Cardtronics plc
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Cardtronics' Third 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 is being recorded. I would now like to introduce your first speaker for today, EVP of Corporate Development and Investor Relations, Mr. Phil Chin. You may begin, sir.

[Phillip Chin:]

Thank you. Good afternoon, and welcome to Cardtronics' Third Quarter Conference Call. On the call we have Steve Rathgaber, Chief Executive Officer, and Chris Brewster, Chief Financial Officer. Steve will start off with an overview of the quarter's developments, followed by Chris with details on our financial performance. Then we will 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, 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 are 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 press release issued this afternoon. With that, I will turn the call over to Steve.

[Steven A. Rathgaber:]

Thank you, Phil, and thanks for investors and analysts for joining our third quarter earnings call. It was a solid quarter for our company with several noteworthy milestones. Top line third quarter revenue growth was 17% versus the third quarter last year. On a constant currency basis, 17% translates to a beefy 21% growth in Cardtronics revenues. This represents our ninth consecutive quarter of double-digit revenue growth. The revenue growth yielded 23% adjusted EBITDA growth. It is worth noting that this is the 18th quarter out of the previous 19 that delivered double-digit growth in this metric. And management is pleased with the earnings leverage produced by these revenues which yielded a 28% adjusted EPS growth rate. This adjusted EPS growth rate, like adjusted EBITDA above, is also the 18th quarter out of the last 19 with double-digit adjusted EPS growth. Now most quarters have a particular number that highlights or exemplifies the strength of our business model. That number for this quarter is our gross margin number which beat last year's by 240 basis points. At 36.1%, we are at a record high in the history of the company. Since the company went public in late 2007, our gross margin has steadily climbed from about 22% then to now over 36%. The success of this margin expansion is a testament to several compelling attributes of our business model and our management team. We have the power of scale which we demonstrate in multiple geographies. We have a demonstrated history of executing smart accretive and synergistic acquisitions. And we have a business that is durable with a respectable organic growth profile. Chris will elaborate on some of the drivers of this result in a few minutes. But it was a combination of factors that drove this improvement, and we saw a nice expansion in both North America and Europe. This is a solid proof point of my belief that Cardtronics can drive meaningful margin improvement over the long term. Now certainly events such as acquisitions, major investments in new markets, compliance costs like EMV or the loss of a key account, can interrupt that journey. But the underlying strength of our unique model will always push margins forward over the long term. We are quite proud of our record and of the team that has produced these results year after year. On a global basis, we had a solid quarter of new ATM installations. Over 1800 ATMs were installed across our six country footprint. About 65% were in Europe, with the balance in North America. This brings our installation activity for the year to more than 4,500 units. It is sometimes easy to lose track of what we are accomplishing day-in and day-out, so let me offer some contextual perspective of our scope and scale. Those 4,500 ATMs installed in the past nine months are almost as many units as the second largest U.S. bank has in total active branches, and it's more ATMs installed in just nine months than several top 10 banks have in total. Turning now to North America, we had a productive third quarter for our branding services. We were successful in selling ATM branding deals on almost 600 new sites. We expanded our relationship with TCF Bank to brand Target stores across the upper Midwest. And I'm very pleased to report an exciting new relationship with Capital One who installed branded ATMs with full function deposit-taking capabilities throughout Target stores in Massachusetts. Our Allpoint growth continues at a solid pace in 2015 with two dozen new financial institutions signing on to the Allpoint Network in the third quarter, representing nearly 500,000 new cardholders that will have surcharge-free access to thousands of our ATMs. This includes two new top 50 credit unions, giving us direct Allpoint relationships with 25 out of the top 100 credit unions in the country. And these two dozen new sales were matched by execution of our conversion backlog of a similar number. This quarter, we added 400 new ATM units to our conversion backlog. Year-to-date that gives us a very respectable 2,800 ATM units sold. Now moving to renewal updates, I'm pleased to report that we signed Target and its 1,800 stores through a significant expansion, part of the 2,300 retail sites we renewed globally this quarter. Despite the news from 7-Eleven this year, the remainder of the 2015 renewal story has been near perfect, securing long-term renewals at a typical level of about five years for over 7,000 ATMs in total. All in, we have renewed almost $150 million in annual revenues, an increase of almost $30 million for this quarter alone over what I shared with you last quarter. Let's move now to our European division. Our European business continues to perform very well. It was a very active quarter for our team in the U.K., with a large focus on assimilating, digesting and reconfiguring the various components of the Sunwin and Co-Op Food Group deal. On the business development side, we extended a pilot with another major grocery retailer. We extended our relationship with Shell U.K. for additional installations at dealer-owned and dealer-operated sites. And we signed two endorsement deals to be the ATM supplier to retailer trade groups to potentially supply their thousands of small retail members. Now we had another significant company milestone in the U.K. this quarter that I believe demonstrates both the growing international profile of Cardtronics and the dramatic differences in ATM usage models between countries. Our U.K. business drove, for the first time, more transactions in this quarter than our comparable U.S. business. Our double-digit organic growth U.K. business, which is currently about half the size of our U.S. business in terms of revenues, generated about 111 million withdrawal transactions in the third quarter, while the ATMs we operate in the U.S. generated approximately 102 million transactions. I should point out that the U.S. number excludes the recently acquired CDS business that performed transaction processing for a number of third parties. We have a very significant consumer-facing business in the U.K., as these volumes could represent every U.K. citizen – man, woman and child – making almost two withdrawals at our ATMs during the third quarter alone. We have an important network in the U.K., and are clearly providing a service that is of tremendous value to consumers and retailers alike. In Continental Europe, we continue to enjoy modest progress in our ATM business in Germany and Poland. We are closing in on our first 100 ATMs in the Polish market. And I'm pleased to announce that we have our first contract where we were added as a second ATM supplier to a chain of stores in Poland. This will certainly help us broaden our view of the competitive landscape and continue our journey of learning in this exciting new market. Geographic expansion remains a key part of our growth strategy. And we are actively at work in two additional markets in Europe. We have successfully recruited industry talents that know these markets and have impressive experience in developing these ATM markets. We are active in our geographic expansion activities, and we are investing in both people and infrastructure. I look forward to sharing future progress reports on this subject. At the beginning of July, you may recall that we closed on the acquisition of Columbus Data Services. As discussed last quarter, CDS is a best-in-class processor of ATM and payment card transactions, processing for over 90,000 ATMs for banks and nonbanks in the U.S. The integration of additional Cardtronics product offerings across the CDS business is progressing, and we look forward to further leveraging the CDS assets. CDS has direct connections into all major credit and debit networks in the U.S., which expands the Cardtronics capability set, and invites some opportunities for adjacency plays down the road. Focusing for a moment on total company transaction volumes, it is noteworthy that the company generated 498 million transactions for the quarter, two million transactions short of 0.5 billion. You may recall that it is only eight months ago in our February earnings call that we recorded the milestone of 1 billion transactions for the entire year of 2014. This is exciting growth. I should add that our acquisition pipeline remains quite robust with opportunities in both existing and new markets and for businesses that are core and complementary adjacencies. As always, we remain disciplined and deliberate in what we ultimately execute, but we feel well positioned financially and strategically to act on the appropriate opportunities. These are very busy and exciting times for Cardtronics. We have a full agenda. We have multiple pilots underway in the U.S. on everything from advertising models to software rollouts that feature some of our new capabilities. We are testing and learning about driving volume with technology, and the product and compliance investments we have made over the past several years are finally beginning to roll out as part of the EMV migration. We are working with bank partners in both the U.S. and Canada on new and deeper relationship models that allow us to provide a richer customer experience for the consumer shared by the financial institution and the retailer. A recent example of this is the Capital One deal I mentioned earlier. And we are seeing encouraging trends in the banking sector that ultimately favor our business model. Specifically, branches are beginning to close in larger numbers. Transactions in branches are declining in material numbers and migrating to digital environments. The consumer is doing more and more activity on digital channels. And you need to know, and recall, that the ATM is a digital channel, and it is poised to be a big beneficiary of this transaction share shift from the traditional branch. Our goal is simple. We want to be there to help. And now I will turn it over to Chris to provide more color on the financial dimensions of our third quarter results.

[J. Chris Brewster:]

Thank you, Steve. First I'd like to start, as I usually do, with a quick recap of the headline numbers for what was a strong quarter on multiple dimensions. Our consolidated revenues for the quarter were $311 million, up 17% year-over-year. On a constant currency basis that metric would be up 21%. Adjusted EBITDA totaled $81.7 million, up 23% from last year. And adjusted net income per diluted share was $0.82 up 28% versus last year. EPS would have been about $0.02 higher, would have been about $0.84, without the currency headwinds that we had to fly through in the third quarter. This P&L performance demonstrates leverage in the business model, 17% top line, 23% further down at EBITDA, and 28% on the bottom line at net earnings, with organic execution and acquisitions contributing in all areas of the income statement. As implied in the numbers that I just gave you, we were once again impacted by currency movements, as the U.S. dollar remained strong relative to the currencies employed in our foreign operations. As I said, on a constant currency basis, our total revenue growth rate in local currency was 21%. Currency fluctuations cost us about 4 percentage points off of that. So reported revenue growth in our reported U.S. dollar financials was 17%. Beginning to split that apart, organic ATM operating revenue growth was about 5% on a constant currency basis in the quarter. That organic growth was fueled by strong performance in Europe, certainly led by the U.K. Europe revenues as a whole were up 34% as reported in dollars, or up 46% on a constant currency basis. The Sunwin and Co-Op Food acquisitions definitely contributed to this robust revenue growth rate. But organic growth in Europe was strong as well, at a little over 10% on a constant currency basis. Growth in our North America segment was solid at 11%, with much of that driven by the acquisition of Welch in the fourth quarter of last year and, to a much lesser degree, the recent CDS acquisition, both of which are performing quite well. Our U.S. same-store transactions were about flat for the quarter which is a slight improvement from what we experienced in the second quarter. This figure excludes the Chase ATM sites that were de-branded within the last nine months. U.S. same-store revenues were up about 2% year-over-year, driven principally by our growth in Allpoint and in bank branding revenues. Turning now to gross margin performance which, as Steve said, was particularly strong this quarter. Gross margins expanded by 240 basis points year-over-year to a level of 36.1%, principally as a result of two things. First is just fundamental scale economics coming through from our revenue growth. And second, the ongoing cost improvements that we've been making across the business, particularly in cash costs, vault cash rental costs and in armored car expenses. I should point out that we turned in this gross margin performance in spite of a fairly significant list of contract renewals that we worked through in the course of the year. Those could've put pressure on gross margins but we were able to maintain relatively constructive pricing dynamics in combination with operating efficiency gains. Columbus Data Services should also be given credit for playing a part in the margin expansion story, coming in the door with the robust margins that we saw and liked as we considered the purchase of that business. As we move further down the P&L, I will say that the SG&A picture does offset a bit of the goodness that we delivered on the gross margin line. SG&A expense as a percent of revenue rose by about 110 basis points year-over-year. In spite of that, the hefty gross margin gain allowed us to deliver about 120 basis points of margin expansion further down the P&L on the adjusted EBITDA line. So adjusted EBITDA margins were up about 120 basis points year-over-year. The elevated SG&A spending rate relates primarily to ongoing investments in technology, in products and in people, including added business development talent and management talent in the European team with the goals of fortifying organic revenue growth in existing markets and driving our entry into new markets. Couple of additional notes on the most recent acquisition of CDS which was completed on July 1 of this year, and which was consequently included in our results for the entirety of the third quarter, I'm very pleased to report that the business is performing above planned on both revenue and earnings. We're quite pleased with the acquisition broadly. It's generating good numbers. We remain excited about the management team, and the go-forward strategic rationale still looks compelling to us. I'd like to mention that our adjusted profit metrics include a couple of significant adjustments in the quarter that were driven mainly by our sale of the retail cash-in-transit business in the U.K. So to do a quick memory refresh on the background of this transaction, we bought Sunwin Services Group in late 2014. That operation consisted of a number of components, some of which were strategically important and synergistic with us like ATM maintenance and ATM armored car service right in our wheelhouse, and some of those components were not strategic to us, like the provision of security guards to retailers and the transportation of notes and coins to and from retailers – the latter of which we call the retail cash-in-transit business. We set about rationalizing this purchase as we came into 2015. In quarter one, we sold the security guard business, and we merged the acquired ATM maintenance operation in with our existing operation. In quarter three, we sold the operation providing cash transportation services to retailers for about £23 million and we set about merging the remaining Sunwin armored car operation which primarily serves ATMs with our existing operation, and we closed six of the acquired cash depots to eliminate excess capacity and to extract cost efficiencies. And I have to say, I think our U.K. management team has just done a superb job managing its way through this process and this quantum of change. As an aside, we recorded about $18 million in revenue in 2015 from these activities prior to their divestiture. And those revenues should be taken out of our 2015 base as you begin to think about 2016. The sale of this retail cash transportation business also had an effect on our third quarter GAAP P&L, which I'd like to describe in brief. In the GAAP P&L for the third quarter, you'll notice a $12.1 million net gain on sale of assets. This gain was excluded from the adjusted earnings metrics that we report. This gain relates primarily to the sale of the retail cash-in-transit business that was closed during the quarter. Second, there's another line on the GAAP P&L titled, Acquisition and Divestiture-Related Costs, which totals about $13 million in expense for the quarter. We also excluded this amount from our adjusted earnings metrics. Most of the expenses in this category also relate to the U.K. retail cash-in-transit sale, and the subsequent shutting down of the six cash service facilities in the U.K. that I mentioned previously. For example, costs such as employee severance, lease terminations, professional fees associated with the transactions and costs incurred during the period that the facilities that were exited were open during the quarter. All in all, these line items mostly offset one another in the GAAP P&L. But because they're nonrecurring and not reflective of business than usual, we excluded them from our adjusted metrics. Moving to the balance sheet, our ratio of net debt outstanding to trailing 12 months adjusted EBITDA at quarter end was 2.3

[Operator:]

And I'm showing our first question or comment comes from the line of Ramsey El-Assal with Jefferies. Your line is now open.

[Ramsey El-Assal:]

Hey, congratulations, guys, on another solid quarter. I guess my first question is on margins. I know there were great results there. Understanding that you attributed some of that to just general scale efficiency and operating leverage, and then the rest is sort of more intentional actions. How sustainable is the margin tailwinds that we have, or maybe on the side of the drivers this quarter that were more sort of a result of your actions rather than just operating leverage?

[J. Chris Brewster:]

Well, I'd say in the aggregate there's – I didn't see anything in the margin story that I would – of any consequence that I would attribute to being sort of one-time, if you will. I would say that the third quarter is typically the high-water mark, both in terms of revenue and percentage gross margins in the year. So I'm not necessarily predicting that you're going to see 36.1% gross margins in every quarter as we go forward. I think that would be a little unreasonable. But I do think there's scope for continuing margin improvement. The primary sources really were – we are in a position where we're – we talk about pipelines. We have an acquisition pipeline. We have a new business pipeline. We also have sort of an acquisition synergy pipeline. We're still gaining some benefits synergy-wise from Welch, certainly from the rationalization of the Sunwin assets and the tuning, if you will, of the Co-Op portfolio of ATMs that we brought in over in the U.K. And all of those things were helpful during the quarter.

[Ramsey El-Assal:]

Okay. That helps. Thanks. On another note, Allpoint, it's an interesting statistic that you're in 25 of the top 100 credit unions. Of course that implies that there's another 75 of the top 100 that you could potentially be in as well. What inning are we in, in terms of Allpoint penetration? That statistic makes it sound like there's a lot of runway. Is that the case? Or are you sort of – where do you think we are in terms of general penetration of that product in the marketplace?

[Steven A. Rathgaber:]

This is Steve, Ramsey. I think still quite early. I don't know if you want to pick third inning or fourth inning. But it's not fifth, sixth or seventh. I think there are many thousands of financial institutions out there. And I'm convinced that every one of them can benefit from Allpoint. And our job is to help them see the wisdom of that opportunity. So I think there is a long runway for Allpoint. And I think when I talk about the trends in the banking industry where we are thinking about how to integrate further with banks to enrich the experience of the consumer whether it be deposit taking, whether it be a richer transaction set by having more direct links with the bank, there is an opportunity for us to continue to be more and more infrastructure, which effectively is what Allpoint is, right. It acts as the bank's infrastructure. And we're on a mission to be every bank's infrastructure over time.

[Ramsey El-Assal:]

Okay. A couple of really quick ones. Has there been any movement in terms of LINK resetting the U.K. pricing?

[J. Chris Brewster:]

Ramsey, as you know, I think they do a cross-survey every year. They typically do it in the middle of the year. And at that point, set an interchange rate for the following year. That process has been done. I'm told by our folks in the U.K. that under LINK rules, we're prohibited from disclosing the results of that process. So we haven't made a habit of talking about it publicly. But the answer to your question is yes, that has played out.

[Ramsey El-Assal:]

But you're precluded from sharing the actual impact of the move on your...

[J. Chris Brewster:]

That is my understanding. I think you know how it works. Let me talk about what I can talk about. I think you know basically how the process works. You know it is a cost based sort of price setting methodology. There hasn't been a lot of change in certain parameters like interest rates. There has been some change in what over in the U.K. are called business rates. In the U.S. we call them property taxes. There has been some increase in that. And that began occurring back in 2013 as I recall. So I'll let you use your imagination on the rest of it I guess.

[Ramsey El-Assal:]

Okay. And very quickly and lastly for me, an awkward question. The CFO search, Chris, have your plans been altered at all? Or are you still actively involved in selecting a replacement? Or what's the update there?

[Steven A. Rathgaber:]

The update is we're making good progress. We have a very credible and viable candidate. We're working hopefully to close soon. And I'll let Chris speak for Chris. But our intentions remain to have Chris actively involved in the transition over the medium term, and to be available to us essentially all next year on some kind of a retainer basis to help with transition activities. I still expect that schedule to be intact as we come and close in on the end of the year.

[Ramsey El-Assal:]

Okay. Great. Take your time on that. There's no rush.

[Steven A. Rathgaber:]

I'm trying to turn back the clock but it just won't work. Every time I look in the mirror I approve.

[J. Chris Brewster:]

The only thing I would add, I can see why, to an outsider's perspective it might look like this is taking a little while, but the only thing I would add perhaps in that context is that frankly Steve and the board are setting a very high bar.

[Steven A. Rathgaber:]

And you all can understand why, based on what you've been working with, right?

[Ramsey El-Assal:]

Great. That's very helpful. That's all for me, guys. Thanks.

[Operator:]

And our next question or comment comes from the line of Andrew Jeffrey with SunTrust. Your line is now open.

[Andrew Jeffrey:]

Hi, guys. Thanks for taking the question. I concur, Chris, you can stay around for as long as you'd like. Focusing in on the U.K. for a second where in Europe generally where you're driving double-digit growth. What's the runway and the visibility to sustainability of that? And now you've got a European management team that perhaps is a little more focused in on the day to day. They've been doing a lot of heavy lifting. So in terms of innovating around the basic ATM transaction, what are your thoughts on that? And what might we see or hear about transaction yield improvement over time in Europe?

[Steven A. Rathgaber:]

Well, I think what I can say is this. The European team is focused on Europe as opposed to just the U.K. And then there is a U.K. team focused on just the U.K. So we have invested in more muscle over there as time has gone on, and we expect to have in our 2016 numbers, some decent investment in product innovation type funding for the U.K. market in specific. And we expect to have some meaningful investment dollars for continuing market and geography expansion. So I think the sustainability of the growth in Europe is there. I think the form it will take will inevitably surprise me. We'll certainly be aware of directions. But it will take multiple forms and but I'd be hard pressed to say that there's going to be a dramatic improvement in yield on, particularly ATM from product initiatives. We'll have more insight into that as we work down the list. I think there's like eight or nine things that we've got the teams looking at to see what they can do for us. But perhaps another way to think about it is articles in the newspaper. I referred in my comments about branch closings in the U.S. In the U.K. they've talked about 25% of the branches being closed over time. And as branches close, I think there is a substantial opportunity for movement for the consumer to ATMs that are the most convenient, which tend to be ours. And I think the U.K. has the additional advantage over the U.S. of not having any foreign fees. So the freedom of movement for the consumer is strong. But my hope is that Cardtronics can play a big role in helping banks be way more efficient by being their ATM infrastructure as bank branches begin to wind down over there, as they reset, as all banks are doing on the new economics of banking.

[Andrew Jeffrey:]

Okay. Chris, when I look at your operating metrics, excluding acquisitions, and I look at per ATM cash withdrawal transaction growth and ATM revenues, there's still a little bit of a slowdown in the third quarter versus the first nine months. What's the driver there? The geographic mix? Is there something else? Because I think you mentioned that you saw a little bit of improvement in your U.S. and machine transactions and revenues.

[J. Chris Brewster:]

Yeah. I'm trying to make sure I properly parse your question, Andrew. Which metric are you looking at?

[Andrew Jeffrey:]

Per ATM cash withdrawal transactions, the 795 versus 753, that organic number.

[J. Chris Brewster:]

And you're looking at on an ex of acquisitions basis?

[Andrew Jeffrey:]

Correct. Yeah.

[J. Chris Brewster:]

Yeah. I think, frankly, what you're seeing is just an effective mix shift that relate to our prior history of acquisitions that we cycled on for more than a year. And as we move through the quarter, that group changes in a sense, in terms of exactly what we cycled on. As I think about the business and its components, for example, thinking about the big U.S. company-owned portfolios, the U.S. merchant-owned portfolios, so on and so forth, and think about what's going on within those components, I don't think there's any significant changes in trends.

[Andrew Jeffrey:]

So you'd encourage us to look at the same-machine transactions and the same-machine revenues in the U.S. as the best metric for the health of the underlying business?

[J. Chris Brewster:]

I think same-machine revenues is probably the best metric. Same-machine transactions is a good metric. The averages are going to be moved around by mix shift. We started – simply the growth of high volume free-to-use ATMs in the U.K. can move the metrics around.

[Steven A. Rathgaber:]

The Welch-Kahuna blend is affecting the metrics around.

[J. Chris Brewster:]

Right.

[Andrew Jeffrey:]

Okay.

[J. Chris Brewster:]

So I think I'll spend some more time on it, Andrew, but that's my off the cuff – is you're simply looking at the effects of shifts in mix of machine types as opposed to sort of broad underlying trend.

[Andrew Jeffrey:]

Got it. All right. Thanks.

[Operator:]

Our next question or comment comes from the line of Bob Napoli with William Blair. Your line is now open.

[Robert Napoli:]

Thank you, and good afternoon. I guess maybe just some big picture thoughts, Steve, if you could on the ATM and digital – I just spent about a week in Vegas, it feels like a month – like Money2020 and all the investment going into digital and contactless. The general thought is that, that is obviously going to put pressure on cash and cash withdrawals. And you're seeing that in some places around the world. But how do you feel about the ability to grow organically given that. And I know you've mentioned remember the ATM is digital, so you're suggesting that you will have a lot more transactions other than cash that may be growing on those machines.

[Steven A. Rathgaber:]

So It's the eternal question, Bob. And Money2020 always has a way of igniting it. I did not attend but I certainly had a bunch of reports coming across the transom about the goings-on there. And we had some folks out there and such. One of the compelling thoughts that I heard about was there's this notion, this continuing notion of people trying to solve the problem of cash, as if cash is a problem. And they keep coming up against the inability to solve it. And the reason they have the inability is because it's not broken. Now that doesn't mean that things like Chase Pay that was announced out there and other activities won't create a customer experience around payments that do change the dynamic over time. But the messages I heard from the Money2020 Conference from multiple sources all suggest a sort of grudging acceptance of cash isn't going anywhere. And really the mission is about trying to create a better payment experience. And so far that's been pretty hard to do. So one part of the answer is I remain unconvinced that any time soon, cash is going to be swept away by some brand new invention from some Silicon Valley startup. There's just no evidence of that. And increasingly you heard people on panels there talk about the fact that they need to partner with entities as opposed to openly replace this vehicle called cash. So that's one sense. The other sense, the other dimension is what I talked about earlier. The digitization of banking, not the digitization of money, but the digitization of banking and banking services is driving people out of the branch. You pick up any top 10 bank or top 20 bank annual report or investor deck and go through their stories about what's going on with the branch volumes, with the branch transactions. And the fact that there's a migration to things like deposits outside the branch or away from the tally counter at least. And if you look at the underlying statistics that they make available, you'll see that the digitization of deposit taking is happening mostly at the ATM, not mostly at the mobile phone. So there is a series of environmental shifts, a series of trends that I think favor the Cardtronics business model because the ATM will be a piece of infrastructure for many, many, many years to come that is incredibly significant to the bank and the bank's customers. And we just have to optimize the relationship with the bank. And that's why I love this Capital One deal where we're brokering the ATM with deposit-taking capability and a much richer relationship with Target than we've had in the past with Capital One engage. And it's to me a symptom, a symbol of the future model of engagement for companies like Cardtronics where we will increasingly draw volume from the bank environment in partnership with the bank. So windy answer, sorry about that, but it's the eternal question. And the problem of cash isn't the problem to be solved. The problem of expense ratios in banks is the problem to be solved. And we're here to help

[Robert Napoli:]

Great. Then a question on the M&A pipeline. I guess, to the extent you can, and discussion about adjacencies. What adjacencies make the most sense? Are we going to see some diversification into pre pay, bill pay – what areas are you looking to acquire into? What makes the most sense outside of your core business?

[Steven A. Rathgaber:]

Well, I think that's that million dollar question. And I think it's fair to say that I feel it's a little premature to start listing categories. But what I can say is Cardtronics is very actively engaged with great inside lines and great outside lines on how to extend our business model into adjacencies that make sense. And the combination of that intellectual journey that we are on in combination with what appears to be a very robust set of items for sale, companies for sale, several of which seem to make obvious sense, several of which we have to think about. And just because it seems to obviously make sense, by the way, as you all know, it doesn't mean it does. So I would ask you to bear with us a bit longer, but rest assured that we are allocating intellectual capital and dollar capital toward diversification journeys. And I expect 2016 to be an important year in that regard.

[Robert Napoli:]

Okay. Thank you.

[Operator:]

And our next question or comment comes from the line of Meghna Ladha with Susquehanna. Your line is now open.

[Meghna Ladha:]

Hi. Thanks for taking my question. I'm just trying to understand the revenue opportunity from dynamic currency conversion. Can you help me understand how we should think about that? And what percent of your ATM installed base currently provides DCC?

[J. Chris Brewster:]

Well, I'll take a whack at it. In Europe, the majority of our ATM base can provide that service. Where it's truly effective, as you might imagine, is only in places where you have significant numbers of international travelers coming through. In other words, in the context of the U.K., it's pretty important in Central London. It's not necessarily all that effective in some smaller town off in the Midlands somewhere. But it is now a nice – I would call it a nice contributor to U.K. revenue, in particular to U.K. profit because it's a high margin transaction. In the U.S., I'd say the answer is a lot more diverse. As you might imagine, its effectiveness would be limited to major cities where you have a lot of international travel, East Coast, West Coast, places like Houston and Dallas and Atlanta, and along the borders, the Canadian border, Mexican border. So a relatively small minority of our U.S. fleet is now DCC capable. And that will change rather dramatically as we go through the EMV upgrades and roll out a new software stack alongside of that, that has significantly enhanced capabilities in it. So I think the product is, partly because it's so far away from being fully implemented in the States, has a pretty solid growth runway in front of it.

[Steven A. Rathgaber:]

And it's a product we're actually working to make available not only at our own ATMs but the merchant-owned ATMs that we provide services to. And that's a very rich margin opportunity for us. So we're looking forward over the next 18 months to driving some good value out of that.

[Meghna Ladha:]

Thanks. That was helpful. And also just wanted to get your thoughts on consolidation. Recently there was a piece in the news that Walgreens plans to acquire Rite Aid. So given some of the consolidation in the States, do you foresee any margin pressure in terms of higher merchant commissions?

[Steven A. Rathgaber:]

Well, I think that those are always tough questions to answer. But I can say the following. Chris talked earlier in his prepared remarks about the fact that we've had this wonderful gross margin improvement during a year where we've done a bunch of renewals, okay. And the linkage there is that we've managed to avoid any serious margin compression in renewals, and in fact have enjoyed an improvement of terms. I talked in the past about the fact that it's very important for the stability of future earnings to get things like interest rate protections and interest exchange rate protections. And we've worked very hard for the past three years to do that. And I've also said I'm quite willing to ensure those protections to surrender a little bit of margin. But I think that each circumstance is unique and I think that mega mergers like the one you were talking about will certainly present interesting conversations. And we'll engage to deliver the best value we can. Fortunately, I believe we stand poised to deliver more products, more proof of in-store sales and more capabilities to support incremental in-store sales at exactly the right time relative to this particular example you're putting forward. And that I think is a good thing in terms of our opportunity to preserve margin and enhance ultimately.

[J. Chris Brewster:]

Yeah. The only thing I would add to that is to say that it's definitely not new news. Consolidation among our customers is definitely not new news around here. We've seen it in the grocery space. There are numerous examples among our convenience store customers where we've had mergers involving multiple customers over time. And we've been through the whole sort of sea change in the petroleum retailing business from major oil companies operating that business to selling it off to independents, and then a lot of those independents merging. So it's something obviously we pay attention to. But it's certainly not something that's radically new and different on the landscape.

[Meghna Ladha:]

Got it. And a very quick one on 7-Eleven. Have there been discussions on the timeline as far as redeploying the ATMs are concerned? And what programs or services do you believe remain based upon the expiration of the contract?

[Steven A. Rathgaber:]

Well, I think as we stated in the past, that that contract expires in July 2017, late July 2017. And I think the appropriate way to think about it at this time is that the contract is fully engaged through that period and then conversions begin. So there's an opportunity to enjoy continued returns on that for the back half of 2017 relative to a conversion schedule. I think the question as to the redeployment opportunity, that's a muddier question, very difficult to see exactly today where we'd redeploy some of those things. But as sales opportunities comes up, as renewals come up we can certainly plan for that. We've said in the past that we do expect to redeploy a significant amount of that equipment. And there's a significant amount that's already written, effectively written off, and a piece in the middle that as we get closer will get very close to being written off. So we continue to think that it spells more of a capital relief opportunity than it does, sitting on capital opportunity. But it's difficult to answer the second part of your question. But be assured that we are creatively at work, trying to figure out how to optimize our shareholder value each and every day. And it certainly includes how to preserve the opportunities we've created in that market space.

[Meghna Ladha:]

Thank you. And congratulations on a good quarter.

[Steven A. Rathgaber:]

Oh, thank you.

[J. Chris Brewster:]

Thank you.

[Operator:]

And our next question or comment comes from the line of Reggie Smith with JPMorgan. Your line is now open.

[Reginald Lawrence Smith:]

Hey. Good evening, guys. Thanks for taking my question. I appreciate I guess the color you guys provided on the U.K. I didn't realize that the transaction counts were actually larger than the United States. I guess my question, and I'm not sure if you provided that, but what's the same-store sales or organic transaction growth rates in the U.K.? Just curious if the dynamics over there are similar to the United States from a growth perspective.

[Steven A. Rathgaber:]

I'd say on a market-wide basis, I think that would be a pretty good conclusion, frankly. You've got some of the same macro drivers with bank branch closings. There are certainly some payment innovations where at the margins might be taking a little bit out of cash. But if you look at the overall market statistics, or if you look at, say, our same-store transaction trends, they're relatively similar.

[Reginald Lawrence Smith:]

In the U.K. versus in the United States?

[Steven A. Rathgaber:]

U.K. versus U.S. Now that's on the same-store basis. On an organic basis, the U.K. market is significantly less installed than the U.S. market in terms of, say, a metric like number of ATMs per million people in the market. From memory I'm thinking that the U.S. is around 1,700, the U.K. is more like 1,300, numbers of that nature. So on a percentage basis, we've certainly been doing better in the U.K. in terms of unit growth than we have in the U.S.

[Reginald Lawrence Smith:]

Understood. I guess a follow-up to that. I know in the past you talked about the foreign ATM fees being a factor that's kind of weighed on same-store sales growth in the U.S. Now in the U.K., I believe most ATMs are free to use for cardholders. So I guess trying to square that commentary or maybe if there are other factors that are at play in the U.K. that would explain why same-store sales trends are kind of similar to the United States.

[Steven A. Rathgaber:]

Well, I think I would square it this way. In the U.S. the bad news is we've got foreign fees that tend to represent a drag on – I believe at least on our transaction counts. The good news is we've got bank branding and Allpoint pushing transaction counts in the right direction. In the U.K. we don't have the negative of foreign fees. But since most ATMs there are free to use to all comers, the concept of the Allpoint surcharge-free network, as you might imagine, is somewhat less powerful than it would be in the United States. And the bank branding environment is less mature than it is in the U.S., if you will. So I think you've got offsetting forces that seem to bring the metrics pretty closely into an equivalency.

[Reginald Lawrence Smith:]

Got it, understood. If I could sneak two more in really quickly, I guess domestically the potential to raise surcharges and then I guess my last question would be given where the stock is today, recognizing that you guys do have some acquisitions in the pipeline, have you guys given any thought to maybe a share repurchase or something along those lines? Thank you.

[Steven A. Rathgaber:]

Why don't you do the last part?

[J. Chris Brewster:]

I'll take the second one and I'll leave the first one for Steve. We thought fairly hard recently, or at least I'd say done the thinking and analysis around a share buyback, but we continue to come back to the same place then. And that is that we do have a robust acquisition pipeline. We see continued opportunities to put capital to work at high returns in the course of acquisitions. And it just goes back to the – would've been the fundamentals of this business for a decade or more. And that is scale matters and synergies tend to be robust and that's very helpful in terms of driving a high-return acquisition strategy. I'd tell you if the time comes when that acquisition pipeline looks less robust and does so for a period of time, then as we've told you before, there's no interest in here taking the company out of debt or dramatically deleveraging it. If we get to the point where we don't have those sort of opportunities to invest capital at high returns, then we I think have to consider alternate – other ways, other things to do with capital including funneling it back to shareholders.

[Reginald Lawrence Smith:]

Got it.

[Steven A. Rathgaber:]

And on the surcharge question, I think I would answer it that it is always on our radar. We do constantly studies about where our ATM population sits relative to other populations. There has been an increase in surcharges by a lot of the larger financial institutions. There's also been an increase in foreign fees by a lot of the larger financial institutions. So one of the pleasantly surprising things is the elasticity of the collective course of doing an ATM transaction. Where now we have lots of locations where the financial institutions are probably making as much money – they're charging as much money, making more because it's essentially all margins from their side, as we charge for a surcharge. So the consumer is quite durable in terms of being willing to pay. Having said all that, we think it's never been our position to be the market leader in raising surcharges. We like to be a quiet follower. And if you saw some of the trade press recently, or heard Chuck Schumer talking about a study in the Wall Street Journal, and that study was effective at illuminating the foreign fee increases, so we're kind of excited about that awareness. But don't think any of it portends any material changes on our part to raise surcharges in the near term.

[Reginald Lawrence Smith:]

Okay. Thank you, guys. Good quarter.

[Steven A. Rathgaber:]

Thank you.

[J. Chris Brewster:]

Thanks, Reggie.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.

[Steven A. Rathgaber:]

Thank you.

[J. Chris Brewster:]

Thank you, everybody.