Cardtronics plc
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cardtronics' Third Quarter 2017 Earnings Conference Call. At this time, all participants are in 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, today's conference is being recorded. I would now like to turn the call over to Mr. Phil Chin, Executive Vice President, Corporate Development. Sir, you may begin.

[Phil Chin:]

Thank you. Good afternoon, and welcome to Cardtronics' third quarter conference call. On the call, we have Steve Rathgaber, Chief Executive Officer, and Ed West, CFO and Chief Operations 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, 2016, our Form 10-Q for the quarter ended September 30, 2017, and other factors set forth from time-to-time in our other filings, including the definitive proxy statement filed on March 31 of 2017, which more fully described forward-looking statements and risk factors and other events that could impact future results. The statements on this call are made as of the date of this call and based on current information and maybe outdated at the time of any replay of this call.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 were made. In addition, during the course of this call, we will reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures, together with the reconciliation of such measures is included in the earnings release issued this afternoon and available on our website. With that, I will turn the call over to Steve.

[Steve Rathgaber:]

Thank you, Phil, and welcome, everyone. We are now 10 months into a year that we knew would be both challenging and transitional. One of the transitional elements is my own pending retirement at the end of this year, making this my last earnings call. I feel it is appropriate for Ed to drive the business discussion including third quarter results and the appropriate stage setting for the future. After Ed covers the quarters and the other big issues of interest, I would like to offer some parting observations. So with that, Ed, take it away.

[Ed West:]

Great, thank you Steve. I would also like to personally thank you on behalf of all 2,200 Cardtronics employees and as an investor for your leadership and dedication to the company. Through your efforts of global expansion and focus on building an unrivaled retail network of ATMs, Cardtronics now has scale and relationships with key retailers and financial institutions worldwide which positions us well for the years ahead. It is this global scale, capability and relationships with leading retailer and financial institutions that has me excited about our future and the opportunity to lead the team following your retirement. In my comments today, I will review this past quarter's performance the more recent events in Australia and with LINK in the United Kingdom as well as guidance. Now let's get into the quarter, three key points. We had a modest improvement in the growth metrics in the US relative to the first half of the year which is encouraging. Second, and related to the first point. We are fully past the operated challenges in the US that we experienced earlier in the year. We had solid operating execution in this quarter. Even in the midst of several natural disasters, not the least of which was Hurricane Harvey which impacted our North American headquarters. I would like to take a minute to thank all our employees who demonstrated amazing commitment, resolve and support in the face of these life threatening natural disasters. This past quarters operational performance and ATM availability in the US and Mexico was nothing short of amazing, where we had 6,5000 ATMs and over $300 million of cash in the path of these storms in addition to our North American headquarters and our operation center in Houston haven't been closed for a week. Where we had power, we operated and cash losses have been de minimis thus far. Not that anyone every wants to be in this situation but it was rewarding to experience the near flawless execution of our business continuity plans in this real life situation. In the third point, our full year 2017 outlook remains on track even while taking into account expected under performance in our Australia business in the fourth quarter due to an unexpected market shift by the four largest banks recent decision to eliminate threat and direct charges from their ATMs in the Australian market. Now let's recap Q3 performance starting with revenue, as a reminder we began to de-install ATMs located at 7-Eleven beginning in July. Given the magnitude of 7-Eleven relationship in the US and resulting implications of the de-installation of the portfolio I will discuss the metrics in three buckets while going through the revenue growth and transaction metrics. In the first bucket which I'll call, all in, includes 7-Eleven. The second I will call, ex-7-Eleven and it's just that excluding 7-Eleven. And the third bucket I will call ex-7-Eleven and recapture. The last metric will exclude our best estimate of recapture benefit of Allpoint transactions at other retailer locations. Unfortunately, it is not tell the whole story if we just report the ex-7-Eleven metrics by themselves. The recapture benefit of Allpoint transactions speaks to the power and strength of our Allpoint product and is a result of individuals electing to transact on other ATMs on the Allpoint network located outside of 7-Eleven. As a result, we effectively retain some of transactions and associated revenue within the Allpoint network. This transaction recapture will and effect benefit the ex-7-Eleven metrics by providing a lift to the transaction and revenue growth on a year-over-year basis on our existing state. Since the year-over-year benefit is temporary we thought it was important to be transparent around these trends. Thus the third bucket ex-7-Eleven and adjusting for the recapture factor will as in precise as it maybe provide information as more comparable to previous periods and assist us when comparing sequential quarterly trends. On a consolidated as reported ATM operating revenue growth in the quarter was up 24%. Substantially all of this growth was acquisition driven, notably DCPayments. All in organic constant currency ATM operating revenue growth was up positive 1.5%. This includes the impact of declining revenue from 7-Eleven estate as we de-installed ATMs throughout the quarter. The de-installation of the 7-Eleven portfolio will continue through first - Q1 in 2018 as we indicated last quarter. On an ex-7-Eleven basis organic constant currency ATM operating revenue growth was positive 3.5%. This includes the benefit of Allpoint transaction recapture on an ex-7-Eleven and recapture basis as well as adding back the adverse impact from the hurricane activity in the quarter and the Chase debrand organic constant currency ATM operating revenue growth was approximately positive 4%, we think this is most normalized metric and the trend is encouraging. Moving to organic constant currency, ATM operating revenue growth by segment Europe and Africa was up 5%. North America was down 1.5% all in. And up 2.5% on an ex-7-Eleven basis. Growth ex-7-Eleven in the estimated Allpoint recapture and adding back for the hurricane activity and Chase debrands was approximately positive 3.6%. Moving to same store withdrawal growth, UK withdrawal volume was down 5% in the quarter, slightly worse than recent trends. ATM availability in the UK during Q3 was adversely impacted by the previously planned upgrades that we performed on a cross section of the fleet to accommodate the new 10 pound polymer notes. We estimate that the polymer note related impact was approximately 90 basis points hit to the same store metric. US same store withdrawal volume was down nearly 4% on an all in basis. About flat on an ex-7-Eleven basis and approximately minus 2% on an ex-7-Eleven and Allpoint recapture basis when adding back the impact from the hurricanes and the Chase debranding. This last normalized metric is a slight improvement in the US from a more negative same store results we experienced earlier in the year. Adjusted gross margin in the quarter was 35.3% compared to 36.6% in the prior year. Much of this compression is due to the de-installation 7-Eleven and DCPayments coming in at a lower margin. Adjusted EBITDA for the quarter was $99.9 million up 15% from prior year. This solid result is reflective of the clean operational quarter we had in the US versus the previous several quarters where we embarked on the software upgrade and the EMV rollout. Adjusted EPS was $0.96 for the quarter down slightly from $0.98 in the third quarter of 2016. Year-over-year we incurred higher interest, depreciation and adjusted tax expense. The incremental interest and depreciation expense was driven by DCPayments and the tax rate was higher this quarter versus prior year due to the FIN 18 tax rate adjustment last year resulting from the announced re-domiciliation effort in the third quarter. Moving onto the balance sheet, our proforma net leverage was 2.7 times as of September, 30. At the end of the quarter we had $158 million drawn on our $400 million credit facility. CapEx in the quarter was $42 million the majority of which related to our fleet upgrade and the recent contract expansions and new sales in the US. Let's take a moment to discuss the impairment charge we took on our Australia business. One important item of background is that the Australian market is a direct charge only market whereby a widespread interchange system is disallowed by regulators, so ATMs relies solely on fees charged to the user to generate revenue. In aggregate, Australia accounts for just under 9% of our total revenues and about 8% of our consolidated adjusted EBITDA on a year-to-date basis in 2017. Approximately 80% of our revenues in Australia were derived from direct charge fees over the last nine months. In late September in an unexpected move in the market. The fourth largest banks in Australia eliminated direct charge fees for all domestic transactions at their ATMs. Completely foregoing this revenue on their ATMs. ATM counts for the four largest banks total over 10,000 in a market of approximately 33,000 ATMs. This action structurally change the environment for ATM operators like ourselves whose business is generating revenue from the efficient operation of ATMs. The magnitude of this change created a triggering event or an indicator of impairment under GAAP which caused us to reassess the carrying value of the asset. Given how recently this move was made, mass consumer behavior is still adjusting to the changed environment and we therefore do not have a definite view of new run rate of transaction volumes on our ATMs. The data we do have is telling us a couple of things. First, as one would expect some volume has migrated from direct charge ATMs to the now fee-free ATMs. I would characterize this decline and volume to be more gradual then a step function. But we have seen lower volumes on some of our ATMs that leads me to the second point, which is at the impact of this new fee-free environment we're very depending on the type of locations where the ATM is placed and its proximity to a fee-free ATM. For example our casino locations are more insulated from erosion of transaction volume than typical shopping center locations. Approximately half of our Australia revenue is generated in placement locations that we believe are more protected from volume erosion or are associated with fixed revenue arrangements such as managed services. In arriving at an impairment charge, we valued the potential incremental impact of this unexpected market shift on our cash flows which resulted in non-cash, goodwill and intangible asset impairment charges of $195 million associated with the Australia segment. In addition, we recognized an impairment of certain ATM related assets in the market totaling $21.5 million. These charges were partially offset by a non-cash $22.5 million tax benefits. The valuation analysis assumes an approximate $17 million impact to EBITDA in Australia in 2018 versus 2017. We feel that the assumptions that resulted in the impairment are prudent given the proportion of our Australia revenue we consider to be exposed to the new fee-free environment. But we ultimately need the benefit of time to see the full progression on volume changes and how the large banks will respond. Over the longer term, it seems to us that the maintenance by the banks of remote or off branch loss making ATMs is not economically feasible. We have already begun to take action and as more data comes in and view is firm, we will most swiftly capitalize on what we see as a market opportunity. Speaking of longer term, before this event occurred we were on the view that the Australian ATM market was ahead toward a structural change in any event. We assume that longer term it was likely that overcapacity of ATMs in a market that was experiencing declining transaction volumes would cause the market to shift to a more efficient, shared infrastructure model not similar to our Allpoint model in the US. And we view this as part of the market opportunity in Australia. The clustering of several bank ATMs in the same location which is common in metropolitan shopping markets or on high streets in Australia for the purpose of delivering fee-free transactions to each banks customers is inefficient from both capital and operating standpoints. We have a unique presence in Australia and experience from building Allpoint in the US that positions us to be shared infrastructure that can maintain or improve consumer access to cash while drastically reducing overall cost in the system. This move by the banks to eliminate the direct charge fee could accelerate the move to a shared infrastructure model and we have an active and engaging with various stakeholders to understand how we can bring a surcharge free model to the market that is sustainable. One other important item we wanted to bring your attention to is regarding LINK in the UK. Yesterday LINK informed it's members and posted their website that they intend to submit for member vote a proposal that caused for the interchange rates to decline by 20% over the next four years and four rateable 5% annual reductions. As a data point, the recommended 2018 interchange rates on our 2017 transaction volumes would have an approximate $15 million impact on EBITDA if the new rate were in place in 2017 and before any mitigating actions. If this new rate is enacted it will obviously have an impact on our operations and we will be responding accordingly. We expect to learn more about the member response and associated LINK board action by the end of January. To give you some more color in the third quarter we operated approximately 22,000 ATMs in the UK of which two-thirds were free to use and generated approximately three quarters of the revenue in the United Kingdom. We have several levers to pull and we will act accordingly once the interchange process is finalized and we have all the facts. Turning to guidance, we are maintaining our outlook for calendar 2017 on our key profitability metrics and raising the lower end of guidance. The negative outlook in Australia for Q4 has been offset for the most part by improved foreign exchange rates and stabilizing trends in the US. Please refer to today's press release to see the details of the guidance. Regarding the fourth quarter ahead of us, we have commented previously that adjusted EBITDA will peak in Q3 on a year-over-year comparative basis. Consistent with that, the Q4 guidance implied by our full year guide as EBITDA about flat year-over-year which incorporates the addition of DCPayments in the continued de-installation of 7-Eleven. Pertaining to 2018, we will obviously have a lot of new data points over the next three months including same store transaction trends in our core markets. The de-installation of the 7-Eleven portfolio and the recapture of the Allpoint transactions. Four months of impact in Australia on our ATM estate resulting from the shift to fee-free at the major banks ATMs and the final action by LINK regarding the interchange rate mechanism in the United Kingdom for 2018. With the benefit of these data points we will then give guidance for 2018 calendar year. In the interim and over the near term, we will continue an internal top to bottom review of all entities and functions with the laser focus on ATM profitability, portfolio optimization, cash flow and rekindling more durable economic organic growth. Lowering unit cost overtime while delivering operational excellence and enhanced products for our customers will be critical. A guiding principal will be gaining more control of our revenues overtime. Several of the markets in which we operate are going through a transition not unlike a transition we've undertaken this year. Those markets will settle to a new normal for which we're well position to capitalize on. We believe the emerging opportunity with financial institutions in our key markets is quite real and that we're better prepared experienced and position to capitalize on this opportunity versus any of our competitors. And we also believe that we'll regain organic growth once we navigate through this channel changing landscape. We have a talented and dedicated team here that is focused on delivering customer through relationships, employee pride and value for our shareholders. Let me turn it over to Steve.

[Steve Rathgaber:]

Thanks Ed. So what attracted to Cardtronics eight years ago was opportunity. The combination of the simplicity of the business model. The exceptional real estate for our ATMs provided by our retail partners, our growing scale advantage and the Allpoint surcharge free network convinced me that Cardtronics was a unique asset with a huge potential for growth. And in fact, through a combination of 16 acquisition and significant organic growth, we delivered 24 quarters of double-digit revenue growth and 26 quarters of double-digit adjusted EPS growth out of the 31 quarters I've led the business. This long-term history of growth has built the business that is underpinned by a unique set of assets. Unique in their combination of scale and quality of locations. Overlaid on these unique assets is deep expertise and operating an ATM channel that is large and a must have for most financial institutions for a long time to come, but not necessarily differentiating. This results in a dynamic where we are positioned to be the most efficient ATM infrastructure operator for banks individually in a managed services context or for banks collectively in the case of Allpoint like surcharge free models. This opens up a close but relatively unexplored market opportunity that is even larger than the off premise ATM market that is our heritage. This is one of the reasons I firmly believe in the future of Cardtronics. We are obviously in a transitional period and facing headwinds, but we have a robust business that can adapt to evolving market environments perhaps better than any other operator while maintaining our core positioning and underlying value proposition to financial institutions. A lot has changed in my time at the company, but this strategic opportunity remains intact. Cardtronics is an important component of payments infrastructure in our core markets and provides tremendous value to retailers, financial institutions and most importantly consumers by delivering safe, convenient access to cash. Executing on this growth strategy is remarkable talent across the organization. For the last 22 months Ed and I have worked closely to build the next generation leadership team. The team we have in place is world class and I have immense confidence in their ability to deepen our relationship as a physical channel partner to financial institutions. The broader teams surrounding our leadership team is the best in the business. It is been my privilege to lead the people of Cardtronics and I'm grateful for their support and commitment. And a last thought about the team. I would like to comment on your incoming CEO. Prior to Ed's hiring when we began the search for a CFO, we the board and I were focused on candidates that demonstrated clear potential to be a CEO successor given the succession planning that was being done. After now working with Ed for nearly two years I'm pleased to report that Ed has exceeded my expectations and hopes for a successor. He has earned this position. He is best hire of my career and I'm extremely confident in his ability to lead this company. It is a source of pride and accomplishment for me to leave the company in his hands. Now let me close with a word of gratitude to our customers, investors, analysts and our Board of Directors. I've always appreciated your constructive feedback, your guidance and challenging questions and I'm sure there will be no shortage of those today. You keep us focused and accountable and therefore make us better. Thank you all for this opportunity to serve. I will now turn it over to the operator to open it up for questions.

[Operator:]

[Operator Instructions] Thank you. And our first question comes from the line of Brendan Hardin with Northcoast Research.

[Brendan Hardin:]

So I guess as you think about LINK's proposed interchange provisions. Is there anything Cardtronics can do to delay or influence implementation through the comment period?

[Steve Rathgaber:]

Well I think we can provide our own commentary, but I think it's likely that they would want to move forward at a pace that they've said and I wouldn't anticipate at this point scheduled changes to what has been announced. But what Cardtronics can do is manage its business through a variety of levers that we have available to react to that new challenge and we will obviously do that.

[Brendan Hardin:]

Okay, so as you think about the changes in the market does it change your view in terms of growth and investment opportunities in the market or I guess how do you view going forward?

[Ed West:]

Well we look at each market in and of itself. I mean obviously now with as you just mentioned on LINK in the United Kingdom with changes in with revenue structure could be and profitability could also change type of ATM types for example, whether we put it into free to use or pay to use and so we would adjust assets accordingly. Other markets where we're investing and growing for example doing quite well in the growth in South Africa or other markets like Germany who have a different model and more of a surcharge model. Frankly what we're seeing in the US is with Allpoint our position here and opportunities with financial institutions is key. And so it's a market-by-market I would say one thing that's probably consistent among all the markets in we operate and as I mentioned in my comments earlier, the opportunities with financial institutions. It is a growing cadence of dialog and discussion as you know changes in cash as we talked about before having settled declines overtime the need for scaled provider and infrastructure of delivering customer service and value for their customers at the ATM, we believe is increasing the need and more uniquely position to capitalize on that.

[Steve Rathgaber:]

And it's important to remember as well as we look at some of these disturbing headlines that they impact everybody, not just Cardtronics. So if you look at the LINK headline that 20% reduction of interchange applies to branches as well, that's going to put a lot of pressure on bank cost and infrastructure and that might cause people to reduce ATM inventory in a way that can be positive for Cardtronics. The same in Australia. Free is a whole new concept where there is no interchange at all supporting it and certainly that's going to put pressure on location inventory for banks and it's going to create a market for pay to use to replace some of the inventory. So these headlines while dramatic and impactful come with also opportunity and we are the ones that are positioned to cease that opportunity as we navigate to charter these waters.

[Brendan Hardin:]

Okay, thank you.

[Operator:]

And our next question comes from the line Ramsey El-Assal with Jefferies.

[Ramsey El-Assal:]

On the LINK network, is the crazy to think that on a per ATM basis there in the UK with your ATMs in the UK, that you might see incremental transaction counts overtime as sort of subscale providers fall away. Could that provide somewhat of a mitigation?

[Steve Rathgaber:]

Good afternoon, Ramsey. You absolutely could, to the extent of the capacity. I mean honestly to the extent their marginal operators, their marginal ATMs out there from a profitability standpoint, some of that capacity could come out of the marketplace and see volume go to the remaining operators. Obviously the banks have been declining over a longer period of time and also with their branch locations has been declining and a lot of that volume has picked up by the independent operators like ourselves. So you could very well see some of that change overtime. I think the other thing you might see is change in terms of certain locations, other vehicles what could be switching to more pay to use because I mentioned earlier about two-thirds of our ATMs today are on a free to use basis and leaving a third on a pay to use, with about a quarter of the revenue so that could shift as well.

[Ramsey El-Assal:]

Okay, switching gears a little bit. Can you give us any incremental color or commentary or your latest thoughts on the underlying organic trends in the business in the same store sales trends I guess primarily in the US? But potentially also in the UK although largely I guess more importantly in the US. Do you have any incremental confidence about the kind of trend lines there are you seeing any stability maybe less of volatility in the same store sales rate would lead you think that this kind of downturn that's happened starting back in Q4 last year is going to continue to gradually improve?

[Ed West:]

Well into saying what we've seen the past couple of quarters and most notably the improvement that we saw this past quarter, which was encouraging as I talked about earlier. All in metric, on the organic growth at the ATM level and the revenue was up about 3.6% when you exclude 7-Eleven and the recapture position, so that was encouraging to see and that's better than what we had, if you go back on the same store basis. Where we talked about was a negativity that we went into the fourth quarter of last year with a software rollout in EMV and it got worst in the first quarter and then slightly better in the second quarter and now slightly better again in the third quarter, which is the most normalized metric, was down about 2% which is better than the down 3% in Q2. So we do feel that trend is encouraging, also the trend on surcharge free is growing nicely and which most notably as I talked about in the market conversations was to recapture of Allpoint transactions off of the 7-Eleven state and then two other retailers was encouraging as well. so underlying the trend, headed in the right direction not back to where we would like to see it yet but we hope to see that more overtime and the UK separately as I mentioned was down about 5% on a same store basis yet on, if you pull out roughly as you shy of 1% from polymer down about 4% not too far out of the negativity from history but slightly worse, but not too far from the van [ph].

[Ramsey El-Assal:]

Okay, lastly for me. What percentage of 7-Eleven has rolled off by this point? I'm just trying to get an idea of the sort of relative pace of how that's going and what to expect kind of going forward? Do you kind of percent to machines or storage [indiscernible] installed or anything like that?

[Ed West:]

Yes it's as I talked about when we first announced this on terms of the plan is almost think of it as rateable throughout the period but going into the first quarter of 2018 into kind of midpoint of 2018. The pace is frankly in terms of the number of locations is over half now little over half so that pace will continue through the period and we'll get more guidance on what stub was left over at for the first quarter.

[Ramsey El-Assal:]

Okay, thanks for taking the questions.

[Operator:]

And our next question comes from the line of Andrew Jeffrey with SunTrust.

[Andrew Jeffrey:]

Steve it's a been a pleasure and I look forward to working with you.

[Steve Rathgaber:]

Thank you.

[Andrew Jeffrey:]

I guess let me ask a question from the stock market point of view because you can imagine how my day was spent today. The kind of questions we're getting are around sort of viability of Cardtronics operations in two key markets Australia being one, UK being the other. Can you just speak to unit level economics in both of those markets today? How you think about the profitability at unit level of your state and how sustainable the profitability is? And then things Cardtronics has within its control that can possibly address and improve unit level profitability and are you committed to all the markets in which you currently operate.

[Ed West:]

[Indiscernible] questions there. As I mentioned earlier, each market is different the unit profitability metrics are different as well and then what the various levers are. In Australia as we talked about the capacity, I think you're going to see less capacity it's not going to make a lot of sense for financial institutions to have an ATM out there with no domestic charges and so sitting there losing money out there, are there better ways to provide cash to their customers. We feel like we're very well positioned to be able to do that, but today we do that for several institutions on a direct basis and managed services. there are different levers we can implement their to help support that, that market is going through a transition and I think you'll see some of the capacity change overtime there and come out obviously from a call standpoint we will continue our relentless basis to figure how we can continue to lower unit costs in each of our markets. In the United Kingdom mentioned earlier, the levers today principally are having deploy the ATM or not looking at the locations for it and then the type of revenue whether it's on a free to use basis or pay to use. The profitability for us between the two is not a whole lot different from an overall margin standpoint. Obviously the volume and throughput free to use little bit better, pay to use little less. But not too materially different. We do see opportunity obviously to the extent the revenue changes and depending on location to also have pay to use tools and be able to implement that. And cost again with the ongoing review, the performance, operating cost to change with less volume, so it is just case-by-case it's been on each situation.

[Steve Rathgaber:]

Let me just add a couple of dots there. One of the things that's true about Australia is we had heard data point about tremendous increase in transaction activity at the first announced bank like something like 30%, but there was no 30% decreases that we're aware of any place. So there's this strange pent up cash demand if you will where there could actually be an increased use of cash as a by-product of this move in Australia and that is good news in the market that has been seeing some decline. Flipside of that is whether or not we can convert that into volume at our ATMs, but to the extent that we can move to managed services and use our protected areas like casinos to grow volume. There can be an outcome there that's very sustainable and growable [ph] and that's probably the toughest market consideration that we're facing, the UK is in the some respects easier by comparison.

[Andrew Jeffrey:]

I'd like to pick up on that comment a little bit and just make sure I understood your commentary at, when you think about the UK and the challenges there. Are you saying that 5% reduction sort of that first rateable step down interchange in UK would be $15 million of EBITDA next year because that feels like a pretty meaningful impact especially thinking about $60 million in proforma cumulative EBITDA - had went in that market?

[Ed West:]

So what that was is to give some color for everyone that if this pricing change and the interchange rate change had been implemented in effect as of January 1 and was rolled into the market on the volume and the transactions that we've for this past year, without any changes by us in terms of being proactive on a cost changing type of machine, type of equipment, location of a machine, their performance of it or any other mitigation circumstances. The flow through of that reduction and interchange would have been a $15 million impact at the EBITDA level. Obviously we will be taking action, we will be taking mitigating strategies once we have all the facts and is known what's done definitively will act accordingly.

[Andrew Jeffrey:]

Which would I assume leads you to say with some degree of confidence that over four years accumulative headwind would be less than the $60 million.

[Ed West:]

We would absolutely move to do that. absolutely and that also assumes again look at the capacity that's in the market, the question earlier that was raised with roughly 70,000 ATMs in the market in the United Kingdom when you now have marginal units out there at a materially lower revenue rate that are free to use, how long will that stay that way. Again we believe just because of our scale, our cost structure, our focus, commitment and customer service and frankly locations that we have there, we feel like we can adjust and act accordingly.

[Andrew Jeffrey:]

Okay, all right thank you and one last one is, were there any unusual events in the US this quarter that might have aided transaction growth. I'm thinking about a big lotto quarter or anything like that or do you think the improvement you've seen is really clean?

[Ed West:]

No it's other than having a plethora of hurricanes and impacting a lot of performance no big a billion and half dollar lottery jackpots, we always are hopeful for one but did not have any of those just the issues and then as I mentioned earlier the like-for-like visibility to adjusting between the storm activity and debraining [ph] from the Chase ATM estate that we acquired a year ago.

[Andrew Jeffrey:]

Okay, all right thanks. Good luck guys.

[Operator:]

Thank you and our next question comes from the line of Bob Napoli with William Blair.

[Bob Napoli:]

Steve it's been great working with you, appreciate your professionalism and enthusiasm for the business.

[Steve Rathgaber:]

Thank you Bob.

[Bob Napoli:]

Look forward to keeping in touch. Questions on - just to be clear Ed, I think you said Australia based on just like very rough look at that it would be a $17 million EBITDA hit to 2018, did I hear that right?

[Ed West:]

So what I mentioned in there, this is what we in the analysis that we did for the revaluation, given the triggering event and the carrying value for goodwill. When we took our estimates and looking at the marketplace and bifurcated the state, we went through every one of our locations, 10,000 plus ATMs where they're located proximity to others and what we thought would be in a more exposed market versus a less exposed or protected group. Frankly 20% of our ATMs are not even exposed to surcharge and more in a managed services basis. So when we go through all of that analysis and then some assumptions on those two markets and frankly the assumption we made on the exposed market, that we could probably see 50% impact to revenue and the markets are more protected, maybe it was around 25% impact to revenue. When you run the math on that through the surcharges that would have an impact of roughly the $17 million of impact, to that estate that's based on those factors happening in the space. We've only had one month the trend we would expect that to phase in overtime, we're not seeing that level of hit so far as I mentioned earlier. We do expect that will get worse overtime as customers adopt, but if we were to, we factored into 2018 was what was in our analysis and that would be a $17 million. Now we'll be talking actions, once we're able to see exactly what happens, where it's being impacted and how do we mitigated that. Other things that we can do, it will be our goal to drive that down as much as possible if we see that type of transaction hit.

[Bob Napoli:]

Okay and that's understandable. The UK - so the interchange in the year, the run rate of interchange income that you're running in the UK is around $300 million, is that how you come with the $15 million, 5% of $300 million?

[Ed West:]

Yes it's little less, little less than that. What it was for like the last nine months here? So overall when we look at interchange for the UK basis is about $191 million, so we would look at roughly just shy of about $200 million on a run rate basis.

[Bob Napoli:]

Okay, does - so 5% of that for next year, would be about $10 million are there other costs, that you would.

[Ed West:]

Bob again you need to look at, so you need to look at, as I mentioned earlier the estate three quarters of that is on the exchange so that's interchange, so that would be impacted by that. And then you have other quarter of the revenues that are not impacted by it. So but we would have to understand that we shift some of the ATMs and then the flow through of that, of the interchange you can imagine, that flow through in those dollars are quite high because there aren't operational related cost, so the impact to the ATM profitability flow through quite significantly and that figure that I put out there earlier roughly $15 million before any other fixed costs or other operational costs that we could pull out.

[Bob Napoli:]

It will be interesting to see how those the Australian, UK markets adjust that's going to take few years to figure that out I guess probably, but does could open some opportunities. In the recapture of 7-Eleven what are you seeing so far. I mean - do you think you're getting customers that are no longer walking into 7-Eleven and walking into Allpoint locations or I mean sure there is, but how are you tracking that?

[Ed West:]

To the best extent possible. It's not absolutely precise because we don't know really, who did or who didn't, but we can absolutely see transaction changes between the data and the Allpoint bins. We do see the changes and it is very real and very encouraging. We anticipated if you recall when we first talked about the impact of this, would be we had factored in some Allpoint recapture and that's absolutely happening, so now we have some real data point and it does speak to the power and strength of the Allpoint network.

[Bob Napoli:]

Are you marketing to Allpoint to the rest of your customer base not to go to 7-Eleven and if you want to a free ATM if you want to use the Allpoint network - other locations are you doing marketing on that.

[Ed West:]

We work with all of our financial institutions to how best they can - serve and support their customers.

[Bob Napoli:]

Okay, last question. Ed would you have any interest in giving some thoughts around EBITDA for 2018?

[Ed West:]

Bob, great question. As I mentioned earlier there is just a significant list of items whether it's ongoing Allpoint [ph] going around the same store implications, the trends there, the 7-Eleven de-conversion now [indiscernible] LINK in Australia, but that's why I also gave those data points about what we are looking at, what we are trying to potential impact on that, so to factor that in. and but as we get passed, we hit all those data points we'll come back to you after the first year and give you the outlook based on what we know then.

[Bob Napoli:]

Okay, thank you.

[Operator:]

[Operator Instructions] and our next question comes from the line of David Ridley-Lane with Bank of America.

[David Ridley-Lane:]

So wanted to better understand sort of the way or the strategy that you're planning for Australia. I hear you that, there is potential for interchange like scheme or shared services arrangement to emerge. But in the meantime are you planning to move aggressively in removing ATMs or are you more of at the mindset to wait and see?

[Ed West:]

No we've been taking actions since the weekend occurred. This was when all that happened several weeks ago, we went to bed on Friday night having just been told CMA fully clearing everything in United Kingdom and woke up on Saturday with this announcement and following that night, that weekend, we started taking action immediately based on looking at activity. The team there is just been extraordinary with locations the current places where we serve today, where we felt like locations are more protected versus places less protected, we're looking at the data now on a daily basis and taking action accordingly and as more additional data comes, those actions will firm. So in the interim, you continue to fine-tune and tweak as much as possible at the same time, where we want to work with the financial institution for what we believe is a longer term solution for the market and for the customers and citizens in Australia who desire to have access to low cost access to cash.

[David Ridley-Lane:]

And am I right in thinking that, at least the different between some of that normalized same ATM and the ex-7-Eleven that is most of the recapture and so it feels like you're recapturing something on the order of 20% of the 7-Eleven, is that in the ballpark or maybe just what's your general expectation around the all spend [ph] recapture rate that you can achieve.

[Ed West:]

Yes, no we haven't talked about any specific rates other than just that we believe certain customers will staying within the network and the value and associate with that and that we're seeing, but we haven't given any kind of specific recapture rates, specifically it's really about the institutions and their customers and the services that they have.

[David Ridley-Lane:]

And last one from me. I understand that the 7-Eleven de-installs are happening sort of rateably here. What is the pipeline for US placements, can you quickly put those ATMs back out to work?

[Ed West:]

We have constantly having sales ongoing, the likelihood of any large significant retailers that are not in the portfolio today there are not many as likely overtime for refurbishments to redeploy those and refurbish locations. We also have been seeing a fair amount of activity in the mid market level where there is excellent opportunity for deployment overtime, but not one that has this capacity about half of those ATMs, we thought could be redeployed overtime and that is more likely to be just managed and paced and more likely in the mid market.

[David Ridley-Lane:]

Thank you very much.

[Operator:]

And our next question comes from the line of Reggie Smith with JP Morgan.

[Reggie Smith:]

It's couple questions. I was looking through and it looked like surcharges per transactions increased this quarter not sure if that was due to mix or what. I guess my question is, were there any pricing actions taken this quarter and if so, when were they implemented. Maybe you can talk a little bit about where and let us know if any pricing impacted the 7-Eleven ATMs?

[Ed West:]

So you have two different questions in there. And the biggest factor probably also if you're looking at on a year-over-year basis is with DCPayments coming in, in the level of surcharge activity there. Separately, we did see from in the mix shift overtime now with Allpoint having come off of the 7-Eleven state surcharge volumes and activity increased on the 7-Eleven portfolio so that's a big driver of that increase. Pertaining to pricing, we're always having looking at activities on a market-by-market location by program and those pricing adjustments occur on an ongoing basis and not with any kind of specific timeframe. Just as look it on a market opportunities.

[Reggie Smith:]

Understood and I guess just to clarify, were there any pricing changes on 7-Eleven ATMs during the quarter?

[Ed West:]

Obviously I haven't and won't talk about specific program. I need to say that Allpoint obviously came off of the 7-Eleven estate and what we saw was surcharge volume increase considerably on the 7-Eleven estate.

[Reggie Smith:]

Understood. I guess a quick question and I think you guys are still digesting the most recent slate of acquisitions. Just given all of moving pieces 7-Eleven coming off the uncertainty around with the UK and what Australia going to look like, the goodwill impairment, does this change in anyway your ability to do additional acquisitions on your appetite there?

[Ed West:]

Well as we said in previous quarters, we have continue to evaluate and look at different things where we see, if we had extraordinary value, but I would say the bar in the hurdle is extremely high on that and our primary focus right now is a relentless focus on the getting back to a more durable organic growth driving our unit cost structure down and operation and focus on operational excellence, generating free cash flow and deleveraging. I think it's most important and appropriate and prudent process to take here and delever and then we will see from there what - free cash flow was the highest and best use for that cash flow. But I would say going forward not that we would not have any acquisitions, but I just you'll see fewer with a more focus on driving more durable organic growth.

[Reggie Smith:]

Got it. This is my last question and then you guys talked about synergy opportunities earlier this year. Just curious as the year's unfolded and you got the approval for the UK piece of the acquisition, has your synergy expectation or even how quickly you think can derive them, does that change at all in the last few months?

[Ed West:]

Haven't changed, on track and expect to continue to move forward on that and obviously moving swiftly forward in the United Kingdom that we began the integration process and start to realize those synergies.

[Reggie Smith:]

Perfect. Thank you.

[Operator:]

And we have a follow-up question from the line of Bob Napoli with William Blair.

[Bob Napoli:]

Just real quickly just want to follow-up you know the balance sheet with all these changes, your funding and covenants and just if you could just refresh on where you're at and your comfort level with the balance sheet.

[Ed West:]

We're comfortable with the balance sheet. We have plenty of flexibility and also within the leverage test there. So not concerned in that and we'll continue to focus as I mentioned a minute ago Bob about free cash flow is continue to delever with the company. Leverage has gone up, it's - will come back down obviously depending on where we're in with 2018 and the visibility and guidance we'll talk more about that. But from a covenant standpoint we feel, we feel good.

[Bob Napoli:]

What are the primary covenants that?

[Ed West:]

You have a total leverage test of roughly four times on that be below and we have a fair amount of cushion as I mentioned a minute ago at roughly 2.7, 2.8 times and then a fixed charge coverage that at 1.5 times and we're well over that by multiples.

[Bob Napoli:]

Great. Thank you appreciated.

[Operator:]

Ladies and gentlemen, this concludes today's question-and-answer session. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.