

On revenues, we are maintaining our guidance range of $1.25 billion to $1.27 billion. On adjusted EBITDA, we are narrowing the range to $320 million to $324 million, which brings in to the top end of the range by $4 million. This is largely due to the almost $4 million adverse impact from FX as well as some incremental recurring operating expenses as a U.K. domiciled entity.

On adjusted EPS, we are raising the range by $0.12 to $3.20 to $3.30. This is inclusive of $0.04 of adverse impact from foreign exchange. It also incorporates updated effective tax rate assumptions following the re-domiciliation.

Now, let me just spend a little more time on the taxes. Historically, the company has used a non-GAAP tax rate of 32% to approximate our long-term cross-jurisdictional effective tax rate for adjusted earnings purposes. Now, with our re-domicile completed and continued substantial profitable operations in the U.S. and U.K., we plan to start using our GAAP tax rate in our adjusted earnings measure on a go-forward basis.

While the GAAP tax rate will fluctuate from time to time due to mix of earnings across jurisdictions, one-time events, and other factors, we generally expect that it will be a good estimate of tax expense on our adjusted earnings, especially as we evolve our geographic mix over time. We would intend to adjust for significant one-time gain or loss items.

With that as background, some specific guidance on tax rates. We expect a 26.5% average tax rate for the back half of 2016. This 26.5 percentage average will not be smooth. Q3 rate is expected to be approximately 24% and the fourth quarter rate is estimated to be around 29%. The second half rate excludes potential one-time tax expense for certain structural changes that we may complete late in the year. Some additional context on tax in the back half of 2016, in the spring, prior to our decision to re-domicile, the U.S. Treasury put out new proposed tax regulations that, if finalized and effective this year, could impact our tax rate in the second half of the year.

We have taken a conservative view of timing of these new regulations, informing the guidance for the second half. To the extent the regs take long to become effective, we would experience lower tax rates than this guidance suggests. As previously mentioned, we expect our rates to come down over time as earnings grow outside of the U.S. The timing of the reduction could accelerate depending on our level of acquisition activity.

Now shifting to our preliminary view of the 2017 tax rate, based on what we know today, our full year 2017 tax rate is expected to be around 30%. This is a preliminary estimate that we will continue to refine as we go forward. This also assumes that Treasury regs will be finalized and implemented as proposed in 2016.

Beyond 2016 and into 2018, we expect an effective tax rate in the mid to high 20%'s. This is based on the current view of geographic mix and tax structures and regulations both of which are obviously subject to change.

One final comment on the tax impact to our reviewed 2016 guidance. If we remove the impact of the pre to post re-domiciliation, our adjusted EPS range isn't very different than our previous guidance. The exchange rate headwind was partially offset by lower expected interest rates on borrowed cash. The takeaway is that the business is largely tracking to expectations.

Now, on the capital expenditures, we're lowering our forecast for the rest of the year by $20 million to $130 million to $140 million driven by timing push out. Some of the previously planned 2016 spend will cross over into 2017.

To close, the quarter exhibited healthy results and we look forward to continuing that through the rest of the year. We remain encouraged by our positioning in the market relative to trends in the consumer banking market. And we are pleased to have the benefits that go along with our newfound status as a U.K. domiciled company, some of which came into play in our updated 2016 earnings guidance.

With that, I'll turn the call back over to Steve.

Steve Rathgaber

All right. Thank you, Ed. Operator, we'll open it up for questions at this point.

Question-and-Answer Session


[Operator instructions] And our first question comes from the line of Kartik Mehta with Northcoast Research.

Kartik Mehta

Hey, good afternoon. It seems as through one of the other benefits you could see in the future would be EMV. And I'm wondering if you could provide maybe some perspective on how you view EMV impacting Cardtronics' business, either from -- I understand you've talked about costs, but from a transaction standpoint, or number of ATMs that are out there.

Steve Rathgaber

Well, Kartik, this is Steve. I'll take a swing at that. Certainly, we've talked in the past about, as we roll out EMV, our desire to roll out software that has product feature/function that should be revenue oriented and transaction acquisition oriented; things like our multibank branding capability.

So, we do expect as we exit this year to have a substantial portion of our ATM fleet converted to both the new software and EMV. And as a byproduct of that, I think several things will be true. We'll be able to sell better into our fleet. We'll be able to attract customers who value the EMV capabilities of our ATMs for branding purposes, because they'll want to have that kind of secure capability available to them. And I think at the end of the day we can possibly benefit from the ATMs that choose not to go EMV that are not ours. That maybe thins the herd a bit, although I can't say I'm expecting a whole bunch of that at this point in time. So, that'd be some perspectives on your question.

Kartik Mehta

And then, Steve, I was hoping to get a little bit of perspective on what you think about the U.K. It seems like there are changes happening in that country as it relates to the LINK network, whether it be whatever interchange is going to be in 2017, whether it be LINK potentially looking at different ways to calculate interchange rate, and obviously, the recent VocaLink acquisition by MasterCard. I'm wondering if you could just talk big picture wise how you see all those changes affecting Cardtronics, either positive, negative, or neutral.

Steve Rathgaber

Sure. Sure. So, let me run through a few of the elements first and then sum up with a rating, if you will. So, first up, important to understand that LINK, the ATM network, is a different entity than VocaLink, the entity that was acquired by MasterCard. And just under the heading of things that are easily confused, the LINK name sits in both of them partially there. So, that can be confusing to some.

MasterCard acquired VocaLink. VocaLink is the processing entity. LINK stands independent and it is the network. And that is what we are part of. We access -- we provide our ATMS into the LINK network. So, relative to the first activity that occurred recently in the U.K., there was this separation between LINK and its processor. They used to be one entity. With that separation, several things happened.

LINK signed up for a long-term processing contract with VocaLink and all of the membership of LINK signed up for a long-term contract with LINK. So, what has been created as a byproduct of that journey is a relatively stable environment, at least contractually, for the LINK network to continue for the foreseeable future. So, I would park that under the heading of change is always in the air, impossible to know what happens, but there is at least a structure in place that suggests some significant stability within the LINK network.

The second point I would make is that the interchange model that has historically been engaged is an interchange model that remains engaged at this point in time. And it's the same machinery that will deliver the 2017 interchange that is employed by the network. So, we don't see any change in the approach to calculating for 2017.

Next, it's difficult to speculate on other future considerations. But if there were ever to be changes in the LINK interchange model. One of the things I love about Cardtronics is, because of its scale and performance capabilities, it's uniquely positioned to handle any sort of change winds better than probably any other organization in the U.K., in the United States, or many other place in the ATM space.

So, I would take those couple of things and add in one final thing. MasterCard as a processor is a large scale organization and they might be able to actually help VocaLink the processor, not the network, get better economics over time. And that would serve the LINK network potentially reasonably well.

So, the net of all that is, like Brexit, it's hard to now. But like Brexit, other than the occasion ripple in the FX, it's probably a net neutral for the foreseeable future with a little dash of uncertainty sprinkled in just to keep it interesting.

Having said that, the Cardtronics' business model that is incredibly successful in the U.S. is a multi network model. We're comfortable with multi network models because it gives us an opportunity for competition between networks and an opportunity to build relationship that are mutually beneficial.

So, I would say I don't see a large downside of any kind. But, if there was, nobody is better prepared to handle it than Cardtronics. And if I had to speculate, over time I think the franchise we've built in the U.K. will be a sterling one, to borrow a financial expression there and one that can not only stand the test of time relative to change, but quite frankly flourish in an environment of change.

Kartik Mehta

Thank you, Steve. And just one last question and I understand it's a little bit difficult. But any thoughts as we go into 2017, the potential impact from obviously 7-Eleven and how that might impact earnings? Any color you could give would be helpful.

Steve Rathgaber

Say again?

Kartik Mehta

Any thoughts as we go into 2017 with the 7-Eleven overhang, potential impact to business? If you could give any color it would be helpful.

Steve Rathgaber

Yes. It's still not productive for us to do that at this point in time. I'm sorry. I know it's on everybody's mind. We do hope to be forthcoming on that sooner rather than later, but probably not until next year. And the reason for that remains the reason that it's been from the outset. We're in discussions with a lot of parties about lots of things. And depending on how the unwind happens and what other potential relationships might happen around the disgorgement of the ATM slice there, it's still stuff that is under active negotiation and consideration. And it just doesn't leave us in a position to provide any meaningful and useful clarity. Sorry, I understand that's frustrating. But, we will get there, that much I can guarantee you.

Kartik Mehta

Thank you very much. Appreciate it.


And our next question comes from the line of Bob Napoli with William Blair. Your line is now open.

Bob Napoli

Thank you. I just wanted a little bit of clarity on the tax rate. Because I -- for next year you put out a number of 30%, but then 2018 mid to high 20%'s. Was that -- I'm sorry. I was a little confused by the trend in the tax rate and your view on the tax rate in the longer term.

Ed West

Sure. Thanks, Bob. This is Ed. So, as we'd talked about previously, we would provide guidance on the call today going forward. And given the guidance of roughly 26.5% for the balance of the year, and it's kind of uneven and a little choppy between Q3 and Q4 as we start off here and obviously a little bit lower in Q3 and a little bit higher in Q4. And as I mentioned in my comments previously, those numbers can change to some degree based on the Treasury regulations that are then proposed. And it's unclear right now the specific date on which those would be implemented. We've taken a fairly conservative view on the timing of that. And to the extent those were to elongate, you would see the rates be incrementally lower.

So, for 2017 overall, one of the reasons why the back half of 2016 is so much lower is because of FIN 18. We have to catch up on the tax rate and that benefits the lower effective tax rate in Q3.

Going into 2017, we'd be at more of a normalized rate now with the new structure. And just from right now from a preliminary planning standpoint -- obviously we're not giving guidance overall for 2017, but just for your models we would just suggest today approximately a 30% effective tax rate for 2017.

To the extent Treasury rules were delayed that could actually lower that rate. And also to the extent our growth rate outside of the U.S. and other domiciled -- other countries in Europe and other places around the world were to grow more rapidly, you would see that benefit the rate. And then also, to the extent we had acquisitions over and beyond about where we are today, that could also serve to accelerate the lowering of the rate.

Then over time beyond 2017, you see that rate continue to step down as we grow in locations outside of the U.S. And then also there's potential, again, to continue to lower that rate even more to the extent we have acquisitions.

So, as I mentioned when we first announced this, this is a long-term opportunity for Cardtronics with the re-domicile. It has a long term benefit in our overall effective tax rates, just given where unfortunately the U.S. tax code is in the U.S. and lower many places around the world. And you'll see us benefit from that on a permanent basis going forward.

Bob Napoli

Great. Thank you very much.


And our next question comes from the line of Andrew Jeffrey with SunTrust. Your line is now open.

Andrew Jeffrey

Hey, guys. Thanks for taking the question. Congratulations on the re-domicile and looking forward to big things from you in Europe now.

Steve, I like the commentary, the hopeful commentary for sure, around secular trends driving demand in the U.S. bank industry. Can you drill down a little bit in terms of what we might think about maybe from a bank size perspective? When you think about those banks that at some point are likely or could possibly outsource to Cardtronics, are we talking sort of that second tier, big regional banks, maybe the top 15 and below, or what's the right way to think about that? I shouldn't -- I should say number 15 and below.

Steve Rathgaber

Yes. Well, one of the ways we're looking at it, just in terms of internal segmentation, is the top 25. And as I mentioned in an attempt to be a little bit cute, Fifth Third is the fifth of the those 25 that we now have a relationship with. Now, the beautiful thing about the Fifth Third relationship is it is all the cards. All the debit cards in Fifth Third are part of this relationship. The other models that we have for Allpoint participation are of varying flavors of card participation.

So, in tranche number -- tranche activity number one, we have Allpoint and we have a belief set that we are moving up market, and expect to increase our penetration in the top 25 banks over time. We're working it. Not everyone will come over the finish line, so I'm not suggesting next earnings call we'll be at 22 out of 25 or something. But I do expect to incrementally add larger banks over time, particularly as they see the benefit accruing from the relationships that are now picking up some steam. So, that would be tranche number one.

Then within the outsourcing question, I would encourage you to think of outsourcing in sort of a range of service models. We could be helping banks with the maintenance of their fleet. We could be helping banks with the processing of their fleet. We could be helping banks with the ownership of their. It could be a collection of opportunities.

And what I can say to you is I think something I've said earlier, is that we have inbounds that are engaging us on a number of those models. And I don't know that I would focus that solely on the top 25 or the top 15, but the TD deal is indicative of a top 15 type bank. And I believe that there'll be more of those and I believe those will happen in the U.K. I believe those will happen in other countries we're in as well. So, I'm sort of mushing this around on you a bit here, but it's a market opportunity that we're excited about. It's a market opportunity that's generating inbound activity. And I believe that you and I will be pleased with the progress we make in the coming months and quarters.

Andrew Jeffrey

Okay. And as a follow-up, can you talk about your competitive footing and position in Europe, particularly from a cost standpoint? I just wonder, as you see deals come up -- and then maybe this changes somewhat with the re-domicile to the U.K. But as you see deals come up and I'm thinking about one of your competitors in particular, can you compete effectively at your incremental costs and current scale in Europe? And are we going to see that competitive position perhaps improve on a relative basis?

Steve Rathgaber

Yes. I think, Andrew, that the opportunity is there for us to compete on a scale basis. Cardtronics has scale globally on a number of factors out of the gate, purchasing power of ATMs, that sort of thing.

So, there are a number of opportunities where we'll be able to leverage our existing scale capabilities. And then there are others that we'll build over time. But if you look at Europe and the countries we enter, we do processing and services differently.

So, when we entered Ireland, that's very much leveraging our U.K. model because it can. When we go into Poland, that's a little bit more of relying on some partners. Using our name, using our ability to win placements and that sort of thing and relying on processor support. In Germany, we've got a slightly different model.

But in no case, I can say at this point, are we unable to compete with any competitor that you might name, at least in terms of what we're seeing. We're winning some. We're losing some. But, competition is good for the soul and good for our business and it sharpens the thinking. But I am not -- you should not think that somebody else's scale is in the way of us growing in Europe.

Andrew Jeffrey

Awesome. Thank you.


[Operator instructions] And our next question comes from the line of Ramsey El-Assal with Jefferies. Your line is now open.

Ramsey El-Assal

Hi, guys. On M&A -- on the M&A front, it seems like you have a incremental tax benefit obviously with re-domiciling and especially now with the contribution that could make to a lower tax rate to get deals done outside the U.S. Can you comment on your non-U.S., ex U.S. M&A pipeline and activity?

Steve Rathgaber

Sure. The pipeline that we are looking at is multidimensional. And I don't mean to be cryptic, but they range across different size deals from bigger to midsize to smaller. And that's both in the U.S. and outside the U.S.

We believe that there are opportunities for small portfolio acquisitions here and there that provide a footprint for us entering a particularly new market. We believe there are opportunities for a few larger deals based on the timing that's appropriate from the seller's perspective. And we can't always control that. So, the pipeline, as I've said in prior calls, is as rich as we've ever seen it in terms of size, breadth and the number of countries. But the discipline is also in full swing in the company and just because it's on a list doesn't mean we should do it.

So, I don't know if I'm helping you get anywhere with your question, but the pipeline is one I'm pleased with and one that will bear fruit for us over time, but always difficult to pinpoint the time. But with the re-domiciliation, certainly an asset to compete on a level playing field with any other potential acquirer.

Ramsey El-Assal

Okay. There was some press in the quarter out about Tata in India looking to offload their private label ATM business. Not obviously commenting on any specific transactions, but are you feeling more prepared as a company to kind of move further afield to different parts of Asia or Latin America or other markets where there may be a strong secular trend, or should we still expect Europe to be kind of the primary focus of your expansion plans in the near term?

Steve Rathgaber

I think I would probably characterize it as this. We're in a scale business, so focus is healthy. And I think mastering the art of the European deal would be a useful construct for the company for a bit. Having said that, as you well know opportunity knocks in different times and different ways and we don't always get to regulate the flow of those knocks. So, we certainly remain open to the right opportunities anywhere on the planet, quite frankly. And the question is are they the right opportunities and is it a good time to be in the market?

I will say the following. I always prefer to be in a market that is slightly more mature rather than slightly less mature because I don't want to be in the business of training people on how to use ATMs. I'd rather be in the business of making an existing model way more efficient, if that makes sense to you.

Ramsey El-Assal

Okay. Yes, that helps. Last one for me. On the preferred branding product, the multibank branding product, you've been out in the marketplace upgrading machines to EMV. I'm assuming that's a product you've tested quite extensively. Will we see material revenue from that? And I say material, it doesn't need to be an enormous amount, but will we see an impact from that or other new products that you've been working on this year?

Steve Rathgaber

Unfortunately, probably not, but I certainly expect you to see stuff next year. And I expect to have some good storyboard for you in next year. We are operating it and customers are accepting it. But I just think, given the challenges of the complexity of the EMV rollout combined with the challenges of the software stack we were rolling out, it's just gone slower. And I would have to fess up that it's in that slowness that we probably missed the window to have material opportunity this year. But I'm extremely bullish on the opportunity overall and I am excited about its ramping opportunity in 2017, 2018 and beyond.

Ramsey El-Assal

Got it. All right. Thanks. That's all for me.

Steve Rathgaber

Thank you.


And our next question comes from the line of David Ridley-Lane with Bank of America. Your line is now open.

David Ridley-Lane

Sure. So, I wanted to ask about the Fifth Third Bank win on Allpoint and the historical experience you've had when you add a significant number of cardholders to the Allpoint network. Is there a rule of thumb that you kind of have maybe internally around the benefit on same ATM transactions when you do see a sizeable increase in Allpoint cardholders?

Steve Rathgaber

So, there are rules of thumb, some of which we would not expose in a competitive public environment, but I can do the following for you. We think in terms of Allpoint, generally without any energy, creating a double or a triple over what we would normally see from an institution at our ATMs.

I think one of the things you'll see in the future, particularly from deals with larger entities, will be more of a structural commitment to leveraging the asset. And by that I mean to imply hopefully over time a materially higher rate of penetration at Cardtronics Allpoint ATMs by those kinds of card bases.

So, there is sort of a -- branding gets you one kind of ratio. Allpoint gets you another kind of ratio. And if there's no engagement, that's one level. But if there is engagement, if there is marketing, if there is commitment, then you'll see something material.

And we run card bases on our platform where, for some financial institutions that never were doing Allpoint or branding with us, we might have seen 2% or 3% of their traffic. And if we manage the account -- which takes a whole lot of handholding in a time, so it's not add water and stir -- we can see penetration rates of all of their ATM transactions, 10%, 20%, 30% of all their volume. And that's where, for some of these larger accounts, we hope to deliver meaningful same-store impacts over time.

The beautiful thing about the Cardtronics' model is we don't have to teach people new behaviors. They know how to use an ATM, but we still have to teach them to use the right ATM. And when the financial institution cooperates, pretty good things happen with that from a same-store perspective.

David Ridley-Lane

Understood. And then in your ongoing conversation with banks and the mix of inbound requests and sort of things, wondering what's generating the highest interest. Is it taking over off-premise ATMs? Is it signing up for the Allpoint network? Is it something else? What's sort of the hottest area in that broad spectrum of services you're --?

Steve Rathgaber

I guess I would call it a combo in the sense that, as banks are managing their transformation process to this digital model, fewer branch model, lower employee count model, they're looking for solutions. And we find ourselves brainstorming with them as opposed to saying take this off the rack sort of thing. But, if forced to answer your question, I would say off-premise activity like the TD deal and -- is a hot subject because it frees up capital and allows them to focus on some internal activities. And increasingly, I think the Allpoint model is getting additional traction.

Branding still does fine and it gets combined with other activities. And multibank branding I think will give that new depth of texture because it will allow us to alter the pricing models for effective -- getting multiple entities delivering greater returns on an ATM, but at a lower transaction cost for them.

So, I think ultimately I'd like to be telling you sometime next year all cylinders are pumping equally and aggressively. But I think in fairness, for a lot of the larger banks, their off-premise leads are a target at the moment. And for lots and lots of banks big and small the Allpoint access, so they can stop thinking about deploying off-premise is increasingly important.

David Ridley-Lane

Thank you very much.

Steve Rathgaber

You're welcome, David.


And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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