Cardtronics plc
Q4 2016 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cardtronics Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Phil Chin, EVP, Corporate Development and Investor Relations. You may begin.

[Phillip Chin:]

Thank you. Good afternoon and welcome to Cardtronics fourth 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 by Steve and Ed 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 included but not limited to those outlined in our reports filed with the SEC, including our Form 10-K for the year ended December 31, 2015 as amended, Form 10-Q for the quarter ended September 30, 2016 and other factors set forth from time to time in our other filings, including the definitive Proxy Statement filed on May 19, 2016. Actual events, results, performance may materially differ. The statements on this call are made as of the date of this call and based on current information even if subsequently made available by us on our website or otherwise. We assume no obligation to update any forward-looking statements made today to reflect events that occur or circumstances that exist after the date on which they were made. In addition, during the course of this call, we will reference certain non-GAAP financial performance measures. Our opinion regarding the usefulness of such measures together with 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.

[Steven A. Rathgaber:]

Thank you, Phil, and welcome, everyone. My remarks today focus on the three key messages that I would like you to take away from this call. The first is simply that the fundamentals of our business remain strong. We've had another solid quarter that contributed nicely to another full year of double-digit top and bottom line growth when adjusted for currency movements. We've also had some meaningful business wins to close the year and set the stage for the future. Second message is this, the waiting is over. 2017 is here. The U.S. business of 7-Eleven will migrate away this year and we are ready. We have been working hard at building and executing a plan to be a better Cardtronics post the transition of the 7-Eleven business. We have made tremendous progress, but have more work to do. Ed and I will provide more insight in this area. The third takeaway is focus on the future of your company. As we enter next year, 2018, Cardtronics will still be the unique asset, a growth company you know, but we will also be a better company with unmatched scale, product and market reach. The secular trends in banking favor Cardtronics and we will be very ready to turn those trends into growth. Let's recap the quarter highlights. We had a strong finish to ATM retail placement contracts with nearly 900 new locations contracted this quarter, yielding total organic unit adds in 2016 of nearly 3,400. 3,400 new placement contracts places us in the middle of our target range of 2,500 to 4,000 new placement contracts per year. We continue to see FIs embrace Allpoint with a record quarter of 31 new FI signings, delivering 1.1 million cards in Q4 and bringing the 2016 full year total to 102 new FIs in the network with over 10.4 million cards. This is the most significant year of direct issuer sales growth that Allpoint has realized in its history. The recent trend of large FIs joining Allpoint, highlighted by the Fifth Third, Fifth Tennessee (sic) [First Tennessee], and now Citibank, reinforces the growth potential of this unique asset. I am delighted to announce that we secured a long-term renewal with the Canadian 7-Eleven business. It is accompanied by the renewal of the branding relationship with Scotiabank to continue for the Canadian 7-Eleven stores. In the UK, we had significant renewal of Shell Oil. In the U.S., we renewed and expanded our relationship with Walgreens, including Duane Reade. Our significant branding relationship with Citibank was transformed with an agreement to brand 1,900 ATMs across multiple retailers, including Walgreens, Duane Reade, and others, which will replace the branding with 7-Eleven. As already mentioned, Citi has elected to participate in the Allpoint Network, our third large financial institution in as many quarters to sign up. We like that trend. I also like it when existing customers want to expand their relationships with us and that happened twice this quarter. We expanded branding relationships with two top 25 FIs, BMO Harris and TD Bank. Early January was busy as well with two acquisitions closing. Cardtronics entered the South Africa market with 2,600 ATMs through the acquisition of Spark ATM Systems. And we completed the largest acquisition in our history with the closing of DCPayments. Now, the Competition and Market Authority is reviewing the United Kingdom portion of the acquisition and we will not be able to begin integration of the two UK businesses until that review process completes, which we understand could take several months. In Australia, the ACCC is also reviewing the acquisition by DCPayments of Cashcard. You may recall that that transaction completed the day before we acquired DCPayments. We will issue updates as the process unfolds for both reviews. Switching to a current event topic, some of you may have seen articles in the London newspapers over the last several weeks about challenges at the LINK network. A debate has arisen between banks and acquirers about the interchange fee structures that support the free-to-use network scheme prominent in much of the U.K. While something of an annual issue, it does seem to be a bit more intense this year. The net of all this debate for Cardtronics is as follows. We like the current model. It is a great value to the consuming public and we would like to see it continue. However, we operate in multiple markets with multiple models and always find a way to do well. In fact, we often do better in markets where we have more options to leverage. So whatever the outcome and it may well be no changes at all, we will adapt. Now to the second key message

[Edward H. West:]

Great. Thank you, Steve. And before I get into the quarter, let me provide some overarching commentary on the year ahead. As Steve mentioned, 2017 will be a transitional year for the company and one that is less apt to follow the same quarter-to-quarter pattern as previous years. Let me tick through a few of the items and which are mostly transitory in nature. First, regarding EMV and our U.S. fleet upgrade. We're in the middle of upgrading our company-owned fleet in the U.S. to be EMV capable and accept chip cards. This in and of itself is not extraordinary since we already process chip-enabled cards in other regions. What is extraordinary is the sheer scale in the U.S. In addition, for some time now, the company has planned on using the occasion of touching each one of our ATMs to also upgrade the operating software to drive new functionality, security features and enhance our ability to remotely manage the ATMs. While we did anticipate some downtime from the engineering we're doing on our ATMs, the software upgrade process has led to more downtime than we had planned. We discovered issues with the software after it was partially rolled out. So we had to turn it back, rectify the software and then get it back out into the field. This delayed the overall software and EMV upgrade efforts, and we're now tracking to complete the software and EMV upgrade in the third quarter of this year. This has a couple of implications. First, the elevated downtime impacted transaction volumes in the fourth quarter with some carryover into the first quarter. Our analysis suggests it had a 1 to 2 percentage point impact on our same-store volumes in the U.S. in the fourth quarter. The other consequence is that we will be exposed to higher operating cost, including the fraud liability shift on the MasterCard transactions on more ATMs for a longer period than we were expecting. And we have built all of this into our 2017 guidance. Second is regarding the integration of DCPayments. We're very pleased to have completed the DCPayments acquisition in early January. The integration process will be lengthier and more involved than other acquisitions we have done partly because of the sheer scale of the operation, but more so because DCP has effectively three distinct businesses at the operating level. That is North America, the United Kingdom, and Australia, New Zealand. Additionally, we're still in the midst of integrating the Cashcard acquisition in Australia that DCPayments made just prior to us announcing our acquisition of the company. Steve mentioned the CMA review in the UK and, accordingly, we will not commence integrating the UK businesses until the regulatory review by the CMA is complete. Regarding the 7-Eleven de-conversion, our agreement with 7-Eleven in the U.S. expires in July of this year, so July will be the trigger point for a couple of things. First, that is when we expect to begin de-installing the approximately 8,000 ATMs that we operate. We're currently assuming that the de-installations will occur ratably through the back half of the year. We continue to work with 7-Eleven and our new provider regarding the transition plan. In addition, the Allpoint and Citibank brands will come off of the terminals during the second half of the year. Fourth area is around the investment in the new business. Steve touched on our broader growth strategy earlier and, in support of this, we will be investing in the business. This includes new geographic markets, evolving and innovating our product set and helping banks manage their in-branch and out-of-branch ATM channels more effectively and efficiently. Our SG&A and CapEx estimates in 2017 incorporate these investments. And finally, regarding foreign exchange, on top the aforementioned items, we will have to content with what is shaping up to be a more dynamic FX and interest rate environment. For instance, foreign exchange alone would be a 4% headwind to our revenue growth rate in the first half of this year based on exchange rates that we're assuming in our guidance. Let's now quickly touch on the fourth quarter 2016 results before we get into guidance. Currency exchange rates did, once again, have a material impact on our results, so I will provide both reported and constant currency figures for our key measures. Q4 was a solid end to the year. Revenues of $310 million were up 2% year-over-year or 8% on constant currency basis. ATM operating revenues of $295 million were up 1% or 7% on a constant currency basis. Organic ATM revenue growth in the quarter was 3% on a constant currency basis. This is down from prior quarters. Same-store transaction and revenue growth in U.S. were both down about 2% for the quarter, which is lower than what we experienced earlier in 2016. The elevated downtime from the software upgrade issues referenced earlier as well as the EMV upgrades hurt both of these metrics, but these are transitory factors. Continued strong unit add performance in the UK drove 13% revenue growth in our Europe segment on a constant currency basis. Same-store transaction volume in the UK was slightly negative with same-store revenue growth just over 2% positive. Consolidated gross margin for the quarter was 35.5%. Gross margin in Europe grew by nearly 600 basis points, driven by strong operating leverage that we benefit from in the UK as a result of the vertically integrated business model. Our North America margin was down by 2 percentage points. This was driven by a combination of weaker-than-normal transaction performance and incremental cost related to the EMV and software upgrade efforts. Adjusted EBITDA was $77.5 million, up 6% from last year or 13% on a constant currency basis. SG&A was down from a year ago both on an absolute basis as well as on a percentage of revenue. Adjusted EPS was $0.79, up 11% or 20% up on a constant currency basis. Excluding the impact from the foreign currency translation, adjusted EPS would've been $0.06 higher. We benefited from lower interest on debt and a lower non-GAAP tax rate. One callout on tax, we reported an exceptionally low GAAP tax rate in the fourth quarter. This relates to the reversal of a reserve that we had on a deferred tax asset in the UK. With expectations for continued taxable income in that market, the reserve was no longer necessary. This gave us an $8.2 million one-time benefit on a GAAP basis. This was excluded from our adjusted earnings. Now, turning to the balance sheet, our Q4 balance sheet does not include the DCPayments acquisition as we completed it in early January. As announced previously, we did amend our credit facility to finance the transaction. We borrowed approximately $470 million under our expanded $600 million credit facility in early January. Net debt-to-adjusted EBITDA on a pro forma basis for the full year impact of DCPayments was approximately 2.6 times as of 12/31. Now, onto the 2017 guidance; let's first go through the guidance figures and then I will provide some color on the moving pieces. Consolidated revenues are forecasted to be $1.45 billion to $1.5 billion. We're planning on a USD to GBP rate of about $1.20 per pound. The impact of adverse foreign currency to revenue is approximately $44 million as compared to 2016. Gross margin is expected to be 33% to 34%. We are contending with several unhelpful factors in gross margin in 2017

[Steven A. Rathgaber:]

Thank you, Ed. Cardtronics has a very simple and focused vision

[Operator:]

Thank you. And our first question comes from the line of Ramsey El-Assal from Jefferies. Your line is open.

[Ramsey El-Assal:]

Hi, guys. Wow, a lot going on. I'm not sure where to begin. The mitigation strategies you talk about at 7-Eleven, I mean, is there any way you can help us think through those in a little more detail now that it's kind of upon us? And also, I'd add, it appears like the Citi relationship that you sort of expanded recently, which I think Ed mentioned is not included in numbers already, would imply that there's some potential incremental contribution there that's coming, independent of whether it's in guidance or not. Is that – I guess those are two separate things in there, but if you could address that, it would be great.

[Edward H. West:]

Good afternoon. There is a lot going on. And then, so speaking more specifically to the 7-Eleven, so what we thought was important is to outline what we've talked about before. 7-Eleven represented about 18% of the consolidated revenues and speak to the incremental contribution margin. So that's the total impact as you think about the relationship. That said, there are activities going on to mitigate some of that. One of those is most notably and currently is the working and signing with Citibank and extending our relationship there. That is outside of that number and incorporated into our overall guidance. So those dollars are now recaptured into our guidance separately. Separately, we would expect the variable costs associated with that relationship to come down as revenues come down. And that's roughly, if you look at the math that we talked about, that would be about $120 million. Now, those do not come down linearly – in a linearly fashion. They do phase to some degree, but they will all come out. In addition, we're working on the cost programs that I mentioned, cost from both an operational standpoint as well as an overhead standpoint, where we would expect a run rate of those savings and efficiencies and implementations to benefit about $35 million. Again, that $35 million is separate from the 7-Eleven and some of that is in the guidance for this year, but not the full year annualized benefit. I think one last element I would speak to also, as we mentioned during the second half of the year, Allpoint will come off of the terminals with 7-Eleven. And so there are a lot of transactions and I would say those transactions are in the tens of millions of transactions. We would anticipate and work to the best extent of our ability to recapture a fair amount of that and working with our key retailers, having very attractive locations for those retailers, for those transactions to be realized.

[Ramsey El-Assal:]

Okay. On the competitive reviews of these pieces of the DCPayments deal, is there any kind of risk adjustment in your guidance that would contemplate any actions there by the regulators to prevent you from integrating this and then getting on with it? Or is it – would that be a – would any potential rulings on that side basically have to come out of numbers?

[Steven A. Rathgaber:]

Ramsey, this is Steve. I would say that any rulings would have to come out of numbers, but from everything we've looked at, the expectations are pretty solid around the fact that these things should move through pretty standardly. If there are adjustments, they would tend to be very minor and have to do with possibly some locations or something like that. So I think there's nothing in guidance that deals with any adjustments is what I would say in a direct answer to your question, but we are cautiously optimistic that we're in pretty good shape.

[Ramsey El-Assal:]

Okay. And then just lastly from me, can you talk about the de-installation process in a particular store with 7-Eleven? This is not just you removing a machine, is this you coordinating with the other team to get their machine put in as yours comes out? I guess I'm just trying to get the better understanding of how feasible it is to move out 8,000 machines in four months. It just seems to be like a pretty – to me to be a pretty herculean task, one that may lead into 2018. Any commentary there would be appreciated.

[Edward H. West:]

Sure. Well, as we mentioned, the agreement terminates at the end of July. And then, for planning purposes, with our guidance here has is just a ratable de-installation through the end of year. Now, we'll continue to work with 7-Eleven and working with their provider to schedule that out. And you're absolutely right, it's a lot of coordination and we will work closely with them and support that as much as possible with as limited customer implications as possible. So it will be highly coordinated and, from our standpoint, to the greatest extent possible. And those plans are still being ironed out and worked on with both organizations.

[Ramsey El-Assal:]

Okay. Fair enough. Thanks for taking my questions.

[Steven A. Rathgaber:]

Thank you.

[Operator:]

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

[Andrew Jeffrey:]

Hi, guys. Good afternoon.

[Steven A. Rathgaber:]

Hello, Andrew.

[Andrew Jeffrey:]

Not as nasty as weather in the Northeast today, I guess. Good thing you're in Houston.

[Steven A. Rathgaber:]

Indeed. Sun always shines in Houston.

[Andrew Jeffrey:]

Could you perhaps, when we think about sort of the magnitude of disruption to your business in 2017, may be rank order or try to frame up how much is 7-Eleven versus how much is some of the EMV disruption, which we kind of had a sense had the possibility to be messy, but it's maybe a little messier than we thought?

[Steven A. Rathgaber:]

Well, it's a tough question to answer. It's like life sometimes; it just gets full of a lot of moving parts. Certainly, the EMV disruption is material for us in the fourth quarter of 2016 and the first quarter of 2017. There is no doubt about that. I expect it to be inconsequential in the fourth quarter of 2017. Maybe some remaining carryover of some charge-backs, but doubtful, I think, will be done well before then. So that's certainly a transitory as Ed has used the word to describe it event. The 7-Eleven activity is more about supporting their de-conversion. It will certainly occupy resource in the back half of the year. But it's less impactful to our day-to-day growth of the business, but very impactful to the numbers, obviously, this year. So it's – I don't point to any particular thing. Certainly, the DCPayments acquisition and integration is an impactful but a wonderful opportunity. We see growth potential in that business because we're engaging with the business that has had a culture more of maintenance than growth. And we're just bringing a different mindset to the countries that they're operating in. So I see that as – the integration of that activity and turning it into a growth culture as certainly an important activity in the year, but that's a happy activity versus the other two. So I have no idea if I'm helping you, Andrew, but some feedback to your question.

[Edward H. West:]

Andrew, I would just add onto that. From a financial standpoint, which is probably how you're looking at it, obviously, 7-Eleven represents the larger, more impactful for 2017. As I mentioned on the software issue that had the downstream impact of impacting the EMV implementation, we size that going through the analysis and looking at part of the estate that had and didn't have the software and it was roughly a 1 to 2 percentage point impact to transactions that we saw on the fourth quarter. So we expect some of that to continue in the first quarter. But getting our hands around that and that will pass as will the cost associated with the EMV, the maintenance visits as well as some of the charge-backs. That will get behind us. But 7-Eleven is the larger implication.

[Andrew Jeffrey:]

Okay. That's helpful actually. And just as we think about your business, which is really sort of level-setting, I think, in a lot of ways in 2017, can you help us understand what the growth profile of Cardtronics is long term, sort of top and bottom line, and how you get there? And I'm getting it organically, growth in machines, growth in transactions, growth in transaction yield and margin, just trying to understand what this business looks like on the other side.

[Steven A. Rathgaber:]

Yeah. So let me take a swing at that, Andrew. So I've consistently been a proponent of an organic growth rate in the 6% to 8% range. And I've described to you during my comments, not all organic, but between organic and acquisition, a double-digit growth history over the last six consecutive years. We want that to continue. And the beauty of the Cardtronics model has historically been the different levers we have to pull to pull together a growth profile that is attractive for our shareholders. So, we see opportunities to place retail locations in a lot of our new markets. We're particularly excited about some of our European countries like Spain. We're particularly excited about South Africa. We think there's great growth prospect down there and, as we delivered just this past year, another 3,400 new placements. We expect to continue to do that kind of new placement add for the foreseeable future. Those kinds of numbers are certainly in our 2017 guidance and we expect that to continue. We also expect to layer in on top of that a good classic Allpoint growth. We now have three consecutive quarters where we're bringing in top 25 institutions into the network. And we think that's a new day and we think that day is just dawning and we're in the early innings. We've now got the very largest of financial institutions with Citibank and, obviously, historically have had many of the smaller sized finance institutions in the Allpoint Network. But that's still only 1,300 or 1,400 finance institutions out of thousands and thousands. So we see nothing but upside growth there. We think all banks belong in Allpoint and we think the secular trends favor more joining in the future. We think that we're in the very early innings of the growth stages of our FI services where we move in-branch and provide new revenue stream that we've never had before. We had an example of that with PenFed last year, cited several examples in my comments about other relationships that our acquisitions have. Spark ATM in South Africa is already doing a relationship like this and they see more opportunities in South Africa. We've already picked up the Bank of Queensland in Australia and see more opportunities down there to take that kind of relationship beyond the Bank of Queensland. I talked about in Canada that range of opportunities with credit unions. That's new muscle for us, product capability that we can grow. So it continues to be the Cardtronics formula of classic organic growth from new placements, Allpoint growth, the transaction growth that will come from more Allpoint members on our existing ATMs and the new services that we're in a position to offer to finance institutions. And then we'll continue to shop appropriately and carefully for the acquisitions that we have, I think, an excellent track record of delivering the value that we pay for them, delivering on that for our shareholders. So the Cardtronics formula remains very much intact and the record we described over the last six and seven years is the record we want to maintain for the future. There is no change in our outlook. It's why I remain bullish. This year was a complicated year. But we go forward with big appetites and big ambitions.

[Andrew Jeffrey:]

Okay. I will jump back into the queue. Thank you.

[Steven A. Rathgaber:]

Thank you.

[Operator:]

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

[Robert Paul Napoli:]

Hi, good afternoon.

[Steven A. Rathgaber:]

Hey, Bob.

[Robert Paul Napoli:]

So, I guess, when you talk about 2018 EBITDA being above 2016, do you expect it to be comfortably above 2016? I would expect that you have no 7-Eleven in that 2018 number. You have the synergies from – you would expect synergies from DCPayments, there's $35 million of expense saves, do you expect to be – can you give some idea of magnitude you believe you could get to above 2016?

[Edward H. West:]

Sure. Hey, Bob, it's Ed. Good afternoon. So one of the reasons why we put that out there as a goal, obviously, we're not guidance on 2018, and I think to some degree, it parlays into Andrew's question on the previous, which is why we thought it was important to put it out there just to provide a little sizing and context, because now that we're sized where we are on 7-Eleven, obviously, with the 45% incremental margin off of 18% of revenues, there is the reduction. We talked about DC on their trailing 12 months EBITDA of adding that back in, into their – kind of what are we left with. And then, we have the cost initiative. You would add that $35 million back in for 2018. That's where you start. And now, we're adding organic growth and other growth initiatives on top of that. And that's where we feel like, at a minimum, we should have that as a goal to exceed that level. I don't want get into color on how much to exceed, but I think if you walk through the math about the goes-ins and goes-outs there to that figure, you will see why that's where we're focused.

[Steven A. Rathgaber:]

I think the other – obviously, from where we are now, obviously, foreign exchange plays with all of that. I mentioned what the impact is there, but those rates obviously can change.

[Robert Paul Napoli:]

Okay. The $35 million expense saves, can you give a little more color on where that's coming from? And that is exclusive of synergies you would expect to get once you fully integrate DCPayments?

[Steven A. Rathgaber:]

Yeah. That's correct. So the DC was separate. And again, there's a long fuse on those to harvest that benefit. Obviously, we're not doing any integration in the United Kingdom right now because of the review, but would anticipate some there. So, that's an opportunity moving forward, I think, we'll see more of in 2018 than 2017. And separately, the $35 million is actually up and down the P&L. It's in both the direct as well as the overhead areas. Frankly, how we're delivering our services, integrating those, we've gone through a global reorganization, bringing folks together where we can have a single approach to it versus multiple approaches around the world where we can manage things centrally, fewer layers across the organization. The company has done a great job historically of many acquisitions around the world, around the organization, even within the U.S. This is a year of really focusing also now of integrating a lot of these capabilities and skills and leveraging that across the business. So we would see these savings in both the direct as well as overhead areas.

[Robert Paul Napoli:]

Then last question, just where do you see the biggest risk factors in these outlooks? Is it the outcome of the LINK network and when you would expect that? Or do you get the approval for the UK to purchase the DCPayments business in the UK? Where are the biggest risk factors, the execution of the $35 million, what are you most concerned about and some of these are out of your control, some are in your control?

[Steven A. Rathgaber:]

Yeah, I guess a great question, Bob, and a challenging one to answer. Obviously, the ones in our control, we feel good about and we'll manage through because that's what we do. The ones that are out of our control are always more unnerving. But you look at the LINK issue, and you've got a system over there that works extremely well, providing great value of free access to consumers. If we're talking about changes, we're talking about changes on the margin, we're not talking about anything material, so I don't – I can't call that a huge risk, but it's certainly a risk. And until we know its outcome, it has to stay out there. But it's a blend, quite frankly, it's the portfolio of change, that's what makes this year so challenging. But I don't think any singular risk is particularly monumental to us. It's the collection and navigating through this year of transition that is the risk, if you will.

[Robert Paul Napoli:]

Great. Thank you. Appreciate it.

[Steven A. Rathgaber:]

Thanks, Bob.

[Operator:]

Thank you. Our next question comes from the line of Reggie Smith from JPMorgan. Your line is open.

[Steven A. Rathgaber:]

Reggie? Hello? Operator -

[Reginald Lawrence Smith:]

I'm sorry. Can you hear me?

[Steven A. Rathgaber:]

We can now.

[Reginald Lawrence Smith:]

I had the mute button on. I'm sorry. I guess my first – I appreciate the color on the 7-Eleven contract. It's nice to finally get that out in the open. I guess my first question is about the $35 million in savings and how we should think about – I guess it sounds like some of that would occur above the gross margin line. And so you gave us kind of 45% margins on that contract. How should we think about the split between what happens above gross margin and what happens kind of below, because I guess it's a little confusing given the two different, I guess, metrics there?

[Edward H. West:]

Sure. Well, good afternoon, Reggie. It's Ed. And it's two distinct matters as well. The 45%, again, is trying to frame the incremental contribution margin from the relationship and the extent with the U.S. business of 7-Eleven and what we experienced in 2016. Pertaining to the $35 million, that's captured of what we expect to realize on that in 2017, is captured in the guidance. And that guidance, when we speak to the gross margin, some of that's reflected in there in the direct cost as well as overall EBITDA. And it is spread between direct and the SG&A, as I mentioned earlier.

[Reginald Lawrence Smith:]

Okay, got it. I guess you guys kind of alluded to this when you talked about EBITDA in 2018, but I guess curious, how are you guys thinking about your leverage ratio pro forma for everything that's happened? DCPayments coming on, 7-Eleven going off; what does that leave you with as far as capacity to do additional deals?

[Edward H. West:]

Well, from a leverage standpoint, as I mentioned in the comments, the leverage as of 12/31 on a pro forma basis, so looking at where we were this past year, adding on DC and adding on the debt, what we have is roughly 2.6 times. We expect, as I mentioned in the guidance, to generate in excess of $100 million of free cash flow, which we can use that to either make other acquisitions if we saw things that were very valuable, value creative, additive to the business and were very compelled on. But I would say the bias without seeing something that represents extraordinary value, right now is focusing on integration, building the infrastructure, executing on everything that we outlined in deleveraging, and continue to pay down debt. From a capacity standpoint, feel good about we have excellent relationships with our financial institutions with the market and have a consistent track record of delivering and delivering free cash flow. And we expanded the revolver on the capacity on this, so I feel good about the position there.

[Reginald Lawrence Smith:]

Got it. And if I could sneak one more in, I guess, thinking about the 7-Eleven devices and the ability to kind of redeploy them elsewhere, is that a part of the strategy? And then two, I guess, the thinking about upgrading your entire U.S. fleet for EMV, just curious like how much fraud do you see within a debit card where you have to enter a PIN number? It would seem that there's not a whole lot of counterfeit fraud in that realm without somebody also having the PIN number associated with that account. So it sounds like you guys are more interested in upgrading to EMV now, just curious the logic behind that.

[Edward H. West:]

Well, the EMV is obviously – it's the liability shift. It's not a mandate, what's mandated is the shift of the liability from the issuing institutions to the acquirers and it was in two phases. First phase with MasterCard this past October and Visa would be next October. When you look at the amount of cards and volume, it's more substantial with Visa. The company, as I mentioned earlier, obviously, there is fraud out there from that. We didn't have visibility to that historically. But it's prudent and we operate in EMV and many other parts around the world and we'll do that here. But because we have to touch each of the machines and implementing software, sometimes putting in the readers to handle the EMV readers, wanted to make sure as we touch it, trying to touch it one-time, which is why the company had the plan of loading many different software upgrades to the terminal to allow for that additional functionality that I mentioned earlier in addition to additional security enhancements and the ability to manage the terminal remotely. So there's more to it than just the EMV.

[Reginald Lawrence Smith:]

Got it. Okay. Thank you.

[Steven A. Rathgaber:]

Thank you.

[Phillip Chin:]

Go ahead operator.

[Operator:]

I'm showing no further questions at this time.

[Phillip Chin:]

Then we will say thank you to all of you for your interest in Cardtronics and have a great day.

[Steven A. Rathgaber:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may disconnect. Everyone have a great day.