Cardtronics plc
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good day, ladies and gentlemen, and thank you for your patience. You've joined Cardtronics' First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, EVP-Corporate Development and Investor Relations, Mr. Phil Chin. Sir, you may begin.

[Phillip Chin:]

Thank you. Good afternoon, and welcome to Cardtronics' first quarter conference call. On the call, we have Steve Rathgaber, Chief Executive Officer; and Chris Brewster, Chief Financial Officer. Before we begin, a cautionary statement regarding forward-looking information. During the course of this call, we will make certain forward-looking statements regarding future events, results or performance. Any forward-looking statements made on this call are subject to risks and uncertainties, including, but not limited to those outlined in our reports filed with the SEC. Actual events, results or performance may differ materially. The statements on this call are made as of the date of this call and based on current information even if subsequently made available by us on our 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 a reconciliation of such measures, is included in the press release issued earlier this afternoon. With that, I'll turn the call over to Steve.

[Steven A. Rathgaber:]

Thank you, Phil, and thanks to our investors and analysts for joining our first quarter earnings call. I'm delighted to report that Cardtronics started 2015 with an exceptionally strong earnings quarter, driven by solid execution across our two business geographies. First quarter financial headlines include revenue growth of 15%, adjusted EBITDA growth of 19% and yet another quarter of adjusted earnings per share growth of 25%. We are also pleased to report to you that our ability to leverage our scale delivered meaningful gross margin expansion of 140 basis points for the quarterly comparison. Now, that very respectable margin expansion is inclusive of the recently acquired lower margin Sunwin Services Group. If we focus our margin performance strictly on the ATM operations, our quarterly compare shows a 230 basis point improvement in our core business. Let me now walk you through some other company-wide metrics that reflect the strength of our performance. It was a strong quarter for implementing against our conversion backlog. More than 2,400 ATMs were brought live on the platform. More than 900 ATMs were physically branded in the quarter, and we successfully implemented 24 new Allpoint clients. It is worth noting that the number of Allpoint clients brought live in Q1 is the best first quarter for conversions we have enjoyed in six years from a client count perspective. We have respectable pipelines for new ATM placements, branding opportunities and Allpoint participation. But in the first quarter, some of our sales pipelines converted at a better rate than others to the contract stage. As I've mentioned before, nailing the timing on contracting is always challenging. However, new ATM site contracting did not disappoint. Q1 generated approximately 1,200 new locations under contract for future installation. And we contracted over 230 ATMs in the quarter for branding, leaving us with a healthy pipeline of branding prospects which remain in negotiation. Demonstrating the quality of our branding sales pipeline in April, we have already contracted for brand placements on almost 475 ATMs with multiple clients, doubling in one month the entire Q1 branding sales volume. And new Allpoint client signings did not disappoint. We signed 22 new financial institutions, bringing over 1 million new debit cards to the network and refilling our conversion backlog. The preceding collection of numbers represents a lot of good news. But I actually think our best news is embodied in five deal headlines that we have announced so far this year. They demonstrate Cardtronics' active engagement in the global ATM market. We entered Poland, launching our services with one of our international retail partners, Shell. We signed a deal with a U.S. retailer to provide our services to their Canadian franchise. We signed our largest ever convenience store chain in Northern Ireland. We launched a new managed services arrangement with Santander Bank, a northeastern U.S. branding client for their ATM locations in Puerto Rico. And this month, we experienced something of a first. We signed a master agreement with TD Bank, which is a top 10 financial institution in North America. It is also our third top 5 Canadian financial institution signing. The master agreement is designed to cover branding deals in both Canada and the U.S. So, the first year is essentially this, a multi-country branding sale with a single master contract agreement. I'm particularly pleased with these internationally flavored deals. They demonstrate a growing strength of Cardtronics and a foundation for our future growth. We are establishing ourselves as the international partner of choice for ATM services. We expand into new countries with existing global retail partners, and we grow with multinational financial institutions in a variety of established Cardtronics markets. A sampling of some North American activities follows. Retail wins in North America for Q1 included an exclusive ATM placement deal with Kum & Go, a convenience store chain in the Upper Midwest and West. We actually consolidated this business from two providers and will install it in two phases ending in the spring of 2016. Other ATM placement wins included Haggen's, a rapidly growing grocery store chain on the West Coast, and the expansion of our Corner Store relationship into Canada. We renewed ATM agreements with Cumberland Farms convenience store chain in the Northeast and Universal Studios theme parks. And we continued our efforts to rebrand the previously Chase-branded portfolio by expanding our relationship with the USAA and installing the USAA brand across CVS and Walgreens sites in its home San Antonio market. This significant list of organic growth drivers represents more business with existing clients, new clients who embraced our model for the first time and even one client who left and has now come back. Shifting to the topic of ATM innovation, we are pleased to be a pilot partner for NCR's new Kalpana ATM software platform. Kalpana uses thin client, cloud-based architecture to shift the software assets from the ATM node to a centralized environment that can efficiently push out updates and changes. It does so in a more modern, sleek packaging as well. We are currently scoping the fit of this new technology with our fleet and our product plans. Also, we've spoken regularly about our efforts to upgrade our U.S. fleet for the new EMV standard. That activity is now underway in the field. In the course of visiting our machines for EMV, we are also upgrading the software that drives the consumer experience for things like screen branding and ATM marketing. This upgrade will position us to continue innovating on functionality at the ATM that will benefit all of our customers, finance institutions, retailers' brands and customers. Let me now turn to the Europe story. As already mentioned, we are very excited about our entry into Poland in March, which expands our global relationship with Shell for an initial 50 sites in Poland. It is up and running and we are learning. We look forward to providing more details on our activities in Poland in future earnings calls. But more importantly, Poland is just the next new market in a continuing series of multiple attractive ATM markets in our expansion plans. Also important in the first quarter was our continued conversion of 1,200 ATMs at Co-op Food locations. We installed nearly 450 new ATM locations at other retail sites in Europe, including the Waitrose, John Lewis locations announced last quarter and at a leading fuel and convenience store operator in the UK. And we won a new business deal with Golf Holdings, a convenience store chain, to become our largest retail partner in Northern Ireland. A key headline for Europe is the organic growth story which registered better than 9% for the quarter. We are very pleased with the performance of our European team. And Chris will share in a bit a great margin story in this business. And I'd like to now turn it over to Chris to provide more color on the financial dimensions of our first quarter results.

[J. Chris Brewster:]

Thank you, Steve. This was obviously another strong quarter. We had continued execution on the core business on acquisition integration and cost management. And I'd also say it was the 26th consecutive quarter in which we delivered a year-over-year increase in adjusted earnings per share. As Steve said, first quarter revenue growth was 15%. That figure was inclusive of about a 4% headwind from exchange rate movements. So, on a constant currency basis, our revenues would have been up about 19%. That figure is inclusive of about 1.5% headwind from a revenue accounting change on some of our domestic contracts with small merchants, where last year, we reported gross revenues, but this year, we're reporting net revenues, meaning revenue, net of what we pay in merchant fees. This is the same matter we mentioned on last quarter's call. It has no profit impact, but it does have a reported revenue impact. So adjusting for both the currency effects and this revenue reporting change, revenues were up about 20% year-over-year. Turning to organic revenue growth, that was about 4.5%, as similarly adjusted for currency changes and the gross-to-net reporting change, and that's a bit off our normal pace. Although we've had some nice U.S. merchant and branding wins recently, they didn't happen early enough to drive organic revenue in this particular quarter. On a forward-looking basis, we've had new merchant wins in quarter one that should help for the rest of the year, and we expect our organic revenue growth to be somewhat stronger in the back nine months than it was in the first quarter. The U.S. same-store transaction count, excluding the ATMs that were de-branded by Chase during the first quarter were up about 1% and that's in line with what we've experienced over the past several quarters. Perhaps somewhat conservatively, our new, large merchant contract in the UK, with the Co-op Food Group, is being characterized in all of these figures as acquired growth, not organic, given that our ATM operating contract with Co-op Food was executed simultaneously with the acquisition of the Sunwin ATM and maintenance and armored car business, and those two entities had a common parent. In reality, one could call the Co-op ATM contract sort of a tweener. It has characteristics of both organic and acquired growth. And as an aside, if it were treated as organic growth, our organic growth rate in the quarter would have been very much on the high end of our 6% to 8% long-term target range. With regard to the quarter's earnings performance, the accelerated timeline in taking over the Co-op ATMs was certainly a contributor to bottom line results. Initially, we thought it might take well into the summer of 2015 to complete that transition. However, the European management team has delivered the goods and had about 75% of the ATMs transitioned by March 31. And at this point in time, we're about 95% done as we sit here at the end of April. The European team also successfully sold the manned guarding business that we picked up last year as part of the Sunwin acquisition. That business generated less than 1% of our revenues and EBITDA, and its sale was contemplated in our guidance for 2015. Certainly, the sale proceeds are nice to have, but more important is the simplification and focus that this brought to our business by the sale of that non-core operation. Turning down farther in the P&L to gross margins. Gross margin for the quarter came in at 33.4%, and as Steve said, that was up about 140 basis points over prior year, and we have solid gains in both North America and Europe, in both cases driven by strong cost management synergies coming out of acquisitions and just our raw scale. In North America, we had a great quarter on managing cost, particularly our cost of cash, in a fashion that did not compromise our uptime. In Europe, the operating team migrated those 1,200 Co-op Food ATMs to our platform during the quarter, while keeping base business cost very much in line. If you look – if you stand back a little bit and look at our progress in Europe over a two-year timeframe, it's really fairly extraordinary. Since the first quarter of 2013, we've expanded from one country to three, revenues have roughly tripled, and the percentage gross margin coming out of that business on that revenue is up about 750 basis points. Moving on down – another notch down to P&L, SG&A expenses, excluding stock-based compensation as a percent of revenue, were up about 80 basis points in the quarter versus last year. That increase was expected as we have not yet cycled on some capability additions we put in place last year. Our current expectation is that full-year SG&A as a percent of revenue will be pretty close to flat with last year's figure. This performance delivered adjusted net income per diluted share of $0.64, up 25% from $0.51 in the first quarter of last year. Obviously, EPS was up more than revenue, driven by margin expansion and driven by lower interest expense that resulted from the refinancing of our bond debt that we accomplished last year. Foreign currency exchange rate changes from prior year knocked about $0.015 off our reported EPS results for the quarter. Now, one might think that this effect would be larger given that about a third of our revenues are now sourced outside the United States. But we happen to have a very good match between the currencies our revenues are denominated in and the currencies that our costs are denominated in. So, we don't see the negative effects on percentage margins that companies are seeing who have revenues denominated in weaker currencies, but substantial related costs in U.S. dollars. Just by way of example, the UK pound sterling depreciated against the U.S. dollar by about 9% from the first quarter of 2014 to the first quarter of 2015. So, our dollar-reported revenues from the UK are 9% lower than what they would have been. Our costs are almost all in sterling, so our dollar-reported costs are 9% lower than they would have been, and our dollar-reported profits are about 9% lower than they would have been with no FX movement. Just to summarize, FX on the quarter, the changes from prior-year levels cost us about 4% off the revenue line and cost us about $0.015 in adjusted earnings per share. Moving on to the balance sheet, our ratio of net debt outstanding to trailing 12-month pro forma EBITDA was about 2.3

[Steven A. Rathgaber:]

Thank you, Chris. Finally, before we start Q&A, I wanted to acknowledge the announcement we made earlier this month that Chris Brewster, our CFO for the past 11 years, the guy who was choking a few minutes ago there, has announced his planned retirement later this year. For a decade, Chris has been the face of the company to the investor community, a community that has, on multiple occasions, expressed to me its trust and respect for Chris and his presentation of our financials. His character and integrity shined through in his dialogue with investors, and with his guidance, our earnings call commentary stands out through its financial clarity and usefulness. When I joined the company five years ago, Chris made me feel welcomed from the very first moment and has since been the absolute best colleague a CEO could hope for in a CFO. While I am pleased that Chris has achieved this milestone in his life, I will personally miss his guidance, his intelligence, his commitment, his calm and professional demeanor, and his all-around support for me and for our company. Now, in terms of transition planning, we are fortunate that Chris is fully committed to working with us. His stated intentions are for full engagement until his replacement is on the ground and sufficiently transitioned. So he is affording the company the opportunity to take its time and find the right person with no end date pressure. As is normally the case with Chris, we simply couldn't asked for more. We have engaged Spencer Stuart to conduct the search and with the formal announcement of his retirement, the search is now actively underway. So until there is something else to announce, your expectation should be for business as usual. Thank you. And with that, operator, we will now open it up for questions.

[Operator:]

Thank you, sir. Our first question comes from the line of Kartik Mehta of Northcoast Research. Your line is open.

[Kartik Mehta:]

Good evening. Chris, as you look at the operating revenue and the margins you reported this quarter? Where was the majority of the leverage? It seems like you were able to really drive the operating line, operating margins or EBITDA margins this quarter.

[J. Chris Brewster:]

Well, the couple of pieces that stand out would be in the U.S., as I've alluded to somewhat in the prepared remarks, the team just did an incredible job managing cash. I mean, it's a real art form in the sense of putting enough cash in the ATMs at the right time so they don't run out and cease operating, but not putting so much that you're wasting money or having the armored guys go out there and show up and that you're wasting money. It's a pretty fine balancing act, and they just did an excellent job of that in the first quarter. They've just been on a game of continuous improvement for quite some time and that really showed some fruit in this quarter we just reported. I'd say on the UK side, it's largely about scale. I mean, we have a platform over there, an operation that is more than twice the size that it was not long ago. And they're able to leverage a lot of cost. We're continuing to see some acquisition synergies come through on the Cashzone acquisition that was closed in August of 2013. So, there are other lines on the P&L as well that I could speak to, but I think those are probably the most important ones.

[Steven A. Rathgaber:]

And I would add that it's particularly nice to see in the European business, given that we're planning on doing a fair amount of investing by growing into other markets.

[Kartik Mehta:]

And then, Steve, as you look at the ATMs that you're on-boarding in the UK, what is happening to average transactions? Are they still staying in that 4,500 to 5,000 range, or is there any difference in the ATMs that you're on-boarding or any experience you're witnessing?

[J. Chris Brewster:]

Well, there is a difference depending on what kind of business you're getting. So, a couple of things I would say are true just from a framing perspective. The ATM traffic in the UK is fairly fixed at this point in time in terms of volume. It's not, I don't think, growing in any material way. So, as we add new ATM locations, we're taking share from others, as we do in the U.S. But you take a portfolio like the Co-op, those are very active machines, very active machines, at the high end of our general average. But there'll be other portfolios, perhaps the department store portfolios that will likely be much lighter. So it sort of depends on what you've contracted. But on balance, we're seeing strong ATM volume, volume we like, and it's manifesting itself in the margins that we just reported.

[Kartik Mehta:]

Thank you very much. Appreciate it.

[Operator:]

Thank you. Our next question comes from Bob Napoli of William Blair. Your question, please.

[Bob P. Napoli:]

And good afternoon. Poland – moving to Poland, that was nice to see. I mean that's a very big market. You have kind of a toe in the water, if you would, with your initial partnership there. I think one of your competitors is very, very profitable in Poland. And what is the strategy? Do you have – I mean, is your intention to gain a market position in Poland like you may have in the U.S. and the UK is to really invest in that market. And what led you to pick Poland?

[Steven A. Rathgaber:]

Well. So a couple of things, the way we have, just picking up on the story, Chris just recited on the UK margins, I would say that's the way we like to enter countries. We get in, we understand it and then we just continue to get better. We've done that essentially in every country and every market we've entered with the possible exception of Mexico with some slightly different outcomes. But generally speaking, we have entered, we've learned, we've understood and then we've proceeded to grow through a combination of organic sales and, when it made it sense, acquisitions. I don't think the playbook in Poland will be any different than what we've experienced in some of the markets with the possible point that one of the reasons it was fun to get in was because we were going in with an existing retail account. We weren't starting from scratch. So, I think that it is a market that is very strong in its use of cash. We like that, obviously. And it has lower than average ATM count per capita, we like that. So those are just healthy conditions of the market. There's a great opportunity in Poland for DCC, that's another optimal condition. So, the usual playbook for Cardtronics with an eye towards as rapidly as we can, margin expansion and leveraging the environment that are healthy from a cash perspective. But we believe there's great opportunity for us in Poland. We feel good about that market; very good about that market.

[Bob P. Napoli:]

Okay. And then just a question on interest rate hedges. Chris, the – it looks like, I mean, maybe at some point, interest rates will start going up. You guys have been hedging pretty aggressively and a lot of that is obviously not – I mean it's nice to have the hedges in place, but there was money thrown down the drain, if you would, with interest rates staying low. But is there – you've also been working on trying to reduce interest rate sensitivity with kind of sliding scale prices with some of your clients. So maybe any thoughts you have on – what is on the outlook for interest rate hedging for, say, 2016 and any success that you're having on reducing interest rate sensitivity with your pricing strategies?

[J. Chris Brewster:]

Well, we – let me kind of take that in pieces. So I didn't say it in my prepared remarks, but I'll tell you here in Q&A that we did put on an additional $600 million in what are called forward starting interest rate swaps that come into effect in January 1, 2019. The way we had been structured is the last of our swaps would have rolled off at the end of 2018. So, essentially, what we've done and instead of having what is today a $1.3 billion swap portfolio go to zero at the end of 2018, we'll now have $600 million in swaps that'll be in place in 2019 and 2020. Those swaps were put on at rates that are below the average rate in the existing swap portfolio. So they will have no effect on the P&L until they come into play in January of 2019. And then when they do come into play in January of 2019, they'll reflect somewhat of a reduction in the swap costs as opposed to an increase because of the lower embedded rate. So we have – I guess you could say we have taken a position that we're not sure that we can manage 100% of our interest rate exposure through the way we write our merchant contracts and the way we write our branding contracts and other things of that nature. There may be a stub that we have to rely on the financial markets to help us manage and we've set about essentially putting that stub in place for a pretty long timeframe now. Coming back to the other part of the question, we continue to have success in new contracts and renewals in putting interest rate protections in place. So, at this point in time, we don't have a felt need to keep that full $1.3 billion in hedges in place for a long extended period of time more than we have today.

[Bob P. Napoli:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ramsey El-Assal of Jefferies. Your question, please.

[Ramsey El-Assal:]

Sure. And congratulations, Chris. Congratulations are in order for your retirement. You will be sorely missed. I'll save more waterworks for when you actually depart, which sounds like it might not be for quite some time. But I wanted to ask about the Chase footprint. Can you give us an update on the percentage of the footprint that is rebranded or in the process of being rebranded, and what's left there to do?

[J. Chris Brewster:]

Yeah, I can touch on that. The last time I think we talked about it on the earnings call, we talked about the ATMs that were presently available and becoming unbranded. We had a pipeline of about 40-ish percent of coverage, okay? That has grown against the available population up to about 50% in terms of pipeline. That is not the same as signed. We have those signed, a decent number of that pipeline, I would call it, maybe in the order of 20%. But we're in active negotiations on good pieces of it. And reflected broadly in my comments, you heard me allude to in April ,that was a bit stronger on its own than the entire first quarter in terms of branding activity and we like our pipeline broadly on branding. So, progress is being made. And it's steady and it's consistent and we're pleased with the deals that are being cut.

[Ramsey El-Assal:]

That was my follow-up question, was that you're still finding that the profitability of the new deals surpasses the less profitable Chase deal?

[Steven A. Rathgaber:]

Yeah. The Chase deal was very unique given its long, long tenure and we've gotten a lot smarter about what good deal terms are and those are being reflected in the contracts we're writing and hopefully being reflected in some of the margins you're seeing.

[Ramsey El-Assal:]

Okay. On the Kum & Go win, you mentioned that you picked that up from two other providers. Anybody in particular you picked it up from? Was Seven Bank involved there or was it just couple of regional providers or anybody notable?

[Steven A. Rathgaber:]

There was one regional provider and there was one provider known as FCTI, which is owned by the entity you referred to.

[Ramsey El-Assal:]

Got it. Okay. And then I had a question on the UK. There is the new payment systems regulator over there. Have you had any contact with that body? Is there any indication that they might be taking a look at ATMs? I don't have an indication of that, but I was just curious if there's any – if you're getting any chatter or contact over there from the new regulatory body?

[Steven A. Rathgaber:]

Yeah. I think it's fair to say, we're actively engaged with the regulator as that is a constructive behavior in sort of the new modern economies. And we are participating with both LINK and independently being solicited by the regulator for input on issues of the day. So we think that the regulator is very interested in having cash readily available to the entire United Kingdom footprint. And we think that bodes well for Cardtronics. We think that the regulator has a point of view that the governance of – and things like LINK needs to be broadly represented. And we think that bodes well for our business model over there. But it is a regulator and you never know.

[Ramsey El-Assal:]

Right.

[Steven A. Rathgaber:]

So, it is a variable. No question. But we are emboldened by the fact that the society greatly values cash and greatly values its availability. And as you know, its availability is largely, largely delivered through the ATM.

[Ramsey El-Assal:]

Okay. Last one for me, you mentioned you're just now in the field with EMV upgrades. I imagine this is not a huge percentage. I'm really asking about. My question is what percentage of your fleet is sort of upgraded now for EMV? And I know the EMV deadline is later for ATM than it is for POS. But I'm asking it in the context of just trying to figure out when your machines will be capable of supporting some of your kind of new offerings, trying to sort of plot out when those might be making kind of a material contribution. So, that's the context in which I'm asking, but I guess the direct question is what percentage of the fleet is upgraded? Maybe what percentage do you expect to be upgraded by, let's say, the same time next year?

[Steven A. Rathgaber:]

Yeah. I think a way to think about it is that – so, first, I'll answer it from the EMV perspective. Then I'll answer it from the core perspective of how you're asking it around product feature functionality. The ATMs we've been buying and deploying and the ATMs we have that we've been upgrading as part of renewals are generally EMV-compliant from a hardware perspective. What has to happen is we have to roll out the software to enable that hardware to properly operate, and that's been in combination with the feature function builds, long and somewhat painful journey. And we still have certification activities underway, but we're making good progress on all of that spadework to get that done. Then we move into the physical field, and it's about getting the software loaded. You'll see a very active schedule at a fairly consistent and even pace that I would say is fully engaged in sort of a July timeframe of this year and ramps consistently for the next 12 months to 15 months towards the end date in October for the 2016 calendar event. And it'll be a pretty even distribution, maybe a bit front-loaded in the first half. So, you'll think in terms of the fleet essentially becoming 10% available for the new functionality or 8% available per month, if I've done the math correctly, something on that basis, starting in broadly July timeframe for that kind of consistent ramp. What we've been doing now is sort of bits and pieces and beginning the journey, exercising the muscle tissue to make sure the vendors and our partners are all working properly to make sure we can execute appropriately.

[Ramsey El-Assal:]

Great. That's really helpful. Thanks a lot.

[Operator:]

Thank you. Our next question comes from Andrew Jeffrey of SunTrust. Please go ahead.

[Andrew Jeffrey:]

Hey, guys. Thank you for taking the question. It's been a busy day of earnings here. Steve, here's a big picture one for you. If I look at your share, Cardtronics' share or transaction volume I guess start there, call it maybe a little less than 800,000 transactions in 2015. Could you roughly break that out in U.S. versus rest of the world and then frame up particularly in the U.S.? But maybe globally to Cardtronics share and how you, if you take a step back and take a multiyear view, how you'd expect your share to grow maybe in basis point terms? I know you've said in the past you think you're 4% to 5% U.S. transactions. What would be the right share growth rate expectation for Cardtronics given what you know about the business today?

[Steven A. Rathgaber:]

Sure. Sure. So, let me try to jump to the end on that and probe me if I lead out too much for you here. But I think in terms globally, we think in terms of being maybe 3% of the ATM population globally and maybe 1% of the ATM transactions globally. And we'd like to think that over time, we can have our transaction share at least match our ATM share, okay, on a global basis. So, that would be sort of the global portrait. Now, different markets obviously grow differently within the planet and different countries are a part of accelerated growth versus other countries. But when we think in terms of transaction share in the U.S., we've consistently believed and do lots of probing research on our own to – that basically causes us to believe that there continues to be 9 billion or 10 billion ATM withdrawals in the United States annually. And the number for the past three or four years might grow 1% or might shrink 1% depending on economic circumstances of the day, but fairly consistent in its number. And I've said internally I see no reason why we can't grow in the U.S. I don't think it's too bold a target to say that a 2 billion transaction share out of that 9 billion or 10 billion transactions is a reasonable goal. And one of the things I think is true is even if – and I'm not saying it will, but even if the market begins to shrink a little bit, there is no reason why we can't still grab 1 billion or 2 billion transactions in the U.S. out of the market that's 7 billion or 8 billion. And as I've said in the past, the reason for that is, if the ATM market ultimately does decline in terms of transaction, that is a secular wind that blows at our back. And it provides an opportunity for us to become the truly cost-efficient machinery for providing the most convenient cash access. So that's a perspective in the U.S. In the UK, we probably have something approaching 20% of the ATM, the shared ATM traffic on LINK that is available to LINK participants, and I see no reason why that can't continue to grow. That number is up materially this year because, for example, something like the Co-op deal that has a lot of high-volume machines. But there are, for those of you that might remember Carl Sagan, billions and billions and billions of ATM transactions globally, and we're basically – we only hit our first 100 billion, including balance inquiries – our first 1 billion, rather, including balance inquiries last year where we haven't even hit 1 billion withdrawals yet. And I think the growth potential for Cardtronics remains enormous despite any other conditions that people might project on to the use of cash. So it's the reason I remain bullish on the company, and it's the reason I believe that we're going to continue to see growth trajectories like the 26th quarter that Chris alluded to earlier with earnings per share growth and with growth in things like 9% organic growth in the UK. We can enter markets where we can achieve those kinds of numbers. We're doing more than 9% in Germany. We're doing well more than 9% in Canada. And we believe we can do that as we enter additional markets.

[Andrew Jeffrey:]

Okay. If I can probe just a little bit deeper on that point, if we assume that maybe 450 million or 500 million of your withdrawal transactions are in the U.S., and those are growing nominally, 1% a year or so, can you get to your share goals in the absence of a secular shift in the market, namely banks disinvesting in their physical footprints and perhaps taking some of that bank transaction share either directly through outsourcing or indirectly, for example, there are fewer bank ATMs in the market or, I guess, how do you get from point A to point B if the organic revenue, or transactions aren't growing that quickly?

[Steven A. Rathgaber:]

Sure. Sure. Now great, great question, thank you. The notion is that we talked earlier about the rollout of the software on to the ATM platform associated with EMV. We're laying tracks down over the next 12 months to 15 months that enables the ATMs to operate differently than they do today. And that allows us to work with financial institutions to move transaction share from where it is to where it ought to naturally be because that's where the consumers already are. So something like I mentioned in my remarks that we converted 24 new Allpoint members this quarter past. And we sold an additional 20 banks this quarter that are now in our conversion pipeline with a million cards. A million cards do several millions of transactions a month. And we expect to get a disproportionate share of those transactions. And that's one example, but the software capabilities, working with banks directly to help them lower their ATM operating costs and grow a more convenient service to compete with other banks more effectively, that's all part of the journey. Our entire product suite that we've been working on is all part of helping to push traffic and pull traffic in our direction. So it's a work-in-process. No, it is not about the slight movement in transaction volumes. It is about actively working with our bank partners and delivering that volume by creating a better ATM experience at our ATMs. And it starts with convenience and grows over there with the other features we're building into our product.

[Andrew Jeffrey:]

Okay. That's very helpful. Thanks. And just a housekeeping question, Chris. I noticed that in your organic machine count, U.S. merchant-owned machines were down quite a bit year-on-year and as well as sequentially. What's going on there?

[J. Chris Brewster:]

Some of it is transfer between the U.S. merchant-owned category and the managed services categories.

[Andrew Jeffrey:]

Okay.

[J. Chris Brewster:]

And it could be because we've reassessed a contract and we've moved it from one place to another, or it could be that we've renewed a contract and it renewed in a different form from what it was in previously. And frankly, when I look at it here, Andrew, I add those categories up and look at what's happening to the total. If you do that, what you'll see, as I recall, say, the sequential total from the ending count for those categories at December 31 versus the ending count as of March 31, 2015, the count in those aggregated categories is down about 300. And that is essentially reflective of the fact that we did one very large acquisition of sort of merchant-owned managed services ATMs in 2014, that being that particular part of Welch's business. And we did a couple of smaller acquisitions in the early part of 2014. And whenever we do that, we end up essentially taking off some of the bottom end of that merchant-owned base. I mean, we're just – there's just not that much joy for us in being involved with an ATM that does 50 transactions a month, and we don't mind seeing them depart the system. Or put differently, that business is essentially managed more for transaction count than it is managed for machine count. And I'll leave it there, Andrew, but hopefully that's helpful.

[Andrew Jeffrey:]

Yeah. That is very helpful. And I'll jump back in the queue. Thanks.

[Operator:]

Thank you. Our next question comes from Dain Haukos of Piper Jaffray. Your line is open.

[Dain A. Haukos:]

Hi. Thanks for taking my questions. I'm actually on for Mike Grondahl today. I'm just curious, could you give a little bit more color as to – or did TD give any more color as to why they chose Cardtronics for that master services agreement?

[Steven A. Rathgaber:]

Well, I think – I don't want to talk out of school about a particular customer situation, quite frankly, but I think it's fair to say that we have the assets that banks are interested in. That's what drives a lot of our selling activities. So if you're a bank of a certain size and you want to compete with banks of larger size, and if you're a bank that focuses on a message of convenience, then I think if you're looking for the most convenient ATMs in the United States or in Canada, well, that's going to be us, we are where the people go to do their shopping. And if your message is convenience, you want to have access to our ATMs on the most favorable terms possible. I will say one of the additional dimensions of the relationship we are seeing with large banks is that they are looking to us as experts in things like IT security and things like ATM security. And we are finding that as we get reviewed by larger banks, they're viewing us as a safe haven and as a place to learn how to do certain things on machine deployment with the right level of security. As you may recall, we invested several years ago in a chief information security officer targeted at upgrading our entire game because we think we should be in the business at certain things. And I was speaking with them earlier today and he was telling me he now spends about a third of his time talking to customers and helping them understand the value proposition of what Cardtronics is doing with security. So that's certainly another dimension that would appeal to large banks who are holding their vendors and themselves to very high operating standards.

[Dain A. Haukos:]

Thanks. That's very helpful. And then just one more question. How much savings, I was just looking at this Kalpana agreement. How much savings do you anticipate or is this kind of the starting of a large trend that you're able to centralize the software within like a datacenter? How much savings do you think that does on a cost basis in operating these ATMs if you can centralize a lot of those software operations?

[Steven A. Rathgaber:]

I think it's premature to say, quite frankly. All that we're doing at this point is piloting with NCR a product that is hardly fully birthed yet. So it is running in an isolated environment, and we're just – we're kicking tires and things of that nature. But it is designed as every next generation of gear is, to be lower cost both in maintenance in terms of breaks – break and fix sort of things and more efficient in terms of code delivery. And one of its features that I'm pretty excited about is that it doesn't use Windows, okay? And as you know, the Windows upgrade cycle is notorious as a distraction for business. And if we could break from that cycle, one, we improve – we continue to improve our security by not having – being a target for Windows type of software applications even though our ATMs aren't networked the way that would attract those kinds of IT issues. But so, it's got lots of features and functions and it's got a journey to undergo before it's out there as a real bonafide product. But we think it's our responsibility to be on the leading edge of technology for ATMs, and to be exploring it on behalf of our constituents. And that's what we're doing here.

[Dain A. Haukos:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from Meghna Ladha of Susquehanna. Your question, please.

[Meghna B. Ladha:]

Hi. Thanks so much for taking my question. And congratulations on the first quarter beat. We're just trying to reconcile the beat. I see that you had a $0.06 EPS beat for the quarter, but you're just raising the full-year guidance by $0.04. Is that because of – that you expect higher OpEx the next three quarters?

[J. Chris Brewster:]

I think, frankly, as much as anything, it's a function of the fact that we're early in the year. And if you look at our historical pattern over time, we've tended to take the view here that the first quarter does not make a year. And we'd like to get a little more under our belt before going farther.

[Meghna B. Ladha:]

Okay. Got it. And then I see that your total average number of transacting ATMs, they were up 36% in the quarter, but the total transactions were just up 19%. Just trying to understand why isn't growth in transactions aligning with total ATM growth?

[J. Chris Brewster:]

It's primarily the – it's related to the issue we were talking a few minutes ago where we brought in, gosh, something like 17,000 merchant-owned ATMs. And typically in owner-operated mom and pop convenient stores that came in through the Welch acquisition, and those – a good one of those might run 200 or 250 transactions a month, whereas our system average is more like 700 or so transactions a month. So that sort of mix shift that occurred where we did that acquisition that brought in that – a large number of that sort of machine will have that effect on the consolidated metrics.

[Steven A. Rathgaber:]

Said differently, across the portfolio, we have ATMs that transact at all different types of levels for all different types of reasons. We price things differently and we try to make money on each and every type. And – but when you blend it all together into some of those averages, it can get a little weird-looking.

[Meghna B. Ladha:]

Got it. And just a last question on surcharge fees, are you seeing any opportunities to raise surcharge fees in the U.S.?

[Steven A. Rathgaber:]

Yeah. I think we are seeing the beginnings of an evolution there. We are – I know I was using some ATMs the other day, which, by the way, I encourage you all to do, particularly if they're ours. And I've started paying $3.50 on a regular – fairly regular basis now, and I've seen $4. I wouldn't call that regular. So, we think the ceiling is rising. We're not necessarily going to jump into that breach because we try to manage traffic, retailer relationships and multiple dimensions with both feet. But we do selectively look at our portfolio every month and try to understand where the best opportunities are to optimize the shareholder returns.

[Meghna B. Ladha:]

Thank you.

[Operator:]

Thank you. And at this time, I'd like to turn the call over to Mr. Rathgaber for any closing remarks.

[Steven A. Rathgaber:]

All right. We'd just like to say thanks to all of you for your interest in Cardtronics, and we'll talk to you next quarter.

[Operator:]

Thank you, sir. And thank you, ladies and gentlemen. That does conclude Cardtronics' first quarter earnings conference call. You may disconnect your lines at this time. Have a great day.