Cardtronics plc
Q1 2018 Earnings Call Transcript

Published: 5 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cardtronics' First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Brad Conrad, Chief Accounting Officer and Treasurer. Please begin.

[Brad Conrad:]

Thank you. Good afternoon, and welcome to Cardtronics' First Quarter 2018 Conference Call. On the call today, we have Ed West, Chief Executive Officer; and Gary Ferrera, Chief Financial Officer. We will start with prepared remarks and then 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, events, market conditions and other risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and our reports filed with the SEC, including our Form 10-K for the year-ended December 31, 2017, which describe forward-looking statements and risk factors and other events that could impact future events and other factors that could impact our business. The statements on this call are made as of the date of this call and are based on current information and may be outdated at the time of any replay of this call. 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 are 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 to the nearest GAAP measure, is included in the earnings release issued this afternoon and available on our website. For your convenience, we've also posted supplemental materials at www.cardtronics.com. With that, I will turn the call over to Ed.

[Ed West:]

Thank you, Brad, and welcome, everyone. In my comments today, I will cover some of the highlights from the quarter, key developments and trends, and then Gary will review the financial results and outlook and then we will open up the call for Q&A. But first, some quick highlights on Cardtronics. We are the largest independent ATM operator in the world. As a result of our size and placement at premier retailers and transit locations, we are uniquely positioned to serve consumers' cash transaction needs in our key markets. We deliver a distinctive value proposition for financial institutions of all sizes, retailers and directly for consumers. We operate over 225,000 ATMs, with nearly 80,000 of those ATMs owned by us and mostly located at high-traffic premier retail locations. Globally, we handle over $2 billion transactions annually, and we dispersed almost $100 billion last year. The lion's share of our economics are transaction-based and centered in those nearly 80,000 ATMs that we own and operate. Our revenues are earned by, one, direct surcharge to consumers; two, interchange paid issuing financial institutions via networks, one of the largest of these networks being Allpoint; third, direct payments from financial institutions for ATM branding and surcharge-free access for their customers; and finally, fourth, managed services and the revenues, which includes processing services for ATM operators and financial institutions, ATM outsourcing and advertising. You can see these revenue categories in our supplemental deck and SEC filings. It's one of our top priorities to grow the sources of revenue that are direct and more durable, where we have greater control. Now on to the results. As expected, during the first quarter, we completed the deconversion of the ATMs at 7-Eleven locations in the U.S. As a reminder, we estimate that 7-Eleven in the U.S. accounted for $188 million of revenues in 2017 and will only account for about $5 million of revenues in 2018. Gary will provide more details on the quarterly impact of 7-Eleven during his comments. On an as-reported basis, our total revenues for the quarter were $336 million, down 6% year-over-year. Excluding 7-Eleven from both periods and using a constant currency, we estimate our year-over-year organic growth was approximately 3% for the quarter, predominantly driven by solid organic growth in North America. It was a good start to the year, demonstrating the resiliency of our platform and consumer appreciation of the convenience of our locations and value proposition of the surcharge-free offering. First quarter adjusted EBITDA was $69 million, down just 4% as compared to prior year. Excluding the impact of 7-Eleven, we estimate that adjusted EBITDA would have increased on a double-digit basis versus last year. We are certainly pleased with this result given the significance of the 7-Eleven contribution. And while there were some onetime benefits this quarter, which Gary will elaborate on, we continue to drive operational improvements, and they're paying off. As a reminder, we laid out four key business priorities for 2018 during the call a couple of months ago. These were to, one, drive organic growth and improve the durability of our revenue streams; two, maintain a relentless focus on operational excellence and portfolio optimization; three, generate free cash flow and pay down debt; and fourth, engender employee pride. I'm very pleased to report that we're making progress against each of these priorities, some of which I will highlight as I walk through the business updates by our geographic reporting segments. I'll start with North America, where we had a very good quarter. Excluding 7-Eleven, revenues in North America were up 7% on an organic constant-currency basis for the quarter. The result was driven by a combination of same-store transaction growth, unit adds and growth in interchange and network branding and surcharge-free revenues. Looking specifically at same-store withdrawals, we experienced year-over-year growth in the U.S. of approximately 4%, driven by double-digit growth in surcharge-free withdrawals. It's important to note a couple of items. The growth rate has benefited this year by a comparatively weak period last year as a result of the software issues and EMV upgrades. In addition, there was a calendar tailwind this year. It was great to see the underlying transaction growth, driven by the new and expanding relationships with key financial institutions with Allpoint and our network branding and surcharge-free access. It is our goal to continue to leverage our platform to drive additional transactions and revenues as well as store traffic to our installed base. We also added Fifth Third as an expanded partner to a number of our speedway locations, which drove transaction growth in the quarter and is expected to continue to drive transaction growth throughout the year. This translates into higher value propositions for our customers and higher interchange and network branding revenues for us. The increased transactions at Speedway locations is a tremendous testament to the combined power of our FI strategy and our unmatched retail locations. Customers value the convenient cash access that our platform provides. We also added 14 new participating financial institutions to Allpoint during the quarter, enabling over 700,000 cardholders with surcharge-free ATM access. New relationships added during the quarter include Old National Bank, a $17 billion bank in Indiana; and Five Star Credit Union in Florida, one of the top 20 credit unions in the nation. Also, while the contribution to the results is currently relatively small, we are gaining traction on our financial institution managed services strategy in North America. The new relationships we announced last quarter have started to transition their on and off-premise leads to us. One of those has already agreed to expand with us, for which we are honored. We are encouraged by the progress we have made at this early stage of the service, but I wanted to caution you that the sales cycles are long and unpredictable. To summarize, we had a solid start to the year in North America, which was driven in part by operational execution. Our platform availability this past quarter was the highest since I've been at the company, which is a true testament to the effort of our operations and technology teams in United States. We continue to invest in new commercial talent and product capabilities in North America, and we are encouraged by the recent performance and prospects going forward. Moving on to our Europe and Africa segment. Revenues in Europe and Africa were up 13% this past quarter. On an organic constant-currency basis, revenues were down about 1%. As we expected on an organic constant-currency basis, revenues in the U.K. were down. But we continue to see significant top line growth in our Germany, Spain and South Africa businesses. As many of you know, the largest market in our Europe and Africa segment is the United Kingdom, where we are the largest independent operator. We have talked quite a bit recently about this market given the recent changes at the LINK network that currently sets interchange rates for the majority of the ATM transactions. As we discussed on our last call, LINK will implement the first of 4 proposed annual interchange rate reductions of 5%, starting on July 1, 2018. In preparation for that rate reduction, we have been renegotiating and/or removing marginally profitable ATMs. We have removed over 2,200 ATMs in the U.K., which has adversely impacted revenues, but we are focused on the bottom line. The reduction of these ATMs impacted the revenue growth rate by about 1 percentage point in the segment. We also experienced a weak quarter in the U.K. in terms of same-store transactions, which were down about 7%. This is a little worse than our recent trend. We believe some of this reduction was driven by harsh weather during the quarter, operational changes and possibly some changes in consumer behavior. Cardtronics is a major participant in the LINK system, accounting for nearly 25% of the off-us withdrawals in the country. While we are frustrated with the market uncertainty caused by some of the LINK changes, we would prefer to find a solution with LINK and the banks to protect broad-based free-to-use ATM access for the U.K. citizens. We continue to have productive dialogues with LINK, the major banks and regulators in the market. While it's far from certain what may ultimately evolve from our collective efforts to find a sensible balance, we do know that the current system is a great asset to the country, providing the U.K. citizens with widespread access to free-to-use ATMs combined with one of the lowest-cost structures in the world for the U.K. issuers. That said, we are building contingency plans to protect our interest in the U.K. If viable funding model for free-to-use access is changed and arbitrary rate reductions move forward beyond what is anticipated to go into effect this summer, our team is currently evaluating a plan, whereby we would lower free-to-use site counts by potentially 5,000 ATMs and transition those units to pay-to-use access with a nominal user surcharge. As we mentioned on the last call, we believe 2018 revenue growth in Germany, South Africa and Spain will largely offset the headwind in the United Kingdom for the rest - for the year. But we will likely see a slight overall decline in the second half of the year in this segment when the initial LINK interchange rate reduction kicks in. Our business in South Africa has been growing quite well. The team in South Africa is having terrific success with both retailers and financial institutions. During the past year, we have deployed over 1,300 new ATM locations with premier retailers and financial institution partners. Moving back to the European continent. We have restructured our commercial team and are now leveraging our U.K. sales leadership across Europe. They have hired new team members, and Spain and Germany are now building momentum with new relationships. Spain had a nice start to the year with growth mostly centered in high-tourism areas. We also had solid growth in the first quarter in Germany, driven mostly by additional unit placements. Our German business is a bit more mature than Spain or South Africa, and it's now starting to grow again after a transitional 2017. We have a new management team in place and expect it to deliver meaningful top line growth going forward. We have received a few questions regarding DCC and the recent announcement in the EU regarding the regulation of DCC transactions. First, let me level set a little bit. DCC revenues on a consolidated basis accounted for approximately 2% of our revenues this past year, and the majority of that revenue relates to our U.K. operation. Since this is an EU directive, we are not certain how or if this new proposed regulation would impact us given the pending U.K. exit from the EU, which is scheduled to commence next year. Secondly, based on how we currently operate and price our DCC transactions and our understanding of the intent of the regulation, we do not believe the regulations, once they're finalized, would have a significant impact on our revenues or profits. The core of our global business is consumer choice and placing convenient ATMs at premier locations and being a strong contributor to local communities. I'd now like to talk a little bit about Australia and New Zealand. As a reminder, we entered these markets via the DCPayments acquisition, which we completed after the first week in January of last year. So this is the first quarter where we have had comparison to the prior year in our results. In Q1, our revenues were down 3% on an as-reported basis. This quarter's result, normalized at 12% for the timing of last year's acquisition, is roughly in line with what we have been experiencing since the acquisition. And it's better than what we anticipated could have happened when the 4 largest banks in Australia made all of their ATMs free to use for all domestic transactions this past fall. To date, we have not experienced a material impact since the action by the 4 largest banks. The transactions on the base business do still continue to decline at high single-digit rates. Nonetheless, we continue to work to optimize our operations. Since the first quarter of last year, we have removed over 700 units. We estimate that these ATM removals adversely impacted the quarter revenues' reported revenue growth rate by approximately 3 percentage points. Now we know that it does not make long-term economic sense for the 4 largest banks in Australia to stand by and observe their collective 10,000 ATMs generate losses. We can assist them and provide a service to their customers as a result of Cardtronics owning the largest ATM portfolio in Australia. Combined with our scale, operating knowledge and surcharge-free network capabilities via Allpoint, we see this as a potential future opportunity in Australia to diversify our revenue base. However, during this transitional period, we're likely to continue to see declines while we execute on our longer-term diversification strategy with financial solutions. In summary, our enthusiasm is building, and it was a solid start to the year. We are notching up our outlook, and we expect to generate more free cash flow this year versus last year. We are all highly focused on serving our customers and executing on our 4 priorities while delivering on our purpose-driven mission. This past quarter's results is evidence that our value proposition for our current and prospective customers is tangible and meaningful. In addition to our scale, we provide a unique value proposition for all constituents. For financial institutions of all sizes, we provide a diversified retail transformation capability. Our range of solutions include expanded presence, brand promotion, convenient surcharge-free access for their customers and a comprehensive managed services solution. For retailers, we help to drive increased store traffic and increased in-store spend. For consumers, we provide convenience and value for service and for the majority of our transactions, no direct fees for usage. We aspire to be the trusted platform handling the majority of the cash transactions in the communities that we serve. So Gary, over to you.

[Gary Ferrera:]

Thank you, Ed. I'll start with a quick recap of some of the key points that drove our financial performance in the quarter. While we had a very solid quarter, there's a lot of noise when trying to compare reported results to the prior year because of the 7-Eleven deconversion, strong currency tailwind and the stub period with the DCPayments acquisition in Q1 2017. As I go through the results, I'll provide a few metrics that adjust for the combination of these factors. Regarding 7-Eleven, as a reminder, we had a full quarter of revenues and profits from this portfolio of almost 8,000 units in the U.S. in Q1 of 2017, driving about $52 million in revenues versus only about $5 million in Q1 of 2018. As a result and as anticipated, our revenues in key profit metrics on an as-reported basis were down. This was included in our 2018 outlook that we provided in late February. On an as-reported basis, consolidated revenues for the quarter were $336 million, down 6% from the first quarter of 2017. On a constant-currency basis, excluding the impact of 7-Eleven and a small benefit from Q1 2017 acquisitions, our organic revenue growth rate was approximately 3% for the quarter. This growth rate was driven by strong performance in our largest segment, North America. Organic constant currency ATM operating revenues, excluding 7-Eleven, were up 7% in North America. As Ed mentioned, this growth rate was driven by a combination of same-store transaction improvement; unit growth; and increased bank branding and surcharge-free network revenues, which includes Allpoint. Same-store transaction growth in the U.S. was approximately 4%. This was the highest rate we'd seen in a couple years, and there are several reasons for that. First, growth in participating financial institutions within Allpoint and growth in bank branding drove traffic to our locations; second, we likely gained some transactions from cardholders that would've previously visited 7-Eleven locations but elected to remain with the Allpoint Network at another retailer. Lastly, we had a favorable compare in Q1 as during the first quarter of 2017, we were still in the process of upgrading our U.S. ATM fleet for the EMV standard and software enhancements. We also had some unexpected downtime in Q1 of 2017 due to a third-party software issue. In the aggregate, we estimate these issues accounted for about 1 to 2 percentage points of the growth in Q1 2018. Therefore, we think the normalized growth rate for same-store transactions in the first quarter was approximately up 2%. While we're expecting some organic unit growth in our U.S. business from new sites with new and existing merchants, we are now also forecasting some additional attrition in the back part of the year, driven by future store closings attributable to recent mergers and bankruptcies. As a result, our ATM placements in North America in the back nine months may only show a small amount of net growth. Moving down the income statement. Our consolidated adjusted gross margin for the quarter was up 110 basis points to 32.1% compared to 31% in Q1 2017. A few factors are in play that drove this margin improvement. Looking at the core business, excluding 7-Eleven, we estimate about 140 basis points of improvement from higher margins and equipment sales, better uptime on our network and lower maintenance costs and charge-backs due to the EMV enablement of our U.S. fleet. Next, there were two factors that just about offset one another. During the first quarter, we had a nonrecurring benefit in our Europe and Africa segment largely related to an adjustment to our liabilities for estimated property taxes of $3.9 million. This benefit mostly offset the margin impact of the 7-Eleven deconversion in the U.S. The net effect of these two factors had an estimated negative impact to margin of approximately 30 basis points. The key takeaway on the margin improvement for the quarter is that we expanded margin through solid operational execution and an efficiency mindset. In addition to the gross margin improvement, we maintained solid controls over SG&A spending, down approximately 4% on a constant-currency basis. Adjusted EBITDA for the quarter was $68.7 million, a decline of 3.6% from Q1 2017. Adjusting for the benefit of a property tax reversal and constant currency, it would've been down almost 14%. However, if you also excluded 7-Eleven, adjusted EBITDA growth for the quarter would have been in the double digits. Moving to capital expenditures. Our total spend for the quarter was $20.7 million, down from $38.6 million in Q1 of 2017. This result was about in line with what we anticipated, and we are still expecting about $110 million of CapEx this year. As Ed mentioned on last quarter's call, increasing free cash flow is one of our key priorities for the year. Before I get into some of the details for the quarter, I'd like to note a new non-GAAP metric that we are reporting this quarter, adjusted free cash flow. This is replacing our previous free cash flow metric. During the first quarter, the accounting rules changed in terms of how companies must report restricted cash in their cash flow statement. On a GAAP basis, restricted cash is now combined with operating cash in calculating cash flow from operations. The effect of this is that the timing of settlement assets and liabilities now flow through cash from operations. This creates additional volatility in reported free cash flow. Our daily settlement balances that comprise restricted cash can change materially between quarters depending on the day of the week and holidays and do not truly represent operational cash generated by the business. As a result, to neutralize distortion created by this new accounting standard, we have defined a free cash flow metric that adjusts for changes in restricted cash and matches to the free cash flow metric we've used in previous periods. This adjustment removes what would have been an additional $21 million in free cash flow in Q1 2018. With that background, our adjusted free cash flow for the quarter was $4.5 million compared to negative $28.1 million in Q1 of 2017. The year-over-year improvement in adjusted free cash flow is primarily due to the previously mentioned decrease in capital expenditures and low working capital outflows as the DCPayments acquisition and other timing-related liabilities created significant cash outflows in Q1 of 2017. As many of you may know, the first quarter of the year is typically the low point of cash generation for us, and we expect significantly higher adjusted free cash flow in the remaining 3 quarters of the year. Moving to the balance sheet. We paid down just over $5 million on our revolving credit facility during the quarter, and our net leverage ratio for the quarter was 2.7x, down slightly from last quarter. This leverage ratio calculation uses the same definition as the total net leverage ratio covenant in our revolving credit facility. We expect this leverage ratio to tick up slightly over the next couple of quarters as we lose the contribution from 7-Eleven and the trailing 12 month results. As I did in the last call, I'll reiterate that we expect to have healthy headroom throughout the year on all of our covenants and our outstanding debt agreements and we expect to continue to pay down debt throughout the course of the year. Since this is the first quarter post U.S. tax reform, we wanted to make a few comments. First, our GAAP tax rate is unusual this quarter at 1%, which is the result of a small GAAP net loss driven by acquisitions and restructuring costs. The small GAAP net loss has the effect of distorting the tax rate as adjustment items are magnified. Our non-GAAP tax rate was 26% for the quarter, at the low end of the range we communicated in February. We continue to work through the effect of U.S. tax reform. And as we reported last quarter, we are being impacted by the new interest deductibility limitations. The incremental tax expense from these deduction limitations is estimated to be approximately $3 million to $5 million relative to what we would have incurred under the previous tax law. Additionally, we are being impacted to a much smaller extent by the global intangible low tax income provisions that seek to add additional U.S. tax to taxes already paid in foreign jurisdictions where the U.S. determines a company has a low asset base. We have parts of our business that remain underneath our former U.S. parent. Therefore, we have a modest amount of exposure to this tax. Now let me turn to our 2018 outlook. The first quarter results were solid and better than anticipated. While we wouldn't ordinarily adjust guidance only 1 quarter into the year, there are a couple of performance drivers in the first quarter that were unanticipated and favorable to our initial guidance. Specifically, the property tax adjustment, favorable currency rates and better-than-expected revenues in Australia. While the currency tailwind is not something we can plan on continuing for the rest of the year, the property tax adjustment is not expected to reverse. As a result, we're adjusting our outlook on revenues, adjusted EBITDA and adjusted EPS. We are now expecting revenues of $1.26 billion to $1.3 billion, up $10 million on each end of the range; adjusted EBITDA in a range of $255 million to $265 million for the year, up $5 million on each side of the range; and adjusted EPS in a range of $1.45 to $1.65, up $0.10 in the low and high end. Finally, while we don't provide specific quarterly outlook, we want to assist with modeling the impact of 7-Eleven throughout the year. As a reminder, we commenced removal of that fleet during the third quarter of 2017. In addition to the impact from the removal schedule, the revenue distribution of 7-Eleven in 2017 was impacted by a soft first quarter due to the software issues and normal seasonality patterns. Of the $188 million in revenues that were attributable to 7-Eleven in 2017, 86% occurred pretty evenly throughout the first 3 quarters, with the remaining 14% in Q4. Of the $188 million in revenues that were attributable to 7-Eleven in 2017, 86% occurred pretty evenly throughout the first 3 quarters, with the remaining 14% in Q4. I'd also like to revisit the discussion from our last earnings call concerning the distribution of adjusted EBITDA across the four quarters. We stated that Q1 should show the best year-over-year comparison on adjusted EBITDA, and we continue to believe that will be the case. For the second through fourth quarters, we now expect year-over-year adjusted EBITDA percentage declines in the range of low 20s to as high as low 30s, with Q3 probably being the worst quarter when compared to the prior year as the reduction in the LINK interchange rate takes effect. With that, let me turn it back over to the operator to open the line for questions.

[Operator:]

[Operator Instructions] The first question comes from Ramsey El-Assal of Jefferies.

[Ben Budish:]

This is Ben Budish on for Ramsey. Just had a question on 7-Eleven. Now that the dust has settled a little bit on the deinstallation, you kind of hinted at it before, but can you maybe give us a little more color on the Allpoint recapture specifically related to that?

[Ed West:]

This is Ed. I guess, what we're going to talk about is just the results that we had and reported for this past quarter, which, in North America, in U.S. in particular, which is the lion's share of North America, from a performance - transaction performance did quite well. As we talked about, up 4%., and with - on withdrawals. And frankly, really driven by the surcharge-free. Where we saw surcharge-free growth double digits over the period. Now some of that probably is due to recapture. We don't know specifically exactly how much, but the bottom - at the end of the day, it was a very strong performance. We saw - seen growth in Allpoint, growth in surcharge-free, direct with financial institutions, with their - sending their customers to our locations and our key retailers. Frankly, we had one retailer experience growth in excess of 1 million transactions. So that's potentially 1 million customers that went into that chain retailer, which is fantastic, something that we're real excited and proud about.

[Ben Budish:]

And then if I could ask one follow-up, in terms of the FI outsourcing plans you kind of spoke to a little bit on this quarter and the last call. Can you maybe speak a little bit to the competitive environment, for example, when a bank decides to outsource? Who are the other players kind of at the table? And what are your relative advantages?

[Ed West:]

Well, I mean, there are several other operators who are there, both large and small, several boutique firms. I guess, where we really distinguish ourselves is, as I've talked about earlier, going back to that value proposition that we, and only Cardtronics has, with financial institutions. And that's that broad enterprise solution for the retail bank side of the business. Because we're not going in there and having a conversation just about the on- and off-premise fleets. We can talk about branding, we can talk about surcharge-free access for their customers. And there's multiple solutions, one of those being the managed services for the fleet. And frankly, given our scale, size, being the largest operator in the world, we've processed more transactions than anybody on pure ATMs. We have very distinctive advantages and scenario we're very focused on now. And going back with one of our priorities to also have revenues that are - we believe are more durable and in our control. One of the reasons why we like this area, it's more long-term contracts and visibility to revenues that are on a longer-term fixed basis.

[Operator:]

The next question is from Andrew Jeffrey of SunTrust.

[Andrew Jeffrey:]

Nice to see the balance in same-store sales, recognizing that some of that may have some easy comps and calendar in it. As you look to the rest of the year, maybe, I guess, a couple of questions. One, could you elaborate a little bit sort of on health on your retailers? I think you noted some consolidations and perhaps some retail closings. And then, two, just if you could broadly - kind of broadly on the sort of overall health of the ATM industry, I think we get a lot of inquiries, just generally speaking, when you look at what the manufacturer stocks have done this week but their results were like not so great. I just wonder, how do you think about your business in the context of sort of the health of the ecosystem?

[Ed West:]

Yes, well, on the first one, the retailers, I mean, we're very honored to work with some fantastic retailers in the countries that - where we operate. Starting with, obviously, our largest here in the U.S. with 8 of the top 10 retailers. And frankly, we, whether they're acquiring or consolidating or whatever, benefit with both ways. And we have situations where one of our retailers acquire someone else and we get to roll with them, and also where one of ours may be acquired. And obviously, because of the value proposition, we have situations where we also grow with the newly acquired retailer as well. So either way, it's just incumbent upon us to demonstrate a very clear value proposition, which we feel very strong about. Specifically, this past quarter, when you look at the U.S. on our transaction growth, withdrawal growth, it was widespread. Frankly, all categories, we saw good strength. And frankly, it was an encouraging side, even on the surcharge aspect. But obviously, those really driven for the growth standpoint was the double-digit growth in surcharge-free. Separately, on the ecosystem and the manufacturers, I mean, obviously, we work with many of the manufacturers and have routine conversations. Everybody's in it for the long haul, and we believe cash is here, is here to stay, and it's going to be here for a long time. So obviously, several of the companies may be going through various changes at points in time, but we see ongoing a bright future.

[Andrew Jeffrey:]

And I guess, just sort of the - as a follow-on with regard to that last comment. Is there a silver lining for Cardtronics in so far as - I just think about the logic. If banks perhaps in the U.S. aren't buying as many ATMs, maybe that's a reflection of their returns. And as a consequence, the value proposition that Cardtronics brings to the table on the managed services side is even more apparent. I mean, it - and I realize the pipelines are long, but is that a part of the conversation you're having?

[Ed West:]

If you go back to what I said last quarter, where the trends in the industry with us - to some degree, some declining trend in terms of percentage of pay at the point-of-sale, with cash growth in other areas, banks refocusing their effort on digital strategies yet their customers still value cash, use cash, cash in circulation continues to grow, like in the United Kingdom this past quarter. Even though overall LINK market declined from transactions, cash grew - in terms of total dispersed cash grew. So those banks and their customers who still want to use cash, that spells opportunity for Cardtronics. Because of those trends, with the banks pulling back, focusing on digital strategies, we have a solution that we believe we can serve their customers on a very efficient basis and a very strong value proposition for both they and the retailers, and ultimately the consumer, because it's much more convenient for them.

[Operator:]

The next question is from Cris Kennedy of William Blair.

[Cris Kennedy:]

Yes, just going back to the outsourcing initiative. You've made a lot of investments over the last couple of years. Do you think - are you kind of done with the investments? Or is there still more to come?

[Ed West:]

Well, we were seeing a lot of investments. Frankly, a lot of the investment over the last couple of years was on software, rolling out all the changes with EMV. We've initiated this year, as Gary talked about last time on - the ERP is a major project we have going on this year. But we have been investing, to your point, on product, on people, capabilities. But it's - we have multiple different areas of investments. But we're very focused on where we see opportunity and attractive returns on capital and good returns, we're going to invest there. And so yes, we'll continue to invest in that. But fortunately, the EMV, that part's behind us now. But there will also always be other kind of compliance matters and everything to spend on. Gary, any other - further thoughts on investments?

[Gary Ferrera:]

Yes, completely agree. Unless you were sort of implying investments in acquisitions, we've stated previously, our focus is to pay down debt. So I think we have a pretty good platform that we have right now.

[Cris Kennedy:]

And then just a follow-up. I mean, the Windows situation - the Windows 10 situation, any thoughts? Or have you quantified that?

[Gary Ferrera:]

Just trying to quantify that exactly is hard to do at this time. There's still a lot to be learned there, but we figure, over the next few years. And I know, when people have asked we've discussed this before, is we have the EMV this year. We'll have probably some more - not EMV, sorry, ERP this year and some next year. We always expected, that said, for these things to come and go over the years. So it's not something we're concerned about, and plan on handling within our normal CapEx.

[Cris Kennedy:]

And then just one longer-term question. When you think about the business excluding 7-Eleven, is there any way you can kind of frame the either gross margin or EBITDA margin kind of targets? What you guys are kind of planning for?

[Ed West:]

What we talked about last quarter is our - the focus and our priorities for this year. Where we're addressing the business, what we're going after, investing in what we want to achieve. And obviously, we've given the outlook for this year. And so far, good. Still a lot to be done. But we'll come back towards the end of the year, to come back because we all know everybody - we want to see, what are the long-term targets? What do we want to achieve longer term based on these areas of opportunity that we see? And so as more things mature through this year, let's not forget we still have to sort out, what's it going on in the United Kingdom with LINK? How that sorts out. We're still in earlier stages with Australia. We'll know a lot more by - towards the end of this year, and then we plan to come back and then giving some longer-term targets and economic model.

[Gary Ferrera:]

And Cris, from my perspective as the new person here, I mean, my mentality over the years has been to be a little less focused on the actual percentage number and just driving the number as high as possible versus being - getting people focused on a percentage. I just want that number to keep going up.

[Operator:]

This next question is from Kartik Mehta of Northcoast Research.

[Kartik Mehta:]

I wanted to ask a little bit about the Allpoint Network. It seems as though you're having success. And I know that you don't want to disclose revenues of Allpoint, but are you able to disclose what kind of growth you're seeing in the network year-over-year from a revenue standpoint?

[Ed West:]

Yes, so we have experienced some nice growth this past quarter over the year. But if you look at it on a pure - on a - excluding 7-Eleven basis, we look at it on - overall, obviously, it's gone down from, looking at the results for the year, year-over-year. Now on excluding 7-Eleven, the growth that we've seen across the business was quite strong. We have not presented that out separately and distinctively. the revenues show up in a couple different lines within our P&L, which gets into both interchange as well as the network branding and surcharge-free category. And frankly, the growth in terms of the number of card members, that we’re seeing as continuing to expand.

[Kartik Mehta:]

And then I just wanted to follow up a little bit on the Windows 10. You'd talked about that. Is there a need for Cardtronics to meet the deadlines established right as of now by Microsoft? Especially as you expand the Allpoint Network and there are more banks that are tied to that network? Is there any pressure to do that? Or are you - do you think, even if you go past the deadline, it's not an issue?

[Ed West:]

It depends. It depends on the client, it depends on where we are and what all are in that we have in specific relationships. But there's also - we're still also waiting on certain software notifications from, and requirements from, some of the manufacturers, as Gary was talking about. So we believe this will come out over time. But in terms of particular institutions, it's on a case-by-case basis. And as Gary talked about, we're always investing in various compliance matters, and we expect this to kind of roll out over time. And frankly, some of the new equipment that we're rolling out right now is compliant with that already.

[Kartik Mehta:]

So is that the reason - I think, Gary, you've said you don't expect any kind of volatility in CapEx, because you'll be able to slowly do this over the next few years?

[Gary Ferrera:]

Yes, I - that would - volatility in CapEx is one way to define it, but I think, just as part of our normal CapEx, we can work within that in order to make it happen over the next few years. As I mentioned, some of the stuff we're already putting out there is already going to be Windows 10-compliant. And so it's just - and it's a very - and that started with - it depends. It really depends on what we're talking about and at what time. So that's the best guidance we can give you right now.

[Operator:]

The next question is from David Ridley-Lane of Bank of America.

[David Ridley-Lane:]

I've noticed that you did cut a fair number of U.K. ATMs this quarter. Are you largely right-sized in that area today? Or would you expect further declines in ATM count?

[Ed West:]

So yes, we did mention where there's a fair amount trimmed, just based on the market where we see things right now, that we're marginally profitable. We're always looking at that. So it depends on market conditions, on what we see and what comes forth over the next few quarters, we can adjust accordingly. I think more of the change probably going forward is what I mentioned, depending on what all happens with the final changes with LINK and additional reductions. And we're piloting various strategies where we could have - also have a shift for more terminals moving from free-to-use to pay-to-use.

[David Ridley-Lane:]

And then you mentioned that you were positively surprised by the trends in Australia. Curious if you expect that to kind of remain a pretty modest headwind for you. And any color on how the portfolio is performing, given kind of the unique market backdrop in that country.

[Ed West:]

Well, start with the latter there, which is just the base business, as I've mentioned. We've seen declines, high single-digit declines, in the market since we've been there. And so we kind of expect that to continue. With respect to the changes in the - with the 4 largest banks and removing the direct charge, time will still tell on that. We still, obviously, are going to be prudent and see how this evolves. Obviously, we have not seen material impact from that to date, and we'll see how the future plays out. Longer term, as I pointed out, we see this as an opportunity. We're in conversations with many banks of our solution, and we feel like we have a terrific network to be able to leverage to provide a solution for the financial institutions and the consumers there in Australia.

[David Ridley-Lane:]

And last one for me. Can you just walk through the factors that drove the increase in gross margin again?

[Gary Ferrera:]

So basically, it was 110 basis points increase. 140 basis points of that, because it was - one in the opposite direction, were just high margins on equipment sales, better uptime on our network and lower maintenance cost and charge-backs due to the EMV enablement of our U.S. fleet. And then the negative side of that was there was sort of 2 things happening. We had a nonrecurring benefit in our Europe and Africa segment, largely related to an adjustment in our liabilities for estimated property taxes, that was $3.9 million, and that mostly, but not completely, offset the 7-Eleven deconversion impact. So that was a negative 30 basis points. So that's how you got to the 110 basis point change.

[Operator:]

[Operator Instructions] The next question is from Charles Nabhan of Wells Fargo.

[Charles Nabhan:]

I was wondering if you could touch on some of the trends you're seeing in Germany and Spain. And as we look into 2019, where we have a full year of the LINK interchange reduction, how we should think about the growth in those countries as an offset to your expectations in the U.K.

[Ed West:]

Well, first, to start off on those markets which we feel like Cardtronics is very well positioned for opportunity there. As I mentioned in our earlier comments, more mature in Germany but still very small for us. We feel like there are a lot of attributes in Germany that are well suited for us. This is a surcharge market where there are solutions that we can provide there surcharge-free, other things, and also building with retailers. So it's nice to see. With the team executing now and the new management team, we're back to growing in momentum there. Spain, similarly, where we've seen some nice growth from a tourist standpoint in terms of new locations, new team. With respect to broader growth going into 2019, we'll come back to - do a little talk more about guidance later in the year, next year, to give longer-term guidance there. All I can say is it's nice to see the trends that we had this past quarter, and we have good expectations for them this year to help mitigate some of this year's impact in the U.K. But obviously, the second half of the year, we overall expect that segment to show a little bit of a decline.

[Charles Nabhan:]

And as a follow-up, you touched on some of the - you touched on the margins in the parts business, and I was wondering, is there anything nonrecurring that occurred this quarter? Or should we think of - if we look at this quarter's margin in that business, could we think about that as a run rate going forward?

[Gary Ferrera:]

Yes, I'd say it moves around. I don't think there's anything very specific, but depending on region, customer, et cetera, it could shift a little bit. But as you know, that - it's not a huge revenue number, so.

[Operator:]

The next question comes from Reggie Smith of JPMorgan.

[Reggie Smith:]

Had a question. I was looking at, I guess, the seasonal patterns of your withdrawal transactions, and I was somewhat surprised by how strong your withdrawals were in the first quarter relative to the fourth quarter, recognizing that, obviously, 7-Eleven continued to roll off. Just curious, could you talk about the moving pieces in transaction growth between the fourth quarter and the first quarter? I know you guys have talked about it year-over-year, but what are the puts and takes? Where do you see strength relative to the fourth quarter from a transaction count perspective?

[Ed West:]

Well, as you said, Reggie, there were lots of puts and takes and changes throughout the periods. One of the things I mentioned, just the availability of the platform was terrific this past quarter from the performance of our operations and technology teams, having things up and running. And from a consumer standpoint, I'm sure the economy helped being at good - the retail locations, what we saw being broad-based throughout the market. I can't really kind of speak to any kind of other things specifically, over - period-over-period that might be different this year than previous periods that you're referring to.

[Reggie Smith:]

Yes. So I guess, when you talk about the technology platform being better, is that comment relative to the fourth quarter of '17? Or are you still talking about versus the first quarter of '17 is that?

[Ed West:]

Mostly year-over-year, to the prior year. But again, we still saw improved performance this quarter versus prior.

[Reggie Smith:]

And I guess, to kind of follow up on that, you guys have announced a number of Allpoint wins over the last couple of quarters. How should we think about the ramp of those wins? And when they're implemented, when you start to see them, was there anything in this quarter that ramped up to kind of drive that double-digit Allpoint transaction growth? Anything worth calling out there?

[Ed West:]

Well, what I would just mention to you is just think about it as Allpoint, but also the surcharge-free access with our branding customers all there together, which shows up in those 2 lines in our revenue statement. It's all - it's a case by case, Reggie. As we've talked about before, it's working with those financial institutions and making sure there's broad-based awareness their - for their customer base. And we have a focused effort on - now on that fact going forward. So we aspire to do better, to have better awareness so that we can see more. Historically speaking, it's a relatively long ramp. It takes time for these things to evolve and build up. Although when we roll out a new branding relationship, like with a key, well-regarded retailer such as Speedway and what we just announced with Fifth Third and Speedway, that those customers and the Fifth Third customers really value that and value the experience. And so those can see the benefit of that more rapidly.

[Reggie Smith:]

If I could sneak one more in. I know, when you first announced the 7-Eleven loss, you guys had outlined some cost synergies. And obviously, it was a different CEO at the time, you were still CFO. Where do you guys stand on the realization of those savings as of right now? And if you can kind of point us to where in the P&L they would've kind of shown up.

[Ed West:]

Well, they show up all the way up and down the P&L, from - whether it's some of the maintenance, how we're doing that, how we're managing cash. How we deploy the cash. The technology operations consolidating various functions around the world, we're consolidating real estate and facilities cost. The SG&A, the overhead in the business, redeploying some of that in terms of new product and commercial side. So Reggie, it's all up and down the P&L. I feel very good about how the business is executing on that. It's an ongoing effort. This wasn't a onetime initiative. This is a mindset driving operational improvement, we call it optimum, and continuing to improve how we deliver performance. It's customer focused and trying to drive efficient, effective top-tier operational excellence. So it's all up and down the P&L. It just a - kind of a way of life for us.

[Reggie Smith:]

And I guess, I got some - what I'm trying to get at is, is it fully complete? Or is there still more to come there? Like how should we think about it? I mean, you guys gave a number, I don't know, it was 8 quarters ago or whatever, of total savings. Like where are you in terms of realizing savings there? Just curious because, obviously, I'm trying to get, is there more to do in understanding the earnings power of the business?

[Ed West:]

I mean, I'll do one more, and then Gary. But one, I would say, just look at this past quarter. With the margin improvement, given with everything else going on, so showing margin improvement and operational effectiveness, I would say there are more savings built into the outlook for this year. Gary, anything else you want to add there?

[Gary Ferrera:]

That's exactly right.

[Ed West:]

So no, that's it. But thank you, Reggie.

[Operator:]

And there are no further questions at this time. I'd like to turn the call back over to Ed West for closing remarks.

[Ed West:]

Great. Well, thank you very much. We thank you for your support and interest, and we look forward to the next update here next quarter, and have a great day. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Everyone have a great day.