Cardtronics plc
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Good day, and welcome to the Cardtronics' Q4 and Full Year 2017 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Dara Dierks. Please go ahead.

[Dara Dierks:]

Thank you. Good afternoon, and welcome to Cardtronics' fourth quarter and full year conference call. On the call, 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, 2016, 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 describes 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 The statements on this call are made as of the date of this call and based on current information and maybe outdated at the time of any replay of this call.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 to the nearest GAAP measure, is included in the earnings release issued this afternoon and available on our website. For your convenience, we have also posted supplemental material at www.Cardtronic.com. During the question and answer session, please limit your question to one question plus a follow up, and then please re-enter the queue if you have additional questions. With that, I will turn the call over to Ed.

[Ed West:]

Great. Thank you, Dara, and welcome everyone. I'm honored to have the opportunity to lead an outstanding team at Cardtronics as we begin a new chapter for the company in 2018. We have a foundation of nearly 25 years of providing convenient cash access for consumers, and we are now poised for our next phase of growth as we pursue a strategy to deepen our relationships with financial institutions of all sizes, and leverage our platform of ATMs with leading retailers in our key markets. Given that this is my first earnings call as CEO, I want to spend a little more time than usual to do a deeper dive in our areas of focus and recent performance. Gary will give a more detailed overview on the financial results and our outlook for 2018. First, I want to spend a few minutes on my thoughts on the company and the market in which we are focused. Cardtronics is 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. Now by the numbers. We operate over 230,000 ATMs, with over 80,000 of those ATMs owned by us and mostly located at high traffic premier retail and transit locations. Globally, we handle over two billion transactions annually, and we have the leading market share in our four core markets. Our retail network is unrivaled and is based on quality and convenience. We currently have relationships with eight out of the top 10 US retailers who have ATM programs. We have customer relationships with 2000 financial institutions, with half of those on Allpoint in the US. There are 60 million cards and counting enabled on Allpoint, our surcharge free network. Allpoint is in a class of its own due to its size and consumer convenience as a result of it being retailer focused. 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 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 operate in a large and durable cash market. Cash has many unique attributes. It’s secure. It has near ubiquitous acceptance, immediate settlement and no merchant discount or chargeback risk. All of this is supported by the numbers. McKinsey's Global Payments map suggests that global cash payment flows will grow from 68 trillion in 2014 to 78 trillion in 2019. Additionally, the report in the Federal Reserve’s most recent state of cash study from late 2016, found that cash was the most frequently used consumer payment instrument, with 32% of all payments made in cash. Debit was next at 27%, followed by credit at 21%. Finally, as cash is our business, we do our own studies as well and found with our fall 2017 Health of Cash Study, that 68% of US consumers prefer cash as their payment vehicle for purchases under $10. And 55% preferring cash for purchases under $20. Of course there continues to be new payment technologies and changes in consumer behavior, but the simple fact is that the cash market is strong and very much a part of the fabric of consumers’ habits and preferences. To summarize, cash is the preferred choice by consumers for low ticket purchases. That said, as a percentage of payment at the point of sale, it is declining. This trend, along with the proliferation of mobile and nontraditional Fintechs, is encouraging banks to refocus their resources on digital strategies versus traditional branches and tellers. At the same time, the facts show that their customers still value convenient access to cash. It is that intersection of trends that spells opportunity for Cardtronics. So now going forward, we believe a substantial opportunity exists for Cardtronics to capitalize on our network of conveniently located ATMs, operating knowhow and the product breadth and scale. This will allow us to become an enterprise platform solution for financial institutions of all sizes. In doing so, this will fortify our network and further benefit our retail partners due to increased consumer traffic. Now, with that as a backdrop, let's review a few highlights from 2017. Our total revenues grew 19% year over year, driven by the DCPayments acquisition completed in January of ’17, the largest acquisition in the company's history. We upgraded our US ATMs for EMV, which was accompanied by technology enablement and stabilization of the fleet. We nearly completed the transition of 7-Eleven ATMs from our company owned fleet. We successfully reduced operating cost. As I said at the beginning of 2017, we anticipated a $35 million run rate savings in addition to cuts in direct costs related to the deconversion of 7-Eleven portfolio in the US. We finished the year with nice momentum in our managed services solution for small and midsized FIs. And finally, we strengthened the leadership team to position us for our next phase of growth. 2017 was a transformational year for the company. As we begin our journey in 2018, we are laser focused on four key priorities to realize the network opportunity I just mentioned. They are first, drive organic growth and improve the durability of our revenue streams. Second, maintain a relentless focus on operational excellence and portfolio optimization. Third, generate free cash flow and pay down debt. And fourth, engender employee pride. Now let me drill into a few of these for just a few minutes, starting with organic growth. We believe that we can return a meaningful organic growth over time. Let me recap some of these levers. First, drive more transactions to our ATMs. Second, drive our add new retailers and FIs through our traditional channels. Third, further develop relationships with our high quality retail and FI customers. And fourth, expand with new products and services, such as our comprehensive managed services solution. We're supporting these efforts with new sales leadership, change in skills and our rigorous sales operations process. Now to touch on some recent progress on each of these fronts. We are highly focused on driving more transactions at our existing ATMs. One of our recent successes has been Allpoint, our surcharge-free network, which steers transactions to the Allpoint enabled ATM. In the fourth quarter, we added 27 financial institutions to Allpoint and enabled over 500,000 cardholders with surcharge-free ATM access. A couple of the recent wins include the US cardholders of Rabobank, and an agreement with Finn by Chase, the all-mobile bank, to offer account holders surcharge-free ATM access through Allpoint. In addition, we expect to add new retailers and financial institutions through our traditional channels, and continue to develop on this core part of our strategy. In the fourth quarter of 2017, we executed a new ATM operating agreement for 120 racetrack convenience store locations in the Dallas, Fort Worth area. Adding to our surcharge-free network, these new racetrack locations are Allpoint enabled and are branded with a new branding partner, the Credit Union of Texas. We also expect to continue to grow with our high quality retail customers as they expand their footprint. As an example, last week we announced that we are now serving over 7,000 Walgreens locations. As I mentioned earlier, Cardtronics is uniquely positioned to serve FIs of all sizes due to the range of solutions and the breadth of our offering. We are now delivering managed services solutions supporting small and mid-size FIs on and off premise ATM fleets. Financial institutions are seeking ways to optimize their ATM management in light of the trends that I mentioned earlier. These trends include a continued focus on brands transformation, and efficient ways to deliver the digital to physical touch points with their customers. We have spent the last year redirecting our investments for this opportunity, such as strengthening our enterprise platform, enhancing our information security leadership and expertise, upgrading our customer care organization, and our work is now beginning to pay dividends. In the fourth quarter, we signed new agreements with the Texas Dow Employees Credit Union or TDECU, and Dearborn Federal Credit Union to manage these financial institutions on and off premise ATM estates. And also with BBVA Compass to manage a portion of their off premises estates. These key partners are trusting us to manage over 200 ATM sites for them, and it's just the beginning in the US. And we have growth opportunities in each of our markets. We have been providing managed services for CFIs in Canada, Australia and South Africa for years. In South Africa alone, we added over 200 ATMs in the fourth quarter, further building on our terrific business in that region. As a result of the commercial and operational actions, we see a path for North America returning to organic growth in 2018 when excluding 7-Eleven. In the EMEA segment, due to the refocus and enhancements of our commercial efforts, we believe 2018 revenue growth in our emerging markets of Germany, South Africa and Spain, will largely offset the headwind in the United Kingdom. Now moving on to the second area of near term focus, operational excellence and portfolio optimization. As I mentioned last quarter, over the past few months, we've been working tirelessly on performing an internal top to bottom review of all entities and functions, while being laser focused on ATM profitability, portfolio optimization, cash flow and rekindling more durable organic growth. Let me just highlight a few of the activities we're focused on to deliver improved customer service while driving process improvement and lowering our cost structure. We have numerous process improvement initiatives across the business to improve service delivery. We measure performance at a detailed level, and we have a competitive advantage here that we intend to widen. Benefits are reinvested in the higher areas of return, or they will drop to the bottom line. Last quarter, we decided to shut down our Poland operations. While we didn't take it lightly, the reality was that our operation was subscale and we could put the resources to higher and better use for positive returns. We are making additional restructuring changes this quarter to right size our costs. We continue to streamline overhead and consolidate activities spread across our locations in an effort to improve customer experience, control and scale. Regarding infrastructure, we're investing in a new ERP system that will not only save operating cost over time, but will enable future scalability as we continue to grow globally. Resulting from the ever changing threat landscape, we recognize the need for continuous improvement in the evolution of both logical and physical security control. Risk management and adherence to compliance are core to our values and the foundation to consumer confidence. And finally, we're also investing in our future growth, with a wide range of product development efforts focused on traditional and non-traditional financial institutions. These are largely being funded with other savings. And as an early proof point, on our ongoing operational effectiveness effort, our fourth quarter adjusted gross profit metric was essentially flat as compared to a year ago. That result is the best comparative outcome versus prior year that we have had since 2016, as we faced significant headwinds from the 7-Eleven deconversion and DCPayments coming on with lower margins. Our 2018 outlook assumes that even with the headwinds in the UK and Australia, combined with the loss of the higher margin 7-Eleven business in the US, our process improvement actions can mitigate the negative impact to gross margin to around 100 basis points in 2018 versus 2017. The third area we're focused on is generating strong free cash flows. We have a great global business that generates significant cash flow, and in the near term, we are focused on using that cash flow to drive organic growth and reduce debt. Gary will provide details here in a few minutes, but based on what we know today, we are planning to exceed 2017’s reported free cash flow this year. As you know, historically a fair amount of the company's growth was derived from acquisitions. Going forward, our focus will be on organic growth and driving transaction share to our platform and not via acquisitions for the near term. Now let me shift gears and provide an update on our businesses in the UK and Australia, two markets that had recent market challenges. As a quick recap, in Australia, the four largest banks made the announcement last fall indicating that they would stop surcharging all domestic users at their ATMs. Australia is a market where there is no interchange and where our ATMs are all direct charge machines. During the fourth quarter, we experienced a year over year decline in transactions of approximately 8%, but still early days since the market change and it's too early to know what the outcome of the bank's action will ultimately be. In the interim, we continue to focus on optimizing our business for what may evolve as the new norm. Since the announcement, we have been in high gear, analyzing the mix of our portfolio and taking action to proactively manage costs and protect margins. These actions include moving ATMs to better, more protected locations, restructuring contracts with merchants, removing unprofitable ATMs, and lowering service costs. We know that it does not make long term economic sense for the four largest banks in Australia to stand by and observe their collective 10,000 ATMs lose money. 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, we see this as a potential future opportunity in Australia to diversify our revenue base. In this transitional period though, we are likely to see declines while we focus on cash flows and the execution of our longer term diversification strategy with financial institutions. Now moving to the United Kingdom. LINK announced on January 31 that it would reduce the interchange on free use ATM transactions in the market by 5%, starting in July of 2018. The additional previously announced annual 5% interchange reductions over the next three years, are still in play and subject to further review. We are hopeful that all parties involved will come together to finalize a model that sustains convenient, free to use cash access for all UK citizens for the long term. In addition, an independent inquiry into the long term access to cash has been requested, which is scheduled to begin in the second quarter. Nonetheless, we're focusing our efforts on optimizing our portfolio in the UK. As a result of LINK changes to the pricing model, we are proactively addressing market developments and have removed some of our unprofitable and marginal locations, shifting some ATMs from free-to-use to pay-to-use, and undertaking other cost control initiatives. At the same time, we are evaluating and developing plans to diversify our revenue and profit mix in the UK and leverage our comprehensive delivery platform. We are well suited for managed services solutions for the banks. More to come on that front in the future. As previously mentioned, our 2018 outlook assumes that growth in Germany and South Africa and Spain, will largely offset the headwind in the UK. So to summarize, 2017 was a transformational year for Cardtronics. We stabilized our technology platform, completed the EMV upgrades for the US owned fleet, and delivered on committed operating expense saves. We recruited an entirely new management team. Within our functions, we've worked tirelessly to become bank grade, from shoring up our operational processes to drive network availability. Continuous improvement is now a part of our DNA. This also extends to new management models on the commercial side, and even more importantly, customer satisfaction scoring. Looking ahead to 2018 and beyond, we are well positioned for long term growth. The cash market is large and durable and Cardtronics sits at the nexus of physical and digital. We enable consumers to easily convert digital funds into physical cash in hand. We will leverage our platform to deepen relationships with FIs of all sizes, deliver more value to retailers, and fortify our network. These actions, along with the new and expanded offerings, will increase control of our revenues over time. With our enhanced people, process and platform capabilities, industry expertise as an operator, and ownership of key retail placements where consumers work, shop and play, Cardtronics is uniquely positioned like no other to assist financial institutions as they continue their brands transformation strategies. Whether it be via in-branch managed services, or by enabling convenient cash access and retail to supplement branch closings, we stand by ready to partner. I would now like to turn the call over to Gary Ferrera, our new CFO.

[Gary Ferrera:]

Thank you, Ed. I've only been on board for two months, but it's been a pretty active two months, and I'm really excited to be a member of this talented leadership team, helping to lead this great company. We are the global leader in ATMs, and I believe there are a number of opportunities for long term growth. But as Ed mentioned earlier, our immediate focus will be on restoring organic growth post 7-Eleven, optimizing our portfolio, driving operational excellence, and delivering free cash flow. Let me start with our Q4 results. Currency exchange rate trends have now reversed. For the first time in a while, they were actually a bit of a tailwind. Therefore, I will give a few constant currency measures as I go through the numbers. Overall, Q4 was a solid end of the year. Revenues of $363 million were up 17% year over year, or 15% on a constant currency basis. ATM operating revenues of $346 million were up 18% or 15% on a constant currency basis. Organic ATM operating revenue growth in the quarter, excluding the 7-Eleven account, was 3% on a constant currency basis. We had similar growth rates in both North America and Europe that yielded the consolidated result. This result is fairly consistent with what we've seen in the last couple of quarters. Looking at our key operating segment, in North America, on an as-reported basis, revenues were up about 1% year over year. Lots of moving parts drove that outcome. In particular, the 7-Eleven deconversion just about completely offset the contribution from North America component of the DCPayments acquisition. Same store transactions growth in the US, excluding 7-Eleven, was up about 1% for the quarter. Building on the positive trend we began seeing in the back half of the year, reflecting the durability and attractiveness of our premier retail ATM locations, and the power of our Allpoint network. In our Europe segment, on an as-reported basis, revenues were up 21% for the quarter, 14% on a constant currency basis. Growth in this segment was mainly the result of our DCPayments and Spark acquisition, but we did manage low single digit organic revenue growth in our base UK business, driven by unit growth in the face of 5.5% same store transaction decline. This same store measure was relatively consistent with the result of recent quarters. Consolidated adjusted gross margin for the quarter was 35.3%, about flat with prior year. Again, there are several factors that drive this result. We have 7-Eleven coming out of the higher margin. We also have DCPayments, which was dilutive to margin. Both of these were sizable headwinds, but were mostly offset by lower EMV related costs in the US, and margin expansion in the UK as a result of operational efficiencies achieved through our internal cash delivery and maintenance function. Adjusted EBITDA was $89.8 million, up 16% from last year, or 13% on a constant currency basis. This growth was mostly attributable to the DCPayments acquisition, and was partly reduced by fewer transacting 7-Eleven ATMs in the US. SG&A costs as a percentage of revenue, were down slightly year over year. Adjusted EPS was $0.73, down from $0.79 in the fourth quarter of last year. The year over year decline in this metric was driven by the incremental interest and depreciation expense associated with our DCPayments acquisition, which more than offset the growth in adjusted EBITDA. Now I will quickly recap our full year 2017 results. The fourth quarter was stronger than anticipated and for most metrics, pushed us at or over the top end of our outlook ranges that we maintained throughout the year. Revenues for the year were $1.5 billion, up 19% from the prior year, with most of that growth coming from the DCPayments acquisition. Adjusted EBITDA of $348.6 million, was up 9% from $318.9 million. Once again, most of that growth being attributable to the DCPayments acquisition, partly offset by the 7-Eleven deconversion. Finally, adjusted EPS was $3 per share, down 9% from the prior year, as the adjusted EBITDA contribution from DCPayments, was more than offset by incremental depreciation and interest expense attributable to the transaction. I now want to spend a moment talking about taxes. Just like every other company, either parented in the US or with substantial US operations, we were impacted by US tax reform. First, let me talk about GAAP tax. Our GAAP tax rate was a bit unusual in the fourth quarter as a result of recording the preliminary estimated impacts of tax reform. Specifically, we had a GAAP tax benefit in the quarter of $7 million on book pretax income of $9 million. This result reflects the net impact of re-measuring net deferred tax liabilities in the US at the now lower US corporate tax rate of 21%. This book tax benefit would have been higher if not for the mandatory toll tax on unrepatriated foreign earnings. We estimated this liability to be approximately $8 million. As permitted under the law, we plan to pay this liability over eight years. When we calculated our non-GAAP tax rate for the quarter, we excluded the one-time impact from US tax reform. Our non-GAAP tax rate for the quarter was 28.6%. Going forward, estimating the GAAP and non-GAAP tax rate will be a bit more complex. While the lower corporate US tax rate is good for our US earnings, there are several provisions of the tax reform package that negatively impact us. And as it relates to 2018, we expect to incur more US tax, mostly as a result of the limitations on the deduction of interest. As a result of some of these disallowances, we could see GAAP tax rate next year in the 40s. Our non GAAP tax rate will likely be more similar to the last 18 months, in the upper 20% range. A number of you are probably curious as to whether we will remain UK domiciled in light of US tax reform. At this time, we have no plans to change our domicile. Turning now the balance sheet. We ended the year with total debt outstanding of $960 million, grossed up for the face value of our debt instruments that are recorded net of discount on our balance sheet. We had $122 million drawn under our $400 million facility, and we had $50 million - $51 million in cash. Net debt to adjusted EBITDA as per our debt covenant calculation under our revolving credit facility, was approximately 2.8 times as of year-end, versus the covenant of four times. We also have plenty of headroom on our other debt covenants at the end of 2017. We plan to use our free cash flow in 2018 to repay a good portion of the revolver during the year. While we anticipate that our net debt outstanding will come down during the year, our net debt to adjusted EBITDA multiple will increase slightly during 2018, as we lose the benefit of the 7-Eleven even Doc contribution. Now on to our outlook for 2018. I would like to note that in the supplemental deck posted to our website, we have included a bridge for revenues and adjusted EBITDA from 2017 actuals to the midpoint of our 2018 outlook, to highlight the major drivers of the year over year changes. Consolidated revenues are forecasted to be a $1.20 - I’m sorry, $1.25 billion to $1.29 billion. I need to point out that 7-Eleven in the US accounted for approximately $188 million in revenues in 2017, and we are only expecting about $5 million in revenues from this account this year, as we had removed the significant majority of our ATMs by the end of December, and expect to be fully out before the end of this quarter. This guidance, on a constant currency basis, implies low single digit organic growth, excluding 7-Eleven, driven mostly by forecasted growth in our US operations. On adjusted EBITDA, we are expecting $250 million to $260 million. Similar to the situation with revenues, there was an approximate $75 million headwind from the 7-Eleven deconversion. Additionally, we continue to take a measured view with respect to our Australian business, and are being impacted in the UK through both the LINK interchange rate impact and general transaction decline. On adjusted EPS, we are currently expecting a range of $1.35 to $1.55. The combined impact of the 7-Eleven deconversion, and our in-year 2017 capital expenditures, has had a significant impact on a book depreciation expense. To elaborate a bit further on this, a number of our 7-Eleven ATMs were fully depreciated coming into 2017. So when we move them in the back half of the year, there was a minimal amount of depreciation expense reduction in relation to the amount of revenue removed. Secondly, we made significant fleet upgrades and technology investments in 2017, and many of the assets were placed in service during the year, some with shorter lives. And as a result, you're seeing a full year of depreciation expense for these assets. We're assuming a range of approximately $125 million to $127 million for depreciation expense in 2018. In addition, US tax reform has had a large impact on our EPS outlook. As the previously mentioned limitations on deductibility of interest significantly increased our estimates for 2018 book taxes, which adversely impacted both our GAAP and non GAAP rate estimates. We anticipate 2018 capital expenditures to be approximately $110 million, significantly less than the $144 million incurred in 2017. This is made up of approximately $35 million in growth CapEx and $75 million in maintenance CapEx. Maintenance CapEx is made up of two main categories. The first category is routine ATM related maintenance CapEx. This category includes upgrades, replacements and swaps of ATMs, vehicle replacement and cash depot upgrades for our cash delivery service in the UK, and other general maintenance and compliance costs. We currently expect to spend approximately $35 million on this category this year. The second major maintenance bucket is what I would refer to as infrastructure investments and enhancements. For this category, we're expecting to spend approximately $40 million in 2018. About half of this amount is due to the combination of an investment in a new ERP system, as well as moving our offices to rationalize our office footprint. The $35 million in growth CapEx, includes organic unit adds across our market, product investment and capital to support our growing financial institution services business. And wrapping up the CapEx piece of our outlook, I would emphasize that this capital plan correlates to our revenue and profit metric outlook. And to the extent we have incremental success with our financial institution growth strategy, we could exceed this target, but that would be a positive for the business and we would communicate any material changes when appropriate. Based on our current capital structure, we anticipate cash interest expense to be in the range of $36 million to $37 million. We are expecting a non-GAAP tax rate of 26% to 28%, and cash taxes will be about $5 million to $10 million. This assumes status quo tax rates and regulations in our major jurisdiction post US tax reform. And finally, we plan on increasing our free cash flow versus last year, and primarily utilizing this cash to reduce outstanding debt. Concerning interest rates, we have entered the year in what we think is a good place as it relates to exposure to floating interest rates on our outstanding vault cash. In January 2018, we entered into additional interest rate swaps in the US. And now with these additional swaps, combined with operational measures and contractual provisions, we believe we have minimal exposure to changes in interest rates in the US in 2018. Additionally, in the UK, we believe that our interest rate swaps and other tools, have mitigated our exposure in the near term. We have other protections in place in our smaller markets, but we specifically mention the US and UK as over 85% of our outstanding vault cash is in these two markets. Let me close off the discussion of our outlook by talking about the distribution of adjusted EBITDA across the four quarters. Our current view is that Q1 should show the best year over year comparison on adjusted EBITDA. As a reminder, we had a number of challenges in Q1 last year, including elevated downtime from our software issues in the field, coupled with higher operating costs associated with the EMV related activity. To be clear, we're still expecting to be down year over year on adjusted EBITDA in Q1, and that percentage decline could be in the region of the low 20. For the second through fourth quarters, we're expecting year over year adjusted EBITDA percentage decline in the range of mid to high 20, with Q3 probably being the worst quarter when compared to the prior year as the reduction in the LINK interchange rate takes effect. I should also note that none of the top five retail contracts come up for renewal in the near term. And in 2018, we wouldn't expect any single merchant relationship to account for more than 7% of total revenues. With that, I'll turn the call back over to Ed.

[Ed West:]

Great. Thank you, Gary. And operator, we’ll turn it over to you to facilitate the questions session.

[Operator:]

[Operator Instructions]. And we will take our first question from Ramsey El-Assal with Jefferies.

[Ramsey El-Assal:]

Hi guys. Thanks for taking my question. The revenue guidance in 2018 came in not too far from Street numbers. Obviously there's a little more potential margin deterioration there than I think the Street was modeling. So I guess my question is - obviously there are a lot of factors in play here, LINK Australia, maybe the full impact on the model of 7-Eleven. My question is, how much confidence do you have that you now have enough visibility to kind of accurately read the impact of these items? Are you taking a conservative approach here because you kind of have to, or are you really able to kind of model some of this stuff out like LINK, like Australia with some -- what you consider to be fairly tight data driven assumptions?

[Ed West:]

Well, good afternoon, Ramsey. It’s Ed, and thanks for going through that. The - one of the great things was flipping the calendar this year into 2018 following on from ’17. We had so much change last year between the acquisition, the operational issues from the software rollout, the integration of acquisitions, and obviously other factors and announcements throughout the period. We actually feel quite good about the business, and where we stand right now, the outlook, the amount of things that are going on, the activities. And candidly, as Gary talked about, as he mentioned in the - some of the same store transactions, in particular in our largest market, the US, showing some encouraging signs there. So we feel good about where things stand right now, what we have ahead of us, we see the issues in Australia. We’ve obviously been very proactive addressing that. This next year is defined for the UK. We’ll continue to optimize as I walk through there. So there's a decent understanding. That said, we're obviously going to be prudent with where things are, very focused, and this is going to be about focus and execution on day to day and taking things how it comes. But I can tell you going into 2018, we all feel quite a bit better than this time a year ago.

[Ramsey El-Assal:]

Okay, great. Just my one follow up is, it feels like a real pivot in terms of your balance sheet deployment strategy here, talking about delevering rather than allocating dollars to M&A. Can you talk a little bit about what that might mean going forward? Following the delevering, are you - is there a greater possibility that you get - you possibly return cash to shareholders in the form of dividends or buybacks? I know that's a question you guys have been asked over the years, but the answer has always been somewhat kind of perfunctory, just in terms of the M&A engine. Is that something that has kind of changed in terms of how we should sort of frame up the Cardtronics story going forward?

[Ed West:]

Well, ultimately any of that in terms of capital allocation longer term is a board decision. But let me just say, for the near term, as both Gary and I were crystal clear about was paying down debt, and also candidly growing cash flow from our expectations in 2018 versus ’17. So I think those are two of the key differences, this year’s expectation to grow cash flow and an ardent focus on that, and then to pay down debt. As we move beyond this year, we'll obviously continue to reevaluate and everything will be on the table.

[Ramsey El-Assal:]

All right, thanks so much. I'll hop back in the queue here.

[Operator:]

We’ll go next to Andrew Jeffrey with SunTrust.

[Andrew Jeffrey:]

Hi guys. Good afternoon. Definitely appreciate the well-articulated strategy, Ed. With regard to Allpoint, particularly what sounds to be a greater emphasis on the FI phasing aspects of that business, what's changing internally at Cardtronics? In other words, we heard your predecessor talk about outsourcing and being the outsourcing partner of choice. We’ve kind of waited for news and continue to wait for real growth there. What’s changed internally that makes you perhaps more confident that you can monetize and really execute in that area?

[Ed West:]

Well, I mean, I would just say just really kind of focusing on the windshield, what's ahead, where we are right now and where we're executing on. Overall, across the organization, the team bringing in a lot of FI background experience, expertise on that, upgrading systems, capabilities, operations, how we execute, how we’re looking at the business. I mean it is across the board and frankly, quite exciting. There’s been a lot of activity over the last year on all fronts on that basis. As we’ve talked about over the last year, there's been a lot of different conversations going on in the marketplace, the kind of phone ringing of interest. The good news is in the fourth quarter, that started to close - turning into new relationships. I think what we announced with two new key or frankly three new key managed service solutions here this past quarter, and was one of the strongest that we’ve had. Obviously we feel like we still have a lot more ahead on that. The other area candidly is the - as I mentioned, the transactions that we're seeing. When we dialed back the clock a year ago, we had the issues with the software, which them - the EMV which delayed that and the operational matters that came along with that. And the clarity into the business was to some degree murky. That is now lifting. We’re seeing underlying business. Transactions in the US, in our core market here, have been recovering. If you go back to a year ago, I think our same store declines were down close to 5%. That steadily improved each quarter to where, as Gary pointed out, this past quarter it was up about 1%. That is an encouraging sign, and it's also a sign showing that surcharge-free transaction growth is outpacing surcharge declines. So those are all positive elements, but as I said earlier, we want to be prudent, focused. We’re going to execute and focused on singles and doubles.

[Andrew Jeffrey:]

Okay, I appreciate that. And Gary, I look forward to working with you. Just a quick question on the UK It sounds like tactically you feel good about the ability to offset the sort of first 5% down lag in interchange. But when you consider a 5% plus same store sales declines, what you effectively offset with unit growth, how sustainable is your sort of economic position in that market as we compound some of these challenging trends?

[Ed West:]

I’ll start off with that, then turn back to Gary. I wasn’t sure if you were going to the jury on that. The UK, as you point out, I believe that …

[Andrew Jeffrey:]

Whoever can do the best job.

[Ed West:]

Okay. The 5% reduction goes into the second half of the year. Unfortunately, the growth as I mentioned in other emerging markets, we feel like can mitigate and offset that. And we'll continue to work with the market there. Clearly the team has been very active there over the last several months, focusing on free to use versus pay to use, changing some of the terminals out to - from free to use to pay to use, pulling ATMs out of the market that were marginal, renegotiating contracts. So that's happening across the board and focused on optimization. So we feel like we can offset and mitigate. Obviously, you can't do that into perpetuity, which is why we also are working on strategies to diversify and move more in a managed services solutions with key FIs. And we’ll talk more about that at a later date. So it's a multi-faceted front and we will continue on there. That said, let me just kind of a moment on LINK. The country has a fantastic system there for the citizens of the UK who have broad, free to use access and convenient access to cash at a very low market - excuse me, at very low cost to the market. So we are big supporters of that. We will continue to support that and support the citizens of the country and work with all its constituents to understand the value that's out there. And we'll work with them to hopefully sustain that into the long term.

[Andrew Jeffrey:]

Thank you.

[Operator:]

And we'll take our next question from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Good evening, Ed and Gary. Ed, you've talked obviously about this opportunity in the US for outsourcing and I'm wondering, I know you talked about the internal changes that are happening that will allow you to pursue it maybe more so than in the past. But is there anything that's happened externally or at the FI level that makes this solution even more appealing to the banks?

[Ed West:]

Well, good evening Kartik. As we talked about in the prepared remarks earlier, the trends in the marketplace obviously is where you do have an overall decline in terms of cash at the point of sale. Banks really focusing on digital strategies, they’re looking at how are they really focusing their resources. Obviously they're under a lot of pressure for efficiency ratios and other factors. Cardtronics is very unique in the breath of our platform. And when we can go in and have a conversation with a financial institution, with multiple solutions, whether it's on branding and better positioning at key retailers and helping serve their customers to manage services solution, is a very broad offering and frankly moving up the level within the organization, because it can be more strategic. So I just think that conversation has progressed and the market’s continuing to evolve, but this has been a long term in the making and I think we're just the very beginning of it, and it will probably move up and down. That’s some positive periods and ones less so. But overall, I think it's a very good trend for Cardtronics.

[Kartik Mehta:]

And then finally, Ed, you talked about LINK and obviously the issues with the interchange reduction. Is there an opportunity that they could reverse it or make it less so? It seems though from your comments, I felt as if there was an opportunity to maybe change what the current ruling is.

[Ed West:]

Well, what they have published is that the first - they talked about overall 20%, which is still on the table over four years. The first of those is definitive and it goes into place this July, on July 1 and reducing the interchange rate down by 5%. They still expect to have three additional ones, but they are all under review. So they - we’ll continue to evaluate and separately, they announced a public inquiry in terms of long term implications on cash in the country. So I think that's where the government, a lot of different various constituents, are engaged or want to better understand the implications. It's a great system, allowing broad, free access to cash, and I think it's a true asset for the country.

[Kartik Mehta:]

Thank you very much. I appreciate it.

[Operator:]

We’ll go next to David Ridley-Lane with Banc of America.

[David Ridley-Lane:]

Good evening. Just wondering on the pacing of actions that you’re taking in Australian and the UK, would you expect it to be largely sort of complete with your right sizing efforts by year end 2018? Or is this something that you have to judge month by month, and maybe continuing to make portfolio changes in 2019 as well?

[Ed West:]

Yes, a great question, David. What we do know is the first of those changes in LINK for July 1 of this year. So that's going into place and we've been taking actions accordingly. And we'll continue to monitor and prepare and adjust as if this is going to continue forward. But obviously we want to keep a close ear to the ground there. Australia, the same way. We have to monitor the situation. We still fully expect that consumer behavior will change. Sometimes it takes longer. Sometimes we could move more quickly, but we're going to monitor that. We’ve taken the initial action with an ongoing exercise and that the teams in both countries are doing an excellent job at - and really staying close to it in the performance.

[David Ridley-Lane:]

And then on - from a follow up, one on 7-Eleven. I know you have various plans to recapture some of the volume from those 7-Eleven ATMs. Any early data you can share or how your expectations around the ultimate percentage shift of those revenues you could retain?

[Ed West:]

It comes back to the strength of Allpoint, that there has been a recapture, and that has benefited the retailers where Allpoint has been enabled there and seen customers where they've had growth at that. So we knew there would be some benefit for the remaining portfolio that came off of 7-Eleven when that ended. And so that is captured in the numbers. It’s also - the numbers that we've talked about, I think what Gary went through, we’re seeing that 1% excluding 7-Eleven growth, is really because there are other ins and outs through the period. It’s a decent number looking at from a comparative standpoint from the beginning of the year. So what I'm trying to say there, the trend’s been good, the performance, there has been recapture and it just speaks to the benefit of Allpoint.

[David Ridley-Lane:]

Thank you very much.

[Operator:]

[Operator instructions]. Well go next to Bob Napoli with William Blair.

[Bob Napoli:]

Thank you. Appreciate the presentation. The growth over the next few years as you look to invest more in FI relationships and invest more in Allpoint, should we - do you have any targets for like maybe what managed services revenue and bank branding and surcharge-free network revenues should be as a percentage of total? Should we see that grow at a much faster rate than total revenue?

[Ed West:]

Well, we do expect that line to grow over time. Targets, Bob, we’re just - we're focused right now on executing within the business and making sure we're getting - moving on the priorities that we outlined here today, and getting back to organic growth. We’ll come back talking more broadly about longer term targets, how you could look at the company on a longer term basis and some longer term financial targets. We’ll come back on that. Right now, frankly the highest and best use where we’re focused is executing and getting this organic growth going and growing cash flow.

[Bob Napoli:]

Okay. And then the much higher depreciation expense this year as a percentage of revenue, understand the 7-Eleven ATMs had very low depreciation, but 9.5% of revenue, somewhere in that range. Is that something that you would expect over the mid to longer term, that type of relationship between depreciation and revenue? And the CapEx, 110 million of CapEx, a lot of that maintenance, maybe two thirds as you broke out very nicely and maintenance. Would you expect CapEx to grow - to maintain the level you had in 2018 or grow from there?

[Gary Ferrera:]

Yes I think on 2018 CapEx, that is where we think we are right now based on the plan. As I mentioned, if things start really escalated during the year with financial institutions, something like that, we’ll come back to you, and it could increase. It could go up, but that would all be a positive because then obviously our growth would go up. When you start looking out further, I don't - it’s too hard to say at this point in time. And as Ed said, we’ll come back probably later in the year with more specificity to a longer term plan. And when it comes to depreciation, I think the numbers you're seeing that we've put in there now are good numbers, assuming CapEx levels at what we're talking right now.

[Bob Napoli:]

And last question. The IRRs on putting in a new ATM, how have they changed? How are they today versus what they've been historically for Cardtronics?

[Ed West:]

Well, I would just say, it depends on the market where we're investing and growing and have growth. We feel very good about that and decent performance and from what we've seen historically. you're not - some markets, you're not going to see any growth, and frankly you're going to see a reduction in terms of ATMs and outstanding based on the factors that we talked about. All in all, we feel good about the returns that - where we have the investments. And I guess one other thing I would say is some of what - that we’re talking about in terms of the business going forward, some of the growth in managed services, there's also a benefit there on certainly the revenue. As we talked about, one of our priorities here is the organic growth, but it's also taking control of our revenues and top side. So there's also benefit of having better visibility, better control and longer term view of that capital.

[Bob Napoli:]

Great. Thank you. Appreciate it.

[Operator:]

And we’ll go next to Tim Willi with Wells Fargo.

[Tim Willi:]

Thank you and good afternoon. Two questions. First was just around sort of international. And I apologize. I jumped on a couple of minutes late, if you addressed it in your prepared comments. I did hear you say you're shutting down or have shut down Poland. As you think I guess maybe beyond the immediate, call it 2018 outlook, are there other geographies that you would view as serious possibilities for de novo or some kind of entry acquisitions where there's probably a much stronger secular opportunity than maybe the existing franchise?

[Ed West:]

Tim, good evening. I'm sure there are and we believe there are, but our focus right now is on the markets where we're operating and getting the highest and best return on those, getting back to the organic growth, growing free cash flow and paying down debt. We’ll come back on further expansion opportunities as they become present. Now, we may come across something that presents an extraordinary opportunity and an extraordinary return, but it will have a very high hurdle rate before we do something, but that - we'll deal with that at that point.

[Gary Ferrera:]

We haven’t told people not to call us. So we’re taking calls, but to Ed’s point, it’s going to go through a very rigorous process.

[Tim Willi:]

Yes, that makes sense and I’m glad to hear that’s sort of the approach. The follow up I had was about the organic growth in the US. And I guess there's never necessarily a definitive reason why things may or may not happen, but would you attribute any of it or as you sort of think about your viewpoint, is it economic in terms of just a better economy and more spending and money in people's pockets? Do you see data from your sources in the industry? It did show a lot of it may be subpar locations of other independents are shrinking and losing volumes that are migrating toward your better positioned machines. Just any sort of insight you might have around that organic growth profile in the US over the last quarter or two.

[Ed West:]

Well, I can't speak to others’ organic growth profile, but I can just tell you what we see, it’s - for the US, it's broad based. It's across most sectors that we have. The trends have been improving. That said, as I said earlier, we're obviously cautiously optimistic about it and take it one step at a time, but it is fairly broad based in nature. I'm sure the economy does help with that and are supportive to it. Us being back in the US had a 1% increase on a same store increase. I mean this company hasn't seen that in a long time. So that is encouraging, and we'll evaluate it over time. The other thing we do see through our, what we call our independent business group, there - that area sees our growth as well in terms of the broader platform and the processing. As you know, we process a couple billion transactions a year in the US. We’re seeing more similar across the platform.

[Tim Willi:]

Great. Thanks very much.

[Operator:]

Thank you everyone. That does conclude the question and answer session. I'd like to turn the conference back to our speakers for any additional or closing remarks.

[Ed West:]

With that, we just want to thank you all very much. Thank you very much for your confidence in Cardtronics, and you have a team here and employee base that couldn't be more enthusiastic and positive about what we have ahead of us. And we're looking forward to spending more time with you and have a great day.

[Operator:]

Thank you, everyone. That does concludes today's conference. We thank you for your participation. You may now disconnect.